As filed with the Securities
and Exchange Commission on January 15, 2010.
Registration
No. 333-162344
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
AMENDMENT NO. 6
To
Form S-1
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF
1933
SYMETRA FINANCIAL
CORPORATION
(Exact name of registrant as
specified in its charter)
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Delaware
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6311
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20-0978027
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(State or other jurisdiction
of
incorporation or organization)
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(Primary Standard Industrial
Classification Code Number)
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(I.R.S. Employer
Identification Number)
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777 108th Avenue NE,
Suite 1200
Bellevue, WA 98004
(425) 256-8000
(Address, including zip code,
and telephone number, including area code, of registrants
principal executive offices)
Margaret A. Meister
Chief Financial
Officer
Symetra Financial
Corporation
777 108th Avenue NE,
Suite 1200
Bellevue, WA 98004
(425) 256-8000
(Name and address, including zip
code, and telephone number, including area code, of agent for
service)
Copies to:
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William J. Whelan III, Esq.
Cravath, Swaine & Moore LLP
Worldwide Plaza
825 Eighth Avenue
New York, NY 10019
(212) 474-1000
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George C. Pagos, Esq.
Senior Vice President, General Counsel and Secretary
Symetra Financial Corporation
777 108th Avenue NE, Suite 1200
Bellevue, WA 98004
(425) 256-8000
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Gary I. Horowitz, Esq.
Simpson Thacher & Bartlett LLP
425 Lexington Avenue
New York, NY 10017
(212) 455-2000
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Approximate date of commencement of proposed sale to the
public: As soon as practicable after the
effective date of this Registration Statement.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, check the
following
box. o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
please check the following box and list the Securities Act
registration statement number of the earlier effective
registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration number of the
earlier effective registration statement for the same
offering. 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)
CALCULATION OF REGISTRATION
FEE
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Proposed Maximum
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Proposed Maximum
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Title of Each Class of
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Amount to be
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Aggregate Offering
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Aggregate Offering
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Amount of
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Securities to be Registered
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Registered(1)
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Price per Share
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Price(1)(2)
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Registration Fee(3)
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Common Stock, $0.01 par value per share
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31,050,000
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$14.00
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$434,700,000.00
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$30,994.11
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(1)
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Includes 4,050,000 shares issuable
upon exercise of the underwriters over-allotment option.
See Underwriting.
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(2)
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Estimated solely for the purpose of
calculating the amount of the registration fee pursuant to rule
457(a) under the Securities Act of 1933, as amended.
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(3)
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The registration fee has been
previously paid.
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The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until this Registration
Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
The information in
this preliminary prospectus is not complete and may be changed.
We may not and the Selling Stockholders may not sell these
securities until the registration statement filed with the
Securities and Exchange Commission of which this preliminary
prospectus forms a part is effective. This preliminary
prospectus is not an offer to sell these securities and it is
not soliciting an offer to buy these securities in any state
where the offer or sale is not permitted.
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SUBJECT TO COMPLETION, DATED
JANUARY 15, 2010
PROSPECTUS
27,000,000 Shares
Common Stock
This is Symetra Financial Corporations initial public
offering. We are selling 17,299,510 shares of our common
stock in this offering. The Selling Stockholders are selling
9,700,490 shares of our common stock in the offering. We
intend to use the net primary proceeds from this offering for
general corporate purposes, which may include contributions of
capital to our insurance and other subsidiaries. We will not
receive any proceeds from the sale of shares by the Selling
Stockholders. See Use of Proceeds.
We expect the public offering price to be between $12.00 and
$14.00 per share. Currently, no public market exists for the
shares. Our common stock has been approved for listing on the
New York Stock Exchange, or NYSE, under the symbol
SYA.
Investing in our common stock involves risks that are
described in the Risk Factors section beginning on
page 12 of this prospectus.
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Per Share
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Total
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Initial public offering price
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$
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$
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Underwriting discounts and commissions
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$
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$
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Proceeds to Symetra (before expenses)
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$
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$
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Proceeds to Selling Stockholders (before expenses)
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$
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$
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The underwriters may also purchase up to an additional
4,050,000 shares of common stock from the Company at the
public offering price, less the underwriting discount, within
30 days from the date of this prospectus to cover
over-allotments.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
The shares will be ready for delivery on or
about ,
2010.
Joint Book-Running Managers
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BofA
Merrill Lynch |
J.P. Morgan |
Goldman, Sachs & Co. |
Barclays Capital |
Senior Co-Managers
UBS
Investment
Bank Wells
Fargo
Securities
Co-Managers
Dowling & Partners
Securities, LLC Keefe,
Bruyette &
Woods Sandler
ONeill + Partners,
L.P. Sterne
Agee
The date of this prospectus
is ,
2010.
TABLE OF
CONTENTS
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Page
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1
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12
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33
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34
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35
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37
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44
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110
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131
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137
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156
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162
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167
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170
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173
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175
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178
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184
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184
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184
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F-1
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G-1
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EX-23.1 |
You should rely only on the information contained in this
document or any free writing prospectus prepared by or on behalf
of us. We have not authorized anyone to provide you with
information that is different. This document may only be used
where it is legal to sell these securities. The information
contained in this document may only be accurate on the date of
this document.
Symetra, Symetra Financial and their
respective logos are our trademarks. Other service marks,
trademarks and trade names referred to in this prospectus are
the property of their respective owners.
Our insurance subsidiaries are domiciled in the states of
Washington and New York. These states have enacted laws that
require regulatory approval for the acquisition of
control of insurance companies. Under these laws,
there exists a presumption of control when an
acquiring party acquires 10% or more of the voting securities of
an insurance company or of a company which itself controls an
insurance company. Therefore, any person acquiring 10% or more
of our common stock would need the prior approval of the state
insurance regulators of these states or a determination from
such regulators that control has not been acquired.
Dealer
Prospectus Delivery Obligation
Until ,
2010 (the 25th day after the date of this prospectus), all
dealers that effect transactions in our common shares, whether
or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealers
obligation to deliver a prospectus when acting as an underwriter
and with respect to unsold allotments or subscriptions.
PROSPECTUS
SUMMARY
The following is a summary of the information contained in
this prospectus, and it may not contain all the information that
is important to you. You should read the entire prospectus
carefully, especially the Risk Factors section, the
consolidated financial statements and the accompanying notes
included in this prospectus.
Unless the context otherwise requires, references in this
prospectus to Symetra refer to Symetra Financial
Corporation on a stand-alone, non-consolidated basis. References
to we, our, us and the
Company are to Symetra Financial Corporation together with
its subsidiaries, including our predecessor operations.
A glossary of selected insurance terms and defined terms used
throughout this prospectus can be found under Glossary of
Selected Insurance and Defined Terms on
page G-1.
Our
Business
We are a life insurance company 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. We are headquartered in Bellevue, Washington and employ
approximately 1,100 people in 16 offices across the United
States, serving approximately 1.8 million customers.
As of September 30, 2009, our stockholders equity was
$1,480.5 million, our adjusted book value was
$1,450.7 million and we had total assets of
$22.2 billion. For the twelve months ended
September 30, 2009, our return on equity, or ROE, was 13.9%
and our operating return on average equity, or operating ROAE,
was 10.6%. We define adjusted book value as stockholders
equity less accumulated other comprehensive income (loss), or
AOCI, and we define operating ROAE as adjusted operating income
divided by average adjusted book value. Adjusted book value,
adjusted operating income and operating ROAE are non-GAAP
measures. For reconciliations of adjusted book value to
stockholders equity and adjusted operating income to net
income and for a summary presentation of our operating results
and financial position determined in accordance with GAAP,
please see Summary Historical Consolidated
Financial and Other Data on page 9.
We manage our business through the following five segments, four
of which are operating:
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Group. We offer medical stop-loss insurance, limited
medical benefit plans, group life insurance, accidental death
and dismemberment insurance and disability 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 through Medical Risk Managers, Inc, or MRM. Our
Group segment generated segment pre-tax adjusted operating
income of $66.9 million during 2008 and $44.7 million
during the nine months ended September 30, 2009.
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Retirement Services. We offer fixed and variable
deferred annuities, including tax sheltered annuities,
individual retirement accounts, or IRAs, and group annuities to
qualified retirement plans, including Section 401(k),
403(b) and 457 plans. Our Retirement Services segment generated
segment pre-tax adjusted operating income of $36.6 million
during 2008 and $41.3 million during the nine months ended
September 30, 2009.
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Income Annuities. We offer single premium immediate
annuities, or SPIAs, to customers seeking a reliable source of
retirement income and structured settlement annuities to fund
third party personal injury settlements. In addition, we offer
our existing structured settlement clients a variety of funding
services product options. Our Income Annuities segment generated
segment pre-tax adjusted operating income of $36.5 million
during 2008 and $33.0 million during the nine months ended
September 30, 2009.
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Individual. We offer a wide array of term, universal
and variable life insurance as well as bank-owned life
insurance, or BOLI. Our Individual segment generated segment
pre-tax adjusted operating income of $59.7 million during
2008 and $51.6 million during the nine months ended
September 30, 2009.
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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
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debt, tax credits from certain investments, the results of
small, non-insurance businesses that are managed outside of our
operating segments, and inter-segment elimination entries. Our
Other segment generated a segment pre-tax adjusted operating
loss of $31.6 million during 2008 and $5.8 million
during the nine months ended September 30, 2009.
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We distribute our products nationally through an extensive and
diversified independent distribution network. Our distributors
include financial institutions, employee benefits brokers, third
party administrators, specialty brokers, independent agents and
advisors. We believe that our multi-channel distribution network
allows us to access a broad share of the distributor and
consumer markets for insurance and financial services products.
For example, we currently distribute our annuity and life
insurance products through approximately 16,000 independent
agents, 26 key financial institutions and 4,300 independent
employee benefits brokers. We continually add new distribution
relationships to expand the breadth of partners offering our
products.
Market
Environment and Opportunities
We believe we are well positioned to capitalize on existing
market opportunities, including:
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Increasing need for retirement savings and
income. There are significant demographic factors that
indicate increased need for retirement solutions. These factors
include:
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according to the U.S. Census Bureau, there are 76.8 million
baby-boomers (Americans born between 1946 and 1964) who are
at or near retirement age; and
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according to the U.S. Census Bureau, there are 61.6 million
members of Generation X (Americans born between 1965 and 1979).
We believe these members of Generation X are likely to fund
their retirement from personal savings.
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Many of these individuals have experienced significant declines
in the value of their savings as a result of recent market
turmoil or have saved too little for retirement. According to
the Employee Benefit Research Institute, or EBRI, as of 2007,
approximately 78% of families with a head of household aged 55
to 65 participated in an employer-based retirement plan or IRA.
EBRI estimates that the median value of this populations
employer-based retirement plans declined 14.7% from
approximately $81,000 in 2007 to approximately $69,100 in June
2009. As a result of these demographic factors, we expect
greater demand for retirement savings products that supplement
social security. In particular, we believe demand will continue
to grow for products like immediate annuities that offer income
streams that cannot be outlived.
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Shift in customer demand toward simple to understand
products. The equity and bond market dislocation of the
last 18 months shifted customer and distributor demand
toward simple to understand and predictable products. Customers
increasingly demand savings and income oriented products (such
as fixed annuities) that offer transparency and stable returns
that are higher than returns on savings accounts. Industry sales
of savings and income oriented products have grown substantially
while sales of equity market based products (such as variable
annuities) have fallen. Illustrating this trend, Kehrer/LIMRA
reported that industry sales of variable annuities declined by
23% in the first nine months of 2009 compared to the equivalent
2008 period. Conversely, industry sales of fixed annuities grew
by 18% over the same period.
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Continued demand for affordable health
insurance. According to the Kaiser Family Foundation,
health insurance premiums in the United States increased 131%
from 1999 to 2009; meanwhile, the Consumer Price Index increased
only 28%. As health care costs continue to rise faster than
inflation, the demand for affordable health insurance options
has increased. According to the Self-Insurance Institute of
America, 75 million people in the United States under the
age of 65 receive their benefits through self-funded plans,
including 47% of workers in smaller firms and 76% of workers in
midsize firms. We believe we can grow our business by providing
employees with affordable access to health insurance through
employer-sponsored limited benefit employee health plans and by
offering group medical stop-loss insurance to medium and large
businesses that self-fund their medical plans.
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Our
Competitive Strengths
Our competitive strengths enabled us to perform well across all
of our operating segments through the recent market turmoil.
Since January 1, 2008 we have added 26 distribution
partners, developed 14 new products and grown our assets under
management by $3.0 billion, or 17.4%. Our sales for the
first nine months of 2009 were $2.2 billion, an increase of
260% over our sales during the first nine months of 2007. Our
competitive strengths include:
Balance sheet focus. We are vigilant about
maintaining a strong balance sheet in all economic environments.
We believe our strong balance sheet will allow us to continue
growing our business and market share as many of our competitors
must first shore up their own balance sheets.
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Superior investment management. We pursue a
value-oriented investment approach focused on disciplined
matching of assets and liabilities and preservation of
principal. We believe we have built a conservative asset
portfolio illustrated by the following (as of September 30,
2009):
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Subprime exposure of only $0.3 million
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Alt-A exposure totaling less than 1% of invested assets, with
88% of Alt-A exposure being supported by fixed rate collateral
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No exposure to option adjustable rate mortgages, or option ARMs
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99% of our commercial mortgage-backed security, or CMBS,
portfolio is rated AAA and has a weighted-average credit
enhancement of 28%
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Minimal exposure to alternative assets, such as hedge funds and
private equity funds
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Below investment grade fixed maturities represent less than 7%
of invested assets
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This investment approach has resulted in what we believe to be
relatively strong performance. For example:
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Our total pre-tax net realized gains (losses) on sales and
impairments of fixed maturities cost 41 basis points for
the first nine months of 2009, cost 52 basis points
for 2008, and cost an annualized average 19 basis points
since January 1, 2005
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Our commercial mortgage portfolio has a weighted-average
loan-to-value ratio of 54% and only one non-performing loan
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Since January 1, 2005, our equity portfolio has grown at an
annualized rate of 10.1% compared to an annualized return of
(0.8)% for the S&P 500 Index
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Disciplined liability risk management. We believe we
have an attractive and diverse mix of businesses that, combined
with our disciplined approach to asset/liability matching,
enables us to stick to our strategy of offering simple to
understand products without adding product features that create
liability-side balance sheet volatility. Our liability portfolio
includes:
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No guaranteed living benefits, or GLBs, in variable annuity
products
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No shadow accounts in universal life products
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No term products that are dependent on lapse-supported pricing
and securitization of deficiency reserves
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No high commission/long surrender period indexed annuities
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Because we do not offer these product features, we avoided
having a complex derivative hedging portfolio similar to those
found on the balance sheets of many of our competitors.
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Strong financial position. We believe we have a
strong and transparent balance sheet due to the lack of
off-balance sheet obligations and embedded guarantees on
variable products, and limited derivative and alternative
investments. We have no value of business acquired, or VOBA, on
our
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balance sheet and minimal goodwill. We believe that we compare
favorably to our industry in terms of the following financial
strength metrics (as of September 30, 2009):
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Our deferred acquisition costs, or DAC, is 16% of
stockholders equity and 17% of adjusted book value
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Our goodwill is 2% of stockholders equity and adjusted
book value
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We have no outstanding debt balances maturing until 2016
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Stockholders equity is 102% and adjusted book value is
100% of regulatory capital
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Our risk-based capital ratio is 361%
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Our AOCI improved from $(1,052.6) million at
December 31, 2008 to $29.8 million at
September 30, 2009
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Adjusted book value is a non-GAAP measure. For a reconciliation
of adjusted book value to stockholders equity and for a
summary presentation of our operating results and financial
position determined in accordance with GAAP, please see
Summary Historical Consolidated Financial and
Other Data on page 9.
Powerful and expanding national distribution
network. We have a two-pronged approach to
expanding product sales by working with our existing
distribution relationships and by adding new distribution
partners.
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High quality distribution relationships. We offer
consumers access to our products through a national
multi-channel network, including financial institutions,
employee benefits brokers, third party administrators, specialty
brokers and independent agents. We are adept at designing simple
to understand, yet innovative products to meet the changing
demands of the market. By working closely with our distributors,
we are able to anticipate opportunities in the marketplace and
rapidly address them. By treating our distributors as clients
and providing them with outstanding levels of service, we have
cultivated strong relationships over decades that we believe
allow us to avoid competing on price alone. In addition, we have
flexible information technology platforms that allow us to
integrate our products onto the operating platforms of our
distributors, which we believe provides us with a competitive
advantage in attracting new distributors.
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Strong bank distribution channel. According to
Kehrer/LIMRA, we were a top-five seller of fixed annuities
through banks in the first nine months of 2009. Our strong bank
distribution relationships make us well-positioned to continue
to take advantage of the increased investor demand for fixed
annuities and to take market share away from financially
stressed competitors. We also have increased our sales of single
premium immediate annuities and single premium life insurance
through existing and new bank distribution partners. During the
first nine months of 2009, our sales of single premium immediate
annuities through banks increased 18% and single premium life
volumes increased 74% as compared to the first nine months of
2008.
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Leading group medical stop-loss insurance
provider. We have been a leading provider of group
medical stop-loss insurance since 1976. We have built a
consistently profitable platform with high levels of customer
service and disciplined underwriting practices. In the last
25 years, our group medical stop-loss insurance business
has experienced only two calendar years of net losses, the most
recent being 1999.
Diverse business mix. We believe that our
diverse mix of businesses offers us a greater level of financial
stability than many of our similarly-sized competitors across
business and economic cycles. Given our lack of reliance on any
particular product or line of business, we are able to allocate
resources to markets with the highest potential returns at any
given point in time. By doing so, we are able to avoid certain
markets when they are experiencing heavy competition and related
pricing pressure without sacrificing our ability to grow
revenues.
Proven management team. We have a high
quality management team with an average of 25 years of
insurance-industry experience, led by Randy Talbot who has been
our chief executive officer since 1998. Having
4
spent a significant portion of his
34-year
insurance industry career operating an insurance brokerage,
Mr. Talbot intimately understands the needs of our
distributors. We also have an experienced board of directors,
which includes industry professionals who have worked closely
with us to develop our strategies and operating philosophies.
Our long-term incentive plan aligns managements incentives
with our stockholders interests.
Our
Growth Strategies
The recent market turmoil and its effects on our competitors
present a compelling opportunity to continue adding business at
attractive returns. Further, we believe our growth strategies
are well aligned with the current market environment as well as
the long-term competitive dynamics of our industry. We believe
the following proven, long-term growth strategies position us
well to consistently grow stockholder value despite periods of
aggressive pricing by our competitors:
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Sell simple to understand products. We have built a
reputation as a writer of simple to understand products that
meet the needs of customers and our distribution partners. This
reputation has been strengthened by the retrenchment of many of
our competitors due to recent market events and the consistency
of our presence and product lineup over the past several years.
We believe independent distributors highly value our
demonstrated ability to accept new business during turbulent
conditions while maintaining strong financial performance. As a
result, we are able to take advantage of the convergence of
increasing customer desire for simple to understand products and
the financial challenges of several market competitors.
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Broaden and deepen distribution relationships. Our
distribution strategy is to deliver multiple products through a
single point of sale, thereby reducing our distribution costs.
We believe that we have an unprecedented opportunity to expand
our existing relationships and build new long-term relationships
due to the recent market disruption that has distracted and
refocused our competitors. Since January 1, 2008, we have
added eight new bank relationships with approximately 6,100
sales representatives. In addition, we have added 18 new
independent distribution relationships which added 2,400 new
sales representatives actively selling our products. These new
relationships, in tandem with existing relationships, have
enabled us to grow our sales from $617 million during the
first nine months of 2007 to $2.2 billion in the first nine
months of 2009.
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Effectively deploy capital. We intend to deploy our
capital prudently while maximizing our profitability and
long-term growth in stockholder value. Our capital management
strategy is to maintain financial strength through conservative
and disciplined risk management practices, capital efficient
product design, effective asset/liability management and
opportunistic market share growth in all our business segments.
We will also maintain our conservative investment management
philosophy, which includes holding a high quality investment
portfolio and carefully matching our investment assets against
the duration of our insurance product liabilities. This approach
will enable us to remain flexible to allocate capital to
opportunities within our business segments that offer the
highest returns.
|
Risks
Related to Our Business, Our Industry and this
Offering
Investing in shares of our common stock involves substantial
risk. The factors that could adversely affect our results and
performance are discussed under the heading Risk
Factors immediately following this summary. Before you
invest in our shares, you should carefully consider all of the
information in this prospectus, including matters set forth
under the heading Risk Factors, including:
|
|
|
|
|
Impact of the credit crisis and economic
downturn. The recent credit crisis, global capital
markets conditions and economic downturn have adversely impacted
and will continue to have an adverse impact on our business and
on the financial services industry in general. Impacts have
included and will include investment losses, less availability
and/or more
competition for appropriate investments to support our products,
higher cash balances generating yields lower
|
5
|
|
|
|
|
than needed to support our products, failure of key business
partners, impacts on demand for our products from new and
existing customers, reduced availability of capital, higher cost
of capital and heightened scrutiny from regulators and ratings
agencies. It is unclear what impact financial rescue programs
instituted by the U.S. federal government will have on the
markets and on our business.
|
|
|
|
|
|
Investment losses. The credit crisis and
significant drop in the equity markets that began in the second
half of 2007 and substantially increased during the fourth
quarter of 2008 have resulted in, and may continue to result in,
decreases in value of fixed maturity securities, equity
securities and other investments in our investment portfolio,
which have impacted and may continue to impact our results of
operations and financial position.
|
|
|
|
Exposure to interest rate fluctuations. Many
of our insurance and investment products are sensitive to
interest rate fluctuations and expose us to the risk that
falling interest rates will reduce the spread, or
the difference between the returns we earn on the investments
that support our obligations under our insurance and investment
products and the amounts that we must credit to policyholders
and contractholders. Generally, persistently low interest rates
would have an adverse effect on our financial condition, results
of operations and cash flows. Generally, inflation could
adversely impact our financial condition, results of operations
and cash flows due to potential higher policyholder withdrawals
and asset sales at undesirable prices.
|
|
|
|
Reserve requirements. Our calculations of
reserves for estimated future benefit payments are based upon
estimates and assumptions with regard to our future experience.
Future experience is subject to many uncertainties and we cannot
predict the ultimate amounts we will pay for future benefits or
the timing of the payments. If reserves are insufficient to
cover actual benefits and payments, we could be required to
increase our reserves, which could adversely affect our
financial condition and results.
|
|
|
|
Deviation from assumptions upon which pricing is
established. The price and expected future
profitability of our insurance and annuity products are based in
part upon expected patterns of premiums, expenses and benefits,
using a number of assumptions, including those related to
persistency, mortality and morbidity. Significant deviations
from these assumptions could have an adverse affect on our
financial condition, results of operations and cash flows.
|
|
|
|
Amortization of deferred policy acquisition
costs. Deferred policy acquisition costs, or DAC,
represent certain costs that vary with, and are primarily
related to, the sale and issuance of insurance policies and
investment contracts and are deferred and amortized over the
estimated policy and contract lives. Unfavorable experience with
regard to expenses, investment returns, mortality, morbidity,
withdrawals or lapses may increase the amortization of DAC,
resulting in higher expenses and lower profitability.
|
|
|
|
Potential downgrade in financial strength
ratings. A downgrade in our financial strength
ratings could have an adverse effect on our financial condition,
results of operations and cash flows in several ways, including
reducing new sales of products, adversely affecting our
relationship with sales agents, increasing the number of policy
surrenders and withdrawals, requiring us to reduce prices in
order to compete and adversely impacting our ability to obtain
reinsurance.
|
|
|
|
Highly regulated industry. Our insurance
businesses are subject to a wide variety of laws and regulations
in various jurisdictions. 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.
|
|
|
|
Proposals for national health care reform. We
sell group medical stop-loss insurance and limited benefit
employee health plans to employer groups. Proposals addressing
the affordability and availability of health insurance,
including reducing the number of uninsured, are pending in
|
6
|
|
|
|
|
the U.S. Congress and in many states. While at this time we
cannot predict whether or in what form these proposals will be
enacted, national health care reform could have a material
effect on the profitability or marketability of our health
insurance products and services and on our financial condition,
results of operations and cash flows.
|
|
|
|
|
|
Constraints related to holding company
structure. As a holding company, we have no
significant direct operations. Dividends and other permitted
distributions from subsidiaries are expected to be our principal
source of funds to meet ongoing cash requirements. These
payments are limited by regulations in the jurisdictions in
which our subsidiaries operate. If our subsidiaries are unable
to pay dividends, we may have difficulty servicing our debt,
paying dividends on our common stock and meeting our holding
company expenses.
|
Financial
Strength Ratings
Currently, the financial strength ratings of our primary life
insurance subsidiaries, Symetra Life Insurance Company and First
Symetra National Life Insurance Company of New York, are
A (Excellent, the third highest of 16
ratings) with a stable outlook from A.M. Best Company,
Inc., A (Strong, the sixth highest of 21
ratings) with a negative outlook from Standard &
Poors Rating Service, and A+
(Strong, the fifth highest of 24 ratings) with a
negative outlook from Fitch, Inc. Moodys Investors
Service, Inc. rates Symetra Life Insurance Company as
A3 (Good, the seventh highest of 21
ratings) with a stable outlook. Moodys does not rate First
Symetra National Life Insurance Company of New York. These
financial strength ratings should not be relied on with respect
to making an investment in our common stock.
Use of
Proceeds
Our board of directors has not made any determination of
specific uses of proceeds at this time. However, we expect to
use the net primary proceeds from this offering for general
corporate purposes, which may include contributions of capital
to our insurance and other subsidiaries. We will not receive any
proceeds from the sale of shares by the Selling Stockholders.
The
Selling Stockholders
In addition to the sale of shares of our common stock by the
Company, members of the original investor group that formed
Symetra by acquiring a group of life insurance and investment
companies from Safeco Corporation on August 2, 2004 (which
we refer to as the Acquisition) will participate in
this offering as Selling Stockholders. Affiliates of White
Mountains Insurance Group, Ltd. and Berkshire Hathaway Inc., who
led the investor group that formed Symetra in the Acquisition,
are not participating in this offering as Selling Stockholders.
Upon consummation of this offering, affiliates of White
Mountains Insurance Group, Ltd. and Berkshire Hathaway Inc. will
each continue to beneficially own approximately 22.5% of our
outstanding common stock (includes warrants exercisable for
9,487,872 shares held by affiliates of each of White
Mountains Insurance Group, Ltd. and Berkshire Hathaway Inc.).
Our
Executive Offices
Symetra was incorporated in 2004 under the laws of Delaware. Our
principal executive offices are located at 777 108th Avenue
NE, Suite 1200, Bellevue, WA 98004. Our telephone number is
(425) 256-8000.
Our internet address is www.symetra.com. The information
contained on or accessible from our website does not constitute
a part of this prospectus and is not incorporated by reference
herein.
7
The
Offering
|
|
|
Common stock offered by Symetra |
|
17,299,510 shares |
|
|
|
Common stock offered by the Selling Stockholders |
|
9,700,490 shares |
|
|
|
Common stock to be outstanding after this offering |
|
110,028,965 shares |
|
|
|
Over-allotment option |
|
The underwriters have an option to purchase a total of up to
4,050,000 additional shares from the Company to cover
over-allotments. |
|
Use of proceeds |
|
We intend to use the net primary proceeds from this offering for
general corporate purposes, which may include contributions of
capital to our insurance and other subsidiaries. We will not
receive any proceeds from the sale of shares by the Selling
Stockholders. See Use of Proceeds. |
|
|
|
New York Stock Exchange symbol |
|
SYA |
|
|
|
Dividend policy |
|
We intend to pay quarterly dividends on our common stock at an
initial rate of approximately $0.05 per share. The declaration,
payment and amount of future 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 that our
board of directors deems relevant. Dividends on our common stock
will also be paid to holders of our outstanding warrants on a
one-to-one
basis. See Dividend Policy. |
|
Risk factors |
|
See Risk Factors for a discussion of factors you
should consider before investing in our common stock. |
All information in this prospectus, unless otherwise indicated
or the context otherwise requires:
|
|
|
|
|
assumes the common stock will be sold at $13.00 per share (the
midpoint of the price range set forth on the cover of this
prospectus);
|
|
|
|
assumes no exercise of the underwriters over-allotment
option;
|
|
|
|
excludes 7,746,840 remaining shares of common stock
reserved for issuance pursuant to our Equity Plan;
|
|
|
|
excludes 870,000 shares of common stock reserved for
issuance pursuant to our Employee Stock Purchase Plan; and
|
|
|
|
assumes no exercise of outstanding warrants to purchase
18,975,744 shares of common stock at an exercise price of
$11.49 per share.
|
8
SUMMARY
HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA
The summary historical consolidated financial and other data,
except for non-GAAP financial measures, as of September 30,
2009 and for the nine months ended September 30, 2009 and
2008 have been derived from our unaudited interim historical
consolidated financial statements and the related notes, which
have been prepared on a basis consistent with our audited
consolidated financial statements and are included in this
prospectus. In the opinion of management, such unaudited
financial data, except for non-GAAP financial measures, reflects
all historical and recurring adjustments necessary for a fair
presentation of the results for these periods. The results of
operations for the nine months ended September 30, 2009 are
not necessarily indicative of the results to be expected for the
full year or any future period. The summary historical
consolidated financial and other data, except for non-GAAP
financial measures, as of December 31, 2008 and 2007 and
for the years ended December 31, 2008, 2007 and 2006 have
been derived from our audited consolidated financial statements
and the related notes that are included elsewhere in this
prospectus. The summary historical consolidated financial and
other data, except for non-GAAP financial measures, as of
December 31, 2006 have been derived from our audited
consolidated financial statements that are not included in this
prospectus. This summary data should be read in conjunction with
our historical consolidated financial statements and related
notes included in this prospectus, and with
Managements Discussion and Analysis of Financial
Condition and Results of Operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
Twelve Months Ended
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In millions, except per share data)
|
|
|
Consolidated Income Statement Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
|
|
$
|
430.2
|
|
|
$
|
440.4
|
|
|
$
|
584.8
|
|
|
$
|
530.5
|
|
|
$
|
525.7
|
|
Net investment income
|
|
|
829.4
|
|
|
|
718.0
|
|
|
|
956.5
|
|
|
|
973.6
|
|
|
|
984.9
|
|
Other revenues
|
|
|
43.2
|
|
|
|
52.0
|
|
|
|
67.8
|
|
|
|
68.7
|
|
|
|
56.1
|
|
Net realized investment gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other-than-temporary
impairment losses on securities
|
|
|
(167.9
|
)
|
|
|
(61.7
|
)
|
|
|
(86.4
|
)
|
|
|
(16.2
|
)
|
|
|
(25.7
|
)
|
Less: portion of losses recognized in other comprehensive income
|
|
|
94.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net impairment losses recognized in earnings
|
|
|
(73.7
|
)
|
|
|
(61.7
|
)
|
|
|
(86.4
|
)
|
|
|
(16.2
|
)
|
|
|
(25.7
|
)
|
Other net realized investment gains (losses)
|
|
|
44.7
|
|
|
|
(41.6
|
)
|
|
|
(71.6
|
)
|
|
|
33.0
|
|
|
|
27.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net realized investment gains (losses)
|
|
|
(29.0
|
)
|
|
|
(103.3
|
)
|
|
|
(158.0
|
)
|
|
|
16.8
|
|
|
|
1.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
1,273.8
|
|
|
|
1,107.1
|
|
|
|
1,451.1
|
|
|
|
1,589.6
|
|
|
|
1,568.4
|
|
Benefits and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder benefits and claims
|
|
|
262.1
|
|
|
|
260.1
|
|
|
|
348.5
|
|
|
|
267.1
|
|
|
|
264.3
|
|
Interest credited
|
|
|
629.2
|
|
|
|
569.1
|
|
|
|
766.1
|
|
|
|
752.3
|
|
|
|
765.9
|
|
Other underwriting and operating expenses
|
|
|
186.7
|
|
|
|
201.9
|
|
|
|
265.8
|
|
|
|
281.9
|
|
|
|
260.5
|
|
Interest expense
|
|
|
23.8
|
|
|
|
24.0
|
|
|
|
31.9
|
|
|
|
21.5
|
|
|
|
19.1
|
|
Amortization of deferred policy acquisition costs
|
|
|
36.4
|
|
|
|
17.7
|
|
|
|
25.8
|
|
|
|
18.0
|
|
|
|
14.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses
|
|
|
1,138.2
|
|
|
|
1,072.8
|
|
|
|
1,438.1
|
|
|
|
1,340.8
|
|
|
|
1,324.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations before income taxes
|
|
|
135.6
|
|
|
|
34.3
|
|
|
|
13.0
|
|
|
|
248.8
|
|
|
|
244.0
|
|
Provision (benefit) for income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
(4.2
|
)
|
|
|
34.2
|
|
|
|
23.8
|
|
|
|
62.8
|
|
|
|
92.4
|
|
Deferred
|
|
|
43.6
|
|
|
|
(26.9
|
)
|
|
|
(32.9
|
)
|
|
|
18.7
|
|
|
|
(7.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision (benefit) for income taxes
|
|
|
39.4
|
|
|
|
7.3
|
|
|
|
(9.1
|
)
|
|
|
81.5
|
|
|
|
84.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
96.2
|
|
|
$
|
27.0
|
|
|
$
|
22.1
|
|
|
$
|
167.3
|
|
|
$
|
159.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.86
|
|
|
$
|
0.24
|
|
|
$
|
0.20
|
|
|
$
|
1.50
|
|
|
$
|
1.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.86
|
|
|
$
|
0.24
|
|
|
$
|
0.20
|
|
|
$
|
1.50
|
|
|
$
|
1.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
111.622
|
|
|
|
111.622
|
|
|
|
111.622
|
|
|
|
111.622
|
|
|
|
111.622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
111.623
|
|
|
|
111.622
|
|
|
|
111.622
|
|
|
|
111.622
|
|
|
|
111.622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per common share
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1.79
|
|
|
$
|
0.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP Financial Measure(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted operating income
|
|
$
|
115.2
|
|
|
$
|
91.8
|
|
|
$
|
122.9
|
|
|
$
|
154.9
|
|
|
$
|
159.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation to net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
96.2
|
|
|
$
|
27.0
|
|
|
$
|
22.1
|
|
|
$
|
167.3
|
|
|
$
|
159.5
|
|
Less: Net realized investment gains (losses) (net of taxes)(3)
|
|
|
(18.9
|
)
|
|
|
(67.1
|
)
|
|
|
(102.7
|
)
|
|
|
10.9
|
|
|
|
1.1
|
|
Add: Net realized and unrealized investment gains (losses) on
FIA options (net of taxes)(4)
|
|
|
0.1
|
|
|
|
(2.3
|
)
|
|
|
(1.9
|
)
|
|
|
(1.5
|
)
|
|
|
1.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted operating income
|
|
$
|
115.2
|
|
|
$
|
91.8
|
|
|
$
|
122.9
|
|
|
$
|
154.9
|
|
|
$
|
159.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30,
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In millions, except share and per share data)
|
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
20,035.2
|
|
|
$
|
16,252.5
|
|
|
$
|
16,905.0
|
|
|
$
|
17,305.3
|
|
Total assets
|
|
|
22,226.0
|
|
|
|
19,229.6
|
|
|
|
19,560.2
|
|
|
|
20,114.6
|
|
Total debt
|
|
|
448.9
|
|
|
|
448.8
|
|
|
|
448.6
|
|
|
|
298.7
|
|
Separate account assets
|
|
|
818.6
|
|
|
|
716.2
|
|
|
|
1,181.9
|
|
|
|
1,233.9
|
|
Accumulated other comprehensive income (loss) (net of taxes)
(AOCI)
|
|
|
29.8
|
|
|
|
(1,052.6
|
)
|
|
|
(12.5
|
)
|
|
|
(0.5
|
)
|
Total stockholders equity
|
|
|
1,480.5
|
|
|
|
286.2
|
|
|
|
1,285.1
|
|
|
|
1,327.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Statutory Financial Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory capital and surplus
|
|
$
|
1,331.7
|
|
|
$
|
1,179.0
|
|
|
$
|
1,225.0
|
|
|
$
|
1,266.2
|
|
Asset valuation reserve (AVR)
|
|
|
117.3
|
|
|
|
113.7
|
|
|
|
176.0
|
|
|
|
158.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory capital and surplus and AVR
|
|
$
|
1,449.0
|
|
|
$
|
1,292.7
|
|
|
$
|
1,401.0
|
|
|
$
|
1,424.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30,
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Book value per common share(5)
|
|
$
|
13.25
|
|
|
$
|
2.56
|
|
|
$
|
11.51
|
|
|
$
|
11.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP Financial Measures(6):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted book value
|
|
$
|
1,450.7
|
|
|
$
|
1,338.8
|
|
|
$
|
1,297.6
|
|
|
$
|
1,327.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation to stockholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
$
|
1,480.5
|
|
|
$
|
286.2
|
|
|
$
|
1,285.1
|
|
|
$
|
1,327.3
|
|
Less: AOCI
|
|
|
29.8
|
|
|
|
(1,052.6
|
)
|
|
|
(12.5
|
)
|
|
|
(0.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted book value
|
|
$
|
1,450.7
|
|
|
$
|
1,338.8
|
|
|
$
|
1,297.6
|
|
|
$
|
1,327.8
|
|
Add: Assumed proceeds from exercise of warrants
|
|
|
218.1
|
|
|
|
218.1
|
|
|
|
218.1
|
|
|
|
218.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted book value, as converted
|
|
$
|
1,668.8
|
|
|
$
|
1,556.9
|
|
|
$
|
1,515.7
|
|
|
$
|
1,545.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted book value per common share(7)
|
|
$
|
15.65
|
|
|
$
|
14.45
|
|
|
$
|
14.01
|
|
|
$
|
14.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted book value per common share, as converted(8)
|
|
$
|
14.94
|
|
|
$
|
13.95
|
|
|
$
|
13.58
|
|
|
$
|
13.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
ROE(9)
|
|
|
13.9
|
%
|
|
|
2.6
|
%
|
|
|
12.6
|
%
|
|
|
12.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average stockholders equity(10)
|
|
$
|
658.0
|
|
|
$
|
861.8
|
|
|
$
|
1,328.3
|
|
|
$
|
1,249.5
|
|
Non-GAAP Financial Measure(11):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating ROAE
|
|
|
10.6
|
%
|
|
|
9.2
|
%
|
|
|
11.2
|
%
|
|
|
12.1
|
%
|
Average adjusted book value(12)
|
|
$
|
1,379.9
|
|
|
$
|
1,329.8
|
|
|
$
|
1,380.2
|
|
|
$
|
1,324.2
|
|
|
|
|
(1) |
|
Basic net income per common share assumes that all participating
securities, including warrants, have been outstanding since the
beginning of the period using the two-class method. Diluted net
income per common share includes the dilutive impact of
non-participating, unvested restricted stock awards, based on
the application of the treasury stock method, weighted for the
portion of the period they were outstanding. |
|
(2) |
|
Management considers adjusted operating income to be a useful
supplement to net income, its most comparable GAAP measure, in
evaluating our financial performance. We believe that the
non-GAAP presentation of adjusted operating income is valuable
because it assists an investor in determining whether our
insurance-related revenues, composed primarily of premiums and
net investment income, have been sufficient to generate
operating earnings after meeting our insurance-related
obligations, composed primarily of claims paid to policyholders
and investment returns credited to policyholder accounts, and
other operating costs. Though the after-tax net realized gains
(losses) excluded from adjusted operating income recur in most
periods, the timing and amount are driven by investment
decisions and external economic developments unrelated to our
management of the insurance and underwriting aspects of our
business. For a definition and |
footnotes continued on following page
10
|
|
|
|
|
discussion of this non-GAAP measure and other metrics used in
our analysis, see Managements Discussion and
Analysis of Financial Condition and Results of
Operations Use of non-GAAP Financial
Measures. |
|
(3) |
|
Net realized investment gains (losses) are reported net of taxes
of $(10.1) million, $(36.2) million,
$(55.3) million, $5.9 million and $0.6 million
for the nine months ended September 30, 2009 and 2008, and
the twelve months ended December 31, 2008, 2007 and 2006,
respectively. |
|
(4) |
|
Net realized and unrealized investment gains (losses) on fixed
income annuity, or FIA, options are reported net of taxes of
$0.1 million, $(1.3) million, $(1.0) million,
$(0.8) million and $0.8 million for the nine months
ended September 30, 2009 and 2008, and the twelve months
ended December 31, 2008, 2007 and 2006, respectively. |
|
(5) |
|
Book value per common share is calculated based on
stockholders equity divided by outstanding common shares
and shares subject to outstanding warrants, totaling
111,705,199, as of September 30, 2009 and 111,622,039, as
of December 31, 2008, 2007 and 2006. |
|
|
|
(6) |
|
Management considers adjusted book value to be a useful
supplement to total stockholders equity, its most
comparable GAAP measure, in evaluating our financial condition.
Adjusted book value is calculated based on stockholders
equity less AOCI. We believe that 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. By evaluating our adjusted book value, an investor can
assess our financial condition based on our general practice of
holding our fixed investments to maturity. For a definition and
discussion of this non-GAAP measure and other metrics used in
our analysis, see Managements Discussion and
Analysis of Financial Condition and Results of
Operations Use of non-GAAP Financial
Measures. |
|
|
|
(7) |
|
Management considers adjusted book value per common share to be
a useful supplement to book value per common share, its most
comparable GAAP measure, in evaluating our financial performance
and condition. Adjusted book value per common share is
calculated based on stockholders equity less AOCI, divided
by outstanding common shares, totaling 92,729,455 as of
September 30, 2009 and 92,646,295 as of December 31,
2008, 2007 and 2006. We believe investors find it useful if we
present them with adjusted book value, a non-GAAP measure that
removes AOCI from stockholders equity, and then translate
it into another measure, adjusted book value per common share,
which allows the investor to understand the value of its
investment on the adjusted book value basis. For a definition
and discussion of this non-GAAP measure and other metrics used
in our analysis, see Managements Discussion and
Analysis of Financial Condition and Results of
Operations Use of non-GAAP Financial
Measures. |
|
|
|
(8) |
|
Management considers adjusted book value per common share, as
converted, to be a useful supplement to book value per common
share, its most comparable GAAP measure, in evaluating our
financial performance and condition. Adjusted book value per
common share, as converted, is calculated as adjusted book value
plus the assumed proceeds from the outstanding warrants, divided
by the sum of outstanding common shares and shares subject to
outstanding warrants, totaling 111,705,199 as of
September 30, 2009 and 111,622,039 as of December 31,
2008, 2007 and 2006. We believe investors find it useful if we
present them with adjusted book value, a non-GAAP measure that
removes AOCI from stockholders equity and then translate
it into another measure, adjusted book value per common share,
as converted, which gives effect to the exercise of our
outstanding warrants. For a definition and discussion of this
non-GAAP measure and other metrics used in our analysis, see
Managements Discussion and Analysis of Financial
Condition and Results of Operations Use of
non-GAAP Financial Measures. |
|
|
|
(9) |
|
Return on stockholders equity is calculated as net income
divided by average stockholders equity. |
|
(10) |
|
Average stockholders equity is derived by averaging ending
stockholders equity for the most recent five quarters. |
|
|
|
(11) |
|
Management considers operating ROAE to be a useful supplement to
return on stockholders equity, or ROE, its most comparable
GAAP measure, in evaluating our financial performance. Operating
ROAE is calculated based on adjusted operating income divided by
average adjusted book value. The numerator and denominator of
this measure have been reconciled to net income and
stockholders equity, respectively, their most comparable
GAAP financial measures. We believe that the non-GAAP
presentation of this measure is valuable to an investor as it
can help an investor form a judgment as to how effectively our
management uses funds invested by our stockholders to generate
adjusted operating income growth. For a definition and
discussion of this non-GAAP measure and other metrics used in
our analysis, see Managements Discussion and
Analysis of Financial Condition and Results of
Operations Use of non-GAAP Financial
Measures. |
|
|
|
(12) |
|
Average adjusted book value is derived by averaging ending
adjusted book value for the most recent five quarters. |
11
RISK
FACTORS
You should carefully consider the following risks and other
information in this prospectus before deciding to invest in
shares of our common stock. Any of the risks described below
could materially adversely affect our business, financial
condition, results of operations and cash flows. In this event,
the trading price of our common stock could decline and you
could lose part or all of your investment.
Risks
Related to Our Business
Markets
in the United States and elsewhere have experienced extreme and
unprecedented volatility and disruption, with adverse
consequences to our liquidity, access to capital and cost of
capital. Market conditions such as we have experienced since the
second half of 2007 may significantly affect our ability to
meet liquidity needs, including capital that may be required by
our subsidiaries. We may seek additional debt or equity capital
but be unable to obtain such capital.
We need liquidity to pay our policyholder benefits, operating
expenses, interest on our debt and dividends on our capital
stock, and to pay down or replace certain debt obligations as
they mature. Without sufficient liquidity, we could be forced to
curtail our operations, and our business could suffer. The
principal sources of our liquidity are premiums earned on group
life, health and individual insurance products, annuity
considerations, deposit funds and cash flow from our investment
portfolio and assets, consisting mainly of cash or assets that
are generally readily convertible into cash. Sources of
liquidity in normal markets also include a variety of short- and
long-term instruments, including long-term debt and capital
securities.
Disruptions, uncertainty or volatility in the financial markets
may limit our access to capital required to operate our business
and maintain desired financial ratios. These market conditions
may limit our ability to access the capital necessary to grow
our business in a timely manner, replace capital withdrawn by
customers or raise new capital required by our subsidiaries as a
result of volatility in the markets. As a result, we may be
forced to delay raising capital, bear an unattractive cost of
capital or be unable to raise capital at any price, which could
decrease our profitability and significantly reduce our
financial flexibility. Actions we might take to access financing
may in turn cause rating agencies to reevaluate our ratings.
Future deterioration of our capital position at a time when we
are unable to access the long-term debt market could have a
material adverse effect on our liquidity. Our internal sources
of liquidity may prove to be insufficient.
Disruptions in the capital markets could adversely affect our
ability to access sources of liquidity, as well as threaten to
reduce our capital below a level that is consistent with our
existing objectives. If this occurs, we may need to:
|
|
|
|
|
further access external sources of capital, including the debt
or equity markets;
|
|
|
|
reduce or eliminate future stockholder dividends of our common
stock;
|
|
|
|
utilize unused borrowings for general corporate purposes;
|
|
|
|
undertake additional capital management activities, including
reinsurance transactions;
|
|
|
|
limit or curtail sales of certain products
and/or
restructure existing products;
|
|
|
|
undertake asset sales or internal asset transfers; and
|
|
|
|
seek temporary or permanent changes to regulatory rules.
|
Certain of these actions may require regulatory approval
and/or the
approval of counterparties which are outside of our control or
have economic costs associated with them.
We rely on our revolving credit facility as a potential source
of liquidity which could be critical in enabling us to meet our
obligations as they come due, particularly during periods when
alternative sources of liquidity are limited. Our ability to
borrow under this facility is conditioned on our satisfaction of
covenants and other requirements contained in the facility, as
described in Description of Certain
Indebtedness Revolving Credit Facilities on
page 171. Our failure to satisfy these covenants and other
requirements would
12
restrict our access to the facility when needed and,
consequently, could have a material adverse effect on our
financial condition and results of operations.
Difficult
conditions in the credit and equity markets, and in the economy
generally, have adversely affected and may continue to adversely
affect our business and results of operations.
Conditions in the global capital markets and the economy
generally, both in the United States and elsewhere around the
world, have adversely affected our results of operations. The
stress experienced by global capital markets that began in the
second half of 2007 continued and substantially increased during
the fourth quarter of 2008 and early 2009. While the second and
third quarters of 2009 brought some turnaround in the capital
markets, concerns about the availability and cost of credit,
inflation, the U.S. mortgage market, the stability of banks
and other financial institutions, and a declining real estate
market in the United States continue and contribute to
heightened market volatility and dampen expectations for the
economy and the markets going forward. These factors, combined
with declining business and consumer confidence, increased
unemployment and volatile oil prices, have precipitated a
sustained recession.
In particular, the credit, financial and economic crisis has
had, or may have in the future, the following effects on our
business and results of operations:
|
|
|
|
|
less supply of appropriate investments available for purchase to
support our liabilities, therefore leading to higher cash
balances yielding less than the credited rates to our customers.
During 2009, we have carried higher cash balances, which have
reduced our net investment income, as discussed in
Managements Discussion and Analysis of Financial
Condition and Results of Operations
Overview Current Outlook;
|
|
|
|
significant losses in our investment portfolio, which have had
an adverse effect on our stockholders equity, statutory
capital and net income. Net realized investment losses before
taxes were $29.0 million through September 30, 2009
and $158.0 million in 2008, as discussed in
Managements Discussion and Analysis of Financial
Condition and Results of Operations
Investments;
|
|
|
|
impairment of key business partners, including distribution
partners and reinsurers (for example, in 2008, one of our
largest distributors was acquired by another bank, as discussed
in Business Distribution);
|
|
|
|
reduced demand for certain financial and insurance products due
to financial hardships experienced by consumers and concern
about the stability of the financial services industry (for
example, industry variable annuity sales declined in late 2008
and early 2009);
|
|
|
|
reduced demand for our insurance products and other related
products and services in our group employer health insurance as
employers have fewer employees requiring insurance coverage due
to rising unemployment levels;
|
|
|
|
an elevated incidence of claims, lapses or surrenders of
policies, as some of our policyholders have chosen or may choose
to defer or stop paying insurance premiums altogether,
particularly in our Individual segment;
|
|
|
|
increased scrutiny of our business and financial strength by
ratings agencies (including negative ratings actions),
regulators, agents who sell our products and other potential
business partners (for example, in 2009, we were downgraded by
Moodys and put on negative watch by Standard &
Poors); and
|
|
|
|
increased utilization of health benefits by some insureds who
may anticipate unemployment or loss of benefits.
|
In addition, general inflationary pressures may affect medical
costs, increasing the costs of paying claims.
13
Our
investment portfolio is subject to various risks that may
diminish the value of our invested assets, reduce investment
returns and erode capital.
The performance of our investment portfolio depends in part upon
the level of and changes in interest rates and credit spreads,
the overall performance of the economy, the creditworthiness of
the specific obligors included in our portfolio, equity prices,
liquidity and other factors, some of which are beyond our
control. These factors could materially affect our investment
results in any period and had an adverse impact on our
investment results in 2008 and 2009. In addition, given our
reliance on external investment advisors, we could also be
exposed to operational risks that may include, but are not
limited to, a failure to follow our investment guidelines,
technological and staffing deficiencies and inadequate disaster
recovery plans.
Interest
rate and credit spread risk
Fluctuations in interest rates and credit spreads can negatively
affect the returns on our fixed maturity and short-term
investments and can cause unrealized losses or reduce unrealized
gains in our investment portfolios. Interest rates and credit
spreads are highly sensitive to many factors, including
governmental monetary policies, general investor sentiment,
domestic and international economic and political conditions and
other factors beyond our control.
The fair value of the fixed maturities in our portfolio and the
investment income from these securities fluctuate depending on
general economic and market conditions. The fair value generally
increases or decreases in an inverse relationship with
fluctuations in interest rates and credit spreads, while net
investment income realized by us from future investments in
fixed maturity securities will generally increase or decrease in
step with interest rates and credit spreads. In addition, actual
net investment income or cash flows from investments that carry
prepayment risk, such as mortgage-backed and certain other
asset-backed securities, may differ from those anticipated at
the time of investment as a result of interest rate
fluctuations. In periods of declining interest rates, mortgage
prepayments generally increase and mortgage-backed securities,
commercial mortgage obligations and other bonds in our
investment portfolio are more likely to be prepaid or redeemed
as borrowers seek to borrow at lower interest rates, and we may
be required to reinvest those funds in lower interest-bearing
investments.
Because substantially all of our fixed maturities are classified
as available-for-sale, changes in the fair value of these
securities as described above are reflected as a component of
comprehensive income. However, U.S. GAAP does not require
similar fair value accounting treatment for the insurance
liabilities that the fixed maturities support. Therefore,
changes in the fair value of our fixed maturities caused by
interest rate fluctuations are not offset in whole or in part by
similar adjustments to the fair value of our insurance
liabilities on the balance sheet.
In an attempt to mitigate these risks, we employ asset/liability
matching strategies to reduce the adverse effects of interest
rate volatility and to ensure that cash flows are available to
pay claims as they become due. Our asset/liability matching
strategies include:
|
|
|
|
|
matching asset and liability cash flows;
|
|
|
|
asset/liability duration management;
|
|
|
|
structuring our fixed maturities and commercial mortgage loan
portfolios to limit the effects of prepayments; and
|
|
|
|
consistent monitoring of, and making appropriate changes to, the
pricing of our products.
|
However, because these strategies may fail to eliminate or
reduce the adverse effects of interest rate and credit spread
volatility, significant fluctuations in the level of interest
rates and credit spreads may have a material adverse effect on
our financial condition, results of operations and cash flows.
14
Credit
risk
From time to time, issuers of the fixed maturities that we own
may default on principal and interest payments. Defaults by
third parties in the payment or performance of their obligations
could reduce our investment income and realized investment gains
or result in realized investment losses. Further, the value of
any particular fixed maturity security is subject to impairment
based on the creditworthiness of a given issuer. Our fixed
maturities portfolio also includes below investment grade
securities, which generally provide higher expected returns but
present greater risk and can be less liquid than investment
grade securities. Further, an issuers inability to
refinance or pay off debt could cause certain of our
investment-grade maturities to present more significant credit
risk than when we first invested. In addition, private equity
buyouts could cause certain of our investment-grade fixed
maturities to present more significant credit risk than when we
first invested. As of September 30, 2009, December 31,
2008 and December 31, 2007, our fixed maturities portfolio
was $18,542.3 million, $14,887.6 million and
$15,599.9 million, respectively. A significant increase in
defaults and impairments on our fixed maturities portfolio could
materially adversely affect our financial condition, results of
operations and cash flows. For the nine months ended
September 30, 2009 and 2008, and the years ended
December 31, 2008, 2007 and 2006, we had credit related
impairments of $47.5 million, $29.6 million,
$39.4 million, $0.7 million and $8.9 million,
respectively. For further information on our fixed maturities
portfolio and credit-related impairments, see
Managements Discussion and Analysis of Financial
Condition and Results of Operations
Investments.
Issuers of the fixed maturities that we own may experience
threats and performance deterioration that trigger rating agency
downgrades. Although the issuers may not have defaulted on
principal and interest payments with respect to these
securities, we may be required by regulators and rating agencies
to hold more capital in support of these investments. We could
experience higher cost of capital and potential constraints on
our ability to grow our business and maintain our own ratings.
Liquidity
risk
Our investments in privately placed fixed maturities, mortgage
loans, policy loans and limited partnership interests, which
collectively represented 11% of total invested assets as of
September 30, 2009, are relatively illiquid as compared to
publicly traded fixed maturities and equities. If we require
significant amounts of cash on short notice in excess of our
normal cash requirements, we may have difficulty selling these
investments in a timely manner, be forced to sell them for less
than we otherwise would have been able to realize, or both.
A
downgrade or a potential downgrade in our financial strength
ratings could result in a loss of business.
Financial strength ratings, which various ratings organizations
publish as measures of an insurance companys ability to
meet contractholder and policyholder obligations, are important
to maintaining public confidence in our company and our
products, the ability to market our products and our competitive
position. Our principal life insurance company subsidiaries,
Symetra Life Insurance Company and First Symetra National Life
Insurance Company of New York, have financial strength ratings
of A (Excellent, third highest of 16
ratings) with a stable outlook from A.M. Best,
A (Strong, sixth highest of 21 ratings)
with a negative outlook from Standard & Poors,
or S&P and A+ (Strong, fifth
highest of 24 ratings) with a negative outlook from Fitch.
Moodys Investors Service, Inc. rates Symetra Life
Insurance Company as A3 (Good, seventh
highest of 21 ratings) with a stable outlook. Moodys does
not rate First Symetra National Life Insurance Company of New
York.
A downgrade in our financial strength ratings, or the announced
potential for a downgrade, could have an adverse effect on our
financial condition, results of operations and cash flows in
several ways, including:
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reducing new sales of insurance products, annuities and other
investment products;
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limiting our ability to offer structured settlement products;
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adversely affecting our relationships with independent sales
intermediaries and our dedicated sales specialists;
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materially increasing the number or amount of policy surrenders
and withdrawals by contractholders and policyholders;
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requiring us to reduce prices for many of our products and
services to remain competitive; and
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adversely affecting our ability to obtain reinsurance or obtain
reasonable pricing on reinsurance.
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Defaults
or volatility of performance in our commercial mortgage loans
may adversely affect our profitability.
Our mortgage loans, which are collateralized by commercial
properties, are subject to default risk. The carrying value of
commercial mortgage loans is stated at outstanding principal
less a valuation allowance. Our allowance provides for the risk
of credit loss. The allowance includes a portfolio reserve for
probable incurred but not specifically identified losses and
loan specific reserves for non-performing loans. At
December 31, 2008, no mortgage loans were considered
non-performing and only one mortgage loan was
non-performing
as of September 30, 2009. The performance of our mortgage
loan portfolio, however, may decline in the future. In addition,
substantially all of our loans have balloon payment maturities.
An increase in the default rate of our mortgage loan
investments, caused by current or worsening economic conditions
or otherwise, could have a material adverse effect on our
business, results of operations and financial condition.
Further, any geographic concentration of our commercial mortgage
loans may have adverse effects on our loan portfolio and,
consequently, on our consolidated results of operations or
financial condition. While we seek to mitigate this risk by
having a broadly diversified portfolio, events or developments
that have a negative effect on any particular geographic region
or sector may have a greater adverse effect on our loan
portfolio. At September 30, 2009, approximately 29.4% of
our commercial mortgage loans were located in California, 20.0%
were located in Washington and 11.0% were located in Texas.
For additional information on our mortgage loan portfolio, see
Managements Discussion and Analysis of Financial
Condition and Results of Operations
Investments Mortgage Loans.
Gross
unrealized losses on fixed maturity and equity securities may be
realized or result in future impairments, resulting in a
reduction in our net income.
Fixed maturity and equity securities classified as
available-for-sale
are reported at their estimated fair value. Unrealized gains or
losses on
available-for-sale
securities are recognized as a component of AOCI and are,
therefore, excluded from net income. Our gross unrealized losses
on
available-for-sale
fixed maturity and equity securities at September 30, 2009
were $658.3 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
$280.5 million at September 30, 2009. 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. Realized
losses or impairments will have a material adverse affect on our
net income in a particular quarterly or annual period.
Fluctuations
in interest rates and interest rate spreads could adversely
affect our financial condition, results of operations and cash
flows.
Certain of our insurance and investment products, such as fixed
annuities and universal life insurance, are sensitive to
interest rate fluctuations and expose us to the risk that
falling interest rates will reduce the spread, or
the difference between the returns we earn on the investments
that support our obligations under these products and the
amounts that we must credit to policyholders and
contractholders. This risk is exacerbated due to the existence
of guaranteed minimum crediting rates established by our
contracts and regulatory authorities and restrictions on the
timing and frequency with which we can adjust our crediting
rates. Accordingly, falling interest rates could have an adverse
effect on our financial condition, results of
16
operations and cash flows. Additionally, we may see interest
rate fluctuations due to potential future inflation resulting
from economic stimulus spending.
Our interest rate spreads and associated investment margins
related to these spreads vary by product as follows:
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The interest rate spread on our Retirement Services
segments fixed deferred annuity products was 1.81%, 1.67%
and 1.68% for the nine months ended September 30, 2009 and
for the years ended December 31, 2008 and 2007,
respectively, which yielded investment margins of
$99.3 million, $89.8 million and $84.3 million,
respectively.
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The interest rate spread on our Income Annuities segments
products was 0.56%, 0.59% and 0.60% for the nine months ended
September 30, 2009 and for the years ended
December 31, 2008 and 2007, respectively, which yielded
investment margins of $67.6 million, $39.2 million and
$43.0 million, respectively.
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The interest rate spread on our Individual segments
universal life insurance products was 1.24%, 1.14% and 1.23% for
the nine months ended September 30, 2009 and for the years
ended December 31, 2008 and 2007, respectively, which
yielded investment margins of $7.7 million,
$10.2 million and $10.2 million, respectively.
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During periods of rising interest rates, we may determine to
offer higher crediting rates on new sales of interest-sensitive
products and to increase crediting rates on existing in force
products, in each case in order to maintain or enhance product
competitiveness. In addition, periods of rising interest rates
may cause increased policy surrenders, withdrawals and requests
for policy loans as policyholders and contractholders allocate
their assets into higher yielding investments. Increases in
crediting rates, as well as surrenders and withdrawals, could
have an adverse effect on our financial condition, results of
operations and cash flows.
We calculate reserves for long-term disability and life waiver
of premium claims using net present value calculations based on
the actual interest rates in effect at the time claims are
funded, as well as our expectations for future interest rates.
Waiver of premium refers to a provision in a life insurance
policy pursuant to which an insured with total disability, which
has lasted for a minimum specified period, continues to receive
life insurance coverage but no longer has to pay premiums for
the duration of the disability or for a stated period. During
periods of declining interest rates, reserves for new claims are
calculated using lower discount rates, thereby increasing the
net present value of those claims and the required reserves.
Further, if actual interest rates used to establish reserves on
open claims prove to be lower than our original expectations, we
would be required to increase such reserves accordingly. As
such, the increase in net present value calculations caused by
declines in interest rates could have an adverse effect on our
financial condition, results of operations and cash flows.
Our term life insurance products also expose us to the risk of
interest rate fluctuations. The pricing and expected future
profitability of these products are based in part on expected
investment returns. Over time, term life insurance products
generally produce positive cash flows as customers pay periodic
premiums, which we invest as we receive them. Lower than
expected interest rates may reduce our ability to achieve our
targeted investment margins and may adversely affect our
financial condition, results of operations and cash flows.
Our
valuation of fixed maturity securities may include
methodologies, estimations and assumptions which are subject to
differing interpretations and could result in changes to
investment valuations that may materially adversely affect our
results of operations or financial condition.
Fixed maturities are reported at fair value on our consolidated
balance sheets and represent 93% of our invested assets. The
accounting guidance regarding Fair Value Measurements
establishes a three-level hierarchy that prioritizes the inputs
to valuation techniques used to measure fair value. The level in
the fair value hierarchy is based on the priority of the inputs
to the respective valuation technique. The fair value hierarchy
gives the highest priority to quoted prices in active markets
for identical assets or liabilities (Level 1) and the
lowest priority to unobservable inputs (Level 3). As of
September 30, 2009, approximately
17
93% and 7% of our fixed maturities were categorized as
Level 2 and Level 3 investments, respectively. As of
December 31, 2008, approximately 95% and 5% of our fixed
maturities were categorized as Level 2 and Level 3
investments, respectively. The determination of estimated fair
values by management is made at a specific point in time,
primarily by obtaining prices from our pricing services, based
on objectively verifiable, observable market data. If such
information about a security is unavailable, we determine the
fair value using internal pricing models that typically utilize
significant, unobservable market inputs or inputs that are
difficult to corroborate with observable market data. The use of
different methodologies and assumptions may have a material
effect on the estimated fair value amounts. For additional
information on our valuation methodology, see Note 7 to our
audited consolidated financial statements.
During periods of market disruption, including periods of
significantly rising or high interest rates, rapidly widening
credit spreads or illiquidity, it may be difficult to value
certain of our securities (for example, corporate private
placements) if trading becomes less frequent
and/or
market data becomes less observable. There may be certain asset
classes that were in active markets with significant observable
data that become illiquid due to the current financial
environment. In such cases, more securities may require more
subjectivity and management judgment. As such, valuations may
include inputs and assumptions that are less observable or
require greater estimation as well as valuation methods that
require greater estimation, which could result in values that
are different from the value at which the investments may be
ultimately sold. Further, rapidly changing and unprecedented
credit and equity market conditions could materially impact the
valuation of securities as reported within our consolidated
financial statements and the
period-to-period
changes in value could vary significantly. Decreases in value
will have a material adverse effect on our results of operations
or financial condition.
Downturns
and volatility in equity markets could adversely affect the
marketability of our products and our
profitability.
Significant downturns and volatility in equity markets could
have an adverse effect on our business in various ways. Market
downturns and volatility may discourage purchases of separate
account products, such as variable annuities and variable life
insurance, which have returns linked to the performance of the
equity markets and may cause some existing customers to withdraw
cash values or reduce investments in those products.
Further, downturns and volatility in equity markets can have an
adverse effect on the revenues and returns from our separate
account products. Because these products depend on fees related
primarily to the value of assets under management, a decline in
the equity markets could reduce our revenues by reducing the
value of the investment assets we manage.
We hold common stock and equity-like investments, primarily in
our Income Annuities segment, that represent 1.2% of the fair
value of our total invested assets as of September 30,
2009. Investments in common stock or equity-like securities
generally provide higher expected total returns over the long
term but present greater risk to preservation of principal than
do our fixed income investments.
If our
reserves for future policy benefits and claims are inadequate,
we would be required to increase our reserve
liabilities.
We calculate and maintain reserves for estimated future benefit
payments to our policyholders and contractholders in accordance
with U.S. GAAP. We release these reserves as those future
obligations are extinguished. The reserves we establish
necessarily reflect estimates and actuarial assumptions with
regard to our future experience. These estimates and actuarial
assumptions involve the exercise of significant judgment. Our
future financial results depend upon the extent to which our
actual future experience is consistent with the assumptions we
have used in pricing our products and determining our reserves.
Many factors can affect future experience, including economic,
political and social conditions, inflation, healthcare costs and
changes in doctrines of legal liability and damage awards in
litigation. Therefore, we cannot predict the ultimate amounts we
will pay for actual future benefits or the timing of those
payments.
We regularly monitor our reserves. If we conclude that our
reserves are insufficient to cover actual or expected policy and
contract benefits and claims payments, we would be required to
increase our reserves and incur income statement charges in the
period in which we make the determination, which could adversely
18
affect our financial condition and results of operations. There
were no significant adjustments to reserves due to inadequacy
during 2007, 2008 or the first nine months of 2009.
We may
face unanticipated losses if there are significant deviations
from our assumptions regarding the probabilities that our
insurance policies or annuity contracts will remain in force
from one period to the next or if morbidity and mortality rates
differ significantly from our pricing
expectations.
The prices and expected future profitability of our insurance
and annuity products are based in part upon expected patterns of
premiums, expenses and benefits, using a number of assumptions,
including those related to persistency, mortality and morbidity.
Persistency is the probability that a policy or contract will
remain in force from one period to the next. The effect of
persistency on profitability varies for different products. For
most of our products, actual persistency that is lower than our
assumptions could have an adverse impact on profitability,
especially in the early years of a policy or contract primarily
because we would be required to accelerate the amortization of
expenses we deferred in connection with the acquisition of the
policy or contract. In addition, we may need to sell investments
at a loss to fund withdrawals. For some of our life insurance
policies, actual persistency in later policy durations that is
higher than our persistency assumptions could have a negative
impact on profitability. If these policies remain in force
longer than we assumed, then we could be required to make
greater benefit payments than we had anticipated when we priced
these products.
In addition, we set prices for our insurance and certain annuity
products based upon expected claims and payment patterns, using
assumptions for, among other factors, morbidity rates and
mortality rates of our policyholders and contractholders. The
long-term profitability of these products depends upon how our
actual experience compares with our pricing assumptions. For
example, if morbidity rates are higher, or mortality rates are
lower, than our pricing assumptions, we could be required to
make greater payments under certain annuity contracts than we
had projected.
Because our assumptions are inherently uncertain, reserves for
future policy benefits and claims may prove to be inadequate if
actual experience is different from our assumptions. Although
certain of our products permit us to increase premiums or reduce
benefits during the life of the policy or contract, these
changes may not be sufficient to maintain profitability.
Moreover, many of our products either do not permit us to
increase premiums or reduce benefits or may limit those changes
during the life of the policy or contract. Therefore,
significant deviations in experience from our assumptions
regarding persistency and mortality and morbidity rates could
have an adverse effect on our financial condition, results of
operations and cash flows.
We may
be required to accelerate the amortization of deferred policy
acquisition costs, which would increase our expenses and reduce
profitability.
Deferred policy acquisition costs, or DAC, represent certain
costs which vary with and are primarily related to the sale and
issuance of our products and are deferred and amortized over the
estimated life of the related contracts. These costs include
commissions in excess of ultimate renewal commissions and
certain other sales incentives, solicitation and printing costs,
sales material and other costs, such as underwriting and
contract and policy issuance expenses. Under U.S. GAAP, DAC
is amortized through income over the lives of the underlying
contracts in relation to the anticipated recognition of premiums
or gross profits for most of our products.
Our amortization of DAC generally depends upon anticipated
profits from investments, surrender and other policy and
contract charges, mortality, morbidity and maintenance and
expense margins. Unfavorable experience with regard to expected
expenses, investment returns, mortality, morbidity, withdrawals
or lapses may cause us to increase the amortization of DAC,
resulting in higher expenses and lower profitability.
We regularly review our DAC asset balance to determine if it is
recoverable from future income. The portion of the DAC asset
balance deemed to be unrecoverable, if any, is charged to
expense in the period in which we make this determination. For
example, if we determine that we are unable to recover DAC from
profits over the life of a book of business of insurance
policies or annuity contracts, we would be required to recognize
the unrecoverable DAC amortization as a current-period expense.
As of September 30, 2009, we had $240.8 million of
DAC. Our amortization of DAC was $36.4 million during the
nine months ended September 30, 2009.
19
The
occurrence of natural disasters, disease pandemics, terrorism or
military actions could adversely affect our financial condition,
results of operations and cash flows.
Our financial condition and results of operations are at risk of
material adverse effects that could arise from catastrophic
mortality and morbidity due to natural disasters, including
floods, tornadoes, earthquakes and hurricanes, disease pandemics
(e.g., H1N1 virus), terrorism and military actions. Such events
could also lead to unexpected changes in persistency rates as
policyholders and contractholders who are affected by the
disaster may be unable to meet their contractual obligations,
such as payment of premiums on our insurance policies or
deposits into our investment products. The continued threat of
terrorism and ongoing military actions may cause significant
volatility in global financial markets, and a natural disaster
or a disease pandemic could trigger an economic downturn in the
areas directly or indirectly affected by the disaster. The
effectiveness of external parties, including governmental and
nongovernmental organizations, in combating the spread and
severity of a disease pandemic could have a material impact on
the losses experienced by us. Further, in our group health and
life insurance operations, a localized event that affects the
workplace of one or more of our customers could cause a
significant loss due to mortality or morbidity claims.
We
rely on reinsurance arrangements to help manage our business
risks, and failure to perform by the counterparties to our
reinsurance arrangements may expose us to risks we had sought to
mitigate.
We utilize reinsurance to mitigate our risks in various
circumstances. Reinsurance does not relieve us of our direct
liability to our policyholders, even when the reinsurer is
liable to us. Accordingly, we bear credit risk with respect to
our reinsurers. The total reinsurance recoverable amount due
from reinsurers was $269.9 million as of September 30,
2009. Our reinsurers may be unable or unwilling to pay the
reinsurance recoverable owed to us now or in the future or on a
timely basis. A reinsurers insolvency, inability or
unwillingness to make payments under the terms of its
reinsurance agreement with us could have an adverse effect on
our financial condition, results of operations and cash flows.
This has not occurred in 2007, 2008 or through
September 30, 2009.
Reinsurance
may not be available, affordable or adequate to protect us
against losses.
As part of our overall risk management strategy, we purchase
reinsurance for certain risks underwritten by our various
business segments. For example, we reinsure the mortality risk
in excess of $0.5 million for most of our individual life
insurance policies. While reinsurance agreements generally bind
the reinsurer for the life of the business reinsured at
generally fixed pricing, market conditions beyond our control
determine the availability and cost of the reinsurance
protection for new business. In certain circumstances, the price
of reinsurance for business already reinsured may also increase.
Any decrease in the amount of reinsurance will increase our risk
of loss and any increase in the cost of reinsurance will reduce
our earnings. Accordingly, we may be forced to incur additional
expenses for reinsurance or may not be able to obtain sufficient
reinsurance on acceptable terms, which could adversely affect
our ability to write future business or result in the assumption
of more risk with respect to those policies we issue.
The availability and cost of these reinsurance arrangements are
subject to market conditions that are beyond our control. As a
result, in the future, we may not be able to enter into
reinsurance arrangements on attractive terms, if at all.
We may
be unable to attract and retain independent sales intermediaries
and dedicated sales specialists.
We distribute our products through financial intermediaries,
independent producers and dedicated sales specialists. We
compete with other financial institutions to attract and retain
commercial relationships in each of these channels, and our
success in competing for sales through these sales
intermediaries depends upon factors such as:
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the amount of sales commissions and fees we pay;
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the breadth of our product offerings;
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the strength of our brand;
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our perceived stability and our financial strength ratings;
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the marketing and services we provide to them; and
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the strength of the relationships we maintain with individuals
at those firms.
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Our competitors may be effective in providing incentives to
existing and potential distribution partners to favor their
products or to reduce sales of our products. Our contracts with
our distribution partners generally allow either party to
terminate the relationship upon short notice. Our distribution
partners do not make minimum purchase commitments, and our
contracts do not prohibit our partners from offering products
that compete with ours. Accordingly, our distribution partners
may choose not to offer our products exclusively or at all, or
may choose to exert insufficient resources and attention to
selling our products.
Our future success is highly dependent on maintaining and
growing both existing and new distribution relationships. We may
have little or no contact with end customers of our products. As
a result, we have little to no brand awareness with end
customers which makes it more difficult to respond to evolving
customer needs, thereby increasing our reliance on our
distribution partners.
From time to time, due to competitive forces, we may experience
unusually high attrition in particular sales channels for
specific products. An inability to recruit productive
independent sales intermediaries and dedicated sales
specialists, or our inability to retain strong relationships
with the individual agents at our independent sales
intermediaries, could have an adverse effect on our financial
condition, results of operations and cash flows.
Consolidation
among distributors or potential distributors of our products may
adversely affect the profitability of our
business.
We distribute many of our products through financial
institutions such as banks and broker-dealers. As capital,
credit and equity markets continue to experience volatility,
bank and broker-dealer consolidation activity may increase and
negatively impact our sales, and such consolidation could
increase competition for access to distributors, result in
greater distribution expenses and impair our ability to market
our products to our current customer base or to expand our
customer base. As a result of recent consolidation in the
financial services industry, a single financial institution,
JPMorgan Chase & Co., accounted for 45.6% and 38.2% of our
total sales in 2008 and for the nine months ended
September 30, 2009, respectively, selling primarily fixed
annuity products. See Business Distribution.
If our relationship with this financial institution were to
deteriorate, it is likely that we would experience a decline in
our sales of such products.
Intense
competition could adversely affect our ability to maintain or
increase our market share and profitability.
Our businesses are subject to intense competition. We believe
the principal competitive factors in the sale of our products
are product features, price, commission structure, marketing and
distribution arrangements, brand, reputation, financial strength
ratings and service. Many other companies actively compete for
sales in our retirement services, income annuity, individual and
group markets, including other major insurers, banks, other
financial institutions, mutual fund and asset management firms
and specialty providers.
In many of our product lines, we face competition from companies
that have greater market share or breadth of distribution, offer
a broader range of products, services or features, assume a
greater level of risk, have lower profitability expectations or
have higher financial strength ratings than we do. Many
competitors offer similar products and use similar distribution
channels. The substantial expansion of banks and insurance
companies distribution capacities and expansion of product
features in recent years have intensified pressure on margins
and production levels and have increased the level of
competition in many of our product lines.
21
Our
risk management policies and procedures may not be effective or
may leave us exposed to unidentified or unanticipated risk,
which could negatively affect our business.
Management of operational, legal and regulatory risks requires
effective policies and procedures to record, verify and report
on a large number of transactions and events. We have devoted
resources to develop our policies and procedures to mitigate
these risks and expect to continue to do so in the future. Even
so, these policies and procedures may not be fully effective to
mitigate all of these risks. Many of our methods for managing
these risks and exposures are based upon historical statistical
models and observed market behavior. As such, our methods may
not be able to predict all future exposures. These could be
significantly greater than our historical measures have
indicated. In addition, our distribution network consists of a
large number of third party agents and requires the
implementation and oversight of policies and procedures to
ensure that we are not unduly subjected to reputational,
financial or other risks attributable to such third party
agents. Other risk management methods depend upon the evaluation
of information regarding markets and clients, or other matters
that are publicly available or otherwise accessible to us. This
information may not always be accurate, complete,
up-to-date
or properly evaluated.
Changes
in accounting standards issued by the Financial Accounting
Standards Board or other
standard-setting
bodies may adversely affect our financial
statements.
Our financial statements are subject to the application of
U.S. generally accepted accounting principles, which are
periodically revised
and/or
expanded by recognized authorities, including the Financial
Accounting Standards Board. On January 1, 2008, we adopted
accounting guidance for the fair value measurements, which,
among other things, defined fair value and established a
framework for measuring fair value. Determinations of fair
values are made at a specific point in time, based on available
market information and judgments about financial instruments,
including estimates of the timing, amounts of expected future
cash flows and the credit standing of the issuer. During periods
of market disruption, rapidly widening credit spreads or
illiquidity, it can be difficult to value certain types of
securities. As such, the value they were originally reported, or
later sold, at may differ materially from the valuations
determined as of the end of the applicable reporting period. In
addition, fluctuations in fair value during these periods can
create larger unrealized gains and losses than during normal
market conditions. Similarly, future accounting standards could
change the current accounting treatment that we apply to our
consolidated financial statements and such changes could have an
adverse effect on our reported financial condition and results
of operations.
The
failure to maintain effective and efficient information systems
could adversely affect our business.
Our business is dependent upon our ability to keep pace with
technological advances. Our ability to keep our systems fully
integrated with those of our clients is critical to the
operation of our business. Our failure to update our systems to
reflect technological advancements or to protect our systems may
adversely affect our relationships and ability to do business
with our clients.
In addition, our business depends significantly on effective
information systems, and we have many different information
systems for our various businesses. We have committed and will
continue to commit significant resources to develop, maintain
and enhance our existing information systems and develop new
information systems in order to keep pace with continuing
changes in information processing technology, evolving industry
and regulatory standards and changing customer preferences. Our
failure to maintain effective and efficient information systems
could have a material adverse effect on our financial condition
and results of operations. If we do not maintain adequate
systems, we could experience adverse consequences, including:
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inadequate information on which to base pricing, underwriting
and reserving decisions;
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inadequate information for accurate financial reporting;
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the loss of existing customers;
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difficulty in attracting new customers;
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customer, provider and agent disputes;
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regulatory compliance problems, such as failure to meet prompt
payment obligations;
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litigation exposure; or
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increases in administrative expenses.
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If we
are unable to maintain the availability of our systems and
safeguard the security of our data, our ability to conduct
business will likely be compromised, which may have a material
adverse effect on our financial condition, results of operations
and cash flows.
We use computer systems to store, retrieve, evaluate and use
customer and company data and information. Additionally, our
computer and information technology systems interface with and
rely upon third party systems. Our business is highly dependent
on our ability, and the ability of our affiliates, to access
these systems to perform necessary business functions. This
includes providing insurance quotes, processing premium
payments, providing customer support, filing and paying claims
and making changes to existing policies. Systems outages or
outright failures would compromise our ability to perform these
functions in a timely manner. This could hurt our relationships
with our business partners and customers and harm our ability to
conduct business. In the event of a disaster such as a blackout,
a computer virus, an industrial accident, a natural catastrophe,
a terrorist attack or war, our systems may not be available to
our employees, customers or business partners for an extended
period of time. If our employees are able to report to work, yet
our systems or our data are destroyed or disabled, they may be
unable to perform their duties for an extended period of time.
Our systems could also be subject to similar disruptions due to
physical and electronic break-ins or other types of unauthorized
tampering with our systems. This may interrupt our business
operations and may have a material adverse effect on our
financial condition, results of operations and cash flows.
Failure
to protect our clients confidential information and
privacy could adversely affect our business.
A number of our businesses are subject to privacy regulations
and to confidentiality obligations. For example, the collection
and use of patient data in our Group segment is the subject of
national and state legislation, including the Health Insurance
Portability and Accountability Act of 1996, or HIPAA, and
certain of the activities conducted by our businesses are
subject to the privacy regulations of the Gramm-Leach-Bliley
Act. We also have contractual obligations to protect certain
confidential information we obtain from our existing vendors and
clients. These obligations generally include protecting such
confidential information in the same manner and to the same
extent as we protect our own confidential information. The
actions we take to protect such confidential information vary by
business segment and may include, among other things:
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training and educating our employees regarding our obligations
relating to confidential information;
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actively monitoring our record retention plans and any changes
in state or federal privacy and compliance requirements;
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drafting appropriate contractual provisions into any contract
that raises proprietary and confidentiality issues;
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maintaining secure storage facilities for tangible
records; and
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limiting access to electronic information.
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In addition, we must develop, implement and maintain a
comprehensive written information security program with
appropriate administrative, technical and physical safeguards to
protect such confidential information. If we do not properly
comply with privacy regulations and protect confidential
information, we could experience adverse consequences, including
regulatory sanctions, such as penalties, fines and loss of
license, as well as loss of reputation and possible litigation.
23
Our
business could be interrupted or compromised if we experience
difficulties arising from outsourcing
relationships.
We outsource certain technology and business functions to third
parties, including a significant portion of our information
technology function, and expect to continue to do so in the
future. If we do not maintain an effective outsourcing strategy
or third party providers do not perform as contracted, we may
experience operational difficulties, increased costs and a loss
of business that could have a material adverse effect on our
consolidated results of operations.
Our
credit facility subjects us to restrictive covenants that impose
operating and financial restrictions on our operations and could
limit our ability to grow our business.
We entered into a $200.0 million revolving credit facility
on August 16, 2007. On February 12, 2009, Bank of
America, N.A. issued a notice of default to Lehman Commercial
Paper, Inc., one of the lending institutions in the syndicate
with a commitment of $20.0 million, effectively limiting
our ability to borrow under the revolving credit facility to
$180.0 million at that time. On October 7, 2009,
Lehman Commercial Paper, Inc. assigned its interest in our
revolving credit facility to Barclays Bank PLC, effectively
restoring capacity in the facility to $200.0 million. As of
September 30, 2009, we had no balance outstanding under
this facility. In connection with this facility, we have made
covenants that may impose significant operating and financial
restrictions on us. These restrictions limit the incurrence of
additional indebtedness by our subsidiaries, limit the ability
of us and our subsidiaries to create liens and impose certain
other operating limitations. These restrictions could limit our
ability to obtain future financing or take advantage of business
opportunities. Furthermore, our credit facility requires us and
our insurance subsidiaries to maintain specified financial
ratios. Our ability to comply with these ratios may be affected
by events beyond our control, including prevailing economic,
financial and industry conditions. If we are unable to comply
with the covenants and ratios in our credit facility, we may be
deemed in default under the facility, or we may be required to
pay substantial fees or penalties to the lenders to obtain a
waiver of any such default. Either development could have a
material adverse effect on our business.
We may
need additional capital in the future, which may not be
available to us on favorable terms. Raising additional capital
could dilute your ownership in the Company and may cause the
market price of our common stock to fall.
We may need to raise additional funds through public or private
debt or equity financings in order to:
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fund liquidity needs;
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refinance our senior notes or our Capital Efficient Notes
(CENts);
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satisfy letter of credit or guarantee bond requirements that may
be imposed by our clients or by regulators;
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acquire new businesses or invest in existing businesses;
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grow our business;
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otherwise respond to competitive pressures;
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maintain adequate risk-based capital; or
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maintain our target ratings from rating agencies.
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Any additional capital raised through the sale of equity will
dilute your ownership percentage in our company and may decrease
the market price of our common stock. Furthermore, the
securities may have rights, preferences and privileges that are
senior or otherwise superior to those of our common stock. Any
additional financing we may need may not be available on terms
favorable to us.
To be eligible for borrowing under our revolving credit
facility, we must not be in default of any payment obligations,
covenants or other requirements set forth in the facility, and
the representations and
24
warranties that we make under the facility must continue to be
true in all material respects. Accordingly, it is possible that
we may not meet these requirements in the future and may not be
eligible to borrow under our credit facility.
In connection with the CENts offering, we entered into a
covenant that may limit our ability to undertake certain
additional types of financing to repay or redeem the CENts.
Risks
Related to Our Industry
Our
industry is highly regulated and changes in regulations
affecting our businesses may reduce our profitability and limit
our growth.
Our insurance businesses are heavily regulated and are subject
to a wide variety of laws and regulations in various
jurisdictions. State insurance laws regulate most aspects of our
insurance businesses and our insurance subsidiaries are
regulated by the insurance departments of the various states in
which they are domiciled and licensed.
State laws in the United States grant insurance regulatory
authorities broad administrative powers with respect to various
aspects of our insurance businesses, including:
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licensing companies and agents to transact business;
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calculating the value of assets to determine compliance with
statutory requirements;
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mandating certain insurance benefits;
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regulating certain premium rates;
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reviewing and approving policy forms;
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regulating unfair trade and claims practices, including the
imposition of restrictions on marketing and sales practices,
distribution arrangements and payment of inducements;
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establishing statutory capital and reserve requirements and
solvency standards;
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fixing maximum interest rates on insurance policy loans and
minimum rates for guaranteed crediting rates on life insurance
policies and annuity contracts;
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requiring regular market conduct examinations;
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approving changes in control of insurance companies;
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restricting the payment of dividends and other transactions
between affiliates; and
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regulating the types, amounts and valuation of investments.
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State insurance regulators and the National Association of
Insurance Commissioners, or NAIC, regularly re-examine existing
laws and regulations applicable to insurance companies and their
products. Changes in these laws and regulations, or in
interpretations thereof, are often made for the benefit of the
consumer at the expense of the insurer and thus could have an
adverse effect on our business.
Currently, the U.S. federal government does not regulate
directly the business of insurance. However, federal legislation
and administrative policies in several areas can significantly
and adversely affect insurance companies. These areas include
financial services regulation, securities regulation, pension
regulation, privacy, tort reform legislation and taxation. In
addition, various forms of direct federal regulation of
insurance have been proposed. These proposals include direct
federal regulation of insurance through an optional federal
charter and enhanced federal oversight through a Federal
Insurance Office. We cannot predict whether these or other
proposals will be adopted, or what impact, if any, such
proposals or, if enacted, such laws may have on our financial
condition, results of operations and cash flows.
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Many of our customers and independent sales intermediaries also
operate in regulated environments. Changes in the regulations
that affect their operations also may affect our business
relationships with them and their ability to purchase or to
distribute our products.
Compliance with applicable laws and regulations is time
consuming and personnel-intensive, and changes in these laws and
regulations may materially increase our direct and indirect
compliance efforts and other expenses of doing business.
U.S. federal and state securities laws apply to investment
products that are also securities, including variable annuities
and variable life insurance policies. As a result, some of our
subsidiaries and the policies and contracts they offer are
subject to regulation under these federal and state securities
laws. Some of our insurance subsidiaries separate accounts
are registered as investment companies under the Investment
Company Act of 1940. Some subsidiaries are registered as
broker-dealers under the Securities Exchange Act of 1934, as
amended, or Exchange Act, and are members of, and subject to
regulation by, the Financial Industry Regulatory Authority, or
FINRA. In addition, one of our subsidiaries also is registered
as an investment adviser under the Investment Advisers Act of
1940.
Securities laws and regulations are primarily intended to ensure
the integrity of the financial markets and to protect investors
in the securities markets or investment advisory or brokerage
clients. These laws and regulations generally grant supervisory
agencies broad administrative powers, including the power to
limit or restrict the conduct of business for failure to comply
with those laws and regulations.
Legal
and regulatory investigations and actions are increasingly
common in the insurance business and may result in financial
losses and harm our reputation.
We face a significant risk of litigation and regulatory
investigations and actions in the ordinary course of operating
our businesses, including the risk of class action lawsuits. Our
pending legal and regulatory actions include proceedings
specific to us and others generally applicable to business
practices in the industries in which we operate. In our
insurance operations, we may become subject to class actions and
we are or may become subject to individual suits relating, among
other things, to sales or underwriting practices, payment of
contingent or other sales commissions, claims payments and
procedures, product design, disclosure, administration,
additional premium charges for premiums paid on a periodic
basis, denial or delay of benefits and breaches of fiduciary or
other duties to customers. Plaintiffs in class action and other
lawsuits against us may seek very large or indeterminate
amounts, including punitive and treble damages, which may remain
unknown for substantial periods of time.
For example, the mutual fund and insurance industry has been the
focus of increased scrutiny and class action lawsuits related to
revenue sharing practices by mutual funds with
service providers and others in offering mutual fund investments
in qualified retirement plans. The lawsuits allege that service
providers were involved in self-dealing and prohibited
transactions under the Employee Retirement Income Security Act,
or ERISA. The outcome of these lawsuits is unknown. We have not
been the subject of any inquiries or lawsuits regarding these
practices. In addition, annuity sales to seniors are coming
under increased scrutiny by FINRA and state insurance
regulators, and have been the source of industry litigation in
situations where annuity sales have allegedly been unsuitable
for the seniors financial needs.
We are also subject to various regulatory inquiries, such as
information requests, subpoenas, market conduct exams and books
and record examinations, from state and federal regulators and
other authorities which may result in fines, recommendations for
corrective action or other regulatory actions.
Current or future investigations and proceedings could have an
adverse effect on our business. A substantial legal liability or
a significant regulatory action against us could have an adverse
effect on our business. Moreover, even if we ultimately prevail
in the litigation, regulatory action or investigation, we could
suffer significant reputational harm, which could have an
adverse effect on our business. Increased regulatory scrutiny
and any resulting investigations or proceedings could result in
new legal actions or precedents and industry-wide regulations or
practices that could adversely affect our business.
26
Proposals
for national health care reform could have a material adverse
effect on the profitability or marketability of the health
insurance products that we sell.
In our Group segment, we sell group medical stop-loss insurance
and limited benefit employee health plans to employer groups.
Addressing the affordability and availability of health
insurance, including reducing the number of uninsured, is a
major initiative of President Obama and members of the
U.S. Congress, and proposals that would address these
issues are pending in the U.S. Congress and in many states.
The proposals vary, and include a public health plan and other
private health plans for individual and small business
customers, individual insurance mandates, potential tax
ramifications, including, among other things, a windfall profits
tax on health insurers, the expansion of eligibility under
existing Medicaid
and/or
Federal Employees Health Benefit Plan programs, minimum medical
benefit ratios for health plans, mandatory issuance of insurance
coverage, limitations on antitrust immunity and requirements
that would limit the ability of health plans and insurers to
vary premiums based on assessments of underlying risk. While
certain of these measures would adversely affect us, at this
time we cannot predict whether they will be enacted, and if
enacted, the extent of the impact of these proposals on our
business or results of operations. If any of these initiatives
ultimately becomes effective, it could have a material adverse
effect on the profitability or marketability of the health
insurance products and services we sell and on our financial
condition, results of operations and cash flows.
Medical
advances, such as genetic research and diagnostic imaging, and
related legislation could adversely affect the financial
performance of our life insurance and annuities
businesses.
Genetic research includes procedures focused on identifying key
genes that render an individual predisposed to specific diseases
such as particular types of cancer and other diseases. Other
medical advances, such as diagnostic imaging technologies, may
be used to detect the early onset of diseases such as cancer and
cardiovascular disease. We believe that if individuals learn
through medical advances that they are predisposed to particular
conditions that may reduce life longevity or require long-term
care, they will be more likely to purchase our life insurance
policies or not to permit existing polices to lapse. In
contrast, if individuals learn that they lack the genetic
predisposition to develop the conditions that reduce longevity,
they will be less likely to purchase our life insurance products
but more likely to purchase certain annuity products. In
addition, such individuals that are existing policyholders will
be more likely to permit their policies to lapse.
If we were to gain access to the same genetic or medical
information as our prospective policyholders and
contractholders, then we would be able to take this information
into account in pricing our life insurance policies and annuity
contracts. However, a growing body of law imposes limitations on
an insurers ability to use genetic information in
underwriting.
Medical advances also could lead to new forms of preventive
care. Preventive care could extend the life and improve the
overall health of individuals. If this were to occur, the
duration of payments under certain of our annuity products
likely would increase, thereby reducing net earnings in that
business.
Changes
in tax laws could make some of our products less attractive to
consumers and as a result have an adverse effect on our
business.
Congress, from time to time, considers legislation that could
make our products less attractive to consumers, including
legislation that would reduce or eliminate the benefits derived
from the tax deferred nature of life insurance and annuity
products.
In addition, changes in tax laws could increase our tax
liability or increase our reporting obligations. For example, in
May 2009, President Obama released additional information about
the tax proposals contained in his Fiscal Year 2010 Budget (the
Budget). There are several proposals included in the
Budget that are significant for life insurance companies. Those
proposals include: modifying the dividends-received deduction
for life insurance company separate accounts; requiring
information reporting for private separate accounts of life
insurance companies; imposing new reporting requirements and
transfer-for-value
rules on purchasers of certain life insurance contracts;
expanding the interest expense disallowance for corporate-owned
life insurance; requiring information reporting on payments to
corporations; and increasing information return
27
penalties. These proposals not only could increase our tax
liabilities but also could reduce the attractiveness of certain
products we sell. These proposals may not be enacted or may be
modified by Congress prior to enactment.
Furthermore, the federal estate tax, which has undergone a
gradual repeal since 2001 that will continue to be phased in
through 2010, is scheduled to revert to pre-2001 law as of
January 1, 2011. The repeal of and continuing uncertainty
regarding the federal estate tax may adversely affect sales and
surrenders of some of our estate planning products.
Failures
elsewhere in the insurance industry could obligate us to pay
assessments through guaranty associations.
When an insurance company becomes insolvent, guaranty
associations in each of the 50 states levy assessments upon
all companies licensed to write insurance in the relevant lines
of business in that state, and use the proceeds to pay claims of
policyholder residents of that state, up to the state-specific
limit of coverage. The total amount of the assessment is based
on the number of insured residents in each state, and each
companys assessment is based on its proportionate share of
premium volume in the relevant lines of business and could have
an adverse effect on our results of operations. The failure of a
large life, health or annuity insurer could trigger guaranty
association assessments which we would be obligated to pay.
Risks
Relating to this Offering and Ownership of Our Common
Stock
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 Financial Corporation 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, 2008, our
insurance subsidiaries may pay dividends to us of up to
$117.9 million in the aggregate during 2009 without
obtaining regulatory approval, provided that the aggregate
dividends paid over the twelve months preceding any dividend
payment made during 2009 do not exceed the $117.9 million
limit. Competitive pressures generally require our insurance
subsidiaries to maintain financial strength ratings, which are
partly based on maintaining certain levels of capital. These
restrictions and other regulatory requirements, such as minimum
required risk-based capital ratios, affect the ability of our
insurance subsidiaries to make dividend payments. Limits on the
ability of the insurance subsidiaries to pay dividends could
adversely affect our liquidity, including our ability to pay
dividends to stockholders and service our debt.
There are a number of other factors that could affect our
ability to pay dividends, including the following:
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lack of availability of cash to pay dividends due to changes in
our operating cash flow, capital expenditure requirements,
working capital requirements and other cash needs;
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unexpected or increased operating or other expenses or changes
in the timing thereof;
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restrictions under Delaware law or other applicable law on the
amount of dividends that we may pay;
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a decision by our board of directors to modify or revoke its
policy to pay dividends; and
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the other risks described under Risk Factors.
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The failure to maintain or pay dividends could adversely affect
the trading price of our common stock.
28
There
may not be an active, liquid trading market for our common
stock.
Prior to this offering, there has been no public market for our
common stock. We cannot predict the extent to which an active
trading market with adequate liquidity will develop. If an
active trading market does not develop, you may have difficulty
selling any of our common stock that you purchase and the value
of your shares may be impaired.
If
securities or industry analysts do not publish research or
reports about our business, if they change their recommendations
regarding our stock adversely or if our operating results do not
meet their expectations, our stock price could
decline.
The trading market for our common stock will be influenced by
the research and reports that industry or securities analysts
publish about us, our business or our industry. If one or more
of these analysts cease coverage of our company or fail to
publish reports on us regularly, we could lose visibility in the
financial markets, which in turn could cause our stock price or
trading volume to decline. Moreover, if one or more of the
analysts who cover our company downgrade our stock or if our
operating results do not meet their expectations, our stock
price could decline.
As a
public company, we will become subject to additional financial
and other reporting and corporate governance
requirements.
We have historically operated our business as a private company.
After this offering, we will become obligated to file with the
Securities and Exchange Commission, or SEC, annual and quarterly
information and other reports that are specified in
Section 13 of the Exchange Act. We will also be required to
ensure that we have the ability to prepare financial statements
that are fully compliant with all SEC reporting requirements on
a timely basis. We will also become subject to other reporting
and corporate governance requirements, including the
requirements of the NYSE and certain provisions of the
Sarbanes-Oxley Act of 2002 and the regulations promulgated
thereunder, which will impose significant compliance obligations
upon us. As a public company, we will be required to:
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prepare and distribute periodic public reports and other
stockholder communications in compliance with our obligations
under the federal securities laws and NYSE rules;
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create or expand the roles and duties of our board of directors
and committees of the board;
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institute more comprehensive financial reporting and disclosure
compliance functions;
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involve and retain to a greater degree outside counsel and
accountants in the activities listed above;
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enhance our investor relations function;
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establish new internal policies, including those relating to
disclosure controls and procedures; and
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comply with the Sarbanes-Oxley Act of 2002, in particular
Section 404 and Section 302.
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These changes will require a significant commitment of
additional expense and other resources. We may not be successful
in implementing these requirements and implementing them could
adversely affect our business or operating results. In addition,
if we fail to implement the requirements with respect to our
internal accounting and audit functions, our ability to report
our operating results on a timely and accurate basis could be
impaired.
Significant
stockholders may be able to influence the direction of our
business.
Upon completion of this offering, our principal stockholders,
affiliates of White Mountains Insurance Group, Ltd. and
Berkshire Hathaway Inc., will each beneficially own
approximately 22.5% of our outstanding shares of common stock
(includes warrants exercisable for 9,487,872 shares held by
affiliates of each of White Mountains Insurance Group, Ltd. and
Berkshire Hathaway Inc.). On matters that are brought to
stockholders
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for their vote, they would continue to have the ability to
significantly influence all matters requiring stockholder
approval, including the nomination and election of directors and
the determination of the outcome of any corporate transaction or
other matter submitted to our stockholders for approval,
including amendments to our certificate of incorporation,
potential mergers or acquisitions, asset sales and other
significant corporate transactions. The interests of our
principal stockholders may not coincide with the interests of
the other holders of our common stock.
Our
internal control over financial reporting does not currently
meet the standards required by Section 404 of the
Sarbanes-Oxley Act of 2002, and failure to achieve and maintain
effective internal control over financial reporting in
accordance with Section 404 of the Sarbanes-Oxley Act could
have a material adverse effect on our business and stock
price.
As a privately held company, we have not been required to
maintain internal control over financial reporting in a manner
that meets the standards of publicly traded companies required
by Section 404 of the Sarbanes-Oxley Act, standards that we
may be required to meet in the course of preparing our
consolidated financial statements as of and for the year ended
December 31, 2010. Although we have documentation of our
internal controls, we do not document or test our compliance
with these controls on a periodic basis in accordance with
Section 404 of the Sarbanes-Oxley Act. In connection with
our 2008, 2007 and 2006 audits, no material weaknesses in our
internal control over financial reporting were identified.
If, as a public company, we are not able to implement the
requirements of Section 404 in a timely manner or with
adequate compliance, our independent registered public
accounting firm may not be able to attest to the adequacy of our
internal control over financial reporting. If we are unable to
maintain adequate internal control over financial reporting, we
may be unable to report our financial information on a timely
basis, may suffer adverse regulatory consequences or violations
of applicable stock exchange listing rules and may breach the
covenants under our revolving credit facilities and our senior
notes. There could also be a negative reaction in the financial
markets due to a loss of investor confidence in us and the
reliability of our financial statements. Confidence in our
financial statements is also likely to suffer if we or our
independent registered public accounting firm report a material
weakness in our internal control over financial reporting. In
addition, we will incur incremental costs in order to improve
our internal control over financial reporting and comply with
Section 404, including increased auditing and legal fees
and costs associated with hiring additional accounting and
administrative staff.
Our
stock price may fluctuate significantly, and you may not be able
to resell your shares at or above the initial public offering
price.
The trading price of our common stock may be volatile and
subject to wide price fluctuations in response to various
factors, including:
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market conditions in the broader stock market in general;
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actual or anticipated fluctuations in our quarterly financial
and operating results;
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changes in interest rates;
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introduction of new services or announcements of significant
contracts, acquisitions or capital commitments by us or our
competitors;
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regulatory or political developments;
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issuance of new or changed securities analysts reports or
recommendations, or the announcement of any changes to our
credit rating;
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additions or departures of key personnel;
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availability of capital;
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litigation and government investigations;
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legislative and regulatory developments;
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future sales of our common stock;
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investor perceptions of us and the life insurance
industry; and
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economic conditions.
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These and other factors may cause the market price of our common
stock to fluctuate substantially, which may limit or prevent
investors from readily selling their shares of common stock and
may otherwise negatively affect the liquidity of our common
stock. Even factors that do not specifically relate to our
company may materially reduce the market price of our common
stock, regardless of our operating performance.
Future
sales, or the perception of future sales, of a substantial
amount of our common stock may depress the market price of our
common stock.
Future sales, or the perception of future sales, of a
substantial number of shares of our common stock in the public
market after this offering could have a material adverse effect
on the prevailing market price of our common stock.
Upon completion of this offering, we will have
110,028,965 shares of common stock outstanding, or
129,004,709 shares if we give effect to the exercise of all
outstanding warrants (in each case assuming no exercise of the
underwriters over-allotment option). All shares sold in
this offering will be freely tradable without restriction under
the Securities Act, except for any shares that may be held or
acquired by affiliates of the Company, as that term is defined
in the Securities Act.
In connection with this offering, we, each of our executive
officers, directors and stockholders will have entered into
lock-up
agreements that prevent the sale of shares of our common stock
for 180 days after the date of this prospectus, subject to
an extension in certain circumstances described under
Underwriting. Following the expiration of the
lock-up
period, the remaining 83,028,965 shares outstanding held by
current stockholders of the Company will be available for sale
pursuant to Rule 144, subject to compliance with the
requirements and limitations under Rule 144. Furthermore,
our existing stockholders will have the right, subject to
certain conditions, to require us to register the sale of
83,028,965 of their shares of our common stock under the
Securities Act. By exercising their registration rights, and
selling a large number of shares, our stockholders could cause
the prevailing market price of our common stock to decline.
Purchasers
of common stock will experience immediate
dilution.
Based on the initial public offering price of $13.00 per share
(the midpoint of the price range shown on the cover page of this
prospectus), purchasers of our common stock in this offering
will experience an immediate dilution in the net tangible book
value per share of common stock of $0.58 from the offering
price. Investors purchasing common stock in this offering will
contribute approximately 17.4% of the total amount invested by
stockholders since inception (gross of estimated expenses of
this offering), but will only own approximately 15.7% of the
shares of common stock outstanding (in each case assuming no
exercise of the underwriters over-allotment option). In
addition, following this offering, a significant number of
warrants to purchase our common stock will be outstanding. You
will incur further dilution if outstanding warrants to purchase
common stock are exercised. Also, our amended and restated
certificate of incorporation allows us to issue significant
numbers of additional shares, including shares that may be
issued under the Equity Plan and Employee Stock Purchase Plan,
which could result in further dilution to purchasers of our
common stock in this offering.
31
Anti-takeover
provisions in our charter documents could delay or prevent a
change of control of our company and may result in an
entrenchment of management and diminish the value of our common
stock.
Our certificate of incorporation and bylaws contain provisions
that could depress the trading price of our common stock by
acting to discourage, delay or prevent a change of control of
our company or changes in management that our stockholders might
deem advantageous. Specific provisions in our certificate of
incorporation include:
|
|
|
|
|
our ability to issue preferred stock with terms that the board
of directors may determine, without stockholder approval;
|
|
|
|
a classified board of directors;
|
|
|
|
advance notice requirements for stockholder proposals and
nominations;
|
|
|
|
the absence of cumulative voting in the election of
directors; and
|
|
|
|
limitations on convening stockholder meetings.
|
These provisions in our certificate of incorporation and bylaws
may frustrate attempts to effect a takeover transaction that is
in the best interests of our minority stockholders. Even in the
absence of a takeover attempt, the existence of these provisions
may adversely affect the prevailing market price of our common
stock if they are viewed as discouraging future takeover
attempts.
Applicable
insurance laws may make it difficult to effect a change of
control of our company.
Before a person can acquire control of a U.S. insurance
company, prior written approval must be obtained from the
insurance commissioner of the state where the insurer is
domiciled. Generally, state statutes provide that control over a
domestic 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 domestic insurer. These statutes may frustrate or delay
attempts to effect a takeover transaction that would benefit our
stockholders.
32
FORWARD-LOOKING
STATEMENTS
This prospectus contains forward-looking statements
that are intended to enhance the readers ability to assess
our future financial and business performance. Forward-looking
statements include, but are not limited to, statements that
represent our beliefs concerning future operations, strategies,
financial results or other developments, and contain words and
phrases such as may, expects,
should, believes,
anticipates, estimates,
intends or similar expressions. In addition,
statements that refer to our future financial performance,
anticipated growth and trends in our business and in our
industry and other characterizations of future events or
circumstances are forward-looking statements. Because these
forward-looking statements are based on estimates and
assumptions that are subject to significant business, economic
and competitive uncertainties, many of which are beyond our
control or are subject to change, actual results could be
materially different.
Consequently, such forward-looking statements should be regarded
solely as our current plans, estimates and beliefs with respect
to, among other things, future events and financial performance.
Except as required under the federal securities laws, we do not
intend, and do not undertake, any obligation to update any
forward-looking statements to reflect future events or
circumstances after the date of such statements.
You should review carefully the section captioned Risk
Factors in this prospectus for a complete discussion of
the material risks of an investment in our common stock.
33
INDUSTRY
AND MARKET DATA
This prospectus includes industry and government data and
forecasts that we have prepared based, in part, upon industry
and government data and forecasts obtained from industry and
government publications and surveys. These sources include
publications and data compiled by the Employee Benefit Research
Institute, Kaiser Family Foundation, U.S. Census Bureau,
U.S. Department of Commerce, Bureau of Economic Analysis and the
Self-Insurance
Institute of America. Third party industry publications, surveys
and forecasts generally state that the information contained
therein has been obtained from sources believed to be reliable,
but there can be no assurance as to the accuracy or completeness
of included information. While we are responsible for the
adequacy and accuracy of the disclosure in this prospectus, we
have not independently verified any of the data from third party
sources nor have we ascertained the underlying economic
assumptions relied upon therein. Forecasts are particularly
likely to be inaccurate, especially over long periods of time.
While we are not aware of any misstatements regarding the
industry data presented herein, our estimates involve risks and
uncertainties and are subject to change based on various
factors, including those discussed in the section captioned
Risk Factors.
34
DILUTION
If you invest in our common stock in this offering, your
interest in our company will be diluted to the extent of the
difference between the initial public offering price per share
of our common stock and the pro forma net tangible book value
per share of our common stock after giving effect to this
offering.
Our net tangible book value per share represents the amount of
our total assets, excluding deferred policy acquisition costs,
goodwill, and intangible assets, less total liabilities, divided
by the total number of common shares then outstanding. As of
September 30, 2009, our net tangible book value was
approximately $1,157.3 million, or approximately $12.48 per
share based on shares of our common stock outstanding as of such
date. After giving effect to the sale of shares of our common
stock at an assumed initial public offering price of $13.00 per
share (the midpoint of the price range set forth on the cover
page of this prospectus), and after deducting estimated
underwriting discounts and commissions and estimated offering
expenses payable by us, our net tangible book value as of
September 30, 2009, which we refer to as our pro forma net
tangible book value, would have been approximately
$1,366.1 million, or $12.42 per share of our common stock.
This represents an immediate decrease in the net tangible book
value of $(0.06) per share to our existing stockholders, and an
immediate dilution of $0.58 per share to new investors
purchasing shares of our common stock in this offering.
The following table illustrates this dilution on a per share
basis:
|
|
|
|
|
Assumed initial public offering price per share
|
|
$
|
13.00
|
|
Net tangible book value per share as of September 30, 2009
|
|
$
|
12.48
|
|
Change in net tangible book value per share attributable to new
investors
|
|
$
|
(0.06
|
)
|
|
|
|
|
|
Pro forma net tangible book value per share after giving effect
to this offering
|
|
$
|
12.42
|
|
|
|
|
|
|
Dilution per share to new investors
|
|
$
|
0.58
|
|
|
|
|
|
|
The foregoing discussion and table do not give effect to the
18,975,744 shares subject to outstanding warrants that can
be exercised at a price of $11.49 per share. To the extent that
these warrants are exercised, there will be further dilution to
our shareholders. Illustrating this additional dilution, after
giving effect to the sale of shares of our common stock at an
assumed initial public offering price of $13.00 per share and
assuming the exercise of all outstanding warrants, and after
deducting estimated underwriting discounts and commissions and
estimated offering expenses payable by us, our net tangible book
value as of September 30, 2009 would have been
approximately $1,584.2 million, or $12.28 per share of our
common stock.
In addition, the foregoing discussion and table do not give
effect to 4,050,000 shares of common stock that we will
issue if the underwriters exercise their option to purchase
additional shares in full. To the extent that this option is
exercised, there will be further dilution to new investors.
The following table summarizes, as of September 30, 2009,
the number of shares of our common stock we issued and sold, the
total consideration we received and the average price per share
paid to us by our existing stockholders prior to this offering,
and by new investors purchasing shares of common stock in this
offering. The table assumes an initial public offering price of
$13.00 per share (the midpoint of the price range set forth on
the cover page of this prospectus) and excludes estimated
underwriting discounts and commissions and estimated offering
expenses payable by us:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Average
|
|
|
|
Shares Purchased
|
|
|
Consideration
|
|
|
Price per
|
|
|
|
Number
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Share
|
|
|
Existing stockholders prior to this offering(1)
|
|
|
92,729,455
|
|
|
|
84.3
|
%
|
|
$
|
1,064,899,906
|
|
|
|
82.6
|
%
|
|
$
|
11.48
|
|
New investors in this offering(1)
|
|
|
17,299,510
|
|
|
|
15.7
|
|
|
|
224,893,630
|
|
|
|
17.4
|
|
|
$
|
13.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
110,028,965
|
|
|
|
100.0
|
%
|
|
|
1,289,793,536
|
|
|
|
100.0
|
%
|
|
$
|
11.72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The number of shares disclosed for the existing stockholders
includes 9,700,490 shares being sold by the Selling Stockholders
in this offering. The number of shares disclosed for the new
investors does not include the shares being purchased by the new
investors from the Selling Stockholders in this offering. |
35
A $1.00 increase (decrease) in the assumed initial public
offering price of $13.00 per share would increase or decrease
our pro forma net tangible book value after giving effect to
this offering by $16.3 million and increase or decrease the
dilution to new investors by $0.85 per share, assuming the
number of shares offered by us, as set forth on the cover page
of this prospectus, remains the same and after deducting the
estimated underwriting discounts and commissions and estimated
expenses payable by us.
If the underwriters option to purchase additional shares
is exercised in full, the 83,028,965 shares held by our existing
stockholders will represent approximately 72.8% of the total
number of shares of our common stock outstanding after this
offering. The number of shares of our common stock held by new
investors will be 31,050,000, which includes the 9,700,490
shares being sold by the selling stockholders in this offering,
or approximately 27.2% of the total number of shares of our
common stock outstanding after this offering.
36
USE OF
PROCEEDS
We expect to receive net primary proceeds from this offering of
approximately $208.8 million. Our board of directors has
not made any determination of specific uses of proceeds at this
time. However, we expect to use the net primary proceeds from
this offering (including shares subject to the
underwriters option to purchase additional shares) for
general corporate purposes, which may include contributions of
capital to our insurance and other subsidiaries. Some of the
shares of common stock offered by this prospectus are being sold
by the Selling Stockholders. For information about the Selling
Stockholders, see Principal and Selling
Stockholders. We will not receive any of the proceeds from
the sale of shares by the Selling Stockholders.
37
DIVIDEND
POLICY
We intend to pay quarterly cash dividends on our common stock at
an initial rate of approximately $0.05 per share. The
declaration, payment and amount of future 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 the board of directors deems relevant.
Dividends on our common stock will also be paid to holders of
our outstanding warrants on a
one-to-one
basis.
We are a holding company with no significant business operations
of our own. All of our business operations are conducted through
our subsidiaries. Dividends and loans from, and cash generated
by, our subsidiaries will be our principal sources of cash to
repay indebtedness, fund operations and pay dividends.
Accordingly, our ability to pay dividends to our stockholders
will depend on the earnings and distributions of funds from our
subsidiaries. See Risk Factors Risks Relating
to this Offering and Ownership of Our Common Stock
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.
38
CAPITALIZATION
The following table sets forth our cash and cash equivalents and
capitalization as of September 30, 2009 on an actual basis
and on an as adjusted basis to give effect to receipt of the net
primary proceeds from the sale by us in this offering of shares
of common stock, assuming that this offering had been
consummated on September 30, 2009. The following table does
not give effect to 4,050,000 shares of common stock that we
will issue if the underwriters exercise their over-allotment
option in full. You should read this table in conjunction with
our consolidated financial statements and related notes and the
information provided in the section captioned
Managements Discussion and Analysis of Financial
Condition and Results of Operations.
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2009
|
|
|
|
|
|
|
As
|
|
|
|
Actual
|
|
|
Adjusted
|
|
|
|
(In millions)
|
|
|
Cash and cash equivalents
|
|
$
|
241.7
|
|
|
$
|
450.5
|
|
|
|
|
|
|
|
|
|
|
Borrowings and other obligations:
|
|
|
|
|
|
|
|
|
Revolving credit facility(1)
|
|
$
|
|
|
|
$
|
|
|
CENts
|
|
|
149.8
|
|
|
|
149.8
|
|
Senior notes
|
|
|
299.1
|
|
|
|
299.1
|
|
|
|
|
|
|
|
|
|
|
Total borrowings and other obligations
|
|
$
|
448.9
|
|
|
$
|
448.9
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value; 10.0 million shares
authorized, none issued
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value; 750.0 million shares
authorized, 92.7 million shares issued and outstanding,
actual; 110.0 million shares issued and outstanding, as adjusted
|
|
|
0.9
|
|
|
|
1.1
|
|
Additional paid-in capital
|
|
|
1,165.5
|
|
|
|
1,374.1
|
|
|
|
|
|
|
|
|
|
|
Total paid-in capital
|
|
|
1,166.4
|
|
|
|
1,375.2
|
|
Retained earnings
|
|
|
284.3
|
|
|
|
284.3
|
|
Accumulated other comprehensive income, net of taxes
|
|
|
29.8
|
|
|
|
29.8
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
1,480.5
|
|
|
|
1,689.3
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
1,929.4
|
|
|
$
|
2,138.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The revolving credit facility provides for borrowings of up to
$200.0 million. On February 12, 2009, Bank of America,
N.A. issued a notice of default to Lehman Commercial Paper,
Inc., one of the lending institutions in the syndicate with a
commitment of $20.0 million, effectively limiting our
ability to borrow under the revolving credit facility to
$180.0 million at that time. On October 7, 2009,
Lehman Commercial Paper, Inc. assigned its interest in our
revolving credit facility to Barclays Bank PLC, effectively
restoring capacity in the facility to $200.0 million. As of
September 30, 2009, we had no balance outstanding under
this facility. |
39
SELECTED
HISTORICAL CONSOLIDATED FINANCIAL DATA
The selected historical consolidated financial data, except for
non-GAAP financial measures, as of September 30, 2009 and
for the nine months ended September 30, 2009 and 2008 have
been derived from our unaudited interim historical consolidated
financial statements, which have been prepared on a basis
consistent with our audited consolidated financial statements,
included elsewhere in this prospectus. In the opinion of
management, such unaudited financial data, except for non-GAAP
financial measures, reflects all historical and recurring
adjustments necessary for a fair presentation of the results for
these periods. The results of operations for the nine months
ended September 30, 2009 are not necessarily indicative of
the results to be expected for the full year or any future
period. The selected historical consolidated financial data,
except for non-GAAP financial measures, as of December 31,
2008 and 2007 and for the years ended December 31, 2008,
2007 and 2006 have been derived from our audited consolidated
financial statements that are included elsewhere in this
prospectus. The selected historical consolidated financial data,
except for non-GAAP financial measures, presented below as of
December 31, 2006 and 2005 and for the year ended
December 31, 2005 and as of December 31, 2004 and for
the period from January 1, 2004 through August 1, 2004
and for the period from August 2, 2004 through
December 31, 2004 have been derived from our audited
consolidated financial statements that are not included in this
prospectus.
On August 2, 2004, we completed the Acquisition which was
accounted for using the purchase method of accounting, referred
to as purchase GAAP accounting, or PGAAP. We do not believe the
predecessor financial results prior to the Acquisition for the
period from January 1, 2004 through August 1, 2004 are
comparable to the results subsequent to the Acquisition. This
lack of comparability is primarily due to significant changes in
our operating costs and also because of PGAAP adjustments
impacting net investment income, policyholder benefits and
claims, interest credited amortization of deferred policy
acquisition costs, intangible assets and net realized investment
gains (losses). Under PGAAP, the purchase price is allocated to
the estimated fair value of the tangible and identifiable assets
acquired less liabilities assumed at the date of acquisition. In
conjunction with PGAAP for the Acquisition, we were required to
adjust our consolidated balance sheet to fair value and reset
our existing deferred policy acquisition costs, goodwill and
intangible asset balances at August 2, 2004 to zero.
In addition to our four operating segments and our Other
segment, during the year ended December 31, 2005 and prior,
our historical financial statements also include the results of
Symetra Asset Management Company and the majority of the
business of Symetra Services Corporation, which are presented in
our historical financial statements as discontinued operations.
40
This selected historical consolidated financial data should be
read in conjunction with other information contained in this
prospectus, including Managements Discussion and
Analysis of Financial Condition and Results of Operations
and our historical consolidated financial statements and related
notes included elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 2
|
|
|
January 1
|
|
|
|
Nine Months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
through
|
|
|
through
|
|
|
|
Ended September 30,
|
|
|
Year Ended December 31,
|
|
|
December 31,
|
|
|
August 1,
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except per share data)
|
|
|
|
|
|
|
|
|
Consolidated Income Statement Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
|
|
$
|
430.2
|
|
|
$
|
440.4
|
|
|
$
|
584.8
|
|
|
$
|
530.5
|
|
|
$
|
525.7
|
|
|
$
|
575.5
|
|
|
$
|
263.2
|
|
|
$
|
357.9
|
|
Net investment income
|
|
|
829.4
|
|
|
|
718.0
|
|
|
|
956.5
|
|
|
|
973.6
|
|
|
|
984.9
|
|
|
|
994.0
|
|
|
|
411.1
|
|
|
|
693.7
|
|
Other revenues
|
|
|
43.2
|
|
|
|
52.0
|
|
|
|
67.8
|
|
|
|
68.7
|
|
|
|
56.1
|
|
|
|
58.6
|
|
|
|
27.1
|
|
|
|
43.9
|
|
Net realized investment gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other-than-temporary
impairment losses on securities
|
|
|
(167.9
|
)
|
|
|
(61.7
|
)
|
|
|
(86.4
|
)
|
|
|
(16.2
|
)
|
|
|
(25.7
|
)
|
|
|
(7.7
|
)
|
|
|
(0.1
|
)
|
|
|
(10.3
|
)
|
Less: portion of losses recognized in other comprehensive income
|
|
|
94.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net impairment losses recognized in earnings
|
|
|
(73.7
|
)
|
|
|
(61.7
|
)
|
|
|
(86.4
|
)
|
|
|
(16.2
|
)
|
|
|
(25.7
|
)
|
|
|
(7.7
|
)
|
|
|
(0.1
|
)
|
|
|
(10.3
|
)
|
Other net realized investment gains (losses)
|
|
|
44.7
|
|
|
|
(41.6
|
)
|
|
|
(71.6
|
)
|
|
|
33.0
|
|
|
|
27.4
|
|
|
|
21.8
|
|
|
|
7.1
|
|
|
|
45.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net realized investment gains (losses)
|
|
|
(29.0
|
)
|
|
|
(103.3
|
)
|
|
|
(158.0
|
)
|
|
|
16.8
|
|
|
|
1.7
|
|
|
|
14.1
|
|
|
|
7.0
|
|
|
|
34.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
1,273.8
|
|
|
|
1,107.1
|
|
|
|
1,451.1
|
|
|
|
1,589.6
|
|
|
|
1,568.4
|
|
|
|
1,642.2
|
|
|
|
708.4
|
|
|
|
1,130.4
|
|
Benefits and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder benefits and claims
|
|
|
262.1
|
|
|
|
260.1
|
|
|
|
348.5
|
|
|
|
267.1
|
|
|
|
264.3
|
|
|
|
327.4
|
|
|
|
127.5
|
|
|
|
223.6
|
|
Interest credited
|
|
|
629.2
|
|
|
|
569.1
|
|
|
|
766.1
|
|
|
|
752.3
|
|
|
|
765.9
|
|
|
|
810.9
|
|
|
|
360.2
|
|
|
|
556.4
|
|
Other underwriting and operating expenses
|
|
|
186.7
|
|
|
|
201.9
|
|
|
|
265.8
|
|
|
|
281.9
|
|
|
|
260.5
|
|
|
|
273.2
|
|
|
|
123.3
|
|
|
|
187.2
|
|
Fair value of warrants issued to investors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101.5
|
|
|
|
|
|
Interest expense
|
|
|
23.8
|
|
|
|
24.0
|
|
|
|
31.9
|
|
|
|
21.5
|
|
|
|
19.1
|
|
|
|
12.4
|
|
|
|
3.5
|
|
|
|
|
|
Amortization of deferred policy acquisition costs
|
|
|
36.4
|
|
|
|
17.7
|
|
|
|
25.8
|
|
|
|
18.0
|
|
|
|
14.6
|
|
|
|
11.9
|
|
|
|
1.6
|
|
|
|
34.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses
|
|
|
1,138.2
|
|
|
|
1,072.8
|
|
|
|
1,438.1
|
|
|
|
1,340.8
|
|
|
|
1,324.4
|
|
|
|
1,435.8
|
|
|
|
717.6
|
|
|
|
1,001.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
|
135.6
|
|
|
|
34.3
|
|
|
|
13.0
|
|
|
|
248.8
|
|
|
|
244.0
|
|
|
|
206.4
|
|
|
|
(9.2
|
)
|
|
|
129.0
|
|
Provision (benefit) for income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
(4.2
|
)
|
|
|
34.2
|
|
|
|
23.8
|
|
|
|
62.8
|
|
|
|
92.4
|
|
|
|
22.2
|
|
|
|
21.3
|
|
|
|
0.9
|
|
Deferred
|
|
|
43.6
|
|
|
|
(26.9
|
)
|
|
|
(32.9
|
)
|
|
|
18.7
|
|
|
|
(7.9
|
)
|
|
|
39.7
|
|
|
|
10.7
|
|
|
|
30.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision (benefit) for income taxes
|
|
|
39.4
|
|
|
|
7.3
|
|
|
|
(9.1
|
)
|
|
|
81.5
|
|
|
|
84.5
|
|
|
|
61.9
|
|
|
|
32.0
|
|
|
|
31.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
96.2
|
|
|
|
27.0
|
|
|
|
22.1
|
|
|
|
167.3
|
|
|
|
159.5
|
|
|
|
144.5
|
|
|
|
(41.2
|
)
|
|
|
97.6
|
|
Income (loss) from discontinued operations (net of taxes)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.0
|
|
|
|
(2.4
|
)
|
|
|
2.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
96.2
|
|
|
$
|
27.0
|
|
|
$
|
22.1
|
|
|
$
|
167.3
|
|
|
$
|
159.5
|
|
|
$
|
145.5
|
|
|
$
|
(43.6
|
)
|
|
$
|
99.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.86
|
|
|
$
|
0.24
|
|
|
$
|
0.20
|
|
|
$
|
1.50
|
|
|
$
|
1.43
|
|
|
$
|
1.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.86
|
|
|
$
|
0.24
|
|
|
$
|
0.20
|
|
|
$
|
1.50
|
|
|
$
|
1.43
|
|
|
$
|
1.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
111.622
|
|
|
|
111.622
|
|
|
|
111.622
|
|
|
|
111.622
|
|
|
|
111.622
|
|
|
|
111.622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
111.623
|
|
|
|
111.622
|
|
|
|
111.622
|
|
|
|
111.622
|
|
|
|
111.622
|
|
|
|
111.622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per common share
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1.79
|
|
|
$
|
0.90
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP Financial Measure(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted operating income (loss)
|
|
$
|
115.2
|
|
|
$
|
91.8
|
|
|
$
|
122.9
|
|
|
$
|
154.9
|
|
|
$
|
159.8
|
|
|
$
|
133.4
|
|
|
$
|
(46.9
|
)
|
|
$
|
75.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation to net income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
96.2
|
|
|
$
|
27.0
|
|
|
$
|
22.1
|
|
|
$
|
167.3
|
|
|
$
|
159.5
|
|
|
$
|
145.5
|
|
|
$
|
(43.6
|
)
|
|
$
|
99.9
|
|
Less: Net realized investment gains (losses) (net of taxes)(3)
|
|
|
(18.9
|
)
|
|
|
(67.1
|
)
|
|
|
(102.7
|
)
|
|
|
10.9
|
|
|
|
1.1
|
|
|
|
9.2
|
|
|
|
4.6
|
|
|
|
22.7
|
|
Add: Net realized and unrealized investment gains (losses) on
FIA options (net of taxes)(4)
|
|
|
0.1
|
|
|
|
(2.3
|
)
|
|
|
(1.9
|
)
|
|
|
(1.5
|
)
|
|
|
1.4
|
|
|
|
(2.9
|
)
|
|
|
1.3
|
|
|
|
(1.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted operating income (loss)
|
|
$
|
115.2
|
|
|
$
|
91.8
|
|
|
$
|
122.9
|
|
|
$
|
154.9
|
|
|
$
|
159.8
|
|
|
$
|
133.4
|
|
|
$
|
(46.9
|
)
|
|
$
|
75.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
(In millions, except share and per share data)
|
|
|
|
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
20,035.2
|
|
|
$
|
16,252.5
|
|
|
$
|
16,905.0
|
|
|
$
|
17,305.3
|
|
|
$
|
18,332.8
|
|
|
$
|
19,244.8
|
|
Total assets
|
|
|
22,226.0
|
|
|
|
19,229.6
|
|
|
|
19,560.2
|
|
|
|
20,114.6
|
|
|
|
20,980.1
|
|
|
|
22,182.0
|
|
Total debt
|
|
|
448.9
|
|
|
|
448.8
|
|
|
|
448.6
|
|
|
|
298.7
|
|
|
|
300.0
|
|
|
|
300.0
|
|
Separate account assets
|
|
|
818.6
|
|
|
|
716.2
|
|
|
|
1,181.9
|
|
|
|
1,233.9
|
|
|
|
1,188.8
|
|
|
|
1,228.4
|
|
Accumulated other comprehensive income (loss) (net of taxes)
(AOCI)
|
|
|
29.8
|
|
|
|
(1,052.6
|
)
|
|
|
(12.5
|
)
|
|
|
(0.5
|
)
|
|
|
136.6
|
|
|
|
312.9
|
|
Total stockholders equity
|
|
|
1,480.5
|
|
|
|
286.2
|
|
|
|
1,285.1
|
|
|
|
1,327.3
|
|
|
|
1,404.9
|
|
|
|
1,435.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Statutory Financial Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory capital and surplus
|
|
$
|
1,331.7
|
|
|
$
|
1,179.0
|
|
|
$
|
1,225.0
|
|
|
$
|
1,266.2
|
|
|
$
|
1,260.1
|
|
|
$
|
1,138.4
|
|
Asset valuation reserve (AVR)
|
|
|
117.3
|
|
|
|
113.7
|
|
|
|
176.0
|
|
|
|
158.4
|
|
|
|
140.9
|
|
|
|
107.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory capital and surplus and AVR
|
|
$
|
1,449.0
|
|
|
$
|
1,292.7
|
|
|
$
|
1,401.0
|
|
|
$
|
1,424.6
|
|
|
$
|
1,401.0
|
|
|
$
|
1,246.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book value per common share(5)
|
|
$
|
13.25
|
|
|
$
|
2.56
|
|
|
$
|
11.51
|
|
|
$
|
11.89
|
|
|
$
|
12.59
|
|
|
$
|
12.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP Financial Measures(6):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted book value
|
|
$
|
1,450.7
|
|
|
$
|
1,338.8
|
|
|
$
|
1,297.6
|
|
|
$
|
1,327.8
|
|
|
$
|
1,268.3
|
|
|
$
|
1,122.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation to stockholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
$
|
1,480.5
|
|
|
$
|
286.2
|
|
|
$
|
1,285.1
|
|
|
$
|
1,327.3
|
|
|
$
|
1,404.9
|
|
|
$
|
1,435.8
|
|
Less: AOCI
|
|
|
29.8
|
|
|
|
(1,052.6
|
)
|
|
|
(12.5
|
)
|
|
|
(0.5
|
)
|
|
|
136.6
|
|
|
|
312.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted book value
|
|
$
|
1,450.7
|
|
|
$
|
1,338.8
|
|
|
$
|
1,297.6
|
|
|
$
|
1,327.8
|
|
|
$
|
1,268.3
|
|
|
$
|
1,122.9
|
|
Add: Assumed proceeds from exercise of warrants
|
|
|
218.1
|
|
|
|
218.1
|
|
|
|
218.1
|
|
|
|
218.1
|
|
|
|
218.1
|
|
|
|
218.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted book value, as converted
|
|
$
|
1,668.8
|
|
|
$
|
1,556.9
|
|
|
$
|
1,515.7
|
|
|
$
|
1,545.9
|
|
|
$
|
1,486.4
|
|
|
$
|
1,341.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted book value per common share(7)
|
|
$
|
15.65
|
|
|
$
|
14.45
|
|
|
$
|
14.01
|
|
|
$
|
14.33
|
|
|
$
|
13.69
|
|
|
$
|
12.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted book value per common share, as converted(8)
|
|
$
|
14.94
|
|
|
$
|
13.95
|
|
|
$
|
13.58
|
|
|
$
|
13.85
|
|
|
$
|
13.32
|
|
|
$
|
12.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
ROE(9)
|
|
|
13.9
|
%
|
|
|
2.6
|
%
|
|
|
12.6
|
%
|
|
|
12.8
|
%
|
|
|
9.9
|
%
|
Average stockholders equity(10)
|
|
$
|
658.0
|
|
|
$
|
861.8
|
|
|
$
|
1,328.3
|
|
|
$
|
1,249.5
|
|
|
$
|
1,465.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP Financial Measure(11):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating ROAE
|
|
|
10.6
|
%
|
|
|
9.2
|
%
|
|
|
11.2
|
%
|
|
|
12.1
|
%
|
|
|
11.2
|
%
|
Average adjusted book value(12)
|
|
$
|
1,379.9
|
|
|
$
|
1,329.8
|
|
|
$
|
1,380.2
|
|
|
$
|
1,324.2
|
|
|
$
|
1,194.2
|
|
|
|
|
(1) |
|
Basic net income per common share assumes that all participating
securities, including warrants, have been outstanding since the
beginning of the period using the two-class method. Diluted net
income per common share includes the dilutive impact of
non-participating, unvested restricted stock awards, based on
the application of the treasury stock method, weighted for the
portion of the period they were outstanding. |
|
|
|
(2) |
|
Management considers adjusted operating income to be a useful
supplement to net income, its most comparable GAAP measure, in
evaluating our financial performance. We believe that the
non-GAAP presentation of adjusted operating income is valuable
because it assists an investor in determining whether our
insurance-related revenues, composed primarily of premiums and
net investment income, have been sufficient to generate
operating earnings after meeting our insurance-related
obligations, composed primarily of claims paid to policyholders
and investment returns credited to policyholder accounts, and
other operating costs. Though the after-tax net realized gains
(losses) excluded from adjusted operating income recur in most
periods, the timing and amount are driven by investment
decisions and external economic developments unrelated to our
management of the insurance and underwriting aspects of our
business. For a definition and discussion of this non-GAAP
measure and |
footnotes continued on following page
42
|
|
|
|
|
other metrics used in our analysis, see Managements
Discussion and Analysis of Financial Condition and Results of
Operations Use of non-GAAP Financial
Measures. |
|
(3) |
|
Net realized investment gains (losses) are reported net of taxes
of $(10.1) million, $(36.2) million,
$(55.3) million, $5.9 million, $0.6 million and
$4.9 million for the nine months ended September 30,
2009 and 2008, and the twelve months ended December 31,
2008, 2007, 2006 and 2005, respectively. Prior and subsequent to
the Acquisition, 2004 net realized investment gains were net of
taxes of $2.4 million and $12.2 million, respectively. |
|
(4) |
|
Net realized and unrealized investment gains (losses) on FIA
options are reported net of taxes of $0.1 million,
$(1.3) million, $(1.0) million, $(0.8) million,
$0.8 million and $(1.5) million for the nine months
ended September 30, 2009 and 2008, and the twelve months
ended December 31, 2008, 2007, 2006 and 2005, respectively.
Prior and subsequent to the Acquisition, 2004 net realized
investment gains were net of taxes of $(0.9) million, and
$0.7 million, respectively. |
|
(5) |
|
Book value per common share is calculated based on
stockholders equity divided by outstanding common shares
and shares subject to outstanding warrants totaling 111,705,199,
as of September 30, 2009 and 111,622,039 as of
December 31, 2008, 2007, 2006, 2005 and 2004. |
|
|
|
(6) |
|
Management considers adjusted book value to be a useful
supplement to total stockholders equity, its most
comparable GAAP measure, in evaluating our financial condition.
Adjusted book value is calculated based on stockholders
equity less AOCI. We believe that 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. By evaluating our adjusted book value, an investor can
assess our financial condition based on our general practice of
holding our fixed investments to maturity. For a definition and
discussion of this non-GAAP measure and other metrics used in
our analysis, see Managements Discussion and
Analysis of Financial Condition and Results of
Operations Use of non-GAAP Financial
Measures. |
|
|
|
(7) |
|
Management considers adjusted book value per common share to be
a useful supplement to book value per common share, its most
comparable GAAP measure, in evaluating our financial performance
and condition. Adjusted book value per common share is
calculated based on stockholders equity less AOCI, divided
by outstanding common shares, totaling 92,729,455 as of
September 30, 2009 and 92,646,295 as of December 31,
2008, 2007, 2006, 2005 and 2004. We believe investors find it
useful if we present them with adjusted book value, a non-GAAP
measure that removes AOCI from stockholders equity, and
then translate it into another measure, adjusted book value per
common share, which allows the investor to understand the value
of its investment on the adjusted book value basis. For a
definition and discussion of this non-GAAP measure and other
metrics used in our analysis, see Managements
Discussion and Analysis of Financial Condition and Results of
Operations Use of non-GAAP Financial
Measures. |
|
|
|
(8) |
|
Management considers adjusted book value per common share, as
converted, to be a useful supplement to book value per common
share, its most comparable GAAP measure, in evaluating our
financial performance and condition. Adjusted book value per
common share, as converted, is calculated as adjusted book value
plus the assumed proceeds from the outstanding warrants, divided
by the sum of outstanding common shares and shares subject to
outstanding warrants, totaling 111,705,199 as of
September 30, 2009 and 111,622,039 as of December 31,
2008, 2007, 2006, 2005 and 2004. We believe investors find it
useful if we present them with adjusted book value, a non-GAAP
measure that removes AOCI from stockholders equity and
then translate it into another measure, adjusted book value per
common share, as converted, which gives effect to the exercise
of our outstanding warrants. For a definition and discussion of
this non-GAAP measure and other metrics used in our analysis,
see Managements Discussion and Analysis of Financial
Condition and Results of Operations Use of
non-GAAP Financial Measures. |
|
|
|
(9) |
|
Return on stockholders equity is calculated as net income
divided by average stockholders equity. |
|
(10) |
|
Average stockholders equity is derived by averaging ending
stockholders equity for the most recent five quarters. |
|
|
|
(11) |
|
Management considers operating ROAE to be a useful supplement to
return on stockholders equity, or ROE, its most comparable
GAAP measure, in evaluating our financial performance. Operating
ROAE is calculated based on adjusted operating income divided by
average adjusted book value. The numerator and denominator of
this measure have been reconciled to net income and
stockholders equity, respectively, their most comparable
GAAP financial measures. We believe that the non-GAAP
presentation of this measure is valuable to an investor as it
can help an investor form a judgment as to how effectively our
management uses funds invested by our stockholders to generate
adjusted operating income growth. For a definition and
discussion of this non-GAAP measure and other metrics used in
our analysis, see Managements Discussion and
Analysis of Financial Condition and Results of
Operations Use of non-GAAP Financial
Measures. |
|
|
|
(12) |
|
Average adjusted book value is derived by averaging ending
adjusted book value for the most recent five quarters. |
43
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with
the audited and unaudited historical financial statements and
the accompanying notes included in this prospectus, as well as
the discussion under Selected Historical Consolidated
Financial Data. This discussion contains forward-looking
statements that involve risks and uncertainties. Our actual
results may differ materially from those discussed in or implied
by any of the forward-looking statements as a result of various
factors, including but not limited to those listed under
Risk Factors and Forward-Looking
Statements. Our fiscal year ends on December 31 of each
calendar year.
Management considers certain non-GAAP financial measures,
including adjusted operating income (loss), adjusted book value,
adjusted book value per common share, adjusted book value per
common share, as converted, and operating ROAE to be useful to
investors in evaluating our financial performance and condition.
These measures have been reconciled to their most comparable
GAAP financial measures. For a definition of these non-GAAP
measures and other metrics used in our analysis, see
Use of non-GAAP Financial
Measures.
Overview
We are a life insurance company focused on profitable growth in
selected group health, retirement, life insurance and employee
benefits markets. Our operations date back to 1957 and many of
our agency and distribution relationships have been in place for
decades. We are headquartered in Bellevue, Washington and employ
approximately 1,100 people in 16 offices across the United
States, serving approximately 1.8 million customers.
As of September 30, 2009, our stockholders equity was
$1,480.5 million, our adjusted book value was
$1,450.7 million and we had total assets of
$22.2 billion. For the twelve months ended
September 30, 2009, our return on equity, or ROE, was 13.9%
and our operating return on average equity, or operating ROAE,
was 10.6%. We define adjusted book value as stockholders
equity less accumulated other comprehensive income (loss), or
AOCI, and we define operating ROAE as adjusted operating income
divided by average adjusted book value. Adjusted book value,
adjusted operating income and operating ROAE are non-GAAP
measures. For reconciliations of adjusted book value to
stockholders equity and adjusted operating income to net
income and for a summary presentation of our operating results
and financial position calculated in accordance with GAAP,
please see Summary Historical Consolidated
Financial and Other Data on page 9.
Our
Operations
We conduct our business through five segments, four of which are
operating:
|
|
|
|
|
Group. We offer medical stop-loss insurance, limited
medical benefit plans, group life insurance, accidental death
and dismemberment insurance and disability insurance mainly to
employer groups of 50 to 5,000 individuals. We also offer
managing general underwriting, or MGU, services through MRM.
|
|
|
|
Retirement Services. We offer fixed and variable
deferred annuities, including tax sheltered annuities,
individual retirement accounts, or IRAs, and group annuities to
qualified retirement plans, including Section 401(k),
403(b) and 457 plans.
|
|
|
|
Income Annuities. We offer single premium immediate
annuities, or SPIAs, for customers seeking a reliable source of
retirement income and structured settlement annuities to fund
third party personal injury settlements. In addition, we offer
our existing structured settlement clients a variety of funding
services product options.
|
|
|
|
Individual. We offer a wide array of term, universal
and variable life insurance as well as bank-owned life
insurance, or BOLI.
|
|
|
|
Other. This segment consists of unallocated
corporate income, composed primarily of investment income on
unallocated surplus, unallocated corporate expenses, interest
expense on
|
44
|
|
|
|
|
debt, tax credits from our tax preferred affordable housing
investments, the results of small, non-insurance businesses that
are managed outside of our operating segments, and inter-segment
elimination entries.
|
Current
Outlook
During the first nine months of 2009, the capital and credit
markets showed signs of improvement following a period of
extreme volatility and disruption for more than twelve months
that affected equity market returns, interest rates, liquidity,
access to capital and cost of capital. Economic conditions
remain uncertain, leaving us exposed to further challenges to
our financial condition and results from operations. If the
current economic environment were to deteriorate further, it
could lead to increased credit defaults, and additional
write-downs of our securities for
other-than-temporary
impairments.
The tight liquidity in the credit markets in 2008 and 2009
resulted in our maintaining higher balances of cash and cash
equivalent assets. Because of the maintenance of these higher
balances of cash and cash equivalent assets, fewer of our assets
were deployed in higher income earning assets, while our
liabilities are increasing based on increasing credited rates to
our customers. As a result, we have experienced lower growth in
our investment income than expected, especially in our
Retirement Services segment.
Despite the still challenging economic environment, we have seen
increases, in the first nine months of 2009 as compared to the
equivalent period of 2008, in sales of our fixed deferred
annuity product which offers our customers an easy to
understand, stable return on their retirement savings. We have
also experienced increases over the same period in sales of our
single premium life insurance product and SPIA products.
We believe that the recent market disruption has created a
tremendous opportunity to build our existing relationships and
add new long-term relationships because of our simple to
understand product designs and because many of our competitors
are in the midst of cleaning up their product suites and balance
sheets. We also seek to take advantage of favorable demographic
trends, including increasing retirement savings and income needs
and the growing demand for affordable health insurance.
Revenues
and Expenses
We earn revenues primarily from premiums earned on group life
and health and individual insurance products, cost of insurance,
or COI, charges primarily from our universal life and BOLI
products, net investment income, net realized investment gains
and other revenues. Other revenues include mortality and
expense, surrender and other administrative charges, revenues
from our non-insurance businesses and revenues from fee
arrangements with our reinsurance partners.
Each operating segment maintains its own portfolio of invested
assets. The realized gains (losses) incurred are reported in the
segment in which they occur. The unallocated portion of net
investment income and the unallocated realized gains (losses)
are reported in the Other segment.
Our primary expenses include interest credited, benefits and
claims and general business and operating expenses, including
commissions. We allocate certain corporate expenses to each of
our operating segments using multiple factors which include
headcount, allocated capital, account values and time study
results.
Critical
Accounting Policies and Estimates and Recently Issued Accounting
Standards
The accounting policies discussed in this section are those that
we consider to be particularly critical to an understanding of
our financial statements because their application places the
most significant demands on our ability to judge the effect of
inherently uncertain matters on our financial results. For all
of these policies, we caution that future events rarely develop
exactly as forecast, and our managements best estimates
may require adjustment. For a discussion of recently adopted and
not yet adopted accounting standards, see Note 2 to our
audited consolidated financial statements and Note 2 to our
interim consolidated financial statements included elsewhere in
this prospectus.
45
Other-Than-Temporary
Impairments (OTTI)
One of the significant estimates related to
available-for-sale
securities is the evaluation of investments for OTTI. We analyze
investments that meet our impairment criteria to determine
whether the decline in value is
other-than-temporary.
The impairment review involves the finance investment management
team, as well as our portfolio asset managers. To make this
determination for each security, we consider both quantitative
and qualitative criteria including:
|
|
|
|
|
how long and by how much the fair value has been below cost or
amortized cost;
|
|
|
|
the financial condition and near-term prospects of the issuer of
the security, including any specific events that may affect its
operations or earnings potential, or compliance with terms and
covenants of the security;
|
|
|
|
changes in the financial condition of the securitys
underlying collateral;
|
|
|
|
any downgrades of the security by a rating agency;
|
|
|
|
any reduction or elimination of dividends or nonpayment of
scheduled interest payments; and
|
|
|
|
for fixed maturities, our intent to sell the security or whether
it is more likely than not that we will be required to sell the
security prior to recovery of its amortized cost considering any
regulatory developments and our liquidity needs.
|
Based on the analysis, we make a judgment as to whether the loss
is
other-than-temporary.
The amount of the loss recorded in our consolidated statements
of operations is determined based on the accounting guidance in
effect during the period of the
other-than-temporary
determination. We adopted new accounting guidance for
impairments of our fixed maturities effective January 1,
2009. See Note 2 to our interim consolidated financial
statements included elsewhere in this prospectus.
Prior to January 1, 2009, under the then existing
accounting guidance, if the loss was determined to be
other-than-temporary,
we recorded an impairment charge equal to the difference between
the fair value and the amortized cost basis of the security
within net realized investment gains (losses) in our
consolidated statements of income in the period that we made the
determination. The fair value of the
other-than-temporarily
impaired investment became its new cost basis. We also recorded
an impairment charge if we did not have the intent
and/or the
ability to hold the security until the fair value was expected
to recover to amortized cost or until maturity, resulting in a
charge recorded for a security that may not have had credit
issues. This situation can exist as a result of certain
portfolio management or cash management strategies.
Effective January 1, 2009, we adopted new accounting
guidance for the recognition and disclosure of OTTI for our
fixed maturities. Our marketable equity securities,
available-for-sale consist primarily of non-redeemable preferred
stock, which are evaluated similarly to fixed maturities. The
adoption of the new accounting guidance required that OTTI
losses be separated into the amount representing the decrease in
cash flows expected to be collected (credit loss),
which is recognized in earnings, and the amount related to all
other factors (noncredit loss), which is recognized
in other comprehensive income (loss). In addition, the new
guidance replaces the requirement for management to assert that
we have the intent and ability to hold an impaired security
until recovery with the requirement that management assert that
it does not have the intent to sell the security and that it is
more likely than not that we will not be required to sell the
security before recovery of our amortized cost basis. For
securities we intend to sell or it is more likely than not that
we will be required to sell the security before recovery, the
impairment charge is equal to the difference between the fair
value and the amortized cost basis of the security in the period
of determination. In determining our intent to sell a security
or whether it is more likely than not that we will be required
to sell a security, we evaluate facts and circumstances such as
decisions to reposition our security portfolio, sales of
securities to meet any 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 flow, the
amortized cost is written down to our estimated recovery value
and recorded as a realized loss in our consolidated statements
of operations, as this is determined to be a credit loss. The
remainder of the decline in
46
fair value is recorded as OTTI on fixed maturities not related
to credit losses in AOCI, 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 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 management
judgment and include the probability of issuer default and
estimates regarding timing and amount of expected recoveries. In
addition, projections of expected future fixed maturity security
cash flows may change based upon new information regarding the
performance of the issuer
and/or
underlying collateral. Future impairments may develop if actual
results underperform current cash flow modeling assumptions,
which may be the result of macroeconomic factors, changes in
assumptions used and specific deterioration in certain industry
sectors or company failures.
As a result of the adoption of the new OTTI accounting guidance,
we recorded a cumulative effect adjustment, resulting in an
increase of $15.7 million, net of tax, to retained earnings
as of January 1, 2009, with a corresponding decrease to
AOCI, to reclassify the noncredit portion of previously
other-than-temporarily
impaired fixed maturity securities. In addition, the amortized
cost basis of fixed maturity securities for which a noncredit
OTTI loss was previously recognized was increased by
$24.1 million.
As of September 30, 2009 and December 31, 2008, the
fair value of our
available-for-sale
securities that are below cost or amortized cost by 20% or more
were $0.7 billion and $2.5 billion, respectively. The
unrealized losses on these securities were $308.7 million
and $1.2 billion, respectively.
Fair
Value
On January 1, 2008, we adopted fair value accounting
guidance which allows companies, at their option, to make an
election on an individual instrument basis to report financial
assets and liabilities at fair value. The election must be made
at the inception of a transaction and may not be reversed. The
election may also be made for existing financial assets and
liabilities at the time of adoption. Unrealized gains and losses
on assets or liabilities for which the fair value option has
been elected are reported in earnings.
We elected the fair value option for investments in common
stock, which are presented as trading securities, and
investments in certain limited partnerships (including hedge
funds and private equity funds), regardless of ownership
percentage, which are presented as investments in limited
partnerships.
Also on January 1, 2008, we adopted the accounting guidance
related to the framework for fair value measurement. Fair value
is defined as the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction
between market participants (an exit price). The
accounting guidance establishes a fair value hierarchy that
distinguishes between inputs based on market data from
independent sources (observable inputs) and a
reporting entitys internal assumptions based upon the best
information available when external market data is limited or
unavailable (unobservable inputs). The fair value
hierarchy prioritizes fair value measurements into three levels
based on the nature of the inputs. The level in the fair value
hierarchy within which the fair value measurement falls is
determined based on the lowest level input that is significant
to the fair value measurement. For further discussion of the
levels of the fair value hierarchy, see Note 7 to our
audited consolidated financial statements included elsewhere in
this prospectus.
47
The availability of market observable information is the
principal factor in determining the level that our investments
are assigned in the fair value hierarchy. The following table
summarizes our investments carried at fair value and the
respective fair value hierarchy, based on input levels:
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2009
|
|
|
|
Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Level 3 Percent
|
|
|
Types of Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities, available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies
|
|
$
|
45.7
|
|
|
$
|
|
|
|
$
|
45.7
|
|
|
$
|
|
|
|
|
|
%
|
State and political subdivisions
|
|
|
484.9
|
|
|
|
|
|
|
|
477.7
|
|
|
|
7.2
|
|
|
|
0.1
|
|
Foreign governments
|
|
|
28.2
|
|
|
|
|
|
|
|
28.2
|
|
|
|
|
|
|
|
|
|
Corporate securities
|
|
|
12,414.0
|
|
|
|
|
|
|
|
11,508.9
|
|
|
|
905.1
|
|
|
|
4.8
|
|
Residential mortgage-backed securities
|
|
|
3,536.6
|
|
|
|
|
|
|
|
3,270.5
|
|
|
|
266.1
|
|
|
|
1.4
|
|
Commercial mortgage-backed securities
|
|
|
1,873.4
|
|
|
|
|
|
|
|
1,850.1
|
|
|
|
23.3
|
|
|
|
0.1
|
|
Other debt obligations
|
|
|
159.5
|
|
|
|
|
|
|
|
146.3
|
|
|
|
13.2
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities,
available-for-sale
|
|
|
18,542.3
|
|
|
|
|
|
|
|
17,327.4
|
|
|
|
1,214.9
|
|
|
|
6.5
|
|
Marketable equity securities,
available-for-sale
|
|
|
35.4
|
|
|
|
32.9
|
|
|
|
|
|
|
|
2.5
|
|
|
|
0.0
|
|
Marketable equity securities, trading
|
|
|
140.6
|
|
|
|
140.3
|
|
|
|
|
|
|
|
0.3
|
|
|
|
0.0
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|
Short-term investments
|
|
|
2.5
|
|
|
|
2.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in limited partnerships
|
|
|
46.6
|
|
|
|
|
|
|
|
|
|
|
|
46.6
|
|
|
|
0.2
|
|
Other invested assets
|
|
|
6.1
|
|
|
|
|
|
|
|
|
|
|
|
6.1
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments
|
|
$
|
18,773.5
|
|
|
$
|
175.7
|
|
|
$
|
17,327.4
|
|
|
$
|
1,270.4
|
|
|
|
6.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Valuation
of Fixed Maturities
Fixed maturities include bonds, mortgage-backed securities and
redeemable preferred stock. We classify all fixed maturities as
available-for-sale and carry them at fair value. We report net
unrealized investment gains and losses related to all of our
available-for-sale securities, which is equal to the difference
between the fair value and the cost or amortized cost, in
accumulated other comprehensive income (loss) in
stockholders equity. We report net realized gains and
losses in the consolidated statements of income (loss). These
investments are subject to impairment reviews to determine when
a decline in fair value is other-than-temporary (see
Other-Than-Temporary Impairments (OTTI)
above).
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 September 30, 2009 and
December 31, 2008, our pricing services priced 93.5% and
95.1%, respectively, of our fixed maturities. The third party
independent pricing services we use have policies and processes
to ensure that they are using objectively verifiable, observable
market data, including documentation on the observable market
inputs, by major security type, used to determine the prices.
Securities are priced using evaluated pricing models that vary
by asset class. The standard inputs for security evaluations
include benchmark yields, reported trades, broker/dealer quotes,
issuer spreads, two-sided markets, benchmark securities, bids,
offers and other reference data, including market research
publications. Because many fixed income securities do not trade
on a daily basis, evaluated pricing models apply available
information through processes such as benchmark curves,
benchmarking of like securities, sector groupings and matrix
pricing to prepare evaluations. In addition, models are used to
develop prepayment and interest rate scenarios, which take into
account market convention.
Our pricing services routinely review the inputs for the
securities they cover, including broker quotes, executed trades
and credit information, as applicable. We perform analyses on
the prices received from our pricing services to ensure that the
prices represent a reasonable estimate of fair value. We gain
assurance on
48
the overall reasonableness and consistent application of input
assumptions valuation methodologies, and compliance with
accounting standards for fair value determination through
various processes including evaluation of pricing methodologies
and inputs, analytical reviews of changes in certain prices
between reporting periods and back-testing of selected sales
activity to determine whether there are any significant
differences between the market price used to value the security
prior to sale and the actual sales price. Through our analysis,
we have engaged our pricing services in discussion regarding the
valuation of a security; however, it has not been our practice
to adjust their prices.
If our pricing services determine that they do not have
sufficient objectively verifiable information about a security,
they will not provide a valuation for that security. In such
situations, we determine the securitys fair value using
internal pricing models that typically utilize significant,
unobservable market inputs or inputs that are difficult to
corroborate with observable market-based data.
As of September 30, 2009, $875.9 million, or
approximately 5% of our fixed maturities portfolio, was invested
in corporate private placement securities, which are not
actively traded. The fair values of these assets are determined
using a discounted cash flow approach. The valuation model
requires the use of inputs that are not market-observable and
involves significant judgment. The discount rate is based on the
current Treasury curve adjusted for credit and liquidity
factors. The appropriate illiquidity adjustment is estimated
based on illiquidity spreads observed in transactions involving
other similar securities. We consider this approach appropriate
for this asset class, which comprises 72.1% of our Level 3
fixed maturities.
For disclosure purposes, our fixed maturities are assigned to a
level within the fair value hierarchy. To make this assessment
we use judgment to determine whether the market for a given
security is active and if significant pricing inputs are
observable. We determine the existence of an active market by
assessing whether transactions occur with sufficient frequency
and volume to provide reliable pricing information, as discussed
below.
When we have significant observable market inputs, which is
generally the case when the security is priced by our pricing
services, it is classified as a Level 2 measurement. When
there is not sufficient observable market information and the
security is priced using internal pricing models, which is
generally the case for corporate private placements and other
securities our pricing services are unable to price, it is
classified as a Level 3 measurement. The inputs used to
measure the fair value of securities priced using internal
pricing models may fall into different levels of the fair value
hierarchy. It has been our experience that, in these situations,
the lowest level input that is significant to the determination
of fair value is a Level 3 input and thus, we typically
report securities valued using internal pricing models as
Level 3 measurements. In limited situations, private
placement securities are valued through the use of a single
broker quote because the security is very thinly traded. In such
situations, we consider the fair value a Level 3
measurement.
Fixed maturities categorized as Level 3 investments
increased $540.6 million from December 31, 2008 to
September 30, 2009. This is primarily due to purchases near
the end of the third quarter of $263.5 million of
residential mortgage-backed securities backed by reverse
mortgages, which is a new asset class for which we did not have
significant observable inputs; the purchase of
$125.0 million of private placement securities; and an
increase in the fair value of private placement securities of
$112.3 million due to the tightening of credit spreads
during the first nine months of 2009. As of September 30,
2009 and December 31, 2008, we had net unrealized gains
(losses) of $27.6 million and $(103.8) million,
respectively, on our Level 3 fixed maturities. For the
nine months ended September 30, 2009 and 2008 and the
year ended December 31, 2008, we reported net realized
losses of $4.0 million, $11.6 million and
$12.1 million, respectively, on our Level 3 fixed
maturities.
We believe that the amount we may realize upon settlement or
maturity of our fixed maturities may differ significantly from
the estimated fair value of the security, as we do not actively
trade our fixed maturity portfolio. Our investment management
objective is to support the expected cash flows of our
liabilities and to produce stable returns over the long term. To
meet this objective, we intend to hold our fixed maturities
until maturity or until market conditions are favorable for the
sale of such investments.
49
We estimate that a 1% increase in interest rates would cause the
fair value of our fixed maturity portfolio that is subject to
interest rate risk to decline by approximately
$1.02 billion and $0.81 billion, based on our
securities positions as of September 30, 2009 and
December 31, 2008, respectively (see
Quantitative and Qualitative Disclosures about
Market Risk Sensitivity Analysis on
page 109 for further information).
Valuation
of Marketable Equity Securities
Marketable equity securities, trading consists of investments in
common stock. Marketable equity securities,
available-for-sale
primarily consists of non-redeemable preferred stock. Both
consist primarily of investments in publicly traded companies.
The fair values of our marketable equity securities are
primarily based on quoted market prices in active markets for
identical assets. We classify the majority of these securities
as Level 1.
The impact of changes in the fair value of our trading portfolio
is recorded in net realized investment gains (losses) in the
consolidated statements of income. The impact of changes in the
fair value of our
available-for-sale
portfolio is recorded as an unrealized gain or loss in AOCI, a
separate component of equity. The
available-for-sale
marketable equity portfolio is subject to impairment reviews to
determine when a decline in fair value is
other-than-temporary.
We estimate that a 10% decline in market prices would cause the
fair value of our equity investments to decline by approximately
$24.3 million and $21.4 million as of
September 30, 2009 and December 31, 2008, respectively
(see Quantitative and Qualitative Disclosures
about Market Risk Sensitivity Analysis on
page 109 for further information).
Valuation
of Investments in Limited Partnerships Hedge Funds
and Private Equity Funds
The fair value of our investments in limited partnership hedge
funds and private equity funds is based upon our proportionate
interest in the underlying partnerships or funds net
asset value (NAV). We use the NAV as the starting point in
determining fair value. We believe it is the strongest component
given that only in rare circumstances would an investor fail to
get the NAV on the redemption date. Most funds contain a put
feature through the redemption rights provisions, with no
redemption fees, which allows us to put our equity interest in
the hedge fund at the NAV. Adjustments to a hedge funds
NAV may be required to reflect, among other items, redemption
fees, halts to redemptions and gates. We have considered these
factors and concluded that these factors, if triggered and
material, would warrant an adjustment to the fair value.
Currently, no adjustment to the NAV is believed necessary. We
classify these securities as Level 3.
We elected the fair value option of accounting for our
investments in hedge funds and private equity funds.
Accordingly, the impact of changes in the fair value of these
investments is recorded in our consolidated statements of income
and reported through net investment income.
50
Deferred
Policy Acquisition Costs
We defer as assets certain costs, generally commissions,
distribution costs and other underwriting costs, that vary with,
and are primarily related to, the production of new and renewal
business. We limit our deferral to acquisition expenses
contained in our product pricing assumptions. The following
table summarizes our DAC asset balances by segment:
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|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
As of
|
|
|
|
September 30, 2009
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
|
(In millions)
|
|
|
Group
|
|
$
|
3.5
|
|
|
$
|
3.3
|
|
|
$
|
3.5
|
|
Retirement Services
|
|
|
240.5
|
|
|
|
158.7
|
|
|
|
81.6
|
|
Income Annuities
|
|
|
19.7
|
|
|
|
14.5
|
|
|
|
10.9
|
|
Individual
|
|
|
51.7
|
|
|
|
43.0
|
|
|
|
33.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total unamortized balance at end of period
|
|
$
|
315.4
|
|
|
$
|
219.5
|
|
|
$
|
129.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated effect of net unrealized (gains) losses
|
|
|
(74.6
|
)
|
|
|
28.0
|
|
|
|
3.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
240.8
|
|
|
$
|
247.5
|
|
|
$
|
132.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In our Group segment, the DAC amortization period for group
medical stop-loss policies is one year as these policies are
repriced on an annual basis.
In our Retirement Services, Income Annuities and Individual
segments, we amortize acquisition costs over the premium paying
period or over the lives of the policies in proportion to the
future estimated gross profits, or EGPs, of each of these
product lines, as follows:
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|
|
|
|
Retirement Services. The DAC amortization period is
typically 20 years for the deferred annuities, although
most of the DAC amortization occurs within the first
10 years because the EGPs are highest during that period.
It is common for deferred annuity policies to lapse after the
surrender charge period expires.
|
|
|
|
Income Annuities. The DAC amortization period for
SPIAs, including structured settlement annuities, is the benefit
payment period. The benefit payment periods vary by policy;
however, nearly all benefits are paid within 80 years of
contract issue.
|
|
|
|
Individual. The DAC amortization period related to
universal life and variable life policies is typically
25 years and 20 years, respectively. DAC amortization
related to our term life insurance policies is the premium
paying period, which ranges from 10 to 30 years.
|
To determine the EGPs, we make assumptions as to lapse and
withdrawal rates, expenses, interest margins, mortality
experience, long-term equity market returns and investment
performance. Estimating future gross profits is a complex
process requiring considerable judgment and forecasting of
events well into the future.
Changes to assumptions can have a significant impact on DAC
amortization. In the event actual experience differs from our
assumptions or our future assumptions are revised, we adjust our
EGPs, which could result in a significant increase in
amortization expense. We true up our assumptions with actual
experience on a quarterly basis. For future assumptions we
complete a study and refine our estimates of future gross
profits annually during the third quarter. Upon completion of an
assumption study, we revise our assumptions to reflect our
current best estimate, thereby changing our estimate of
projected EGPs used in the DAC asset amortization models. The
following would generally cause an increase in DAC amortization
expense: increases to lapse and withdrawal rates in the current
period, increases to expected future lapse and withdrawal rates,
increases to future expected expense levels, increases to
interest margins in the current period, decreases to expected
future interest margins and decreases to current or expected
equity market
51
returns. EGPs are adjusted quarterly to reflect actual
experience to date or to change underlying key assumptions based
on experience studies.
We regularly conduct DAC recoverability analyses. We compare the
current DAC asset balance with the estimated present value of
future profitability of the underlying business. The DAC asset
balances are considered recoverable if the present value of
future profits is greater than the current DAC asset balance.
In connection with our recoverability analyses, we perform
sensitivity analyses on our two most significant DAC asset
balances, which currently consist of our Retirement Services
deferred annuity product and our Individual universal life
product DAC asset balances, to capture the effect that certain
key assumptions have on DAC asset balances. The sensitivity
tests are performed independently, without consideration for any
correlation among the key assumptions. The following depicts the
sensitivities for our deferred annuity, universal life and BOLI
DAC asset balances: if we changed our future lapse and
withdrawal rate assumptions by a factor of 10%, the effect on
the DAC asset balance is approximately $2.5 million; if we
changed our future expense assumptions by a factor of 10%, the
effect on the DAC asset balance is less than $0.1 million.
The DAC asset balance on the date of our Acquisition,
August 2, 2004, was reset to zero in accordance with PGAAP.
Because of this, quarterly updates to our DAC models to reflect
actual experience have led to immaterial changes in the DAC
asset balance and amortization, and the magnitude of the
sensitivities is currently relatively small. We expect the DAC
asset balance to grow as we continue to write new business, and
as this occurs, we would expect the sensitivities to grow
accordingly. In addition, depending on the amount and the type
of new business written in the future we may determine that
other assumptions may produce significant variations in our
financial results.
Funds
Held Under Deposit Contracts
Liabilities for fixed deferred annuity contracts and universal
life policies, including BOLI, are computed as deposits net of
withdrawals made by the policyholder, plus amounts credited
based on contract specifications, less contract fees and charges
assessed, plus any additional interest. The unamortized PGAAP
reserve, related to the Acquisition, is also included in this
balance. As of September 30, 2009, our funds held under
deposit contracts totaled $18.6 billion.
For SPIAs, including structured settlements, liabilities are
based on discounted amounts of estimated future benefits.
Contingent future benefits are discounted with best-estimate
mortality assumptions, which include provisions for longer life
spans over time. The interest rate pattern used to calculate the
reserves for SPIAs is set at issue for policies issued
subsequent to the Acquisition or based upon prevailing market
interest rates on August 2, 2004 for policies in existence
on the Acquisition date. The interest rates within the pattern
vary over time and start with interest rates that prevailed at
contract issue or on the Acquisition date. As of
September 30, 2009, the weighted-average implied interest
rate on the existing book of business is currently at 6.0% and
will grade to an ultimate assumed level of 6.7% in approximately
17 years.
Future
Policy Benefits
We compute liabilities for future policy benefits under
traditional individual life and group life insurance policies on
the level premium method, which uses a level premium assumption
to fund reserves. We select the level of premiums at issuance so
that the actuarial present value of future benefits equals the
actuarial present value of future premiums. We set the interest,
mortality and persistency assumptions in the year of issue and
include provisions for adverse deviations. These liabilities are
contingent upon the death of the insured while the policy is in
force. We derive mortality assumptions from both
company-specific and industry statistics. We discount future
benefits at interest rates that vary by year of policy issue,
are set initially at a rate consistent with portfolio rates at
the time of issue, and graded 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.
52
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 results of operations 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 impact in our financial results due to
changes in assumptions.
Policy
and Contract Claims
Liabilities for policy and contract claims primarily represent
liabilities for claims under group medical coverages and are
established on the basis of reported losses. We also provide for
claims incurred but not reported, or IBNR, based on expected
loss ratios, claims paying completion patterns and historical
experience. We continually review estimates for reported but
unpaid claims and IBNR. Any necessary adjustments are reflected
in current operating results. If expected loss ratios increase
or expected claims paying completion patterns extend, the IBNR
amount increases.
Income
Taxes
The application of GAAP requires us to evaluate the
recoverability of our deferred tax assets and establish a
valuation allowance, if necessary, to reduce our deferred tax
asset to an amount that is more likely than not to be
realizable. Considerable judgment and the use of estimates are
required in determining whether a valuation allowance is
necessary, and if so, the amount of such valuation allowance. In
evaluating the need for a valuation allowance, we consider many
factors, including: the nature and character of the deferred tax
assets and liabilities; future reversals of existing temporary
differences; operating income carry-backs or loss carry-forwards
and their expirations; and any tax planning strategies we would
employ to avoid a tax benefit expiring unused.
Our deferred tax assets are primarily related to unrealized
losses, reserves, capitalization of policy acquisition costs and
investment impairments. Due to the unprecedented volatility and
disruption within the capital markets over the past year, the
associated deferred tax assets within our investment portfolio
have also been subject to this volatility. To assess the impact
of this volatility, we reviewed the liquidity requirements of
our invested assets as they relate to the liabilities associated
with our insurance and investment products to determine the
future reversals and the utilization of capital loss carry-backs
and carry-forwards related to our investment timing differences.
Based upon the results of our valuation allowance determination,
management believes it is more likely than not that the deferred
tax asset will be realized.
Use of
non-GAAP Financial Measures
Certain tables and related disclosures in this prospectus
include non-GAAP financial measures. We believe these measures
provide useful information to investors in evaluating our
financial performance or condition. In addition, our management
and board of directors use these measures to gauge the
historical performance of our operations and for business
planning purposes. In the following paragraphs, we provide
definitions of these non-GAAP measures and explain how we
believe investors will find them useful, how we use them, what
their limitations are and how we compensate for such limitations.
Adjusted
Operating Income (Loss)
Adjusted operating income (loss) is a non-GAAP measure of our
performance. Adjusted operating income (loss) consists of net
income (loss), less after-tax net realized investment gains
(losses), plus after-tax net realized and unrealized investment
gains (losses) on our fixed income annuity (FIA) options.
53
Net income (loss) is the most directly comparable GAAP measure
to adjusted operating income. Net income (loss) for any period
presents the results of our insurance operations, as well as our
net realized investment gains (losses). We consider investment
income generated by our invested assets to be part of the
results of our insurance operations because they are acquired
and generally held to maturity to generate income that we use to
meet our obligations. Conversely, we do not consider the
activities reported through net realized investment gains
(losses), with the exception of our FIA options, to be
reflective of the performance of our insurance operations, as
discussed below.
We believe investors find it useful to review a measure of the
results of our insurance operations separate from the gain and
loss activity attributable to most of our investment portfolio
because it assists an investor in determining whether our
insurance-related revenues, composed primarily of premiums and
net investment income, have been sufficient to generate
operating earnings after meeting our insurance-related
obligations, composed primarily of claims paid to policyholders
and investment returns credited to policyholder accounts, and
other operating costs.
In presenting adjusted operating income, we are excluding
after-tax net realized investment gains (losses). Even though
these gains and losses recur in most periods, the timing and
amount are driven by investment decisions and external economic
developments unrelated to our management of the insurance and
underwriting aspects of our business. Thus, because our
insurance operations are not dependent on the following, we
exclude from adjusted operating income the following items which
are recorded in after-tax net realized investment gains (losses):
|
|
|
|
|
other-than-temporary impairments (OTTI) related to
available-for-sale securities, which depend on the timing and
severity of market credit cycles and management judgments
regarding recoverability;
|
|
|
|
net gains (losses) on changes in fair value of our trading
securities, which depend on equity market performance and
broader market conditions; and
|
|
|
|
net realized gains (losses) on sales of securities, which are
subject to our discretion and influenced by market opportunities.
|
The one exception to the exclusion of realized investment gains
and losses is the gains (losses) on our FIA options in our
Retirement Services segment. Each year, we use the realized
gains from our FIA options, similar to the way we use investment
income, to meet our obligations associated with our FIA product,
which credits interest to policyholder accounts based on equity
market performance.
In addition to using adjusted operating income to evaluate our
insurance operations, our management and board of directors have
other uses for this measure, including managing our insurance
liabilities and assessing achievement of our financial plan. For
instance, we use adjusted operating income to help determine the
renewal interest rates we can afford to credit to policyholders.
We also develop a financial plan that includes our expectation
of adjusted operating income. We review our achievement of our
financial plan by understanding variances between actual and
planned adjusted operating income. We use this information to
make decisions on how to manage our consolidated insurance
operations, including making decisions regarding expense
budgets, product prices and the purchase of tax-advantaged
affordable housing limited partnerships.
Adjusted operating income is not a substitute for net income
determined in accordance with GAAP. The adjustments made to
derive adjusted operating income are important to understanding
our overall results from operations and, if evaluated without
proper context, adjusted operating income possesses material
limitations. As an example, we could produce a low level of net
income in a given period, despite strong operating performance,
if in that period we generate significant net realized losses
from our investment portfolio. We could also produce a high
level of net income in a given period, despite poor operating
performance, if in that period we generate significant net
realized gains from our investment portfolio. As an example of
another limitation of adjusted operating income, it does not
include the decrease in cash flows expected to be collected as a
result of credit loss OTTI. Further, it includes changes to net
investment income as a result of OTTI, which are not directly
related to our insurance operations, and does not adjust for any
54
negative impact to cash flows that we may experience in future
periods as a result of such changes in net investment income.
Therefore, our management and board of directors also separately
review net realized investment gains (losses) and analyses of
our net investment income, including impacts related to OTTI
write-downs, in connection with their review of our investment
portfolio. In addition, our management and board of directors
examine net income as part of their review of our overall
financial results. For a reconciliation of adjusted operating
income to net income, see Selected Historical Consolidated
Financial Data on page 40.
Adjusted
Book Value, Adjusted Book Value per Common Share and Adjusted
Book Value per Common Share, as Converted
Adjusted
book value
Adjusted book value is a non-GAAP financial measure of our
financial condition. Adjusted book value consists of
stockholders equity, less accumulated other comprehensive
income (loss), or AOCI.
Stockholders equity is the most directly comparable GAAP
measure to adjusted book value. AOCI, which is primarily
composed of the net unrealized gains (losses) on our fixed
maturities, net of taxes, is a component of stockholders
equity.
We purchase fixed maturities with durations and cash flows that
match our estimate of when our insurance liabilities and other
obligations will come due. We typically expect to hold our fixed
maturities to maturity, using the principal and interest cash
flows to pay our obligations over time. Since we expect to
collect the contractual cash flows on these fixed maturities, we
do not expect to realize the unrealized gains (losses) that are
included in our AOCI balance as of any particular date. AOCI
primarily fluctuates based on changes in the fair value of our
fixed maturities, which is driven by factors outside of our
control, including the impact of credit market conditions and
the movement of interest rates and credit spreads. These
fluctuations do not reflect any change in the cash flows we
expect to receive. As an example, an increase in the fair value
of our fixed maturities improved AOCI by $1,082.4 million,
or 103%, from December 31, 2008 to September 30, 2009,
due to credit market improvements and tightening of interest
spreads. This contributed to a related increase in
stockholders equity over the same period of
$1,194.3 million, or 417%; however, this increase did not
impact our estimates regarding collection of cash flows on the
underlying fixed maturities.
We believe investors find it useful if we present them with a
financial measure that removes from stockholders equity
these temporary and unrealized changes in the fair values of our
investments, and the related effects on AOCI. By evaluating our
adjusted book value, an investor can assess our financial
condition based on our general practice of holding our fixed
investments to maturity. For example, we believe it is important
that an investor not assume that an increase in
stockholders equity driven by unrealized gains means our
company has grown in value and alternatively, it is important
that an investor not assume that a decrease in
stockholders equity driven by unrealized losses means our
companys value has decreased.
In addition to using adjusted book value to evaluate our
financial condition, our management and board of directors have
other uses for this measure, including reviewing debt levels as
a percentage of adjusted book value to monitor compliance with
revolving credit facility covenants and helping to maintain and
improve our ratings from rating agencies. Our management also
compares adjusted book value to regulatory capital to assess our
ability to maintain regulatory capital ratios and ratings.
Finally, our board of directors uses adjusted book value as a
basis to measure the success of our company over historical
periods and reviews and ultimately approves managements
financial plans based on the projected growth in adjusted book
value.
Adjusted book value is not a substitute for stockholders
equity determined in accordance with GAAP and considering
adjusted book value on its own would present material
limitations to an analysis of our financial condition. For
example, AOCI may deteriorate due to higher interest rates,
credit spreads and issues specific to particular investments. By
not considering the size of gross unrealized losses within AOCI,
an investor may fail to appreciate the size of potential losses
or the amount of potential gains based on the fair value of our
fixed maturities. As a result, when evaluating our financial
condition, we compensate for these
55
limitations by also considering stockholders equity and
the unrealized losses on invested assets, which are provided in
our investment disclosures (see Investments
for further information).
Adjusted book value should not be considered a substitute for
stockholders equity. For a reconciliation of adjusted book
value to stockholders equity, see Selected
Historical Consolidated Financial Data on page 40.
Adjusted
book value per common share
Adjusted book value per common share is a non-GAAP financial
measure of our financial condition. Adjusted book value per
common share is calculated as adjusted book value, divided by
outstanding common shares. This measure does not include the
18,975,744 shares subject to outstanding warrants for all
periods presented because the warrant holders only participate
in dividends and would not be entitled to proceeds in the event
of a liquidation or winding down of our company should such
event precede the exercise of the outstanding warrants.
Book value per common share is the most directly comparable GAAP
measure to adjusted book value per common share. Book value per
common share is calculated as stockholders equity divided
by the sum of our common shares outstanding and shares issuable
pursuant to outstanding warrants.
We believe investors find it useful if we present them with
adjusted book value (discussed above), a financial measure that
removes AOCI from stockholders equity, and then translate
it into another measure, adjusted book value per common share,
that allows the investor to understand the value of its
investment on the adjusted book value basis. By evaluating this
measure, an investor will be able to assess its proportionate
stake in our adjusted book value as of the dates presented, and
the change in such measure over time, based on our practice of
holding our fixed maturities to maturity. In addition, this
measure allows an investor to understand the value of its
investment based on current shares outstanding because it
represents our future share count in the event that the
outstanding warrants are not exercised before they expire.
In addition to using adjusted book value to evaluate our
financial condition on a per common share basis, our management
and board of directors use this measure to assess the cost of
obtaining new equity capital and to compare the value and the
change in value over time of our common shares to that of our
peer companies. For example, our board of directors takes into
account the expected market price of our common shares relative
to adjusted book value per common share when considering raising
new equity capital.
Adjusted book value per common share is not a substitute for
book value per common share determined in accordance with GAAP
and only considering adjusted book value per common share on its
own would present material limitations similar to those
discussed above with respect to adjusted book value.
Adjusted book value per common share should not be considered a
substitute for book value per common share. For a reconciliation
of adjusted book value per common share to book value per common
share, see Selected Historical Consolidated Financial
Data on page 40.
Adjusted
book value per common share, as converted
Adjusted book value per common share, as converted, is a
non-GAAP financial measure of our financial condition and gives
effect to the exercise of our outstanding warrants. Adjusted
book value per common share, as converted, is calculated as
adjusted book value plus the assumed proceeds from the warrants,
divided by the sum of outstanding common shares and shares
subject to outstanding warrants. Our shares issuable pursuant to
outstanding warrants were 18,975,744 for all periods presented.
Book value per common share is the most directly comparable GAAP
measure to adjusted book value per share, as converted. Book
value per common share is calculated as stockholders
equity divided by the sum of our common shares outstanding and
shares issuable pursuant to our outstanding warrants.
56
We believe investors find it useful if we present them with
adjusted book value (discussed above), a financial measure that
removes AOCI from stockholders equity and then translate
it into another measure, adjusted book value per common share,
as converted, which gives effect to the exercise of our
outstanding warrants. By evaluating this measure, an investor
will be able to assess its proportionate stake in our adjusted
book value for the periods presented, on a fully diluted basis.
We believe it is most meaningful for investors to compare this
measure to adjusted book value per common share as this will
allow the investor to understand the dilutive effect if the
warrant holders exercise our outstanding warrants.
As discussed above, our management and board of directors use
adjusted book value per common share to compare the value of a
share of our common stock to that of our peer companies, and
also to measure the cost of new equity capital. To further this
analysis, our management and board of directors also make these
comparisons and judgments after taking into account the
potential dilutive effect of the exercise of our outstanding
warrants.
Adjusted book value per common share, as converted, is not a
substitute for book value per common share determined in
accordance with GAAP and only considering adjusted book value
per common share, as converted, on its own would present
material limitations similar to those discussed above with
respect to adjusted book value.
Adjusted book value per common share, as converted, should not
be considered a substitute for book value per common share. For
a reconciliation of adjusted book value per common share, as
converted, to book value per common share, see Selected
Historical Consolidated Financial Data on page 40.
Operating
ROAE
Operating return on average equity, or operating ROAE, is a
non-GAAP measure of our performance. Operating ROAE consists of
adjusted operating income for the most recent four quarters,
divided by average adjusted book value, both of which are
non-GAAP measures as described above. We measure average
adjusted book value by averaging adjusted book value for the
most recent five quarters.
Return on stockholders equity, or ROE, is the most
directly comparable GAAP measure. Return on stockholders
equity for the most recent four quarters is calculated as net
income for such period divided by the average stockholders
equity for the most recent five quarters.
As discussed above under Adjusted operating
income, we believe investors find it useful to review the
results of our insurance operations separate from the gain and
loss activity attributable to most of our investment portfolio
because it highlights trends in the performance of our insurance
operations. In addition, as discussed above under
Adjusted Book Value, Adjusted Book Value per
common share and Adjusted Book Value per common share, as
Converted, we believe investors find it useful if we
present them with a financial measure that removes from
stockholders equity the temporary and unrealized changes
in the fair values of our investments, and the related effects
on AOCI, because we do not expect to realize the unrealized
gains (losses) that are included in our AOCI balance as of any
particular date. By referring to operating ROAE, an investor can
form a judgment as to how effectively our management uses funds
invested by our stockholders to generate adjusted operating
income growth. Thus, we present operating ROAE for a period to
measure the rate of return produced by our adjusted operating
income in such period based on our average adjusted book value
for such period.
In addition to using operating ROAE to evaluate how effectively
our management uses funds invested in our company, our
management and board of directors have additional uses for
operating ROAE. These include comparing our operating ROAE to
those of our peer companies, comparing our operating ROAE
against our target return objectives, and determining if our
insurance and annuity products are priced to achieve our
long-term targets. For example, our board of directors used a
comparison of our operating ROAE to that of our competitors in
determining 2008 bonuses for our management.
57
However, because operating ROAE excludes realized and unrealized
gains (losses) on our investment portfolio, it has material
limitations as a financial measure of performance and should not
be considered on its own. As an example, we could produce a high
operating ROAE in a given period, despite poor net income, if in
that period we generated significant net realized losses from
our investment portfolio. To compensate for such limitations, we
also consider ROE to assess financial performance and return on
total equity.
Operating ROAE should not be considered a substitute for ROE.
The numerator and denominator of operating ROAE have been
reconciled to net income and stockholders equity,
respectively, their most comparable GAAP financial measures, in
Selected Historical Consolidated Financial Data on
page 40.
58
Results
of Operations
Total
Company
The following discussion should be read in conjunction with our
audited consolidated financial statements and the related notes
included elsewhere in this prospectus. Set forth below is a
summary of our consolidated financial results for the nine
months ended September 30, 2009 and 2008 and for the years
ended December 31, 2008, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
Twelve Months Ended
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
(In millions, except per share data)
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
|
|
$
|
430.2
|
|
|
$
|
440.4
|
|
|
$
|
584.8
|
|
|
$
|
530.5
|
|
|
$
|
525.7
|
|
Net investment income
|
|
|
829.4
|
|
|
|
718.0
|
|
|
|
956.5
|
|
|
|
973.6
|
|
|
|
984.9
|
|
Other revenues
|
|
|
43.2
|
|
|
|
52.0
|
|
|
|
67.8
|
|
|
|
68.7
|
|
|
|
56.1
|
|
Net realized investment gains (losses)(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other-than-temporary
impairment losses on securities
|
|
|
(167.9
|
)
|
|
|
(61.7
|
)
|
|
|
(86.4
|
)
|
|
|
(16.2
|
)
|
|
|
(25.7
|
)
|
Less: portion of losses recognized in other comprehensive income
|
|
|
94.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net impairment losses recognized in earnings
|
|
|
(73.7
|
)
|
|
|
(61.7
|
)
|
|
|
(86.4
|
)
|
|
|
(16.2
|
)
|
|
|
(25.7
|
)
|
Other net realized investment gains (losses)
|
|
|
44.7
|
|
|
|
(41.6
|
)
|
|
|
(71.6
|
)
|
|
|
33.0
|
|
|
|
27.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net realized investment gains (losses)
|
|
|
(29.0
|
)
|
|
|
(103.3
|
)
|
|
|
(158.0
|
)
|
|
|
16.8
|
|
|
|
1.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
1,273.8
|
|
|
|
1,107.1
|
|
|
|
1,451.1
|
|
|
|
1,589.6
|
|
|
|
1,568.4
|
|
Benefits and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder benefits and claims
|
|
|
262.1
|
|
|
|
260.1
|
|
|
|
348.5
|
|
|
|
267.1
|
|
|
|
264.3
|
|
Interest credited
|
|
|
629.2
|
|
|
|
569.1
|
|
|
|
766.1
|
|
|
|
752.3
|
|
|
|
765.9
|
|
Other underwriting and operating expenses
|
|
|
186.7
|
|
|
|
201.9
|
|
|
|
265.8
|
|
|
|
281.9
|
|
|
|
260.5
|
|
Interest expense
|
|
|
23.8
|
|
|
|
24.0
|
|
|
|
31.9
|
|
|
|
21.5
|
|
|
|
19.1
|
|
Amortization of deferred policy acquisition costs
|
|
|
36.4
|
|
|
|
17.7
|
|
|
|
25.8
|
|
|
|
18.0
|
|
|
|
14.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses
|
|
|
1,138.2
|
|
|
|
1,072.8
|
|
|
|
1,438.1
|
|
|
|
1,340.8
|
|
|
|
1,324.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations before income taxes
|
|
|
135.6
|
|
|
|
34.3
|
|
|
|
13.0
|
|
|
|
248.8
|
|
|
|
244.0
|
|
Provision (benefit) for income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
(4.2
|
)
|
|
|
34.2
|
|
|
|
23.8
|
|
|
|
62.8
|
|
|
|
92.4
|
|
Deferred
|
|
|
43.6
|
|
|
|
(26.9
|
)
|
|
|
(32.9
|
)
|
|
|
18.7
|
|
|
|
(7.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision (benefit) for income taxes
|
|
|
39.4
|
|
|
|
7.3
|
|
|
|
(9.1
|
)
|
|
|
81.5
|
|
|
|
84.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
96.2
|
|
|
$
|
27.0
|
|
|
$
|
22.1
|
|
|
$
|
167.3
|
|
|
$
|
159.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.86
|
|
|
$
|
0.24
|
|
|
$
|
0.20
|
|
|
$
|
1.50
|
|
|
$
|
1.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.86
|
|
|
$
|
0.24
|
|
|
$
|
0.20
|
|
|
$
|
1.50
|
|
|
$
|
1.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
111,622
|
|
|
|
111,622
|
|
|
|
111.622
|
|
|
|
111.622
|
|
|
|
111.622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
111,623
|
|
|
|
111,622
|
|
|
|
111.622
|
|
|
|
111.622
|
|
|
|
111.622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP Financial Measures(3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted operating income
|
|
$
|
115.2
|
|
|
$
|
91.8
|
|
|
$
|
122.9
|
|
|
$
|
154.9
|
|
|
$
|
159.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation to Net Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
96.2
|
|
|
|
27.0
|
|
|
$
|
22.1
|
|
|
$
|
167.3
|
|
|
$
|
159.5
|
|
Less: Net realized investment gains (losses) (net of taxes)
|
|
|
(18.9
|
)
|
|
|
(67.1
|
)
|
|
|
(102.7
|
)
|
|
|
10.9
|
|
|
|
1.1
|
|
Add: Net realized and unrealized investment gains (losses) on
FIA options (net of taxes)
|
|
|
0.1
|
|
|
|
(2.3
|
)
|
|
|
(1.9
|
)
|
|
|
(1.5
|
)
|
|
|
1.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted operating income
|
|
$
|
115.2
|
|
|
$
|
91.8
|
|
|
$
|
122.9
|
|
|
$
|
154.9
|
|
|
$
|
159.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
We adopted new OTTI accounting guidance effective
January 1, 2009, which changed the recognition and
measurement of OTTI for fixed maturities. |
|
(2) |
|
Basic net income per common share assumes that all participating
securities, including warrants, have been outstanding since the
beginning of the period using the two-class method. Diluted net
income per |
footnotes continued on following page
59
|
|
|
|
|
common share includes the dilutive impact of non-participating,
unvested restricted stock awards, based on the application of
the treasury stock method, weighted for the portion of the
period they were outstanding. |
|
(3) |
|
Management considers adjusted operating income to be a useful
supplement to net income, its most comparable GAAP measure, in
evaluating our financial performance. We believe that the
non-GAAP presentation of adjusted operating income is valuable
because it assists an investor in determining whether our
insurance-related revenues, composed primarily of premiums and
net investment income, have been sufficient to generate
operating earnings after meeting our insurance-related
obligations, composed primarily of claims paid to policyholders
and investment returns credited to policyholder accounts, and
other operating costs. Though the after-tax net realized gains
(losses) excluded from adjusted operating income recur in most
periods, the timing and amount are driven by investment
decisions and external economic developments unrelated to our
management of the insurance and underwriting aspects of our
business. For a definition and discussion of this non-GAAP
measure and other metrics used in our analysis, see
Managements Discussion and Analysis of Financial
Condition and Results of Operations Use of
non-GAAP Financial Measures. |
Nine
Months Ended September 30, 2009 Compared to the Nine Months
Ended September 30, 2008
Summary of results. Net income increased
$69.2 million to $96.2 million from $27.0 million
as a result of an increase in adjusted operating income, which
increased $23.4 million, or 25.5%, to $115.2 million
from $91.8 million, and a decrease in net realized
investment losses of $48.2 million, net of taxes. Net
realized investment losses decreased mainly due to a
$68.8 million increase in changes in fair value on our
trading portfolio as the equity markets increased in 2009
compared to equity market declines in 2008. The increase in
adjusted operating income is primarily due to a $33.4 million
increase in the investment margin (net investment income, less
interest credited) in our Retirement Services segment, an
increase in the fair value of our limited partnerships of
$21.6 million and a reduction in other underwriting and
operating expenses of $15.2 million. Our increased sales
during 2009 allowed us to fully defer our acquisition costs,
resulting in an increase in DAC and driving a reduction in
overall underwriting and operating expenses. Offsetting these
increases to income was a $16.8 million decrease related to
our Group segment as a result of decreased premium, an increase
in our overall loss ratio from 65.5% to 67.8%, and an
$18.7 million increase in DAC amortization.
Net investment income. Net investment income
represents the income earned on our investments, including gains
or losses on changes in the fair value on our investments in
limited partnerships, primarily hedge funds and private equity
funds. Net investment income increased $111.4 million, or
15.5%, to $829.4 million from $718.0 million. This
increase was due to a positive volume variance of
$81.0 million as average invested assets increased
$2.0 billion to $19.6 billion from $17.6 billion
driven by increased fixed deferred annuity sales and lower
withdrawals; and a positive rate variance of $30.4 million
as yields increased to 5.64% from 5.44%. The yield increase is
primarily driven by $1.7 million in fair value gains on our
limited partnership investments, versus $19.9 million in fair
value losses in 2008. Overall yields on our fixed maturities
also increased as we were able to invest in higher yielding
assets in our Retirement Services segment.
Other revenues. Other revenues include mortality
expense, surrender and other administrative charges, revenues
from our non-insurance businesses and reinsurance allowance
fees. Other revenues decreased $8.8 million, or 16.9%, to
$43.2 million from $52.0 million. The decrease was due
in part to a $3.6 million decrease in our Retirement
Services segment, whose other revenues are mainly fees on
variable account values, which have decreased overall due to
lower account values. Our Individual segment experienced a
decrease of $2.3 million primarily related to a decrease in
reinsurance allowance fees on new term insurance business sold
in 2009. In addition, our Group segment experienced a
$1.6 million decrease primarily due to lower client
retention and production by our third party administrator.
Net realized investment losses. Net realized
investment losses consist 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. Net realized investment losses decreased
$74.3 million, or 71.9%, to $29.0 million from
$103.3 million. For the nine months ended
September 30, 2009, gross realized gains were
$82.4 million, including gross equity gains of
$36.5 million, offset by gross realized losses of
$111.4 million, including impairments of $73.7 million
and gross equity losses of $7.9 million. For the nine
months ended September 30,
60
2008, gross realized gains were $42.8 million, including
gross equity gains of $12.2 million, offset by gross
realized losses of $146.1 million, including impairments of
$61.7 million and gross equity losses of
$52.4 million. The increase in impairments was due to an
increase in credit related losses as a result of issuer credit
concerns, primarily in the three months ended March 31,
2009. See Investments for further
information.
Policyholder benefits and claims. Policyholder
benefits and claims consist of benefits paid and reserve
activity on group life and health and individual life products.
In addition, we record, as a reduction of this expense, PGAAP
reserve amortization related to our fixed deferred annuities and
BOLI policies. The PGAAP reserve is amortized as a reduction to
policyholder benefits according to our expected pattern of
profitability of the book of business of policies in force on
the Acquisition date. The PGAAP reserve related to our fixed
deferred annuities was fully amortized as of September 30,
2009. Policyholder benefits and claims increased
$2.0 million, or 0.8%, to $262.1 million from
$260.1 million. This was primarily due to a
$4.5 million increase in our Retirement Services segment,
driven by a reduction in the benefit received from the
amortization of the PGAAP reserve. This was partially offset by
a $2.1 million decrease in our Group segment, driven by
lower claims due to a smaller premium base. The Group loss ratio
is above our long-term expectations, as we have experienced
increases in both the number and the size of claims exceeding
$0.5 million, in particular related to claims for premature
births.
Interest credited. Interest credited represents
interest credited to policyholder reserves and contractholder
general account balances. Interest credited increased
$60.1 million, or 10.6%, to $629.2 million from
$569.1 million due to a $60.0 million increase in
deferred annuities interest credited in our Retirement Services
segment and a $4.4 million increase in our Individual
segment, partially offset by a $3.7 million decrease in our
Income Annuities segment. Our Retirement Services segment
increased due to a $1.8 billion, or 37%, increase in
average fixed account value from increased sales of fixed
deferred annuities and decreased policy lapses. Our Individual
segment increased primarily due to growth in the BOLI account
value related to increased sales and strong persistency. The
decrease in our Income Annuities segment interest credited
is driven by a lower reserve balance and higher mortality gains
in 2009.
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
commissions, policy issuance expenses and other general
operating costs. Other underwriting and operating expenses
decreased $15.2 million, or 7.5%, to $186.7 million
from $201.9 million. The majority of the decline was
attributable to increased deferral of new business acquisition
costs, mainly in our Retirement Services, Income Annuities and
Individual segments, which was driven by increased sales. This
decline is also attributable to a $7.0 million reduction in
overall operating expenses, primarily payroll and employee
related expenses due to attrition and disciplined expense
management.
Amortization of deferred policy acquisition
costs. Amortization of previously capitalized DAC is
recorded as an expense. Amortization of DAC increased
$18.7 million to $36.4 million from
$17.7 million. This increase was due primarily to an
$18.4 million increase in our Retirement Services segment,
due to growth in the block of business, an increase in margins
in 2009 and a $1.1 million increase due to the unlocking of
future DAC assumptions.
Provision for income taxes. The provision for income
taxes increased $32.1 million to $39.4 million from
$7.3 million. This is primarily due to the increase in
income from operations before income taxes in 2009, compared to
2008. The effective tax rate increased 7.8% to 29.0% from 21.2%.
The difference between the U.S. corporate federal income
tax rate of 35.0% and the annualized effective rate of 29.0% is
due almost entirely to tax credits from tax-advantaged federal
affordable housing investments.
Twelve
Months Ended December 31, 2008 Compared to the Twelve
Months Ended December 31, 2007
Summary of results. Net income decreased
$145.2 million, or 86.8%, to $22.1 million from
$167.3 million as a result of an increase in net realized
investment losses and a decrease in adjusted operating income.
We experienced net realized investment losses of
$158.0 million, including impairments of $86.4 million
and net losses on our common stock of $69.2 million,
resulting from volatile markets in 2008. In 2008, we elected to
record changes in fair value on equity securities in income.
61
Adjusted operating income decreased $32.0 million, or
20.7%, to $122.9 million from $154.9 million. This is
primarily due to decreases in fair value on our investments in
hedge funds and private equity funds recorded in net investment
income, which totaled $24.4 million in 2008 compared to
gains of $7.0 million in 2007. Additionally, the decrease
was driven by an increase in the loss ratio in our Group segment
and an increase in interest expense. The overall loss ratio in
Group increased to 65.8% from 54.3% as a result of an increase
in paid claims, primarily attributable to the medical stop-loss
product. Interest expense increased as a result of issuing the
$150.0 million of CENts in October 2007. The decreases in
adjusted operating income were mitigated by strong sales of
fixed deferred annuities, which drove an increase in our fixed
annuities account value and an increase in the investment margin
related to these products.
Premiums. Premiums consist primarily of revenues
from our group life and health and individual life insurance
products, and COI charges on our universal life insurance and
BOLI polices. Premiums increased $54.3 million, or 10.2%,
to $584.8 million from $530.5 million. This increase
was primarily due an increase of $57.7 million in our Group
segment, as a result of strong sales of our medical stop-loss
product. This was partially offset by a $3.5 million
decrease in our Individual segment related to reinsured policies.
Net investment income. Net investment income
decreased $17.1 million, or 1.8%, to $956.5 million
from $973.6 million. Of this decrease, $38.9 million
was the result of a negative rate variance as yields decreased
to 5.38% from 5.60%, of which $35.6 million related mainly
to
mark-to-market
losses on investments in limited partnerships. This decrease was
partially offset by a $21.8 million positive volume
variance as average invested assets increased to
$17.8 billion from $17.4 billion resulting from
positive net cash flows of fixed deferred annuities.
Net realized investment gains (losses). Net realized
investment gains (losses) decreased $174.8 million, to a
$158.0 million loss from a $16.8 million gain. For the
year ended December 31, 2008, gross realized gains of
$43.7 million including gross equity gains of
$3.6 million, offset by gross realized losses were
$201.7 million, including impairments of $86.4 million
and gross equity losses of $72.8 million. During 2008, the
majority of realized gains (losses) from trading activity and
impairment was in the Income Annuities segment. For the year
ended December 2007, gross realized gains were
$63.1 million, partially offset by gross losses of
$46.3 million, including impairments of $16.2 million.
Gross gains included $14.4 million related to gains on
sales of common stock and $37.1 million representing gains
from the sales of mainly corporate securities, the majority of
which is in the Income Annuities segment. See
Investments for further information.
Policyholder benefits and claims. Policyholder
benefits and claims consist of benefits paid and reserve
activity on group life and health and individual life products.
In addition, we record, as a reduction of this expense, PGAAP
reserve amortization related to our fixed deferred annuities and
BOLI policies. The PGAAP reserve is amortized as a reduction to
policyholder benefits according to our expected pattern of
profitability of the book of business of policies in force on
the Acquisition date. Policyholder benefits and claims increased
$81.4 million, or 30.5%, to $348.5 million from
$267.1 million. This increase was primarily due to an
$82.8 million increase in our Group segment caused by an
increase in medical stop loss paid claims, and a
year-over-year
increase in reserve changes. Our Group claims increased due to
growth in the block of business and a higher loss ratio on that
business.
Interest credited. Interest credited increased
$13.8 million, or 1.8%, to $766.1 million from
$752.3 million. Of this increase, $11.4 million was
primarily due to growth in the BOLI account values from new BOLI
sales and strong persistency, and a $10.9 million increase
primarily related to an increase in average fixed account value
in Retirement Services. These were partially offset by a
$7.0 million decrease in Income Annuities due to lower
required interest on lower reserves and higher mortality gains
in 2008.
Other underwriting and operating expenses. Other
underwriting and operating expenses decreased
$16.1 million, or 5.7%, to $265.8 million from
$281.9 million. This decrease was primarily due to a
$4.5 million decrease in professional services expenses,
primarily IT related, and a reduction in general management
expenses, which were primarily related to management bonuses. In
addition, strong 2008 sales resulted in an increase in
deferrable policy acquisition costs.
62
Interest expense. Interest expense represents
interest on debt. Interest expense increased $10.4 million,
or 48.4%, to $31.9 million from $21.5 million. This
increase was due to interest expense on the $150.0 million
CENts issued in October 2007. See Liquidity
and Capital Resources for further information.
Provision (benefit) for income taxes. The provision
(benefit) for income taxes decreased $90.6 million, to a
$9.1 million benefit from an $81.5 million provision.
The effective tax rate decreased to (70.0)% from 32.8% primarily
due to the significant reduction in income from continuing
operations, an increase in affordable housing credits, a
favorable decrease in prior year adjustments, and the favorable
impact of the settlement of the 2004 2005 IRS
examination of our life insurance subsidiaries.
Twelve
Months Ended December 31, 2007 Compared to the Twelve
Months Ended December 31, 2006
Summary of results. Net income increased
$7.8 million, or 4.9%, to $167.3 million from
$159.5 million due to a decrease in adjusted operating
income, offset by an increase in net realized investment gains
excluding gains (losses) on the FIA options. Adjusted operating
income decreased $4.9 million, or 3.1%, to
$154.9 million from $159.8 million. In 2007, total
revenues increased to $1.59 billion from $1.57 billion
in 2006. Key drivers in our 2007 performance include a 55.2%
medical stop-loss loss ratio in our Group segment
along with increased premiums from increased sales, which was
offset by lower profitability in our Retirement Services segment
due to a decrease in account value as withdrawals exceeded new
deposits and a decrease in the interest spread, driven by a
decrease in PGAAP reserve amortization.
Premiums. Premiums increased $4.8 million, or
0.9%, to $530.5 million from $525.7 million. Premiums
increased primarily due to strong 2007 sales of medical
stop-loss coverage.
Net investment income. Net investment income
decreased $11.3 million, or 1.1%, to $973.6 million
from $984.9 million. Of this decrease, $32.1 million
was due to a decrease in average invested assets to
$17.4 billion from $18.0 billion, primarily in our
Retirement Services segment. This decrease was partially offset
by a positive rate variance of $20.8 million, which
increased to 5.60% from 5.48%. The increase in yield was
primarily due to the reinvestment of funds in higher yielding
securities, an increase in the yield on short-term investments,
the receipt of prepayment consent fees and a reduction in
investment advisory fee expense.
Other revenues. Other revenues include mortality
expense, surrender and other administrative charges, revenues
from our non-insurance businesses and revenues from fee
arrangements with our reinsurance partners. Other revenues
increased $12.6 million, or 22.5%, to $68.7 million
from $56.1 million. The increase is primarily due to an
increase in fee revenue generated by our newly acquired
subsidiary MRM and an increase in fee revenue in our
broker-dealer operations.
Net realized investment gains. Net realized
investment gains increased $15.1 million, to
$16.8 million from $1.7 million. For the twelve months
ended December 31, 2007, gross realized gains were
$63.1 million, partially offset by gross realized losses
were $46.3 million, including impairments of
$16.2 million. Gross gains included $14.4 million
related to gains on sales of common stock and $37.1 million
representing gains from the sales of corporate securities, the
majority of which is in the Income Annuities segment, as part of
our portfolio rebalancing to increase yields. For the twelve
months ending December 31, 2006, gross realized gains were
$56.4 million, including $26.8 million in fixed
maturity gains as part of our rebalancing strategy and
$18.3 million in equity gains. Gross realized losses were
$54.7 million, including impairments of $25.7 million.
Policyholder benefits and claims. Policyholder
benefits and claims increased $2.8 million, or 1.1%, to
$267.1 million from $264.3 million. This increase was
primarily due to a $25.7 million reduction in our group
benefits and claims, partially offset by a $10.7 million
reduction in PGAAP reserve amortization, a $5.8 million
increase in our Individual segments paid claims and a
$6.5 million increase in the change in reserves in our
Individual segment.
Interest credited. Interest credited decreased
$13.6 million, or 1.8%, to $752.3 million from
$765.9 million. Of this decrease, $20.7 million was
the result of a decrease in fixed account values in our
63
Retirement Services segment. This was partially offset by an
$8.1 million increase in our Individual segment that was
primarily due to growth in the BOLI account values.
Other underwriting and operating expenses. Other
underwriting and operating expenses increased
$21.4 million, or 8.2%, to $281.9 million from
$260.5 million. The increase is primarily due to a
$9.0 million increase in corporate shared services
expenses, a $5.5 million increase in distribution expenses,
$2.7 million of expense related to our acquisition of MRM,
and a $1.5 million increase in premium taxes. The increase
in corporate shared services expenses includes $3.5 million
of expenses related to our terminated 2007 initial public
offering, or IPO, process and a $3.0 million increase in
all employee bonus expenses. The increase in distribution
expenses is also due to an increase in employee payroll and
related benefit expenses and an increase in incentive
compensation. The increase in premium taxes was due to new BOLI
sales.
Provision for income taxes. The provision for income
taxes decreased $3.0 million, to $81.5 million from
$84.5 million. The effective tax rate decreased 1.8% to
32.8% from 34.6% due primarily to an increase in affordable
housing credits, and the impact of prior year adjustment related
to the 2006 tax year.
Segment
Operating Results
The following table reconciles segment pre-tax adjusted
operating income, which is used to measure our segments
performance, to income from operations before income taxes in
our consolidated statements of income. More information about
the results of each segment follows this table.
Segment
Pre-Tax Adjusted Operating Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
Twelve Months Ended
|
|
|
|
Ended September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in millions)
|
|
|
Group
|
|
$
|
44.7
|
|
|
$
|
51.7
|
|
|
$
|
66.9
|
|
|
$
|
91.6
|
|
|
$
|
68.1
|
|
Retirement Services
|
|
|
41.3
|
|
|
|
27.4
|
|
|
|
36.6
|
|
|
|
34.2
|
|
|
|
62.4
|
|
Income Annuities
|
|
|
33.0
|
|
|
|
28.0
|
|
|
|
36.5
|
|
|
|
45.1
|
|
|
|
45.8
|
|
Individual
|
|
|
51.6
|
|
|
|
43.0
|
|
|
|
59.7
|
|
|
|
58.7
|
|
|
|
66.4
|
|
Other
|
|
|
(5.8
|
)
|
|
|
(16.1
|
)
|
|
|
(31.6
|
)
|
|
|
0.1
|
|
|
|
1.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment pre-tax adjusted operating income
|
|
|
164.8
|
|
|
|
134.0
|
|
|
|
168.1
|
|
|
|
229.7
|
|
|
|
244.5
|
|
Add: Net realized investment gains (losses)
|
|
|
(29.0
|
)
|
|
|
(103.3
|
)
|
|
|
(158.0
|
)
|
|
|
16.8
|
|
|
|
1.7
|
|
Less: Net realized and unrealized investment gains (losses) on
FIA options
|
|
|
0.2
|
|
|
|
(3.6
|
)
|
|
|
(2.9
|
)
|
|
|
(2.3
|
)
|
|
|
2.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations before income taxes
|
|
$
|
135.6
|
|
|
$
|
34.3
|
|
|
$
|
13.0
|
|
|
$
|
248.8
|
|
|
$
|
244.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64
Group
The following table sets forth the results of operations
relating to our Group segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
Twelve Months Ended
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
|
|
$
|
324.1
|
|
|
$
|
338.8
|
|
|
$
|
449.8
|
|
|
$
|
392.1
|
|
|
$
|
387.3
|
|
Net investment income
|
|
|
13.3
|
|
|
|
13.4
|
|
|
|
17.8
|
|
|
|
18.1
|
|
|
|
18.0
|
|
Other revenues
|
|
|
12.7
|
|
|
|
14.3
|
|
|
|
19.0
|
|
|
|
15.2
|
|
|
|
10.2
|
|
Net realized investment losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other-than-temporary
impairment losses on securities
|
|
|
(8.5
|
)
|
|
|
(0.1
|
)
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
Less: portion of losses recognized in other comprehensive income
|
|
|
6.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net impairment losses recognized in earnings
|
|
|
(2.2
|
)
|
|
|
(0.1
|
)
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
Other net realized investment losses
|
|
|
(0.7
|
)
|
|
|
|
|
|
|
|
|
|
|
(0.1
|
)
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net realized investment losses
|
|
|
(2.9
|
)
|
|
|
(0.1
|
)
|
|
|
(0.1
|
)
|
|
|
(0.1
|
)
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
347.2
|
|
|
|
366.4
|
|
|
|
486.5
|
|
|
|
425.3
|
|
|
|
415.4
|
|
Benefits and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder benefits and claims
|
|
|
219.9
|
|
|
|
222.0
|
|
|
|
295.9
|
|
|
|
213.1
|
|
|
|
230.8
|
|
Other underwriting and operating expenses
|
|
|
79.7
|
|
|
|
86.7
|
|
|
|
115.7
|
|
|
|
112.3
|
|
|
|
105.7
|
|
Amortization of deferred policy acquisition costs
|
|
|
5.8
|
|
|
|
6.1
|
|
|
|
8.1
|
|
|
|
8.4
|
|
|
|
10.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses
|
|
|
305.4
|
|
|
|
314.8
|
|
|
|
419.7
|
|
|
|
333.8
|
|
|
|
347.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pre-tax income
|
|
|
41.8
|
|
|
|
51.6
|
|
|
|
66.8
|
|
|
|
91.5
|
|
|
|
68.0
|
|
Less: Net realized investment losses
|
|
|
(2.9
|
)
|
|
|
(0.1
|
)
|
|
|
(0.1
|
)
|
|
|
(0.1
|
)
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pre-tax adjusted operating income
|
|
$
|
44.7
|
|
|
$
|
51.7
|
|
|
$
|
66.9
|
|
|
$
|
91.6
|
|
|
$
|
68.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth selected historical operating
metrics relating to our Group segment as of, or for, the periods
ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
Twelve Months Ended
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
Group loss ratio(1)
|
|
|
67.8
|
%
|
|
|
65.5
|
%
|
|
|
65.8
|
%
|
|
|
54.3
|
%
|
|
|
59.6
|
%
|
Expense ratio(2)
|
|
|
24.2
|
%
|
|
|
24.8
|
%
|
|
|
24.8
|
%
|
|
|
27.8
|
%
|
|
|
27.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio(3)
|
|
|
92.0
|
%
|
|
|
90.3
|
%
|
|
|
90.6
|
%
|
|
|
82.1
|
%
|
|
|
87.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical stop-loss loss ratio(4)
|
|
|
69.4
|
%
|
|
|
66.7
|
%
|
|
|
67.9
|
%
|
|
|
55.2
|
%
|
|
|
62.4
|
%
|
Total sales(5)
|
|
$
|
77.9
|
|
|
$
|
103.6
|
|
|
$
|
112.6
|
|
|
$
|
86.2
|
|
|
$
|
69.1
|
|
|
|
|
(1) |
|
Group loss ratio represents policyholder benefits and claims
divided by premiums earned. |
|
(2) |
|
Expense ratio is equal to other underwriting and operating
expenses of our insurance operations and amortization of DAC
divided by premiums earned. |
|
(3) |
|
Combined ratio is equal to the sum of the loss ratio and the
expense ratio. |
|
(4) |
|
Medical stop-loss loss ratio represents medical
stop-loss policyholder benefits and claims divided by medical
stop-loss premiums earned. |
|
(5) |
|
Total sales represent annualized first-year premiums. |
65
Nine
Months Ended September 30, 2009 Compared to the Nine Months
Ended September 30, 2008
Group summary of results. Our Group segment pre-tax
income decreased $9.8 million, or 19.0%, to
$41.8 million from $51.6 million, primarily due to a
$7.0 million decrease in segment pre-tax adjusted operating
income and a $2.8 million increase in net realized
investment losses. The decrease in segment pre-tax adjusted
operating income was primarily the result of an increase in the
loss ratio on our medical stop-loss business.
Premiums. Premiums decreased $14.7 million, or
4.3%, to $324.1 million from $338.8 million. This
decrease was primarily due to a $12.9 million decrease in
medical stop-loss premiums, as pricing increases have led to
lower sales and renewals in 2009 and a $2.2 million
decrease in premium on our limited medical benefits product.
Net realized investment losses. Net realized
investment losses increased $2.8 million to
$2.9 million from $0.1 million. This increase was
predominately due to a $2.1 million increase in impairments
on fixed maturities.
Policyholder benefits and claims. Policyholder
benefits and claims decreased $2.1 million, or 0.9%, to
$219.9 million from $222.0 million. This decrease was
primarily driven by lower claims due to a smaller premium base.
The loss ratio is above our long-term expectations as we have
experienced more claims exceeding $0.5 million, many of
which relate to claims for premature births.
Other underwriting and operating expenses. Other
underwriting and operating expenses decreased $7.0 million,
or 8.1%, to $79.7 million from $86.7 million. This is
primarily due to a $3.0 million decrease in commission
expense due to a decrease in sales and lower average
commissions, and a $3.1 million decrease in other operating
expenses due partially to a decrease in the number of employees.
Twelve
Months Ended December 31, 2008 Compared to the Twelve
Months Ended December 31, 2007
Group summary of results. Our Group segments
pre-tax income decreased $24.7 million, or 27.0%, to
$66.8 million from $91.5 million, primarily due to
higher paid medical stop-loss claims as shown in the increase in
the loss ratio, applied to a larger book of business driven by
strong sales growth and renewals in 2008. In 2008, we adjusted
pricing to grow the block. As a result, we generated more
premiums, and experienced an increase in the actual loss ratio.
Premiums. Premiums increased $57.7 million, or
14.7%, to $449.8 million from $392.1 million. This was
primarily due to a $58.4 million increase in medical
stop-loss premiums, as a result of an increase in new sales and
strong renewals.
Other revenues. Other revenues increased
$3.8 million, or 25.0%, to $19.0 million from
$15.2 million. Our subsidiary MRM, acquired in May 2007,
generated revenues of $11.1 million in 2008, versus
$6.4 million in 2007. This was partially offset by a
decrease in revenues from our third party administrator.
Policyholder benefits and claims. Policyholder
benefits and claims increased $82.8 million, or 38.9%, to
$295.9 million from $213.1 million. This was primarily
driven by the larger book of business on increased sales and
renewals and the higher loss ratio described above.
Other underwriting and operating expenses. Other
underwriting and operating expenses increased $3.4 million,
or 3.0%, to $115.7 million from $112.3 million. This
is primarily due to a $3.4 million increase in commission
expense as a result of strong sales. The overall expense ratio
improved by 3.0% in 2008.
Twelve
Months Ended December 31, 2007 Compared to the Twelve
Months Ended December 31, 2006
Group summary of results. Our Group segments
pre-tax income increased $23.5 million, or 34.6%, to
$91.5 million from $68.0 million, primarily due to
lower paid claims on our medical stop-loss product
66
which was reflected in the reduction of our loss ratio to 55.2%
from 62.4%. The 55.2% medical loss ratio was better than our
expectations.
Premiums. Premiums increased $4.8 million, or
1.2%, to $392.1 million from $387.3 million. This was
primarily due to a $6.4 million increase in medical
stop-loss premiums, partially offset by a $1.5 million
decrease in premiums from other products.
Other revenues. Other revenues increased
$5.0 million, or 49.0%, to $15.2 million from
$10.2 million. Our newly acquired subsidiary, MRM,
generated revenues of $6.4 million, partially offset by a
decrease in revenues from our third party administrator as a
result of lower production.
Policyholder benefits and claims. Policyholder
benefits and claims decreased $17.7 million, or 7.7%, to
$213.1 million from $230.8 million. Paid claims
decreased $25.7 million, primarily related to strong
underwriting results and an unusual number of paid claims in
excess of $0.5 million in 2006 that did not recur in 2007.
This is partially offset by an increase in the change in claims
due and unpaid of $8.4 million.
Other underwriting and operating expenses. Other
underwriting and operating expenses increased $6.6 million,
or 6.2%, to $112.3 million from $105.7 million. This
is primarily due to increases in direct expenses and
distribution expenses of $4.2 million and
$2.7 million, respectively, and a $1.7 million
reduction in DAC deferrals. The increase in direct expenses is
primarily due to the acquisition of MRM, which contributed
$2.7 million in expenses in 2007. This is partially offset
by a $3.2 million decrease in commission expense, which is
related to lower average commission costs on business written.
67
Retirement
Services
The following table sets forth the results of operations
relating to our Retirement Services segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
Twelve Months Ended
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in millions)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
|
|
$
|
0.1
|
|
|
$
|
0.1
|
|
|
$
|
0.1
|
|
|
$
|
|
|
|
$
|
0.1
|
|
Net investment income
|
|
|
281.8
|
|
|
|
188.4
|
|
|
|
261.1
|
|
|
|
244.3
|
|
|
|
269.8
|
|
Other revenues
|
|
|
12.3
|
|
|
|
15.9
|
|
|
|
20.2
|
|
|
|
24.5
|
|
|
|
22.8
|
|
Net realized investment losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other-than-temporary
impairment losses on securities
|
|
|
(53.1
|
)
|
|
|
(12.9
|
)
|
|
|
(20.7
|
)
|
|
|
(4.9
|
)
|
|
|
(11.8
|
)
|
Less: portion of losses recognized in other comprehensive income
|
|
|
23.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net impairment losses recognized in earnings
|
|
|
(29.7
|
)
|
|
|
(12.9
|
)
|
|
|
(20.7
|
)
|
|
|
(4.9
|
)
|
|
|
(11.8
|
)
|
Other net realized investment gains (losses)
|
|
|
12.2
|
|
|
|
(4.1
|
)
|
|
|
(0.1
|
)
|
|
|
(4.9
|
)
|
|
|
(5.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net realized investment losses
|
|
|
(17.5
|
)
|
|
|
(17.0
|
)
|
|
|
(20.8
|
)
|
|
|
(9.8
|
)
|
|
|
(17.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
276.7
|
|
|
|
187.4
|
|
|
|
260.6
|
|
|
|
259.0
|
|
|
|
275.7
|
|
Benefits and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder benefits and claims
|
|
|
(2.2
|
)
|
|
|
(6.7
|
)
|
|
|
(6.8
|
)
|
|
|
(8.3
|
)
|
|
|
(16.5
|
)
|
Interest credited
|
|
|
187.2
|
|
|
|
127.2
|
|
|
|
176.4
|
|
|
|
165.5
|
|
|
|
186.2
|
|
Other underwriting and operating expenses
|
|
|
41.3
|
|
|
|
44.5
|
|
|
|
57.4
|
|
|
|
69.1
|
|
|
|
61.7
|
|
Amortization of deferred policy acquisition costs
|
|
|
26.8
|
|
|
|
8.4
|
|
|
|
14.9
|
|
|
|
6.0
|
|
|
|
1.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses
|
|
|
253.1
|
|
|
|
173.4
|
|
|
|
241.9
|
|
|
|
232.3
|
|
|
|
232.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pre-tax income
|
|
|
23.6
|
|
|
|
14.0
|
|
|
|
18.7
|
|
|
|
26.7
|
|
|
|
43.2
|
|
Less: Net realized investment losses
|
|
|
(17.5
|
)
|
|
|
(17.0
|
)
|
|
|
(20.8
|
)
|
|
|
(9.8
|
)
|
|
|
(17.0
|
)
|
Add: Net realized and unrealized investment gains (losses) on
FIA options
|
|
|
0.2
|
|
|
|
(3.6
|
)
|
|
|
(2.9
|
)
|
|
|
(2.3
|
)
|
|
|
2.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pre-tax adjusted operating income
|
|
$
|
41.3
|
|
|
$
|
27.4
|
|
|
$
|
36.6
|
|
|
$
|
34.2
|
|
|
$
|
62.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth selected historical operating
metrics relating to our Retirement Services segment as of, or
for, the periods ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
Twelve Months Ended
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in millions)
|
|
|
Account values Fixed annuities
|
|
$
|
7,464.1
|
|
|
$
|
5,202.9
|
|
|
$
|
5,724.9
|
|
|
$
|
4,445.4
|
|
|
$
|
4,922.5
|
|
Account values Variable annuities
|
|
|
736.9
|
|
|
|
821.1
|
|
|
|
645.7
|
|
|
|
1,059.2
|
|
|
|
1,115.5
|
|
PGAAP reserve balance
|
|
|
|
|
|
|
2.9
|
|
|
|
2.2
|
|
|
|
9.9
|
|
|
|
18.4
|
|
Interest spread on average account values(1)
|
|
|
1.81
|
%
|
|
|
1.71
|
%
|
|
|
1.67
|
%
|
|
|
1.68
|
%
|
|
|
1.76
|
%
|
Total sales(2)
|
|
$
|
1,966.5
|
|
|
$
|
1,142.4
|
|
|
$
|
1,766.5
|
|
|
$
|
692.3
|
|
|
$
|
573.2
|
|
|
|
|
(1) |
|
Interest spread is the difference between net investment yield
earned and the credited interest rate to policyholders. The
investment yield is the approximate yield on invested assets in
the general account attributed to the segment. The credited
interest rate is the approximate rate credited on policyholder
fixed account values within the segment. Interest credited is
subject to contractual terms, including minimum guarantees.
Interest spread tends to move gradually over time to reflect
market interest rate movements and may reflect actions by
management to respond to competitive pressures and profit
targets. |
|
(2) |
|
Total sales represent deposits for new policies. |
68
Nine
Months Ended September 30, 2009 Compared to the Nine Months
Ended September 30, 2008
Retirement Services summary of results. Our
Retirement Services segment pre-tax income increased
$9.6 million, or 68.6%, to $23.6 million from
$14.0 million due to an increase in segment pre-tax
adjusted operating income, partially offset by an increase in
net realized investment losses due to increased investment
impairments. Segment pre-tax adjusted operating income increased
$13.9 million, or 50.7%, to $41.3 million from
$27.4 million as fixed deferred annuities experienced
positive net cash flows and an increase in sales of
$873.8 million, or 85.0%, to $1,902.1 million from
$1,028.3 million, which drove an increase in fixed
annuities account value of $2.3 billion. We also
experienced an increase in the interest spread on average
account values, which increased to 1.81% from 1.71%. Although
our yields increased, the 2009 yield was unfavorably impacted by
an increase in uninvested cash caused by the increase in sales
in a tight credit environment. This dampened growth in margins
until the cash was invested, limiting the growth of segment
pre-tax income. In addition, the increase in sales allowed us to
fully defer acquisition expenses resulting in lower other
underwriting and operating expenses. Offsetting this was an
increase in DAC amortization of $18.4 million related to
our growing DAC asset balance.
Net investment income. Net investment income
increased $93.4 million, or 49.6%, to $281.8 million
from $188.4 million. Of this increase, $79.3 million
was driven by higher average invested assets, which increased to
$6.89 billion from $4.85 billion, and
$14.1 million was driven by a positive rate variance as
yields increased to 5.45% from 5.18%. Overall yields on our
fixed maturities also increased as we were able to invest in
higher yielding assets.
Other revenues. Other revenues decreased
$3.6 million, or 22.6%, to $12.3 million from
$15.9 million, which was primarily due to a reduction in
fees on variable account values.
Net realized investment losses. Net realized
investment losses increased $0.5 million to
$17.5 million from $17.0 million. For the nine months
ended September 30, 2009, gross realized gains were
$20.7 million, offset by gross realized losses of
$38.2 million, including impairments of $29.7 million.
For the nine months ended September 30, 2008, gross
realized gains were $2.9 million, offset by gross realized
losses of $19.9 million, including impairments of
$12.9 million. In addition, the realized and unrealized
gains and losses on FIA options increased $3.8 million to a
$0.2 million gain, from a $3.6 million loss as the
S&P 500 increased in the first nine months of 2009 versus a
decrease in the first nine months of 2008.
Policyholder benefits and claims. Policyholder
benefits and claims decreased $4.5 million, or 67.2%, to a
$2.2 million benefit from a $6.7 million benefit. This
decrease was primarily driven by a reduced benefit from PGAAP
reserve amortization, which was fully amortized as of
September 30, 2009. The PGAAP reserve was amortized as a
reduction to policyholder benefits according to our expected
pattern of profitability of the block of business of policies in
force at the time of the Acquisition.
Interest credited. Interest credited increased
$60.0 million, or 47.2%, to $187.2 million from
$127.2 million due to a 37% increase in average fixed
account values resulting from increased sales and higher
persistency.
Other underwriting and operating expenses. Other
underwriting and operating expenses decreased $3.2 million,
or 7.2%, to $41.3 million from $44.5 million. This
decrease is primarily due to increased sales in 2009, which
resulted in an increase in deferrable policy acquisition costs.
In addition, we received a $1.0 million guaranteed fund
assessment refund in 2009, which decreased operating expenses.
Amortization of deferred policy acquisition
costs. Amortization of deferred policy acquisition
costs increased $18.4 million to $26.8 million from
$8.4 million. This increase was primarily driven by an
increased DAC asset balance to amortize due to increased sales
and an increase in margins in 2009, as well as a
$1.1 million increase due to the unlocking of future DAC
assumptions.
69
Twelve
Months Ended December 31, 2008 Compared to the Twelve
Months Ended December 31, 2007
Retirement Services summary of results. Our
Retirement Services segment pre-tax income decreased
$8.0 million, or 30.0%, to $18.7 million from
$26.7 million, due to an increase in segment pre-tax
adjusted operating income offset by an increase in net realized
investment losses. Segment pre-tax adjusted operating income
increased $2.4 million, or 7.0%, to $36.6 million from
$34.2 million. Segment pre-tax adjusted operating income
benefited from strong sales and higher persistency leading to a
growing block of business producing greater investment margin
(net investment income less interest credited). Increased sales
also resulted in an increase in DAC deferrals which contributed
positively to lower net operating expense. Partially offsetting
this was a decrease in other revenues of $4.3 million
driven by lower fees on variable annuities due to the declines
in the equity markets and an $8.9 million increase in
amortization of DAC.
Net investment income. Net investment income
increased $16.8 million, or 6.9%, to $261.1 million
from $244.3 million. Of this increase, $17.0 million
was a result of an increase in average invested assets, which
increased to $5.1 billion from $4.7 billion. This was
partially offset by a $0.2 million negative rate variance
as yields decreased to 5.15% from 5.16%. Investment yields were
unfavorably impacted in the latter half of 2008 by increased
uninvested cash.
Other revenues. Other revenues decreased
$4.3 million, or 17.6%, to $20.2 million from
$24.5 million due to lower fees on variable annuities
caused by a decline in the equity markets which impacted our
variable annuities account value.
Net realized investment losses. Net realized
investment losses increased $11.0 million to
$20.8 million from $9.8 million. For the year ended
December 31, 2008, gross realized gains were
$11.0 million, offset by gross realized losses of
$31.8 million, including impairments of $20.7 million.
For the year ended December 31, 2007, gross realized gains
were $8.6 million, offset by gross realized losses of
$18.4 million, including impairments of $4.9 million.
Interest credited. Interest credited increased
$10.9 million, or 6.6%, to $176.4 million from
$165.5 million. This is due primarily to an increase in
average fixed account values and higher crediting rates on new
business.
Other underwriting and operating expenses. Other
underwriting and operating expenses decreased
$11.7 million, or 16.9%, to $57.4 million from
$69.1 million. This change was primarily driven by
increased sales in 2008, which resulted in an increase in
deferrable policy acquisition costs. In 2008, we were able to
fully defer acquisition expenses as a result of the increase in
sales.
Amortization of deferred policy acquisition
costs. Amortization of DAC increased $8.9 million
to $14.9 million from $6.0 million. This change was
primarily driven by a growing book of business and corresponding
DAC asset.
Twelve
Months Ended December 31, 2007 Compared to the Twelve
Months Ended December 31, 2006
Retirement Services summary of results. Our
Retirement Services segment pre-tax income decreased
$16.5 million, or 38.2%, to $26.7 million from
$43.2 million due to a decrease in segment pre-tax adjusted
operating income of $28.2 million offset by a
$11.7 million decrease in net realized investment losses
excluding losses on FIA options. Segment pre-tax adjusted
operating income decreased $28.2 million, or 45.2%, to
$34.2 million from $62.4 million. Segment pre-tax
adjusted operating income decreased due to a decline in account
value as withdrawals exceeded new deposits, a decrease in the
interest spread on average account values driven by lower
amortization of the PGAAP reserve, increased operating expenses
and increased DAC amortization.
Net investment income. Net investment income
decreased $25.5 million, or 9.5%, to $244.3 million
from $269.8 million. Of this decrease, $34.4 million
was a result of a decrease in average invested assets to
$4.7 billion from $5.4 billion. This decrease was
partially offset by a positive rate variance of
$8.9 million due to improved yields related to our
investment portfolio rebalancing strategy, which increased to
5.16% from 4.97%.
70
Net realized investment losses. Net realized
investment losses decreased $7.2 million, or 42.4%, to
$9.8 million from $17.0 million. For the year ended
December 31, 2007, gross realized gains were
$8.6 million, offset by gross realized losses of
$18.4 million, including impairments of $4.9 million.
For the year ended December 31, 2006, gross realized gains
were $8.6 million, offset by gross realized losses of
$25.6 million, including impairments of $11.8 million.
Policyholder benefits and claims. Policyholder
benefits and claims increased $8.2 million, or 49.7%, to
$8.3 million from $16.5 million. This increase was
primarily driven by differences in the amount of PGAAP reserve
amortization. The PGAAP reserve is amortized as a reduction to
policyholder benefits according to our expected pattern of
profitability of the book of business of policies in force at
the time of the Acquisition. This pattern resulted in higher
PGAAP reserve amortization in the years immediately following
the Acquisition.
Interest credited. Interest credited decreased
$20.7 million, or 11.1%, to $165.5 million from
$186.2 million. This decrease is primarily due to a
decrease in fixed account values as withdrawals exceeded
deposits and a $5.2 million decrease in interest credited
on our FIA products, which resulted from 3.5% growth in the
S&P 500 Index in 2007 compared to 13.6% growth in the
S&P 500 Index in 2006. These decreases were partially
offset by a $5.5 million increase related to higher
crediting rates and persistency.
Other underwriting and operating expenses. Other
underwriting and operating expenses increased $7.4 million,
or 12.0%, to $69.1 million from $61.7 million. This
increase was primarily due to a $3.3 million increase in
allocated corporate expenses, and a $2.9 million increase
in distribution expenses.
Amortization of deferred policy acquisition
costs. Amortization of deferred policy acquisition
costs increased $4.9 million to $6.0 million from
$1.1 million. This increase is primarily driven by a
growing block of business and corresponding DAC, which increased
to $84.3 million from $54.5 million at
December 31, 2006. We experienced an increase in our DAC
asset balance despite the decrease in fixed account value as
customer withdrawals were primarily on products without DAC
asset balances.
71
Income
Annuities
The following table sets forth the results of operations
relating to our Income Annuities segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
Twelve Months Ended
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in millions)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
318.1
|
|
|
$
|
316.9
|
|
|
$
|
423.4
|
|
|
$
|
439.3
|
|
|
$
|
439.0
|
|
Other revenues
|
|
|
0.4
|
|
|
|
0.6
|
|
|
|
0.9
|
|
|
|
0.8
|
|
|
|
0.8
|
|
Net realized investment gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other-than-temporary
impairment losses on securities
|
|
|
(76.6
|
)
|
|
|
(22.6
|
)
|
|
|
(35.4
|
)
|
|
|
(8.0
|
)
|
|
|
(9.4
|
)
|
Less: portion of losses recognized in other comprehensive income
|
|
|
49.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net impairment losses recognized in earnings
|
|
|
(27.1
|
)
|
|
|
(22.6
|
)
|
|
|
(35.4
|
)
|
|
|
(8.0
|
)
|
|
|
(9.4
|
)
|
Other net realized investment gains (losses)
|
|
|
34.8
|
|
|
|
(31.4
|
)
|
|
|
(64.2
|
)
|
|
|
31.0
|
|
|
|
26.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net realized investment gains (losses)
|
|
|
7.7
|
|
|
|
(54.0
|
)
|
|
|
(99.6
|
)
|
|
|
23.0
|
|
|
|
16.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
326.2
|
|
|
|
263.5
|
|
|
|
324.7
|
|
|
|
463.1
|
|
|
|
456.6
|
|
Benefits and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest credited
|
|
|
268.7
|
|
|
|
272.4
|
|
|
|
364.5
|
|
|
|
371.5
|
|
|
|
371.8
|
|
Other underwriting and operating expenses
|
|
|
15.6
|
|
|
|
16.1
|
|
|
|
21.9
|
|
|
|
22.4
|
|
|
|
21.6
|
|
Amortization of deferred policy acquisition costs
|
|
|
1.2
|
|
|
|
1.0
|
|
|
|
1.4
|
|
|
|
1.1
|
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses
|
|
|
285.5
|
|
|
|
289.5
|
|
|
|
387.8
|
|
|
|
395.0
|
|
|
|
394.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pre-tax income (loss)
|
|
|
40.7
|
|
|
|
(26.0
|
)
|
|
|
(63.1
|
)
|
|
|
68.1
|
|
|
|
62.6
|
|
Less: Net realized investment gains (losses)
|
|
|
7.7
|
|
|
|
(54.0
|
)
|
|
|
(99.6
|
)
|
|
|
23.0
|
|
|
|
16.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pre-tax adjusted operating income
|
|
$
|
33.0
|
|
|
$
|
28.0
|
|
|
$
|
36.5
|
|
|
$
|
45.1
|
|
|
$
|
45.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth selected historical operating
metrics relating to our Income Annuities segment as of, or for,
the periods ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
Twelve Months Ended
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in millions)
|
|
|
Reserves(1)
|
|
$
|
6,722.7
|
|
|
$
|
6,796.3
|
|
|
$
|
6,761.2
|
|
|
$
|
6,895.4
|
|
|
$
|
7,012.6
|
|
Interest spread(2)
|
|
|
0.56
|
%
|
|
|
0.58
|
%
|
|
|
0.59
|
%
|
|
|
0.60
|
%
|
|
|
0.66
|
%
|
Mortality gains (losses)(3)
|
|
$
|
3.8
|
|
|
$
|
3.5
|
|
|
$
|
2.1
|
|
|
$
|
(0.1
|
)
|
|
$
|
6.3
|
|
Total sales(4)
|
|
|
168.0
|
|
|
|
106.3
|
|
|
|
140.8
|
|
|
|
140.2
|
|
|
|
96.6
|
|
|
|
|
(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 within the segment 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 a life contingent
annuity. |
|
(4) |
|
Sales represent deposits for new policies. |
72
Nine
Months Ended September 30, 2009 Compared to the Nine Months
Ended September 30, 2008
Income Annuities summary of results. Our Income
Annuities segment pre-tax income increased $66.7 million to
$40.7 million from a $26.0 million loss, primarily due
to $7.7 million of net realized investment gains in 2009,
compared to $54.0 million of net realized investment losses
in 2008, and a $5.0 million increase in segment pre-tax
adjusted operating income. The increase in net realized
investment gains (losses) was due to an increase in gains from
our trading portfolio of equity securities, which experienced
net gains of $29.0 million in 2009 compared to net losses
of $33.4 million in 2008, primarily due to changes in the
fair value of our equity securities due to improvements in the
equity markets in 2009. Segment pre-tax adjusted operating
income increased $5.0 million, to $33.0 million from
$28.0 million, which was primarily due to a positive rate
variance on investments. In addition, our sales of immediate
annuities increased $35.8 million, or 39.1%, to
$127.4 million from $91.6 million.
Net investment income. Net investment income
increased $1.2 million, or 0.4%, to $318.1 million
from $316.9 million. Of this increase, $4.5 million
was the result of a positive rate variance as yields increased
to 6.09% from 6.00%. In part, the increase in the yields was due
to the transfer of all of our investments in limited
partnerships from our Income Annuities segment to our Other
segment during the third quarter of 2008, in exchange for equity
securities and cash. We experienced $1.8 million of losses
on our investments in limited partnerships in 2008, primarily
due to declines in fair value related to the equity markets. In
addition, the increase in yield was due to adjustments to
investment income related to changes in prepayment speeds on the
underlying collateral of certain mortgage-backed fixed
maturities, which increased investment income $2.5 million
in 2009 versus a decrease of $0.1 million in 2008. The
increase in investment income resulting from the increase in
yields was partially offset by a $3.3 million decrease as
average invested assets declined by $72.3 million, to
$7.0 billion from $7.1 billion as a result of
decreased reserves.
Net realized investment gains (losses). Net realized
investment gains (losses) increased $61.7 million to a
$7.7 million gain from a $(54.0) million loss. For the
nine months ended September 30, 2009, gross realized gains
were $48.9 million, including gross equity gains of
$35.2 million, partially offset by gross realized losses of
$41.2 million, including impairments of $27.1 million
and gross equity losses of $6.2 million. For the nine
months ended September 30, 2008, gross realized gains were
$15.0 million, including gross equity gains of
$2.0 million, offset by gross realized losses of
$69.0 million, including impairments of $22.6 million,
and gross equity losses of $35.4 million.
Interest credited. Interest credited decreased
$3.7 million, or 1.4%, to $268.7 million from
$272.4 million. This is primarily driven by lower reserves,
as benefit payments outpaced new sales.
Twelve
Months Ended December 31, 2008 Compared to the Twelve
Months Ended December 31, 2007
Income Annuities summary of results. Our Income
Annuities segment pre-tax income (loss) decreased
$131.2 million to a $63.1 million loss from a
$68.1 million gain due to $99.6 million in net
realized losses in 2008 compared to $23.0 million in net
realized gains in 2007. Segment pre-tax adjusted operating
income decreased $8.6 million, or 19.1%, to
$36.5 million from $45.1 million, which was primarily
due to lower investment yields driven by
mark-to-market
losses on our investments in limited partnerships.
Net investment income. Net investment income
decreased $15.9 million, or 3.6%, to $423.4 million
from $439.3 million. Of this decrease, $9.5 million
was a result of a negative rate variance as yields decreased to
6.01% from 6.15%, and $6.4 million of the decrease was due
to a decrease in average invested assets to $7.0 billion
from $7.1 billion as a result of decreased reserves. In
addition, this decrease was due to lower performance in our
investments in limited partnerships. These losses totaled
$1.8 million in 2008 compared to $7.0 million in gains
in 2007. During the third quarter of 2008, we transferred all
investments in limited partnerships held by our Income Annuities
segment to the holding company, included in our Other segment,
in exchange for marketable equity securities.
Net realized investment gains (losses). Net
investment gains (losses) decreased $122.6 million to a
$99.6 million loss from a $23.0 million gain. For the
year ended December 31, 2008, gross realized gains were
$15.2 million, offset by gross realized losses of
$114.8 million, including impairments of
$35.4 million
73
and losses in the fair value of our equity portfolio of
$61.2 million. For the year ended December 31, 2007,
gross realized gains were $40.4 million, offset by gross
realized losses of $17.4 million, including impairments of
$8.0 million.
Interest credited. Interest credited decreased
$7.0 million, or 1.9%, to $364.5 million from
$371.5 million. This decrease primarily related to a
$4.1 million decrease in interest as a result of lower
reserves as benefit payments exceeded new deposits, and
$2.2 million due to an increase in mortality gains.
Twelve
Months Ended December 31, 2007 Compared to the Twelve
Months Ended December 31, 2006
Income Annuities summary of results. Our Income
Annuities segment pre-tax income increased $5.5 million, or
8.8%, to $68.1 million from $62.6 million. Segment
pre-tax adjusted operating income decreased $0.7 million,
or 1.5%, to $45.1 million from $45.8 million. Segment
pre-tax adjusted operating income decreased due to a decrease in
the interest spread on reserves, which was driven by higher
crediting rates. A slight increase in employee payroll and
benefit operating expenses also decreased operating results.
Net investment income. Net investment income
increased $0.3 million, to $439.3 million from
$439.0 million. Of this increase, $6.3 million related
to improved yields on assets and investments in limited
partnerships to 6.15% from 6.06%. This increase was partially
offset by a $6.0 million decrease related to a decrease in
average invested assets, which decreased to $7.1 billion
from $7.2 billion.
Net realized investment gains. Net investment gains
increased $6.2 million, or 36.9%, to $23.0 million
from $16.8 million. For the year ended December 31,
2007, gross realized gains were $40.4 million, offset by
gross realized losses of $17.4 million, including
impairments of $8.0 million. For the year ended
December 31, 2006, gross realized gains were
$34.2 million, offset by gross realized losses of
$17.4 million, including impairments of $9.4 million.
We had higher realized gains in 2007 primarily due to gains
related to a significant tender offer related to certain fixed
maturities in our investment portfolio.
Interest credited. Interest credited decreased
$0.3 million, or less than 0.1%, to $371.5 million
from $371.8 million. Of this decrease, $5.0 million
relates to a decrease in reserves and $2.5 million relates
to an increase in gains from funding services activity. These
decreases are offset by a $6.4 million change in mortality
from mortality losses in the current year versus mortality gains
in the prior year.
74
Individual
The following table sets forth the results of operations
relating to our Individual segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
Twelve Months Ended
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in millions)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
|
|
$
|
106.0
|
|
|
$
|
101.5
|
|
|
$
|
134.9
|
|
|
$
|
138.4
|
|
|
$
|
138.3
|
|
Net investment income
|
|
|
198.0
|
|
|
|
190.6
|
|
|
|
254.6
|
|
|
|
244.1
|
|
|
|
232.8
|
|
Other revenues
|
|
|
9.9
|
|
|
|
12.2
|
|
|
|
16.0
|
|
|
|
15.0
|
|
|
|
12.9
|
|
Net realized investment gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other-than-temporary
impairment losses on securities
|
|
|
(17.7
|
)
|
|
|
(12.7
|
)
|
|
|
(15.9
|
)
|
|
|
(1.9
|
)
|
|
|
(2.9
|
)
|
Less: portion of losses recognized in other comprehensive income
|
|
|
9.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net impairment losses recognized in earnings
|
|
|
(8.6
|
)
|
|
|
(12.7
|
)
|
|
|
(15.9
|
)
|
|
|
(1.9
|
)
|
|
|
(2.9
|
)
|
Other net realized investment gains (losses)
|
|
|
0.7
|
|
|
|
(0.5
|
)
|
|
|
(0.9
|
)
|
|
|
0.4
|
|
|
|
(0.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net realized investment losses
|
|
|
(7.9
|
)
|
|
|
(13.2
|
)
|
|
|
(16.8
|
)
|
|
|
(1.5
|
)
|
|
|
(3.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
306.0
|
|
|
|
291.1
|
|
|
|
388.7
|
|
|
|
396.0
|
|
|
|
380.2
|
|
Benefits and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder benefits and claims
|
|
|
44.4
|
|
|
|
44.8
|
|
|
|
59.4
|
|
|
|
62.3
|
|
|
|
50.0
|
|
Interest credited
|
|
|
175.7
|
|
|
|
171.3
|
|
|
|
227.7
|
|
|
|
216.3
|
|
|
|
208.2
|
|
Other underwriting and operating expenses
|
|
|
39.6
|
|
|
|
43.0
|
|
|
|
57.3
|
|
|
|
57.7
|
|
|
|
57.4
|
|
Amortization of deferred policy acquisition costs
|
|
|
2.6
|
|
|
|
2.2
|
|
|
|
1.4
|
|
|
|
2.5
|
|
|
|
2.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses
|
|
|
262.3
|
|
|
|
261.3
|
|
|
|
345.8
|
|
|
|
338.8
|
|
|
|
317.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pre-tax income
|
|
|
43.7
|
|
|
|
29.8
|
|
|
|
42.9
|
|
|
|
57.2
|
|
|
|
62.6
|
|
Less: Net realized investment losses
|
|
|
(7.9
|
)
|
|
|
(13.2
|
)
|
|
|
(16.8
|
)
|
|
|
(1.5
|
)
|
|
|
(3.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pre-tax adjusted operating income
|
|
$
|
51.6
|
|
|
$
|
43.0
|
|
|
$
|
59.7
|
|
|
$
|
58.7
|
|
|
$
|
66.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth selected historical operating
metrics relating to our Individual segment as of, and for the
periods ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
Twelve Months Ended
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in millions)
|
|
|
Insurance in force(1)
|
|
$
|
50,215.6
|
|
|
$
|
51,643.7
|
|
|
$
|
51,313.5
|
|
|
$
|
52,055.6
|
|
|
$
|
52,295.3
|
|
Mortality ratio(2)
|
|
|
77.9
|
%
|
|
|
82.8
|
%
|
|
|
79.2
|
%
|
|
|
84.0
|
%
|
|
|
74.7
|
%
|
BOLI account value(3)
|
|
$
|
3,754.9
|
|
|
$
|
3,663.9
|
|
|
$
|
3,700.4
|
|
|
$
|
3,527.2
|
|
|
$
|
3,346.8
|
|
UL account value(3)
|
|
|
584.8
|
|
|
|
578.0
|
|
|
|
580.3
|
|
|
|
573.6
|
|
|
|
565.1
|
|
PGAAP reserve balance
|
|
|
38.9
|
|
|
|
52.0
|
|
|
|
49.2
|
|
|
|
62.0
|
|
|
|
77.1
|
|
BOLI ROA(4)
|
|
|
1.23
|
%
|
|
|
1.21
|
%
|
|
|
1.13
|
%
|
|
|
1.13
|
%
|
|
|
1.18
|
%
|
UL interest spread(5)
|
|
|
1.24
|
%
|
|
|
1.17
|
%
|
|
|
1.14
|
%
|
|
|
1.23
|
%
|
|
|
1.31
|
%
|
Total sales, excluding BOLI(6)
|
|
$
|
7.8
|
|
|
$
|
4.8
|
|
|
$
|
7.2
|
|
|
$
|
8.5
|
|
|
$
|
9.3
|
|
BOLI sales(7)
|
|
|
2.5
|
|
|
|
2.9
|
|
|
|
2.9
|
|
|
|
4.6
|
|
|
|
|
|
|
|
|
(1) |
|
Insurance in force represents dollar face amounts of policies. |
|
(2) |
|
Mortality ratio represents actual mortality experience as a
percentage of an industry mortality benchmark. This benchmark is
an expected level of claims that is derived by applying our
current in force business to the Society of Actuaries
1990-95
Basic Select and Ultimate Mortality Table. |
|
(3) |
|
BOLI account value and UL account value represent our liability
to our policyholders. |
footnotes continued on following page
75
|
|
|
(4) |
|
The 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. |
|
(5) |
|
UL interest spread is the difference between net investment
yield earned and the credited interest rate to policyholders.
The investment yield is the approximate yield on invested assets
in the general account attributed to the UL policies. The
credited interest rate is the approximate rate credited on UL
policyholder fixed account values. Interest credited to UL
policyholders account values is subject to contractual
terms, including minimum guarantees. Interest credited tends to
move gradually over time to reflect market interest rate
movements and may reflect actions by management to respond to
competitive pressures and profit targets. |
|
(6) |
|
Total sales, excluding BOLI represent annualized first year
premiums and deposits for new policies excluding BOLI sales. |
|
(7) |
|
BOLI sales represent 10% of new BOLI total deposits. |
Nine
Months Ended September 30, 2009 Compared to the Nine Months
Ended September 30, 2008
Individual Summary of Results. Our Individual
segment pre-tax income increased $13.9 million, or 46.6%,
to $43.7 million from $29.8 million due to an increase
of $8.6 million in segment pre-tax adjusted operating
income and a decrease of $5.3 million in net realized
investment losses. Segment pre-tax adjusted operating income
increased $8.6 million, or 20.0%, to $51.6 million
from $43.0 million driven by increased BOLI ROA on
increased BOLI account value, increased UL interest spread,
lower operating expenses and an improved mortality ratio.
Premiums. Premiums increased $4.5 million, or
4.4%, to $106.0 million from $101.5 million. This
increase is primarily related to the annual increases in COI
charges on the BOLI block of business due to aging of the
covered BOLI lives and a decrease in ceded premium related to
term insurance.
Net investment income. Net investment income
increased $7.4 million, or 3.9%, to $198.0 million
from $190.6 million. Of this increase, $6.5 million
related to an increase in the average invested assets, which
increased to $4.9 billion from $4.8 billion. In
addition, there was a positive rate variance of
$0.9 million as a result of an increase in yields to 5.38%
from 5.36%.
Net realized investment losses. Net realized
investment losses decreased $5.3 million, or 40.2%, to
$7.9 million from $13.2 million. For the nine months
ended September 30, 2009, gross realized gains were
$9.9 million offset by gross realized losses of
$17.8 million, including impairments of $8.6 million.
For the nine months ended September 30, 2008, gross
realized gains were $1.2 million, offset by gross realized
losses of $14.4 million, including impairments of
$12.7 million.
Policyholder benefits and claims. Policyholder
benefits and claims decreased $0.4 million, or 0.9%, to
$44.4 million from $44.8 million. This decrease was
due to a $2.3 million decrease in the change in reserves,
primarily term reserves, due to a smaller block of business and
smaller reserve requirements on new sales. This was partially
offset by a $2.0 million increase in incurred claims,
primarily BOLI separate account claims.
Interest credited. Interest credited increased
$4.4 million, or 2.6%, to $175.7 million from
$171.3 million. This increase was primarily related to
growth in BOLI account value, which is growing as a result of
new sales and strong persistency. Interest related to the growth
in BOLI account value was offset by decreases related to BOLI
separate account claims experience. BOLI separate account
interest credited is favorably impacted by BOLI separate account
claims.
Other underwriting and operating expenses. Other
underwriting and operating expenses decreased $3.4 million,
or 7.9%, to $39.6 million from $43.0 million. This
decrease was primarily driven by increases of $3.2 million
in DAC deferrals as increased sales resulted in an increase in
deferral of acquisition related expense.
76
Twelve
Months Ended December 31, 2008 Compared to the Twelve
Months Ended December 31, 2007
Individual Summary of Results. Our Individual
segment pre-tax income decreased $14.3 million, or 25.0%,
to $42.9 million from $57.2 million due to an increase
in segment pre-tax adjusted operating income offset by an
increase in net realized investment losses of
$15.3 million. Segment pre-tax adjusted operating income
increased $1.0 million, or 1.7%, to $59.7 million from
$58.7 million due to an increase in net investment income
and favorable mortality, partially offset by decreased premiums
and an increase in interest credited on our BOLI block of
business.
Premiums. Premiums decreased $3.5 million, or
2.5%, to $134.9 million from $138.4 million. This is
primarily related to lower sales and adjustments associated with
reinsured policies that increased ceded premiums, partially
offset by an increase in BOLI COI charges related to the
increase in our BOLI account value due to new sales and the
aging of covered BOLI lives.
Net investment income. Net investment income
increased $10.5 million, or 4.3%, to $254.6 million
from $244.1 million. Of this increase, $13.2 million
related to an increase in the average invested assets, which
increased to $4.8 billion from $4.5 billion mainly due
to growth in BOLI account value. This increase was partially
offset by a negative rate variance of $2.7 million due to
decreasing yields, which decreased to 5.33% from 5.38%.
Net realized investment losses. Net realized
investment losses increased $15.3 million to
$16.8 million from $1.5 million. For the year ended
December 31, 2008, gross realized gains were
$1.3 million, offset by gross realized losses of
$18.1 million, including impairments of $15.9 million.
For the year ended December 31, 2007, gross realized gains
were $2.4 million, offset by gross realized losses of
$3.9 million, including impairments of $1.9 million.
Policyholder benefits and claims. Policyholder
benefits and claims expense decreased $2.9 million, or
4.7%, to $59.4 million from $62.3 million. Of this
decrease, $1.5 million was due to ceded maintenance reserve
credit in 2008. In addition, mortality, which excludes BOLI
experience, improved from 84.0% to 79.2% as claims decreased
$0.8 million, but was offset by a decrease in the change in
reserves primarily related to a $2.5 million adjustment
from a refinement of our reserve methodology in 2007 in
connection with an actuarial reserving software conversion. In
addition, the benefit received from PGAAP reserve amortization
decreased $2.2 million.
Interest credited. Interest credited increased
$11.4 million, or 5.3%, to $227.7 million from
$216.3 million. This increase was primarily due to an
increase in our BOLI account values caused by new sales and
strong persistency and a decrease in BOLI separate account
claims, which resulted in an increase in interest credited
related to BOLI separate account business.
Twelve
Months Ended December 31, 2007 Compared to Twelve Months
Ended December 31, 2006
Individual Summary of Results. Our Individual
segment pre-tax income decreased $5.4 million, or 8.6%, to
$57.2 million from $62.6 million. Segment pre-tax
adjusted operating income decreased $7.7 million, or 11.6%,
to $58.7 million from $66.4 million. This decrease in
segment pre-tax adjusted operating income and pre-tax income was
primarily due to a higher mortality ratio and lower BOLI ROA.
Net investment income. Net investment income
increased $11.3 million, or 4.9%, to $244.1 million
from $232.8 million. Of this increase, $3.7 million
related to improved yields, which increased to 5.38% from 5.30%,
and a $7.6 million increase related to an increase in the
average invested assets, which increased to $4.5 billion
from $4.4 billion.
Net realized investment losses. Net realized
investment losses decreased $2.3 million, or 60.5%, to
$1.5 million from $3.8 million. For the year ended
December 31, 2007, gross realized gains were
$2.4 million, offset by gross realized losses of
$3.9 million, including impairments of $1.9 million.
For the year ended December 31, 2006, gross realized gains
were $2.1 million, offset by gross realized losses of
$5.9 million, including impairments of $2.9 million.
77
Policyholder benefits and claims. Policyholder
benefits and claims expense increased $12.3 million, or
24.6%, to $62.3 million from $50.0 million. This is
primarily due to an increase in claims and unfavorable reserve
adjustments. Claims increased $5.8 million mainly related
to variable universal life, term life and BOLI separate account
claims. On a net basis, we also recorded $6.5 million of
unfavorable reserve adjustments which were due to changes in
reserve assumptions and a refinement of our reserve methodology
implemented in connection with an actuarial reserving software
conversion and a reduction in the benefit received from PGAAP
reserve amortization.
Other
The following table sets forth the results of operations
relating to our Other segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
Twelve Months Ended
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in millions)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income (losses)
|
|
$
|
18.2
|
|
|
$
|
8.7
|
|
|
$
|
(0.4
|
)
|
|
$
|
27.8
|
|
|
$
|
25.3
|
|
Other revenues
|
|
|
7.9
|
|
|
|
9.0
|
|
|
|
11.7
|
|
|
|
13.2
|
|
|
|
9.4
|
|
Net realized investment gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other-than-temporary
impairment losses on securities
|
|
|
(12.0
|
)
|
|
|
(13.4
|
)
|
|
|
(14.3
|
)
|
|
|
(1.4
|
)
|
|
|
(1.6
|
)
|
Less: portion of loss recognized in other comprehensive income
|
|
|
5.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net impairment losses recognized in earnings
|
|
|
(6.1
|
)
|
|
|
(13.4
|
)
|
|
|
(14.3
|
)
|
|
|
(1.4
|
)
|
|
|
(1.6
|
)
|
Other net realized investment gains (losses)
|
|
|
(2.3
|
)
|
|
|
(5.6
|
)
|
|
|
(6.4
|
)
|
|
|
6.6
|
|
|
|
7.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net realized investment gains (losses)
|
|
|
(8.4
|
)
|
|
|
(19.0
|
)
|
|
|
(20.7
|
)
|
|
|
5.2
|
|
|
|
5.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
17.7
|
|
|
|
(1.3
|
)
|
|
|
(9.4
|
)
|
|
|
46.2
|
|
|
|
40.5
|
|
Benefits and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest credited
|
|
|
(2.4
|
)
|
|
|
(1.8
|
)
|
|
|
(2.5
|
)
|
|
|
(1.0
|
)
|
|
|
(0.3
|
)
|
Other underwriting and operating expenses
|
|
|
10.5
|
|
|
|
11.6
|
|
|
|
13.5
|
|
|
|
20.4
|
|
|
|
14.1
|
|
Interest expense
|
|
|
23.8
|
|
|
|
24.0
|
|
|
|
31.9
|
|
|
|
21.5
|
|
|
|
19.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses
|
|
|
31.9
|
|
|
|
33.8
|
|
|
|
42.9
|
|
|
|
40.9
|
|
|
|
32.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pre-tax income (loss)
|
|
|
(14.2
|
)
|
|
|
(35.1
|
)
|
|
|
(52.3
|
)
|
|
|
5.3
|
|
|
|
7.6
|
|
Less: Net realized investment gains (losses)
|
|
|
(8.4
|
)
|
|
|
(19.0
|
)
|
|
|
(20.7
|
)
|
|
|
5.2
|
|
|
|
5.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pre-tax adjusted operating income (loss)
|
|
$
|
(5.8
|
)
|
|
$
|
(16.1
|
)
|
|
$
|
(31.6
|
)
|
|
$
|
0.1
|
|
|
$
|
1.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended September 30, 2009 Compared to the Nine Months
Ended September 30, 2008
Other segment summary of results. Our Other segment
pre-tax loss decreased $20.9 million, or 59.5%, to
$14.2 million from $35.1 million due to a decrease of
$10.6 million in net realized investment losses and a
decrease in segment pre-tax adjusted operating loss. Our segment
pre-tax adjusted operating loss decreased $10.3 million, or
64.0%, to a loss of $5.8 million from a loss of
$16.1 million primarily due to an increase in net
investment income of $9.5 million as a result of improved
yields driven by income from our investments in limited
partnerships due to increases in their fair value in 2009
compared to 2008 as a result of improvements in the equity
markets in 2009.
Net investment income. Net investment income is
primarily non-allocated net investment income related to
insurance surplus and corporate assets, including income (loss)
on our investments in limited partnerships (hedge funds and
private equity funds), which were transferred to the holding
company in exchange for equity securities and cash and included
in our Other segment beginning in September 2008. Net
78
investment income increased $9.5 million to
$18.2 million from $8.7 million. This increase was due
to an $11.8 million positive rate variance as yields more
than doubled to 5.45% from 1.91%. This increase was driven by
income from our investments in limited partnerships due to
increases in their fair value in 2009 compared to 2008, as a
result of improvements in the equity markets in 2009.
Investments in our limited partnerships produced
$1.7 million of investment income in 2009, as compared to
$18.1 million in losses in 2008. This was partially offset
by a negative volume variance of $7.0 million as
non-allocated average invested assets declined to
$380.5 million from $586.6 million.
Net realized investment losses. Net realized
investment losses decreased $10.6 million, or 55.8%, to
$8.4 million from $19.0 million. For the nine months
ended September 30, 2009, gross realized gains were
$2.9 million offset by gross realized losses of
$11.3 million, including impairments of $6.1 million.
For the nine months ended September 30, 2008, gross
realized gains were $23.7 million, including gross equity
gains of $10.2 million, offset by gross realized losses of
$42.7 million, including impairments of $13.4 million
and gross equity losses of $16.4 million.
Twelve
Months Ended December 31, 2008 Compared to the Twelve
Months Ended December 31, 2007
Other segment summary of results. Our Other segment
pre-tax income (loss) decreased $57.6 million to a
$52.3 million loss from a $5.3 million gain due to an
increase of $25.9 million in net realized investment gains
(losses) to a $20.7 million loss from a $5.2 million
gain in 2007. Segment pre-tax adjusted operating income (loss)
decreased $31.7 million to a $31.6 million loss from a
$0.1 million gain. This is primarily due to a decrease in
net investment income (loss) of $28.2 million and
additional interest expense incurred in connection with our
$150.0 million CENts offering in the fourth quarter of 2007.
Net investment income. Net investment income
(losses) decreased $28.2 million to a $0.4 million
loss from a $27.8 million gain. This decrease was driven
primarily by a $24.9 million negative rate variance as
yields decreased to (0.08)% from 4.69% primarily due to
$22.5 million in losses on investments in limited
partnerships, and a $3.3 million decrease due to a decrease
in non-allocated average invested assets, to $522.6 million
from $592.2 million.
Net realized investment gains (losses). Net realized
investment gains (losses) decreased by $25.9 million to a
$20.7 million loss from a $5.2 million gain. For the
year ended December 31, 2008, gross realized gains were
$16.2 million, offset by gross realized losses of
$36.9 million, including impairments of $14.3 million
and losses in the fair value of our equities trading portfolio
of $7.0 million. For the year ended December 31, 2007,
gross realized gains were $11.7 million, partially offset
by gross realized losses of $6.5 million, including
impairments of $1.4 million.
Other underwriting and operating expenses. Other
underwriting and operating expenses decreased $6.9 million,
or 33.8%, to $13.5 million from $20.4 million. The
decrease was due to $3.0 million in costs related to our
terminated IPO process during 2007 and a $1.4 million
decrease in depreciation expense as certain significant assets
became fully depreciated.
Interest expense. Interest expense increased
$10.4 million, or 48.4%, to $31.9 million from
$21.5 million. This increase was due to interest expense on
the $150.0 million CENts issued in October 2007.
Twelve
Months Ended December 31, 2007 Compared to the Twelve
Months Year Ended December 31, 2006
Other segment summary of results. Our Other segment
pre-tax income decreased $2.3 million, or 30.3%, to
$5.3 million from $7.6 million. Segment pre-tax
adjusted operating income decreased $1.7 million, or 94.4%,
to $0.1 million from $1.8 million. This is primarily
due to increased operating expenses related to our terminated
IPO process in 2007 and increased amortization of information
technology assets as well as additional interest expense
incurred in connection with the $150.0 million CENts issued
in October 2007.
Net investment income. Net investment income
increased $2.5 million, or 9.9%, to $27.8 million from
$25.3 million. This increase was related to a
$56.1 million increase in non-allocated average invested
assets, to $592.2 million at December 31, 2007 from
$536.1 million at December 31, 2006.
79
Other revenues. Other revenues increased
$3.8 million, or 40.4%, to $13.2 million from
$9.4 million, due to increased revenue from our
broker-dealer operations.
Net realized investment gains. Net realized
investment gains decreased by $0.6 million, or 10.3%, to
$5.2 million from $5.8 million. For the year ended
December 31, 2007, gross realized gains were
$11.7 million, partially offset by gross realized losses of
$6.5 million, including impairments of $1.4 million.
For the year ended December 31, 2006, gross realized gains
were $11.5 million, partially offset by gross realized
losses of $5.7 million, including impairments of
$1.6 million.
Other underwriting and operating expenses. Other
underwriting and operating expenses increased $6.3 million,
or 44.7%, to $20.4 million from $14.1 million in 2006.
This increase was primarily due to $3.0 million of
additional operating expenses related to our terminated IPO
process during 2007 and $1.3 million of increased
amortization of information technology assets.
Interest expense. Interest expense increased
$2.4 million, or 12.6%, to $21.5 million from
$19.1 million in 2006. This increase was due to interest
expense on the $150.0 million CENts issued in October 2007.
Investments
Our investment portfolio is structured with the objective of
supporting the expected cash flows of our liabilities and to
produce stable returns over the long term. The composition of
our portfolio reflects our asset management philosophy of
protecting principal and receiving appropriate reward for credit
risk. Our investment portfolio mix as of September 30, 2009
consisted in large part of high quality fixed maturities and
commercial mortgage loans, as well as a smaller allocation of
high yield fixed maturities, marketable equity securities,
investments in limited partnerships (which includes private
equity funds, affordable housing 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 our
longest duration liabilities.
The following table presents the composition of our investment
portfolio:
|
|
|
|
|
|
|
|
|
|
|
As of September 30,
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in millions)
|
|
|
Types of Investments
|
|
|
|
|
|
|
|
|
Fixed maturities,
available-for-sale:
|
|
|
|
|
|
|
|
|
Public
|
|
$
|
17,666.4
|
|
|
$
|
14,255.4
|
|
Private
|
|
|
875.9
|
|
|
|
632.2
|
|
Marketable equity securities,
available-for-sale(1)
|
|
|
35.4
|
|
|
|
38.1
|
|
Marketable equity securities, trading(2)
|
|
|
140.6
|
|
|
|
106.3
|
|
Mortgage loans
|
|
|
1,095.2
|
|
|
|
988.7
|
|
Policy loans
|
|
|
73.9
|
|
|
|
75.2
|
|
Investments in limited partnerships(3)
|
|
|
133.4
|
|
|
|
138.3
|
|
Other invested assets(4)
|
|
|
14.4
|
|
|
|
18.3
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
20,035.2
|
|
|
$
|
16,252.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amount primarily represents nonredeemable preferred stock. |
|
(2) |
|
Amount represents investments in common stock. |
|
(3) |
|
As of September 30, 2009 and December 31, 2008, these
amounts included $46.6 million and $56.3 million,
respectively, of investments in hedge funds and private equity
funds carried at fair value. The remaining balance is comprised
of investments in affordable housing projects and state tax
credit refunds, which are carried at amortized cost. |
|
(4) |
|
As of September 30, 2009 and December 31, 2008, these
amounts included investments such as a note receivable,
warrants, options and short-term investments. |
80
The increase in invested assets in the first nine months of 2009
is primarily due to portfolio growth generated by fixed deferred
annuity sales of $1.9 billion and a net increase in the
fair value of our fixed maturities driven by credit spreads
tightening. As of September 30, 2009, net unrealized gains
(losses) on our fixed maturities increased $1.8 billion
from a $(1.6) billion loss at December 31, 2008 to a
$0.2 billion gain at September 30, 2009.
Investment
Returns
Return on invested assets is an important element of our
financial results. During the second half of 2008, there were
significant declines and high volatility in equity markets, a
lack of liquidity in the credit markets and a widening of credit
spreads on fixed maturities. During the nine months ended
September 30, 2009, primarily in the second and third
quarter of 2009, the equity markets improved and credit spreads
tightened, which led to an increase in the fair value of our
investment portfolio.
The following tables set forth the income yield and investment
income excluding realized gains (losses) for each major
investment category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2009
|
|
|
September 30, 2008
|
|
|
|
Yield(1)
|
|
|
Amount
|
|
|
Yield(1)
|
|
|
Amount
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
Types of Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities,
available-for-sale
|
|
|
5.93
|
%
|
|
$
|
781.4
|
|
|
|
5.81
|
%
|
|
$
|
691.2
|
|
Marketable equity securities,
available-for-sale
|
|
|
5.76
|
|
|
|
2.3
|
|
|
|
5.17
|
|
|
|
2.0
|
|
Marketable equity securities, trading
|
|
|
1.61
|
|
|
|
1.9
|
|
|
|
2.18
|
|
|
|
2.1
|
|
Mortgage loans
|
|
|
6.33
|
|
|
|
49.3
|
|
|
|
6.45
|
|
|
|
43.4
|
|
Policy loans
|
|
|
5.91
|
|
|
|
3.3
|
|
|
|
5.88
|
|
|
|
3.4
|
|
Investments in limited partnerships
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedge funds and private equity funds
|
|
|
17.87
|
|
|
|
8.6
|
|
|
|
(16.72
|
)
|
|
|
(10.8
|
)
|
Affordable housing(2)
|
|
|
(8.65
|
)
|
|
|
(6.9
|
)
|
|
|
(12.40
|
)
|
|
|
(9.1
|
)
|
Other income producing assets(3)
|
|
|
1.00
|
|
|
|
4.0
|
|
|
|
3.46
|
|
|
|
10.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross investment income before investment expenses
|
|
|
5.74
|
|
|
|
843.9
|
|
|
|
5.55
|
|
|
|
732.7
|
|
Investment expenses
|
|
|
(0.10
|
)
|
|
|
(14.5
|
)
|
|
|
(0.11
|
)
|
|
|
(14.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
5.64
|
%
|
|
$
|
829.4
|
|
|
|
5.44
|
%
|
|
$
|
718.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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) |
|
Negative yield from affordable housing investments is offset by
positive U.S. federal income tax benefits. |
|
(3) |
|
Includes income from other invested assets, short-term
investments and cash and cash equivalents. |
81
The net investment income yield on our investment portfolio
after investment expenses, excluding realized gains (losses),
was 5.64% and 5.44% as of September 30, 2009 and 2008,
respectively. The increase is primarily due to an increase in
the yield on fixed maturities as we invested the
$1.9 billion of cash generated from 2009 sales of fixed
deferred annuities in higher yielding investments. In addition,
the yield on investments in limited partnerships increased as a
result of an increase in the fair value of our hedge funds and
private equity funds in 2009 as compared to declines in the fair
value for the same period in 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
|
Year
|
|
|
Year
|
|
|
|
Ended December 31,
|
|
|
Ended December 31,
|
|
|
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
Yield(1)
|
|
|
Amount
|
|
|
Yield(1)
|
|
|
Amount
|
|
|
Yield(1)
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
Types of Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities,
available-for-sale
|
|
|
5.82
|
%
|
|
$
|
930.7
|
|
|
|
5.74
|
%
|
|
$
|
911.4
|
|
|
|
5.61
|
%
|
|
$
|
930.3
|
|
Marketable equity securities,
available-for-sale
|
|
|
6.44
|
|
|
|
3.4
|
|
|
|
3.79
|
|
|
|
5.8
|
|
|
|
4.14
|
|
|
|
6.8
|
|
Marketable equity securities, trading
|
|
|
2.06
|
|
|
|
2.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans
|
|
|
6.49
|
|
|
|
59.4
|
|
|
|
6.18
|
|
|
|
50.0
|
|
|
|
6.12
|
|
|
|
48.8
|
|
Policy loans
|
|
|
5.89
|
|
|
|
4.5
|
|
|
|
6.07
|
|
|
|
4.7
|
|
|
|
6.07
|
|
|
|
4.9
|
|
Investments in limited partnerships
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedge funds and private equity funds
|
|
|
(28.98
|
)
|
|
|
(24.4
|
)
|
|
|
9.39
|
|
|
|
7.0
|
|
|
|
8.48
|
|
|
|
4.7
|
|
Affordable housing(2)
|
|
|
(12.24
|
)
|
|
|
(12.0
|
)
|
|
|
(8.81
|
)
|
|
|
(7.0
|
)
|
|
|
|
|
|
|
|
|
Other income producing assets(3)
|
|
|
2.69
|
|
|
|
11.5
|
|
|
|
6.27
|
|
|
|
20.9
|
|
|
|
4.82
|
|
|
|
13.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross investment income before investment expenses
|
|
|
5.49
|
|
|
|
975.8
|
|
|
|
5.71
|
|
|
|
992.8
|
|
|
|
5.61
|
|
|
|
1,008.9
|
|
Investment expenses
|
|
|
(0.11
|
)
|
|
|
(19.3
|
)
|
|
|
(0.11
|
)
|
|
|
(19.2
|
)
|
|
|
(0.13
|
)
|
|
|
(24.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
5.38
|
%
|
|
$
|
956.5
|
|
|
|
5.60
|
%
|
|
$
|
973.6
|
|
|
|
5.48
|
%
|
|
$
|
984.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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) |
|
Negative yield from affordable housing investments is offset by
positive U.S. federal income tax benefits. |
|
(3) |
|
Includes income from other invested assets, short-term
investments and cash and cash equivalents. |
The decrease in our net investment yield from 5.60% in 2007 to
5.38% in 2008 is primarily due to declines in the fair value of
hedge funds and private equity funds. This decrease is mainly a
result of equity market declines and volatility in the latter
part of 2008. Yields of our fixed maturities grew due to sales
of fixed maturities in the latter part of 2008 and re-investment
opportunities at higher yields.
82
The following table sets forth the detail of our net realized
gains (losses) before taxes. As the following table indicates,
our gross gains on trading securities significantly increased
and gross losses on trading securities significantly decreased
in the nine months ended September 30, 2009 as compared to
2008 as a result of improved market conditions. The gross
realized gains on sales during 2008 are the result of sales from
our equity security trading portfolio and portfolio management
activity that resulted in lengthening the duration of our fixed
maturities in our Income Annuities investment portfolio.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
Gross realized gains on sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
$
|
17.0
|
|
|
$
|
10.2
|
|
|
$
|
10.3
|
|
|
$
|
37.1
|
|
|
$
|
26.8
|
|
Marketable equity securities,
available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14.4
|
|
|
|
18.3
|
|
Marketable equity securities, trading
|
|
|
2.3
|
|
|
|
14.6
|
|
|
|
14.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross realized gains on sales
|
|
|
19.3
|
|
|
|
24.8
|
|
|
|
25.1
|
|
|
|
51.5
|
|
|
|
45.1
|
|
Gross realized losses on sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
|
(14.9
|
)
|
|
|
(6.1
|
)
|
|
|
(7.0
|
)
|
|
|
(15.1
|
)
|
|
|
(18.4
|
)
|
Marketable equity securities,
available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3.5
|
)
|
|
|
(1.4
|
)
|
Marketable equity securities, trading
|
|
|
(5.3
|
)
|
|
|
(5.6
|
)
|
|
|
(8.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross realized losses on sales
|
|
|
(20.2
|
)
|
|
|
(11.7
|
)
|
|
|
(15.5
|
)
|
|
|
(18.6
|
)
|
|
|
(19.8
|
)
|
Impairments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public fixed maturity securities(1)
|
|
|
(42.6
|
)
|
|
|
(25.9
|
)
|
|
|
(31.9
|
)
|
|
|
|
|
|
|
(8.9
|
)
|
Private fixed maturity securities
|
|
|
(4.9
|
)
|
|
|
(3.7
|
)
|
|
|
(7.5
|
)
|
|
|
(0.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total credit-related
|
|
|
(47.5
|
)
|
|
|
(29.6
|
)
|
|
|
(39.4
|
)
|
|
|
(0.7
|
)
|
|
|
(8.9
|
)
|
Other(2)
|
|
|
(26.2
|
)
|
|
|
(32.1
|
)
|
|
|
(47.0
|
)
|
|
|
(15.5
|
)
|
|
|
(16.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impairments
|
|
|
(73.7
|
)
|
|
|
(61.7
|
)
|
|
|
(86.4
|
)
|
|
|
(16.2
|
)
|
|
|
(25.7
|
)
|
Gains (losses) on trading securities(3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross gains
|
|
|
36.5
|
|
|
|
12.2
|
|
|
|
3.6
|
|
|
|
|
|
|
|
|
|
Gross losses
|
|
|
(7.9
|
)
|
|
|
(52.4
|
)
|
|
|
(72.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net gains (losses) on trading securities
|
|
|
28.6
|
|
|
|
(40.2
|
)
|
|
|
(69.2
|
)
|
|
|
|
|
|
|
|
|
Other net investment gains (losses)(4):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other gross gains
|
|
|
26.6
|
|
|
|
5.3
|
|
|
|
15.0
|
|
|
|
11.6
|
|
|
|
11.3
|
|
Other gross losses
|
|
|
(9.6
|
)
|
|
|
(19.8
|
)
|
|
|
(27.0
|
)
|
|
|
(11.5
|
)
|
|
|
(9.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains (losses) before taxes
|
|
$
|
(29.0
|
)
|
|
$
|
(103.3
|
)
|
|
$
|
(158.0
|
)
|
|
$
|
16.8
|
|
|
$
|
1.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Public fixed maturities includes publicly traded securities and
highly marketable private placements for which there is an
actively traded market. |
|
(2) |
|
As a result of new accounting guidance, beginning
January 1, 2009, other includes only those
impairments for which the Company had the intent to sell the
security prior to recovery. Prior to January 1, 2009, under
accounting guidance in effect at that time, other
also included impairments where we did not have the intent and
ability to hold the security to recovery. |
|
(3) |
|
As of January 1, 2008, changes in fair value related to
certain marketable equity securities are recognized in net
realized gains (losses) due to the election of the fair value
option. |
|
(4) |
|
Primarily consists of changes in fair value on derivatives
instruments, the impact on DAC and deferred sales inducements
and gains (losses) on calls and redemptions. |
83
Impairments for the nine months ended September 30, 2009
were $73.7 million, of which 64.5% were related to credit
concerns of the issuer and 35.5% were due to our intent to sell
the security. We implemented new accounting guidance for
impairments on January 1, 2009 (see
Critical Accounting Policies and Estimates and
Recently Issued Accounting Standards). Credit-related
impairments increased by $17.9 million for the nine months
ended September 30, 2009, compared to the same period last
year, primarily as a result of increased credit concerns,
especially related to issuers of securities in our high yield
portfolio. The amount recognized as credit-related impairments
is determined by management as the difference between a
securitys estimated recovery value and the amortized cost
of the security.
The following table summarizes our five largest aggregate losses
from impairments and remaining holdings, if any, by each
issuers industry for the nine months ended
September 30, 2009, which represent $33.8 million, or
45.9%, of total impairments during this period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
|
|
|
Ended
|
|
|
As of September 30, 2009
|
|
|
|
September 30, 2009
|
|
|
Cost or Amortized
|
|
|
Fair
|
|
Industry
|
|
Impairment
|
|
|
Cost(1)
|
|
|
Value
|
|
|
|
(Dollars in millions)
|
|
|
Other diversified financial services (public)
|
|
$
|
(14.4
|
)
|
|
$
|
20.1
|
|
|
$
|
18.1
|
|
Publishing (public)
|
|
|
(6.7
|
)
|
|
|
|
|
|
|
|
|
Consumer finance (public)
|
|
|
(4.3
|
)
|
|
|
90.6
|
|
|
|
64.1
|
|
Broadcast and cable T.V. (public)
|
|
|
(4.3
|
)
|
|
|
|
|
|
|
|
|
Specialty chemicals (public)
|
|
|
(4.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
(33.8
|
)
|
|
$
|
110.7
|
|
|
$
|
82.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As of September 30, 2009, the cost or amortized cost
represents our estimated recovery value, based on our discounted
cash flow analysis. |
For the consumer finance industry issuer identified above, we
had $3.6 million in losses on the partial disposition of
our holdings. The remaining holdings primarily represent
non-agency, prime residential mortgage-backed securities, the
amortized cost of which we believe is recoverable.
Impairments for the year ended December 31, 2008 were
$86.4 million, of which 45.6% were related to credit
concerns about the issuer. Impairments increased by
$70.2 million from 2007 to 2008, primarily due to credit
issues, including bankruptcies and corporate security defaults,
and our belief that certain investment declines were
other-than-temporary.
The following table summarizes our five largest aggregate losses
on impairments and remaining holdings, if any, by each
issuers industry for the year ended December 31,
2008, which represent $40.6 million, or 47.0%, of the total
impairments during this period. We had no significant losses on
dispositions during this period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
As of December 31, 2008
|
|
|
|
December 31, 2008
|
|
|
Cost or Amortized
|
|
|
Fair
|
|
Industry
|
|
Impairment
|
|
|
Cost
|
|
|
Value
|
|
|
|
(Dollars in millions)
|
|
|
Paper products (public)
|
|
$
|
(9.6
|
)
|
|
$
|
1.1
|
|
|
$
|
1.1
|
|
FNMA (public)
|
|
|
(8.0
|
)
|
|
|
0.4
|
|
|
|
0.1
|
|
Other diversified financial services (public)
|
|
|
(7.8
|
)
|
|
|
6.7
|
|
|
|
4.6
|
|
Commercial printing (public)
|
|
|
(7.8
|
)
|
|
|
0.2
|
|
|
|
0.2
|
|
Specialized finance (public)
|
|
|
(7.4
|
)
|
|
|
7.0
|
|
|
|
5.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
(40.6
|
)
|
|
$
|
15.4
|
|
|
$
|
11.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84
Fixed
Maturity Securities
Fixed maturities consist principally of publicly traded and
privately placed debt securities, and represented 92.5% and
91.6% of invested assets as of September 30, 2009 and
December 31, 2008, respectively.
The fair value of publicly traded and privately placed fixed
maturities represented 95.3% and 4.7%, respectively, of total
fixed maturities as of September 30, 2009. We invest in
privately placed fixed maturities in an attempt 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 include securities rated BBB-
or higher by Standard & Poors. NAIC designations
of 3 through 6 are referred to as below
investment grade, which include securities rated BB+ or lower by
Standard & Poors. As a result of time lags
between the funding of investments, the finalization of legal
documents and the completion of the SVO filing process, the
fixed maturities portfolio generally includes securities that
have not yet been rated by the SVO as of each balance sheet
date. Pending receipt of SVO ratings, the categorization of
these securities by NAIC designation is based on the expected
ratings indicated by internal analysis.
The following table presents our fixed maturities by NAIC
designation and S&P equivalent credit ratings as well as
the percentage, based upon fair value, that each designation
comprises:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2009
|
|
|
As of December 31, 2008
|
|
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
% of Total
|
|
|
Amortized
|
|
|
Fair
|
|
|
% of Total
|
|
NAIC
|
|
S&P Equivalent
|
|
Cost
|
|
|
Value
|
|
|
Fair Value
|
|
|
Cost
|
|
|
Value
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
1
|
|
AAA, AA, A
|
|
$
|
10,509.2
|
|
|
$
|
10,817.9
|
|
|
|
58.4
|
%
|
|
$
|
9,028.3
|
|
|
$
|
8,566.3
|
|
|
|
57.5
|
%
|
2
|
|
BBB
|
|
|
6,374.5
|
|
|
|
6,454.5
|
|
|
|
34.8
|
|
|
|
6,385.1
|
|
|
|
5,553.8
|
|
|
|
37.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment grade
|
|
|
16,883.7
|
|
|
|
17,272.4
|
|
|
|
93.2
|
|
|
|
15,413.4
|
|
|
|
14,120.1
|
|
|
|
94.8
|
|
3
|
|
BB
|
|
|
812.9
|
|
|
|
709.6
|
|
|
|
3.8
|
|
|
|
639.3
|
|
|
|
475.6
|
|
|
|
3.2
|
|
4
|
|
B
|
|
|
348.2
|
|
|
|
292.8
|
|
|
|
1.6
|
|
|
|
313.1
|
|
|
|
216.1
|
|
|
|
1.5
|
|
5
|
|
CCC & lower
|
|
|
256.7
|
|
|
|
206.8
|
|
|
|
1.1
|
|
|
|
158.6
|
|
|
|
73.1
|
|
|
|
0.5
|
|
6
|
|
In or near default
|
|
|
79.7
|
|
|
|
60.7
|
|
|
|
0.3
|
|
|
|
4.0
|
|
|
|
2.7
|
|
|
|
0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total below investment grade
|
|
|
1,497.5
|
|
|
|
1,269.9
|
|
|
|
6.8
|
|
|
|
1,115.0
|
|
|
|
767.5
|
|
|
|
5.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
18,381.2
|
|
|
$
|
18,542.3
|
|
|
|
100.0
|
%
|
|
$
|
16,528.4
|
|
|
$
|
14,887.6
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2009 securities with an amortized cost
and fair value of $829.9 million and $850.9 million,
respectively, have 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 6.8% and 5.2% of our
fixed maturities portfolio, respectively, as of
September 30, 2009 and December 31, 2008. Most of
these securities were purchased while classified as below
investment grade, as high yield investments. At
September 30, 2009, our below investment grade securities
primarily consisted of corporate securities and residential
mortgage-backed securities (RMBS), which represented 79.6% and
16.9%, respectively, of the fair value of below investment grade
fixed maturities. At December 31, 2008, 97% of the fair
value of our below investment grade securities were corporate
securities.
As of September 30, 2009 and December 31, 2008, the
gross unrealized losses on these securities were
$252.5 million and $352.0 million, respectively, which
included $80.0 million of non-credit related OTTI
85
recorded in other comprehensive income (OCI) as of
September 30, 2009. As of September 30, 2009,
$167.8 million, or 66.5%, of the gross unrealized losses
were related to corporate securities and $60.7 million, or
24.0%, were related to RMBS. Of the $60.7 million gross
unrealized losses on RMBS, $36.5 million was non-credit
related OTTI recorded through OCI. As of December 31, 2008,
the gross unrealized losses were primarily related to corporate
securities. For the nine months ended September 30, 2009,
we recorded $72.6 million of OTTI in net realized
investment losses related to below investment grade fixed
maturities based on their rating as of September 30, 2009,
of which $56.8 million and $12.1 million were related
to corporate securities and RMBS, respectively. For the year
ended December 31, 2008, we recorded $73.7 million of
OTTI in net realized investment losses related to below
investment grade securities based on their ratings as of
December 31, 2008, of which $65.7 million was related
to corporate securities and no impairments related to RMBS.
We monitor our investments for indicators of possible
credit-related impairments, with a focus on securities that
represent a significant risk of impairment, namely 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, among other factors, its rating and
evaluate whether the issuers circumstances have changed
significantly since acquisition. For each security where
circumstances have changed, we review our current best estimate
of the underlying cash flows relative to our initial estimates
and the amounts necessary for a full recovery of our basis in
the investment. Based on the analyses, an impairment is recorded
if the investment is not deemed recoverable. For securities
where we recorded a credit-related OTTI, the amortized cost as
of September 30, 2009 in the table above represents
managements estimated recovery value, based on our best
estimate of discounted cash flows for the security. Prior to
2009, securities we recorded as OTTI were written down to their
fair value, which became the securitys amortized cost on
the date of impairment. (See Critical
Accounting Policies and Estimates and Recently Issued Accounting
Standards for a detailed discussion of our impairment
analysis accounting policy and process.) As of
September 30, 2009, we did not have the intent to sell
these securities or consider it more likely than not that we
would be required to sell the securities prior to recovery of
their amortized costs. Furthermore, based upon our cash flow
modeling and the expected continuation of contractually required
principal and interest payments, we considered these securities
to be temporarily impaired as of September 30, 2009.
We had securities with an NAIC 5 designation with a total fair
value of $206.8 million as of September 30, 2009.
These securities had net unrealized losses of
$49.9 million, comprised of gross unrealized losses of
$54.2 million and gross unrealized gains of
$4.3 million. Of the total gross unrealized losses,
$24.8 million were non-credit related losses on securities
that were written down to their estimated recovery values, based
on our best estimate of discounted future cash flows, and
$17.6 million, or 71.0%, of this amount was related to a
single issuer. The remaining gross unrealized losses of
$29.4 million were related to securities for which our
impairment analyses indicated that the losses are temporary. The
issuers of these securities are current on their contractual
payments and our analyses, including cash flow analyses where
appropriate, support the recoverability of amortized cost.
We had securities with an NAIC 6 designation with a total fair
value of $60.7 million as of September 30, 2009, which
included net unrealized losses of $19.0 million. Of these
unrealized losses, $12.1 million, or 63.7%, was from a
single issuer. This issuer is current on its contractual
payments and our analysis of the underlying credit and
managements best estimates of discounted future cash flows
support the recoverability of the amortized cost.
Certain of our fixed maturities are supported by guarantees from
monoline bond insurers. As of September 30, 2009, fixed
maturities with monoline guarantees had an amortized cost of
$600.2 million and a fair value of $562.1 million,
with gross unrealized losses of $46.4 million. As of
December 31, 2008, fixed maturities with monoline
guarantees had an amortized cost of $602.4 million and a
fair value of $511.4 million, with gross unrealized losses
of $98.8 million. The majority of these securities were
municipal bonds. Of the monoline bond insurers, MBIA represented
the highest concentration, guaranteeing 63.7% and 40.7% of the
fair value at September 30, 2009 and December 31,
2008, respectively. The credit ratings of our fixed maturities
set forth in the table above reflect, where applicable, the
guarantees provided by monoline
86
bond insurers. The credit ratings of the monoline bond insurers,
including MBIA, have declined over the last two years. Any
further decline may lead to declines in the ratings of certain
of our fixed maturities. As of September 30, 2009, 92.9% of
the fixed maturities supported by guarantees from monoline bond
insurers had investment grade credit ratings, and the overall
credit quality of these securities was an NAIC 2
designation, the S&P equivalent credit rating of BBB.
Excluding the benefits of monoline insurance, the overall credit
quality of these securities remains an NAIC 2 designation.
For municipal bonds, which comprised 69.1% of fixed maturities
supported by monoline guarantees as of September 30, 2009,
the overall credit quality of these securities was an
NAIC 1 designation, the S&P equivalent credit rating
of AAA, AA or A. Excluding the benefits of monoline insurance,
the overall credit quality of these securities remains an
NAIC 1 designation.
Fixed
Maturity Securities and Unrealized Losses by Duration
The following table sets forth unrealized losses by the length
of time for which the underlying
available-for-sale
security has been in an unrealized loss position for consecutive
months.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30,
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
|
Losses
|
|
|
% of Total
|
|
|
Losses
|
|
|
% of Total
|
|
|
|
(Dollars in millions)
|
|
|
6-months or less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 20%
|
|
$
|
7.9
|
|
|
|
1.2
|
%
|
|
$
|
136.4
|
|
|
|
7.3
|
%
|
20% or more
|
|
|
3.8
|
|
|
|
0.6
|
|
|
|
113.6
|
|
|
|
6.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11.7
|
|
|
|
1.8
|
|
|
|
250.0
|
|
|
|
13.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
More than
6-months:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 20%
|
|
|
341.6
|
|
|
|
53.4
|
|
|
|
555.6
|
|
|
|
30.0
|
|
20% or more
|
|
|
286.9
|
|
|
|
44.8
|
|
|
|
1,051.7
|
|
|
|
56.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
628.5
|
|
|
|
98.2
|
|
|
|
1,607.3
|
|
|
|
86.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
640.2
|
|
|
|
100.0
|
%
|
|
$
|
1,857.3
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2009, $83.2 million of the total
gross unrealized losses are related to the
non-credit portion of OTTI (see
Critical Accounting Policies and Estimates and
Recently Issued Accounting Standards for a detailed
discussion of our impairment policy). We have not recognized the
gross unrealized losses as OTTI, as each security is current on
its contractual payments and our analysis of the underlying
credit and managements best estimate of discounted cash
flows supported the recovery of the amortized cost of the
security. We believe the recoverable value of these investments
based on expected future cash flows is greater than or equal to
the amortized cost, we do not have the intent to sell the
security and it is more likely than not that we will not be
required to sell the security before recovery of amortized cost.
While the declines in fair value were mainly due to credit
spread widening and increased liquidity discounts, primarily
related to our securities with maturities due after ten years,
the economic environment has shown signs of recovery during the
second and third quarter of 2009.
87
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 the total fixed
maturities each sector comprises of the total as of the dates
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other-than-
|
|
|
|
Cost or
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
% of
|
|
|
Temporary
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Total Fair
|
|
|
Impairments
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Value
|
|
|
in AOCI(1)
|
|
|
|
(Dollars in millions)
|
|
|
Security Sector
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer discretionary
|
|
$
|
1,096.2
|
|
|
$
|
43.6
|
|
|
$
|
(38.8
|
)
|
|
$
|
1,101.0
|
|
|
|
5.9
|
%
|
|
$
|
(9.0
|
)
|
Consumer staples
|
|
|
1,735.4
|
|
|
|
111.3
|
|
|
|
(13.9
|
)
|
|
|
1,832.8
|
|
|
|
9.9
|
|
|
|
(1.4
|
)
|
Energy
|
|
|
642.5
|
|
|
|
30.7
|
|
|
|
(6.7
|
)
|
|
|
666.5
|
|
|
|
3.6
|
|
|
|
(0.6
|
)
|
Financials
|
|
|
2,121.9
|
|
|
|
40.1
|
|
|
|
(204.5
|
)
|
|
|
1,957.5
|
|
|
|
10.6
|
|
|
|
(8.0
|
)
|
Health care
|
|
|
856.9
|
|
|
|
74.7
|
|
|
|
(3.7
|
)
|
|
|
927.9
|
|
|
|
5.0
|
|
|
|
(1.9
|
)
|
Industrials
|
|
|
1,993.9
|
|
|
|
127.2
|
|
|
|
(23.7
|
)
|
|
|
2,097.4
|
|
|
|
11.3
|
|
|
|
(1.4
|
)
|
Information technology
|
|
|
343.0
|
|
|
|
31.8
|
|
|
|
(0.1
|
)
|
|
|
374.7
|
|
|
|
2.0
|
|
|
|
|
|
Materials
|
|
|
1,018.3
|
|
|
|
36.5
|
|
|
|
(57.1
|
)
|
|
|
997.7
|
|
|
|
5.4
|
|
|
|
(12.8
|
)
|
Telecommunication services
|
|
|
596.1
|
|
|
|
26.0
|
|
|
|
(15.0
|
)
|
|
|
607.1
|
|
|
|
3.3
|
|
|
|
(1.1
|
)
|
Utilities
|
|
|
1,819.4
|
|
|
|
74.6
|
|
|
|
(51.1
|
)
|
|
|
1,842.9
|
|
|
|
9.9
|
|
|
|
(0.5
|
)
|
Other
|
|
|
8.0
|
|
|
|
0.5
|
|
|
|
|
|
|
|
8.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total corporate securities
|
|
|
12,231.6
|
|
|
|
597.0
|
|
|
|
(414.6
|
)
|
|
|
12,414.0
|
|
|
|
66.9
|
|
|
|
(36.7
|
)
|
U.S. government and agencies
|
|
|
42.4
|
|
|
|
3.3
|
|
|
|
|
|
|
|
45.7
|
|
|
|
0.2
|
|
|
|
(0.1
|
)
|
State and political subdivisions
|
|
|
518.7
|
|
|
|
3.9
|
|
|
|
(37.7
|
)
|
|
|
484.9
|
|
|
|
2.6
|
|
|
|
(1.8
|
)
|
Foreign governments
|
|
|
26.9
|
|
|
|
1.3
|
|
|
|
|
|
|
|
28.2
|
|
|
|
0.2
|
|
|
|
|
|
Residential mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency
|
|
|
2,878.3
|
|
|
|
131.5
|
|
|
|
(0.6
|
)
|
|
|
3,009.2
|
|
|
|
16.3
|
|
|
|
|
|
Non-agency:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prime
|
|
|
472.7
|
|
|
|
0.4
|
|
|
|
(77.9
|
)
|
|
|
395.2
|
|
|
|
2.1
|
|
|
|
(28.2
|
)
|
Alt-A
|
|
|
155.0
|
|
|
|
0.1
|
|
|
|
(23.2
|
)
|
|
|
131.9
|
|
|
|
0.7
|
|
|
|
(8.3
|
)
|
Subprime
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total residential mortgage-backed securities
|
|
|
3,506.3
|
|
|
|
132.0
|
|
|
|
(101.7
|
)
|
|
|
3,536.6
|
|
|
|
19.1
|
|
|
|
(36.5
|
)
|
Commercial mortgage-backed securities
|
|
|
1,883.7
|
|
|
|
54.6
|
|
|
|
(64.9
|
)
|
|
|
1,873.4
|
|
|
|
10.1
|
|
|
|
(0.1
|
)
|
Other debt obligations
|
|
|
171.6
|
|
|
|
9.2
|
|
|
|
(21.3
|
)
|
|
|
159.5
|
|
|
|
0.9
|
|
|
|
(8.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
18,381.2
|
|
|
$
|
801.3
|
|
|
$
|
(640.2
|
)
|
|
$
|
18,542.3
|
|
|
|
100.0
|
%
|
|
$
|
(83.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Effective January 1, 2009, we prospectively adopted new
Other-Than-Temporary-Impairment
(OTTI) accounting guidance, which changed the recognition and
measurement of OTTI for debt securities. See
Critical Accounting Policies and Estimates and
Recently Issued Accounting Standards. |
During the nine months ended September 30, 2009 we
increased our investments in corporate securities with cash
generated from sales, primarily fixed deferred annuities. We
have purchased new issues of investment grade corporate
securities with a focus on increasing yield while retaining
quality.
88
Our fixed maturities holdings are diversified by industry and
issuer. The portfolio does not have significant exposure to any
single issuer. As of September 30, 2009 and
December 31, 2008 the fair value of our combined corporate
securities holdings in the ten issuers in which we had the
greatest exposure was $1,128.4 million and
$901.5 million, or approximately 9.1% and 9.7% of our
corporate securities investments, respectively. Our exposure to
the largest single issuer of corporate securities held at fair
value as of September 30, 2009 and December 31, 2008
was $155.5 million and $149.4 million, which was 1.3%
and 1.6% of our corporate securities investments, respectively.
The following table sets forth the fair value of our fixed
maturities by sector as of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008
|
|
|
|
Cost or
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
% of
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Total Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
Security Sector
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer discretionary
|
|
$
|
891.5
|
|
|
$
|
2.0
|
|
|
$
|
(153.6
|
)
|
|
$
|
739.9
|
|
|
|
5.0
|
%
|
Consumer staples
|
|
|
1,533.2
|
|
|
|
16.6
|
|
|
|
(111.7
|
)
|
|
|
1,438.1
|
|
|
|
9.7
|
|
Energy
|
|
|
414.5
|
|
|
|
9.9
|
|
|
|
(43.1
|
)
|
|
|
381.3
|
|
|
|
2.6
|
|
Financials
|
|
|
2,040.7
|
|
|
|
7.1
|
|
|
|
(403.8
|
)
|
|
|
1,644.0
|
|
|
|
11.0
|
|
Health care
|
|
|
548.8
|
|
|
|
17.1
|
|
|
|
(22.0
|
)
|
|
|
543.9
|
|
|
|
3.6
|
|
Industrials
|
|
|
1,523.7
|
|
|
|
16.6
|
|
|
|
(136.9
|
)
|
|
|
1,403.4
|
|
|
|
9.4
|
|
Information technology
|
|
|
300.6
|
|
|
|
1.3
|
|
|
|
(31.8
|
)
|
|
|
270.1
|
|
|
|
1.8
|
|
Materials
|
|
|
834.6
|
|
|
|
3.7
|
|
|
|
(152.7
|
)
|
|
|
685.6
|
|
|
|
4.6
|
|
Telecommunication services
|
|
|
619.7
|
|
|
|
5.2
|
|
|
|
(103.5
|
)
|
|
|
521.4
|
|
|
|
3.5
|
|
Utilities
|
|
|
1,829.9
|
|
|
|
23.7
|
|
|
|
(203.0
|
)
|
|
|
1,650.6
|
|
|
|
11.1
|
|
Other
|
|
|
26.9
|
|
|
|
1.9
|
|
|
|
(0.6
|
)
|
|
|
28.2
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total corporate securities
|
|
|
10,564.1
|
|
|
|
105.1
|
|
|
|
(1,362.7
|
)
|
|
|
9,306.5
|
|
|
|
62.5
|
|
U.S. government and agencies
|
|
|
155.5
|
|
|
|
5.2
|
|
|
|
(3.9
|
)
|
|
|
156.8
|
|
|
|
1.1
|
|
State and political subdivisions
|
|
|
488.8
|
|
|
|
0.9
|
|
|
|
(64.8
|
)
|
|
|
424.9
|
|
|
|
2.8
|
|
Foreign governments
|
|
|
31.4
|
|
|
|
3.2
|
|
|
|
|
|
|
|
34.6
|
|
|
|
0.2
|
|
Residential mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency
|
|
|
2,412.5
|
|
|
|
84.4
|
|
|
|
(0.2
|
)
|
|
|
2,496.7
|
|
|
|
16.8
|
|
Non-agency:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prime
|
|
|
570.9
|
|
|
|
0.2
|
|
|
|
(97.8
|
)
|
|
|
473.3
|
|
|
|
3.2
|
|
Alt-A
|
|
|
191.8
|
|
|
|
|
|
|
|
(36.3
|
)
|
|
|
155.5
|
|
|
|
1.0
|
|
Subprime
|
|
|
0.9
|
|
|
|
|
|
|
|
(0.1
|
)
|
|
|
0.8
|
|
|
|
0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total residential mortgage-backed securities
|
|
|
3,176.1
|
|
|
|
84.6
|
|
|
|
(134.4
|
)
|
|
|
3,126.3
|
|
|
|
21.0
|
|
Commercial mortgage-backed securities
|
|
|
1,912.7
|
|
|
|
17.5
|
|
|
|
(255.2
|
)
|
|
|
1,675.0
|
|
|
|
11.3
|
|
Other debt obligations
|
|
|
199.8
|
|
|
|
|
|
|
|
(36.3
|
)
|
|
|
163.5
|
|
|
|
1.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
16,528.4
|
|
|
$
|
216.5
|
|
|
$
|
(1,857.3
|
)
|
|
$
|
14,887.6
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89
Fixed
Maturity Securities by Contractual Maturity Date
The following table sets forth the amortized cost and fair value
of our fixed maturities by contractual maturity dates as of the
dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2009
|
|
|
As of December 31, 2008
|
|
Years to Maturity
|
|
Amortized Cost
|
|
|
Fair Value
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
Due in one year or less
|
|
$
|
430.2
|
|
|
$
|
435.2
|
|
|
$
|
384.9
|
|
|
$
|
379.4
|
|
Due after one year through five years
|
|
|
2,941.9
|
|
|
|
3,046.0
|
|
|
|
2,573.2
|
|
|
|
2,382.7
|
|
Due after five years through ten years
|
|
|
4,259.7
|
|
|
|
4,445.9
|
|
|
|
2,967.4
|
|
|
|
2,609.9
|
|
Due after ten years
|
|
|
5,187.8
|
|
|
|
5,045.7
|
|
|
|
5,314.3
|
|
|
|
4,550.8
|
|
Residential mortgage-backed securities
|
|
|
3,506.3
|
|
|
|
3,536.6
|
|
|
|
3,176.1
|
|
|
|
3,126.3
|
|
Commercial mortgage-backed securities
|
|
|
1,883.7
|
|
|
|
1,873.4
|
|
|
|
1,912.7
|
|
|
|
1,675.0
|
|
Other debt obligations(1)
|
|
|
171.6
|
|
|
|
159.5
|
|
|
|
199.8
|
|
|
|
163.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
18,381.2
|
|
|
$
|
18,542.3
|
|
|
$
|
16,528.4
|
|
|
$
|
14,887.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Other debt obligations includes $41.4 million and
$30.5 million of amortized cost and fair value,
respectively, of collateralized debt obligations at
September 30, 2009. At December 31, 2008,
collateralized debt obligations were recorded in the ten years
or greater category, with an amortized cost and fair value of
$20.1 million and $6.3 million, respectively. |
A large portion of our portfolio is due after ten years. Fixed
maturities in this maturity category primarily back our long
duration reserves in our Income Annuities segment, which can
exceed a period of 30 years. The majority of the unrealized
losses on our investment portfolio as of September 30, 2009
and December 31, 2008 related to these longer duration
assets, which are more sensitive to interest rate fluctuations
and credit spreads.
Residential
Mortgage-Backed Securities (RMBS)
We purchase RMBS to diversify the portfolio risk from primarily
corporate credit risk to a mix of credit and cash flow risk. We
classify our investments in RMBS as agency, prime, Alt-A and
subprime. Agency RMBS are guaranteed or otherwise supported by
the Federal National Mortgage Association, the Federal Home Loan
Mortgage Corporation or the Government National Mortgage
Association. Prime RMBS are loans to the most credit-worthy
customers with high quality credit profiles.
The following table sets forth the fair value of the
Companys investment in agency, prime, Alt-A and subprime
RMBS and the percentage of total invested assets they represent:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2009
|
|
|
As of December 31, 2008
|
|
|
|
|
|
|
% of Total
|
|
|
|
|
|
% of Total
|
|
|
|
Fair Value
|
|
|
Invested Assets
|
|
|
Fair Value
|
|
|
Invested Assets
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
Agency
|
|
$
|
3,009.2
|
|
|
|
15.0
|
%
|
|
$
|
2,496.7
|
|
|
|
15.4
|
%
|
Non-agency:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prime
|
|
|
395.2
|
|
|
|
2.0
|
|
|
|
473.3
|
|
|
|
2.9
|
|
Alt-A
|
|
|
131.9
|
|
|
|
0.6
|
|
|
|
155.5
|
|
|
|
1.0
|
|
Subprime
|
|
|
0.3
|
|
|
|
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal non-agency
|
|
|
527.4
|
|
|
|
2.6
|
|
|
|
629.6
|
|
|
|
3.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,536.6
|
|
|
|
17.6
|
%
|
|
$
|
3,126.3
|
|
|
|
19.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The majority of our RMBS investments are AAA rated. As of
September 30, 2009, agency represented 85.1% of our RMBS
holdings and we had nominal investments in subprime securities.
We classified $131.9 million of securities as Alt-A because
we viewed each security to have overall collateral
90
credit quality between prime and subprime, based on a review of
the characteristics of their underlying mortgage loan pools,
such as credit scores and financial ratios. Of the total Alt-A
securities, $76.6 million, or 58.1%, had an S&P
equivalent credit rating of AAA as of September 30, 2009.
The following table sets forth the amortized cost of our
non-agency RMBS by credit quality and year of origination
(vintage). There were eight securities totaling
$102.5 million that were rated below investment grade by
Moodys, S&P or Fitch, while the others rated them
investment grade.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2009
|
|
|
|
|
|
|
Highest Rating Agency Rating
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
As of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BB and
|
|
|
Amortized
|
|
|
December 31,
|
|
Vintage
|
|
AAA
|
|
|
AA
|
|
|
A
|
|
|
BBB
|
|
|
Below
|
|
|
Cost
|
|
|
2008
|
|
|
2009
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
17.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83.7
|
|
|
|
101.1
|
|
|
|
137.0
|
|
2006
|
|
|
0.6
|
|
|
|
6.5
|
|
|
|
22.4
|
|
|
|
33.0
|
|
|
|
126.6
|
|
|
|
189.1
|
|
|
|
269.3
|
|
2005
|
|
|
12.9
|
|
|
|
10.8
|
|
|
|
24.6
|
|
|
|
68.3
|
|
|
|
|
|
|
|
116.6
|
|
|
|
126.4
|
|
2004 & prior
|
|
|
220.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.7
|
|
|
|
221.2
|
|
|
|
230.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
251.4
|
|
|
$
|
17.3
|
|
|
$
|
47.0
|
|
|
$
|
101.3
|
|
|
$
|
211.0
|
|
|
$
|
628.0
|
|
|
$
|
763.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of cost
|
|
|
40.0
|
%
|
|
|
2.8
|
%
|
|
|
7.5
|
%
|
|
|
16.1
|
%
|
|
|
33.6
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the fair value of our non-agency
RMBS by credit quality and year of origination (vintage):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2009
|
|
|
|
|
|
|
Highest Rating Agency Rating
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
As of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BB and
|
|
|
Total Fair
|
|
|
December 31,
|
|
Vintage
|
|
AAA
|
|
|
AA
|
|
|
A
|
|
|
BBB
|
|
|
Below
|
|
|
Value
|
|
|
2008
|
|
|
2009
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
14.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72.1
|
|
|
|
87.0
|
|
|
|
116.7
|
|
2006
|
|
|
0.6
|
|
|
|
6.2
|
|
|
|
21.5
|
|
|
|
29.5
|
|
|
|
92.9
|
|
|
|
150.7
|
|
|
|
220.3
|
|
2005
|
|
|
8.1
|
|
|
|
10.4
|
|
|
|
18.6
|
|
|
|
52.1
|
|
|
|
|
|
|
|
89.2
|
|
|
|
98.5
|
|
2004 & prior
|
|
|
199.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.7
|
|
|
|
200.5
|
|
|
|
194.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
223.4
|
|
|
$
|
16.6
|
|
|
$
|
40.1
|
|
|
$
|
81.6
|
|
|
$
|
165.7
|
|
|
$
|
527.4
|
|
|
$
|
629.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of fair value
|
|
|
42.4
|
%
|
|
|
3.1
|
%
|
|
|
7.6
|
%
|
|
|
15.5
|
%
|
|
|
31.4
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2009 and December 31, 2008, 75% of
our non-agency RMBS are prime. As of September 30, 2009 and
December 31, 2008, 56% and 64% have super senior
subordination, respectively.
On a fair value basis, our Alt-A portfolio was 88% fixed rate
collateral and 12% hybrid adjustable rate mortgages, or ARM,
with no exposure to option ARM mortgages. Generally, fixed rate
mortgages have performed better than both option ARMs and hybrid
ARMs in the current economic environment.
As of September 30, 2009, our Alt-A, prime and total
non-agency RMBS had an estimated weighted- average credit
enhancement of 14.5%, 8.3% and 9.9%, 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.
91
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 September 30, 2009
|
|
|
As of December 31, 2008
|
|
|
|
|
|
|
% of Total
|
|
|
|
|
|
% of Total
|
|
|
|
Fair Value
|
|
|
Invested Assets
|
|
|
Fair Value
|
|
|
Invested Assets
|
|
|
Agency
|
|
$
|
442.5
|
|
|
|
2.2
|
%
|
|
$
|
434.9
|
|
|
|
2.7
|
%
|
Non-agency
|
|
|
1,430.9
|
|
|
|
7.1
|
|
|
|
1,240.1
|
|
|
|
7.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,873.4
|
|
|
|
9.3
|
%
|
|
$
|
1,675.0
|
|
|
|
10.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We purchase CMBS to diversify the portfolio risk from primarily
corporate credit risk to a mix of credit and cash flow risk.
There have been disruptions in the CMBS market due to weakness
in commercial real estate market fundamentals and reduced
underwriting standards by some originators of commercial
mortgage loans within the more recent vintage years (2006 and
later). This has increased market belief that default rates will
increase, reduced market liquidity and availability of capital,
and increased spreads and the repricing of risk. As of
September 30, 2009, on an amortized cost basis, 98.6% of
our CMBS were rated AAA, 0.5% were rated A and 0.9% were rated
BB and below.
The following table sets forth the amortized cost of our
non-agency CMBS by credit quality and year of origination
(vintage). There were five securities having a fair value of
$93.2 million and an amortized cost of $83.4 million
that were rated A by S&P, while Moodys and Fitch
rated them AAA.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2009
|
|
|
|
|
|
|
Highest Rating Agency Rating
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
Total
|
|
|
As of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BB and
|
|
|
Amortized
|
|
|
December 31,
|
|
Vintage
|
|
AAA
|
|
|
AA
|
|
|
A
|
|
|
BBB
|
|
|
Below
|
|
|
Cost
|
|
|
2008
|
|
|
2009
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
2008
|
|
|
67.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67.8
|
|
|
|
67.8
|
|
2007
|
|
|
511.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.3
|
|
|
|
512.6
|
|
|
|
504.4
|
|
2006
|
|
|
135.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12.3
|
|
|
|
147.7
|
|
|
|
128.3
|
|
2005
|
|
|
343.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
343.5
|
|
|
|
343.7
|
|
2004 & prior
|
|
|
381.6
|
|
|
|
|
|
|
|
7.4
|
|
|
|
|
|
|
|
|
|
|
|
389.0
|
|
|
|
445.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,439.6
|
|
|
$
|
|
|
|
$
|
7.4
|
|
|
$
|
|
|
|
$
|
13.6
|
|
|
$
|
1,460.6
|
|
|
$
|
1,490.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following tables set forth the fair value of our non-agency
CMBS by credit quality and year of origination (vintage):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2009
|
|
|
|
|
|
|
Highest Rating Agency Rating
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
As of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BB and
|
|
|
Total Fair
|
|
|
December 31,
|
|
Vintage
|
|
AAA
|
|
|
AA
|
|
|
A
|
|
|
BBB
|
|
|
Below
|
|
|
Value
|
|
|
2008
|
|
|
2009
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
2008
|
|
|
59.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59.3
|
|
|
|
54.7
|
|
2007
|
|
|
491.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.2
|
|
|
|
492.3
|
|
|
|
400.8
|
|
2006
|
|
|
131.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.6
|
|
|
|
139.9
|
|
|
|
102.2
|
|
2005
|
|
|
349.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
349.2
|
|
|
|
284.4
|
|
2004 & prior
|
|
|
384.2
|
|
|
|
|
|
|
|
6.0
|
|
|
|
|
|
|
|
|
|
|
|
390.2
|
|
|
|
398.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,415.1
|
|
|
$
|
|
|
|
$
|
6.0
|
|
|
$
|
|
|
|
$
|
9.8
|
|
|
$
|
1,430.9
|
|
|
$
|
1,240.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92
U.S. CMBS securities have historically utilized a
senior/subordinate credit structure to allocate cash flows and
losses, which includes super-senior, mezzanine and junior AAA
tranches. The credit enhancement on the most senior tranche
(super-senior) is 30%. The mezzanine AAAs typically have 20%
credit enhancement and the junior AAAs generally have 14% credit
enhancement. Credit enhancement refers to the weighted-average
percentage of outstanding capital structure that is subordinate
in the priority of cash flows and absorbs losses first. Credit
enhancement does not include any equity interest or principal in
excess of outstanding debt. The super senior class has priority
over the mezzanine and junior classes to all principal and
interest cash flows and will not experience any loss of
principal until both the entire mezzanine and junior tranches
are written down to zero. We believe this additional credit
enhancement is significant in a deep real estate downturn during
which expected losses increase substantially.
The following tables set forth the amortized cost of our AAA
non-agency CMBS by type and year of origination (vintage):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2009
|
|
|
|
|
(Dollars in millions)
|
|
|
|
|
Super Senior (Post 2004)
|
|
|
|
Other Structures (2005 and Prior)
|
|
|
|
Total AAA
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities at
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Amortized
|
|
Vintage
|
|
|
Super Senior
|
|
|
Mezzanine
|
|
|
Junior
|
|
|
|
Other Senior
|
|
|
Subordinate
|
|
|
Other
|
|
|
|
Cost
|
|
2009
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
$
|
|
|
2008
|
|
|
|
67.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67.8
|
|
2007
|
|
|
|
511.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
511.3
|
|
2006
|
|
|
|
135.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
135.4
|
|
2005
|
|
|
|
163.5
|
|
|
|
32.6
|
|
|
|
|
|
|
|
|
135.2
|
|
|
|
|
|
|
|
12.3
|
|
|
|
|
343.6
|
|
2004 & prior
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
312.2
|
|
|
|
48.9
|
|
|
|
20.4
|
|
|
|
|
381.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$
|
878.0
|
|
|
$
|
32.6
|
|
|
$
|
|
|
|
|
$
|
447.4
|
|
|
$
|
48.9
|
|
|
$
|
32.7
|
|
|
|
$
|
1,439.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008
|
|
|
|
|
(Dollars in millions)
|
|
|
|
|
Super Senior (Post 2004)
|
|
|
|
Other Structures (2005 and Prior)
|
|
|
|
Total AAA
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities at
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Amortized
|
|
Vintage
|
|
|
Super Senior
|
|
|
Mezzanine
|
|
|
Junior
|
|
|
|
Other Senior
|
|
|
Subordinate
|
|
|
Other
|
|
|
|
Cost
|
|
2009
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
$
|
|
|
2008
|
|
|
|
67.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67.8
|
|
2007
|
|
|
|
503.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
503.0
|
|
2006
|
|
|
|
116.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
116.1
|
|
2005
|
|
|
|
163.6
|
|
|
|
32.6
|
|
|
|
|
|
|
|
|
135.2
|
|
|
|
|
|
|
|
12.3
|
|
|
|
|
343.7
|
|
2004 & prior
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
349.1
|
|
|
|
58.6
|
|
|
|
25.8
|
|
|
|
|
433.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$
|
850.5
|
|
|
$
|
32.6
|
|
|
$
|
|
|
|
|
$
|
484.3
|
|
|
$
|
58.6
|
|
|
$
|
38.1
|
|
|
|
$
|
1,464.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As the tables above indicate, our CMBS holdings are
predominately in the most senior tranche of the structure type.
As of September 30, 2009, on an amortized cost basis, 92.1%
of our AAA-rated CMBS were in the most senior tranche. As of
September 30, 2009, our CMBS holdings had a
weighted-average estimated credit enhancement of 27.6%. Adjusted
for 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 September 30, 2009 was
30.8%.
93
Asset-Backed
Securities
The following table provides the amortized cost and fair value
of our asset-backed securities, by underlying collateral type,
as of September 30, 2009 and December 31, 2008. We are
not currently purchasing these types of securities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2009
|
|
|
As of December 31, 2008
|
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
Other asset-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auto
|
|
$
|
12.4
|
|
|
$
|
12.9
|
|
|
$
|
13.4
|
|
|
$
|
12.2
|
|
Credit cards
|
|
|
68.0
|
|
|
|
74.2
|
|
|
|
105.0
|
|
|
|
97.6
|
|
Franchise
|
|
|
13.7
|
|
|
|
9.7
|
|
|
|
17.6
|
|
|
|
13.0
|
|
Manufactured homes
|
|
|
19.3
|
|
|
|
15.2
|
|
|
|
20.8
|
|
|
|
13.6
|
|
Utility
|
|
|
10.9
|
|
|
|
11.9
|
|
|
|
16.4
|
|
|
|
15.8
|
|
Other
|
|
|
5.9
|
|
|
|
5.0
|
|
|
|
6.5
|
|
|
|
5.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other asset-backed securities
|
|
$
|
130.2
|
|
|
$
|
128.9
|
|
|
$
|
179.7
|
|
|
$
|
157.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on
Equity-Like Investments
Prospector manages our portfolio of equity-like investments,
including publicly traded common stock and convertible
securities. The following table compares our total return to the
benchmark S&P 500 Index for the nine months ended
September 30, 2009, and for the years ended
December 31, 2008, 2007 and 2006. We believe that these
equity and equity-like investments are suitable for funding
certain long duration liabilities in our Income Annuities
segment. See Business Investments
Portfolio Managers for further information regarding
Prospector.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
September 30,
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Public equity
|
|
|
25.2
|
%
|
|
|
(30.6
|
)%
|
|
|
10.2
|
%
|
|
|
26.1
|
%
|
S&P 500 Index (total return)
|
|
|
19.3
|
|
|
|
(37.0
|
)
|
|
|
5.5
|
|
|
|
15.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Difference
|
|
|
5.9
|
%
|
|
|
6.4
|
%
|
|
|
4.7
|
%
|
|
|
10.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
Loans
Our mortgage loan department originates new commercial mortgages
and manages our existing commercial mortgage loan portfolio. The
commercial mortgage holdings are secured by first-mortgage liens
on income-producing commercial real estate, primarily in the
retail, industrial and office building sectors. All loans are
underwritten consistently to our standards based on
loan-to-value
ratios and debt service coverage based on income and detailed
market, property and borrower analysis using our long-term
experience in commercial mortgage lending. A substantial
majority of our loans have personal guarantees and are inspected
and evaluated annually. We diversify our mortgage loans by
geographic region, loan size and scheduled maturities. Mortgage
loans are reported net of an allowance for losses and include a
PGAAP adjustment.
As of September 30, 2009, 80.2% of our total mortgage loans
were under $5 million and our average loan balance was
$1.8 million.
Composition
of Mortgage Loans
The stress experienced in the U.S. financial markets and
unfavorable credit market conditions led to a decrease in
overall liquidity and availability of capital in the commercial
mortgage loan market, which has led to greater opportunities for
more selective loan originations. While we have begun to observe
some weakness in commercial real estate fundamentals, we have
only one non-performing loan in our commercial mortgage
94
loan portfolio during the nine months ended September 30,
2009. We have experienced no other delinquencies or
non-performing loans in the years since the Acquisition.
The following table sets forth the carrying value of our
investments in commercial mortgage loans by geographic region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2009
|
|
|
As of December 31, 2008
|
|
|
|
Carrying Value
|
|
|
% of Total
|
|
|
Carrying Value
|
|
|
% of Total
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
Region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
California
|
|
$
|
322.7
|
|
|
|
29.4
|
%
|
|
$
|
265.3
|
|
|
|
26.8
|
%
|
Washington
|
|
|
219.5
|
|
|
|
20.0
|
|
|
|
211.2
|
|
|
|
21.3
|
|
Texas
|
|
|
120.5
|
|
|
|
11.0
|
|
|
|
101.2
|
|
|
|
10.2
|
|
Oregon
|
|
|
67.5
|
|
|
|
6.1
|
|
|
|
65.8
|
|
|
|
6.7
|
|
Colorado
|
|
|
45.1
|
|
|
|
4.1
|
|
|
|
46.8
|
|
|
|
4.7
|
|
Arizona
|
|
|
37.4
|
|
|
|
3.4
|
|
|
|
31.9
|
|
|
|
3.2
|
|
Minnesota
|
|
|
30.7
|
|
|
|
2.8
|
|
|
|
31.8
|
|
|
|
3.2
|
|
Other
|
|
|
254.6
|
|
|
|
23.2
|
|
|
|
235.5
|
|
|
|
23.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,098.0
|
|
|
|
100.0
|
%
|
|
$
|
989.5
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the carrying value of our
investments in commercial mortgage loans by property type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2009
|
|
|
As of December 31, 2008
|
|
|
|
Carrying Value
|
|
|
% of Total
|
|
|
Carrying Value
|
|
|
% of Total
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
Property Type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shopping Centers and Retail
|
|
$
|
434.5
|
|
|
|
39.6
|
%
|
|
$
|
390.7
|
|
|
|
39.5
|
%
|
Industrial
|
|
|
325.9
|
|
|
|
29.7
|
|
|
|
309.2
|
|
|
|
31.3
|
|
Office Buildings
|
|
|
296.3
|
|
|
|
27.0
|
|
|
|
248.3
|
|
|
|
25.1
|
|
Multi-Family
|
|
|
26.3
|
|
|
|
2.4
|
|
|
|
26.1
|
|
|
|
2.6
|
|
Other
|
|
|
15.0
|
|
|
|
1.3
|
|
|
|
15.2
|
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,098.0
|
|
|
|
100.0
|
%
|
|
$
|
989.5
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the
loan-to-value
ratios for our mortgage loan portfolio:
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
|
|
|
September 30,
|
|
|
% of
|
|
Loan-to-Value Ratio
|
|
2009
|
|
|
Portfolio
|
|
|
|
(Dollars in millions)
|
|
|
< or = 50%
|
|
$
|
427.4
|
|
|
|
38.9
|
%
|
51% 60%
|
|
|
294.7
|
|
|
|
26.9
|
|
61% 70%
|
|
|
194.6
|
|
|
|
17.7
|
|
71% 75%
|
|
|
67.3
|
|
|
|
6.1
|
|
76% 80%
|
|
|
16.8
|
|
|
|
1.6
|
|
81% 100%
|
|
|
93.6
|
|
|
|
8.5
|
|
> 100%
|
|
|
3.6
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,098.0
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
We use the
loan-to-value
ratio as our primary metric to assess the quality of our
mortgage loans. The
loan-to-value
ratio, which is expressed as a percentage, compares the amount
of the loan to the fair value of the underlying property
collateralizing the loan.
Loan-to-value
ratios greater than 100% indicate that the loan
95
amount is greater than the collateral value. A smaller
loan-to-value
ratio generally indicates a higher quality loan. As of
September 30, 2009 and December 31, 2008, our mortgage
loan portfolio had weighted-average
loan-to-value
ratios of 53.6% and 50.7%, respectively. The values used in
calculating these
loan-to-value
ratios are developed as part of our annual review of the
mortgage loan portfolio, which includes an internal evaluation
of the underlying collateral value.
For loans originated in the nine months ended September 30,
2009, 45.9% had a
loan-to-value
ratio of 50% or less, and no loans had a
loan-to-value
ratio of more than 70%. For loans originated during the year
ended December 31, 2008, 35.3% had a
loan-to-value
ratio of 50% or less, and no loans had a
loan-to-value
ratio of more than 75%.
Maturity
Date of Mortgage Loans
The following table sets forth our mortgage loans by contractual
maturity date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Years to Maturity
|
|
Carrying Value
|
|
|
% of Total
|
|
|
Carrying Value
|
|
|
% of Total
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
Due in one year or less
|
|
$
|
4.7
|
|
|
|
0.4
|
%
|
|
$
|
5.0
|
|
|
|
0.5
|
%
|
Due after one year through five years
|
|
|
96.2
|
|
|
|
8.8
|
|
|
|
78.8
|
|
|
|
8.0
|
|
Due after five years through ten years
|
|
|
495.6
|
|
|
|
45.1
|
|
|
|
391.9
|
|
|
|
39.6
|
|
Due after ten years
|
|
|
501.5
|
|
|
|
45.7
|
|
|
|
513.8
|
|
|
|
51.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,098.0
|
|
|
|
100.0
|
%
|
|
$
|
989.5
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
Loan Quality
Our allowance for losses on mortgage loans provides for the risk
of credit loss inherent in the lending process. The allowance
includes a portfolio reserve for probable incurred but not
specifically identified losses and loan specific reserves for
non-performing loans. We define non-performing loans as loans
for which it is probable that amounts due according to the terms
of the loan agreement will not be collected. The portfolio
reserve for incurred but not specifically identified losses
considers our past loan experience and the current credit
composition of the portfolio, and takes into consideration
market experience. We evaluate the allowance for losses on
mortgage loans as of each reporting period and record
adjustments when appropriate.
Our allowance for losses on mortgage loans was $6.1 million
and $5.0 million as of September 30, 2009 and
December 31, 2008, respectively. One loan was classified as
non-performing as of September 30, 2009, and a specific
reserve of $0.6 million was established.
Investments
in Limited Partnerships Affordable Housing
Investments
We invest in tax-advantaged federal affordable housing
investments through limited liability partnerships. These
affordable housing investments are typically 15-year investments
that provide tax credits in years one through ten. As of
September 30, 2009, we were invested in seven limited
partnership interests related to the federal affordable housing
projects and other various state tax credit funds. We have
unconditionally committed to provide capital contributions
totaling approximately $115.4 million, of which the
unfunded portion of $44.2 million is expected to be
contributed over the next three years. These investments are
accounted for under the equity method and are recorded at
amortized cost in investments in limited partnerships, with the
present value of unfunded contributions recorded in other
liabilities.
96
Cumulative capital contributions of $71.2 million were paid
as of September 30, 2009, with the remaining expected cash
capital contributions payable as follows:
|
|
|
|
|
|
|
Expected Capital
|
|
|
|
Contributions
|
|
|
|
(Dollars in millions)
|
|
|
Remainder of 2009
|
|
$
|
4.2
|
|
2010
|
|
|
35.9
|
|
2011
|
|
|
2.2
|
|
2012
|
|
|
1.9
|
|
|
|
|
|
|
Total expected future capital contribution
|
|
$
|
44.2
|
|
|
|
|
|
|
Although these investments decrease our net investment income
over time on a pre-tax basis, they provide us with significant
tax benefits.
The following table provides detail on the impact to net income
of the amortization and the tax credits related to these
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
September 30,
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
Amortization related to affordable housing investments, net of
tax benefit
|
|
$
|
(4.5
|
)
|
|
$
|
(5.9
|
)
|
|
$
|
(7.8
|
)
|
|
$
|
(4.6
|
)
|
|
$
|
(0.9
|
)
|
Affordable housing tax credits
|
|
|
7.2
|
|
|
|
6.4
|
|
|
|
8.3
|
|
|
|
4.5
|
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact to net income
|
|
$
|
2.7
|
|
|
$
|
0.5
|
|
|
$
|
0.5
|
|
|
$
|
(0.1
|
)
|
|
$
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table provides the future estimated impact to net
income:
|
|
|
|
|
|
|
Impact to Net
|
|
|
|
Income (Net of Tax)
|
|
|
|
(Dollars in millions)
|
|
|
Remainder of 2009
|
|
$
|
|
|
2010
|
|
|
5.1
|
|
2011
|
|
|
6.2
|
|
2012 and beyond
|
|
|
17.0
|
|
|
|
|
|
|
Estimated impact to net income (net of taxes)
|
|
$
|
28.3
|
|
|
|
|
|
|
Financial
Strength Ratings
Rating organizations continually review the financial
performance and condition of most insurers and provide financial
strength ratings based on a companys operating performance
and ability to meet obligations to policyholders. Ratings
provide both industry participants and insurance consumers
meaningful information on specific insurance companies and are
an important factor in establishing the competitive position of
insurance companies. In addition, ratings are important to
maintaining public confidence in us and our ability to market
our products.
97
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, S&P, Moodys and Fitch as follows as
of September 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Strength Ratings
|
|
|
|
A.M. Best
|
|
|
S&P
|
|
|
Moodys
|
|
|
Fitch
|
|
|
Financial Strength Rating
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Symetra Life Insurance Company
|
|
|
A
|
|
|
|
A
|
|
|
|
A3
|
|
|
|
A+
|
|
First Symetra National Life Insurance Company of New York
|
|
|
A
|
|
|
|
A
|
|
|
|
NR*
|
|
|
|
A+
|
|
Issuer Credit/Default Ratings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Symetra Financial Corporation
|
|
|
bbb+
|
|
|
|
BBB
|
|
|
|
Baa3
|
**
|
|
|
A-
|
|
Symetra Life Insurance Company
|
|
|
a+
|
|
|
|
A
|
|
|
|
NR*
|
|
|
|
NR*
|
|
First Symetra National Life Insurance Company of New York
|
|
|
a+
|
|
|
|
A
|
|
|
|
NR*
|
|
|
|
NR*
|
|
|
|
|
* |
|
NR indicates not rated |
|
** |
|
Represents the senior debt rating. |
A.M. Best states that its A (Excellent)
financial strength rating is assigned to those companies that
have, in its opinion, an excellent ability to meet their ongoing
obligations to policyholders. The A (Excellent) is
the third highest of 16 ratings assigned by A.M. Best,
which range from A++ to S.
A.M. Best describes its a issuer credit rating
for insurers as excellent, assigned to those
companies that have, in its opinion, a strong ability to meet
the terms of their ongoing senior financial obligations. Its
bbb issuer credit rating is described as
good, assigned to those companies that have, in its
opinion, an adequate ability to meet the terms of their
obligations but are more susceptible to changes in economic or
other conditions. A.M. Best issuer credit ratings range
from aaa (exceptional) to rs (regulatory
supervision/liquidation) and may be enhanced with a
+ (plus) or − (minus) to
indicate whether credit quality is near the top or bottom of a
category.
Symetra Life Insurance Company and First Symetra National Life
Insurance Company of New Yorks Financial Size Category, or
FSC, rankings, as determined by A.M. Best, are both XIII,
the third highest of 15. A.M. Best indicates that the FSC
is designed to provide an indicator of the size of a company in
terms of its statutory surplus and related accounts.
Standard & Poors states that an insurer with a
financial strength rating of A (Strong) has strong
financial security characteristics that outweigh any
vulnerabilities, and is highly likely to have the ability to
meet financial commitments, but is somewhat more likely to be
affected by adverse business conditions than are insurers with
higher ratings. The A range is the third highest of
the four ratings ranges that meet these criteria, and also is
the third highest of nine financial strength ratings ranges
assigned by S&P, which range from AAA to
R. A plus (+) or minus (-) shows relative standing
in a rating category. Accordingly, the A rating is
the sixth highest of S&Ps 21 ratings categories.
S&P describes companies assigned an A issuer
credit rating as having a strong capacity to meet financial
commitments, but somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
higher-rated companies. Companies assigned a BBB
issuer credit rating have adequate capacity to meet financial
commitments, but adverse economic conditions are more likely to
lead to a weakened capacity to meet such commitments. S&P
issuer credit ratings range from AAA (extremely
strong) to D, indicating default.
Moodys Investors Service states that insurance companies
rated A3 (Good) offer good financial security.
However, elements may be present that suggest a susceptibility
to impairment sometime in the future. The A range is
the third highest of nine financial strength rating ranges
assigned by Moodys which range from Aaa to
C. Numeric modifiers are used to refer to the
ranking within the group, with 1 being the highest
and 3 being the lowest. Accordingly, the
A3 rating is the seventh highest of Moodys 21
ratings 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.
98
Fitch states that insurance companies with a financial strength
rating of A+ (Strong) are viewed as possessing
strong capacity to meet policyholder and contract obligations.
Risk factors are moderate, and the impact of any adverse
business and economic factors is expected to be small. The
A rating category is the third highest of eight
financial strength categories, which range from AAA
to D. The symbol (+) or (-) may be appended to a
rating to indicate the relative position of a credit within a
rating category. These suffixes are not added to ratings in the
AAA category or to ratings below the CCC
category. Accordingly, the A+ rating is the fifth
highest of Fitchs 24 financial strength ratings
categories. Fitch describes its A- issuer default
rating as high credit quality, which denotes an
expectation of low default risk, but may be more vulnerable to
adverse business or economic conditions than higher ratings.
Fitch issuer default ratings range from AAA (highest
credit quality) to D (default).
A.M. Best, S&P, Moodys and Fitch review their
ratings periodically and we cannot assure you that we will
maintain our current ratings in the future. Other agencies may
rate Symetra or our insurance subsidiaries on a solicited or
unsolicited basis.
The A.M. Best, S&P, Moodys and Fitch ratings
included are not designed to be, and do not serve as, measures
of protection or valuation offered to investors in this
offering. These financial strength ratings should not be relied
on with respect to making an investment in our securities.
Liquidity
and Capital Resources
We conduct all our operations through our operating
subsidiaries. Dividends from our subsidiaries and permitted
payments of our tax sharing arrangements with our subsidiaries
are Symetras principal sources of cash to pay stockholder
dividends and meet Symetras obligations, including
payments of principal and interest on notes payable.
Our primary uses of funds at our holding company level include
payment of general operating expenses, payment of debt and other
expenses related to holding company debt and payment of
dividends to our stockholders. The declaration and payment of
future dividends to holders of our common stock will be at the
discretion of our board of directors.
Starting in late 2007, the global financial markets experienced
unprecedented disruption, adversely affecting the business
environment in general, as well as financial services companies
in particular. This disruption increased during the second half
of 2008. In managing through these challenging market
conditions, we benefit from the strength of our management
philosophy, diversification of our business and strong financial
fundamentals. We actively manage our liquidity in light of
changing market, economic and business conditions and we believe
that our liquidity levels are more than adequate to cover our
exposures, as evidenced by the following:
|
|
|
|
|
We continue to increase sales and recorded sales growth of 63.4%
for the nine months ended September 30, 2009 compared to
the same period in 2008. Strong sales have led to strong cash
inflows on our deposit contracts (annuities and universal life
policies, including BOLI) of $2,187.7 million as of
September 30, 2009, compared to $1,266.5 million as of
September 30, 2008.
|
|
|
|
While certain lapses and surrenders occur in the normal course
of business, these lapses and surrenders have not deviated
materially from management expectations during the financial
crisis.
|
|
|
|
The amount of accumulated other comprehensive income (loss), net
of taxes on our balance sheet increased to $29.8 million as
of September 30, 2009 from $(1,052.6) million as of
December 31, 2008. The primary driver of this increase was
an increase in the fair value of our
available-for-sale
securities, due to the market showing signs of stabilization
during 2009 and credit spreads tightening. We believe we are
positioned to hold these investments to maturity because of our
mix of insurance products and our disciplined asset/liability
matching. We have $7,352.1 million of illiquid liabilities
consisting of reserves for structured settlements and SPIAs that
cannot be surrendered, deferred annuities with five-year payout
provisions or market value adjustments, traditional life
insurance, and group life and health policies.
|
99
|
|
|
|
|
As of September 30, 2009, we had the ability to borrow on
an unsecured basis up to a maximum principal amount of
$180.0 million, under a $200.0 million revolving line of
credit arrangement. On October 7, 2009, we added a new
member to the syndicate of lending institutions in this
revolving credit facility, effectively restoring our ability to
borrow under the facility to $200.0 million.
|
Liquidity
Requirements and Sources of Liquidity
The liquidity requirements of our insurance subsidiaries
principally relate to the liabilities associated with their
various insurance and investment products, operating costs and
expenses, the payment of dividends to us, 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, our insurance
subsidiaries have used cash flows from operations, cash flows
from invested assets and sales of investment securities to fund
their liquidity requirements.
In managing the liquidity of our insurance operations, we also
consider the risk of policyholder and contractholder withdrawals
of funds earlier than our assumptions when selecting assets to
support these contractual obligations. We use surrender charges
and other contract provisions to mitigate the extent, timing and
profitability impact of withdrawals of funds by customers from
annuity contracts and deposit liabilities. The following table
sets forth withdrawal characteristics of our general account
annuity reserves and deposit liabilities as of
September 30, 2009 and December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
|
December 31, 2008
|
|
|
|
Amount
|
|
|
% of Total
|
|
|
Amount
|
|
|
% of Total
|
|
|
|
(Dollars in millions)
|
|
|
Illiquid Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Structured settlements & other SPIAs(1)
|
|
$
|
6,704.8
|
|
|
|
35.2
|
%
|
|
$
|
6,761.7
|
|
|
|
39.0
|
%
|
Deferred annuities with
5-year
payout provision or MVA(2)
|
|
|
393.3
|
|
|
|
2.0
|
%
|
|
|
397.5
|
|
|
|
2.3
|
%
|
Traditional insurance (net of reinsurance)(3)
|
|
|
185.4
|
|
|
|
1.0
|
%
|
|
|
186.7
|
|
|
|
1.1
|
%
|
Group health & life(3)
|
|
|
68.6
|
|
|
|
0.3
|
%
|
|
|
71.5
|
|
|
|
0.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total illiquid liabilities
|
|
|
7,352.1
|
|
|
|
38.5
|
%
|
|
|
7,417.4
|
|
|
|
42.8
|
%
|
Somewhat Liquid Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank-owned life insurance (BOLI)(4)
|
|
|
3,827.2
|
|
|
|
20.1
|
%
|
|
|
3,772.4
|
|
|
|
21.8
|
%
|
Deferred annuities with surrender charges > 5%
|
|
|
4,575.2
|
|
|
|
24.0
|
%
|
|
|
2,792.5
|
|
|
|
16.1
|
%
|
Universal life with surrender charges > 5%
|
|
|
146.8
|
|
|
|
0.8
|
%
|
|
|
139.1
|
|
|
|
0.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total somewhat liquid liabilities
|
|
|
8,549.2
|
|
|
|
44.9
|
%
|
|
|
6,704.0
|
|
|
|
38.7
|
%
|
Fully Liquid Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred annuities with surrender charges of: 3-5%
|
|
|
422.4
|
|
|
|
2.2
|
%
|
|
|
355.9
|
|
|
|
2.1
|
%
|
0-3%
|
|
|
53.1
|
|
|
|
0.3
|
%
|
|
|
39.9
|
|
|
|
0.2
|
%
|
No surrender charges(5)
|
|
|
1,983.1
|
|
|
|
10.4
|
%
|
|
|
2,056.3
|
|
|
|
11.9
|
%
|
Universal life and whole life with surrender charges < 5%
|
|
|
439.2
|
|
|
|
2.3
|
%
|
|
|
443.9
|
|
|
|
2.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fully Liquid Liabilities
|
|
|
2,897.8
|
|
|
|
15.2
|
%
|
|
|
2,896.0
|
|
|
|
16.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Policyholder Liabilities
|
|
|
272.5
|
|
|
|
1.4
|
%
|
|
|
302.4
|
|
|
|
1.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Policyholder Liabilities(6)
|
|
$
|
19,071.6
|
|
|
|
100.0
|
%
|
|
$
|
17,319.8
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
These contracts cannot be surrendered. The benefits are
specified in the contracts as fixed amounts to be paid over the
next several decades. |
100
|
|
|
(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. |
|
(4) |
|
The biggest deterrent to surrender is the taxation on the gain
within these contracts, which includes a 10% non-deductible
penalty tax. Banks can exchange certain of these contracts with
other carriers, tax-free. However, a significant portion of this
business may not qualify for this tax-free treatment due to the
employment status of the original covered employees. |
|
(5) |
|
Approximately half of this business has been with the Company
for over a decade, contains lifetime minimum interest guarantees
of 4.0% to 4.5%, and has been free of surrender charges for many
years. This business has experienced high persistency given the
high lifetime guarantees that have not been available in the
market on new issues for many years. |
|
(6) |
|
Represents the sum of funds held under deposit contracts, future
policy benefits and other policyholders funds on the
consolidated balance sheets. |
Liquid
Assets
Our insurance subsidiaries maintain investment strategies
intended to provide adequate funds to pay benefits without
forced sales of investments. Products having liabilities with
longer durations, such as certain life insurance policies and
structured settlement annuities, are matched with investments
having similar estimated lives such as long-term fixed
maturities, mortgage loans and marketable equity securities.
Shorter-term liabilities are matched with fixed maturities that
have short- and medium-term fixed maturities. In addition, our
insurance subsidiaries hold highly liquid, high quality,
short-term investment securities and other liquid
investment-grade fixed maturities 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 September 30, 2009 and
December 31, 2008, our insurance subsidiaries had liquid
assets of $18.0 billion and $14.7 billion,
respectively, of our total liquid assets of $18.1 billion
and $14.9 billion, respectively. The portion of total
company liquid assets comprised of cash and cash equivalents and
short-term investments was $244.2 million and
$477.4 million as of September 30, 2009 and
December 31, 2008, respectively. Our fixed maturities
portfolio included below investment grade securities that
comprised 6.8% and 5.2% of the total fair value of our total
fixed maturities as of September 30, 2009 and
December 31, 2008, respectively. In addition, our fixed
maturities portfolio included non-rated securities that
comprised 4.6% and 4.8% of the total fair value of our fixed
maturities as of these dates.
We consider attributes of the various categories of liquid
assets (for example, type of asset and credit quality) in
calculating internal liquidity measures in order to evaluate 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
portfolios, we believe that claim experience varying from our
projections does not constitute a significant liquidity risk.
Our asset/liability management process takes into account the
expected maturity of investments and expected claim payments as
well as the specific nature and risk profile of the liabilities.
Historically, there has been no significant variation between
the expected maturities of our investments and the payment of
claims.
101
Capitalization
Our capital structure consists of notes payable and
stockholders equity. The following table summarizes our
capital structure as of the dates indicated:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in millions)
|
|
|
Notes payable
|
|
$
|
448.9
|
|
|
$
|
448.8
|
|
|
$
|
448.6
|
|
|
$
|
298.7
|
|
Stockholders equity
|
|
|
1,480.5
|
|
|
|
286.2
|
|
|
|
1,285.1
|
|
|
|
1,327.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital
|
|
$
|
1,929.4
|
|
|
$
|
735.0
|
|
|
$
|
1,733.7
|
|
|
$
|
1,626.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our capitalization increased $1,194.4 million as of
September 30, 2009 as compared to December 31, 2008.
This increase was driven by net income of $96.2 million, a
cumulative effect adjustment related to new accounting guidance,
which increased retained earnings as of January 1, 2009 by
$15.7 million and an increase in AOCI. AOCI increased
primarily due to changes in net unrealized gains (losses) on
available-for-sale
securities of $1,136.5 million, partially offset by OTTIs
not related to credit losses of $38.4 million.
Our capitalization decreased $998.7 million as of
December 31, 2008, as compared to December 31, 2007.
Accumulated other comprehensive loss increased by
$1,040.1 million, primarily due to changes in net
unrealized losses of $1,021.0 million. The increase in net
unrealized losses was concentrated in our corporate fixed
securities due to credit spreads widening and increased
liquidity discounts during the volatile markets in 2008.
Our capitalization increased $107.7 million as of
December 31, 2007 as compared to December 31, 2006 as
we issued $150.0 million aggregate principal amount of
CENts at an issue price of $149.8 million. We used the
proceeds from the CENts and dividends from life insurance
subsidiaries to pay two dividends to our stockholders, totaling
$200.0 million. In addition, net income for the year ended
December 31, 2007 was $167.3 million.
Debt
The following table summarizes our debt instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Amount Available as of
|
|
|
Amount Outstanding as of
|
|
|
|
Maturity
|
|
|
September 30,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
December 31,
|
|
Description
|
|
Date
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in millions)
|
|
|
Senior notes payable
|
|
|
4/1/2016
|
|
|
$
|
300.0
|
|
|
$
|
300.0
|
|
|
$
|
300.0
|
|
|
$
|
300.0
|
|
|
$
|
300.0
|
|
|
$
|
300.0
|
|
CENts
|
|
|
10/15/2067
|
|
|
|
150.0
|
|
|
|
150.0
|
|
|
|
150.0
|
|
|
|
150.0
|
|
|
|
150.0
|
|
|
|
150.0
|
|
Revolving credit facilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank of America, N.A
|
|
|
8/16/2012
|
|
|
|
180.0
|
|
|
|
200.0
|
|
|
|
200.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Bank of New York:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Holding company
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
25.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance subsidiary
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
25.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total notes payable and revolving credit facilities
|
|
|
|
|
|
$
|
630.0
|
|
|
$
|
650.0
|
|
|
$
|
700.0
|
|
|
$
|
450.0
|
|
|
$
|
450.0
|
|
|
$
|
450.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
Payable
Senior
Notes Due 2016
On March 30, 2006, we issued $300.0 million of
6.125% senior notes due April 1, 2016, which were
issued at a discount yielding $298.7 million. Proceeds from
the senior notes were used to pay down the outstanding principal
on a variable rate revolving line of credit. Interest on the
senior notes is payable semiannually in arrears, beginning on
October 2, 2006.
102
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, see Description of
Certain Indebtedness 6.125% Senior Notes due
2016 on page 170.
Capital
Efficient Notes Due 2067
On October 10, 2007, we issued $150.0 million
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 million. 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, see Description of
Certain Indebtedness Capital Efficient Notes due
2067 on page 170.
Revolving
Credit Facilities
Current Credit Facility. On August 16,
2007, we entered into a $200.0 million senior unsecured
revolving credit agreement with a syndicate of lending
institutions led by Bank of America, N.A. On February 12,
2009, Bank of America, N.A. issued a notice of default to Lehman
Commercial Paper, Inc., one of the lending institutions in the
syndicate with a commitment of $20.0 million, effectively
limiting our ability to borrow under the revolving credit
facility to $180.0 million at that time. On October 7,
2009, Lehman Commercial Paper, Inc. assigned its interest in our
revolving credit facility to Barclays Bank PLC, effectively
restoring capacity in the facility to $200.0 million. 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
Description of Certain Indebtedness Revolving
Credit Facilities on page 171.
Prior Facility. In June 2004, we entered into
a $370.0 million revolving credit facility with a syndicate
of lending institutions led by Bank of America, N.A. On
March 30, 2006, this revolving credit facility was reduced
to $70 million and, on August 17, 2007, this revolving
credit facility was closed and replaced with the current credit
facility led by Bank of America, N.A. described above.
Closed Facilities. In addition, in 2005, we
entered into two $25.0 million revolving credit facilities
with The Bank of New York to support our overnight repurchase
agreements program, which provides us with the liquidity to meet
general funding requirements. On March 7, 2008, we closed
both of these revolving credit facilities with The Bank of New
York. We did not borrow under these facilities while they were
in place.
Securities
Lending
We participate in a securities lending program as a mechanism
for generating additional investment income. Under the
securities lending arrangements, certain securities we own are
loaned to other institutions for short periods of time through a
lending agent. The securities lending counterparty is required
to provide initial collateral for the loaned securities, which
is then invested by the lending agent. The collateral is
103
required at a rate of 102% of the fair value of the loaned
securities, is controlled by the lending agent and may not be
sold or re-pledged. In the event that the lending agent does not
return the full amount of collateral to the securities lending
counterparty, we are obligated to make up any deficiency.
In late September 2008, we began reducing the exposure to
securities lending by recalling loans from some of the more
troubled financial services companies, and have reduced our
exposure from $105.7 million at December 31, 2008 to
$31.4 million at September 30, 2009. At
September 30, 2009, there was approximately
$0.5 million of unrealized losses related to the collateral
invested. Our securities lending portfolio was reduced to zero
by the end of 2009.
Dividends
and Regulatory Requirements
The payment of dividends and other distributions to us by our
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, 2008, we received $100.0 million in
dividends from our insurance subsidiaries. These dividends were
considered extraordinary based on the timing of the dividend
payment. We received $166.4 million and $122.5 million
in dividends from our insurance subsidiaries in 2007 and 2006,
respectively.
Based on our statutory results, as of December 31, 2008,
our insurance subsidiaries may pay dividends of up to
$117.9 million to us during 2009 without needing to obtain
regulatory approval. To support the growing sales of our
products and maintain financial strength ratings, we target a
risk-based capital level of at least 350% in our life insurance
company, Symetra Life Insurance Company. To maintain this level,
we are currently not planning on paying dividends from our
insurance subsidiaries in 2009. As of September 30, 2009,
Symetra Life Insurance Company had a risk-based capital ratio of
361%.
Cash
Flows
The following table sets forth a summary of our consolidated
cash flows for the nine months ended September 30, 2009 and
2008, and for the years ended December 31, 2008, 2007 and
2006.
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Nine Months Ended September 30,
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in millions)
|
|
|
Net cash flows from operating activities
|
|
$
|
596.6
|
|
|
$
|
557.6
|
|
|
$
|
733.0
|
|
|
$
|
813.8
|
|
|
$
|
794.6
|
|
Net cash flows from investing activities
|
|
|
(1,916.7
|
)
|
|
|
(831.2
|
)
|
|
|
(976.8
|
)
|
|
|
522.3
|
|
|
|
908.9
|
|
Net cash flows from financing activities
|
|
|
1,093.8
|
|
|
|
284.9
|
|
|
|
457.9
|
|
|
|
(1,335.4
|
)
|
|
|
(1,561.3
|
)
|
Operating
Activities
Cash flows from our operating activities are primarily driven by
the amounts and timing of cash received for premiums on our
group medical stop-loss, group life and term life insurance
products, income including dividends and interest on our general
account investments, as well as the amounts and timing of cash
disbursed for our payment of policyholder benefits and claims,
underwriting and operating expenses and income taxes. The
following discussion highlights key drivers in the level of cash
flows generated from our operating activities:
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|
Nine months ended September 30, 2009 and
2008. Net cash provided by operating activities
for the nine months ended September 30, 2009 was
$596.6 million, a $39.0 million increase over the same
period in 2008. This increase was primarily the result of lower
income taxes paid in 2009 due to tax refunds we received for
prior year returns and a decrease in operating expenses due to
reductions in spending, including payroll and travel-related
expenditures.
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104
|
|
|
|
|
Years ended December 31, 2008 and
2007. Net cash provided by operating activities
for the year ended December 31, 2008 was
$733.0 million, an $80.8 million decrease over the
same period in 2007. This decrease was primarily the result of
an increase in cash paid to settle policyholder benefits and
claims related to our group medical stop-loss products, and an
increase in paid commissions related to our deferred annuity
products. In addition, interest payments in 2008 increased
compared to 2007 as a result of the CENts sold in October 2007.
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|
Years ended December 31, 2007 and
2006. Net cash provided by operating activities
for the year ended December 31, 2007 was
$813.8 million, a $19.2 million increase over the same
period in 2006. This increase was primarily the result of the
timing of certain cash settlements related to certain
receivables, changes in current and deferred taxes payable and
an increase in realized investment gains due to trading
activities.
|
Investing
Activities
Cash flows from our investing activities are primarily driven by
the amounts and timing of cash received from our sales of
investments and from maturities and calls of fixed maturity
securities, as well as the amounts and timing of cash disbursed
for our purchases of investments. The following discussion
highlights key drivers in the level of cash flows generated from
our investing activities:
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|
Nine months ended September 30, 2009 and
2008. Net cash used in investing activities for
the nine months ended September 30, 2009 was
$1,916.7 million, a $1,085.5 million increase from the
same period in 2008. The increase was primarily the result of
higher purchases of fixed maturities, as we experienced an
increase in sales primarily of fixed deferred annuities. This
was partially offset by an increase in maturities, calls and
paydowns. In addition, securities lending activity resulted in
net cash used in investing of securities lending collateral of
$4.0 million in 2008 compared to cash collateral returned
of $72.3 million in 2009.
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|
Years ended December 31, 2008 and
2007. Net cash used in investing activities for
the year ended December 31, 2008 was $976.8 million, a
$1,499.1 million decrease from the same period in 2007. The
decrease was primarily the result of lower sales of fixed
maturities due to decreased withdrawals from certain of our
products. In addition, we originated $224.5 million in new
mortgage loans in 2008, an increase of $74.5 million.
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|
Years ended December 31, 2007 and
2006. Net cash provided by investing activities
during the year ended December 31, 2007 was
$522.3 million, a $386.6 million decrease from the
same period in 2006. The decrease was primarily the result of
management of our fixed maturities and marketable equity
securities, as purchases increased $887.1 million, and
sales increased by $447.2 million. In addition, we used
$22.0 million to acquire MRM.
|
Financing
Activities
Cash flows from our financing activities are primarily driven by
the amounts and timing of cash received from deposits into
certain life insurance and annuity policies and proceeds from
our issuances of debt, as well as the amounts and timing of cash
disbursed to fund withdrawals from certain life insurance and
annuity policies, repayments of debt and dividend distributions
to our stockholders. The following discussion highlights key
drivers in the level of cash flows generated from our financing
activities:
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|
|
|
|
Nine months ended September 30, 2009 and
2008. Net cash provided by financing activities
for the nine months ended September 30, 2009 was
$1,093.8 million, an $808.9 million increase over the
same period in 2008. This was primarily due to a
$921.2 million increase in deposits primarily related to
the sales of fixed deferred annuities referred to in investing
activities above. This was partially offset by a
$42.4 million increase in withdrawals for 2009 compared to
2008, primarily due to a BOLI withdrawal of $59.0 million
in 2009, and a $76.3 million decrease in securities lending
collateral. Securities lending activity resulted in net cash
collateral received of $4.0 million in 2008 compared to
cash collateral returned of $72.3 million in 2009.
|
105
|
|
|
|
|
Years ended December 31, 2008 and
2007. Net cash provided by financing activities
for the year ended December 31, 2008 was
$457.9 million, a $1,793.3 million increase over the
same period in 2007. This was primarily due to a
$1,150.8 million increase in deposits and a
$562.3 million decrease in withdrawals in 2008 over 2007.
Sales of fixed deferred annuities increased in 2008 as our
distribution channel strategy matured. Also, withdrawals
decreased as products containing a surrender charge free period
passed the surrender charge free window. In addition, in 2007,
we received $149.8 million in proceeds from our CENts
offering and paid $200.0 million in stockholder dividends.
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|
Years ended December 31, 2007 and
2006. Net cash used in financing activities
during the year ended December 31, 2007 was
$1,335.4 million, a $225.9 million decrease over the
same period in 2006. We incurred a net cash outflow from
financing activities in both periods as policyholder withdrawals
exceeded deposits; however, compared to 2006 we experienced a
$159.5 million increase in policyholder deposits as a
result of sales, and a $131.7 million reduction in
policyholder withdrawals as two large blocks of annuities exited
an 18-month
period of surrendering without charges in the fourth quarter of
2007. In addition, in 2007, we received $149.8 million in
proceeds from our CENts offering and paid $200.0 million in
stockholders dividends. In 2006 we received $298.7 million
in proceeds from our senior debt offering and paid
$100.0 million in stockholder dividends.
|
Contractual
Obligations and Commitments
We enter into obligations with third parties in the ordinary
course of our operations. These obligations as of
December 31, 2008 are set forth in the table below.
However, we do not believe that our cash flow requirements can
be assessed based upon an analysis of these obligations as the
funding of these future cash obligations will be from future
cash flows from premiums, deposits, fees and investment income
that are not reflected in the table below. In addition, our
operations involve significant expenditures that are not based
upon commitments, including expenditures for income taxes and
payroll.
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Payments Due by Year
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|
|
|
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|
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|
2014 and
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Contractual Obligations
|
|
Total
|
|
|
2009
|
|
|
2010-2011
|
|
|
2012-2013
|
|
|
thereafter
|
|
|
|
(Dollars in millions)
|
|
|
Insurance obligations(1)
|
|
$
|
41,330.3
|
|
|
$
|
1,575.4
|
|
|
$
|
2,959.0
|
|
|
$
|
2,813.9
|
|
|
$
|
33,982.0
|
|
Notes payable
|
|
|
450.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
450.0
|
|
Interest on notes payable
|
|
|
242.6
|
|
|
|
30.8
|
|
|
|
61.7
|
|
|
|
61.7
|
|
|
|
88.4
|
|
Securities collateral on securities lending(2)
|
|
|
105.7
|
|
|
|
105.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase and lending commitments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in limited partnerships(3)
|
|
|
93.8
|
|
|
|
60.8
|
|
|
|
31.2
|
|
|
|
1.8
|
|
|
|
|
|
Commercial mortgage loans(4)
|
|
|
9.0
|
|
|
|
9.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other(5)
|
|
|
9.1
|
|
|
|
2.0
|
|
|
|
4.1
|
|
|
|
3.0
|
|
|
|
|
|
Operating lease obligations(6)
|
|
|
46.8
|
|
|
|
7.9
|
|
|
|
14.6
|
|
|
|
13.5
|
|
|
|
10.8
|
|
Licensing fees(7)
|
|
|
18.3
|
|
|
|
11.6
|
|
|
|
6.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
42,305.6
|
|
|
$
|
1,803.2
|
|
|
$
|
3,077.3
|
|
|
$
|
2,893.9
|
|
|
$
|
34,531.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 |
footnotes continued on following page
106
|
|
|
|
|
table, our obligations recorded in our consolidated balance
sheets do not incorporate future credited interest for deposit
contracts or tabular interest for insurance policies. Therefore,
the estimated obligations for insurance liabilities presented in
this table significantly exceed the liabilities recorded in
reserves for future annuity and contract benefits and the
liability for policy and contract claims. Due to the
significance of the assumptions used, the amounts presented
could materially differ from actual results. We have not
included the variable separate account obligations as these
obligations are legally insulated from general account
obligations and will be fully funded by cash flows from separate
account assets. We expect to fund the obligations for insurance
liabilities from cash flows from general account investments and
future deposits and premiums. |
|
(2) |
|
We have accepted cash collateral in connection with our
securities lending program and reinvested this collateral in
investments with a fair value of $105.7 million. Since the
timing of the return of collateral is uncertain, the return of
collateral has been included in the payments due in less than
one year. For more information, see Note 6,
Securities Lending Program, to our audited
consolidated financial statements included elsewhere in this
prospectus. |
|
(3) |
|
We have investments in twelve limited partnership interests
related to tax-advantaged affordable housing projects and
various state tax credit funds, and five private equity
partnerships. We will provide capital contributions to the five
private equity partnerships through 2015 with a remaining
committed amount of $37.0 million 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 17, Commitments and
Contingencies, to our audited consolidated financial
statements included elsewhere in this prospectus. Amounts
recorded on the balance sheet are included in other
liabilities. |
|
(4) |
|
Unfunded mortgage loan commitments as of December 31, 2008. |
|
(5) |
|
In connection with the acquisition of MRM in May 2007, we
committed to pay $14.0 million to the selling stockholder
over a period of five years, including $10.2 million which
is contingent upon the achievement of certain annual
profitability targets. For more information, see Note 11,
Acquisitions, to our audited consolidated financial
statements included in this prospectus. |
|
(6) |
|
Includes minimum rental commitments on leases for office space,
commercial real estate and certain equipment. For more
information, see Note 17, Commitments and
Contingencies, to our audited consolidated financial
statements included elsewhere in this prospectus. |
|
(7) |
|
Includes contractual commitments for a service agreement to
outsource the majority of our information technology
infrastructure. For more information, see Note 17,
Commitments and Contingencies, to our audited
consolidated financial statements included elsewhere in this
prospectus. |
On August 1, 2009, we entered into a service agreement with
a third party service provider to outsource the majority of its
information technology infrastructure, effectively terminating
the previous agreement, referred to in the table under licensing
fees, scheduled to expire in July 2010 and renewing with the
same vendor. Under the terms of the service agreement, we agreed
to pay $4.3 million for the five months ended
December 31, 2009, $21.7 million in
2010-2011,
$21.5 million in
2012-2013
and $6.4 million in 2014 and thereafter. These amounts are
not included in the table above.
Off-balance
Sheet Transactions
We do not have off-balance sheet transactions.
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.
107
Interest
Rate Risk
Our exposure to interest rate risk relates to the market price
and/or cash
flow variability associated with changes in market interest
rates.
An increase in market interest rates from current levels would
generally be a favorable development for us. If market interest
rates increase, we would expect to earn additional investment
income, to have increased annuity and universal life insurance
sales, and to limit the potential risk of margin erosion due to
minimum guaranteed crediting rates. However, an increase in
interest rates would also increase the unrealized net loss
position of the investment portfolio. In addition, if interest
rates rise quickly enough within a short time period, certain
lines of business that are interest sensitive are exposed to
lapses as policyholders seek higher yielding investments.
Our investment portfolios primarily consist of investment grade
fixed maturity securities, including public and privately-placed
corporate bonds, residential mortgage-backed securities and
commercial mortgage-backed securities. The carrying value of our
investment portfolio as of December 31, 2008 and 2007 was
$16.3 billion and $16.9 billion, respectively, of
which 91.6% in 2008 and 92.3% in 2007 was invested in fixed
maturities. The primary market risk to our investment portfolio
is interest rate risk associated with investments in fixed
maturity securities. The fair value of our fixed maturities
fluctuates depending on the interest rate environment. During
periods of declining interest rates, paydowns on mortgage-backed
securities and collateralized mortgage obligations increase and
we would generally be unable to reinvest the proceeds of such
prepayments at comparable yields. The weighted-average duration
of our fixed maturity portfolio was approximately 5.6 and
6.1 years as of December 31, 2008 and 2007,
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 an investment policy based on its specific
liability characteristics.
Equity
Risk
We are exposed to equity price risk on our common stock and
other equity holdings. In addition, asset fees calculated as a
percentage of the separate account assets are a source of
revenue to us. Gains and losses in the equity markets result in
corresponding increases and decreases in our separate account
assets and asset fee revenue.
In addition, a decrease in the value of separate account assets
may cause an increase in guaranteed minimum death benefit, or
GMDBs, claims. However, most of our GMDBs on individual variable
annuities are reinsured. In recent years, the supply of
reinsurance has dwindled and costs have risen. Therefore, we
have not obtained GMDB reinsurance on new sales.
We manage equity price risk on investment holdings through
industry and issuer diversification and asset allocation
techniques.
Derivative
Financial Instruments
We make minimal use of derivative financial instruments as part
of our risk management strategy. We use indexed call options to
manage our exposure to changes in the S&P 500 Index. Our
exposure is related to our closed FIA block of business, which
credits policyholders account values based on gains in the
S&P 500 Index.
In addition, in 2007 and 2006, we entered into interest rate
swaps, which qualified as cash flow hedges of the forecasted
issuance of the CENts and the senior notes to hedge our exposure
to interest rate fluctuations prior to the note issuances.
108
As a matter of policy, we have not, and do not intend to, engage
in derivative market-making, speculative derivative trading or
other speculative derivatives activities.
Sensitivity
Analysis
Sensitivity analysis measures the impact of hypothetical changes
in interest rates and other market rates or prices on the
profitability of market-sensitive financial instruments.
The following discussion about the potential effects of changes
in interest rates and equity market prices is based on so-called
shock-tests, which model the effects of interest
rate and equity market price shifts on our financial condition
and results of operations. Although we believe shock tests
provide the most meaningful analysis, they are constrained by
several factors, including the necessity to conduct the analysis
based on a single point in time and by their inability to
include the extraordinarily complex market reactions that
normally would arise from the market shifts modeled. Although
the following results of shock tests for changes in interest
rates and equity market prices may have some limited use as
benchmarks, they should not be viewed as forecasts. These
forward-looking disclosures also are selective in nature and
address only the potential impacts on our financial instruments.
They do not include a variety of other potential factors that
could affect our business as a result of these changes in
interest rates and equity market prices.
One means of assessing exposure of our fixed maturities
portfolio to interest rate changes is a duration-based analysis
that measures the potential changes in fair value resulting from
a hypothetical change in interest rates of 100 basis points
across all maturities. This is sometimes referred to as a
parallel shift in the yield curve. Our investment manager uses
Derivative Solutions, a fixed-income analytics tool, to model
and calculate the duration and convexity of our asset portfolio.
Under this model, with all other factors constant and assuming
no offsetting change in the fair value of our liabilities, we
estimated that such an increase in interest rates would cause
the fair value of our fixed maturities portfolio to decline by
approximately $1.02 billion and $0.81 billion, based
on our securities positions as of September 30, 2009 and
December 31, 2008, respectively.
One means of assessing exposure to changes in equity market
prices is to estimate the potential changes in values on our
equity investments 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
$24.3 million and $21.4 million as of
September 30, 2009 and December 31, 2008,
respectively. In addition, fluctuations in equity market prices
affect our revenues and returns related to our variable annuity
and life products, which depend upon fees that are related
primarily to the fair value of the underlying assets.
109
BUSINESS
Overview
Our
Business
We are a life insurance company focused on profitable growth in
select group health, retirement, life insurance and employee
benefits markets. Our first day of operations as an independent
company was August 2, 2004, when Symetra completed the
Acquisition. Our operations date back to 1957 and many of our
agency and distribution relationships have been in place for
decades. We are headquartered in Bellevue, Washington and employ
approximately 1,100 people in 16 offices across the United
States, serving approximately 1.8 million customers.
As of September 30, 2009, our stockholders equity was
$1,480.5 million, our adjusted book value was
$1,450.7 million, and we had total assets of
$22.2 billion. For the twelve months ended
September 30, 2009, our return on equity, or ROE, was 13.9%
and our operating return on average equity, or operating ROAE,
was 10.6%. We define adjusted book value as stockholders
equity less accumulated other comprehensive income (loss), or
AOCI, and we define operating ROAE as adjusted operating income
divided by average adjusted book value. Adjusted book value,
adjusted operating income and operating ROAE are non-GAAP
measures. For reconciliations of adjusted book value to
stockholders equity and adjusted operating income to net
income and for a summary presentation of our operating results
and financial position determined in accordance with GAAP,
please see Summary Historical Consolidated
Financial and Other Data on page 9.
We manage our business through the following five segments, four
of which are operating:
|
|
|
|
|
Group. We offer medical stop-loss insurance, limited
medical benefit plans, group life insurance, accidental death
and dismemberment insurance and disability 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 through Medical Risk Managers, Inc, or MRM. Our
Group segment generated segment pre-tax adjusted operating
income of $66.9 million during 2008 and $44.7 million
during the nine months ended September 30, 2009.
|
|
|
|
|
|
Retirement Services. We offer fixed and variable
deferred annuities, including tax sheltered annuities,
individual retirement accounts, or IRAs, and group annuities to
qualified retirement plans, including Section 401(k),
403(b) and 457 plans. Our Retirement Services segment generated
segment pre-tax adjusted operating income of $36.6 million
during 2008 and $41.3 million during the nine months ended
September 30, 2009.
|
|
|
|
|
|
Income Annuities. We offer single premium immediate
annuities, or SPIAs, to customers seeking a reliable source of
retirement income and structured settlement annuities to fund
third party personal injury settlements. In addition, we offer
our existing structured settlement clients a variety of funding
services product options. Our Income Annuities segment generated
segment pre-tax adjusted operating income of $36.5 million
during 2008 and $33.0 million during the nine months ended
September 30, 2009.
|
|
|
|
|
|
Individual. We offer a wide array of term, universal
and variable life insurance as well as bank-owned life
insurance, or BOLI. Our Individual segment generated segment
pre-tax adjusted operating income of $59.7 million during
2008 and $51.6 million during the nine months ended
September 30, 2009.
|
|
|
|
|
|
Other. This segment consists of unallocated
corporate income, composed primarily of investment income on
unallocated surplus, unallocated corporate expenses, interest
expense on debt, tax credits from certain investments, the
results of small, non-insurance businesses that are managed
outside of our operating segments, and inter-segment elimination
entries. Our Other segment generated a segment pre-tax adjusted
operating loss of $31.6 million during 2008 and
$5.8 million during the nine months ended
September 30, 2009.
|
See Note 22 to our audited consolidated financial statements for
selected financial information by segment for each of the last
three fiscal years.
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We distribute our products nationally through an extensive and
diversified independent distribution network. Our distributors
include financial institutions, employee benefits brokers, third
party administrators, specialty brokers, independent agents and
advisors. We believe that our multi-channel distribution network
allows us to access a broad share of the distributor and
consumer markets for insurance and financial services products.
For example, we currently distribute our annuity and life
insurance products through approximately 16,000 independent
agents, 26 key financial institutions and 4,300 independent
employee benefits brokers. We continually add new distribution
relationships to expand the breadth of partners offering our
products.
Market
Environment and Opportunities
We believe we are well positioned to capitalize on existing
market opportunities, including:
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Increasing need for retirement savings and
income. There are significant demographic factors that
indicate increased need for retirement solutions. These factors
include:
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according to the U.S. Census Bureau, there are 76.8 million
baby-boomers (Americans born between 1946 and 1964) who are
at or near retirement age; and
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according to the U.S. Census Bureau, there are 61.6 million
members of Generation X (Americans born between 1965 and 1979).
We believe these members of Generation X are likely to fund
their retirement from personal savings.
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Many of these individuals have experienced significant declines
in the value of their savings as a result of recent market
turmoil or have saved too little for retirement. According to
the Employee Benefit Research Institute, or EBRI, as of 2007,
approximately 78% of families with a head of household aged 55
to 65 participated in an employer-based retirement plan or IRA.
EBRI estimates that the median value of this populations
employer-based retirement plans declined 14.7% from
approximately $81,000 in 2007 to approximately $69,100 in June
2009. As a result of these demographic factors, we expect
greater demand for retirement savings products that supplement
social security. In particular, we believe demand will continue
to grow for products like immediate annuities that offer income
streams that cannot be outlived.
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Shift in customer demand toward simple to understand
products. The equity and bond market dislocation of the
last 18 months shifted customer and distributor demand
toward simple to understand and predictable products. Customers
increasingly demand savings and income oriented products (such
as fixed annuities) that offer transparency and stable returns
that are higher than returns on savings accounts. Industry sales
of savings and income oriented products have grown substantially
while sales of equity market based products (such as variable
annuities) have fallen. Illustrating this trend, Kehrer/LIMRA
reported that industry sales of variable annuities declined by
23% in the first nine months of 2009 compared to the equivalent
2008 period. Conversely, industry sales of fixed annuities grew
by 18% over the same period.
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Continued demand for affordable health
insurance. According to the Kaiser Family Foundation,
health insurance premiums in the United States increased 131%
from 1999 to 2009; meanwhile, the Consumer Price Index increased
only 28%. As health care costs continue to rise faster than
inflation, the demand for affordable health insurance options
has increased. According to the Self-Insurance Institute of
America, 75 million people in the United States under the
age of 65 receive their benefits through self-funded plans,
including 47% of workers in smaller firms and 76% of workers in
midsize firms. We believe we can grow our business by providing
employees with affordable access to health insurance through
employer-sponsored limited benefit employee health plans and by
offering group medical stop-loss insurance to medium and large
businesses that self-fund their medical plans.
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Our
Competitive Strengths
Our competitive strengths enabled us to perform well across all
of our operating segments through the recent market turmoil.
Since January 1, 2008 we have added 26 distribution
partners, developed 14 new products and grown our assets under
management by $3.0 billion, or 17.4%. Our sales for the
first nine
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months of 2009 were $2.2 billion, an increase of 260% over
our sales during the first nine months of 2007. Our competitive
strengths include:
Balance sheet focus. We are vigilant about
maintaining a strong balance sheet in all economic environments.
We believe our strong balance sheet will allow us to continue
growing our business and market share as many of our competitors
must first shore up their own balance sheets.
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Superior investment management. We pursue a
value-oriented investment approach focused on disciplined
matching of assets and liabilities and preservation of
principal. We believe we have built a conservative asset
portfolio illustrated by the following (as of September 30,
2009):
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Subprime exposure of only $0.3 million
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Alt-A exposure totaling less than 1% of invested assets, with
88% of Alt-A exposure being supported by fixed rate collateral
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No exposure to option adjustable rate mortgages, or option ARMs
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99% of our commercial mortgage-backed security, or CMBS,
portfolio is rated AAA and has a weighted-average credit
enhancement of 28%
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Minimal exposure to alternative assets, such as hedge funds and
private equity funds
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Below investment grade fixed maturities represent less than 7%
of invested assets
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This investment approach has resulted in what we believe to be
relatively strong performance. For example:
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Our total pre-tax net realized gains (losses) on sales and
impairments of fixed maturities cost 41 basis points for the
first nine months of 2009, cost 52 basis points for 2008, and
cost an annualized average 19 basis points since January 1,
2005
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Our commercial mortgage portfolio has a weighted-average
loan-to-value ratio of 54% and only one non-performing loan
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Since January 1, 2005, our equity portfolio has grown at an
annualized rate of 10.1% compared to an annualized return of
(0.8)% for the S&P 500 Index
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Disciplined liability risk management. We believe we
have an attractive and diverse mix of businesses that, combined
with our disciplined approach to asset/liability matching,
enables us to stick to our strategy of offering simple to
understand products without adding product features that create
liability-side balance sheet volatility. Our liability portfolio
includes:
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No guaranteed living benefits, or GLBs, in variable annuity
products
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No shadow accounts in universal life products
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No term products that are dependent on lapse-supported pricing
and securitization of deficiency reserves
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No high commission/long surrender period indexed annuities
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Because we do not offer these product features, we avoided
having a complex derivative hedging portfolio similar to those
found on the balance sheets of many of our competitors.
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Strong financial position. We believe we have a
strong and transparent balance sheet due to the lack of
off-balance sheet obligations and embedded guarantees on
variable products, and limited derivative and alternative
investments. We have no value of business acquired, or VOBA, on
our balance sheet and minimal goodwill. We believe that we
compare favorably to our industry in terms of the following
financial strength metrics (as of September 30, 2009):
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Our deferred acquisition costs, or DAC, is 16% of
stockholders equity and 17% of adjusted book value
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Our goodwill is 2% of stockholders equity and adjusted
book value
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We have no outstanding debt balances maturing until 2016
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Stockholders equity is 102% and adjusted book value is
100% of regulatory capital
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Our risk-based capital ratio is 361%
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Our AOCI improved from $(1,052.6) million at
December 31, 2008 to $29.8 million at
September 30, 2009
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Adjusted book value is a non-GAAP measure. For a reconciliation
of adjusted book value to stockholders equity and for a
summary presentation of our operating results and financial
position determined in accordance with GAAP, please see
Summary Historical Consolidated Financial and
Other Data on page 9.
Powerful and expanding national distribution
network. We have a two-pronged approach to
expanding product sales by working with our existing
distribution relationships and by adding new distribution
partners.
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High quality distribution relationships. We offer
consumers access to our products through a national
multi-channel network, including financial institutions,
employee benefits brokers, third party administrators, specialty
brokers and independent agents. We are adept at designing simple
to understand, yet innovative products to meet the changing
demands of the market. By working closely with our distributors,
we are able to anticipate opportunities in the marketplace and
rapidly address them. By treating our distributors as clients
and providing them with outstanding levels of service, we have
cultivated strong relationships over decades that we believe
allow us to avoid competing on price alone. In addition, we have
flexible information technology platforms that allow us to
integrate our products onto the operating platforms of our
distributors, which we believe provides us with a competitive
advantage in attracting new distributors.
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Strong bank distribution channel. According to
Kehrer/LIMRA, we were a top-five seller of fixed annuities
through banks in the first nine months of 2009. Our strong bank
distribution relationships make us well-positioned to continue
to take advantage of the increased investor demand for fixed
annuities and to take market share away from financially
stressed competitors. We also have increased our sales of
single premium immediate annuities and single premium life
insurance through existing and new bank distribution partners.
During the first nine months of 2009, our sales of single
premium immediate annuities through banks increased 18% and
single premium life volumes increased 74% as compared to the
first nine months of 2008.
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Leading group medical stop-loss insurance
provider. We have been a leading provider of group
medical stop-loss insurance since 1976. We have built a
consistently profitable platform with high levels of customer
service and disciplined underwriting practices. In the last
25 years, our group medical stop-loss insurance business
has experienced only two calendar years of net losses, the most
recent being 1999.
Diverse business mix. We believe that our
diverse mix of businesses offers us a greater level of financial
stability than many of our similarly-sized competitors across
business and economic cycles. Given our lack of reliance on any
particular product or line of business, we are able to allocate
resources to markets with the highest potential returns at any
given point in time. By doing so, we are able to avoid certain
markets when they are experiencing heavy competition and related
pricing pressure without sacrificing our ability to grow
revenues.
Proven management team. We have a high
quality management team with an average of 25 years of
insurance-industry experience, led by Randy Talbot who has been
our chief executive officer since 1998. Having spent a
significant portion of his
34-year
insurance industry career operating an insurance brokerage,
Mr. Talbot intimately understands the needs of our
distributors. We also have an experienced board of directors,
which includes industry professionals who have worked closely
with us to develop our strategies and operating philosophies.
Our long-term incentive plan aligns managements incentives
with our stockholders interests.
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Our
Growth Strategies
The recent market turmoil and its effects on our competitors
present a compelling opportunity to continue adding business at
attractive returns. Further, we believe our growth strategies
are well aligned with the current market environment as well as
the long-term competitive dynamics of our industry. We believe
the following proven, long-term growth strategies position us
well to consistently grow stockholder value despite periods of
aggressive pricing by our competitors:
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Sell simple to understand products. We have built a
reputation as a writer of simple to understand products that
meet the needs of customers and our distribution partners. This
reputation has been strengthened by the retrenchment of many of
our competitors due to recent market events and the consistency
of our presence and product lineup over the past several years.
We believe independent distributors highly value our
demonstrated ability to accept new business during turbulent
conditions while maintaining strong financial performance. As a
result, we are able to take advantage of the convergence of
increasing customer desire for simple to understand products and
the financial challenges of several market competitors.
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Broaden and deepen distribution relationships. Our
distribution strategy is to deliver multiple products through a
single point of sale, thereby reducing our distribution costs.
We believe that we have an unprecedented opportunity to expand
our existing relationships and build new long-term relationships
due to the recent market disruption that has distracted and
refocused our competitors. Since January 1, 2008, we have
added eight new bank relationships with approximately 6,100
sales representatives. In addition, we have added 18 new
independent distribution relationships which added 2,400 new
sales representatives actively selling our products. These new
relationships, in tandem with existing relationships, have
enabled us to grow our sales from $617 million during the
first nine months of 2007 to $2.2 billion in the first nine
months of 2009.
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Effectively deploy capital. We intend to deploy our
capital prudently while maximizing our profitability and
long-term growth in stockholder value. Our capital management
strategy is to maintain financial strength through conservative
and disciplined risk management practices, capital efficient
product design, effective asset/liability management and
opportunistic market share growth in all our business segments.
We will also maintain our conservative investment management
philosophy, which includes holding a high quality investment
portfolio and carefully matching our investment assets against
the duration of our insurance product liabilities. This approach
will enable us to remain flexible to allocate capital to
opportunities within our business segments that offer the
highest returns.
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Group
Overview
We offer a full range of employment-based benefit products and
services targeted primarily at employers, unions and public
agencies with 50 to 5,000 employees. Groups products
include group medical stop-loss insurance sold to employer
self-funded health plans; limited medical benefits insurance for
employees not able to participate in a traditional health plan,
such as part-time, seasonal and temporary workers; group life,
accidental death and dismemberment insurance; and disability
products. We purchase reinsurance coverage to limit our exposure
to losses from our group medical stop-loss, life, short-term
disability and long-term disability products. In general, we
retain group medical stop-loss risk up to $1.0 million per
individual and reinsure the remainder. We reinsure 50% of our
Group life risk and cap our liability at $0.5 million per
individual. Our short-term and long-term disability risk is 100%
reinsured, except for the short-term disability product sold
within limited benefit medical plans, which is not reinsured.
We sell through several types of distributors within the Group
segment, including third party administrators or TPAs, employee
benefits brokers, consultants and Administrative Services Only,
or ASO, arrangements. ASOs are fully insured networks that also
offer our group medical stop-loss insurance.
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We work closely with employee benefits brokers, consultants and
the employer to design benefit plans to meet the employers
particular requirements. Our customers primarily are small and
mid-size employers that require knowledgeable employee benefits
brokers, consultants and insurance company representatives to
understand their individual financial needs and employee
profiles, and to customize benefit plans that are appropriate
for them. We believe our extensive experience and expertise in
group medical stop-loss insurance, limited medical benefits
insurance, group life, accidental death and dismemberment
insurance and disability products provide us with opportunities
to support close broker relationships and to provide employers
innovative and customer-centric benefit plans.
Products
Group
Medical Stop-Loss
Our group medical stop-loss insurance, our leading product in
the Group segment, is provided to employers that self-fund their
employees health claim costs. Such employers provide a
health plan to their employees and pay all claims and
administrative costs. Our product helps employers manage health
expenses by reimbursing specific claim amounts above a certain
dollar deductible and by reimbursing aggregate claims above a
total dollar threshold. Group medical stop-loss is our biggest
Group product and represented 90.6% of earned premiums in our
Group segment for the nine months ended September 30, 2009.
Limited
Medical Benefits
Our limited medical benefits insurance is provided to employers
for health coverage to employees not otherwise eligible to
participate in traditional plans, such as part-time, seasonal
and temporary workers. The employer has a great deal of
flexibility in choosing benefits available to employees and
therefore managing total health costs incurred by the employer.
Our limited medical benefits product represented 7.0% of earned
premiums in our Group segment for the nine months ended
September 30, 2009.
Life
Insurance, Accidental Death and Dismemberment
Our group term life insurance product provides benefits in the
event of an insured employees death. The death benefit can
be based upon an individuals earnings or occupation, or
can be fixed at a set dollar amount. Our products also include
optional accidental death and dismemberment coverage as a
supplement to our term life insurance policies. This coverage
provides benefits for an insured employees loss of life,
limb or sight as a result of accidental death or injury.
Disability
Insurance
Our group long-term disability coverage is designed to cover the
risk of employee loss of income during prolonged periods of
disability. Our group short-term disability coverage provides
partial replacement of an insured employees weekly
earnings in the event of disability resulting from an injury or
illness. Benefits can be a set dollar amount or based upon a
percentage of earnings. We reinsure 100% of the risk associated
with this business.
Underwriting
and Pricing
Group insurance pricing reflects the employer groups
claims experience and the risk characteristics of each employer
group. The employers group 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 industry, geographic location, regional economic
trends, plan design and prior claims experience.
We face significant competition in the Group segment operations.
Our competitors include large and highly rated insurance
carriers. Some of these competitors have greater resources than
we do, and many of them offer similar products and use similar
distribution channels. We strive to write and renew only
business that meets our return targets, and this discipline
sometimes leads to a negative impact on our market share.
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However, this remains consistent with our focus on
profitability. Competition is based primarily upon product
pricing and features, compensation and benefits structure and
support offered.
Pricing in the medical stop-loss insurance market has proven to
be cyclical. Recently, we have seen generally disciplined
pricing in the medical stop-loss insurance market, which may
suggest a developing trend towards higher pricing for this
product line, based on our experience with previous pricing
cycles.
Retirement
Services
Overview
Our Retirement Services operation offers a full range of fixed
and variable deferred annuities in both the qualified and
non-qualified markets. Qualified contracts include IRAs, Roth
IRAs, tax-sheltered annuities (marketed to teachers and
not-for-profit
organizations) and Section 457 plans. We offer these
products to a broad range of consumers who want to accumulate
tax-deferred assets for retirement, desire a reliable source of
income during their retirement or seek to protect against
outliving their assets during retirement.
We offer our annuities primarily through financial institutions,
broker-dealers, independent agents, financial advisors and
worksite employee benefits specialists.
The demand for fixed annuities has increased as consumers seek
the simple to understand stable return offered by fixed annuity
products. We believe that demand for fixed annuity and other
investment products that help consumers supplement their social
security benefits with reliable retirement income will endure as
consumers rebuild and refocus on savings after the recent market
turmoil.
We offer a variety of simple variable annuity products that
position us to increase sales to consumers looking to maximize
earnings over the long-term and have a tolerance for some
volatility in their underlying investments.
We believe that the small to mid-sized employer market place
will be an area of fixed and variable annuity sales growth as
more employers eliminate traditional pensions and offer defined
contribution plans with lower administrative costs. As employers
drive down employee costs, we believe they still want to offer
competitive retirement benefit plans as long as the
administrative costs are reasonable. Our products are designed
to allow employers to provide their employees with attractive
retirement investments for a relatively low cost. Once those
retirement plan customers decide to retire or rollover their
funds, we offer a suite of IRAs, Roth IRAs, immediate annuities
and other retirement vehicles. It is our goal to capture and
hold those customers by offering products that address their
evolving needs and through excellent service to our distribution
partners and customers.
Products
Fixed
Annuities
We offer fixed single premium and flexible premium deferred
annuities that provide for a premium payment at time of issue,
an accumulation period and an annuity payout period beginning at
some future date. Our most popular products are our Select and
Custom series that offer three, five and seven-year surrender
charge periods and a choice of one, three, or five-year interest
rate lock periods. After the interest rate lock period, the
crediting rate is subject to change at our discretion (subject
to the minimum guaranteed rate in the contract) based upon
competitive factors, portfolio earnings rate, prevailing market
rates and product profitability. Our fixed annuity contracts are
supported by our general account, and the accrual of interest is
generally on a tax-deferred basis to the owner. The majority of
our fixed annuity contract owners retain their contracts through
the surrender penalty period. After one year in the annuity
contract, the contract owner may elect to take the accumulated
value of the annuity and convert it to a series of future
payments that are received over a selected period of time.
Our fixed annuity contracts permit the contract owners at any
time during the accumulation period to withdraw all or part of
the premium paid, plus the amount credited to their accounts,
subject to contract provisions such as surrender charges that
vary depending upon the terms of the product. The contracts
impose surrender charges that typically vary from 5.0% to 8.0%
of the amount withdrawn, starting in the year of
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contract issue and decreasing to zero over a three to eight-year
period. Approximately $5.1 billion, or 68.6%, of the total
account value of our fixed annuities as of September 30,
2009, were subject to surrender charges.
As market conditions change, we change the initial crediting
rate for newly issued fixed deferred annuities. We maintain the
initial crediting rate for a minimum period of one year or the
guarantee period, whichever is longer. Thereafter, we may adjust
the crediting rate annually for any given deposit. Most of our
recently issued annuity contracts have lifetime minimum
guaranteed crediting rates between 1.0% and 1.5%.
Our earnings from fixed annuities are based upon the spread
between the crediting rate on our fixed annuity contracts and
the returns we earn in our general account on our investment of
premiums, less acquisition and administrative expenses.
Variable
Annuities
We offer variable annuities that allow the contract owner to
make payments into a guaranteed-rate account and separate
accounts divided into subaccounts that invest in underlying
investment portfolios. Like a deferred fixed annuity, a deferred
variable annuity has an accumulation period and a payout period.
Although the fixed-rate account is credited with interest in a
manner similar to a fixed deferred annuity, there is no
guaranteed minimum rate of return for investments in the
subaccounts, and the contract owner bears the entire risk
associated with the performance of these subaccounts, subject to
the guaranteed minimum death benefit or any other benefit
offered under the contract.
Similar to our fixed annuities, our variable annuity contracts
permit the contract owner to withdraw all or part of the
premiums paid, plus the amount credited to the contract
owners account, subject to contract terms such as
surrender charges. The cash surrender value of a variable
annuity contract depends upon the allocation of payments between
fixed and variable subaccounts, how long the contract has been
in force, and the investment performance of the variable
subaccounts to which the contract owner has allocated assets.
Variable annuities provide us with fee revenue in the form of
flat-fee charges, mortality and expense risk charges, and asset
related administration charges. The mortality and expense risk
charge and asset related administration charge equal a
percentage of the contract owners assets in the separate
account and typically range from 1.00% to 1.55% per annum. In
addition, some contracts may offer the option for contract
owners to purchase additional features, such as GMDB, for
additional fees that are paid for through charges equal to a
percentage of the contract owners assets. Substantially
all of our GMDB risk on our individual variable annuities is
reinsured.
Our variable annuity strategy is to offer simple product designs
that emphasize long-term returns for the customer. We do not
offer the myriad of complex guaranteed living benefits found in
most of the products on the market. As a result, we are not a
significant writer of variable annuity business. Unlike some of
our competitors, we are not having to reprice our products to
properly charge for these features. Our Symetra Focus Variable
Annuity product is an example of our approach to the variable
annuity marketplace. Focus is one of the most cost-effective
products on the market. Because of the cost-effective design,
Focus is one of the few variable annuities available featuring
index investment options from Vanguard. The products
low-cost structure and investment options are designed to
benefit the clients. The lower cost structure allows our clients
to keep a greater share of investment returns in their accounts
as opposed to paying fees for benefits that may not be needed.
For clients that seek an income solution from their variable
product, we offer standard annuitization features and a
long-life benefit that is funded over time. Our long-life
benefit is unique in the industry and works like a multi-premium
immediate annuity, or MPIA, with a deferred payment start date.
Historically, we have seen variable annuity sales decline during
and after equity market declines and volatility, but we expect
Focus to garner more sales as consumers gain more confidence in
the equity market and the competition continues to reduce
guaranteed living benefit options or increase the costs of these
benefits.
Retirement
Plans
We offer a wide range of annuities to fund employer-sponsored
retirement plans, which include 401(k) plans (including
traditional, Safe Harbor and SIMPLE profit sharing plans),
403(b) plans and Section 457 plans.
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Underwriting
and Pricing
We price our products based upon our expected investment returns
and our expectations for mortality, longevity and the
probability that a policy or contract will remain in force from
one period to the next, referred to as persistency, for the
group of our contract owners as a whole, taking into account
mortality improvements in the general population and our
historical experience. We price deferred annuities by analyzing
longevity and persistency risk, volatility of expected earnings
on our assets under management, risk profile of the product,
special reserving and capital requirements, and the expected
expenses we will incur.
Income
Annuities
Overview
We offer immediate annuities that guarantee a series of payments
that continue either for a certain number of years or for the
remainder of an annuitants life.
We offer structured settlement contracts that provide an
alternative to a lump sum settlement, generally in a personal
injury lawsuit or workers compensation claim, and
typically are purchased by property and casualty insurance
companies for the benefit of an injured claimant. The structured
settlements provide scheduled payments over a fixed period or,
in the case of a life-contingent structured settlement, for the
life of the claimant, or a combination of fixed and life
contingent payments.
Products
Immediate
Annuities
We have recently experienced
year-over-year
increases in our sales of our immediate annuities products. We
anticipate further increases in sales given the demographic
trend of greater numbers of people approaching retirement age
and their corresponding need for dependable retirement income
that lasts their entire life. We believe that we are one of the
most innovative designers of immediate annuity products.
According to Kehrer-LIMRA, we were the second largest seller of
immediate annuities through banks in the third quarter of 2009.
Immediate annuities differ from deferred annuities in that they
provide for contractually guaranteed payments that generally
begin within one year of issue. Generally the immediate
annuities available in the marketplace do not provide for
surrender or policy loans by the contractholder. We offer a
liquidity feature that allows the contractholder to withdraw
portions of the future payments. We also offer a feature that
allows benefits to be converted to a lump sum after death of the
annuitant. We recently introduced the Freedom Income product
that enables the customer to pick a payment start date several
years after contract purchase. This product is a cost effective
means of funding a future income stream.
Structured
Settlements
Structured settlement contracts provide an alternative to a lump
sum settlement, generally in a personal injury lawsuit or
workers compensation claim, and typically are purchased by
property and casualty insurance companies for the benefit of an
injured claimant. The structured settlements provide scheduled
payments over a fixed period or, in the case of a
life-contingent structured settlement, for the life of the
claimant, and may have a guaranteed minimum period of payments.
Structured settlement contracts also may provide for irregularly
scheduled payments to coincide with anticipated medical or other
claimant needs. These settlements offer tax-advantaged,
long-term financial security to the injured party and facilitate
claim settlement for the property and casualty insurance
carrier. Structured settlement contracts are long-term in
nature, guarantee a fixed benefit stream and generally do not
permit surrender or borrowing against the amounts outstanding
under the contract. In 2005, we introduced funding services to
clients with financial circumstances that may have changed from
the time they originally received a structured settlement. Our
initial funding service product provides an immediate lump sum
payment to replace future benefit payments and includes
coordinating the court approval process. In 2009, we expanded
the funding service product offerings
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to allow clients to receive a lump sum and to change the timing
of future benefit payments. This product has been well received
by our clients and the courts.
Our current financial strength ratings limit our ability to
offer structured settlement contracts. If our principal life
insurance company subsidiary, Symetra Life Insurance Company,
increases its financial strength ratings from A
(Excellent) to A+ (Excellent) from A.M. Best,
courts will be more willing to approve structured settlement
contract arrangements from us. Improving this key rating will
allow us to participate fully in this market.
Underwriting
and Pricing
We price immediate annuities and structured settlements using
industry produced annuity mortality information, our mortality
experience and assumptions regarding continued improvement in
annuitant longevity, as well as assumptions regarding investment
yields at the time of issue and thereafter. Our structured
settlement contracts and traditional immediate annuities can be
underwritten in our medical department by medical doctors and
other trained medical personnel. If the medical department
determines the annuitant has a shorter or longer than standard
life expectancy, we can adjust our pricing to reflect that
information.
Our earnings from immediate annuities and structured settlement
annuities are driven by the spread on the returns we earn in our
general account on our investment of premiums and the interest
rate we used to determine the amount of income payments a client
receives at the time they purchase their annuity.
Earnings increase or decrease on these products depending on our
mortality experience.
Individual
Overview
Life insurance provides protection against financial hardship
after the death of an insured by providing cash payments to the
beneficiaries of the policyholder. Single premium life and
universal life insurance products also provide an efficient way
for assets to be transferred to heirs. Our principal individual
life insurance product is term life, which provides life
insurance coverage with guaranteed level premiums for a
specified period of time with little or no buildup of cash value
that is payable upon lapse of the coverage. In addition to term
life insurance, we offer universal life insurance products,
which are designed to provide protection for the entire life of
the insured and may include a buildup of cash value that can be
used to meet the policyholders particular financial needs
during the policyholders lifetime. We also sell bank-owned
life insurance, or BOLI, to financial institutions seeking a
fixed yield investment that efficiently matches future employee
benefit liabilities.
We price our traditional insurance policies based primarily upon
our own historical experience in the underwriting risk
categories that we target. We target individuals in preferred
risk categories and offer them attractive products at
competitive prices in addition to targeting more standard risks.
Persons in preferred risk categories include healthier
individuals who generally have family histories that do not
present increased mortality risk. We also have significant
expertise in evaluating people with health problems and offer
appropriately priced coverage for people who meet our
underwriting criteria.
We offer our life insurance products primarily through three
distribution channels: independent agents and financial
advisors, financial institutions, and specialty agents for BOLI.
We believe there are opportunities to expand our sales through
each of these distribution channels.
Products
Term Life
Insurance
Our term life insurance policies provide a death benefit if the
insured dies while the coverage is in force. Term life policies
have little to no cash value buildup and therefore rarely have a
payment due if and
119
when a policyholder decides to lapse the policy. As of
September 30, 2009, we had $181.5 million of reserves
associated with our term life and other traditional life
products.
Our primary term life insurance products have guaranteed level
premiums for initial terms of 10, 15, 20 or 30 years. After
the guaranteed period expires, premiums increase annually and
the policyholder has the option to continue under the current
policy by paying the increased premiums without demonstrating
insurability or qualifying for a new policy by submitting again
to the underwriting process. Coverage continues until the
insured reaches the policy expiration age or the policyholder
ceases to make premium payments or otherwise terminates the
policy, including potentially converting to a permanent plan of
insurance. The termination of coverage is called a lapse. For
newer policies, we seek to reduce lapses at the end of the
guaranteed period by gradually grading premiums to the attained
age scale of the insured over the five years following the
guaranteed period. After this phase-in period, premiums continue
to increase as the insured ages.
In 2009, we launched a new term insurance product designed
primarily for the mortgage term market. This product allows
customers to safeguard their home (often their most valuable
asset) in the event of death. This product includes an optional
return of premium feature allowing for the customer to pay
additional premiums for the comfort of knowing they will receive
back at a minimum what they paid in premiums.
We design and price our term insurance to limit the impact from
statutory reserves mandated by the valuation of life insurance
policies model regulation, also known in the insurance industry
as XXX deficiency reserves. We had $8.0 million of XXX
reserves as of September 30, 2009. Our product pricing is
not dependent on securitization of XXX deficiency reserves.
Universal
Life Insurance
Our universal life insurance policies provide policyholders with
lifetime death benefit coverage, the ability to accumulate
assets on a flexible, tax-deferred basis and the option to
access the cash value of the policy through a policy loan,
partial withdrawal or full surrender. Our universal life
products also allow policyholders to adjust the timing and
amount of premium payments. We credit premiums paid, less
certain expenses, to the policyholders account and from
that account deduct regular expense charges and certain risk
charges, known as 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 September 30,
2009, we had $677.5 million of reserves associated with
various universal life products, including variable universal
life.
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 $18.7 million of AXXX reserves as of September 30,
2009. Our product pricing is not dependent on securitization of
AXXX deficiency reserves.
Bank-Owned
Life Insurance (BOLI)
Our life insurance business also includes $3.9 billion of
BOLI statutory reserves. Many financial institutions purchased
several billion dollars of BOLI as a means of generating the
cash flow needed to fund benefit liabilities. A fixed rate BOLI
product is a highly stable, low-risk source of financing that
can offer net annual after-tax returns that are generally higher
than traditional bank investments. Over the last few years some
financial institutions bought variable BOLI products and
experienced significant volatility and write-downs associated
with those products. Our book of BOLI business is 100% fixed.
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Underwriting
and Pricing
We believe our rigorous underwriting and pricing practices are
significant drivers of the consistent profitability of our life
insurance business. Our fully underwritten term life insurance
is 50% to 90% reinsured, which limits mortality risk retained by
us. We set pricing assumptions for expected claims, lapses,
investment returns, expenses and customer demographics based on
our own relevant experience and other factors. Our strategy is
to price our products competitively for our target risk
categories and not necessarily to be equally competitive in all
categories.
Our fully underwritten policies place each insurable life
insurance applicant in one of eight primary risk categories,
depending upon current health, medical history and other
factors. Each of these eight categories has specific health
criteria, including the applicants history of using
nicotine products. We consider each life insurance application
individually and apply our guidelines to place each applicant in
the appropriate risk category, regardless of face value or net
amount at risk. We may decline an applicants request for
coverage if the applicants health or other risk factor
assessment is unacceptable to us. We do not delegate
underwriting decisions to independent sales intermediaries.
Instead, all underwriting decisions are made by our own
underwriting personnel or by our automated underwriting system.
We often share information with our reinsurers to gain their
insights on potential mortality and underwriting risks and to
benefit from their broad expertise. We use the information we
obtain from the reinsurers to help us develop effective
strategies to manage our underwriting risks. For specific
markets where fully underwritten products are not preferred by
the distributor, we have developed specially priced products to
support a simplified issue process. This process
enables us to reach applicants not called on by traditional
insurance agents. Simplified issue contracts are
typically generated via worksite sales to employees and sales to
retail bank customers. Insurance amounts are limited and
separate underwriting guidelines are applied for simplified
issue policies.
Other
Our Other segment consists primarily of unallocated surplus net
investment income, unallocated operating expenses including
interest expense on debt, tax credits from certain investments,
the results of small, non-insurance businesses that are managed
outside of our operating segments and intersegment elimination
entries.
Operating
Subsidiaries
Symetra Financial Corporation is a holding company, and we
conduct business through our subsidiaries. Our primary operating
subsidiaries are as follows:
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Name
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Operating Segment
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Other Information
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Symetra Life Insurance Company
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All segments
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Primary operating subsidiary
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First Symetra National Life Insurance Company of New York
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Primarily Retirement Services
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Clearscape Funding Corporation
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Other
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Symetra Assigned Benefits Service Company
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Income Annuities
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Structured settlements
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Symetra Securities, Inc.
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Retirement Services
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Broker-dealer; distributor
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Symetra Investment Services, Inc.
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Other
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Broker-dealer; distributor
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Medical Risk Managers, Inc.
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Group
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Managing general underwriter
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Health Network Strategies, LLC
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Group
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60% owned joint venture
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Distribution
We distribute our products through an extensive and diversified
distribution network. We believe access to a variety of
distribution channels enables us to respond effectively to
changing consumer needs and distribution trends. We compete with
other financial services companies to attract and retain
relationships in each of these channels. Some of the factors
that lead to our success in competing for sales through these
channels include amount of sales commissions and fees we pay,
breadth of our product offerings, our perceived stability and
our financial strength ratings, marketing and training we
provide and maintenance of key relationships with
121
individuals at those firms. We believe we have a well
diversified multi-channel distribution network to capture a
broad share of the distributor and consumer markets for
insurance and financial services products.
Our Group segment distributes their products through employee
benefits brokers, ASOs and TPAs.
Our Individual, Retirement Services and Income Annuities
segments distribute their products through the following
channels:
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financial institutions;
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brokerage general agencies and independent agents; and
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structure settlement specialty brokers.
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The following table sets forth our annualized first-year
premiums and deposits on new policies in our Group, Retirement
Services, Income Annuities and Individual segments:
Sales for
the Year Ended December 31, 2008
by Distribution Channel
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Segment
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Retirement
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Income
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Distribution Channel
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Group(1)
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Services(2)
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Annuities(3)
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Individual(4)
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(In millions)
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Financial institutions
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$
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$
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1,558.5
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$
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70.7
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$
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1.8
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Employee benefits brokers/TPAs
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112.6
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|
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Independent agents/BGAs
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208.0
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45.7
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5.3
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Structured settlements/BOLI
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24.4
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2.9
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(1) |
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Includes medical stop-loss, life, disability and limited medical
benefits insurance. |
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(2) |
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Includes deferred and variable annuities and retirement programs. |
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(3) |
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Includes immediate annuities and structured settlements. |
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(4) |
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Includes term, universal, single premium, BOLI and variable life
insurance. |
Financial Institutions. We have agency agreements
with 26 key financial institutions, accounting for approximately
37,000 agents and registered representatives in all
50 states and the District of Columbia. We use financial
institutions to distribute a significant portion of our fixed
and variable annuities, as well as a growing portion of our life
insurance policies.
One financial institution, JPMorgan Chase & Co.,
accounted for 45.6% and 38.2% of our total sales in 2008 and for
the nine months ended September 30, 2009, respectively,
selling primarily fixed annuity products. In September of 2008,
JPMorgan Chase & Co. (which owns the Chase banking
business) acquired the banking operations of Washington Mutual,
Inc. Prior to that acquisition, Chase and Washington Mutual each
individually accounted for a significant portion of our total
sales. We do not believe that the acquisition has negatively
affected our distribution relationship with the combined
institution.
Under our two agreements with Chase Insurance Agency, Inc. (an
affiliate of JPMorgan Chase & Co.), Chase acts as a
writing agency in distributing certain of our annuity and life
insurance products and, with the consent of the policyowner,
also acts as servicing agent with regard to those products. In
exchange for these services, we pay commissions and service fees
to Chase on premiums paid to the Company and we pay trail
commissions, which are additional periodic commissions, to Chase
based on the value of the policies outstanding. These agreements
do not have a fixed term. With respect to future business, one
of the agreements is terminable by either party upon
30 days written notice to the other party and the
other agreement is terminable upon written notice.
Employee Benefits Brokers, Third Party
Administrators. We distribute our Group segment
products through approximately 2,100 agencies in the employee
benefits broker/third party administrator channel. This
122
distribution channel is also supported by approximately 30 of
our employees located strategically across a nationwide network
of 14 regional offices.
Independent Agents, Brokerage General Agencies. We
distribute life insurance and fixed and deferred annuities
through approximately 16,000 independent agents located
throughout the United States from approximately 9,400 different
agencies. These independent agents market our products and those
of other insurance companies.
Structured Settlements. We distribute structured
settlements through approximately 560 settlement consultants
representing 85 agencies in 48 states and the District of
Columbia. We believe our ability to participate and compete
effectively in the sales of structured settlements will depend
on our ability to achieve upgrades from the ratings agencies.
Marketing
We promote and differentiate our products and services through
the breadth of our product offerings, technology services,
specialized support for our distributors and innovative
marketing programs to help distributors grow their business with
our products.
We have customized our marketing approach to promote our brand
to distributors of our products whom we believe have the most
influence in our customers purchasing decisions. We built
our brand among this constituency in three phases: an outreach
to our employees to understand and deliver on the brand, an
outreach to our independent producers in our sales channels and
a prudent consumer outreach. These programs include advertising
in trade and business periodicals, consumer advertising with a
small, prudent budget leveraged by its ties to our producers,
media outreach to both trade and consumer periodicals and
community outreach, including partnering with distributors.
At the product level, we simplify the sales process so that the
recommendation to purchase our product is as easy and seamless
as possible. This is accomplished through our product
collateral, technology in the sales process and ease of service
after the sale.
We seek to build recognition of our brand and maintain strong
relationships with leading distributors by providing a high
level of specialized support, such as product training, sales
solutions, and financial product design for targeted customers.
Reserves
Overview
We calculate and maintain reserves for estimated future benefit
payments to our policyholders and contractholders in accordance
with U.S. GAAP. We establish reserves at amounts that we
expect to be sufficient to satisfy our policy obligations. We
release these reserves as those future obligations are
extinguished. The reserves we establish necessarily reflect
estimates and actuarial assumptions with regard to our future
experience. These estimates and actuarial assumptions involve
the exercise of significant judgment. Our future financial
results depend significantly upon the extent to which our actual
future experience is consistent with the assumptions we have
used in pricing our products and determining our reserves. Many
factors can affect future experience, including economic and
social conditions, inflation, healthcare costs, changes in
doctrines of legal liability and damage awards in litigation.
Therefore, we cannot determine with complete precision the
ultimate amounts we will pay for actual future benefits or the
timing of those payments.
Individual
and Group Life Insurance and Group Health
Insurance
We establish reserves for life insurance policies based upon
generally recognized actuarial methods. We use mortality tables
in general use in the United States, modified where appropriate
to reflect relevant historical experience and our underwriting
practices. Persistency, expense and interest rate assumptions
are based upon relevant experience and expectations for future
development.
123
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. The BOLI life reserves were reset
to fair value on the date of the Acquisition.
Our reserves for unpaid group life and health insurance claims,
including our stop-loss medical and other lines, are estimates
of the ultimate net cost of both reported losses that have not
yet been settled and incurred but as yet unreported losses.
Reserves for incurred but as yet unreported claims are based
upon historic incidence rates, severity rates, reporting delays
and any known events that we believe will materially affect
claim levels.
Reserves for long-term disability 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 insurance policies consist of payments to
be made periodically, generally monthly, in accordance with the
contractual terms of the policy.
Retirement
Services and Income Annuities
For our investment contracts, which are primarily deferred
annuities, contractholder liabilities are equal to the
accumulated contract account values, which generally consist of
an accumulation of deposit payments, less withdrawals, plus
investment earnings and interest credited to the account, less
expense, mortality and product charges, if applicable. We also
maintain a separate reserve for any expected future payments in
excess of the account value due to the potential death of the
contractholder. The reserves were reset to fair value on the
date of the Acquisition.
Reserves for future policy benefits on our immediate fixed
annuity contracts are calculated based upon actuarial
assumptions regarding the interest to be earned on the assets
underlying the reserves and, if applicable, the annuitants
life expectancy. The reserves were reset to fair value on the
date of the Acquisition, with adjustments to future interest and
mortality assumptions.
Investments
Investment
Management Overview
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.
For each of our operating segments and for our unallocated
surplus, we separate our investments into one or more distinct
portfolios. Our investment strategy for each portfolio is based
on the expected cash flow characteristics of the portion of the
liabilities of the business segment associated with the
portfolio. The strategies are regularly monitored through a
review of portfolio metrics, such as effective duration, yield
curve sensitivity, convexity, liquidity, asset sector
concentration and credit quality.
In general, we purchase high quality assets to pursue the
following investment strategies for our operating segments:
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Group. We invest in short duration fixed income
corporate bonds.
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Retirement Services. We invest in short to medium
duration fixed income corporate bonds, mortgage backed
securities, commercial loans and a modest amount of below
investment grade bonds.
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Income Annuities. The Income Annuities segment has
liability payments that run well beyond 40 years. The majority
of the segments portfolio is invested in long duration
fixed income corporate bonds, mortgage-backed securities and
commercial loans. In addition, we invest in equities to support
liability payments due more than 40 years in the future.
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124
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Individual. We invest in medium to long duration
fixed income corporate bonds, mortgage-backed securities,
commercial mortgages and a modest amount of below investment
grade bonds.
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Other. We invest in short to medium duration fixed
income assets.
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We are exposed to three primary sources of investment risk:
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Credit risk risk relating to the uncertainty
associated with the continued ability of a given obligor to make
timely payments of principal and interest;
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Interest rate and credit spread risk risk
relating to the market price
and/or cash
flow variability associated with changes in market yield curves
and credit spreads; and
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Equity risk risk relating to adverse
fluctuations in a particular common stock.
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Our ability to manage these risks while generating an
appropriate investment return is essential to our business and
our profitability.
We manage credit risk by analyzing issuers, transaction
structures and, for our commercial mortgage portfolio, real
estate properties. We use analytic techniques to monitor credit
risk. For example, we regularly measure the probability of
credit default and estimated loss in the event of such a
default, which provides us with early notification of worsening
credit. If an issuer downgrade causes our holdings of that
issuer to exceed our risk thresholds, we automatically undertake
a detailed review of the issuers credit. We also manage
credit risk through industry and issuer diversification and
asset allocation practices. For commercial real estate loans, we
manage credit risk through geographic and product-type
diversification and asset allocation. We routinely review
different issuers and sectors and conduct more formal quarterly
portfolio reviews.
We mitigate interest rate and credit spread risk through
rigorous management of the relationship between the duration of
our assets and the duration of our liabilities, seeking to
minimize risk of loss in both rising and falling interest rate
and widening credit spread environments.
We mitigate equity risk by limiting the size of our equity
portfolio to correlate with our exposure to long duration
obligations in our income annuities segment and the ability of
our capital base to absorb downside volatility without creating
capital ratio stress
and/or
constraints on growth. We invest in relatively concentrated
positions in the United States and other developed markets. The
investments are identified using a
bottom-up
fundamental analysis and value oriented investment approach.
Portfolio
Managers
Other than our commercial mortgage portfolio, which is managed
by our employees, we have hired professional investment advisors
to invest our assets. As of September 30, 2009, our
$18.4 billion (amortized cost) fixed income portfolio is
managed by White Mountains Advisors LLC, or WM Advisors, and our
$0.2 billion equity portfolio is managed by Prospector
Partners, LLC, or Prospector.
WM Advisors seeks 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. WM Advisors directly invests
the bulk of our fixed income investments, while hiring
sub-advisors
for private placements, high yield bonds and bank loans. The
sub-advisors
work under WM Advisors direction to manage our credit and
interest rate risk and preserve the integrity of our
asset/liability matching. The
sub-advisors
are:
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Principal Global Investors, or
Principal. Principal manages our investment grade
private placement portfolio and some fallen angel below
investment grade assets. As of September 30, 2009,
Principal managed approximately $1.5 billion of our asset
portfolio.
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Pioneer Investment Management, or
Pioneer. Pioneer manages our high yield
investment portfolio. Pioneer seeks to generate high current
yield while preserving principal. As of September 30, 2009,
Pioneer managed approximately $0.3 billion of our asset
portfolio.
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Wellington Management, or Wellington.
Wellington manages our bank loan portfolio and some fallen angel
below investment grade assets. As of September 30, 2009,
Wellington managed approximately $44.0 million of our asset
portfolio.
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125
Prospector manages our equity portfolio. Prospectors
investment strategy is to maximize absolute total return through
investments in a variety of equity and equity-related
instruments, including convertible preferred and convertible
debt securities.
Our in-house mortgage loan department originates new commercial
mortgage loans and manages our existing commercial loan
portfolio. The commercial mortgage holdings are whole loans
secured by first liens on income producing properties. There are
no construction, development or land loans in the portfolio.
Over our 35 year history in this asset class, we have had
very strong investment experience through all parts of the real
estate cycle. This success is attributed to underwriting
standards that include large equity and debt service coverage
requirements, and strong real estate and borrower analysis.
Typically the loans have personal recourse. All aspects of the
investment process including origination, due diligence,
underwriting, approval and closing are handled internally.
For further information on our investment portfolio, see
Managements Discussion and Analysis of Financial
Condition and Results of Operations
Investments and Certain Relationships and Related
Transactions.
Reinsurance
We engage in the industry practice of reinsuring portions of our
insurance risk with reinsurance companies through both treaty
and facultative reinsurance agreements. We use reinsurance to
diversify our risks and manage loss exposures primarily in our
Group and Individual segments. The use of reinsurance permits us
to write policies in amounts larger than the risk we are willing
to retain.
We cede insurance primarily on a treaty basis, under which risks
are ceded to a reinsurer on specific books of business where the
underlying risks meet certain predetermined criteria. To a
lesser extent, we cede insurance risks on a facultative basis,
under which the reinsurers prior approval is required on
each risk reinsured. The use of reinsurance does not discharge
us, as the insurer, from liability on the insurance ceded. We,
as the insurer, are required to pay the full amount of our
insurance obligations even in circumstances where we are
entitled or able to receive payments from our reinsurer. The
principal reinsurers to which we cede risks have A.M. Best
financial strength ratings ranging from A+ to
A-.
We had reinsurance recoverables of $269.9 million and
$264.2 million as of September 30, 2009 and
December 31, 2008, respectively. The following table sets
forth our exposure to our principal reinsurers, including
reinsurance recoverables as of September 30, 2009 and the
A.M. Best ratings of those reinsurers as of that date:
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Reinsurance
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A.M. Best
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Recoverable
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Rating
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(In millions)
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RGA Reinsurance Company
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$
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100.1
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A+
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Transamerica Life Insurance Company
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70.1
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A
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UNUM Life Insurance Company of America (UNUM)
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49.8
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A−
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Lincoln National Life Insurance Company
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23.5
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A+
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In the table above, the reinsurance recoverables under our
agreements with RGA, UNUM and Lincoln represent our reinsurance
exposure to these parties under the reinsurance policies. The
reinsurance recoverable under our agreement with Transamerica
represents the assets withheld for our share of the coinsurance
policy.
Under most of our reinsurance agreements, we obtain reinsurance
to mitigate some or all of the risk of the policies we issue,
particularly the risk of substantial loss from death of an
individual or catastrophic loss, and in other cases where the
reinsurer offers a particular expertise. Some of these
agreements are coinsurance arrangements, whereby we only obtain
reinsurance for a portion of the risk, and retain the remainder.
In some cases, we instead act as a reinsurer (or coinsurer) of
another life insurance company.
126
The following is a brief summary of our reinsurance agreements
with the parties listed in the table above:
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RGA Reinsurance Company. Under our agreements
with RGA, RGA reinsures the risk of a large loss on term life
insurance and universal life insurance policies. These are
typically coinsurance or yearly renewable term arrangements,
whereby we cede 50% or more of the claims liability to RGA.
Reinsurance premiums are determined according to the amount
reinsured with RGA per policy. These agreements do not have a
fixed term. Either party can terminate these agreements with
respect to future business with 90 days written
notice to the other party.
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Transamerica Life Insurance Company. Under an
agreement with Transamerica, we act as their reinsurer with
respect to 28.6% of a BOLI policy. BOLI is life insurance
purchased by a bank to insure the lives of bank employees,
usually officers and other highly compensated employees. BOLI
policies are commonly used by banks to fund employee pension
plans and benefit plans. Transamerica invests the policy
premiums paid by the bank, and manages those investments subject
to the terms of the policy. We have assumed 28.6% of the claims
liability under this policy, and receive 28.6% of the proceeds
generated under the policy. The term of this agreement is
perpetual. We are only allowed to terminate this agreement in
the event Transamerica fails to pay amounts due to us under this
agreement or in the event of fraud, misrepresentation or breach
of this agreement by Transamerica.
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UNUM Life Insurance Company of America. We
cede all of our Group Long-Term-Disability and
Short-Term-Disability claims liability through a reinsurance
pool under agreements with the administrator of the pool,
Reliance Standard Life Insurance Company (Reliance),
as Managing Agent for each participating reinsurer in the pool
and as a participating reinsurer in its own right. The pool of
reinsurers and their participation levels may change each
agreement year for new claims. Reliance has been the sole pool
participant for agreement years 2006 and later. UNUM maintained
the highest level of participation for agreement years prior to
2006. On an aggregate basis, UNUM currently reinsures the
substantial majority of existing Group Long-Term-Disability and
Short-Term-Disability 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. These agreements
do not have a fixed term. Either party can terminate the
agreement with respect to future business by providing
90 days written notice to the other.
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Lincoln National Life Insurance Company. Under
our agreements with Lincoln, we primarily cede claims liability
under 10, 15 and
20-year term
life insurance policies to Lincoln. These are typically
coinsurance arrangements, whereby we cede 50% or more of the
claims liability to Lincoln. Reinsurance premiums are determined
in proportion to the amount reinsured with Lincoln per policy.
These agreements do not have a fixed term. Either party can
terminate these agreements with respect to future business upon
90 days written notice to the other party.
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Risk
Management
Overview
Risk management is a critical part of our business and we have
adopted risk management processes in virtually every aspect of
our operations, including product development, underwriting,
investment management, asset/liability management and technology
development projects. The primary objective of these risk
management processes is to reduce the variations we experience
from our expected results.
We use a risk model that draws on the risk-based capital
concepts. Risks are classified into four main categories:
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pricing risks, including determination of adequate spreads or
premiums, and estimation of claims, both expected and
catastrophic;
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interest rate risk, including asset liability duration matching
exposures; and
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other business risks, including business continuity, data
security and other operational risks.
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Operations
and Technology
Service
and Support
We have a dedicated team of service and support personnel, as
well as Affiliated Computer Services, or ACS, based in Dallas,
Texas, our outsourced provider, that deliver automation
solutions to drive competitive advantage, to achieve earnings
growth objectives and to 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.
Operating
Centers
In August 2009, we signed a new outsourcing agreement with ACS.
The renewal of the agreement expires in July 2014, with two
one-year extensions at our election. The scope of the contract
with ACS includes the management of the following:
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data center: mainframe, Wintel systems, storage, web services
and disaster recovery;
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distributed computing: field office services, desktop support
and asset management;
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data network: network infrastructure, carrier services and
secured remote access;
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voice communications: voice systems, wireless and contact center
technologies;
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help desk supporting: infrastructure, packaged software and
password resets;
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output processing: print and mail fulfillment, archive and
online viewing; and
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content management: imaging and content management system.
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Under this agreement, we are obligated to pay an annual service
fee of approximately $10.8 million. These fees are subject
to adjustments based on a variety of factors, including product
utilization and reductions for failure to meet service level
standards.
The agreement may be terminated by us for convenience prior to
the end of the five-year term upon ninety days notice and
payment by us of a termination fee, which is currently
$4.7 million if the entire agreement is terminated. The
termination fee generally declines over time and is pro-rated
based on which service(s) are terminated and their related fixed
and variable costs, including depreciable asset and investment
costs and
non-amortizable
investment costs. In the event of termination, we have the right
to acquire hardware and software assets used by ACS to provide
services to us.
On September 28, 2009, ACS and Xerox Corporation announced
a definitive agreement for Xerox to acquire ACS. We do not
currently believe that this acquisition will materially affect
our relationship with ACS.
Competition
We face significant competition for customers and distributors
from insurance and other financial services companies in each of
our businesses. Our competitors include other large and highly
rated insurance carriers. Some of these competitors have greater
resources than we do, and many of them offer similar products
and use similar distribution channels. Competition in our
operating business segments is based on a number of factors,
including:
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quality of service;
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product features;
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price;
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commissions;
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ability to purchase attractive assets;
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scope of distribution;
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financial strength ratings; and
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name recognition.
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The relative importance of these factors depends on the
particular product and market. We compete for customers and
distributors with insurance companies and other financial
services companies in our various businesses.
Financial
Strength Ratings
Rating organizations continually review the financial
performance and condition of most insurers and provide financial
strength ratings based on a companys operating performance
and ability to meet obligations to policyholders. Ratings
provide both industry participants and insurance consumers
meaningful information on specific insurance companies and are
an important factor in establishing the competitive position of
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, S&P, Moodys and Fitch as follows as
of September 30, 2009:
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Financial Strength Rating
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Financial Strength Ratings
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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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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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**
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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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Represents the senior debt rating. |
A.M. Best states that its A (Excellent)
financial strength rating is assigned to those companies that
have, in its opinion, an excellent ability to meet their ongoing
obligations to policyholders. The A (Excellent) is
the third highest of 16 ratings assigned by A.M. Best,
which range from A++ to S.
A.M. Best describes its a issuer credit rating
for insurers as excellent, assigned to those
companies that have, in its opinion, a strong ability to meet
the terms of their ongoing senior financial obligations. Its
bbb issuer credit rating is described as
good, assigned to those companies that have, in its
opinion, an adequate ability to meet the terms of their
obligations but are more susceptible to changes in economic or
other conditions. A.M. Best issuer credit ratings range
from aaa (exceptional) to rs (regulatory
supervision/liquidation) and may be enhanced with a
+ (plus) or − (minus) to
indicate whether credit quality is near the top or bottom of a
category.
Symetra Life Insurance Company and First Symetra National Life
Insurance Company of New Yorks Financial Size Category, or
FSC, rankings, as determined by A.M. Best, are both XIII,
the third highest of 15. A.M. Best indicates that the
FSC is designed to provide an indicator of the size of a company
in terms of its statutory surplus and related accounts.
Standard & Poors states that an insurer with a
financial strength rating of A (Strong) has strong
financial security characteristics that outweigh any
vulnerabilities, and is highly likely to have the ability to
meet financial commitments, but is somewhat more likely to be
affected by adverse business conditions than
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are insurers with higher ratings. The A range is the
third highest of the four ratings ranges that meet these
criteria, and also is the third highest of nine financial
strength ratings ranges assigned by S&P, which range from
AAA to R. A plus (+) or minus (-) shows
relative standing in a rating category. Accordingly, the
A rating is the sixth highest of S&Ps 21
ratings categories. S&P describes companies assigned an
A issuer credit rating as having a strong capacity
to meet financial commitments, but somewhat more susceptible to
the adverse effects of changes in circumstances and economic
conditions than higher-rated companies. Companies assigned a
BBB issuer credit rating have adequate capacity to
meet financial commitments, but adverse economic conditions are
more likely to lead to a weakened capacity to meet such
commitments. S&P issuer credit ratings range from
AAA to D, indicating default.
Moodys Investors Service states that insurance companies
rated A3 (Good) offer good financial security.
However, elements may be present that suggest a susceptibility
to impairment sometime in the future. The A range is
the third highest of nine financial strength rating ranges
assigned by Moodys which range from Aaa to
C. Numeric modifiers are used to refer to the
ranking within the group, with 1 being the highest
and 3 being the lowest. Accordingly, the
A3 rating is the seventh highest of Moodys 21
ratings categories. Moodys credit rating is assigned to
our senior debt. A rating of Baa is defined as
subject to moderate credit risk, considered medium-grade, and
may possess certain speculative characteristics.
Fitch states that insurance companies with a financial strength
rating of A+ (Strong) are viewed as possessing
strong capacity to meet policyholder and contract obligations.
Risk factors are moderate, and the impact of any adverse
business and economic factors is expected to be small. The
A rating category is the third highest of eight
financial strength categories, which range from AAA
to D. The symbol (+) or (-) may be appended to a
rating to indicate the relative position of a credit within a
rating category. These suffixes are not added to ratings in the
AAA category or to ratings below the CCC
category. Accordingly, the A+ rating is the fifth
highest of Fitchs 24 financial strength ratings
categories. Fitch describes its A- issuer default
rating as high credit quality, which denotes an
expectation of low default risk, but may be more vulnerable to
adverse business or economic conditions than higher ratings.
Fitch issuer default ratings range from AAA (highest
credit quality) to D (default).
A.M. Best, S&P, Moodys and Fitch review their
ratings periodically and we cannot assure you that we will
maintain our current ratings in the future. Other agencies may
rate Symetra or our insurance subsidiaries on a solicited or
unsolicited basis.
The A.M. Best, S&P, Moodys and Fitch ratings
included are not designed to be, and do not serve as, measures
of protection or valuation offered to investors in this
offering. These financial strength ratings should not be relied
on with respect to making an investment in our securities.
Employees
As of September 30, 2009, we had approximately
1,100 full-time and part-time employees. We believe our
employee relations are satisfactory. To the best of our
knowledge, none of our employees is subject to a collective
bargaining agreement.
Facilities
We lease approximately 350,000 square feet of office space
in various locations throughout the United States, which
consists primarily of 292,000 square feet of office space
at our headquarters in Bellevue, Washington.
Most of our leases have lease terms ranging from one to ten
years. Our aggregate annual rental expense under these leases
was $8.0 million during 2008.
We believe our properties are adequate for our business as
presently conducted.
Legal
Proceedings
We are regularly a party to litigation, arbitration proceedings
and governmental examinations in the ordinary course of our
business. While we cannot predict the outcome of any pending or
future litigation or examination, we do not believe that any
pending matter, individually or in the aggregate, will have a
material adverse effect on our business.
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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 SEC, FINRA and state securities
authorities regulate these products.
Our broker-dealers are subject to federal and state securities
and related laws. The SEC, FINRA and state securities
authorities are the principal regulators of these operations.
The purpose of the laws and regulations affecting our insurance
and securities businesses is primarily to protect our customers
and not our noteholders or stockholders. Many of the laws and
regulations to which we are subject are regularly re-examined,
and existing or future laws and regulations may become more
restrictive or otherwise adversely affect our operations.
In addition, insurance and securities regulatory authorities
increasingly make inquiries regarding compliance by us and our
subsidiaries with insurance, securities and other laws and
regulations regarding the conduct of our insurance and
securities businesses. We cooperate with such inquiries and take
corrective action when warranted.
Many of our customers and agents also operate in regulated
environments. Changes in the regulations that affect their
operations also may affect our business relationships with them
and their ability to purchase or to distribute our products.
Insurance
Regulation
Our insurance subsidiaries are licensed and regulated in all
states in which they conduct insurance business. The extent of
this regulation varies, but most states have laws and
regulations governing the financial condition of insurers,
including standards of solvency, types and concentration of
investments, establishment and maintenance of reserves, credit
for reinsurance and requirements of capital adequacy, and the
business conduct of insurers, including marketing and sales
practices and claims handling. In addition, statutes and
regulations usually require the licensing of insurers and their
agents, the approval of policy forms and related 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 to its financial needs. Statutory surplus is the excess
of admitted assets over statutory liabilities. For certain types
of agreements and transactions between an insurer and its
affiliates, these laws and regulations require prior
notification to, and non-disapproval or approval by, the
insurance regulatory authority of the insurers state of
domicile.
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Policy
Forms
Our insurance subsidiaries policy forms are subject to
regulation in every state in which such subsidiaries are
licensed to transact insurance business. In most states, policy
forms must be filed prior to their use.
Dividend
Limitations
As a holding company with no significant business operations of
its own, Symetra depends on dividends or other distributions
from its subsidiaries as the principal source of cash to meet
its obligations, including the payment of interest on and
repayment of principal of any debt obligations and payment of
dividends to stockholders and stock repurchases. The payment of
dividends or other distributions to Symetra by its insurance
subsidiaries is regulated by the insurance laws and regulations
of their respective states of domicile. In the state of
Washington, the state of domicile of Symetras principal
insurance subsidiary, Symetra Life Insurance Company, an
insurance company subsidiary may not pay an
extraordinary dividend or distribution until
30 days after the insurance commissioner has received
sufficient notice of the intended payment and has not objected
or has approved the payment within the
30-day
period. An extraordinary dividend or distribution is
defined under Washington law as a dividend or distribution that,
together with other dividends and distributions made within the
preceding twelve months, exceeds the greater of:
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10% of the insurers statutory surplus as of the
immediately prior year end; or
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the statutory net gain from the insurers operations for
the prior year.
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State laws and regulations also prohibit an insurer from
declaring or paying a dividend except out of its statutory
surplus or require the insurer to obtain regulatory approval
before it may do so. In addition, insurance regulators may
prohibit the payment of ordinary dividends or other payments by
our insurance subsidiaries to Symetra (such as a payment under a
tax sharing agreement or for employee or other services) if they
determine that such payment could be adverse to our
policyholders or contractholders.
Market
Conduct Regulation
The laws and regulations of U.S. jurisdictions include
numerous provisions governing the marketplace activities of
insurers, including provisions governing the form and content of
disclosure to consumers, product illustrations, advertising,
product replacement, suitability, sales and underwriting
practices, complaint handling and claims handling. State
jurisdictions generally enforce these provisions through
periodic market conduct examinations.
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 NAIC.
In the three-year period ended December 31, 2008 and
through September 30, 2009, we have not received any
material adverse findings resulting from any insurance
department examinations of our insurance subsidiaries.
Guaranty
Associations and Similar Arrangements
Most states require life insurers licensed to write insurance
within the state to participate in guaranty associations, which
are organized to pay contractual benefits owed pursuant to
insurance policies of insurers who become impaired or insolvent.
These associations levy assessments, up to prescribed limits, on
all member insurers in a particular state on the basis of the
proportionate share of the premiums written by member insurers
in the lines of business in which the impaired, insolvent or
failed insurer is engaged. Some states permit member insurers to
recover assessments paid through full or partial premium tax
offsets.
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We had net aggregate assessments (refunds) levied against or
received by our insurance subsidiaries totaling
$(1.6) million, $0.1 million, $0.2 million and
$0.2 million for the nine months ended September 30,
2009 and for the years ended December 31, 2008, 2007 and
2006, respectively. Included in the net amount above are refunds
totaling $2.2 million received during the nine months ended
September 30, 2009, primarily from two states related to
assessments we paid prior to 1998. Although the amount and
timing of future assessments are not predictable, we have
established reserves for guaranty fund assessments that we
consider adequate for assessments with respect to insurers that
currently are subject to insolvency proceedings. In
December 2009, we were provided information by the National
Organization of Life and Health Guaranty Associations pertaining
to estimated future assessments payable by us to various state
guaranty fund associations. As a result, we increased our net
guaranty fund liability by $2.0 million.
Change
of Control
The laws and regulations of the states in which our insurance
subsidiaries are domiciled require that a person obtain the
approval of the insurance commissioner of the insurance
companys jurisdiction of domicile prior to acquiring
control of the insurer. Generally, such laws provide that
control over an insurer is presumed to exist if any person,
directly or indirectly, owns, controls, holds with the power to
vote, or holds proxies representing 10% or more of the voting
securities of the insurer. In considering an application to
acquire control of an insurer, the insurance commissioner
generally will consider such factors as the experience,
competence and financial strength of the applicant, the
integrity of the applicants board of directors and
executive officers, the acquirors plans for the management
and operation of the insurer, and any anti-competitive results
that may arise from the acquisition. In addition, a person
seeking to acquire control of an insurance company is required
in some states to make filings prior to completing an
acquisition if the acquiror and the target insurance company and
their affiliates have sufficiently large market shares in
particular lines of insurance in those states. Approval of an
acquisition may not be required in these states, but the state
insurance departments could take action to impose conditions on
an acquisition that could delay or prevent its consummation.
These laws may discourage potential acquisition proposals and
may delay, deter or prevent a change of control involving us,
including through transactions, and in particular unsolicited
transactions, that some or all of our stockholders might
consider to be desirable.
Policy
and Contract Reserve Sufficiency Analysis
Under the laws and regulations of their states of domicile, our
life insurance subsidiaries are required to conduct annual
analyses of the sufficiency of their life and health insurance
and annuity statutory reserves. In addition, other jurisdictions
in which these subsidiaries are licensed may have certain
reserve requirements that differ from those of their domiciliary
jurisdictions. In each case, a qualified actuary must submit an
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.
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Risk-based
Capital
The NAIC has established risk-based capital standards for life
insurance companies as well as a model act with the intention
that these standards be applied at the state level. The model
act provides that life insurance companies must submit an annual
risk-based capital report to state regulators reporting their
risk-based capital based upon four categories of risk: asset
risk, insurance risk, interest rate risk and business risk. For
each category, the capital requirement is determined by applying
factors to various asset, premium and reserve items, with the
factor being higher for those items with greater underlying risk
and lower for less risky items. The formula is intended to be
used by insurance regulators as an early warning tool to
identify possible weakly capitalized companies for purposes of
initiating further regulatory action.
If an insurers risk-based capital falls below specified
levels, the insurer would be subject to different degrees of
regulatory action depending upon the level. These actions range
from requiring the insurer to propose actions to correct the
capital deficiency to placing the insurer under regulatory
control. As of September 30, 2009, the risk-based capital
of each of our life insurance subsidiaries exceeded the level of
risk-based capital that would require any of them to take or
become subject to any corrective action.
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 may be 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, they are
registered under the Securities Act of 1933 (or are exempt from
registration) and are subject to regulation by the SEC, FINRA
and state securities authorities. Federal and state securities
regulation similar to that discussed below under
Other Laws and Regulations
Securities Regulation affect investment advice, sales and
related activities with respect to these products.
Although the federal government does not comprehensively
regulate the business of insurance, federal legislation and
administrative policies in several other areas, including
taxation, privacy regulation, financial services regulation and
pension and welfare benefits regulation, can also significantly
affect the insurance industry.
From time to time, federal measures are proposed that may
significantly affect the insurance business, including direct
federal regulation of insurance through an optional federal
charter, enhanced federal oversight
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of insurance through a Federal Insurance Office, comprehensive
health care reform, limitations on antitrust immunity, tax
incentives for lifetime annuity payouts, simplification bills
affecting tax-advantaged or tax-exempt savings and retirement
vehicles, and proposals to modify or make permanent the estate
tax repeal enacted in 2001. We cannot predict whether these or
other proposals will be adopted, or what impact, if any, such
proposals may have on our business.
Changes
in Tax Laws
Congress, from time to time, considers legislation that could
make our products less attractive to consumers, including
legislation that would reduce or eliminate the benefits derived
from the tax deferred nature of life insurance and annuity
products.
In addition, changes in tax laws could increase our tax
liability or increase our reporting obligations. For example, in
May 2009, President Obama released additional information about
the tax proposals contained in his Fiscal Year 2010 Budget (the
Budget). There are several proposals included in the
Budget that are significant for life insurance companies. Those
proposals include modifying the dividends-received deduction for
life insurance company separate accounts; requiring information
reporting for private separate accounts of life insurance
companies; imposing new reporting requirements and
transfer-for-value
rules on purchasers of certain life insurance contracts;
expanding the interest expense disallowance for corporate-owned
life insurance; requiring information reporting on payments to
corporations; and increasing information return penalties. In
addition, certain recent proposals for healthcare reform have
included potential tax ramifications, including, among other
things, a windfall profits tax on health insurers. These
proposals not only could increase our tax liabilities but also
could reduce the attractiveness of certain products we sell.
These proposals may not be enacted or may be modified by
Congress prior to enactment.
Furthermore, the federal estate tax, which has undergone a
gradual repeal since 2001 that will continue to be phased in
through 2010, is scheduled to revert to pre-2001 law as of
January 1, 2011. The repeal of and continuing uncertainty
regarding the federal estate tax may adversely affect sales and
surrenders of some of our estate planning products.
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, the FINRA, as well
as by various state and local regulators. The registered
representatives of our broker-dealers are also regulated by the
SEC and FINRA and are also subject to applicable state and local
laws.
These laws and regulations are primarily intended to protect
investors in the securities markets and generally grant
supervisory agencies broad administrative powers, including the
power to limit or restrict the conduct of business for failure
to comply with such laws and regulations. In such event, the
possible sanctions that may be imposed include suspension of
individual employees, suspension or limitation of sales of our
products, limitations on the activities in which the investment
adviser or broker-dealer may engage, suspension or revocation of
the investment adviser or broker-dealer registration, censure or
fines. We may also be subject to similar laws and regulations in
the states in which we provide investment advisory services,
offer the products described above, or conduct other
securities-related activities.
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Certain of our subsidiaries also sponsor and manage investment
vehicles and issue annuities that rely on certain exemptions
from registration under the Investment Company Act of 1940 and
the Securities Act of 1933. Nevertheless, certain provisions of
the Investment Company Act of 1940 and the Securities Act of
1933 apply to these investment vehicles and the securities
issued by such vehicles. The Investment Company Act of 1940, the
Investment Advisers Act of 1940 and the Securities Act of 1933,
including the rules promulgated thereunder, are subject to
change which may affect our subsidiaries that sponsor and manage
such investment vehicles. Our costs may increase or we may exit
markets to the extent certain of our vehicles and annuities are
required to comply with increased regulation and liability under
the securities laws.
ERISA
and Internal Revenue Code Considerations
We provide certain products and services to certain employee
benefits plans that are subject to ERISA or the Internal Revenue
Code. As such, our activities are subject to the restrictions
imposed by ERISA and the Internal Revenue Code, including the
requirement under ERISA that fiduciaries must perform their
duties solely in the interests of ERISA plan participants and
beneficiaries and the requirement under ERISA and the Internal
Revenue Code that fiduciaries may not cause a covered plan to
engage in certain prohibited transactions with persons who have
certain relationships with respect to such plans. The applicable
provisions of ERISA and the Internal Revenue Code are subject to
enforcement by the U.S. Department of Labor, the IRS and
the Pension Benefit Guaranty Corporation.
USA
Patriot Act
The USA Patriot Act of 2001, or the Patriot Act, which was
renewed for an additional four years in 2006, contains
anti-money laundering and financial transparency laws and
mandates the implementation of various new regulations
applicable to broker-dealers and other financial services
companies including insurance companies. The Patriot Act seeks
to promote cooperation among financial institutions, regulators
and law enforcement entities in identifying parties that may be
involved in terrorism or money laundering. The increased
obligations of financial institutions to identify their
customers, watch for and report suspicious transactions, respond
to requests for information by regulatory authorities and law
enforcement agencies, and share information with other financial
institutions, require the implementation and maintenance of
internal practices, procedures and controls. We believe that we
have implemented, and that we maintain, appropriate internal
practices, procedures and controls to enable us to comply with
the provisions of the Patriot Act.
Privacy
of Consumer Information
U.S. federal and state laws and regulations require
financial institutions, including insurance companies, to
protect the security and confidentiality of consumer financial
information and to notify consumers about their policies and
practices relating to their collection and disclosure of
consumer information and their 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.
136
MANAGEMENT
Directors
and Executive Officers
Set forth below is a list of the directors and principal
executive officers of Symetra as of January 1, 2010.
The positions listed are of Symetra unless otherwise indicated.
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Name
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Age
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Positions
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Lowndes A. Smith
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70
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Director, Chairman of the Board
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Lois W. Grady
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65
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Director, Vice Chairman of the Board
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Randall H. Talbot
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56
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Director, President and Chief Executive Officer
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Margaret A. Meister
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45
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Executive Vice President and Chief Financial Officer
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Jennifer V. Davies
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51
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Senior Vice President Enterprise Development
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Michael W. Fry
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48
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Senior Vice President Group Division, Symetra Life
Insurance Company
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Richard J. Lindsay
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53
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Senior Vice President Life & Annuities
Division, Symetra Life Insurance Company
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Patrick B. McCormick
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52
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Senior Vice President Distribution, Symetra Life
Insurance Company
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George C. Pagos
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59
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Senior Vice President, General Counsel and Secretary
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Tommie D. Brooks
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39
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Vice President and Chief Actuary Symetra Life
Insurance Company
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Christine A. Katzmar Holmes
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50
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Vice President Human Resources and Administration
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Troy J. Olson-Blair
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54
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Vice President Information Technology
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David T. Foy
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43
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Director
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Sander M. Levy
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48
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Director
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Robert R. Lusardi
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53
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Director
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David I. Schamis
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36
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Director
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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 CEO 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. and is a director of
White Mountains Insurance Group, Ltd. and 76 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 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. Ms. Grady received her B.S. degree
from Southern Connecticut State University.
Randall H. Talbot has been a director, Chief Executive
Officer and President of Symetra since August 2004 and
director and President of Symetra Life Insurance Company since
joining in February 1998. He is also an officer and director of
various affiliates of Symetra. From 1988 to 1998, he was Chief
Executive Officer and President of Talbot Financial Corporation.
Mr. Talbot is also a director of Concur Technologies, Inc.
He received his B.S. degree from Arizona State 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. She joined Symetra Life
137
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.
Jennifer V. Davies has been Senior Vice President of
Symetra since June 2007 and of Symetra Life Insurance Company
since August 2004 and is responsible for Enterprise Development.
She is also a director of Symetra Life Insurance Company as well
as an officer and director of various affiliates of Symetra.
Ms. Davies joined Symetra Life Insurance Company in 1992,
and served in a variety of positions, including Vice President,
prior to being promoted to her current position. Ms. Davies
was employed by Sons of Norway from 1986 to 1992, and
ITT/Hartford Life Insurance Company from 1982 to 1986.
Ms. Davies received her B.A. degree from the University of
Minnesota and her M.A. degree from the University of Virginia.
Michael W. Fry has been Senior Vice President of Symetra
Life Insurance Company since May 2008 and is responsible for the
operations of its Group Division. He also serves as an officer
and director of various Symetra affiliates. Prior to his current
position, Mr. Fry served as Vice President of Symetra Life
Insurance Company from February 2003 until May 2008. Prior to
joining Symetra in August 2002, Mr. Fry was Vice President
of Swiss Res Group Division. Mr. Fry graduated from
Indiana University with a degree in Accounting.
Richard J. Lindsay has been Senior Vice President of
Symetra Life Insurance Company since August 2006 and is
responsible for the operations of its Life & Annuities
Division. He also serves as an officer and director of other
various Symetra affiliates. Prior to joining Symetra Life
Insurance Company, Mr. Lindsay had worked for AIG VALIC
since 1998, where his last position was as an Executive Vice
President of AIG VALIC and as President of VALIC Financial
Advisors, an affiliated broker-dealer. Prior to joining AIG
VALIC, Mr. Lindsay spent 11 years with CoreStates
Financial Corp. Mr. Lindsay received his B.A. degree from
Brown University, his M.B.A. degree from Wharton School of the
University of Pennsylvania, and his J.D. degree from Temple
University.
Patrick B. McCormick has been Senior Vice President of
Symetra Life Insurance Company since June 1999 and is
responsible for Distribution. Mr. McCormick joined Symetra
Life Insurance Company in 1995, and served in a variety of
positions, including Vice President, prior to being promoted to
his current position. He is also an officer and director of
other various affiliates of Symetra.
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.
Tommie D. Brooks has been Vice President of Symetra since
March 2007 and Vice President and Chief Actuary of Symetra Life
Insurance Company since March 2007. Mr. Brooks joined
Symetra Life Insurance Company in 1992, and served in a variety
of managerial positions throughout the Company. Mr. Brooks
attained the Fellow of the Society of Actuaries in 1998 and
earned his B.S. in Math and Actuarial Sciences from Central
Washington University.
Christine A. Katzmar Holmes has been Vice President of
Symetra since August 2004 and is responsible for Human
Resources, Service Operations and Security. Ms. Katzmar
Holmes joined Symetra Life Insurance Company in 2001 as Vice
President. From 1991 to 2001, she was with Safeco Insurance
Company, where she held a variety of positions, including Human
Resources Director. She is also an officer of various affiliates
of Symetra. Ms. Katzmar Holmes received her B.S. degree
from Miami University, Ohio.
Troy J. Olson-Blair has been Vice President of Symetra
since June 2007 and is responsible for Information Technology.
She has been Vice President of Symetra Life Insurance Company
since 2000 and also served as Chief Information Officer since
2004. She has been responsible for Information Technology since
joining the Company. Prior to Symetra, Ms. Olson-Blair held
a variety of technical and managerial positions with Safeco
Insurance Company that spanned twenty years; her last position
was AVP and director for IT
138
Operations. Ms. Olson-Blairs background includes
application development, voice and data communications,
networking, web services and ITIL service level management.
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. From 1989 to 1993, Mr. Foy was with Milliman and
Robertson, an actuarial consulting firm. He is also a director
of OneBeacon Insurance Group, Ltd. 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 has been Managing Director of Vestar Capital
Partners, a private equity firm, since 1988. He was previously a
member of the Management Buyout Group of The First Boston
Corporation. 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. He is also a director of Validus
Holdings, Ltd, Duff & Phelps Corporation and Wilton Re
Holdings Limited.
Robert R. Lusardi has been a director of Symetra since
August 2005. He has been President and Chief Executive Officer
of White Mountains Financial Services LLC since February 2005.
Prior to joining White Mountains, Mr. Lusardi was an
Executive Vice President of XL Capital Ltd. from 1998 to 2005
and was a Managing Director at Lehman Brothers, where he was
employed from 1980 to 1998. He is also a director of two NYSE
listed companies, OneBeacon Insurance Group, Ltd. and Primus
Guaranty, Ltd. He received his B.A. and M.A. degrees from Oxford
University, and his M.B.A. from Harvard University.
David I. Schamis has been a director of Symetra since
August 2004. He has been Managing Director of J.C.
Flowers & Co. LLC since 2000. Previously, he was with
Salomon Smith Barney from 1995 to 2000. He received his B.A.
degree from Yale University. Mr. Schamis also serves as the
Chairman of the Board of Crump Group, Inc., and is a director of
Fox-Pitt Kelton LLC, Affirmative Insurance Holdings, Inc. and MF
Global, Ltd.
Composition
of the Board of Directors
Our business and affairs are managed under the direction of our
board of directors. Our board of directors currently consists of
seven members, four of whom we believe are independent directors
under currently applicable listing standards of the NYSE. The
four independent directors are Messrs. Levy, Schamis and Smith
and Ms. Grady.
Our board of directors is divided into three classes of
directors who serve in staggered three-year terms, as follows:
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Class I directors are Messrs. Lusardi and Schamis, and
their terms will expire at the annual meeting of stockholders to
be held in 2011;
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Class II directors are Messrs. Levy and Smith, and
their terms will expire at the annual meeting of stockholders to
be held in 2012; and
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Class III directors are Messrs. Foy and Talbot and
Ms. Grady, and their terms will expire at the annual
meeting of stockholders to be held in 2010.
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At each annual meeting of our stockholders, the successors to
the directors whose terms expire at each such meeting will be
elected to serve until the third annual meeting after their
election or until their successor has been elected. As a result,
only one class of directors will be elected at each annual
meeting of our stockholders, with the other classes serving for
the remainder of their respective three-year terms.
Committees
of the Board of Directors
Upon completion of this offering, our board of directors will
conduct its business through four standing committees: the audit
committee, the compensation committee, the finance committee and
the nominating and corporate governance committee. In addition,
from time to time, special committees may be
139
established under the direction of the board of directors when
necessary to address specific issues. Our audit committee, our
compensation committee and our nominating and corporate
governance committee will be required to be composed of a
majority of independent directors within 90 days following
the completion of this offering. Our audit committee, our
compensation committee and our nominating and corporate
governance committee will be required to be composed entirely of
independent directors within one year following the completion
of this offering.
Audit
Committee
Upon completion of this offering, we will have an audit
committee that will have responsibilities that meet all NYSE and
SEC requirements.
The audit committee will have the power to investigate any
matter brought to its attention within the scope of its duties
and to retain counsel for this purpose where appropriate.
Upon the completion of this offering, our audit committee will
consist of Mr. Foy, Mr. Levy, Mr. Schamis and
Mr. Smith. Within a year of the completion of this
offering, all members of the audit committee will be independent
directors according to the rules and regulations of the SEC and
the NYSE and at least one member will be an audit
committee financial expert, as such term is defined in
Item 407 of Regulation S-K.
Our board of directors has adopted a written charter for the
audit committee to be effective upon the completion of this
offering, which will be available on our website as of the date
of this offering.
Compensation
Committee
Upon completion of this offering, we will have a compensation
committee that will have responsibilities that meet all NYSE
requirements.
Upon the completion of this offering, our compensation committee
will consist of Mr. Foy, Ms. Grady and Mr. Smith.
Within a year of completion of this offering, all members of the
compensation committee will be independent directors according
to the rules and regulations of the NYSE.
Our board of directors has adopted a written charter for the
compensation committee to be effective upon the completion of
this offering, which will be available on our website as of the
date of this offering.
Nominating
and Corporate Governance Committee
Upon completion of this offering, we will have a nominating and
corporate governance committee that will have responsibilities
that meet all NYSE requirements.
Upon completion of this offering, our nominating and corporate
governance committee will consist of Mr. Foy, Mr. Levy
and Mr. Smith. Within a year of completion of this
offering, all members of the nominating and corporate governance
committee will be independent directors according to the rules
and regulations of the NYSE.
Our board of directors has adopted a written charter for the
corporate governance and nominating committee to be effective
upon the completion of this offering, which will be available on
our website as of the date of this offering.
Finance
Committee
Upon completion of this offering, we will have a finance
committee that will have responsibilities as outlined in its
charter.
Upon completion of the offering, our finance committee will
consist of Mr. Foy, Mr. Levy and Mr. Smith. The
majority of the members of the finance committee will be
independent directors according to the rules and regulations of
the NYSE.
140
Our board of directors has adopted a written charter for the
finance committee, which will be available on our website as of
the date of this offering.
Compensation
Committee Interlocks and Insider Participation
Upon completion of this offering, our board of directors will
have a compensation committee as described above. None of our
executive officers will serve as a member of our compensation
committee, and none of them have served, or will be permitted to
serve, on the compensation committee (or any other committee
serving a similar function) of any entity of which an executive
officer is expected to serve as a member of our compensation
committee.
Code
of Business Conduct and Corporate Governance
Guidelines
Our board of directors has adopted a code of business and
financial conduct applicable to our directors, officers and
employees, to be effective upon the completion of this offering,
as well as corporate governance guidelines, each in accordance
with applicable rules and regulations of the SEC and the NYSE.
The code of business conduct and the corporate governance
guidelines will be available on our website as of the date of
this offering.
Compensation
Discussion and Analysis
Named
Executive Officers
The following Compensation Discussion and Analysis describes the
compensation earned by, awarded to or paid to our Chief
Executive Officer, our Chief Financial Officer and our three
other most highly paid executive officers in 2009 as determined
under the rules of the SEC, collectively referred to as the
Named Executive Officers and listed below:
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Randall H. Talbot, President and Chief Executive Officer
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Margaret A. Meister, Executive Vice President and Chief
Financial Officer
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Jennifer V. Davies, Senior Vice President, Enterprise
Development
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Richard J. Lindsay, Senior Vice President,
Life & Annuities Division, Symetra Life Insurance
Company
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Patrick B. McCormick, Senior Vice President,
Distribution, Symetra Life Insurance Company
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Compensation
Philosophy
Our overall executive compensation program is designed to align
the financial interests of our executives with those of our
stockholders. We focus on pay-for-performance (both individual
and company performance) by providing incentives that emphasize
long-term value creation, thereby putting a large portion of our
executives pay at risk. Based on this philosophy, the
compensation committee has maintained base salaries that may be
lower than those paid by other financial services companies and
life insurers and has chosen not to provide pensions or other
perquisites, choosing instead to grant the largest portion of
compensation as long-term incentive compensation which is based
on the growth of intrinsic business value per share.
Pay-for-performance. A majority of our executive
officers compensation is directly linked to our short- and
long-term financial goals, thereby providing incentives for both
short- and long-term results. Our Annual Incentive Bonus Plan
rewards performance relative to short-term results based on a
combination of meeting company performance goals and individual
performance goals. The Symetra Financial Corporation Performance
Share Plan (the Performance Share Plan) rewards long-term
performance relative to financial goals set on three-year cycles.
141
Pay at risk. The pay at risk approach of our
incentive compensation is intended to align with the executive
officers impact on company performance over the short-and
long-term. All executive officers have a significant amount of
their total annual compensation at risk through company
performance-based incentives.
Competitive opportunities. As we grow and strive to
reach competitive financial goals, our need for experienced
executive talent will continue. Our compensation opportunities
must be competitive to allow us to attract and retain talented
executives in our field.
Compensation
Process
The compensation committee, according to its charter, is
responsible for approving all compensation for our Named
Executive Officers as well as our other executive officers and
for administering the Performance Share Plan with respect to all
participants.
The compensation committee relies on Randall H. Talbot, our
Chief Executive Officer, and Christine A. Katzmar Holmes, our
Vice President of Human Resources, to recommend compensation
programs and awards for executive officers, subject to
compensation committee approval, and to administer approved
programs for all employees. Mr. Talbot and Ms. Katzmar
Holmes attend compensation committee meetings and, at the
committees request, present managements analysis and
recommendations regarding compensation actions including our
base salaries, Annual Incentive Bonus Plan, Performance Share
Plan and Equity Plan.
Compensation actions are typically considered at the first
meeting of the compensation committee of each year after
financial results for the prior year are available. In the
meeting, Mr. Talbot also presents a self-evaluation
outlining his performance to assist the compensation committee
in determining his total compensation for the year. The
compensation committee then holds a private session to discuss
and determine Mr. Talbots total compensation.
The compensation committee is composed of members with extensive
business experience who have, based on their experience, set
compensation levels and performance targets at what they believe
to be appropriate levels.
In 2009, the compensation committee considered adding an equity
component to our long term incentive plans and asked for a
review by a compensation consultant. Towers Perrin was
contracted for that review. The compensation committee
determined based on a variety of factors, including the
compensation consultants review, not to add an equity
component to our performance share plan, although equity awards
were granted to our CEO and CFO in 2009.
Elements
of Compensation
We currently compensate our executives through a combination of
base salary, annual incentive compensation or, in the case of
our sales executive, sales incentive compensation, and long-term
incentive compensation.
Base salary. Our philosophy is to make base salary a
relatively smaller portion of the overall compensation package
of our executive officers relative to what we believe to be
common in the industry. While executive performance is annually
reviewed, base salaries for executives are not regularly
adjusted. Our practice of not adjusting base salaries based on
performance is consistent with our philosophy that the majority
of compensation should be variable based on our actual long-term
and short-term performance and that of the executive.
Annual incentive compensation. We pay annual
incentive cash awards to our Named Executive Officers, other
than Mr. McCormick, through the Annual Incentive Bonus Plan
in March of each year for performance in the prior calendar
year. The Annual Incentive Bonus Plan awards are based on our
fulfillment of performance goals set at the beginning of the
year and the executives individual role in that goal
fulfillment.
The compensation committee determines the performance goals and
approves the target aggregate bonus pool for the Annual
Incentive Bonus Plan each year. The actual aggregate bonus pool
for the Annual
142
Incentive Bonus Plan is determined by the sum of all
participants target awards and can range from 0% to 200%
of this target, based on our fulfillment of performance goals.
The Annual Incentive Bonus Plan establishes the metric used to
determine the actual aggregate bonus pool as the growth in our
intrinsic business value per share, which is the average of the
growth of both our GAAP book value per share and enterprise
value per share during the plan year. For 2009, the growth
target was 13%. If the average growth was 10% or lower, the plan
would not be funded. If the average growth fell between 10% and
13%, the aggregate bonus pool would be less than 100% of the
target. If the average growth met or exceeded 13%, the aggregate
bonus pool would grow proportionately up to a maximum of 200% of
the target if average growth met or exceeded 16%.
After the aggregate bonus pool for the Annual Incentive Bonus
Plan is established, each executive is allocated a portion of
the pool based on his or her individual target and individual
performance. The individual target bonus for the CEO and CFO is
equal to 50% of his or her base salary while the individual
target bonus for Ms. Davies and Mr. Lindsay is 35% of
base salary. After reviewing the performance of each executive,
Mr. Talbot recommends to the compensation committee a
percentage of that executives individual target to be paid
for the performance year based on that executives
individual performance compared to goals or expectations set by
that executive and Mr. Talbot. Mr. Talbots
recommended annual incentive bonus is subject to the total
funding level for the Annual Incentive Bonus Plan and the
average percentage of target bonuses paid to the executive team.
As of September 30, 2009, the growth in our intrinsic
business value per share was 9.25%. A final determination of the
growth in our intrinsic business value per share for 2009 will
not be completed until later in the first quarter of 2010 and
the funding level of the bonus pool and the amount of the bonus
pool to be received by each executive will not be available
until then. In May 2009, the compensation committee agreed that,
due to the significant downturn in the financial markets, if the
growth target for 2009 was not met, it would use its discretion
outside of the Annual Incentive Bonus Plan to fund an aggregate
bonus pool for bonuses to be paid in March 2010. If the growth
target is not met, the compensation committee will take into
account our companys operating performance for 2009, as
well as other relevant factors, when it determines, in its
discretion, the level of funding for the bonus pool. The
compensation committee will make the final determination of the
amount of the bonus pool to be received by each executive based
on its determination of each executives individual
performance.
Mr. Talbots 2009 goals were based on the Symetra
vision statement and included meet or exceed a 13% return on
equity, be the go-to company by partnering with
advisors, brokers and financial institutions to deliver on our
promises to be easy to work with and provide products that bring
value, increase customer value by ensuring each interaction
reinforces their choice to do business with Symetra and manage
expenses not only by monitoring the bottom line but by also
finding innovative ways to improve business processes and
procedures. Ms. Meisters 2009 goals included meet or
exceed a 13% return on equity, to balance pricing of our
products, to control expenses to plan and to provide financial
leadership. Mr. Lindsays 2009 goals included to
achieve significant sales growth and to develop and implement
product management in the Life & Annuities division.
Ms. Daviess 2009 goals included to pursue enterprise
development opportunities and to complete strategic projects.
Combining our overall company performance and individual
performance in determining the amount to be received by each
executive ensures that the interests of each executive are
aligned with our goals for financial success and that each
executive is rewarded for individual performance. In 2009, the
Annual Incentive Bonus constitutes 5%, 9%, 11% and 10% of total
target compensation for Mr. Talbot, Ms. Meister,
Mr. Lindsay and Ms. Davies, respectively.
Sales incentive compensation. All sales employees,
including Mr. McCormick, participate in a sales incentive
program. The targets for Mr. McCormicks Sales
Incentive Plan are based on Sales and Distributions
financial plan and are designed to motivate him to develop new
distribution relationships and expand existing relationships.
Mr. McCormick earns a percentage of sales for each product
line for new net sales volumes. The percentages decrease after a
prescribed sales-volume threshold is met. The percentages and
thresholds differ from product to product within each product
line. The range of percentages that applies before a sales
143
threshold is met is 0.000025%-0.002% and the range of sales
thresholds is $50,215,000-$1,000,000,000. The range of
percentages that applies after a sales threshold is met is
0.0000125%-0.001%. The products to which this plan applies are
individual life products, fixed and variable annuities, income
annuities and bundled share products. Mr. McCormicks
2009 Sales Incentive Plan also includes a Sales Effectiveness
Payment component pursuant to which he can earn up to $50,000
based on the following criteria: 76% of the payment is based on
sales goals achievement per quarter and 24% is based on expense
management per quarter. Mr. McCormicks total sales
incentive target is 36% of his total target compensation for
2009. As of third quarter 2009, Mr. McCormicks earned
incentive compensation is 66% of his goal. The total 2009
incentive compensation for Mr. McCormick will not be
determined until later in the first quarter of 2010.
Long-Term
Incentive Compensation
The Performance Share Plan. We primarily provide
long-term incentives to our Named Executive Officers and other
executive officers through the Performance Share Plan. This
long-term incentive compensation is in the form of unit-based
performance awards. Awards are granted annually. Each award
period is typically three years, therefore overlapping other
award periods. At the time of grant, each target performance
unit has the financial value of $100.00. Thereafter, each target
performance unit has a notional value of $100.00 x (1 +
aggregate percentage growth per share). At the end of the award
period, the compensation committee determines the level of
attainment of the performance target and assigns a performance
percentage of 0% to 200% of target based on that determination.
The matured performance units are paid in cash in an amount
equal to the then notional value of the target shares multiplied
by the performance percentage.
For the
2007-2009
and
2008-2010
cycles under the Performance Share Plan, the performance target
is 13% compound annualized growth in our intrinsic business
value per share with a threshold performance target of 10% and a
maximum performance target of 16%. Growth in our intrinsic
business value per share equals the average of the compound
annualized growth rates during the award period of the GAAP book
value per share and the enterprise value per share, excluding
unrealized gains or losses other than unrealized gains or losses
on equities held as investments.
For the
2009-2011
cycle under the Performance Share Plan, the performance target
is 13% modified operating return on equity averaged over the
award period measured by modified operating income divided by
beginning of year GAAP book value with a threshold performance
target of 8% and a maximum performance target of 18%. Modified
operating income equals net income minus realized gains/(losses)
minus hedge funds investment income plus 30 year
A Bond investment income substituted for
equities/hedge fund performance (valued quarterly). The metrics
used to calculate the performance target were changed for the
2009-2011
cycle under the Performance Share Plan in order to focus
management on achieving core earnings goals that are within
their control and to mitigate the volatile effects of upward and
downward movements on equities and hedge funds.
The performance percentage ranges from 0% to 200% for all
currently running performance cycles, although the board of
directors retains the discretion to make an award outside the
Performance Share Plan if the threshold is not met. For the
2007-2009
and the
2008-2010
cycles, if the compound annualized growth is 10% or lower, the
performance percentage will be 0%. If the compound annualized
growth is 16% or higher, the maximum performance percentage of
200% applies. For annualized percentage growth between 10% and
16%, the performance percentage will be determined on the basis
of straight line interpolation.
The actual annualized percentage growth for the
2007-2009
cycle will not be determined until later in the first quarter of
2010. It is anticipated that the threshold performance targets
will not be met for the
2007-2009
and
2008-2010
cycles. The compensation committee has the discretion to modify
the terms of awards granted, and anticipates that after the end
of the award periods for these cycles, it will approve a
discretionary payout based on the growth in book value over each
cycles three-year period using a performance percentage in
the range of 60%-90% for the
2007-2009
cycle and 70%-110% for the
2008-2010
cycle, assuming that our performance follows the modified
operating return on equity forecast.
144
For the
2009-2011
cycle, if the modified operating return on equity is 8% or
lower, the performance percentage will be 0%. If the modified
operating return on equity is 18% or higher, the maximum
performance percentage of 200% applies. For modified operating
return on equity between 8% and 18%, the performance percentage
will be determined on the basis of straight line interpolation.
The Grant of Plan-Based Awards in 2009 table on
page 147 sets forth the grants made under the Performance
Share Plan to each Named Executive Officer in 2009. For the
Performance Share Plan, our CEOs recommendations and our
compensation committees determinations with respect to the
size of awards to participants are subjective, and no
proportional or other mathematical formula is applied, nor are
any specific factors considered. Our CEO receives the largest
grant because he is responsible for our companys overall
business and financial performance. Our CFOs awards have
increased each year to reflect her increased level of
responsibility. The Senior Vice President, Life &
Annuities receives a significant grant because Mr. Lindsay
is accountable for several product line results. The grant
awarded to our Senior Vice President, Enterprise Development,
Ms. Davies, is reflective of her duties as head of
enterprise development for the company. Our Senior Vice
President, Distribution, receives a relatively smaller grant
because his sales incentive plan, which is also performance
based, already constitutes a significant component of his
overall compensation.
The target grants for the
2009-2011
cycle under the Performance Share Plan constituted 61%, 72%,
60%, 45% and 53% of target total compensation for
Mr. Talbot, Ms. Meister, Mr. Lindsay,
Mr. McCormick and Ms. Davies, respectively. Although
awards of performance shares were not specifically set at these
percentages, the Performance Share Plan is designed such that
our Named Executive Officers have a substantial proportion of
their target total compensation linked to the achievement of
company performance targets.
The Equity Plan. We maintain an Equity Plan to
provide long-term incentives to our Named Executive Officers and
other employees, our non-employee directors and any consultants.
Prior to 2009, we did not make grants under the Equity Plan. Our
compensation committee administers the Equity Plan and
determines which individuals are eligible to receive awards, the
number of shares or units to be granted, the exercise or
purchase price for awards, the vesting schedule for each award
and the maximum term of each award. Awards may consist of stock
options, stock appreciation rights, restricted stock, restricted
stock units, performance shares/units and other stock-based
awards. On August 24, 2009, pursuant to the Equity Plan,
our CEO and CFO received grants for 75,270 and 7,890 shares
of restricted stock, respectively, that are scheduled to vest on
December 31, 2011, subject to their continued employment
through such date. These grants of restricted stock to our CEO
and CFO were made to align the interests of these executives
directly with the interests of our stockholders. The grants for
the
2009-2011
cycle under the Equity Plan constituted 21% of target total
compensation for Mr. Talbot and 5% for Ms. Meister.
Employment/severance/change-in-control
arrangements. We have no employment agreements with our
executive officers. All of our executive officers are at
will employees. In the event of a termination of an
executive officers employment by us without cause or by
the executive due to a constructive termination, in either case
within 12 months (in the case of the Equity Plan) or within
24 months (in the case of the Performance Share Plan) of a
change in control, executives receive certain payments and
accelerated vesting under our Performance Share Plan and our
Equity Plan as described in more detail beginning on
page 148. We provide for this
change-in-control
benefit as an incentive and retention mechanism that provides
security to our executives in the event that we experience a
change in ownership.
Retirement benefits. All of our employees, including
our Named Executive Officers, may participate in our qualified
401(k) plan, which includes a safe harbor employer match. The
safe harbor employer match is equal to 100% of the employee
contributions up to the first 6% of eligible compensation. We
have no defined benefit pension plans, non-qualified deferred
compensation plans or retiree medical plans.
Perquisites. Our executive officers receive the same
benefits that are available to all employees. Benefits such as
medical and dental insurance, life insurance, short- and
long-term disability, vacation and sick leave, tuition
reimbursement and professional education funding, charitable
gift matching, employee referral program and relocation
assistance are available to all employees. All employees are
also eligible for
145
several discount programs including fitness club memberships,
computers/software, wireless programs, office supplies, rental
cars and hotels for personal use.
Tax
and Accounting Implications of Executive Compensation
Programs
After the consummation of this offering, Section 162(m) of
the Internal Revenue Code would limit the deductibility of the
compensation of our Named Executive Officers to $1,000,000 per
individual to the extent that such compensation is not
performance-based as defined in Section 162(m).
We intend to rely on an exemption from Internal Revenue Code
Section 162(m) for compensation plans adopted prior to a
companys initial public offering. This transition
exemption for our compensation plans will no longer be available
to us after the date of our annual meeting that occurs after the
third calendar year following the year of our initial public
offering, or if we materially modify the plan earlier. We will
continue to consider the implications of Internal Revenue Code
Section 162(m) and the limits of deductibility of
compensation in excess of $1,000,000 as we design our
compensation programs going forward.
Summary
Compensation Table
The following table presents compensation earned during 2008 and
2009 by the Companys CEO, CFO and its three most highly
compensated executive officers other than the CEO and CFO (the
Named Executive Officers).
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Non-Equity
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Stock
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Incentive Plan
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All Other
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Total
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Salary
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Bonus
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Awards
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Compensation
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Compensation
|
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Compensation
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Name and Principal Position
|
|
Year
|
|
|
($)
|
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|
($)(2)
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($)(3)
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($)(4)
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($)(5)
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($)(6)
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Randall H. Talbot
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2008
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525,000
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2,131,403
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14,461
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2,670,864
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President and Chief Executive Officer
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2009
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525,000
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(a)
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146,115
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15,267
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686,382
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Margaret A. Meister
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2008
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295,962
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535,451
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14,173
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845,586
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Executive Vice President and Chief Financial Officer
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2009
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300,000
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(b)
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15,338
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15,024
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330,362
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Richard J. Lindsay
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2008
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285,000
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293,595
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14,159
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592,754
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Senior Vice President, Life & Annuities
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2009
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285,000
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(c)
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15,008
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300,008
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Patrick B. McCormick
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2008
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200,000
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354,837
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14,225
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569,062
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Senior Vice President, Sales and Distribution
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2009
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200,000
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(d)
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191,356
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15,046
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406,402
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Jennifer V. Davies(1)
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|
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Senior Vice President, Enterprise Development
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2009
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235,000
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(e)
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9,238
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244,238
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(1) |
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Ms. Davies was not a named executive officer in 2008. |
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(2) |
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For 2008, represents the discretionary amounts awarded for the
2008 Annual Incentive Bonuses and the
2006-2008
cycle under the Performance Share Plan paid in March 2009. |
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For 2009, amounts for the 2009 Annual Incentive Bonus and
2007-2009
cycle under the Performance Share Plan will not be determined
until later in the first quarter of 2010. The compensation
committee has the discretion to modify the terms of awards
granted in the Performance Share Plan, and anticipates that
after the end of the award period, it will approve a
discretionary payout based on the growth in book value over the
cycles three-year period using a performance percentage in
the range of 60%-90% for the
2007-2009
cycle, assuming that our performance follows the modified
operating return on equity forecast. |
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(a) Mr. Talbot is expected to receive between
$2,251,145 and $3,376,717 for the
2007-2009
cycle under the Performance Share Plan.
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(b) Ms. Meister is expected to receive between
$675,343 and $1,013,015 for the
2007-2009
cycle under the Performance Share Plan.
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(c) Mr. Lindsay is expected to receive between
$262,634 and $393,950 for the
2007-2009
cycle under the Performance Share Plan.
|
146
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(d) Mr. McCormick is expected to receive between
$206,355 and $309,532 for the
2007-2009
cycle under the Performance Share Plan.
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(e) Ms. Davies is expected to receive between $262,634
and $393,950 for the
2007-2009
cycle under the Performance Share Plan.
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The compensation committee has the discretion to make an award
outside of the Annual Incentive Bonus Plan and anticipates that
after the end of the award period, if the growth target is not
met, it will approve a discretionary bonus pool. |
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(3) |
|
Amounts disclosed in the Stock Awards column relate to
restricted stock granted on August 24, 2009. The amounts
disclosed represent the Companys 2009 compensation cost
recorded in the consolidated financial statements for these
awards in accordance with applicable accounting guidance,
ASC 718 Compensation - Stock Compensation (formerly SFAS
No. 123R). These amounts do not correspond to the actual value
that may be received by the named executive officers.
Compensation cost for restricted stock is recorded ratably over
the vesting period using the grant-date fair value. The amounts
shown exclude the impact of estimated forfeitures related to
service-based vesting conditions. There were no forfeitures of
restricted stock during 2009. |
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(4) |
|
Represents the amount Mr. McCormick earned as of
September 30, 2009 for his 2009 Sales Incentive Plan. The
total amount earned by Mr. McCormick under his 2009 Sales
Incentive Plan will not be determined until later in the first
quarter of 2010. |
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(5) |
|
Represents (a) employer contributions to the Symetra
Financial Retirement Savings Plan equal to $13,800 in 2008 and
$14,700 in 2009 for each of our Named Executive Officers except
for Ms. Davies whose employer contributions equal $8,985
and (b) employer-paid life insurance premiums with respect
to each Named Executive Officer. |
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(6) |
|
For 2008, represents total earned compensation in 2008. For
2009, represents total earned compensation not including
expected bonus compensation. |
Grant of
Plan-Based Awards in 2009
The following table summarizes the estimated future payouts
under grants made by us to the Named Executive Officers in 2009
under our incentive plans:
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Estimated Future Payouts Under
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Non-Equity Incentive Plan Awards(1)
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Non-Equity Incentive Plan Awards
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All Other Stock Awards(2)
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Grant Date
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Number of
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Number
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Fair Value
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Units
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Threshold
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Target
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Maximum
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Grant
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of Shares
|
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of Stock
|
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Name
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Type of Award
|
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Cycle
|
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Granted
|
|
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($)
|
|
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($)
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($)
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Date
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of Stock
|
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Awards ($)
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|
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Restricted Stock
|
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|
|
|
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8/24/2009
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|
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75,270
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984,532
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Annual Incentive Plan
|
|
2009
|
|
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n/a
|
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8,750
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262,500
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525,000
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|
|
|
|
|
|
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|
Randall H. Talbot
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Performance Share Plan
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2009-2011
|
|
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19,500
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49,265
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2,813,649
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6,407,825
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Restricted Stock
|
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|
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|
8/24/2009
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7,890
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|
103,201
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|
|
|
Annual Incentive Plan
|
|
2009
|
|
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n/a
|
|
|
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5,000
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|
150,000
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|
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300,000
|
|
|
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|
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|
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|
|
|
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Margaret A. Meister
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|
Performance Share Plan
|
|
2009-2011
|
|
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9,900
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|
|
25,012
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|
|
|
1,428,468
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|
|
|
3,253,203
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|
|
|
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|
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|
|
|
Annual Incentive Plan
|
|
2009
|
|
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n/a
|
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3,325
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99,750
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199,500
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Richard J. Lindsay
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|
Performance Share Plan
|
|
2009-2011
|
|
|
4,000
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|
|
|
10,106
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|
|
|
577,159
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|
|
|
1,314,426
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
Sales Incentive Plan
|
|
2009
|
|
|
n/a
|
|
|
|
n/a
|
|
|
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289,258
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|
|
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n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patrick B. McCormick
|
|
Performance Share Plan
|
|
2009-2011
|
|
|
2,750
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|
|
|
6,948
|
|
|
|
396,797
|
|
|
|
903,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual Incentive Plan
|
|
2009
|
|
|
n/a
|
|
|
|
2,742
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82,250
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|
|
164,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jennifer V. Davies
|
|
Performance Share Plan
|
|
2009-2011
|
|
|
2,500
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|
|
|
6,316
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|
|
|
360,724
|
|
|
|
821,516
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
On March 3, 2009, the 2009 targets of the Annual Incentive
Plan were approved for Mr. Talbot, Ms. Meister,
Mr. Lindsay and Ms. Davies. Mr. McCormicks
2009 Sales Incentive Plan was approved by Mr. Talbot on
March 20, 2009. On May 12, 2009, Mr. Lindsay,
Mr. McCormick and Ms. Davies were granted shares in
the
2009-2011
cycle under the Performance Share Plan. On August 24, 2009,
Mr. Talbot and Ms. Meister were granted shares in the
2009-2011
cycle under the Performance Share Plan. Each share is initially
valued at $100.00. |
147
|
|
|
(2) |
|
On August 24, 2009, Mr. Talbot and Ms. Meister
were granted restricted stock under the Equity Plan. The awards
vest on December 31, 2011. |
Outstanding
Equity Awards at 2009 Fiscal Year-End
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|
Stock awards
|
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Equity Incentive
|
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Plan Awards: Number
|
|
|
Equity Incentive Plan
|
|
|
|
|
|
|
Market Value of
|
|
|
of Unearned Shares,
|
|
|
Awards: Market or Payout
|
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|
|
Number of Shares
|
|
|
Shares or Units of
|
|
|
Units or Other
|
|
|
Value of Unearned Shares,
|
|
|
|
or Units of Stock
|
|
|
Stock that Have Not
|
|
|
Rights that Have
|
|
|
Units or Other Rights
|
|
|
|
that Have Not Vested
|
|
|
Vested
|
|
|
Not Vested
|
|
|
that Have Not Vested
|
|
Name
|
|
(#)
|
|
|
(#)
|
|
|
(#)(1)
|
|
|
($)(2)
|
|
|
Randall H. Talbot
|
|
|
|
|
|
|
|
|
|
|
75,270
|
|
|
|
984,532
|
|
Margaret A. Meister
|
|
|
|
|
|
|
|
|
|
|
7,890
|
|
|
|
103,201
|
|
Richard J. Lindsay
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patrick B. McCormick
|
|
|
|
|
|
|
|
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|
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|
|
Jennifer V. Davies
|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents the number of share of restricted stock granted on
August 24, 2009 with a full vesting date of
December 31, 2011. Partial or full vesting may also occur
upon certain terminations as discussed on page 152 of
Potential Payments Upon Termination or Change
of Control. |
|
|
|
(2) |
|
Represents the fair value of $13.08 per share as of
December 31, 2009. |
Employee
Benefit Plans
The following is a summary of our primary employee benefit plans:
Annual
Incentive Bonus Plan
Annual incentive cash awards are paid to our Named Executive
Officers, other than Mr. McCormick, pursuant to the Annual
Incentive Bonus Plan. A description of the material terms of the
Annual Incentive Bonus Plan is on page 142 of
Elements of Compensation.
Sales
Incentive Plan
Our sales employees, including Mr. McCormick, receive
short-term incentive compensation through the Sales Incentive
Plan. A description of the material terms of the Sales Incentive
Plan, and the payout received by Mr. McCormick with respect
to third quarter 2009, is on page 143 of
Elements of Compensation.
Performance
Share Plan
We provide our Named Executive Officers with long-term incentive
compensation primarily through grants pursuant to the
Performance Share Plan. A description of the material terms of
the Performance Share Plan, and the terms of the awards
outstanding pursuant to the
2008-2010
and
2009-2011
performance cycles, are on page 144 of
Elements of Compensation.
Equity
Plan
Background. The purpose of the Symetra Financial
Corporation Equity Plan (the Equity Plan) is to
advance the Companys and our stockholders interests
by providing long-term incentives to our employees, directors
and consultants. The Equity Plan became effective in 2007 and
has a ten-year term. Prior to 2009,
148
we did not make grants under the Equity Plan, and long-term
incentive compensation remains primarily provided by the
Performance Share Plan.
Administration. Our compensation committee
administers the Equity Plan, and determines which individuals
are eligible to receive awards, the type of awards and number of
shares or units to be granted, the exercise or purchase price
for awards, the vesting schedule for each award and the maximum
term of each award (subject to the limits set forth in the
Equity Plan). The compensation committee has authority to
interpret the Equity Plan, and any determination by the
compensation committee will be final.
Share Reserve. We have reserved
7,830,000 shares of our common stock for issuance under the
Equity Plan, of which 7,746,840 remain available for issuance.
This reserve, and all limits referenced below, is subject to
adjustment in the event of stock splits or similar
capitalization events.
Eligibility. The individuals eligible to participate
in the Equity Plan include our officers and other employees, our
non-employee directors and any consultants.
Limit on Awards. During any calendar year, the
maximum aggregate number of shares subject to awards granted to
any individual shall be 435,000.
Equity Awards. The Equity Plan permits us to grant
the following types of awards:
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|
Restricted Stock. A restricted stock award is a
grant of shares or an offer by us to sell shares of our common
stock subject to a risk of forfeiture
and/or a
right of repurchase by us upon the termination of employment of
the participant on such terms (including price and timing) as
may be determined by the compensation committee. This risk of
forfeiture
and/or right
of repurchase may lapse according to vesting conditions, which
may include performance conditions, a time-based schedule or a
combination thereof, to be determined in each case by the
compensation committee. In the event of death or disability of a
holder of restricted stock subject to vesting other than monthly
vesting, the risk of forfeiture
and/or our
right to repurchase such shares shall lapse with respect to a
pro rata portion of the restricted shares equal to the
percentage of the vesting period that has elapsed. The
compensation committee also has the discretion to waive all or a
portion of the risk of forfeiture
and/or our
right to repurchase shares of restricted stock in the event of a
participants voluntary resignation or retirement. In the
event of a change of control followed by termination without
cause or constructive termination of the participant within
twelve months, the restrictions on such participants
restricted stock will lapse.
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|
|
Stock Options. The Equity Plan provides for the
grant of incentive stock options (commonly referred to as ISOs)
to employees and non-qualified stock options (commonly referred
to as NSOs) to employees, directors and consultants. The
compensation committee determines the terms of options, provided
that ISOs are subject to statutory limitations. The compensation
committee determines the exercise price for a stock option,
within the terms and conditions of the Equity Plan and
applicable law, provided that the exercise price of an ISO may
not be less than 100% (or 110% in the case of a recipient who is
a ten percent stockholder) of the fair market value of our
common stock on the date of grant. ISOs exercisable for no more
than 435,000 shares may be issued to a participant in any
one year.
|
Options granted under the Equity Plan will vest at the rate
specified by the compensation committee, with the vesting
schedule for each stock option to be set forth in the stock
option agreement for such option grant. Generally, the committee
determines the term of stock options granted under the Equity
Plan, up to a maximum term of ten years.
After termination of an optionees employment, the optionee
may exercise the vested portion of each option for the period of
time stated in the option agreement to which such option
relates. The compensation committee also has the discretion to
permit exercise of the unvested portion of an option in the
event of voluntary resignation or retirement. Generally, if
termination is due to disability, the vested portion of each
option will remain exercisable for three years following the
date of disability, and in the event of death of an optionee,
the vested portion of each option
149
will remain exercisable by such optionees estate for one
year. In all other cases, the vested portion of each option will
generally remain exercisable for three months following
termination of employment. However, an option may not be
exercised later than its expiration date.
Notwithstanding the above, in the event of a change of control
of Symetra, followed by termination without cause or
constructive termination (as such terms are defined in the
Equity Plan) of an optionee within twelve months of the change
of control, such optionees stock options will become 100%
vested and exercisable for up to 30 days following such
termination.
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|
Stock Appreciation Rights. Stock appreciation rights
provide for a payment, or payments, in cash or shares of common
stock, to the participant based upon the difference between the
fair market value of our common stock on the date of exercise
and the stated exercise price. The exercise price of a stock
appreciation right may not be less than 100% of the fair market
value of our common stock on the date of grant of the stock
appreciation right. Stock appreciation rights are otherwise
generally subject to the same terms and limitations as described
above for stock options, including vesting acceleration upon
termination following a change of control.
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|
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|
|
|
Restricted Stock Units. Restricted stock units
represent the right to receive, without payment to the Company,
an amount of shares of our common stock equal to the number of
shares underlying the restricted stock units multiplied by the
fair market value of a share on the date of vesting of the
restricted stock units. The compensation committee may, at its
discretion, impose vesting conditions, which may include
performance conditions, a time-based vesting schedule or a
combination thereof, on the exercise of such units. A
participants restricted stock units generally terminate in
the event the participants employment terminates prior to
payment with respect to the units. However, in the event of
death or disability of a holder of restricted stock units that
are subject to vesting other than monthly vesting, the holder
will receive payment for a pro rata percentage of the unvested
units equal to the percentage of the vesting period that has
elapsed. The compensation committee also has the discretion to
make payment with respect to all or a portion of the unvested
restricted stock units held by a participant in the event of
such participants voluntary resignation or retirement. In
the event of a change of control followed by termination without
cause or constructive termination of the participant within
twelve months, such participants restricted stock units
that were outstanding on the date of termination will be
cancelled and such participant will receive a cash payment equal
to the product of the number of restricted stock units and the
fair market value of a share of our common stock on the date of
termination.
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|
Performance Shares/Units. A performance share award
entitles a participant to receive all or part of the value of a
specified number of hypothetical shares if specified performance
objectives, as determined by the compensation committee, are
satisfied during a specified award period. The payout under a
performance share award is the product of (1) the target
number of performance shares subject to award, (2) the
performance percentage and (3) the fair market value of a
share on the date the award is paid or becomes payable to the
participant.
|
Performance units are similar to performance shares, except that
the value is based on a fixed dollar value or formula specified
by the committee, rather than the fair market value of a share
on the date the award is paid or payable (as with performance
shares). The maximum value of performance units that may be
earned by a participant for any single award period of one year
or longer may not exceed $25 million.
At the end of the award period for performance shares or
performance units, the compensation committee assigns a
performance percentage that is between 0% and 200% depending on
the extent to which the applicable performance objectives were
met during the award period. Performance shares and units may be
settled in cash, shares of our common stock, other securities,
other awards, other property or any combination thereof, as
determined by the compensation committee.
150
A participants performance shares or units are cancelled
if the participants employment is terminated prior to end
of the award period. However, if a participant dies or becomes
disabled during the performance period, such award is paid to
such participant (or such participants estate) on a
pro-rata basis. In the event of a change of control followed by
termination without cause or constructive termination of the
participant within twelve months, the participants
performance share/unit award shall be paid out on a pro rata
basis according to the percentage of months during the award
period that have elapsed, with a performance percentage of 100%.
|
|
|
|
|
Other Stock-Based Awards. The compensation committee
also has the discretion to issue other equity-based awards under
the Equity Plan, including fully-vested shares of common stock.
|
Awards Not Transferable. Awards under the Equity
Plan are generally non-transferable, except to a
participants estate in the event of the participants
death.
Adjustments. The compensation committee is
authorized to make adjustments to the terms and conditions of
awards in recognition of certain unusual or nonrecurring events,
including but not limited to extraordinary dividends, stock
splits, mergers or a change in control of Symetra. In such
events, the committee has the discretion to do what it
determines is appropriate or desirable, including providing for
the substitution or assumption of awards, accelerating the
vesting of or the lapse of restrictions on awards, terminating
the awards or making a cash payment in consideration for the
cancellation of the awards.
Amendment and Termination. The Equity Plan may be
amended or terminated at any time upon approval of our board of
directors, provided that no amendment or termination will
adversely affect outstanding awards. The Equity Plan will
terminate on the earlier of the termination of the Equity Plan
by our board of directors or ten years from the effective date
of the Equity Plan.
Employee
Stock Purchase Plan
Background. Our employee stock purchase plan is
designed to enable eligible employees to periodically purchase
shares of our common stock at a discount. Purchases are
accomplished through participation during discrete offering
periods. Our employee stock purchase plan is intended to qualify
as an employee stock purchase plan under section 423 of the
Internal Revenue Code of 1986, as amended. Our board of
directors adopted our employee stock purchase plan in October
2007.
Share Reserve. We have initially reserved
870,000 shares of our common stock for issuance under our
employee stock purchase plan.
Administration. Our compensation committee
administers our employee stock purchase plan. Our employees
generally are eligible to participate in our employee stock
purchase plan if they are employed on a salaried basis by us, or
a subsidiary of ours that we designate, for 20 or more hours per
week and more than five months in a calendar year. Employees who
are 5% stockholders, or would become 5% stockholders as a result
of their participation in our employee stock purchase plan, are
ineligible to participate in our employee stock purchase plan.
We may impose additional restrictions on eligibility as well.
Under our employee stock purchase plan, eligible employees may
acquire shares of our common stock by accumulating funds through
payroll deductions. Our eligible employees may select a rate of
payroll deduction up to 15% of their cash compensation (or such
lower limit as determined by the compensation committee). We
also have the right to amend or terminate our employee stock
purchase plan, except that, subject to certain exceptions, no
such action may adversely affect any outstanding rights to
purchase stock under the plan. Our employee stock purchase plan
will remain in effect until terminated by our compensation
committee.
Purchase Rights. When an offering period commences,
our employees who meet the eligibility requirements for
participation in that offering period and who elect to
participate are granted a non-transferable option to purchase
shares in that offering period. An employees participation
automatically ends upon termination of employment for any
reason. An employee may withdraw from the plan at any time at
151
least five business days prior to a purchase date, and in such
event shall receive a refund of all of such employees
payroll deductions deposited to date into the plan.
No offering period will commence until this offering is
complete. Each offering period will be for approximately six
months (commencing on the first trading day on or immediately
after February 15 and August 15 of each year and terminating on
the trading day on or immediately preceding the next August 14
or February 14, respectively). The duration and timing of
offering periods may be changed by the compensation committee
without stockholder approval if such change is announced prior
to the scheduled beginning of the offering period to be effected
thereafter.
No participant will have the right to purchase our shares at a
rate which, when aggregated with purchase rights under all our
employee stock purchase plans that are also outstanding in the
same calendar year(s), has a fair market value of more than
$25,000, determined as of the first trading day of the
applicable offering period, for each calendar year in which such
right is outstanding. The purchase price for shares of our
common stock purchased under our employee stock purchase plan
will be 85% of the closing trading price per share of our common
stock as reported by the NYSE on the last date of each purchase
period.
Change in Control. In the event of a change in
control of Symetra, the acquiring entity shall assume the
outstanding purchase rights. In the event the acquiring entity
refuses to do so, the purchase and offering periods then in
progress shall terminate prior to the date of closing of the
change of control transaction.
401(k)
Plan
We offer Section 401(k) plan to all employees who meet
specified eligibility requirements. Eligible employees may
contribute up to 100% of their eligible compensation, subject to
limitations established under Section 401(k). We match
participant contributions dollar-for-dollar, up to 6% of their
compensation. Participants are immediately vested in their
contributions.
Potential
Payments Upon Termination or Change in Control
We have no employment agreements with our Named Executive
Officers that would provide payments upon termination of
employment.
Annual
Incentive Bonus Plan
The Annual Incentive Bonus Plan requires that an executive be an
active employee on December 31 of the plan year, and remain
continuously employed by the Company through the award payout
date, in order to be eligible to receive a bonus award.
Exceptions to this include death, disability, retirement at
age 65 or older or position elimination. In these cases,
the bonus will be based on eligible earnings paid through the
executives last day of work within the plan year and is
modified by the funding level of the aggregate bonus pool.
Sales
Incentive Plan
Mr. McCormicks Sales Incentive Plan provides that if
he leaves his position for any reason, he will be paid for
production earned through the end of the last full month of
employment.
Performance
Share Plan
The Performance Share Plan provides that, except for the change
in control provision described below, the executive would
immediately forfeit all outstanding awards upon termination of
employment prior to the end of the applicable award period. The
board of directors, at its discretion, may provide that if an
executive dies, retires, is disabled or is granted a leave of
absence, or if the executive is otherwise terminated in a manner
reasonably judged to be not seriously detrimental to our
company, then all or a portion of the executives award, as
determined by the board, may be paid to the executive (or
beneficiary).
152
The Performance Share Plan includes a double trigger
change in control provision which provides that if a
participants employment is terminated without cause or
constructively terminated within 24 months after a change
in control of our company, each award held by the participant
prior to the change in control is cancelled and the participant
is entitled to receive an award payment equal to the product of
(a) the then financial value of 100% of the performance
shares and (b) the performance percentage, which is based
on the level of attainment of the performance goal as of the
last day of the calendar quarter ending prior to the date of the
termination event. Alternatively, following the change in
control, if the participant remains continuously employed
through the end of the award period, then the participant will
receive those awards for which the participant would have been
paid had the change in control not occurred. For purposes of the
Performance Share Plan, a change in control occurs when any
person or group, other than White Mountains or Berkshire
Hathaway, an underwriter or an employee benefit plan of the
Company, becomes the beneficial owner of 35% or more of the
Companys outstanding common stock.
Under the Performance Share Plan, a constructive
termination is defined as a termination of the
participants employment at the initiative of the
participant following a material decrease in salary or a
material diminution in the participants authority, duties
or responsibilities.
Restricted
Stock Agreements
Restricted Stock Agreements with Mr. Talbot and
Ms. Meister provide that the restricted stock will vest on
December 31, 2011, subject to their continued employment
through such date. In the event of the executives
voluntary termination or termination with cause (as defined in
the Equity Plan), all of the unvested shares will be forfeited.
If the executives employment is terminated by us without
cause or due to the executives death or disability, the
following amounts of restricted stock will become vested: if
such termination is on or after December 31, 2009 but prior
to December 31, 2010, one-third of the restricted stock
will vest. If such termination is on or after December 31,
2010 but prior to December 31, 2011, two-thirds of the
restricted stock will vest.
In the event of a change in control followed by termination
without cause or constructive termination (as defined in the
Equity Plan) of the executive within twelve months, the
restrictions on all of the executives restricted stock
will lapse.
Potential
Payments Upon Termination
The following table shows the potential payments that would be
made by us to each of the Named Executive Officers assuming that
each executives employment was terminated due to death,
disability, retirement at age 65 or older or position
elimination on December 31, 2009 whether or not a change in
control has occurred.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 Annual
|
|
|
2008-2010
|
|
|
2009-2011
|
|
|
|
|
|
|
|
|
|
Incentive Bonus
|
|
|
Performance
|
|
|
Performance
|
|
|
Restricted Stock
|
|
|
|
|
Executive
|
|
Plan ($)(1)
|
|
|
Share Plan ($)(2)
|
|
|
Share Plan ($)(3)
|
|
|
Awards ($)(4)
|
|
|
Total ($)
|
|
|
Randall H. Talbot
|
|
|
(a
|
)
|
|
|
0
|
|
|
|
|
|
|
|
328,177
|
|
|
|
328,177
|
(5)
|
Margaret A. Meister
|
|
|
(b
|
)
|
|
|
0
|
|
|
|
|
|
|
|
34,400
|
|
|
|
34,440
|
(5)
|
Richard J. Lindsay
|
|
|
(c
|
)
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patrick B. McCormick
|
|
|
(d
|
)
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jennifer V. Davies
|
|
|
(e
|
)
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents the amount payable under the 2009 Annual Incentive
Bonus Plan, except with respect to Mr. McCormick, who would
instead receive payment under his Sales Incentive Plan. The
amounts for the 2009 Annual Incentive Bonus plan will be
determined later in the first quarter of 2010. Once determined,
this amount is payable in the event of death, disability,
retirement at age 65 or older or elimination of position,
whether or not a change in control of the Company has occurred.
This figure represents 100% of the executives individual
target modified by the funding level of the aggregate bonus pool |
153
|
|
|
|
|
(a) Mr. Talbot would receive $262,500 multiplied by
the discretionary percentage determined by the compensation
committee.
|
|
|
|
|
|
(b) Ms. Meister would receive $150,000 multiplied by
the discretionary percentage determined by the compensation
committee.
|
|
|
|
|
|
(c) Mr. Lindsay would receive $99,750 multiplied by
the discretionary percentage determined by the compensation
committee.
|
|
|
|
|
|
(d) Mr. McCormick would receive his fourth quarter
2009 earned incentive compensation (this amount will not be
determined until later in the first quarter of 2010).
|
|
|
|
|
|
(e) Ms. Davies would receive $82,250 multiplied by the
discretionary percentage determined by the compensation
committee.
|
|
|
|
(2) |
|
No payment would have been made in respect of performance units
because performance goals were not met in 2008, which affected
the
2008-2010
Performance Share Plan as of December 31, 2009. The board
of directors, at its discretion, may elect to award all or a
portion of the grant to an executive in the event of such
executives death, retirement, disability or leave of
absence, or in the event of termination in a manner not
determined to be seriously detrimental to the Company. |
|
|
|
(3) |
|
This amount will not be determined until later in the first
quarter of 2010. |
|
|
|
(4) |
|
Represents the amount vested (based on a per share fair value as
of December 31, 2009 of $13.08) if Mr. Talbots
or Ms. Meisters employment is terminated without
cause or due to his or her death or disability. In the event of
a change in control followed by termination without cause or
constructive termination within twelve months, Mr. Talbot
would receive $984,532 and Ms. Meister would receive
$103,200. |
|
|
|
(5) |
|
These amounts will be increased by the amounts listed in
footnote (1)(a) or (b) above, as applicable, when those
amounts are determined. |
Compensation
of Directors
The following table presents compensation paid to our board of
directors for the year ended December 31, 2009:
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|
|
|
|
|
|
|
|
Fees Earned
|
|
|
|
|
|
|
or Paid in
|
|
|
|
|
Name
|
|
Cash ($)
|
|
|
Total ($)
|
|
|
David T. Foy(1)
|
|
|
63,000
|
|
|
|
63,000
|
|
Lois W. Grady(2)
|
|
|
74,900
|
|
|
|
74,900
|
|
Sander M. Levy(3)
|
|
|
58,900
|
|
|
|
58,900
|
|
Robert R. Lusardi(4)
|
|
|
30,000
|
|
|
|
30,000
|
|
David I. Schamis(5)
|
|
|
42,900
|
|
|
|
42,900
|
|
Lowndes A. Smith(6)
|
|
|
261,800
|
|
|
|
261,800
|
|
Randall H. Talbot(7)
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes chairman of the finance committee retainer, annual
retainer, and board, audit committee, compensation committee,
finance committee and IPO committee meeting fees. Mr. Foy
served as chairman of the board until May 2009. |
|
|
|
(2) |
|
Includes vice chairman of the board retainer, chairman of the
compensation committee retainer, annual retainer and board and
compensation committee meeting fees. Ms. Grady also serves
on the First Symetra National Life Insurance Company of New York
board of directors and audit committee. |
|
|
|
(3) |
|
Includes chairman of the audit committee retainer, annual
retainer and board, audit committee, finance committee and IPO
committee meeting fees. Mr. Levy also serves on the First
Symetra National Life Insurance Company of New York board of
directors and audit committee. All compensation is paid to
Vestar Capital Partners. |
154
|
|
|
(4) |
|
Includes annual retainer and board meeting fees. |
|
|
|
(5) |
|
Includes annual retainer, and board, audit committee and finance
committee meeting fees. Mr. Schamis also serves on the
First Symetra National Life Insurance Company of New York board
of directors and audit committee. All compensation is paid to
J.C. Flowers & Co. LLC. |
|
|
|
(6) |
|
Includes chairman of the board retainer, annual retainer and
board, compensation committee and IPO committee meeting fees.
Mr. Smith has served as chairman of the board since May
2009. Mr. Smith also serves on the First Symetra National
Life Insurance Company of New York board of directors. |
|
|
|
(7) |
|
Mr. Talbot is our employee and receives no additional
retainer or fee for board participation. |
Upon completion of the offering, our directors who are not
employees of the Company will be entitled to the following
compensation for service on our board of directors and board
committees:
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|
|
Chairman of the board additional annual retainer: $270,000
|
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|
|
|
Vice chairman of the board additional annual
retainer: $40,000
|
|
|
|
|
|
Board member annual retainer: $75,000
|
|
|
|
|
|
Audit committee chairman additional annual retainer: $40,000
|
|
|
|
|
|
Audit committee member annual retainer: $10,000
|
|
|
|
|
|
Compensation committee chairman annual retainer: $25,000
|
|
|
|
|
|
Finance committee chairman annual retainer: $25,000
|
|
|
|
|
|
Nominating and corporate governance committee chairman annual
retainer: $15,000
|
|
|
|
|
|
Board meeting participation: $2,000
|
|
|
|
|
|
Committee meeting participation: $2,000
|
In addition, members of the board of directors of First Symetra
National Life Insurance Co. of New York receive an annual
retainer of $500, and fees of $100 per board meeting and $50 per
committee meeting attended.
We reimburse our directors for first class travel, hotel
accommodations, meals, and other necessary expenses.
155
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
The following is a summary of each transaction or series of
similar transactions since January 1, 2006 to which we were
or are a party in which the amount involved exceeded or exceeds
$120,000 and in which any of our directors or executive
officers, any holder of 5% of our capital stock or any member of
the immediate family of any of the foregoing persons had or will
have a direct or indirect material interest.
Investment
Management Agreement with White Mountains Advisors LLC
A majority of our investments are managed by WM Advisors, a
wholly owned subsidiary of White Mountains Insurance Group, Ltd.
White Mountains Insurance Group, Ltd. beneficially owns
26,887,872 shares of our common stock, which includes
warrants exercisable for 9,487,872 shares. Mr. David T.
Foy, one of our directors, serves as Executive Vice President
and Chief Financial Officer of White Mountains Insurance Group,
Ltd. Mr. Lowndes A. Smith, chairman of our board of directors,
serves as a director of White Mountains Insurance Group, Ltd.
Mr. Robert R. Lusardi, one of our directors, serves as
President and Chief Executive Officer of White Mountains
Financial Services, LLC, an affiliate of White Mountains
Insurance Group, Ltd. The total fees incurred with respect to WM
Advisors under our existing investment management agreements, or
IMAs, with them for the nine months ended September 30,
2009 and for the years ended December 31, 2008, 2007 and
2006, respectively, were $10.4 million, $14.6 million,
$15.3 million and $20.2 million. Following
satisfaction of applicable prior notice/approval requirements of
insurance regulatory authorities, we and certain of our
subsidiaries intend to enter into an amended investment
management agreement, or the WMA Agreement, on substantially the
same terms as our existing IMAs with WM Advisors pursuant to
which WM Advisors will continue to supervise and direct the
fixed income and alternative investment portion of our
investment portfolio in accordance with our investment
philosophy described under Business
Investments.
Under the WMA Agreement and consistent with the existing IMAs,
WM Advisors will have full discretion and authority to make all
investment decisions in respect of the fixed income and
alternative investment portion of our investment portfolio on
our behalf and at our sole risk, and to do anything which WM
Advisors deems is required, appropriate or advisable in
connection with the foregoing.
The assets of our portfolio will be held in one or more
separately identifiable accounts in the custody of a bank or
similar entity designated by us and acceptable to WM Advisors.
We will be responsible for custodial arrangements and the
payment of all custodial charges and fees.
We will agree to pay annual investment management fees generally
based on the month-end market/book values held under custody as
set forth in the table below (which are substantially the same
as the fees under our existing IMAs):
|
|
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|
|
|
|
Value
|
|
Annual Fee
|
|
Investment grade fixed maturities:
|
|
|
|
|
Up to $1 billion
|
|
Book
|
|
10.0 basis points
|
|
|
|
|
(0.1% or 0.001)
|
$1 billion $2 billion
|
|
Book
|
|
8.5 basis points
|
$2 billion $5 billion
|
|
Book
|
|
7.5 basis points
|
Greater than $5 billion
|
|
Book
|
|
2.5 basis points
|
High yield debt
|
|
Market
|
|
25.0 basis points
|
Equities
|
|
Market
|
|
100.0 basis points
|
Fully funded hedge funds, private equity funds and other
deferred fundings:
|
|
|
|
|
First two years of funds life
|
|
Committed
|
|
100.0 basis points
|
Thereafter
|
|
Market
|
|
100.0 basis points
|
Affordable Housing Credit Funds:
|
|
|
|
|
First year of funds life
|
|
Committed
|
|
100.0 basis points
|
Thereafter
|
|
Market
|
|
10.0 basis points
|
156
We will pay WM Advisors a quarterly fee for portfolio management
services computed at the annual rate of one-half basis point
(0.005%) of the aggregate value of the net assets of the
aggregate investment account, which includes equities and
commercial mortgage loans in addition to the items managed by WM
Advisors.
WM Advisors will provide reports containing a detailed listing
of invested assets and transactions in our investment portfolio,
as well as various other analytical reports as outlined by
Symetra, at least quarterly. We will review periodically the
performance of and the fees paid to WM Advisors under the WMA
Agreement.
The WMA Agreement will provide for an initial fixed term of one
year, which will be extendible by us for an additional year (a
second year) and, if so extended, for a second additional year
(a third year). Following the end of the initial term and any
extensions, the WMA Agreement may be terminated by either party
upon 60 days written notice.
WM Advisors also provides investment advisory services to White
Mountains Insurance Group, Ltd., its subsidiaries and a number
of its affiliates.
Investment
Management Agreement with Prospector Partners, LLC
Prospector is a registered investment adviser managing assets
for corporations, foundations, endowments and high net worth
individuals. Mr. John D. Gillespie, the founder and
Managing Member of Prospector, is a director of White Mountains
Insurance Group, Ltd. As discussed above, White Mountains
Insurance Group, Ltd. beneficially owns shares of our common
stock and warrants and our chairman serves as a director and two
of our directors serve as officers of White Mountains entities.
Historically, Prospector managed most of the publicly traded
common equity and convertible securities in our portfolio
through a sub-advisory agreement with WM Advisors. As of
September 30, 2009, Prospector served as a discretionary
advisor to WM Advisors under the sub-advisory agreement with
respect to approximately $0.2 billion of specified assets
in our combined insurance and non-insurance portfolios. For the
nine months ended September 30, 2009 and during the years
ended December 31, 2008, 2007 and 2006, respectively, we
incurred $1.2 million, $1.9 million, $2.1 million
and $1.8 million in fees with respect to the Prospector
portfolio. These fees are included in the WM Advisor fees
mentioned above.
Following satisfaction of applicable prior notice/approval
requirements of insurance regulatory authorities, we intend to
enter into a separate investment management agreement with
Prospector, or the Prospector Agreement, pursuant to which
Prospector will agree to supervise and direct the publicly
traded common equity and convertible securities portion of our
investment portfolio in accordance with its investment strategy
described under Business Investments.
Under the Prospector Agreement, Prospector will have discretion
and authority with respect to the portfolio it manages for us
that is substantially similar to WM Advisors discretion
and authority under the WMA Agreement. The assets of our
portfolio will be held in one or more separately identifiable
accounts in the custody of a bank or similar entity designated
by us and acceptable to Prospector. We will be responsible for
custodial arrangements and the payment of all custodial charges
and fees.
Under the Prospector Agreement, we will agree to pay annual
investment management fees based on aggregate net assets under
management according to the following schedule:
|
|
|
Assets Under Management
|
|
Annual Fee
|
|
Up to $200 million
|
|
100.0 basis points
|
$200 million to $400 million
|
|
50.0 basis points
|
Greater than $400 million
|
|
25.0 basis points
|
The Prospector Agreement will have an initial fixed term of
three years, which will be extendible by us for an additional
year (a fourth year) at or prior to the end of the second year
of the term and, if so extended, for a second additional year (a
fifth year) at or prior to the end of the third year of the
term. The Prospector Agreement will be terminable by us only
(i) for cause (including material non-performance by
Prospector), (ii) if either John D. Gillespie or Richard P.
Howard are no longer affiliated with Prospector or (iii) if
there is a change in control of Prospector. Following the end of
the initial term and any extensions, the
157
Prospector Agreement may be terminated by either party on
60 days written notice. We will review periodically
the performance of and the fees paid to Prospector under the
Prospector Agreement.
Relationships
and Transactions with White Mountains Insurance Group, Ltd. and
its Affiliates
We are party to certain shareholders agreements, dated as of
March 8, 2004, March 19, 2004 and April 16, 2004,
with our stockholders. The shareholders agreements will
terminate on the consummation of this offering other than
certain provisions, including provisions relating to tag-along
rights, transfer restrictions, registration rights,
confidentiality and competition. Regarding
tag-along
rights, for one year following this offering, if one or more
stockholders party to a shareholders agreement propose to
transfer 10% or more of our then outstanding common stock, they
must afford each other stockholder party to such shareholders
agreement the opportunity to participate proportionally in the
transfer. Regarding transfer restrictions, for one year
following this offering, warrant transfers are generally
restricted and for 18 months following this offering, any
stockholder party to a shareholders agreement wishing to
transfer shares of our common stock or warrants must generally
require the transferee to agree to be bound by the terms of the
shareholders agreement. Regarding registration rights, for
ten years following this offering, stockholders party to a
shareholders agreement holding in the aggregate 10% of all
registrable securities (as defined in the shareholders
agreements) then held by stockholders party to a shareholders
agreement may request that we effect the registration of such
securities through an underwritten public offering or the filing
of a shelf registration statement or permit the sale of such
securities already included in an effective shelf registration
statement pursuant to an underwritten public offering, subject
to certain limitations. During this
ten-year
period, if we register common shares in connection with an
offering, stockholders party to a shareholders agreement will be
given an opportunity to include their registrable securities,
subject to certain limitations. With respect to confidentiality
provisions, the shareholders agreements provide that, for an
indefinite period of time, the stockholders party to a
shareholders agreement will keep confidential any non-public
information made available to them during the due diligence
process of any prior offering of our common stock. The
shareholders agreements provide that, for an indefinite period
of time, we will indemnify the holders of registrable securities
and any underwriters for losses or damages arising out of
material misstatements or omissions in the relevant registration
statement or prospectus or violations of law in connection with
the registration of registrable securities, and further provide
that the holders of registrable securities and any underwriters
will indemnify us for losses or damages arising out of material
misstatements or omissions in the relevant registration
statement or prospectus that was made in reliance on written
information furnished by such holders or underwriters. The
shareholders agreements also provide that the stockholders may
freely engage in, or invest in, businesses that are competitive
with ours and that there are no obligations for any stockholder
to refer any business opportunities to us. In addition,
following this offering and so long as White Mountains Insurance
Group, Ltd. holds at least 20% of our outstanding common stock,
assuming exercise of any outstanding warrants, each stockholder
party to a shareholders agreement is required to vote its shares
for two board members designated by White Mountains Insurance
Group, Ltd., which will be reduced to one nominee so long as
White Mountains Insurance Group, Ltd. holds at least 10%, but
less than 20%, of our outstanding common stock.
Symetra Life Insurance Company entered into an accident and
health reinsurance agreement with a related party, White
Mountains Re America, a subsidiary of White Mountains Insurance
Group, Ltd. Berkshire Hathaway, Inc. and White Mountains Group,
Ltd. each beneficially own 26,887,872 shares of our common
stock, which includes warrants exercisable for 9,487,872 shares.
As discussed above, our chairman serves as a director and two of
our directors serve as officers of White Mountains entities.
This reinsurance agreement is on substantially the same terms as
agreements entered into with other third parties. For the nine
months ended September 30, 2009 and the year ended
December 31, 2008, we recorded ceded premiums of
$1.1 million and $2.1 million, respectively, and
recovered ceded losses of $2.5 million and
$1.1 million, respectively.
Relationships
and Transactions with Others
The following transactions involve the operations of our
subsidiary, Symetra Life Insurance Company, and were entered
into in the ordinary course of business.
158
Symetra Life Insurance Company entered into a coinsurance
reinsurance agreement with Wilton Reassurance Company, or Wilton
Re. This agreement is on substantially the same terms as
agreements entered into with other third parties. For the nine
months ended September 30, 2009 and for the years ended
December 31, 2008, 2007 and 2006, we recorded ceded
premiums of $1.4 million, $1.8 million,
$1.7 million and $1.4 million, respectively, and
recovered ceded losses of $0.3 million, $0.9 million,
$0.3 million and $0.2 million, respectively. Vestar
Capital Partners, which holds 6,089,999 shares of our
common stock, has an investment interest in Wilton Re.
Mr. Sander M. Levy, one of our directors and our audit
committee chairman, serves on the board of directors of Wilton
Re. Mr. Levy is not directly involved in the business
dealings between the two companies but disclosed the
relationship to our audit committee, which ratified the
relationship.
Symetra Life Insurance Company is a party to several coinsurance
reinsurance agreements with General Re Life Corporation. General
Re Life Corporation is the North American life and health
reinsurance company of General Re Corporation, a subsidiary of
Berkshire Hathaway Inc. As discussed above, Berkshire Hathaway,
Inc. beneficially owns shares of our common stock and warrants.
These agreements are on substantially the same terms as
agreements entered into with other third parties. For the nine
months ended September 30, 2009 and the years ended
December 31, 2008, 2007 and 2006, we recorded ceded
premiums of $0.3 million, $0.5 million,
$0.4 million and $0.1 million, respectively. No ceded
losses have been recovered under these agreements.
Symetra Life Insurance Company issued an insurance policy for
both specific and aggregate excess loss coverage to Essent
Healthcare with an effective date of January 1, 2008 with
substantially the same terms as those provided to other third
parties. Vestar Capital Partners, which holds
6,089,999 shares of our common stock, has an investment in
Essent Healthcare. Premiums received for the nine months ended
September 30, 2009 and the year ended December 31,
2008 were $0.1 million and $0.1 million, respectively.
We recorded losses of $0.1 million and $0.6 million,
for the nine months ended September 30, 2009 and for the
year ended December 31, 2008, respectively.
Symetra Life Insurance Company issued an insurance policy for
specific excess loss coverage to Nebraska Furniture Mart with an
effective date of January 1, 2009 with substantially the
same terms as those provided to other third parties. Nebraska
Furniture Mart is a subsidiary of Berkshire Hathaway, Inc. As
discussed above, Berkshire Hathaway, Inc. beneficially owns
shares of our common stock and warrants. For the nine months
ended September 30, 2009 we received premiums of $0.5
million and recorded losses of $0.1 million.
Symetra Life Insurance Company issued an insurance policy for
specific excess loss coverage to Moodys Corporation, with
an effective date of January 1, 2008 with substantially the
same terms as those provided to other third parties. The policy
was terminated as of December 31, 2008. Berkshire Hathaway
Inc., has an investment in Moodys Corporation. As
discussed above, Berkshire Hathaway, Inc. beneficially owns
shares of our common stock and warrants. We recorded premiums of
$0.3 million for the year ended December 31, 2008.
Symetra Life Insurance Company issued medical stop-loss and
group life insurance policies with a related party, MidAmerican
Energy Holdings Company, an affiliate of Berkshire Hathaway
Inc., beginning January 1, 2006 with substantially the same
terms as those provided to other third parties. As discussed
above, Berkshire Hathaway, Inc. beneficially owns shares of our
common stock and warrants. The policy was terminated as of
December 31, 2006. Premiums received from MidAmerican
Energy Holdings Company for the year ended December 31,
2006 were $2.7 million and ceded losses for the years ended
December 31, 2007 and 2006 were $0.6 million and
$1.0 million, respectively.
Symetra Life Insurance Company held $3.6 million, $3.1 million,
$6.5 million, and $5.6 million in fair value of Class B common
stock in Berkshire Hathaway, Inc. as of September 30, 2009 and
December 31, 2008, 2007, and 2006, respectively. As
discussed above, Berkshire Hathaway, Inc. beneficially owns
shares of our common stock and warrants. For the nine months
ended September 30, 2009, we had purchases of $0.4 million and
no sales related to our holdings in Berkshire Hathaway, Inc. For
the years ending December 31, 2008, 2007, and 2006, we had
purchases of $2.1 million, $0.0 million, and
$2.2 million, respectively, and sales of $3.1 million,
$0.4 million, and $0.0 million, respectively, related
to our holdings in Berkshire Hathaway, Inc.
159
One of our subsidiaries, Symetra Assigned Benefits Service
Company (SABSCO), in the ordinary course of business, accepted
the assignment of periodic payment obligations from related
parties OneBeacon Insurance Group (OB) and United States
Liability Insurance Company (USLI). OB and USLI are affiliated
companies of White Mountains Insurance Group, Ltd. and Berkshire
Hathaway Inc., respectively. As discussed above, White Mountains
Group, Ltd. and Berkshire Hathaway, Inc. each beneficially own
shares of our common stock and warrants and our chairman serves
as a director and two of our directors serve as officers of
White Mountains entities. These assignments were on
substantially the same terms as those provided to other third
parties. For the nine months ended September 30, 2009 and
the years ended December 31, 2008, 2007 and 2006, SABSCO
purchased $1.1 million, $0.1 million,
$0.6 million and $0.4 million, respectively, in
structured settlement annuities from Symetra Life to fund these
obligations for OB and purchased $0.3 million in structured
settlement annuities from Symetra Life to fund these obligations
for USLI for the year ended December 31, 2007.
Indemnification
Agreements with our Directors and Officers
Our certificate of incorporation and bylaws provide that we
shall indemnify our directors and officers to the fullest extent
permitted by law. In addition, as permitted by the laws of the
State of Delaware, we have entered into indemnification
agreements with each of our directors and officers. Under the
terms of our indemnification agreements, we are required to
indemnify each of our directors and officers, to the fullest
extent permitted by the laws of the State of Delaware, against
any and all (a) costs and expenses (including
attorneys and experts fees, expenses and charges)
actually and reasonably paid or incurred in connection with
investigating, defending, being a witness in or participating
in, or preparing to investigate, defend, be a witness in or
participate in, and (b) damages, losses, liabilities,
judgments, fines, penalties and amounts paid in settlement
relating to, resulting from or arising out of, in the case of
either (a) or (b), any threatened, pending or completed
action, suit or proceeding, or any inquiry or investigation that
such person determines might lead to the institution of any such
action, suit or proceeding, by reason of the fact that
(y) such person is or was a director, officer, employee or
agent of the Company
and/or a
subsidiary of the Company or (z) such person is or was
serving at our request as a director, officer, employee or agent
of another corporation, partnership, non-profit organization,
joint venture, trust or other enterprise. The indemnification
agreements also require us, if so requested, to advance within
20 business days any and all costs and expenses to the director
or officer which such person determines reasonably likely to be
payable, provided that such person will return any such advance
which remains unspent at the final conclusion of the claim to
which the advance related. Our bylaws also require that such
person return any such advance if it is ultimately determined
that such person is not entitled to indemnification by us as
authorized by the laws of the State of Delaware.
We are not required to provide indemnification under our
indemnification agreements for certain matters, including:
(1) indemnification beyond that permitted by the laws of
the State of Delaware; (2) indemnification in connection
with certain proceedings or claims initiated or brought
voluntarily by the director or officer; (3) indemnification
for settlements the director or officer enters into without the
Companys written consent; (4) indemnification related
to disgorgement of profits under Section 16(b) of the
Securities Exchange Act of 1934; (5) indemnification where
a final decision by a court having jurisdiction in the matter
shall determine that such indemnification is not lawful; or
(6) indemnification for liabilities for which the director
or officer has received payment under any insurance policy as
may exist for such persons benefit, our articles of
incorporation or bylaws or any other contract or otherwise. The
indemnification agreements require us, to the extent that our
board of directors determines it to be economically reasonable,
to maintain directors and officers liability
insurance.
Procedures
for Approval of Related Party Transactions
Prior to this offering, we did not have a written policy
relating to the approval of related party transactions. Any such
transactions were approved by our board of directors or audit
committee in accordance with applicable law.
160
In connection with this offering, we will adopt a written policy
relating to the approval of related party transactions. We will
review all relationships and transactions in which we and our
directors and executive officers or their immediate family
members are participants to determine whether such persons have
a direct or indirect material interest. Our legal staff will be
primarily responsible for the development and implementation of
processes and controls to obtain information from our directors
and executive officers with respect to related party
transactions and for determining, based on the facts and
circumstances, whether we or a related person have a direct or
indirect material interest in the transaction.
In addition, our audit committee will review and approve or
ratify any related party transaction reaching a certain
threshold of significance. As set forth in the audit
committees charter to be effective upon completion of this
offering, in the course of its review and approval or
ratification of a related party transaction, the committee will
consider:
|
|
|
|
|
the nature of the related persons interest in the
transaction;
|
|
|
|
the material terms of the transaction, including, without
limitation, the amount and type of transaction;
|
|
|
|
the importance of the transaction to the related person;
|
|
|
|
the importance of the transaction to us;
|
|
|
|
whether the transaction would impair the judgment of a director
or executive officer to act in the best interest of the
Company; and
|
|
|
|
any other matters the audit committee deems appropriate.
|
Any member of the audit committee who is a related person with
respect to a transaction under review will not be permitted to
participate in the deliberations or vote respecting approval or
ratification of the transaction. However, such director may be
counted in determining the presence of a quorum at a meeting of
the committee that considers the transaction.
161
PRINCIPAL
AND SELLING STOCKHOLDERS
The following table sets forth, as of January 1, 2010,
information regarding the beneficial ownership of our common
stock by:
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|
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|
|
each person known by us to beneficially own more than 5% of the
outstanding shares of our common stock;
|
|
|
|
each Selling Stockholder;
|
|
|
|
each of our current directors;
|
|
|
|
each of our named executive officers; and
|
|
|
|
our directors and executive officers as a group.
|
Beneficial ownership is determined in accordance with the SEC
rules and includes voting or investment power with respect to
the securities. Shares of common stock subject to options and
warrants that are currently exercisable or exercisable within
60 days are deemed to be outstanding and beneficially owned
by the person holding such options and warrants. Such shares,
however, are not deemed to be outstanding for the purposes of
computing the percentage ownership of any other person.
Percentage of beneficial ownership is based on
92,729,455 shares of our common stock outstanding as of
January 1, 2010. Unless otherwise indicated, the address
for all beneficial owners is
c/o Symetra
Financial Corporation, 777 108th Avenue NE,
Suite 1200, Bellevue, WA 98004.
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Shares Beneficially Owned After Offering
|
|
|
Shares of
|
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|
|
Assuming No
|
|
Assuming Full
|
|
|
Common Stock
|
|
|
|
Exercise of
|
|
Exercise of
|
|
|
Beneficially Owned
|
|
|
|
Over-Allotment
|
|
Over-Allotment
|
|
|
Prior to the Offering
|
|
Shares Offered
|
|
Option
|
|
Option
|
Beneficial Owner of 5% or More:
|
|
Number
|
|
%
|
|
Number
|
|
Number
|
|
%
|
|
Number
|
|
%
|
|
Berkshire Hathaway Inc(1)(2)
|
|
|
26,887,872
|
|
|
|
26.3
|
%
|
|
|
|
|
|
|
26,887,872
|
|
|
|
22.5
|
%
|
|
|
26,887,872
|
|
|
|
21.8
|
%
|
White Mountains Insurance Group, Ltd(1)(3)
|
|
|
26,887,872
|
|
|
|
26.3
|
|
|
|
|
|
|
|
26,887,872
|
|
|
|
22.5
|
|
|
|
26,887,872
|
|
|
|
21.8
|
|
Franklin Mutual Advisers, LLC(4)
|
|
|
10,875,000
|
|
|
|
11.7
|
|
|
|
|
|
|
|
10,875,000
|
|
|
|
9.9
|
|
|
|
10,875,000
|
|
|
|
9.5
|
|
Caxton Associates LP(5)
|
|
|
6,090,000
|
|
|
|
6.6
|
|
|
|
609,000
|
|
|
|
5,481,000
|
|
|
|
5.0
|
|
|
|
5,481,000
|
|
|
|
4.8
|
|
OZ Master Fund, Ltd.(6)
|
|
|
6,090,000
|
|
|
|
6.6
|
|
|
|
609,000
|
|
|
|
5,481,000
|
|
|
|
5.0
|
|
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|
5,481,000
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|
|
|
4.8
|
|
Vestar Capital Partners(7)
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|
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6,089,999
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|
|
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6.6
|
|
|
|
|
|
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|
6,089,999
|
|
|
|
5.5
|
|
|
|
6,089,999
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|
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5.3
|
|
Highfields Capital Management LP(8)
|
|
|
6,089,998
|
|
|
|
6.6
|
|
|
|
|
|
|
|
6,089,998
|
|
|
|
5.5
|
|
|
|
6,089,998
|
|
|
|
5.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Selling Stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prospector Partners, LLC(9)
|
|
|
3,480,000
|
|
|
|
3.8
|
|
|
|
1,111,100
|
|
|
|
2,368,900
|
|
|
|
2.2
|
|
|
|
2,368,900
|
|
|
|
2.1
|
|
Fairholme Capital Management, LLC(10)
|
|
|
1,740,000
|
|
|
|
1.9
|
|
|
|
1,740,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SC Liquidator, LLC(11)
|
|
|
1,739,999
|
|
|
|
1.9
|
|
|
|
1,739,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sayro Fund Investors III LLC(12)
|
|
|
974,400
|
|
|
|
1.1
|
|
|
|
974,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rho Capital Partners, Inc(13)
|
|
|
650,325
|
|
|
|
*
|
|
|
|
162,581
|
|
|
|
487,744
|
|
|
|
*
|
|
|
|
487,744
|
|
|
|
*
|
|
JPMorgan Trust Co./Sulam Trust(14)
|
|
|
239,250
|
|
|
|
*
|
|
|
|
239,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Terry L. Baxter
|
|
|
43,500
|
|
|
|
*
|
|
|
|
20,000
|
|
|
|
23,500
|
|
|
|
*
|
|
|
|
23,500
|
|
|
|
*
|
|
Snyder, Cahoon & Co., PLLC Profit Sharing Plan(15)
|
|
|
17,400
|
|
|
|
*
|
|
|
|
17,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael J. Batal, III
|
|
|
6,525
|
|
|
|
*
|
|
|
|
6,525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alekh N. Dalal
|
|
|
4,350
|
|
|
|
*
|
|
|
|
435
|
|
|
|
3,915
|
|
|
|
*
|
|
|
|
3,915
|
|
|
|
*
|
|
J.C. Flowers I LP(16)
|
|
|
2,175,000
|
|
|
|
2.3
|
|
|
|
2,175,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ulysses Partners Designated Investments, L.P.(17)
|
|
|
739,500
|
|
|
|
*
|
|
|
|
295,800
|
|
|
|
443,700
|
|
|
|
*
|
|
|
|
443,700
|
|
|
|
*
|
|
162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Beneficially Owned After Offering
|
|
|
Shares of
|
|
|
|
Assuming No
|
|
Assuming Full
|
|
|
Common Stock
|
|
|
|
Exercise of
|
|
Exercise of
|
|
|
Beneficially Owned
|
|
|
|
Over-Allotment
|
|
Over-Allotment
|
|
|
Prior to the Offering
|
|
Shares Offered
|
|
Option
|
|
Option
|
|
|
Number
|
|
%
|
|
Number
|
|
Number
|
|
%
|
|
Number
|
|
%
|
|
Directors and Executive Officers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lowndes A. Smith(18)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lois W. Grady(19)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Randall H. Talbot(20)
|
|
|
140,520
|
|
|
|
*
|
|
|
|
|
|
|
|
140,520
|
|
|
|
*
|
|
|
|
140,520
|
|
|
|
*
|
|
Margaret A. Meister(21)
|
|
|
7,890
|
|
|
|
*
|
|
|
|
|
|
|
|
7,890
|
|
|
|
*
|
|
|
|
7,890
|
|
|
|
*
|
|
Jennifer V. Davies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard J. Lindsay
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patrick B. McCormick
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David T. Foy(1)(22)
|
|
|
26,887,872
|
|
|
|
26.3
|
|
|
|
|
|
|
|
26,887,872
|
|
|
|
22.5
|
|
|
|
26,887,872
|
|
|
|
21.8
|
|
Sander M. Levy(23)
|
|
|
6,089,999
|
|
|
|
6.6
|
|
|
|
|
|
|
|
6,089,999
|
|
|
|
5.5
|
|
|
|
6,089,999
|
|
|
|
5.3
|
|
Robert R. Lusardi(1)(24)
|
|
|
26,887,872
|
|
|
|
26.3
|
|
|
|
|
|
|
|
26,887,872
|
|
|
|
22.5
|
|
|
|
26,887,872
|
|
|
|
21.8
|
|
David I. Schamis(25)
|
|
|
2,175,000
|
|
|
|
2.3
|
|
|
|
2,175,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directors and executive offiers as a group (16 persons)
|
|
|
35,301,281
|
|
|
|
34.5
|
|
|
|
2,175,000
|
|
|
|
33,126,281
|
|
|
|
30.1
|
|
|
|
33,126,281
|
|
|
|
29.0
|
|
|
|
|
* |
|
Represents ownership of less than 1% |
|
(1) |
|
Includes warrants exercisable for 9,487,872 shares. |
|
(2) |
|
Represents shares held by General Reinsurance Corporation
(Gen Re), a subsidiary of General Re Corporation
(General Re). General Re is a subsidiary of
Berkshire Hathaway Inc. (Berkshire). As General Re
and Berkshire are each in the chain of ownership of Gen Re, each
of Berkshire and General Re may be deemed to both beneficially
own and have a pecuniary interest in all shares of the
Companys common stock owned by Gen Re. Warren E. Buffett,
as the controlling stockholder of Berkshire, may be deemed to
beneficially own, but only to the extent he has a pecuniary
interest in, the shares of the Companys common stock owned
by Gen Re. Mr. Buffett disclaims beneficial ownership of the
reported securities except to the extent of his pecuniary
interest therein. The address of Berkshire is 3555
Farnam Street, Omaha, NE 68131. |
|
(3) |
|
Represents shares held by White Mountains Holdings (NL) B.V.
White Mountains Holdings (NL) B.V. (WMNL) is a
subsidiary of White Mountains Insurance Group, Ltd. (White
Mountains). White Mountains may be deemed to both
beneficially own and have a pecuniary interest in all shares of
the Companys common stock owned by WMNL. The address of
White Mountains is 80 South Main Street, Hanover, NH 03755. |
|
(4) |
|
Represents 1,183,200 shares held by Franklin Mutual Beacon
Fund, 445,440 shares held by Franklin Mutual Recovery Fund,
255,780 shares held by Mutual Beacon Fund (Canada),
1,020,510 shares held by Mutual Financial Services Fund,
3,434,760 shares held by Mutual Quest Fund,
84,390 shares held by Mutual Recovery Fund, Ltd. and
4,450,920 shares held by Mutual Beacon Fund (collectively,
the Franklin Funds). The Franklin Funds are
investment advisory clients of Franklin Mutual Advisers, LLC
(FMA). None of the Franklin Funds owns more than 5%
of the Companys common stock. Pursuant to investment
advisory agreements with each of the Franklin Funds, FMA has
sole voting and investment power over all the securities owned
by the Franklin Funds, including the shares of the
Companys common stock. Peter Langerman, chairman,
president and chief executive officer of FMA, has overall
responsibility for exercising voting and investment control over
the Franklin Funds shares of the Companys common
stock. For purposes of the reporting requirements of the
Exchange Act, FMA and Peter Langerman are deemed to be
beneficial owners of the shares; however, FMA and Peter
Langerman each expressly disclaim beneficial ownership of the
shares of the Companys common stock because neither Mr.
Langerman nor FMA has any right to any economic benefits in, nor
any interest in, dividends |
footnotes continued on following page
163
|
|
|
|
|
or proceeds from the sale of shares of the Companys common
stock. The address of FMA is 101 John F. Kennedy Parkway, Short
Hills, NJ 07078. |
|
(5) |
|
Represents shares held by CxLife, LLC. Caxton Associates LP is
the manager of CxLife, LLC. Bruce S. Kovner is the Chairman of
Caxton Associates LP and the sole shareholder of Caxton
Corporation, the general partner and majority owner of Caxton
Associates LP. As a result of the foregoing, Mr. Kovner may
be deemed to beneficially own the shares of the Companys
common stock held by CxLife, LLC. Mr. Kovner disclaims
beneficial ownership of the shares of the Companys common
stock, except to the extent of any direct pecuniary interest
therein. The address of Caxton Associates LP and Caxton
Corporation is 731 Alexander Road, Building 2, Princeton, NJ
08540. |
|
(6) |
|
Represents shares held by OZ Management LP. Daniel S. Och, as
Chief Executive Officer of Och-Ziff Capital Management LLC, the
sole shareholder of Och-Ziff Holding Corporation, the general
partner of OZ Management LP and the Investment Manager of OZ
Master Fund, Ltd., may be deemed to have voting and/or
investment control of the shares of the Companys common
stock held by OZ Master Fund, Ltd. Mr. Och disclaims beneficial
ownership of the shares of the Companys common stock,
except to the extent of any direct pecuniary interest therein.
The address of OZ Management LP is 9 West 57th Street,
39th Floor, New York, NY 10019. |
|
(7) |
|
Represents 128,424 shares held by Vestar Symetra LLC and
5,961,575 shares held by Vestar Capital Partners IV, LP,
entities which are affiliated with or managed by Vestar Capital
Partners. Sander M. Levy, one of the Companys directors,
is a managing director of Vestar Capital Partners. Mr. Levy
disclaims beneficial ownership in the shares of the
Companys common stock except to the extent of any
pecuniary interest therein. The address of Vestar Capital
Partners is 245 Park Avenue, 41st Floor, New York, NY 10167. |
|
(8) |
|
Represents 553,876 shares held by Highfields Capital I LP
(Highfields I), 1,306,426 shares held by
Highfields Capital II LP (Highfields II) and
4,229,696 shares held by Highfields Capital III L.P.
(Highfields III and together with Highfields I and
Highfields II, the Highfields Funds). Highfields
Capital Management LP (Highfields Capital
Management) serves as the investment manager to each of
the Highfields Funds. Highfields GP LLC (Highfields
GP) is the general partner of Highfields Capital
Management. Highfields Associates LLC (Highfields
Associates) is the general partner of each of the
Highfields Funds. Jonathon S. Jacobson and Richard L. Grubman
are Senior Managing Members of Highfields Associates and
Managing Members of Highfields GP. Each of Highfields I,
Highfields II, Highfields III, Highfields Capital Management,
Highfields GP, Highfields Associates, Mr. Jacobson and Mr.
Grubman disclaims beneficial ownership of any securities owned
beneficially or of record by any person or persons other than
itself or himself. The address of each of Highfields I,
Highfields II, Highfields Capital Management, Highfields GP,
Highfields Associates, Mr. Jacobson and Mr. Grubman is
c/o Highfields
Capital Management LP, John Hancock Tower, 200 Clarendon Street,
59th Floor, Boston, Massachusetts 02116. The address of
Highfields III is
c/o Goldman
Sachs (Cayman) Trust, Limited, Suite 3307, Gardenia Court,
45 Market Street, Camana Bay, P.O. Box 906, Grand
Cayman KY1-1101, Cayman Islands. |
|
|
|
(9) |
|
Represents (i) 3,222,973 shares held prior to the offering
by various funds (2,047,110 shares held by Prospector
Partners Fund, L.P., 893,113 shares held by Prospector
Offshore Fund (Bermuda), Ltd., 243,600 shares held by
Prospector Partners Small Cap Fund, L.P. and 39,150 shares
held by Prospector Turtle Fund, L.P.) of Prospector Partners,
LLC in which John D. Gillespie is a managing member,
(ii) 174,000 shares held prior to the offering by NGM
Insurance Company to which Mr. Gillespie serves as an
investment manager and (iii) 83,027 shares held prior
to the offering by Prospector Partners, LLC. Mr. Gillespie
disclaims beneficial ownership of all of such common shares
except to the extent of his pecuniary interest therein. The
address of Prospector Partners, LLC is 370 Church Street,
Guilford, CT 06437. |
|
|
|
(10) |
|
Represents 870,000 shares held prior to the offering by
Fairholme Ventures II, LLC and 870,000 shares held prior to
the offering by Fairholme Holdings, Ltd. Fairholme Capital
Management, LLC acts as the Managing Member of Fairholme
Ventures II, LLC and is the Investment Manager to Fairholme
Holdings, Ltd. Bruce R. Berkowitz is the Managing Member of
Fairholme Capital Management, LLC, and the Chairman and Director
of Fairholme |
footnotes continued on following page
164
|
|
|
|
|
Holdings, Ltd., a Bermuda exempted mutual fund, and has the
sole voting and investment control over the shares. The address
of Fairholme Capital Management, LLC is 4400 Biscayne Blvd.,
Suite 900, Miami, FL 33137. |
|
|
|
(11) |
|
Represents 1,439,110 shares held prior to the offering by
Scion Qualified Value Fund and 300,889 shares held prior to
the offering by Scion Value Fund. SC Liquidator, LLC is the
managing member of both Scion Value Fund and Scion Qualified
Value Fund. Dr. Michael J. Burry is the managing member of
SC Liquidator, LLC and has sole voting and investment control
over the shares held by Scion Value Fund and Scion Qualified
Value Fund. Dr. Burry disclaims beneficial ownership of the
shares, except to the extent of his direct pecuniary interest
therein. The address of SC Liquidator, LLC is 20400 Stevens
Creek Blvd., Suite 840, Cupertino, CA 95014. |
|
|
|
(12) |
|
Sayro Ventures, Ltd. is the managing member of Sayro
Fund Investors III LLC. Linda Twinam, Gerard OGorman,
and Ashley Cox are the directors of Sayro Ventures, Ltd., and
possess shared voting and investment control over the shares.
The address of Sayro Ventures, Ltd. is Barclays Wealth,
P.O. Box 487, First Caribbean House, 4th Floor, 25
Main Street, Grand Cayman KY1-1106, Cayman Islands. |
|
|
|
(13) |
|
Represents 58,529 shares held prior to the offering by Rho
Management Trust I (RMT I) and
591,796 shares held prior to the offering by Rho Management
Trust III (RMT III). Pursuant to an Investment
Advisory Agreement between RMT I, RMT III and Rho
Management Partners L.P. (Rho), Rho exercises sole
voting and investment control over the shares held of record by
RMT I and RMT III. Altas Capital Corp., a Delaware corporation,
is sole general partner of Rho. As sole stockholder of Atlas
Capital Corp., Joshua Ruch may be deemed to have sole voting and
investment control over the shares held by RMT I and RMT III.
Mr. Ruch disclaims beneficial ownership of the shares held of
record by RMT I and RMT III, except to the extent of his
indirect pecuniary interest therein. The address of RMT I,
RMT III, Rho and Mr. Ruch is
c/o Rho
Capital Partners, Inc., 152 W. 57th Street, 23rd
Floor, New York, NY 10019. |
|
|
|
(14) |
|
Represents shares held by JP Morgan Trust Co. of Delaware
as Trustee for the Sulam Trust. Pursuant to the Trust
instrument, Moris Tabacinic serves as investment adviser to the
Trust and possesses sole voting and investment control over the
shares. The address of JP Morgan Trust Co. of Delaware is
500 Stanton Christiana Road, Newark, DE 19713. |
|
|
|
(15) |
|
Robert E. Snyder and Michael Cahoon, trustees of the Snyder,
Cahoon & Co., PLLC Profit Sharing Plan
(Plan), possess voting and investment control over
the shares. The address of the Plan and trustees is
c/o Snyder,
Cahoon & Co., PLLC, 80 South S. Main Street,
Suite 202, Hanover, NH 03755. |
|
|
|
(16) |
|
Represents shares held by J.C. Flowers I L.P. The general
partner of J.C. Flowers I L.P. is JCF Associates I LLC, of which
J. Christopher Flowers is the managing member. Mr. Flowers
possesses indirect voting and investment control over the shares
held by J.C. Flowers I L.P. Mr. Flowers disclaims
beneficial ownership of such shares, except to the extent of his
direct pecuniary interest therein. The business address of J.C.
Flowers I L.P. is 717 Fifth Avenue, 26th Floor, New York,
NY 10022. |
|
|
|
(17) |
|
Joshua Nash LLC is a general partner of Ulysses Partners
Designated Investments, L.P. and has voting and investment
authority over the shares held by Ulysses Partners Designated
Investments, L.P. Joshua Nash is the managing member of Joshua
Nash LLC and has the sole power to vote, direct the voting of,
dispose of and direct the disposition of the shares owned by
Ulysses Partners Designated Investments, L.P. Mr. Nash expressly
disclaims any such beneficial ownership which exceeds the
proportionate interest in the shares which he may be deemed to
own indirectly through Ulysses Partners Designated Investments,
L.P. The address of Mr. Nash is
c/o Ulysses
Partners Designated Investments, L.P., One Rockefeller Plaza,
20th Floor, New York, New York, 10020. |
|
|
|
(18) |
|
As further discussed in Underwriting, at our
request, the underwriters have reserved for sale, at the initial
public offering price, up to 10,000 shares offered by this
prospectus for sale to Mr. Smith. |
|
|
|
(19) |
|
As further discussed in Underwriting, at our
request, the underwriters have reserved for sale, at the initial
public offering price, up to 7,000 shares offered by this
prospectus for sale to Ms. Grady. |
|
|
|
(20) |
|
Includes 75,270 shares of restricted stock. |
|
|
|
(21) |
|
Represents shares of restricted stock. |
165
|
|
|
(22) |
|
Represents shares owned by affiliates of White Mountains
Insurance Group, Ltd., of which Mr. Foy is an executive
officer. Mr. Foy disclaims beneficial ownership of all such
shares. As further discussed in Underwriting, at our
request, the underwriters have reserved for sale, at the initial
public offering price, up to 100,000 shares offered by this
prospectus for sale to Mr. Foy. |
|
|
|
(23) |
|
Represents shares owned by affiliates of Vestar Capital
Partners, of which Mr. Levy is a Managing Director.
Mr. Levy disclaims beneficial ownership of all such shares. |
|
|
|
(24) |
|
Represents shares owned by affiliates of White Mountains
Insurance Group, Ltd., of which Mr. Lusardi is an executive
officer. Mr. Lusardi disclaims beneficial ownership of all
such shares. |
|
|
|
(25) |
|
Represents shares owned by affiliates of J.C.
Flowers & Co. LLC, of which Mr. Schamis is a
Managing Director. Mr. Schamis disclaims beneficial
ownership of all such shares. |
166
DESCRIPTION
OF CAPITAL STOCK
The following information reflects our certificate of
incorporation and bylaws as these documents will be in effect
upon completion of this offering. Our certificate of
incorporation and bylaws will be filed as exhibits to the
registration statement of which this prospectus forms a part.
The summaries of these documents are qualified in their entirety
by reference to the full text of the documents.
General
Our authorized capital stock consists of 750,000,000 shares
of common stock, $0.01 par value per share and
10,000,000 shares of preferred stock, $0.01 par value
per share. As of January 1, 2010, there were
92,729,455 shares of our common stock issued and
outstanding held by 58 stockholders of record and no shares of
preferred stock outstanding.
Immediately prior to this offering, there has been no public
market for our common stock. Although our common stock has been
approved for listing on the NYSE under the symbol
SYA, we cannot assure you that a market for our
common stock will develop or if it develops that it will be
sustained.
Common
Stock
Voting
Rights
Each share of our common stock entitles the holder to one vote
with respect to each matter presented to our stockholders. Our
common stock votes as a single class. The approval of matters
brought before the stockholders requires the affirmative vote of
the holders of a majority of the shares of common stock
represented and voting, except where otherwise required by law
or by our certificate of incorporation or bylaws. Pursuant to
our certificate of incorporation, an increase or decrease in the
number of authorized shares of our common stock or preferred
stock requires the affirmative vote of the holders of a majority
in voting power of our stock entitled to vote thereon. Holders
of our common stock will not have cumulative voting rights.
Dividends
Holders of common stock and warrant holders will share equally
in any dividend declared by our board of directors, subject to
the rights of the holders of any outstanding preferred stock, on
a
one-for-one
basis.
Liquidation
Rights
In the event of any voluntary or involuntary liquidation,
dissolution or winding up of our affairs, holders of our common
stock would be entitled to share ratably in our assets that are
legally available for distribution to stockholders after payment
of liabilities. If we have any preferred stock outstanding at
such time, holders of the preferred stock may be entitled to
distributions
and/or
liquidation preferences. In either such case, we must pay the
applicable distribution to the holders of our preferred stock
before we may pay distributions to the holders of our common
stock.
Other
Rights
Our stockholders have no preemptive or other rights to subscribe
for additional shares. All holders of our common stock are
entitled to share equally on a
share-for-share
basis in any assets available for distribution to common
stockholders upon our liquidation, dissolution or winding up.
All outstanding shares are, and all shares offered by this
prospectus will be, when sold, validly issued, fully paid and
nonassessable.
Warrants
We currently have outstanding warrants to purchase
18,975,744 shares of our common stock at an exercise price
of $11.49 per share. If our warrants were exercised on a
cashless basis, we would have had 4,616,824, 0, 0 and 8,278,736
additional shares of common stock outstanding for the nine
months ended September 30, 2009 and 2008, and for the years
ended December 31, 2008 and 2007, respectively.
The exercise price and number of shares of common stock for each
warrant are subject to anti-dilution adjustments in respect of
certain events. If certain of these events occur, the warrant
holders will
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receive the right to receive the full intrinsic value of the
warrants instead of the stock acquirable and receivable upon
exercise. In the event we pay cash or stock dividends or other
distributions to our common stockholders, the warrant holders
will also receive such dividends or distributions on a
one-to-one
basis.
Preferred
Stock
Our board of directors is authorized, subject to the limits
imposed by the Delaware General Corporation Law, or DGCL, to
issue to up 10,000,000 shares of preferred stock in one or
more series, to establish from time to time the number of shares
to be included in each series, and to fix the rights,
preferences, privileges, qualifications, limitations and
restrictions of the shares of each wholly unissued series. Our
board of directors is also authorized to increase or decrease
the number of shares of any series, but not below the number of
shares of that series then outstanding, without any further vote
or action by our stockholders.
Our board of directors may authorize the issuance of preferred
stock with voting or conversion rights that affect adversely the
voting power or other rights of our common stockholders. The
issuance of preferred stock, while providing flexibility in
connection with possible acquisitions and other corporate
purposes, could have the effect of delaying, deferring or
preventing a change in control, causing the market price of our
common stock to decline, or impairing the voting and other
rights of the holders of our common stock. We have no current
plans to issue any shares of preferred stock.
Certain
Anti-Takeover Provisions of our Charter and Bylaws and the
Delaware Law
Upon completion of this offering, we will have the following
provisions in our certificate of incorporation and bylaws that
could deter, delay or prevent a third party from acquiring us,
even if doing so would benefit our stockholders.
Undesignated
Preferred Stock
The ability to authorize undesignated preferred stock makes it
possible for our board of directors to issue preferred stock
with super voting, special approval, dividend or other rights or
preferences on a discriminatory basis that could impede the
success of any attempt to acquire us. These and other provisions
may have the effect of deferring, delaying or discouraging
hostile takeovers or changes in control or management of our
company.
Classified
Board of Directors
Our certificate of incorporation provides that our board of
directors is divided into three classes. Each class of directors
serves three-year terms.
Requirements
for Advance Notification of Stockholder Meetings, Nominations
and Proposals
Our bylaws provide that special meetings of the stockholders may
be called only upon the request of the majority of the board of
directors or upon request of the president. Our bylaws prohibit
the conduct of any business at a special meeting other than as
specified in the notice for such meeting.
Our bylaws establish advance notice procedures with respect to
stockholder proposals for annual meetings and the nomination of
candidates for election as directors, other than nominations
made by or at the direction of the board of directors or a
committee of the board of directors. In order for any matter to
be properly brought before a meeting, a stockholder
will have to comply with advance notice requirements and provide
us with certain information. Additionally, vacancies and newly
created directorships may be filled only by a vote of a majority
of the directors then in office, even though less than a quorum,
and not by the stockholders. Our bylaws allow the chairman of a
meeting of the stockholders to adopt rules and regulations for
the conduct of meetings that may have the effect of precluding
the conduct of certain business at a meeting if the rules and
regulations are not followed. These provisions may also defer,
delay or discourage a potential acquiror from conducting a
solicitation of proxies to elect the acquirors own slate
of directors or otherwise attempting to obtain control of us.
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No
Stockholder Action by Written Consent
Pursuant to Section 228 of the DGCL, any action required to
be taken at any annual or special meeting of the stockholders
may be taken without a meeting, without prior notice and without
a vote if a consent or consents in writing, setting forth the
action so taken, is signed by the holders of outstanding stock
having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which
all shares of our stock entitled to vote thereon were present
and voted, unless our certificate of incorporation provides
otherwise. Our certificate of incorporation provides that any
action required or permitted to be taken by our stockholders may
be effected at a duly called annual or special meeting of our
stockholders and may not be effected by written consent.
Certain
Other Provisions of our Charter and Bylaws and the Delaware
Law
Board
of Directors
Our certificate of incorporation provides that the number of
directors will be fixed in the manner provided in our bylaws.
Our bylaws provide that the number of directors will be fixed
from time to time solely pursuant to a resolution adopted by the
board of directors. Our board of directors currently has seven
members who serve staggered terms as described above.
Limitations
of Liability and Indemnification of Officers and
Directors
The DGCL authorizes corporations to limit or eliminate the
personal liability of directors to corporations and their
stockholders for monetary damages for breaches of
directors fiduciary duties. Our certificate of
incorporation includes a provision that eliminates the personal
liability of directors for monetary damages for actions taken as
a director to the fullest extent authorized by the DGCL. The
DGCL does not permit exculpation for liability:
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for breach of duty of loyalty;
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for acts or omissions not in good faith or involving intentional
misconduct or knowing violation of law;
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under Section 174 of the DGCL (unlawful dividends); or
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for transactions from which the director derived improper
personal benefit.
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Our certificate of incorporation and bylaws provide that we
shall indemnify our directors and officers to the fullest extent
permitted by law and, as described under Certain
Relationships and Related Transactions, we have entered
into indemnification agreements with each of our directors and
officers. We are also expressly authorized to carry
directors and officers insurance providing
indemnification for our directors, officers and certain
employees and agents for some liabilities. We believe that these
indemnification provisions and insurance are useful to attract
and retain qualified directors and executive officers.
The limitation of liability and indemnification provisions in
our certificate of incorporation, bylaws and indemnification
agreements may discourage stockholders from bringing a lawsuit
against directors for breach of their fiduciary duty. These
provisions may also have the effect of reducing the likelihood
of derivative litigation against directors and officers, even
though such an action, if successful, might otherwise benefit us
and our stockholders. In addition, your investment may be
adversely affected to the extent we pay the costs of settlement
and damage awards against directors and officers pursuant to
these indemnification provisions.
There is currently no pending material litigation or proceeding
involving any of our directors, officers or employees for which
indemnification is sought.
Transfer
Agent and Registrar
The transfer agent and registrar of our common stock is Mellon
Investor Services LLC.
New York
Stock Exchange Listing
Our common stock has been approved for listing on the NYSE under
the symbol SYA.
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DESCRIPTION
OF CERTAIN INDEBTEDNESS
6.125% Senior
Notes due 2016
In March 2006, we issued $300.0 million aggregate principal
amount of 6.125% senior notes due 2016, at a price of
$298.7 million in proceeds prior to commissions and
discounts for the initial purchasers and offering expenses.
Interest on the senior notes is payable semi-annually on April 1
and October 1 of each year.
The senior notes are unsecured senior obligations and are equal
in right of payment to all existing and future unsecured senior
indebtedness. The senior notes are redeemable at our option at
any time, in whole or in part, at a redemption price equal to
the greater of (i) 100% of the principal amount of the
senior notes or (ii) the sum of the present values of the
remaining scheduled payments of principal and interest on the
notes (exclusive of interest accrued to the date of redemption),
discounted to the redemption date on a semiannual basis
(assuming a
360-day year
consisting of twelve
30-day
months) at the U.S. Treasury rate plus 25 basis
points, plus, in each case accrued and unpaid interest thereon
to the date of redemption.
The indenture for the senior notes contains covenants that,
among other things, limit the ability of our subsidiaries to:
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create liens;
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enter into certain sale and leaseback transactions; and
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enter into certain mergers and acquisitions.
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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 notes upon a change of
control or other event involving us.
The indenture for the senior notes provides for events of
default that, if any of them occurs, would permit or require the
principal of, premium, if any, interest and any other monetary
obligations on the senior notes to become or to be declared to
be immediately due and payable. These events of default include
default in the payment of interest or principal, default in the
performance of covenants under the indenture and default under
the terms of any instrument evidencing or securing indebtedness
of us that results in the acceleration of the payment of such
indebtedness or constitutes the failure to pay the principal of
such indebtedness when due, in each case where the total amount
of such indebtedness has an outstanding aggregate principal
amount greater than $25.0 million.
Capital
Efficient Notes due 2067
On October 10, 2007, we issued $150.0 million
aggregate principal amount of CENts. The CENts were purchased by
a syndicate of initial purchasers, led by J.P. Morgan
Securities Inc. and Lehman Brothers Inc., and were eligible for
resale to qualified institutional buyers pursuant to
Rule 144A under the Securities Act or to
non-U.S. persons
pursuant to Regulation S under the Securities Act.
The CENts bear interest at a fixed annual rate of 8.300% to but
not including October 15, 2017, and at a floating annual
rate equal to three-month LIBOR plus 4.177% thereafter. We may
elect to defer the payment of interest for up to ten years. The
CENts have a scheduled maturity date of October 15, 2037,
provided that we raise sufficient funds from the sale of
qualifying capital securities. Qualifying capital securities
refers generally to securities or combinations of securities
issued by us or our subsidiaries (other than common stock,
warrants, mandatorily convertible preferred stock, debt
exchangeable for common equity and debt exchangeable for
preferred
170
equity) that, in the determination of our board of directors,
meet certain criteria relating to, among other things, ranking
upon liquidation, dissolution or winding up, a long dated
maturity, being subject to a replacement capital covenant
similar to the covenant applicable to the CENts, having a
no-payment provision, having a mandatory trigger provision,
having an optional deferral provision and being non-cumulative.
For a complete definition of qualifying capital securities,
please see the indenture for the CENts. If we do not raise
sufficient funds, we are obligated to use commercially
reasonable efforts to sell enough qualifying capital securities
to permit repayment of the CENts in full on each interest
payment date thereafter. On October 15, 2067, we must pay
any remaining amounts due under the CENts, whether or not we
have sold sufficient qualifying capital securities.
We may redeem the CENts, in whole or in part, at any time before
October 15, 2017, at a redemption price equal to the
greater of 100% of the principal amount or a make-whole price as
set forth in the CENts, in either case plus accrued and unpaid
interest, including deferred interest. However, if a special
event occurs, we may redeem the CENts, in whole but not in part,
at a redemption price equal to the greater of 100% of the
principal amount or a special event make-whole price as set
forth in the CENts, in either case plus accrued and unpaid
interest, including deferred interest. We may redeem the CENts
after October 15, 2017 on each interest payment date
thereafter, at a price equal to 100% of the principal amount of
the CENts plus accrued and unpaid interest, including deferred
interest.
In connection with the CENts offering, we entered into a
covenant in favor of the holders of our $300.0 million
principal amount senior notes, pursuant to which we may not
repay or redeem the CENts prior to October 15, 2047 unless
the repayment or redemption does not exceed a maximum amount
determined by reference to the proceeds received from the
offering of replacement capital securities. Replacement capital
securities means our common stock, warrants, mandatorily
convertible preferred stock, debt exchangeable for common
equity, debt exchangeable for preferred equity and qualifying
capital securities.
Revolving
Credit Facilities
Long-Term
Facility
On August 16, 2007, we entered into a $200.0 million
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. This new credit facility replaced our prior
$70.0 million revolving credit facility.
The facility enables us to obtain letters of credit of up to
$50.0 million and short-term loans of up to
$10.0 million, which would count against the
$200.0 million limit. We can increase the
$200.0 million limit by up to an additional
$100.0 million, upon the agreement of any lender to lend
such additional amount, without the consent of the other
lenders. On February 12, 2009, Bank of America, N.A. issued
a notice of default to Lehman Commercial Paper, Inc., one of the
lending institutions in the syndicate with a commitment of
$20 million, effectively limiting our ability to borrow
under the revolving credit facility to $180.0 million at
that time. On October 7, 2009, Lehman Commercial Paper,
Inc. assigned its interest in the revolving credit facility to
Barclays Bank PLC, effectively restoring capacity in the
facility to $200.0 million.
Loans under the credit facility bear interest, at our election,
at a spread above LIBOR, or at a base rate. The initial spread
above the LIBOR rate is 36 basis points, and may vary from
19 to 60 basis points depending on our credit rating. The
base rate is equal to the higher of 50 basis points above
the federal funds rate, and the Bank of America prime rate.
Interest under LIBOR-based loans is payable periodically, with
the period at the election of the Company (but at most
annually). Interest under base rate loans is payable quarterly.
In addition, we are obligated to pay a facility fee of between
six and 15 basis points, depending on our credit rating,
quarterly over the term of the facility, as well as letter of
credit and other fees as applicable.
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Under the terms of the credit agreement, we are required to
maintain certain financial ratios. In particular, each of our
material insurance subsidiaries must maintain a risk-based
capital ratio of at least 200%, measured at the end of each
year, and our
debt-to-capitalization
ratio may not exceed 37.5%, measured at the end of each quarter.
In addition, we have agreed to other covenants restricting the
ability of our subsidiaries to incur additional indebtedness,
our ability to create liens and our ability to change our 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 we make in the credit
agreement must continue to be true in all material respects, and
we must not be in default under the facility, including failure
to comply with the covenants described above.
As of September 30, 2009, we had no borrowings outstanding
under this facility.
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SHARES ELIGIBLE
FOR FUTURE SALE
Before this offering, there has been no public market for our
common stock. We cannot predict the effect, if any, that market
sales of shares or the availability of shares will have on the
market price of our common stock. Sales of substantial amounts
of common stock in the public market, or the perception that
such sales could occur, could cause the prevailing market price
to decrease or to be lower than it might be in the absence of
those sales or perceptions.
Sales of
Restricted Securities
Upon the closing of this offering, we will have outstanding
110,028,965 shares of common stock (assuming no exercise of
the underwriters over-allotment option). We have no shares
of common stock held in treasury. All of the shares of our
common stock sold in this offering will be freely tradeable
without restriction under the Securities Act of 1933, as amended
(the Securities Act), except for any shares that may
be acquired by an affiliate of us, as the term
affiliate is defined in Rule 144 under the
Securities Act. Persons who may be deemed to be affiliates
generally include individuals or entities that control, are
controlled by, or are under common control with, us and may
include our directors and officers as well as our significant
stockholders. Following the expiration of the
lock-up
agreements described below, the remaining 83,028,965 shares
outstanding held by current stockholders of the Company will be
available for sale pursuant to Rule 144, subject to
compliance with the requirements and limitations under
Rule 144, all as further described below.
Rule 144
Generally, under Rule 144 as currently in effect, beginning
90 days after the date of this prospectus, a person (or
persons whose shares are aggregated) who has beneficially owned
restricted shares for at least six months, will be
entitled to sell within any three-month period, a number of
shares that does not exceed the greater of:
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1% of the then outstanding shares of common stock, which will
equal approximately 1.1 million shares of common stock
immediately after this offering; and
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the average weekly trading volume of the common stock on the
open market during the four calendar weeks preceding the filing
of notice with respect to such sale.
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Sales under Rule 144 are also subject to manner of sale
provisions and notice requirements and the availability of
current public information about our company.
In addition, under Rule 144, a person who is not currently
an affiliate of ours, and who is not deemed to have been one of
our affiliates for purposes of the Securities Act at any time
during the 90 days preceding a sale and who has
beneficially owned the shares proposed to be sold for at least
six months, including the holding period of any prior owner
other than our affiliates, is entitled to sell such shares
without restriction, provided that until the shares have been
held for at least one year, they may only be sold subject to the
availability of current public information about us.
Lock-Up
Arrangements
In connection with this offering, each of our executive
officers, directors and stockholders have agreed to enter into
lock-up
agreements described under Underwriting that
restrict the sale of shares of our common stock and securities
convertible into or exchangeable or exercisable for common stock
for up to 180 days after the date of this prospectus,
subject to an extension in certain circumstances. Following the
expiration of the
lock-up
period, our stockholders will have the right, subject to certain
conditions, to require us to register the sale of their
remaining shares of our common stock under federal securities
laws. By exercising their registration rights, and selling a
large number of shares, our stockholders could cause the
prevailing market price of our common stock to decline.
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Warrants
We currently have outstanding warrants to purchase
18,975,744 shares of our common stock at an exercise price
of $11.49 per share. The warrants permit the holders to exercise
either by paying the full exercise price in cash, or by means of
a cashless exercise, whereby the holders would surrender a right
to receive that number of shares having a value equal to the
exercise price of the warrants. In the event the holders pay the
exercise price in cash, the shares will be subject to the
holding period and other requirements of Rule 144. In the
event of a cashless exercise, the shares will be deemed to have
been acquired at the time of issuance of the warrants, in which
case the holding period will be met and the shares will be
eligible for resale subject to compliance with the other
requirements of Rule 144 and the
lock-up
agreements described above.
Registration
Statements
Following the completion of this offering, we intend to file one
or more registration statements on
Form S-8
under the Securities Act to register the shares of our common
stock that are issuable pursuant to the Equity Plan and the 2008
Employee Stock Purchase Plan. Such registration statements will
become effective immediately upon filing, and shares covered by
such registration statements will be eligible for sale in the
public market immediately after the effective date, upon
expiration of the
lock-up
agreements, and subject to vesting of such shares and to
Rule 144 volume limitations applicable to affiliates.
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MATERIAL
UNITED STATES FEDERAL TAX CONSEQUENCES
TO NON-U.S.
STOCKHOLDERS
This is a general summary of material U.S. federal income
and estate tax considerations with respect to your acquisition,
ownership and disposition of common stock if you purchase your
common stock in this offering, you will hold the common stock as
a capital asset and you are a beneficial owner of shares other
than:
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an individual citizen or resident of the United States;
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a corporation or other entity taxable as a corporation created
or organized in, or under the laws of, the United States or any
political subdivision of the United States;
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a partnership or other entity taxable as a partnership for
U.S. federal income tax purposes;
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an estate, the income of which is subject to U.S. federal
income taxation regardless of its source;
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a trust, if a court within the United States is able to exercise
primary supervision over the administration of the trust and one
or more U.S. persons have the authority to control all
substantial decisions of the trust; or
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a trust that has a valid election in place to be treated as a
U.S. person.
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This summary does not address all of the U.S. federal
income and estate tax considerations that may be relevant to you
in light of your particular circumstances or if you are a
beneficial owner subject to special treatment under
U.S. income tax laws (such as a controlled foreign
corporation, passive foreign investment
company, company that accumulates earnings to avoid
U.S. federal income tax, foreign tax-exempt organization,
financial institution, broker or dealer in securities, insurance
company, regulated investment company, real estate investment
trust, financial asset securitization investment trust, person
who holds common stock as part of a hedging or conversion
transaction or as part of a short-sale or straddle, or former
U.S. citizen or resident). This summary does not discuss
any aspect of U.S. federal alternative minimum tax, state,
local or
non-U.S. taxation.
This summary is based on current provisions of the U.S. Internal
Revenue Code of 1986, as amended (Code), Treasury
regulations, judicial opinions, published positions of the
United States Internal Revenue Service (IRS) and all
other applicable authorities as of the date hereof, all of which
are subject to change, possibly with retroactive effect.
If a partnership holds our common stock, the tax treatment of a
partner will generally depend on the status of the partner and
the activities of the partnership. If you are a partner of a
partnership holding our common stock, you should consult your
tax advisor.
THIS DISCUSSION IS PROVIDED FOR GENERAL INFORMATION ONLY AND
DOES NOT CONSTITUTE LEGAL AND/OR TAX ADVICE TO ANY PROSPECTIVE
PURCHASER OF OUR COMMON STOCK. WE URGE PROSPECTIVE
NON-U.S. STOCKHOLDERS
TO CONSULT THEIR TAX ADVISORS REGARDING THE UNITED STATES
FEDERAL, STATE, LOCAL AND
NON-UNITED
STATES INCOME AND OTHER TAX CONSIDERATIONS OF ACQUIRING, HOLDING
AND DISPOSING OF SHARES OF COMMON STOCK.
Dividends
In general, any distributions we make to you with respect to
your shares of common stock that constitute dividends for
U.S. federal income tax purposes will be subject to
U.S. withholding tax at a rate of 30% of the gross amount,
unless you are eligible for a reduced rate of withholding tax
under an applicable income tax treaty and you provide proper
certification of your eligibility for such reduced rate
(generally, on an IRS
Form W-8BEN).
A distribution will constitute a dividend for U.S. federal
income tax purposes to the extent of our current or accumulated
earnings and profits as determined under the Code. Any
distribution not constituting a dividend will be treated first
as reducing your basis in your shares of common stock and, to
the extent it exceeds your basis, as capital gain.
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Dividends we pay to you that are effectively connected with your
conduct of a trade or business within the United States (and, if
certain income tax treaties apply, are attributable to a
U.S. permanent establishment maintained by you) generally
will not be subject to U.S. withholding tax if you comply
with applicable certification and disclosure requirements.
Instead, such dividends generally will be subject to
U.S. federal income tax, net of certain deductions, at the
same graduated individual or corporate rates applicable to
U.S. persons. If you are a corporation, effectively
connected income may also be subject to a branch profits
tax at a rate of 30% (or such lower rate as may be
specified by an applicable income tax treaty). Dividends that
are effectively connected with your conduct of a trade or
business but that under an applicable income tax treaty are not
attributable to a U.S. permanent establishment maintained
by you may be eligible for a reduced rate of
U.S. withholding tax under such treaty, provided you comply
with certification and disclosure requirements necessary to
obtain treaty benefits.
Sale or
Other Disposition of Common Stock
You generally will not be subject to U.S. federal income
tax on any gain realized upon the sale or other disposition of
your shares of common stock unless:
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the gain is effectively connected with your conduct of a trade
or business within the United States (and, under certain income
tax treaties, is attributable to a U.S. permanent
establishment you maintain);
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you are an individual, you are present in the United States for
183 days or more in the taxable year of disposition and you
meet other conditions, and you are not eligible for relief under
an applicable income tax treaty; or
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we are or have been a United States real property holding
corporation for U.S. federal income tax purposes
(which we believe we are not and have never been, and do not
anticipate we will become) and, in the event that our common
stock is regularly traded on an established securities market,
you hold or have held, directly or indirectly, at any time
within the shorter of the five-year period preceding disposition
or your holding period for your shares of common stock, more
than 5% of our common stock.
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Gain that is effectively connected with your conduct of a trade
or business within the United States generally will be subject
to U.S. federal income tax, net of certain deductions, at
the same rates applicable to U.S. persons. If you are a
corporation, the branch profits tax (described above) also may
apply to such effectively connected gain. If the gain from the
sale or disposition of your shares is effectively connected with
your conduct of a trade or business in the United States but
under an applicable income tax treaty is not attributable to a
permanent establishment you maintain in the United States, your
gain may be exempt from U.S. tax under the treaty. If you
are described in the second bullet point above, you generally
will be subject to U.S. tax at a rate of 30% on the gain
realized, although the gain may be offset by some
U.S. source capital losses realized during the same taxable
year.
Information
Reporting and Backup Withholding
We must report annually to the IRS the amount of dividends or
other distributions we pay to you on your shares of common stock
and the amount of tax we withhold on these distributions
regardless of whether withholding is required. The IRS may make
copies of the information returns reporting those distributions
and amounts withheld available to the tax authorities in the
country in which you reside pursuant to the provisions of an
applicable income tax treaty or exchange of information treaty.
Under certain circumstances, the United States imposes backup
withholding on dividends and certain other types of payments to
U.S. persons. You will not be subject to backup withholding
on dividends you receive on your shares of common stock if you
provide proper certification of your status as a
non-U.S. person
or you are a corporation or one of several types of entities and
organizations that qualify for exemption (an exempt
recipient).
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Information reporting and backup withholding generally are not
required with respect to the amount of any proceeds from the
sale of your shares of common stock outside the United States
through a foreign office of a foreign broker that does not have
certain specified connections to the United States. However, if
you sell your shares of common stock through a U.S. broker
or the U.S. office of a foreign broker, the broker will be
required to report the amount of proceeds paid to you to the IRS
and also perform backup withholding on that amount unless you
provide appropriate certification to the broker of your status
as a
non-U.S. person
or you are an exempt recipient. Information reporting will also
apply if you sell your shares of common stock through a foreign
broker deriving more than a specified percentage of its income
from U.S. sources or having certain other connections to
the United States, unless such broker has documenting evidence
in its records that you are a
non-U.S. person
and certain other conditions are met or you are an exempt
recipient.
Any amounts withheld with respect to your shares of common stock
under the backup withholding rules will be refunded to you or
credited against your U.S. federal income tax liability, if
any, by the IRS if the required information is furnished in a
timely manner.
Estate
Tax
Common stock owned or treated as owned by an individual who is
not a citizen or resident (as defined for U.S. federal
estate tax purposes) of the United States at the time of his or
her death will be included in the individuals gross estate
for U.S. federal estate tax purposes and therefore may be
subject to U.S. federal estate tax unless an applicable
treaty provides otherwise.
177
UNDERWRITING
We and the Selling Stockholders intend to offer the shares in
the United States and Canada through the underwriters. Merrill
Lynch, Pierce, Fenner & Smith Incorporated,
J.P. Morgan Securities Inc., Goldman, Sachs & Co.
and Barclays Capital Inc. are acting as joint book-running
managers and as representatives of each of the underwriters
named below. Subject to the terms and conditions described in an
underwriting agreement among us, the Selling Stockholders and
the underwriters, we and the Selling Stockholders have agreed to
sell to the underwriters, and each of the underwriters has
agreed, severally and not jointly, to purchase from us and the
Selling Stockholders, the number of shares of common stock
listed opposite its name below.
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Number of
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Underwriter
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Shares
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Merrill Lynch, Pierce, Fenner & Smith
Incorporated
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J.P. Morgan Securities Inc.
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Goldman, Sachs & Co.
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Barclays Capital Inc.
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UBS Securities LLC
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Wells Fargo Securities, LLC
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Dowling & Partners Securities, LLC
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Keefe, Bruyette & Woods, Inc.
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Sandler ONeill & Partners, L.P.
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Sterne, Agee & Leach, Inc.
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Total
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Subject to the terms and conditions set forth in the
underwriting agreement, the underwriters have agreed, severally
and not jointly, to purchase all of the shares sold under the
underwriting agreement if any of these shares are purchased. If
an underwriter defaults, the underwriting agreement provides
that the purchase commitments of the nondefaulting underwriters
may be increased or the underwriting agreement may be terminated.
The underwriters are offering the shares, subject to prior sale,
when, as and if issued to and accepted by them, subject to
approval of legal matters by their counsel, including the
validity of the shares, and other conditions contained in the
underwriting agreement, such as the receipt by the underwriters
of officers certificates and legal opinions. The
underwriters reserve the right to withdraw, cancel or modify
offers to the public and to reject orders in whole or in part.
Commissions
and Discounts
The representatives have advised us and the Selling Stockholders
that the underwriters propose initially to offer the shares to
the public at the initial public offering price on the cover
page of this prospectus and to dealers at that price less a
concession not in excess of $ per
share. The underwriters may allow, and the dealers may reallow,
a discount not in excess of $ per
share to other dealers. After the initial public offering, the
public offering price, concession and discount may be changed.
The following table shows the public offering price,
underwriting discount and proceeds before expenses to us and the
Selling Stockholders. The information assumes either no exercise
or full exercise by the underwriters of their over-allotment
option.
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Per Share
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Without Option
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With Option
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Public offering price
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$
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$
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$
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Underwriting discount
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$
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$
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$
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Proceeds, before expenses, to the Company
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$
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$
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$
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Proceeds, before expenses, to the Selling Stockholders
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$
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$
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$
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The expenses of this offering, not including the underwriting
discount, are estimated at $3.2 million and are payable by
us.
178
Over-allotment
Option
The Company has granted an option to the underwriters to
purchase a total of up to 4,050,000 additional shares at the
public offering price, less the underwriting discount. The
underwriters may exercise this option for 30 days from the
date of this prospectus solely to cover any over-allotments. If
the underwriters exercise this option, each will be obligated,
subject to conditions contained in the underwriting agreement,
to purchase a number of additional shares proportionate to that
underwriters initial amount reflected in the above table.
Indemnification
We and the Selling Stockholders have agreed to indemnify the
several underwriters against certain liabilities, including
certain liabilities under the Security Act, or to contribute to
payments that the underwriters may be required to make for these
liabilities.
Reserved
Shares
At our request, the underwriters have reserved, at the initial
public offering price, up to 100,000 shares offered by this
prospectus for sale to David T. Foy, one of our directors, up to
10,000 shares offered by this prospectus for sale to
Lowndes A. Smith, chairman of our board of directors, and up to
7,000 shares offered by this prospectus for sale to Lois W.
Grady, also one of our directors. If Mr. Foy,
Mr. Smith or Ms. Grady purchases reserved shares, it
will reduce the number of shares available for sale to the
general public. Any reserved shares that are not so purchased
will be offered by the underwriters to the general public on the
same terms as the other shares offered by this prospectus.
No Sales
of Similar Securities
We and each of our executive officers, directors and
stockholders have agreed, with certain exceptions described
below, not to sell or transfer any common stock or securities
convertible into, exchangeable for, exercisable for or repayable
with common stock, for 180 days after the date of this
prospectus without first obtaining the written consent of the
representatives. Specifically, we and these other individuals
and entities have agreed not to directly or indirectly:
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offer, pledge, sell or contract to sell any common stock;
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sell any option or contract to purchase any common stock;
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purchase any option or contract to sell any common stock;
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grant any option, right or warrant for the sale of any common
stock;
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lend or otherwise dispose of or transfer any common stock;
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request or demand that we file a registration statement related
to the common stock; or
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enter into any swap or other agreement that transfers, in whole
or in part, the economic consequence of ownership of any common
stock whether any such swap or transaction is to be settled by
delivery of shares or other securities, in cash or otherwise.
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This lock-up
provision also applies to common stock owned now or acquired
later by the person executing the agreement or for which the
person executing the agreement later acquires the power of
disposition.
This lock-up
provision is subject to certain exceptions. As applicable to us,
these exceptions, which are subject to certain limitations,
include: the issuance of any shares of common stock upon the
exercise of a warrant or the conversion of a security
outstanding on the date of the underwriting agreement; grants,
offers, sales or issuances of shares of common stock or
securities convertible into shares of common stock pursuant to
an employee benefit plan; and offers, sales and issuances of up
to 10% of the shares of common stock outstanding at the time of
the issuance as consideration for acquisitions of businesses,
provided that the recipient of such common stock agrees to be
bound by the lock-up provision. As applicable to our executive
officers, directors and stockholders, these exceptions, which
are subject to certain limitations, include: transfers of shares
of common stock by bona fide gift, will or intestacy; transfers
of shares of common stock by an individual to any trust for the
benefit of the individual or the individuals immediate
family;
179
distributions of shares of common stock by a trust to its
beneficiaries; distributions of shares of common stock by a
corporation, partnership or a limited liability company to its
shareholders, subsidiaries, partners, members or affiliates; the
establishment of a trading plan that complies with
Rule 10b5-1
under the Exchange Act, provided that the lock-up provision will
apply to any sales pursuant to such trading plan; and the
exercise of stock options granted pursuant to the Companys
stock option or incentive plans disclosed in this prospectus,
provided that the lock-up provision will apply to any shares of
common stock issued upon such exercise.
Notwithstanding the foregoing, if: (1) during the last
17 days of the
180-day
lock-up
period, we issue an earnings release or material news or a
material event relating to us occurs; or (2) prior to the
expiration of the
180-day
lock-up
period, we announce that we will release earnings results or
become aware that material news or a material event will occur
during the
16-day
period beginning on the last day of the
180-day
lock-up
period, then the restrictions imposed by this
lock-up
provision shall continue to apply until the expiration of the
18-day
period beginning on the issuance of the earnings release or the
occurrence of the material news or material event, as
applicable, unless the representatives waive, in writing, such
extension.
New York
Stock Exchange Listing
Our common stock has been approved for listing on the NYSE under
the symbol SYA. In order to meet the requirements
for listing on that exchange, the underwriters have undertaken
to sell a minimum number of shares to a minimum number of
beneficial owners as required by that exchange. Before this
offering, there has been no public market for our common stock.
The initial public offering price will be determined through
negotiations among us, the Selling Stockholders and the
representatives. In addition to prevailing market conditions,
the factors to be considered in determining the initial public
offering price are as follows:
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the valuation multiples of publicly traded companies that the
representatives believe to be comparable to us;
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our financial information;
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the history of, and the prospects for, our company and the
industry in which we compete;
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an assessment of our management, its past and present
operations, and the prospects for, and timing of, our future
revenues;
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the present state of our development; and
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the above factors in relation to market values and various
valuation measures of other companies engaged in activities
similar to ours.
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An active trading market for the shares may not develop. It is
also possible that after this offering the shares will not trade
in the public market at or above the initial public offering
price.
The underwriters do not expect to sell more than 5% of the
shares in the aggregate to accounts over which they exercise
discretionary authority.
Price
Stabilization, Short Positions and Penalty Bids
Until the distribution of the shares is completed, SEC rules may
limit underwriters and selling group members from bidding for
and purchasing our common stock. However, the representatives
may engage in transactions that stabilize the price of the
common stock, such as bids or purchases to peg, fix or maintain
that price. If the representatives elect to engage in such
transactions, they may discontinue them at any time without
notice.
In connection with this offering, the underwriters may purchase
and sell our common stock in the open market. These transactions
may include short sales, purchases on the open market to cover
positions created by short sales and stabilizing transactions.
Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the
offering. Covered short sales are sales made in an
amount not greater than the underwriters over-allotment
option described above. The underwriters may close out any
covered short position by either exercising their over-allotment
option or purchasing shares in the open market. In determining
the source of shares to close out the covered short position,
the underwriters will consider, among other things, the price of
shares available for purchase in the open market as compared to
the price at which they may purchase shares through the
over-allotment option. Naked short sales are sales
in
180
excess of the over-allotment option. The underwriters must close
out any naked short position by purchasing shares in the open
market. A naked short position is more likely to be created if
the underwriters are concerned that there may be downward
pressure on the price of our common stock in the open market
after pricing that could adversely affect investors who purchase
in the offering. Stabilizing transactions consist of various
bids for or purchases of shares of common stock made by the
underwriters in the open market prior to the completion of this
offering.
The underwriters may also impose a penalty bid. This occurs when
a particular underwriter repays to the underwriters a portion of
the underwriting discount received by it because the
representatives have repurchased shares sold by or for the
account of such underwriter in stabilizing or short covering
transactions.
Similar to other purchase transactions, the underwriters
purchases to cover the syndicate short sales may have the effect
of raising or maintaining the market price of our common stock
or preventing or retarding a decline in the market price of our
common stock. As a result, the price of our common stock may be
higher than the price that might otherwise exist in the open
market. The underwriters may conduct these transactions on the
NYSE, in the over-the-counter market or otherwise.
Neither we nor any of the underwriters make any representation
or prediction as to the direction or magnitude of any effect
that the transactions described above may have on the price of
the common stock. In addition, neither we nor any of the
underwriters make any representation that the representatives
will engage in these transactions or that these transactions,
once commenced, will not be discontinued without notice.
Electronic
Offer, Sale and Distribution of Shares
In connection with this offering, certain of the underwriters,
their affiliates or securities dealers may distribute
prospectuses by electronic means, such as
e-mail. In
addition, the underwriters or their affiliates may facilitate
Internet distribution for this offering to certain of their
Internet subscription customers. In those cases, prospective
investors may view offering terms online and, depending upon the
particular underwriter, prospective investors may be allowed to
place orders online. The underwriters may allocate a limited
number of shares for sale to their online brokerage customers.
An electronic prospectus is available on the Internet web sites
of certain of the underwriters and their affiliates. Other than
the prospectus in electronic format, the information on the web
sites of the underwriters and their affiliates is not part of
this prospectus and should not be relied upon by investors.
Other
Relationships
Some of the underwriters and their affiliates have engaged in,
and may in the future engage in, investment banking and other
commercial banking and other dealings in the ordinary course of
business with us, our affiliates, and White Mountains Insurance
Group, Ltd. They have received, or may in the future receive,
customary fees and commissions for these transactions.
For example, J.P. Morgan Securities Inc. and Banc of
America Securities LLC (an affiliate of Merrill Lynch, Pierce,
Fenner & Smith Incorporated) were initial purchasers
in connection with the offering of our 6.125% senior notes
due 2016 and were initial purchasers in connection with the
offering of our Capital Efficient Notes due 2067. JPMorgan Chase
Bank, N.A., an affiliate of J.P. Morgan Securities Inc.,
was involved in the financing of the Acquisition. JPMorgan Chase
Bank, N.A., Barclays Bank PLC (an affiliate of Barclays Capital
Inc.), Merrill Lynch Bank USA (an affiliate of Merrill Lynch,
Pierce, Fenner & Smith Incorporated), an affiliate of
Goldman, Sachs & Co. and Bank of America, N.A. (an
affiliate of Merrill Lynch, Pierce, Fenner & Smith
Incorporated) are lenders under our revolving credit facility.
Under such facility, Bank of America, N.A. also serves as
administrative agent, swing line lender and issuing lender, Banc
of America Securities LLC serves as sole lead arranger and sole
book manager and JPMorgan Chase Bank, N.A. serves as syndication
agent. We are party to an arms length distribution
relationship with Chase Insurance Agency, Inc. (an affiliate of
J.P. Morgan Securities Inc.) in connection with the sale of
our immediate annuity products. Howard L. Clark, Jr., Vice
Chair of Barclays Capital Inc., is a director of White Mountains
Insurance Group, Ltd.
In the ordinary course of their various business activities, the
underwriters and their respective affiliates may make or hold a
broad array of investments and actively trade debt and equity
securities (or
181
related derivative securities) and financial instruments
(including bank loans) for their own account and for the
accounts of their customers and may at any time hold long and
short positions in such securities and instruments. Such
investment and securities activities may involve our securities
and instruments.
Notice to
Prospective Investors in the EEA
In relation to each Member State of the European Economic Area,
or EEA, which has implemented the Prospectus Directive (each, a
Relevant Member State), an offer to the public of
any shares which are the subject of the offering contemplated by
this prospectus may not be made in that Relevant Member State,
except that an offer to the public in that Relevant Member State
of any shares may be made at any time under the following
exemptions under the Prospectus Directive, if they have been
implemented in that Relevant Member State:
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(a)
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to legal entities which are authorized or regulated to operate
in the financial markets or, if not so authorized or regulated,
whose corporate purpose is solely to invest in securities;
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(b)
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to any legal entity which has two or more of (1) an average
of at least 250 employees during the last financial year,
(2) a total balance sheet of more than 43,000,000 and
(3) an annual net turnover of more than 50,000,000,
as shown in its last annual or consolidated accounts;
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(c)
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by the underwriters to fewer than 100 natural or legal persons
(other than qualified investors as defined in the
Prospectus Directive) subject to obtaining the prior consent of
the representatives for any such offer; or
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(d)
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in any other circumstances falling within Article 3(2) of
the Prospectus Directive;
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provided that no such offer of shares shall result in a
requirement for the publication by us or any representative of a
prospectus pursuant to Article 3 of the Prospectus
Directive.
Any person making or intending to make any offer of shares
within the EEA should only do so in circumstances in which no
obligation arises for us or any of the underwriters to produce a
prospectus for such offer. Neither we nor the underwriters have
authorized, nor do they authorize, the making of any offer of
shares through any financial intermediary, other than offers
made by the underwriters which constitute the final offering of
shares contemplated in this prospectus.
For the purposes of this provision, and the representation
below, the expression an offer to the public in
relation to any shares in any Relevant Member State means the
communication in any form and by any means of sufficient
information on the terms of the offer and any shares to be
offered so as to enable an investor to decide to purchase any
shares, as the same may be varied in that Relevant Member State
by any measure implementing the Prospectus Directive in that
Relevant Member State and the expression Prospectus
Directive means Directive 2003/71/EC and includes any
relevant implementing measure in each Relevant Member State.
Each person in a Relevant Member State who receives any
communication in respect of, or who acquires any shares under,
the offer of shares contemplated by this prospectus will be
deemed to have represented, warranted and agreed to and with us
and each underwriter that:
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(a)
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it is a qualified investor within the meaning of the
law in that Relevant Member State implementing
Article 2(1)(e) of the Prospectus Directive; and
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(b)
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in the case of any shares acquired by it as a financial
intermediary, as that term is used in Article 3(2) of the
Prospectus Directive, (i) the shares acquired by it in the
offering have not been acquired on behalf of, nor have they been
acquired with a view to their offer or resale to, persons in any
Relevant Member State other than qualified investors
(as defined in the Prospectus Directive), or in circumstances in
which the prior consent of the representatives has been given to
the offer or resale or (ii) where shares have been acquired
by it on behalf of persons in any Relevant Member State other
than qualified investors, the offer of those shares to it is not
treated under the Prospectus Directive as having been made to
such persons.
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182
Notice to
Prospective Investors in Switzerland
This document, as well as any other material relating to the
shares which are the subject of the offering contemplated by
this prospectus, do not constitute an issue prospectus pursuant
to Article 652a of the Swiss Code of Obligations. The
shares will not be listed on the SWX Swiss Exchange and,
therefore, the documents relating to the shares, including, but
not limited to, this document, do not claim to comply with the
disclosure standards of the listing rules of SWX Swiss Exchange
and corresponding prospectus schemes annexed to the listing
rules of the SWX Swiss Exchange. The shares are being offered in
Switzerland by way of a private placement (i.e., to a small
number of selected investors only), without any public offer and
only to investors who do not purchase the shares with the
intention to distribute them to the public. The investors will
be individually approached by us from time to time. This
document, as well as any other material relating to the shares,
is personal and confidential and does not constitute an offer to
any other person. This document may only be used by those
investors to whom it has been handed out in connection with the
offering described herein and may neither directly nor
indirectly be distributed or made available to other persons
without our express consent. It may not be used in connection
with any other offer and shall in particular not be copied
and/or
distributed to the public in (or from) Switzerland.
Notice to
Prospective Investors in the Dubai International Financial
Centre
This document relates to an exempt offer in accordance with the
Offered Securities Rules of the Dubai Financial Services
Authority. This document is intended for distribution only to
persons of a type specified in those rules. It must not be
delivered to, or relied on by, any other person. The Dubai
Financial Services Authority has no responsibility for reviewing
or verifying any documents in connection with exempt offers. The
Dubai Financial Services Authority has not approved this
document nor taken steps to verify the information set out in
it, and has no responsibility for it. The shares which are the
subject of the offering contemplated by this prospectus may be
illiquid
and/or
subject to restrictions on their resale. Prospective purchasers
of the shares offered should conduct their own due diligence on
the shares. If you do not understand the contents of this
document you should consult an authorised financial adviser.
Notice to
Prospective Investors in Hong Kong
This prospectus has not been approved by or registered with the
Securities and Futures Commission of Hong Kong or the Registrar
of Companies of Hong Kong. The shares will not be offered or
sold in Hong Kong other than (a) to professional
investors as defined in the Securities and Futures
Ordinance (Cap. 571) of Hong Kong and any rules made under
that Ordinance or (b) in other circumstances which do not
result in the document being a prospectus as defined
in the Companies Ordinance (Cap. 32) of Hong Kong or which
do not constitute an offer to the public within the meaning of
that Ordinance. No advertisement, invitation or document
relating to the shares which is directed at, or the contents of
which are likely to be accessed or read by, the public of Hong
Kong (except if permitted to do so under the securities laws of
Hong Kong) has been issued or will be issued in Hong Kong or
elsewhere other than with respect to shares which are or are
intended to be disposed of only to persons outside Hong Kong or
only to professional investors as defined in the
Securities and Futures Ordinance of Hong Kong and any rules made
under that Ordinance.
Notice to
Prospective Investors in Singapore
This prospectus has not been registered as a prospectus with the
Monetary Authority of Singapore. Accordingly, this prospectus
and any other document or material in connection with the offer
or sale, or invitation for subscription or purchase, of the
shares may not be circulated or distributed, nor may the shares
be offered or sold, or be made the subject of an invitation for
subscription or purchase, whether directly or indirectly, to
persons in Singapore other than (i) to an institutional
investor under Section 274 of the Securities and Futures
Act (Chapter 289) (the SFA), (ii) to a
relevant person, or any person pursuant to Section 275(1A),
and in accordance with the conditions, specified in
Section 275 of the SFA or (iii) otherwise pursuant to,
and in accordance with the conditions of, any other applicable
provision of the SFA. Where the shares are subscribed or
purchased under Section 275 by a relevant person which is:
(a) a corporation (which is not an accredited investor) the
sole business of which is to hold investments and the entire
share capital of which is owned by one or more individuals, each
of whom is an accredited investor or (b) a trust (where the
trustee is not an accredited investor) whose sole purpose is
183
to hold investments and each beneficiary is an accredited
investor, then shares, debentures and units of shares and
debentures of that corporation or the beneficiaries rights
and interest in that trust shall not be transferable for
six months after that corporation or that trust has
acquired the shares under Section 275 except: (i) to
an institutional investor under Section 274 of the SFA or
to a relevant person, or any person pursuant to
Section 275(1A), and in accordance with the conditions
specified in Section 275 of the SFA, (ii) where no
consideration is given for the transfer or (iii) by
operation of law.
Notice to
Prospective Investors in Japan
The shares have not been and will not be registered under the
Financial Instruments and Exchange Law of Japan (Law No. 25
of 1948, as amended) and, accordingly, will not be offered or
sold, directly or indirectly, in Japan, or for the benefit of
any Japanese Person or to others for re-offering or resale,
directly or indirectly, in Japan or to any Japanese Person,
except in compliance with all applicable laws, regulations and
ministerial guidelines promulgated by relevant Japanese
governmental or regulatory authorities in effect at the relevant
time. For the purposes of this paragraph, Japanese
Person shall mean any person resident in Japan, including
any corporation or other entity organized under the laws of
Japan.
LEGAL
MATTERS
The validity of our common stock offered hereby will be passed
upon for us by Cravath, Swaine & Moore LLP, New York,
New York. The underwriters are being represented in connection
with this offering by Simpson Thacher & Bartlett LLP,
New York, New York. An investment vehicle comprised of several
partners of Simpson Thacher & Bartlett LLP, members of
their families, related persons and others owns interests
representing less than 1% of the capital commitments of funds
affiliated with Vestar that hold an interest in Symetra
Financial Corporation.
EXPERTS
The consolidated financial statements and schedules of Symetra
Financial Corporation at December 31, 2008 and 2007, and
for each of the three years in the three-year period ended
December 31, 2008, appearing in this prospectus and
registration statement have been audited by Ernst &
Young LLP, independent registered public accounting firm, as set
forth in their reports thereon appearing elsewhere herein, and
are included in reliance upon such report given on the authority
of such firm as experts in accounting and auditing.
WHERE YOU
CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on
Form S-1
under the Securities Act of 1933, as amended, with respect to
the common stock we propose to sell in this offering. This
prospectus, which constitutes part of the registration
statement, does not contain all of the information set forth in
the registration statement. For further information about us and
the common stock we propose to sell in this offering, we refer
you to the registration statement and the exhibits and schedules
filed as a part of the registration statement. Statements
contained in this prospectus as to the contents of any contract
or other document filed as an exhibit to the registration
statement are not necessarily complete. If a contract or
document has been filed as an exhibit to the registration
statement, we refer you to the copy of the contract or document
that has been filed. The registration statement may be inspected
without charge at the principal office of the SEC in
Washington, D.C. and copies of all or any part of the
registration statement may be inspected and copied at the public
reference facilities maintained by the SEC at
100 F Street, N.E., Washington, D.C. 20549.
Copies of such material can also be obtained at prescribed rates
by mail from the Public Reference Section of the SEC at
100 F Street, N.E., Washington, D.C. 20549. The
SECs toll-free number is
1-800-SEC-0330.
In addition, the SEC maintains a website
(http://www.sec.gov)
that contains reports, proxy and information statements and
other information regarding registrants that file electronically
with the SEC. Prior to this offering, we were not required to
file reports with the SEC.
Upon completion of this offering, we will become subject to the
information and periodic reporting requirements of the Exchange
Act. The periodic reports and other information that we file
with the SEC will be available for inspection and copying at the
SECs public reference facilities and on the website of the
SEC referred to above.
184
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page
|
|
Audited Consolidated Financial Statements of Symetra
Financial Corporation
|
|
|
|
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
Unaudited Interim Consolidated Financial Statements of
Symetra Financial Corporation
|
|
|
|
|
|
|
|
F-45
|
|
|
|
|
F-46
|
|
|
|
|
F-47
|
|
|
|
|
F-48
|
|
|
|
|
F-49
|
|
F-1
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 (the Company) as of
December 31, 2008 and 2007, 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, 2008. The financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. We were not engaged to perform an
audit of the Companys internal control over financial
reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial 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, 2008 and 2007, and the consolidated results of
its operations and its cash flows for each of the three years in
the period ended December 31, 2008, in conformity with U.S.
generally accepted accounting principles.
As discussed in Note 7 to the financial statements, in 2008
the Company changed its method of accounting for certain
marketable equity securities, hedge funds and private equity
funds.
/s/ Ernst & Young LLP
Seattle, Washington
March 6, 2009
F-2
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2008
|
|
2007
|
|
|
(In millions, except share and per share data)
|
|
ASSETS
|
Investments:
|
|
|
|
|
|
|
|
|
Available-for-sale
securities:
|
|
|
|
|
|
|
|
|
Fixed maturities, at fair value (cost: $16,528.4 and
$15,644.2, respectively)
|
|
$
|
14,887.6
|
|
|
$
|
15,599.9
|
|
Marketable equity securities, at fair value (cost: $52.5
and $174.7, respectively)
|
|
|
38.1
|
|
|
|
200.8
|
|
Trading securities:
|
|
|
|
|
|
|
|
|
Marketable equity securities, trading, at fair value (cost:
$152.1 and $0, respectively)
|
|
|
106.3
|
|
|
|
|
|
Mortgage loans, net
|
|
|
988.7
|
|
|
|
845.5
|
|
Policy loans
|
|
|
75.2
|
|
|
|
77.2
|
|
Short-term investments
|
|
|
9.4
|
|
|
|
10.9
|
|
Investments in limited partnerships (includes $56.3 and
$70.3 measured at fair value, respectively)
|
|
|
138.3
|
|
|
|
158.8
|
|
Other invested assets
|
|
|
8.9
|
|
|
|
11.9
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
|
16,252.5
|
|
|
|
16,905.0
|
|
Cash and cash equivalents
|
|
|
468.0
|
|
|
|
253.9
|
|
Accrued investment income
|
|
|
206.3
|
|
|
|
194.5
|
|
Accounts receivable and other receivables
|
|
|
61.7
|
|
|
|
57.4
|
|
Reinsurance recoverables
|
|
|
264.2
|
|
|
|
253.9
|
|
Deferred policy acquisition costs
|
|
|
247.5
|
|
|
|
132.9
|
|
Goodwill
|
|
|
24.3
|
|
|
|
22.3
|
|
Current income tax recoverable
|
|
|
21.1
|
|
|
|
4.5
|
|
Deferred income tax assets, net
|
|
|
785.8
|
|
|
|
203.1
|
|
Property, equipment, and leasehold improvements, net
|
|
|
18.9
|
|
|
|
23.3
|
|
Other assets
|
|
|
57.4
|
|
|
|
44.2
|
|
Securities lending collateral
|
|
|
105.7
|
|
|
|
283.3
|
|
Separate account assets
|
|
|
716.2
|
|
|
|
1,181.9
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
19,229.6
|
|
|
$
|
19,560.2
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Funds held under deposit contracts
|
|
$
|
16,810.4
|
|
|
$
|
15,562.0
|
|
Future policy benefits
|
|
|
392.1
|
|
|
|
384.9
|
|
Policy and contract claims
|
|
|
133.1
|
|
|
|
110.9
|
|
Unearned premiums
|
|
|
11.9
|
|
|
|
11.5
|
|
Other policyholders funds
|
|
|
117.3
|
|
|
|
56.8
|
|
Notes payable
|
|
|
448.8
|
|
|
|
448.6
|
|
Other liabilities
|
|
|
207.9
|
|
|
|
235.2
|
|
Securities lending payable
|
|
|
105.7
|
|
|
|
283.3
|
|
Separate account liabilities
|
|
|
716.2
|
|
|
|
1,181.9
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
18,943.4
|
|
|
|
18,275.1
|
|
Commitments and contingencies (Note 17)
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value; 10,000,000 shares
authorized; none issued
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value; 750,000,000 shares
authorized; 92,646,295 shares issued and outstanding as of
December 31, 2008 and 2007
|
|
|
0.9
|
|
|
|
0.9
|
|
Additional paid-in capital
|
|
|
1,165.5
|
|
|
|
1,165.5
|
|
Retained earnings
|
|
|
172.4
|
|
|
|
131.2
|
|
Accumulated other comprehensive loss, net of taxes
|
|
|
(1,052.6
|
)
|
|
|
(12.5
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
286.2
|
|
|
|
1,285.1
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
19,229.6
|
|
|
$
|
19,560.2
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-3
CONSOLIDATED
STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In millions, except per share data)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
|
|
$
|
584.8
|
|
|
$
|
530.5
|
|
|
$
|
525.7
|
|
Net investment income
|
|
|
956.5
|
|
|
|
973.6
|
|
|
|
984.9
|
|
Other revenues
|
|
|
67.8
|
|
|
|
68.7
|
|
|
|
56.1
|
|
Net realized investment gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other-than-temporary
impairment losses on securities
|
|
|
(86.4
|
)
|
|
|
(16.2
|
)
|
|
|
(25.7
|
)
|
Less: portion of losses recognized in other comprehensive income
(loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net impairment losses recognized in earnings
|
|
|
(86.4
|
)
|
|
|
(16.2
|
)
|
|
|
(25.7
|
)
|
Other net realized investment gains (losses)
|
|
|
(71.6
|
)
|
|
|
33.0
|
|
|
|
27.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net realized investment gains (losses)
|
|
|
(158.0
|
)
|
|
|
16.8
|
|
|
|
1.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
1,451.1
|
|
|
|
1,589.6
|
|
|
|
1,568.4
|
|
Benefits and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder benefits and claims
|
|
|
348.5
|
|
|
|
267.1
|
|
|
|
264.3
|
|
Interest credited
|
|
|
766.1
|
|
|
|
752.3
|
|
|
|
765.9
|
|
Other underwriting and operating expenses
|
|
|
265.8
|
|
|
|
281.9
|
|
|
|
260.5
|
|
Interest expense
|
|
|
31.9
|
|
|
|
21.5
|
|
|
|
19.1
|
|
Amortization of deferred policy acquisition costs
|
|
|
25.8
|
|
|
|
18.0
|
|
|
|
14.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses
|
|
|
1,438.1
|
|
|
|
1,340.8
|
|
|
|
1,324.4
|
|
Income from operations before income taxes
|
|
|
13.0
|
|
|
|
248.8
|
|
|
|
244.0
|
|
Provision (benefit) for income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
23.8
|
|
|
|
62.8
|
|
|
|
92.4
|
|
Deferred
|
|
|
(32.9
|
)
|
|
|
18.7
|
|
|
|
(7.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision (benefit) for income taxes
|
|
|
(9.1
|
)
|
|
|
81.5
|
|
|
|
84.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
22.1
|
|
|
$
|
167.3
|
|
|
$
|
159.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.20
|
|
|
$
|
1.50
|
|
|
$
|
1.43
|
|
Diluted
|
|
$
|
0.20
|
|
|
$
|
1.50
|
|
|
$
|
1.43
|
|
Weighted-average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
111.622
|
|
|
|
111.622
|
|
|
|
111.622
|
|
Diluted
|
|
|
111.622
|
|
|
|
111.622
|
|
|
|
111.622
|
|
Cash dividends declared per common share
|
|
$
|
|
|
|
$
|
1.79
|
|
|
$
|
0.90
|
|
See accompanying notes.
F-4
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 at January 1, 2006
|
|
$
|
0.9
|
|
|
$
|
1,165.5
|
|
|
$
|
101.9
|
|
|
$
|
136.6
|
|
|
$
|
1,404.9
|
|
Comprehensive income, net of taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
159.5
|
|
|
|
|
|
|
|
159.5
|
|
Other comprehensive income, net of taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized losses on investment securities (net of taxes:
$(75.4))
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(140.0
|
)
|
|
|
(140.0
|
)
|
Derivatives qualifying as cash flow hedges (net of taxes: $1.6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.9
|
|
|
|
2.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend distributions
|
|
|
|
|
|
|
|
|
|
|
(100.0
|
)
|
|
|
|
|
|
|
(100.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2006
|
|
$
|
0.9
|
|
|
$
|
1,165.5
|
|
|
$
|
161.4
|
|
|
$
|
(0.5
|
)
|
|
$
|
1,327.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at January 1, 2007
|
|
$
|
0.9
|
|
|
$
|
1,165.5
|
|
|
$
|
161.4
|
|
|
$
|
(0.5
|
)
|
|
$
|
1,327.3
|
|
Cumulative effect adjustment new accounting guidance
(net of taxes: $(1.3))
|
|
|
|
|
|
|
|
|
|
|
2.5
|
|
|
|
(2.5
|
)
|
|
|
|
|
Comprehensive income, net of taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
167.3
|
|
|
|
|
|
|
|
167.3
|
|
Other comprehensive income, net of taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized losses on investment securities (net of taxes:
$(2.5))
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4.6
|
)
|
|
|
(4.6
|
)
|
Derivatives qualifying as cash flow hedges (net of taxes: $(2.6))
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4.9
|
)
|
|
|
(4.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
157.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend distributions
|
|
|
|
|
|
|
|
|
|
|
(200.0
|
)
|
|
|
|
|
|
|
(200.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2007
|
|
$
|
0.9
|
|
|
$
|
1,165.5
|
|
|
$
|
131.2
|
|
|
$
|
(12.5
|
)
|
|
$
|
1,285.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at January 1, 2008
|
|
$
|
0.9
|
|
|
$
|
1,165.5
|
|
|
$
|
131.2
|
|
|
$
|
(12.5
|
)
|
|
$
|
1,285.1
|
|
Cumulative effect adjustment new accounting guidance
(net of taxes: $(10.3))
|
|
|
|
|
|
|
|
|
|
|
19.1
|
|
|
|
(19.1
|
)
|
|
|
|
|
Comprehensive income, net of taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
22.1
|
|
|
|
|
|
|
|
22.1
|
|
Other comprehensive income, net of taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized losses on investment securities (net of taxes:
$(549.8))
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,021.0
|
)
|
|
|
(1,021.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(998.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2008
|
|
$
|
0.9
|
|
|
$
|
1,165.5
|
|
|
$
|
172.4
|
|
|
$
|
(1,052.6
|
)
|
|
$
|
286.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-5
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In millions)
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
22.1
|
|
|
$
|
167.3
|
|
|
$
|
159.5
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment (gains) and losses
|
|
|
158.0
|
|
|
|
(16.8
|
)
|
|
|
(1.7
|
)
|
Accretion of fixed maturity investments and mortgage loans
|
|
|
36.4
|
|
|
|
58.3
|
|
|
|
72.4
|
|
Accrued interest on bonds
|
|
|
(33.4
|
)
|
|
|
(38.5
|
)
|
|
|
(43.4
|
)
|
Amortization and depreciation
|
|
|
14.6
|
|
|
|
13.6
|
|
|
|
12.0
|
|
Deferred income tax provision (benefit)
|
|
|
(32.9
|
)
|
|
|
18.7
|
|
|
|
(7.9
|
)
|
Interest credited on deposit contracts
|
|
|
766.1
|
|
|
|
752.3
|
|
|
|
765.9
|
|
Mortality and expense charges and administrative fees
|
|
|
(96.7
|
)
|
|
|
(94.1
|
)
|
|
|
(91.2
|
)
|
Changes in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued investment income
|
|
|
(11.8
|
)
|
|
|
12.2
|
|
|
|
7.2
|
|
Deferred policy acquisition costs
|
|
|
(89.6
|
)
|
|
|
(42.3
|
)
|
|
|
(39.1
|
)
|
Other receivables
|
|
|
(13.7
|
)
|
|
|
17.2
|
|
|
|
(28.9
|
)
|
Future policy benefits
|
|
|
7.2
|
|
|
|
8.5
|
|
|
|
4.9
|
|
Policy and contract claims
|
|
|
22.2
|
|
|
|
(8.6
|
)
|
|
|
(16.1
|
)
|
Accrued income taxes
|
|
|
(16.6
|
)
|
|
|
(7.1
|
)
|
|
|
28.8
|
|
Other assets and liabilities
|
|
|
1.2
|
|
|
|
(24.1
|
)
|
|
|
(29.0
|
)
|
Other, net
|
|
|
(0.1
|
)
|
|
|
(2.8
|
)
|
|
|
1.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustments
|
|
|
710.9
|
|
|
|
646.5
|
|
|
|
635.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
733.0
|
|
|
|
813.8
|
|
|
|
794.6
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities and marketable equity securities
|
|
|
(2,286.7
|
)
|
|
|
(2,646.3
|
)
|
|
|
(1,759.2
|
)
|
Other invested assets and investments in limited partnerships
|
|
|
(33.5
|
)
|
|
|
(62.6
|
)
|
|
|
(12.5
|
)
|
Issuances of mortgage loans
|
|
|
(224.5
|
)
|
|
|
(150.0
|
)
|
|
|
(122.0
|
)
|
Issuances of policy loans
|
|
|
(16.2
|
)
|
|
|
(17.8
|
)
|
|
|
(19.6
|
)
|
Maturities, calls, paydowns, and other
|
|
|
922.0
|
|
|
|
974.8
|
|
|
|
912.8
|
|
Securities lending collateral returned, net
|
|
|
174.4
|
|
|
|
159.9
|
|
|
|
151.0
|
|
Acquisitions, net of cash received
|
|
|
(9.2
|
)
|
|
|
(22.0
|
)
|
|
|
|
|
Sales of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities and marketable equity securities
|
|
|
371.8
|
|
|
|
2,123.8
|
|
|
|
1,676.6
|
|
Other invested assets and investments in limited partnerships
|
|
|
29.6
|
|
|
|
13.2
|
|
|
|
6.8
|
|
Repayments of mortgage loans
|
|
|
80.1
|
|
|
|
94.8
|
|
|
|
99.1
|
|
Repayments of policy loans
|
|
|
17.0
|
|
|
|
18.7
|
|
|
|
20.7
|
|
Net (increase) decrease in short-term investments
|
|
|
1.5
|
|
|
|
38.0
|
|
|
|
(41.5
|
)
|
Purchases of property, equipment, and leasehold improvements
|
|
|
(2.0
|
)
|
|
|
(2.2
|
)
|
|
|
(3.2
|
)
|
Other, net
|
|
|
(1.1
|
)
|
|
|
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(976.8
|
)
|
|
|
522.3
|
|
|
|
908.9
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder account balances:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
1,970.8
|
|
|
$
|
820.0
|
|
|
$
|
660.5
|
|
Withdrawals
|
|
|
(1,322.0
|
)
|
|
|
(1,884.3
|
)
|
|
|
(2,016.0
|
)
|
Securities lending collateral paid, net
|
|
|
(174.4
|
)
|
|
|
(159.9
|
)
|
|
|
(151.0
|
)
|
Repayment of notes payable
|
|
|
|
|
|
|
|
|
|
|
(300.0
|
)
|
Proceeds from notes payable
|
|
|
|
|
|
|
149.8
|
|
|
|
298.7
|
|
Dividend distributions
|
|
|
|
|
|
|
(200.0
|
)
|
|
|
(100.0
|
)
|
Other, net
|
|
|
(16.5
|
)
|
|
|
(61.0
|
)
|
|
|
46.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
457.9
|
|
|
|
(1,335.4
|
)
|
|
|
(1,561.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
214.1
|
|
|
|
0.7
|
|
|
|
142.2
|
|
Cash and cash equivalents at beginning of period
|
|
|
253.9
|
|
|
|
253.2
|
|
|
|
111.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
468.0
|
|
|
$
|
253.9
|
|
|
$
|
253.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
31.3
|
|
|
$
|
18.5
|
|
|
$
|
17.8
|
|
Income taxes
|
|
|
40.4
|
|
|
|
69.6
|
|
|
|
62.8
|
|
Non-cash transactions during the year:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in limited partnerships and capital obligations
incurred
|
|
|
4.2
|
|
|
|
20.0
|
|
|
|
19.9
|
|
See accompanying notes.
F-6
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in millions, unless otherwise
stated)
|
|
1.
|
Organization
and Description of Business
|
Symetra Financial Corporation is a Delaware corporation
privately owned by an investor group led by White Mountains
Insurance Group, Ltd. and Berkshire Hathaway Inc. The
accompanying financial statements include on a consolidated
basis the accounts of Symetra Financial Corporation and its
subsidiaries, which are collectively referred to as
Symetra Financial or the Company.
The Companys subsidiaries offer group and individual
insurance products and retirement products, including annuities
marketed through professional agents and distributors 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 Companys primary operating subsidiaries and insurance
subsidiaries are as follows:
|
|
|
|
|
Symetra Life Insurance Company
|
|
|
|
First Symetra National Life Insurance Company of New York
|
|
|
|
Symetra National Life Insurance Company
|
|
|
|
Symetra Securities, Inc.
|
|
|
|
Symetra Investment Services, Inc.
|
|
|
|
Symetra Assigned Benefits Service Company
|
|
|
|
Clearscape Funding Corporation
|
|
|
|
Medical Risk Managers Holdings, Inc. (MRM)
|
Common
and Preferred Stock (in millions, except par value and share
amounts)
The Company has 750,000,000 authorized shares of common stock,
$0.01 par value per share, and 10,000,000 authorized shares
of preferred stock, $0.01 par value per share. The
Companys Board of Directors has the authority to designate
the preferred stock into series and to designate the voting
powers, preferences and other rights of the shares of each
series without further stockholder approval. In 2004, the
Company issued warrants to its two lead investors. The warrants
remained outstanding as of December 31, 2008, and are
exercisable at any time until August 2, 2014, for
18,975,744 shares of common stock in the aggregate at an
exercise price of $11.49 per share.
On October 26, 2007, the Company executed a 7.7-for-1 stock
dividend (substantially equivalent to an 8.7-for-1 stock split)
that increased the shares of common stock outstanding from
10,649,000 to 92,646,295, and the shares subject to outstanding
warrants from 2,181,120 to 18,975,744. The stock split, effected
in the form of a dividend, has been reflected retroactively in
these financial statements for all periods presented.
|
|
2.
|
Summary
of Significant Accounting Policies
|
Basis
of Presentation and Use of Estimates
The consolidated financial statements have been prepared in
conformity with U.S. generally accepted accounting
principles (GAAP). The preparation of financial statements in
conformity with GAAP requires the Company to make estimates and
assumptions that may affect the amounts reported in the
consolidated financial statements and accompanying notes.
The most significant estimates include those used to determine
the following: valuation of investments; the identification of
other-than-temporary
impairments of investments; the balance, recoverability and
amortization of deferred policy acquisition costs (DAC); the
liabilities for funds held under deposit contracts, future
policy benefits, and policy and contract claims; and income
taxes. The recorded amounts
F-7
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in millions, unless otherwise
stated)
reflect managements best estimates, though actual results
could differ from those estimates. Management believes the
amounts provided are appropriate.
The consolidated financial statements include the accounts of
Symetra Financial Corporation and its subsidiaries that are
wholly owned, directly or indirectly. All significant
intercompany transactions and balances have been eliminated.
Recognition
of Insurance Revenue and Related Benefits
Premiums from group life and health insurance products are
recognized as revenue when earned over the life of the policy.
The Company reports a liability for the portion of premiums
unearned on the consolidated balance sheets. Benefit claims are
charged to operations as incurred. These policies are
short-duration contracts.
Traditional individual life insurance products, primarily term
and whole life insurance products, are long-duration contracts
consisting principally of products with fixed and guaranteed
premiums and benefits. Premiums from these products are
recognized as revenue when due. Benefits and expenses are
associated with earned premiums to result in the recognition of
profits over the life of the policy. This association is
accomplished by the provision for future policy benefits and the
deferral and amortization of policy acquisition costs.
Deposits related to universal life-type, limited payment-type
and investment-type products are credited to policyholder
account balances and reflected as liabilities rather than as
premium income when received. Revenues from these contracts
consist of investment income on the policyholders fund
balances and amounts assessed during the period against
policyholders account balances for cost of insurance
charges, policy administration charges, and surrender charges.
The Company includes these cost of insurance charges in
premiums. Policy administration charges and surrender charges
are included in other revenues in the consolidated statements of
income. Amounts that are charged to operations include interest
credited and benefit claims incurred in excess of related
policyholder account balances.
Variable product fees are charged to variable annuity and
variable life policyholders accounts based upon the daily
net assets of the policyholders account values and are
recognized as other revenues when charged. Mortality and expense
charges, policy administration charges, and surrender charges
are included in other revenues in the consolidated statements of
income.
Investments
Available-for-Sale
Securities
The Company classifies its investments in fixed maturities and
certain marketable equity securities as
available-for-sale
securities and carries them at fair value. Fixed maturities
include bonds, mortgage-backed securities and redeemable
preferred stock. Marketable equity securities primarily include
nonredeemable preferred stock, which consist of investments in
publicly traded companies and certain mutual funds.
The Company reports net unrealized investment gains (losses)
related to its
available-for-sale
securities in accumulated other comprehensive income (loss) in
stockholders equity, net of related DAC and deferred
income taxes.
The Company reports interest and dividends earned in net
investment income. When the collectibility of interest income
for fixed maturities is considered doubtful, any accrued but
uncollectible interest is reversed against investment income in
the current period. The Company then places the securities on
nonaccrual status, and they are not restored to accrual status
until all delinquent interest and principal are paid. For
mortgage-backed securities, the Company recognizes income using
a constant effective yield based on anticipated prepayments and
the estimated economic life of the securities. Quarterly, the
Company compares actual prepayments to anticipated prepayments
and recalculates the effective yield to reflect actual payments
to date plus anticipated future payments. The Company includes
any resulting adjustment in net investment income.
F-8
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in millions, unless otherwise
stated)
Trading
Securities
On January 1, 2008, the Company adopted new accounting
guidance that allowed the Company to elect fair value accounting
for its investments in common stock. Prior to January 1,
2008 these investments were accounted for as available-for-sale
securities. 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.
Investment
Valuation
The Company uses quoted market prices or public market
information to determine the fair value of its investments when
such information is available. When such information is not
available, as in the case of securities that are not publicly
traded, the Company uses other valuation techniques. These
techniques include evaluating discounted cash flows, identifying
comparable securities with quoted market prices, and using
internally prepared valuations based on certain modeling and
pricing methods. The Companys investment portfolio at
December 31, 2008 and 2007 included $632.2 and $656.5,
respectively, of fixed maturities and $0 and $21.1,
respectively, of marketable equity securities that were not
publicly traded, and values for these securities were determined
using these other valuation techniques. See Note 7 for
additional disclosures about fair value measurements.
The cost of securities sold is determined by the
specific-identification method.
Other-Than-Temporary
Impairments
Investments are considered to be impaired when a decline in fair
value is judged to be
other-than-temporary.
The Companys review of investment securities includes both
quantitative and qualitative criteria. Quantitative criteria
include the length of time and amount that each security is in
an unrealized loss position and, for fixed maturities, whether
the issuer is in compliance with the terms and covenants of the
security.
The Companys review of its fixed maturities and marketable
equity securities (non-trading) for impairments includes an
analysis of the total gross unrealized losses by three
categories of securities: (i) securities where the
estimated fair value has declined and remained below cost or
amortized cost by less than 20%, (ii) securities where the
estimated fair value has declined and remained below cost or
amortized cost by 20% or more for less than six months and
(iii) securities where the estimated fair value has
declined and remained below cost or amortized cost by 20% or
more for six months or longer. While all securities are
monitored for impairment, the Companys experience
indicates that the first category does not represent a
significant risk of impairment and, often, fair values recover
over time as the factors that caused the declines improve. The
Company performs a qualitative analysis by issuer to identify
securities in category (i) that should be further evaluated for
OTTI.
If the value of any of the Companys investments falls into
the second or third category, the Company analyzes the decrease
to determine whether it is an
other-than-temporary
decline in value. To make this determination for each security,
the Company considers:
|
|
|
|
|
How long and by how much the fair value has been below its 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.
|
|
|
|
The Companys intent and ability to hold the security long
enough for it to recover its value, considering any long-range
plans that may affect the Companys ability to hold
securities.
|
F-9
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in millions, unless otherwise
stated)
|
|
|
|
|
Any downgrades of the security by a rating agency.
|
|
|
|
Any reduction or elimination of dividends or nonpayment of
scheduled interest payments.
|
Based on the analysis, the Company makes a judgment as to
whether the loss is
other-than-temporary.
If the loss is
other-than-temporary,
the Company records an impairment charge within net realized
investment gains (losses) in its consolidated statements of
income in the period that the Company makes the determination.
In addition, any impaired investment where the Company does not
have the intent and ability to hold the security long enough for
it to recover its value is recorded as an
other-than-temporary
impairment.
Mortgage
Loans
The Company carries mortgage loans at outstanding principal
balances, less a valuation allowance. The allowance for losses
on mortgage loans provides for the risk of credit losses
inherent in the lending process. The allowance includes a
portfolio reserve for probable incurred but not specifically
identified losses and loan specific reserves for non-performing
loans. We define non-performing loans as a loan for which it is
probable that amounts due according to the terms of the loan
agreement will not be collected. As of December 31, 2008
and 2007 no loans were considered non-performing. The portfolio
reserve for probable incurred but not specifically identified
losses considers our past loan experience, the current credit
composition of the portfolio and takes into account market
considerations.
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.
Short-Term
Investments
Short-term investments consist of highly liquid debt instruments
with original maturities of greater than three months and less
than twelve months when purchased.
Investments
in Limited Partnerships
Investments in limited partnerships consist of $56.3 of
investments in hedge funds and private equity funds, recorded at
fair value under new fair value accounting guidance adopted
January 1, 2008, and $82.0 of investments in affordable
housing projects and state tax credit funds recorded at
amortized cost. The impact of changes in the fair value of hedge
funds and private equity funds is recorded in net investment
income in the consolidated statements of income. Prior to
adoption of the new accounting guidance on January 1, 2008,
hedge funds and private equity funds where the Company had a 3%
or greater interest were accounted for under the equity method.
Income (loss) from equity method investments is recorded in net
investment income. See Note 7 for discussion of fair value
and impact from the adoption of SFAS No. 159.
The Company has identified certain investments in limited
partnerships that meet the definition of a variable interest
entity (VIE). Based on the analysis of these interests, the
Company does not meet the definition of primary
beneficiary of any of these partnerships and therefore has
not consolidated these entities. The maximum exposure to loss as
a result of the Companys involvement in its VIEs was
$181.4 and $204.7 as of December 31, 2008 and 2007,
respectively. The maximum exposure to loss includes commitments
to provide future capital contributions as described in
Note 17.
Cash
and Cash Equivalents
Cash and cash equivalents consist of demand bank deposits and
short-term highly liquid investments with original maturities of
three months or less at the time of purchase. Cash equivalents
are reported at cost, which approximates fair value, and were
$441.6 and $242.7 as of December 31, 2008 and 2007,
respectively.
F-10
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in millions, unless otherwise
stated)
At December 31, 2008, $366.9 of total cash equivalents was
held at a single highly rated financial institution. At
December 31, 2007, $105.2 and $81.7 were held with two
highly rated financial institutions.
Derivative
Financial Instruments
Derivative financial instruments are included in other invested
assets at fair value on the Companys consolidated balance
sheets. The Companys financial statement recognition of
the change in fair value of a derivative depends on the intended
use of the derivative and the extent to which it is effective as
part of a hedging transaction. Derivatives that are highly
effective and designated as either fair value or cash flow
hedges receive hedge accounting treatment.
Derivatives that hedge variable rate assets or liabilities or
forecasted transactions are designated as cash flow hedges.
For such derivatives, the Company recognizes the changes in the
fair value of the derivative as a component of accumulated other
comprehensive loss, net of deferred income taxes, until the
hedged transaction affects current earnings. At the time current
earnings are affected by the variability of cash flows, the
related portion of deferred gains or losses on cash flow hedge
derivatives is reclassified from accumulated other comprehensive
loss and recorded in the consolidated statements of income.
When the changes in the fair value of such derivatives do not
perfectly offset the changes in the fair value of the hedged
transaction, the Company recognizes the ineffective portion in
the consolidated statements of income. For hedge ineffectiveness
and derivatives that do not qualify for hedge accounting
treatment, the Company records the changes in the fair value of
these derivatives in net realized investment gains (losses) in
the consolidated statements of income.
The Company formally documents all relationships between the
hedging instruments and hedged items, as well as risk-management
objectives and strategies for undertaking various hedge
transactions. The Company links all hedges that are designated
as cash flow hedges to specific variable rate assets or
liabilities or to forecasted transactions. The Company also
assesses, both at the inception of the hedge and on an ongoing
basis, whether the derivatives that are used in hedging
transactions are highly effective in offsetting the changes in
fair values or cash flows of hedged items. When it is determined
that a derivative is not highly effective as a hedge, the
Company discontinues hedge accounting on a prospective basis.
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. Reinsurance does not affect
the Companys liability to its policyholders. Accordingly,
the future policy benefit reserves and policy and contract
claims liabilities are reported gross of any related reinsurance
recoverables. The Company reports premiums, benefits, and
settlement expenses net of reinsurance ceded on the consolidated
statements of income. The Company accounts for reinsurance
premiums, commissions, expense reimbursements, benefits and
reserves related to reinsured business on bases consistent with
those used in accounting for the original policies issued and
the terms of the reinsurance contracts. The Company remains
liable to its policyholders to the extent that counterparties to
ceded reinsurance contracts do not meet their contractual
obligations.
Deferred
Policy Acquisition Costs
The Company defers as assets certain costs, principally
commissions, distribution costs and other underwriting costs,
that vary with and are primarily related to the production of
business. The Company limits deferrals to the lesser of the
acquisition costs contained in the Companys product
pricing assumptions or actual costs incurred.
F-11
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in millions, unless otherwise
stated)
The Company amortizes acquisition costs for deferred and
immediate annuity contracts and universal life insurance
policies over the lives of the contracts or policies in
proportion to the estimated future gross profits of each of
these product lines. In this estimation process, the Company
makes assumptions as to surrender rates, mortality experience,
maintenance expenses, and investment performance. Actual profits
can vary from the estimates and can thereby result in increases
or decreases to DAC amortization rates. For interest-sensitive
life products, the Company regularly evaluates its assumptions
and, when necessary, revises the estimated gross profits of
these contracts, resulting in adjustments to DAC amortization.
When such estimates are revised, they are recorded in current
earnings. The Company adjusts the unamortized balance of DAC for
the impact on estimated future gross profits as if net
unrealized investment gains and losses on securities had been
realized as of the balance sheet date. The Company includes the
impact of this adjustment, net of tax, in accumulated other
comprehensive loss in Stockholders Equity.
The Company amortizes acquisition costs for traditional
individual life insurance policies over the premium paying
period of the related policies, using assumptions consistent
with those used in computing policy benefit liabilities. The
Company amortizes acquisition costs for group medical policies
over the policy period of one year.
The Company conducts regular recoverability analyses for
deferred and immediate annuity contract, universal life
contract, and traditional life contract DAC asset balances. The
Company compares the current DAC asset 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. As of December 31, 2008
and 2007, all of the DAC asset balances were considered
recoverable.
For some products, policyholders can elect to modify product
benefits, features, rights or coverage by exchanging a contract
for a new contract or by amendment, endorsement or rider to a
contract or by election of a feature or coverage within a
contract. These transactions are known as internal replacements.
If the modification substantially changes the contract, the DAC
is immediately written off through income and any new deferrable
costs associated with the replacement contract are deferred. If
the modification does not substantially change the contract, the
DAC is retained and amortized over the life of the modified
contract and any acquisition costs associated with the related
modification are expensed.
Goodwill
Goodwill, which represents the excess of the cost of businesses
acquired over the fair value of the net assets, was primarily
attributable to MRM in the Companys Group operating
segment. Goodwill is not amortized but is tested for impairment
at least annually using a fair value approach, which requires
the use of estimates and judgment. No impairment was recorded
for the years ended December 31, 2008, 2007 and 2006.
Property,
Equipment and Leasehold Improvements
Property, equipment and leasehold improvements are stated at
cost, less accumulated depreciation and amortization.
Depreciation is determined using the straight-line method over
the estimated useful lives of the assets. Estimated useful lives
generally range from one to ten years for leasehold improvements
and three to ten years for all other property and equipment.
Leasehold improvements are amortized over the shorter of their
economic useful lives or the term of the lease.
Leases
Certain operating leases of the Company provide for minimum
annual payments that change over the life of the lease. The
aggregate minimum annual payments are expensed on the
straight-line basis over the minimum lease term. The Company
recognizes a deferred rent liability for minimum step rents when
the amount of rent expense exceeds the actual lease payments,
and reduces the deferred rent liability when the
F-12
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in millions, unless otherwise
stated)
actual lease payments exceed the amount of straight-line rent
expense. Rent holidays, rent incentives, and tenant improvement
allowances are amortized on the straight-line basis over the
initial term of the lease and any option period that is
reasonably assured.
Deferred
Sales Inducements
The Company defers sales inducements to contractholders for
bonus interest and sales inducement interest on deferred
annuities. The inducement interest entitles the contractholder
to an incremental amount of interest to be credited to the
account value over a 12- to
60-month
period following the initial deposit, depending on the product.
The incremental interest causes the initial credited rate to be
higher than the contracts expected ongoing crediting rates
for periods after the inducement. Deferred sales inducements to
contractholders are reported as other assets and amortized into
interest credited to policyholder account values using the same
methodology and assumptions used to amortize DAC.
Separate
Accounts
Separate account assets and liabilities reported on the
accompanying consolidated balance sheets represent funds that
the Company administers and invests to meet the specific fund
allocations of the policyholders of variable annuity, life, and
universal life contracts. The assets of each separate account
are legally segregated and are not subject to claims that arise
out of the Companys other business activities. Net
investment income and net realized and unrealized investment
gains and losses accrue directly to such policyholders who bear
the investment risk, subject to guaranteed minimum death
benefits (GMDB). For variable annuity contracts with GMDB, the
Company contractually guarantees total deposits made to the
contract, less any partial withdrawals, in the event of death.
The Company offers three types of GMDB contracts consisting of
return of premium and two versions of ratchet, which are
evaluated every fifth and eighth year, respectively. The ratchet
reset benefit is equal to the immediately preceding GMDB or is
stepped up to the account value on the evaluation
date, if higher.
The Company reinsures nearly all of the GMDB risk on its
individual variable annuity contracts. Therefore, the net GMDB
liability balance is not material. The Company does not include
investment results accruing directly to the policyholder in its
revenues. Fees charged to policyholders include mortality,
policy administration, and surrender charges and are included in
other revenues.
Funds
Held Under Deposit Contracts
Liabilities for fixed deferred annuity contracts, guaranteed
investment contracts, and universal life policies, including
bank-owned life insurance (BOLI), are computed as deposits net
of withdrawals made by the policyholder, plus amounts credited
based on contract specifications, less contract fees and charges
assessed, plus any additional interest. For single premium
immediate annuities (SPIAs), including structured settlements,
future benefits are either fully guaranteed or are contingent on
the survivorship of the annuitant. Liabilities are based on
discounted amounts of estimated future benefits. Contingent
future benefits are discounted with current pricing mortality
assumptions, which include provisions for longer life spans over
time. The interest rate pattern used to calculate the reserves
for SPIAs is set at issue. The interest rates within the pattern
vary over time and start with interest rates that prevailed at
the contract issue. The weighted-average implied interest rate
on the existing block is currently 5.9% and will grade to an
ultimate assumed level of 6.7% in about 17 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
F-13
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in millions, unless otherwise
stated)
assumptions in the year of issue and includes a provision for
adverse deviation. These liabilities are contingent upon the
death of the insured while the policy is in force. The Company
derives mortality assumptions from both company-specific and
industry statistics. The Company discounts future benefits at
interest rates that vary by year of policy issue, are set
initially at a rate consistent with portfolio rates at the time
of issue, and graded to a lower rate, such as the statutory
valuation interest rate, over time. Assumptions are set at the
time each product is introduced and are not updated for actual
experience unless the total product liability amount is
determined to be inadequate to cover future policy benefits. The
provision for adverse deviation is intended to provide coverage
for the risk that actual experience may be worse than locked-in
best-estimate assumptions.
Policy
and Contract Claims
Liabilities for policy and contract claims primarily represent
liabilities for claims under group medical coverages and are
established on the basis of reported losses (case basis method).
The Company also provides for claims incurred but not reported
(IBNR), based on expected loss ratios, claims paying completion
patterns, and historical experience. The Company periodically
reviews estimates for reported but unpaid claims and IBNR. Any
necessary adjustments are reflected in current operating
results. If expected loss ratios increase or expected claims
paying completion patterns extend, the IBNR claim liability
increases.
Income
Taxes
Income taxes have been provided using the liability method. The
provision for income taxes has two components: amounts currently
payable or receivable and deferred income taxes. The deferred
income taxes are calculated as the difference between the book
and tax basis of the appropriate assets and liabilities and are
measured using enacted tax rates. Deferred tax assets are
recognized only to the extent that it is probable that future
tax profits will be available. A valuation allowance is
established where deferred tax assets cannot be recognized.
Adoption
of New Accounting Pronouncements
SFAS No. 157,
Fair Value Measurements
On January 1, 2008, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 157, Fair
Value Measurements. This statement defines fair value,
establishes a framework for measuring fair value, and expands
disclosures about fair value measurements. The adoption of
SFAS No. 157 did not have a material impact on the
Companys consolidated financial statements. Additionally,
on January 1, 2008, the Company elected the partial
adoption of SFAS No. 157 under the provisions of FASB
Staff Position (FSP)
FAS 157-2,
which amends SFAS No. 157 to allow an entity to delay
the application of the Statement until January 1, 2009 for
certain non-financial assets and liabilities. Under the
provisions of the FSP, the Company delayed the application of
SFAS No. 157 for fair value measurements used in the
impairment testing of goodwill and eligible non-financial assets
and liabilities included within a business combination. In
October 2008, the FASB issued FSP
FAS 157-3,
Determining the Fair Value of a Financial Asset When the
Market for That Asset Is Not Active. The FSP provides
clarification and guidance on how managements internal
assumptions, observable market information, and market quotes
are considered when applying SFAS No. 157 in inactive
markets. The adoption of FSP
FAS 157-3
did not have a material impact on the Companys
consolidated financial statements. See Note 7 for
additional disclosures about fair value measurements.
SFAS No. 159,
Fair Value Options
On January 1, 2008, the Company adopted
SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities. The Statement allows
companies to make an election, on an individual instrument
basis, to report financial assets and liabilities at fair value.
The election must be made at the inception of a transaction and
may not be reversed. The election may also be made for existing
financial assets and liabilities
F-14
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in millions, unless otherwise
stated)
at the time of adoption. The Company elected the fair value
option for certain of its investments in common stock, which are
presented as trading securities, and its investments in hedge
funds and private equity funds, regardless of ownership
percentage, which are presented as investments in limited
partnerships. See Note 7 for additional disclosure about
the effects of this adoption and fair value measurements.
FIN No. 48,
Accounting for Uncertainty in Income Taxes An
Interpretation of FASB Statement No. 109
In June 2006, the FASB issued FIN No. 48,
Accounting for Uncertainty in Income Taxes, an Interpretation
of SFAS No. 109, Accounting for Income Taxes.
FIN No. 48 clarifies the accounting for uncertainty in
income taxes recognized in an enterprises financial
statements in accordance with SFAS No. 109.
FIN No. 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition
and measurement of a tax position taken or expected to be taken
in a tax return. FIN No. 48 also provides guidance on
de-recognition, classification, interest and penalties,
accounting in interim periods, disclosure, and transition. The
Company adopted the provisions of FIN No. 48 on
January 1, 2007. The Company did not recognize a change in
the liability for unrecognized tax benefits or an adjustment to
retained earnings upon adoption.
SFAS No. 155,
Accounting for Certain Hybrid Financial Instruments
On January 1, 2007, the Company adopted
SFAS No. 155, Accounting for Certain Hybrid
Financial Instruments. SFAS No. 155 amends certain
paragraphs of SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, and
SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities. SFAS No. 155 also resolves issues
addressed in SFAS No. 133 Implementation Issue
No. D1, Application of Statement 133 to Beneficial
Interests in Securitized Financial Assets. In summary,
SFAS No. 155 eliminates the requirement to bifurcate
financial instruments with embedded derivatives if the holder of
the instrument elects to account for the entire instrument on a
fair value basis. Changes in fair value are recorded as realized
gains (losses). The fair value election may be applied upon
adoption of the statement for hybrid instruments that had been
bifurcated under SFAS No. 133 prior to adoption.
Upon adoption of SFAS No. 155, the Company recorded an
adjustment of $2.5 in gross gains, net of tax, to reclassify net
unrealized gains on investments to beginning retained earnings
to reflect the cumulative effective of adoption. At
December 31, 2007 and 2008, the Company had $75.2 and
$50.5, respectively, of convertible securities recorded at fair
value in fixed maturities.
Accounting
Pronouncements Not Yet Adopted
SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements. SFAS No. 160 clarifies that a
noncontrolling interest in a subsidiary is an ownership interest
in the consolidated entity that should be reported as equity in
the consolidated financial statements. The Company adopted
SFAS No. 160 effective January 1, 2009. The
adoption did not have a material impact on the Companys
consolidated financial statements.
SFAS No. 141(R),
Business Combinations
In December 2007, the FASB issued SFAS No. 141(R),
Business Combinations. SFAS No. 141(R)
establishes principles and requirements for how the acquirer of
a business would recognize and measure the identifiable assets
acquired, the liabilities assumed, and any noncontrolling
interest in the acquiree; the goodwill acquired in the business
combination or a gain from a bargain purchase; and the
appropriate disclosures. The Company adopted
SFAS No. 141(R) effective January 1, 2009. The
adoption of this Statement will impact future business
combinations.
F-15
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in millions, unless otherwise
stated)
Basic earnings per share represent the amount of earnings for
the period available to each share of common stock outstanding
during the reporting period. Diluted earnings per share
represent 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. All outstanding warrants are considered participating
securities or potential common stock securities that are
included in weighted-average common shares outstanding for
purposes of computing basic earnings per share using the
two-class method. The warrants are considered participating
securities or potential common stock securities because the
terms of the warrants 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, without regard to whether the warrants are exercised
prior to the record date for any such dividend.
The following table presents information relating to the
Companys calculations of basic and diluted earnings per
share (EPS):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income, as reported
|
|
$
|
22.1
|
|
|
$
|
167.3
|
|
|
$
|
159.5
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
92.646
|
|
|
|
92.646
|
|
|
|
92.646
|
|
Warrants
|
|
|
18.976
|
|
|
|
18.976
|
|
|
|
18.976
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding basic and
diluted
|
|
|
111.622
|
|
|
|
111.622
|
|
|
|
111.622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.20
|
|
|
$
|
1.50
|
|
|
$
|
1.43
|
|
Diluted
|
|
$
|
0.20
|
|
|
$
|
1.50
|
|
|
$
|
1.43
|
|
The following tables summarize the Companys fixed
maturities and marketable equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost or
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies
|
|
$
|
155.5
|
|
|
$
|
5.2
|
|
|
$
|
(3.9
|
)
|
|
$
|
156.8
|
|
State and political subdivisions
|
|
|
488.8
|
|
|
|
0.9
|
|
|
|
(64.8
|
)
|
|
|
424.9
|
|
Foreign governments
|
|
|
31.4
|
|
|
|
3.2
|
|
|
|
|
|
|
|
34.6
|
|
Corporate securities
|
|
|
10,584.2
|
|
|
|
105.1
|
|
|
|
(1,376.5
|
)
|
|
|
9,312.8
|
|
Mortgage-backed securities
|
|
|
5,268.5
|
|
|
|
102.1
|
|
|
|
(412.1
|
)
|
|
|
4,958.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
16,528.4
|
|
|
|
216.5
|
|
|
|
(1,857.3
|
)
|
|
|
14,887.6
|
|
Marketable equity securities,
available-for-sale
|
|
|
52.5
|
|
|
|
|
|
|
|
(14.4
|
)
|
|
|
38.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
16,580.9
|
|
|
$
|
216.5
|
|
|
$
|
(1,871.7
|
)
|
|
$
|
14,925.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-16
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in millions, unless otherwise
stated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost or
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies
|
|
$
|
193.1
|
|
|
$
|
3.7
|
|
|
$
|
(2.7
|
)
|
|
$
|
194.1
|
|
State and political subdivisions
|
|
|
490.1
|
|
|
|
13.0
|
|
|
|
(4.1
|
)
|
|
|
499.0
|
|
Foreign governments
|
|
|
122.1
|
|
|
|
4.3
|
|
|
|
(0.1
|
)
|
|
|
126.3
|
|
Corporate securities
|
|
|
10,184.8
|
|
|
|
151.2
|
|
|
|
(218.9
|
)
|
|
|
10,117.1
|
|
Mortgage-backed securities
|
|
|
4,654.1
|
|
|
|
47.5
|
|
|
|
(38.2
|
)
|
|
|
4,663.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
15,644.2
|
|
|
|
219.7
|
|
|
|
(264.0
|
)
|
|
|
15,599.9
|
|
Marketable equity securities,
available-for-sale
|
|
|
174.7
|
|
|
|
36.4
|
|
|
|
(10.3
|
)
|
|
|
200.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
15,818.9
|
|
|
$
|
256.1
|
|
|
$
|
(274.3
|
)
|
|
$
|
15,800.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Of the U.S. government and agencies securities, agencies
comprised $132.1 and $170.9 of the fair value, with $3.9 and
$0.1 of gross unrealized losses, at December 31, 2008 and
2007, respectively.
The following tables show gross unrealized losses and fair
values of the Companys available-for-sale investments.
These are aggregated by investment category and the severity of
the unrealized loss, separated between securities that have been
in a continuous unrealized loss position for less than twelve
months and for twelve months or more.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or More
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
# of
|
|
|
Fair
|
|
|
Unrealized
|
|
|
# of
|
|
|
|
Value
|
|
|
Losses
|
|
|
Securities
|
|
|
Value
|
|
|
Losses
|
|
|
Securities
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies
|
|
$
|
52.4
|
|
|
$
|
(3.9
|
)
|
|
|
3
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
State and political subdivisions
|
|
|
305.0
|
|
|
|
(57.0
|
)
|
|
|
61
|
|
|
|
73.1
|
|
|
|
(7.8
|
)
|
|
|
14
|
|
Corporate securities
|
|
|
4,572.0
|
|
|
|
(498.0
|
)
|
|
|
696
|
|
|
|
2,789.7
|
|
|
|
(878.5
|
)
|
|
|
426
|
|
Mortgage-backed securities
|
|
|
1,351.1
|
|
|
|
(224.5
|
)
|
|
|
183
|
|
|
|
762.4
|
|
|
|
(187.6
|
)
|
|
|
94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
6,280.5
|
|
|
|
(783.4
|
)
|
|
|
943
|
|
|
|
3,625.2
|
|
|
|
(1,073.9
|
)
|
|
|
534
|
|
Marketable equity securities, available-for-sale
|
|
|
14.8
|
|
|
|
(11.2
|
)
|
|
|
3
|
|
|
|
23.3
|
|
|
|
(3.2
|
)
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,295.3
|
|
|
$
|
(794.6
|
)
|
|
|
946
|
|
|
$
|
3,648.5
|
|
|
$
|
(1,077.1
|
)
|
|
|
536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Below amortized cost fixed maturities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 20%
|
|
$
|
5,427.3
|
|
|
$
|
(434.1
|
)
|
|
|
|
|
|
$
|
1,997.1
|
|
|
$
|
(257.9
|
)
|
|
|
|
|
20% or more
|
|
|
853.2
|
|
|
|
(349.3
|
)
|
|
|
|
|
|
|
1,628.1
|
|
|
|
(816.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
6,280.5
|
|
|
|
(783.4
|
)
|
|
|
|
|
|
|
3,625.2
|
|
|
|
(1,073.9
|
)
|
|
|
|
|
% Below cost marketable equity securities,
available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 20%
|
|
|
0.5
|
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
23.3
|
|
|
|
(3.2
|
)
|
|
|
|
|
20% or more
|
|
|
14.3
|
|
|
|
(10.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable equity securities, available-for-sale
|
|
|
14.8
|
|
|
|
(11.2
|
)
|
|
|
|
|
|
|
23.3
|
|
|
|
(3.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,295.3
|
|
|
$
|
(794.6
|
)
|
|
|
|
|
|
$
|
3,648.5
|
|
|
$
|
(1,077.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-17
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in millions, unless otherwise
stated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or More
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
# of
|
|
|
Fair
|
|
|
Unrealized
|
|
|
# of
|
|
December 31, 2007
|
|
Value
|
|
|
Losses
|
|
|
Securities
|
|
|
Value
|
|
|
Losses
|
|
|
Securities
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies
|
|
$
|
33.7
|
|
|
$
|
(0.4
|
)
|
|
|
3
|
|
|
$
|
34.3
|
|
|
$
|
(2.3
|
)
|
|
|
3
|
|
State and political subdivisions
|
|
|
13.4
|
|
|
|
(0.6
|
)
|
|
|
6
|
|
|
|
82.7
|
|
|
|
(3.5
|
)
|
|
|
17
|
|
Foreign governments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.6
|
|
|
|
(0.1
|
)
|
|
|
1
|
|
Corporate securities
|
|
|
2,837.3
|
|
|
|
(109.5
|
)
|
|
|
437
|
|
|
|
2,520.4
|
|
|
|
(109.4
|
)
|
|
|
310
|
|
Mortgage-backed securities
|
|
|
647.8
|
|
|
|
(8.8
|
)
|
|
|
86
|
|
|
|
1,553.3
|
|
|
|
(29.4
|
)
|
|
|
290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
3,532.2
|
|
|
|
(119.3
|
)
|
|
|
532
|
|
|
|
4,201.3
|
|
|
|
(144.7
|
)
|
|
|
621
|
|
Marketable equity securities,
available-for-sale
|
|
|
59.7
|
|
|
|
(10.1
|
)
|
|
|
45
|
|
|
|
0.9
|
|
|
|
(0.2
|
)
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,591.9
|
|
|
$
|
(129.4
|
)
|
|
|
577
|
|
|
$
|
4,202.2
|
|
|
$
|
(144.9
|
)
|
|
|
628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Below amortized cost fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 20%
|
|
$
|
3,505.6
|
|
|
$
|
(111.1
|
)
|
|
|
|
|
|
$
|
4,179.6
|
|
|
$
|
(133.0
|
)
|
|
|
|
|
20% or more
|
|
|
26.6
|
|
|
|
(8.2
|
)
|
|
|
|
|
|
|
21.7
|
|
|
|
(11.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
3,532.2
|
|
|
|
(119.3
|
)
|
|
|
|
|
|
|
4,201.3
|
|
|
|
(144.7
|
)
|
|
|
|
|
% Below cost marketable equity securities,
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 20%
|
|
|
34.7
|
|
|
|
(2.4
|
)
|
|
|
|
|
|
|
0.4
|
|
|
|
(0.1
|
)
|
|
|
|
|
20% or more
|
|
|
25.0
|
|
|
|
(7.7
|
)
|
|
|
|
|
|
|
0.5
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable equity securities,
available-for-sale
|
|
|
59.7
|
|
|
|
(10.1
|
)
|
|
|
|
|
|
|
0.9
|
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,591.9
|
|
|
$
|
(129.4
|
)
|
|
|
|
|
|
$
|
4,202.2
|
|
|
$
|
(144.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company reviewed all its investments with unrealized losses
at the end of 2008 and 2007 in accordance with the impairment
policy described in Note 2. The Companys evaluation
determined, after the recognition of
other-than-temporary
impairment, the remaining declines in fair value were temporary,
and it had the intent and ability to hold them until recovery.
As of December 31, 2008 and 2007, $883.6 and $128.9,
respectively, of unrealized losses for a period of twelve months
or more related to investment-grade fixed maturity 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. Sector-related credit spreads widened substantially in
the fourth quarter of 2008. As of December 31, 2008 and
2007, the Company had the intent and ability to hold these
investments for a period of time sufficient for them to recover
in value.
At December 31, 2008 and 2007, the Company held
below-investment-grade fixed maturities with fair values of
$458.8 and $586.6, respectively, and amortized costs of $680.1
and $599.4, respectively. These holdings amounted to 3.1% and
3.7% of the Companys investments in fixed maturities at
fair value as of December 31, 2008 and 2007, respectively.
The fixed maturity portfolio also included not-rated securities
with fair values of $707.2 and $722.4, respectively, and
amortized costs of $802.7 and $720.5, respectively. These
holdings amounted to 4.8% and 4.6%, respectively, of the
Companys investments in fixed maturities at fair value as
of December 31, 2008 and 2007.
F-18
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in millions, unless otherwise
stated)
As of December 31, 2008 and 2007, the majority of the
Companys mortgage-backed securities were classified as
prime. Approximately $0.8 and $1.8, representing 0.02% and 0.04%
of the fair value of total mortgage-backed securities, were
classified as subprime at December 31, 2008 and 2007,
respectively. The subprime mortgage-backed securities were
issued from a dedicated second-lien shelf, which the Company
considers to be a subprime risk regardless of credit score or
other metrics. The Company does not own any securities from
dedicated subprime shelves. The subprime securities had a
Standard & Poors (S&P) credit rating of B
and AAA as of December 31, 2008 and 2007, respectively.
In addition, based on a review of the characteristics of their
underlying mortgage loan pools, such as credit scores and
financial ratios, the Company classified certain securities as
Alt-A, as each has overall collateral credit quality between
prime and subprime. At December 31, 2008 and 2007, $155.5
and $209.7 were classified as Alt-A, representing 3.1% and 4.7%,
respectively, of the fair value of total mortgage-backed
securities. Of the securities classified as Alt-A, $155.5 and
$190.5, or 100% and 90.8%, had an S&P credit rating of AAA
as of December 31, 2008 and 2007.
The Companys investments in asset-backed securities, which
are included in mortgage-backed securities, had fair values of
$157.2 and $160.2 as of December 31, 2008 and 2007,
respectively.
The following table summarizes the cost or amortized cost and
fair value of fixed maturities at December 31, 2008, 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
|
|
$
|
384.9
|
|
|
$
|
379.4
|
|
Over one year through five years
|
|
|
2,573.2
|
|
|
|
2,382.7
|
|
Over five years through ten years
|
|
|
2,967.4
|
|
|
|
2,609.9
|
|
Over ten years
|
|
|
5,334.4
|
|
|
|
4,557.1
|
|
Mortgage-backed securities
|
|
|
5,268.5
|
|
|
|
4,958.5
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
$
|
16,528.4
|
|
|
$
|
14,887.6
|
|
|
|
|
|
|
|
|
|
|
The carrying value of certain securities and cash on deposit
with state regulatory authorities was $10.6 and $9.8 at
December 31, 2008 and 2007, respectively.
For the year ended December 31, 2008, financial
institutions, U.S. federal government and utilities
industries represented 24.8%, 20.6% and 11.1%, respectively, of
the Companys investments in fixed maturity and marketable
equity securities at fair value.
For the year ended December 31, 2007, financial
institutions, U.S. federal government and utilities
industries represented 25.9%, 18.9% and 12.5%, respectively, of
the Companys investments in fixed maturity and marketable
equity securities at fair value.
F-19
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in millions, unless otherwise
stated)
The following table summarizes the Companys net investment
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Fixed maturities
|
|
$
|
930.7
|
|
|
$
|
911.4
|
|
|
$
|
930.3
|
|
Marketable equity securities,
available-for-sale
|
|
|
3.4
|
|
|
|
5.8
|
|
|
|
6.8
|
|
Marketable equity securities, trading
|
|
|
2.7
|
|
|
|
|
|
|
|
|
|
Mortgage loans
|
|
|
59.4
|
|
|
|
50.0
|
|
|
|
48.8
|
|
Policy loans
|
|
|
4.5
|
|
|
|
4.7
|
|
|
|
4.9
|
|
Investments in limited partnerships
|
|
|
(36.4
|
)
|
|
|
|
|
|
|
4.7
|
|
Other
|
|
|
11.5
|
|
|
|
20.9
|
|
|
|
13.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income
|
|
|
975.8
|
|
|
|
992.8
|
|
|
|
1,008.9
|
|
Investment expenses
|
|
|
(19.3
|
)
|
|
|
(19.2
|
)
|
|
|
(24.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
956.5
|
|
|
$
|
973.6
|
|
|
$
|
984.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of investments in fixed maturities that have not
produced income for the last twelve months was $6.5 and
$15.0 at December 31, 2008 and 2007, respectively. All of
the Companys mortgage loans produced income during 2008
and 2007.
The following table summarizes the Companys net realized
investment gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Fixed maturities
|
|
$
|
(94.2
|
)
|
|
$
|
7.9
|
|
|
$
|
(16.1
|
)
|
Marketable equity securities,
available-for-sale
|
|
|
|
|
|
|
10.5
|
|
|
|
14.9
|
|
Marketable equity securities, trading
|
|
|
(64.5
|
)
|
|
|
|
|
|
|
|
|
Other invested assets
|
|
|
(5.2
|
)
|
|
|
(2.4
|
)
|
|
|
1.7
|
|
Deferred policy acquisition costs adjustment
|
|
|
5.9
|
|
|
|
0.8
|
|
|
|
1.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment gains (losses)
|
|
$
|
(158.0
|
)
|
|
$
|
16.8
|
|
|
$
|
1.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2008, the Company recorded impairment charges on fixed
maturities totaling $86.4. The largest write-downs were from
investments in the paper-related industry, totaling $14.2, or
16.4%; in the diversified financial service industry, totaling
$8.4, or 9.7%; and in FNMA - U.S. federal government
securities, totaling $8.0, or 9.3%. During 2007, the Company
recorded write-downs of $16.2 primarily on investments in the
paper-related industry, totaling $7.6, or 46.9%, and in the
brewing industry, totaling $1.7, or 10.5%. During 2006, the
Company recorded impairments of $25.7, of which $15.7, or 60.9%,
were attributable to investments in the paper-related industry.
The additional write-downs in 2008, 2007 and 2006 generally
represent securities that the Company did not intend to hold
until recovery.
F-20
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in millions, unless otherwise
stated)
The following tables provide additional detail of net realized
investment gains (losses).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Gross realized gains on sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
$
|
10.3
|
|
|
$
|
37.1
|
|
|
$
|
26.8
|
|
Marketable equity securities,
available-for-sale
|
|
|
|
|
|
|
14.4
|
|
|
|
18.3
|
|
Marketable equity securities, trading
|
|
|
14.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross realized gains on sales
|
|
|
25.1
|
|
|
|
51.5
|
|
|
|
45.1
|
|
Gross realized losses on sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
|
(7.0
|
)
|
|
|
(15.1
|
)
|
|
|
(18.4
|
)
|
Marketable equity securities,
available-for-sale
|
|
|
|
|
|
|
(3.5
|
)
|
|
|
(1.4
|
)
|
Marketable equity securities, trading
|
|
|
(8.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross realized losses on sales
|
|
|
(15.5
|
)
|
|
|
(18.6
|
)
|
|
|
(19.8
|
)
|
Impairments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
|
(86.4
|
)
|
|
|
(15.0
|
)
|
|
|
(24.6
|
)
|
Marketable equity securities,
available-for-sale
|
|
|
|
|
|
|
(1.2
|
)
|
|
|
(1.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impairments
|
|
|
(86.4
|
)
|
|
|
(16.2
|
)
|
|
|
(25.7
|
)
|
Gross gains on trading securities(1)
|
|
|
3.6
|
|
|
|
|
|
|
|
|
|
Gross losses on trading securities(1)
|
|
|
(72.8
|
)
|
|
|
|
|
|
|
|
|
Other, including gains (losses) on calls and redemptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
|
(11.1
|
)
|
|
|
0.9
|
|
|
|
0.1
|
|
Marketable equity securities,
available-for-sale
|
|
|
|
|
|
|
0.8
|
|
|
|
(0.9
|
)
|
Marketable equity securities, trading
|
|
|
(1.6
|
)
|
|
|
|
|
|
|
|
|
Other
|
|
|
0.7
|
|
|
|
(1.6
|
)
|
|
|
2.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other
|
|
|
(12.0
|
)
|
|
|
0.1
|
|
|
|
2.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment gains (losses)
|
|
$
|
(158.0
|
)
|
|
$
|
16.8
|
|
|
$
|
1.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As of January 1, 2008, changes in fair value related to
certain marketable equity securities are recognized in net
realized investment gains (losses) due to the Companys
election of the fair value option. Refer to Note 7. |
The following table summarizes the Companys allowance for
mortgage loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Allowance at beginning of period
|
|
$
|
4.2
|
|
|
$
|
4.0
|
|
|
$
|
3.9
|
|
Provision
|
|
|
0.8
|
|
|
|
0.2
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance at end of period
|
|
$
|
5.0
|
|
|
$
|
4.2
|
|
|
$
|
4.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
This allowance relates to mortgage loan investments of $993.7
and $849.7 at December 31, 2008 and 2007, respectively. All
of the Companys mortgage loan investments were in good
standing at December 31, 2008 and 2007.
F-21
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in millions, unless otherwise
stated)
At December 31, 2008, mortgage loans constituted
approximately 5.1% of total assets and are secured by
first-mortgage liens on income-producing commercial real estate,
primarily in the retail, industrial and office building sectors.
The average
loan-to-value
(LTV) ratio, which is a loans carrying amount divided by
its appraised value at loan inception, was 53.8% and 53.2% for
loans funded during 2008 and 2007, respectively. The average LTV
ratio for the Companys entire mortgage portfolio was 50.7%
as of December 31, 2008. The majority of the properties are
located in the western United States, with 26.8% of the total in
California and 21.3% in Washington State. Individual loans
generally do not exceed $15.0.
The carrying value of other invested assets approximates fair
value. The following table summarizes the Companys other
invested assets:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2008
|
|
2007
|
|
Note receivable agency
|
|
$
|
6.5
|
|
|
$
|
7.3
|
|
Options
|
|
|
2.3
|
|
|
|
3.8
|
|
Other
|
|
|
0.1
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
Total other invested assets
|
|
$
|
8.9
|
|
|
$
|
11.9
|
|
|
|
|
|
|
|
|
|
|
The note receivable is a loan to a third party agency. The
agencys equity at risk is not sufficient to finance its
activities and is therefore considered a VIE. The loan is
secured by the assets of the agency, and the majority of the
loan amount is personally guaranteed by the agencys equity
holders. The Company is not the primary beneficiary. The
potential exposure to losses is limited to the senior debt
holding, which was $6.5 as of December 31, 2008, excluding
the value of rights to the assets of the agency and personal
guarantees provided by the equity holders.
|
|
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 interest rate swaps
and options, as a means of hedging exposure to equity price
changes
and/or
interest rate risk on anticipated transactions related to the
Companys notes payable.
Interest rate risk is the risk of economic loss due to changes
in the level of interest rates. The Company manages interest
rate risk through active portfolio management and selective use
of interest rate swaps as hedges to change the characteristics
of certain assets and liabilities. With interest rate swap
agreements, the Company exchanges with a counterparty, at
specified intervals, interest rate payments of differing
character (e.g., fixed-rate payments exchanged for variable-rate
payments), based on an underlying principal balance (notional
amount). No cash is exchanged at the outset of the contract, and
no principal payments are made by either party. Net interest
payments made at each interest payment due date are recorded to
interest expense.
Counterparty credit risk is the risk that a counterparty to a
derivative contract will be unable to perform its obligations.
The Company manages counterparty credit risk on an individual
counterparty basis, and gains and losses are netted by
counterparty. The Company mitigates counterparty credit risk
through credit reviews, approval controls and by only entering
into agreements with creditworthy counterparties. The Company
performs ongoing monitoring of counterparty credit exposure risk
against credit limits. The contract or notional amounts of these
instruments reflect the extent of involvement the Company has in
a particular class of derivative financial instruments. However,
the maximum loss of cash flow associated with these instruments
can be less than these amounts. For interest rate swaps, credit
risk is limited to the amount that it would cost the Company to
replace the contract.
F-22
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in millions, unless otherwise
stated)
Cash
Flow Hedges
In 2007, the Company entered into interest rate swaps, which
qualified as cash flow hedges of the forecasted issuance of the
Capital Efficient Notes in 2007. In addition, in 2006, the
Company entered into interest rate swaps, which qualified as
cash flow hedges for the $300.0 fixed rate senior notes in 2006
(see Note 14). The unrealized gain or loss on the interest
rate swaps is being amortized into interest expense over the
life of the related debt issuance. As the critical terms of the
interest rate swaps were the same as the forecasted
transactions, the Company has not recorded any ineffectiveness.
For the years ended December 31, 2008, 2007 and 2006, the
Company amortized $(0.1), $0.3 and $0.2, respectively, from
accumulated other comprehensive loss to interest expense. The
Company estimates that $(0.1) will be reclassified from
accumulated other comprehensive loss to interest expense within
the next twelve months. For the years ended December 31,
2007 and 2006, the Company recorded unrealized gains (losses) of
$(7.2) and $4.8, respectively, in accumulated other
comprehensive loss.
Other
Derivatives
The Company has a closed block of fixed indexed annuity (FIA)
product that credits the policyholders accounts based on a
percentage of the gain in the S&P 500 Index. In connection
with this product, the Company has a hedging program with the
objective to hedge the exposure to changes in the S&P 500
Index. This program consists of buying S&P 500 Index
options. Although the Company uses index options to hedge the
equity return component of the FIA, the options do not qualify
as hedging instruments or for hedge accounting treatment.
Accordingly, the assets are recorded at fair value as
free-standing derivative assets or options 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
$(2.9), $(2.3) and $2.2 for the years ended December 31,
2008, 2007 and 2006, respectively.
|
|
6.
|
Securities
Lending Program
|
The Company participates in a securities lending program whereby
blocks of securities included in investments are loaned to third
parties, primarily major brokerage firms. The Company requires a
minimum of 102% of the fair value of the loaned securities at
inception of the loan to be separately maintained as collateral
for the loans. The borrower deposits this collateral with a
lending agent, who invests the collateral to generate additional
income according to the Companys guidelines. In the event
that the lending agent does not return the full amount of
collateral to the security lending counterparty, the Company is
obligated to make up any deficiency. The fair value of the
loaned securities is monitored on a daily basis, and additional
collateral is obtained if the collateral falls below 100% of the
fair value of the loaned securities.
The Company maintains full ownership rights to the securities on
loan, and accordingly the loaned securities are classified as
investments in the consolidated balance sheets. The securities
loaned under the program had an amortized cost of $117.1 and
$281.3 and a fair value of $102.8 and $271.3 at
December 31, 2008 and 2007, respectively. The Company
reports the securities lending collateral and the corresponding
securities lending payable on its consolidated balance sheets as
assets and liabilities.
At December 31, 2008 and 2007, the Company was liable for
securities lending collateral under its control of $105.7 and
$283.3, respectively. As of December 31, 2008 and 2007, the
fair value of invested collateral was less than the amounts
required to be returned to the counterparty by the lending agent
upon return of the loaned securities by $2.3 and $1.8,
respectively.
|
|
7.
|
Fair
Value of Financial Instruments
|
Effective January 1, 2008, the Company determined the fair
value of its financial instruments based on the fair value
hierarchy, which requires an entity to disclose the use of
observable inputs and minimize the use of unobservable inputs
when measuring fair value.
F-23
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in millions, unless otherwise
stated)
The Company has categorized its financial instruments, based on
the priority of the inputs to the valuation technique, into the
three-level hierarchy. The fair value hierarchy gives the
highest priority to quoted prices in active markets for
identical assets or liabilities (Level 1) and the
lowest priority to unobservable inputs (Level 3). The level
in the fair value hierarchy within which the fair value
measurement falls is determined based on the lowest-level input
that is significant to the fair value measurement. The
Companys financial assets recorded at fair value on the
consolidated balance sheets are categorized as follows:
|
|
|
|
|
Level 1 Unadjusted quoted prices in
active markets for identical instruments. Primarily consists of
financial instruments whose value is based on quoted market
prices, such as exchange-traded marketable equity securities,
and actively traded mutual fund investments.
|
|
|
|
Level 2 Quoted prices for similar
instruments in active markets, quoted prices for identical or
similar instruments in markets that are not active and
model-derived valuations whose inputs are observable or whose
significant value drivers are observable.
|
This level includes those financial instruments that are valued
using industry-standard pricing methodologies, models or other
valuation methodologies. These models are primarily
industry-standard models that consider various inputs, such as
interest rate, credit spread and foreign exchange rates for the
underlying financial instruments. All significant inputs are
observable, or 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 maturity securities, government or
agency securities, and certain mortgage-backed and asset-backed
securities.
|
|
|
|
|
Level 3 Instruments whose significant
value drivers are unobservable. This comprises financial
instruments for which fair value is estimated based on
industry-standard pricing methodologies and internally developed
models utilizing significant inputs not based on or corroborated
by readily available market information. In limited
circumstances, this category may also utilize non-binding broker
quotes. This category primarily consists of certain less liquid
fixed maturities, investment in hedge funds and private equity
funds, corporate private placement securities and trading
securities where the Company cannot corroborate the significant
valuation inputs with market observable data.
|
The following table presents the financial instruments carried
at fair value by level (as described above):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3
|
|
|
|
Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Percent
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities,
available-for-sale
|
|
$
|
14,887.6
|
|
|
$
|
|
|
|
$
|
14,213.3
|
|
|
$
|
674.3
|
|
|
|
4.26
|
%
|
Marketable equity securities,
available-for-sale
|
|
|
38.1
|
|
|
|
38.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable equity securities, trading
|
|
|
106.3
|
|
|
|
106.1
|
|
|
|
|
|
|
|
0.2
|
|
|
|
0.00
|
|
Short-term investments
|
|
|
9.4
|
|
|
|
7.2
|
|
|
|
2.2
|
|
|
|
|
|
|
|
|
|
Investments in limited partnerships(1)
|
|
|
56.3
|
|
|
|
|
|
|
|
|
|
|
|
56.3
|
|
|
|
0.36
|
|
Other invested assets(2)
|
|
|
2.4
|
|
|
|
|
|
|
|
|
|
|
|
2.4
|
|
|
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
|
15,100.1
|
|
|
|
151.4
|
|
|
|
14,215.5
|
|
|
|
733.2
|
|
|
|
4.64
|
|
Separate account assets
|
|
|
716.2
|
|
|
|
716.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
15,816.3
|
|
|
$
|
867.6
|
|
|
$
|
14,215.5
|
|
|
$
|
733.2
|
|
|
|
4.64
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As of December 31, 2008, this amount included investments
in hedge funds and private equity funds. |
|
(2) |
|
As of December 31, 2008, this amount included investments,
such as options and warrants. |
F-24
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in millions, unless otherwise
stated)
Fixed
Maturities
The vast majority of the Companys fixed maturities use
Level 2 inputs for the determination of fair value. The
Company predominantly utilizes third party independent pricing
services to assist management in determining the fair value of
its fixed maturity securities. The third party independent
pricing services provide prices where observable inputs are
available. The Companys pricing services utilize evaluated
pricing models that vary by asset class and incorporate
available trade, bid and other market information. Because many
fixed maturities do not trade on a daily basis, evaluated
pricing applications apply available information through
processes, such as benchmark curves, benchmarking of like
securities, sector groupings and matrix pricing to prepare
evaluations. In addition, the pricing services use models and
processes to develop prepayment and interest rate scenarios.
These models and processes take into account market convention.
If sufficient objectively verifiable information about a
securitys valuation is not available, the pricing service
will discontinue evaluating the security until it is able to
obtain such information. The Company gains assurance on the
overall reasonableness and consistent application of input
assumptions, valuation methodologies and compliance with
accounting standards for fair value determination through
various processes including, but not limited to, evaluation of
pricing methodologies, analytical reviews of certain prices and
back-testing of selected sales activity to determine whether
there are any significant differences between the market price
used to value the security prior to sale and the actual sales
prices.
In situations where the Company is unable to obtain sufficient
market observable information upon which to estimate the fair
value of a particular security, fair values are obtained
primarily from industry-standard pricing methodologies based on
market observable information. Certain structured securities and
private equity funds valued using industry-standard pricing
methodologies utilize significant unobservable inputs to
estimate fair value, resulting in the fair value measurements
being classified as Level 3.
As of December 31, 2008, the Company has approximately
$632.2, or 4%, of its fixed maturities invested in corporate
private placement securities. The valuation of 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. Private
placement securities are valued initially based upon transaction
price. The carrying values or fair values of these investments
are adjusted to reflect expected exit values as evidence by
financing and sale transactions with third parties, or when
determination of a valuation adjustment is confirmed through
ongoing reviews by the Companys investment advisors. A
variety of factors are reviewed and monitored to assess changes
in valuation, including, but not limited to, discounted cash
flows based on current performance and future expectations of
particular investments, industry valuation of comparable public
companies, changes in market outlook and the third party
financing environment over time. Private placement securities
are included in Level 3 of the valuation hierarchy.
Marketable
Equity Securities
Marketable equity securities consist primarily of investments in
common stock and certain nonredeemable preferred stocks and
mutual fund assets, which consist of investments in publicly
traded companies and actively traded mutual fund investments.
The fair values of the Companys marketable equity
securities are based on quoted market prices in active markets
for identical assets and are primarily classified as
Level 1.
On January 1, 2008, the Company adopted
SFAS No. 159, 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 Company made the fair value election for the majority of its
marketable equity securities comprised of investments in common
stock and investments in hedge funds and private equity funds
regardless of ownership percentage. Investments in hedge funds
and investments in private equity funds with less than
three percent ownership, were previously classified and
F-25
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in millions, unless otherwise
stated)
accounted for as
available-for-sale
securities. Certain nonredeemable preferred stock continues to
be reported as
available-for-sale.
Upon the adoption of SFAS No. 159 on January 1,
2008, $130.6 in investments in common stock was classified as
trading, and $21.1 in investments in limited partnerships (with
less than three percent ownership) that was previously reported
as
available-for-sale
marketable equity securities was reclassified to investments in
limited partnerships. Realized and unrealized investment gains
and losses on trading securities are reported in the
consolidated statements of income as net realized investment
gains (losses). Prior to the adoption, unrealized investment
gains and losses on
available-for-sale
securities were reported net, after-tax, as a component of
stockholders equity. Changes in net unrealized investment
gains (losses) on
available-for-sale
securities, after-tax, were reported as a component of other
comprehensive loss. 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.
The Company believes that making the election for investments in
common stock will result in reporting its investment results on
a basis that is more consistent with managements operating
principles, as the Company considers changes in fair value of
its common stock when evaluating results. For the year ended
December 31, 2008, net changes in the fair value of trading
securities was a loss of $69.2 and was reported in net realized
investment gains (losses).
The election for investments in hedge funds and private equity
funds, regardless of the Companys ownership percentage,
standardizes the accounting and reporting for these investments.
For the year ended December 31, 2008, changes in the fair
value of hedge funds and private equity funds was $30.1 and was
reported in net investment income.
Investments
in Limited Partnerships
The fair value for the Companys investments in hedge funds
and private equity 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. In circumstances where the partnership
NAV is deemed to differ from fair value due to illiquidity or
other factors, the NAV is adjusted accordingly. At
December 31, 2008, there were no factors present that would
require an adjustment to the NAV. The Company classifies these
securities as Level 3.
Separate
Accounts
Separate account assets are primarily invested in mutual funds,
which are included in Level 1.
F-26
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in millions, unless otherwise
stated)
The following table presents additional information about assets
measured at fair value on a recurring basis and for which we
have utilized significant unobservable
(Level 3) inputs to determine fair value between
January 1 and December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
Investments in
|
|
|
Other
|
|
|
|
|
|
|
Fixed
|
|
|
Securities,
|
|
|
Limited
|
|
|
Invested
|
|
|
Total
|
|
|
|
Maturities
|
|
|
Trading
|
|
|
Partnerships
|
|
|
Assets
|
|
|
Level 3
|
|
|
Balance as of January 1, 2008
|
|
$
|
690.3
|
|
|
$
|
0.5
|
|
|
$
|
91.3
|
|
|
$
|
4.6
|
|
|
$
|
786.7
|
|
Purchases
|
|
|
92.7
|
|
|
|
1.1
|
|
|
|
19.3
|
|
|
|
|
|
|
|
113.1
|
|
Sales
|
|
|
(4.2
|
)
|
|
|
(0.4
|
)
|
|
|
(29.9
|
)
|
|
|
0.4
|
|
|
|
(34.1
|
)
|
Transfers in and/or (out) of Level 3(1)
|
|
|
50.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50.3
|
|
Other(2)
|
|
|
(32.0
|
)
|
|
|
|
|
|
|
|
|
|
|
1.8
|
|
|
|
(30.2
|
)
|
Unrealized gains (losses) included in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
(1.0
|
)
|
|
|
(30.1
|
)
|
|
|
0.4
|
|
|
|
(30.7
|
)
|
Other comprehensive income
|
|
|
(110.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(110.7
|
)
|
Realized gains/(losses)
|
|
|
(12.1
|
)
|
|
|
|
|
|
|
5.7
|
|
|
|
(4.8
|
)
|
|
|
(11.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2008
|
|
$
|
674.3
|
|
|
$
|
0.2
|
|
|
$
|
56.3
|
|
|
$
|
2.4
|
|
|
$
|
733.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Transfers into and/or out of Level 3 are generally reported at
the value as of the beginning of the period in which the
transfer occurs. Gross transfers into and (out of) Level 3 for
the year ended December 31, 2008 were $64.4 and $(14.1),
respectively.
|
|
(2)
|
Other is comprised of transactions such as pay downs, calls and
amortization.
|
The following table summarizes the carrying or reported values
and corresponding fair values of financial instruments subject
to disclosure requirements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
|
Carrying
|
|
|
|
|
|
Carrying
|
|
|
|
|
|
|
Amount
|
|
|
Fair Value
|
|
|
Amount
|
|
|
Fair Value
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
$
|
14,887.6
|
|
|
$
|
14,887.6
|
|
|
$
|
15,599.9
|
|
|
$
|
15,599.9
|
|
Marketable equity securities,
available-for-sale
|
|
|
38.1
|
|
|
|
38.1
|
|
|
|
200.8
|
|
|
|
200.8
|
|
Marketable equity securities, trading
|
|
|
106.3
|
|
|
|
106.3
|
|
|
|
|
|
|
|
|
|
Mortgage loans
|
|
|
988.7
|
|
|
|
907.6
|
|
|
|
845.5
|
|
|
|
857.4
|
|
Short-term investments
|
|
|
9.4
|
|
|
|
9.4
|
|
|
|
10.9
|
|
|
|
10.9
|
|
Investments in limited partnerships
|
|
|
138.3
|
|
|
|
140.2
|
|
|
|
158.8
|
|
|
|
158.8
|
|
Cash and cash equivalents
|
|
|
468.0
|
|
|
|
468.0
|
|
|
|
253.9
|
|
|
|
253.9
|
|
Securities lending collateral
|
|
|
105.7
|
|
|
|
105.7
|
|
|
|
283.3
|
|
|
|
283.3
|
|
Separate account assets
|
|
|
716.2
|
|
|
|
716.2
|
|
|
|
1,181.9
|
|
|
|
1,181.9
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds held under deposit contracts
|
|
|
11,987.9
|
|
|
|
10,972.2
|
|
|
|
10,886.9
|
|
|
|
10,739.2
|
|
Notes payable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Efficient Notes (CENts)
|
|
|
149.8
|
|
|
|
64.0
|
|
|
|
149.8
|
|
|
|
150.1
|
|
Senior notes
|
|
|
299.0
|
|
|
|
268.1
|
|
|
|
298.8
|
|
|
|
302.7
|
|
Securities lending payable
|
|
|
105.7
|
|
|
|
105.7
|
|
|
|
283.3
|
|
|
|
283.3
|
|
F-27
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in millions, unless otherwise
stated)
Other
Financial Instruments
The fair values for mortgage loans are determined by discounting
the projected cash flows using the current rate at which the
loans would be made to borrowers with similar credit ratings and
for the same maturities.
Investments in limited partnerships are comprised of hedge
funds, private equity funds and affordable housing projects and
state tax credit funds. Investments in limited partnerships
associated with hedge funds and private equity funds are carried
at fair value based on the NAV. Investments in limited
partnerships associated with affordable housing projects and
state tax credit funds are carried at amortized cost. Fair value
is estimated based on the discounted cash flows over the
remaining life of the tax credits.
For cash and cash equivalents, the carrying value is a
reasonable estimate of fair value.
The Company reports funds held under deposit contracts related
to investment-type contracts at carrying value and estimates the
fair values of these contracts using an income approach based on
the present value of the discounted cash flows. Cash flows are
projected using best estimates for lapses, mortality and
expenses, and discounted at a risk-free rate plus a
nonperformance risk spread.
The fair values of the Companys notes payable are based on
quoted prices for similar instruments. The fair value
measurement assumes that liabilities are transferred to a market
participant of equal credit standing and without consideration
for any optional redemption feature.
The fair value of securities lending collateral is the cash and
non-cash collateral received by the custodian and held on the
Companys behalf, based on quoted prices for similar
instruments. The carrying amount of securities lending payable
approximates fair value.
The Company evaluates the financial condition of its reinsurers
to minimize the exposure to losses from reinsurer insolvencies.
Management of the Company is not aware of any of the
Companys 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 at December 31,
2008, 99.7% was with reinsurers rated A- or higher by
A.M. Best. The Company had no reserve for uncollectible
reinsurance in 2008 or 2007. None of the Companys
reinsurance contracts exclude certified terrorist acts.
For the individual life business, the Company has reinsurance
agreements that limit the maximum claim on a single individual
to $0.5. The reinsurance agreements vary by product and policy
issue year. Most of the reinsurance recoverable relates to
future policy benefits and is covered by coinsurance agreements
where the reinsurer reimburses the Company based on a
percentage, which ranges from 50% to 85%, as specified in the
reinsurance contracts.
The Company reinsures 100% of its group long-term and short-term
disability business, except for the short-term disability sold
within the limited medical benefit plans, which is not
reinsured. The reinsurer is responsible for paying all claims.
F-28
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in millions, unless otherwise
stated)
Reinsurance recoverables are composed of the following amounts:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Life insurance and annuities
|
|
|
|
|
|
|
|
|
Reinsurance recoverables on:
|
|
|
|
|
|
|
|
|
Funds held under deposit contracts
|
|
$
|
75.1
|
|
|
$
|
74.4
|
|
Future policy benefits
|
|
|
121.4
|
|
|
|
106.8
|
|
Paid claims, expense allowance and premium tax recoverable
|
|
|
2.9
|
|
|
|
5.0
|
|
Policy and contract claims
|
|
|
2.7
|
|
|
|
5.2
|
|
|
|
|
|
|
|
|
|
|
Total life insurance and annuities
|
|
|
202.1
|
|
|
|
191.4
|
|
Accident and health insurance
|
|
|
|
|
|
|
|
|
Reinsurance recoverables on:
|
|
|
|
|
|
|
|
|
Future policy benefits
|
|
|
59.1
|
|
|
|
60.6
|
|
Paid claims, expense allowance and premium tax recoverable
|
|
|
0.6
|
|
|
|
1.2
|
|
Policy and contract claims
|
|
|
2.4
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
Total accident and health insurance
|
|
|
62.1
|
|
|
|
62.5
|
|
|
|
|
|
|
|
|
|
|
Total reinsurance recoverables
|
|
$
|
264.2
|
|
|
$
|
253.9
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth net life insurance in force as of
December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
Direct life insurance in force
|
|
$
|
55,577.1
|
|
|
$
|
56,246.8
|
|
|
$
|
55,656.3
|
|
Amounts assumed from other companies
|
|
|
223.1
|
|
|
|
215.3
|
|
|
|
211.7
|
|
Amounts ceded to other companies
|
|
|
(24,190.0
|
)
|
|
|
(23,799.3
|
)
|
|
|
(21,944.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net life insurance in force
|
|
$
|
31,610.2
|
|
|
$
|
32,662.8
|
|
|
$
|
33,923.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of amount assumed to net
|
|
|
0.71
|
%
|
|
|
0.66
|
%
|
|
|
0.62
|
%
|
F-29
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in millions, unless otherwise
stated)
The effects of reinsurance on earned premiums are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Direct:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accident and health premiums
|
|
$
|
456.3
|
|
|
$
|
395.8
|
|
|
$
|
390.9
|
|
Life insurance premiums
|
|
|
195.3
|
|
|
|
194.3
|
|
|
|
191.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
651.6
|
|
|
|
590.1
|
|
|
|
582.8
|
|
Assumed:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accident and health premiums
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
Life insurance premiums
|
|
|
0.2
|
|
|
|
0.2
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
0.8
|
|
|
|
0.2
|
|
|
|
0.2
|
|
Ceded:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accident and health premiums
|
|
|
(13.6
|
)
|
|
|
(9.9
|
)
|
|
|
(10.2
|
)
|
Life insurance premiums
|
|
|
(54.0
|
)
|
|
|
(49.9
|
)
|
|
|
(47.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(67.6
|
)
|
|
|
(59.8
|
)
|
|
|
(57.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total premiums
|
|
$
|
584.8
|
|
|
$
|
530.5
|
|
|
$
|
525.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of amount assumed to total premiums
|
|
|
0.14
|
%
|
|
|
0.04
|
%
|
|
|
0.04
|
%
|
Ceded reinsurance reduced policy benefits by $54.3, $51.4 and
$45.5 for the years ended December 31, 2008, 2007 and 2006,
respectively.
|
|
9.
|
Deferred
Policy Acquisition Costs
|
The following table provides a reconciliation of the beginning
and ending balance for deferred policy acquisition costs:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2008
|
|
2007
|
|
Unamortized balance at beginning of period
|
|
$
|
129.9
|
|
|
$
|
87.6
|
|
Deferral of acquisition costs
|
|
|
110.6
|
|
|
|
59.6
|
|
Adjustments related to investment losses
|
|
|
4.8
|
|
|
|
0.7
|
|
Amortization related to other expenses
|
|
|
(25.8
|
)
|
|
|
(18.0
|
)
|
|
|
|
|
|
|
|
|
|
Unamortized balance at end of period
|
|
|
219.5
|
|
|
|
129.9
|
|
Accumulated effect of net unrealized investment losses
|
|
|
28.0
|
|
|
|
3.0
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
247.5
|
|
|
$
|
132.9
|
|
|
|
|
|
|
|
|
|
|
F-30
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in millions, unless otherwise
stated)
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2008
|
|
2007
|
|
Unamortized balance at beginning of period
|
|
$
|
17.2
|
|
|
$
|
9.0
|
|
Capitalizations
|
|
|
17.3
|
|
|
|
8.8
|
|
Adjustments related to investment losses
|
|
|
1.0
|
|
|
|
0.2
|
|
Amortization related to other expenses
|
|
|
(2.5
|
)
|
|
|
(0.8
|
)
|
|
|
|
|
|
|
|
|
|
Unamortized balance at end of period
|
|
|
33.0
|
|
|
|
17.2
|
|
Accumulated effect of net unrealized investment losses
|
|
|
4.5
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
37.5
|
|
|
$
|
18.0
|
|
|
|
|
|
|
|
|
|
|
On May 1, 2007, the Company acquired 100% ownership of MRM,
a full-service managing general underwriter (or MGU) and health
care network consulting firm specializing in the stop-loss
market. This acquisition provides the Company with pricing and
underwriting competitive advantages and an additional source of
revenue. The aggregate purchase price was $32.2, of which $22.0
was paid in cash and the remaining $10.2 is payable over the
five-year period following the acquisition contingent upon the
achievement of certain annual profitability targets. At the date
of the acquisition, the fair value of the assets acquired was
$29.0 and liabilities assumed were $6.6.
The acquisition was accounted for using the purchase method of
accounting. The results of MRMs operations are presented
in the Group segment and consolidated in the accompanying
financial statements from the date of acquisition. The purchase
price allocation resulted in $6.9 of identifiable intangible
assets, including customer relationships, employment contracts,
noncompete agreements and the MRM trade name with useful lives
ranging from 5 to 10 years. Goodwill of $18.6 was initially
recognized as of December 31, 2007 for the amount in excess
of the purchase price paid over the fair value of the net assets
acquired. As of December 31, 2008, goodwill totaled $20.6
as a result of satisfying certain contingent targets as
described above.
As part of the MRM acquisition, the Company placed funds into
escrow to be disbursed to the seller in the event that specified
contingencies are resolved. Escrow funds related to the
acquisition were $5.4 as of December 31, 2007. The
specified contingencies were resolved during 2008, and the
escrow funds were disbursed to the seller.
MRM maintains fiduciary cash accounts restricted for the
specific use of paying customer claims. These accounts are
funded by customers, and balances are generally offset by claims
liability accounts. Amounts maintained in these accounts totaled
$3.7 and $4.6 as of December 31, 2008 and 2007,
respectively.
F-31
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in millions, unless otherwise
stated)
|
|
12.
|
Property,
Equipment and Leasehold Improvements
|
Property, equipment and leasehold improvements are composed of
the following amounts:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Computer equipment and software
|
|
$
|
9.4
|
|
|
$
|
8.1
|
|
Office equipment, furniture and fixtures
|
|
|
9.4
|
|
|
|
9.3
|
|
Equipment and software under capital leases
|
|
|
13.8
|
|
|
|
13.8
|
|
Leasehold improvements
|
|
|
13.7
|
|
|
|
13.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46.3
|
|
|
|
44.9
|
|
Less: accumulated depreciation and amortization
|
|
|
27.4
|
|
|
|
21.6
|
|
|
|
|
|
|
|
|
|
|
Total property, equipment and leasehold improvements, net
|
|
$
|
18.9
|
|
|
$
|
23.3
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expenses associated with property,
equipment, and leasehold improvements, including equipment and
software under capital leases, amounted to $6.2, $7.2 and $5.6
for the years ended December 31, 2008, 2007 and 2006,
respectively.
|
|
13.
|
Policy
and Contract Claims
|
The following table provides a reconciliation of the beginning
and ending reserve balances for policy and contract claims:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Balance as of January 1
|
|
$
|
110.9
|
|
|
$
|
119.5
|
|
|
$
|
135.7
|
|
Less: reinsurance recoverable
|
|
|
5.9
|
|
|
|
5.3
|
|
|
|
3.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net balance as of January 1
|
|
|
105.0
|
|
|
|
114.2
|
|
|
|
132.4
|
|
Incurred related to insured events of:
|
|
|
|
|
|
|
|
|
|
|
|
|
The current year
|
|
|
364.2
|
|
|
|
292.2
|
|
|
|
304.0
|
|
Prior years
|
|
|
4.5
|
|
|
|
(7.0
|
)
|
|
|
(7.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total incurred
|
|
|
368.7
|
|
|
|
285.2
|
|
|
|
296.4
|
|
Paid related to insured events of:
|
|
|
|
|
|
|
|
|
|
|
|
|
The current year
|
|
|
271.7
|
|
|
|
226.6
|
|
|
|
234.3
|
|
Prior years
|
|
|
74.0
|
|
|
|
67.8
|
|
|
|
80.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total paid
|
|
|
345.7
|
|
|
|
294.4
|
|
|
|
314.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net balance as of December 31
|
|
|
128.0
|
|
|
|
105.0
|
|
|
|
114.2
|
|
Add: reinsurance recoverable
|
|
|
5.1
|
|
|
|
5.9
|
|
|
|
5.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31
|
|
$
|
133.1
|
|
|
$
|
110.9
|
|
|
$
|
119.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2008, the change
in prior year incurred claims was primarily due to
higher-than-expected paid claims and unfavorable changes in
liability estimates in medical stop-loss claims. For the year
ended December 31, 2007, the change in prior year incurred
claims was primarily due to favorable changes in liability
estimates related to group medical stop-loss claims. This was
offset by
higher-than-expected
claims experience related to individual life insurance. For the
year ended December 31, 2006, the change in prior year
incurred claims was primarily due to favorable claims experience
and timing differences related to reinsurance recoveries in the
current year of claims incurred and paid in prior years, related
to individual life insurance.
F-32
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in millions, unless otherwise
stated)
|
|
14.
|
Notes
Payable and Credit Facilities
|
Capital
Efficient Notes Due 2067
On October 10, 2007, the Company issued $150.0 aggregate
principal amount CENts with a scheduled maturity date of
October 15, 2037, and 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. Considering the impact of the cash flow
hedge, as well as the discount on the notes and the debt
issuance costs, the effective interest rate on the CENts is
9.39%.
The Company is required to use commercially reasonable efforts
to sell enough qualifying capital securities to permit repayment
of the CENts at the scheduled maturity date or on each interest
payment date thereafter. Any remaining outstanding principal
amount will be due on October 15, 2067.
Subject to certain conditions, the Company has the right, on one
or more occasions, to defer the payment of interest on the CENts
during any period up to ten years without giving rise to an
event of default. The Company will not be required to settle
deferred interest subject to certain conditions until it has
deferred interest for five consecutive years or, if earlier,
made a payment of current interest during a deferral period.
Deferred interest will accumulate additional interest at an
annual rate equal to the annual interest rate then applicable to
the CENts.
The CENts are unsecured junior subordinated obligations. The
Company can redeem the CENts at its option, in whole or in part,
on October 15, 2017, and on each interest payment date
thereafter at a redemption price of 100% of the principal amount
being redeemed plus accrued but unpaid interest. The Company can
redeem the CENts at its option, prior to October 15, 2017,
in whole or in part, at a redemption price of 100% of the
principal amount being redeemed or, if greater, a make-whole
price, plus accrued and unpaid interest.
In connection with the offering of the CENts, the Company
entered into a replacement capital covenant for the
benefit of the holders of the $300.0 senior notes due
April 1, 2016 (see below). Under the terms of the
replacement capital covenant, the Company may not redeem or
repay the CENts prior to October 15, 2047 unless the
redemption or repayment is financed from the offering of
replacement capital securities, as specified in the covenant.
Senior
Notes Due 2016
On March 30, 2006, the Company issued $300.0 of
6.125% senior notes due on April 1, 2016, which were
issued at a discount yielding $298.7. Proceeds from the senior
notes were used to pay down the outstanding principal on a
revolving line of credit. Interest on the senior notes is
payable semi-annually in arrears, beginning on October 2,
2006. Considering the impact of the cash flow hedge, as well as
the discount on the notes and the debt issuance costs, the
effective interest rate on the senior notes is 6.11%.
The senior notes are unsecured senior obligations and are equal
in right of payment to all existing and future unsecured senior
indebtedness. These notes are redeemable, in whole or in part,
at the option of the Company at any time or from time to time at
a redemption price equal to the greater of: (1) 100% of the
aggregate principal amount of the notes to be redeemed or
(2) the sum of the present value of the remaining scheduled
payments of principal and interest on the senior notes,
discounted to the redemption date on a semi-annual basis at a
prevailing U.S. Treasury rate plus 25 basis points,
together in each case with accrued interest payments to the
redemption date.
F-33
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in millions, unless otherwise
stated)
Revolving
Credit Facilities
$200.0
Bank of America, N.A.
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 may not exceed 37.5%, measured at the end of each quarter.
In addition, the Company has agreed to other covenants
restricting the ability of its subsidiaries to incur additional
indebtedness, its ability to create liens, and its ability to
change its fiscal year and to enter into new lines of business,
as well as other customary affirmative covenants.
To be eligible for borrowing funds under this facility, the
representations and warranties that the Company made in the
credit agreement must continue to be true in all material
respects, and the Company must not be in default under the
facility, including failure to comply with the covenants
described above.
As of December 31, 2008 and 2007, the Company had no
borrowings outstanding under this facility and was in compliance
with all covenants.
On February 12, 2009, Bank of America, N.A. issued a notice
of default to one of the lending institutions in the syndicate
with a commitment of $20.0, effectively limiting the
Companys ability to borrow under this facility to $180.0.
$50.0
Bank of New York
In 2005, the Company entered into two $25.0 revolving credit
facilities with The Bank of New York to support the
Companys overnight repurchase agreement program, which
provides the Company liquidity to meet its general funding
requirements. These facilities were closed in March 2008. Prior
to closure, there was no borrowing activity on these facilities
in 2008 or 2007.
The Company files income tax returns in the U.S. federal
and various state jurisdictions. The Companys federal
income tax returns have been examined and closing agreements
have been executed with the Internal Revenue Service, or the
statute of limitations has expired for all tax periods through
December 31, 2003. The Internal Revenue Service is in the
process of auditing the Companys life insurance and
non-life insurance company returns for the tax year ended
July 31, 2004, filed in consolidation with the
Companys former parent, Safeco Corporation. To date, no
significant issues or proposed adjustments have been raised by
the examiners. The Internal Revenue Service has also completed
an audit of the Companys life insurance company returns
for the years ended December 31, 2004 and 2005. As of
December 31, 2008, all issues were agreed upon and a
Form 4549-A
was prepared and sent to the Joint Committee on Taxation for
review pursuant to IRC § 6405(a) (refund in excess of
$2.0). The non-life insurance company tax returns are currently
not subject to an Internal Revenue Service audit for tax years
ended after July 31, 2004, and the statute of limitations
has expired for the tax year ended December 31, 2004. The
Company is not currently subject to any state income tax
examinations.
F-34
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in millions, unless otherwise
stated)
Differences between income taxes computed by applying the
U.S. federal income tax rate of 35% to income before income
taxes and the provision for income taxes were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Year Ended December 31,
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Income from operations before income taxes
|
|
$
|
13.0
|
|
|
|
|
|
|
$
|
248.8
|
|
|
|
|
|
|
$
|
244.0
|
|
|
|
|
|
Computed expected tax expense
|
|
|
4.5
|
|
|
|
35.00
|
%
|
|
|
87.1
|
|
|
|
35.00
|
%
|
|
|
85.4
|
|
|
|
35.00
|
%
|
Separate account dividend received deduction
|
|
|
(1.4
|
)
|
|
|
(10.77
|
)
|
|
|
(1.5
|
)
|
|
|
(0.60
|
)
|
|
|
(2.0
|
)
|
|
|
(0.82
|
)
|
Low income housing credits
|
|
|
(8.5
|
)
|
|
|
(65.38
|
)
|
|
|
(4.6
|
)
|
|
|
(1.85
|
)
|
|
|
(0.8
|
)
|
|
|
(0.33
|
)
|
Prior period adjustments
|
|
|
(2.9
|
)
|
|
|
(22.31
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
(0.8
|
)
|
|
|
(6.54
|
)
|
|
|
0.5
|
|
|
|
0.20
|
|
|
|
1.9
|
|
|
|
0.78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for income taxes
|
|
$
|
(9.1
|
)
|
|
|
(70.00
|
)%
|
|
$
|
81.5
|
|
|
|
32.75
|
%
|
|
$
|
84.5
|
|
|
|
34.63
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The tax effects of temporary differences that gave rise to the
deferred income tax assets and deferred income tax liabilities
were as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Deferred income tax assets:
|
|
|
|
|
|
|
|
|
Adjustment to life policy liabilities
|
|
$
|
398.8
|
|
|
$
|
365.4
|
|
Capitalization of policy acquisition costs
|
|
|
45.1
|
|
|
|
44.8
|
|
Goodwill
|
|
|
1.3
|
|
|
|
1.8
|
|
Intangibles
|
|
|
11.6
|
|
|
|
13.8
|
|
Investment impairments
|
|
|
35.0
|
|
|
|
12.6
|
|
Performance share plan
|
|
|
3.9
|
|
|
|
3.7
|
|
Other liabilities accruals
|
|
|
1.7
|
|
|
|
1.8
|
|
Unrealized losses on investment securities (net of DAC
adjustment: $(9.8) and $(1.3), respectively)
|
|
|
566.8
|
|
|
|
6.8
|
|
Non-life net operating loss
|
|
|
1.0
|
|
|
|
|
|
Other
|
|
|
7.3
|
|
|
|
5.4
|
|
|
|
|
|
|
|
|
|
|
Total deferred income tax assets
|
|
|
1,072.5
|
|
|
|
456.1
|
|
Deferred income tax liabilities:
|
|
|
|
|
|
|
|
|
Deferred policy acquisition costs
|
|
|
74.9
|
|
|
|
45.2
|
|
Securities basis adjustment
|
|
|
211.1
|
|
|
|
206.9
|
|
Other
|
|
|
0.7
|
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
Total deferred income tax liabilities
|
|
|
286.7
|
|
|
|
253.0
|
|
|
|
|
|
|
|
|
|
|
Net deferred income tax asset
|
|
$
|
785.8
|
|
|
$
|
203.1
|
|
|
|
|
|
|
|
|
|
|
Due to the unprecedented volatility and disruption within the
capital markets over the past year the associated deferred tax
assets within our investment portfolio have also been subject to
this volatility. To assess the impact of this volatility, we
reviewed the liquidity requirements of our invested assets as
they relate to the liabilities associated with our insurance and
investment products to determine the future reversals and the
utilization of capital loss carry-backs and carry-forwards
related to our investment timing differences.
As the Company expects that it will fully realize the deferred
tax assets, no valuation allowance has been recorded as of
December 31, 2008 and 2007.
F-35
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in millions, unless otherwise
stated)
As of December 31, 2008, the Company has $1.0 of non-life
federal net operating loss carry-forwards due to expire under
current law during 2028.
A reconciliation of the beginning and ending amount of
unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Balance at January 1
|
|
$
|
0.8
|
|
|
$
|
0.6
|
|
Additions based on tax positions related to the current year
|
|
|
0.1
|
|
|
|
0.2
|
|
Reductions for tax positions of prior years
|
|
|
(0.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31
|
|
$
|
0.4
|
|
|
$
|
0.8
|
|
|
|
|
|
|
|
|
|
|
The total balance of the unrecognized tax benefits above would
affect the effective tax rate if recognized. The Company does
not expect the total amount of unrecognized tax benefits for any
tax position to change significantly within the next twelve
months.
The Company includes penalties and interest accrued related to
unrecognized tax benefits in the calculation of income tax
expense. For the years ended December 31, 2008, 2007 and
2006, amounts recognized for interest and penalties in the
consolidated statements of income were not material.
|
|
16.
|
Accumulated
Other Comprehensive Loss
|
The components of accumulated other comprehensive loss are as
follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Net unrealized losses on
available-for-sale
securities
|
|
$
|
(1,649.0
|
)
|
|
$
|
(20.2
|
)
|
Net unrealized losses on derivative financial instruments
|
|
|
(2.9
|
)
|
|
|
(2.9
|
)
|
Adjustment for deferred policy acquisition costs
|
|
|
28.0
|
|
|
|
3.0
|
|
Adjustment for deferred sales inducements
|
|
|
4.5
|
|
|
|
0.8
|
|
Deferred income taxes
|
|
|
566.8
|
|
|
|
6.8
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss
|
|
$
|
(1,052.6
|
)
|
|
$
|
(12.5
|
)
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2008, 2007 and 2006, the
amounts reclassified from other comprehensive loss to net
realized investment gains (losses) included in net income were
$(103.2), $(13.6), and $0.7, net of taxes of $(55.5), $(7.3) and
$0.4, respectively.
|
|
17.
|
Commitments
and Contingencies
|
Guaranty
Fund Assessments
Under state insolvency and guaranty laws, insurers licensed to
do business in a state can be assessed or required to contribute
to state guaranty funds to cover policyholder losses resulting
from insurer insolvencies. Liabilities for guaranty funds are
not discounted or recorded net of premium taxes and are included
in other liabilities in the consolidated balance sheets. At
December 31, 2008, the Company had liabilities of $7.3 for
estimated guaranty fund assessments. The Company has a related
asset for premium tax offsets of $5.8, reported in accounts
receivable and other receivables, which are available for a
period of five to 20 years.
Investments
in Limited Partnerships
At December 31, 2008, the Company was invested in 12
limited partnership interests related to affordable housing
projects and state tax credit funds, three of which were entered
into in 2008. The Company
F-36
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in millions, unless otherwise
stated)
unconditionally committed to provide capital contributions
totaling approximately $106.9, of which the remaining $56.8 is
expected to be contributed over a period of four years. These
investments are accounted for under the equity method and are
recorded at amortized cost in investments in limited
partnerships, with the present value of unfunded contributions
recorded in other liabilities.
Capital contributions of $50.1 were paid as of December 31,
2008, with the remaining expected cash capital contributions as
follows:
|
|
|
|
|
|
|
Expected Capital
|
|
|
|
Contributions
|
|
|
2009
|
|
$
|
23.8
|
|
2010
|
|
|
31.1
|
|
2011
|
|
|
0.1
|
|
2012
|
|
|
1.8
|
|
|
|
|
|
|
Total expected capital contributions
|
|
$
|
56.8
|
|
|
|
|
|
|
The Company has also committed to invest $52.5 in five private
equity funds. The Company will provide capital contributions to
the partnerships up to the committed amount at the discretion of
the general partners, subject to certain incremental
contribution limits. The remaining term of the capital
commitment ranges up to seven years, ending in 2015.
As of December 31, 2008, the Company has remaining
investment commitments totaling $37.0 related to these
partnerships.
Litigation
Because of the nature of the business, the Company is subject to
legal actions filed or threatened in the ordinary course of its
business operations. The Company does not expect that any such
litigation, pending or threatened, as of December 31, 2008,
will have a material adverse effect on its consolidated
financial condition, future operating results or liquidity.
Leases
The Company has office space, commercial real estate, and
certain equipment under leases that expire at various dates
through 2015. The Company accounts for these leases as operating
leases. Certain leases include renewal options.
Future minimum lease commitments, including cost escalation
clauses, for the next five years and thereafter are as follows:
|
|
|
|
|
|
|
Operating
|
|
|
|
Leases
|
|
|
2009
|
|
$
|
7.9
|
|
2010
|
|
|
7.6
|
|
2011
|
|
|
7.0
|
|
2012
|
|
|
6.8
|
|
2013
|
|
|
6.7
|
|
Thereafter
|
|
|
10.8
|
|
|
|
|
|
|
Total
|
|
$
|
46.8
|
|
|
|
|
|
|
The amount of rent expense was $8.0, $8.1 and $7.8 for the years
ended December 31, 2008, 2007 and 2006, respectively.
F-37
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in millions, unless otherwise
stated)
In October 2004, the Company entered into 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 2010, 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 $13.2 to $14.7 for five years. The remaining annual
service fee is $11.6 for 2009 and $6.7 for 2010, subject to
certain annual service fee adjustments based on actual
benchmarks and production utilization. The Company incurred
service fee expenses of $11.8, $12.8 and $13.3 for the years
ended December 31, 2008, 2007 and 2006, respectively.
Other
Commitments
At December 31, 2008 and 2007, unfunded mortgage loan
commitments were $9.0 and $1.5, respectively.
The Company had no other material commitments or contingencies
at December 31, 2008 and 2007.
|
|
18.
|
Employee
Benefit Plans
|
Defined
Contribution Plan
The Company sponsors a defined contribution plan for all
eligible employees that includes a matching contribution of 100%
of a participants contributions up to 6% of eligible
compensation. Defined contribution plan expense was $4.5, $4.2
and $2.2 for the years ended December 31, 2008, 2007 and
2006, respectively.
Performance
Share Plan
In 2004, the Company adopted a performance share plan (the
Performance Share Plan) that provides incentives to
selected executives based on the long-term success of the
Company. Awards under the Performance Share Plan are typically
made in the form of performance shares with a three-year award
period. The value of each performance share is based on
achievement of a growth target in intrinsic business value per
share, which is based on book value per share and enterprise
value per share, and awards are paid in cash. The expense
recorded for grants related to the Performance Share Plan was
$6.0, $9.4 and $11.8 for the years ended December 31, 2008,
2007 and 2006, respectively.
Equity
Incentive Plan and Employee Stock Purchase Plan
In October 2007, the Companys Board of Directors adopted,
and the Companys stockholders approved, the Equity
Incentive Plan and employee stock purchase plan (or ESPP) and
reserved 7,830,000 and 870,000 shares of common stock,
respectively, for issuance under these plans. Also in October
2007, the Companys Board of Directors adopted, and the
Companys stockholders approved, an initial public offering
(IPO) grant program under which shares of common stock,
restricted stock units, and stock options would be granted to
certain management-level employees in connection with the
terminated 2007 initial public offering.
In October 2008, the Company withdrew its registration for an
IPO with the Securities and Exchange Commission as a result of
market conditions. As of December 31, 2008, the
Companys Board of Directors had not approved any grants to
individuals under the Equity Incentive Plan, ESPP or IPO program.
Intracompany
Dividends
The Companys insurance subsidiaries are restricted by
state regulations as to the aggregate amount of dividends they
may pay in any consecutive
12-month
period without regulatory approval. Accordingly, based
F-38
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in millions, unless otherwise
stated)
on statutory limits as of December 31, 2007, the Company
was eligible to receive dividends from its insurance
subsidiaries during 2008 without obtaining regulatory approval
as long as the aggregate dividends paid over the twelve months
preceding any dividend payment date in 2008 did not exceed
$135.2. The total amount of dividends received by the Company
from its insurance subsidiaries during 2008 was $100.0. Based on
state regulations as of December 31, 2008, the Company is
eligible to receive dividends from its insurance subsidiaries
during 2009 without obtaining regulatory approval as long as the
aggregate dividends paid over the twelve months preceding any
dividend payment date in 2009 do not exceed $117.9.
Dividends
to Stockholders
The Company paid no dividends to its stockholders and warrant
holders of record for the year ended December 31, 2008. On
October 19, 2007, the Company paid cash dividends totaling
$200.0, or $1.792 per share, to its stockholders and warrant
holders of record as of October 12, 2007. On
December 26, 2006, the Company paid a cash dividend
totaling $100.0, or $0.896 per share, to its stockholders and
warrant holders of record as of December 15, 2006.
|
|
20.
|
Statutory-Basis
Information
|
State insurance regulatory authorities require insurance
companies to file annual statements prepared on an accounting
basis prescribed or permitted by their respective states of
domicile. Prescribed statutory accounting practices include
state laws, regulations and general administrative rules, as
well as a variety of publications of the National Association of
Insurance Commissioners (NAIC), including the revised Accounting
Practices and Procedures Manual. Permitted statutory accounting
practices encompass all accounting practices not so prescribed.
The statutory net income (loss) for the Companys insurance
subsidiaries is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Statutory net income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Symetra Life Insurance Company
|
|
$
|
36.7
|
|
|
$
|
134.1
|
|
|
$
|
145.0
|
|
Symetra National Life Insurance Company
|
|
|
0.5
|
|
|
|
0.4
|
|
|
|
1.1
|
|
First Symetra National Life Insurance Company of New York
|
|
|
(2.2
|
)
|
|
|
2.4
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
35.0
|
|
|
$
|
136.9
|
|
|
$
|
146.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory net income differs from income reported in accordance
with GAAP primarily because policy acquisition costs are
expensed when incurred, reserves are based on different
assumptions, and income tax expense reflects only taxes paid or
currently payable.
Statutory capital and surplus for Symetra Life Insurance Company
was $1,179.0 and $1,225.0 for the years ended December 31,
2008 and 2007, respectively. These differ from amounts reported
in accordance with GAAP primarily because policy acquisition
costs are expensed when incurred, reserve calculations are based
on different assumptions and fixed maturities are carried at
amortized cost.
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, 2008
and 2007, Symetra Life Insurance Company and its subsidiaries
met the risk-based capital requirements.
F-39
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in millions, unless otherwise
stated)
The Company entered into an Investment Management Agreement on
March 14, 2004, with White Mountains Advisors, LLC
(WMA), a subsidiary of White Mountains Investment Group, Ltd.
This agreement provides for investment advisory services related
to the Companys invested assets and portfolio management
services. Expenses amounted to $14.6, $15.3, and $20.2 for the
years ended December 31, 2008, 2007 and 2006, respectively.
At December 31, 2008 and 2007, amounts due to WMA were $3.5
and $3.8, respectively.
The Company offers a broad range of products and services that
include group and individual insurance products, pension
products and annuities. These operations are managed separately
as five reportable segments based on product groupings: Group,
Retirement Services, Income Annuities, Individual and Other.
The primary segment profitability measure that management uses
is segment pre-tax adjusted operating income (loss), which is
calculated by adjusting income (loss) from continuing operations
before federal income taxes to exclude net realized investment
gains (losses), and for the Retirement Services segment to
include the net realized investment gains (losses) on fixed
index annuities (FIA) options.
When evaluating segment pre-tax adjusted operating income (loss)
in the Retirement Services segment, management includes
the realized and unrealized investment gains (losses) from
options related to an FIA hedging program. This program consists
of buying S&P 500 Index call options. The Company uses
index options to hedge the equity return component of FIA
products. These options do not qualify as hedge instruments or
for hedge accounting treatment. The realized and unrealized
gains (losses) from the options are recorded in net realized
investment gains (losses). Since the interest incurred on the
Companys FIA products is included as a component of
interest credited, it is more meaningful to evaluate results
inclusive of the results of the hedge program.
|
|
|
|
|
Group. Group offers medical stop-loss insurance,
limited medical benefit plans, group life insurance, accidental
death and dismemberment insurance, and disability insurance
mainly to employer groups of 50 to 5,000 individuals. The
Company also offers MGU services.
|
|
|
|
Retirement Services. Retirement Services offers
fixed and variable deferred annuities, including tax-sheltered
annuities, IRAs and group annuities, to qualified retirement
plans, including Section 401(k) and 457 plans. It also
provides record-keeping services for qualified retirement plans
invested in mutual funds.
|
|
|
|
Income Annuities. Income Annuities offers SPIAs for
customers seeking a reliable source of retirement income and
structured settlement annuities to fund third party personal
injury settlements.
|
|
|
|
Individual. Individual offers a wide array of term,
universal and variable life insurance products, as well as BOLI.
|
|
|
|
Other. This segment consists of unallocated
corporate income, composed primarily of investment income on
unallocated surplus, unallocated corporate expenses, interest
expense on debt, the results of small, noninsurance businesses
that are managed outside of the operating segments and
intersegment elimination entries.
|
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 investment income on life insurance
company surplus assets to each segment using a risk-based
capital formula.
F-40
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in millions, unless otherwise
stated)
The following tables present selected financial information by
segment and reconciles segment pre-tax adjusted operating income
(loss) to amounts reported in the consolidated statements of
income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008
|
|
|
|
|
|
|
Retirement
|
|
|
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Group
|
|
|
Services
|
|
|
Annuities
|
|
|
Individual
|
|
|
Other
|
|
|
Total
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
|
|
$
|
449.8
|
|
|
$
|
0.1
|
|
|
$
|
|
|
|
$
|
134.9
|
|
|
$
|
|
|
|
$
|
584.8
|
|
Net investment income (loss)
|
|
|
17.8
|
|
|
|
261.1
|
|
|
|
423.4
|
|
|
|
254.6
|
|
|
|
(0.4
|
)
|
|
|
956.5
|
|
Other revenues
|
|
|
19.0
|
|
|
|
20.2
|
|
|
|
0.9
|
|
|
|
16.0
|
|
|
|
11.7
|
|
|
|
67.8
|
|
Net realized investment losses
|
|
|
(0.1
|
)
|
|
|
(20.8
|
)
|
|
|
(99.6
|
)
|
|
|
(16.8
|
)
|
|
|
(20.7
|
)
|
|
|
(158.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
486.5
|
|
|
|
260.6
|
|
|
|
324.7
|
|
|
|
388.7
|
|
|
|
(9.4
|
)
|
|
|
1,451.1
|
|
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 income (loss)
|
|
|
66.8
|
|
|
|
18.7
|
|
|
|
(63.1
|
)
|
|
|
42.9
|
|
|
|
(52.3
|
)
|
|
|
13.0
|
|
Less: Net realized investment losses
|
|
|
(0.1
|
)
|
|
|
(20.8
|
)
|
|
|
(99.6
|
)
|
|
|
(16.8
|
)
|
|
|
(20.7
|
)
|
|
|
(158.0
|
)
|
Add: Net realized and unrealized losses on FIA options
|
|
|
|
|
|
|
(2.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pre-tax adjusted operating income (loss)
|
|
$
|
66.9
|
|
|
$
|
36.6
|
|
|
$
|
36.5
|
|
|
$
|
59.7
|
|
|
$
|
(31.6
|
)
|
|
$
|
168.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
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 policyholder 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. |
F-41
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in millions, unless otherwise
stated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007
|
|
|
|
|
|
|
Retirement
|
|
|
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Group
|
|
|
Services
|
|
|
Annuities
|
|
|
Individual
|
|
|
Other
|
|
|
Total
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
|
|
$
|
392.1
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
138.4
|
|
|
$
|
|
|
|
$
|
530.5
|
|
Net investment income
|
|
|
18.1
|
|
|
|
244.3
|
|
|
|
439.3
|
|
|
|
244.1
|
|
|
|
27.8
|
|
|
|
973.6
|
|
Other revenues
|
|
|
15.2
|
|
|
|
24.5
|
|
|
|
0.8
|
|
|
|
15.0
|
|
|
|
13.2
|
|
|
|
68.7
|
|
Net realized investment gains (losses)
|
|
|
(0.1
|
)
|
|
|
(9.8
|
)
|
|
|
23.0
|
|
|
|
(1.5
|
)
|
|
|
5.2
|
|
|
|
16.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
425.3
|
|
|
|
259.0
|
|
|
|
463.1
|
|
|
|
396.0
|
|
|
|
46.2
|
|
|
|
1,589.6
|
|
Benefits and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder benefits and claims
|
|
|
213.1
|
|
|
|
(8.3
|
)
|
|
|
|
|
|
|
62.3
|
|
|
|
|
|
|
|
267.1
|
|
Interest credited
|
|
|
|
|
|
|
165.5
|
|
|
|
371.5
|
|
|
|
216.3
|
|
|
|
(1.0
|
)
|
|
|
752.3
|
|
Other underwriting and operating expenses
|
|
|
112.3
|
|
|
|
69.1
|
|
|
|
22.4
|
|
|
|
57.7
|
|
|
|
20.4
|
|
|
|
281.9
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21.5
|
|
|
|
21.5
|
|
Amortization of deferred policy acquisition costs
|
|
|
8.4
|
|
|
|
6.0
|
|
|
|
1.1
|
|
|
|
2.5
|
|
|
|
|
|
|
|
18.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses
|
|
|
333.8
|
|
|
|
232.3
|
|
|
|
395.0
|
|
|
|
338.8
|
|
|
|
40.9
|
|
|
|
1,340.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pre-tax income
|
|
|
91.5
|
|
|
|
26.7
|
|
|
|
68.1
|
|
|
|
57.2
|
|
|
|
5.3
|
|
|
|
248.8
|
|
Less: Net realized investment gains (losses)
|
|
|
(0.1
|
)
|
|
|
(9.8
|
)
|
|
|
23.0
|
|
|
|
(1.5
|
)
|
|
|
5.2
|
|
|
|
16.8
|
|
Add: Net realized and unrealized losses on FIA options
|
|
|
|
|
|
|
(2.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pre-tax adjusted operating income
|
|
$
|
91.6
|
|
|
$
|
34.2
|
|
|
$
|
45.1
|
|
|
$
|
58.7
|
|
|
$
|
0.1
|
|
|
$
|
229.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
255.9
|
|
|
$
|
3,976.0
|
|
|
$
|
6,830.3
|
|
|
$
|
4,299.6
|
|
|
$
|
1,543.2
|
|
|
$
|
16,905.0
|
|
Deferred policy acquisition costs
|
|
|
3.5
|
|
|
|
84.3
|
|
|
|
10.9
|
|
|
|
34.2
|
|
|
|
|
|
|
|
132.9
|
|
Separate account assets
|
|
|
|
|
|
|
1,059.3
|
|
|
|
|
|
|
|
122.6
|
|
|
|
|
|
|
|
1,181.9
|
|
Total assets
|
|
|
385.3
|
|
|
|
5,337.0
|
|
|
|
7,132.5
|
|
|
|
4,818.9
|
|
|
|
1,886.5
|
|
|
|
19,560.2
|
|
Future policy benefits, losses, claims and loss expenses(1)
|
|
|
171.2
|
|
|
|
4,438.4
|
|
|
|
6,891.1
|
|
|
|
4,560.3
|
|
|
|
(3.2
|
)
|
|
|
16,057.8
|
|
Unearned premiums
|
|
|
1.6
|
|
|
|
|
|
|
|
|
|
|
|
9.9
|
|
|
|
|
|
|
|
11.5
|
|
Other policyholder funds
|
|
|
11.2
|
|
|
|
7.0
|
|
|
|
4.3
|
|
|
|
26.6
|
|
|
|
7.7
|
|
|
|
56.8
|
|
Notes payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
448.6
|
|
|
|
448.6
|
|
|
|
|
(1) |
|
This includes funds held under deposit contracts, future policy
benefits, and policy and contract claims. |
F-42
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in millions, unless otherwise
stated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006
|
|
|
|
|
|
|
Retirement
|
|
|
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Group
|
|
|
Services
|
|
|
Annuities
|
|
|
Individual
|
|
|
Other
|
|
|
Total
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
|
|
$
|
387.3
|
|
|
$
|
0.1
|
|
|
$
|
|
|
|
$
|
138.3
|
|
|
$
|
|
|
|
$
|
525.7
|
|
Net investment income
|
|
|
18.0
|
|
|
|
269.8
|
|
|
|
439.0
|
|
|
|
232.8
|
|
|
|
25.3
|
|
|
|
984.9
|
|
Other revenues
|
|
|
10.2
|
|
|
|
22.8
|
|
|
|
0.8
|
|
|
|
12.9
|
|
|
|
9.4
|
|
|
|
56.1
|
|
Net realized investment gains (losses)
|
|
|
(0.1
|
)
|
|
|
(17.0
|
)
|
|
|
16.8
|
|
|
|
(3.8
|
)
|
|
|
5.8
|
|
|
|
1.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
415.4
|
|
|
|
275.7
|
|
|
|
456.6
|
|
|
|
380.2
|
|
|
|
40.5
|
|
|
|
1,568.4
|
|
Benefits and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder benefits and claims
|
|
|
230.8
|
|
|
|
(16.5
|
)
|
|
|
|
|
|
|
50.0
|
|
|
|
|
|
|
|
264.3
|
|
Interest credited
|
|
|
|
|
|
|
186.2
|
|
|
|
371.8
|
|
|
|
208.2
|
|
|
|
(0.3
|
)
|
|
|
765.9
|
|
Other underwriting and operating expenses
|
|
|
105.7
|
|
|
|
61.7
|
|
|
|
21.6
|
|
|
|
57.4
|
|
|
|
14.1
|
|
|
|
260.5
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19.1
|
|
|
|
19.1
|
|
Amortization of deferred policy acquisition costs
|
|
|
10.9
|
|
|
|
1.1
|
|
|
|
0.6
|
|
|
|
2.0
|
|
|
|
|
|
|
|
14.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses
|
|
|
347.4
|
|
|
|
232.5
|
|
|
|
394.0
|
|
|
|
317.6
|
|
|
|
32.9
|
|
|
|
1,324.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pre-tax income
|
|
|
68.0
|
|
|
|
43.2
|
|
|
|
62.6
|
|
|
|
62.6
|
|
|
|
7.6
|
|
|
|
244.0
|
|
Less: Net realized investment gains (losses)
|
|
|
(0.1
|
)
|
|
|
(17.0
|
)
|
|
|
16.8
|
|
|
|
(3.8
|
)
|
|
|
5.8
|
|
|
|
1.7
|
|
Add: Net realized and unrealized gains on FIA options
|
|
|
|
|
|
|
2.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pre-tax adjusted operating income
|
|
$
|
68.1
|
|
|
$
|
62.4
|
|
|
$
|
45.8
|
|
|
|
66.4
|
|
|
$
|
1.8
|
|
|
$
|
244.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
168.7
|
|
|
$
|
4,443.3
|
|
|
$
|
6,967.9
|
|
|
$
|
4,074.9
|
|
|
$
|
1,650.5
|
|
|
$
|
17,305.3
|
|
Deferred policy acquisition costs
|
|
|
4.0
|
|
|
|
54.5
|
|
|
|
6.8
|
|
|
|
22.9
|
|
|
|
|
|
|
|
88.2
|
|
Separate account assets
|
|
|
|
|
|
|
1,115.5
|
|
|
|
|
|
|
|
118.4
|
|
|
|
|
|
|
|
1,233.9
|
|
Total assets
|
|
|
300.1
|
|
|
|
5,905.0
|
|
|
|
7,273.4
|
|
|
|
4,601.7
|
|
|
|
2,034.4
|
|
|
|
20,114.6
|
|
Future policy benefits, losses, claims and loss expenses(1)
|
|
|
185.2
|
|
|
|
4,914.7
|
|
|
|
7,010.6
|
|
|
|
4,370.1
|
|
|
|
(0.7
|
)
|
|
|
16,479.9
|
|
Unearned premiums
|
|
|
2.5
|
|
|
|
|
|
|
|
|
|
|
|
9.2
|
|
|
|
|
|
|
|
11.7
|
|
Other policyholder funds
|
|
|
8.4
|
|
|
|
7.9
|
|
|
|
2.0
|
|
|
|
22.0
|
|
|
|
8.3
|
|
|
|
48.6
|
|
Notes payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
298.7
|
|
|
|
298.7
|
|
|
|
|
(1) |
|
This includes funds held under deposit contracts, future policy
benefits, and policy and contract claims. |
F-43
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in millions, unless otherwise
stated)
|
|
23.
|
Quarterly
Results of Operations (Unaudited)
|
The unaudited quarterly results of operations for years ended
December 31, 2008 and 2007 are summarized in the table
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
|
(In millions, except for per share data)
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
365.0
|
|
|
$
|
400.4
|
|
|
$
|
341.7
|
|
|
$
|
344.0
|
|
Total benefits and expenses
|
|
|
360.3
|
|
|
|
360.2
|
|
|
|
352.3
|
|
|
|
365.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations before income taxes
|
|
|
4.7
|
|
|
|
40.2
|
|
|
|
(10.6
|
)
|
|
|
(21.3
|
)
|
Net income (loss)
|
|
|
3.3
|
|
|
|
28.5
|
|
|
|
(4.8
|
)
|
|
|
(4.9
|
)
|
Net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share(1)
|
|
$
|
0.03
|
|
|
$
|
0.26
|
|
|
$
|
(0.05
|
)
|
|
$
|
(0.05
|
)
|
Diluted net income (loss) per share(1)
|
|
$
|
0.03
|
|
|
$
|
0.26
|
|
|
$
|
(0.05
|
)
|
|
$
|
(0.05
|
)
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
407.3
|
|
|
$
|
405.8
|
|
|
$
|
391.3
|
|
|
$
|
385.2
|
|
Total benefits and expenses
|
|
|
331.5
|
|
|
|
338.6
|
|
|
|
329.7
|
|
|
|
341.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations before income taxes
|
|
|
75.8
|
|
|
|
67.2
|
|
|
|
61.6
|
|
|
|
44.2
|
|
Net income
|
|
|
50.7
|
|
|
|
45.5
|
|
|
|
41.4
|
|
|
|
29.7
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share(1)
|
|
$
|
0.45
|
|
|
$
|
0.41
|
|
|
$
|
0.37
|
|
|
$
|
0.27
|
|
Diluted net income per share(1)
|
|
$
|
0.45
|
|
|
$
|
0.41
|
|
|
$
|
0.37
|
|
|
$
|
0.27
|
|
|
|
|
(1) |
|
Quarterly earnings per share amounts may not add to the full
year amounts as holders of outstanding warrants do not
participate in losses. |
F-44
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
(In millions, except share and
|
|
|
|
per share data)
|
|
|
ASSETS
|
Investments:
|
|
|
|
|
|
|
|
|
Available-for-sale
securities:
|
|
|
|
|
|
|
|
|
Fixed maturities, at fair value (amortized cost: $18,381.2
and $16,528.4, respectively)
|
|
$
|
18,542.3
|
|
|
$
|
14,887.6
|
|
Marketable equity securities, at fair value (cost: $52.9
and $52.5, respectively)
|
|
|
35.4
|
|
|
|
38.1
|
|
Trading securities:
|
|
|
|
|
|
|
|
|
Marketable equity securities, at fair value (cost: $157.9
and $152.1, respectively)
|
|
|
140.6
|
|
|
|
106.3
|
|
Mortgage loans, net
|
|
|
1,095.2
|
|
|
|
988.7
|
|
Policy loans
|
|
|
73.9
|
|
|
|
75.2
|
|
Short-term investments
|
|
|
2.5
|
|
|
|
9.4
|
|
Investments in limited partnerships (includes $46.6 and
$56.3 measured at fair value, respectively)
|
|
|
133.4
|
|
|
|
138.3
|
|
Other invested assets
|
|
|
11.9
|
|
|
|
8.9
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
|
20,035.2
|
|
|
|
16,252.5
|
|
Cash and cash equivalents
|
|
|
241.7
|
|
|
|
468.0
|
|
Accrued investment income
|
|
|
243.0
|
|
|
|
206.3
|
|
Accounts receivable and other receivables
|
|
|
66.1
|
|
|
|
61.7
|
|
Reinsurance recoverables
|
|
|
269.9
|
|
|
|
264.2
|
|
Deferred policy acquisition costs
|
|
|
240.8
|
|
|
|
247.5
|
|
Goodwill
|
|
|
25.8
|
|
|
|
24.3
|
|
Current income tax recoverable
|
|
|
25.1
|
|
|
|
21.1
|
|
Deferred income tax assets, net
|
|
|
150.9
|
|
|
|
785.8
|
|
Property, equipment, and leasehold improvements, net
|
|
|
16.2
|
|
|
|
18.9
|
|
Other assets
|
|
|
61.3
|
|
|
|
57.4
|
|
Securities lending collateral
|
|
|
31.4
|
|
|
|
105.7
|
|
Separate account assets
|
|
|
818.6
|
|
|
|
716.2
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
22,226.0
|
|
|
$
|
19,229.6
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Funds held under deposit contracts
|
|
$
|
18,586.1
|
|
|
$
|
16,810.4
|
|
Future policy benefits
|
|
|
394.7
|
|
|
|
392.1
|
|
Policy and contract claims
|
|
|
134.6
|
|
|
|
133.1
|
|
Unearned premiums
|
|
|
13.0
|
|
|
|
11.9
|
|
Other policyholders funds
|
|
|
90.8
|
|
|
|
117.3
|
|
Notes payable
|
|
|
448.9
|
|
|
|
448.8
|
|
Other liabilities
|
|
|
227.4
|
|
|
|
207.9
|
|
Securities lending payable
|
|
|
31.4
|
|
|
|
105.7
|
|
Separate account liabilities
|
|
|
818.6
|
|
|
|
716.2
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
20,745.5
|
|
|
|
18,943.4
|
|
Commitments and contingencies (Note 9)
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value; 10,000,000 shares
authorized; none issued
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value; 750,000,000 shares
authorized;
92,729,455 and 92,646,295 shares issued and outstanding as
of September 30, 2009 and December 31, 2008,
respectively
|
|
|
0.9
|
|
|
|
0.9
|
|
Additional paid-in capital
|
|
|
1,165.5
|
|
|
|
1,165.5
|
|
Retained earnings
|
|
|
284.3
|
|
|
|
172.4
|
|
Accumulated other comprehensive income (loss), net of taxes
|
|
|
29.8
|
|
|
|
(1,052.6
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
1,480.5
|
|
|
|
286.2
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
22,226.0
|
|
|
$
|
19,229.6
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-45
CONSOLIDATED
STATEMENTS OF INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except per share data)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
|
|
$
|
142.1
|
|
|
$
|
148.1
|
|
|
$
|
430.2
|
|
|
$
|
440.4
|
|
Net investment income
|
|
|
283.6
|
|
|
|
241.6
|
|
|
|
829.4
|
|
|
|
718.0
|
|
Other revenues
|
|
|
14.7
|
|
|
|
16.4
|
|
|
|
43.2
|
|
|
|
52.0
|
|
Net realized investment gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other-than-temporary
impairment losses on securities
|
|
|
(44.1
|
)
|
|
|
(23.3
|
)
|
|
|
(167.9
|
)
|
|
|
(61.7
|
)
|
Less: portion of losses recognized in other comprehensive income
|
|
|
26.7
|
|
|
|
|
|
|
|
94.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net impairment losses recognized in earnings
|
|
|
(17.4
|
)
|
|
|
(23.3
|
)
|
|
|
(73.7
|
)
|
|
|
(61.7
|
)
|
Other net realized investment gains (losses)
|
|
|
28.7
|
|
|
|
(41.1
|
)
|
|
|
44.7
|
|
|
|
(41.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net realized investment gains (losses)
|
|
|
11.3
|
|
|
|
(64.4
|
)
|
|
|
(29.0
|
)
|
|
|
(103.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
451.7
|
|
|
|
341.7
|
|
|
|
1,273.8
|
|
|
|
1,107.1
|
|
Benefits and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder benefits and claims
|
|
|
85.6
|
|
|
|
79.7
|
|
|
|
262.1
|
|
|
|
260.1
|
|
Interest credited
|
|
|
220.5
|
|
|
|
192.1
|
|
|
|
629.2
|
|
|
|
569.1
|
|
Other underwriting and operating expenses
|
|
|
61.7
|
|
|
|
65.4
|
|
|
|
186.7
|
|
|
|
201.9
|
|
Interest expense
|
|
|
7.9
|
|
|
|
8.0
|
|
|
|
23.8
|
|
|
|
24.0
|
|
Amortization of deferred policy acquisition costs
|
|
|
13.8
|
|
|
|
7.1
|
|
|
|
36.4
|
|
|
|
17.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses
|
|
|
389.5
|
|
|
|
352.3
|
|
|
|
1,138.2
|
|
|
|
1,072.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations before income taxes
|
|
|
62.2
|
|
|
|
(10.6
|
)
|
|
|
135.6
|
|
|
|
34.3
|
|
Provision (benefit) for income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
(15.7
|
)
|
|
|
10.7
|
|
|
|
(4.2
|
)
|
|
|
34.2
|
|
Deferred
|
|
|
33.8
|
|
|
|
(16.5
|
)
|
|
|
43.6
|
|
|
|
(26.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision (benefit) for income taxes
|
|
|
18.1
|
|
|
|
(5.8
|
)
|
|
|
39.4
|
|
|
|
7.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
44.1
|
|
|
$
|
(4.8
|
)
|
|
$
|
96.2
|
|
|
$
|
27.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.40
|
|
|
$
|
(0.05
|
)
|
|
$
|
0.86
|
|
|
$
|
0.24
|
|
Diluted
|
|
$
|
0.40
|
|
|
$
|
(0.05
|
)
|
|
$
|
0.86
|
|
|
$
|
0.24
|
|
Weighted-average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
111.622
|
|
|
|
92.646
|
|
|
|
111.622
|
|
|
|
111.622
|
|
Diluted
|
|
|
111.624
|
|
|
|
92.646
|
|
|
|
111.623
|
|
|
|
111.622
|
|
Cash dividends declared per common share
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
See accompanying notes.
F-46
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
Common
|
|
|
Paid-in
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Stockholders
|
|
|
|
Stock
|
|
|
Capital
|
|
|
Earnings
|
|
|
Income (Loss)
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
Balances at January 1, 2008
|
|
$
|
0.9
|
|
|
$
|
1,165.5
|
|
|
$
|
131.2
|
|
|
$
|
(12.5
|
)
|
|
$
|
1,285.1
|
|
Cumulative effect adjustment new accounting guidance
(net of taxes: $(10.3))
|
|
|
|
|
|
|
|
|
|
|
19.1
|
|
|
|
(19.1
|
)
|
|
|
|
|
Comprehensive income (loss), net of taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
27.0
|
|
|
|
|
|
|
|
27.0
|
|
Other comprehensive loss (net of taxes: $(404.5))
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(751.2
|
)
|
|
|
(751.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(724.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at September 30, 2008
|
|
$
|
0.9
|
|
|
$
|
1,165.5
|
|
|
$
|
177.3
|
|
|
$
|
(782.8
|
)
|
|
$
|
560.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at January 1, 2009
|
|
$
|
0.9
|
|
|
$
|
1,165.5
|
|
|
$
|
172.4
|
|
|
$
|
(1,052.6
|
)
|
|
$
|
286.2
|
|
Cumulative effect adjustment new accounting guidance
(net of taxes: $(8.4))
|
|
|
|
|
|
|
|
|
|
|
15.7
|
|
|
|
(15.7
|
)
|
|
|
|
|
Comprehensive income, net of taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
96.2
|
|
|
|
|
|
|
|
96.2
|
|
Other comprehensive income (net of taxes: $(591.3))
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,098.1
|
|
|
|
1,098.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,194.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at September 30, 2009
|
|
$
|
0.9
|
|
|
$
|
1,165.5
|
|
|
$
|
284.3
|
|
|
$
|
29.8
|
|
|
$
|
1,480.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-47
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
(In millions)
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
96.2
|
|
|
$
|
27.0
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
Net realized investment losses
|
|
|
29.0
|
|
|
|
103.3
|
|
Accretion of fixed maturities and mortgage loans
|
|
|
15.0
|
|
|
|
28.9
|
|
Accrued interest on bonds
|
|
|
(25.8
|
)
|
|
|
(25.4
|
)
|
Amortization and depreciation
|
|
|
10.9
|
|
|
|
11.1
|
|
Deferred income tax provision (benefit)
|
|
|
43.6
|
|
|
|
(26.9
|
)
|
Interest credited on deposit contracts
|
|
|
629.2
|
|
|
|
569.1
|
|
Mortality and expense charges and administrative fees
|
|
|
(75.1
|
)
|
|
|
(72.3
|
)
|
Changes in:
|
|
|
|
|
|
|
|
|
Deferred policy acquisition costs
|
|
|
(95.9
|
)
|
|
|
(56.9
|
)
|
Accrued income taxes
|
|
|
(4.0
|
)
|
|
|
(1.4
|
)
|
Accrued investment income
|
|
|
(36.7
|
)
|
|
|
(19.9
|
)
|
Policy and contract claims
|
|
|
1.5
|
|
|
|
24.4
|
|
Future policy benefits
|
|
|
2.6
|
|
|
|
8.1
|
|
Other assets
|
|
|
(27.8
|
)
|
|
|
(4.9
|
)
|
Other liabilities
|
|
|
34.1
|
|
|
|
(6.6
|
)
|
Other, net
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustments
|
|
|
500.4
|
|
|
|
530.6
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
596.6
|
|
|
|
557.6
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Purchases of:
|
|
|
|
|
|
|
|
|
Fixed maturities and equity securities
|
|
|
(3,332.4
|
)
|
|
|
(1,675.2
|
)
|
Other invested assets and investments in limited partnerships
|
|
|
(30.3
|
)
|
|
|
(22.5
|
)
|
Issuances of mortgage loans
|
|
|
(162.3
|
)
|
|
|
(169.7
|
)
|
Issuances of policy loans
|
|
|
(13.6
|
)
|
|
|
(12.2
|
)
|
Maturities, calls, paydowns, and other
|
|
|
1,001.5
|
|
|
|
636.9
|
|
Securities lending collateral returned (invested), net
|
|
|
72.3
|
|
|
|
(4.0
|
)
|
Sales of:
|
|
|
|
|
|
|
|
|
Fixed maturities and equity securities
|
|
|
454.1
|
|
|
|
346.8
|
|
Other invested assets and investments in limited partnerships
|
|
|
23.0
|
|
|
|
2.4
|
|
Repayments of mortgage loans
|
|
|
53.9
|
|
|
|
62.7
|
|
Repayments of policy loans
|
|
|
14.1
|
|
|
|
13.1
|
|
Net decrease (increase) in short-term investments
|
|
|
6.9
|
|
|
|
(5.3
|
)
|
Purchases of property, equipment, and leasehold improvements
|
|
|
(1.1
|
)
|
|
|
(1.5
|
)
|
Other, net
|
|
|
(2.8
|
)
|
|
|
(2.7
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(1,916.7
|
)
|
|
|
(831.2
|
)
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Policyholder account balances:
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
2,187.7
|
|
|
$
|
1,266.5
|
|
Withdrawals
|
|
|
(1,010.1
|
)
|
|
|
(967.7
|
)
|
Securities lending collateral (paid) received, net
|
|
|
(72.3
|
)
|
|
|
4.0
|
|
Other, net
|
|
|
(11.5
|
)
|
|
|
(17.9
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
1,093.8
|
|
|
|
284.9
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(226.3
|
)
|
|
|
11.3
|
|
Cash and cash equivalents at beginning of period
|
|
|
468.0
|
|
|
|
253.9
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
241.7
|
|
|
$
|
265.2
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information
|
|
|
|
|
|
|
|
|
Net cash paid (received) during the year for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
15.5
|
|
|
$
|
15.8
|
|
Income taxes
|
|
|
(0.4
|
)
|
|
|
35.5
|
|
Non-cash transactions during the period:
|
|
|
|
|
|
|
|
|
Investments in limited partnerships and capital obligations
incurred
|
|
|
10.0
|
|
|
|
3.6
|
|
See accompanying notes.
F-48
NOTES TO
UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in millions, unless otherwise
stated)
|
|
1.
|
Nature of
Operations, Basis of Presentation and Accounting
Policies
|
Organization
and Description of Business
The accompanying interim consolidated financial statements
include on a consolidated basis the accounts of Symetra
Financial Corporation and its subsidiaries which are referred to
as Symetra Financial or the Company.
Symetra Financial Corporation is a Delaware corporation
privately owned by an investor group led by White Mountains
Insurance Group, Ltd. and Berkshire Hathaway Inc.
Symetra Financials subsidiaries offer group and individual
insurance products and retirement products, including annuities
marketed through professional agents and distributors 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.
Basis
of Presentation and Use of Estimates
The interim consolidated financial statements have been prepared
in conformity with U.S. generally accepted accounting
principles (GAAP) and the rules and regulations of the
Securities and Exchange Commission (SEC) for interim financial
reporting. These interim consolidated financial statements are
unaudited but in managements opinion include all
adjustments, consisting of normal recurring adjustments and
accruals, necessary for a fair presentation. The consolidated
balance sheet as of December 31, 2008 is derived from
audited consolidated financial statements as of that date, but
certain information and footnotes required by GAAP for complete
financial statements have been excluded. These interim
consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and
accompanying notes included elsewhere in this prospectus.
The most significant estimates include those used to determine
the following: the valuation of investments; the identification
of
other-than-temporary
impairments of investments; the balance, recoverability and
amortization of deferred policy acquisition costs (DAC); the
liabilities for funds held under deposit contracts, future
policy benefits, and policy and contract claims; and the
recoverability of deferred tax assets. The recorded amounts
reflect managements best estimates, though actual results
could differ. Management believes the amounts provided are
appropriate.
The interim consolidated financial statements include the
accounts of Symetra Financial Corporation and its subsidiaries
that are wholly owned, directly or indirectly. All significant
intercompany transactions and balances have been eliminated.
For a description of significant accounting policies, see
Note 2 to the audited consolidated financial statements of
Symetra Financial Corporation included elsewhere in this
prospectus.
Adoption
of New Accounting Pronouncements
ASC
810-10
(formerly SFAS No. 160) Noncontrolling Interests
in Consolidated Financial Statements an Amendment of
Accounting Research Bulletin No. 51
In December 2007, the Financial Accounting Standards Board
(FASB) issued SFAS No. 160
(ASC 810-10),
Noncontrolling Interests in Consolidated Financial
Statements, which clarifies that a noncontrolling interest
in a subsidiary is an ownership interest in the consolidated
entity that should be reported as equity in the consolidated
financial statements. The Company adopted this guidance
effective January 1, 2009. The adoption did not have a
material impact on the Companys consolidated financial
statements.
F-49
NOTES TO
UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in millions, unless otherwise
stated)
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 on fixed
maturities and modifies the OTTI presentation and disclosure
requirements for both fixed maturities and equity securities.
The FSP replaces the provision that management must positively
assert the intent and ability to hold a fixed maturity until
recovery to determine impairment, with the assertion that the
Company does not intend to sell or it is not
more-likely-than-not that the Company will be required to sell a
fixed maturity prior to recovery. In addition, if a credit loss
exists, the FSP requires that the credit loss is recognized in
earnings, whereas the portion due to other factors is recognized
in other comprehensive income (loss). As permitted by the
transition guidance, the Company elected to prospectively adopt
the guidance effective January 1, 2009, which resulted in
an increase of $15.7 (net of taxes of $8.4) to the opening
balance of retained earnings with a corresponding decrease to
accumulated other comprehensive income (loss) to reclassify the
noncredit portion of previously impaired fixed maturities held
as of January 1, 2009, for which the Company did not intend
to sell and it was not more likely than not that the Company
would be required to sell the security before recovery of its
amortized cost.
To determine the cumulative effect of adoption the Company
compared the present value of cash flows expected to be received
as of January 1, 2009, to the amortized cost basis of the
fixed maturities. The discount rate used to calculate the
present value was the rate for each respective fixed maturity in
effect before recognizing any OTTI. The cumulative effect
adjustment increased the amortized cost of our fixed maturity
securities, primarily corporate securities, by $24.1.
The Company enhanced its financial statement presentation, as
required, to separately present the OTTI recognized in
accumulated other comprehensive income (loss) on the face of the
consolidated statements of changes in stockholders equity
and present the total OTTI recognized as a realized loss in the
income statement, with an offset for the amount of noncredit
impairments recognized in accumulated other comprehensive income
(loss). The enhanced financial statement disclosures are
included in Note 4. For the nine months ended
September 30, 2009, gross impairments were $167.9, of which
$73.7 was included in earnings and $94.2 was recorded in other
comprehensive income (loss).
ASC
820-10
(formerly FSP
SFAS 157-2),
Effective Date of FASB Statement No. 157
On January 1, 2008, the Company elected the partial
adoption of SFAS No. 157 (ASC
820-10),
Fair Value Measurements under the provisions of FSP
SFAS 157-2,
which allowed an entity to delay application of the guidance for
fair value measurements until January 1, 2009, for certain
non-financial assets and liabilities, including fair value
measurements used in the impairment testing of goodwill and
eligible non-financial assets and liabilities included within a
business combination. The Company adopted the guidance for fair
value measurements for these non-financial assets and
liabilities on January 1, 2009. The adoption did not have a
material impact on the Companys consolidated financial
statements.
ASC
820-10
(formerly FSP
SFAS 157-4),
Fair Value Nonactive Markets
The Company prospectively adopted FSP
SFAS No. 157-4
(ASC
820-10),
Determining Fair Value When the Volume and Level of Activity
for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly on
January 1, 2009, which provides guidance for determining
fair value when the volume or level of activity for an asset or
liability has significantly decreased and identifies
circumstances that indicate a transaction is not orderly. The
adoption of this guidance did not have a material impact on the
Companys consolidated financial statements.
F-50
NOTES TO
UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in millions, unless otherwise
stated)
ASC
825-10
(formerly FSP
SFAS 107-1
and APB
28-1),
Interim Disclosures about Fair Value of Financial
Instruments
In April 2009, the FASB issued FSP
SFAS No. 107-1
and APB 28-1
(ASC
825-10),
Interim Disclosures about Fair Value of Financial Instruments
to require the fair value disclosures for certain financial
instruments be included in interim financial statements of
public companies. This guidance applies to all financial
instruments under ASC
825-10-50
(formerly SFAS No. 107, Disclosures about Fair
Value of Financial Instruments), whether recognized in the
financial statements or not. Additionally, companies must
disclose methods and significant assumptions used to estimate
fair value. The Company adopted this guidance on April 1,
2009. The adoption did not have a material impact on the
Companys consolidated financial statements.
ASC
815-10
(formerly SFAS No. 161) Disclosures about
Derivative Instruments and Hedging Activities
In March 2008, the FASB issued SFAS No. 161 (ASC
815-10),
Disclosures about Derivative Instruments and Hedging
Activities, an amendment to SFAS No. 133. This
Statement amends and expands the disclosure requirements for
derivative instruments and hedging activities by requiring
companies to provide enhanced disclosures about how and why the
entity uses derivative instruments, how derivative instruments
and hedging activities are accounted for, and how derivative
instruments and related hedged items affect a companys
financial position, financial performance and cash flows. The
Company adopted this guidance on January 1, 2009. The
adoption of this guidance did not impact the Companys
consolidated financial statements, as the Company does not have
a material amount of derivative instruments.
ASC
855-10
(formerly SFAS No. 165) Subsequent
Events
In May 2009, the FASB issued SFAS No. 165 (ASC
855-10),
Subsequent Events. This guidance establishes the
standards of accounting for and disclosing events that occur
after the balance sheet date, but before financial statements
are issued and renames type I and type II subsequent events
to recognized subsequent events and
non-recognized subsequent events, respectively. The
guidance also clarifies that companies who widely distribute
financial statements should evaluate subsequent events through
the date of issuance, whereas all other companies should
evaluate subsequent events through the date financial statements
are available to be issued. The Company adopted this guidance
for its interim reporting period ending on June 30, 2009.
The adoption did not have a material impact on the
Companys consolidated financial statements.
ASC
105-10
(formerly SFAS No. 168), FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting
Principles
In July 2009, the FASB issued SFAS No. 168 (ASC
105-10),
FASB Accounting Standards Codification and the Hierarchy of
Generally Accepted Accounting Principles, which establishes
the FASB Accounting Standards Codification (Codification or ASC)
as the single source of authoritative GAAP recognized by the
FASB to be applied by nongovernmental entities. Rules and
interpretive releases of the SEC under authority of federal
securities laws are also sources of authoritative GAAP for SEC
registrants. The Codification supersedes all existing non-SEC
accounting and reporting standards. All other non-grandfathered,
non-SEC accounting literature not included in the Codification
will become non-authoritative.
Following the Codification, the FASB will not issue new
standards in the form of Statements, FASB Staff Positions or
Emerging Issues Task Force Abstracts. Instead, it will issue
Accounting Standards Updates (ASUs), which will serve to update
the Codification, provide background information about the
guidance and provide the basis for conclusions on the changes to
the Codification.
GAAP is not intended to be changed as a result of the
FASBs Codification project, but it will change the way the
guidance is organized and presented. As a result, these changes
have a significant impact on how
F-51
NOTES TO
UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in millions, unless otherwise
stated)
companies reference GAAP in their financial statements and in
their accounting policies for financial statements issued for
interim and annual periods ending after September 15, 2009.
The Company has implemented the Codification in this quarterly
report by referencing the Codification topics where appropriate.
References to the superseded standards have been included for
informational purposes.
Accounting
Pronouncements Not Yet Adopted
ASC
810-10
(formerly SFAS No. 167), Amendments to FASB
Interpretation No. 46(R)
In June 2009, the FASB issued SFAS No. 167 (ASC
810-10),
Amendments to FASB Interpretation No. 46(R), which
provides guidance for determining which enterprise, if any, has
a controlling financial interest in a variable interest entity
and requires additional disclosures about involvement in
variable interest entities. The Company will adopt this guidance
on January 1, 2010. The Company has not yet determined the
impact adoption of this guidance will have on its consolidated
financial statements.
ASU
2009-05,
Measuring Liabilities at Fair Value
In August 2009, the FASB issued ASU
2009-05,
Fair Value Measurements and Disclosures
(Topic 820) Measuring Liabilities at Fair
Value. This update provides guidance on appropriate
measurement techniques for determining the fair value of
liabilities. The Company adopted this guidance on
October 1, 2009, and it will not have a material impact on
its consolidated financial statements.
ASU
2009-12,
Investments in Certain Entities That Calculate Net Asset Value
per Share (or Its Equivalent)
In September 2009, the FASB issued ASU
2009-12,
Investments in Certain Entities That Calculate Net Asset
Value per Share (or Its Equivalent). This update
amends ASC 820 to permit entities to estimate the fair value of
certain investments using the net asset value (NAV) per share as
of the measurement date, if the fair value of the investment is
not readily determinable. The guidance applies to investments in
entities that calculate NAV in accordance with ASC 946. The
Company adopted this guidance on October 1, 2009, and it
will not have a material impact on its consolidated financial
statements.
Basic earnings per share represents the amount of earnings for
the period available to each share of common stock outstanding
during the reporting period. Diluted earnings per share
represents the amount of earnings for the period available to
each share of common stock outstanding during the reporting
period adjusted for the potential issuance of common stock, if
dilutive.
The outstanding warrants exercisable for 18,975,744 shares are
considered participating securities or potential common stock
securities that are included in weighted-average common shares
outstanding for purposes of computing basic earnings per share
using the two-class method. The warrants are considered
participating securities or potential common stock securities
because the terms of the agreements entitle the holders to
receive any dividends declared on the common stock concurrently
with the holders of outstanding shares of common stock, on a
one-to-one
basis. In periods of net loss, none of the loss is allocated to
the outstanding warrants; therefore, the warrants are not
included in the basic earnings per share calculation in such
periods.
The Company granted 83,160 shares of restricted stock to
certain members of senior management on August 24, 2009,
which were included in the computation of diluted earnings per
share, based on application of the treasury stock method,
weighted for the portion of the period they were outstanding.
The restricted stock shares are subject to certain service
vesting conditions, none of which were satisfied as of
September 30, 2009.
F-52
NOTES TO
UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in millions, unless otherwise
stated)
The following table presents information relating to the
Companys calculations of basic and diluted earnings per
share (EPS) for the following periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
For the Nine Months
|
|
|
|
Ended September 30,
|
|
|
Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions, except per share data)
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss), as reported
|
|
$
|
44.1
|
|
|
$
|
(4.8
|
)
|
|
$
|
96.2
|
|
|
$
|
27.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding basic
|
|
|
111.622
|
|
|
|
92.646
|
|
|
|
111.622
|
|
|
|
111.622
|
|
Add: Dilutive effect of restricted stock
|
|
|
0.002
|
|
|
|
|
|
|
|
0.001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding diluted
|
|
|
111.624
|
|
|
|
92.646
|
|
|
|
111.623
|
|
|
|
111.622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.40
|
|
|
$
|
(0.05
|
)
|
|
$
|
0.86
|
|
|
$
|
0.24
|
|
Diluted
|
|
$
|
0.40
|
|
|
$
|
(0.05
|
)
|
|
$
|
0.86
|
|
|
$
|
0.24
|
|
Antidilutive shares not included in net income (loss) per
diluted common share
|
|
|
|
|
|
|
18.976
|
|
|
|
|
|
|
|
|
|
For periods with net losses, the warrants and restricted stock
are not included in the computation of diluted EPS as they are
anti-dilutive.
The following tables summarize the Companys
available-for-sale
fixed maturities and marketable equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other-Than-
|
|
|
|
Cost or
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
Temporary
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Impairments in
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
AOCI(1)
|
|
|
September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies
|
|
$
|
42.4
|
|
|
$
|
3.3
|
|
|
$
|
|
|
|
$
|
45.7
|
|
|
$
|
(0.1
|
)
|
State and political subdivisions
|
|
|
518.7
|
|
|
|
3.9
|
|
|
|
(37.7
|
)
|
|
|
484.9
|
|
|
|
(1.8
|
)
|
Foreign governments
|
|
|
26.9
|
|
|
|
1.3
|
|
|
|
|
|
|
|
28.2
|
|
|
|
|
|
Corporate securities
|
|
|
12,231.6
|
|
|
|
597.0
|
|
|
|
(414.6
|
)
|
|
|
12,414.0
|
|
|
|
(36.7
|
)
|
Residential mortgage-backed securities
|
|
|
3,506.3
|
|
|
|
132.0
|
|
|
|
(101.7
|
)
|
|
|
3,536.6
|
|
|
|
(36.5
|
)
|
Commercial mortgage-backed securities
|
|
|
1,883.7
|
|
|
|
54.6
|
|
|
|
(64.9
|
)
|
|
|
1,873.4
|
|
|
|
(0.1
|
)
|
Other debt obligations
|
|
|
171.6
|
|
|
|
9.2
|
|
|
|
(21.3
|
)
|
|
|
159.5
|
|
|
|
(8.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
18,381.2
|
|
|
|
801.3
|
|
|
|
(640.2
|
)
|
|
|
18,542.3
|
|
|
|
(83.2
|
)
|
Marketable equity securities,
available-for-sale
|
|
|
52.9
|
|
|
|
0.6
|
|
|
|
(18.1
|
)
|
|
|
35.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
18,434.1
|
|
|
$
|
801.9
|
|
|
$
|
(658.3
|
)
|
|
$
|
18,577.7
|
|
|
$
|
(83.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents the amount of cumulative non-credit OTTI losses
transferred to or recorded in other comprehensive income in
accordance with
ASC 820-10
(formerly
FSP SFAS 115-2)
for securities that also had a credit-related impairment. |
F-53
NOTES TO
UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in millions, unless otherwise
stated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost or
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies
|
|
$
|
155.5
|
|
|
$
|
5.2
|
|
|
$
|
(3.9
|
)
|
|
$
|
156.8
|
|
State and political subdivisions
|
|
|
488.8
|
|
|
|
0.9
|
|
|
|
(64.8
|
)
|
|
|
424.9
|
|
Foreign governments
|
|
|
31.4
|
|
|
|
3.2
|
|
|
|
|
|
|
|
34.6
|
|
Corporate securities
|
|
|
10,564.1
|
|
|
|
105.1
|
|
|
|
(1,362.7
|
)
|
|
|
9,306.5
|
|
Residential mortgage-backed securities
|
|
|
3,176.1
|
|
|
|
84.6
|
|
|
|
(134.4
|
)
|
|
|
3,126.3
|
|
Commercial mortgage-backed securities
|
|
|
1,912.7
|
|
|
|
17.5
|
|
|
|
(255.2
|
)
|
|
|
1,675.0
|
|
Other debt obligations
|
|
|
199.8
|
|
|
|
|
|
|
|
(36.3
|
)
|
|
|
163.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
16,528.4
|
|
|
|
216.5
|
|
|
|
(1,857.3
|
)
|
|
|
14,887.6
|
|
Marketable equity securities,
available-for-sale
|
|
|
52.5
|
|
|
|
|
|
|
|
(14.4
|
)
|
|
|
38.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
16,580.9
|
|
|
$
|
216.5
|
|
|
$
|
(1,871.7
|
)
|
|
$
|
14,925.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Of the U.S. government and agencies securities, agencies
comprised $24.3 and $132.1 of the fair value as of
September 30, 2009 and December 31, 2008,
respectively. As of September 30, 2009, these securities
had gross unrealized gains of $1.6 and no unrealized losses. As
of December 31, 2008, these securities had gross unrealized
gains of $2.6 and gross unrealized losses of $(3.9).
F-54
NOTES TO
UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in millions, unless otherwise
stated)
The following tables show the gross unrealized losses including
the portion of OTTI recognized in other comprehensive income
(loss) for fixed maturities, and fair values of the
Companys available-for-sale investments. These are
aggregated by investment category and the severity of the
unrealized loss, separated between 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
|
|
September 30, 2009
|
|
Value
|
|
|
Losses
|
|
|
Securities
|
|
|
Value
|
|
|
Losses
|
|
|
Securities
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and political subdivisions
|
|
$
|
35.1
|
|
|
$
|
(5.4
|
)
|
|
|
6
|
|
|
$
|
270.4
|
|
|
$
|
(32.3
|
)
|
|
|
45
|
|
Corporate securities
|
|
|
554.9
|
|
|
|
(27.7
|
)
|
|
|
55
|
|
|
|
2,711.6
|
|
|
|
(386.9
|
)
|
|
|
349
|
|
Residential mortgage-backed securities
|
|
|
132.0
|
|
|
|
(3.9
|
)
|
|
|
10
|
|
|
|
468.4
|
|
|
|
(97.8
|
)
|
|
|
70
|
|
Commercial mortgage-backed securities
|
|
|
55.6
|
|
|
|
(0.9
|
)
|
|
|
6
|
|
|
|
794.8
|
|
|
|
(64.0
|
)
|
|
|
50
|
|
Other debt securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38.5
|
|
|
|
(21.3
|
)
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
777.6
|
|
|
|
(37.9
|
)
|
|
|
77
|
|
|
|
4,283.7
|
|
|
|
(602.3
|
)
|
|
|
524
|
|
Marketable equity securities,
available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34.2
|
|
|
|
(18.1
|
)
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
777.6
|
|
|
$
|
(37.9
|
)
|
|
|
77
|
|
|
$
|
4,317.9
|
|
|
$
|
(620.4
|
)
|
|
|
529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Below amortized cost fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 20%
|
|
$
|
752.0
|
|
|
$
|
(26.3
|
)
|
|
|
|
|
|
$
|
3,638.7
|
|
|
$
|
(323.2
|
)
|
|
|
|
|
20% or more
|
|
|
25.6
|
|
|
|
(11.6
|
)
|
|
|
|
|
|
|
645.0
|
|
|
|
(279.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
777.6
|
|
|
|
(37.9
|
)
|
|
|
|
|
|
|
4,283.7
|
|
|
|
(602.3
|
)
|
|
|
|
|
% Below cost marketable equity securities,
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 20%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.2
|
|
|
|
(0.1
|
)
|
|
|
|
|
20% or more
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34.0
|
|
|
|
(18.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable equity securities,
available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34.2
|
|
|
|
(18.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
777.6
|
|
|
$
|
(37.9
|
)
|
|
|
|
|
|
$
|
4,317.9
|
|
|
|
(620.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-55
NOTES TO
UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in millions, unless otherwise
stated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or More
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
# of
|
|
|
Fair
|
|
|
Unrealized
|
|
|
# of
|
|
December 31, 2008
|
|
Value
|
|
|
Losses
|
|
|
securities
|
|
|
Value
|
|
|
Losses
|
|
|
securities
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies
|
|
$
|
52.4
|
|
|
$
|
(3.9
|
)
|
|
|
3
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
State and political subdivisions
|
|
|
305.0
|
|
|
|
(57.0
|
)
|
|
|
61
|
|
|
|
73.1
|
|
|
|
(7.8
|
)
|
|
|
14
|
|
Foreign governments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate securities
|
|
|
4,565.7
|
|
|
|
(484.2
|
)
|
|
|
695
|
|
|
|
2,789.7
|
|
|
|
(878.5
|
)
|
|
|
426
|
|
Residential mortgage-backed securities
|
|
|
536.0
|
|
|
|
(74.4
|
)
|
|
|
105
|
|
|
|
169.6
|
|
|
|
(60.0
|
)
|
|
|
41
|
|
Commercial mortgage-backed securities
|
|
|
694.3
|
|
|
|
(140.2
|
)
|
|
|
60
|
|
|
|
566.2
|
|
|
|
(115.0
|
)
|
|
|
48
|
|
Other debt securities
|
|
|
127.1
|
|
|
|
(23.7
|
)
|
|
|
19
|
|
|
|
26.6
|
|
|
|
(12.6
|
)
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
6,280.5
|
|
|
|
(783.4
|
)
|
|
|
943
|
|
|
|
3,625.2
|
|
|
|
(1,073.9
|
)
|
|
|
534
|
|
Marketable equity securities,
available-for-sale
|
|
|
14.8
|
|
|
|
(11.2
|
)
|
|
|
3
|
|
|
|
23.3
|
|
|
|
(3.2
|
)
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,295.3
|
|
|
$
|
(794.6
|
)
|
|
|
946
|
|
|
$
|
3,648.5
|
|
|
$
|
(1,077.1
|
)
|
|
|
536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Below amortized cost fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 20%
|
|
$
|
5,427.3
|
|
|
$
|
(434.1
|
)
|
|
|
|
|
|
$
|
1,997.1
|
|
|
$
|
(257.9
|
)
|
|
|
|
|
20% or more
|
|
|
853.2
|
|
|
|
(349.3
|
)
|
|
|
|
|
|
|
1,628.1
|
|
|
|
(816.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
6,280.5
|
|
|
|
(783.4
|
)
|
|
|
|
|
|
|
3,625.2
|
|
|
|
(1,073.9
|
)
|
|
|
|
|
% Below cost marketable equity securities,
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 20%
|
|
|
0.5
|
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
23.3
|
|
|
|
(3.2
|
)
|
|
|
|
|
20% or more
|
|
|
14.3
|
|
|
|
(10.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable equity securities,
available-for-sale
|
|
|
14.8
|
|
|
|
(11.2
|
)
|
|
|
|
|
|
|
23.3
|
|
|
|
(3.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,295.3
|
|
|
$
|
(794.6
|
)
|
|
|
|
|
|
|
3,648.5
|
|
|
|
(1,077.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After the recognition of OTTI, the Company believes that the
remaining securities in an unrealized loss position as of
September 30, 2009 were not
other-than-temporarily
impaired as it did not intend to sell these fixed maturity
securities or it was not more likely than not that it will be
required to sell the fixed maturity securities before recovery
of their amortized cost basis. Furthermore, based upon the
Companys cash flow modeling and the expected continuation
of contractually required principal and interest payments, the
Company considered these securities to be temporarily impaired
as of September 30, 2009.
The Company does not intend to sell its
available-for-sale
marketable equity securities, primarily consisting of
non-redeemable preferred stock, or it is not more likely than
not it will be required to sell these securities before recovery
of their cost basis, and the Company expects to recover the cost
basis of these securities.
The following table summarizes the amortized cost and fair value
of fixed maturities as September 30, 2009, by contractual
years to maturity. Expected maturities will differ from
contractual maturities because borrowers may have the right to
call or prepay obligations with or without prepayment
F-56
NOTES TO
UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in millions, unless otherwise
stated)
penalties. Residential and commercial mortgage-backed securities
and other debt obligations, which are mainly asset-backed
securities, are shown separately as they are not due at a single
maturity date.
|
|
|
|
|
|
|
|
|
|
|
Cost or
|
|
|
|
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
|
One year or less
|
|
$
|
430.2
|
|
|
$
|
435.2
|
|
Over one year through five years
|
|
|
2,941.9
|
|
|
|
3,046.0
|
|
Over five years through ten years
|
|
|
4,259.7
|
|
|
|
4,445.9
|
|
Over ten years
|
|
|
5,187.8
|
|
|
|
5,045.7
|
|
Residential mortgage-backed securities
|
|
|
3,506.3
|
|
|
|
3,536.6
|
|
Commercial mortgage-backed securities
|
|
|
1,883.7
|
|
|
|
1,873.4
|
|
Other debt obligations
|
|
|
171.6
|
|
|
|
159.5
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
$
|
18,381.2
|
|
|
$
|
18,542.3
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the Companys net investment
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
For the Nine Months
|
|
|
|
Ended September 30,
|
|
|
Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Fixed maturities
|
|
$
|
267.0
|
|
|
$
|
235.7
|
|
|
$
|
781.4
|
|
|
$
|
691.2
|
|
Marketable equity securities,
available-for-sale
|
|
|
0.6
|
|
|
|
0.4
|
|
|
|
2.3
|
|
|
|
2.0
|
|
Marketable equity securities, trading
|
|
|
0.7
|
|
|
|
0.7
|
|
|
|
1.9
|
|
|
|
2.1
|
|
Mortgage loans
|
|
|
17.2
|
|
|
|
15.1
|
|
|
|
49.3
|
|
|
|
43.4
|
|
Policy loans
|
|
|
1.1
|
|
|
|
1.1
|
|
|
|
3.3
|
|
|
|
3.4
|
|
Investments in limited partnerships
|
|
|
(0.9
|
)
|
|
|
(9.7
|
)
|
|
|
1.7
|
|
|
|
(19.9
|
)
|
Other(1)
|
|
|
2.8
|
|
|
|
3.2
|
|
|
|
4.0
|
|
|
|
10.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income
|
|
|
288.5
|
|
|
|
246.5
|
|
|
|
843.9
|
|
|
|
732.7
|
|
Investment expenses(2)
|
|
|
(4.9
|
)
|
|
|
(4.9
|
)
|
|
|
(14.5
|
)
|
|
|
(14.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
283.6
|
|
|
$
|
241.6
|
|
|
$
|
829.4
|
|
|
$
|
718.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes income from other invested assets, short-term
investments and cash and cash equivalents. |
|
(2) |
|
Investment expenses are primarily composed of fees paid to the
Companys investment advisor, an affiliate of White
Mountains Insurance Group, Ltd. |
F-57
NOTES TO
UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in millions, unless otherwise
stated)
The following table provides additional detail of net realized
investment gains (losses). The cost of securities sold is
determined using the specific identification method.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
For the Nine Months
|
|
|
|
Ended September 30,
|
|
|
Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Gross realized gains on sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
$
|
10.7
|
|
|
$
|
0.7
|
|
|
$
|
17.0
|
|
|
$
|
10.2
|
|
Marketable equity securities, trading
|
|
|
1.3
|
|
|
|
8.5
|
|
|
|
2.3
|
|
|
|
14.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross realized gains on sales
|
|
|
12.0
|
|
|
|
9.2
|
|
|
|
19.3
|
|
|
|
24.8
|
|
Gross realized losses on sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
|
(12.7
|
)
|
|
|
(3.1
|
)
|
|
|
(14.9
|
)
|
|
|
(6.1
|
)
|
Marketable equity securities, trading
|
|
|
(1.0
|
)
|
|
|
(5.3
|
)
|
|
|
(5.3
|
)
|
|
|
(5.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross realized losses on sales
|
|
|
(13.7
|
)
|
|
|
(8.4
|
)
|
|
|
(20.2
|
)
|
|
|
(11.7
|
)
|
Impairments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
|
(17.4
|
)
|
|
|
(23.3
|
)
|
|
|
(73.7
|
)
|
|
|
(61.7
|
)
|
Gains (losses) on trading securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross gains
|
|
|
22.6
|
|
|
|
14.9
|
|
|
|
36.5
|
|
|
|
12.2
|
|
Gross losses
|
|
|
(0.5
|
)
|
|
|
(50.5
|
)
|
|
|
(7.9
|
)
|
|
|
(52.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net gains (losses) on trading securities
|
|
|
22.1
|
|
|
|
(35.6
|
)
|
|
|
28.6
|
|
|
|
(40.2
|
)
|
Other, including gains (losses) on calls and redemptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities(1)
|
|
|
7.6
|
|
|
|
(3.6
|
)
|
|
|
6.9
|
|
|
|
(8.5
|
)
|
Marketable equity securities, trading
|
|
|
(0.8
|
)
|
|
|
(2.4
|
)
|
|
|
0.3
|
|
|
|
(2.4
|
)
|
Other
|
|
|
1.5
|
|
|
|
(0.3
|
)
|
|
|
9.8
|
|
|
|
(3.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other
|
|
|
8.3
|
|
|
|
(6.3
|
)
|
|
|
17.0
|
|
|
|
(14.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment gains (losses)
|
|
$
|
11.3
|
|
|
$
|
(64.4
|
)
|
|
$
|
(29.0
|
)
|
|
$
|
(103.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The Company uses the fair value option for its investments in
convertible fixed maturities. The fair value of these securities
was $55.3 and $50.5 as of September 30, 2009 and
December 31, 2008, respectively. The Company recorded gains
(losses) in net realized investment gains (losses) related to
changes in fair value of these securities of $6.3 and $(2.1) for
the three months ended September 30, 2009 and 2008,
respectively, and $10.0 and $(6.8) for the nine months ended
September 30, 2009 and 2008, respectively. These realized
gains (losses) are included in Other-fixed maturities. |
Other-Than-Temporary
Impairments
Investments are considered to be impaired when a decline in fair
value is judged to be
other-than-temporary.
The Companys review of investment securities includes both
quantitative and qualitative criteria. Quantitative criteria
include the length of time and amount that each security is in
an unrealized loss position and, for fixed maturities, whether
expected future cash flows indicate a credit loss exists.
The Companys review of its fixed maturity and
available-for-sale
marketable equity securities for impairments includes an
analysis of the gross unrealized losses by three categories of
securities: (i) securities where the estimated fair value
has declined and remained below cost or amortized cost by less
than 20%, (ii) securities where the estimated fair value
has declined and remained below cost or amortized cost by 20% or
more for less than six months and (iii) securities where
the estimated fair value has declined and remained
F-58
NOTES TO
UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in millions, unless otherwise
stated)
below cost or amortized cost by 20% or more for six months or
longer. While all securities are monitored for impairment, the
Companys experience indicates that the first category does
not represent a significant risk of impairment and, often, fair
values recover over time as the factors that caused the declines
improve. In times of economic turbulence, such as those of 2008
and 2009, securities in category (ii) represent a
significant risk. Securities in category (iii) are always
considered to represent a significant risk. The Company performs
a qualitative analysis by issuer to identify securities in
category (i) that should be further evaluated for OTTI.
If the value of a security falls into category (ii) or
(iii), the Company analyzes the decrease in fair value to
determine whether it is an
other-than-temporary
decline in value. To make this determination for each security,
the Company considers, among other factors:
|
|
|
|
|
Extent and duration of the decline in fair value below cost or
amortized cost;
|
|
|
|
The financial condition and near-term prospects of the issuer of
the security, including any specific events that may affect its
operations or earnings potential;
|
|
|
|
Any downgrades of the security by a rating agency;
|
|
|
|
Any reduction or elimination of dividends or nonpayment of
scheduled interest payments;
|
|
|
|
Other indications that a credit loss has occurred; and
|
|
|
|
For fixed maturities, the Companys intent to sell the
security or whether it is more likely than not the Company will
be required to sell the security prior to recovery of its
amortized cost, considering any regulatory developments and the
Companys liquidity needs.
|
Based on the analysis, the Company makes a judgment as to
whether the loss is
other-than-temporary.
The Companys
available-for-sale
marketable equity securities consist primarily of non-redeemable
preferred stock, which are evaluated similarly to fixed
maturities.
For fixed maturities, the Company implemented new accounting
guidance effective January 1, 2009. If the Company intends
to sell a security or it is more-likely-than-not it will be
required to sell a security before recovery of its amortized
cost basis and the fair value of the security is below amortized
cost, an OTTI has occurred and the amortized cost is written
down to current fair value, with a corresponding charge to net
realized investment gains (losses) in the consolidated
statements of income. If the Company does not intend to sell a
security or believes it is not more likely than not it will be
required to sell a security before recovery of its amortized
cost basis, but the present value of the cash flows expected to
be collected is less than the amortized cost of the security
(that is, a credit loss exists), the Company concludes that an
OTTI has occurred and the amortized cost is written down to the
discounted estimated recovery value with a corresponding charge
to net realized investment gains (losses) in the consolidated
statements of income, as this is deemed the credit portion of
the OTTI. The remainder of the decline in fair value is recorded
in other comprehensive income (loss) in the consolidated
statements of stockholders equity, as this is considered
the portion of the impairment due to other, non-credit factors.
When assessing the Companys intent to sell a fixed
maturity or if it is more likely than not it will be required to
sell a fixed maturity before recovery of its cost basis, the
Company evaluates facts and circumstances including, but not
limited to, decisions to reposition its security portfolio,
sales of securities to meet cash flow needs and sales of
securities to capitalize on favorable pricing. In order to
determine the amount of the credit loss for a fixed maturity,
the Company calculates the recovery value by performing a
discounted cash flow analysis based on the current expectations
of future cash flows it expects to recover. The discount rate is
the effective interest rate implicit in the underlying fixed
maturity. The effective interest rate is the original yield, or
the coupon if the security was previously impaired. See the
discussion below for additional information on the methodology
and significant inputs, by security type, used to determine the
amount of a credit loss.
F-59
NOTES TO
UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in millions, unless otherwise
stated)
In periods subsequent to the recognition of an OTTI, the
security is accounted for as if it had been purchased on the
measurement date of the OTTI, with a par value equal to the
expected principal to be recovered. Therefore, for fixed
maturity securities, the revised discount or reduced premium is
reflected in net investment income over the contractual term of
the investment in a manner that produces a constant effective
yield.
Determination
of Credit Losses on Corporate Securities
To determine recovery value of a corporate security, the Company
performs an analysis related to the underlying issuer including,
but not limited to, the following:
|
|
|
|
|
Fundamentals of the issuer to determine what the Company would
recover if the issuer were to file bankruptcy versus the price
at which the market is trading;
|
|
|
|
Fundamentals of the industry in which the issuer operates;
|
|
|
|
Earnings multiples for the given industry or sector of the
industry that the underlying issuer operates within, divided by
the outstanding debt to determine an expected recovery value of
the security in the case of a liquidation;
|
|
|
|
Expected cash flows of the issuer;
|
|
|
|
Expectations regarding defaults and recovery rates;
|
|
|
|
Changes to the rating of the security by a rating
agency; and
|
|
|
|
Additional market information.
|
Determination
of Credit Losses on Mortgage-backed Securities
To determine recovery value of a mortgage-backed security,
including residential, commercial and other asset-backed
securities, the Company performs an analysis related to the
underlying issuer including, but not limited to, the following:
|
|
|
|
|
Discounted cash flow analysis based on the current and future
cash flows the Company expects to recover;
|
|
|
|
Level of creditworthiness;
|
|
|
|
Delinquency ratios and
loan-to-value
ratios;
|
|
|
|
Average cumulative collateral loss, vintage year and level of
subordination;
|
|
|
|
Susceptibility to fair value fluctuations due to changes in the
interest rate environment;
|
|
|
|
Susceptibility to reinvestment risk in cases where market yields
are lower than the book yield earned;
|
|
|
|
Susceptibility to reinvestment risk in cases where market yields
are higher than the book yields earned and the Companys
expectation of the sale of such security; and
|
|
|
|
Susceptibility to variability of prepayments.
|
F-60
NOTES TO
UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in millions, unless otherwise
stated)
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:
|
|
|
|
|
|
|
|
|
|
|
For the Three
|
|
|
For the Nine
|
|
|
|
Months Ended
|
|
|
Months Ended
|
|
|
|
September 30, 2009
|
|
|
September 30, 2009
|
|
|
Balance, beginning of the period
|
|
$
|
74.4
|
|
|
$
|
73.0
|
|
Increases recognized in the current period:
|
|
|
|
|
|
|
|
|
For which an OTTI was not previously recognized
|
|
|
14.1
|
|
|
|
35.4
|
|
Recognized in the current period for which an OTTI was
previously recognized
|
|
|
1.5
|
|
|
|
12.1
|
|
Decreases attributable to:
|
|
|
|
|
|
|
|
|
Securities sold or paid down during the period
|
|
|
(18.7
|
)
|
|
|
(26.4
|
)
|
Previously recognized credit losses on securities impaired
during the period due to a change in intent to sell(1)
|
|
|
(0.3
|
)
|
|
|
(23.1
|
)
|
|
|
|
|
|
|
|
|
|
Balance, end of the period
|
|
$
|
71.0
|
|
|
$
|
71.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
|
Fair
Value of Financial Instruments
|
The Company has categorized its financial instruments, based on
the priority of the inputs to the valuation technique, into the
three-level fair value hierarchy. The fair value hierarchy gives
the highest priority to quoted prices in active markets for
identical assets or liabilities (Level 1) and the
lowest priority to unobservable inputs (Level 3). The level
in the fair value hierarchy within which the fair value
measurement falls is determined based on the lowest-level input
that is significant to the fair value measurement. The
Companys financial assets recorded at fair value on the
consolidated balance sheets are categorized as follows:
|
|
|
|
|
Level 1 Unadjusted quoted prices in
active markets for identical instruments. Primarily consists of
financial instruments whose value is based on quoted market
prices, such as exchange-traded marketable equity securities and
actively traded mutual fund investments.
|
|
|
|
Level 2 Quoted prices for similar
instruments in active markets; quoted prices for identical or
similar instruments in markets that are not active; and
model-derived valuations whose inputs are observable or whose
significant value drivers are observable.
|
This level includes those financial instruments that are valued
using industry-standard pricing methodologies, models, or other
valuation methodologies. These models are primarily
industry-standard models that consider various inputs, such as
interest rate and credit spread for the underlying financial
instruments. All significant inputs are observable, or 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 maturity
securities, government or agency securities, and certain
mortgage-backed and asset-backed securities.
|
|
|
|
|
Level 3 Instruments whose significant
value drivers are unobservable. This comprises financial
instruments for which fair value is estimated based on
industry-standard pricing
|
F-61
NOTES TO
UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in millions, unless otherwise
stated)
|
|
|
|
|
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 nonbinding broker quotes. This
category primarily consists of certain less liquid fixed
maturities, investments in hedge funds and private equity funds,
corporate private placement securities, and trading securities
where the Company cannot corroborate the significant valuation
inputs with market observable data.
|
The following table presents the financial instruments carried
at fair value under the valuation hierarchy, as described above,
for assets accounted for at fair value on a recurring basis. The
Company has no financial liabilities accounted for at fair value
on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2009
|
|
|
|
Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Level 3 Percent
|
|
|
Types of Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities,
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies
|
|
$
|
45.7
|
|
|
$
|
|
|
|
$
|
45.7
|
|
|
$
|
|
|
|
|
|
|
State and political subdivisions
|
|
|
484.9
|
|
|
|
|
|
|
|
477.7
|
|
|
|
7.2
|
|
|
|
0.0
|
%
|
Foreign governments
|
|
|
28.2
|
|
|
|
|
|
|
|
28.2
|
|
|
|
|
|
|
|
|
|
Corporate securities
|
|
|
12,414.0
|
|
|
|
|
|
|
|
11,508.9
|
|
|
|
905.1
|
|
|
|
4.6
|
|
Residential mortgage-backed securities
|
|
|
3,536.6
|
|
|
|
|
|
|
|
3,270.5
|
|
|
|
266.1
|
|
|
|
1.4
|
|
Commercial mortgage-backed securities
|
|
|
1,873.4
|
|
|
|
|
|
|
|
1,850.1
|
|
|
|
23.3
|
|
|
|
0.1
|
|
Other debt obligations
|
|
|
159.5
|
|
|
|
|
|
|
|
146.3
|
|
|
|
13.2
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities,
available-for-sale
|
|
|
18,542.3
|
|
|
|
|
|
|
|
17,327.4
|
|
|
|
1,214.9
|
|
|
|
6.2
|
|
Marketable equity securities,
available-for-sale
|
|
|
35.4
|
|
|
|
32.9
|
|
|
|
|
|
|
|
2.5
|
|
|
|
0.0
|
|
Marketable equity securities, trading
|
|
|
140.6
|
|
|
|
140.3
|
|
|
|
|
|
|
|
0.3
|
|
|
|
0.0
|
|
Short-term investments
|
|
|
2.5
|
|
|
|
2.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in limited partnerships(1)
|
|
|
46.6
|
|
|
|
|
|
|
|
|
|
|
|
46.6
|
|
|
|
0.2
|
|
Other invested assets
|
|
|
6.1
|
|
|
|
|
|
|
|
|
|
|
|
6.1
|
|
|
|
0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
18,773.5
|
|
|
$
|
175.7
|
|
|
$
|
17,327.4
|
|
|
$
|
1,270.4
|
|
|
|
6.4
|
|
Separate account assets
|
|
|
818.6
|
|
|
|
818.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
19,592.1
|
|
|
$
|
994.3
|
|
|
$
|
17,327.4
|
|
|
$
|
1,270.4
|
|
|
|
6.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As of September 30, 2009, this amount included investments
in hedge funds and private equity funds. |
F-62
NOTES TO
UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in millions, unless otherwise
stated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008
|
|
|
|
Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Level 3 Percent
|
|
|
Types of Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities,
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies
|
|
$
|
156.8
|
|
|
$
|
|
|
|
$
|
156.8
|
|
|
$
|
|
|
|
|
|
|
State and political subdivisions
|
|
|
424.9
|
|
|
|
|
|
|
|
418.6
|
|
|
|
6.3
|
|
|
|
0.0
|
%
|
Foreign governments
|
|
|
34.6
|
|
|
|
|
|
|
|
34.6
|
|
|
|
|
|
|
|
|
|
Corporate securities
|
|
|
9,306.5
|
|
|
|
|
|
|
|
8,674.9
|
|
|
|
631.6
|
|
|
|
4.0
|
|
Residential mortgage-backed securities
|
|
|
3,126.3
|
|
|
|
|
|
|
|
3,126.3
|
|
|
|
|
|
|
|
|
|
Commercial mortgage-backed securities
|
|
|
1,675.0
|
|
|
|
|
|
|
|
1,650.6
|
|
|
|
24.4
|
|
|
|
0.2
|
|
Other debt obligations
|
|
|
163.5
|
|
|
|
|
|
|
|
151.5
|
|
|
|
12.0
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities,
available-for-sale
|
|
|
14,887.6
|
|
|
|
|
|
|
|
14,213.3
|
|
|
|
674.3
|
|
|
|
4.3
|
|
Marketable equity securities,
available-for-sale
|
|
|
38.1
|
|
|
|
38.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable equity securities, trading
|
|
|
106.3
|
|
|
|
106.1
|
|
|
|
|
|
|
|
0.2
|
|
|
|
0.0
|
|
Short-term investments
|
|
|
9.4
|
|
|
|
7.2
|
|
|
|
2.2
|
|
|
|
|
|
|
|
|
|
Investments in limited partnerships(1)
|
|
|
56.3
|
|
|
|
|
|
|
|
|
|
|
|
56.3
|
|
|
|
0.4
|
|
Other invested assets
|
|
|
2.4
|
|
|
|
|
|
|
|
|
|
|
|
2.4
|
|
|
|
0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
15,100.1
|
|
|
$
|
151.4
|
|
|
$
|
14,215.5
|
|
|
$
|
733.2
|
|
|
|
4.7
|
|
Separate account assets
|
|
|
716.2
|
|
|
|
716.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
15,816.3
|
|
|
$
|
867.6
|
|
|
$
|
14,215.5
|
|
|
$
|
733.2
|
|
|
|
4.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As of December 31, 2008, this amount included investments
in hedge funds and private equity 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
September 30, 2009 and December 31, 2008, pricing services
provided prices for 93.5% and 95.1%, respectively, of the
Companys fixed maturities. Prices received from the
pricing services are not adjusted and multiple prices for these
securities are not obtained. The pricing services provide prices
where observable inputs are available. The Companys
pricing services utilize evaluated pricing models that vary by
asset class. The standard inputs for security evaluations
include benchmark yields, reported trades, broker/dealer quotes,
issuer spreads, two-sided markets, benchmark securities, bids,
offers and other reference data, including market research
publications. Because many fixed maturities do not trade on a
daily basis, evaluated pricing applications apply available
information through processes, such as benchmark curves,
benchmarking of like securities, sector groupings and matrix
pricing, to prepare evaluations. In addition, the pricing
services use models and processes to develop prepayment and
interest rate scenarios. These models take into account market
convention. If sufficient objectively verifiable information
about a securitys valuation is not available, the pricing
services will not provide a valuation for the security until it
is able to obtain such information.
The Company performs analysis on the prices received from the
pricing services to ensure that the prices represent a
reasonable estimate of fair value and gains assurance on the
overall reasonableness and consistent application of input
assumptions, valuation methodologies and compliance with
accounting standards for fair value determination. This analysis
is performed through various processes including
F-63
NOTES TO
UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in millions, unless otherwise
stated)
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 are any significant differences between the market price
used to value the security prior to sale and the actual sales
prices.
In situations where the Company is unable to obtain sufficient
market-observable information upon which to estimate the fair
value of a particular security, fair values are determined using
internal pricing models that typically utilize significant,
unobservable market inputs or inputs that are difficult to
corroborate with observable market data. When there is not
sufficient observable market information and the security is
priced using internal pricing models, which is generally the
case for private placement securities and other securities the
pricing services are unable to price, it is considered a Level 3
measurement.
As of September 30, 2009 and December 31, 2008, the Company had
$875.9, or 4.7%, and $632.2, or 4.0%, respectively, of its fixed
maturities invested in private placement securities. The
valuation of certain private placement securities requires
significant judgment by management due to the absence of quoted
market prices, the inherent lack of liquidity and the long-term
nature of such assets. The fair values of these assets are
determined using a discounted cash flow approach. The valuation
model requires the use of inputs that are not market-observable
and involve significant judgment. The discount rate is based on
the current Treasury curve adjusted for credit and liquidity
factors. The appropriate illiquidity adjustment is estimated
based on illiquidity spreads observed in transactions involving
other similar securities. The use of significant unobservable
inputs in determining the fair value of the Companys
investments in private placement securities resulted in the
classification of $783.9, or 89.5%, and $583.2, or 92.2%, as
Level 3 measurements, as of September 30, 2009 and December 31,
2008, respectively.
Marketable
Equity Securities
Marketable equity securities consist primarily of investments in
common stock and certain nonredeemable preferred stock and
mutual fund assets, which consist of investments in publicly
traded companies and actively traded mutual fund investments.
The fair values of the Companys marketable equity
securities are based on quoted market prices in active markets
for identical assets and the vast majority are classified as
Level 1.
Investments
in Limited Partnerships
The fair value of the Companys investments in hedge funds
and private equity 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. In circumstances where the partnership
NAV is deemed to differ from fair value due to illiquidity or
other factors, the NAV is adjusted accordingly. As of
September 30, 2009 and December 31, 2008, there were
no factors present that would require an adjustment to the NAV.
The Company classifies these securities as Level 3.
Separate
Account Assets
Separate account assets are primarily invested in mutual funds,
which are included in Level 1.
F-64
NOTES TO
UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in millions, unless otherwise
stated)
Rollforward
of Financial Instruments Measured at Fair Value on a Recurring
Basis Using Significant Unobservable Inputs
(Level 3)
The following tables present additional information about assets
measured at fair value on a recurring basis and for which the
Company utilized significant unobservable
(Level 3) inputs to determine fair value for the three
and nine months ended September 30, 2009 and 2008,
respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers in
|
|
|
|
|
|
Included in:
|
|
|
|
|
|
|
|
|
|
Balance as
|
|
|
|
|
|
|
|
|
and/or
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
Balance as of
|
|
|
|
of July 1,
|
|
|
|
|
|
|
|
|
(Out) of
|
|
|
|
|
|
Net
|
|
|
Comprehensive
|
|
|
Realized
|
|
|
September 30,
|
|
|
|
2009
|
|
|
Purchases
|
|
|
Sales
|
|
|
Level 3(1)
|
|
|
Other
|
|
|
Income(2)
|
|
|
Income
|
|
|
Gains(2)
|
|
|
2009
|
|
|
Types of Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and political subdivisions
|
|
$
|
7.1
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(0.6
|
)
|
|
$
|
|
|
|
$
|
0.7
|
|
|
$
|
|
|
|
$
|
7.2
|
|
Corporate securities(3)
|
|
|
747.1
|
|
|
|
34.4
|
|
|
|
(4.0
|
)
|
|
|
7.8
|
|
|
|
37.9
|
|
|
|
|
|
|
|
81.9
|
|
|
|
|
|
|
|
905.1
|
|
Residential mortgage-backed securities
|
|
|
61.1
|
|
|
|
206.6
|
|
|
|
|
|
|
|
(4.3
|
)
|
|
|
0.2
|
|
|
|
|
|
|
|
2.5
|
|
|
|
|
|
|
|
266.1
|
|
Commercial mortgage-backed securities
|
|
|
23.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.6
|
)
|
|
|
|
|
|
|
0.8
|
|
|
|
|
|
|
|
23.3
|
|
Other debt obligations
|
|
|
12.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
0.7
|
|
|
|
|
|
|
|
13.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities,
available-for-sale
|
|
|
851.1
|
|
|
|
241.0
|
|
|
|
(4.0
|
)
|
|
|
3.5
|
|
|
|
36.7
|
|
|
|
|
|
|
|
86.6
|
|
|
|
|
|
|
|
1,214.9
|
|
Marketable equity securities,
available-for-sale
|
|
|
1.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.3
|
|
|
|
|
|
|
|
0.4
|
|
|
|
|
|
|
|
2.5
|
|
Marketable equity securities, trading
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
0.3
|
|
Investments in limited partnerships
|
|
|
63.2
|
|
|
|
2.2
|
|
|
|
(20.1
|
)
|
|
|
|
|
|
|
|
|
|
|
0.3
|
|
|
|
|
|
|
|
1.0
|
|
|
|
46.6
|
|
Other invested assets
|
|
|
1.2
|
|
|
|
3.0
|
|
|
|
|
|
|
|
|
|
|
|
0.2
|
|
|
|
1.7
|
|
|
|
|
|
|
|
|
|
|
|
6.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Level 3
|
|
$
|
917.5
|
|
|
$
|
246.2
|
|
|
$
|
(24.1
|
)
|
|
$
|
3.5
|
|
|
$
|
37.2
|
|
|
$
|
2.1
|
|
|
$
|
87.0
|
|
|
$
|
1.0
|
|
|
$
|
1,270.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Gain (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers in
|
|
|
|
|
|
Included in:
|
|
|
|
|
|
|
|
|
|
Balance as
|
|
|
|
|
|
|
|
|
and/or
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
Balance as of
|
|
|
|
of January 1,
|
|
|
|
|
|
|
|
|
(Out) of
|
|
|
|
|
|
Net
|
|
|
Comprehensive
|
|
|
Realized
|
|
|
September 30,
|
|
|
|
2009
|
|
|
Purchases
|
|
|
Sales
|
|
|
Level 3(1)
|
|
|
Other
|
|
|
Income(2)
|
|
|
Income
|
|
|
Losses(2)
|
|
|
2009
|
|
|
Types of Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and political subdivisions
|
|
$
|
6.3
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(0.7
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1.6
|
|
|
$
|
|
|
|
$
|
7.2
|
|
Corporate securities(3)
|
|
|
631.6
|
|
|
|
147.7
|
|
|
|
(4.0
|
)
|
|
|
(14.3
|
)
|
|
|
12.0
|
|
|
|
|
|
|
|
136.1
|
|
|
|
(4.0
|
)
|
|
|
905.1
|
|
Residential mortgage-backed securities
|
|
|
|
|
|
|
263.5
|
|
|
|
|
|
|
|
|
|
|
|
0.2
|
|
|
|
|
|
|
|
2.4
|
|
|
|
|
|
|
|
266.1
|
|
Commercial mortgage-backed securities
|
|
|
24.4
|
|
|
|
|
|
|
|
|
|
|
|
(0.7
|
)
|
|
|
(2.2
|
)
|
|
|
|
|
|
|
1.8
|
|
|
|
|
|
|
|
23.3
|
|
Other debt obligations
|
|
|
12.0
|
|
|
|
|
|
|
|
|
|
|
|
0.7
|
|
|
|
(1.5
|
)
|
|
|
|
|
|
|
2.0
|
|
|
|
|
|
|
|
13.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities,
available-for-sale
|
|
|
674.3
|
|
|
|
411.2
|
|
|
|
(4.0
|
)
|
|
|
(15.0
|
)
|
|
|
8.5
|
|
|
|
|
|
|
|
143.9
|
|
|
|
(4.0
|
)
|
|
|
1,214.9
|
|
Marketable equity securities,
available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.2
|
|
|
|
0.3
|
|
|
|
|
|
|
|
(3.0
|
)
|
|
|
|
|
|
|
2.5
|
|
Marketable equity securities, trading
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
0.3
|
|
Investments in limited partnerships
|
|
|
56.3
|
|
|
|
4.6
|
|
|
|
(23.0
|
)
|
|
|
|
|
|
|
|
|
|
|
9.5
|
|
|
|
|
|
|
|
(0.8
|
)
|
|
|
46.6
|
|
Other invested assets
|
|
|
2.4
|
|
|
|
3.0
|
|
|
|
|
|
|
|
|
|
|
|
0.3
|
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
6.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Level 3
|
|
$
|
733.2
|
|
|
$
|
418.8
|
|
|
$
|
(27.0
|
)
|
|
$
|
(9.8
|
)
|
|
$
|
9.1
|
|
|
$
|
10.0
|
|
|
$
|
140.9
|
|
|
$
|
(4.8
|
)
|
|
$
|
1,270.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 $8.2 and $14.7
for the three and nine months ended |
F-65
NOTES TO
UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in millions, unless otherwise
stated)
|
|
|
|
|
September 30, 2009, respectively. Gross transfers out of
Level 3 were $4.7 and $24.5 for the three and nine months
ended September 30, 2009, respectively. |
|
(2) |
|
Realized and unrealized gains and losses for investments in
limited partnerships are included in net investment income. All
other realized and unrealized gains and losses are included in
realized gains (losses) on the income statement. |
|
(3) |
|
Other transactions for corporate securities include a tax free
exchange of $40.0, where a Level 2 bond, purchased in 2009,
was exchanged for a Level 3 bond from the same issuer
during the third quarter of 2009. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Gain (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers in
|
|
|
|
|
|
Included in:
|
|
|
|
|
|
|
|
|
|
Balance as
|
|
|
|
|
|
|
|
|
and/or
|
|
|
|
|
|
|
|
|
Other
|
|
|
Realized
|
|
|
Balance as of
|
|
|
|
of July 1,
|
|
|
|
|
|
|
|
|
(Out) of
|
|
|
|
|
|
Net
|
|
|
Comprehensive
|
|
|
Gains
|
|
|
September 30,
|
|
|
|
2008
|
|
|
Purchases
|
|
|
Sales
|
|
|
Level 3(1)
|
|
|
Other
|
|
|
Income(2)
|
|
|
Income
|
|
|
(Losses)(2)
|
|
|
2008
|
|
|
Types of Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and political subdivisions
|
|
$
|
7.5
|
|
|
$
|
22.0
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(1.8
|
)
|
|
$
|
|
|
|
$
|
27.7
|
|
Corporate securities
|
|
|
649.2
|
|
|
|
14.6
|
|
|
|
(4.0
|
)
|
|
|
22.4
|
|
|
|
(5.5
|
)
|
|
|
|
|
|
|
(29.8
|
)
|
|
|
(3.3
|
)
|
|
|
643.6
|
|
Residential mortgage-backed securities
|
|
|
80.6
|
|
|
|
3.9
|
|
|
|
|
|
|
|
(40.5
|
)
|
|
|
0.2
|
|
|
|
|
|
|
|
(1.7
|
)
|
|
|
|
|
|
|
42.5
|
|
Commercial mortgage-backed securities
|
|
|
36.9
|
|
|
|
|
|
|
|
|
|
|
|
5.3
|
|
|
|
(8.0
|
)
|
|
|
|
|
|
|
2.3
|
|
|
|
|
|
|
|
36.5
|
|
Other debt obligations
|
|
|
16.1
|
|
|
|
|
|
|
|
|
|
|
|
(1.7
|
)
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
(1.4
|
)
|
|
|
|
|
|
|
12.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities,
available-for-sale
|
|
|
790.3
|
|
|
|
40.5
|
|
|
|
(4.0
|
)
|
|
|
(14.5
|
)
|
|
|
(13.5
|
)
|
|
|
|
|
|
|
(32.4
|
)
|
|
|
(3.3
|
)
|
|
|
763.1
|
|
Marketable equity securities, trading
|
|
|
1.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.8
|
|
|
|
(1.7
|
)
|
|
|
|
|
|
|
|
|
|
|
1.4
|
|
Investments in limited partnerships
|
|
|
100.5
|
|
|
|
0.4
|
|
|
|
(2.8
|
)
|
|
|
|
|
|
|
|
|
|
|
(8.5
|
)
|
|
|
|
|
|
|
2.0
|
|
|
|
91.6
|
|
Other invested assets
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.4
|
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
(0.4
|
)
|
|
|
1.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Level 3
|
|
$
|
893.0
|
|
|
$
|
40.9
|
|
|
$
|
(6.8
|
)
|
|
$
|
(14.5
|
)
|
|
$
|
(10.3
|
)
|
|
$
|
(10.4
|
)
|
|
$
|
(32.4
|
)
|
|
$
|
(1.7
|
)
|
|
$
|
857.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Gain (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers in
|
|
|
|
|
|
Included in:
|
|
|
|
|
|
|
|
|
|
Balance as
|
|
|
|
|
|
|
|
|
and/or
|
|
|
|
|
|
|
|
|
Other
|
|
|
Realized
|
|
|
Balance as
|
|
|
|
of January 1,
|
|
|
|
|
|
|
|
|
(Out) of
|
|
|
|
|
|
Net
|
|
|
Comprehensive
|
|
|
Gains
|
|
|
of September 30,
|
|
|
|
2008
|
|
|
Purchases
|
|
|
Sales
|
|
|
Level 3(1)
|
|
|
Other
|
|
|
Income(2)
|
|
|
Income
|
|
|
(Losses)(2)
|
|
|
2008
|
|
|
Types of Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and political subdivisions
|
|
$
|
0.8
|
|
|
$
|
28.7
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(1.8
|
)
|
|
$
|
|
|
|
$
|
27.7
|
|
Corporate securities
|
|
|
632.4
|
|
|
|
61.7
|
|
|
|
(7.1
|
)
|
|
|
29.3
|
|
|
|
(14.5
|
)
|
|
|
|
|
|
|
(47.2
|
)
|
|
|
(11.0
|
)
|
|
|
643.6
|
|
Residential mortgage-backed securities
|
|
|
|
|
|
|
3.9
|
|
|
|
|
|
|
|
50.4
|
|
|
|
0.5
|
|
|
|
|
|
|
|
(12.3
|
)
|
|
|
|
|
|
|
42.5
|
|
Commercial mortgage-backed securities
|
|
|
49.6
|
|
|
|
|
|
|
|
|
|
|
|
0.6
|
|
|
|
(11.9
|
)
|
|
|
|
|
|
|
(1.2
|
)
|
|
|
(0.6
|
)
|
|
|
36.5
|
|
Other debt obligations
|
|
|
7.4
|
|
|
|
|
|
|
|
|
|
|
|
17.1
|
|
|
|
(0.6
|
)
|
|
|
|
|
|
|
(11.1
|
)
|
|
|
|
|
|
|
12.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities,
available-for-sale
|
|
|
690.2
|
|
|
|
94.3
|
|
|
|
(7.1
|
)
|
|
|
97.4
|
|
|
|
(26.5
|
)
|
|
|
|
|
|
|
(73.6
|
)
|
|
|
(11.6
|
)
|
|
|
763.1
|
|
Marketable equity securities, trading
|
|
|
0.5
|
|
|
|
1.1
|
|
|
|
(0.5
|
)
|
|
|
0.2
|
|
|
|
1.8
|
|
|
|
(1.7
|
)
|
|
|
|
|
|
|
|
|
|
|
1.4
|
|
Investments in limited partnerships
|
|
|
91.4
|
|
|
|
13.9
|
|
|
|
(2.9
|
)
|
|
|
|
|
|
|
|
|
|
|
(12.9
|
)
|
|
|
|
|
|
|
2.1
|
|
|
|
91.6
|
|
Other invested assets
|
|
|
4.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.8
|
|
|
|
(4.0
|
)
|
|
|
|
|
|
|
(0.7
|
)
|
|
|
1.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Level 3
|
|
$
|
786.7
|
|
|
$
|
109.3
|
|
|
$
|
(10.5
|
)
|
|
$
|
97.6
|
|
|
$
|
(22.9
|
)
|
|
$
|
(18.6
|
)
|
|
$
|
(73.6
|
)
|
|
$
|
(10.2
|
)
|
|
$
|
857.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-66
NOTES TO
UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in millions, unless otherwise
stated)
|
|
|
(1) |
|
Transfers into and/or out of Level 3 are reported as the
value as of the beginning of the period in which the transfer
occurs. Gross transfers into Level 3 were $34.2 and $111.8 for
the three and nine months ended September 30, 2008,
respectively. Gross transfers out of Level 3 were $48.7 and
$14.2 for the three and nine months ended September 30,
2008, respectively. |
|
(2) |
|
Realized and unrealized gains and losses for investments in
limited partnerships are included in net investment income. All
other realized and unrealized gains and losses are included in
realized gains (losses) on the income statement. |
The following table summarizes the carrying or reported values
and corresponding fair values of financial instruments subject
to disclosure requirements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
|
December 31, 2008
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
Amount
|
|
|
Value
|
|
|
Amount
|
|
|
Value
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
$
|
18,542.3
|
|
|
$
|
18,542.3
|
|
|
$
|
14,887.6
|
|
|
$
|
14,887.6
|
|
Marketable equity securities,
available-for-sale
|
|
|
35.4
|
|
|
|
35.4
|
|
|
|
38.1
|
|
|
|
38.1
|
|
Marketable equity securities, trading
|
|
|
140.6
|
|
|
|
140.6
|
|
|
|
106.3
|
|
|
|
106.3
|
|
Mortgage loans
|
|
|
1,095.2
|
|
|
|
1,076.5
|
|
|
|
988.7
|
|
|
|
907.6
|
|
Short-term investments
|
|
|
2.5
|
|
|
|
2.5
|
|
|
|
9.4
|
|
|
|
9.4
|
|
Investments in limited partnerships
|
|
|
133.4
|
|
|
|
134.8
|
|
|
|
138.3
|
|
|
|
140.2
|
|
Cash and cash equivalents
|
|
|
241.7
|
|
|
|
241.7
|
|
|
|
468.0
|
|
|
|
468.0
|
|
Securities lending collateral
|
|
|
31.4
|
|
|
|
31.4
|
|
|
|
105.7
|
|
|
|
105.7
|
|
Separate account assets
|
|
|
818.6
|
|
|
|
818.6
|
|
|
|
716.2
|
|
|
|
716.2
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds held under deposit contracts
|
|
|
13,735.7
|
|
|
|
14,148.9
|
|
|
|
11,987.9
|
|
|
|
10,972.2
|
|
Notes payable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Efficient Notes (CENts)
|
|
|
149.8
|
|
|
|
93.8
|
|
|
|
149.8
|
|
|
|
64.0
|
|
Senior notes
|
|
|
299.1
|
|
|
|
277.5
|
|
|
|
299.0
|
|
|
|
268.1
|
|
Securities lending payable
|
|
|
31.4
|
|
|
|
31.4
|
|
|
|
105.7
|
|
|
|
105.7
|
|
The fair values of mortgage loans are determined by discounting
the projected cash flows using the current rate at which the
loans would be made to borrowers with similar credit ratings and
for the same maturities.
Investments in limited partnerships are comprised of hedge
funds, private equity funds, and affordable housing projects and
state tax credit funds. Investments in limited partnerships
associated with hedge funds and private equity funds are carried
at fair value based on the NAV, as described previously.
Investments in limited partnerships associated with affordable
housing projects and state tax credit funds are carried at
amortized cost. Fair value is estimated based on the discounted
cash flows over the remaining life of the tax credits.
For cash and cash equivalents, the carrying value is a
reasonable estimate of fair value.
The Company reports funds held under deposit contracts related
to investment-type contracts at carrying value and estimates the
fair values of these contracts using an income approach based on
the present value of the discounted cash flows. Cash flows are
projected using prudent best estimates for lapses, mortality,
and expenses and discounted at a risk-free rate plus a
nonperformance risk spread.
F-67
NOTES TO
UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in millions, unless otherwise
stated)
The fair values of the Companys notes payable are based on
quoted market prices for similar instruments. The fair value
measurement assumes that liabilities are transferred to a market
participant of equal credit standing, without consideration for
any optional redemption feature.
The fair value of securities lending collateral is the cash and
non-cash collateral received by the custodian and held on the
Companys behalf, based on quoted market prices for similar
instruments. The carrying amount of securities lending payable
approximates fair value.
|
|
6.
|
Comprehensive
Income (Loss)
|
The components of comprehensive income (loss) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Net income (loss)
|
|
$
|
44.1
|
|
|
$
|
(4.8
|
)
|
|
$
|
96.2
|
|
|
$
|
27.0
|
|
Other comprehensive income (loss), net of taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in unrealized gains and losses on
available-for-sale
securities(1)
|
|
|
743.0
|
|
|
|
(487.5
|
)
|
|
|
1,191.7
|
|
|
|
(834.7
|
)
|
Reclassification adjustment for net realized investment (gains)
losses included in net income(2)
|
|
|
(6.4
|
)
|
|
|
41.7
|
|
|
|
25.2
|
|
|
|
64.9
|
|
Adjustment for deferred policy acquisition costs and deferred
sales inducements valuation allowance(3)
|
|
|
(68.5
|
)
|
|
|
12.7
|
|
|
|
(80.4
|
)
|
|
|
18.6
|
|
Other than temporary impairments on fixed maturities not related
to credit losses(4)
|
|
|
4.6
|
|
|
|
|
|
|
|
(38.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
672.7
|
|
|
|
(433.1
|
)
|
|
|
1,098.1
|
|
|
|
(751.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss)
|
|
$
|
716.8
|
|
|
$
|
(437.9
|
)
|
|
$
|
1,194.3
|
|
|
$
|
(724.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Net of taxes of $400.1, $(262.5), $641.7 and $(449.4) for the
three months ended September 30, 2009 and 2008 and the nine
months ended September 30, 2009 and 2008, respectively. |
|
(2) |
|
Net of taxes of $(3.4), $22.4, $13.6 and $34.9 for the three
months ended September 30, 2009 and 2008 and the nine
months ended September 30, 2009 and 2008, respectively. For
the three and nine months ended September 30, 2009, $22.0
(net of taxes of $11.8) and $22.9 (net of taxes of $12.2),
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 $(37.0), $6.9, $(43.3) and $10.0 for the three
months ended September 30, 2009 and 2008 and the nine
months ended September 30, 2009 and 2008, respectively. |
|
(4) |
|
Net of taxes of $2.5, $0, $(20.7) and $0 for the three months
ended September 30, 2009 and 2008 and the nine months ended
September 30, 2009 and 2008, respectively. |
F-68
NOTES TO
UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in millions, unless otherwise
stated)
|
|
7.
|
Deferred
Policy Acquisition Costs
|
The following table provides a reconciliation of the beginning
and ending balance for deferred policy acquisition costs:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Unamortized balance at beginning of period
|
|
$
|
219.5
|
|
|
$
|
129.9
|
|
Deferral of acquisition costs
|
|
|
123.2
|
|
|
|
110.6
|
|
Adjustments related to investment losses
|
|
|
9.1
|
|
|
|
4.8
|
|
Amortization related to other expenses
|
|
|
(36.4
|
)
|
|
|
(25.8
|
)
|
|
|
|
|
|
|
|
|
|
Unamortized balance at end of period
|
|
|
315.4
|
|
|
|
219.5
|
|
Accumulated effect of net unrealized investment (gains) losses
|
|
|
(74.6
|
)
|
|
|
28.0
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
240.8
|
|
|
$
|
247.5
|
|
|
|
|
|
|
|
|
|
|
|
|
8.
|
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:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Unamortized balance at beginning of period
|
|
$
|
33.0
|
|
|
$
|
17.2
|
|
Capitalizations
|
|
|
30.4
|
|
|
|
17.3
|
|
Adjustments related to investment losses
|
|
|
2.0
|
|
|
|
1.0
|
|
Amortization related to other expenses
|
|
|
(6.8
|
)
|
|
|
(2.5
|
)
|
|
|
|
|
|
|
|
|
|
Unamortized balance at end of period
|
|
|
58.6
|
|
|
|
33.0
|
|
Accumulated effect of net unrealized investment (gains) losses
|
|
|
(16.6
|
)
|
|
|
4.5
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
42.0
|
|
|
$
|
37.5
|
|
|
|
|
|
|
|
|
|
|
|
|
9.
|
Commitments
and Contingencies
|
Litigation
Because of the nature of the business, the Company is subject to
legal actions filed or threatened in the ordinary course of its
business operations. The Company does not expect that any such
litigation, pending or threatened, as of September 30,
2009, will have a material adverse effect on its consolidated
financial condition, future operating results or liquidity.
Leases
On August 1, 2009, the Company entered into a new service
agreement with a third party service provider to outsource the
majority of its information technology infrastructure,
effectively terminating the previous agreement with this vendor
which was scheduled to expire in July 2010. The initial term of
the new 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 contract years beginning
August 1, 2009.
F-69
NOTES TO
UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in millions, unless otherwise
stated)
Investments
in Limited Partnerships
On June 24, 2009, the Company invested in a new limited
partnership interest related to affordable housing projects. The
Company unconditionally committed to provide capital
contributions totaling $10.0. As of September 30, 2009 the
Company contributed $1.4 and is expected to contribute $8.6 over
the next four years. The present value of these unfunded
contributions is recorded in other liabilities.
Other
Commitments
At September 30, 2009 and December 31, 2008, unfunded
mortgage loan commitments were $17.4 and $9.0, respectively. The
Company had no other material commitments or contingencies at
September 30, 2009 and December 31, 2008.
The Company offers a broad range of products and services that
include group and individual insurance products, retirement
products and annuities. These operations are managed separately
as five reportable segments based on product groupings: Group,
Retirement Services, Income Annuities, Individual and Other.
The primary segment profitability measure that management uses
is segment pre-tax adjusted operating income (loss), which is
calculated by adjusting income (loss) from continuing operations
before federal income taxes to exclude net realized investment
gains (losses), and for the Retirement Services segment to
include the net realized investment gains (losses) on fixed
index annuities (FIA) options.
When evaluating segment pre-tax adjusted operating income (loss)
in the Retirement Services segment, management includes
the realized and unrealized investment gains (losses) from
options related to a FIA hedging program. This program consists
of buying S&P 500 Index call options. The Company uses
index options to hedge the equity return component of FIA
products. These options do not qualify as hedge instruments or
for hedge accounting treatment. The realized and unrealized gain
(losses) from the options is recorded in net realized investment
gains (losses). Since the interest incurred on the
Companys FIA products is included as a component of
interest credited, it is more meaningful to evaluate results
inclusive of the results of the hedge program.
|
|
|
|
|
Group. Group offers medical stop-loss insurance,
limited medical benefit plans, group life insurance, accidental
death and dismemberment insurance, and disability insurance
mainly to employer groups of 50 to 5,000 individuals. Group also
offers managing general underwriter services through Medical
Risk Managers Holdings, Inc.
|
|
|
|
Retirement Services. Retirement Services offers
fixed and variable deferred annuities, including tax-sheltered
annuities, IRAs and group annuities, to qualified retirement
plans, including Section 401(k) and 457 plans.
|
|
|
|
Income Annuities. Income Annuities offers single
premium immediate annuities, or SPIAs, for customers seeking a
reliable source of retirement income and structured settlement
annuities to fund third party personal injury settlements.
|
|
|
|
Individual. Individual offers a wide array of term,
universal and variable life insurance products, as well as
bank-owned life insurance, or BOLI.
|
|
|
|
Other. This segment consists of unallocated
corporate income, composed primarily of investment income on
unallocated surplus, unallocated corporate expenses, interest
expense on debt, the results of small, non-insurance businesses
that are managed outside of the operating segments, and
intersegment elimination entries.
|
F-70
NOTES TO
UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in millions, unless otherwise
stated)
The Company allocates capital and related investment income to
each segment using a risk-based capital formula.
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2009
|
|
|
|
|
|
|
Retirement
|
|
|
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Group
|
|
|
Services
|
|
|
Annuities
|
|
|
Individual
|
|
|
Other
|
|
|
Total
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
|
|
$
|
106.5
|
|
|
$
|
0.1
|
|
|
$
|
|
|
|
$
|
35.5
|
|
|
$
|
|
|
|
$
|
142.1
|
|
Net investment income
|
|
|
4.5
|
|
|
|
103.5
|
|
|
|
104.7
|
|
|
|
66.9
|
|
|
|
4.0
|
|
|
|
283.6
|
|
Other revenues
|
|
|
4.2
|
|
|
|
4.5
|
|
|
|
0.1
|
|
|
|
3.1
|
|
|
|
2.8
|
|
|
|
14.7
|
|
Net realized investment gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other-than-temporary
impairment losses on securities
|
|
|
(3.4
|
)
|
|
|
(6.3
|
)
|
|
|
(24.4
|
)
|
|
|
(3.9
|
)
|
|
|
(6.1
|
)
|
|
|
(44.1
|
)
|
Less: portion of losses recognized in other comprehensive income
|
|
|
2.7
|
|
|
|
1.9
|
|
|
|
14.9
|
|
|
|
2.5
|
|
|
|
4.7
|
|
|
|
26.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net impairment losses recognized in earnings
|
|
|
(0.7
|
)
|
|
|
(4.4
|
)
|
|
|
(9.5
|
)
|
|
|
(1.4
|
)
|
|
|
(1.4
|
)
|
|
|
(17.4
|
)
|
Other net realized investment gains (losses)
|
|
|
(0.8
|
)
|
|
|
5.3
|
|
|
|
28.4
|
|
|
|
(2.1
|
)
|
|
|
(2.1
|
)
|
|
|
28.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net realized investment gains (losses)
|
|
|
(1.5
|
)
|
|
|
0.9
|
|
|
|
18.9
|
|
|
|
(3.5
|
)
|
|
|
(3.5
|
)
|
|
|
11.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
113.7
|
|
|
|
109.0
|
|
|
|
123.7
|
|
|
|
102.0
|
|
|
|
3.3
|
|
|
|
451.7
|
|
Benefits and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder benefits and claims
|
|
|
71.7
|
|
|
|
(1.3
|
)
|
|
|
|
|
|
|
15.2
|
|
|
|
|
|
|
|
85.6
|
|
Interest credited
|
|
|
|
|
|
|
70.5
|
|
|
|
90.7
|
|
|
|
60.0
|
|
|
|
(0.7
|
)
|
|
|
220.5
|
|
Other underwriting and operating expenses
|
|
|
25.6
|
|
|
|
13.6
|
|
|
|
5.4
|
|
|
|
13.4
|
|
|
|
3.7
|
|
|
|
61.7
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.9
|
|
|
|
7.9
|
|
Amortization of deferred policy acquisition costs
|
|
|
1.9
|
|
|
|
10.5
|
|
|
|
0.4
|
|
|
|
1.0
|
|
|
|
|
|
|
|
13.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses
|
|
|
99.2
|
|
|
|
93.3
|
|
|
|
96.5
|
|
|
|
89.6
|
|
|
|
10.9
|
|
|
|
389.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pre-tax income (loss)
|
|
|
14.5
|
|
|
|
15.7
|
|
|
|
27.2
|
|
|
|
12.4
|
|
|
|
(7.6
|
)
|
|
|
62.2
|
|
Less: Net realized investment gains (losses)
|
|
|
(1.5
|
)
|
|
|
0.9
|
|
|
|
18.9
|
|
|
|
(3.5
|
)
|
|
|
(3.5
|
)
|
|
|
11.3
|
|
Add: Net realized and unrealized gains (losses) on FIA options
|
|
|
|
|
|
|
1.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pre-tax adjusted operating income (loss)
|
|
$
|
16.0
|
|
|
$
|
16.2
|
|
|
$
|
8.3
|
|
|
$
|
15.9
|
|
|
$
|
(4.1
|
)
|
|
$
|
52.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-71
NOTES TO
UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in millions, unless otherwise
stated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2008
|
|
|
|
|
|
|
Retirement
|
|
|
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Group
|
|
|
Services
|
|
|
Annuities
|
|
|
Individual
|
|
|
Other
|
|
|
Total
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
|
|
$
|
113.2
|
|
|
$
|
0.1
|
|
|
$
|
|
|
|
$
|
34.8
|
|
|
$
|
|
|
|
$
|
148.1
|
|
Net investment income
|
|
|
4.2
|
|
|
|
67.9
|
|
|
|
108.4
|
|
|
|
64.3
|
|
|
|
(3.2
|
)
|
|
|
241.6
|
|
Other revenues
|
|
|
4.7
|
|
|
|
5.1
|
|
|
|
0.2
|
|
|
|
3.4
|
|
|
|
3.0
|
|
|
|
16.4
|
|
Net realized investment gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other-than-temporary
impairment losses on securities
|
|
|
(0.1
|
)
|
|
|
(2.0
|
)
|
|
|
(3.3
|
)
|
|
|
(9.8
|
)
|
|
|
(8.1
|
)
|
|
|
(23.3
|
)
|
Less: portion of losses recognized in other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net impairment losses recognized in earnings
|
|
|
(0.1
|
)
|
|
|
(2.0
|
)
|
|
|
(3.3
|
)
|
|
|
(9.8
|
)
|
|
|
(8.1
|
)
|
|
|
(23.3
|
)
|
Other net realized investment gains (losses)
|
|
|
|
|
|
|
(1.6
|
)
|
|
|
(33.8
|
)
|
|
|
(1.0
|
)
|
|
|
(4.7
|
)
|
|
|
(41.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment gains (losses)
|
|
|
(0.1
|
)
|
|
|
(3.6
|
)
|
|
|
(37.1
|
)
|
|
|
(10.8
|
)
|
|
|
(12.8
|
)
|
|
|
(64.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
122.0
|
|
|
|
69.5
|
|
|
|
71.5
|
|
|
|
91.7
|
|
|
|
(13.0
|
)
|
|
|
341.7
|
|
Benefits and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder benefits and claims
|
|
|
67.3
|
|
|
|
(2.4
|
)
|
|
|
|
|
|
|
14.8
|
|
|
|
|
|
|
|
79.7
|
|
Interest credited
|
|
|
|
|
|
|
44.5
|
|
|
|
90.5
|
|
|
|
57.8
|
|
|
|
(0.7
|
)
|
|
|
192.1
|
|
Other underwriting and operating expenses
|
|
|
27.5
|
|
|
|
14.2
|
|
|
|
5.3
|
|
|
|
14.7
|
|
|
|
3.7
|
|
|
|
65.4
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.0
|
|
|
|
8.0
|
|
Amortization of deferred policy acquisition costs
|
|
|
2.0
|
|
|
|
4.0
|
|
|
|
0.4
|
|
|
|
0.7
|
|
|
|
|
|
|
|
7.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses
|
|
|
96.8
|
|
|
|
60.3
|
|
|
|
96.2
|
|
|
|
88.0
|
|
|
|
11.0
|
|
|
|
352.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pre-tax income (loss)
|
|
|
25.2
|
|
|
|
9.2
|
|
|
|
(24.7
|
)
|
|
|
3.7
|
|
|
|
(24.0
|
)
|
|
|
(10.6
|
)
|
Less: Net realized investment gains (losses)
|
|
|
(0.1
|
)
|
|
|
(3.6
|
)
|
|
|
(37.1
|
)
|
|
|
(10.8
|
)
|
|
|
(12.8
|
)
|
|
|
(64.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pre-tax adjusted operating income (loss)
|
|
$
|
25.3
|
|
|
$
|
12.8
|
|
|
$
|
12.4
|
|
|
$
|
14.5
|
|
|
$
|
(11.2
|
)
|
|
$
|
53.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-72
NOTES TO
UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in millions, unless otherwise
stated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2009
|
|
|
|
|
|
|
Retirement
|
|
|
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Group
|
|
|
Services
|
|
|
Annuities
|
|
|
Individual
|
|
|
Other
|
|
|
Total
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
|
|
$
|
324.1
|
|
|
$
|
0.1
|
|
|
$
|
|
|
|
$
|
106.0
|
|
|
$
|
|
|
|
$
|
430.2
|
|
Net investment income
|
|
|
13.3
|
|
|
|
281.8
|
|
|
|
318.1
|
|
|
|
198.0
|
|
|
|
18.2
|
|
|
|
829.4
|
|
Other revenues
|
|
|
12.7
|
|
|
|
12.3
|
|
|
|
0.4
|
|
|
|
9.9
|
|
|
|
7.9
|
|
|
|
43.2
|
|
Net realized investment gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other-than-temporary
impairment losses on securities
|
|
|
(8.5
|
)
|
|
|
(53.1
|
)
|
|
|
(76.6
|
)
|
|
|
(17.7
|
)
|
|
|
(12.0
|
)
|
|
|
(167.9
|
)
|
Less: portion of losses recognized in other comprehensive income
|
|
|
6.3
|
|
|
|
23.4
|
|
|
|
49.5
|
|
|
|
9.1
|
|
|
|
5.9
|
|
|
|
94.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net impairment losses recognized in earnings
|
|
|
(2.2
|
)
|
|
|
(29.7
|
)
|
|
|
(27.1
|
)
|
|
|
(8.6
|
)
|
|
|
(6.1
|
)
|
|
|
(73.7
|
)
|
Other net realized investment gains (losses)
|
|
|
(0.7
|
)
|
|
|
12.2
|
|
|
|
34.8
|
|
|
|
0.7
|
|
|
|
(2.3
|
)
|
|
|
44.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net realized investment gains (losses)
|
|
|
(2.9
|
)
|
|
|
(17.5
|
)
|
|
|
7.7
|
|
|
|
(7.9
|
)
|
|
|
(8.4
|
)
|
|
|
(29.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
347.2
|
|
|
|
276.7
|
|
|
|
326.2
|
|
|
|
306.0
|
|
|
|
17.7
|
|
|
|
1,273.8
|
|
Benefits and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder benefits and claims
|
|
|
219.9
|
|
|
|
(2.2
|
)
|
|
|
|
|
|
|
44.4
|
|
|
|
|
|
|
|
262.1
|
|
Interest credited
|
|
|
|
|
|
|
187.2
|
|
|
|
268.7
|
|
|
|
175.7
|
|
|
|
(2.4
|
)
|
|
|
629.2
|
|
Other underwriting and operating expenses
|
|
|
79.7
|
|
|
|
41.3
|
|
|
|
15.6
|
|
|
|
39.6
|
|
|
|
10.5
|
|
|
|
186.7
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23.8
|
|
|
|
23.8
|
|
Amortization of deferred policy acquisition costs
|
|
|
5.8
|
|
|
|
26.8
|
|
|
|
1.2
|
|
|
|
2.6
|
|
|
|
|
|
|
|
36.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses
|
|
|
305.4
|
|
|
|
253.1
|
|
|
|
285.5
|
|
|
|
262.3
|
|
|
|
31.9
|
|
|
|
1,138.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pre-tax income (loss)
|
|
|
41.8
|
|
|
|
23.6
|
|
|
|
40.7
|
|
|
|
43.7
|
|
|
|
(14.2
|
)
|
|
|
135.6
|
|
Less: Net realized investment gains (losses)
|
|
|
(2.9
|
)
|
|
|
(17.5
|
)
|
|
|
7.7
|
|
|
|
(7.9
|
)
|
|
|
(8.4
|
)
|
|
|
(29.0
|
)
|
Add: Net realized and unrealized gains (losses) on FIA options
|
|
|
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pre-tax adjusted operating income (loss)
|
|
$
|
44.7
|
|
|
$
|
41.3
|
|
|
$
|
33.0
|
|
|
$
|
51.6
|
|
|
$
|
(5.8
|
)
|
|
$
|
164.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
157.8
|
|
|
$
|
6,979.3
|
|
|
$
|
6,481.9
|
|
|
$
|
4,710.3
|
|
|
$
|
1,705.9
|
|
|
$
|
20,035.2
|
|
Deferred policy acquisition costs
|
|
|
3.5
|
|
|
|
166.3
|
|
|
|
19.7
|
|
|
|
51.3
|
|
|
|
|
|
|
|
240.8
|
|
Separate account assets
|
|
|
|
|
|
|
736.9
|
|
|
|
|
|
|
|
81.7
|
|
|
|
|
|
|
|
818.6
|
|
Total assets
|
|
|
285.5
|
|
|
|
8,158.5
|
|
|
|
6,664.6
|
|
|
|
5,076.5
|
|
|
|
2,040.9
|
|
|
|
22,226.0
|
|
Future policy benefits, losses, claims, and loss expenses(1)
|
|
|
190.5
|
|
|
|
7,448.0
|
|
|
|
6,703.4
|
|
|
|
4,792.8
|
|
|
|
(19.3
|
)
|
|
|
19,115.4
|
|
Unearned premiums
|
|
|
2.2
|
|
|
|
|
|
|
|
|
|
|
|
10.8
|
|
|
|
|
|
|
|
13.0
|
|
Other policyholder funds
|
|
|
8.6
|
|
|
|
16.1
|
|
|
|
19.4
|
|
|
|
40.3
|
|
|
|
6.4
|
|
|
|
90.8
|
|
Notes payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
448.9
|
|
|
|
448.9
|
|
|
|
|
(1) |
|
This includes funds held under deposit contracts, future policy
benefits, and policy and contract claims. |
F-73
NOTES TO
UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in millions, unless otherwise
stated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2008
|
|
|
|
|
|
|
Retirement
|
|
|
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Group
|
|
|
Services
|
|
|
Annuities
|
|
|
Individual
|
|
|
Other
|
|
|
Total
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
|
|
$
|
338.8
|
|
|
$
|
0.1
|
|
|
$
|
|
|
|
$
|
101.5
|
|
|
$
|
|
|
|
$
|
440.4
|
|
Net investment income
|
|
|
13.4
|
|
|
|
188.4
|
|
|
|
316.9
|
|
|
|
190.6
|
|
|
|
8.7
|
|
|
|
718.0
|
|
Other revenues
|
|
|
14.3
|
|
|
|
15.9
|
|
|
|
0.6
|
|
|
|
12.2
|
|
|
|
9.0
|
|
|
|
52.0
|
|
Net realized investment gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other-than-temporary
impairment losses on securities
|
|
|
(0.1
|
)
|
|
|
(12.9
|
)
|
|
|
(22.6
|
)
|
|
|
(12.7
|
)
|
|
|
(13.4
|
)
|
|
|
(61.7
|
)
|
Less: portion of losses recognized in other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net impairment losses recognized in earnings
|
|
|
(0.1
|
)
|
|
|
(12.9
|
)
|
|
|
(22.6
|
)
|
|
|
(12.7
|
)
|
|
|
(13.4
|
)
|
|
|
(61.7
|
)
|
Other net realized investment losses
|
|
|
|
|
|
|
(4.1
|
)
|
|
|
(31.4
|
)
|
|
|
(0.5
|
)
|
|
|
(5.6
|
)
|
|
|
(41.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment losses
|
|
|
(0.1
|
)
|
|
|
(17.0
|
)
|
|
|
(54.0
|
)
|
|
|
(13.2
|
)
|
|
|
(19.0
|
)
|
|
|
(103.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
366.4
|
|
|
|
187.4
|
|
|
|
263.5
|
|
|
|
291.1
|
|
|
|
(1.3
|
)
|
|
|
1,107.1
|
|
Benefits and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder benefits and claims
|
|
|
222.0
|
|
|
|
(6.7
|
)
|
|
|
|
|
|
|
44.8
|
|
|
|
|
|
|
|
260.1
|
|
Interest credited
|
|
|
|
|
|
|
127.2
|
|
|
|
272.4
|
|
|
|
171.3
|
|
|
|
(1.8
|
)
|
|
|
569.1
|
|
Other underwriting and operating expenses
|
|
|
86.7
|
|
|
|
44.5
|
|
|
|
16.1
|
|
|
|
43.0
|
|
|
|
11.6
|
|
|
|
201.9
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24.0
|
|
|
|
24.0
|
|
Amortization of deferred policy acquisition costs
|
|
|
6.1
|
|
|
|
8.4
|
|
|
|
1.0
|
|
|
|
2.2
|
|
|
|
|
|
|
|
17.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses
|
|
|
314.8
|
|
|
|
173.4
|
|
|
|
289.5
|
|
|
|
261.3
|
|
|
|
33.8
|
|
|
|
1,072.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pre-tax income (loss)
|
|
|
51.6
|
|
|
|
14.0
|
|
|
|
(26.0
|
)
|
|
|
29.8
|
|
|
|
(35.1
|
)
|
|
|
34.3
|
|
Less: Net realized investment gains (losses)
|
|
|
(0.1
|
)
|
|
|
(17.0
|
)
|
|
|
(54.0
|
)
|
|
|
(13.2
|
)
|
|
|
(19.0
|
)
|
|
|
(103.3
|
)
|
Add: Net realized and unrealized gains (losses) on FIA options
|
|
|
|
|
|
|
(3.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pre-tax adjusted operating income (loss)
|
|
$
|
51.7
|
|
|
$
|
27.4
|
|
|
$
|
28.0
|
|
|
$
|
43.0
|
|
|
$
|
(16.1
|
)
|
|
$
|
134.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
157.4
|
|
|
$
|
4,508.5
|
|
|
$
|
6,069.1
|
|
|
$
|
4,186.2
|
|
|
$
|
1,527.3
|
|
|
$
|
16,448.5
|
|
Deferred policy acquisition costs
|
|
|
3.2
|
|
|
|
151.9
|
|
|
|
13.8
|
|
|
|
42.9
|
|
|
|
|
|
|
|
211.8
|
|
Separate account assets
|
|
|
|
|
|
|
821.1
|
|
|
|
|
|
|
|
91.3
|
|
|
|
|
|
|
|
912.4
|
|
Total assets
|
|
|
293.7
|
|
|
|
5,856.8
|
|
|
|
6,491.0
|
|
|
|
4,768.3
|
|
|
|
1,981.2
|
|
|
|
19,391.0
|
|
Future policy benefits, losses, claims, and loss expenses(1)
|
|
|
198.2
|
|
|
|
5,173.8
|
|
|
|
6,794.1
|
|
|
|
4,698.8
|
|
|
|
(9.4
|
)
|
|
|
16,855.5
|
|
Unearned premiums
|
|
|
2.2
|
|
|
|
|
|
|
|
|
|
|
|
10.3
|
|
|
|
|
|
|
|
12.5
|
|
Other policyholder funds
|
|
|
9.2
|
|
|
|
29.1
|
|
|
|
2.1
|
|
|
|
28.8
|
|
|
|
7.9
|
|
|
|
77.1
|
|
Notes payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
448.7
|
|
|
|
448.7
|
|
|
|
|
(1) |
|
This includes funds held under deposit contracts, future policy
benefits, and policy and contract claims. |
F-74
NOTES TO
UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in millions, unless otherwise
stated)
|
|
11.
|
Quarterly
Results of Operations
|
The unaudited quarterly results of operations for the nine
months ended September 30, 2009 and the year ended
December 31, 2008 are summarized in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
|
(In millions, except for per share data)
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
378.8
|
|
|
$
|
443.3
|
|
|
$
|
451.7
|
|
|
|
|
|
Total benefits and expenses
|
|
|
371.6
|
|
|
|
377.1
|
|
|
|
389.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations before income taxes
|
|
|
7.2
|
|
|
|
66.2
|
|
|
|
62.2
|
|
|
|
|
|
Net income
|
|
|
5.1
|
|
|
|
47.0
|
|
|
|
44.1
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share(1)
|
|
$
|
0.05
|
|
|
$
|
0.42
|
|
|
$
|
0.40
|
|
|
|
|
|
Diluted net income per share(1)
|
|
$
|
0.05
|
|
|
$
|
0.42
|
|
|
$
|
0.40
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
365.0
|
|
|
$
|
400.4
|
|
|
$
|
341.7
|
|
|
$
|
344.0
|
|
Total benefits and expenses
|
|
|
360.3
|
|
|
|
360.2
|
|
|
|
352.3
|
|
|
|
365.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations before income taxes
|
|
|
4.7
|
|
|
|
40.2
|
|
|
|
(10.6
|
)
|
|
|
(21.3
|
)
|
Net income (loss)
|
|
|
3.3
|
|
|
|
28.5
|
|
|
|
(4.8
|
)
|
|
|
(4.9
|
)
|
Net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share(1)
|
|
$
|
0.03
|
|
|
$
|
0.26
|
|
|
$
|
(0.05
|
)
|
|
$
|
(0.05
|
)
|
Diluted net income (loss) per share(1)
|
|
$
|
0.03
|
|
|
$
|
0.26
|
|
|
$
|
(0.05
|
)
|
|
$
|
(0.05
|
)
|
|
|
|
(1) |
|
Quarterly earnings per share amounts may not add to the full
year amounts due to share weighting, rounding and, in the
periods of quarterly net losses, the antidilutive effect of the
outstanding warrants and restricted shares. |
On November 9, 2009, the date the September 30, 2009
unaudited interim consolidated financial statements of Symetra
Financial were issued, the Company evaluated the recognition and
disclosure of subsequent events.
On October 5, 2009, the Companys IPO committee
approved the filing of a registration statement with the
Securities and Exchange Commission for an initial public
offering of the Companys common stock.
On October 7, 2009, a member in default in the syndicate of
lending institutions on the Companys revolving credit
facility assigned its interest in the facility to a new member.
This assignment effectively restored the Companys ability
to borrow under the facility from $180.0 to the original amount
of $200.0.
F-75
GLOSSARY
OF SELECTED INSURANCE AND DEFINED TERMS
|
|
|
Accumulation period |
|
The period during which a deferred annuity accumulates interest
or investment gains (losses). The period ends when the income
payments begin. |
|
Annualized first-year premiums (AFYP) |
|
This term applies to our Group and Individual segments. For
recurring premium products it represents the total expected
premium payments over the first twelve months on new sales. The
entire twelve months of expected premium is reported as AFYP in
the period during which the policy is issued. For single-premium
products, the AFYP is 10% of the single premium. |
|
Annuity |
|
A contract sold by insurance companies that offers tax-deferred
savings and a choice of payout options to meet the owners
income needs in retirement. |
|
Bank-owned life insurance (BOLI) |
|
A life insurance policy purchased to insure the life of certain
bank employees, usually officers and other highly compensated
employees. The policies are commonly used to fund employee
pension and benefit plans. |
|
Brokerage general agent |
|
An independent contractor of the insurance company who has the
authority to appoint brokers on behalf of the insurance company. |
|
Cash value |
|
The amount of cash available to a policyholder on the surrender
of or withdrawal from a life insurance policy or annuity
contract. |
|
Cede |
|
Reinsuring with another insurance company all or a portion of
the risk we insure. |
|
Contract values |
|
The amounts held for the benefit of policyholders or
contractholders within investment products. For variable
products, account value is equal to fair value. |
|
Deferred annuities |
|
Annuity contracts that delay income payments until the holder
chooses to receive them. These contracts might also be
surrendered for cash, exchanged for another contract or rolled
over to another contract. |
|
Defined benefit plan |
|
A pension plan that promises to pay a specified amount to each
eligible plan member who retires. |
|
Defined contribution plan |
|
A plan established under Section 401(a), 401(k), 403(b) or
457(b) of the Internal Revenue Code, under which the benefits to
a participant depend on contributions made to, and the
investment return on, the participants account. |
|
Earned premiums |
|
The portion of a premium, net of any amount ceded, that
represents coverage already provided or that belongs to the
insurer based on the part of the policy period that has passed. |
|
Expense risk |
|
The measure of the sensitivity of the insurance companys
liability for the resultant higher expense rates than charged
for in the premium, expense charge or margin. |
|
Fixed annuity |
|
An annuity that guarantees that a specific sum of money will be
paid in the future, usually as monthly income, to an annuitant.
The dollar amount will not fluctuate regardless of adverse
changes in |
G-1
|
|
|
|
|
the insurance companys mortality experience, investment
return and expenses. |
|
Fixed indexed annuity (FIA) |
|
Modifications of the single premium deferred annuity, which
usually guarantees at a minimum a return of the premium.
Additional interest can be earned that is linked to a specified
stock index. Thus, this insurance product usually guarantees the
principal of the investment, while at the same time providing
the opportunity for increasing values tied to the equities
market. |
|
General account |
|
All of the assets of our insurance companies recognized for
statutory accounting purposes other than those specifically
allocated to separate accounts. We bear the risk of our
investments held in our general account. |
|
Group insurance |
|
A single contract or policy under which individuals in a natural
group (such as employees of a business firm) and potentially
their dependants are covered. |
|
Group medical stop-loss insurance |
|
Coverage purchased by employers in order to limit their exposure
under self-insured medical plans. |
|
Guaranteed investment contract |
|
A contract, usually purchased by ERISA qualified plans, that
guarantees a minimum rate of return on the amount invested. |
|
Guaranteed living benefits (GLBs) |
|
An industry term associated with optional benefit riders on
variable annuity contracts, such as guaranteed minimum
withdrawal benefits (GMWBs), guaranteed minimum income benefits
(GMIBs) and guaranteed minimum accumulation benefits (GMABs).
For a separate charge assessed against the variable annuity
contract value, GLBs generally provide for some guaranteed level
of withdrawal, annuity or accumulation benefit regardless of
declines in the variable annuity contract value. Some variable
annuity contracts may allow for increases or
step-ups
in guaranteed benefit amounts. GLBs are typically subject to
various contractual conditions, including minimum waiting
periods, required participation in asset allocation programs and
limitations on withdrawal amounts. GLBs typically require
insurers to maintain complex hedging programs to manage the
risks associated with these guaranties. |
|
Guaranteed minimum income benefit (GMIB) |
|
A benefit that guarantees a specified minimum appreciation rate
for a defined period of time, after which annuity payments
commence. |
|
Guaranteed minimum withdrawal benefit (GMWB) |
|
A benefit that guarantees a customers minimum stream of
income, equal to the return of the contracts principal,
provided it is withdrawn within specified limits over time. |
|
In force |
|
Policies and contracts reflected on our applicable records that
have not expired or been terminated as of a given date. |
|
Interest spread |
|
Yield on investments less the interest rate credited on
liabilities. |
|
Managing general underwriter (MGU) |
|
An MGU is a business that acts as a sales intermediary between
an insurance company and medical stop-loss policyholder.
MGUs can |
G-2
|
|
|
|
|
provide marketing, premium administration, claims
administration, claims adjudication and pricing. The MGU is
generally paid a percentage of premium and does not share in any
of the risk. |
|
Market value adjustment (MVA) |
|
A market value adjustment is a feature that adjusts the
surrender value of a contract in the event of surrender prior to
the end of the contract period to protect an insurer against
losses due to higher interest rates at the time of the surrender. |
|
Morbidity |
|
The incidence of disease or disability in a specific population
over a specific period of time. |
|
Mortality |
|
The number of deaths in a specific population over a specific
period of time. |
|
Mortality gains |
|
Mortality gains may arise if mortality rates are higher or lower
than expected. For structured settlements and SPIAs mortality
gains occur if policyholders die sooner than expected. For life
insurance, mortality gains occur if policyholders die later than
expected. |
|
Multiple premium immediate annuity (MPIA) |
|
An annuity that is funded with multiple premiums and guarantees
a series of payments continuing over a fixed number of years or
for the life of the annuitant. The payments typically begin more
than one year after the initial premium payment. |
|
Non-admitted assets |
|
Certain assets or portions thereof that are not permitted to be
reported as admitted assets in an insurers annual
statement prepared in accordance with statutory accounting
principles. As a result, certain assets that normally would be
accorded value in the financial statements of non-insurance
corporations are accorded no value and thus reduce the reported
statutory surplus of the insurer. |
|
Non-qualified plan |
|
An employee benefits plan that does not have the federal tax
advantages of a qualified pension plan, in which employers
receive a federal tax deduction for contributions paid into the
plan on behalf of their employees. For an employer, not having a
tax deduction can be a serious disadvantage, but a non-qualified
plan has these advantages: |
|
|
|
1) otherwise discriminatory coverage for some employees is
allowed; and
|
|
|
|
2) benefits can be allocated to certain employees whom the
employer wishes to reward. The result could be that the total
cost of the benefits for a particular group of employees may be
less under a non-qualified plan than for all employees under a
qualified plan.
|
|
Persistency |
|
Measurement of the percentage of insurance policies or annuity
contracts remaining in force between specified measurement dates. |
|
Premiums |
|
Payments and other consideration received on insurance policies
issued or reinsurance assumed by an insurance company. Under
generally accepted accounting principles, premiums on variable
life and other investment-type contracts are not accounted for
as revenues. |
G-3
|
|
|
Regulatory capital |
|
Regulatory capital is the sum of statutory capital and surplus
and asset valuation reserve (AVR). |
|
Reinsurance |
|
A form of insurance that insurance companies buy for their own
protection a sharing of insurance. An insurer (the
reinsured) reduces its possible maximum loss on either an
individual risk or a large number of risks by giving a portion
of its liability to another insurance company (the reinsurer).
Reinsurance enables an insurance company to (1) expand its
capacity; (2) stabilize its underwriting results;
(3) finance its expanding volume; (4) secure
catastrophe protection against shock losses; (5) withdraw
from a class or line of business, or a geographical area, within
a relatively short time period and (6) share large risks
with other companies. |
|
Reserves |
|
Liabilities established by insurers and reinsurers to reflect
the estimated costs of claim payments and benefits and the
related expenses that the insurer or reinsurer will ultimately
be required to pay in respect of insurance or reinsurance it has
written. |
|
Section 403(b) plan |
|
A retirement plan which is available primarily to public school
employees and non-profit organizations that allows individuals
to defer compensation on a pre-tax basis through payroll
deductions and to defer federal and sometimes state taxes until
the assets are withdrawn. |
|
Section 457 plan |
|
A retirement plan available to government employees that allows
an individual to defer compensation on a pre-tax basis through
payroll deductions and to defer federal and sometimes state
taxes until the assets are withdrawn. |
|
Shadow account |
|
A shadow account is a proxy for the account value of a UL
policy. The shadow account accumulates based on more favorable
cost of insurance charges, loads and interest crediting rates
than the policys actual account value. The policy will not
lapse as long as the value of the shadow account remains
positive. The shadow account is not accessible by the
policyholder. |
|
Single premium immediate annuities (SPIAs) |
|
An annuity that is purchased for a single premium at the time of
issue and guarantees a series of payments continuing over a
fixed number of years or for the life of the annuitant. |
|
Statutory reserves |
|
Liabilities established by state insurance law that an insurer
must have available to provide for future obligations with
respect to all policies. Statutory reserves are liabilities on
the balance sheet of financial statements prepared in conformity
with statutory accounting principles. |
|
Statutory surplus |
|
The excess of admitted assets over statutory liabilities as
shown on an insurers statutory financial statements. |
|
Structured settlement |
|
A customized annuity used to provide a claimant ongoing periodic
payments instead of a lump sum payment. A structured settlement
provides an alternative to a lump sum settlement generally in a
personal injury lawsuit and typically is purchased by a property
and casualty insurance company for the benefit of an injured |
G-4
|
|
|
|
|
claimant with benefits scheduled to be paid throughout a fixed
period or for the life of the claimant. |
|
Surrender charge |
|
An amount specified in an insurance policy or annuity contract
that is charged to a policyholder or contractholder for early
cancellation of, or withdrawal under, that policy or contract. |
|
Surrenders and withdrawals |
|
Amounts taken from life insurance policies and annuity contracts
representing the full or partial values of these policies or
contracts. |
|
Tax sheltered annuity |
|
An annuity issued as part of a Section 403(b) plan.
Tax-sheltered annuities are also referred to as
Section 403(b) annuities. |
|
Term life insurance |
|
Life insurance that stays in effect for only a specified,
limited period. If an insured dies within that period, the
beneficiary receives the death payments. If the insured
survives, the policy ends and the beneficiary receives nothing. |
|
Third party administrator (TPA) |
|
A person or entity that, pursuant to a service contract,
processes claims or provides administrative services for an
employee benefits plan. |
|
Underwriting |
|
The insurers process of reviewing applications submitted
for insurance coverage, deciding whether to accept all or part
of the coverage requested and determining the applicable
premiums. |
|
Universal life (UL) insurance |
|
Adjustable life insurance under which (1) premiums are
flexible, not fixed, (2) protection is adjustable, not
fixed, and (3) insurance company expenses and other charges
are specifically disclosed to a purchaser. This policy is
referred to as unbundled life insurance because its three basic
elements (investment earnings, pure cost of protection and
company expenses) are separately identified both in the policy
and in an annual report to the policyowner. After the first
premium, additional premiums can be paid at any time. A
specified percentage expense charge is deducted from each
premium before the balance is credited to the cash value, along
with interest. The pure cost of protection is subtracted from
the cash value monthly. As selected by the insured, the death
benefit can be a specified amount plus the cash value or the
specified amount that includes the cash value. After payment of
the minimal initial premium required, there are no contractually
scheduled premium payments (provided the cash value account
balance is sufficient to pay the pure cost of protection each
month and any other expenses and charges). Expenses and charges
may take the form of a flat dollar amount for the first policy
year, a sales charge for each premium received and a monthly
expense charge for each policy year. An annual report is
provided the policy owner that shows the status of the policy. |
|
Variable annuity |
|
An annuity in which premium payments are used to purchase
accumulation units, their number depending on the value of each
unit. The value of a unit is determined by the value of the
portfolio of stocks in which the insurance company invests the
premiums. |
|
Variable life (VL) insurance |
|
An investment-oriented life insurance policy that provides a
return linked to an underlying portfolio of securities. The
investment offered through the policy is typically established
as a separate |
G-5
|
|
|
|
|
account, which is divided into subaccounts that invest in
underlying mutual funds. The policyholder has discretion in
choosing among the available subaccounts, such as a common stock
fund, bond fund, or money market fund. The life insurance policy
benefits payable to the beneficiary upon the death of the
insured or the surrender of the policy will vary to reflect the
investment performance of the subaccounts chosen by the policy
owner. |
|
Waiver of premium |
|
A provision of a life insurance policy pursuant to which an
insured with total disability that lasts for a specified period
no longer has to pay premiums for the duration of the disability
or for a stated period, during which time the life insurance
policy provides continued coverage. |
|
Whole life insurance |
|
Level premium life insurance that covers the lifetime of the
individual instead of a fixed term. |
G-6
27,000,000 Shares
Common Stock
PRELIMINARY
PROSPECTUS
Joint Book-Running Managers
BofA Merrill Lynch
J.P. Morgan
Goldman, Sachs &
Co.
Barclays Capital
Senior Co-Managers
UBS Investment Bank
Wells Fargo
Securities
Co-Managers
Dowling & Partners Securities, LLC
Keefe, Bruyette & Woods
Sandler ONeill + Partners, L.P.
Sterne Agee
,
2010
PART II
INFORMATION
NOT REQUIRED IN PROSPECTUS
|
|
Item 13.
|
Other
Expenses of Issuance and Distribution.
|
The following table sets forth the expenses (other than
underwriting compensation expected to be incurred) in connection
with this offering. All of such amounts (except the SEC
registration fee and FINRA filing fee) are estimated.
|
|
|
|
|
SEC registration fee
|
|
$
|
30,994
|
|
FINRA filing fee
|
|
|
58,000
|
|
Listing fee
|
|
|
250,000
|
|
Blue Sky fees and expenses
|
|
|
15,900
|
|
Printing and engraving costs
|
|
|
560,000
|
|
Legal fees and expenses
|
|
|
1,145,000
|
|
Accounting fees and expenses
|
|
|
750,000
|
|
Transfer Agent and Registrar fees and expenses
|
|
|
14,000
|
|
Miscellaneous expenses
|
|
|
376,106
|
|
|
|
|
|
|
Total
|
|
$
|
3,200,000
|
|
|
|
|
|
|
|
|
Item 14.
|
Indemnification
of Directors and Officers.
|
Section 145(a) of the Delaware General Corporation Law (the
DGCL) provides in relevant part that a corporation
may indemnify any officer or director who was or is a party or
is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding (other than an action by or
in the right of the corporation) by reason of the fact that such
person is or was a director or officer of the corporation, or is
or was serving at the request of the corporation as a director
or officer of another entity, against expenses (including
attorneys fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding if such person
acted in good faith and in a manner such person reasonably
believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe such
persons conduct was unlawful.
Section 145(b) of the DGCL provides in relevant part that a
corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation
to procure a judgment in its favor by reason of the fact that
the person is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other
enterprise against expenses (including attorneys fees)
actually and reasonably incurred by the person in connection
with the defense or settlement of such action or suit if the
person acted in good faith and in a manner the person reasonably
believed to be in or not opposed to the best interests of the
corporation and except that no indemnification shall be made in
respect of any claim, issue or matter as to which such person
shall have been adjudged to be liable to the corporation unless
and only to the extent that the Court of Chancery or the court
in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly
and reasonably entitled to indemnity for such expenses which the
Court of Chancery or such other court shall deem proper.
Our articles of incorporation and bylaws generally provide that
we will indemnify our directors and officers to the fullest
extent permitted by law.
We also obtained officers and directors liability
insurance which insures against liabilities that officers and
directors of the registrant may, in such capacities, incur.
Section 145(g) of the DGCL provides
II-1
that a corporation shall have power to purchase and maintain
insurance on behalf of any person who is or was a director,
officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director,
officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against any liability
asserted against such person and incurred by such person in any
such capacity, or arising out of such persons status as
such, whether or not the corporation would have the power to
indemnify such person against such liability under that section.
Section 145(f) of the DGCL provides that the
indemnification and advancement of expenses provided by, or
granted pursuant to, the other subsections of Section 145
of the DGCL shall not be deemed exclusive of any other rights to
which those seeking indemnification or advancement of expenses
may be entitled under any bylaw, agreement, vote of stockholders
or disinterested directors or otherwise, both as to action in
such persons official capacity and as to action in another
capacity while holding such office.
We have entered into indemnification agreements with each of our
directors and officers. Under the terms of our indemnification
agreements, we are required to indemnify each of our directors
and officers, to the fullest extent permitted by the laws of the
State of Delaware, against any and all (a) costs and
expenses (including attorneys and experts fees,
expenses and charges) actually and reasonably paid or incurred
in connection with investigating, defending, being a witness in
or participating in, or preparing to investigate, defend, be a
witness in or participate in, and (b) damages, losses,
liabilities, judgments, fines, penalties and amounts paid in
settlement relating to, resulting from or arising out of, in the
case of either (a) or (b), any threatened, pending or
completed action, suit or proceeding, or any inquiry or
investigation that such person determines might lead to the
institution of any such action, suit or proceeding, by reason of
the fact that (y) such person is or was a director,
officer, employee or agent of the Company
and/or a
subsidiary of the Company or (z) such person is or was
serving at our request as a director, officer, employee or agent
of another corporation, partnership, non-profit organization,
joint venture, trust or other enterprise. The indemnification
agreements also require us, if so requested, to advance within
20 business days any and all costs and expenses to the director
or officer which such person determines reasonably likely to be
payable, provided that such person will return any such advance
which remains unspent at the final conclusion of the claim to
which the advance related. Our bylaws also require that such
person return any such advance if it is ultimately determined
that such person is not entitled to indemnification by us as
authorized by the laws of the State of Delaware.
We are not required to provide indemnification under our
indemnification agreements for certain matters, including:
(1) indemnification beyond that permitted by the laws of
the State of Delaware; (2) indemnification in connection
with certain proceedings or claims initiated or brought
voluntarily by the director or officer; (3) indemnification
for settlements the director or officer enters into without the
Companys written consent; (4) indemnification related
to disgorgement of profits under Section 16(b) of the
Securities Exchange Act of 1934; (5) indemnification where
a final decision by a court having jurisdiction in the matter
shall determine that such indemnification is not lawful; or
(6) indemnification for liabilities for which the director
or officer has received payment under any insurance policy as
may exist for such persons benefit, our articles of
incorporation or bylaws or any other contract or otherwise. The
indemnification agreements require us, to the extent that our
board of directors determines it to be economically reasonable,
to maintain directors and officers liability
insurance.
Reference is made to the form of underwriting agreement to be
filed as Exhibit 1.1 hereto for provisions providing that
the underwriters are obligated under certain circumstances to
indemnify our directors, officers and controlling persons
against certain liabilities under the Securities Act of 1933, as
amended.
|
|
Item 15.
|
Recent
Sales of Unregistered Securities.
|
In the three years preceding the filing of this registration
statement, we have issued the following securities that were not
registered under the Securities Act:
On October 10, 2007, we issued $150.0 million
aggregate principal amount of Capital Efficient Notes due 2067
to a syndicate of initial purchasers, led by J.P. Morgan
Securities Inc. and
II-2
Lehman Brothers Inc. in reliance on Section 4(2) of the
Securities Act of 1933, which were eligible for resale to
qualified institutional buyers in compliance with Rule 144A
and/or
Regulation S under the Securities Act of 1933. We applied
the net proceeds from the CENts to pay a special cash dividend
to our stockholders on October 19, 2007.
|
|
Item 16.
|
Exhibits
and Financial Statement Schedules.
|
(a) Exhibits
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
1
|
.1
|
|
Underwriting Agreement**
|
|
3
|
.1
|
|
Amended and Restated Certificate of Incorporation of Symetra
Financial Corporation**
|
|
3
|
.2
|
|
Form of Bylaws of Symetra Financial Corporation**
|
|
4
|
.1
|
|
Specimen Common Stock Certificate**
|
|
4
|
.2
|
|
Fiscal Agency Agreement between Symetra Financial Corporation
and U.S. Bank dated March 30, 2006**
|
|
4
|
.3
|
|
Warrant Certificate General Reinsurance Corporation,
dated October 26, 2007**
|
|
4
|
.4
|
|
Warrant Certificate White Mountains Re (NL) B.V.,
dated July 24, 2008**
|
|
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)**
|
|
4
|
.6
|
|
Purchase Agreement between Symetra Financial Corporation and the
purchasers listed therein, dated October 4, 2007**
|
|
4
|
.7
|
|
Indenture between Symetra Financial Corporation and U.S. Bank
National Association, as trustee, dated as of October 10, 2007**
|
|
5
|
.1
|
|
Opinion of Cravath, Swaine & Moore LLP**
|
|
9
|
.1
|
|
Shareholders Agreement among Occum Acquisition Corp. and
the persons listed on the signature pages thereto, dated as of
March 8, 2004**
|
|
9
|
.2
|
|
Shareholders Agreement among Occum Acquisition Corp. and
the persons listed on the signature pages thereto, dated as of
March 19, 2004**
|
|
9
|
.3
|
|
Shareholders Agreement among Occum Acquisition Corp. and
the persons listed on the signature pages thereto, dated as of
April 16, 2004**
|
|
10
|
.1
|
|
Master Services Agreement between Affiliated Computer Services,
Inc. and Symetra Life Insurance Company, dated August 1,
2009**
|
|
10
|
.2
|
|
Coinsurance Reinsurance Agreement dated as of January 1,
1998 (the RGA Agreement) between Safeco Life
Insurance Company and RGA Reinsurance Company (including the two
Amendments to the RGA Agreement dated as of June 19, 2002,
Amendment to the RGA Agreement dated as of September 23,
2002 and Addendum to the RGA Agreement dated as of
August 12, 2003)**
|
|
10
|
.3
|
|
Group Short Term Disability Reinsurance Agreement dated as of
January 1, 1999 (the Short Term Agreement) between
Safeco Life Insurance Company and Reliance Standard Life
Insurance Company, doing business as Custom Disability
Solutions, successor to Duncanson & Holt Services, Inc.
(including Amendment No. 1 to the Short Term Agreement
dated as of July 1, 2006 and Amendment No. 2 to the
Short Term Agreement Dated as of December 8, 2006)**
|
II-3
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.4
|
|
Group Long Term Disability Reinsurance Agreement dated as of
January 1, 1999 (the Long Term Agreement)
between Safeco Life Insurance Company and Reliance Standard Life
Insurance Company, doing business as Custom Disability
Solutions, successor to Duncanson & Holt Services, Inc.
(including Amendment No. 1 to the Long Term Agreement dated
as of January 1, 2000, Amendment to the Long Term Agreement
dated as of January 1, 2006, Amendment No. 3 to
the Long Term Agreement dated as of July 1, 2006, Amendment
No. 4 to the Long Term Agreement dated as of December 8,
2006 and Amendment No. 5 to the Long Term Agreement dated as of
September 1, 2008)**
|
|
10
|
.5
|
|
Coinsurance Agreement dated as of August 24, 2001 between
Safeco Life Insurance Company and The Lincoln National Life
Insurance Company**
|
|
10
|
.6
|
|
Coinsurance Funds Withheld Reinsurance Agreement dated as of
December 1, 2001 between Safeco Life Insurance Company and
Transamerica Insurance Company**
|
|
10
|
.7
|
|
Investment Management Agreement between White Mountains Advisors
LLC and Occum Acquisition Corp., dated as of March 14, 2004
(including Amendment to Investment Management Agreement dated as
of September 30, 2004, Amendment No. 2 to the
Investment Management Agreement dated as of August 1, 2005,
Amendment No. 3 to the Investment Management Agreement
dated as of October 1, 2005 and Amendment No. 4 to the
Investment Management Agreement dated as of March 9, 2007)**
|
|
10
|
.8
|
|
Agency Agreement dated as of March 10, 2006 among Symetra Life
Insurance Company, WM Financial Services, Inc. and WMFS
Insurance Services, Inc. (including Addendum to the Agency
Agreement dated as of February 22, 2007, Amendment to the Agency
Agreement dated as of March 26, 2007, Amendment to the
Agency Agreement dated as of July 17, 2007, Amendment to the
Agency Agreement dated as of December 18, 2007, Amendment to the
Agency Agreement dated as of September 15, 2008, Amendment to
the Agency Agreement dated as of September 23, 2008, Addendum to
the Agency Agreement dated as of September 23, 2008,
Assignment of Agency Agreement between Symetra Life Insurance
Company and WaMu Investments, Inc. (formerly WM Financial
Services, Inc.) dated as of May 2, 2009 among Symetra Life
Insurance Company, WaMu Investments, Inc. (formerly WM Financial
Services, Inc.), WMFS Insurance Services, Inc. and Chase
Insurance Agency, Inc. and Amendment to the Agency Agreement
dated as of May 2, 2009)**
|
|
10
|
.9
|
|
Agency Agreement dated as of September 26, 2006 among
Symetra Life Insurance Company and Chase Insurance Agency, Inc.
(including Addendum to the Agency Agreement dated as of
May 15, 2007 and Addendum to the Agency Agreement dated as
of March 21, 2008)**
|
|
10
|
.10
|
|
Symetra Financial Corporation Performance Share Plan 2006-2008**
|
|
10
|
.11
|
|
Symetra Financial Corporation Performance Share Plan 2007-2009**
|
|
10
|
.12
|
|
Symetra Financial Corporation Performance Share Plan 2008-2010**
|
|
10
|
.13
|
|
Symetra Financial Corporation Performance Share Plan 2009-2011**
|
|
10
|
.14
|
|
Annual Incentive Bonus Plan**
|
|
10
|
.15
|
|
2008 Sales Incentive Plan for Pat McCormick**
|
|
10
|
.16
|
|
Symetra Financial Corporation Equity Plan**
|
|
10
|
.17
|
|
Symetra Financial Corporation Employee Stock Purchase Plan**
|
|
10
|
.18
|
|
2009 Sales Incentive Plan for Pat McCormick**
|
|
10
|
.19
|
|
Form of Restricted Stock Agreement**
|
|
10
|
.20
|
|
Form of Director and Officer Indemnification Agreement**
|
|
21
|
.1
|
|
Subsidiaries of Symetra Financial Corporation**
|
|
23
|
.1
|
|
Consent of Ernst & Young LLP, Independent Registered Public
Accounting Firm
|
|
23
|
.2
|
|
Consent of Cravath, Swaine & Moore LLP (included in the
opinion filed as Exhibit 5.1)**
|
|
24
|
.1
|
|
Power of Attorney (included in signature page to the
Registration Statement filed October 5, 2009)**
|
II-4
|
|
|
** |
|
Previously filed. |
|
|
|
Portions of this exhibit have been omitted pursuant to a
confidential treatment request and this information has been
filed separately with the Commission. |
The undersigned registrant hereby undertakes as follows:
(1) The undersigned will provide to the underwriters at the
closing specified in the underwriting agreement certificates in
such denominations and registered in such names as required by
the underwriters to permit prompt delivery to each purchaser.
(2) For purposes of determining any liability under the
Securities Act of 1933, as amended, the information omitted from
the form of prospectus filed as part of this registration
statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities
Act shall be deemed to be part of this registration statement as
of the time it is declared effective.
(3) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered
therein and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended may be permitted to
directors, officers and controlling persons of the registrant
pursuant to the provisions described in Item 14 or
otherwise, the registrant has been advised that in the opinion
of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Securities Act of
1933, as amended, and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid
by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant
will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue.
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this Amendment No. 6 to the
Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Bellevue,
State of Washington, on January 15, 2010.
SYMETRA FINANCIAL CORPORATION
Name: George C. Pagos
|
|
|
|
Title:
|
Senior Vice President, General Counsel and Secretary
|
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 6 to the Registration Statement has been
signed by the following persons in the capacities indicated as
of January 15, 2010.
|
|
|
|
|
Signature
|
|
Title
|
|
|
|
|
*
|
|
Randall H. Talbot
President, Chief Executive Officer and Director
(Principal Executive Officer)
|
|
|
|
*
|
|
Margaret A. Meister
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
|
|
|
|
*
|
|
David T. Foy
(Director)
|
|
|
|
*
|
|
Lois W. Grady
(Director)
|
|
|
|
*
|
|
Sander M. Levy
(Director)
|
|
|
|
*
|
|
Robert R. Lusardi
(Director)
|
|
|
|
*
|
|
David I. Schamis
(Director)
|
|
|
|
*
|
|
Lowndes A. Smith
(Director)
|
|
|
|
|
|
George C. Pagos
(Attorney-in-Fact)
|
EXHIBIT INDEX
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
1
|
.1
|
|
Underwriting Agreement**
|
|
3
|
.1
|
|
Amended and Restated Certificate of Incorporation of Symetra
Financial Corporation**
|
|
3
|
.2
|
|
Form of Bylaws of Symetra Financial Corporation**
|
|
4
|
.1
|
|
Specimen Common Stock Certificate**
|
|
4
|
.2
|
|
Fiscal Agency Agreement between Symetra Financial Corporation
and U.S. Bank dated March 30, 2006**
|
|
4
|
.3
|
|
Warrant Certificate General Reinsurance Corporation,
dated October 26, 2007**
|
|
4
|
.4
|
|
Warrant Certificate White Mountains Re (NL) B.V.,
dated July 24, 2008**
|
|
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)**
|
|
4
|
.6
|
|
Purchase Agreement between Symetra Financial Corporation and the
purchasers listed therein, dated October 4, 2007**
|
|
4
|
.7
|
|
Indenture between Symetra Financial Corporation and U.S. Bank
National Association, as trustee, dated as of October 10, 2007**
|
|
5
|
.1
|
|
Opinion of Cravath, Swaine & Moore LLP**
|
|
9
|
.1
|
|
Shareholders Agreement among Occum Acquisition Corp. and
the persons listed on the signature pages thereto, dated as of
March 8, 2004**
|
|
9
|
.2
|
|
Shareholders Agreement among Occum Acquisition Corp. and
the persons listed on the signature pages thereto, dated as of
March 19, 2004**
|
|
9
|
.3
|
|
Shareholders Agreement among Occum Acquisition Corp. and
the persons listed on the signature pages thereto, dated as of
April 16, 2004**
|
|
10
|
.1
|
|
Master Services Agreement between Affiliated Computer Services,
Inc. and Symetra Life Insurance Company, dated August 1,
2009**
|
|
10
|
.2
|
|
Coinsurance Reinsurance Agreement dated as of January 1,
1998 (the RGA Agreement) between Safeco Life
Insurance Company and RGA Reinsurance Company (including the two
Amendments to the RGA Agreement dated as of June 19, 2002,
Amendment to the RGA Agreement dated as of September 23,
2002 and Addendum to the RGA Agreement dated as of
August 12, 2003)**
|
|
10
|
.3
|
|
Group Short Term Disability Reinsurance Agreement dated as of
January 1, 1999 (the Short Term Agreement) between
Safeco Life Insurance Company and Reliance Standard Life
Insurance Company, doing business as Custom Disability
Solutions, successor to Duncanson & Holt Services, Inc.
(including Amendment No. 1 to the Short Term Agreement
dated as of July 1, 2006 and Amendment No. 2 to the
Short Term Agreement dated as of December 8, 2006)**
|
|
10
|
.4
|
|
Group Long Term Disability Reinsurance Agreement dated as of
January 1, 1999 (the Long Term Agreement)
between Safeco Life Insurance Company and Reliance Standard Life
Insurance Company, doing business as Custom Disability
Solutions, successor to Duncanson & Holt Services, Inc.
(including Amendment No. 1 to the Long Term Agreement dated
as of January 1, 2000, Amendment to the Long Term Agreement
dated as of January 1, 2006, Amendment No. 3 to
the Long Term Agreement dated as of July 1, 2006, Amendment
No. 4 to the Long Term Agreement dated as of December 8,
2006 and Amendment No. 5 to the Long Term Agreement dated as of
September 1, 2008)**
|
|
10
|
.5
|
|
Coinsurance Agreement dated as of August 24, 2001 between
Safeco Life Insurance Company and The Lincoln National Life
Insurance Company**
|
|
10
|
.6
|
|
Coinsurance Funds Withheld Reinsurance Agreement dated as of
December 1, 2001 between Safeco Life Insurance Company and
Transamerica Insurance Company**
|
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.7
|
|
Investment Management Agreement between White Mountains Advisors
LLC and Occum Acquisition Corp., dated as of March 14, 2004
(including Amendment to Investment Management Agreement dated as
of September 30, 2004, Amendment No. 2 to the
Investment Management Agreement dated as of August 1, 2005,
Amendment No. 3 to the Investment Management Agreement
dated as of October 1, 2005 and Amendment No. 4 to the
Investment Management Agreement dated as of March 9, 2007)**
|
|
10
|
.8
|
|
Agency Agreement dated as of March 10, 2006 among Symetra Life
Insurance Company, WM Financial Services, Inc. and WMFS
Insurance Services, Inc. (including Addendum to the Agency
Agreement dated as of February 22, 2007, Amendment to the Agency
Agreement dated as of March 26, 2007, Amendment to the Agency
Agreement dated as of July 17, 2007, Amendment to the Agency
Agreement dated as of December 18, 2007, Amendment to the Agency
Agreement dated as of September 15, 2008, Amendment to the
Agency Agreement dated as of September 23, 2008, Addendum to the
Agency Agreement dated as of September 23, 2008, Assignment
of Agency Agreement between Symetra Life Insurance Company and
WaMu Investments, Inc. (formerly WM Financial Services, Inc.)
dated as of May 2, 2009 among Symetra Life Insurance Company,
WaMu Investments, Inc. (formerly WM Financial Services, Inc.),
WMFS Insurance Services, Inc. and Chase Insurance Agency, Inc.
and Amendment to the Agency Agreement dated as of May 2,
2009)**
|
|
10
|
.9
|
|
Agency Agreement dated as of September 26, 2006 among
Symetra Life Insurance Company and Chase Insurance Agency, Inc.
(including Addendum to the Agency Agreement dated as of
May 15, 2007 and Addendum to the Agency Agreement dated as
of March 21, 2008)**
|
|
10
|
.10
|
|
Symetra Financial Corporation Performance Share Plan 2006-2008**
|
|
10
|
.11
|
|
Symetra Financial Corporation Performance Share Plan 2007-2009**
|
|
10
|
.12
|
|
Symetra Financial Corporation Performance Share Plan 2008-2010**
|
|
10
|
.13
|
|
Symetra Financial Corporation Performance Share Plan 2009-2011**
|
|
10
|
.14
|
|
Annual Incentive Bonus Plan**
|
|
10
|
.15
|
|
2008 Sales Incentive Plan for Pat McCormick**
|
|
10
|
.16
|
|
Symetra Financial Corporation Equity Plan**
|
|
10
|
.17
|
|
Symetra Financial Corporation Employee Stock Purchase Plan**
|
|
10
|
.18
|
|
2009 Sales Incentive Plan for Pat McCormick**
|
|
10
|
.19
|
|
Form of Restricted Stock Agreement**
|
|
10
|
.20
|
|
Form of Director and Officer Indemnification Agreement**
|
|
21
|
.1
|
|
Subsidiaries of Symetra Financial Corporation**
|
|
23
|
.1
|
|
Consent of Ernst & Young LLP, Independent Registered Public
Accounting Firm
|
|
23
|
.2
|
|
Consent of Cravath, Swaine & Moore LLP (included in the
opinion filed as Exhibit 5.1)**
|
|
24
|
.1
|
|
Power of Attorney (included in signature page to the
Registration Statement filed October 5, 2009)**
|
|
|
|
** |
|
Previously filed. |
|
|
|
Portions of this exhibit have been omitted pursuant to a
confidential treatment request and this information has been
filed separately with the Commission. |
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Symetra Financial Corporation
We have audited the consolidated financial statements of Symetra
Financial Corporation (the Company) as of December 31, 2008
and 2007, and for each of the three years in the period ended
December 31, 2008, and have issued our report thereon dated
March 6, 2009 (included elsewhere in this Registration
Statement). Our audits also included the financial statement
schedules listed in Item 16(b) of
Form S-1
of this Registration Statement. These schedules are the
responsibility of the Companys management. Our
responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedules referred to
above, when considered in relation to the basic financial
statements taken as a whole, present fairly, in all material
respects the information set forth therein.
Seattle, Washington
March 6, 2009
S-1
Schedule I
Summary
of Investments Other Than Investments in Related
Parties
Year
Ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost or
|
|
|
|
|
|
Amount as
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
Shown in the
|
|
Type of Investment
|
|
Cost
|
|
|
Value
|
|
|
Balance Sheet
|
|
|
|
(In millions)
|
|
|
Fixed maturities
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States government and government agencies and authorities
|
|
$
|
155.5
|
|
|
$
|
156.8
|
|
|
$
|
156.8
|
|
States, municipalities, and political subdivisions
|
|
|
488.8
|
|
|
|
424.9
|
|
|
|
424.9
|
|
Foreign governments
|
|
|
31.4
|
|
|
|
34.6
|
|
|
|
34.6
|
|
Public utilities(1)
|
|
|
1,744.4
|
|
|
|
1,568.4
|
|
|
|
1,568.4
|
|
Convertible bonds and bonds with warrants attached
|
|
|
56.7
|
|
|
|
50.5
|
|
|
|
50.5
|
|
All other corporate bonds
|
|
|
8,687.6
|
|
|
|
7,606.3
|
|
|
|
7,606.3
|
|
Mortgage-backed securities
|
|
|
5,268.5
|
|
|
|
4,958.5
|
|
|
|
4,958.5
|
|
Redeemable preferred stock
|
|
|
16.6
|
|
|
|
11.3
|
|
|
|
11.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
16,449.5
|
|
|
|
14,811.3
|
|
|
|
14,811.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
Public utilities
|
|
|
17.1
|
|
|
|
12.0
|
|
|
|
12.0
|
|
Banks, trusts, and insurance companies(2)
|
|
|
8.3
|
|
|
|
7.0
|
|
|
|
7.0
|
|
Industrial, miscellaneous, and all other
|
|
|
124.7
|
|
|
|
84.7
|
|
|
|
84.7
|
|
Nonredeemable preferred stock
|
|
|
51.7
|
|
|
|
37.6
|
|
|
|
37.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable equity securities
|
|
|
201.8
|
|
|
|
141.3
|
|
|
|
141.3
|
|
Mortgage loans(3)
|
|
|
993.7
|
|
|
|
907.6
|
|
|
|
988.7
|
|
Policy loans
|
|
|
75.2
|
|
|
|
75.2
|
|
|
|
75.2
|
|
Other long-term investments
|
|
|
178.8
|
|
|
|
147.2
|
|
|
|
147.2
|
|
Short-term investments
|
|
|
9.4
|
|
|
|
9.4
|
|
|
|
9.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
17,908.4
|
|
|
$
|
16,092.0
|
|
|
$
|
16,173.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The amount shown in the consolidated balance sheet for total
fixed maturities differs from cost and fair value, as these
investments include affiliated fixed maturities with a cost and
fair value of $78.9 and $76.3, respectively. |
|
(2) |
|
The amount shown in the consolidated balance sheet for total
marketable equity securities differs from cost and fair value,
as these investments include affiliated marketable equity
securities with a cost and fair value of $2.8 and $3.1,
respectively. |
|
(3) |
|
The amount shown in the consolidated balance sheet for mortgage
loans differs from cost, as these investments are presented net
of a $5.0 allowance. |
S-2
Schedule II
Condensed
Statements of Financial Position
(Parent
Company Only)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In millions, except share and per share data)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash and investments:
|
|
|
|
|
|
|
|
|
Investments
|
|
$
|
110.8
|
|
|
$
|
149.1
|
|
Investments in subsidiaries
|
|
|
533.0
|
|
|
|
1,542.1
|
|
Cash and cash equivalents
|
|
|
60.8
|
|
|
|
38.4
|
|
Restricted funds
|
|
|
|
|
|
|
5.4
|
|
|
|
|
|
|
|
|
|
|
Total cash and investments
|
|
|
704.6
|
|
|
|
1,735.0
|
|
Current and deferred tax receivables
|
|
|
20.4
|
|
|
|
4.9
|
|
Receivables due from affiliates
|
|
|
24.8
|
|
|
|
24.0
|
|
Other assets
|
|
|
21.1
|
|
|
|
17.4
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
770.9
|
|
|
$
|
1,781.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders equity
|
|
|
|
|
|
|
|
|
Notes payable
|
|
$
|
448.8
|
|
|
$
|
448.6
|
|
Other liabilities
|
|
|
35.9
|
|
|
|
47.6
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
484.7
|
|
|
|
496.2
|
|
Common stock, par value $0.01 per share, 750,000,000 shares
authorized and 92,646,295 shares issued and outstanding
|
|
|
0.9
|
|
|
|
0.9
|
|
Additional paid-in capital
|
|
|
1,165.5
|
|
|
|
1,165.5
|
|
Retained earnings
|
|
|
172.4
|
|
|
|
131.2
|
|
Accumulated other comprehensive loss, net of taxes
|
|
|
(1,052.6
|
)
|
|
|
(12.5
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
286.2
|
|
|
|
1,285.1
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
770.9
|
|
|
$
|
1,781.3
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
S-3
Schedule II
(continued)
Condensed
Statements of Income
(Parent
Company Only)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In millions)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends from subsidiaries:
|
|
|
|
|
|
|
|
|
|
|
|
|
Symetra Life Insurance Company
|
|
$
|
100.0
|
|
|
$
|
166.4
|
|
|
$
|
122.5
|
|
Other subsidiaries
|
|
|
15.7
|
|
|
|
5.7
|
|
|
|
|
|
Net investment income (loss)
|
|
|
(14.8
|
)
|
|
|
3.3
|
|
|
|
2.2
|
|
Net realized investment gains (losses)
|
|
|
(12.3
|
)
|
|
|
6.8
|
|
|
|
7.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
88.6
|
|
|
|
182.2
|
|
|
|
132.1
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense on debt
|
|
|
31.9
|
|
|
|
21.5
|
|
|
|
19.2
|
|
Operating expenses
|
|
|
0.8
|
|
|
|
3.7
|
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
32.7
|
|
|
|
25.2
|
|
|
|
19.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
55.9
|
|
|
|
157.0
|
|
|
|
112.3
|
|
Income tax benefits
|
|
|
(22.6
|
)
|
|
|
(5.0
|
)
|
|
|
(3.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before equity in undistributed net income of subsidiaries
|
|
|
78.5
|
|
|
|
162.0
|
|
|
|
116.1
|
|
Equity in undistributed net income (loss) of subsidiaries:
|
|
|
|
|
|
|
|
|
|
|
|
|
Symetra Life Insurance Company
|
|
|
(52.3
|
)
|
|
|
1.1
|
|
|
|
38.6
|
|
Other subsidiaries
|
|
|
(4.1
|
)
|
|
|
4.2
|
|
|
|
4.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity in undistributed net income (loss) of subsidiaries
|
|
|
(56.4
|
)
|
|
|
5.3
|
|
|
|
43.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
22.1
|
|
|
$
|
167.3
|
|
|
$
|
159.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
S-4