This discussion contains forward-looking statements that involve risk and
uncertainties. Our actual results may differ materially from those discussed in,
or implied by, any of the forward-looking statements as a result of various
factors, including but not limited to those listed under "Forward-Looking
Statements." You should read the following discussion in conjunction with the
unaudited interim condensed consolidated financial statements and accompanying
condensed notes included in Item 1 - "Condensed Financial Statements" included
in this Form 10-Q, our Annual Report for the year ended December 31, 2011, filed
with the SEC on February 29, 2012 ("2011 10-K"), as well as our current reports
on Form 8-K and other publicly available information. Our fiscal year ends on
December 31 of each calendar year.
Management considers certain non-GAAP financial measures, including adjusted
operating income, adjusted operating income per common share, pre-tax adjusted
operating income, adjusted book value, adjusted book value, as converted,
adjusted book value per common share, adjusted book value per common share, as
converted, average adjusted book value, and operating return on average equity
(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 and further discussion of these non-GAAP
measures, see Item 7 - "Management's Discussion and Analysis of Financial
Condition - Use of non-GAAP Financial Measures" in our 2011 10-K.
Historical financial information has been restated to reflect the retrospective
adoption of a new accounting standard for deferred acquisition costs on
January 1, 2012. See Note 2 in the accompanying unaudited interim condensed
consolidated financial statements for discussion of adoption of new accounting
pronouncements.
All dollar and share amounts, except per share data, are in millions unless
otherwise stated.
Overview
We are a financial services company in the life insurance industry providing
employee benefits, annuities and life insurance through a national network of
benefits consultants, financial institutions and independent agents and
advisers. Our operations date back to 1957 and many of our distribution
relationships have been in place for decades.
Our Operations
We manage our business through three divisions composed of four business
segments:
Benefits Division
• Benefits. We offer medical stop-loss insurance, limited benefit medical
plans, group life insurance, accidental death and dismemberment insurance
and disability income insurance mainly to employer groups of 50 to 5,000
individuals. In addition to our insurance products, we offer managing
general underwriter (MGU) services.
Retirement Division
• Deferred Annuities. We offer fixed and variable deferred annuities to
consumers who want to accumulate tax-deferred assets for retirement.
• Income Annuities. We offer single premium income annuities (SPIAs) to
customers seeking a reliable source of retirement income or to protect
against outliving their assets during retirement, and structured
settlement annuities to fund third party personal injury settlements. In
addition, we offer funding services options to existing structured
settlement clients.
Life Division
• Life. We offer a wide array of insurance products such as term and
universal life insurance (UL), including single premium life insurance
(SPL), bank-owned life insurance (BOLI) and corporate-owned life insurance
(COLI).
In addition, we have our Other segment, which consists primarily of investment
income on unallocated surplus, unallocated corporate expenses, interest expense
on debt, earnings related to our limited partnership interests, the results of
small, non-insurance businesses that are managed outside of our divisions, such
as our broker-dealer, and inter-segment elimination entries.
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See Note 11 to the accompanying unaudited interim condensed consolidated
financial statements for the financial results of our segments.
Current Outlook
During the second quarter, U.S. economic growth slowed substantially. Limited
growth is expected in the second half of 2012 as a result of continued European
instability and weakness, and the political uncertainty in the U.S. regarding
the potential for spending cuts and the elimination of tax cuts scheduled to
occur at the beginning of 2013. In response to these factors and others,
policies of the Federal Reserve Board have resulted in the suppression of
interest rates to historically low levels. Further, interest rates are expected
to remain low for the duration of 2012 and into next year, which will create
headwind for our interest-sensitive asset-based businesses, impacting sales of
and margins on fixed annuities, universal life insurance policies and BOLI
products.
To mitigate the risk of unfavorable consequences in this environment, such as
spread compression on our in force business, we remain proactive in our
investment and product strategies, interest-crediting strategies and overall
asset-liability management practices. In the first half of 2012, we sold $328.3
of lower yielding, higher premium, agency RMBS where the prepayment
characteristics of these securities had deteriorated. In doing so, we were able
to produce realized gains while reducing our future reinvestment risk. We remain
proactive in managing our prepayment and reinvestment risk and may seek similar
transactions during the second half of 2012. Looking forward, we continue the
pursuit of other investment strategies to help us in the current low interest
rate environment, and position us well for rising interest rate scenarios.
To manage our asset yield in this environment, we have been and plan to continue
increasing our investments in commercial mortgage loans we underwrite. While
interest rates on recently written loans have decreased consistent with the
overall level of interest rates, they continue to be an attractive investment
opportunity. During the second quarter of 2012, we originated mortgage loans of
$221.9 with an average yield of approximately 5.0%. This asset class comprised
10.5% of our invested assets as of June 30, 2012, up from 9.6% as of
December 31, 2011.
To manage our way through this uncertain environment and grow profitably, we
will continue to focus on the strategies outlined in Item 1 - "Business - Our
Strategies" in the 2011 10-K. Our 2012 focus is to continue executing on our
Grow & Diversify initiatives, while at the same time remaining focused on our
core businesses and maintaining our financial strength ratings. We reached
several significant milestones on these initiatives by the end of the second
quarter, including the introduction of our Symetra True Variable AnnuitySM (True
VA) product and a lapse protection benefit for our Classic UL product. Further,
we have built an integrated process to manage group life and short- and
long-term disability claims and employee leave administration. Also during the
second quarter, the U.S. Supreme Court issued its ruling on the
constitutionality of the Patient Protection and Affordable Care Act of 2010
(PPACA), which provided some clarity for the healthcare industry and this
decision reinforced the importance our Benefits division plays in helping
employers provide healthcare benefits to their employees.
We believe we have adequate levels of capital to support our current business
and to fund organic and transactional growth. Opportunities for organic growth
of our business and for strategic transactions have arisen as major players in
the life insurance industry have exited or announced plans to exit the life and
annuities marketplace. However, the success of these and other strategies may be
affected by the factors discussed in Item 1A - "Risk Factors" and other factors
as discussed herein.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with GAAP requires
management to adopt accounting policies and make estimates and assumptions that
affect amounts reported and disclosed in the unaudited interim condensed
consolidated financial statements. The following accounting policies are those
we consider to be particularly critical to understanding our condensed 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:
• The evaluation of OTTI of investments;
• The valuation of investments at fair value;
• The balance, recoverability and amortization of deferred policy
acquisition costs and deferred sales inducements; and
• The liabilities for future policy benefits and policy and contract claims.
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In applying the Company's accounting policies, management makes subjective and
complex judgments that frequently require estimates about matters that are
inherently uncertain. Many of these policies, estimates and related judgments
are common in the insurance and financial services industries; others are
specific to the Company's businesses and operations. For all of these policies,
we caution that future events rarely develop exactly as forecasted, and our best
estimates may require adjustment.
On January 1, 2012, we retrospectively adopted a new accounting standard related
to the deferral of policy acquisition costs. Our new policy regarding deferrable
costs, including the impact of retrospective adoption, is described below. This
new accounting standard did not impact the accounting for deferred sales
inducements.
Other than as described above, there have been no material changes to the
critical accounting estimates listed above, which are described in Item 7 -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Critical Accounting Policies and Estimates" and Note 2 of the notes
to the audited financial statements included in the 2011 10-K.
Deferred Policy Acquisition Costs (DAC)
Prior to the adoption of new accounting guidance, deferrable acquisition costs
were those that varied with and were primarily related to the acquisition of new
or renewal business, regardless of whether the efforts were successful or
unsuccessful. Under the new standard, we defer only costs that are directly
related to the successful acquisition or renewal of insurance contracts,
including:
• Commissions for successful contract acquisitions;
• Premium-based taxes and assessments;
• Distribution costs directly related to successful contract acquisition;
• Third-party underwriting costs related to contracts that are successfully
acquired; and
• The portion of the salaries and benefits related to employee time spent on
the processing of successfully acquired new and renewal contracts.
All other acquisition-related costs, including costs incurred for soliciting
potential customers, managing distribution and underwriting functions, training,
administration, unsuccessful acquisition or renewal efforts, market research and
product development are not deferrable and are expensed in the period incurred.
Additionally, upon adoption, policy acquisition costs in our Benefits segment
are no longer being deferred, as the application of the new standard to the
short-duration contracts in this segment resulted in an immaterial net impact of
deferral of acquisition costs.
While we have restated DAC amortization to reflect the retrospective reduction
in costs deferred, our policies and methodology have not changed. For more
information on the impact of adoption, see Note 2 of the condensed notes to the
consolidated financial statements.
The following table summarizes our DAC asset balances by segment:
As of June 30, 2012 As of December 31, 2011
(As adjusted)
Deferred Annuities $ 265.2 $ 265.5
Income Annuities 42.3 37.9
Life 68.7 65.0
Total unamortized balance at end
of period 376.2 368.4
Accumulated effect of net
unrealized gains (203.0 ) (182.4 )
Balance at end of period $ 173.2 $ 186.0
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Amortization of DAC
We amortize DAC over the premium paying period or over the lives of the policies
in proportion to the future estimated gross profits (EGPs) of each of these
product lines, as follows:
• Deferred Annuities. The DAC amortization period is typically 20 years for
deferred annuities, although most of the DAC amortization occurs within
the first 10 years because the EGPs are highest during such period. It is
common for deferred annuity policies to lapse after the surrender charge
period expires.
• Income Annuities. The DAC amortization period for SPIAs, including structured settlement annuities, is the benefit payment period. The
benefit payment periods vary by policy; however, 80% of the benefits will
be paid over the next 45 years and nearly all benefits are paid within
80 years of contract issue.
• Life. The DAC amortization period related to universal life policies is
typically 25 years. DAC amortization related to our term life insurance
policies is the premium paying period, which ranges from 10 to 30 years.
To determine the EGPs, we make assumptions as to lapse and withdrawal rates,
expenses, interest margins, mortality experience, long-term equity market
returns and investment performance. Estimating future gross profits is a complex
process requiring considerable judgment and forecasting of events well into the
future.
Changes to assumptions can have a significant impact on DAC amortization. In the
event actual experience differs from our assumptions or our future assumptions
are revised, we adjust our EGPs, which could result in a significant increase in
amortization expense. EGPs are adjusted quarterly to reflect actual experience
to date. For example, for our deferred annuity products, if renewal crediting
rates are greater or lower than the renewal crediting rates we assumed in our
DAC asset amortization models, we would record a change in amortization expense
to reflect the change in our EGPs. For future assumptions we complete a study
and refine our estimates of future gross profits at least 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. This is often referred to as
"unlocking" the DAC asset amortization model. We also revise future assumptions
as needed throughout the year if a significant transaction or trend is
identified that would warrant a change in those assumptions.
The following would generally cause an increase in DAC amortization expense:
Actual experience differs from our assumptions:
• increases to interest margins in the current period from increased yields
or decreased crediting rates;
• increases to lapse and withdrawal rates in the current period;
• decreases to current period expense levels;
• significant investment prepayment related income;
• increases to equity market returns; and
• lower death claims.
Future assumption changes (unlocking):
• decreases in expected future interest margins due to increases in expected
renewal crediting rates and/or decreases to expected investment yields;
• increases to expected future lapse and withdrawal rates;
• increases to future expected expense levels;
• significant investment prepayment activity, which results in decreased
future interest margins;
• decreases to expected equity market returns; and
• higher expected future death claims.
We regularly conduct DAC recoverability analyses, where we compare the current
DAC asset balances with the estimated present value of future profitability of
the underlying business. The DAC asset balance is considered recoverable if the
present value of future profits is greater than the current DAC asset balance.
In connection with our recoverability analyses, we perform sensitivity analyses
on our most significant DAC asset balances, which currently relate to our
deferred annuity, universal life, and BOLI products, to capture the effect that
certain key assumptions
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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 as of December 31, 2011:
• if we increased our future lapse and withdrawal rate assumptions by a
factor of 10%, the DAC asset balance would decrease approximately $4.9;
• if we increased our future expense assumptions by a factor of 10%, the DAC
asset balance would decrease approximately $0.5.
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.
We adjust the unamortized DAC balance for the accumulated effect of net
unrealized gains or losses, which is recorded net of taxes in AOCI. This
adjustment reflects the impact on EGPs as if the unrealized investment gains and
losses had been realized as of the balance sheet date. Currently, our
available-for-sale portfolio is in a net unrealized gain position, primarily due
to the low interest rate environment, and the corresponding adjustment decreases
our DAC balance and AOCI. In periods of rising interest rates, the fair value of
our fixed maturities would generally decrease, and this may result in net
unrealized investment losses. In such circumstances, the DAC adjustment would
increase our DAC balance and increase AOCI. However, this adjustment is limited
to cumulative capitalized acquisition costs plus interest, which would be
$200.0, net of taxes of $130.0, in our Deferred Annuities segment, and $11.0,
net of taxes of $7.1, in our Life segment as of December 31, 2011.
New Accounting Standards
For a discussion of recently adopted accounting pronouncements, see Note 2 in
the accompanying unaudited interim condensed consolidated financial statements.
Sources of Revenues and Expenses
Our primary sources of revenues from our insurance operations are premiums, net
investment income and policy fees and contract charges. Our primary sources of
expenses from our insurance operations are policyholder benefits and claims,
interest credited to policyholder reserves and account balances, and general
business and operating expenses, net of DAC. We allocate shared service
operating expenses to each segment using multiple factors, including employee
headcount, allocated investments, account values and time study results. We also
generate net realized investment gains (losses) on sales or impairment of our
investments and changes in fair value on our equity trading portfolio.
Each of our four business segments maintains its own portfolio of invested
assets, which are managed in accordance with specific guidelines. The net
investment income and realized investment gains (losses) are reported in the
segment in which they occur. We also allocate surplus net investment income to
each segment using a risk-based capital formula. The unallocated portion of net
investment income is reported in the Other segment.
Revenues
Premiums
Premiums consist primarily of premiums from our medical stop-loss and individual
term and whole life insurance products.
Net investment income
Net investment income represents the income earned on our investments, net of
investment expenses, including prepayment related income such as bond make-whole
payments. Net investment income also includes gains or losses from changes in
the fair value of our investments in private equity fund limited partnerships
and the amortization of tax credit investments.
Policy fees, contract charges and other
Policy fees, contract charges and other includes cost of insurance (COI) charges
on our UL and BOLI policies, mortality expense, surrender and other
administrative charges to policyholders, revenues from our non-insurance
businesses, and reinsurance allowance fees.
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Net realized investment gains (losses)
Net realized investment gains (losses) mainly consists of realized gains
(losses) from sales of our investments, realized losses from investment
impairments, changes in fair value on our trading portfolio and changes in fair
value of our FIA options and related FIA embedded derivative.
Benefits and Expenses
Policyholder benefits and claims
Policyholder benefits and claims consist of benefits paid and reserve activity
on medical stop-loss, individual life and BOLI policies.
Interest credited
Interest credited represents interest credited to policyholder reserves and
contract holder general account balances, the impact of mortality and funding
services activity within our Income Annuities segment, and the amortization of
deferred sales inducement assets.
Other underwriting and operating expenses
Other underwriting and operating expenses represent non-deferrable costs related
to the acquisition and ongoing maintenance of insurance and investment
contracts, including certain non-deferrable commissions, policy issuance
expenses and other business and administrative operating costs.
Interest expense
Interest expense primarily includes interest on corporate debt, the impact of
interest rate hedging activities on the debt and amortization of debt issuance
costs.
Amortization of deferred policy acquisition costs
We defer as assets certain commissions, distribution costs and other
underwriting costs that are directly related to the successful acquisition of
new and renewal business. Amortization of previously capitalized DAC is recorded
as an expense.
Use of non-GAAP Financial Measures
Certain tables and related disclosures in this report include non-GAAP financial
measures. We believe these measures provide useful information to investors in
evaluating our financial performance or condition. The non-GAAP financial
measures discussed below are not substitutes for their most directly comparable
GAAP measures. The adjustments made to derive these non-GAAP measures are
important to understanding our overall results of operations and financial
position and, if evaluated without proper context, these non-GAAP measures
possess material limitations. Therefore, our management and board of directors
also separately review the items excluded from or added to the most directly
comparable GAAP measures to arrive at these non-GAAP measures. In addition,
management and our board of directors also analyze each of the comparable GAAP
measures in connection with their review of our results of operations and
financial position.
For a full discussion of each non-GAAP measure, see Item 7 - "Management's
Discussion and Analysis of Financial Condition and Results of Operations - Use
of non-GAAP Financial Measures" in our 2011 10-K.
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As of As of
June 30, December 31,
2012 2011
(As adjusted)
Total stockholders' equity $ 3,378.4 $ 3,114.9
Less: AOCI 1,188.0 1,027.3
Adjusted book value* 2,190.4 2,087.6
Add: Assumed proceeds from exercise of warrants 218.1 218.1
Adjusted book value, as converted* $ 2,408.5 $ 2,305.7
Book value per common share (1) $ 24.46
$ 22.64
Adjusted book value per common share (2)* $ 18.39
$ 17.60
Adjusted book value per common share, as converted (3)* $ 17.44
$ 16.75
For the Twelve Months Ended
June 30, December 31,
2012 2011
(As adjusted)
Return on stockholders' equity, or ROE 6.6 % 7.2 %
Net income (4) $ 203.4 $
195.8
Average stockholders' equity (5) 3,063.5
2,710.2
Operating return on average equity, or ROAE* 9.8 %
9.5 %
Adjusted operating income (6)* $ 204.5 $
190.2
Average adjusted book value (7)* 2,094.3 2,002.4
* Represents a non-GAAP measure.
(1) Book value per common share is calculated as stockholders' equity divided by
outstanding common shares and shares subject to outstanding warrants totaling
138.107 and 137.613 as of June 30, 2012 and December 31, 2011, respectively.
(2) Adjusted book value per common share is calculated as adjusted book value
divided by outstanding common shares totaling 119.131 and 118.637 as of
June 30, 2012 and December 31, 2011, respectively.
(3) Adjusted book value per common share, as converted is calculated as adjusted
book value plus the assumed proceeds from exercise of warrants, divided by
outstanding common shares and shares subject to outstanding warrants totaling
138.107 and 137.613 as of June 30, 2012 and December 31, 2011, respectively.
The warrants, which will expire in 2014, have an exercise price of $11.49.
(4) Net income for the most recent twelve months is used in the calculation of
ROE. For the twelve months ended June 30, 2012, this consisted of quarterly
net income of $43.8, $75.4, $73.7 and $10.5.
(5) Ending stockholder's equity balances for the most recent five quarters are
used in the calculation of ROE. As of June 30, 2012, stockholder's equity for
the most recent five quarters was $3,378.4, $3,154.7, $3,114.9, $3,042.2 and
$2,627.3. As of December 31, 2011, stockholder's equity for the most recent
five quarters was $3,114.9, $3,042.2, $2.627.3, $2,410.2 and $2,356.6.
(6) Adjusted operating income for the most recent twelve months is used in the
calculation of operating ROAE. For the twelve months ended June 30, 2012,
this consisted of quarterly adjusted operating income of $47.2, $59.3, $51.1
and $46.9. Adjusted operating income consists of net income, less after-tax
net realized gains (losses), plus after-tax net realized and unrealized gains
(losses) related to our FIA product. For the twelve months ended June 30,
2012, the net quarterly reconciling amounts were $(5.0), $17.7, $21.8, and
$(37.2). For the twelve months ended December 31, 2011, adjusted operating
income was $190.2, with a net reconciling amount of $3.8.
(7) Ending adjusted book values for the most recent five quarters are used in the
calculation of operating ROAE. Adjusted book value consists of stockholders'
equity, less AOCI. As of June 30, 2012, adjusted book value for the most
recent five quarters was $2,190.4, $2,154.6, $2,087.6, $2,021.1, and
$2,017.6. AOCI, for the most recent five quarters was $1,188.0, $1,000.1,
$1,027.3, $1,021.1and $609.7. As of December 31, 2011, adjusted book value of
the most recent five quarters was $2,087.5, $2,021.0, $2,017.6, $1,966.5 and
$1,919.0. AOCI, for the most recent five quarters was $1,027.3, $1,021.1,
$609.7, $443.7 and $437.6.
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Results of Operations
The following discussion should be read in conjunction with our unaudited
interim condensed consolidated financial statements and the related condensed
notes.
Total Company
Set forth below is a summary of our consolidated financial results. The
variances noted in the total company and segment tables should be interpreted as
increases or (decreases), respectively.
Three Months Ended QTD Six Months Ended YTD
June 30, Variance (%) June 30, Variance (%)
2012 2011 2012 vs. 2011 2012 2011 2012 vs. 2011
(As adjusted) (As adjusted)
Revenues:
Premiums $ 146.8 $ 119.4 22.9 % $ 297.1 $ 240.3 23.6 %
Net investment income 319.2 312.2 2.2 639.7 622.2 2.8
Policy fees, contract charges,
and other 48.8 45.9 6.3 95.1 90.6 5.0
Net realized investment gains
(losses):
Net impairment losses recognized
in earnings (9.4 ) (2.8 ) * (11.9 ) (3.7 )
*
Other net realized investment
gains 3.0 16.9 (82.2 ) 31.4 33.4
(6.0 )
Total net realized investment
gains (losses) (6.4 ) 14.1 * 19.5 29.7 (34.3 )
Total revenues 508.4 491.6 3.4 1,051.4 982.8 7.0
Benefits and expenses:
Policyholder benefits and claims 104.5 83.7 24.9 209.7 176.0 19.1
Interest credited 230.3 225.1 2.3 459.8 453.4 1.4
Other underwriting and operating
expenses 92.6 76.1 21.7 175.6 148.0 18.6
Interest expense 8.2 8.0 2.5 16.4 16.0 2.5
Amortization of deferred policy
acquisition costs 15.4 16.4 (6.1 ) 31.2 32.7 (4.6 )
Total benefits and expenses 451.0 409.3 10.2 892.7 826.1 8.1
Income from operations before
income taxes 57.4 82.3 (30.3 ) 158.7 156.7
1.3
Total provision for income taxes 13.6 24.2 (43.8 ) 39.5 45.1 (12.4 )
Net income $ 43.8 $ 58.1 (24.6 )% $ 119.2 $ 111.6 6.8 %
Net income per common share(1):
Basic $ 0.32 $ 0.42 (23.8 )% $ 0.86 $ 0.81 6.2 %
Diluted $ 0.32 $ 0.42 (23.8 ) $ 0.86 $ 0.81 6.2
Weighted-average common shares
outstanding:
Basic 138.090 137.523 0.4 % 137.933 137.408 0.4 %
Diluted 138.094 137.532 0.4 137.936 137.417 0.4
Non-GAAP Financial Measures:
Adjusted operating income $ 47.2 $ 48.5 (2.7 )% $ 106.5 $ 92.2
15.5 %
Adjusted operating income per
common share:
Basic $ 0.34 $ 0.35 (2.9 )% $ 0.77 $ 0.67 14.9 %
Diluted $ 0.34 $ 0.35 (2.9 ) $ 0.77 $ 0.67 14.9
Reconciliation to net income:
Net income $ 43.8 $ 58.1 (24.6 ) $ 119.2 $ 111.6
6.8
Less: Net realized investment
gains (losses) (net of taxes of
$(2.2), $4.9, $6.8 and $10.4) (4.2 ) 9.2 * 12.7 19.3 (34.2 )
Add: Net realized losses - FIA
(net of taxes of $(0.4), $(0.2),
$0.0 and $(0.0)) (0.8 ) (0.4 ) (100.0 ) - (0.1 ) (100.0 )
Adjusted operating income $ 47.2 $ 48.5 (2.7 )% $ 106.5 $ 92.2 15.5 %
* Represents percentage variances that are not meaningful or are explained
through the discussion of other variances.
(1) Basic and diluted net income per common share includes all participating
securities, such as warrants and unvested restricted shares, based on the
application of
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the two-class method. Diluted net income per common share also includes the
dilutive impact of non-participating securities, to the extent dilutive, such
as stock options and shares estimated to be issued under the employee stock
purchase plan, based on application of the treasury stock method.
Antidilutive awards were excluded from the computation of dilutive net income
per share.
The following table sets forth pre-tax adjusted operating income, by segment:
Three Months Ended QTD Six Months Ended YTD
June 30, Variance (%) June 30, Variance (%)
2012 2011 2012 vs. 2011 2012 2011 2012 vs. 2011
(As adjusted) (As adjusted)
Segment pre-tax adjusted
operating income (loss):
Benefits $ 16.3 $ 19.0 (14.2 )% $ 41.4 $ 33.0 25.5 %
Deferred Annuities 23.8 21.1 12.8 49.6 41.8 18.7
Income Annuities 16.8 12.6 33.3 31.3 21.5 45.6
Life 13.2 17.3 (23.7 ) 27.7 34.4 (19.5 )
Other (7.5 ) (2.4 ) * (10.8 ) (3.8 ) *
Pre-tax adjusted operating
income (1) $ 62.6 $ 67.6 (7.4 )% $ 139.2 $ 126.9 9.7 %
Add: Net realized investment
gains (losses), excluding FIA (5.2 ) 14.7 * 19.5 29.8 (34.6 )
Income from operations before
incomes taxes $ 57.4 $ 82.3 (30.3 )% $ 158.7 $ 156.7 1.3 %
* Represents percentage variances that are not meaningful or are explained
through the discussion of other variances.
(1) Represents a non-GAAP measure. For a definition of this measure, see - "Use
of non-GAAP Financial Measures" in the 2011 10-K.
Three Months Ended June 30, 2012 Compared to the Three Months Ended June 30,
2011
Summary of Results
Net income decreased $14.3 as a result of lower pre-tax adjusted operating
income and realized losses on our investment portfolio, compared to realized
gains in the second quarter of 2011. In addition, the provision for income taxes
decreased $10.6 on lower pre-tax income and an increase in tax credits, which
drove a lower effective tax rate of 23.7% for the three months ended June 30,
2012 compared to 29.4% for the same period in 2011.
Net realized investment gains (losses) decreased $20.5. This was driven by a
decrease in net gains on sales in our fixed maturity portfolio, and an increase
in impairments. Net gains on sales of fixed maturities were $17.3 for the three
months ended June 30, 2012 compared to $28.2 for the three months ended June 30,
2011. Impairments increased to $(9.4) for second quarter 2012, compared to
$(2.8) for second quarter 2011. For further discussion of our investment results
and portfolio refer to - "Investments."
Further discussion of adjusted operating income drivers described above:
Pre-tax adjusted operating income decreased due to declines in two of our four
business segments, as well as higher losses in our Other segment. Further, other
underwriting and operating expenses increased $16.5 over second quarter 2011
levels, primarily due to higher employee-related expenses and professional
services expenses, including costs related to our Grow & Diversify initiatives.
Our Benefits segment's profitability decreased $2.7 over second quarter 2011
levels, driven by a higher loss ratio and higher expenses related to the build
out of our group life and disability income insurance business, one of our
Grow & Diversify initiatives. The loss ratio increased to 65.5% for the three
months ended June 30, 2012, compared to 62.4% in the prior-year period.
Our Deferred Annuities segment's profitability increased $2.7, as the investment
margin (net investment income less interest credited) increased $6.1 on higher
fixed account values and a higher year-over-year interest spread. This was
partially offset by increased expenses related to our True VA product, one of
our Grow & Diversify initiatives that launched in June 2012.
Our Income Annuities segment's profitability increased $4.2 on an improved
interest margin and an increase in mortality gains.
Our Life segment's profitability decreased $4.1 primarily due to higher
individual claims and increased employee-related expenses primarily associated
with our Grow & Diversify initiatives.
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Our Other segment's losses increased $5.1 primarily due to lower net investment
income related to alternative investments and tax credit investments.
Six Months Ended June 30, 2012 Compared to the Six Months Ended June 30, 2011
Summary of Results
Net income increased $7.6 as a result of higher pre-tax adjusted operating
income and a lower effective tax rate, partially offset by lower net realized
investment gains. The provision for income taxes decreased $5.6 due to an
increase in tax credits, which drove a lower effective tax rate of 24.9% for the
six months ended June 30, 2012 compared to 28.8% for the same period in 2011.
Net realized investment gains decreased $10.2, driven by higher impairments in
the first half of 2012. Impairment losses were $11.9 in the first six months of
2012, compared to $3.7 for the same period in 2011. For further discussion of
our investment results and portfolio refer to - "Investments."
Further discussion of adjusted operating income drivers described above:
Pre-tax adjusted operating income increased on higher profitability in three of
our four business segments. Further, other underwriting and operating expenses
increased $27.6 over expense levels for the first half of 2011, primarily due to
higher employee-related expenses and professional services expenses, including
costs related to our Grow & Diversify initiatives.
Our Benefits segment's profitability increased $8.4 for the six months ended
June 30, 2012, compared to the same period in 2011. This was driven by an
improved loss ratio on a larger block of medical stop-loss business, a result of
policies added from a block of business acquired in July 2011 as well as organic
growth from strong sales. The loss ratio improved to 63.5% for the six months
ended June 30, 2012, compared to 65.0% for the same period in 2011. This was
partially offset by higher expenses related to the build out of our group life
and disability income insurance business.
Our Deferred Annuities segment's profitability increased $7.8 as the investment
margin (net investment income less interest credited) increased $12.8. This was
driven by a higher year-over-year base interest spread on increased fixed
account values, which were partially offset by higher expenses primarily related
to our True VA product.
Our Income Annuities segment's profitability increased $9.8 on mortality gains
of $11.8 during the first half of 2012, compared to mortality gains of $5.6 for
the same period in 2011, as well as contributions from higher year-over-year
interest spreads.
Our Life segment's profitability decreased $6.7 primarily due to higher claims
and a lower BOLI base return on assets (ROA). In addition, we experienced
increased employee-related expenses, primarily related to the implementation of
our Grow & Diversify initiatives.
Our Other segment's losses increased $7.0 primarily due to lower net investment
income related to alternative investments and tax credit investments.
Division Operating Results
The results of operations and selected operating metrics for our five segments
(Benefits, Deferred Annuities, Income Annuities, Life and Other) for the three
and six months ended June 30, 2012 and 2011 are set forth in the following
respective sections.
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Benefits
The following table sets forth the results of operations relating to our
Benefits segment:
Three Months Ended QTD Six Months Ended YTD
June 30, Variance (%) June 30, Variance (%)
2012 2011 2012 vs. 2011 2012 2011 2012 vs. 2011
(As adjusted) (As adjusted)
Operating revenues:
Premiums $ 137.9 $ 109.8 25.6 % $ 278.4 $ 219.8 26.7 %
Net investment income 5.3 4.4 20.5 10.7 8.6 24.4
Policy fees, contract charges,
and other 3.5 3.7 (5.4 ) 6.5 7.0 (7.1 )
Total operating revenues 146.7 117.9 24.4 295.6 235.4 25.6
Benefits and expenses:
Policyholder benefits and
claims 90.3 68.5 31.8 176.9 142.8 23.9
Other underwriting and
operating expenses 40.1 30.4 31.9 77.3 59.6 29.7
Total benefits and expenses 130.4 98.9 31.9 254.2 202.4 25.6
Segment pre-tax adjusted
operating income $ 16.3 $ 19.0 (14.2 )% $ 41.4 $ 33.0 25.5 %
The following table sets forth selected historical operating metrics relating to
our Benefits segment for the three and six months ended:
Three Months Ended Six Months Ended
June 30, June 30,
2012 2011 2012 2011
(As adjusted) (As adjusted)Loss ratio (1) 65.5 % 62.4 % 63.5 % 65.0 %
Expense ratio (2) 29.1 26.9 27.8 26.3
Combined ratio (3) 94.6 89.3 91.3 91.3
Medical stop-loss - loss ratio (4) 65.8 63.6 63.8 66.5
Total sales (5) $ 35.6 $ 23.4 $ 102.3 $ 72.1
(1) Loss ratio represents policyholder benefits and claims incurred divided by
premiums earned.
(2) Expense ratio is equal to other underwriting and operating expenses of our
insurance operations 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 incurred divided by medical stop-loss premiums earned.
(5) Total sales represents annualized first-year premiums net of first year
policy lapses.
Three Months Ended June 30, 2012 Compared to the Three Months Ended June 30,
2011
Summary of Results
Segment pre-tax adjusted operating income decreased $2.7, primarily the result
of increased expenses related to the build-out of Symetra's group life and
disability income insurance business, and a higher loss ratio. The second
quarter of 2012 loss ratio increased to 65.5%, compared to 62.4% for the same
period in 2011, due to reinsurance related adjustments totaling $3.3 and claims
experience of the medical stop-loss business acquired in July 2011.
In addition to the drivers discussed above, we consider the following
information regarding operating revenues and benefits and expenses useful in
understanding our results.
Operating Revenues
Premiums increased $28.1 driven by medical stop-loss policies added from a block
of business acquired in July 2011, as well as organic growth from strong first
quarter sales.
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Benefits and Expenses
Policyholder benefits and claims increased $21.8 driven by growth in our medical
stop-loss business. The second quarter of 2012 loss ratio increased compared to
the same period in 2011, which primarily reflects higher claims on the block of
business acquired in July 2011.
The $9.7 increase in other underwriting and operating expenses was driven mainly
by expenses related to expansion of our group life and disability operations as
part of our Grow & Diversify strategy. Also contributing to the increase were
higher commissions and incentive compensation driven by improved profitability
on a larger block of business.
Six Months Ended June 30, 2012 Compared to the Six Months Ended June 30, 2011
Summary of Results
Segment pre-tax adjusted operating income increased $8.4 primarily the result of
an improved loss ratio on a larger medical stop-loss block of business. The six
months ended June 30, 2012 loss ratio improved to 63.5%, compared to 65.0% for
the same period in 2011.
In addition to the drivers discussed above, we consider the following
information regarding operating revenues and benefits and expenses useful in
understanding our results.
Operating Revenues
Premiums increased $58.6 driven by medical stop-loss policies added from a block
of business acquired in July 2011, as well as organic growth from strong first
quarter sales.
Benefits and Expenses
Policyholder benefits and claims increased $34.1 driven by growth in our medical
stop-loss business. The six months ended June 30, 2012 loss ratio decreased as
compared to the same period in 2011, which reflects favorable claims experience
on a larger medical stop-loss business.
The $17.7 increase in other underwriting and operating expenses was driven by
higher commissions and incentive compensation expense, which was a result of
improved profitability on a larger block of business. Also contributing to the
increase were expenses related to expansion of our group life and disability
operations as part of our Grow & Diversify strategy.
Deferred Annuities
The following table sets forth the results of operations relating to our
Deferred Annuities segment:
Three Months Ended QTD Six Months Ended YTD
June 30, Variance (%) June 30, Variance (%)
2012 2011 2012 vs. 2011 2012 2011 2012 vs. 2011
(As adjusted) (As adjusted)
Operating revenues:
Net investment income $ 135.2 $ 128.2 5.5 % $ 269.6 $ 251.3 7.3 %
Policy fees, contract charges, and
other 5.1 5.5 (7.3 ) 10.2 10.6 (3.8 )
Net realized losses - FIA (1.2 ) (0.6 ) (100.0 ) - (0.1 ) (100.0 )
Total operating revenues 139.1 133.1 4.5 279.8 261.8 6.9
Benefits and expenses:
Policyholder benefits and claims 0.1 - * - (0.1 ) (100.0 )
Interest credited 80.8 79.9 1.1 163.0 157.5 3.5
Other underwriting and operating
expenses 21.2 17.5 21.1 40.2 33.7 19.3
Amortization of deferred policy
acquisition costs 13.2 14.6 (9.6 ) 27.0 28.9 (6.6 )
Total benefits and expenses 115.3 112.0 2.9 230.2 220.0 4.6
Segment pre-tax adjusted operating
income $ 23.8 $ 21.1 12.8 % $ 49.6 $ 41.8 18.7 %
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* Represents percentage variances that are not meaningful or are explained
through the discussion of other variances.
The following table sets forth selected historical operating metrics relating to
our Deferred Annuities segment as of, or for the three and six months ended:
Three Months Ended Six Months Ended
June 30, June 30,
2012 2011 2012 2011 Account values-Fixed annuities $ 10,963.7$ 10,127.3
Account values-Variable annuities 715.9 796.9
Interest spread (1) 1.88 % 1.81 % 1.91 % 1.83 %
Base earned yield 4.87 5.06 4.90 5.08
Base credited yield 3.03 3.25 3.03 3.26
Base interest spread (2) 1.84 1.81 1.87 1.82
Total sales (3) $ 325.5 $ 446.5 $ 679.3 $ 1,064.9
(1) Interest spread is the difference between the net investment yield and the
credited rate to policyholders. The net investment yield is the approximate
yield on invested assets in the general account attributed to the segment.
The credited rate is the approximate rate credited on policyholder fixed
account values. Interest credited is subject to contractual terms, including
minimum guarantees. Interest is credited on a daily basis and therefore
quarters with more/less days of interest reduces/increases interest spread
and base interest spread.
(2) Base interest spread is the interest spread adjusted to exclude items that
can vary significantly from period to period due to a number of factors and,
therefore, may contribute to yields that are not indicative of the underlying
trends. This is primarily the impact of asset prepayments, such as bond make
whole premiums, net of any related deferred sales inducement unlocking, and
the MBS prepayment speed adjustment. Interest is credited on a daily basis
and therefore quarters with more/less days of interest reduces/increases
interest spread and base interest spread.
(3) Total sales represent deposits for new policies net of first year policy
lapses and/or surrenders.
Three Months Ended June 30, 2012 Compared to the Three Months Ended June 30,
2011
Summary of Results
Segment pre-tax adjusted operating income increased $2.7, primarily driven by
higher fixed annuities account values, which increased $0.9 billion to $11.0
billion. Also contributing to the increase in income was a higher year-over-year
interest spread, reflecting continued disciplined pricing on new business and
management of renewal crediting rates on existing business. These results were
partially offset by higher expenses primarily related to our True VA product,
which was launched in June 2012.
In addition to the drivers discussed above, we consider the following
information regarding operating revenues and benefits and expenses useful in
understanding our results.
Operating Revenues
Net investment income increased $7.0, driven by a $0.9 billion increase in
average invested assets from increased fixed annuities account values. This
income growth from higher average invested assets was partially offset by lower
yields on fixed maturity purchases. Additionally, prepayment-related income
increased $1.1, to $1.2 for the three months ended June 30, 2012 compared to
$0.1 for the same period in 2011.
Benefits and Expenses
Interest credited increased $0.9, primarily due to a $0.9 billion increase in
average fixed annuities account values. DAC amortization, which normally
increases as account values increase, decreased $1.4 as a result of an
adjustment to our DAC model and lower lapses than previously assumed in our
models. Other underwriting and operating expenses increased $3.7, primarily
related to expenses associated with our True VA product.
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Six Months Ended June 30, 2012 Compared to the Six Months Ended June 30, 2011
Summary of Results
Segment pre-tax adjusted operating income increased $7.8, primarily driven by
higher fixed annuities account values, which increased $0.9 billion to $11.0
billion. Also contributing to the increase in income was a higher year-over-year
base interest spread, reflecting continued disciplined pricing on new business
and management of renewal crediting rates on existing business. These results
were partially offset by higher expenses related to our True VA product.
In addition to the drivers discussed above, we consider the following
information regarding operating revenues and benefits and expenses useful in
understanding our results.
Operating Revenues
Net investment income increased $18.3, driven by a $1.1 billion increase in
average invested assets from increased fixed annuities account values. This
income growth from higher average invested assets was partially offset by lower
yields on fixed maturity purchases and recent commercial mortgage loan
originations.
Benefits and Expenses
Interest credited increased $5.5, primarily due to a $1.1 billion increase in
average fixed annuities account values. DAC amortization, which normally
increases as account values increase, decreased $1.9 as a result of an
adjustment to our DAC model and lower lapses than previously assumed in our
models. Other underwriting and operating expenses increased $6.5, primarily
related to expenses associated with our True VA product.
Income Annuities
The following table sets forth the results of operations relating to our Income
Annuities segment:
Three Months Ended QTD Six Months Ended YTD
June 30, Variance (%) June 30, Variance (%)
2012 2011 2012 vs.2011 2012 2011 2012 vs. 2011
Operating revenues:
Net investment income
$ 104.5 $ 102.3 2.2 % $ 208.6 $ 207.3 0.6 %
Policy fees, contract charges,
and other 2.0 0.4 * 3.2 0.6 *
Total operating revenues 106.5 102.7 3.7 211.8 207.9 1.9
Benefits and expenses:
Interest credited 82.9 83.6 (0.8 ) 167.4 173.3 (3.4 )
Other underwriting and operating
expenses 5.9 5.9 - 11.6 11.8 (1.7 )
Amortization of deferred policy
acquisition costs 0.9 0.6 50.0 1.5 1.3 15.4
Total benefits and expenses 89.7 90.1 (0.4 ) 180.5 186.4 (3.2 )
Segment pre-tax adjusted
operating income $ 16.8 $ 12.6 33.3 % $ 31.3 $ 21.5 45.6 %
* Represents percentage variances that are not meaningful or are explained
through the discussion of other variances.
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The following table sets forth selected historical operating metrics relating to
our Income Annuities segment as of, or for the three and six months ended:
Three Months Ended Six Months Ended
June 30, June 30,
2012 2011 2012 2011
Reserves (1) $ 6,613.6 $ 6,646.6
Interest spread (2) 0.70 % 0.48 % 0.64 % 0.55 %
Base earned yield 6.16 6.09 6.12 6.11
Base credited yield 5.57 5.59 5.58 5.61
Base interest spread (3) 0.59 0.50 0.54 0.50
MBS prepayment speed adjustment (4) $ 0.1 $ (0.7 ) $ 0.2 $ 1.1
Mortality gains (5) 6.4 4.9 11.8 5.6
Total sales (6) 95.3 38.7 151.1 103.2
(1) Reserves represent the present value of future income annuity benefits and
assumed expenses, discounted by the assumed interest rate. This metric
represents the amount of our in-force book of business.
(2) Interest spread is the difference between the net investment yield and the
credited rate to policyholders. The net investment yield is the approximate
yield on invested assets in the general account attributed to the segment.
The credited rate is the approximate rate credited on policyholder reserves.
(3) Base interest spread is the interest spread adjusted to exclude items that
can vary significantly from period to period due to a number of factors and,
therefore, may contribute to yields that are not indicative of the underlying
trends. This is primarily the impact of asset prepayments, such as bond make
whole premiums and the MBS prepayment speed adjustment.
(4) MBS prepayment speed adjustment is the impact to net investment income due to
the change in prepayment speeds on the underlying collateral of
mortgage-backed securities.
(5) Mortality gains (losses) represent the difference between actual and expected
reserves released on our life contingent annuities.
(6) Total sales represent deposits for new policies net of first year policy
lapses and/or surrenders.
Three Months Ended June 30, 2012 Compared to the Three Months Ended June 30,
2011
Summary of Results
Segment pre-tax adjusted operating income increased $4.2 primarily due to higher
interest spreads on slightly lower reserves and an increase in mortality gains,
which was partially offset by lower income from funding services activity.
In addition to the drivers discussed above, we consider the following
information regarding benefits and expenses useful in understanding our results.
Operating Revenues
Net investment income increased $2.2 driven by an increase in base earned
yields, which is a result of higher year-over-year allocations of mortgage
loans. Also contributing to the increase was a $2.2 increase in
prepayment-related income, primarily due to make whole premiums received on bond
prepayments and favorable changes in our MBS prepayment speed adjustment. Total
prepayment-related income was $1.8 for the second quarter of 2012, compared to
$(0.4) for the second quarter of 2011.
Benefits and Expenses
Interest credited decreased $0.7 driven primarily by favorable mortality
experience as we experienced mortality gains of $6.4 in the second quarter of
2012, compared to gains of $4.9 in the second quarter of 2011. Mortality
experience is volatile and can fluctuate significantly from quarter to quarter.
In addition, lower interest credited on slightly lower reserves was offset by
decreased funding services activity.
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Six Months Ended June 30, 2012 Compared to the Six Months Ended June 30, 2011
Summary of Results
Segment pre-tax adjusted operating income increased $9.8 primarily due to
mortality gains of $11.8 during the six months ended June 30, 2012, compared to
gains of $5.6 for the same period in 2011. Higher base interest spreads on
slightly lower reserves also contributed to the improved earnings.
In addition to the drivers discussed above, we consider the following
information regarding benefits and expenses useful in understanding our results.
Operating Revenues
Net investment income increased $1.3, driven by an increase in
prepayment-related income, primarily make whole premiums on bond prepayments and
mortgage loan prepayment fees, partially offset by unfavorable changes in our
MBS prepayment speed adjustment.
Benefits and Expenses
Interest credited decreased $5.9 driven primarily by favorable mortality
experience as we experienced mortality gains of $11.8 for the six months ended
June 30, 2012, compared to gains of $5.6 in the same period in 2011. Mortality
experience is volatile and can fluctuate significantly from quarter to quarter.
In addition, lower interest credited on slightly lower reserves was offset by
decreased funding services activity.
Life
The following table sets forth the results of operations relating to our Life
segment:
Three Months Ended QTD Six Months Ended YTD
June 30, Variance (%) June 30, Variance (%)
2012 2011 2012 vs. 2011 2012 2011 2012 vs. 2011
(As adjusted) (As adjusted)
Operating revenues:
Premiums $ 8.9 $ 9.6 (7.3 )% $ 18.7 $ 20.5 (8.8 )%
Net investment income 71.8 71.1 1.0 143.4 142.3 0.8
Policy fees, contract charges,
and other 32.6 30.9 5.5 64.3 61.6 4.4
Total operating revenues 113.3 111.6 1.5 226.4 224.4 0.9
Benefits and expenses:
Policyholder benefits and claims 14.1 15.2 (7.2 ) 32.8 33.3 (1.5 )
Interest credited 67.3 62.2 8.2 130.5 123.9 5.3
Other underwriting and operating
expenses 17.4 15.7 10.8 32.7 30.3 7.9
Amortization of deferred policy
acquisition costs 1.3 1.2 8.3 2.7 2.5 8.0
Total benefits and expenses 100.1 94.3 6.2 198.7 190.0 4.6
Segment pre-tax adjusted
operating income $ 13.2 $ 17.3 (23.7 )% $ 27.7 $ 34.4 (19.5 )%
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The following table sets forth selected historical operating metrics relating to
our Life segment as of, or for the three and six months ended:
Three Months Ended Six Months
June 30, Ended June 30,
2012 2011 2012 2011
Individual insurance:
Individual claims (1) $ 15.1 $ 12.1 $ 30.8 $ 27.8
UL account value (2) 714.6 635.5
UL interest spread (3) 1.70 % 1.58 % 1.70 % 1.72 %
UL base interest spread (4) 1.66 1.61 1.68 1.68
Individual sales (5) $ 3.2 $ 2.9 $ 6.2 $ 5.3
BOLI:
BOLI account value (2) $ 4,587.3 $ 4,442.0
BOLI ROA (6) 1.00 % 0.98 % 1.00 % 1.07 %
BOLI base ROA (7) 0.91 1.01 0.92 1.06
BOLI sales (8) $ - $ - $ 2.0 $ -
(1) Individual claims represents incurred claims, net of reinsurance, on our term
and universal life policies.
(2) UL account value and BOLI account value represent our liabilities to our
policyholders. UL account values include SPL account values of $203.1 and
$114.9 as of June 30, 2012 and 2011, respectively.
(3) UL interest spread, excluding SPL, is the difference between the net
investment yield and the credited rate to policyholders. The net investment
yield is the approximate yield on invested assets in the general account
attributed to UL policies. The credited rate is the approximate rate credited
on UL policyholder fixed account values. Interest credited is subject to
contractual terms, including minimum guarantees.
(4) UL base interest spread, excluding SPL, is UL interest spread adjusted to
exclude items that can vary significantly from period to period due to a
number of factors and, therefore, may contribute to yields that are not
indicative of the underlying trends. This is primarily the impact of asset
prepayments, such as bond make whole premiums, the MBS prepayment speed
adjustment, and reserve adjustments.
(5) Individual sales represents annualized first year premiums for recurring
premium products, and 10% of new single premium deposits net of first year
policy lapses and/or surrenders.
(6) BOLI ROA is a measure of the gross margin on our BOLI book of business. This
metric is calculated as the difference between our BOLI revenue earnings rate
and our BOLI policy benefits rate. The revenue earnings rate is calculated as
revenues divided by average invested assets. The policy benefits rate is
calculated as total policy benefits divided by average account value. The
policy benefits used in this metric do not include expenses.
(7) BOLI base ROA is BOLI ROA adjusted to exclude items that can vary
significantly from period to period due to a number of factors and,
therefore, may contribute to yields that are not indicative of the underlying
trends. This is primarily the impact of asset prepayments, such as bond make
whole premiums, the MBS prepayment speed adjustment, and reserve adjustments.
(8) BOLI sales represents 10% of new BOLI total deposits.
Three Months Ended June 30, 2012 Compared to the Three Months Ended June 30,
2011
Summary of Results
Segment pre-tax adjusted operating income decreased $4.1 primarily driven by
higher individual claims experience, and increased employee-related expenses
related to our Grow & Diversify initiatives.
In addition to the drivers discussed above, we consider the following
information regarding operating revenues and benefits and expenses useful in
understanding our results.
Operating Revenues
Net investment income increased $0.7, driven by an increase in average invested
assets, primarily related to BOLI and UL account values. This was partially
offset by lower yields in 2012 on asset purchases, including reinvestment, over
the past twelve months.
Policy fees, contract charges, and other increased $1.7 due to higher COI and
administrative fees on larger blocks of business for our UL and BOLI products.
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Benefits and Expenses
Benefit related expenses (policyholder benefits and claims, and interest
credited) increased $4.0, primarily due to higher claims on our individual
insurance business. In addition, we experienced an increase in incurred interest
on higher BOLI and UL account values that was partially offset by lower BOLI
claims. Other underwriting and operating expenses increased $1.7 associated with
employee-related expenses.
Six Months Ended June 30, 2012 Compared to the Six Months Ended June 30, 2011
Summary of Results
Segment pre-tax adjusted operating income decreased $6.7 primarily driven by
higher individual claims experience, and a lower BOLI base ROA as a result of
lower reinvestment rates. Also contributing to the earnings decline was higher
administrative expenses associated with the build out of the Life Division team
and expenses related to our Grow & Diversify initiatives.
In addition to the drivers discussed above, we consider the following
information regarding operating revenues and benefits and expenses useful in
understanding our results.
Operating Revenues
Net investment income increased $1.1 due to an increase in average invested
assets, primarily related to higher BOLI and UL account values. This was
partially offset by lower yields in the six months ended June 30, 2012, compared
to the same period in 2011, which was the result of lower yields on asset
purchases over the past twelve months.
Benefits and Expenses
Benefit related expenses (policyholder benefits and claims, and interest
credited) increased $6.1. This was primarily driven by higher claims on our
individual insurance products, as well as an increase in interest credited on
higher BOLI and UL account values. Other underwriting and operating expenses
increased $2.4 due to higher employee-related expenses, primarily related to the
implementation of our Grow & Diversify initiatives.
Other
The following table sets forth the results of operations relating to our Other
segment:
Three Months Ended QTD Six Months Ended YTD
June 30, Variance (%) June 30, Variance (%)
2012 2011 2012 vs. 2011 2012 2011 2012 vs. 2011
Operating revenues:
Net investment income $ 2.4 $ 6.2 (61.3 )% $ 7.4 $ 12.7 (41.7 )%
Policy fees, contract charges, and
other 5.6 5.4 3.7 10.9 10.8 0.9
Total operating revenues 8.0 11.6 (31.0 ) 18.3 23.5 (22.1 )
Benefits and expenses:
Interest credited (0.7 ) (0.6 ) (16.7 ) (1.1 ) (1.3 ) 15.4
Other underwriting and operating
expenses 8.0 6.6 21.2 13.8 12.6 9.5
Interest expense 8.2 8.0 2.5 16.4 16.0 2.5
Total benefits and expenses 15.5 14.0 10.7 % 29.1 27.3 6.6 %
Segment pre-tax adjusted operating
loss $ (7.5 ) $ (2.4 ) * $ (10.8 ) $ (3.8 ) *
* Represents percentage variances that are not meaningful or are explained
through the discussion of other variances.
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Three Months Ended June 30, 2012 Compared to the Three Months Ended June 30,
2011
Summary of Results
Our Other segment reported pre-tax adjusted operating losses of $7.5 for the
second quarter of 2012 compared with losses of $2.4 for the same period in 2011.
This decline in results was primarily due to lower net investment income on
alternative and tax credit investments. Tax credit investments reduce investment
income, but provide tax benefits that help decrease our effective tax rate. See
"Investments - Investments in Limited Partnerships - Tax Credit Investments" for
further information. Additionally, lower yields on our fixed maturities were
partially offset by increased mortgage loan investment income.
Six Months Ended June 30, 2012 Compared to the Six Months Ended June 30, 2011
Summary of Results
Our Other segment reported pre-tax adjusted operating losses of $10.8 for the
six months ended June 30, 2012 compared with losses of $3.8 for the same period
in 2011. This decline in results was primarily due to lower net investment
income, mainly related to tax credit and alternative investments.
Investments
Our investment portfolio is structured with the objective of supporting the
expected cash flows of our liabilities and producing stable returns over the
long term. The composition of our portfolio reflects our asset management
philosophy of protecting principal and receiving appropriate reward for risk.
Our investment portfolio mix as of June 30, 2012 consisted in large part of high
quality fixed maturities and commercial mortgage loans we originated, as well as
a smaller allocation of high yield fixed maturities, marketable equity
securities, investments in limited partnerships (primarily tax credit
investments and private equity funds) and other investments. Our
marked-to-market portfolio of securities, also referred to as our equity
investments, mainly support investment strategies including asset and liability
matching strategies for certain long-duration insurance products. These equity
investments include common stock, investments in REITs and convertible bonds. We
believe that prudent levels of equity investments offer enhanced long-term,
after-tax total returns to support a portion of our longest duration
liabilities.
The following table presents the composition of our investment portfolio:
As of June 30, 2012 As of December 31, 2011
Amount % of Total Amount % of Total
Types of Investments
Fixed maturities,
available-for-sale:
Public $ 22,439.9 83.0 % $ 21,968.8 83.9 %
Private 860.9 3.2 936.4 3.6
Marketable equity securities,
available-for-sale(1) 49.8 0.2 50.3 0.2
Marketable equity securities,
trading(2) 501.8 1.9 381.7 1.4
Mortgage loans, net 2,827.8 10.5 2,517.6 9.6
Policy loans 67.8 0.2 69.0 0.3
Investments in limited
partnerships(3):
Private equity funds 27.9 0.1 27.8 0.1
Tax credit investments 219.8 0.8 199.1 0.8
Other invested assets 41.9 0.1 21.0 0.1
Total $ 27,037.6 100.0 % $ 26,171.7 100.0 %
(1) Primarily includes non-redeemable preferred stock.
(2) Includes investments in common stock, including REITs, and investments in
mutual funds.
(3) Investments in private equity funds are carried at fair value, while our
limited partnership interests related to tax credit investments are carried
at amortized cost.
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The increase in invested assets during the first six months of 2012 is primarily
due to portfolio growth generated by sales of fixed deferred annuities and an
increase in the net unrealized gain position of our available-for-sale fixed
maturities. As of June 30, 2012 and December 31, 2011, we had net unrealized
gains of $2.1 billion and $1.8 billion on our fixed maturity portfolio,
respectively.
Investment Returns
Net Investment Income
Return on invested assets is an important element of our financial results. The
following table sets forth the income yield and net investment income, excluding
realized investment gains (losses), for each major investment category:
For the Three Months Ended For the Three Months Ended
June 30, 2012 June 30, 2011
Yield(1) Amount Yield(1) Amount
Types of Investments
Fixed maturities,
available-for-sale 5.32 % $ 281.4 5.42 % $ 283.1
Marketable equity securities,
available-for-sale 8.45 1.2 8.46 1.1
Marketable equity securities,
trading 2.71 2.9 2.91 2.2
Mortgage loans, net 6.06 41.7 6.36 31.3
Policy loans 5.67 0.9 5.84 1.0
Investments in limited
partnerships:
Private equity funds 3.21 0.2 22.84 1.7
Tax credit investments(2) (6.57 ) (4.5 ) (5.92 ) (3.0 )
Other income producing assets(3) 2.68 2.1 1.70 1.4
Gross investment income before
investment expenses 5.20 325.9 5.35 318.8
Investment expenses (0.11 ) (6.7 ) (0.11 ) (6.6 )
Net investment income 5.09 % $ 319.2 5.24 % $ 312.2
(1) Yields are determined based on monthly averages calculated using beginning
and end-of-period balances. Yields for fixed maturities are based on
amortized cost. Yields for equity securities, including investments in
limited partnerships, are based on cost. Yields for all other asset types are
based on carrying values.
(2) The negative yield from these tax credit investments is offset by U.S.
federal income tax benefits. The total benefit to net income was $4.2 and
$2.2 for the three months ended June 30, 2012 and 2011, respectively.
(3) Other income producing assets includes other invested assets, short-term
investments and cash and cash equivalents.
For the three months ended June 30, 2012, net investment income increased 2.2%
compared to the same period in 2011, driven by an increase in invested assets on
sales of our fixed deferred annuities. The income increase driven by growth in
invested assets was partially offset by a decrease in the total net investment
yield, which decreased to 5.09% for the three months ended June 30, 2012 from
5.24% for the same period in 2011. This reduction reflects the prolonged low
interest rate environment. In an attempt to mitigate the effects of this, we
continued to increase our underwriting of commercial mortgage loans, which
generally provide higher yields than fixed maturities.
We continue to experience prepayment activity and related prepayment income as a
result of the low interest rate environment. Prepayment-related income generated
approximately 7 basis points (bps) of yield in the three months ended June 30,
2012, compared to a decrease of (1)bp in the same period in 2011.
Prepayment-related income includes amounts from corporate action activities,
such as make-whole premiums or consent fees on early calls of fixed maturities,
prepayment fees on commercial mortgage loans and prepayment speed adjustments on
structured securities. Make-whole premiums and consent fees are collected when
borrowers elect to call or prepay their debt prior to the stated maturity,
allowing investors to attain similar yields as if the borrower made all
scheduled interest payments. The cash inflows from prepayment activity, which is
typically from higher-yielding investments, are then reinvested into new assets
at current yields, which are typically lower.
In June 2012, U.S. banking regulators announced that, beginning in 2013, trust
preferred securities, or TruPS, issued by banks would no longer be treated as
Tier 1 Capital. Many TruPS have features that allow the issuer to call the
security at par upon a regulatory event such as this. As a result, we expect
calls of TruPS during the remainder of 2012. As of June 30, 2012, we held, on an
amortized cost basis, $244.6 of these callable securities of which we have
already received redemption notices for $92.7. Generally, we do not expect to
receive prepayment related income on these redemptions.
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The following table sets forth the income yield and net investment income,
excluding realized investment gains (losses) for each major investment category:
For the Six Months Ended For the Six Months Ended
June 30, 2012 June 30, 2011
Yield(1) Amount Yield(1) Amount
Types of Investments
Fixed maturities,
available-for-sale 5.35 % $ 565.7 5.49 % $ 569.8
Marketable equity securities,
available-for-sale 6.44 1.7 6.45 1.7
Marketable equity securities,
trading 2.78 5.6 2.53 3.1
Mortgage loans, net 6.18 82.6 6.29 59.2
Policy loans 5.62 1.9 5.78 2.0
Investments in limited
partnerships:
Private equity and hedge funds 5.40 0.6 14.85 2.4
Tax credit investments(2) (6.72 ) (8.9 ) (6.30 ) (6.3 )
Other income producing assets(3) 2.54 3.9 1.65 2.7
Gross investment income before
investment expenses 5.24 653.1 5.39 634.6
Investment expenses (0.11 ) (13.4 ) (0.11 ) (12.4 )
Net investment income 5.13 % $ 639.7 5.28 % $ 622.2
(1) Yields are determined based on monthly averages calculated using beginning
and end-of-period balances. Yields for fixed maturities are based on
amortized cost. Yields for equity securities, including investments in
limited partnerships, are based on cost. Yields for all other asset types are
based on carrying values.
(2) The negative yield from these tax credit investments is offset by U.S.
federal income tax benefits. The total benefit to net income was $8.7 and
$4.3 for the six months ended June 30, 2012 and 2011, respectively.
(3) Other income producing assets includes other invested assets, short-term
investments and cash and cash equivalents.
For the six months ended months ended June 30, 2012, net investment income
increased 2.8% compared to the same period in 2011, driven by an increase in
invested assets on sales of our fixed deferred annuities. The income increase
driven by growth in invested assets was partially offset by a decrease in the
total net investment yield, which decreased to 5.13% for the six months ended
June 30, 2012 from 5.28% for the same period in 2011. This reduction reflects
the prolonged low interest rate environment. Yields on fixed maturity purchases
in the six months ended June 30, 2012 were approximately 250 bps lower than the
average yield on existing fixed maturity investments. In an attempt to mitigate
the effects of this, we continued to increase our underwriting of commercial
mortgage loans. Additionally, prepayment-related income generated 8bps of yield
in the first six months of 2012, compared to 3bps of yield in the same period in
2011.
Net Realized Investment Gains (Losses)
In the second quarter 2012, our portfolio produced net realized losses of $6.4
as compared to net realized gains $14.1 for the same period in 2011, primarily
due to a $10.9 decrease in gains on sales of our fixed maturities. During the
second quarter of 2011, we began identifying specific securities for sale to
reduce our prepayment risk. While this strategy continued in the second quarter
of 2012, we experienced lower gains on sales of these securities. Additionally,
we had higher impairments associated with securities that we intend to sell.
For the six months ended June 30, 2012, our portfolio produced net realized
gains of $19.5, as compared to $29.7 for the same period in 2011, primarily due
to an $8.2 increase in impairments on securities we intend to sell.
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The following table sets forth the detail of our net realized investment gains
(losses) before taxes:
For the Three Months Ended For the Six Months Ended
June 30, June 30,
2012 2011 2012 2011
Gross realized gains on sales of
fixed maturities $ 23.1 $ 29.7 $ 33.0 $ 32.4
Gross realized losses on sales
of fixed maturities (5.8 ) (1.5 ) (7.9 ) (7.6 )
Impairments:
Public fixed maturities(1) (1.0 ) (0.2 ) (2.2 ) (0.6 )
Private fixed maturities - - - -
Total credit-related (1.0 ) (0.2 ) (2.2 ) (0.6 )
Other (8.4 ) (2.6 ) (9.7 ) (3.1 )
Total impairments (9.4 ) (2.8 ) (11.9 ) (3.7 )
Net gains (losses) on trading
securities (9.4 ) (7.7 ) 8.6 4.5
Other net investment gains
(losses)(2):
Other gross gains 2.0 2.7 8.3 12.7
Other gross losses (6.9 ) (6.3 ) (10.6 ) (8.6 )
Net realized investment gains
(losses) before taxes $ (6.4 ) $ 14.1 $ 19.5 $ 29.7
(1) Public fixed maturities include publicly traded securities and highly
marketable private placements for which there is an actively traded market.
(2) This primarily consists of changes in fair value on derivatives instruments,
gains (losses) on calls and redemptions, and the impact of net realized
investment gains (losses) on DAC and DSI.
Impairments
We monitor our investments for indicators of impairment. When evaluating a
security for possible impairment, we consider several factors, which are
described in more detail in Note 4 to the accompanying unaudited interim
condensed consolidated financial statements. Impairments for the three and six
months ended June 30, 2012 were driven by write-downs of securities we intend to
sell, including a $7.2 impairment of one holding, which significantly declined
in value during the second quarter. For those issuers for which we recorded a
credit-related impairment during 2012, we had remaining holdings with an
amortized cost of $65.9 and a fair value of $63.2 as of June 30, 2012. We
believe the amortized cost of these securities is recoverable, based on our
estimated recovery values.
Fixed Maturity Securities
Fixed maturities represented approximately 86% and 88% of invested assets as of
June 30, 2012 and December 31, 2011, respectively. As of June 30, 2012, publicly
traded and privately placed fixed maturities represented 96.3% and 3.7%,
respectively, of our total fixed maturity portfolio at fair value. We invest in
privately placed fixed maturities to enhance the overall value of the portfolio
and obtain higher yields than can ordinarily be obtained with comparable public
market securities.
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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 maturity
securities to one of the six categories called "NAIC Designations." NAIC
designations of "1" or "2" include fixed maturities considered investment grade,
which generally include securities rated BBB- or higher by Standard & Poor's.
NAIC designations of "3" through "6" are referred to as below investment grade,
which generally include securities rated BB+ or lower by Standard & Poor's. In
recent years, the NAIC adopted a modeling approach to determine the NAIC
designation for RMBS and CMBS securities. As a result, the NAIC designation for
structured securities may not correspond to the Standard & Poor's designations
described.
The following table presents our fixed maturities by NAIC designation and S&P
equivalent credit ratings, as well as the percentage of total fixed maturities,
based upon fair value that each designation comprises:
As of June 30, 2012 As of December 31, 2011
Amortized Fair % of Total Amortized Fair % of Total
Cost Value Fair Value Cost Value Fair Value
NAIC: S&P Equivalent:
1 AAA, AA, A $ 12,413.9 $ 13,890.1 59.6 % $ 12,684.8 $ 13,987.6 61.1 %
2 BBB 7,339.6 8,027.5 34.5 6,792.9 7,409.5 32.3
Total investment grade 19,753.5 21,917.6 94.1 19,477.7 21,397.1 93.4
3 BB 796.2 807.5 3.5 902.9 897.8 3.9
4 B 481.9 468.2 2.0 549.4 507.5 2.2
5 CCC & lower 129.1 104.3 0.4 124.4 96.2 0.4
6 In or near default 3.3 3.2 - 7.0 6.6 0.1
Total below investment grade 1,410.5 1,383.2 5.9 1,583.7 1,508.1 6.6
Total $ 21,164.0 $ 23,300.8 100.0 % $ 21,061.4 $ 22,905.2 100.0 %
Below investment grade securities comprised 5.9% and 6.6% of our fixed
maturities portfolio as of June 30, 2012 and December 31, 2011, respectively.
The decline in the relative amount of below investment grade fixed maturities is
primarily due to securities that were called or prepaid during 2012, or were
upgraded to investment grade. We held NAIC 5 and 6 designated securities with
gross unrealized losses of $28.9 as of June 30, 2012, of which $19.2, or 66.4%,
related to five issuers. Our analysis of these issuers, including management's
best estimates of future cash flows where appropriate, supports the
recoverability of amortized cost.
Certain of our fixed maturities are supported by guarantees from monoline bond
insurers, the majority of which are municipal bonds. As of June 30, 2012, fixed
maturities with monoline guarantees had an amortized cost of $511.1 and a fair
value of $550.6, with gross unrealized losses of $2.0, compared to an amortized
cost of $513.4 and a fair value of $543.4, with gross unrealized losses of $4.2
as of December 31, 2011. As of June 30, 2012, $514.4, or 93.4%, of the fair
value of fixed maturities supported by guarantees from monoline bond insurers
had investment grade credit ratings both when including and excluding the effect
of the monoline insurance. The credit ratings in the table above reflect, where
applicable, the guarantees provided by monoline bond insurers.
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Fixed Maturity Securities and Unrealized Gains and Losses by Security Sector
The following table sets forth the fair value of our fixed maturities by sector,
as well as the associated gross unrealized gains and losses and the percentage
of total fixed maturities that each sector comprises as of the dates indicated:
As of June 30, 2012
Cost or Gross Gross % of
Amortized Unrealized Unrealized Fair Total Fair OTTI
Cost Gains Losses Value Value in AOCI
Security Sector
Corporate securities:
Consumer discretionary $ 1,834.6 $ 167.9 $ (6.4 ) $ 1,996.1 8.5 % $ (0.7 )
Consumer staples 2,481.6 305.6 (8.4 ) 2,778.8 11.9 (1.4 )
Energy 828.7 99.4 (3.0 ) 925.1 4.0 -
Financials 1,850.8 125.5 (51.3 ) 1,925.0 8.3 (0.7 )
Health care 1,304.1 179.4 (1.1 ) 1,482.4 6.4 (1.7 )
Industrials 2,910.7 393.0 (3.9 ) 3,299.8 14.2 0.5
Information technology 338.8 44.2 (0.1 ) 382.9 1.6 -
Materials 1,365.0 129.8 (19.0 ) 1,475.8 6.3 (11.0 )
Telecommunication services 708.1 72.9 (9.6 ) 771.4 3.3 (0.8 )
Utilities 1,687.0 237.7 (15.8 ) 1,908.9 8.2 (0.1 )
Total corporate securities 15,309.4 1,755.4 (118.6 ) 16,946.2 72.7 (15.9 )
U.S. government and agencies 162.9 4.6 (0.1 ) 167.4 0.7 (0.1 )
State and political subdivisions 611.8 40.5 (0.6 ) 651.7 2.8 (0.1 )
Residential mortgage-backed
securities:
Agency 2,650.3 245.8 (0.6 ) 2,895.5 12.4 -
Non-agency:
Prime 250.0 6.7 (5.9 ) 250.8 1.1 (12.2 )
Alt-A 82.8 2.9 (1.8 ) 83.9 0.4 (4.4 )
Total residential mortgage-backed
securities 2,983.1 255.4 (8.3 ) 3,230.2 13.9 (16.6 )
Commercial mortgage-backed
securities 1,642.9 156.2 (2.1 ) 1,797.0 7.7 (1.8 )
Other debt obligations 453.9 54.8 (0.4 ) 508.3 2.2 (3.8 )
Total $ 21,164.0 $ 2,266.9 $ (130.1 ) $ 23,300.8 100.0 % $ (38.3 )
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As of December 31, 2011
Cost or Gross Gross % of
Amortized Unrealized Unrealized Fair Total OTTI
Cost Gains Losses Value Fair Value in AOCI
Security Sector
Corporate securities:
Consumer discretionary $ 1,578.6 $ 138.5 $ (8.1 ) $ 1,709.0 7.5 % $ (0.7 )
Consumer staples 2,409.3 308.3 (6.9 ) 2,710.7 11.8 (1.4 )
Energy 768.4 94.9 (4.0 ) 859.3 3.8 -
Financials 1,882.1 90.5 (93.3 ) 1,879.3 8.2 (0.7 )
Health care 1,280.3 156.6 (3.3 ) 1,433.6 6.3 (1.8 )
Industrials 2,887.3 344.0 (10.8 ) 3,220.5 14.0 0.4
Information technology 355.2 39.0 (0.2 ) 394.0 1.7 -
Materials 1,270.3 110.5 (24.9 ) 1,355.9 5.9 (11.4 )
Telecommunication services 666.4 66.9 (17.6 ) 715.7 3.1 (0.8 )
Utilities 1,719.2 223.0 (15.9 ) 1,926.3 8.4 (0.1 )
Total corporate securities 14,817.1 1,572.2 (185.0 ) 16,204.3 70.7 (16.5 )
U.S. government and agencies 60.3 3.8 - 64.1 0.3 (0.1 )
State and political subdivisions 609.1 28.0 (1.8 ) 635.3 2.8 (0.1 )
Residential mortgage-backed
securities:
Agency 3,019.5 243.8 (0.5 ) 3,262.8 14.2 -
Non-agency:
Prime 278.3 8.3 (13.8 ) 272.8 1.2 (25.7 )
Alt-A 90.6 2.1 (3.3 ) 89.4 0.4 (8.2 )
Total residential mortgage-backed
securities 3,388.4 254.2 (17.6 ) 3,625.0 15.8 (33.9 )
Commercial mortgage-backed
securities 1,698.1 143.0 (4.1 ) 1,837.0 8.0 (2.6 )
Other debt obligations 488.4 52.9 (1.8 ) 539.5 2.4 (4.1 )
Total $ 21,061.4 $ 2,054.1 $ (210.3 ) $ 22,905.2 100.0 % $ (57.3 )
During the six months ended June 30, 2012, we increased our investments in
corporate securities with cash generated from sales, primarily of fixed deferred
annuities. We have mainly purchased investment grade corporate securities, with
a focus on obtaining appropriate yields and duration to match our policyholder
liabilities while retaining quality.
Our fixed maturities holdings are diversified by industry and issuer. As of
June 30, 2012, there was $51.3 of gross unrealized losses in financial sector
securities, compared to $93.3 as of December 31, 2011. The losses were primarily
associated with long dated subordinated, hybrid, and preferred securities, and
the securities' prices reflect relatively wide financial sector credit spreads.
Financial sector credit spreads were wider at December 31, 2011 due to
heightened concerns over the European debt crisis and its potential impact on
the industry. Improvement in gross unrealized losses can also be attributed to
generally lower interest rates, particularly intermediate and long-term rates,
and tendered securities. Additionally, as of June 30, 2012, $14.8 of the gross
unrealized losses were related to a single holding. Based on our analysis of
this security, as well as our other financial sector holdings in an unrealized
loss position, we expect to recover the entire amortized cost.
The portfolio does not have significant exposure to any single issuer. As of
June 30, 2012 and December 31, 2011, the fair value of our ten largest corporate
securities holdings was $1,540.8 and $1,505.0, or 9.1% and 9.3% of total
corporate securities, respectively. The fair value of our largest exposure to a
single issuer of corporate securities was $215.9, or 1.3% of total corporate
securities, as of June 30, 2012. All of the securities related to this issuer
have an NAIC rating of 2 or higher. As of December 31, 2011, the fair value of
our largest exposure to a single issuer of corporate securities was $221.5, or
1.4% of total corporate securities, all of which had an NAIC rating of 2 or
higher.
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Fixed Maturity Securities in European Countries
The following table summarizes our exposure to fixed maturities in European
countries, denominated in U.S. dollars and separated into sovereign debt,
financial industry and other corporate debt. The country designation is based on
the issuer's country of incorporation.
As of June 30, 2012
Sovereign Financial Other Total Fair % of Amortized
Debt Industry Corporate Value Exposure Cost
European Countries:
United Kingdom $ - $ 33.4 $ 503.9 $ 537.3 36.3 % $ 483.0
Netherlands - - 475.2 475.2 32.1 438.6
Luxembourg - - 134.3 134.3 9.1 119.6
Switzerland - 104.9 - 104.9 7.1 101.8
France - 16.5 85.9 102.4 6.9 101.0
Sweden - - 49.2 49.2 3.3 43.0
Germany - 9.2 9.9 19.1 1.3 22.2
Spain - - 14.4 14.4 0.9 14.6
Italy - - 14.5 14.5 0.9 13.4
Belgium - - 7.7 7.7 0.5 7.1
Norway - 0.7 6.5 7.2 0.5 6.1
Greece - - 4.7 4.7 0.3 4.0
Finland - - 4.3 4.3 0.3 4.2
Austria - - 4.0 4.0 0.3 3.9
Ireland - - 1.0 1.0 0.1 1.0
Portugal 0.8 - - 0.8 0.1 0.9
Total $ 0.8 $ 164.7 $ 1,315.5 $ 1,481.0 100.0 % $ 1,364.4
As of June 30, 2012, the fair value of our fixed maturities in European
countries was 6.4% of our total fixed maturities portfolio. These fixed
maturities had gross unrealized losses of $18.7 as of June 30, 2012. The fair
value of our ten largest European country holdings was $898.6, or 3.9% of the
fixed maturities portfolio. The fair value of our largest single issuer exposure
to a European country was $121.8, or 0.5% of the portfolio.
Effective July 1, 2012, Washington state, our primary state of domicile,
increased the percentage of assets our primary insurance subsidiary is able to
invest in foreign securities to 20% from 10% of statutory admitted assets. We
expect to take advantage of these new limits during 2012. This opportunity
provides us with additional flexibility to invest in high-quality foreign
corporate securities with a focus on investment grade securities.
Fixed Maturity Securities by Contractual Maturity Date
As of June 30, 2012 and December 31, 2011, approximately 22% and 24%,
respectively, of the fair value of our fixed maturity portfolio was held in
mortgage-backed securities, and approximately 22% and 23%, respectively, was
related to securities that are due after ten years, which we consider to be
longer duration assets. Fixed maturities in these categories primarily back long
duration reserves in our Income Annuities segment, which can exceed a period of
30 years. As of June 30, 2012 and December 31, 2011, approximately 75% and 78%,
respectively of the gross unrealized losses on our investment portfolio related
to these longer duration assets, which fluctuate more significantly with changes
in interest rates and credit spreads. Refer to Note 4 to the accompanying
unaudited interim condensed consolidated financial statements for a table
summarizing the amortized cost and fair value of fixed maturities by contractual
years to maturity as of June 30, 2012.
Mortgage-Backed Securities
As of June 30, 2012, our fixed maturity securities portfolio included $5.0
billion of residential and commercial mortgage-backed securities at fair value.
Approximately 67% of these securities are agency securities and approximately
26% are AAA rated non-agency securities in the most senior tranche of the
structure type.
All of our RMBS and CMBS securities have prepayment options. Prepayments that
vary in amount or timing from our estimates cause fluctuations in our yields due
to an acceleration or deceleration of unamortized premium or discount associated
with
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the securities in our portfolio. Such adjustment is recorded in net investment
income in our results of operations. These adjustments, which relate primarily
to RMBS, create volatility in our net investment income. Refer to the RMBS
section below for additional discussion.
Residential Mortgage-Backed Securities (RMBS)
We classify our investments in RMBS as agency, prime, Alt-A, and subprime.
Agency RMBS are guaranteed or otherwise supported by the Federal National
Mortgage Association, the Federal Home Loan Mortgage Corporation, or the
Government National Mortgage Association. Prime RMBS have underlying loans to
the most credit-worthy customers with high quality credit profiles. Alt-A RMBS
have overall credit quality between prime and subprime, based on a review of
their underlying mortgage loans and factors such as credit scores and financial
ratios.
The following table sets forth the fair value of the Company's investment in
agency, prime, and Alt-A RMBS and the percentage of total invested assets they
represent:
As of June 30, 2012 As of December 31, 2011
% of Total % of Total
Fair Value Invested Assets Fair Value Invested Assets
Agency $ 2,895.5 10.7 % $ 3,262.8 12.5 %
Non-agency:
Prime 250.8 0.9 272.8 1.0
Alt-A 83.9 0.3 89.4 0.3
Subtotal non-agency 334.7 1.2 362.2 1.3
Total $ 3,230.2 11.9 % $ 3,625.0 13.8 %
The following table sets forth the total fair value, and amortized cost of our
non-agency RMBS by year of origination (vintage) and credit quality, based on
highest rating by Moody's, S&P, or Fitch.
As of June 30, 2012
Highest Rating Agency Rating
Total as of
BB and December 31,
AAA AA A BBB Below Total 2011
Vintage:
2007 - - - - 19.5 19.5 21.4
2006 - - - - 83.6 83.6 94.5
2005 - - 3.3 - 94.8 98.1 104.7
2004 and prior 108.7 10.6 11.8 - 0.5 131.6 148.3
Total amortized cost $ 108.7 $ 10.6 $ 15.1 $ - $ 198.4 $ 332.8 $ 368.9
Net unrealized gains (losses) 3.7 0.4 0.5 - (2.7 ) 1.9 (6.7 )
Total fair value $ 112.4 $ 11.0 $ 15.6 $ - $ 195.7 $ 334.7 $ 362.2
On a fair value basis, as of June 30, 2012, our Alt-A portfolio was 88.9% fixed
rate collateral and 11.1% hybrid adjustable rate mortgages, or ARMs, with no
exposure to option ARMs. Generally, fixed rate mortgages have a better credit
performance than ARMs, with lower delinquencies and defaults on the underlying
collateral.
As of June 30, 2012, our Alt-A, prime and total non-agency RMBS had an estimated
weighted-average credit enhancement of 13.3%, 7.5% and 8.9%, 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. We monitor delinquency rates associated with these securities, and
as of June 30, 2012, we believe that our credit enhancements are sufficient to
cover potential delinquencies.
As of June 30, 2012 and December 31, 2011, 62.0% and 59.9%, respectively, of the
fair value of our non-agency RMBS had super senior subordination. The super
senior class has priority over all principal and interest cash flows and will
not experience any loss of principal until lower levels are written down to
zero. Therefore, the majority of our RMBS investments have less exposure to
defaults and delinquencies in the underlying collateral than if we held the more
subordinated classes.
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As of June 30, 2012, our RMBS had gross unamortized premiums and discounts of
$55.1 and $71.1, respectively. Changes in prepayment speeds, which are based on
prepayment activity of the underlying mortgages, create volatility in our net
investment income because they accelerate or decelerate our amortization of the
unamortized premiums and discounts. The impact to net investment income is
dependent on whether the securities are at a discount or premium and whether the
prepayment speeds increase or decrease.
The following table provides additional information on our RMBS prepayment
exposure, by type and vintage:
Prepayment Speed
As of June 30, 2012 Adjustment
Three Months Six Months
Unrealized Average Ended Ended
Amortized Gains/ Fair Gross Gross Mortgage June 30, June 30,
Cost (Losses) Value Discount Premium Loan Rate 2012 2012
Agency:
CMO:
2012 $ 108.5 $ 1.7 $ 110.2 $ 2.8 $ (2.1 ) 4.1 % $ - $ -
2011 272.9 21.3 294.2 11.7 (1.4 ) 3.5 0.1 0.1
2010 475.1 58.3 533.4 14.4 (9.4 ) 4.5 - 0.3
2009 198.5 25.9 224.4 2.0 (2.3 ) 4.8 - 0.1
2008 4.1 0.2 4.3 - - 5.8 - -
2007 23.6 1.3 24.9 0.9 - 6.5 - (0.1 )
2006 22.5 1.2 23.7 - - 6.7 - -
2005 49.5 6.5 56.0 0.4 - 6.3 - -
2004 and prior 519.2 73.6 592.8 14.2 (5.2 ) 6.2 0.3 0.6
Total Agency CMO $ 1,673.9 $ 190.0 $ 1,863.9 $ 46.4 $ (20.4 ) 5.0 % $ 0.4 $ 1.0
Passthrough:
2012 $ 10.4 $ - $ 10.4 $ - $ (0.4 ) 3.7 % $ - $ -
2011 30.6 0.6 31.2 - (1.3 ) 3.9 - -
2010 203.0 9.8 212.8 0.1 (7.9 ) 4.7 - -
2009 581.1 29.9 611.0 - (22.9 ) 5.8 0.1 0.2
2008 40.4 3.6 44.0 - (0.8 ) 6.3 - -
2007 29.4 2.7 32.1 0.2 (0.6 ) 6.4 - -
2006 9.8 1.0 10.8 0.1 - 6.5 - -
2005 11.0 1.3 12.3 0.5 (0.1 ) 5.2 - -
2004 and prior 60.7 6.3 67.0 1.0 (0.5 ) 5.8 - -
Total Agency Passthrough $ 976.4 $ 55.2 $ 1,031.6 $ 1.9 $ (34.5 ) 5.5 % $
0.1 $ 0.2
Total Agency RMBS $ 2,650.3 $ 245.2 $ 2,895.5 $ 48.3 $ (54.9 ) 5.2 % $ 0.5 $ 1.2
Non-Agency:
2008-2012 $ - $ - $ - $ - $ - - % $ - $ -
2007 19.5 0.7 20.2 5.5 - 6.0 - -
2006 83.6 - 83.6 11.6 - 6.0 - 1.3
2005 98.2 (3.0 ) 95.2 2.6 - 5.7 0.1 0.2
2004 and prior 131.5 4.2 135.7 3.1 (0.2 ) 5.9 - 0.2
Total Non-Agency RMBS $ 332.8 $ 1.9 $ 334.7 $ 22.8 $ (0.2 ) 5.9 % $ 0.1 $ 1.7
Total RMBS $ 2,983.1 $ 247.1 $
3,230.2 $ 71.1 $ (55.1 ) 5.3 % $ 0.6 $ 2.9
There are various U.S. Government initiatives through the Making Home Affordable
program that may result in higher than expected prepayments on our RMBS
portfolio. For example, changes to HARP (Home Affordable Refinance Program),
which targets borrowers whose mortgages are owned or guaranteed by Freddie Mac
or Fannie Mae, are current on their mortgages, and have loan-to-values exceeding
80% among other qualifying requirements, went into effect in March 2012. Also,
the extension of HAMP (Home Affordable Modification Program), which targets
employed borrowers facing financial hardship to reduce their mortgage payments
through 2013, may increase prepayments. We continually monitor the underlying
collateral in our RMBS to manage our prepayment exposure.
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During the six months ended June 30, 2012, we strategically sold $328.3 of lower
yielding, higher premium agency RMBS securities for gains totaling $19.2 while
reducing future reinvestment risk. We plan to continue to manage our prepayment
and reinvestment risk through similar transactions during 2012.
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 June 30, 2012 As of December 31, 2011
% of Total % of Total
Fair Value Invested Assets Fair Value Invested Assets
Agency $ 466.3 1.7 % $ 521.0 2.0 %
Non-Agency 1,330.7 4.9 1,316.0 5.0
Total $ 1,797.0 6.6 % $ 1,837.0 7.0 %
The following table sets forth the total fair value, and amortized cost of our
non-agency CMBS by credit quality and vintage. There were 11 securities having a
fair value of $316.2 and an amortized cost of $277.3 that were rated A by S&P,
while Moody's and/or Fitch rated them AAA.
As of June 30, 2012
Highest Rating Agency Rating
Total as of
BB and December 31,
AAA AA A BBB Below Total 2011
Vintage:
2012 $ 46.7 $ - $ - $ - $ - $ 46.7 $ -
2011 136.2 - - - - 136.2 115.7
2010 1.1 - - - - 1.1 1.2
2009 - - - - - - -
2008 51.0 18.7 - - - 69.7 69.7
2007 402.4 - - - - 402.4 422.1
2006 158.9 - - - 11.5 170.4 170.0
2005 241.3 - - - - 241.3 258.7
2004 and prior 124.5 2.3 - 5.4 132.2 165.0
Total amortized cost $ 1,162.1 $ 18.7 $ 2.3 $- $ 16.9$ 1,200.0 $ 1,202.4
Net unrealized gains (losses) 127.5 3.4 - - (0.2 ) 130.7 113.6
Total fair value $ 1,289.6 $ 22.1 $ 2.3 $ - $ 16.7 $ 1,330.7 $ 1,316.0
As of June 30, 2012, our CMBS portfolio is highly concentrated in the most
senior tranches, with 95.1% of our AAA-rated securities in the most senior
tranche with significant credit enhancement, based on amortized cost.
U.S. CMBS have historically utilized a senior/subordinate credit structure to
allocate cash flows and losses. The structure was changed in late 2004 and was
in transition into early 2005 when fully implemented to include super-senior,
mezzanine and junior AAA tranches. This change resulted in increasing the credit
enhancement (subordination) on the most senior tranche (super-senior) to 30%.
The mezzanine AAAs were structured to typically have 20% credit enhancement and
the junior AAAs 14% credit enhancement. Credit enhancement does not include any
equity interest or property value in excess of outstanding debt. The super
senior class has priority over the mezzanine and junior classes to all principal
and interest cash flows and will not experience any loss of principal until both
the entire mezzanine and junior tranches are written down to zero.
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The following tables set forth the amortized cost of our AAA non-agency CMBS by
type and vintage:
As of June 30, 2012
Super Senior Other Structures Total AAA
Securities at
Super Other Other Amortized
Senior Mezzanine Junior Senior Subordinate Other Cost
Vintage:
2012 $ 30.6 $ - $ - $ - $ - $ 16.1 $ 46.7
2011 - - - 136.2 - - 136.2
2010 - - - 1.1 - - 1.1
2009 - - - - - - -
2008 51.0 - - - - - 51.0
2007 398.4 - - 4.0 - - 402.4
2006 158.9 - - - - - 158.9
2005 131.3 25.4 - 84.6 - - 241.3
2004 and prior - - - 109.4 15.1 - 124.5
Total $ 770.2 $ 25.4 $ - $ 335.3 $ 15.1 $ 16.1 $ 1,162.1
As of December 31, 2011
Total $ 760.4 $ 27.1 $ - $ 347.0 $ 27.6 $ - $ 1,162.1
The weighted-average credit enhancement of our CMBS, adjusted to remove defeased
loans, as of June 30, 2012 was 30.0%. We believe this additional credit
enhancement is significant, especially in the event of a deep real estate
downturn during which losses would be expected to increase substantially.
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The following table provides additional information on our CMBS prepayment
exposure by type and vintage:
Prepayment Speed
As of June 30, 2012 Adjustment
Three Months Six Months
Unrealized Average Ended Ended
Amortized Gains/ Fair Gross Gross Mortgage June 30, June 30,
Cost (Losses) Value Discount Premium Loan Rate 2012 2012
Agency:
CMO:
2012 $ - $ - $ - $ - $ - - % $ - $ -
2011 44.7 2.3 47.0 - (1.3 ) 4.9 - -
2010 21.5 2.0 23.5 - (1.7 ) 5.0 - -
2009 10.5 1.7 12.2 - - 6.5 - -
2008 30.8 0.6 31.4 - (1.2 ) 4.7 (0.1 ) -
2007 53.8 1.3 55.1 - (2.8 ) 5.6 (0.1 ) (0.1 )
2006 58.7 (0.3 ) 58.4 - (2.9 ) 5.7 0.1 -
2005 31.8 1.0 32.8 - (1.4 ) 5.8 - -
2004 and prior 106.2 9.3 115.5 - (3.2 ) 6.7 (0.1 ) (0.2 )
Total Agency CMO $ 358.0 $ 17.9 $ 375.9 $ - $ (14.5 ) 5.8 % $ (0.2 ) $ (0.3 )
Passthrough:
2005-2012 $ - $ - $ - $ - $ - - % $ - $ -
2004 and prior 84.9 5.5 90.4 0.2 (2.6 ) 7.5 - -
Total Agency Passthrough $ 84.9 $ 5.5 $ 90.4 $ 0.2 $ (2.6 ) 7.5 % $ - $ -
Total CMBS Agency $ 442.9 $ 23.4 $ 466.3 $ 0.2 $ (17.1 ) 6.1 % $ (0.2 ) $ (0.3 )
Non-Agency:
2012 $ 46.7 $ 0.4 $ 47.1 $ - $ (0.8 ) 4.8 % $ - $ -
2011 136.2 5.9 142.1 - (1.6 ) 5.5 - -
2010 1.1 0.1 1.2 - - 4.1 - -
2009 - - - - - - - -
2008 69.8 7.7 77.5 1.4 (0.2 ) 6.1 - -
2007 402.4 59.4 461.8 15.1 (0.3 ) 5.8 - -
2006 170.4 24.6 195.0 7.0 (0.9 ) 5.9 0.1 0.1
2005 241.3 29.0 270.3 7.2 - 5.4 - (0.1 )
2004 and prior 132.1 3.6 135.7 0.7 (1.5 ) 6.0 - -
Total CMBS Non-Agency $ 1,200.0 $ 130.7 $1,330.7 $ 31.4 $ (5.3 ) 5.7 % $ 0.1 $ -
Total CMBS $ 1,642.9 $ 154.1 $ 1,797.0 $ 31.6 $ (22.4 ) 5.8 % $ (0.1 ) $ (0.3 )
Return on Equity-Like Investments
Prospector Partners, LLC, or Prospector, manages a portfolio of equity and
equity-like investments, the majority of which are publicly traded common stock
and convertible securities. We believe that these investments are suitable for
funding certain long duration liabilities in our Income Annuities segment and,
on a limited basis, in our surplus portfolio. These securities are recorded at
fair value, with changes in fair value recorded in net realized investment gains
(losses). The common stock securities are included in trading marketable equity
securities and the convertible securities are included in fixed maturities on
our consolidated balance sheets.
The following table compares our total gross return on common stock and
convertible securities in the Prospector portfolio to the benchmark S&P 500
Total Return Index for the three and six months ended June 30, 2012 and 2011.
Three Months Ended Six Months Ended
June 30, June 30,
2012 2011 2012 2011
Common stock (4.9 )% (2.1 )% (1.3 )% 4.3 %
Convertible securities (2.7 )% (2.7 )% 3.2 % (0.6 )%
S&P 500 Total Return Index (2.8 )% 0.1 % 9.5 % 6.0 %
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Return on Real Estate-Related Investments
Beginning in the second quarter of 2011, we implemented an investment strategy
focusing on real estate-related investments to enhance funding the long duration
liabilities in our Income Annuities segment. The investments for this strategy
primarily consist of investments in REITs, which are included in trading
marketable equity securities, on our consolidated balance sheets. As of June 30,
2012, the real estate-related investments had a fair value of $160.1. For the
three and six months ended June 30, 2012, the real estate-related investments
had a total gross return of 1.5% and 9.1% respectively, compared with the FTSE
NAREIT All Equity REITS Index result of 1.6% and 10.0% respectively.
Other
In the second quarter 2012, we provided a $103.0 initial investment in the
Symetra mutual funds trust, which holds mutual funds available to our new True
VA policyholders. This investment is included in trading marketable equity
securities on our consolidated balance sheets.
Mortgage Loans
Our mortgage loan department originates commercial mortgages and manages our
existing commercial mortgage loan portfolio. Our commercial mortgage loan
holdings are secured by first-mortgage liens on income-producing commercial real
estate, primarily in the retail, industrial and office building sectors. All
loans are underwritten consistently to our standards based on loan-to-value
(LTV) ratios and debt service coverage ratios (DSCR) based on income and
detailed market, property and borrower analysis using our long-term experience
in commercial mortgage lending. A large majority of our loans have personal
guarantees and all loans are inspected and evaluated annually. We diversify our
mortgage loans by geographic region, loan size and scheduled maturities. On our
consolidated balance sheets, mortgage loans are reported net of an allowance for
losses, deferred loan origination costs, and unearned mortgage loan fees;
however, the following tables exclude these items.
We specialize in originating loans of $1.0 to $5.0. We believe a disciplined
increase in our mortgage loan portfolio will help maintain the overall quality
of our investment portfolio and obtain appropriate yields to match our
policyholder liabilities. We continue to increase our investments in mortgage
loans to improve our overall investment yields. This strategy has resulted in
increased net investment yields when compared to fixed maturity investments. We
originated $221.9 and $419.5 of mortgage loans during the three and six months
ended June 30, 2012, respectively, and expect strong originations for the
remainder of 2012.
As of June 30, 2012 and December 31, 2011, 71.4% and 71.6% of our mortgage loans
were under $5.0 and our average loan balance was $2.4 and $2.4, respectively. As
of June 30, 2012 and December 31, 2011, our largest loan balance was $13.0 and
$12.4, respectively.
Credit Quality
We use the LTV and DSCR ratios as our primary metrics to assess mortgage loan
quality. These factors are also considered in our evaluation of our allowance
for mortgage loan losses. For more information and further discussion of our
allowance for mortgage loan losses, see Note 5 to our unaudited interim
condensed consolidated financial statements. The following table sets forth the
LTV ratios for our gross mortgage loan portfolio:
As of June 30, 2012 As of December 31, 2011
Carrying Carrying
Value % of Total Value % of Total
Loan-to-Value Ratio:
< or = 50% $ 839.5 29.6 % $ 805.7 31.9 %
51% - 60% 770.2 27.2 689.3 27.3
61% - 70% 874.0 30.8 720.6 28.5
71% - 75% 158.5 5.6 121.1 4.8
76% - 80% 70.0 2.5 58.8 2.3
81% - 100% 94.4 3.3 89.6 3.6
> 100% 29.7 1.0 40.1 1.6
Total $ 2,836.3 100.0 % $ 2,525.2 100.0 %
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The LTV ratio compares the amount of the loan to the estimated fair value of the
underlying property collateralizing the loan. In the year of funding, LTV ratios
are calculated using independent appraisals performed by Member of the Appraisal
Institute (MAI) designated appraisers. Subsequent to the year of funding, LTV
ratios are updated annually using internal valuations based on property income
and estimated market capitalization rates. Property income estimates are
typically updated during the third quarter of each year. Market capitalization
rates are updated during the first quarter based on geographic region, property
type and economic climate. LTV ratios greater than 100% indicate that the loan
amount is greater than the collateral value. A smaller LTV ratio generally
indicates a higher quality loan.
The following table sets forth the carrying value and weighted-average LTV
ratios for our mortgage loan portfolio by year of origination, as of June 30,
2012:
Weighted
Carrying % of Total Average
Value Value LTV
Origination Year:
2012 $ 431.4 15.2 % 53.9 %
2011 951.6 33.5 60.1
2010 555.3 19.6 56.0
2009 228.6 8.1 53.3
2008 189.8 6.7 61.4
2007 136.5 4.8 65.4
2006 93.9 3.3 62.0
2005 72.4 2.6 60.6
2004 and prior 176.8 6.2 40.8
Total $ 2,836.3 100.0 % 57.0 %
As we increase the volume of originations, we maintain our disciplined
underwriting approach. The weighted average LTV ratio was 53.9% and 57.1% for
loans funded during the six months ended June 30, 2012 and the year ended
December 31, 2011, respectively. For loans originated in the six months ended
June 30, 2012, 33.4 % had an LTV ratio of 50% or less, and no loans had an LTV
ratio of more than 75%. For loans originated in the year ended December 31,
2011, 23.2% had an LTV ratio of 50% or less, and no loans had an LTV ratio of
more than 75%. The weighted-average LTV ratio for our entire portfolio was 57.0%
and 57.1% as of June 30, 2012 and December 31, 2011, respectively.
The following table sets forth the DSCR for our gross mortgage loan portfolio:
As of June 30, 2012 As of December 31, 2011
Carrying Carrying
Value % of Total Value % of Total
Debt Service Coverage Ratio:
> or = 1.60 $ 1,567.5 55.3 % $ 1,310.8 51.9 %
1.40 - 1.59 610.4 21.5 566.5 22.4
1.20 - 1.39 362.8 12.8 369.7 14.7
1.00 - 1.19 169.3 6.0 157.4 6.3
0.85 - 0.99 37.9 1.3 39.0 1.5
< 0.85 88.4 3.1 81.8 3.2
Total $ 2,836.3 100.0 % $ 2,525.2 100.0 %
The DSCR compares the amount of rental income a property is generating to the
amount of the mortgage payments due on the property. DSCRs are calculated using
the most current annual operating history for the collateral. As of June 30,
2012 and December 31, 2011, the mortgage loan portfolio had weighted-average
DSCRs of 1.75 and 1.72, respectively. For loans originated during the six months
ended June 30, 2012 and the year ended December 31, 2011, 74.6% and 56.0%,
respectively, had a DSCR of 1.60 or more. As of June 30, 2012, loans with an
aggregate carrying value of $126.3 had a DSCR of less than 1.00. The average
outstanding principal balance of these loans was $2.0. As of June 30, 2012, only
one loan, with an outstanding principal balance of $7.6, was in default; all
other borrowers were current with respect to their loan payments.
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Composition of Mortgage Loans
The following table sets forth the gross carrying value of our investments in
mortgage loans by geographic region:
As of June 30, 2012 As of December 31, 2011
Carrying Carrying
Value % of Total Value % of Total
Region:
California $ 847.4 29.9 % $ 813.7 32.2 %
Washington 314.1 11.1 304.8 12.1
Texas 301.8 10.6 265.2 10.5
Illinois 119.2 4.2 105.6 4.2
Florida 118.8 4.2 87.8 3.5
Other 1,135.0 40.0 948.1 37.5
Total $ 2,836.3 100.0 % $ 2,525.2 100.0 %
The following table sets forth the gross carrying value of our investments in
mortgage loans by property type:
As of June 30, 2012 As of December 31, 2011
Carrying Carrying
Value % of Total Value % of Total
Property Type:
Shopping centers and retail $ 1,346.2 47.5 % $ 1,190.6 47.1 %
Office buildings 696.7 24.6 628.9 24.9
Industrial 554.6 19.6 503.7 19.9
Multi-family 129.9 4.6 113.4 4.5
Other 108.9 3.7 88.6 3.6
Total $ 2,836.3 100.0 % $ 2,525.2 100.0 %
Maturity Date of Mortgage Loans
The following table sets forth our gross carrying value of our investments in
mortgage loans by contractual maturity date:
As of June 30, 2012 As of December 31, 2011
Carrying Carrying
Value % of Total Value % of Total
Years to Maturity:
Due in one year or less $ 26.6 0.9 % $ 18.7 0.7 %
Due after one year through five years 157.2 5.5 154.0 6.1
Due after five years through ten years 1,494.3 52.7 1,322.5 52.4
Due after ten years 1,158.2 40.9 1,030.0 40.8
Total $ 2,836.3 100.0 % $ 2,525.2 100.0 %
Prior to the maturity dates shown above, the majority of our mortgage loans have
one or more specified rate resetting windows during which the loan typically can
be prepaid without a fee. During these windows we expect that a substantial
portion of these loans will either be reset or refinanced at market terms given
the current low interest rate environment. These loan features are considered in
our asset-liability management and we align our expected mortgage loan cash
flows and duration with the amount and timing of liability cash outflows.
Additionally, our loan terms usually allow borrowers to prepay their mortgage
loan prior to the stated maturity or outside specified rate resetting windows.
Prepayments are driven by factors specific to the activities of our borrowers as
well as the interest rate environment. However, the vast majority of our
mortgage loans contain yield maintenance prepayment provisions that we believe
mitigate prepayments in a low interest rate environment.
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Investments in Limited Partnerships - Tax Credit Investments
We invest in limited partnership interests related to tax credit investments,
which are typically 15-year investments that provide tax credits in the first
ten years. Although these investments decrease our net investment income over
time on a pre-tax basis, they provide us with significant tax benefits, which
decrease our effective tax rate. The following table sets forth the impact the
amortization of our investments and related tax credits had on net income:
For the Three Months Ended For the Six Months Ended
June 30, June 30,
2012 2011 2012 2011
Amortization related to tax credit
investments, net of taxes $ (2.9 ) $ (2.0 ) $ (5.8 ) $ (4.2 )
Realized losses related to tax
credit investments, net of taxes (0.4 ) - (0.6 ) -
Tax credits 7.5 4.2 15.1 8.5
Impact to net income $ 4.2 $ 2.2 $ 8.7 $ 4.3
The following table provides the future estimated impact to net income:
Impact to Net
Income
Remainder of 2012 $ 9.0
2013 19.5
2014 19.9
2015 and beyond 52.2
Estimated impact to net income $ 100.6
The tax credits from our investments in limited partnerships occur in the first
10 years, with the largest portions provided in the middle years. A significant
amount of our investments are entering these middle years and we expect the
future impact to net income to grow significantly in the next few years.
Liquidity and Capital Resources
Symetra conducts its operations through its operating subsidiaries, and our
liquidity requirements primarily have been and will continue to be met by funds
from such subsidiaries. Dividends from its subsidiaries are Symetra's principal
sources of cash to pay dividends and meet its obligations, including payments of
principal and interest on notes payable and tax obligations.
We have and intend to pay quarterly cash dividends on our common stock and
warrants. During the six months ended June 30, 2012, we declared and paid two
quarterly cash dividends of $0.07 per share, each. The declaration and payment
of future dividends to holders of our common stock will be at the discretion of
our board of directors. See "- Dividends" below for further discussion.
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:
• As of June 30, 2012 we had $23.1 billion of liquid assets, which includes
cash, cash equivalents, short-term investments, publicly traded fixed
maturities and public equity securities.
• While certain policy lapses and surrenders occur in the normal course of
business, these lapses and surrenders have not increased materially from
management expectations.
• As of June 30, 2012, we had the ability to borrow, on an unsecured basis,
up to a maximum principal amount of $300.0 under a revolving line of
credit arrangement.
• We continued to generate strong cash flows from operations, which grew by
$30.5 to $481.8 for the six months ended June 30, 2012, from $451.3 for
the six months ended June 30, 2011.
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• As of June 30, 2012 our primary life insurance company, Symetra Life
Insurance Company, had an estimated risk-based capital ratio of
approximately 474%. This provides adequate capital levels for growth of
our business.
Liquidity Requirements and Sources of Liquidity
The liquidity requirements of our insurance subsidiaries principally relate to
the liabilities associated with their various insurance and investment products,
operating costs and expenses, the payment of dividends to the holding company,
and payment of income taxes. Liabilities arising from insurance and investment
products include the payment of benefits, as well as cash payments in connection
with policy and contract surrenders and withdrawals and policy loans.
Historically, Symetra's insurance subsidiaries have used cash flows from
operations, cash flows from invested assets and sales of investment securities
to fund their liquidity requirements.
In managing the liquidity of our insurance operations, we also consider the risk
of policyholder and contract holder withdrawals of funds earlier than assumed
when selecting assets to support these contractual obligations. We use surrender
charges and other contract provisions to mitigate the extent, timing and
profitability impact of withdrawals of funds by customers from annuity contracts
and deposit liabilities. The following table sets forth withdrawal
characteristics of our general account policyholder liabilities, composed of
annuity reserves, deposit liabilities and policy and contract claim liabilities,
net of reinsurance recoverables:
As of June 30, 2012 As of December 31, 2011
Amount % of Total Amount % of Total
Illiquid Liabilities
Structured settlements & other SPIAs(1) $ 6,627.1 28.5 % $ 6,605.4 29.0 %
Deferred annuities with 5-year payout
provision or MVA(2) 310.7 1.3 372.3 1.6
Traditional insurance (net of
reinsurance)(3) 177.3 0.8 180.1 0.8
Group health & life (net of
reinsurance)(3) 136.1 0.6 127.5 0.6
Total illiquid liabilities 7,251.2 31.2 7,285.3 32.0
Somewhat Liquid Liabilities
Bank-owned life insurance (BOLI)(4) 4,673.8 20.1 4,575.9 20.1
Deferred annuities with surrender
charges of 5% or higher 6,828.7 29.4 6,984.4 30.7
Universal life with surrender charges
of 5% or higher 286.2 1.2 250.5 1.0
Total somewhat liquid liabilities 11,788.7 50.7 11,810.8 51.8
Fully Liquid Liabilities
Deferred annuities with surrender
charges of:
3% up to 5% 1,003.5 4.3 710.7 3.1
Less than 3% 186.5 0.8 142.9 0.6
No surrender charges(5) 2,567.4 11.0 2,346.9 10.3
Universal life with surrender charges
less than 5% 446.2 1.9 444.8 2.0
Other(6) 18.7 0.1 37.3 0.2
Total fully liquid liabilities 4,222.3 18.1 3,682.6 16.2
Total(7) $ 23,262.2 100.0 % $ 22,778.7 100.0 %
(1) These contracts cannot be surrendered. The benefits are specified in the
contracts as fixed amounts, primarily to be paid over the next several
decades.
(2) In a liquidity crisis situation, we could invoke the five-year payout
provision so that the contract value with interest is paid out ratably over
five years.
(3) Represents incurred but not reported claim liabilities. 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 does not qualify for this tax-free
treatment due to the employment status of the original covered employees and
charges may be applicable.
(5) Approximately half of the account value has been with us for many years, due
to guaranteed minimum interest rates of 4.0 - 4.5% that are significantly
higher than those currently offered on new business, which range from 1.0 -
1.5%. Given the current low interest rate environment, we do not expect
significant changes in the persistency of this business.
(6) Represents BOLI, traditional insurance, and Group health and life reported
claim liabilities.
(7) Represents the sum of funds held under deposit contracts, future policy
benefits and policy and contract claims on the consolidated balance sheets,
excluding other policyholder related liabilities and reinsurance recoverables
of $230.4 and $232.9 as of June 30, 2012 and December 31, 2011, respectively.
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Liquid Assets
Symetra's insurance subsidiaries maintain investment strategies intended to
provide adequate funds to pay benefits without forced sales of investments.
Products having liabilities with longer durations, such as certain life
insurance policies and structured settlement annuities, are matched with
investments having similar estimated lives such as long-term fixed maturities,
mortgage loans and marketable equity securities. Shorter-term liabilities are
matched with fixed maturities that have short- and medium-terms. In addition,
our insurance subsidiaries hold highly liquid, high quality, shorter-term
investment securities and other liquid investment-grade fixed maturities and
cash equivalents to fund anticipated operating expenses, surrenders and
withdrawals.
We define liquid assets to include cash, cash equivalents, short-term
investments, publicly traded fixed maturities and public equity securities. As
of June 30, 2012 and December 31, 2011, our insurance subsidiaries had liquid
assets of $23.0 billion and $22.5 billion, respectively, and Symetra had liquid
assets of $110.6 and $114.6, respectively. The portion of total company liquid
assets comprised of cash and cash equivalents and short-term investments was
$178.5 and $245.1 as of June 30, 2012 and December 31, 2011, respectively. The
increase in our insurance subsidiaries' liquid assets was primarily the result
of sales of deferred annuities during the first two quarters of 2012.
We consider attributes of the various categories of liquid assets (for example,
type of asset and credit quality) in evaluating the adequacy of our insurance
operations' liquidity under a variety of stress scenarios. We believe that the
liquidity profile of our assets is sufficient to satisfy liquidity requirements,
including under foreseeable stress scenarios.
Given the size and liquidity profile of our investment portfolio, we believe
that claim experience varying from our projections does not constitute a
significant liquidity risk. Our asset/liability management program takes into
account the expected cash flows on investments and expected claim payments as
well as the specific nature and risk profile of the liabilities. Historically,
there has been limited variation between the expected cash flows on our
investments and the payment of claims.
Dividends
We declared and paid a quarterly dividend of $0.07 per common share during the
first and second quarters of 2012, for a total payout of $19.4. On August 8,
2012, we declared a quarterly dividend of $0.07 per common share to shareholders
and warrant holders as of August 22, 2012, for an approximate total of $9.7 to
be paid on or about September 7, 2012.
Cash Flows
The following table sets forth a summary of our consolidated cash flows for the
dates indicated:
For the Six Months Ended June 30,
2012 2011Net cash flows provided by operating activities $ 481.8
$ 451.3
Net cash flows used in investing activities (609.1 ) (1,156.0 )
Net cash flows provided by financing activities 57.6 517.5
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 and term
life insurance products, income on our investments, including dividends and
interest, as well as the amounts and timing of cash disbursed for our payment of
policyholder benefits and claims, underwriting and operating expenses and income
taxes.
Net cash provided by operating activities for the six months ended June 30, 2012
increased $30.5 over the same period in 2011. This increase was primarily the
result of favorable underwriting results on a growing book of medical stop-loss
business and an increase in net investment income driven by higher average
assets, partially offset by higher operating expenses as we execute on our
Grow & Diversify strategies.
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 purchases of investments and funding of mortgage loan
originations.
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Net cash used in investing activities for the six months ended June 30, 2012
decreased $546.9 over the same period in 2011. This decrease was primarily the
result of lower purchases of fixed maturities, related to a decline in sales of
fixed deferred annuities, and higher sales of fixed maturities, related to
active management of our prepayment risk. Further, we experienced a reduction in
cash received from prepayments, maturities and calls on fixed maturities.
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 and common stock, as well as
the amounts and timing of cash disbursed to fund withdrawals from certain life
insurance and annuity policies, and dividend distributions to our stock and
warrant holders.
Net cash provided by financing activities for the six months ended June 30, 2012
decreased $459.9 over the same period in 2011. This was primarily driven by
lower policyholder deposits, mainly on fixed deferred annuities. In addition,
there were higher deferred annuity policyholder withdrawals, which we anticipate
as policies move out of the surrender charge period.
