Fitch Affirms Symetra's Ratings; Outlook Negative

The following is from Fitch Ratings on May 22:

Fitch Ratings has affirmed the 'A+' Insurer Financial Strength (IFS) rating on Symetra Life Insurance Company (Symetra Life) as well as all ratings for Symetra Financial Corp. (Symetra), including the Issuer Default Rating (IDR) at 'A-' and all outstanding debt issues. The Rating Outlook is Negative. A full list of rating actions follows at the end of this release.

KEY RATING DRIVERS

Fitch's affirmation of Symetra's ratings reflects the company's strong balance sheet, consistent and diversified earnings, moderate financial leverage and lower-risk products. Additional strengths include the company's good competitive position in the group medical stop-loss market and fixed annuities sold through banks.

The ratings also consider Symetra's lack of significant scale compared to other highly rated life insurers, moderate profitability and lower fixed charge coverage compared to rating expectations and similarly rated peers. In addition, the company relies upon its group medical stop-loss business to generate a significant but sometimes volatile source of earnings.

The Negative Outlook is based primarily on Symetra's high exposure to the continuing low interest rate environment and the effect on profitability, GAAP based fixed charge coverage and additional statutory reserving related to asset adequacy testing over the next 12 to 18 months. The company's statutory reserves are adequate to support the policyholder contractual obligations under moderately adverse conditions as analyzed by year end 2014 cash flow testing results. Given its liability mix, Symetra is more exposed to this risk than peers due to its large legacy structured settlement and bank owned life insurance (BOLI) book. Longer-term, Fitch is concerned with the earnings implications of a prolonged low interest rate environment as spreads between earned rates and credited rates narrow.

Symetra's GAAP fixed charge coverage ratio is low for the rating, declining to 6.7X for the first three months of 2015 and 7.9x for full 2014. Fixed charge coverage is expected to be pressured in 2015 as interest expenses increase and earnings are challenged by low rates and the increase to normal loss ratios in the group benefits medical stop loss business. Statutory interest coverage based on maximum dividend coverage is expected to remain strong at over 4.7 times in 2015. In addition Symetra has approximately $100 million in committed cash at the holding company.

Symetra's profitability is below peers and moderate for the rating with operating ROE at 8-10 percent on a run rate basis. After GAAP profitability improved moderately to 9.6 percent for 2014, the company reported a decline in operating returns on equity to 6.5 percent for the first quarter 2015. Key drivers were an increase in stop loss benefit ratios back to normal ranges, lower mortality gains experience in income annuities, higher expenses related to growth initiatives and higher losses on hedge fund investments than in first quarter 2014. All segments reported lower pre-tax operating income in the first quarter 2015 compared to the prior year. Interest rate margins have remained generally intact and recent sales of employer medical stop loss, deferred and fixed index annuities continue to be strong while universal life sales continue to grow. Fitch expects Symetra's earnings will be negatively affected in a sustained low interest rate environment.

Symetra's balance sheet remains a key strength for the rating with very strong capitalization, moderate financial leverage and a high quality, liquid investment portfolio. Statutory capital of Symetra Life is considered very strong with an RBC ratio at 464 percent at March 31. Symetra Life has a small captive reinsurer in place to manage reserve financing of its universal life book of business. Financial leverage is considered moderate for the rating at 22.6 percent at the end of the first quarter 2015 and operating leverage low for the rating and exposure to capital market funding is not excessive.

Symetra's risky assets declined to 79 percent of total adjusted capital at year end 2014 from 91 percent at yearend 2013 and us below the life industry average of 87 percent. Symetra's bond portfolio has normally carried a greater than industry allocation of 'BBB' rated bonds and an average exposure to below investment grade bonds (BIGs). The company's investment portfolio has higher than average exposure to commercial mortgages than the life insurance industry as this asset class has grown to over 15.5 percent of invested assets. Mortgage credit quality is considered high and mortgage performance has been very good with 99.9 percent of mortgages were in good standing at Dec. 31, 2014.

RATING SENSITIVITIES

Key rating triggers that could lead to a downgrade include:

--Material additional statutory reserve strengthening driven by asset adequacy testing;

--A decline in profitability to below 8 percent;

--A deterioration in operating company capitalization sustained below 400 percent Risk Based Capital (RBC);

--An increase in financial leverage above 25 percent or a decline in GAAP-based fixed charge coverage to below 8x on a sustained basis;

--Material realized or unrealized losses in the company's long- duration bond portfolio derived from sudden changes in market conditions, spiked interest rate levels, and credit spreads that lead to significant cash flow stresses or declines in capital.

Rating triggers that could lead to an upgrade would be achieved over an extended period of time, and include:

--Enhanced profitability to double-digit ROE levels;

--Successful execution of its product diversification strategy;

--Maintenance of strong capital levels in excess of 450 percent RBC and operating company leverage maintained near current levels or improved;

--financial leverage below 20 percent and fixed charge coverage exceeding 12X.

Fitch has affirmed the following ratings with a Negative Outlook:

Symetra Financial Corp.

--IDR at 'A-';

--6.125 percent senior unsecured notes due April 1, 2016 at 'BBB+';

--4.25 percent. senior unsecured notes due July 15, 2024 at 'BBB+';

--8.3 percent junior subordinated CENts due Oct. 15, 2067 at 'BBB- '.

Symetra Life Insurance Company

--IFS at 'A+'.

First Symetra National Life Insurance Company of New York

--IFS at 'A+'.

Additional information is available at 'fitchratings.com'.

Applicable Criteria and Related Research:

--'Insurance Rating Methodology' (September 2014);

--'Exposure Draft: Insurance Notching Criteria' (May 2015).

Applicable Criteria and Related Research:

Insurance Rating Methodology

http://fitchratings.com/creditdesk/reports/ report_frame.cfm?rpt_id=756650

Exposure Draft: Insurance Notching Criteria (Proposed Methodology Changes)

http://fitchratings.com/creditdesk/reports/ report_frame.cfm?rpt_id=865576

Additional Disclosure

Solicitation Status

http://fitchratings.com/gws/en/disclosure/ solicitation?pr_id=985272

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