Fitch Downgrades Symetra Life’s IFS to ‘A’ and Affirms Holdco’s IDR at ‘A-‘; Outlook Stable

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has downgraded Symetra Life Insurance Company's (Symetra Life) Insurer Financial Strength (IFS) rating to 'A' from 'A+' and removed the rating from Rating Watch Negative. Fitch has also affirmed the Issuer Default Rating (IDR) of Symetra Financial Corporation (Symetra) at 'A-' and all outstanding debt. The Rating Outlook on all ratings is Stable. A complete list of rating actions follows at the end of this release.

KEY RATING DRIVERS

Today's rating action considers Symetra Life's high exposure to the continued low interest rate environment, with both profitability and fixed charge coverage below rating expectations and similarly rated peers. The rating action also reflects Symetra Life's lack of significant scale compared to other highly rated life insurers, as well as its reliance on its group medical stop-loss business to generate a significant, but sometimes volatile source of earnings.

Fitch believes that with its liability mix, particularly its large legacy structured settlement and bank owned life insurance (BOLI) book, Symetra is more exposed to interest rate risk than peers. Fitch is concerned with the effects of a protracted low interest rate environment and expected continued spread compression.

Symetra Life's IFS was placed on Rating Watch Negative on Aug. 11, 2015 following the announcement that it had agreed to be acquired by Sumitomo Life Insurance Company (Sumitomo Life). Sumitomo Life's IFS rating of 'A' was one notch lower than Symetra Life's and is constrained by Japan's sovereign rating of 'A'. Prior to the announcement, Symetra's ratings carried a Negative Outlook. Today's downgrade of Symetra Life's IFS is based upon the company's standalone profile, while the affirmation of Symetra's IDR reflects Fitch's anticipated application of its notching criteria beginning with Sumitomo Life's IDR of 'A'. Fitch expects to assign a strategic importance level of 'Very Important' to Symetra within the Sumitomo enterprise.

Symetra's profitability was below rating expectations with operating return on equity (ROE) at 8%-10% on a run rate basis. GAAP profitability improved moderately to 9.6% for 2014, but the company reported a decline in operating returns on equity to 8.3% for the first nine months of 2015. Key drivers were spread compression, an increase in stop loss benefit ratios back to normal ranges, lower mortality gains on Income annuities, higher expenses related to growth initiatives and higher losses on alternative investments. Aside from Symetra's Deferred Annuities segment, which was boosted by growth in the Fixed Indexed Annuity account values, all other segments reported lower pre-tax operating income for the nine months 2015 compared to the prior year. Interest rate margins have deteriorated with margins on Symetra's fixed accounts (excluding fixed indexed annuities) dropping to 1.65% year-to-date through Sept. 30, 2015 from 1.74% in the prior year period, while recent sales of employer medical stop loss and fixed index annuities remain strong and universal life sales continue to grow. Fitch expects Symetra's earnings will continue to be negatively affected in a sustained low interest rate environment.

Symetra's GAAP fixed charge declined to 5.6x for the first nine months of 2015 and 7.8x for the full year 2014. Fixed charge coverage has been pressured in 2015 as interest expenses increase and earnings have been challenged by low rates and more normalized loss ratios in the group medical stop loss business. Statutory interest coverage based on maximum dividend coverage has remained adequate at over 4.7x in 2015. In addition, Symetra has approximately $100 million in committed liquid assets at the holding company.

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 432% at Sept. 30, 2015. Financial leverage is considered moderate for the rating at 22.8% at the end of the third quarter 2015 and exposure to capital market funding is modest, as evidenced by the company's total financings and commitments (TFC) ratio of 0.3x.

Symetra's risky asset ratio declined to 70% of total adjusted capital at year-end 2014 from 78% at year-end 2013 and is below the life industry average of 82%. 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 16.5% of invested assets, but the portfolio is of high quality and is considered a good match for the company's long-dated liabilities. As of June 30, 2015, 100% of the mortgages were in good standing, with an average loan to value of 53.4% and an average debt service coverage ratio of 1.83.

RATING SENSITIVITIES

Upon acquisition by Sumitomo Life, Symetra's future rating movements will be highly influenced by the ratings of the new parent. When developing rating sensitivities, Fitch will consider the financial strength of the parent, the strategic importance of Symetra to group and the stand alone financial strength of Symetra. If the transaction does not close as anticipated in early 2016, Fitch would downgrade the holding company ratings to reflect normal notching from the Symetra Life rating.

FULL LIST OF RATING ACTIONS

Fitch has downgraded the following ratings and removed them from Rating Watch Negative. The Rating Outlook is Stable:

Symetra Life Insurance Company

--IFS to 'A' from 'A+'.

First Symetra National Life Insurance Company of New York

--IFS to 'A' from 'A+'.

Fitch has affirmed the following ratings and revised the Rating Outlook to Stable from Negative:

Symetra Financial Corp.

--IDR at 'A-';

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

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

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

Additional information is available on www.fitchratings.com

Applicable Criteria

Insurance Rating Methodology (pub. 16 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=871172

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=993832

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=993832

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Source: Fitch Ratings