e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
|
|
|
þ |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2010
OR
|
|
|
o |
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number: 001-33808
SYMETRA FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
|
|
|
Delaware
|
|
20-0978027 |
(State or other jurisdiction of
|
|
(I.R.S. Employer |
incorporation or organization)
|
|
Identification No.) |
777 108th Avenue NE, Suite 1200
Bellevue, Washington 98004
(Address of principal executive offices, including zip code)
(425) 256-8000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the Registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer o |
Accelerated filer o |
Non-accelerated filer þ (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
As
of November 8, 2010, the Registrant had 118,197,471 common voting shares outstanding, with
a par value of $0.01 per share.
Forward-Looking Statements
This Quarterly Report on Form 10-Q, including Management’s Discussion and Analysis of
Financial Condition and Results of Operations, contains statements, which constitute
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. All statements, other than statements of
current or historical facts included or referenced in this report that address activities, events
or developments that we expect or anticipate will or may occur in the future, are forward-looking
statements. The words “will,” “believe,” “intend,” “plan,” “expect,” “anticipate,” “project,”
“estimate,” “predict” and similar expressions also are intended to identify forward-looking
statements. These forward-looking statements include, among others, statements with respect to
Symetra Financial Corporation’s:
|
• |
|
estimates or projections of revenues, net income, net income per share, adjusted
operating income, adjusted operating income per share, market share or other financial
forecasts; |
|
|
• |
|
trends in operations, financial performance and financial condition; |
|
|
• |
|
financial and operating targets or plans; and |
|
|
• |
|
business and growth strategy. |
These statements are based on certain assumptions and analyses made by Symetra in light of its
experience and perception of historical trends, current conditions and expected future
developments, as well as other factors believed to be appropriate under the circumstances. Whether
actual results and developments will conform to Symetra’s expectations and predictions is subject
to a number of risks, uncertainties and contingencies that could cause actual results to differ
materially from expectations, including, among others:
|
• |
|
general economic, market or business conditions, including further economic downturns
or other adverse conditions in the global and domestic capital and credit markets; |
|
|
• |
|
the availability of capital and financing; |
|
|
• |
|
potential investment losses; |
|
|
• |
|
the effects of fluctuations in interest rates and a prolonged low interest rate environment; |
|
|
• |
|
recorded reserves for future policy benefits and claims subsequently proving to be inadequate or inaccurate; |
|
|
• |
|
deviations from assumptions used in setting prices for insurance and annuity products; |
|
|
• |
|
market pricing and competitive trends related to insurance products and services; |
|
|
• |
|
changes in amortization of deferred policy acquisition costs; |
|
|
• |
|
financial strength or credit ratings downgrades; |
|
|
• |
|
the continued availability and cost of reinsurance coverage; |
|
|
• |
|
changes in laws or regulations, or their interpretation, including those that could
increase Symetra’s business costs and required capital levels; |
|
|
• |
|
the ability of subsidiaries to pay dividends to Symetra; |
|
|
• |
|
the effects of implementation of the Patient Protection and Affordable Care Act; |
|
|
• |
|
the effects of implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act; and |
|
|
• |
|
the risks that are described in Part II, Item 1A — “Risk Factors” in this report; in
Part I, Item 1A — “Risk Factors” in our Annual Report on Form 10-K for the year ended
December 31, 2009; and Item 1A — “Risk Factors” in Part II of our Form 10-Q for the
quarters ended March 31, and June 30, 2010. |
Consequently, all of the forward-looking statements made in this report are qualified by these
cautionary statements, and there can be no assurance that the actual results or developments
anticipated by Symetra will be realized or, even if substantially realized, that they will have the
expected consequences to, or effects on, Symetra or its business or operations. Symetra assumes no
obligation to update publicly any such forward-looking statements, whether as a result of new
information, future events or otherwise.
2
PART I — Financial Information
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
(In millions, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
As of |
|
|
|
September 30, 2010 |
|
|
December 31, 2009 |
|
|
|
(Unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
Investments: |
|
|
|
|
|
|
|
|
Available-for-sale securities: |
|
|
|
|
|
|
|
|
Fixed maturities, at fair value (cost: $19,896.4 and $18,553.7, respectively) |
|
$ |
21,450.1 |
|
|
$ |
18,594.3 |
|
Marketable equity securities, at fair value (cost: $52.5 and $52.6, respectively) |
|
|
45.4 |
|
|
|
36.7 |
|
Trading securities: |
|
|
|
|
|
|
|
|
Marketable equity securities, at fair value (cost: $159.0 and $165.9, respectively) |
|
|
158.8 |
|
|
|
154.1 |
|
Mortgage loans, net |
|
|
1,493.4 |
|
|
|
1,199.6 |
|
Policy loans |
|
|
71.7 |
|
|
|
73.9 |
|
Investments in limited partnerships (includes $38.5 and $24.7 measured at fair value,
respectively) |
|
|
169.1 |
|
|
|
110.2 |
|
Other invested assets |
|
|
12.0 |
|
|
|
12.2 |
|
|
|
|
|
|
|
|
Total investments |
|
|
23,400.5 |
|
|
|
20,181.0 |
|
Cash and cash equivalents |
|
|
197.2 |
|
|
|
257.8 |
|
Accrued investment income |
|
|
257.5 |
|
|
|
237.2 |
|
Accounts receivable and other receivables |
|
|
89.0 |
|
|
|
70.1 |
|
Reinsurance recoverables |
|
|
284.8 |
|
|
|
276.6 |
|
Deferred policy acquisition costs |
|
|
160.9 |
|
|
|
250.4 |
|
Goodwill |
|
|
27.8 |
|
|
|
26.3 |
|
Current income taxes recoverable |
|
|
— |
|
|
|
20.2 |
|
Deferred income tax assets, net |
|
|
— |
|
|
|
191.2 |
|
Other assets |
|
|
58.4 |
|
|
|
84.5 |
|
Separate account assets |
|
|
826.2 |
|
|
|
840.1 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
25,302.3 |
|
|
$ |
22,435.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
Funds held under deposit contracts |
|
$ |
20,107.9 |
|
|
$ |
18,816.7 |
|
Future policy benefits |
|
|
397.6 |
|
|
|
394.9 |
|
Policy and contract claims |
|
|
126.1 |
|
|
|
125.6 |
|
Unearned premiums |
|
|
12.8 |
|
|
|
12.1 |
|
Other policyholders’ funds |
|
|
109.1 |
|
|
|
113.8 |
|
Notes payable |
|
|
449.0 |
|
|
|
448.9 |
|
Deferred income tax liabilities, net |
|
|
291.1 |
|
|
|
— |
|
Other liabilities |
|
|
271.2 |
|
|
|
250.0 |
|
Separate account liabilities |
|
|
826.2 |
|
|
|
840.1 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
22,591.0 |
|
|
|
21,002.1 |
|
Commitments and contingencies (Note 10) |
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value; 10,000,000 shares authorized; none issued |
|
|
— |
|
|
|
— |
|
Common stock, $0.01 par value; 750,000,000 shares authorized; 118,171,213 issued and
outstanding as of September 30, 2010; 92,729,455 issued and outstanding as of December
31, 2009 |
|
|
1.2 |
|
|
|
0.9 |
|
Additional paid-in capital |
|
|
1,449.3 |
|
|
|
1,165.7 |
|
Retained earnings |
|
|
441.4 |
|
|
|
316.4 |
|
Accumulated other comprehensive income (loss), net of taxes |
|
|
819.4 |
|
|
|
(49.7 |
) |
|
|
|
|
|
|
|
Total stockholders’ equity |
|
|
2,711.3 |
|
|
|
1,433.3 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity |
|
$ |
25,302.3 |
|
|
$ |
22,435.4 |
|
|
|
|
|
|
|
|
See accompanying notes.
3
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
For the Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums |
|
$ |
120.2 |
|
|
$ |
116.6 |
|
|
$ |
354.7 |
|
|
$ |
352.9 |
|
Net investment income |
|
|
304.4 |
|
|
|
283.6 |
|
|
|
888.4 |
|
|
|
829.4 |
|
Policy fees, contract charges, and other |
|
|
40.9 |
|
|
|
40.2 |
|
|
|
123.2 |
|
|
|
120.5 |
|
Net realized investment gains (losses): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other-than-temporary impairment losses on securities |
|
|
(9.6 |
) |
|
|
(44.1 |
) |
|
|
(30.2 |
) |
|
|
(167.9 |
) |
Less: portion of losses recognized in other comprehensive
income |
|
|
6.1 |
|
|
|
26.7 |
|
|
|
15.5 |
|
|
|
94.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net impairment losses recognized in earnings |
|
|
(3.5 |
) |
|
|
(17.4 |
) |
|
|
(14.7 |
) |
|
|
(73.7 |
) |
Other net realized investment gains |
|
|
23.5 |
|
|
|
28.7 |
|
|
|
31.5 |
|
|
|
44.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net realized investment gains (losses) |
|
|
20.0 |
|
|
|
11.3 |
|
|
|
16.8 |
|
|
|
(29.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
485.5 |
|
|
|
451.7 |
|
|
|
1,383.1 |
|
|
|
1,273.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder benefits and claims |
|
|
85.4 |
|
|
|
85.6 |
|
|
|
254.9 |
|
|
|
262.1 |
|
Interest credited |
|
|
227.8 |
|
|
|
220.5 |
|
|
|
667.8 |
|
|
|
629.2 |
|
Other underwriting and operating expenses |
|
|
63.1 |
|
|
|
61.7 |
|
|
|
186.9 |
|
|
|
186.7 |
|
Interest expense |
|
|
8.0 |
|
|
|
7.9 |
|
|
|
23.9 |
|
|
|
23.8 |
|
Amortization of deferred policy acquisition costs |
|
|
18.0 |
|
|
|
13.8 |
|
|
|
50.4 |
|
|
|
36.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses |
|
|
402.3 |
|
|
|
389.5 |
|
|
|
1,183.9 |
|
|
|
1,138.2 |
|
Income from operations before income taxes |
|
|
83.2 |
|
|
|
62.2 |
|
|
|
199.2 |
|
|
|
135.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for income taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
|
18.8 |
|
|
|
(15.7 |
) |
|
|
46.1 |
|
|
|
(4.2 |
) |
Deferred |
|
|
7.8 |
|
|
|
33.8 |
|
|
|
14.4 |
|
|
|
43.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision for income taxes |
|
|
26.6 |
|
|
|
18.1 |
|
|
|
60.5 |
|
|
|
39.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
56.6 |
|
|
$ |
44.1 |
|
|
$ |
138.7 |
|
|
$ |
96.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.41 |
|
|
$ |
0.40 |
|
|
$ |
1.03 |
|
|
$ |
0.86 |
|
Diluted |
|
$ |
0.41 |
|
|
$ |
0.40 |
|
|
$ |
1.03 |
|
|
$ |
0.86 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
137.140 |
|
|
|
111.622 |
|
|
|
135.082 |
|
|
|
111.622 |
|
Diluted |
|
|
137.145 |
|
|
|
111.624 |
|
|
|
135.096 |
|
|
|
111.623 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per common share |
|
$ |
0.05 |
|
|
|
— |
|
|
$ |
0.10 |
|
|
|
— |
|
See accompanying notes.
4
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In millions)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
Treasury |
|
|
Other |
|
|
Total |
|
|
|
Common |
|
|
Paid-in |
|
|
Retained |
|
|
Stock, |
|
|
Comprehensive |
|
|
Stockholders’ |
|
|
|
Stock |
|
|
Capital |
|
|
Earnings |
|
|
at Cost |
|
|
Income (Loss) |
|
|
Equity |
|
Balances as of January 1, 2009 |
|
$ |
0.9 |
|
|
$ |
1,165.5 |
|
|
$ |
172.4 |
|
|
$ |
— |
|
|
$ |
(1,052.6 |
) |
|
$ |
286.2 |
|
Cumulative effect adjustment — new accounting
guidance (net of taxes: $(8.4)) |
|
|
— |
|
|
|
— |
|
|
|
15.7 |
|
|
|
— |
|
|
|
(15.7 |
) |
|
|
— |
|
Comprehensive income, net of taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
96.2 |
|
|
|
— |
|
|
|
— |
|
|
|
96.2 |
|
Other comprehensive income (net of taxes: $591.3) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,098.1 |
|
|
|
1,098.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income, net of taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,194.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of September 30, 2009 |
|
$ |
0.9 |
|
|
$ |
1,165.5 |
|
|
$ |
284.3 |
|
|
$ |
— |
|
|
$ |
29.8 |
|
|
$ |
1,480.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of January 1, 2010 |
|
$ |
0.9 |
|
|
$ |
1,165.7 |
|
|
$ |
316.4 |
|
|
$ |
— |
|
|
$ |
(49.7 |
) |
|
$ |
1,433.3 |
|
Common stock issued (net of issuance costs: $20.6) |
|
|
0.3 |
|
|
|
282.2 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
282.5 |
|
Comprehensive income, net of taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
138.7 |
|
|
|
— |
|
|
|
— |
|
|
|
138.7 |
|
Other comprehensive income (net of taxes: $467.8) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
869.1 |
|
|
|
869.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income, net of taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,007.8 |
|
Stock-based compensation |
|
|
— |
|
|
|
2.0 |
|
|
|
— |
|
|
|
(0.6 |
) |
|
|
— |
|
|
|
1.4 |
|
Retirement of treasury stock |
|
|
— |
|
|
|
(0.6 |
) |
|
|
— |
|
|
|
0.6 |
|
|
|
— |
|
|
|
— |
|
Dividends declared |
|
|
— |
|
|
|
— |
|
|
|
(13.7 |
) |
|
|
— |
|
|
|
— |
|
|
|
(13.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of September 30, 2010 |
|
$ |
1.2 |
|
|
$ |
1,449.3 |
|
|
$ |
441.4 |
|
|
$ |
— |
|
|
$ |
819.4 |
|
|
$ |
2,711.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
5
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended |
|
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
138.7 |
|
|
$ |
96.2 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Net realized investment (gains) losses |
|
|
(16.8 |
) |
|
|
29.0 |
|
Accretion and amortization of invested assets, net |
|
|
30.0 |
|
|
|
15.0 |
|
Accrued interest on bonds |
|
|
(31.1 |
) |
|
|
(25.8 |
) |
Amortization and depreciation |
|
|
16.9 |
|
|
|
10.9 |
|
Deferred income tax provision |
|
|
14.4 |
|
|
|
43.6 |
|
Interest credited on deposit contracts |
|
|
667.8 |
|
|
|
629.2 |
|
Mortality and expense charges and administrative fees |
|
|
(77.0 |
) |
|
|
(75.1 |
) |
Changes in: |
|
|
|
|
|
|
|
|
Accrued investment income |
|
|
(20.3 |
) |
|
|
(36.7 |
) |
Deferred policy acquisition costs, net |
|
|
(44.0 |
) |
|
|
(95.9 |
) |
Other receivables |
|
|
(10.1 |
) |
|
|
(5.4 |
) |
Future policy benefits |
|
|
2.7 |
|
|
|
2.6 |
|
Policy and contract claims |
|
|
0.5 |
|
|
|
1.5 |
|
Current income taxes |
|
|
23.1 |
|
|
|
(4.0 |
) |
Other assets and liabilities |
|
|
(30.0 |
) |
|
|
(9.5 |
) |
Other, net |
|
|
0.4 |
|
|
|
(0.2 |
) |
|
|
|
|
|
|
|
Total adjustments |
|
|
526.5 |
|
|
|
479.2 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
665.2 |
|
|
|
575.4 |
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
Purchases of: |
|
|
|
|
|
|
|
|
Fixed maturities and marketable equity securities |
|
|
(3,219.8 |
) |
|
|
(3,332.4 |
) |
Other invested assets and investments in limited partnerships |
|
|
(34.1 |
) |
|
|
(9.1 |
) |
Issuances of mortgage loans |
|
|
(354.5 |
) |
|
|
(162.3 |
) |
Issuances of policy loans |
|
|
(12.3 |
) |
|
|
(13.6 |
) |
Maturities, calls, paydowns, and other |
|
|
1,345.3 |
|
|
|
1,001.5 |
|
Securities lending collateral returned, net |
|
|
— |
|
|
|
72.3 |
|
Sales of: |
|
|
|
|
|
|
|
|
Fixed maturities and marketable equity securities |
|
|
548.3 |
|
|
|
454.1 |
|
Other invested assets and investments in limited partnerships |
|
|
13.8 |
|
|
|
23.0 |
|
Repayments of mortgage loans |
|
|
56.5 |
|
|
|
53.9 |
|
Repayments of policy loans |
|
|
13.6 |
|
|
|
14.1 |
|
Other, net |
|
|
(1.8 |
) |
|
|
3.0 |
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(1,645.0 |
) |
|
|
(1,895.5 |
) |
Cash flows from financing activities |
|
|
|
|
|
|
|
|
Policyholder account balances: |
|
|
|
|
|
|
|
|
Deposits |
|
|
1,674.0 |
|
|
|
2,187.7 |
|
Withdrawals |
|
|
(1,005.7 |
) |
|
|
(1,010.1 |
) |
Securities lending collateral paid, net |
|
|
— |
|
|
|
(72.3 |
) |
Proceeds from issuance of common stock |
|
|
282.5 |
|
|
|
— |
|
Cash dividends paid on common stock |
|
|
(13.7 |
) |
|
|
— |
|
Other, net |
|
|
(17.9 |
) |
|
|
(11.5 |
) |
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
919.2 |
|
|
|
1,093.8 |
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(60.6 |
) |
|
|
(226.3 |
) |
Cash and cash equivalents at beginning of period |
|
|
257.8 |
|
|
|
468.0 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
197.2 |
|
|
$ |
241.7 |
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information |
|
|
|
|
|
|
|
|
Non-cash transactions during the period: |
|
|
|
|
|
|
|
|
Investments in limited partnerships and capital obligations incurred |
|
$ |
38.7 |
|
|
$ |
10.0 |
|
Bond exchanges |
|
|
76.5 |
|
|
|
147.7 |
|
See accompanying notes.
6
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless otherwise stated)
(Unaudited)
1. Description of Business
Symetra Financial Corporation is a Delaware corporation that, through its subsidiaries, offers
group and individual insurance products and retirement products, including annuities, marketed
through benefits consultants, financial institutions and independent agents and advisors in all
states and the District of Columbia. The Company’s principal products include medical stop-loss
insurance, fixed and variable deferred annuities, single premium immediate annuities and individual
life insurance. The accompanying interim financial statements include, on a consolidated basis, the
accounts of Symetra Financial Corporation and its subsidiaries, which are collectively referred to
as “Symetra Financial” or “the Company.”
On January 27, 2010, the Company completed an initial public offering (IPO) of its common
stock at an offering price of $12.00 per share. The IPO included 25.260 newly issued shares of
common stock sold by the Company, and 9.700 existing shares of common stock sold by selling
stockholders. The Company received net proceeds from the offering of $282.5. The Company did not
receive any proceeds from the sale of shares by the selling stockholders.
2. Summary of Significant Accounting Policies
Basis of Presentation and Use of Estimates
The interim consolidated financial statements have been prepared in conformity with U.S.
generally accepted accounting principles (GAAP), including the rules and regulations of the
Securities and Exchange Commission (SEC), for interim reporting. The preparation of financial
statements in conformity with GAAP requires the Company to make estimates and assumptions that may
affect the amounts reported in the interim consolidated financial statements and accompanying
notes. These interim consolidated financial statements are unaudited but in management’s opinion
include all adjustments, consisting of normal recurring adjustments and accruals, necessary for a
fair presentation.
The interim consolidated financial statements include the accounts of Symetra Financial
Corporation and its subsidiaries that are wholly owned, directly or indirectly. All significant
intercompany transactions and balances have been eliminated. Certain reclassifications have been
made to prior year financial information to conform to the current period presentation. For the
three and nine months ended September 30, 2009, this included reclassifications of $25.5 and $77.3,
respectively, related to cost of insurance charges on universal life-type (UL) contracts from
premium revenues to policy fees, contract charges and other revenues on the consolidated statements
of income. These reclassifications did not change total revenues or amounts previously reported as
other revenues that are now included in policy fees, contract charges and other.
These interim consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and accompanying notes included in the Company’s Annual Report on
Form 10-K for the year ended December 31, 2009, filed with the SEC. The consolidated balance sheet
as of December 31, 2009 was derived from audited consolidated financial statements as of that date,
but certain information and footnotes required by GAAP for complete financial statements have been
excluded. Operating results for the three and nine months ended September 30, 2010 are not
necessarily indicative of the results that may be expected for the twelve months ended December 31,
2010.
During the first quarter of 2010, the Company revised its estimate for bonus interest reserves
on one of its universal life products. This bonus interest is not earned by the contractholder if
the policy’s credited rate is equal to the guaranteed minimum. Due to the negative impact the low
interest rate environment has had on investment yields, the credited interest rate is being
adjusted downward to the guaranteed minimum rate over the next six months. As a result, for the
nine months ended September 30, 2010, income from operations before income taxes increased $7.4.
The impact on net income for the same period was $4.8, or $0.03 per share of common stock.
Adoption of New Accounting Pronouncements
ASC 810-10 (formerly SFAS No. 167), Amendments to FASB Interpretation No. 46(R)
In June 2009, the FASB issued SFAS No. 167 (ASC 810-10), Amendments to FASB Interpretation No.
46(R), which provides guidance for determining whether an entity is a variable interest entity
(VIE); assessing which enterprise, if any, has a controlling financial interest in a VIE; and
providing additional disclosures about involvement with such entities. This guidance changed the
basis for determining the primary beneficiary of a VIE from a quantitative analysis to a primarily
qualitative analysis and requires
7
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless otherwise stated)
(Unaudited)
reassessment of this determination at each reporting period. The Company adopted this guidance
on January 1, 2010, and it did not change the Company’s previous conclusions regarding its VIEs,
which consist primarily of investments in limited partnerships.
Based on the analysis of its investments in VIEs, the Company does not meet the definition of
“primary beneficiary” for any of these VIEs, as it lacks the power to direct the activities of its
VIEs, and therefore has not consolidated these entities. The maximum exposure to loss as a result
of the Company’s involvement in its VIEs, which includes unfunded commitments, was $193.9 and
$147.3 as of September 30, 2010 and December 31, 2009, respectively. See Note 5 for disclosures
related to the fair value of these investments and their impact on earnings.
ASU 2010-6, Improving Disclosures about Fair Value Measurement
In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures (Topic
820) — Improving Disclosures about Fair Value Measurement. The guidance in this ASU requires
additional disclosures about an entity’s fair value measurements, including information about
inputs to Level 2 measurements, gross transfers into and out of Levels 1 and 2, and information
about activity for Level 3 measurements on a gross basis. It also clarifies the level of
disaggregation required for existing fair value disclosures. The Company adopted this guidance on
January 1, 2010, except for the provisions regarding activity for Level 3 measurements presented on
a gross basis, which will be adopted on January 1, 2011, as provided for in the guidance. See Note
5 for the Company’s disclosures related to fair value measurements.
Accounting Pronouncements Not Yet Adopted
ASU 2010-15, How Investments Held through Separate Accounts Affect an Insurer’s Consolidation Analysis of Those Investments
In April 2010, the FASB issued ASU 2010-15, Financial Services — Insurance (Topic 944) — How
Investments Held through Separate Accounts Affect an Insurer’s Consolidation Analysis of Those
Investments. This guidance clarifies that an insurer should only consider its ownership interests
held within its general account when determining if it holds a controlling interest, thus excluding
interests held in a separate account from the analysis. It does not change the guidance for
consolidating investments when the general account holds a controlling interest. The Company will
adopt this guidance on January 1, 2011, which will not change the Company’s current practice of
excluding ownership interests held in its separate account from its consolidation analysis.
ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses
In July 2010, the FASB issued ASU 2010-20, Receivables (Topic 310) — Disclosures about the
Credit Quality of Financing Receivables and the Allowance for Credit Losses. This guidance requires
increased disclosure about financing receivables, including credit risk exposures and the allowance
for credit losses; however, it does not change how credit losses are measured or recognized. It
requires, on a disaggregated basis, new disclosures regarding allowances for credit losses, the
credit quality of financing receivables, and loan impairments. The Company is evaluating the new
disclosure requirements to determine the extent to which they will impact its financial statements.
The Company’s mortgage loans are considered financing receivables. The Company will include the
required disclosures in its financial statements for the year ended December 31, 2010.
ASU 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts
In October 2010, the FASB issued ASU 2010-26, Financial Services — Insurance (Topic 944) —
Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts. This guidance
limits the amounts of deferrable acquisition costs to those incremental costs directly related to
the successful acquisition of an insurance contract and clarifies which costs are included in that
definition. Additionally, advertising costs must meet existing GAAP guidance for capitalization of
advertising costs to be deferred
under ASC 944. The guidance is effective for fiscal years beginning after December 15, 2011.
Retrospective application, as well as early adoption, are permitted, but not required. The Company
is evaluating the method and impact of adopting this guidance.
3. Earnings Per Share
Basic earnings per share represents the amount of earnings for the period available to each
share of common stock outstanding during the reporting period. Diluted earnings per share
represents the amount of earnings for the period available to each share of common stock
outstanding during the reporting period, adjusted for the potential issuance of common stock, if
dilutive.
8
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless otherwise stated)
(Unaudited)
The outstanding warrants, exercisable for 18.976 common shares, are considered participating
securities or potential common stock securities that are included in weighted-average common shares
outstanding for purposes of computing basic and diluted earnings per share using the two-class
method. The warrants are considered participating securities or potential common stock securities
because the terms of the agreements entitle the holders to receive any dividends declared on the
common stock concurrently with the holders of outstanding shares of common stock, on a one-to-one
basis.
The Company has issued restricted stock to certain employees that are included in the
computation of earnings per share, weighted for the portion of the period the shares were
outstanding. Certain of the restricted shares are considered participating securities because the
terms of the agreements entitle the holders to receive any dividends declared on the common stock
concurrently with the holders of outstanding shares of common stock, on a one-to-one basis.
Participating restricted stock is included in basic and diluted earnings per share based on the
application of the two-class method. Non-participating restricted stock is included in diluted
earnings per share based on the application of the treasury stock method.
For the three and nine months ended September 30, 2010, 2.350 stock options were excluded from
the computation of diluted earnings per share, based on the application of the treasury stock
method, because they were antidilutive. There were no stock options issued or outstanding in 2009.
The following table presents information relating to the Company’s calculations of basic and
diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
For the Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income, as reported |
|
$ |
56.6 |
|
|
$ |
44.1 |
|
|
$ |
138.7 |
|
|
$ |
96.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding — basic |
|
|
137.140 |
|
|
|
111.622 |
|
|
|
135.082 |
|
|
|
111.622 |
|
Add: Dilutive effect of restricted stock |
|
|
0.005 |
|
|
|
0.002 |
|
|
|
0.014 |
|
|
|
0.001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding — diluted |
|
|
137.145 |
|
|
|
111.624 |
|
|
|
135.096 |
|
|
|
111.623 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.41 |
|
|
$ |
0.40 |
|
|
$ |
1.03 |
|
|
$ |
0.86 |
|
Diluted |
|
$ |
0.41 |
|
|
$ |
0.40 |
|
|
$ |
1.03 |
|
|
$ |
0.86 |
|
4. Investments
The following tables summarize the Company’s available-for-sale fixed maturities and
marketable equity securities. The other-than-temporary impairments (OTTI) in accumulated other
comprehensive income (loss) (AOCI) represent the amount of cumulative non-credit OTTI losses
transferred to, or recorded in, AOCI for securities that also had a credit-related impairment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost or |
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
OTTI in |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
|
AOCI |
|
As of September 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies |
|
$ |
87.6 |
|
|
$ |
8.4 |
|
|
$ |
— |
|
|
$ |
96.0 |
|
|
$ |
(0.1 |
) |
State and political subdivisions |
|
|
468.8 |
|
|
|
12.1 |
|
|
|
(7.6 |
) |
|
|
473.3 |
|
|
|
(0.2 |
) |
Corporate securities |
|
|
13,576.7 |
|
|
|
1,331.0 |
|
|
|
(128.4 |
) |
|
|
14,779.3 |
|
|
|
(25.2 |
) |
Residential mortgage-backed securities |
|
|
3,667.7 |
|
|
|
214.9 |
|
|
|
(42.6 |
) |
|
|
3,840.0 |
|
|
|
(39.1 |
) |
Commercial mortgage-backed securities |
|
|
1,766.9 |
|
|
|
152.3 |
|
|
|
(8.2 |
) |
|
|
1,911.0 |
|
|
|
(3.6 |
) |
Other debt obligations |
|
|
328.7 |
|
|
|
29.7 |
|
|
|
(7.9 |
) |
|
|
350.5 |
|
|
|
(8.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
|
19,896.4 |
|
|
|
1,748.4 |
|
|
|
(194.7 |
) |
|
|
21,450.1 |
|
|
|
(76.7 |
) |
Marketable equity securities, available-for-sale |
|
|
52.5 |
|
|
|
1.1 |
|
|
|
(8.2 |
) |
|
|
45.4 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
19,948.9 |
|
|
$ |
1,749.5 |
|
|
$ |
(202.9 |
) |
|
$ |
21,495.5 |
|
|
$ |
(76.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless otherwise stated)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost or |
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
OTTI in |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
|
AOCI |
|
As of December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies |
|
$ |
41.6 |
|
|
$ |
2.4 |
|
|
$ |
(0.1 |
) |
|
$ |
43.9 |
|
|
$ |
(0.1 |
) |
State and political subdivisions |
|
|
518.4 |
|
|
|
1.9 |
|
|
|
(37.3 |
) |
|
|
483.0 |
|
|
|
(1.3 |
) |
Corporate securities |
|
|
12,300.2 |
|
|
|
483.8 |
|
|
|
(384.0 |
) |
|
|
12,400.0 |
|
|
|
(32.3 |
) |
Residential mortgage-backed securities |
|
|
3,532.1 |
|
|
|
105.3 |
|
|
|
(101.0 |
) |
|
|
3,536.4 |
|
|
|
(39.9 |
) |
Commercial mortgage-backed securities |
|
|
1,805.6 |
|
|
|
44.5 |
|
|
|
(60.7 |
) |
|
|
1,789.4 |
|
|
|
(4.0 |
) |
Other debt obligations |
|
|
355.8 |
|
|
|
13.1 |
|
|
|
(27.3 |
) |
|
|
341.6 |
|
|
|
(4.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
|
18,553.7 |
|
|
|
651.0 |
|
|
|
(610.4 |
) |
|
|
18,594.3 |
|
|
|
(81.9 |
) |
Marketable equity securities, available-for-sale |
|
|
52.6 |
|
|
|
0.1 |
|
|
|
(16.0 |
) |
|
|
36.7 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
18,606.3 |
|
|
$ |
651.1 |
|
|
$ |
(626.4 |
) |
|
$ |
18,631.0 |
|
|
$ |
(81.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following tables summarize gross unrealized losses and fair values of the Company’s
available-for-sale investments. For fixed maturities, gross unrealized losses include the portion
of OTTI recorded in AOCI. The tables are aggregated by investment category and present separately
those securities that have been in a continuous unrealized loss position for less than twelve
months and for twelve months or more.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months |
|
|
12 Months or More |
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Fair |
|
|
Unrealized |
|
|
# of |
|
|
Fair |
|
|
Unrealized |
|
|
# of |
|
|
|
Value |
|
|
Losses |
|
|
Securities |
|
|
Value |
|
|
Losses |
|
|
Securities |
|
As of September 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and political subdivisions |
|
$ |
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
180.5 |
|
|
$ |
(7.6 |
) |
|
|
26 |
|
Corporate securities |
|
|
343.0 |
|
|
|
(26.1 |
) |
|
|
63 |
|
|
|
1,083.2 |
|
|
|
(102.3 |
) |
|
|
123 |
|
Residential mortgage-backed securities |
|
|
27.1 |
|
|
|
(0.2 |
) |
|
|
8 |
|
|
|
319.5 |
|
|
|
(42.4 |
) |
|
|
47 |
|
Commercial mortgage-backed securities |
|
|
21.8 |
|
|
|
(0.4 |
) |
|
|
7 |
|
|
|
70.9 |
|
|
|
(7.8 |
) |
|
|
19 |
|
Other debt obligations |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
50.8 |
|
|
|
(7.9 |
) |
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
$ |
391.9 |
|
|
$ |
(26.7 |
) |
|
|
78 |
|
|
$ |
1,704.9 |
|
|
$ |
(168.0 |
) |
|
|
224 |
|
Marketable equity securities, available-for-sale |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
23.6 |
|
|
|
(8.2 |
) |
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
391.9 |
|
|
$ |
(26.7 |
) |
|
|
78 |
|
|
$ |
1,728.5 |
|
|
$ |
(176.2 |
) |
|
|
227 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months |
|
|
12 Months or More |
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Fair |
|
|
Unrealized |
|
|
# of |
|
|
Fair |
|
|
Unrealized |
|
|
# of |
|
|
|
Value |
|
|
Losses |
|
|
Securities |
|
|
Value |
|
|
Losses |
|
|
Securities |
|
As of December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies |
|
$ |
2.2 |
|
|
$ |
(0.1 |
) |
|
|
1 |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
— |
|
State and political subdivisions |
|
|
67.7 |
|
|
|
(1.9 |
) |
|
|
18 |
|
|
|
299.7 |
|
|
|
(35.4 |
) |
|
|
49 |
|
Corporate securities |
|
|
1,377.6 |
|
|
|
(33.3 |
) |
|
|
148 |
|
|
|
2,442.6 |
|
|
|
(350.8 |
) |
|
|
284 |
|
Residential mortgage-backed securities |
|
|
579.9 |
|
|
|
(9.4 |
) |
|
|
30 |
|
|
|
404.6 |
|
|
|
(91.6 |
) |
|
|
65 |
|
Commercial mortgage-backed securities |
|
|
94.9 |
|
|
|
(1.4 |
) |
|
|
11 |
|
|
|
622.8 |
|
|
|
(59.3 |
) |
|
|
44 |
|
Other debt obligations |
|
|
37.8 |
|
|
|
(0.3 |
) |
|
|
6 |
|
|
|
89.6 |
|
|
|
(26.9 |
) |
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
$ |
2,160.1 |
|
|
$ |
(46.4 |
) |
|
|
214 |
|
|
$ |
3,859.3 |
|
|
$ |
(564.0 |
) |
|
|
457 |
|
Marketable equity securities, available-for-sale |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
36.3 |
|
|
|
(16.0 |
) |
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,160.1 |
|
|
$ |
(46.4 |
) |
|
|
214 |
|
|
$ |
3,895.6 |
|
|
$ |
(580.0 |
) |
|
|
462 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based on the National Association of Insurance Commissioners (NAIC) ratings, as of September
30, 2010 and December 31, 2009, the Company held below-investment-grade fixed maturities with fair
values of $969.7 and $1,032.1, respectively, and amortized
costs of $1,008.0 and $1,165.1, respectively. These holdings amounted to 4.5% and 5.6% of the
Company’s investments in fixed maturities at fair value as of September 30, 2010 and December 31,
2009, respectively.
10
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless otherwise stated)
(Unaudited)
The following table summarizes the amortized cost and fair value of fixed maturities as of
September 30, 2010, by contractual years to maturity. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay obligations with or
without prepayment penalties.
|
|
|
|
|
|
|
|
|
|
|
Amortized |
|
|
Fair |
|
|
|
Cost |
|
|
Value |
|
One year or less |
|
$ |
718.7 |
|
|
$ |
730.1 |
|
Over one year through five years |
|
|
3,189.3 |
|
|
|
3,441.5 |
|
Over five years through ten years |
|
|
5,163.1 |
|
|
|
5,755.8 |
|
Over ten years |
|
|
5,121.0 |
|
|
|
5,484.8 |
|
Residential mortgage-backed securities |
|
|
3,667.7 |
|
|
|
3,840.0 |
|
Commercial mortgage-backed securities |
|
|
1,766.9 |
|
|
|
1,911.0 |
|
Other asset-backed securities |
|
|
269.7 |
|
|
|
286.9 |
|
|
|
|
|
|
|
|
Total fixed maturities |
|
$ |
19,896.4 |
|
|
$ |
21,450.1 |
|
|
|
|
|
|
|
|
The following table summarizes the Company’s net investment income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
For the Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Fixed maturities |
|
$ |
282.0 |
|
|
$ |
267.0 |
|
|
$ |
833.4 |
|
|
$ |
781.4 |
|
Marketable equity securities, available-for-sale |
|
|
0.6 |
|
|
|
0.6 |
|
|
|
2.3 |
|
|
|
2.3 |
|
Marketable equity securities, trading |
|
|
0.7 |
|
|
|
0.7 |
|
|
|
2.2 |
|
|
|
1.9 |
|
Mortgage loans |
|
|
23.2 |
|
|
|
17.2 |
|
|
|
62.9 |
|
|
|
49.3 |
|
Policy loans |
|
|
1.1 |
|
|
|
1.1 |
|
|
|
3.3 |
|
|
|
3.3 |
|
Investments in limited partnerships |
|
|
(0.3 |
) |
|
|
(0.9 |
) |
|
|
(4.1 |
) |
|
|
1.7 |
|
Other |
|
|
1.8 |
|
|
|
2.8 |
|
|
|
3.6 |
|
|
|
4.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income |
|
|
309.1 |
|
|
|
288.5 |
|
|
|
903.6 |
|
|
|
843.9 |
|
Investment expenses |
|
|
(4.7 |
) |
|
|
(4.9 |
) |
|
|
(15.2 |
) |
|
|
(14.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
$ |
304.4 |
|
|
$ |
283.6 |
|
|
$ |
888.4 |
|
|
$ |
829.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the Company’s net realized investment gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
For the Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross gains on sales |
|
$ |
6.6 |
|
|
$ |
10.7 |
|
|
$ |
24.0 |
|
|
$ |
17.0 |
|
Gross losses on sales |
|
|
(2.1 |
) |
|
|
(12.7 |
) |
|
|
(3.4 |
) |
|
|
(14.9 |
) |
Other-than-temporary impairments |
|
|
(3.5 |
) |
|
|
(17.4 |
) |
|
|
(14.7 |
) |
|
|
(73.7 |
) |
Other(1) |
|
|
5.1 |
|
|
|
7.6 |
|
|
|
7.3 |
|
|
|
6.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
|
6.1 |
|
|
|
(11.8 |
) |
|
|
13.2 |
|
|
|
(64.7 |
) |
Marketable equity securities, trading(2) |
|
|
15.2 |
|
|
|
21.6 |
|
|
|
14.0 |
|
|
|
25.9 |
|
Other invested assets |
|
|
(0.4 |
) |
|
|
0.4 |
|
|
|
(6.6 |
) |
|
|
(1.1 |
) |
Deferred policy acquisition costs adjustment |
|
|
(0.9 |
) |
|
|
1.1 |
|
|
|
(3.8 |
) |
|
|
10.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment gains (losses) |
|
$ |
20.0 |
|
|
$ |
11.3 |
|
|
$ |
16.8 |
|
|
$ |
(29.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
This includes gains (losses) on calls and redemptions. Also
included are changes in the fair value of the Company’s
convertible securities held as of period end totaling $4.0, $6.3,
$(0.4) and $7.7 for the three and nine months ended September 30,
2010 and 2009, respectively. |
|
(2) |
|
This includes $15.8, $21.5, $13.5 and $23.5 of net gains for the
three and nine months ended September 30, 2010 and 2009,
respectively, related to changes in fair value of trading
securities held as of period end. |
Other-Than-Temporary Impairments
The Company’s review of investment securities for OTTI includes both quantitative and
qualitative criteria. Quantitative criteria include the length of time and amount that each
security is in an unrealized loss position (i.e., is underwater) and, for fixed maturities, whether
expected future cash flows indicate a credit loss exists.
11
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless otherwise stated)
(Unaudited)
While all securities are monitored for impairment, the Company’s experience indicates that
securities for which the cost or amortized cost exceeds fair value by less than 20% do not
represent a significant risk of impairment and, often, fair values recover over time as the factors
that caused the declines improve. If the estimated fair value has declined and remained below cost
or amortized cost by 20% or more, the Company further analyzes the decrease in fair value to
determine whether it is an other-than-temporary decline. To make this determination for each
security, the Company considers, among other factors:
|
• |
|
Extent and duration of the decline in fair value below cost or amortized cost; |
|
|
• |
|
The financial condition and near-term prospects of the issuer of the security,
including any specific events that may affect its operations, earnings potential or
compliance with terms and covenants of the security; |
|
|
• |
|
Changes in the financial condition of the security’s underlying collateral; |
|
|
• |
|
Any downgrades of the security by a rating agency; |
|
|
• |
|
Any reduction or elimination of dividends or nonpayment of scheduled interest payments; |
|
|
• |
|
Other indications that a credit loss has occurred; and |
|
|
• |
|
The Company’s intent to sell a fixed maturity or whether it is more likely than not the
Company will be required to sell the fixed maturity prior to recovery of its amortized
cost, considering any regulatory developments and the Company’s liquidity needs. |
For fixed maturities, if the Company determines that the present value of the cash flows
expected to be collected is less than the amortized cost of the security (i.e., a credit loss
exists), the Company concludes that an OTTI has occurred. In order to determine the amount of the
credit loss, the Company calculates the recovery value by performing a discounted cash flow
analysis based on the current expectations of future cash flows it expects to recover. The discount
rate is the effective interest rate implicit in the underlying fixed maturity. The effective
interest rate is the original yield for corporate securities, or current yield for mortgage-backed
securities.
Determination of Credit Losses on Corporate Securities
To determine the recovery value, credit loss and intent to sell for a corporate security, the
Company performs an analysis related to the underlying issuer including, but not limited to, the
following:
|
• |
|
Fundamentals of the issuer to determine what the Company would recover if the issuer
were to file for bankruptcy, compared to the price at which the market is trading; |
|
|
• |
|
Fundamentals of the industry in which the issuer operates; |
|
|
• |
|
Earnings multiples for the given industry or sector of the industry that the issuer
operates within, divided by the outstanding debt to determine an expected recovery value of
the security in the case of a liquidation; |
|
|
• |
|
Expected cash flows of the issuer; |
|
|
• |
|
Expectations regarding defaults and recovery rates; |
|
|
• |
|
Changes to the rating of the security by a rating agency; and |
|
|
• |
|
Additional market information. |
Determination of Credit Losses on Structured Securities
To determine the recovery value, credit loss and intent to sell for a structured security,
including residential mortgage-, commercial mortgage- and other asset-backed securities, the
Company performs an analysis related to the underlying issuer including, but not limited to, the
following:
|
• |
|
Discounted cash flow analysis based on the current and future cash flows the Company
expects to recover; |
12
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless otherwise stated)
(Unaudited)
|
• |
|
Level of creditworthiness; |
|
|
• |
|
Delinquency ratios and loan-to-value ratios; |
|
|
• |
|
Average cumulative collateral loss, vintage year and level of subordination; |
|
|
• |
|
Susceptibility to fair value fluctuations due to changes in the interest rate
environment; |
|
|
• |
|
Susceptibility to reinvestment risk in cases where market yields are lower than the
book yield earned; |
|
|
• |
|
Susceptibility to reinvestment risk in cases where market yields are higher than the
book yields earned and the Company’s expectation of the sale of such security; and |
|
|
• |
|
Susceptibility to variability of prepayments. |
The following table presents the severity and duration of the gross unrealized losses on the
Company’s underwater available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2010 |
|
|
As of December 31, 2009 |
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwater by 20% or more: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 6 consecutive months |
|
$ |
97.3 |
|
|
$ |
(29.7 |
) |
|
$ |
103.4 |
|
|
$ |
(28.4 |
) |
6 consecutive months or more |
|
|
157.3 |
|
|
|
(54.4 |
) |
|
|
517.9 |
|
|
|
(229.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total underwater by 20% or more |
|
|
254.6 |
|
|
|
(84.1 |
) |
|
|
621.3 |
|
|
|
(257.9 |
) |
All other underwater fixed maturities |
|
|
1,842.2 |
|
|
|
(110.6 |
) |
|
|
5,398.1 |
|
|
|
(352.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total underwater fixed maturities |
|
$ |
2,096.8 |
|
|
$ |
(194.7 |
) |
|
$ |
6,019.4 |
|
|
$ |
(610.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable equity securities, available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwater by 20% or more: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 consecutive months or more |
|
$ |
1.7 |
|
|
$ |
(4.4 |
) |
|
$ |
35.6 |
|
|
$ |
(15.9 |
) |
All other underwater marketable equity securities, available-for-sale |
|
|
21.9 |
|
|
|
(3.8 |
) |
|
|
0.7 |
|
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total underwater marketable equity securities, available-for-sale |
|
$ |
23.6 |
|
|
$ |
(8.2 |
) |
|
$ |
36.3 |
|
|
$ |
(16.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2010 and December 31, 2009, investment grade securities comprised 36.6%
and 59.7%, respectively, of all gross unrealized losses on fixed maturities underwater by 20% or
more for six months or more. Unrealized losses on investment grade securities are principally
related to changes in interest rates or changes in the issuer and the sector-related credit spreads
since the securities were acquired.
The Company reviewed its available-for-sale investments with unrealized losses as of September
30, 2010 in accordance with its impairment policy and determined, after the recognition of
other-than-temporary impairments, that the remaining declines in fair value were temporary. The
Company did not intend to sell its underwater fixed maturities and it was not more likely than not
that the Company will be required to sell the fixed maturities before recovery of amortized cost.
This conclusion is supported by the Company’s spread analysis, cash flow modeling and expected
continuation of contractually required principal and interest payments. Based on its analysis of
its underwater available-for-sale marketable equity securities, including an evaluation of the near
term prospects of the issuers, the Company had the intent and ability to hold them until recovery.
13
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless otherwise stated)
(Unaudited)
Changes in the amount of credit-related OTTI recognized in net income where the portion related to
other factors was recognized in other comprehensive income (loss) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
For the Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Balance, beginning of period |
|
$ |
68.5 |
|
|
$ |
74.4 |
|
|
$ |
69.6 |
|
|
$ |
73.0 |
|
Increases recognized in the current period: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For which an OTTI was not previously recognized |
|
|
2.1 |
|
|
|
14.1 |
|
|
|
8.6 |
|
|
|
35.4 |
|
For which an OTTI was previously recognized |
|
|
0.5 |
|
|
|
1.5 |
|
|
|
2.9 |
|
|
|
12.1 |
|
Decreases attributable to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold or paid down during the period |
|
|
(3.5 |
) |
|
|
(18.7 |
) |
|
|
(13.5 |
) |
|
|
(26.4 |
) |
Previously recognized credit losses on
securities impaired during the period due to a
change in intent to sell(1) |
|
|
— |
|
|
|
(0.3 |
) |
|
|
— |
|
|
|
(23.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
67.6 |
|
|
$ |
71.0 |
|
|
$ |
67.6 |
|
|
$ |
71.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents circumstances where the Company determined in the
current period that it intends to sell the security or it is more
likely than not that it will be required to sell the security
prior to recovery of its amortized cost. |
5. Fair Value of Financial Instruments
The Company determines the fair value of its financial instruments based on the fair value
hierarchy, which requires an entity to maximize its use of observable inputs and minimize the use
of unobservable inputs when measuring fair value.
The Company has categorized its financial instruments, based on the priority of the inputs to
the valuation technique, into the three-level hierarchy. The fair value hierarchy gives the highest
priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the
lowest priority to unobservable inputs (Level 3). The level in the fair value hierarchy within
which the fair value measurement falls is determined based on the lowest-level input that is
significant to the fair value measurement. The Company’s financial assets recorded at fair value on
the consolidated balance sheets are categorized as follows:
|
• |
|
Level 1 — Unadjusted quoted prices in active markets for identical instruments. This
level primarily consists of exchange-traded marketable equity securities and actively
traded mutual fund investments. |
|
|
• |
|
Level 2 — Quoted prices for similar instruments in active markets, quoted prices for
identical or similar instruments in markets that are not active and model-derived
valuations whose inputs are observable or whose significant value drivers are observable.
This level includes those financial instruments that are valued using industry-standard
pricing methodologies, models or other valuation methodologies. All significant inputs are
observable, derived from observable information in the marketplace or are supported by
observable levels at which transactions are executed in the market place. Financial
instruments in this category primarily include certain public and private corporate fixed
maturities, government or agency securities and certain mortgage-backed securities. |
|
|
• |
|
Level 3 — Instruments whose significant value drivers are unobservable. This comprises
financial instruments for which fair value is estimated based on industry-standard pricing
methodologies and internally developed models utilizing significant inputs not based on or
corroborated by readily available market information. In limited circumstances, this
category may also utilize non-binding broker quotes. This category primarily consists of
certain less liquid fixed maturities, including corporate private placement securities,
investments in private equity and hedge funds and trading securities where the Company
cannot corroborate the significant valuation inputs with market observable data. |
14
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless otherwise stated)
(Unaudited)
The following tables present the financial instruments carried at fair value under the
valuation hierarchy described above for assets accounted for at fair value on a recurring basis.
The Company has no financial liabilities accounted for at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2010 |
|
|
|
Fair Value |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Level 3 Percent |
|
Types of Investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities, available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies |
|
$ |
96.0 |
|
|
$ |
— |
|
|
$ |
96.0 |
|
|
$ |
— |
|
|
|
— |
|
State and political subdivisions |
|
|
473.3 |
|
|
|
— |
|
|
|
473.3 |
|
|
|
— |
|
|
|
— |
|
Corporate securities |
|
|
14,779.3 |
|
|
|
— |
|
|
|
13,916.4 |
|
|
|
862.9 |
|
|
|
3.8 |
% |
Residential mortgage-backed securities |
|
|
3,840.0 |
|
|
|
— |
|
|
|
3,779.1 |
|
|
|
60.9 |
|
|
|
0.3 |
|
Commercial mortgage-backed securities |
|
|
1,911.0 |
|
|
|
— |
|
|
|
1,891.9 |
|
|
|
19.1 |
|
|
|
0.1 |
|
Other debt obligations |
|
|
350.5 |
|
|
|
— |
|
|
|
292.7 |
|
|
|
57.8 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities, available-for-sale |
|
|
21,450.1 |
|
|
|
— |
|
|
|
20,449.4 |
|
|
|
1,000.7 |
|
|
|
4.4 |
|
Marketable equity securities, available-for-sale |
|
|
45.4 |
|
|
|
43.6 |
|
|
|
— |
|
|
|
1.8 |
|
|
|
0.0 |
|
Marketable equity securities, trading |
|
|
158.8 |
|
|
|
158.2 |
|
|
|
— |
|
|
|
0.6 |
|
|
|
0.0 |
|
Investments in limited partnerships(1) |
|
|
38.5 |
|
|
|
— |
|
|
|
— |
|
|
|
38.5 |
|
|
|
0.2 |
|
Other invested assets |
|
|
5.5 |
|
|
|
2.7 |
|
|
|
— |
|
|
|
2.8 |
|
|
|
0.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments carried at fair value |
|
|
21,698.3 |
|
|
|
204.5 |
|
|
|
20,449.4 |
|
|
|
1,044.4 |
|
|
|
4.6 |
|
Separate account assets |
|
|
826.2 |
|
|
|
826.2 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
22,524.5 |
|
|
$ |
1,030.7 |
|
|
$ |
20,449.4 |
|
|
$ |
1,044.4 |
|
|
|
4.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009 |
|
|
|
Fair Value |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Level 3 Percent |
|
Types of Investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities, available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies |
|
$ |
43.9 |
|
|
$ |
— |
|
|
$ |
43.9 |
|
|
$ |
— |
|
|
|
— |
|
State and political subdivisions |
|
|
483.0 |
|
|
|
— |
|
|
|
475.8 |
|
|
|
7.2 |
|
|
|
0.0 |
% |
Corporate securities |
|
|
12,400.0 |
|
|
|
— |
|
|
|
11,552.9 |
|
|
|
847.1 |
|
|
|
4.3 |
|
Residential mortgage-backed securities |
|
|
3,536.4 |
|
|
|
— |
|
|
|
3,285.9 |
|
|
|
250.5 |
|
|
|
1.3 |
|
Commercial mortgage-backed securities |
|
|
1,789.4 |
|
|
|
— |
|
|
|
1,765.4 |
|
|
|
24.0 |
|
|
|
0.1 |
|
Other debt obligations |
|
|
341.6 |
|
|
|
— |
|
|
|
286.9 |
|
|
|
54.7 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities, available-for-sale |
|
|
18,594.3 |
|
|
|
— |
|
|
|
17,410.8 |
|
|
|
1,183.5 |
|
|
|
6.0 |
|
Marketable equity securities, available-for-sale |
|
|
36.7 |
|
|
|
34.9 |
|
|
|
— |
|
|
|
1.8 |
|
|
|
0.0 |
|
Marketable equity securities, trading |
|
|
154.1 |
|
|
|
153.8 |
|
|
|
— |
|
|
|
0.3 |
|
|
|
0.0 |
|
Investments in limited partnerships(1) |
|
|
24.7 |
|
|
|
— |
|
|
|
— |
|
|
|
24.7 |
|
|
|
0.2 |
|
Other invested assets |
|
|
6.7 |
|
|
|
2.1 |
|
|
|
— |
|
|
|
4.6 |
|
|
|
0.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments carried at fair value |
|
|
18,816.5 |
|
|
|
190.8 |
|
|
|
17,410.8 |
|
|
|
1,214.9 |
|
|
|
6.2 |
|
Separate account assets |
|
|
840.1 |
|
|
|
840.1 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
19,656.6 |
|
|
$ |
1,030.9 |
|
|
$ |
17,410.8 |
|
|
$ |
1,214.9 |
|
|
|
6.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As of September 30, 2010 and December 31, 2009, this amount consisted of investments in private equity
and hedge funds. |
Fixed Maturities
The vast majority of the Company’s fixed maturities have been classified as Level 2
measurements. To make this assessment, the Company determines whether the market for a security is
active and if significant pricing inputs are observable. The Company predominantly utilizes third
party independent pricing services to assist management in determining the fair value of its fixed
maturity securities. As of September 30, 2010 and December 31, 2009, pricing services provided
prices for 95.3% and 93.6% of the Company’s fixed maturities, respectively. Prices received from
the pricing services are not adjusted, and multiple prices for these securities are not obtained.
The pricing services provide prices where observable inputs are available. If sufficient
objectively verifiable information about a security’s valuation is not available, the pricing
services will not provide a valuation for the security until they are able to obtain such
information.
The Company analyzes the prices received from the pricing services to ensure that they
represent a reasonable estimate of fair value and to gain assurance on the overall reasonableness
and consistent application of input assumptions, valuation methodologies and compliance with
accounting standards for fair value determination. This process includes evaluation of pricing
methodologies and
15
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless otherwise stated)
(Unaudited)
inputs, analytical reviews of certain prices between reporting periods, and
back-testing of selected sales activity to determine whether there are any significant differences
between the market price used to value the security prior to sale and the actual sales prices.
In situations where the Company is unable to obtain sufficient market-observable information
upon which to estimate the fair value of a particular security, fair values are determined using
internal pricing models that typically utilize significant, unobservable market inputs or inputs
that are difficult to corroborate with observable market data. Such measurements are classified as
Level 3 and typically include private placements and other securities that the pricing services are
unable to price. As of September 30, 2010 and December 31, 2009, the Company had $897.9, or 4.2%,
and $901.3, or 4.8%, of its fixed maturities invested in private placement securities,
respectively, most of which are corporate securities. The use of significant unobservable inputs in
determining the fair value of the Company’s investments in private placement securities resulted in
the classification of $824.9, or 91.9%, and $819.8, or 91.0%, of these privately placed securities
as Level 3 measurements, as of September 30, 2010 and December 31, 2009, respectively.
Corporate Securities
As of September 30, 2010 and December 31, 2009, the fair value of the Company’s corporate
securities classified as Level 2 measurements was $13,916.4 and $11,552.9, respectively. The
following table presents additional information about the composition of the Level 2 corporate
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2010 |
|
|
As of December 31, 2009 |
|
|
|
|
|
|
|
% |
|
|
# of |
|
|
|
|
|
|
% |
|
|
# of |
|
|
|
Amount |
|
|
of Total |
|
|
Securities |
|
|
Amount |
|
|
of Total |
|
|
Securities |
|
Significant Security Sectors: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrials |
|
$ |
2,396.5 |
|
|
|
17.2 |
% |
|
|
203 |
|
|
$ |
1,923.4 |
|
|
|
16.6 |
% |
|
|
215 |
|
Consumer staples |
|
|
2,100.4 |
|
|
|
15.1 |
|
|
|
145 |
|
|
|
1,695.9 |
|
|
|
14.7 |
|
|
|
147 |
|
Utilities |
|
|
1,909.8 |
|
|
|
13.7 |
|
|
|
253 |
|
|
|
1,771.6 |
|
|
|
15.3 |
|
|
|
216 |
|
Financials |
|
|
1,896.0 |
|
|
|
13.6 |
|
|
|
199 |
|
|
|
1,750.5 |
|
|
|
15.2 |
|
|
|
285 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average coupon rate |
|
|
6.41 |
% |
|
|
|
|
|
|
|
|
|
|
6.55 |
% |
|
|
|
|
|
|
|
|
Weighted-average remaining years to contractual maturity |
|
|
12.3 |
|
|
|
|
|
|
|
|
|
|
|
13.3 |
|
|
|
|
|
|
|
|
|
Corporate securities classified as Level 2 measurements are priced by independent pricing
services, who utilize evaluated pricing models. The significant inputs for security evaluations
include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets,
benchmark securities, bids, offers and other reference data, including market research
publications. Because many corporate securities do not trade on a daily basis, evaluated pricing
applications apply available information through processes such as benchmark curves, benchmarking
of like securities, sector groupings and matrix pricing to prepare evaluations.
As of September 30, 2010, 91.8% of the Level 3 corporate securities were privately placed
securities. These securities were issued by entities primarily in the financial sector, 25.5%, the
industrial sector, 20.9%, and the materials sector, 14.6%.
As of December 31, 2009, 91.9% of the Level 3 corporate securities were privately placed
securities. These securities were issued by entities primarily in the financial sector, 22.9%, the
industrial sector, 20.7%, and the materials sector, 15.6%.
The following table presents additional information about the quality of the Level 3 privately
placed corporate securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2010 |
|
|
As of December 31, 2009 |
|
|
|
|
|
Fair |
|
|
% of Total |
|
|
Fair |
|
|
% of Total |
|
NAIC Rating |
|
Comparable Standard & Poor’s rating |
|
Value |
|
|
Fair Value |
|
|
Value |
|
|
Fair Value |
|
1 |
|
AAA, AA, A |
|
$ |
140.7 |
|
|
|
17.8 |
% |
|
$ |
153.5 |
|
|
|
19.2 |
% |
2 |
|
BBB |
|
|
573.5 |
|
|
|
72.4 |
|
|
|
557.4 |
|
|
|
69.8 |
|
3 – 6 |
|
BB & below |
|
|
78.1 |
|
|
|
9.8 |
|
|
|
87.3 |
|
|
|
11.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
$ |
792.3 |
|
|
|
100.0 |
% |
|
$ |
798.2 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The valuation of these privately placed Level 3 corporate securities requires significant
judgment due to the absence of quoted market prices, the inherent lack of liquidity and the
duration of such assets. The fair values of these securities were determined using a discounted
cash flow approach. The discount rate was based on the current Treasury curve, adjusted for credit
and liquidity factors. The credit factor adjustment, which is based on credit spreads to the
Treasury curve for similar securities, varies for each security based on its quality and industry
or sector. The appropriate illiquidity adjustment is estimated based on illiquidity spreads
16
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless otherwise stated)
(Unaudited)
observed in transactions involving similar securities. As of September 30, 2010, the range of
illiquidity adjustments varied from 0 to 50 basis points.
Residential Mortgage-backed Securities
As of September 30, 2010 and December 31, 2009, the fair value of the Company’s residential
mortgage-backed securities (RMBS) classified as Level 2 measurements was $3,779.1 and $3,285.9,
respectively. These securities were primarily fixed-rate, with a weighted-average coupon rate of
5.20% and 5.36% as of September 30, 2010 and December 31, 2009, respectively.
Agency securities composed 87.7% and 84.7% of the Company’s Level 2 RMBS as of September 30,
2010 and December 31, 2009, respectively. The following table presents additional information about
the composition of the Level 2 non-agency RMBS securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
As of |
|
|
|
September 30, 2010 |
|
|
December 31, 2009 |
|
|
|
Amount |
|
|
% of Total |
|
|
Amount |
|
|
% of Total |
|
Standard & Poor’s equivalent rating: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA |
|
$ |
176.8 |
|
|
|
38.0 |
% |
|
$ |
200.8 |
|
|
|
39.9 |
% |
AA through BBB |
|
|
94.7 |
|
|
|
20.3 |
|
|
|
140.2 |
|
|
|
27.8 |
|
BB & below |
|
|
193.9 |
|
|
|
41.7 |
|
|
|
162.7 |
|
|
|
32.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-agency RMBS |
|
$ |
465.4 |
|
|
|
100.0 |
% |
|
$ |
503.7 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-agency RMBS with super senior subordination |
|
$ |
276.1 |
|
|
|
59.3 |
% |
|
$ |
300.3 |
|
|
|
59.6 |
% |
As of September 30, 2010 and December 31, 2009, the Company’s non-agency Level 2 RMBS had a
weighted-average credit enhancement of 9.8%, and $189.5 and $191.3, or 40.7% and 38.0%,
respectively, had an origination or vintage year of 2004 and prior.
Level 2 RMBS securities are priced by independent pricing services, who utilize evaluated
pricing models. The significant inputs for security evaluations include benchmark yields, reported
trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers
and other reference data, including market research publications. Because many RMBS do not trade on
a daily basis, evaluated pricing applications apply available information through processes such as
benchmark curves, benchmarking of like securities, sector groupings and matrix pricing to prepare
evaluations. In addition, the pricing services use models and processes to develop prepayment and
interest rate scenarios. The pricing services monitor market indicators, industry and economic
events, and their models take into account market convention.
Commercial Mortgage-backed Securities
As of September 30, 2010 and December 31, 2009, the fair value of the Company’s commercial
mortgage-backed securities (CMBS) classified as Level 2 measurements was $1,891.9 and $1,765.4,
respectively. These were primarily non-agency securities, which comprised 68.7% and 76.8% of Level
2 CMBS as of September 30, 2010 and December 31, 2009, respectively. The non-agency CMBS had an
estimated weighted-average credit enhancement of 28.2% and 27.8% as of September 30, 2010 and
December 31, 2009, respectively, and 93.4% and 92.4%, respectively, were in the most senior
tranche.
The Company’s Level 2 CMBS had a weighted-average coupon rate of 5.53% and 5.55% as of
September 30, 2010 and December 31, 2009, respectively. As of September 30, 2010, 18.7% of the
underlying collateral for these securities was located in New York, 13.5% was located in
California, and 7.0% was located in Texas. The underlying collateral primarily consisted of
shopping centers/retail and office buildings, comprising 33.6% and 31.0%, respectively, as of
September 30, 2010.
Level 2 CMBS securities are priced by independent pricing services, who utilize evaluated pricing
models. The significant inputs for security evaluations include benchmark yields, reported trades,
broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, new
issues, monthly payment information and other reference data, including market research
publications. Because many CMBS do not trade on a daily basis, evaluated pricing applications apply
available information through processes, such as benchmark curves, benchmarking of like securities,
sector groupings and matrix pricing, to prepare evaluations.
17
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless otherwise stated)
(Unaudited)
Marketable Equity Securities
Marketable equity securities are primarily investments in common stock and certain
nonredeemable preferred stocks and mutual fund assets, which consist of investments in publicly
traded companies and actively traded mutual fund investments. The fair values of the Company’s
marketable equity securities are based on quoted market prices in active markets for identical
assets and are primarily classified as Level 1.
The Company manages a trading portfolio of marketable equity securities, composed mostly of
investments in common stock. Investment gains and losses on trading securities, including changes
in fair value, are reported in the consolidated statements of income as net realized investment
gains (losses). The Company believes this presents its investment results for these securities on a
basis that is consistent with management’s operating principles, as the Company considers changes
in fair value on its marketable equity securities when evaluating its performance. Certain
nonredeemable preferred stock are reported as available-for-sale.
Investments in Limited Partnerships
Investments in limited partnerships recorded at fair value are investments in private equity
and hedge funds. The Company utilizes the fair value option for these investments, regardless of
ownership percentage, to standardize the related accounting and reporting.
The fair value for the Company’s investments in private equity and hedge funds is based upon
the Company’s proportionate interest in the underlying partnership or fund’s net asset value (NAV),
which is deemed to approximate fair value. The Company is generally unable to liquidate these
investments during the term of the partnership or fund, which range from five to twelve years. As
such, the Company classifies these securities as Level 3 measurements.
Other Invested Assets
Other invested assets recorded at fair value primarily consist of life settlement investments,
short-term investments and S&P 500 Index options. The carrying value of these assets approximates
fair value.
Separate Accounts
Separate account assets are primarily invested in mutual funds with published NAVs, which are
included in Level 1.
Rollforward of Financial Instruments Measured at Fair Value on a Recurring Basis Using Significant
Unobservable Inputs (Level 3)
The following tables present additional information about assets measured at fair value on a
recurring basis and for which the Company has utilized significant unobservable inputs (Level 3) to
determine fair value for the three and nine months ended September 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Gain (Loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers In |
|
|
|
|
|
|
Included in: |
|
|
|
|
|
|
|
|
|
Balance as |
|
|
|
|
|
|
|
|
|
|
and/or |
|
|
|
|
|
|
|
|
|
|
Other |
|
|
Realized |
|
|
Balance as of |
|
|
|
of July 1, |
|
|
|
|
|
|
|
|
|
|
(Out) of |
|
|
|
|
|
|
Net |
|
|
Comprehensive |
|
|
Gains |
|
|
September 30, |
|
|
|
2010 |
|
|
Purchases |
|
|
Sales |
|
|
Level 3(1) |
|
|
Other(2) |
|
|
Income(3) |
|
|
Income |
|
|
(Losses)(3) |
|
|
2010 |
|
Types of Investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and political subdivisions |
|
$ |
7.6 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(7.6 |
) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Corporate securities |
|
|
862.2 |
|
|
|
— |
|
|
|
(9.9 |
) |
|
|
(5.8 |
) |
|
|
(1.1 |
) |
|
|
— |
|
|
|
17.6 |
|
|
|
(0.1 |
) |
|
|
862.9 |
|
Residential mortgage-backed securities |
|
|
77.1 |
|
|
|
— |
|
|
|
— |
|
|
|
(17.5 |
) |
|
|
0.3 |
|
|
|
— |
|
|
|
1.0 |
|
|
|
— |
|
|
|
60.9 |
|
Commercial mortgage-backed securities |
|
|
31.6 |
|
|
|
— |
|
|
|
— |
|
|
|
(10.5 |
) |
|
|
(1.9 |
) |
|
|
— |
|
|
|
(0.1 |
) |
|
|
— |
|
|
|
19.1 |
|
Other debt obligations |
|
|
56.5 |
|
|
|
— |
|
|
|
— |
|
|
|
(3.5 |
) |
|
|
(3.2 |
) |
|
|
— |
|
|
|
10.1 |
|
|
|
(2.1 |
) |
|
|
57.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities, available-for-sale |
|
|
1,035.0 |
|
|
|
— |
|
|
|
(9.9 |
) |
|
|
(37.3 |
) |
|
|
(13.5 |
) |
|
|
— |
|
|
|
28.6 |
|
|
|
(2.2 |
) |
|
|
1,000.7 |
|
Marketable equity securities, available-for-sale |
|
|
1.8 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1.8 |
|
Marketable equity securities, trading |
|
|
0.7 |
|
|
|
— |
|
|
|
— |
|
|
|
(0.1 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
0.6 |
|
Investments in limited partnerships |
|
|
32.1 |
|
|
|
11.9 |
|
|
|
— |
|
|
|
— |
|
|
|
(7.5 |
) |
|
|
2.0 |
|
|
|
— |
|
|
|
— |
|
|
|
38.5 |
|
Other invested assets |
|
|
2.5 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
0.3 |
|
|
|
— |
|
|
|
— |
|
|
|
2.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Level 3 |
|
$ |
1,072.1 |
|
|
$ |
11.9 |
|
|
$ |
(9.9 |
) |
|
$ |
(37.4 |
) |
|
$ |
(21.0 |
) |
|
$ |
2.3 |
|
|
$ |
28.6 |
|
|
$ |
(2.2 |
) |
|
$ |
1,044.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless otherwise stated)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Gain (Loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers In |
|
|
|
|
|
|
Included in: |
|
|
|
|
|
|
|
|
|
Balance as |
|
|
|
|
|
|
|
|
|
|
and/or |
|
|
|
|
|
|
|
|
|
|
Other |
|
|
Realized |
|
|
Balance as of |
|
|
|
of January 1, |
|
|
|
|
|
|
|
|
|
|
(Out) of |
|
|
|
|
|
|
Net |
|
|
Comprehensive |
|
|
Gains |
|
|
September 30, |
|
|
|
2010 |
|
|
Purchases |
|
|
Sales |
|
|
Level 3(1) |
|
|
Other(2) |
|
|
Income(3) |
|
|
Income |
|
|
(Losses)(3) |
|
|
2010 |
|
Types of Investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and political subdivisions |
|
$ |
7.2 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(7.2 |
) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Corporate securities |
|
|
847.1 |
|
|
|
26.8 |
|
|
|
(27.2 |
) |
|
|
12.8 |
|
|
|
(40.1 |
) |
|
|
— |
|
|
|
43.0 |
|
|
|
0.5 |
|
|
|
862.9 |
|
Residential mortgage-backed securities |
|
|
250.5 |
|
|
|
— |
|
|
|
— |
|
|
|
(194.6 |
) |
|
|
1.8 |
|
|
|
— |
|
|
|
3.2 |
|
|
|
— |
|
|
|
60.9 |
|
Commercial mortgage-backed securities |
|
|
24.0 |
|
|
|
— |
|
|
|
— |
|
|
|
(1.3 |
) |
|
|
(4.7 |
) |
|
|
— |
|
|
|
1.1 |
|
|
|
— |
|
|
|
19.1 |
|
Other debt obligations |
|
|
54.7 |
|
|
|
— |
|
|
|
— |
|
|
|
(3.4 |
) |
|
|
(4.2 |
) |
|
|
— |
|
|
|
12.9 |
|
|
|
(2.2 |
) |
|
|
57.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities, available-for-sale |
|
|
1,183.5 |
|
|
|
26.8 |
|
|
|
(27.2 |
) |
|
|
(186.5 |
) |
|
|
(54.4 |
) |
|
|
— |
|
|
|
60.2 |
|
|
|
(1.7 |
) |
|
|
1,000.7 |
|
Marketable equity securities, available-for-sale |
|
|
1.8 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1.8 |
|
Marketable equity securities, trading |
|
|
0.3 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
0.2 |
|
|
|
0.1 |
|
|
|
— |
|
|
|
— |
|
|
|
0.6 |
|
Investments in limited partnerships |
|
|
24.7 |
|
|
|
21.1 |
|
|
|
— |
|
|
|
— |
|
|
|
(9.9 |
) |
|
|
2.7 |
|
|
|
— |
|
|
|
(0.1 |
) |
|
|
38.5 |
|
Other invested assets |
|
|
4.6 |
|
|
|
— |
|
|
|
(0.3 |
) |
|
|
— |
|
|
|
(0.7 |
) |
|
|
(0.9 |
) |
|
|
— |
|
|
|
0.1 |
|
|
|
2.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Level 3 |
|
$ |
1,214.9 |
|
|
$ |
47.9 |
|
|
$ |
(27.5 |
) |
|
$ |
(186.5 |
) |
|
$ |
(64.8 |
) |
|
$ |
1.9 |
|
|
$ |
60.2 |
|
|
$ |
(1.7 |
) |
|
$ |
1,044.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Transfers into and/or out of Level 3 are reported at the value as of the beginning of the
period in which the transfer occurs. Gross transfers into Level 3 were $0.0 and $14.9 for
the three and nine months ended September 30, 2010, respectively. Gross transfers out of
Level 3 were $(37.4) and $(201.4) for the three and nine months ended September 30, 2010,
respectively, as public market information on many of our RMBS securities became
available and third party independent pricing services began to provide prices. Such
securities are now classified as Level 2. |
|
(2) |
|
Other is comprised of transactions such as pay downs, calls, amortization and redemptions. |
|
(3) |
|
Realized and unrealized gains and losses for investments in limited partnerships are
included in net investment income. All other realized and unrealized gains and losses are
included in net realized investment gains (losses). |
The following tables present additional information about assets measured at fair value
on a recurring basis and for which the Company has utilized significant unobservable inputs (Level
3) to determine fair value for the three and nine months ended September 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Gain (Loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers In |
|
|
|
|
|
|
Included in: |
|
|
|
|
|
|
|
|
|
Balance as |
|
|
|
|
|
|
|
|
|
|
and/or |
|
|
|
|
|
|
|
|
|
|
Other |
|
|
Realized |
|
|
Balance as of |
|
|
|
of July 1, |
|
|
|
|
|
|
|
|
|
|
(Out) of |
|
|
|
|
|
|
Net |
|
|
Comprehensive |
|
|
Gains |
|
|
September 30, |
|
|
|
2009 |
|
|
Purchases |
|
|
Sales |
|
|
Level 3(1) |
|
|
Other(2) |
|
|
Income(3) |
|
|
Loss |
|
|
(Losses)(3) |
|
|
2009 |
|
Types of Investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and political subdivisions |
|
$ |
7.1 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(0.6 |
) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
0.7 |
|
|
$ |
— |
|
|
$ |
7.2 |
|
Corporate securities |
|
|
704.2 |
|
|
|
34.4 |
|
|
|
(4.0 |
) |
|
|
7.8 |
|
|
|
38.5 |
|
|
|
— |
|
|
|
79.2 |
|
|
|
— |
|
|
|
860.1 |
|
Residential mortgage-backed securities |
|
|
61.1 |
|
|
|
206.6 |
|
|
|
— |
|
|
|
(4.3 |
) |
|
|
0.2 |
|
|
|
— |
|
|
|
2.5 |
|
|
|
— |
|
|
|
266.1 |
|
Commercial mortgage-backed securities |
|
|
23.1 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(0.6 |
) |
|
|
— |
|
|
|
0.8 |
|
|
|
— |
|
|
|
23.3 |
|
Other debt obligations |
|
|
55.6 |
|
|
|
— |
|
|
|
— |
|
|
|
0.6 |
|
|
|
(1.4 |
) |
|
|
— |
|
|
|
3.4 |
|
|
|
— |
|
|
|
58.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities, available-for-sale |
|
|
851.1 |
|
|
|
241.0 |
|
|
|
(4.0 |
) |
|
|
3.5 |
|
|
|
36.7 |
|
|
|
— |
|
|
|
86.6 |
|
|
|
— |
|
|
|
1,214.9 |
|
Marketable equity securities, available-for-sale |
|
|
1.8 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
0.3 |
|
|
|
— |
|
|
|
0.4 |
|
|
|
— |
|
|
|
2.5 |
|
Marketable equity securities, trading |
|
|
0.2 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
0.1 |
|
|
|
— |
|
|
|
— |
|
|
|
0.3 |
|
Investments in limited partnerships |
|
|
63.2 |
|
|
|
2.2 |
|
|
|
(20.1 |
) |
|
|
— |
|
|
|
— |
|
|
|
0.3 |
|
|
|
— |
|
|
|
1.0 |
|
|
|
46.6 |
|
Other invested assets |
|
|
1.2 |
|
|
|
3.0 |
|
|
|
— |
|
|
|
— |
|
|
|
0.2 |
|
|
|
1.7 |
|
|
|
— |
|
|
|
— |
|
|
|
6.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Level 3 |
|
$ |
917.5 |
|
|
$ |
246.2 |
|
|
$ |
(24.1 |
) |
|
$ |
3.5 |
|
|
$ |
37.2 |
|
|
$ |
2.1 |
|
|
$ |
87.0 |
|
|
$ |
1.0 |
|
|
$ |
1,270.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Gain (Loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers In |
|
|
|
|
|
|
Included in: |
|
|
|
|
|
|
|
|
|
Balance as |
|
|
|
|
|
|
|
|
|
|
and/or |
|
|
|
|
|
|
|
|
|
|
Other |
|
|
Realized |
|
|
Balance as of |
|
|
|
of January 1, |
|
|
|
|
|
|
|
|
|
|
(Out) of |
|
|
|
|
|
|
Net |
|
|
Comprehensive |
|
|
Gains |
|
|
September 30, |
|
|
|
2009 |
|
|
Purchases |
|
|
Sales |
|
|
Level 3(1) |
|
|
Other(2) |
|
|
Income(3) |
|
|
Loss |
|
|
(Losses)(3) |
|
|
2009 |
|
Types of Investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and political subdivisions |
|
$ |
6.3 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(0.7 |
) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
1.6 |
|
|
$ |
— |
|
|
$ |
7.2 |
|
Corporate securities |
|
|
610.0 |
|
|
|
129.7 |
|
|
|
(4.0 |
) |
|
|
(14.3 |
) |
|
|
12.9 |
|
|
|
— |
|
|
|
129.8 |
|
|
|
(4.0 |
) |
|
|
860.1 |
|
Residential mortgage-backed securities |
|
|
— |
|
|
|
263.5 |
|
|
|
— |
|
|
|
— |
|
|
|
0.2 |
|
|
|
— |
|
|
|
2.4 |
|
|
|
— |
|
|
|
266.1 |
|
Commercial mortgage-backed securities |
|
|
24.4 |
|
|
|
— |
|
|
|
— |
|
|
|
(0.7 |
) |
|
|
(2.2 |
) |
|
|
— |
|
|
|
1.8 |
|
|
|
— |
|
|
|
23.3 |
|
Other debt obligations |
|
|
33.6 |
|
|
|
18.0 |
|
|
|
— |
|
|
|
0.7 |
|
|
|
(2.4 |
) |
|
|
— |
|
|
|
8.3 |
|
|
|
— |
|
|
|
58.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities, available-for-sale |
|
|
674.3 |
|
|
|
411.2 |
|
|
|
(4.0 |
) |
|
|
(15.0 |
) |
|
|
8.5 |
|
|
|
— |
|
|
|
143.9 |
|
|
|
(4.0 |
) |
|
|
1,214.9 |
|
Marketable equity securities, available-for-sale |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
5.2 |
|
|
|
0.3 |
|
|
|
— |
|
|
|
(3.0 |
) |
|
|
— |
|
|
|
2.5 |
|
Marketable equity securities, trading |
|
|
0.2 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
0.1 |
|
|
|
— |
|
|
|
— |
|
|
|
0.3 |
|
Investments in limited partnerships |
|
|
56.3 |
|
|
|
4.6 |
|
|
|
(23.0 |
) |
|
|
— |
|
|
|
— |
|
|
|
9.5 |
|
|
|
— |
|
|
|
(0.8 |
) |
|
|
46.6 |
|
Other invested assets |
|
|
2.4 |
|
|
|
3.0 |
|
|
|
— |
|
|
|
— |
|
|
|
0.3 |
|
|
|
0.4 |
|
|
|
— |
|
|
|
— |
|
|
|
6.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Level 3 |
|
$ |
733.2 |
|
|
$ |
418.8 |
|
|
$ |
(27.0 |
) |
|
$ |
(9.8 |
) |
|
$ |
9.1 |
|
|
$ |
10.0 |
|
|
$ |
140.9 |
|
|
$ |
(4.8 |
) |
|
$ |
1,270.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Transfers into and/or out of Level 3 are reported at the value as of the beginning of the
period in which the transfer occurs. Gross transfers into Level 3 were $8.2 and $14.7 for
the three and nine months ended September 30, 2009, respectively. Gross transfers out of
Level 3 were $(4.7) and $(24.5) for the three and nine months ended September 30, 2009,
respectively. |
|
(2) |
|
Other is comprised of transactions such as pay downs, calls, amortization, and redemptions. |
|
(3) |
|
Realized and unrealized gains and losses for investments in limited partnerships are
included in net investment income. All other realized and unrealized gains and losses are
included in net realized investment gains (losses). |
19
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless otherwise stated)
(Unaudited)
The following table summarizes the carrying or reported values and corresponding fair
values of financial instruments subject to fair value disclosure requirements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2010 |
|
|
As of December 31, 2009 |
|
|
|
Carrying |
|
|
|
|
|
|
Carrying |
|
|
|
|
|
|
Amount |
|
|
Fair Value |
|
|
Amount |
|
|
Fair Value |
|
Financial assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
$ |
21,450.1 |
|
|
$ |
21,450.1 |
|
|
$ |
18,594.3 |
|
|
$ |
18,594.3 |
|
Marketable equity securities, available-for-sale |
|
|
45.4 |
|
|
|
45.4 |
|
|
|
36.7 |
|
|
|
36.7 |
|
Marketable equity securities, trading |
|
|
158.8 |
|
|
|
158.8 |
|
|
|
154.1 |
|
|
|
154.1 |
|
Mortgage loans |
|
|
1,493.4 |
|
|
|
1,580.8 |
|
|
|
1,199.6 |
|
|
|
1,190.1 |
|
Investments in limited partnerships: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedge funds and private equity funds |
|
|
38.5 |
|
|
|
38.5 |
|
|
|
24.7 |
|
|
|
24.7 |
|
Affordable housing |
|
|
130.6 |
|
|
|
132.8 |
|
|
|
85.5 |
|
|
|
89.9 |
|
Other invested assets |
|
|
12.0 |
|
|
|
12.0 |
|
|
|
12.2 |
|
|
|
12.2 |
|
Cash and cash equivalents |
|
|
197.2 |
|
|
|
197.2 |
|
|
|
257.8 |
|
|
|
257.8 |
|
Separate account assets |
|
|
826.2 |
|
|
|
826.2 |
|
|
|
840.1 |
|
|
|
840.1 |
|
Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds held under deposit contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred annuities |
|
|
8,351.6 |
|
|
|
8,381.4 |
|
|
|
7,212.1 |
|
|
|
7,128.2 |
|
Immediate annuities |
|
|
6,698.4 |
|
|
|
7,497.3 |
|
|
|
6,724.4 |
|
|
|
6,937.8 |
|
Notes payable: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Efficient Notes (CENts) |
|
|
149.8 |
|
|
|
131.6 |
|
|
|
149.8 |
|
|
|
118.5 |
|
Senior notes |
|
|
299.2 |
|
|
|
310.1 |
|
|
|
299.1 |
|
|
|
276.8 |
|
Other Financial Instruments
Cash and cash equivalents are reported at cost, which approximates fair value. Cash
equivalents were $162.1 and $244.4 as of September 30, 2010 and December 31, 2009, respectively. As
of September 30, 2010 and December 31, 2009, $158.4 and $223.8 of total cash equivalents,
respectively, were held at a single highly rated financial institution.
The fair values of the Company’s mortgage loans were measured by discounting the projected
future cash flows using the current rate at which the loans would be made to borrowers with similar
credit ratings and for the same maturities.
Investments in limited partnerships associated with affordable housing projects and state tax
credit funds are carried at amortized cost. Fair value was estimated based on the discounted cash
flows over the remaining life of the tax credits.
The Company estimates the fair values of funds held under deposit contracts related to
investment-type contracts using an income approach based on the present value of the discounted
cash flows. Cash flows were projected using best estimates for lapses, mortality and expenses, and
discounted at a risk-free rate plus a nonperformance risk spread. The carrying value of this
balance excludes $5,057.9 and $4,880.2 of liabilities related to insurance contracts as of
September 30, 2010 and December 31, 2009, respectively.
The fair values of the Company’s notes payable were based on quoted prices for similar
instruments. The fair value measurement assumes that liabilities were transferred to a market
participant of equal credit standing and without consideration for any optional redemption feature.
20
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless otherwise stated)
(Unaudited)
6. Deferred Policy Acquisition Costs
The following table provides a reconciliation of the beginning and ending balance for deferred
policy acquisition costs:
|
|
|
|
|
|
|
|
|
|
|
For the Nine |
|
|
|
|
|
|
Months Ended |
|
|
For the Year Ended |
|
|
|
September 30, 2010 |
|
|
December 31, 2009 |
|
Unamortized balance at beginning of period |
|
$ |
325.7 |
|
|
$ |
219.5 |
|
Deferral of acquisition costs |
|
|
97.2 |
|
|
|
148.3 |
|
Adjustments related to investment (gains) losses |
|
|
(2.8 |
) |
|
|
9.3 |
|
Amortization |
|
|
(50.4 |
) |
|
|
(51.4 |
) |
|
|
|
|
|
|
|
Unamortized balance at end of period |
|
|
369.7 |
|
|
|
325.7 |
|
Accumulated effect of net unrealized investment gains |
|
|
(208.8 |
) |
|
|
(75.3 |
) |
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
160.9 |
|
|
$ |
250.4 |
|
|
|
|
|
|
|
|
7. Deferred Sales Inducements
The following table provides a reconciliation of the beginning and ending balance for deferred
sales inducements, which are included in other assets:
|
|
|
|
|
|
|
|
|
|
|
For the Nine |
|
|
|
|
|
|
Months Ended |
|
|
For the Year Ended |
|
|
|
September 30, 2010 |
|
|
December 31, 2009 |
|
Unamortized balance at beginning of period |
|
$ |
67.6 |
|
|
$ |
33.0 |
|
Capitalizations |
|
|
43.5 |
|
|
|
42.5 |
|
Adjustments related to investment (gains) losses |
|
|
(0.9 |
) |
|
|
2.4 |
|
Amortization |
|
|
(14.1 |
) |
|
|
(10.3 |
) |
|
|
|
|
|
|
|
Unamortized balance at end of period |
|
|
96.1 |
|
|
|
67.6 |
|
Accumulated effect of net unrealized investment gains |
|
|
(68.9 |
) |
|
|
(18.4 |
) |
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
27.2 |
|
|
$ |
49.2 |
|
|
|
|
|
|
|
|
8. Stockholders’ Equity
The components of comprehensive income are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
For the Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Net income |
|
$ |
56.6 |
|
|
$ |
44.1 |
|
|
$ |
138.7 |
|
|
$ |
96.2 |
|
Other comprehensive income, net of taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in unrealized gains and losses on available-for-sale securities(1) |
|
|
378.0 |
|
|
|
743.0 |
|
|
|
1,002.9 |
|
|
|
1,191.7 |
|
Reclassification adjustment for net realized investment (gains) losses
included in net income(2) |
|
|
(14.0 |
) |
|
|
(6.4 |
) |
|
|
(17.7 |
) |
|
|
25.2 |
|
Adjustment for deferred policy acquisition costs and deferred sales
inducements valuation allowance(3) |
|
|
(45.3 |
) |
|
|
(68.5 |
) |
|
|
(119.5 |
) |
|
|
(80.4 |
) |
Other-than-temporary-impairments on fixed maturities not related to
credit losses(4) |
|
|
(0.4 |
) |
|
|
4.6 |
|
|
|
3.4 |
|
|
|
(38.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income |
|
|
318.3 |
|
|
|
672.7 |
|
|
|
869.1 |
|
|
|
1,098.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
374.9 |
|
|
$ |
716.8 |
|
|
$ |
1,007.8 |
|
|
$ |
1,194.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Net of taxes of $203.6, $400.1, $540.0 and $641.7 for the three and nine months ended September 30, 2010 and 2009, respectively. |
|
(2) |
|
Net of taxes of $(7.5), $(3.4), $(9.5) and $13.6 for the three and nine months ended September 30, 2010 and 2009, respectively. For
the three and nine months ended September 30, 2010, $3.6 (net of taxes of $1.9) and $13.5 (net of taxes of $7.2) of the
reclassification adjustment is related to losses previously classified as OTTI not related to credit losses. For the three and nine
months ended September 30, 2009, $22.0 (net of taxes of $11.8) and $22.9 (net of taxes of $12.2), respectively, of the
reclassification adjustment is related to losses previously classified as OTTI not related to credit losses. |
|
(3) |
|
Net of taxes of $(24.6), $(37.0), $(64.5) and $(43.3) for the three and nine months ended September 30, 2010 and 2009, respectively. |
|
(4) |
|
Net of taxes of $(0.2), $2.5, $1.8 and $(20.7) for the three and nine months ended September 30, 2010 and 2009, respectively. |
21
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless otherwise stated)
(Unaudited)
The following table provides a reconciliation of changes in outstanding shares of common
stock:
|
|
|
|
|
|
|
Common Shares |
|
Balance at January 1, 2009 |
|
|
92.646 |
|
Restricted shares(1) |
|
|
0.083 |
|
|
|
|
|
Balance at December 31, 2009 |
|
|
92.729 |
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2010 |
|
|
92.729 |
|
Common stock, issued in initial public offering |
|
|
25.260 |
|
Restricted shares(1) |
|
|
0.230 |
|
Treasury shares retired(2) |
|
|
(0.048 |
) |
|
|
|
|
Balance at September 30, 2010 |
|
|
118.171 |
|
|
|
|
|
|
|
|
(1) |
|
Represents net restricted shares issued pursuant to the Company’s Equity Plan. |
|
(2) |
|
Represents shares repurchased to satisfy employee income tax withholding,
pursuant to the Company’s Equity Plan. |
9. Stock-Based Compensation
As of September 30, 2010, the Company has two share-based compensation plans: the Symetra
Financial Corporation Equity Plan (amended and restated on August 11, 2010) (the “Equity Plan”) and
the Symetra Financial Corporation Employee Stock Purchase Plan (amended and restated on May 11,
2010) (the “Stock Purchase Plan”). Under the Equity Plan, the Company is authorized to issue
various types of share-based compensation to employees, directors and consultants. A total of 7.830
shares are authorized for issuance under the Equity Plan, and 5.215 equity instruments are
available for future issuance as of September 30, 2010. The Stock Purchase Plan allows eligible
employees to purchase shares of the Company’s common stock at a 15% discount from the market price.
A total of 0.870 shares are authorized for issuance under this plan. As of September 30, 2010, no
shares have been issued pursuant to the Stock Purchase Plan.
Compensation Cost
The Company measures compensation cost for all stock awards at fair value on the date of grant
and recognizes it over the service period for awards expected to vest. Restricted shares are valued
based on the number of shares granted and the Company’s closing stock price on the grant date.
Stock options are valued using the Black-Scholes valuation model. The Company recognizes such
compensation cost as expense over the service period, net of estimated forfeitures, using the
straight-line method. The estimation of equity awards that will ultimately vest requires judgment,
and to the extent actual results or updated estimates differs from current estimates, the Company
records such amounts as a cumulative adjustment in the period estimates are revised. Many factors
are considered when estimating forfeitures, including types of awards, employee class and
historical experience.
Share-based compensation expense, which is recorded in other operating expense, for the three
and nine months ended September 30, 2010 was $0.4 and $2.0, respectively. This included
compensation expense of $1.2 for the nine months ended September 30, 2010, related to the
modification and accelerated vesting of certain restricted shares. Share-based compensation expense
was $0.0 for the three and nine months ended September 30, 2009.
Restricted Stock Activity
The Company issued 0.010 and 0.244 shares of restricted stock for the three and nine months
ended September 30, 2010, respectively. These awards vest on December 31, 2012. The weighted
average fair value of restricted stock granted for the three and nine months ended September 30,
2010 was $10.75 and $12.42 per share, respectively. The Company issued 0.083 shares of restricted
stock for both the three and nine months ended September 30, 2009 with 0.075 of these shares
vested on June 15, 2010, and the remainder vesting on December 31, 2011. The weighted average fair
value of restricted stock granted for both the three and nine months ended September 30, 2009 was
$13.08 per share.
22
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless otherwise stated)
(Unaudited)
The following table summarizes the Company’s restricted stock activity for the nine months
ended September 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
Weighted-Average |
|
|
|
Shares |
|
|
Fair Value |
|
Outstanding as of January 1, 2010 |
|
|
0.083 |
|
|
$ |
13.08 |
|
Shares granted |
|
|
0.244 |
|
|
$ |
12.42 |
|
Shares vested |
|
|
(0.131 |
) |
|
$ |
12.40 |
|
Shares forfeited |
|
|
(0.014 |
) |
|
$ |
12.51 |
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2010 |
|
|
0.182 |
|
|
$ |
12.34 |
|
|
|
|
|
|
|
|
|
Stock Option Activity
The Company issued 0.600 and 2.350 options for the three and nine months ended September 30,
2010, with an exercise price of $28.00. These options vest on June 30, 2017 and expire one year
thereafter. The weighted average fair value of awards granted during the three and nine months
ended September 30, 2010 was $2.24 and $2.83 per share, respectively. The Company did not issue any
stock option awards in 2009.
The following table summarizes the weighted average assumptions used to value stock options
issued:
|
|
|
|
|
|
|
For the Nine Months |
|
|
|
Ended September 30, 2010 |
|
Expected term |
|
|
7.5 |
years |
Risk-free interest rate |
|
|
2.6 |
% |
Dividend yield |
|
|
1.6 |
% |
Volatility |
|
|
45.6 |
% |
10. Commitments and Contingencies
Investments in Limited Partnerships
In March and August 2010, the Company invested in two new limited partnership interests
related to federal affordable housing projects. The Company unconditionally committed to provide
capital contributions totaling $55.0 for the two limited partnerships. As of September 30, 2010,
the Company contributed $13.0 and is expected to contribute the remaining $42.0 by the first
quarter of 2013. The present value of these unfunded contributions is recorded in other
liabilities.
Litigation
Because of the nature of its business, the Company is subject to legal actions filed or
threatened in the ordinary course of its business operations. The Company does not expect that any
such litigation, pending or threatened, as of September 30, 2010, will have a material adverse
effect on its consolidated financial condition, future operating results or liquidity.
Other Commitments
As of September 30, 2010 and December 31, 2009, unfunded mortgage loan commitments were $76.1
and $4.5, respectively. The Company had no other material commitments or contingencies as of
September 30, 2010 and December 31, 2009.
23
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless otherwise stated)
(Unaudited)
11. Segment Information
The following tables present selected financial information by segment and reconcile segment
pre-tax adjusted operating income (loss) to amounts reported in the consolidated statements of
income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30, 2010 |
|
|
|
|
|
|
|
Retirement |
|
|
Income |
|
|
|
|
|
|
|
|
|
|
|
|
Group |
|
|
Services |
|
|
Annuities |
|
|
Individual |
|
|
Other |
|
|
Total |
|
Operating revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums |
|
$ |
109.9 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
10.3 |
|
|
$ |
— |
|
|
$ |
120.2 |
|
Net investment income |
|
|
4.7 |
|
|
|
119.0 |
|
|
|
105.6 |
|
|
|
67.5 |
|
|
|
7.6 |
|
|
|
304.4 |
|
Policy fees, contract charges, and other |
|
|
2.7 |
|
|
|
4.7 |
|
|
|
0.1 |
|
|
|
29.6 |
|
|
|
3.8 |
|
|
|
40.9 |
|
Net investment gains on fixed index annuity (FIA) options |
|
|
— |
|
|
|
0.3 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues |
|
|
117.3 |
|
|
|
124.0 |
|
|
|
105.7 |
|
|
|
107.4 |
|
|
|
11.4 |
|
|
|
465.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder benefits and claims |
|
|
73.1 |
|
|
|
(0.5 |
) |
|
|
— |
|
|
|
12.8 |
|
|
|
— |
|
|
|
85.4 |
|
Interest credited |
|
|
— |
|
|
|
75.7 |
|
|
|
90.1 |
|
|
|
63.1 |
|
|
|
(1.1 |
) |
|
|
227.8 |
|
Other underwriting and operating expenses |
|
|
25.4 |
|
|
|
13.0 |
|
|
|
5.5 |
|
|
|
14.2 |
|
|
|
5.0 |
|
|
|
63.1 |
|
Interest expense |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
8.0 |
|
|
|
8.0 |
|
Amortization of deferred policy acquisition costs |
|
|
2.1 |
|
|
|
13.3 |
|
|
|
0.6 |
|
|
|
2.0 |
|
|
|
— |
|
|
|
18.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses |
|
|
100.6 |
|
|
|
101.5 |
|
|
|
96.2 |
|
|
|
92.1 |
|
|
|
11.9 |
|
|
|
402.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pre-tax adjusted operating income (loss) |
|
$ |
16.7 |
|
|
$ |
22.5 |
|
|
$ |
9.5 |
|
|
$ |
15.3 |
|
|
$ |
(0.5 |
) |
|
$ |
63.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues |
|
$ |
117.3 |
|
|
$ |
124.0 |
|
|
$ |
105.7 |
|
|
$ |
107.4 |
|
|
$ |
11.4 |
|
|
$ |
465.8 |
|
Add: Net realized investment gains (losses), excluding FIA
options |
|
|
— |
|
|
|
2.1 |
|
|
|
16.3 |
|
|
|
2.0 |
|
|
|
(0.7 |
) |
|
|
19.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
117.3 |
|
|
|
126.1 |
|
|
|
122.0 |
|
|
|
109.4 |
|
|
|
10.7 |
|
|
|
485.5 |
|
Total benefits and expenses |
|
|
100.6 |
|
|
|
101.5 |
|
|
|
96.2 |
|
|
|
92.1 |
|
|
|
11.9 |
|
|
|
402.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
$ |
16.7 |
|
|
$ |
24.6 |
|
|
$ |
25.8 |
|
|
$ |
17.3 |
|
|
$ |
(1.2 |
) |
|
$ |
83.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30, 2009 |
|
|
|
|
|
|
|
Retirement |
|
|
Income |
|
|
|
|
|
|
|
|
|
|
|
|
Group |
|
|
Services |
|
|
Annuities |
|
|
Individual |
|
|
Other |
|
|
Total |
|
Operating revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums |
|
$ |
106.5 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
10.1 |
|
|
$ |
— |
|
|
|
116.6 |
|
Net investment income |
|
|
4.5 |
|
|
|
103.5 |
|
|
|
104.7 |
|
|
|
66.9 |
|
|
|
4.0 |
|
|
|
283.6 |
|
Policy fees, contract charges, and other |
|
|
4.2 |
|
|
|
4.6 |
|
|
|
0.1 |
|
|
|
28.5 |
|
|
|
2.8 |
|
|
|
40.2 |
|
Net investment gains on FIA options |
|
|
— |
|
|
|
1.4 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues |
|
|
115.2 |
|
|
|
109.5 |
|
|
|
104.8 |
|
|
|
105.5 |
|
|
|
6.8 |
|
|
|
441.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder benefits and claims |
|
|
71.7 |
|
|
|
(1.3 |
) |
|
|
— |
|
|
|
15.2 |
|
|
|
— |
|
|
|
85.6 |
|
Interest credited |
|
|
— |
|
|
|
70.5 |
|
|
|
90.7 |
|
|
|
60.0 |
|
|
|
(0.7 |
) |
|
|
220.5 |
|
Other underwriting and operating expenses |
|
|
25.6 |
|
|
|
13.6 |
|
|
|
5.4 |
|
|
|
13.4 |
|
|
|
3.7 |
|
|
|
61.7 |
|
Interest expense |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
7.9 |
|
|
|
7.9 |
|
Amortization of deferred policy acquisition costs |
|
|
1.9 |
|
|
|
10.5 |
|
|
|
0.4 |
|
|
|
1.0 |
|
|
|
— |
|
|
|
13.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses |
|
|
99.2 |
|
|
|
93.3 |
|
|
|
96.5 |
|
|
|
89.6 |
|
|
|
10.9 |
|
|
|
389.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pre-tax adjusted operating income |
|
$ |
16.0 |
|
|
$ |
16.2 |
|
|
$ |
8.3 |
|
|
$ |
15.9 |
|
|
$ |
(4.1 |
) |
|
$ |
52.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues |
|
$ |
115.2 |
|
|
$ |
109.5 |
|
|
$ |
104.8 |
|
|
$ |
105.5 |
|
|
$ |
6.8 |
|
|
$ |
441.8 |
|
Add: Net realized investment gains (losses),
excluding FIA options |
|
|
(1.5 |
) |
|
|
(0.5 |
) |
|
|
18.9 |
|
|
|
(3.5 |
) |
|
|
(3.5 |
) |
|
|
9.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
113.7 |
|
|
|
109.0 |
|
|
|
123.7 |
|
|
|
102.0 |
|
|
|
3.3 |
|
|
|
451.7 |
|
Total benefits and expenses |
|
|
99.2 |
|
|
|
93.3 |
|
|
|
96.5 |
|
|
|
89.6 |
|
|
|
10.9 |
|
|
|
389.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
$ |
14.5 |
|
|
$ |
15.7 |
|
|
$ |
27.2 |
|
|
$ |
12.4 |
|
|
$ |
(7.6 |
) |
|
$ |
62.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless otherwise stated)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30, 2010 |
|
|
|
|
|
|
|
Retirement |
|
|
Income |
|
|
|
|
|
|
|
|
|
|
|
|
Group |
|
|
Services |
|
|
Annuities |
|
|
Individual |
|
|
Other |
|
|
Total |
|
Operating revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums |
|
$ |
324.5 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
30.2 |
|
|
$ |
— |
|
|
$ |
354.7 |
|
Net investment income |
|
|
14.1 |
|
|
|
342.1 |
|
|
|
314.3 |
|
|
|
201.9 |
|
|
|
16.0 |
|
|
|
888.4 |
|
Policy fees, contract charges, and other |
|
|
8.6 |
|
|
|
14.3 |
|
|
|
0.5 |
|
|
|
88.5 |
|
|
|
11.3 |
|
|
|
123.2 |
|
Net investment losses on FIA options |
|
|
— |
|
|
|
(0.9 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(0.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues |
|
|
347.2 |
|
|
|
355.5 |
|
|
|
314.8 |
|
|
|
320.6 |
|
|
|
27.3 |
|
|
|
1,365.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder benefits and claims |
|
|
215.5 |
|
|
|
0.2 |
|
|
|
— |
|
|
|
39.2 |
|
|
|
— |
|
|
|
254.9 |
|
Interest credited |
|
|
— |
|
|
|
214.6 |
|
|
|
275.0 |
|
|
|
180.7 |
|
|
|
(2.5 |
) |
|
|
667.8 |
|
Other underwriting and operating expenses |
|
|
75.1 |
|
|
|
40.2 |
|
|
|
16.0 |
|
|
|
40.3 |
|
|
|
15.3 |
|
|
|
186.9 |
|
Interest expense |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
23.9 |
|
|
|
23.9 |
|
Amortization of deferred policy acquisition costs |
|
|
6.0 |
|
|
|
40.1 |
|
|
|
1.5 |
|
|
|
2.8 |
|
|
|
— |
|
|
|
50.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses |
|
|
296.6 |
|
|
|
295.1 |
|
|
|
292.5 |
|
|
|
263.0 |
|
|
|
36.7 |
|
|
|
1,183.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pre-tax adjusted operating income (loss) |
|
$ |
50.6 |
|
|
$ |
60.4 |
|
|
$ |
22.3 |
|
|
$ |
57.6 |
|
|
$ |
(9.4 |
) |
|
$ |
181.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues |
|
$ |
347.2 |
|
|
$ |
355.5 |
|
|
$ |
314.8 |
|
|
$ |
320.6 |
|
|
$ |
27.3 |
|
|
$ |
1,365.4 |
|
Add: Net realized investment gains (losses), excluding
FIA options |
|
|
(0.2 |
) |
|
|
7.7 |
|
|
|
7.3 |
|
|
|
4.5 |
|
|
|
(1.6 |
) |
|
|
17.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
347.0 |
|
|
|
363.2 |
|
|
|
322.1 |
|
|
|
325.1 |
|
|
|
25.7 |
|
|
|
1,383.1 |
|
Total benefits and expenses |
|
|
296.6 |
|
|
|
295.1 |
|
|
|
292.5 |
|
|
|
263.0 |
|
|
|
36.7 |
|
|
|
1,183.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
$ |
50.4 |
|
|
$ |
68.1 |
|
|
$ |
29.6 |
|
|
$ |
62.1 |
|
|
$ |
(11.0 |
) |
|
$ |
199.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2010: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
237.4 |
|
|
$ |
9,878.0 |
|
|
$ |
7,176.4 |
|
|
$ |
5,684.3 |
|
|
$ |
2,326.2 |
|
|
$ |
25,302.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30, 2009 |
|
|
|
|
|
|
|
Retirement |
|
|
Income |
|
|
|
|
|
|
|
|
|
|
|
|
Group |
|
|
Services |
|
|
Annuities |
|
|
Individual |
|
|
Other |
|
|
Total |
|
Operating revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums |
|
$ |
324.1 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
28.8 |
|
|
$ |
— |
|
|
$ |
352.9 |
|
Net investment income |
|
|
13.3 |
|
|
|
281.8 |
|
|
|
318.1 |
|
|
|
198.0 |
|
|
|
18.2 |
|
|
|
829.4 |
|
Policy fees, contract charges, and other |
|
|
12.7 |
|
|
|
12.4 |
|
|
|
0.4 |
|
|
|
87.1 |
|
|
|
7.9 |
|
|
|
120.5 |
|
Net investment gains on FIA options |
|
|
— |
|
|
|
0.2 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues |
|
|
350.1 |
|
|
|
294.4 |
|
|
|
318.5 |
|
|
|
313.9 |
|
|
|
26.1 |
|
|
|
1,303.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder benefits and claims |
|
|
219.9 |
|
|
|
(2.2 |
) |
|
|
— |
|
|
|
44.4 |
|
|
|
— |
|
|
|
262.1 |
|
Interest credited |
|
|
— |
|
|
|
187.2 |
|
|
|
268.7 |
|
|
|
175.7 |
|
|
|
(2.4 |
) |
|
|
629.2 |
|
Other underwriting and operating expenses |
|
|
79.7 |
|
|
|
41.3 |
|
|
|
15.6 |
|
|
|
39.6 |
|
|
|
10.5 |
|
|
|
186.7 |
|
Interest expense |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
23.8 |
|
|
|
23.8 |
|
Amortization of deferred policy acquisition costs |
|
|
5.8 |
|
|
|
26.8 |
|
|
|
1.2 |
|
|
|
2.6 |
|
|
|
— |
|
|
|
36.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses |
|
|
305.4 |
|
|
|
253.1 |
|
|
|
285.5 |
|
|
|
262.3 |
|
|
|
31.9 |
|
|
|
1,138.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pre-tax adjusted operating income (loss) |
|
$ |
44.7 |
|
|
$ |
41.3 |
|
|
$ |
33.0 |
|
|
$ |
51.6 |
|
|
$ |
(5.8 |
) |
|
$ |
164.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues |
|
$ |
350.1 |
|
|
$ |
294.4 |
|
|
$ |
318.5 |
|
|
$ |
313.9 |
|
|
$ |
26.1 |
|
|
$ |
1,303.0 |
|
Add: Net realized investment gains (losses),
excluding FIA options |
|
|
(2.9 |
) |
|
|
(17.7 |
) |
|
|
7.7 |
|
|
|
(7.9 |
) |
|
|
(8.4 |
) |
|
|
(29.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
347.2 |
|
|
|
276.7 |
|
|
|
326.2 |
|
|
|
306.0 |
|
|
|
17.7 |
|
|
|
1,273.8 |
|
Total benefits and expenses |
|
|
305.4 |
|
|
|
253.1 |
|
|
|
285.5 |
|
|
|
262.3 |
|
|
|
31.9 |
|
|
|
1,138.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
$ |
41.8 |
|
|
$ |
23.6 |
|
|
$ |
40.7 |
|
|
$ |
43.7 |
|
|
$ |
(14.2 |
) |
|
$ |
135.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
285.5 |
|
|
$ |
8,157.3 |
|
|
$ |
6,664.1 |
|
|
$ |
5,076.2 |
|
|
$ |
2,040.9 |
|
|
$ |
22,224.0 |
|
25
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless otherwise stated)
(Unaudited)
12. Subsequent Events
On November 10, 2010, the Company declared a dividend of $0.05 per common share, or
approximately $6.9 in total, to shareholders and warrant holders of record as of November 24, 2010.
The dividend will be paid on or about December 10, 2010.
26
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Unless the context otherwise requires, references in this report on Form 10-Q to “Symetra”
refer to Symetra Financial Corporation on a stand-alone, non-consolidated basis. References to
“we,” “our,” “us” and “the Company” are to Symetra Financial Corporation together with its
subsidiaries.
This discussion contains forward-looking statements that involve risks and uncertainties. Our
actual results may differ materially from those discussed in or implied by any of the
forward-looking statements as a result of various factors, including but not limited to those
listed under “Forward-Looking Statements.” You should read the following discussion in conjunction
with the unaudited interim consolidated financial statements and accompanying condensed notes
included in Item 1 — “Financial Statements” included in this Form 10-Q, as well as our Annual
Report on Form 10-K for the year ended December 31, 2009, filed with the SEC on March 8, 2010
(“2009 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 book value, adjusted book value per common share, adjusted book value per common share, as
converted, and operating ROAE to be useful to investors in evaluating our financial performance and
condition. These measures have been reconciled to their most comparable GAAP financial measures.
For a definition of these non-GAAP measures, see “— Use of non-GAAP Financial Measures.”
All amounts, except per share data, are in millions unless otherwise stated.
Overview
We are a financial services company in the life insurance industry focused on profitable
growth in selected group health, retirement, life insurance and employee benefits markets. Our
operations date back to 1957 and many of our agency and distribution relationships have been in
place for decades.
Our Operations
We conduct our business through five segments, four of which are operating:
|
• |
|
Group. We offer medical stop-loss insurance, limited benefit medical plans, group life
insurance, accidental death and dismemberment insurance and disability income insurance
mainly to employer groups of 50 to 5,000 individuals. In addition to our insurance
products, we offer managing general underwriting services. |
|
|
• |
|
Retirement Services. We offer fixed and variable deferred annuities, including tax
sheltered annuities, individual retirement accounts, or IRAs, and group annuities to
qualified retirement plans, including Section 401(k), 403(b) and 457 plans. |
|
|
• |
|
Income Annuities. We offer single premium immediate annuities, or SPIAs, for customers
seeking a reliable source of retirement income and structured settlement annuities to fund
third-party personal injury settlements. In addition, we offer funding services options to
existing structured settlement clients. |
|
|
• |
|
Individual. We offer a wide array of term and universal life insurance as well as
bank-owned life insurance, or BOLI. |
|
|
• |
|
Other. This segment consists of unallocated corporate income, composed primarily of
investment income on unallocated surplus, returns from our investments in limited
partnerships, unallocated corporate expenses, interest expense on debt, tax credits from
our tax preferred affordable housing investments, the results of small, non-insurance
businesses that are managed outside of our operating segments, and inter-segment
elimination entries. |
Current Outlook
The economic recovery continued to be slow during the third quarter as unemployment rates and
foreclosures continued to dampen the overall recovery. Although the recovery remains weak, equity
markets moved higher. Despite the improved equity markets, we continued to see declines in the
treasury yields and yields on new asset purchases.
27
The low interest rate environment and tight credit spreads have been a challenge for our
various asset-based businesses as demand for investments with the necessary yields and quality that
meet our investment requirements, and which we believe have an attractive risk-return profile,
continues to exceed supply. Despite these challenges, we made progress in deploying our cash during
the quarter, although we are generally reinvesting in assets with lower yields than we were
previously earning. In an effort to manage this risk, we continue to monitor crediting rates and
product pricing. We also invested in U.S. treasury securities, as a short-term alternative to cash,
to improve our yields.
Despite continued widespread concerns regarding commercial real estate lending, we believe our
high quality commercial mortgage loan portfolio and commercial mortgage-backed securities (CMBS)
have significant credit enhancement and will continue to generate strong cash flows. While we do
not anticipate being immune to commercial real estate losses, given the structure of our mortgage
loan and CMBS portfolios, we believe our strategies in these areas, including disciplined
underwriting, will minimize our exposure to future losses. To improve our spreads, we have been
prudently increasing our investments in commercial mortgage loans, primarily in our Retirement
Services and Income Annuities segments. During the third quarter of 2010 we originated over $170.0
of loans.
Toward the end of the second quarter, Tom Marra took over as president and chief executive
officer. We have also more recently announced several additions to our executive management team.
We intend to leverage the experience of the new executive leaders as we continue to concentrate on
our strategic objectives of:
|
— |
|
developing new distribution partnerships, especially with financial institutions and
broker-dealers; |
|
|
— |
|
adding additional products with existing partners; |
|
|
— |
|
expanding our less interest-rate sensitive products in the Group and Individual segments
while maintaining our solid position in fixed deferred and income annuities; |
|
|
— |
|
developing transparent products that capitalize on favorable demographic trends such as
the need for retirement savings, life insurance and employers’ need to provide affordable
health care to employees; and |
|
|
— |
|
disciplined balance sheet management. |
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 in the
unaudited interim consolidated financial statements. The following accounting policies are those we
consider to be particularly critical to understanding our financial statements because their
application places the most significant demands on our ability to judge the effect of inherently
uncertain matters on our financial results:
|
• |
|
Valuation of investments at fair value; |
|
|
• |
|
The evaluation of OTTI of investments; |
|
|
• |
|
The balance, recoverability and amortization of deferred policy acquisition costs; |
|
|
• |
|
The liabilities for funds held under deposit contracts, future policy benefits, and
policy and contract claims; and |
|
|
• |
|
The recoverability of deferred tax assets. |
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 forecast, and our best estimates
may require adjustment.
There have been no material changes to the above critical accounting estimates, 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 2009 10-K.
28
New Accounting Standards
For a discussion of recently adopted and not yet adopted accounting pronouncements, see Note 2
in the accompanying unaudited interim consolidated financial statements.
Sources of Revenues and Expenses
Our primary sources of revenues from our insurance operations are premiums and net investment
income. Our primary sources of expenses from our insurance operations are policyholder benefits and
claims, interest credited to policyholder reserves and account balances and general business and
operating expenses, net of deferred policy acquisition costs (DAC). We also generate net realized
investment gains (losses) on sales or impairments of our investments and changes in fair value of
our equity trading portfolio.
Each of our four operating segments maintains its own portfolio of invested assets, which are
centrally managed. The net investment income and net 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 our Other segment. In addition, we allocate certain corporate expenses to each
operating segment using multiple factors, including employee headcount, allocated investments,
account values and time study results.
Revenues
Premiums
Premiums consist primarily of premiums from our group medical stop-loss and individual life
insurance products.
Net investment income
Net investment income represents the income earned on our investments, net of investment
expenses, including gains or losses from changes in the fair value of our investments in private
equity and hedge fund limited partnerships.
Policy fees, contract charges and other
Policy fees, contract charges and other includes mortality expense, surrender and other
administrative charges to policyholders, revenues from our non-insurance businesses, reinsurance
allowance fees, and cost of insurance (COI) charges on our universal life insurance and BOLI
policies.
Net realized investment gains (losses)
Net realized investment gains (losses) mainly consists of realized gains (losses) from sales
of our investments, realized losses from investment impairments and changes in fair value of our
trading portfolio and fixed index annuity (FIA) options.
Benefits and Expenses
Policyholder benefits and claims
Policyholder benefits and claims consist of benefits paid and reserve activity on group
medical stop-loss and health and individual life products. In addition, in accordance with the
purchase method of accounting (referred to as PGAAP), we record, as a reduction of this expense,
PGAAP reserve amortization related to our BOLI policies. PGAAP reserve amortization related to our
fixed deferred annuities was recorded in this line item until it was fully amortized as of
September 30, 2009.
Interest credited
Interest credited represents interest credited to policyholder reserves and contractholder
general account balances.
29
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 general operating costs.
Interest expense
Interest expense primarily includes interest on corporate debt, the impact of interest rate
hedging activities and amortization of debt issuance costs.
Amortization of deferred policy acquisition costs
We defer as assets certain costs, generally commissions, distribution costs and other
underwriting costs, that vary with, and are primarily related to, the production of new and renewal
business. Amortization of previously capitalized DAC is recorded as an expense.
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. In addition, our management and board of directors use these measures to
gauge the historical performance of our operations and for business planning purposes. In the
tables below, we present these measures and provide reconciliations to the nearest GAAP financial
measure. In the following paragraphs, we provide definitions of these non-GAAP measures and explain
how we believe investors will find them useful, how we use them, what their limitations are, and
how we compensate for such limitations.
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
As of |
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
Total stockholders’ equity |
|
$ |
2,711.3 |
|
|
$ |
1,433.3 |
|
Less: AOCI |
|
|
819.4 |
|
|
|
(49.7 |
) |
|
|
|
|
|
|
|
Adjusted book value* |
|
|
1,891.9 |
|
|
|
1,483.0 |
|
Add: Assumed proceeds from exercise of warrants |
|
|
218.1 |
|
|
|
218.1 |
|
|
|
|
|
|
|
|
Adjusted book value, as converted* |
|
$ |
2,110.0 |
|
|
$ |
1,701.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book value per common share |
|
$ |
19.77 |
|
|
$ |
12.83 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted book value per common share* |
|
$ |
16.01 |
|
|
$ |
15.99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted book value per common share, as converted* |
|
$ |
15.38 |
|
|
$ |
15.23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Twelve Months Ended |
|
|
September 30, |
|
December 31, |
|
|
2010 |
|
2009 |
Return on stockholders’ equity, ROE |
|
|
8.6 |
% |
|
|
15.4 |
% |
Average stockholders’ equity |
|
$ |
1,987.9 |
|
|
$ |
832.4 |
|
|
|
|
|
|
|
|
|
|
Operating return on average equity, or ROAE* |
|
|
9.4 |
% |
|
|
10.5 |
% |
Average adjusted book value* |
|
$ |
1,695.9 |
|
|
$ |
1,407.8 |
|
|
|
|
* |
|
Represents non-GAAP measures. |
Adjusted Operating Income
Adjusted operating income is a non-GAAP measure of our performance. Adjusted operating income
consists of net income, less after-tax net realized investment gains (losses), plus after-tax net
investment gains (losses) on our FIA options.
30
Net income is the most directly comparable GAAP measure to adjusted operating income. Net
income for any period presents the results of our insurance operations, as well as our net realized
investment gains (losses). We consider investment income generated by our invested assets to be
part of the results of our insurance operations because they are acquired and generally held to
maturity to generate income that we use to meet our obligations. Conversely, we do not consider the
activities reported through net realized investment gains (losses), with the exception of our FIA
options, to be reflective of the performance of our insurance operations, as discussed below.
We believe investors find it useful to review a measure of the results of our insurance
operations separate from the net realized gain and loss activity attributable to most of our
investment portfolio because it assists an investor in determining whether our insurance-related
revenues, composed primarily of premiums; net investment income; and policy fees, contract charges
and other, have been sufficient to generate operating earnings after meeting our insurance-related
obligations, composed primarily of claims paid to policyholders, investment returns credited to
policyholder accounts, and other operating costs.
In presenting adjusted operating income, we are excluding after-tax net realized investment
gains (losses). Even though these gains and losses recur in most periods, the timing and amount are
driven by investment decisions and external economic developments unrelated to our management of
the insurance and underwriting aspects of our business. Thus, because our insurance operations are
not dependent on the following, we exclude from adjusted operating income the following items which
are recorded in after-tax net realized investment gains (losses):
|
• |
|
OTTI related to available-for-sale securities, which depend on the timing and severity
of market credit cycles and management judgments regarding recoverability; |
|
|
• |
|
Net gains (losses) on changes in fair value of our trading securities, which depend on
equity market performance and broader market conditions; and |
|
|
• |
|
Net realized gains (losses) on sales of securities, which are subject to our discretion
and influenced by market opportunities. |
The one exception to the exclusion of net realized investment gains (losses) is the gains
(losses) on our FIA options in our Retirement Services segment. Each year, we use the realized
gains from our FIA options, similar to the way we use investment income, to meet our obligations
associated with our FIA product, which credits interest to policyholder accounts based on equity
market performance.
In addition to using adjusted operating income to evaluate our insurance operations, our
management and board of directors have other uses for this measure, including managing our
insurance liabilities and assessing achievement of our financial plan. For instance, we use
adjusted operating income to help determine the renewal interest rates we can afford to credit to
policyholders. We also develop a financial plan that includes our expectation of adjusted operating
income. We review our achievement of our financial plan by understanding variances between actual
and planned adjusted operating income. We use this information to make decisions on how to manage
our consolidated insurance operations, including making decisions regarding expense budgets,
product prices and the purchase of tax-advantaged affordable housing limited partnerships.
Adjusted operating income is not a substitute for net income determined in accordance with
GAAP. The adjustments made to derive adjusted operating income are important to understanding our
overall results from operations and, if evaluated without proper context, adjusted operating income
possesses material limitations. As an example, we could produce a low level of net income in a
given period, despite strong operating performance, if in that period we generate significant net
realized losses from our investment portfolio. We could also produce a high level of net income in
a given period, despite poor operating performance, if in that period we generate significant net
realized gains from our investment portfolio. As an example of another limitation of adjusted
operating income, it does not include the decrease in cash flows expected to be collected as a
result of credit loss OTTI. Further, it includes changes to net investment income as a result of
OTTI, which are not directly related to our insurance operations, and does not adjust for any
negative impact to cash flows that we may experience in future periods as a result of such changes
in net investment income. Therefore, our management and board of directors also separately review
net realized investment gains (losses) and analyses of our net investment income, including impacts
related to OTTI write-downs, in connection with their review of our investment portfolio. In
addition, our management and board of directors examine net income as part of their review of our
overall financial results. For a reconciliation of adjusted operating income to net income, see “—
Results of Operations” below.
31
Adjusted Book Value, Adjusted Book Value per Common Share and Adjusted Book Value per Common
Share, as Converted
Adjusted book value
Adjusted book value is a non-GAAP financial measure of our financial condition. Adjusted book
value consists of stockholders’ equity, less accumulated other comprehensive income (loss), or
AOCI.
Stockholders’ equity is the most directly comparable GAAP measure to adjusted book value.
AOCI, which is primarily composed of the net unrealized gains (losses) on our fixed maturities, net
of taxes, is a component of stockholders’ equity.
We purchase fixed maturities with durations and cash flows that match our estimate of when our
insurance liabilities and other obligations will come due. We typically expect to hold our fixed
maturities to maturity, using the principal and interest cash flows to pay our obligations over
time. Since we expect to collect the contractual cash flows on these fixed maturities, we do not
expect to realize the unrealized gains (losses) that are included in our AOCI balance as of any
particular date. AOCI primarily fluctuates based on changes in the fair value of our fixed
maturities, which is driven by factors outside of our control, including the impact of credit
market conditions and the movement of interest rates and credit spreads. These fluctuations do not
reflect any change in the cash flows we expect to receive. As an example, an increase in the fair
value of our fixed maturities improved AOCI by $869.1 to an $819.4 gain as of September 30, 2010,
from a $49.7 loss as of December 31, 2009, due to bond market improvements and tightening of
interest spreads. This contributed to a related increase in stockholders’ equity over the same
period of $1,278.0, or 89%; however, this increase did not impact our estimates regarding
collection of cash flows on the underlying fixed maturities.
We believe investors find it useful if we present them with a financial measure that removes
from stockholders’ equity these temporary and unrealized changes in the fair values of our
investments, and the related effects on AOCI. By evaluating our adjusted book value, an investor
can assess our financial condition based on our general practice of holding our fixed investments
to maturity. For example, we believe it is important that an investor not assume that an increase
in stockholders’ equity driven by unrealized gains means our company has grown in value and,
alternatively, it is important that an investor not assume that a decrease in stockholders’ equity
driven by unrealized losses means our company’s value has decreased.
In addition to using adjusted book value to evaluate our financial condition, our management
and board of directors have other uses for this measure, including reviewing debt levels as a
percentage of adjusted book value to monitor compliance with revolving credit facility covenants
and helping to maintain and improve our ratings from rating agencies. Our management also compares
adjusted book value to regulatory capital to assess our ability to maintain regulatory capital
ratios and ratings. Finally, our board of directors uses adjusted book value as a basis to measure
the success of our company over historical periods and reviews management’s financial plans with
consideration to adjusted book value.
Adjusted book value is not a substitute for stockholders’ equity determined in accordance with
GAAP and considering adjusted book value on its own would present material limitations to an
analysis of our financial condition. For example, AOCI may deteriorate due to higher interest
rates, credit spreads and issues specific to particular investments. By not considering the size of
gross unrealized losses within AOCI, an investor may fail to appreciate the size of potential
losses or the amount of potential gains based on the fair value of our fixed maturities. As a
result, when evaluating our financial condition, we compensate for these limitations by also
considering stockholders’ equity and the unrealized gains (losses) on invested assets, which are
provided in our investment disclosures (see “— Investments” for further information).
Adjusted book value should not be considered a substitute for stockholders’ equity. For a
reconciliation of adjusted book value to stockholders’ equity, see above.
Adjusted book value per common share
Adjusted book value per common share is a non-GAAP financial measure of our financial condition.
Adjusted book value per common share is calculated as adjusted book value, divided by outstanding
common shares. This measure does not include the 18.976 shares subject to outstanding warrants for
all periods presented because the warrant holders only participate in dividends and would not be
entitled to proceeds in the event of a liquidation or winding down of our company should such event
precede the exercise of the outstanding warrants.
32
Book value per common share is the most directly comparable GAAP measure to adjusted book
value per common share. Book value per common share is calculated as stockholders’ equity divided
by the sum of our common shares outstanding and shares issuable pursuant to outstanding warrants.
We believe investors find it useful if we present them with adjusted book value (discussed
above), a financial measure that removes AOCI from stockholders’ equity, and then translate it into
another measure, adjusted book value per common share, that allows the investor to understand the
value of its investment on the adjusted book value basis. By evaluating this measure, an investor
will be able to assess its proportionate stake in our adjusted book value as of the dates
presented, and the change in such measure over time, based on our practice of holding our fixed
maturities to maturity. In addition, this measure allows an investor to understand the value of its
investment based on current shares outstanding because it represents our future share count in the
event that the outstanding warrants are not exercised before they expire.
In addition to using adjusted book value to evaluate our financial condition on a per common
share basis, our management and board of directors use this measure to assess the cost of obtaining
new equity capital and to compare the value and the change in value over time of our common shares
to that of our peer companies. For example, our board of directors takes into account the expected
market price of our common shares relative to adjusted book value per common share when considering
raising new equity capital.
Adjusted book value per common share is not a substitute for book value per common share
determined in accordance with GAAP and only considering adjusted book value per common share on its
own would present material limitations similar to those discussed above with respect to adjusted
book value.
Adjusted book value per common share should not be considered a substitute for book value per
common share. For a reconciliation of adjusted book value per common share to book value per common
share, see above.
Adjusted book value per common share, as converted
Adjusted book value per common share, as converted, is a non-GAAP financial measure of our
financial condition and gives effect to the exercise of our outstanding warrants. Adjusted book
value per common share, as converted, is calculated as adjusted book value plus the assumed
proceeds from the warrants, divided by the sum of outstanding common shares and shares subject to
outstanding warrants. Our shares issuable pursuant to outstanding warrants were 18.976 for all
periods presented.
Book value per common share is the most directly comparable GAAP measure to adjusted book
value per share, as converted. Book value per common share is calculated as stockholders’ equity
divided by the sum of our common shares outstanding and shares issuable pursuant to our outstanding
warrants.
We believe investors find it useful if we present them with adjusted book value (discussed
above), a financial measure that removes AOCI from stockholders’ equity and then translate it into
another measure, adjusted book value per common share, as converted, which gives effect to the
exercise of our outstanding warrants. By evaluating this measure, an investor will be able to
assess its proportionate stake in our adjusted book value for the periods presented, on a fully
diluted basis. We believe it is most meaningful for investors to compare this measure to adjusted
book value per common share as this will allow the investor to understand the dilutive effect if
the warrant holders exercise our outstanding warrants.
As discussed above, our management and board of directors use adjusted book value per common
share to compare the value of a share of our common stock to that of our peer companies, and also
to measure the cost of new equity capital. To further this analysis, our management and board of
directors also make these comparisons and judgments after taking into account the potential
dilutive effect of the exercise of our outstanding warrants.
Adjusted book value per common share, as converted, is not a substitute for book value per
common share determined in accordance with GAAP and only considering adjusted book value per common
share, as converted, on its own would present material limitations similar to those discussed above
with respect to adjusted book value.
Adjusted book value per common share, as converted, should not be considered a substitute for
book value per common share. For a reconciliation of adjusted book value per common share, as
converted, to book value per common share, see above.
33
Operating ROAE
Operating return on average equity, or operating ROAE, is a non-GAAP measure of our
performance. Operating ROAE consists of adjusted operating income for the most recent four
quarters, divided by average adjusted book value, both of which are non-GAAP measures as described
above. We measure average adjusted book value by averaging adjusted book value for the most recent
five quarters.
Return on stockholders’ equity, or ROE, is the most directly comparable GAAP measure. Return
on stockholders’ equity is calculated as net income for the most recent four quarters, for such
period divided by the average stockholders’ equity for the most recent five quarters.
As discussed above under “— Adjusted operating income,” we believe investors find it useful
to review the results of our insurance operations separate from the gain and loss activity
attributable to most of our investment portfolio because it highlights trends in the performance of
our insurance operations. In addition, as discussed above under “— Adjusted Book Value, Adjusted
Book Value per Common Share and Adjusted Book Value per Common Share, as Converted,” we believe
investors find it useful if we present them with a financial measure that removes from
stockholders’ equity the temporary and unrealized changes in the fair values of our investments,
and the related effects on AOCI, because we do not expect to realize the unrealized gains (losses)
that are included in our AOCI balance as of any particular date. By referring to operating ROAE, an
investor can form a judgment as to how effectively our management uses funds invested by our
stockholders to generate adjusted operating income growth. Thus, we present operating ROAE for a
period to measure the rate of return produced by our adjusted operating income in such period based
on our average adjusted book value for such period.
In addition to using operating ROAE to evaluate how effectively our management uses funds
invested in our company, our management and board of directors have additional uses for operating
ROAE. These include comparing our operating ROAE to those of our peer companies, comparing our
operating ROAE against our target return objectives, and determining if our insurance and annuity
products are priced to achieve our long-term targets.
However, because operating ROAE excludes realized and unrealized gains (losses) on our
investment portfolio, it has material limitations as a financial measure of performance and should
not be considered on its own. As an example, we could produce a high operating ROAE in a given
period, despite poor net income, if in that period we generated significant net realized losses
from our investment portfolio. To compensate for such limitations, we also consider ROE to assess
financial performance and return on total equity.
Operating ROAE should not be considered a substitute for ROE. The numerator and denominator of
operating ROAE have been reconciled to net income and stockholders’ equity, respectively, their
most comparable GAAP financial measures, see above.
34
Results of Operations
The following discussion should be read in conjunction with our unaudited interim 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).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
QTD |
|
|
Nine Months Ended |
|
|
YTD |
|
|
|
September 30, |
|
|
Variance (%) |
|
|
September 30, |
|
|
Variance (%) |
|
|
|
2010 |
|
|
2009 |
|
|
2010 vs. 2009 |
|
|
2010 |
|
|
2009 |
|
|
2010 vs. 2009 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums |
|
$ |
120.2 |
|
|
$ |
116.6 |
|
|
|
3.1 |
% |
|
$ |
354.7 |
|
|
$ |
352.9 |
|
|
|
0.5 |
% |
Net investment income |
|
|
304.4 |
|
|
|
283.6 |
|
|
|
7.3 |
|
|
|
888.4 |
|
|
|
829.4 |
|
|
|
7.1 |
|
Policy fees, contract charges, and other |
|
|
40.9 |
|
|
|
40.2 |
|
|
|
1.7 |
|
|
|
123.2 |
|
|
|
120.5 |
|
|
|
2.2 |
|
Net realized investment gains (losses): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net impairment losses recognized in earnings |
|
|
(3.5 |
) |
|
|
(17.4 |
) |
|
|
79.9 |
|
|
|
(14.7 |
) |
|
|
(73.7 |
) |
|
|
80.1 |
|
Other net realized investment gains |
|
|
23.5 |
|
|
|
28.7 |
|
|
|
(18.1 |
) |
|
|
31.5 |
|
|
|
44.7 |
|
|
|
(29.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net realized investment gains (losses) |
|
|
20.0 |
|
|
|
11.3 |
|
|
|
77.0 |
|
|
|
16.8 |
|
|
|
(29.0 |
) |
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
485.5 |
|
|
|
451.7 |
|
|
|
7.5 |
|
|
|
1,383.1 |
|
|
|
1,273.8 |
|
|
|
8.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder benefits and claims |
|
|
85.4 |
|
|
|
85.6 |
|
|
|
(0.2 |
) |
|
|
254.9 |
|
|
|
262.1 |
|
|
|
(2.7 |
) |
Interest credited |
|
|
227.8 |
|
|
|
220.5 |
|
|
|
3.3 |
|
|
|
667.8 |
|
|
|
629.2 |
|
|
|
6.1 |
|
Other underwriting and operating expenses |
|
|
63.1 |
|
|
|
61.7 |
|
|
|
2.3 |
|
|
|
186.9 |
|
|
|
186.7 |
|
|
|
0.1 |
|
Interest expense |
|
|
8.0 |
|
|
|
7.9 |
|
|
|
1.3 |
|
|
|
23.9 |
|
|
|
23.8 |
|
|
|
0.4 |
|
Amortization of deferred policy acquisition costs |
|
|
18.0 |
|
|
|
13.8 |
|
|
|
30.4 |
|
|
|
50.4 |
|
|
|
36.4 |
|
|
|
38.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses |
|
|
402.3 |
|
|
|
389.5 |
|
|
|
3.3 |
|
|
|
1,183.9 |
|
|
|
1,138.2 |
|
|
|
4.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations before income taxes |
|
|
83.2 |
|
|
|
62.2 |
|
|
|
33.8 |
|
|
|
199.2 |
|
|
|
135.6 |
|
|
|
46.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for income taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
|
18.8 |
|
|
|
(15.7 |
) |
|
|
* |
|
|
|
46.1 |
|
|
|
(4.2 |
) |
|
|
* |
|
Deferred |
|
|
7.8 |
|
|
|
33.8 |
|
|
|
(76.9 |
) |
|
|
14.4 |
|
|
|
43.6 |
|
|
|
(67.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision for income taxes: |
|
|
26.6 |
|
|
|
18.1 |
|
|
|
47.0 |
|
|
|
60.5 |
|
|
|
39.4 |
|
|
|
53.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
56.6 |
|
|
$ |
44.1 |
|
|
|
28.3 |
% |
|
$ |
138.7 |
|
|
$ |
96.2 |
|
|
|
44.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share(1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.41 |
|
|
$ |
0.40 |
|
|
|
2.5 |
% |
|
$ |
1.03 |
|
|
$ |
0.86 |
|
|
|
19.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.41 |
|
|
$ |
0.40 |
|
|
|
2.5 |
% |
|
$ |
1.03 |
|
|
$ |
0.86 |
|
|
|
19.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
137.140 |
|
|
|
111.622 |
|
|
|
* |
|
|
|
135.082 |
|
|
|
111.622 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
137.145 |
|
|
|
111.624 |
|
|
|
* |
|
|
|
135.096 |
|
|
|
111.623 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP Financial Measures(2): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted operating income |
|
$ |
43.8 |
|
|
$ |
37.7 |
|
|
|
16.2 |
% |
|
$ |
127.2 |
|
|
$ |
115.2 |
|
|
|
10.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation to net income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
56.6 |
|
|
$ |
44.1 |
|
|
|
28.3 |
|
|
$ |
138.7 |
|
|
$ |
96.2 |
|
|
|
44.2 |
|
Less: Net realized investment gains (losses)
(net of taxes of $7.0, $4.0, $5.9 and $(10.1)) |
|
|
13.0 |
|
|
|
7.3 |
|
|
|
78.1 |
|
|
|
10.9 |
|
|
|
(18.9 |
) |
|
|
* |
|
Add: Net investment gains (losses) on FIA
options (net of taxes of $0.1, $0.5, $(0.3) and
$0.1) |
|
|
0.2 |
|
|
|
0.9 |
|
|
|
(77.8 |
) |
|
|
(0.6 |
) |
|
|
0.1 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted operating income |
|
$ |
43.8 |
|
|
$ |
37.7 |
|
|
|
16.2 |
% |
|
$ |
127.2 |
|
|
$ |
115.2 |
|
|
|
10.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Represents percentage variances that are not meaningful or are explained through the discussion of other variances. |
|
(1) |
|
For further information on the calculation of basic and diluted net income per common share, see Note 3 to the
accompanying unaudited interim financial statements. |
|
(2) |
|
For a definition and discussion of the uses and limitations of this non-GAAP measure and other metrics used in our
analysis, see “— Use of non-GAAP Financial Measures” above. |
35
Three Months Ended September 30, 2010 Compared to the Three Months Ended September 30, 2009
Summary of Results
Net income increased $12.5 as a result of an increase in adjusted operating income and higher
net realized investment gains in the current quarter, versus the same period in the prior year.
Adjusted operating income increased $6.1, primarily driven by our interest spread on increased
account values in our Retirement Services segment. In addition, an increased interest spread in our
Income Annuities segment and an improved loss ratio in our Group segment also contributed to higher
adjusted operating income. This was slightly offset by a decline in our Individual segment as there
was a decrease in our BOLI return on assets (ROA).
Net realized investment gains increased $8.7, to $20.0 from $11.3. This was primarily driven
by a $13.9 reduction in impairments, partially offset by reduced gains from our equity portfolio,
which produced gains of $15.2 in the third quarter of 2010 compared to $21.6 for the same period of
2009, a $6.4 reduction. The S&P 500 increased 10.7% in the third quarter of 2010 as compared to
15.0% in the same quarter prior year. For further discussion of our investment results and
portfolio, refer to “— Investments” below.
The provision for income taxes increased $8.5 primarily due to higher income from operations
before income taxes during the three months ended September 30, 2010, compared to the same period
in 2009.
Further discussion of adjusted operating income drivers described above:
Our Group segment’s loss ratio improved to 66.5% for the three months ended September 30, 2010
compared to 67.3% for the same period in 2009. This was mostly due to an improved loss ratio on our
limited benefit medical product. Offsetting the improved loss ratio was lower profits from our
managing general underwriting services.
Our Retirement Services segment’s investment margin (net investment income less interest
credited) increased $10.3 as a result of a $1.3 billion increase in our fixed annuity account
values. Strong sales of fixed deferred annuity products over the past year drove the increased
account values. Partially offsetting this was a $2.8 increase in DAC amortization on a growing DAC
balance.
Our Income Annuities segment’s interest spread on reserves increased to 0.59% for the three
months ended September 30, 2010 compared to 0.48% for the same period in 2009, increasing pre-tax
adjusted operating income $1.5. This was driven by lower average daily cash balances and the
company’s strategy to increase originations of commercial mortgage loans.
Nine Months Ended September 30, 2010 Compared to the Nine Months Ended September 30, 2009
Summary of Results
Net income increased $42.5 as a result of an increase in adjusted operating income and net
realized investment gains for the nine months ended September 30, 2010, versus losses during the
same period in 2009. Adjusted operating income increased $12.0, which was primarily due to a $32.9
increase in the investment margin in our Retirement Services segment, an increase in the universal
life (UL) margin in our Individual segment, and improvement in our Group segment’s loss ratio. The
loss ratio, improved to 66.4% for the nine months ended September 30, 2010, compared to 67.8% for
the same period in 2009. These favorable drivers were partially offset by mortality losses and a
decrease in the interest spread on reserves in our Income Annuities segment, a decrease in BOLI ROA
in our Individual segment, and decreased gains on our private equity and hedge fund investments in
our Other segment.
Net realized investment gains (losses) increased $45.8, to a $16.8 gain from a $(29.0) loss.
This was primarily driven by a reduction in impairments, which were $14.7 for the nine months ended
September 30, 2010, versus $73.7 for the same period in 2009, an improvement of $59.0. Partially
offsetting the improvement in impairments was a reduction in gains from our equity portfolio, which
produced gains of $14.0 for the nine months ended September 30, 2010, versus $25.9 for the same
period in 2009, a decrease of $11.9. The S&P 500 increased 2.3% for the nine months ended
September 30, 2010 compared to 17.0% for the same period in 2009. For further discussion of our
investment results and portfolio refer to “— Investments” below.
The provision for income taxes increased $21.1 primarily due to higher income from operations
before income taxes during the nine months ended September 30, 2010, compared to the same period in
2009. Our effective tax rate was 30.4% and 29.0%, for the nine months ended September 30, 2010 and
2009, respectively.
36
Further discussion of adjusted operating income drivers described above:
Our Group segment’s loss ratio improved to 66.4% for the nine months ended September 30, 2010
from 67.8% for the same period in 2009, which was driven by pricing increases on policies issued in
2010 and improved limited benefit medical underwriting results.
Our Retirement Services segment’s investment margin increased $32.9 on an increase in our
fixed account values of $1.3 billion, and an increase in interest spreads. Spreads improved as we
reduced our average daily cash balances to improve yields and lowered crediting rates due to the
low interest rate environment. Partially offsetting the increase in the investment margin was a
$13.3 increase in DAC amortization on a growing DAC balance.
Our Income Annuities segment’s interest spread on reserves decreased to 0.50% for the nine
months ended September 30, 2010 compared to 0.56% for the same period in 2009, which decreased
pre-tax adjusted operating income $3.3. This was driven by lower investment yields due to changes
in prepayment speeds on mortgage-backed securities and the negative impacts of prepayments and
maturities leading to reinvestment in lower yielding assets. In addition, we experienced mortality
losses of $2.0 in the first nine months of 2010, compared to mortality gains of $3.8 for the same
period of 2009.
Our Individual segment’s UL margin increased $7.0. This was driven primarily by the first
quarter 2010 bonus interest reserve release and decreased amortization of deferred acquisition
costs as the credited interest rate on one of our universal life products is being adjusted
downward to the guaranteed minimum over the next six months. This was partially offset by a
decrease in the BOLI ROA driven by a decrease in the PGAAP reserve amortization, and an increase in
BOLI claims.
Segment Operating Results
The results of operations and selected operating metrics for our five segments (Group,
Retirement Services, Income Annuities, Individual and Other) for the three and nine months ended
September 30, 2010 and 2009 are set forth in the following respective sections.
Group
The following table sets forth the results of operations relating to our Group segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
QTD |
|
|
Nine Months Ended |
|
|
YTD |
|
|
|
September 30, |
|
|
Variance (%) |
|
|
September 30, |
|
|
Variance (%) |
|
|
|
2010 |
|
|
2009 |
|
|
2010 vs. 2009 |
|
|
2010 |
|
|
2009 |
|
|
2010 vs. 2009 |
|
Operating revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums |
|
$ |
109.9 |
|
|
$ |
106.5 |
|
|
|
3.2 |
% |
|
$ |
324.5 |
|
|
$ |
324.1 |
|
|
|
0.1 |
% |
Net investment income |
|
|
4.7 |
|
|
|
4.5 |
|
|
|
4.4 |
|
|
|
14.1 |
|
|
|
13.3 |
|
|
|
6.0 |
|
Policy fees, contract charges, and other |
|
|
2.7 |
|
|
|
4.2 |
|
|
|
(35.7 |
) |
|
|
8.6 |
|
|
|
12.7 |
|
|
|
(32.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues |
|
|
117.3 |
|
|
|
115.2 |
|
|
|
1.8 |
|
|
|
347.2 |
|
|
|
350.1 |
|
|
|
(0.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder benefits and claims |
|
|
73.1 |
|
|
|
71.7 |
|
|
|
2.0 |
|
|
|
215.5 |
|
|
|
219.9 |
|
|
|
(2.0 |
) |
Other underwriting and operating expenses |
|
|
25.4 |
|
|
|
25.6 |
|
|
|
(0.8 |
) |
|
|
75.1 |
|
|
|
79.7 |
|
|
|
(5.8 |
) |
Amortization of deferred policy acquisition
costs |
|
|
2.1 |
|
|
|
1.9 |
|
|
|
10.5 |
|
|
|
6.0 |
|
|
|
5.8 |
|
|
|
3.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses |
|
|
100.6 |
|
|
|
99.2 |
|
|
|
1.4 |
|
|
|
296.6 |
|
|
|
305.4 |
|
|
|
(2.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pre-tax adjusted operating income |
|
$ |
16.7 |
|
|
$ |
16.0 |
|
|
|
4.4 |
% |
|
$ |
50.6 |
|
|
$ |
44.7 |
|
|
|
13.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37
The following table sets forth selected historical operating metrics relating to our Group
segment as of, or for the three and nine months ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Group loss ratio(1) |
|
|
66.5 |
% |
|
|
67.3 |
% |
|
|
66.4 |
% |
|
|
67.8 |
% |
Expense ratio(2) |
|
|
24.0 |
% |
|
|
23.9 |
% |
|
|
24.2 |
% |
|
|
24.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio(3) |
|
|
90.5 |
% |
|
|
91.2 |
% |
|
|
90.6 |
% |
|
|
92.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical stop-loss — loss ratio(4) |
|
|
68.7 |
% |
|
|
68.7 |
% |
|
|
68.1 |
% |
|
|
69.4 |
% |
Total sales(5) |
|
$ |
18.4 |
|
|
$ |
27.1 |
|
|
$ |
80.4 |
|
|
$ |
77.9 |
|
|
|
|
(1) |
|
Group 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
and amortization of DAC divided by premiums earned. |
|
(3) |
|
Combined ratio is equal to the sum of the loss ratio and the expense ratio. |
|
(4) |
|
Medical stop-loss — loss ratio represents medical stop-loss policyholder benefits and incurred
claims divided by medical stop-loss premiums earned. |
|
(5) |
|
Total sales represents annualized first-year premiums. |
Three Months Ended September 30, 2010 Compared to the Three Months Ended September 30, 2009
Summary of Results
Segment pre-tax adjusted operating income increased $0.7, primarily the result of an improved
loss ratio. For third quarter 2010, the loss ratio was 66.5%, down from 67.3% for the same period
in 2009, which was driven by an improved loss ratio on our limited benefit medical product. The
loss ratio for the medical stop-loss business remained flat on slightly higher premiums compared
with third quarter 2009. Our medical stop-loss business results were affected by one large
unprofitable case, scheduled to terminate in the fourth quarter, with an estimated loss ratio in
excess of 95%. Without this case, the third quarter 2010 group loss ratio would have been 65.3% and
the medical stop-loss — loss ratio would have been 67.5%.
In addition to the drivers discussed above, we consider the following information regarding
operating revenues and benefits and expenses useful in understanding our results.
Operating Revenues
Policy fees, contract charges, and other decreased $1.5 primarily due to a reduction in
revenue from our third party administrator, which was sold in the third quarter of 2009. This
reduction in revenue was fully offset by a corresponding reduction in
operating expenses as noted below. In
addition, fee revenue from our managing general underwriting services declined $0.7 as higher
claims experience led to lower profit sharing revenue.
Benefits and Expenses
The slight reduction in other underwriting and operating expenses was primarily the result of
the sale of our third party administrator, as noted above.
Nine Months Ended September 30, 2010 Compared to the Nine Months Ended September 30, 2009
Summary of Results
Segment pre-tax adjusted operating income increased $5.9 as a result of an improved loss
ratio. We experienced an overall decrease in the number and severity of medical stop-loss claims,
as well as strong underwriting results on our limited benefit medical product. For the nine months
ended September 30, 2010, the loss ratio was 66.4%, down from 67.8% for the same period in 2009.
38
In addition to the drivers discussed above, we consider the following information regarding
operating revenues and benefits and expenses useful in understanding our results.
Operating Revenues
Policy fees, contract charges, and other decreased $4.1 primarily due to a reduction in
revenue from our third party administrator, which was sold in the third quarter of 2009. This
reduction in revenue was fully offset by a corresponding reduction in operating expenses.
Benefits and Expenses
The $4.6 decrease in other underwriting and operating expenses was the result of the sale of
our third party administrator, described above.
Retirement Services
The following table sets forth the results of operations relating to our Retirement Services
segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
QTD |
|
|
Nine Months Ended |
|
|
YTD |
|
|
|
September 30, |
|
|
Variance (%) |
|
|
September 30, |
|
|
Variance (%) |
|
|
|
2010 |
|
|
2009 |
|
|
2010 vs. 2009 |
|
|
2010 |
|
|
2009 |
|
|
2010 vs. 2009 |
|
Operating revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
$ |
119.0 |
|
|
$ |
103.5 |
|
|
|
15.0 |
% |
|
$ |
342.1 |
|
|
$ |
281.8 |
|
|
|
21.4 |
% |
Policy fees, contract charges, and other |
|
|
4.7 |
|
|
|
4.6 |
|
|
|
2.2 |
|
|
|
14.3 |
|
|
|
12.4 |
|
|
|
15.3 |
|
Net investment gains (losses) on FIA options |
|
|
0.3 |
|
|
|
1.4 |
|
|
|
(78.6 |
) |
|
|
(0.9 |
) |
|
|
0.2 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues |
|
|
124.0 |
|
|
|
109.5 |
|
|
|
13.2 |
|
|
|
355.5 |
|
|
|
294.4 |
|
|
|
20.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder benefits and claims |
|
|
(0.5 |
) |
|
|
(1.3 |
) |
|
|
61.5 |
|
|
|
0.2 |
|
|
|
(2.2 |
) |
|
|
* |
|
Interest credited |
|
|
75.7 |
|
|
|
70.5 |
|
|
|
7.4 |
|
|
|
214.6 |
|
|
|
187.2 |
|
|
|
14.6 |
|
Other underwriting and operating expenses |
|
|
13.0 |
|
|
|
13.6 |
|
|
|
(4.4 |
) |
|
|
40.2 |
|
|
|
41.3 |
|
|
|
(2.7 |
) |
Amortization of deferred policy acquisition costs |
|
|
13.3 |
|
|
|
10.5 |
|
|
|
26.7 |
|
|
|
40.1 |
|
|
|
26.8 |
|
|
|
49.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses |
|
|
101.5 |
|
|
|
93.3 |
|
|
|
8.8 |
|
|
|
295.1 |
|
|
|
253.1 |
|
|
|
16.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pre-tax adjusted operating income |
|
$ |
22.5 |
|
|
$ |
16.2 |
|
|
|
38.9 |
% |
|
$ |
60.4 |
|
|
$ |
41.3 |
|
|
|
46.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
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
Retirement Services segment as of, or for the three and nine months ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Account values — Fixed annuities |
|
$ |
8,805.6 |
|
|
$ |
7,464.1 |
|
|
|
|
|
|
|
|
|
Account values — Variable annuities |
|
|
742.6 |
|
|
|
736.9 |
|
|
|
|
|
|
|
|
|
Interest spread on average account values(1) |
|
|
1.85 |
% |
|
|
1.90 |
% |
|
|
1.89 |
% |
|
|
1.81 |
% |
Total sales(2) |
|
$ |
286.4 |
|
|
$ |
486.9 |
|
|
$ |
1,287.8 |
|
|
$ |
1,966.5 |
|
|
|
|
(1) |
|
Interest spread is the difference between net investment yield
earned and the credited interest rate to policyholders. The
investment yield is the approximate yield on invested assets in
the general account attributed to the segment. The credited
interest rate is the approximate rate credited on policyholder
fixed account values within the segment. Interest credited is
subject to contractual terms, including minimum guarantees. |
|
(2) |
|
Total sales represent deposits for new policies. |
39
Three Months Ended September 30, 2010 Compared to the Three Months Ended September 30, 2009
Summary of Results
Segment pre-tax adjusted operating income increased $6.3. This was driven by a $10.3 increase
in the investment margin from record high account values driven by strong sales in 2009 and 2010,
and carrying lower average daily cash balances. In addition, the margin on our FIA product
increased $3.1 as a result of a lower interest credited, consistent with the smaller growth in the
S&P 500 index during the third quarter 2010 compared to the prior year. This was partially offset
by a $2.8 increase in DAC amortization on a growing DAC balance.
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 $15.5, which was driven by a $1.3 billion increase in average
invested assets from increased fixed annuities account values. Net investment gains on FIA options
decreased $1.1 to $0.3 in the third quarter of 2010 compared to $1.4 for the same period in 2009.
The S&P 500 index increased 10.7% in the third quarter of 2010, as compared to a 15.0% increase in
the third quarter of 2009. Average daily cash balances decreased $220.0 to $54.4 for the third
quarter of 2010 compared to $274.4 for the same period in 2009.
Benefits and Expenses
Interest credited increased $5.2, which is primarily due to a $1.3 billion increase in fixed
annuities account values over the year. This was partially offset by a $4.1 decrease in FIA
interest credited as the S&P 500 index increased less in the third quarter of 2010 as compared to
the same period in 2009.
Amortization of DAC increased $2.8, which was primarily driven by a growing block of business
and corresponding growth in our DAC asset.
Nine Months Ended September 30, 2010 Compared to the Nine Months Ended September 30, 2009
Summary of Results
Segment pre-tax adjusted operating income increased $19.1 driven by a $32.9 increase in the
investment margin from a higher interest spread on record high account values. This was partially
offset by a $13.3 increase in DAC amortization.
In addition to the drivers discussed above, we consider the following information regarding
operating revenues and benefits and expenses useful in understanding our results.
Operating Revenues
Net investment income increased $60.3, which was driven by a $1.5 billion increase in average
invested assets from increased fixed annuities account values. Further growth of net investment
income was limited in 2009 and the first half of 2010 as sales during a tight credit market have
resulted in us carrying higher levels of cash than during normal economic periods, which earn lower
yields. We began investing in treasury securities in second quarter 2010, as a strategy to help
reduce cash levels and increase yields.
Benefits and Expenses
Interest credited increased $27.4 primarily due to a $1.3 billion increase in fixed account
values driven by strong sales of fixed deferred annuity products in 2009 and 2010.
Amortization of DAC increased $13.3, which was primarily driven by a growing block of business
and corresponding growth in our DAC asset.
40
Income Annuities
The following table sets forth the results of operations relating to our Income Annuities
segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
QTD |
|
|
Nine Months Ended |
|
|
YTD |
|
|
|
September 30, |
|
|
Variance (%) |
|
|
September 30, |
|
|
Variance (%) |
|
|
|
2010 |
|
|
2009 |
|
|
2010 vs. 2009 |
|
|
2010 |
|
|
2009 |
|
|
2010 vs. 2009 |
|
Operating revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
$ |
105.6 |
|
|
$ |
104.7 |
|
|
|
0.9 |
% |
|
$ |
314.3 |
|
|
$ |
318.1 |
|
|
|
(1.2 |
)% |
Policy fees, contract charges, and other |
|
|
0.1 |
|
|
|
0.1 |
|
|
|
— |
|
|
|
0.5 |
|
|
|
0.4 |
|
|
|
25.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues |
|
|
105.7 |
|
|
|
104.8 |
|
|
|
0.9 |
|
|
|
314.8 |
|
|
|
318.5 |
|
|
|
(1.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest credited |
|
|
90.1 |
|
|
|
90.7 |
|
|
|
(0.7 |
) |
|
|
275.0 |
|
|
|
268.7 |
|
|
|
2.3 |
|
Other underwriting and operating expenses |
|
|
5.5 |
|
|
|
5.4 |
|
|
|
1.9 |
|
|
|
16.0 |
|
|
|
15.6 |
|
|
|
2.6 |
|
Amortization of deferred policy acquisition costs |
|
|
0.6 |
|
|
|
0.4 |
|
|
|
50.0 |
|
|
|
1.5 |
|
|
|
1.2 |
|
|
|
25.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses |
|
|
96.2 |
|
|
|
96.5 |
|
|
|
(0.3 |
) |
|
|
292.5 |
|
|
|
285.5 |
|
|
|
2.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pre-tax adjusted operating income |
|
$ |
9.5 |
|
|
$ |
8.3 |
|
|
|
14.5 |
% |
|
$ |
22.3 |
|
|
$ |
33.0 |
|
|
|
(32.4 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth selected historical operating metrics relating to our Income
Annuities segment as of, or for the three and nine months ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Reserves(1) |
|
$ |
6,676.8 |
|
|
$ |
6,722.7 |
|
|
|
|
|
|
|
|
|
Interest spread on reserves(2) |
|
|
0.59 |
% |
|
|
0.48 |
% |
|
|
0.50 |
% |
|
|
0.56 |
% |
Mortality gains (losses)(3) |
|
$ |
(0.1 |
) |
|
$ |
— |
|
|
$ |
(2.0 |
) |
|
$ |
3.8 |
|
Prepayment speed adjustment on mortgage-backed securities(4) |
|
|
0.1 |
|
|
|
— |
|
|
|
(0.2 |
) |
|
|
2.5 |
|
Total sales(5) |
|
|
58.0 |
|
|
|
70.7 |
|
|
|
192.1 |
|
|
|
168.0 |
|
|
|
|
(1) |
|
Reserves represent the present value of future income annuity benefits and assumed expenses, discounted by the assumed interest rate.
This metric represents the amount of our in-force book of business. |
|
(2) |
|
Interest spread is the difference between net investment yield earned and the credited interest rate on policyholder reserves. The
investment yield is the approximate yield on invested assets, excluding equities, in the general account attributed to the segment. The
credited interest rate is the approximate rate credited on policyholder reserves and excludes the gains and losses from funding services
and mortality. |
|
(3) |
|
Mortality gains (losses) represent the difference between actual and expected reserves released on death of our life contingent annuities. |
|
(4) |
|
Prepayment speed adjustment on mortgage-backed securities is the impact to net investment income due to the change in prepayment speeds
on the underlying collateral of mortgage-backed securities. |
|
(5) |
|
Sales represent deposits for new policies. |
Three Months Ended September 30, 2010 Compared to the Three Months Ended September 30, 2009
Summary of Results
Segment pre-tax adjusted operating income increased $1.2 due to a higher interest spread on
slightly lower reserves. To help combat the low interest rate environment, we continued to be very
diligent in our product pricing and also focused on improving our yield by increasing mortgage loan
originations, generating attractive yields. Reserves, while relatively stable, fell slightly as
benefit payments exceeded deposits and interest credited.
In addition to the drivers discussed above, we consider the following information regarding
operating revenues and benefits and expenses useful in understanding our results.
41
Operating Revenues
Net investment income increased $0.9 primarily driven by an improvement in our return on
invested assets. Investment yields increased to 6.09% from 6.00%, which was primarily due to
increased investments in commercial mortgages, increased fees associated with early redemptions on
fixed maturities, and lower average daily cash balances.
Nine Months Ended September 30, 2010 Compared to the Nine Months Ended September 30, 2009
Summary of Results
Segment pre-tax adjusted operating income decreased $10.7 primarily due to mortality losses of
$2.0 for the nine months ended September 30, 2010 compared to gains of $3.8 for the same period in
2009. Also contributing to the decrease was a lower interest spread driven by changes in prepayment
speeds on mortgage-backed securities and the negative impacts of prepayments and maturities leading
to reinvestment in lower yielding assets, and a $2.5 decrease in gains from funding services’
activities.
In addition to the drivers discussed above, we consider the following information regarding
operating revenues and benefits and expenses useful in understanding our results.
Operating Revenues
Net investment income decreased $3.8 primarily driven by a reduction in our return on invested
assets. Yields decreased to 6.03% from 6.07%, which was primarily the result of changes in payment
speeds on mortgage-backed securities, the negative impacts of prepayments and the reinvestment of
prepayments in lower yielding assets. These reductions in the yield were partially offset by
returns on our growing portfolio of mortgage loans, which offer more attractive yields.
Benefits and Expenses
Interest credited increased $6.3 primarily driven by a $5.8 fluctuation in our mortality
experience as we experienced unusually high mortality gains of $3.8 in the first nine months of
2009 versus mortality losses of $2.0 in the first nine months of 2010. The gains from the first
quarter of 2009 were the highest quarterly mortality gains we experienced over the past five years.
Individual
The following table sets forth the results of operations relating to our Individual segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
QTD |
|
|
Nine Months Ended |
|
|
YTD |
|
|
|
September 30, |
|
|
Variance (%) |
|
|
September 30, |
|
|
Variance (%) |
|
|
|
2010 |
|
|
2009 |
|
|
2010 vs. 2009 |
|
|
2010 |
|
|
2009 |
|
|
2010 vs. 2009 |
|
Operating revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums |
|
$ |
10.3 |
|
|
$ |
10.1 |
|
|
|
2.0 |
% |
|
$ |
30.2 |
|
|
$ |
28.8 |
|
|
|
4.9 |
% |
Net investment income |
|
|
67.5 |
|
|
|
66.9 |
|
|
|
0.9 |
|
|
|
201.9 |
|
|
|
198.0 |
|
|
|
2.0 |
|
Policy fees, contract charges, and other |
|
|
29.6 |
|
|
|
28.5 |
|
|
|
3.9 |
|
|
|
88.5 |
|
|
|
87.1 |
|
|
|
1.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues |
|
|
107.4 |
|
|
|
105.5 |
|
|
|
1.8 |
|
|
|
320.6 |
|
|
|
313.9 |
|
|
|
2.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder benefits and claims |
|
|
12.8 |
|
|
|
15.2 |
|
|
|
(15.8 |
) |
|
|
39.2 |
|
|
|
44.4 |
|
|
|
(11.7 |
) |
Interest credited |
|
|
63.1 |
|
|
|
60.0 |
|
|
|
5.2 |
|
|
|
180.7 |
|
|
|
175.7 |
|
|
|
2.8 |
|
Other underwriting and operating expenses |
|
|
14.2 |
|
|
|
13.4 |
|
|
|
6.0 |
|
|
|
40.3 |
|
|
|
39.6 |
|
|
|
1.8 |
|
Amortization of deferred policy acquisition costs |
|
|
2.0 |
|
|
|
1.0 |
|
|
|
* |
|
|
|
2.8 |
|
|
|
2.6 |
|
|
|
7.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses |
|
|
92.1 |
|
|
|
89.6 |
|
|
|
2.8 |
|
|
|
263.0 |
|
|
|
262.3 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pre-tax adjusted operating income |
|
$ |
15.3 |
|
|
$ |
15.9 |
|
|
|
(3.8 |
)% |
|
$ |
57.6 |
|
|
$ |
51.6 |
|
|
|
11.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Represents percentage variances that are not meaningful or are explained through the discussion of other variances. |
42
The following table sets forth selected historical operating metrics relating to our
Individual segment as of, or for the three and nine months ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Insurance in force(1) |
|
$ |
49,792.9 |
|
|
$ |
50,215.6 |
|
|
|
|
|
|
|
|
|
Mortality ratio(2) |
|
|
71.1 |
% |
|
|
72.7 |
% |
|
|
77.9 |
% |
|
|
77.9 |
% |
BOLI account value(3) |
|
$ |
3,969.7 |
|
|
$ |
3,754.9 |
|
|
|
|
|
|
|
|
|
UL account value(3) |
|
|
596.9 |
|
|
|
584.8 |
|
|
|
|
|
|
|
|
|
BOLI ROA(4) |
|
|
0.92 |
% |
|
|
1.09 |
% |
|
|
1.09 |
% |
|
|
1.23 |
% |
UL interest spread(5) |
|
|
1.57 |
% |
|
|
1.27 |
% |
|
|
1.49 |
% |
|
|
1.24 |
% |
Total sales, excluding BOLI(6) |
|
$ |
2.6 |
|
|
$ |
2.9 |
|
|
$ |
7.8 |
|
|
$ |
7.8 |
|
BOLI sales(7) |
|
|
7.5 |
|
|
|
— |
|
|
|
10.2 |
|
|
|
2.5 |
|
|
|
|
(1) |
|
Insurance in force represents dollar face amounts of policies. |
|
(2) |
|
Mortality ratio represents actual mortality experience (excluding BOLI) as a percentage of industry mortality
ratio benchmark. This benchmark is an expected level of claims derived by applying our current in force
business to the Society of Actuaries 1990-95 Basic Select and Ultimate Mortality Table. |
|
(3) |
|
BOLI account value and UL account value represent our liability to our policyholders. |
|
(4) |
|
BOLI ROA is a measure of the gross margin on our BOLI book of business. This metric is calculated as the
difference between our BOLI revenue earnings rate and our BOLI policy benefits rate. The revenue earnings
rate is calculated as revenues divided by average invested assets. The policy benefits rate is calculated as
total policy benefits divided by average account value. The policy benefits used in this metric do not
include expenses. |
|
(5) |
|
UL interest spread is the difference between net investment yield earned and the credited interest rate to
policyholders. The investment yield is the approximate yield on invested assets in the general account
attributed to the UL policies. The credited interest rate is the approximate rate credited on UL policyholder
fixed account values. Interest credited to UL policyholders’ account values is subject to contractual terms,
including minimum guarantees. Interest credited tends to move gradually over time to reflect actions by
management to respond to competitive pressures and profit targets. The 2010 year-to-date third quarter
credited rate to policyholders has been adjusted to exclude a reserve adjustment related to a persistency
bonus. Without this adjustment, the 2010 year-to-date third quarter the UL interest spread would have been
2.83%. |
|
(6) |
|
Total sales, excluding BOLI represents annualized first year premiums, and 10% of single premium new deposits. |
|
(7) |
|
BOLI sales represent 10% of new BOLI total deposits. |
Three Months Ended September 30, 2010 Compared to the Three Months Ended September 30, 2009
Summary of Results
Segment pre-tax adjusted operating income decreased $0.6, primarily due to a $1.2 decrease
attributed to the reduction in the BOLI ROA, driven by increased claims and a decrease in the
benefit related to the PGAAP reserve amortization, and a $1.0 increase in DAC amortization. These
were partially offset by a $0.9 reduction in claims, excluding BOLI, mainly on our Term products.
In addition to the drivers discussed above, we consider the following information regarding
operating revenues and benefits and expenses useful in understanding our results.
Benefits and Expenses
Policyholder benefits and claims decreased $2.4 driven by the reduction in Term claims and
BOLI separate account claims, offset by increased BOLI general account claims. Decreased BOLI
separate account claims were offset by increased interest credited.
The $1.0 increase in DAC amortization was the result of unlocking of $0.4 during the current
quarter and increased amortization on a higher DAC balance.
43
Nine Months Ended September 30, 2010 Compared to the Nine Months Ended September 30, 2009
Summary of Results
Segment pre-tax adjusted operating income increased $6.0 primarily due to a $7.0 increase in
the gross margin on our UL products, partially offset by a decrease attributed to the reduction in
the BOLI ROA. The increase in the UL gross margin was related to a 2010 first quarter credited rate
reduction, discussed in further detail below.
In addition to the drivers discussed above, we consider the following information regarding
operating revenues and benefits and expenses useful in understanding our results.
Benefits and Expenses
Due to the continued low interest rate environment, the credited interest rate on a universal
life product is being adjusted downward to the guaranteed minimum rate. For these policies, bonus
interest is not earned if the credited rate is equal to the guaranteed minimum. As a result, during
the first quarter of 2010, we released bonus interest reserves recorded in policyholder benefits
and claims, which was reflected in the increase in UL gross margin. This was partially offset by a
decrease in the BOLI ROA, which was driven by a $3.6 decrease in the benefit related to PGAAP
reserve amortization and increased BOLI claims. We experienced higher surrenders of policies with
associated PGAAP reserves in 2009 compared to 2010.
Other
The following table sets forth the results of operations relating to our Other segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
QTD |
|
|
Nine Months Ended |
|
|
YTD |
|
|
|
September 30, |
|
|
Variance (%) |
|
|
September 30, |
|
|
Variance (%) |
|
|
|
2010 |
|
|
2009 |
|
|
2010 vs. 2009 |
|
|
2010 |
|
|
2009 |
|
|
2010 vs. 2009 |
|
Operating revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
$ |
7.6 |
|
|
$ |
4.0 |
|
|
|
90.0 |
% |
|
$ |
16.0 |
|
|
$ |
18.2 |
|
|
|
(12.1 |
)% |
Policy fees, contract charges, and other |
|
|
3.8 |
|
|
|
2.8 |
|
|
|
35.7 |
|
|
|
11.3 |
|
|
|
7.9 |
|
|
|
43.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues |
|
|
11.4 |
|
|
|
6.8 |
|
|
|
67.6 |
|
|
|
27.3 |
|
|
|
26.1 |
|
|
|
4.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest credited |
|
|
(1.1 |
) |
|
|
(0.7 |
) |
|
|
(57.1 |
) |
|
|
(2.5 |
) |
|
|
(2.4 |
) |
|
|
(4.2 |
) |
Other underwriting and operating expenses |
|
|
5.0 |
|
|
|
3.7 |
|
|
|
35.1 |
|
|
|
15.3 |
|
|
|
10.5 |
|
|
|
45.7 |
|
Interest expense |
|
|
8.0 |
|
|
|
7.9 |
|
|
|
1.3 |
|
|
|
23.9 |
|
|
|
23.8 |
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses |
|
|
11.9 |
|
|
|
10.9 |
|
|
|
9.2 |
|
|
|
36.7 |
|
|
|
31.9 |
|
|
|
15.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pre-tax adjusted operating loss |
|
$ |
(0.5 |
) |
|
$ |
(4.1 |
) |
|
|
87.8 |
% |
|
$ |
(9.4 |
) |
|
$ |
(5.8 |
) |
|
|
(62.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2010 Compared to the Three Months Ended September 30, 2009
Summary of Results
Our Other segment reported pre-tax adjusted operating losses of $0.5 for the third quarter of
2010 compared with losses of $4.1 for the same period in 2009. This was due primarily to an
increase in investment income from increased average invested assets, primarily from the IPO
proceeds. In addition, income from our private equity and hedge funds increased to $2.1 for the
third quarter 2010 compared to $1.3 for 2009. Contributing to the current period loss was stock
compensation expenses of $0.5 and charges totaling $0.3 related to senior management transitions.
Nine Months Ended September 30, 2010 Compared to the Nine Months Ended September 30, 2009
Summary of Results
Our Other segment reported pre-tax adjusted operating losses of $9.4 and $5.8, for the nine
months ended September 30, 2010 and 2009, respectively. This was due to a $6.0 decrease in private
equity and hedge funds income, as our investment in these funds were substantially liquidated,
primarily in the second half of 2009. This decrease was partially offset by a $3.8 increase in
44
investment income mainly from increased average invested assets, primarily the IPO proceeds.
Also contributing to the current period loss were charges totaling $1.6 related to transition
expenses in connection with our CEO and other senior management positions.
Investments
Our investment portfolio is structured with the objective of supporting the expected cash
flows of our liabilities and to produce stable returns over the long term. The composition of our
portfolio reflects our asset management philosophy of protecting principal and receiving
appropriate reward for credit risk. Our investment portfolio mix as of September 30, 2010, was
largely comprised of high quality fixed maturities and commercial mortgage loans, as well as a
smaller allocation of high yield fixed maturities, marketable equity securities, investments in
limited partnerships (which includes affordable housing, private equity and hedge funds) and other
investments. We believe that prudent levels of investments in marketable equity securities within
our investment portfolio offer enhanced long term, after-tax total returns to support a portion of
our longest duration liabilities.
The following table presents the composition of our investment portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2010 |
|
|
As of December 31, 2009 |
|
Types of Investments |
|
Amount |
|
|
% of Total |
|
|
Amount |
|
|
% of Total |
|
Fixed maturities, available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public |
|
$ |
20,552.2 |
|
|
|
87.8 |
% |
|
$ |
17,693.0 |
|
|
|
87.7 |
% |
Private |
|
|
897.9 |
|
|
|
3.8 |
|
|
|
901.3 |
|
|
|
4.5 |
|
Marketable equity securities, available-for-sale(1) |
|
|
45.4 |
|
|
|
0.2 |
|
|
|
36.7 |
|
|
|
0.2 |
|
Marketable equity securities, trading(2) |
|
|
158.8 |
|
|
|
0.7 |
|
|
|
154.1 |
|
|
|
0.7 |
|
Mortgage loans, net |
|
|
1,493.4 |
|
|
|
6.4 |
|
|
|
1,199.6 |
|
|
|
5.9 |
|
Policy loans |
|
|
71.7 |
|
|
|
0.3 |
|
|
|
73.9 |
|
|
|
0.4 |
|
Investments in limited partnerships(3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private equity and hedge funds |
|
|
38.5 |
|
|
|
0.2 |
|
|
|
24.7 |
|
|
|
0.1 |
|
Affordable housing projects |
|
|
130.6 |
|
|
|
0.5 |
|
|
|
85.5 |
|
|
|
0.4 |
|
Other invested assets |
|
|
12.0 |
|
|
|
0.1 |
|
|
|
12.2 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
23,400.5 |
|
|
|
100.0 |
% |
|
$ |
20,181.0 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amount primarily represents non-redeemable preferred stock. |
|
(2) |
|
Amount represents investments in common stock. |
|
(3) |
|
Investments in private equity and hedge funds are carried at fair
value, while our investments in affordable housing projects and
state tax credits are carried at amortized cost. In 2009, we
submitted liquidation notices to all of our hedge fund
partnerships. As of September 30, 2010, our remaining investment
in hedge funds was $3.7. |
The increase in invested assets during the first nine months of 2010 is primarily due to
a net increase in the fair value of our fixed maturities, and portfolio growth generated by sales
of fixed deferred annuities and net proceeds from our IPO. As of September 30, 2010, the fair value
of our fixed maturities increased $1,513.1 from a $40.6 net unrealized gain as of December 31, 2009
to a $1,553.7 net unrealized gain as of September 30, 2010. Despite the year to date 2010
improvements in the equity markets, we continued to see treasury yields decline; a slight widening
of fixed income spreads to partially offset the decline in treasury yields; and sporadic new bond
issuances in 2010.
45
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
|
September 30, 2010 |
|
|
September 30, 2009 |
|
|
|
Yield(1) |
|
|
Amount |
|
|
Yield(1) |
|
|
Amount |
|
Types of Investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities, available-for-sale |
|
|
5.70 |
% |
|
$ |
282.0 |
|
|
|
5.90 |
% |
|
$ |
267.0 |
|
Marketable equity securities, available-for-sale |
|
|
4.43 |
|
|
|
0.6 |
|
|
|
4.41 |
|
|
|
0.6 |
|
Marketable equity securities, trading |
|
|
1.92 |
|
|
|
0.7 |
|
|
|
1.70 |
|
|
|
0.7 |
|
Mortgage loans, net |
|
|
6.53 |
|
|
|
23.2 |
|
|
|
6.40 |
|
|
|
17.2 |
|
Policy loans |
|
|
5.99 |
|
|
|
1.1 |
|
|
|
6.16 |
|
|
|
1.1 |
|
Investments in limited partnerships: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private equity and hedge funds |
|
|
22.93 |
|
|
|
2.1 |
|
|
|
9.50 |
|
|
|
1.3 |
|
Affordable housing(2) |
|
|
(6.21 |
) |
|
|
(2.4 |
) |
|
|
(7.79 |
) |
|
|
(2.2 |
) |
Other income producing assets(3) |
|
|
2.22 |
|
|
|
1.8 |
|
|
|
2.01 |
|
|
|
2.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross investment income before investment expenses |
|
|
5.62 |
|
|
|
309.1 |
|
|
|
5.72 |
|
|
|
288.5 |
|
Investment expenses |
|
|
(0.09 |
) |
|
|
(4.7 |
) |
|
|
(0.10 |
) |
|
|
(4.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
|
5.53 |
% |
|
$ |
304.4 |
|
|
|
5.62 |
% |
|
$ |
283.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Yields are determined based on monthly averages calculated
using beginning and end-of-period balances. Yields are
based on carrying values except for fixed maturities and
equity securities. Yields for fixed maturities are based
on amortized cost. Yields for equity securities are based
on cost. |
|
(2) |
|
The negative yield from affordable housing investments is
offset by U.S. federal income tax benefits. The resulting
overall impact to net income was $1.0 and $0.9 for the
three months ended September 30, 2010 and 2009,
respectively. |
|
(3) |
|
Other income producing assets includes income from other
invested assets, short-term investments and cash and cash
equivalents. |
For the three months ended September 30, 2010, net investment income increased 7.3% compared
to the same period in 2009, driven by an increase in invested assets on strong sales of our fixed
deferred annuities in 2009 and 2010. In addition, income from mortgage loans increased as we
continue to grow our mortgage loan portfolio. These increases were partially offset by a decrease
in net investment yields, which decreased to 5.53% in 2010 from 5.62% in 2009. The reduction in
yields is the effect of the low interest rate environment — we have experienced lower yields on
recent purchases of fixed maturities, and negative impacts from prepayments of mortgage-backed
securities. Included in these negative impacts were the reinvestment of the funds at lower yields
and the write-off of unamortized fixed maturities’ premium.
For the three months ended September 30, 2010, and 2009 the Company had average daily cash
balances of $224.2 and $530.6, respectively. The decrease in average daily cash balances is
primarily attributable to a slight improvement in the credit markets, and investing in treasury
securities as we continue to look for high quality, higher yielding investments.
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, 2010 |
|
|
September 30, 2009 |
|
|
|
Yield(1) |
|
|
Amount |
|
|
Yield(1) |
|
|
Amount |
|
|
|
|
|
|
|
(Dollars in millions) |
|
|
|
|
|
Types of Investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities, available-for-sale |
|
|
5.75 |
% |
|
$ |
833.4 |
|
|
|
5.93 |
% |
|
$ |
781.4 |
|
Marketable equity securities, available-for-sale |
|
|
5.77 |
|
|
|
2.3 |
|
|
|
5.76 |
|
|
|
2.3 |
|
Marketable equity securities, trading |
|
|
1.88 |
|
|
|
2.2 |
|
|
|
1.61 |
|
|
|
1.9 |
|
Mortgage loans, net |
|
|
6.39 |
|
|
|
62.9 |
|
|
|
6.34 |
|
|
|
49.3 |
|
Policy loans |
|
|
5.97 |
|
|
|
3.3 |
|
|
|
5.91 |
|
|
|
3.3 |
|
Investments in limited partnerships: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private equity and hedge funds |
|
|
10.73 |
|
|
|
2.6 |
|
|
|
17.87 |
|
|
|
8.6 |
|
Affordable housing(2) |
|
|
(6.58 |
) |
|
|
(6.7 |
) |
|
|
(8.65 |
) |
|
|
(6.9 |
) |
Other income producing assets(3) |
|
|
1.21 |
|
|
|
3.6 |
|
|
|
1.00 |
|
|
|
4.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross investment income before investment expenses |
|
|
5.61 |
|
|
|
903.6 |
|
|
|
5.74 |
|
|
|
843.9 |
|
Investment expenses |
|
|
(0.10 |
) |
|
|
(15.2 |
) |
|
|
(0.10 |
) |
|
|
(14.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
|
5.51 |
% |
|
$ |
888.4 |
|
|
|
5.64 |
% |
|
$ |
829.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Yields are determined based on monthly averages calculated
using beginning and end-of-period balances. Yields are
based on carrying values except for fixed maturities and
equity securities. Yields for fixed maturities are based
on amortized cost. Yields for equity securities are based
on cost. |
|
(2) |
|
The negative yield from affordable housing investments is
offset by U.S. federal income tax benefits. The resulting
impact to net income was $3.8 and $2.7 for the nine months
ended September 30, 2010 and 2009, respectively. |
|
(3) |
|
Other income producing assets includes income from other
invested assets, short-term investments and cash and cash
equivalents. |
For the nine months ended September 30, 2010, net investment income increased 7.1% compared to
the same period in 2009, driven by an increase in invested assets on strong sales of our fixed
deferred annuities in 2009 and 2010 and increased assets related to our IPO proceeds. In addition,
income from mortgage loans increased as we continue to grow our mortgage loan portfolio. These were
partially offset by a decrease in net investment yields, which decreased to 5.51% in 2010 from
5.64% in 2009. The reduction in yields is the effect of the low interest rate environment — we
have experienced lower yields on recent purchases of fixed maturities, and negative impacts from
prepayments of mortgage-backed securities. Included in these negative impacts were the reinvestment
of the funds at lower yields and the write-off of unamortized fixed maturities’ premium. In
addition, investment income decreased due to a $6.0 decrease in private equity and hedge funds
income, with gains of $2.6 compared to $8.6 for the nine months ended September 30, 2010 and 2009,
respectively, primarily the result of the decrease in hedge fund assets which were primarily
liquidated in the second half of 2009.
For the nine months ended September 30, 2010 and 2009, the Company had average daily cash
balances of $297.4 and $470.8, respectively. The decrease in average daily cash balances is
attributable to investing in U.S. treasury securities.
Net Realized Investment Gains (Losses)
In the third quarter 2010, equity markets rebounded which led to net gains on our trading
securities for the quarter, but remained below prior period levels for 2009, as illustrated in the
following table. Our portfolio produced total net realized gains for the nine months ended
September 30, 2010 as compared to losses for the same period in 2009, primarily due to a
significant reduction in impairments.
47
The following table sets forth the detail of our net realized investment gains (losses) before
taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Gross realized gains on sales of fixed maturities |
|
$ |
6.6 |
|
|
$ |
10.7 |
|
|
$ |
24.0 |
|
|
$ |
17.0 |
|
Gross realized losses on sales of fixed maturities |
|
|
(2.1 |
) |
|
|
(12.7 |
) |
|
|
(3.4 |
) |
|
|
(14.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public fixed maturities(1) |
|
|
(0.5 |
) |
|
|
(14.7 |
) |
|
|
(4.3 |
) |
|
|
(42.6 |
) |
Private fixed maturities |
|
|
(2.1 |
) |
|
|
(0.8 |
) |
|
|
(7.2 |
) |
|
|
(4.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total credit-related |
|
|
(2.6 |
) |
|
|
(15.5 |
) |
|
|
(11.5 |
) |
|
|
(47.5 |
) |
Other |
|
|
(0.9 |
) |
|
|
(1.9 |
) |
|
|
(3.2 |
) |
|
|
(26.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impairments |
|
|
(3.5 |
) |
|
|
(17.4 |
) |
|
|
(14.7 |
) |
|
|
(73.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gains on trading securities |
|
|
15.2 |
|
|
|
21.6 |
|
|
|
14.0 |
|
|
|
25.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other net investment gains (losses)(2): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other gross gains |
|
|
6.0 |
|
|
|
10.1 |
|
|
|
14.4 |
|
|
|
25.2 |
|
Other gross losses |
|
|
(2.2 |
) |
|
|
(1.0 |
) |
|
|
(17.5 |
) |
|
|
(8.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment gains (losses) before taxes |
|
$ |
20.0 |
|
|
$ |
11.3 |
|
|
$ |
16.8 |
|
|
$ |
(29.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Public fixed maturities includes publicly traded securities and
highly marketable private placements for which there is an
actively traded market. |
|
(2) |
|
This primarily consists of changes in fair value on derivatives
instruments, gains (losses) on calls and redemptions, and the
impact of net realized investment gains (losses) on DAC and
deferred sales inducements. |
Impairments
We monitor our investments for indicators of possible credit-related impairments, with a focus
on securities that represent a significant risk of impairment, primarily securities for which the
fair value has declined below amortized cost by 20% or more for a period of six months or more, or
for which we have concerns about the creditworthiness of the issuer based on qualitative
information. When evaluating a security for possible impairment, we consider several factors, which
are described in more detail in Note 4 to the accompanying unaudited interim consolidated financial
statements.
Impairments for the three months ended September 30, 2010 and 2009 were $3.5 and $17.4,
respectively. This decrease was primarily attributable to reduced credit concerns as credit-related
impairments decreased $12.9. Impairments for the nine months ended September 30, 2010 and 2009 were
$14.7 and $73.7, respectively. This decrease was largely due to improved bond markets and reduced
credit concerns as credit-related impairments decreased $36.0. For those issuers in which we
recorded an impairment, we had remaining holdings with an amortized cost of $261.8 and a fair value
of $258.5 as of September 30, 2010.
Fixed Maturity Securities
Fixed maturities represented approximately 92% of invested assets as of both September 30,
2010 and December 31, 2009. As of September 30, 2010, publicly traded and privately placed fixed
maturities represented 95.8% and 4.2%, respectively, of our total fixed maturity portfolio at fair
value. We invest in privately placed fixed maturities to enhance the overall value of the
portfolio, increase diversification and obtain higher yields than can ordinarily be obtained with
comparable public market securities.
Fixed Maturity Securities Credit Quality
The Securities Valuation Office, or SVO, of the NAIC, evaluates the investments of insurers
for regulatory reporting purposes and assigns fixed maturities to one of the six categories called
“NAIC Designations.” NAIC designations of “1” or “2” include fixed maturities considered investment
grade, which generally include securities rated BBB- or higher by Standard & 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.
48
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 September 30, 2010 |
|
|
As of December 31, 2009 |
|
|
|
|
|
|
|
Amortized |
|
|
Fair |
|
|
% of Total |
|
|
Amortized |
|
|
Fair |
|
|
% of Total |
|
NAIC |
|
|
S&P Equivalent |
|
Cost |
|
|
Value |
|
|
Fair Value |
|
|
Cost |
|
|
Value |
|
|
Fair Value |
|
|
1 |
|
|
AAA, AA, A |
|
$ |
11,793.4 |
|
|
$ |
12,798.7 |
|
|
|
59.7 |
% |
|
$ |
10,917.3 |
|
|
$ |
11,031.3 |
|
|
|
59.3 |
% |
|
2 |
|
|
BBB |
|
|
7,095.0 |
|
|
|
7,681.7 |
|
|
|
35.8 |
|
|
|
6,471.3 |
|
|
|
6,530.9 |
|
|
|
35.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment grade |
|
|
18,888.4 |
|
|
|
20,480.4 |
|
|
|
95.5 |
|
|
|
17,388.6 |
|
|
|
17,562.2 |
|
|
|
94.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
BB |
|
|
589.9 |
|
|
|
570.4 |
|
|
|
2.7 |
|
|
|
717.9 |
|
|
|
641.3 |
|
|
|
3.5 |
|
|
4 |
|
|
B |
|
|
286.0 |
|
|
|
268.1 |
|
|
|
1.2 |
|
|
|
251.0 |
|
|
|
219.2 |
|
|
|
1.2 |
|
|
5 |
|
|
CCC & lower |
|
|
108.6 |
|
|
|
111.0 |
|
|
|
0.5 |
|
|
|
128.0 |
|
|
|
113.5 |
|
|
|
0.6 |
|
|
6 |
|
|
In or near default |
|
|
23.5 |
|
|
|
20.2 |
|
|
|
0.1 |
|
|
|
68.2 |
|
|
|
58.1 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total below investment grade |
|
|
1,008.0 |
|
|
|
969.7 |
|
|
|
4.5 |
|
|
|
1,165.1 |
|
|
|
1,032.1 |
|
|
|
5.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
$ |
19,896.4 |
|
|
$ |
21,450.1 |
|
|
|
100.0 |
% |
|
$ |
18,553.7 |
|
|
$ |
18,594.3 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2010 and December 31, 2009, securities with an amortized cost of $829.1
and $898.2, and fair value of $899.1 and $925.8, respectively, had no rating from a nationally
recognized securities rating agency. We derived the equivalent S&P credit quality rating for these
securities based on the securities’ NAIC rating designation.
Below investment grade securities comprised 4.5% and 5.6% of our fixed maturities portfolio as
of September 30, 2010 and December 31, 2009, respectively. Most of these securities were corporate
securities that were purchased while classified as below investment grade, high yield investments.
We had NAIC 5 and 6 designated securities with gross unrealized losses of $11.7 as of September 30,
2010, of which $10.4, or 88.9%, related to two issuers. These issuers are current on their
contractual payments and our analysis supports the recoverability of amortized cost.
Certain of our fixed maturities are supported by guarantees from monoline bond insurers. The
credit ratings of our fixed maturities set forth in the table above reflect, where applicable, the
guarantees provided by monoline bond insurers. As of September 30, 2010, fixed maturities with
monoline guarantees had an amortized cost of $562.4 and a fair value of $573.4, with gross
unrealized losses of $11.6. As of December 31, 2009, fixed maturities with monoline guarantees had
an amortized cost of $599.7 and a fair value of $559.8, with gross unrealized losses of $45.2. The
majority of these securities were municipal bonds. As of September 30, 2010, $544.7, or 95.0%, 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.
49
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 September 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other-Than- |
|
|
|
Cost or |
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
% of |
|
|
Temporary |
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
Total Fair |
|
|
Impairments |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
|
Value |
|
|
in AOCI |
|
Security Sector |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer discretionary |
|
$ |
1,491.1 |
|
|
$ |
119.4 |
|
|
$ |
(10.7 |
) |
|
$ |
1,599.8 |
|
|
|
7.4 |
% |
|
$ |
(2.8 |
) |
Consumer staples |
|
|
1,943.8 |
|
|
|
233.2 |
|
|
|
(6.4 |
) |
|
|
2,170.6 |
|
|
|
10.1 |
|
|
|
(1.4 |
) |
Energy |
|
|
652.2 |
|
|
|
74.9 |
|
|
|
(2.9 |
) |
|
|
724.2 |
|
|
|
3.4 |
|
|
|
— |
|
Financials |
|
|
2,090.2 |
|
|
|
106.0 |
|
|
|
(56.0 |
) |
|
|
2,140.2 |
|
|
|
10.0 |
|
|
|
(4.7 |
) |
Health care |
|
|
1,143.4 |
|
|
|
146.1 |
|
|
|
(1.2 |
) |
|
|
1,288.3 |
|
|
|
6.0 |
|
|
|
(1.9 |
) |
Industrials |
|
|
2,286.0 |
|
|
|
284.5 |
|
|
|
(4.0 |
) |
|
|
2,566.5 |
|
|
|
12.0 |
|
|
|
(0.4 |
) |
Information technology |
|
|
393.1 |
|
|
|
51.8 |
|
|
|
(0.1 |
) |
|
|
444.8 |
|
|
|
2.1 |
|
|
|
— |
|
Materials |
|
|
1,197.8 |
|
|
|
96.0 |
|
|
|
(28.3 |
) |
|
|
1,265.5 |
|
|
|
5.9 |
|
|
|
(12.7 |
) |
Telecommunication services |
|
|
579.2 |
|
|
|
50.4 |
|
|
|
(6.3 |
) |
|
|
623.3 |
|
|
|
2.9 |
|
|
|
(0.9 |
) |
Utilities |
|
|
1,799.9 |
|
|
|
168.7 |
|
|
|
(12.5 |
) |
|
|
1,956.1 |
|
|
|
9.1 |
|
|
|
(0.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total corporate securities |
|
|
13,576.7 |
|
|
|
1,331.0 |
|
|
|
(128.4 |
) |
|
|
14,779.3 |
|
|
|
68.9 |
|
|
|
(25.2 |
) |
U.S. government and agencies |
|
|
87.6 |
|
|
|
8.4 |
|
|
|
— |
|
|
|
96.0 |
|
|
|
0.5 |
|
|
|
(0.1 |
) |
State and political subdivisions |
|
|
468.8 |
|
|
|
12.1 |
|
|
|
(7.6 |
) |
|
|
473.3 |
|
|
|
2.2 |
|
|
|
(0.2 |
) |
Residential mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency |
|
|
3,170.8 |
|
|
|
204.3 |
|
|
|
(0.5 |
) |
|
|
3,374.6 |
|
|
|
15.7 |
|
|
|
— |
|
Non-agency: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prime |
|
|
374.5 |
|
|
|
5.9 |
|
|
|
(34.4 |
) |
|
|
346.0 |
|
|
|
1.6 |
|
|
|
(30.5 |
) |
Alt-A |
|
|
122.4 |
|
|
|
4.7 |
|
|
|
(7.7 |
) |
|
|
119.4 |
|
|
|
0.6 |
|
|
|
(8.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total residential mortgage-backed securities |
|
|
3,667.7 |
|
|
|
214.9 |
|
|
|
(42.6 |
) |
|
|
3,840.0 |
|
|
|
17.9 |
|
|
|
(39.1 |
) |
Commercial mortgage-backed securities |
|
|
1,766.9 |
|
|
|
152.3 |
|
|
|
(8.2 |
) |
|
|
1,911.0 |
|
|
|
8.9 |
|
|
|
(3.6 |
) |
Other debt obligations |
|
|
328.7 |
|
|
|
29.7 |
|
|
|
(7.9 |
) |
|
|
350.5 |
|
|
|
1.6 |
|
|
|
(8.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
19,896.4 |
|
|
$ |
1,748.4 |
|
|
$ |
(194.7 |
) |
|
$ |
21,450.1 |
|
|
|
100.0 |
% |
|
$ |
(76.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the nine months ended September 30, 2010 we increased our investments in corporate
securities with cash generated from sales, primarily fixed deferred annuities, and the proceeds
from our IPO. We have purchased new issues of investment grade corporate securities with a focus on
obtaining appropriate yields to match our policyholder liabilities while retaining quality. \
Our fixed maturities holdings are diversified by industry and issuer. The portfolio does
not have significant exposure to any single issuer. As of September 30, 2010 and December 31, 2009,
the fair value of our ten largest corporate securities holdings was $1,301.5 and $1,138.3, or 8.8%
and 9.1%, respectively. The fair value of our largest exposure to a single issuer of corporate
securities was $147.7, or 1.0%, and $141.9, or 1.1%, of our investments in corporate securities, as
of September 30, 2010 and December 31, 2009, respectively. As of September 30, 2010, we had $1.4
in direct exposure to the sovereign and local debt of Portugal, Ireland, Italy, Greece, and Spain.
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other-Than- |
|
|
|
Cost or |
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
% of |
|
|
Temporary |
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
Total Fair |
|
|
Impairments |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
|
Value |
|
|
in AOCI |
|
Security Sector |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer discretionary |
|
$ |
1,083.4 |
|
|
$ |
41.9 |
|
|
$ |
(27.8 |
) |
|
$ |
1,097.5 |
|
|
|
5.9 |
% |
|
$ |
(7.9 |
) |
Consumer staples |
|
|
1,686.4 |
|
|
|
84.3 |
|
|
|
(14.3 |
) |
|
|
1,756.4 |
|
|
|
9.4 |
|
|
|
(1.4 |
) |
Energy |
|
|
651.4 |
|
|
|
28.3 |
|
|
|
(8.8 |
) |
|
|
670.9 |
|
|
|
3.6 |
|
|
|
— |
|
Financials |
|
|
2,109.2 |
|
|
|
39.8 |
|
|
|
(189.2 |
) |
|
|
1,959.8 |
|
|
|
10.6 |
|
|
|
(5.8 |
) |
Health care |
|
|
861.1 |
|
|
|
59.1 |
|
|
|
(4.1 |
) |
|
|
916.1 |
|
|
|
4.9 |
|
|
|
(1.9 |
) |
Industrials |
|
|
2,022.3 |
|
|
|
90.3 |
|
|
|
(27.5 |
) |
|
|
2,085.1 |
|
|
|
11.2 |
|
|
|
(0.9 |
) |
Information technology |
|
|
357.2 |
|
|
|
27.9 |
|
|
|
(0.3 |
) |
|
|
384.8 |
|
|
|
2.1 |
|
|
|
— |
|
Materials |
|
|
1,111.7 |
|
|
|
39.1 |
|
|
|
(49.0 |
) |
|
|
1,101.8 |
|
|
|
5.9 |
|
|
|
(12.7 |
) |
Telecommunication services |
|
|
572.0 |
|
|
|
20.3 |
|
|
|
(16.7 |
) |
|
|
575.6 |
|
|
|
3.1 |
|
|
|
(1.2 |
) |
Utilities |
|
|
1,837.5 |
|
|
|
52.4 |
|
|
|
(46.3 |
) |
|
|
1,843.6 |
|
|
|
9.9 |
|
|
|
(0.5 |
) |
Other |
|
|
8.0 |
|
|
|
0.4 |
|
|
|
— |
|
|
|
8.4 |
|
|
|
0.1 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total corporate securities |
|
|
12,300.2 |
|
|
|
483.8 |
|
|
|
(384.0 |
) |
|
|
12,400.0 |
|
|
|
66.7 |
|
|
|
(32.3 |
) |
U.S. government and agencies |
|
|
41.6 |
|
|
|
2.4 |
|
|
|
(0.1 |
) |
|
|
43.9 |
|
|
|
0.2 |
|
|
|
(0.1 |
) |
State and political subdivisions |
|
|
518.4 |
|
|
|
1.9 |
|
|
|
(37.3 |
) |
|
|
483.0 |
|
|
|
2.6 |
|
|
|
(1.3 |
) |
Residential mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency |
|
|
2,936.8 |
|
|
|
102.6 |
|
|
|
(6.7 |
) |
|
|
3,032.7 |
|
|
|
16.3 |
|
|
|
— |
|
Non-agency: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prime |
|
|
449.8 |
|
|
|
0.6 |
|
|
|
(72.4 |
) |
|
|
378.0 |
|
|
|
2.0 |
|
|
|
(31.7 |
) |
Alt-A |
|
|
145.3 |
|
|
|
2.1 |
|
|
|
(21.9 |
) |
|
|
125.5 |
|
|
|
0.7 |
|
|
|
(8.2 |
) |
Subprime |
|
|
0.2 |
|
|
|
— |
|
|
|
— |
|
|
|
0.2 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total residential mortgage-backed securities |
|
|
3,532.1 |
|
|
|
105.3 |
|
|
|
(101.0 |
) |
|
|
3,536.4 |
|
|
|
19.0 |
|
|
|
(39.9 |
) |
Commercial mortgage-backed securities |
|
|
1,805.6 |
|
|
|
44.5 |
|
|
|
(60.7 |
) |
|
|
1,789.4 |
|
|
|
9.7 |
|
|
|
(4.0 |
) |
Other debt obligations |
|
|
355.8 |
|
|
|
13.1 |
|
|
|
(27.3 |
) |
|
|
341.6 |
|
|
|
1.8 |
|
|
|
(4.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
18,553.7 |
|
|
$ |
651.0 |
|
|
$ |
(610.4 |
) |
|
$ |
18,594.3 |
|
|
|
100.0 |
% |
|
$ |
(81.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Maturity Securities by Contractual Maturity Date
As of September 30, 2010 and December 31, 2009, approximately 27% and 29% of the fair value of
our fixed maturity portfolio was held in mortgaged-backed securities, and 26% and 27% of our
portfolio was due after ten years, which we consider to be longer duration assets. Fixed maturities
in these categories primarily back long duration reserves in our Income Annuities segment, which
can exceed a period of 30 years. As of September 30, 2010 and December 31, 2009, approximately 87%
and 82%, respectively, of the gross unrealized losses on our investment portfolio related to these
longer duration assets, which are more sensitive to interest rate fluctuations and credit spreads.
Residential Mortgage-Backed Securities (RMBS)
We classify our investments in RMBS as agency, prime, Alt-A, and subprime. Agency RMBS are
guaranteed or otherwise supported by the Federal National Mortgage Association, the Federal Home
Loan Mortgage Corporation, or the Government National Mortgage Association. Prime RMBS are loans to
the most credit-worthy customers with high quality credit profiles.
51
The following table sets forth the fair value of the Company’s investment in agency, prime,
Alt-A, and subprime RMBS and the percentage of total invested assets they represent:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2010 |
|
|
As of December 31, 2009 |
|
|
|
|
|
|
|
% of Total |
|
|
|
|
|
|
% of Total |
|
|
|
Fair Value |
|
|
Invested Assets |
|
|
Fair Value |
|
|
Invested Assets |
|
Agency |
|
$ |
3,374.6 |
|
|
|
14.4 |
% |
|
$ |
3,032.7 |
|
|
|
15.0 |
% |
Non-agency: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prime |
|
|
346.0 |
|
|
|
1.5 |
|
|
|
378.0 |
|
|
|
1.9 |
|
Alt-A |
|
|
119.4 |
|
|
|
0.5 |
|
|
|
125.5 |
|
|
|
0.6 |
|
Subprime |
|
|
— |
|
|
|
— |
|
|
|
0.2 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal non-agency |
|
|
465.4 |
|
|
|
2.0 |
|
|
|
503.7 |
|
|
|
2.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
3,840.0 |
|
|
|
16.4 |
% |
|
$ |
3,536.4 |
|
|
|
17.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
We classified certain non-agency RMBS securities as Alt-A because we view each security to
have overall collateral credit quality between prime and subprime, based on a review of the
characteristics of their underlying mortgage loan pools, such as credit scores and financial
ratios.
The following table sets forth the total fair value, and amortized cost of our non-agency RMBS
by credit quality and year of origination (vintage). There were seven securities with a total
amortized cost and fair value of $87.8 and $75.4, respectively, that were rated below investment
grade by either Moody’s, S&P or Fitch, while the others rated them investment grade.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2010 |
|
|
|
|
|
|
Highest Rating Agency Rating |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total as of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BB and |
|
|
|
|
|
|
December 31, |
|
Vintage |
|
AAA |
|
|
AA |
|
|
A |
|
|
BBB |
|
|
Below |
|
|
Total |
|
|
2009 |
|
2007 |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
47.2 |
|
|
$ |
47.2 |
|
|
$ |
91.0 |
|
2006 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
16.6 |
|
|
|
122.7 |
|
|
|
139.3 |
|
|
|
177.0 |
|
2005 |
|
|
— |
|
|
|
9.2 |
|
|
|
10.3 |
|
|
|
58.9 |
|
|
|
40.0 |
|
|
|
118.4 |
|
|
|
113.6 |
|
2004 & prior |
|
|
177.3 |
|
|
|
14.1 |
|
|
|
— |
|
|
|
— |
|
|
|
0.6 |
|
|
|
192.0 |
|
|
|
213.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amortized cost |
|
$ |
177.3 |
|
|
$ |
23.3 |
|
|
$ |
10.3 |
|
|
$ |
75.5 |
|
|
$ |
210.5 |
|
|
$ |
496.9 |
|
|
$ |
595.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total unrealized losses |
|
|
(0.5 |
) |
|
|
(5.9 |
) |
|
|
— |
|
|
|
(8.5 |
) |
|
|
(16.6 |
) |
|
|
(31.5 |
) |
|
|
(91.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fair value |
|
$ |
176.8 |
|
|
$ |
17.4 |
|
|
$ |
10.3 |
|
|
$ |
67.0 |
|
|
$ |
193.9 |
|
|
$ |
465.4 |
|
|
$ |
503.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On a fair value basis as of September 30, 2010, our Alt-A portfolio was 86.3% fixed rate
collateral and 13.7% hybrid adjustable rate mortgages, or ARM, with no exposure to option ARM
mortgages. Generally, fixed rate mortgages have performed better with lower delinquencies and
defaults on the underlying collateral than both option ARMs and hybrid ARMs in the current economic
environment. As of September 30, 2010 and December 31, 2009, respectively, $64.0, or 53.6%, and
$73.9, or 58.9%, of the total Alt-A portfolio had an S&P equivalent credit rating of AAA.
As of September 30, 2010, our Alt-A, prime and total non-agency RMBS had an estimated
weighted-average credit enhancement of 13.8%, 8.5% and 9.8%, respectively. Credit enhancement
refers to the weighted-average percentage of the outstanding capital structure that is subordinate
in the priority of cash flows and absorbs losses first. As of September 30, 2010 and December 31,
2009, 59.3% and 59.6%, respectively, of the fair value of our RMBS had super senior subordination.
The super senior class has priority over all principal and interest cash flows and will not
experience any loss of principal until lower levels are written down to zero. Therefore, the
majority of our RMBS investments have less exposure to defaults and delinquencies in the underlying
collateral than if we held the more subordinated classes.
52
Commercial Mortgage-Backed Securities (CMBS)
The following table sets forth the fair value of our investment in CMBS and the percentage of
total invested assets they represent:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2010 |
|
|
As of December 31, 2009 |
|
|
|
|
|
|
|
% of Total |
|
|
|
|
|
|
% of Total |
|
|
|
Fair Value |
|
|
Invested Assets |
|
|
Fair Value |
|
|
Invested Assets |
|
Agency |
|
$ |
606.3 |
|
|
|
2.6 |
% |
|
$ |
425.6 |
|
|
|
2.1 |
% |
Non-agency |
|
|
1,304.7 |
|
|
|
5.6 |
|
|
|
1,363.8 |
|
|
|
6.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,911.0 |
|
|
|
8.2 |
% |
|
$ |
1,789.4 |
|
|
|
8.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
There have been disruptions in the CMBS market beginning in 2009 and into 2010 due to weakness
in commercial real estate market fundamentals, and previously reduced underwriting standards by
some originators of commercial mortgage loans within the more recent vintage years (2006 through
2008). This has reduced market liquidity and availability of capital, increased market belief that
default rates will increase, and increased spreads and the repricing of risk. However, as discussed
below, the quality of our CMBS portfolio, which is predominately in the most senior tranche of the
structure type, has a weighted-average estimated credit enhancement of 28.5% on the entire
portfolio, as of September 30, 2010, which is significant in a deep commercial real estate downturn
during which expected losses may increase substantially. As of September 30, 2010, on an amortized
cost basis, 97.3% of our entire CMBS portfolio were rated AAA, 1.4% were rated AA or A, and 1.3%
were rated B and below.
The following table sets forth the total fair value, and amortized cost of our non-agency CMBS
by credit quality and year of origination (vintage). There were 12 securities having a fair value
of $296.9 and an amortized cost of $275.9 that were rated A by S&P, while Moody’s and/or Fitch
rated them AAA.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2010 |
|
|
|
|
|
|
Highest Rating Agency Rating |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BB and |
|
|
|
|
|
|
December 31, |
|
Vintage |
|
AAA |
|
|
AA |
|
|
A |
|
|
BBB |
|
|
Below |
|
|
Total |
|
|
2009 |
|
2008 |
|
$ |
47.8 |
|
|
$ |
18.4 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
66.2 |
|
|
$ |
66.0 |
|
2007 |
|
|
447.8 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1.3 |
|
|
|
449.1 |
|
|
|
471.0 |
|
2006 |
|
|
136.6 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
11.3 |
|
|
|
147.9 |
|
|
|
148.0 |
|
2005 |
|
|
288.8 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
288.8 |
|
|
|
311.4 |
|
2004 & prior |
|
|
227.9 |
|
|
|
— |
|
|
|
5.5 |
|
|
|
— |
|
|
|
10.4 |
|
|
|
243.8 |
|
|
|
391.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amortized cost |
|
$ |
1,148.9 |
|
|
$ |
18.4 |
|
|
$ |
5.5 |
|
|
$ |
— |
|
|
$ |
23.0 |
|
|
$ |
1,195.8 |
|
|
$ |
1,388.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total unrealized gains (losses) |
|
|
115.5 |
|
|
|
(2.0 |
) |
|
|
(0.3 |
) |
|
|
— |
|
|
|
(4.3 |
) |
|
|
108.9 |
|
|
|
(24.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fair value |
|
$ |
1,264.4 |
|
|
$ |
16.4 |
|
|
$ |
5.2 |
|
|
$ |
— |
|
|
$ |
18.7 |
|
|
$ |
1,304.7 |
|
|
$ |
1,363.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. CMBS securities have historically utilized a senior/subordinate credit structure to
allocate cash flows and losses, which includes super-senior, mezzanine and junior AAA tranches. The
credit enhancement on the most senior tranche (super-senior) is 30%. The mezzanine AAAs typically
have 20% credit enhancement and the junior AAAs generally have 14% credit enhancement. Credit
enhancement refers to the weighted-average percentage of outstanding capital structure that is
subordinate in the priority of cash flows and absorbs losses first. Credit enhancement does not
include any equity interest or principal in excess of outstanding debt. The super senior class has
priority over the mezzanine and junior classes to all principal and interest cash flows and will
not experience any loss of principal until both the entire mezzanine and junior tranches are
written down to zero. We believe this additional credit enhancement is significant in a deep real
estate downturn during which losses are expected to increase substantially.
The following tables set forth the amortized cost of our AAA non-agency CMBS by type and year
of origination (vintage):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2010 |
|
|
|
Super Senior (Post 2004) |
|
|
Other Structures (2005 and Prior) |
|
|
Total AAA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities at |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
Amortized |
|
Vintage |
|
Super Senior |
|
|
Mezzanine |
|
|
Junior |
|
|
Other Senior |
|
|
Subordinate |
|
|
Other |
|
|
Cost |
|
2008 |
|
$ |
47.8 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
47.8 |
|
2007 |
|
|
447.8 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
447.8 |
|
2006 |
|
|
136.6 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
136.6 |
|
2005 |
|
|
136.1 |
|
|
|
31.2 |
|
|
|
— |
|
|
|
121.5 |
|
|
|
— |
|
|
|
— |
|
|
|
288.8 |
|
2004 & prior |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
187.7 |
|
|
|
40.2 |
|
|
|
— |
|
|
|
227.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
768.3 |
|
|
$ |
31.2 |
|
|
$ |
— |
|
|
$ |
309.2 |
|
|
$ |
40.2 |
|
|
$ |
— |
|
|
$ |
1,148.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total AAA |
|
|
|
Super Senior (Post 2004) |
|
|
Other Structures (2005 and Prior) |
|
|
Securities at |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
Amortized |
|
Vintage |
|
Super Senior |
|
|
Mezzanine |
|
|
Junior |
|
|
Other Senior |
|
|
Subordinate |
|
|
Other |
|
|
Cost |
|
2008 |
|
$ |
66.0 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
66.0 |
|
2007 |
|
|
469.7 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
469.7 |
|
2006 |
|
|
135.7 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
135.7 |
|
2005 |
|
|
147.4 |
|
|
|
31.1 |
|
|
|
— |
|
|
|
132.8 |
|
|
|
— |
|
|
|
— |
|
|
|
311.3 |
|
2004 & prior |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
310.6 |
|
|
|
42.1 |
|
|
|
19.4 |
|
|
|
372.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
818.8 |
|
|
$ |
31.1 |
|
|
$ |
— |
|
|
$ |
443.4 |
|
|
$ |
42.1 |
|
|
$ |
19.4 |
|
|
$ |
1,354.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As the tables above indicate, our CMBS holdings are predominantly in the most senior tranche
of the structure type. As of September 30, 2010, on an amortized cost basis, 93.8% of our AAA-rated
CMBS were in the most senior tranche. Adjusted to remove defeased loans, which are loans whose cash
flows have been replaced by U.S. Treasury securities, the weighted-average credit enhancement of
our CMBS as of September 30, 2010 was 29.7%.
Asset-Backed Securities
The following table provides the amortized cost and fair value of our asset-backed securities,
by underlying collateral type, as of September 30, 2010 and December 31, 2009. Our other
asset-backed securities are presented as part of other debt obligations in the security sector
tables above.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2010 |
|
|
As of December 31, 2009 |
|
Other asset-backed securities |
|
Amortized Cost |
|
|
Fair Value |
|
|
Amortized Cost |
|
|
Fair Value |
|
Credit cards |
|
$ |
71.8 |
|
|
$ |
81.4 |
|
|
$ |
73.0 |
|
|
$ |
78.5 |
|
Lease payments |
|
|
68.6 |
|
|
|
71.1 |
|
|
|
71.4 |
|
|
|
67.6 |
|
Trains |
|
|
29.3 |
|
|
|
34.4 |
|
|
|
30.6 |
|
|
|
32.5 |
|
Airplanes |
|
|
31.0 |
|
|
|
31.9 |
|
|
|
35.5 |
|
|
|
35.5 |
|
Other |
|
|
69.0 |
|
|
|
68.1 |
|
|
|
77.1 |
|
|
|
69.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other asset-backed securities |
|
$ |
269.7 |
|
|
$ |
286.9 |
|
|
$ |
287.6 |
|
|
$ |
284.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on Equity-Like Investments
Prospector manages a portfolio of equity and equity-like investments, including publicly
traded common stock and convertible securities. Previously, our relationship with Prospector had
been through our investment advisor, White Mountains Advisors, LLC, with Prospector serving in a
sub-advisory role. We entered into an investment management agreement, effective July 1, 2010,
directly with Prospector under which they will continue to supervise and direct our equity and
equity-like investment portfolio. The following table compares our total return to the benchmark
S&P 500 Total Return Index for the three and nine months ended September 30, 2010 and 2009. We
believe that these equity and equity-like investments are suitable for funding certain long
duration liabilities in our Income Annuities segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Public equity |
|
|
10.3 |
% |
|
|
17.9 |
% |
|
|
10.8 |
% |
|
|
25.2 |
% |
S&P 500 Total Return Index |
|
|
11.3 |
|
|
|
15.6 |
|
|
|
3.9 |
|
|
|
19.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Difference |
|
|
(1.0 |
)% |
|
|
2.3 |
% |
|
|
6.9 |
% |
|
|
5.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Loans
Our mortgage loan department originates commercial mortgages and manages our existing
commercial mortgage loan portfolio. The commercial mortgage loan holdings are secured by
first-mortgage liens on income-producing commercial real estate, primarily in the retail,
industrial and office building sectors. All loans are underwritten consistently to our standards
based on loan-to-value ratios and debt-service coverage ratios based on detailed market, property
and borrower analysis using our long-term experience in commercial mortgage lending. A substantial
majority of our loans have personal guarantees and are inspected and evaluated annually. We attempt
to diversify our mortgage loans by geographic region, loan size and scheduled maturities. On our
consolidated
54
balance sheets, mortgage loans are reported net of an allowance for losses and deferred fees
and costs and includes a PGAAP adjustment; however, the tables presented below exclude these items.
Composition of Mortgage Loans
The stress experienced in the U.S. financial markets and unfavorable credit market conditions
led to a decrease in overall liquidity and availability of capital in the commercial mortgage loan
market, which has led to greater opportunities for more selective loan originations. As noted
previously, we believe a disciplined increase in our mortgage loan portfolio will help maintain the
overall quality of our investment portfolio and obtain appropriate yields to match our policyholder
liabilities. We are prudently increasing our investments in mortgage loans primarily in our Income
Annuities and Retirement Services segments to improve our overall investment yields. We originated
$354.5 of mortgage loans during the first three quarters of 2010 and expect strong originations in
the fourth quarter of 2010.
As of September 30, 2010 and December 31, 2009, 76.1% and 77.7%, respectively, of our mortgage
loans were under $5.0 and our average loan balance was $2.1, and $1.9, respectively. As of
September 30, 2010, our highest loan balance was $13.0.
The following table sets forth the loan-to-value ratios for our mortgage loan portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2010 |
|
|
As of December 31, 2009 |
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
Loan-to-Value Ratio |
|
Carrying Value |
|
|
Total |
|
|
Carrying Value |
|
|
Total |
|
< or = 50% |
|
$ |
531.3 |
|
|
|
35.4 |
% |
|
$ |
484.2 |
|
|
|
40.1 |
% |
51% — 60% |
|
|
291.3 |
|
|
|
19.4 |
|
|
|
348.5 |
|
|
|
28.9 |
|
61% — 70% |
|
|
394.4 |
|
|
|
26.3 |
|
|
|
195.8 |
|
|
|
16.2 |
|
71% — 75% |
|
|
97.7 |
|
|
|
6.5 |
|
|
|
68.2 |
|
|
|
5.6 |
|
76% — 80% |
|
|
52.8 |
|
|
|
3.5 |
|
|
|
17.7 |
|
|
|
1.5 |
|
81% — 100% |
|
|
100.1 |
|
|
|
6.7 |
|
|
|
85.1 |
|
|
|
7.1 |
|
> 100% |
|
|
33.4 |
|
|
|
2.2 |
|
|
|
7.4 |
|
|
|
0.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,501.0 |
|
|
|
100.0 |
% |
|
$ |
1,206.9 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
We use the loan-to-value and debt-service coverage ratios as our primary metrics to assess the
quality of our mortgage loans. The loan-to-value ratio, which is expressed as a percentage,
compares the amount of the loan to the estimated fair value of the underlying property
collateralizing the loan. In the year of funding, loan-to-value ratios are calculated using
independent appraisals performed by Member of the Appraisal Institute, or MAI, designated
appraisers. Subsequent to the year of funding, loan-to-value ratios are updated annually using
internal valuations based on property income and market capitalization rates. Loan-to-value ratios
greater than 100% indicate that the loan amount is greater than the collateral value. A smaller
loan-to-value ratio generally indicates a higher quality loan. As of September 30, 2010 and
December 31, 2009, our mortgage loan portfolio had weighted-average loan-to-value ratios of 57.4%
and 53.5%, respectively. The slight increase in our loan-to-value ratio is driven by a reduction in
the market values of the properties, which is the result of the distressed commercial real estate
market.
For loans originated in the three and nine months ended September 30, 2010, 27.0% and 33.3%,
respectively, had a loan-to-value ratio of 50% or less, and no loans had a loan-to-value ratio of
more than 72%. For loans originated in the year ended December 31, 2009, 44.8% had a loan-to-value
ratio of 50% or less, and no loans had a loan-to-value ratio of more than 70%.
The debt-service coverage ratio compares the amount of rental income a property is generating
to the amount of the mortgage payments due on the property. Debt-service coverage ratios are
calculated using the most current operating history for the collateral. As of September 30, 2010
and December 31, 2009, our mortgage loan portfolio had weighted-average debt-service coverage
ratios of 1.72 and 1.75, respectively. For loans originated in the three and nine months ended
September 30, 2010, 55.2% and 62.5%, respectively, had a debt-service ratio of 1.60 or more.
55
The following table sets forth the carrying value of our investments in mortgage loans by
geographic region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2010 |
|
|
As of December 31, 2009 |
|
Region |
|
Carrying Value |
|
|
% of Total |
|
|
Carrying Value |
|
|
% of Total |
|
California |
|
$ |
449.4 |
|
|
|
29.9 |
% |
|
$ |
346.0 |
|
|
|
28.6 |
% |
Washington |
|
|
259.7 |
|
|
|
17.3 |
|
|
|
222.9 |
|
|
|
18.5 |
|
Texas |
|
|
150.3 |
|
|
|
10.0 |
|
|
|
125.6 |
|
|
|
10.4 |
|
Oregon |
|
|
88.7 |
|
|
|
5.9 |
|
|
|
88.0 |
|
|
|
7.3 |
|
Florida |
|
|
52.0 |
|
|
|
3.5 |
|
|
|
23.9 |
|
|
|
2.0 |
|
Other |
|
|
500.9 |
|
|
|
33.4 |
|
|
|
400.5 |
|
|
|
33.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,501.0 |
|
|
|
100.0 |
% |
|
$ |
1,206.9 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the carrying value of our investments in mortgage loans by
property type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2010 |
|
|
As of December 31, 2009 |
|
Property Type |
|
Carrying Value |
|
|
% of Total |
|
|
Carrying Value |
|
|
% of Total |
|
Shopping Centers and Retail |
|
$ |
634.9 |
|
|
|
42.3 |
% |
|
$ |
472.9 |
|
|
|
39.2 |
% |
Office Buildings |
|
|
407.7 |
|
|
|
27.2 |
|
|
|
339.2 |
|
|
|
28.1 |
|
Industrial |
|
|
394.1 |
|
|
|
26.3 |
|
|
|
345.7 |
|
|
|
28.6 |
|
Multi-Family |
|
|
45.4 |
|
|
|
3.0 |
|
|
|
34.9 |
|
|
|
2.9 |
|
Other |
|
|
18.9 |
|
|
|
1.2 |
|
|
|
14.2 |
|
|
|
1.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,501.0 |
|
|
|
100.0 |
% |
|
$ |
1,206.9 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity Date of Mortgage Loans
The following table sets forth our mortgage loans by contractual maturity date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2010 |
|
|
As of December 31, 2009 |
|
Years to Maturity |
|
Carrying Value |
|
|
% of Total |
|
|
Carrying Value |
|
|
% of Total |
|
Due in one year or less |
|
$ |
7.0 |
|
|
|
0.5 |
% |
|
$ |
2.4 |
|
|
|
0.2 |
% |
Due after one year through five years |
|
|
112.0 |
|
|
|
7.5 |
|
|
|
100.0 |
|
|
|
8.3 |
|
Due after five years through ten years |
|
|
770.9 |
|
|
|
51.4 |
|
|
|
541.8 |
|
|
|
44.9 |
|
Due after ten years |
|
|
611.1 |
|
|
|
40.6 |
|
|
|
562.7 |
|
|
|
46.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,501.0 |
|
|
|
100.0 |
% |
|
$ |
1,206.9 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Loan Quality
Our allowance for losses on mortgage loans provides for the risk of credit loss inherent in
the lending process. The allowance includes a portfolio reserve for probable incurred but not
specifically identified losses and specific reserves for non-performing loans. We define
non-performing loans as loans for which it is probable that amounts due according to the terms of
the loan agreement will not be collected. The portfolio reserve for incurred but not specifically
identified losses considers our past loan experience and the current credit composition of the
portfolio, and takes into consideration market experience. We evaluate the allowance for losses on
mortgage loans as of each reporting period and record adjustments when appropriate.
Our total allowance for losses on mortgage loans was $7.5 and $8.2 as of September 30, 2010
and December 31, 2009, respectively. The allowance as of December 31, 2009 included a specific
reserve of $2.2 related to a property we foreclosed and took possession of in the second quarter of
2010.
Investments in Limited Partnerships — Affordable Housing Investments
We invest in tax-advantaged federal affordable housing investments through limited liability
partnerships. These affordable housing investments are typically 15-year investments that provide
tax credits in years one through ten. As of September 30, 2010, we were invested in nine limited
partnership interests related to the federal affordable housing projects and other various state
tax credit funds. These investments are accounted for under the equity method and are recorded at
amortized cost in investments in limited partnerships, with the present value of unfunded
contributions recorded in other liabilities.
56
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Amortization related to
affordable housing
investments, net of taxes |
|
$ |
(1.5 |
) |
|
$ |
(1.5 |
) |
|
$ |
(4.3 |
) |
|
$ |
(4.5 |
) |
Affordable housing tax credits |
|
|
2.5 |
|
|
|
2.4 |
|
|
|
8.1 |
|
|
|
7.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact to net income |
|
$ |
1.0 |
|
|
$ |
0.9 |
|
|
$ |
3.8 |
|
|
$ |
2.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table provides the future estimated impact to net income:
|
|
|
|
|
|
|
Estimated |
|
|
|
Impact to Net |
|
|
|
Income |
|
Remainder of 2010 |
|
$ |
1.3 |
|
2011 |
|
|
7.4 |
|
2012 |
|
|
11.0 |
|
2013 and beyond |
|
|
36.2 |
|
|
|
|
|
Estimated impact to net income |
|
$ |
55.9 |
|
|
|
|
|
Liquidity and Capital Resources
We conduct all our operations through our operating subsidiaries, and our liquidity
requirements primarily have been and will continue to be met by funds from our subsidiaries.
Dividends and permitted tax sharing payments from our subsidiaries are Symetra’s principal sources
of cash to pay stock and warrant holder dividends and meet its obligations, including payments of
principal and interest on notes payable and tax obligations. On January 27, 2010, we completed an
initial public offering of our common stock and received net proceeds of $282.5, which further
enhanced our liquidity and capital resources.
We have and intend to pay quarterly cash dividends on our common stock and warrants at a rate
of approximately $0.05 per share. The declaration and payment of future dividends to holders of our
common stock will be at the discretion of our board of directors. See “— Dividends” below for
further discussion.
Over the past few years, the global financial markets experienced unprecedented disruption,
adversely affecting the business environment in general, and financial services companies in
particular. During the nine months ended September 30, 2010, the economic recovery continues to be
slow. The credit markets remain tight, and we continue to experience a low interest rate
environment, which we expect to continue in the last quarter of 2010 and into 2011. In managing the
challenging market conditions over the past couple of years, we benefited from the diversification
of our business and strong financial fundamentals. We actively manage our liquidity in light of
changing market, economic and business conditions and we believe that our liquidity levels are more
than adequate to cover our exposures, as evidenced by the following:
|
• |
|
Sales for the nine months ended September 30, 2010 were
solid across all distribution
channels. Although below the record levels for the same period in 2009, sales continued to
generate strong cash inflows on our deposit contracts (annuities and universal life
policies, including BOLI). |
|
|
• |
|
While certain lapses and surrenders occur in the normal course of business, these
lapses and surrenders have not deviated materially from management expectations. |
|
|
• |
|
The amount of accumulated other comprehensive income (loss), net of taxes, on our
consolidated balance sheets increased to income of $819.4 as of September 30, 2010, from a
loss of $49.7 as of December 31, 2009. The primary driver was an increase in the fair value
of our available-for-sale securities, due to the bond markets showing signs of
stabilization and credit spreads tightening. |
|
|
• |
|
As of September 30, 2010, we had the ability to borrow, on an unsecured basis, up to a
maximum principal amount of $200.0 under a revolving line of credit arrangement. |
57
|
• |
|
To support the sales of our products and maintain financial strength ratings, we target
a risk-based capital level of at least 350% in our life insurance company, Symetra Life
Insurance Company. As of September 30, 2010, Symetra Life Insurance Company had an
estimated risk-based capital ratio of 501%. |
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, our
insurance subsidiaries have used cash flows from operations, cash flows from invested assets and
sales of investment securities to fund their liquidity requirements.
In managing the liquidity of our insurance operations, we also consider the risk of
policyholder and contractholder withdrawals of funds earlier than our assumptions when selecting
assets to support these contractual obligations. We use surrender charges and other contract
provisions to mitigate the extent, timing and profitability impact of withdrawals of funds by
customers from annuity contracts and deposit liabilities. The following table sets forth withdrawal
characteristics of our general account policyholder liabilities, composed of annuity reserves,
deposit liabilities and policy and contract claim liabilities, net of reinsurance recoverables. The
total represents the sum of funds held under deposit contracts, future policy benefits and policy
and contract claims on the consolidated balance sheets, excluding other policyholder related
liabilities and reinsurance recoverables of $235.8 and $247.2 as of September 30, 2010 and December
31, 2009, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2010 |
|
|
As of December 31, 2009 |
|
|
|
Amount |
|
|
% of Total |
|
|
Amount |
|
|
% of Total |
|
Illiquid Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Structured settlements & other SPIAs(1) |
|
$ |
6,671.6 |
|
|
|
32.7 |
% |
|
$ |
6,703.6 |
|
|
|
35.1 |
% |
Deferred annuities with 5-year payout provision or MVA(2) |
|
|
378.6 |
|
|
|
1.9 |
|
|
|
381.0 |
|
|
|
2.0 |
|
Traditional insurance (net of reinsurance)(3) |
|
|
186.7 |
|
|
|
0.9 |
|
|
|
185.8 |
|
|
|
1.0 |
|
Group health & life (net of reinsurance)(3) |
|
|
106.8 |
|
|
|
0.5 |
|
|
|
97.2 |
|
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total illiquid liabilities |
|
|
7,343.7 |
|
|
|
36.0 |
|
|
|
7,367.6 |
|
|
|
38.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Somewhat Liquid Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank-owned life insurance (BOLI)(4) |
|
|
4,047.6 |
|
|
|
19.8 |
|
|
|
3,865.1 |
|
|
|
20.2 |
|
Deferred annuities with surrender charges of 5% or higher |
|
|
5,782.6 |
|
|
|
28.4 |
|
|
|
4,788.2 |
|
|
|
25.1 |
|
Universal life with surrender charges of 5% or higher |
|
|
171.4 |
|
|
|
0.8 |
|
|
|
152.5 |
|
|
|
0.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total somewhat liquid liabilities |
|
|
10,001.6 |
|
|
|
49.0 |
|
|
|
8,805.8 |
|
|
|
46.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fully Liquid Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred annuities with surrender charges of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3% up to 5% |
|
|
430.1 |
|
|
|
2.1 |
|
|
|
412.4 |
|
|
|
2.2 |
|
Less than 3% |
|
|
226.8 |
|
|
|
1.1 |
|
|
|
87.6 |
|
|
|
0.5 |
|
No surrender charges(5) |
|
|
1,935.1 |
|
|
|
9.5 |
|
|
|
1,950.7 |
|
|
|
10.2 |
|
Universal life with surrender charges less than 5% |
|
|
440.3 |
|
|
|
2.2 |
|
|
|
441.7 |
|
|
|
2.3 |
|
BOLI(6) |
|
|
1.5 |
|
|
|
0.0 |
|
|
|
3.7 |
|
|
|
0.0 |
|
Traditional insurance (net of reinsurance)(6) |
|
|
2.2 |
|
|
|
0.0 |
|
|
|
2.1 |
|
|
|
0.0 |
|
Group health & life (net of reinsurance)(6) |
|
|
14.5 |
|
|
|
0.1 |
|
|
|
18.4 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fully liquid liabilities |
|
|
3,050.5 |
|
|
|
15.0 |
|
|
|
2,916.6 |
|
|
|
15.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
20,395.8 |
|
|
|
100.0 |
% |
|
$ |
19,090.0 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
These contracts cannot be surrendered. The benefits are specified in the contracts as fixed amounts to be paid over the next several decades. |
|
(2) |
|
In a liquidity crisis situation, we could invoke the five-year payout provision so that the contract value with interest is paid out ratably
over five years. |
|
(3) |
|
The surrender value on these contracts is generally zero. Represents incurred but not reported claim liabilities. |
|
(4) |
|
The biggest deterrent to surrender is the taxation on the gain within these contracts, which includes a 10% non-deductible penalty tax. Banks
can exchange certain of these contracts with other carriers, tax-free. However, a significant portion of this business does not qualify for this
tax-free treatment due to the employment status of the original covered employees. |
footnotes
continued on following page
58
|
|
|
(5) |
|
Approximately half of this business has been with the Company for over a decade, contains lifetime minimum interest guarantees of 4.0% to 4.5%,
and has been free of surrender charges for many years. This business has experienced high persistency given the high lifetime guarantees that
have not been available in the market on new issues for many years. |
|
(6) |
|
Represents reported claim liabilities. |
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 September 30, 2010 and December 31,
2009, our insurance subsidiaries had liquid assets of $20.8 billion and $18.1 billion,
respectively, and Symetra had liquid assets of $89.7 and $33.3, respectively. The portion of total
company liquid assets comprised of cash and cash equivalents and short-term investments was $199.8
and $259.9 as of September 30, 2010 and December 31, 2009, respectively. The increase in our liquid
assets was primarily the result of improved valuation of our fixed maturities, as well as sales of
deferred annuities in the first nine months of 2010 and our IPO proceeds.
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 stress scenarios.
Given the size and liquidity profile of our investment portfolio, we believe that claim
experience varying from our projections does not constitute a significant liquidity risk. Our
asset/liability management process takes into account the expected maturity of investments and
expected claim payments as well as the specific nature and risk profile of the liabilities.
Historically, there has been limited variation between the expected maturities of our investments
and the payment of claims.
Capitalization
Our capital structure consists of notes payable and stockholders’ equity. The following table
summarizes our capital structure:
|
|
|
|
|
|
|
|
|
|
|
As of, |
|
|
As of |
|
|
|
September 30, 2010 |
|
|
December 31, 2009 |
|
Notes payable |
|
$ |
449.0 |
|
|
$ |
448.9 |
|
Stockholders’ equity |
|
|
2,711.3 |
|
|
|
1,433.3 |
|
|
|
|
|
|
|
|
Total capital |
|
$ |
3,160.3 |
|
|
$ |
1,882.2 |
|
|
|
|
|
|
|
|
Our capitalization increased $1,278.1 as of September 30, 2010, as compared to December 31,
2009 due to an increase in stockholders’ equity. This increase was driven by an increase in AOCI,
the net proceeds received from our IPO, and the generation of net income of $138.7. AOCI improved
primarily due to improved valuation of available-for-sale fixed maturities, primarily corporate
securities. We believe our capital levels position us well to capitalize on organic growth as well
as pursue any potentially favorable acquisition opportunities.
Dividends
We declared and paid quarterly dividends of $0.05 per common share for a total of $13.7 to
shareholders and warrant holders during the second and third quarters of 2010. On November 10, 2010
we declared a dividend of $0.05 per common share to shareholders and warrant holders of record as
of November 24, 2010, for an approximate total of $6.9, to be payable on or about December 10,
2010.
59
Cash Flows
The following table sets forth a summary of our consolidated cash flows for the dates
indicated.
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
2010 |
|
|
2009 |
|
Net cash flows provided by operating activities |
|
$ |
665.2 |
|
|
$ |
575.4 |
|
Net cash flows used in investing activities |
|
|
(1,645.0 |
) |
|
|
(1,895.5 |
) |
Net cash flows provided by financing activities |
|
|
919.2 |
|
|
|
1,093.8 |
|
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
including dividends and interest on our investments, as well as the amounts and timing of cash
disbursed for our payment of policyholder benefits and claims, underwriting and operating expenses
and income taxes. The following discussion highlights key drivers in the level of cash flows
generated from our operating activities:
Net cash provided by operating activities for the nine months ended September 30, 2010
increased $89.8 over the same period in 2009. This increase was primarily the result of increased
net investment income driven by an increase in average assets, a decline in paid commissions
related to our deferred annuity products on lower sales, and a decrease in medical stop-loss paid
claims.
Investing Activities
Cash flows from our investing activities are primarily driven by the amounts and timing of
cash received from our sales of investments and from maturities and calls of fixed maturity
securities, as well as the amounts and timing of cash disbursed for our purchases of investments
and funding of mortgage loan originations. The following discussion highlights key drivers in the
level of cash flows generated from our investing activities:
Net cash used in investing activities for the nine months ended September 30, 2010 decreased
$250.5 over the same period in 2009. This decrease was primarily the result of an increase in cash
received from prepayments, maturities and calls on fixed maturities, and strategic sales of fixed
maturities. This was partially offset by increased cash outflows on increased originations of
mortgage loans.
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, repayments of debt and dividend
distributions to our stock and warrant holders. The following discussion highlights key drivers in
the level of cash flows generated from our financing activities:
Net cash provided by financing activities for the nine months ended September 30, 2010
decreased $174.6 over the same period in 2009. This was primarily due to a $513.7 decrease in
policyholder deposits primarily related to lower sales of fixed deferred annuities. This was
partially offset by IPO proceeds received during the first quarter of 2010.
Off-Balance Sheet Transactions
We do not have off-balance sheet transactions.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk is the risk of change in the value of financial instruments as a result of
absolute or relative changes in interest rates, foreign currency exchange rates, or equity or
commodity prices. To varying degrees, the investment and trading activities supporting all of our
products and services generate market risks. There have been no material changes in our market risk
exposures from December 31, 2009, a description of which may be found in Part II, Item 7A —
“Quantitative and Qualitative Disclosures about Market Risk” in our Annual Report on Form 10-K for
the year ended December 31, 2009. See Item 1A — “Risk Factors” of Part II in this report for a
discussion of how changes to the operating and investing markets may materially adversely affect
our business and results of operations.
60
Item 4.
Controls and Procedures
Disclosure Controls and Procedures
We carried out an evaluation required by the 1934 Act, under the supervision and with the
participation of our principal executive and principal financial officer, of the effectiveness of
the design and operation of our disclosure controls and procedures, as defined in Rule 13a—15(e)
of the 1934 Act, as of September 30, 2010. Based on this evaluation our principal executive officer
and principal financial officer concluded that, as of September 30, 2010, our disclosure controls
and procedures were effective to provide reasonable assurance that information required to be
disclosed by us in the reports that we file or submit under the 1934 Act is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and forms and to
provide reasonable assurance that such information is accumulated and communicated to our
management, including our principal executive officer and principal financial officer, as
appropriate, to allow timely decisions regarding required disclosures.
Limitations on Controls
Our disclosure controls and procedures are designed to provide reasonable assurance of
achieving their objectives as specified above. Management does not expect, however, that our
disclosure controls and procedures will prevent or detect all errors or fraud. Any control system,
no matter how well designed and operated, is based on certain assumptions and can provide only
reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of
controls can provide absolute assurance that misstatements due to error or fraud will not occur or
that all control issues and instances of fraud, if any, within the Company have been detected.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting during our most recent
fiscal quarter that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
61
PART II — Other Information
Item 1. Legal Proceedings
Disclosure concerning material legal proceedings, if any, can be found in Item 1 “Financial
Statements, Notes to Consolidated Financial Statements, Note 10, Commitments and Contingencies”
under the caption, “Litigation,” which is incorporated here by this reference.
Item 1A. Risk Factors
In addition to the other information set forth in this report, consideration should be given
to the factors discussed in Part I, Item 1A — “Risk Factors” in our Annual Report on Form 10-K for
the year ended December 31, 2009, and Item 1A — “Risk Factors” in Part II of our Form 10-Q for the
quarters ended March 31, and June 30, 2010. If any of those factors were to occur, they could
materially adversely affect our business, financial condition or future results and could cause
actual results to differ materially from those expressed in forward-looking statements in this
report. There have been no material changes to the risk factors set forth in the above-referenced
filings as of September 30, 2010.
Item 6. Exhibits
|
|
|
Exhibit |
|
|
Number |
|
Description |
10.1
|
|
Form of Stock Option Award Agreement* |
|
|
|
10.2
|
|
Group Short Term Disability Reinsurance Agreement dated as of January 1, 1999 (the “Short
Term Agreement”) between Safeco Life Insurance Company and Reliance Standard Life Insurance
Company, doing business as Custom Disability Solutions, successor to Duncanson & Holt
Services, Inc. (including Amendment No. 1 to the Short Term Agreement dated as of July 1, 2006
and Amendment No. 2 to the Short Term Agreement dated as of December 8, 2006)* |
|
|
|
10.3
|
|
Group Long Term Disability Reinsurance Agreement dated as of January 1, 1999 (the “Long Term
Agreement”) between Safeco Life Insurance Company and Reliance Standard Life Insurance
Company, doing business as Custom Disability Solutions, successor to Duncanson & Holt
Services, Inc. (including Amendment No. 1 to the Long Term Agreement dated as of January 1,
2000, Amendment to the Long Term Agreement dated as of January 1, 2006, Amendment No. 3 to the
Long Term Agreement dated as of July 1, 2006, Amendment No. 4 to the Long Term Agreement dated
as of December 8, 2006 and Amendment No. 5 to the Long Term Agreement dated as of September 1,
2008)* |
|
|
|
31.1
|
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the
Securities Exchange Act, as amended* |
|
|
|
31.2
|
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the
Securities Exchange Act, as amended* |
|
|
|
32.1
|
|
Certification of Chief Executive Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002* |
|
|
|
32.2
|
|
Certification of Chief Financial Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002* |
62
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
|
|
|
|
|
SYMETRA FINANCIAL CORPORATION
|
|
Date: November 10, 2010 |
By: |
/s/ Thomas M. Marra
|
|
|
|
Name: |
Thomas M. Marra |
|
|
|
Title: |
President and Chief Executive Officer |
|
|
|
|
|
Date: November 10, 2010 |
By: |
/s/ Margaret A. Meister
|
|
|
|
Name: |
Margaret A. Meister |
|
|
|
Title: |
Executive Vice President and Chief Financial Officer |
|
|
63