[Letterhead of]
CRAVATH, SWAINE & MOORE LLP
[New York Office]
[New York Office]
(212) 474-1644
December 18, 2009
Symetra Financial Corporation
Registration Statement on Form S-1
File No. 333-162344
Registration Statement on Form S-1
File No. 333-162344
Dear Mr. Riedler:
Symetra Financial Corporation (the “Company”) hereby files with the Securities and
Exchange Commission (the “Commission”), via EDGAR, the Company’s second supplemental
response to Comment No. 1 in your letter dated November 25, 2009 (the “Comment Letter”)
relating to Amendment No. 2 to the Company’s Registration Statement on Form S-1 (File No.
333-162344) (as amended, the “Registration Statement”). This letter supplements the
Company’s prior response to cover the topics raised during the telephonic discussion among members
of the Staff, the undersigned and members of the Company’s management on December 14, 2009.
The Company is in the process of preparing an amendment to the Registration Statement, as well
as a complete response letter, that will include changes to disclosures or supplemental
information, as appropriate, to address comments 2-8 of the Comment Letter. However, in the
meantime, the Company believes that it is important to present to the staff of the Commission (the
“Staff”) its written response to Comment No. 1 of the Comment Letter, as well as to the
above-referenced telephonic discussion, in order to expedite the discussion and ultimate resolution
of that comment.
Set forth below is a draft of a revised section of the Registration Statement intended to
replace in its entirety the discussion of Non-GAAP information currently appearing on pages 53-56
of the Registration Statement under the heading “Use of Non-GAAP Financial Measures”:
Use of non-GAAP Financial Measures
Certain tables in this prospectus include non-GAAP financial measures. We believe these
measures provide useful information to investors in evaluating our financial performance or
condition. In addition, our management and board of directors use these measures to gauge the
historical performance of our operations and for business planning purposes. In the following
paragraphs, we provide definitions of these non-GAAP measures and explain how we believe investors
will find them useful, how we use them, what their limitations are and how we compensate for such
limitations.
Adjusted Operating Income (Loss)
Adjusted operating income (loss) is a non-GAAP measure of our performance. Adjusted operating
income (loss) consists of net income (loss), less after-tax net realized investment gains (losses),
plus after-tax net realized and unrealized investment gains (losses) on our fixed income annuity
(FIA) options.
Net income (loss) is the most directly comparable GAAP measure to adjusted operating income.
Net income (loss) for any period presents the results of our insurance operations, as well as our
net realized investment gains (losses). We consider investment income generated by our asset
portfolio 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, reflective of the performance of our insurance operations, as
discussed below.
We believe investors find it useful to review a measure of the results of our insurance
operations separate from the gain and loss activity attributable to most of our investment
portfolio because it assists an investor in determining whether our insurance-related revenues,
composed primarily of premiums and net investment income, have been sufficient to generate
operating earnings after meeting our insurance-related obligations, composed primarily of claims
paid to policyholders and investment returns credited to policyholder accounts, and other operating
costs.
In presenting adjusted operating income, we are excluding after-tax net realized investment
gains (losses). Even though these gains and losses recur in most periods, the timing and amount
are driven by investment decisions and external economic developments unrelated to our management
of the insurance and underwriting aspects of our business. Thus, because our insurance operations
are not dependent on the following, we exclude:
| • | other-than-temporary impairments (OTTI) related to available-for-sale securities, which depend on the timing and severity of market credit cycles and management judgments regarding recoverability, |
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| • | net gains (losses) on changes in fair value of our trading securities, which depend on equity market performance and broader market conditions, and | ||
| • | net realized gains (losses) on sales of securities, which are subject to our discretion and influenced by market opportunities. |
The one exception to the exclusion of realized investment gains and losses is the gains
(losses) on our FIA options in our Retirement Services segment. Each year we use the realized gains
from our FIA options, similar to the way we use investment income, to meet our obligations
associated with our FIA product, which credits interest to policyholder accounts based on equity
market performance.
In addition to using adjusted operating income to evaluate our insurance operations, our
management and board of directors have additional 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 in our Retirement Services segment. We also develop a financial plan that includes
our expectation of adjusted operating income by segment. 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 a result, our management and board of directors
also separately review net realized investment gains (losses) in connection with their review of
our investment portfolio. Additionally, our management and board of directors examine net income as
part of their review of our overall financial results. For a reconciliation of adjusted operating
income to net income, see “Selected Historical Consolidated Financial Data” on page 41.
Adjusted Book Value, Adjusted Book Value per common share and Adjusted Book Value per common
share, as Converted
Adjusted book value
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Adjusted book value is a non-GAAP financial measure of our financial condition. Adjusted book
value consists of stockholders’ equity, less accumulated other comprehensive income (loss), or
AOCI.
Stockholders’ equity is the most directly comparable GAAP measure to adjusted book value.
AOCI, which is primarily composed of the net unrealized gains (losses) on our fixed maturities, net
of taxes, is a component of stockholders’ equity.
We purchase fixed maturities with durations and cash flows that match our estimate of when our
insurance liabilities and other obligations will come due. We typically expect to hold our fixed
maturities to maturity, using the principal and interest cash flows to pay our obligations over
time. Since we expect to collect the contractual cash flows on these fixed maturities, we do not
expect to realize the unrealized gains (losses) that are included in our AOCI balance as of any
particular date. AOCI primarily fluctuates based on changes in the fair value of our fixed
maturities, which is driven by factors outside of our control, including the impact of credit
market conditions and the movement of interest rates and credit spreads. These fluctuations do not
reflect any change in the cash flows we expect to receive. As an example, an increase in the fair
value of our fixed maturities improved AOCI by $1,082.4 million, or 103%, from December 31, 2008 to
September 30, 2009, due to credit market improvements and tightening of interest spreads. This
contributed to a related increase in stockholders’ equity over the same period of $1,194.3 million,
or 417%; however, this increase did not impact our estimates regarding collection of cash flows on
the underlying fixed maturities.
We believe investors find it useful if we present them with a financial measure that removes
from stockholders’ equity these temporary and unrealized changes in the fair values of our
investments, and the related effects on AOCI. By evaluating our adjusted book value, an investor
can assess our financial condition based on our general practice of holding our fixed investments
to maturity. For example, we believe it is important that an investor not assume that an increase
in stockholders’ equity driven by unrealized gains means our company has grown in value and
alternatively, it is important that an investor not assume that a decrease in stockholders’ equity
driven by unrealized losses means our company’s value has decreased.
In addition to using adjusted book value to evaluate our financial condition, our management
and board of directors have additional uses for this measure, including reviewing debt levels as a
percentage of adjusted book value to monitor compliance with revolving credit facility covenants
and helping to maintain and improve our ratings from rating agencies. Our management also compares
adjusted book value to regulatory capital to assess our ability to maintain regulatory capital
ratios and ratings. Finally, our board of directors uses adjusted book value as a basis to measure
the success of our company over historical periods and reviews and ultimately approves management’s
financial plans based on the projected growth in adjusted book value.
Adjusted book value is not a substitute for stockholders’ equity determined in accordance with
GAAP and considering adjusted book value on its own
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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 losses on
invested assets, which are provided in our investment disclosures.
Adjusted book value should not be considered a substitute for stockholders’ equity. For a
reconciliation of adjusted book value to stockholders’ equity, see “Selected Historical
Consolidated Financial Data” on page 42.
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.
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.
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Adjusted book value per common share should not be considered a substitute for book value per
common share. For a reconciliation of adjusted book value per common share to book value per common
share, see “Selected Historical Consolidated Financial Data” on page 42.
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.
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, should not be considered a substitute for
book value per common share. For a reconciliation of adjusted book value per common share, as
converted, to book value per common share, see “Selected Historical Consolidated Financial Data” on
page 42.
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.
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Return on stockholders’ equity, or ROE, is the most directly comparable GAAP measure. Return
on stockholders’ equity for the most recent four quarters is calculated as net income for such
period divided by the average stockholders’ equity for the most recent five quarters.
As discussed above under “—Adjusted operating income,” we believe investors find it useful to
review the results of our insurance operations separate from the gain and loss activity
attributable to most of our investment portfolio because it highlights trends in the performance of
our insurance operations. In addition, as discussed above under “—Adjusted Book Value, Adjusted
Book Value per common share and Adjusted Book Value per common share, as Converted,” we believe
investors find it useful if we present them with a financial measure that removes from
stockholders’ equity the temporary and unrealized changes in the fair values of our investments,
and the related effects on AOCI, because we do not expect to realize the unrealized gains (losses)
that are included in our AOCI balance as of any particular date. By referring to operating ROAE, an
investor can form a judgment as to how effectively our management uses funds invested by our
stockholders to generate adjusted operating earnings growth. Thus, we present operating ROAE for a
period to measure the rate of return produced by our adjusted operating income in such period based
on our average adjusted book value for such period.
In addition to using operating ROAE to evaluate how effectively our management uses funds
invested in our company, our management and board of directors have additional uses for operating
ROAE. These include comparing our operating ROAE to those of our peer companies, comparing our
operating ROAE against our target return objectives, and determining if our insurance and annuity
products are priced to achieve our long-term targets. For example, our board of directors used a
comparison of our operating ROAE to that of our competitors in determining 2008 bonuses for our
management.
However, because operating ROAE excludes realized and unrealized gains (losses) on our
investment portfolio, it has material limitations as a financial measure of performance and should
not be considered on its own. As an example, we could produce a high operating ROAE in a given
period, despite poor net income, if in that period we generated significant net realized losses
from our investment portfolio. To compensate for such limitations, we also consider ROE to assess
financial performance and return on total equity.
Operating ROAE should not be considered a substitute for ROE. The numerator and denominator
of operating ROAE have been reconciled to net income and stockholders’ equity, respectively, their
most comparable GAAP financial measures, in “Selected Historical Consolidated Financial Data” on
page 42.
***********************
Because the Company would like to be in a position to access the markets in the near future,
we are hopeful that the Staff will be in a position to review in an expeditious
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manner the Company’s proposed revised non-GAAP disclosure with a view toward resolving this comment
at the earliest possible time.
Thank you for your attention and consideration. The Company is grateful to the Staff for its
diligent review of the Registration Statement and looks forward to a constructive dialogue with the
Staff in resolving all outstanding comments.
Please contact the undersigned at (212) 474-1644, or, in my absence, D. Scott Bennett at (212)
474-1132, with any questions or comments you may have regarding this letter.
| Very truly yours, |
||||
| /s/ William J. Whelan III | ||||
| William J. Whelan III | ||||
Mr. Jeffrey Riedler |
Assistant Director |
U.S. Securities and Exchange Commission |
Division of Corporation Finance |
100 F Street, N.E. |
Washington, DC 20549 |
FEDEX
Copies to:
Mr. Todd Hardiman |
Mr. Joel Parker |
Ms. Tabatha Akins |
Staff Attorney |
U.S. Securities and Exchange Commission |
Division of Corporation Finance |
100 F Street, N.E. |
Washington, DC 20549 |
FEDEX
Mr. George C. Pagos |
Symetra Financial Corporation |
777 108th Avenue NE, Suite 1200 |
Bellevue, WA 98004 |
FEDEX
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