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As filed with the Securities and Exchange Commission on
October 29, 2007.
Registration No. 333-144162
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
Amendment No. 7
to
Form S-1
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF
1933
SYMETRA FINANCIAL
CORPORATION
(Exact name of registrant as
specified in its charter)
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Delaware
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6311
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20-0978027
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(State or other jurisdiction
of
incorporation or organization)
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(Primary Standard Industrial
Classification Code Number)
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(I.R.S. Employer
Identification Number)
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777 108th Avenue NE,
Suite 1200
Bellevue, WA 98004
(425) 256-8000
(Address, including zip code,
and telephone number, including area code, of
registrants principal
executive offices)
Randall H. Talbot
President and Chief Executive
Officer
Symetra Financial
Corporation
777 108th Avenue NE,
Suite 1200
Bellevue, WA 98004
(425) 256-8000
(Name and address, including zip
code, and telephone number,
including area code, of agent
for service)
Copies to:
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William J. Whelan III, Esq.
Cravath, Swaine & Moore LLP
Worldwide Plaza
825 Eighth Avenue
New York, NY 10019
(212) 474-1000
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George C. Pagos, Esq.
Senior Vice President, General Counsel and Secretary
Symetra Financial Corporation
777 108th Avenue NE, Suite 1200
Bellevue, WA 98004
(425) 256-8000
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Gary I. Horowitz, Esq.
Simpson Thacher & Bartlett LLP
425 Lexington Avenue
New York, NY 10017
(212) 455-2000
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Approximate date of commencement of proposed sale to the
public: As soon as practicable after the
effective date of this Registration Statement.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, check the
following box. o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
please check the following box and list the Securities Act
registration statement number of the earlier effective
registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration number of the
earlier effective registration statement for the same
offering. o
CALCULATION
OF REGISTRATION FEE
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Proposed
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Maximum
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Proposed
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Aggregate
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Maximum
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Title of Each Class of
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Amount to be
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Offering Price
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Aggregate
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Amount of
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Securities to be Registered
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Registered(1)
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per Share
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Offering Price(2)
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Registration Fee(3)
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Common Stock, $0.01 par value per share
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45,425,000
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$20.00
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$908,500,000
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$27,891
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(1)
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Includes 5,925,000 shares
issuable upon exercise of the underwriters over-allotment
option.
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(2)
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Estimated solely for the purpose of
calculating the amount of the registration fee pursuant to rule
457(a) under the Securities Act of 1933.
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(3)
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Of this amount, $23,025 was paid
previously.
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The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until this Registration
Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
The
information in this preliminary prospectus is not complete and
may be changed. The selling stockholders may not sell these
securities until the registration statement filed with the
Securities and Exchange Commission is effective. This
preliminary prospectus is not an offer to sell these securities,
and we and the selling stockholders are not soliciting an offer
to buy these securities in any state where the offer or sale is
not permitted.
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SUBJECT TO COMPLETION, DATED
OCTOBER 29, 2007.
PRELIMINARY PROSPECTUS
39,500,000 Shares
Common Stock
This is Symetra Financial Corporations initial public
offering. The selling stockholders are selling all of the shares
in the offering. We will not receive any of the proceeds from
the sale of shares by the selling stockholders.
We expect the public offering price to be between $18.00 and
$20.00 per share. Currently, no public market exists for the
shares. Our common stock has been approved for listing, subject
to official notice of issuance, on the New York Stock Exchange
under the symbol SYA.
Investing in our common stock involves risks that are
described in the Risk Factors section beginning on
page 10 of this prospectus.
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Per Share
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Total
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Public offering price
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$
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$
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Underwriting discount
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$
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$
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Proceeds to selling stockholders
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$
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$
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The underwriters may also purchase up to an additional
5,925,000 shares of common stock from the selling
stockholders at the public offering price, less the underwriting
discount, within 30 days from the date of this prospectus
to cover over-allotments.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or passed on the accuracy or adequacy of this
prospectus. Any representation to the contrary is a criminal
offense.
The shares will be ready for delivery on or
about ,
2007.
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Merrill
Lynch & Co. |
Goldman,
Sachs & Co. |
JPMorgan |
Lehman
Brothers |
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UBS Investment Bank
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Banc of America Securities LLC
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Dowling & Partners Securities, LLC
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Fox-Pitt Kelton Cochran Caronia Waller
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Keefe, Bruyette & Woods
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Wells Fargo Securities
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The date of this prospectus
is ,
2007.
TABLE OF
CONTENTS
You should rely only on the information contained in this
prospectus or any free writing prospectus prepared by or on
behalf of us. We have not authorized anyone to provide you with
information that is different. We are not making an offer of our
common stock in any state where the offer is not permitted. You
should not assume that the information contained in this
prospectus is accurate as of any date other than the date on the
front cover of this prospectus.
Symetra, Symetra Financial and their
respective logos are our trademarks. Other service marks,
trademarks and trade names referred to in this prospectus are
the property of their respective owners.
Our insurance subsidiaries are domiciled in the states of
Washington and New York. These states have enacted laws that
require regulatory approval for the acquisition of
control of insurance companies. Under these laws,
there exists a presumption of control when an
acquiring party acquires 10% or more of the voting securities of
an insurance company or of a company which itself controls an
insurance company. Therefore, any person acquiring 10% or more
of our common stock would need the prior approval of the state
insurance regulators of these states or a determination from
such regulators that control has not been acquired.
Dealer
Prospectus Delivery Obligation
Through and
including ,
2007 (the 25th day after the date of this prospectus), all
dealers that effect transactions in our common stock, whether or
not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers obligation
to deliver a prospectus when acting as an underwriter and with
respect to unsold allotments or subscriptions.
The following is a summary of the information contained in
this prospectus, and it may not contain all the information that
is important to you. You should read the entire prospectus
carefully, especially the Risk Factors section, the
consolidated financial statements and the accompanying notes
included in this prospectus.
Unless the context otherwise requires, references in this
prospectus 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, including our predecessor operations.
A glossary of selected insurance terms and defined terms used
throughout this prospectus can be found under Glossary of
Selected Insurance and Defined Terms on
page G-1.
Our
Business
We are a life insurance company focused on profitable growth in
select group health, retirement, life insurance and employee
benefits markets. Our first day of operations as an independent
company was August 2, 2004 when Symetra acquired a group of
life insurance and investment companies from Safeco Corporation
(the Acquisition). Our operations date back to 1957,
and many of our agency and distribution relationships have been
in place for decades. We are headquartered in Bellevue,
Washington and employ approximately 1,300 people in 25
offices across the United States, serving approximately
1.7 million customers. As of September 30, 2007, we
had total stockholders equity of $1.4 billion,
regulatory capital of $1.5 billion and total assets of
$19.7 billion. Our operating return on average equity, or
operating ROAE, was 12.6% and 12.1% for the twelve month periods
ended September 30, 2007 and 2006, and 13.0% and 11.9% for
the years ended December 31, 2006 and December 31,
2005, respectively. We define operating ROAE as net operating
income, a non-GAAP financial measure, divided by average
stockholders equity excluding accumulated other
comprehensive income. For a reconciliation of net operating
income to net income, please see page 8.
We manage our business through the following five segments, four
of which are operating:
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Group. We offer medical stop-loss insurance,
limited medical benefit plans, group life insurance, accidental
death and dismemberment insurance and disability insurance
mainly to employer groups of 50 to 1,000 individuals. Our Group
segment generated segment pre-tax income of $68.0 million
during 2006 and $70.1 million during the nine months ended
September 30, 2007. As a result of our recent acquisition
of Medical Risk Managers, Inc., we also offer managing general
underwriting, or MGU, services.
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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) and
457 plans. We also provide record keeping services for qualified
retirement plans invested in mutual funds. Our Retirement
Services segment generated segment pre-tax income of
$43.2 million during 2006 and $19.4 million during the
nine months ended September 30, 2007.
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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. Our Income
Annuities segment generated segment pre-tax income of
$62.6 million during 2006 and $63.7 million during the
nine months ended September 30, 2007.
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Individual. We offer a wide array of term,
universal and variable life insurance as well as bank-owned life
insurance, or BOLI. Our Individual segment generated segment
pre-tax income of $62.6 million during 2006 and
$44.3 million during the nine months ended
September 30, 2007.
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Other. This segment consists of unallocated
corporate income, composed primarily of investment income on
unallocated surplus, unallocated corporate expenses, interest
expense on debt, the results of
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small, non-insurance businesses that are managed outside of our
operating segments and inter-segment elimination entries. Our
Other segment generated segment pre-tax income of
$7.6 million during 2006 and $7.1 million during the
nine months ended September 30, 2007.
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We distribute our products nationally through an extensive and
diversified independent distribution network. Our distributors
include financial institutions, employee benefits brokers, third
party administrators, worksite specialists, specialty brokers
and independent agents. We believe that our multi-channel
distribution network allows us to access a broad share of the
distributor and consumer markets for insurance and financial
services products. For example, we currently distribute our
annuity and life insurance products through approximately 23,000
independent agents, 28 key financial institutions and 3,300
independent employee benefits brokers. We have recently signed
selling agreements with an additional 10 key financial
institutions.
Market
Environment and Opportunities
We believe we are well positioned to benefit from a number of
demographic and market trends, including the following:
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Growing demand for affordable health
insurance. According to the Kaiser Family
Foundation, health insurance premiums in the U.S. increased
87% from
2000-2006,
while the Consumer Price Index increased only 17% over the same
period. As increases in health care costs continue to outpace
inflation, the demand for affordable health insurance options
has increased. We believe we can grow our business by providing
employees with affordable access to health insurance through
employer-sponsored limited benefit employee health plans and by
offering group medical stop-loss insurance to medium and large
businesses. We also believe that the trend toward reductions in
employer-paid benefits and the uncertainty over the future of
government benefit programs provide us with the opportunity to
successfully offer other attractive employee benefits products.
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Increasing retirement savings and income
needs. According to the U.S. Census Bureau,
approximately 77 million Americans born between 1946 and
1964 are approaching retirement age. However, according to the
Employee Benefit Research Institute, in 2006, 52% of workers
over the age of 55 and their spouses had accumulated less than
$50,000 in retirement savings and only 14% of workers report
that a traditional pension plan will be their primary source of
retirement income. These projected demographic trends, along
with a shift in the burden for funding retirement needs from
governments and employers to individuals, increase the need for
retirement savings and income. We expect greater demand for
additional sources of retirement savings, such as our annuities
and other investment products that will help consumers
supplement their social security benefits with reliable
retirement income.
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Expanding mass affluent market. As of June
2006, the mass affluent market included 13.7 million
households with investible assets between $250,000 and
$1.0 million, representing 28% of total financial assets.
We believe that the mass affluent population is growing and that
it underutilizes various financial products, such as insurance
to protect assets, annuities to provide adequate income to
support a desired future lifestyle and wealth transfer products
to ensure its legacy. We believe we are well positioned to reach
consumers in this target market given our relationships with
financial institutions and independent agents, which are often
their primary sources of guidance and advice. As such, we expect
increased demand for our life insurance, variable and fixed
annuity and wealth transfer products.
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Our
Competitive Strengths
We leverage the following competitive strengths to capitalize on
opportunities in our targeted markets:
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Innovative and collaborative product development
capabilities. We design innovative products to
meet the changing demands of the market. By working closely with
our distributors, we are able to anticipate opportunities in the
marketplace and rapidly address them. For example, we introduced
Complete, an innovative variable life insurance policy designed
for wealth transfer and centered on minimizing the inherent cost
of insurance and thus maximizing the underlying account value.
We also recently
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introduced our Focus variable annuity, which features low total
cost to the contractholders, well-respected investment options
and simplified product features.
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High-quality distribution relationships. We
offer consumers access to our products through a national
multi-channel network, including financial institutions,
employee benefits brokers, third party administrators, worksite
specialists, specialty brokers and independent agents. By
treating our distributors as clients and providing them with
outstanding levels of service, we have cultivated strong
relationships over decades and are able to avoid competing on
price alone.
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Leading group medical stop-loss insurance
provider. We believe we have been a leading
provider of group medical stop-loss insurance since 1976. We
have built a consistently profitable platform with high levels
of customer service and disciplined underwriting practices. In
the last 25 years, our group medical stop-loss insurance
business has experienced only two calendar years of net losses.
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Diverse businesses provide flexibility, earnings stability
and capital efficiency. We have an attractive and
diverse mix of businesses that allows us to make
profitability-driven decisions in each business across various
market environments. We believe that this mix offers us a
greater level of financial stability than many of our
similarly-sized competitors across business and economic cycles.
Our diverse business mix also allows us to reallocate our
resources to product lines that generate the most attractive
returns on capital invested while reducing our overall capital
requirements.
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Flexible information technology platform integrated with our
distributors. We have a flexible information
technology platform that allows us to seamlessly integrate our
products onto the operating platforms of our distributors, which
we believe provides us with a competitive advantage in
attracting new distributors. For example, our
ExpressTM
tool allows our distributors to capture all the necessary data
to make products and services instantly available at the point
of sale. We will continue to leverage our information technology
platform to market our current and future product offerings.
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Experienced management team with investor-aligned
compensation. We have a high-quality management
team with an average of 24 years of insurance-industry
experience, led by Randy Talbot who has been our chief executive
officer since 1998. Mr. Talbot has spent a significant
portion of his
30-year
career in the insurance industry operating an insurance
brokerage, providing him with the knowledge to intimately
understand the needs of our distributors. We also have an
experienced board of directors, consisting of industry
professionals who have worked closely with us since the
Acquisition to develop our strategies and operating
philosophies. Our compensation structure aligns
managements incentives with our stockholders through our
long-term incentive plan that rewards long-term growth in
tangible book value and in the intrinsic value of our business.
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Our
Growth Strategies
To maximize stockholder value, we pursue the following
strategies:
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Target large and growing markets. We will
continue to capitalize on favorable demographic trends,
including the growing demand for affordable health insurance,
increasing retirement savings and income needs and an expanding
mass affluent market. We will continue to identify key
opportunities within these markets and provide tailored
solutions that address the evolving needs of these customers.
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Broaden and deepen distribution
relationships. Our distribution strategy is to
deliver multiple products through a single point of sale,
thereby leveraging the cost of distribution. We utilize diverse
distribution channels, including financial institutions,
employee benefits brokers, third party administrators, worksite
specialists, specialty brokers and independent agents. We intend
to deepen our long-standing distribution relationships while
adding new large-scale and high quality distributors.
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Be innovative in anticipating customer
needs. We will continue to work closely with our
distributors to develop customer-responsive products that meet
our stringent return requirements, address our target markets
and can be delivered efficiently across our information
technology platforms. We will also continue to pursue
non-traditional avenues of product development and be innovative
in enhancing our
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product offering. For example, we recently began offering
funding services to holders of our structured settlements to
offer them an attractive financial alternative.
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Effectively manage capital. We intend to
manage our capital prudently to maximize our profitability and
long-term growth in stockholder value. Our capital management
strategy is to maintain financial strength through conservative
and disciplined risk management practices while deploying or
returning excess capital as situations warrant. We will also
maintain our conservative investment management philosophy,
which includes holding a high quality investment portfolio and
carefully matching our investment assets against the duration of
our insurance product liabilities. For example, we have a
portfolio of equities that supports the longest duration
benefits in our Income Annuities segment. We have experienced
strong performance on this equity portfolio.
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Pursue complementary acquisitions. We will
continue to seek acquisition opportunities that fit
strategically within our existing business lines, provide us
with a larger distribution presence and meet our stringent
return objectives. We believe we have ample financial capacity
to remain a prudent acquirer while maintaining a conservative
balance sheet.
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Risks
Related to Our Business, Our Industry and this
Offering
Investing in shares of our common stock involves substantial
risk. The factors that could adversely affect our results and
performance are discussed under the heading Risk
Factors immediately following this summary. Before you
invest in our shares, you should carefully consider all of the
information in this prospectus, including matters set forth
under the heading Risk Factors, including:
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Exposure to interest rate
fluctuations. Many of our insurance and
investment products are sensitive to interest rate fluctuations.
Generally, declines in interest rates would have an adverse
effect on our financial condition, results of operations and
cash flows.
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Reserve requirements. Our calculation
of reserves for estimated future benefit payments are based upon
estimates and assumptions with regard to our future experience.
Future experience is subject to many uncertainties and we cannot
predict the ultimate amounts we will pay for future benefits or
the timing of the payments. If reserves are insufficient to
cover actual benefits and payments, we could be required to
increase our reserves, which could adversely affect our
financial condition and results.
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Deviation from assumptions upon which pricing is
established. The price and expected future profitability
of our insurance and deferred annuity products are based in part
upon expected patterns of premiums, expenses and benefits, using
a number of assumptions, including those related to persistency,
mortality and morbidity. Significant deviations from these
assumptions could have an adverse affect on our financial
condition, results of operations and cash flows.
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Amortization of deferred acquisition
costs. Deferred acquisition costs, or DAC,
represent certain costs which vary with, and are primarily
related to, the sale and issuance of insurance policies and
investment contracts and are deferred and amortized over the
estimated policy and contract lives. Unfavorable experience with
regard to expenses, investment returns, mortality, morbidity,
withdrawals or lapses may increase the amortization of DAC,
resulting in higher expenses and lower profitability.
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Potential downgrade in financial strength
ratings. A downgrade in our financial
strength ratings could have an adverse effect on our financial
condition, results of operation, and cash flows in several ways,
including reducing new sales of products; adversely affecting
our relationship with sales agents; increasing the number of
policy surrenders and withdrawals; requiring us to reduce prices
and adversely impacting our ability to obtain reinsurance.
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Highly regulated industry. Our
insurance businesses are subject to a wide variety of laws and
regulations in various jurisdictions. Compliance with applicable
laws and regulations is time consuming and personnel intensive,
and changes in these laws and regulations may materially
increase our direct and indirect compliance efforts and other
expenses of doing business.
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Constraints related to holding company
structure. As a holding company, we have no
significant direct operations. Dividends and other permitted
distributions from subsidiaries are expected to be our principal
source of funds to meet ongoing cash requirements. These
payments are limited by regulations in the jurisdictions in
which our subsidiaries operate. If our subsidiaries are unable
to pay dividends, we may have difficulty servicing our debt,
paying dividends on our common stock and meeting our holding
company expenses.
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Financial
Strength Ratings
As of September 30, 2007, the financial strength ratings of
our primary life insurance subsidiaries were A
(Excellent, the third highest of 15 ratings) with a
stable outlook from A.M. Best Company, Inc.,
A (Strong, the seventh highest of
21 ratings) with a positive outlook from Standard &
Poors Rating Service, A2 (Good,
the sixth highest of 21 ratings) with a stable outlook from
Moodys Investors Service, Inc. and A+
(Strong, the fifth highest of 24 ratings) with a
stable outlook from Fitch, Inc. These financial strength ratings
should not be relied on with respect to making an investment in
our common stock.
Recent
Events
On October 10, 2007, we issued $150.0 million
aggregate principal amount of Capital Efficient Notes due 2067
(the CENts). The CENts were purchased by a syndicate
of initial purchasers, led by J.P. Morgan Securities Inc.
and Lehman Brothers Inc., and may be resold to qualified
institutional buyers in compliance with applicable securities
laws. The CENts bear interest at a fixed annual rate of 8.30%
to, but not including, October 15, 2017, and thereafter at
a floating annual rate equal to three-month LIBOR plus 4.177%.
The CENts have a scheduled maturity date of October 15,
2037, subject to certain limitations, with a final maturity date
of October 15, 2067. We applied the net proceeds from the
CENts to pay a special cash dividend to our stockholders on
October 19, 2007.
On October 12, 2007, we declared two dividends, totaling
$200.0 million, which we paid on October 19, 2007 to
stockholders of record on October 12, 2007.
The
Selling Stockholders
Symetra was formed for the purpose of acquiring our principal
subsidiaries from Safeco Corporation. Affiliates of White
Mountains Insurance Group, Ltd. and Berkshire Hathaway Inc. led
the investor group that formed Symetra to consummate the
Acquisition. In addition to the affiliates of White Mountains
Insurance Group, Ltd. and Berkshire Hathaway Inc., others from
the original investor group may participate in this offering as
selling stockholders. Upon consummation of this offering,
affiliates of White Mountains Insurance Group, Ltd. and
Berkshire Hathaway Inc. will collectively continue to
beneficially own approximately 33.4% of our outstanding common
stock.
Our
Executive Offices
Symetra was incorporated in 2004 under the laws of Delaware. Our
principal executive offices are located at 777 108th Ave
NE, Suite 1200, Bellevue, WA 98004. Our telephone number is
(425) 256-8000.
Our internet address is www.symetra.com. The information
contained on or accessible from our website does not constitute
a part of this prospectus and is not incorporated by reference
herein.
5
The
Offering
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Common stock offered by the selling stockholders |
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39,500,000 shares |
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Common stock to be outstanding after this offering |
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92,646,295 shares |
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Over-allotment option |
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The underwriters have an option to purchase a maximum of
5,925,000 additional shares from the selling stockholders to
cover over-allotments. |
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Use of proceeds |
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We will not receive any proceeds from this offering. See
Use of Proceeds. |
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Listing |
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Our common stock has been approved for listing, subject to
official notice of issuance, on the New York Stock Exchange, or
NYSE, under the symbol SYA. |
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Dividend policy |
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We intend to pay quarterly dividends on our common stock. The
declaration, payment and amount of future dividends to holders
of our common stock will be at the discretion of our board of
directors and will depend on many factors, including our
financial condition and results of operations, liquidity
requirements, market opportunities, capital requirements of our
subsidiaries, legal requirements, regulatory constraints and
other factors that our board of directors deems relevant.
Dividends on our common stock will also be paid to holders of
our outstanding warrants. |
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Risk factors |
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See Risk Factors for a discussion of factors you
should consider before investing in our common stock. |
All information in this prospectus, unless otherwise indicated
or the context otherwise requires:
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|
assumes the common stock will be sold at $19.00 per share
(the midpoint of the price range set forth on the cover of this
prospectus);
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assumes no exercise of the underwriters over-allotment
option;
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excludes 7,830,000 shares of common stock reserved for
issuance pursuant to awards granted under our Equity Plan, of
which 911,152 shares are subject to awards to be granted to
employees, in the form of stock options, restricted stock units
and shares, under an IPO grant program on or about the date of
this offering (See Management Compensation
Discussion and Analysis Elements of
Compensation IPO Grant Program);
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excludes 870,000 shares of common stock reserved for
issuance pursuant to our Employee Stock Purchase Plan;
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assumes no exercise of outstanding warrants to purchase
18,975,744 shares of common stock at an exercise price of
$11.49 per share; and
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has been adjusted to give effect to a 7.7-for-1 stock dividend
(substantially equivalent to a 8.7-for-1 stock split) that
occurred on October 26, 2007.
|
6
SUMMARY
HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA
The summary historical consolidated financial and other data,
except for non-GAAP financial measures, as of September 30,
2007 and for the nine months ended September 30, 2007 and
2006 have been derived from our unaudited interim historical
consolidated financial statements and the related notes, which
have been prepared on a basis consistent with our annual
consolidated financial statements and are included in this
prospectus. In the opinion of management such unaudited
financial data, except for non-GAAP financial measures, reflects
all historical and recurring adjustments necessary for a fair
presentation of the results for these periods. The results of
operations for the nine months ended September 30, 2007 are
not necessarily indicative of the results to be expected for the
full year or any future period. The summary historical
consolidated financial and other data, except for non-GAAP
financial measures, as of and for the years ended
December 31, 2006 and 2005, and for the period from
August 2, 2004 through December 31, 2004, and the
period from January 1, 2004 through August 1, 2004
have been derived from our audited consolidated financial
statements and the related notes that are included in this
prospectus. The summary historical consolidated financial and
other data, except for non-GAAP financial measures, as of
December 31, 2004 have been derived from our audited
consolidated financial statements and the related notes, which
are not included in this prospectus.
We do not believe the predecessor financial results for the
period from January 1, 2004 through August 1, 2004 are
comparable to the results of our new independent company,
primarily because during and after the Acquisition we
experienced significant changes in our operating costs and also
because of purchase accounting adjustments impacting net
investment income, policyholder benefits and claims, interest
credited, amortization of deferred policy acquisition costs,
intangible assets and net realized investment gains (losses).
Additionally, due to the short period from our inception as an
independent company to the end of 2004, as well as the effect of
transitional expense charges associated with the Acquisition, we
do not consider our financial results for the period from
August 2, 2004 through December 31, 2004 to be
comparable to those for the years ended December 31, 2006
and 2005. This summary data should be read in conjunction with
our historical consolidated financial statements and related
notes included in this prospectus, as well as our Selected
Historical Consolidated Financial Data and with
Managements Discussion and Analysis of Financial
Condition and Results of Operations.
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 2
|
|
|
January 1
|
|
|
|
Nine Months
|
|
|
Year Ended
|
|
|
through
|
|
|
through
|
|
|
|
Ended September 30,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
August 1,
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2004
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except per share data)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
|
|
$
|
397.9
|
|
|
$
|
398.0
|
|
|
$
|
525.7
|
|
|
$
|
575.5
|
|
|
$
|
263.2
|
|
|
$
|
357.9
|
|
Net investment income
|
|
|
732.3
|
|
|
|
734.0
|
|
|
|
984.9
|
|
|
|
994.0
|
|
|
|
411.1
|
|
|
|
693.7
|
|
Other revenues
|
|
|
50.4
|
|
|
|
42.7
|
|
|
|
56.1
|
|
|
|
58.6
|
|
|
|
27.1
|
|
|
|
43.9
|
|
Net realized investment gains (losses)
|
|
|
23.8
|
|
|
|
(4.9
|
)
|
|
|
1.7
|
|
|
|
14.1
|
|
|
|
7.0
|
|
|
|
34.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
1,204.4
|
|
|
|
1,169.8
|
|
|
|
1,568.4
|
|
|
|
1,642.2
|
|
|
|
708.4
|
|
|
|
1,130.4
|
|
Benefits and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder benefits and claims
|
|
|
196.5
|
|
|
|
209.8
|
|
|
|
264.3
|
|
|
|
327.4
|
|
|
|
127.5
|
|
|
|
223.6
|
|
Interest credited
|
|
|
564.9
|
|
|
|
571.9
|
|
|
|
765.9
|
|
|
|
810.9
|
|
|
|
360.2
|
|
|
|
556.4
|
|
Other underwriting and operating expenses
|
|
|
209.9
|
|
|
|
191.9
|
|
|
|
260.5
|
|
|
|
273.2
|
|
|
|
123.3
|
|
|
|
182.3
|
|
Fair value of warrants issued to investors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101.5
|
|
|
|
|
|
Interest expense
|
|
|
14.1
|
|
|
|
14.5
|
|
|
|
19.1
|
|
|
|
12.4
|
|
|
|
3.5
|
|
|
|
|
|
Amortization of deferred policy acquisition costs
|
|
|
14.2
|
|
|
|
11.0
|
|
|
|
14.6
|
|
|
|
11.9
|
|
|
|
1.6
|
|
|
|
34.2
|
|
Intangible asset amortization
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses
|
|
|
999.8
|
|
|
|
999.1
|
|
|
|
1,324.4
|
|
|
|
1,435.8
|
|
|
|
717.6
|
|
|
|
1,001.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 2
|
|
|
January 1
|
|
|
|
Nine Months
|
|
|
Year Ended
|
|
|
through
|
|
|
through
|
|
|
|
Ended September 30,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
August 1,
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2004
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except per share data)
|
|
|
Income (loss) from continuing operations before income taxes
|
|
|
204.6
|
|
|
|
170.7
|
|
|
|
244.0
|
|
|
|
206.4
|
|
|
|
(9.2
|
)
|
|
|
129.0
|
|
Provisions for income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
46.1
|
|
|
|
72.5
|
|
|
|
92.4
|
|
|
|
22.2
|
|
|
|
21.3
|
|
|
|
0.9
|
|
Deferred
|
|
|
20.9
|
|
|
|
(12.7
|
)
|
|
|
(7.9
|
)
|
|
|
39.7
|
|
|
|
10.7
|
|
|
|
30.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision for income taxes
|
|
|
67.0
|
|
|
|
59.8
|
|
|
|
84.5
|
|
|
|
61.9
|
|
|
|
32.0
|
|
|
|
31.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
137.6
|
|
|
|
110.9
|
|
|
|
159.5
|
|
|
|
144.5
|
|
|
|
(41.2
|
)
|
|
|
97.6
|
|
Income (loss) from discontinued operations (net of taxes)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.0
|
|
|
|
(2.4
|
)
|
|
|
2.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
137.6
|
|
|
$
|
110.9
|
|
|
$
|
159.5
|
|
|
$
|
145.5
|
|
|
$
|
(43.6
|
)
|
|
$
|
99.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.23
|
|
|
$
|
0.99
|
|
|
$
|
1.43
|
|
|
$
|
1.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
1.23
|
|
|
$
|
0.99
|
|
|
$
|
1.43
|
|
|
$
|
1.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
111.622
|
|
|
|
111.622
|
|
|
|
111.622
|
|
|
|
111.622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
111.622
|
|
|
|
111.622
|
|
|
|
111.622
|
|
|
|
111.622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP Financial Measures(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income (loss)
|
|
$
|
126.1
|
|
|
$
|
121.6
|
|
|
$
|
172.1
|
|
|
$
|
141.9
|
|
|
$
|
(46.0
|
)
|
|
$
|
75.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation to Net Income (Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
137.6
|
|
|
$
|
110.9
|
|
|
$
|
159.5
|
|
|
$
|
145.5
|
|
|
$
|
(43.6
|
)
|
|
$
|
99.9
|
|
Less: Net realized investment gains (losses) (net of taxes)
|
|
|
15.5
|
|
|
|
(3.2
|
)
|
|
|
1.1
|
|
|
|
9.2
|
|
|
|
4.6
|
|
|
|
22.7
|
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized and unrealized investment gains (losses) on fixed
indexed annuities (FIA) options (net of taxes)
|
|
|
0.5
|
|
|
|
(0.2
|
)
|
|
|
1.4
|
|
|
|
(2.9
|
)
|
|
|
1.3
|
|
|
|
(1.7
|
)
|
Net realized and unrealized investment gains on equity
securities (net of taxes)
|
|
|
3.5
|
|
|
|
7.7
|
|
|
|
12.3
|
|
|
|
8.5
|
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income (loss)
|
|
$
|
126.1
|
|
|
$
|
121.6
|
|
|
$
|
172.1
|
|
|
$
|
141.9
|
|
|
$
|
(46.0
|
)
|
|
$
|
75.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30,
|
|
As of December 31,
|
Consolidated Balance Sheet
Data:
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
(In millions, except per share data)
|
|
Total investments
|
|
$
|
16,864.2
|
|
|
$
|
17,305.3
|
|
|
$
|
18,332.8
|
|
|
$
|
19,244.8
|
|
Total assets
|
|
|
19,729.2
|
|
|
|
20,114.6
|
|
|
|
20,980.1
|
|
|
|
22,182.0
|
|
Total debt
|
|
|
298.8
|
|
|
|
298.7
|
|
|
|
300.0
|
|
|
|
300.0
|
|
Separate account assets
|
|
|
1,260.5
|
|
|
|
1,233.9
|
|
|
|
1,188.8
|
|
|
|
1,228.4
|
|
Accumulated other comprehensive income (loss) (net of taxes)
(AOCI)
|
|
|
(102.3
|
)
|
|
|
(0.5
|
)
|
|
|
136.6
|
|
|
|
312.9
|
|
Total stockholders equity
|
|
$
|
1,365.6
|
|
|
$
|
1,327.3
|
|
|
$
|
1,404.9
|
|
|
$
|
1,435.8
|
|
Book value per common share:
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|
|
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|
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|
|
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|
|
|
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Basic(3)
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$
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15.84
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|
|
$
|
14.33
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|
|
$
|
13.69
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|
|
$
|
12.12
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|
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Diluted(4)
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$
|
15.10
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|
|
$
|
13.85
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|
|
$
|
13.32
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|
|
$
|
12.01
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|
|
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U.S. Statutory Financial Information:
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Statutory capital and surplus
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$
|
1,309.7
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|
|
$
|
1,266.2
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|
|
$
|
1,260.1
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|
|
$
|
1,138.4
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Asset valuation reserve (AVR)
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|
|
172.2
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|
|
|
158.4
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|
|
|
140.9
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|
|
|
107.6
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|
|
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|
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|
|
|
|
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|
Statutory capital and surplus and AVR
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$
|
1,481.9
|
|
|
$
|
1,424.6
|
|
|
$
|
1,401.0
|
|
|
$
|
1,246.0
|
|
|
|
|
|
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(1) |
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Net income per common share (basic and diluted) assumes that all
participating securities, including warrants, have been
outstanding since the beginning of the period, using the
two-class method. |
|
(2) |
|
Management considers certain non-GAAP financial measures,
including net operating income (loss), to be a useful supplement
to comparable GAAP measures in evaluating our financial
performance and condition. These measures have been reconciled
to their most comparable GAAP financial measures. We believe
that the non-GAAP presentation of net operating income is
valuable because excluding certain realized capital gains and
losses, many of which are driven by investment decisions and
external economic developments unrelated to the insurance and
underwriting aspects of the business, reveals trends that may be
otherwise obscured. For a definition of these non-GAAP measures
and other metrics used in our analysis, see
Managements Discussion and Analysis of Financial
Condition and Results of Operations Use of
non-GAAP Financial Measures. |
|
|
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(3) |
|
Basic book value per common share is calculated based on total
stockholders equity less AOCI divided by 92,646,295 shares
of common stock outstanding. |
|
|
|
(4) |
|
Diluted book value per common share is calculated based on total
stockholders equity less AOCI plus the proceeds from the
assumed exercise of outstanding warrants, divided by the sum of
the outstanding shares of common stock and shares subject to
outstanding warrants, equal to 111,622,039 in the aggregate. |
9
You should carefully consider the following risks and other
information in this prospectus before deciding to invest in
shares of our common stock. Any of the risks described below
could materially adversely affect our business, financial
condition, results of operations and cash flows. In this event,
the trading price of our common stock could decline and you
could lose part or all of your investment.
Risks
Related to Our Business
Interest
rate fluctuations could adversely affect our financial
condition, results of operations and cash flows.
Certain of our insurance and investment products, such as fixed
annuities and universal life insurance, are sensitive to
interest rate fluctuations and expose us to the risk that
falling interest rates will reduce the spread, or
the difference between the returns we earn on the investments
that support our obligations under these products and the
amounts that we must credit to policyholders and
contractholders. This risk is exacerbated due to the existence
of guaranteed minimum crediting rates established by regulatory
authorities and restrictions on the timing and frequency with
which we can adjust our crediting rates. Accordingly, falling
interest rates could have an adverse effect on our financial
condition, results of operations and cash flows.
Our interest rate spreads and gains related to these spreads
vary by product as follows:
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The interest rate spread on our Retirement Services
segments fixed deferred annuity products was 1.69%, 1.76%
and 1.58% for the nine months ended September 30, 2007 and
for the years ended December 31, 2006 and 2005,
respectively, which yielded gains of $64.5 million,
$102.3 million and $103.4 million, respectively.
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The interest rate spread on our Income Annuities segments
variable annuity products was 0.69%, 0.76% and 0.67% for the
nine months ended September 30, 2007 and for the years
ended December 31, 2006 and 2005, respectively, which
yielded gains of $47.0 million, $66.3 million and
$59.6 million, respectively.
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The interest rate spread on our Individual segments
universal life insurance products was 1.17%, 1.31% and 0.66% for
the nine months ended September 30, 2007 and for the years
ended December 31, 2006 and 2005, respectively, which
yielded gains of $7.6 million, $10.8 million and
$7.5 million, respectively.
|
During periods of rising interest rates, we may determine to
offer higher crediting rates on new sales of interest-sensitive
products and to increase crediting rates on existing in-force
products, in each case in order to maintain or enhance product
competitiveness. In addition, periods of rising interest rates
may cause increased policy surrenders, withdrawals and requests
for policy loans as policyholders and contractholders allocate
their assets into higher yielding investments. Increases in
crediting rates, as well as surrenders and withdrawals, could
have an adverse effect on our financial condition, results of
operations and cash flows.
We calculate reserves for long-term disability and life waiver
of premium claims using net present value calculations based on
the actual interest rates in effect at the time claims are
funded, as well as our expectations for future interest rates.
Waiver of premium refers to a provision in a life insurance
policy pursuant to which an insured with total disability, which
has lasted for a minimum specified period, continues to receive
life insurance coverage but no longer has to pay premiums for
the duration of the disability or for a stated period. During
periods of declining interest rates, reserves for new claims are
calculated using lower discount rates thereby increasing the net
present value of those claims and the required reserves.
Further, if actual interest rates used to establish reserves on
open claims prove to be lower than our original expectations, we
would be required to increase such reserves accordingly. As
such, the increase in net present value calculations caused by
declines in interest rates could have an adverse effect on our
financial condition, results of operations and cash flows.
10
Our term life insurance products also expose us to the risk of
interest rate fluctuations. The pricing and expected future
profitability of these products are based in part on expected
investment returns. Over time, term life insurance products
generally produce positive cash flows as customers pay periodic
premiums, which we invest as we receive them. Lower than
expected interest rates may reduce our ability to achieve our
targeted investment margins and may adversely affect our
financial condition, results of operations and cash flows.
If our
reserves for future policy benefits and claims are inadequate,
we may be required to increase our reserve
liabilities.
We calculate and maintain reserves for estimated future benefit
payments to our policyholders and contractholders in accordance
with U.S. GAAP and industry accounting practices. We
release these reserves as those future obligations are
extinguished. The reserves we establish necessarily reflect
estimates and actuarial assumptions with regard to our future
experience. These estimates and actuarial assumptions involve
the exercise of significant judgment. Our future financial
results depend upon the extent to which our actual future
experience is consistent with the assumptions we have used in
pricing our products and determining our reserves. Many factors
can affect future experience, including economic, political and
social conditions, inflation, healthcare costs and changes in
doctrines of legal liability and damage awards in litigation.
Therefore, we cannot predict the ultimate amounts we will pay
for actual future benefits or the timing of those payments.
We regularly monitor our reserves. If we conclude that our
reserves are insufficient to cover actual or expected policy and
contract benefits and claims payments, we would be required to
increase our reserves and incur income statement charges in the
period in which we make the determination, which could adversely
affect our financial condition and results of operations.
We may
face unanticipated losses if there are significant deviations
from our assumptions regarding the probabilities that our
insurance policies or annuity contracts will remain in-force
from one period to the next or if morbidity and mortality rates
differ significantly from our pricing
expectations.
The prices and expected future profitability of our insurance
and deferred annuity products are based in part upon expected
patterns of premiums, expenses and benefits, using a number of
assumptions, including those related to persistency, mortality
and morbidity. Persistency is the probability that a policy or
contract will remain in-force from one period to the next. The
effect of persistency on profitability varies for different
products. For most of our life insurance, group life and health
insurance and deferred annuity products, actual persistency that
is lower than our assumptions could have an adverse impact on
profitability, especially in the early years of a policy or
contract primarily because we would be required to accelerate
the amortization of expenses we deferred in connection with the
acquisition of the policy or contract. In addition, we may need
to sell investments at a loss to fund withdrawals. For some of
our health insurance policies, actual persistency in later
policy durations that is higher than our persistency assumptions
could have a negative impact on profitability. If these policies
remain in-force longer than we assumed, then we could be
required to make greater benefit payments than we had
anticipated when we priced these products.
In addition, we set prices for our insurance and certain annuity
products based upon expected claims and payment patterns, using
assumptions for, among other factors, morbidity rates and
mortality rates of our policyholders and contractholders. The
long-term profitability of these products depends upon how our
actual experience compares with our pricing assumptions. For
example, if morbidity rates are higher, or mortality rates are
lower, than our pricing assumptions, we could be required to
make greater payments under certain annuity contracts than we
had projected.
Because our assumptions are inherently uncertain, reserves for
future policy benefits and claims may prove to be inadequate if
actual experience is different from our assumptions. Although
certain of our products permit us to increase premiums during
the life of the policy or contract, these increases may not be
sufficient to maintain profitability. Moreover, many of our
products either do not permit us to increase premiums or limit
those increases during the life of the policy or contract.
Therefore, significant deviations in experience
11
from our assumptions regarding persistency and mortality and
morbidity rates could have an adverse effect on our financial
condition, results of operations and cash flows.
We may
be required to accelerate the amortization of deferred
acquisition costs, which would increase our expenses and reduce
profitability.
Deferred acquisition costs, or DAC, represent certain costs
which vary with and are primarily related to the sale and
issuance of our insurance policies and investment contracts and
are deferred and amortized over the estimated life of the
related insurance policies and contracts. These costs include
commissions in excess of ultimate renewal commissions and
certain other sales incentives, solicitation and printing costs,
sales material and other costs, such as underwriting and
contract and policy issuance expenses. Under U.S. GAAP, DAC
is amortized through operations over the lives of the underlying
contracts in relation to the anticipated recognition of premiums
or gross profits.
Our amortization of DAC generally depends upon anticipated
profits from investments, surrender and other policy and
contract charges, mortality, morbidity and maintenance and
expense margins. Unfavorable experience with regard to expected
expenses, investment returns, mortality, morbidity, withdrawals
or lapses may cause us to increase the amortization of DAC,
resulting in higher expenses and lower profitability.
We regularly review our DAC asset balance to determine if it is
recoverable from future income. The portion of the DAC balance
deemed to be unrecoverable, if any, is charged to expense in the
period in which we make this determination. For example, if we
determine that we are unable to recover DAC from profits over
the life of a book of business of insurance policies or annuity
contracts, or if withdrawals or surrender charges associated
with early withdrawals do not fully offset the unamortized
acquisition costs related to those policies or annuities, we
would be required to recognize the additional DAC amortization
as a current-period expense. In general, we limit our deferral
of acquisition costs to costs assumed in our pricing
assumptions. As of September 30, 2007 and December 31,
2006, we had $117.7 million and $88.2 million of DAC,
respectively. Our amortization of DAC was $14.2 million
during the nine months ended September 30, 2007 and
$14.6 million during the year ended December 31, 2006.
A
downgrade or a potential downgrade in our financial strength
ratings could result in a loss of business.
Financial strength ratings, which various ratings organizations
publish as measures of an insurance companys ability to
meet contractholder and policyholder obligations, are important
to maintaining public confidence in our company and our
products, the ability to market our products and our competitive
position. As of September 30, 2007, our principal life
insurance company subsidiary, Symetra Life Insurance Company,
has financial strength ratings of A
(Excellent, third highest of 15 ratings) with a
stable outlook from A.M. Best, A−
(Strong, seventh highest of 21 ratings) with a
positive outlook from Standard & Poors, or
S&P, A2 (Good, sixth highest of 21
ratings) with a stable outlook from Moodys and
A+ (Strong, fifth highest of 24 ratings)
with a stable outlook from Fitch.
A downgrade in our financial strength ratings, or the announced
potential for a downgrade, could have an adverse effect on our
financial condition, results of operations and cash flows in
several ways, including:
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reducing new sales of insurance products, annuities and other
investment products;
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limiting our ability to offer structured settlement products;
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adversely affecting our relationships with independent sales
intermediaries and our dedicated sales specialists;
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materially increasing the number or amount of policy surrenders
and withdrawals by contractholders and policyholders;
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requiring us to reduce prices for many of our products and
services to remain competitive; and
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adversely affecting our ability to obtain reinsurance or obtain
reasonable pricing on reinsurance.
|
12
The
occurrence of natural disasters, disease pandemics, terrorism or
military actions could adversely affect our financial condition,
results of operations and cash flows.
Our financial condition and results of operations are at risk of
material adverse effects that could arise from catastrophic
mortality and morbidity due to natural disasters, including
floods, tornadoes, earthquakes and hurricanes, disease
pandemics, terrorism and military actions. Such events could
also lead to unexpected changes in persistency rates as
policyholders and contractholders who are affected by the
disaster may be unable to meet their contractual obligations,
such as payment of premiums on our insurance policies or
deposits into our investment products. The continued threat of
terrorism and ongoing military actions may cause significant
volatility in global financial markets, and a natural disaster
or a disease pandemic could trigger an economic downturn in the
areas directly or indirectly affected by the disaster. The
effectiveness of external parties, including governmental and
nongovernmental organizations, in combating the spread and
severity of a disease pandemic could have a material impact on
the losses experienced by us. Further, in our group insurance
operations, a localized event that affects the workplace of one
or more of our group insurance customers could cause a
significant loss due to mortality or morbidity claims.
Our
investment portfolio is subject to various risks that may
diminish the value of our invested assets and reduce investment
returns.
The performance of our investment portfolio depends in part upon
the level of and changes in interest rates, the overall
performance of the economy, the creditworthiness of the specific
obligors included in our portfolio, equity prices, liquidity and
other factors, some of which are beyond our control. Changes in
these factors could materially affect our investment results in
any period.
Interest
rate risk
Changes in interest rates can negatively affect the performance
of most of our investments. Interest rate volatility can reduce
unrealized gains or create unrealized losses in our portfolios.
Interest rates are highly sensitive to many factors, including
governmental monetary policies, domestic and international
economic and political conditions and other factors beyond our
control. Fluctuations in interest rates affect our returns on,
and the fair value of, our fixed maturity and short-term
investments, which comprised $15.6 billion, or 92.4% of the
fair value of our total invested assets as of September 30,
2007.
The fair value of the fixed maturity securities in our portfolio
and the investment income from these securities fluctuate
depending on general economic and market conditions. The fair
value generally increases or decreases in an inverse
relationship with fluctuations in interest rates, while net
investment income realized by us from future investments in
fixed maturity securities will generally increase or decrease in
step with interest rates. In addition, actual net investment
income or cash flows from investments that carry prepayment
risk, such as mortgage-backed and certain other asset-backed
securities, may differ from those anticipated at the time of
investment as a result of interest rate fluctuations. In periods
of declining interest rates, mortgage prepayments generally
increase and mortgage-backed securities, commercial mortgage
obligations and other bonds in our investment portfolio are more
likely to be prepaid or redeemed as borrowers seek to borrow at
lower interest rates, and we may be required to reinvest those
funds in lower interest-bearing investments. As of
September 30, 2007, mortgage-backed and other asset-backed
securities represented $4.5 billion, or 28.6% of the fair
value of our total invested assets.
Because all of our fixed maturity securities are classified as
available for sale, changes in the fair value of these
securities as described above are reflected as a component of
comprehensive income. However, U.S. GAAP does not permit
similar mark-to-market treatment to the insurance liabilities
that the fixed maturity securities support. Therefore, changes
in the fair value of our fixed maturity securities caused by
interest rate fluctuations are not offset in whole or in part by
similar adjustments to the fair value of our insurance
liabilities.
13
We employ asset/liability matching strategies to reduce the
adverse effects of interest rate volatility and to ensure that
cash flows are available to pay claims as they become due. Our
asset/liability matching strategies include:
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asset/liability duration management;
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structuring our bond and commercial mortgage loan portfolios to
limit the effects of prepayments; and
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consistent monitoring of, and making appropriate changes to, the
pricing of our products.
|
However, because these strategies may fail to eliminate or
reduce the adverse effects of interest rate volatility,
significant fluctuations in the level of interest rates may have
a material adverse effect on our financial condition, results of
operations and cash flows.
Credit
risk
From time to time, issuers of the fixed maturity securities that
we own may default on principal and interest payments. Defaults
by third parties in the payment or performance of their
obligations could reduce our investment income and realized
investment gains or result in realized investment losses.
Further, the value of any particular fixed maturity security is
subject to impairment based on the creditworthiness of a given
issuer. As of September 30, 2007, we held
$15.6 billion of fixed maturity securities, or 92.4% of the
fair value of our total invested assets at that date. Our fixed
maturity portfolio also includes below investment grade and
non-rated securities, which comprised 3.9% and 4.1%,
respectively, of the fair value of our total fixed maturity
securities at September 30, 2007. These investments
generally provide higher expected returns, but present greater
risk and can be less liquid than investment grade securities.
Further, the current trend of private equity buyouts could cause
certain of our investment-grade fixed maturities to present more
significant credit risk than when we first invested. A
significant increase in defaults and impairments on our fixed
maturity securities portfolio could materially adversely affect
our financial condition, results of operations and cash flows.
Liquidity
risk
Our investments in privately placed fixed maturities, mortgage
loans, policy loans and limited partnership interests are
relatively illiquid as compared to publicly-traded fixed
maturities and equities. These asset classes represented
approximately 10.1% of the carrying value of our total invested
assets as of September 30, 2007. If we require significant
amounts of cash on short notice in excess of our normal cash
requirements, we may have difficulty selling these investments
in a timely manner, be forced to sell them for less than we
otherwise would have been able to realize, or both.
Downturns
and volatility in equity markets could adversely affect the
marketability of our products and our
profitability.
Significant downturns and volatility in equity markets could
have an adverse effect on our business in various ways. Market
downturns and volatility may discourage purchases of separate
account products, such as variable annuities and variable life
insurance, which have returns linked to the performance of the
equity markets and may cause some existing customers to withdraw
cash values or reduce investments in those products.
Further, downturns and volatility in equity markets can have an
adverse effect on the revenues and returns from our separate
account products. Because these products depend on fees related
primarily to the value of assets under management, a decline in
the equity markets could reduce our revenues by reducing the
value of the investment assets we manage.
We hold equity and equity-like investments in our Income
Annuities and Other segments that represent 1.2% of the fair
value of our general account investments as of
September 30, 2007. Investments in common stock or
equity-like securities generally provide higher expected total
returns over the long term, but present greater risk to
preservation of principal than do our fixed income investments.
14
We
rely on reinsurance arrangements to help manage our business
risks, and failure to perform by the counterparties to our
reinsurance arrangements may expose us to risks we had sought to
mitigate.
We utilize reinsurance to mitigate our risks in various
circumstances. Reinsurance does not relieve us of our direct
liability to our policyholders, even when the reinsurer is
liable to us. Accordingly, we bear credit risk with respect to
our reinsurers. The total reinsurance recoverable amount due
from reinsurers was $247.0 million as of September 30,
2007 and $238.8 million as of December 31, 2006. Our
reinsurers may be unable or unwilling to pay the reinsurance
recoverable owed to us now or in the future or on a timely
basis. A reinsurers insolvency, inability or unwillingness
to make payments under the terms of its reinsurance agreement
with us could have an adverse effect on our financial condition,
results of operations and cash flows.
Reinsurance
may not be available, affordable or adequate to protect us
against losses.
As part of our overall risk management strategy, we purchase
reinsurance for certain risks underwritten by our various
business segments. For example, we currently reinsure up to 85%
of the mortality risk for new fully-underwritten individual term
life insurance policies. We reinsure the mortality risk in
excess of $0.5 million for most of the remainder of new
individual life insurance policies. While reinsurance agreements
generally bind the reinsurer for the life of the business
reinsured at generally fixed pricing, market conditions beyond
our control determine the availability and cost of the
reinsurance protection for new business. In certain
circumstances, the price of reinsurance for business already
reinsured may also increase. Any decrease in the amount of
reinsurance will increase our risk of loss and any increase in
the cost of reinsurance will, absent a decrease in the amount of
reinsurance, reduce our earnings. Accordingly, we may be forced
to incur additional expenses for reinsurance or may not be able
to obtain sufficient reinsurance on acceptable terms, which
could adversely affect our ability to write future business or
result in the assumption of more risk with respect to those
policies we issue.
The availability and cost of these reinsurance arrangements are
subject to market conditions that are beyond our control. As a
result, in the future, we may not be able to enter into
reinsurance arrangements on attractive terms, if at all.
We may
be unable to attract and retain independent sales intermediaries
and dedicated sales specialists.
We distribute our products through financial intermediaries,
independent producers and dedicated sales specialists. We
compete with other financial institutions to attract and retain
commercial relationships in each of these channels, and our
success in competing for sales through these sales
intermediaries depends upon factors such as:
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the amount of sales commissions and fees we pay;
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the breadth of our product offerings;
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the strength of our brand;
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our perceived stability and our financial strength ratings;
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the marketing and services we provide to them; and
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the strength of the relationships we maintain with individuals
at those firms.
|
Our competitors may be effective in providing incentives to
existing and potential distribution partners to favor their
products or to reduce sales of our products.
Our contracts with our distribution partners generally allow
either party to terminate the relationship upon short notice.
Our distribution partners do not make minimum purchase
commitments, and our contracts do not prohibit our partners from
offering products that compete with ours. Accordingly, our
distribution partners may choose not to offer our products
exclusively or at all, or may choose to exert insufficient
resources and attention to selling our products.
15
Our future success is highly dependent on maintaining and
growing both existing and new distribution relationships. We may
have little or no contact with end customers of our products,
thereby resulting in little to no brand awareness with end
customers and making it more difficult to respond to evolving
customer needs, thereby increasing our reliance on our
distribution partners.
From time to time, due to competitive forces, we may experience
unusually high attrition in particular sales channels for
specific products. An inability to recruit productive
independent sales intermediaries and dedicated sales
specialists, or our inability to retain strong relationships
with the individual agents at our independent sales
intermediaries, could have an adverse effect on our financial
condition, results of operations and cash flows.
General
economic, financial market and political conditions may
adversely affect our business.
Our business may be materially adversely affected from time to
time by general economic, financial market and political
conditions, most of which are beyond our control. These
conditions include economic cycles such as:
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cyclical movements in the insurance industry;
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levels of unemployment;
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levels of consumer lending;
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levels of inflation; and
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movements of the financial markets.
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Fluctuations in interest rates, monetary policy, demographics,
and legislative and competitive factors also influence our
performance. During periods of economic downturn:
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individuals and businesses may choose not to purchase our
insurance products and other related products and services, may
terminate existing policies or contracts or permit them to
lapse, may choose to reduce the amount of coverage purchased or,
in our group employer health insurance, may have fewer employees
requiring insurance coverage due to rising unemployment levels;
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new disability insurance claims and claims on other specialized
insurance products tend to rise;
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there is a higher loss ratio due to rising unemployment
levels; and
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insureds tend to increase their utilization of health benefits
if they anticipate unemployment or loss of benefits.
|
In addition, general inflationary pressures may affect medical
costs, increasing the costs of paying claims.
Intense
competition could adversely affect our ability to maintain or
increase our market share and profitability.
Our businesses are subject to intense competition. We believe
the principal competitive factors in the sale of our products
are product features, price, commission structure, marketing and
distribution arrangements, brand, reputation, financial strength
ratings and service. Many other companies actively compete for
sales in our retirement services, income annuity, individual and
group markets, including other major insurers, banks, other
financial institutions, mutual fund and money asset management
firms and specialty providers.
In many of our product lines, we face competition from companies
that have greater market share or breadth of distribution, offer
a broader range of products, services or features, assume a
greater level of risk, have lower profitability expectations or
have higher financial strength ratings than we do. Many
competitors offer similar products and use similar distribution
channels. The substantial expansion of banks and insurance
companies distribution capacities and expansion of product
features in recent years have intensified pressure on margins
and production levels and have increased the level of
competition in many of our product lines.
16
Our
risk management policies and procedures may not be effective or
may leave us exposed to unidentified or unanticipated risk,
which could negatively affect our business.
We are subject to substantial operational, legal and regulatory
risks that require effective policies and procedures to record,
verify and report on a large number of transactions and events.
For instance, our distribution network consists of a large
number of third party agents and requires the implementation and
oversight of policies and procedures to ensure that we are not
unduly subjected to reputational, financial or other risks. We
must also monitor and accurately process large numbers of claims
which, if not properly processed, could subject us to financial
and regulatory risk. In addition, we regularly monitor changes
in laws and regulations in order maintain our products and
administrative procedures in compliance. We have developed
policies and procedures to mitigate these and other risks,
including establishing risk management teams to quantify risk
exposures and make recommendations to our risk committee, and we
have developed procedures to remediate compliance or other
issues. Even so, these policies and procedures may not be fully
effective to mitigate all of these risks. Many of our methods
for managing these risks and exposures are based upon historical
statistical models and observed market behavior. As such, our
methods may not be able to predict all future exposures. These
could be significantly greater than our historical measures have
indicated. Other risk management methods depend upon the
evaluation of information regarding markets and clients, or
other matters that are publicly available or otherwise
accessible to us. This information may not always be accurate,
complete, up-to-date or properly evaluated.
The
failure to maintain effective and efficient information systems
could adversely affect our business.
Our business is dependent upon our ability to keep pace with
technological advances. Our ability to keep our systems fully
integrated with those of our clients is critical to the
operation of our business. Our failure to update our systems to
reflect technological advancements or to protect our systems may
adversely affect our relationships and ability to do business
with our clients.
In addition, our business depends significantly on effective
information systems, and we have many different information
systems for our various businesses. We have committed and will
continue to commit significant resources to develop, maintain
and enhance our existing information systems and develop new
information systems in order to keep pace with continuing
changes in information processing technology, evolving industry
and regulatory standards and changing customer preferences. Our
failure to maintain effective and efficient information systems
could have a material adverse effect on our financial condition
and results of operations. If we do not maintain adequate
systems, we could experience adverse consequences, including:
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inadequate information on which to base pricing, underwriting
and reserving decisions;
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the loss of existing customers;
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difficulty in attracting new customers;
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customer, provider and agent disputes;
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regulatory compliance problems, such as failure to meet prompt
payment obligations;
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litigation exposure; or
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increases in administrative expenses.
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If we
are unable to maintain the availability of our systems and
safeguard the security of our data, our ability to conduct
business will likely be compromised, which may have a material
adverse effect on our financial condition, results of operations
and cash flows.
We use computer systems to store and retrieve, evaluate and use
customer and company data and information. Additionally, our
computer and information technology systems interface with and
rely upon third-party systems. Our business is highly dependent
on our ability, and the ability of our affiliates, to access
these systems to perform necessary business functions. This
includes providing insurance quotes, processing
17
premium payments, providing customer support, filing and paying
claims and making changes to existing policies. Systems outages
or outright failures would compromise our ability to perform
these functions in a timely manner. This could hurt our
relationships with our business partners and customers and harm
our ability to conduct business. In the event of a disaster such
as a blackout, a computer virus, an industrial accident, a
natural catastrophe, a terrorist attack or war, our systems may
not be available to our employees, customers or business
partners for an extended period of time. If our employees are
able to report to work, yet our systems or our data are
destroyed or disabled, they may be unable to perform their
duties for an extended period of time. Our systems could also be
subject to similar disruptions due to physical and electronic
break-ins or other types of unauthorized tampering with our
systems. This may interrupt our business operations and may have
a material adverse effect on our financial condition, results of
operations and cash flows.
Failure
to protect our clients confidential information and
privacy could adversely affect our business.
A number of our businesses are subject to privacy regulations
and to confidentiality obligations. For example, the collection
and use of patient data in our Group segment is the subject of
national and state legislation, including the Health Insurance
Portability and Accountability Act of 1996, or HIPAA, and
certain of the activities conducted by our businesses are
subject to the privacy regulations of the Gramm-Leach-Bliley
Act. We also have contractual obligations to protect certain
confidential information we obtain from our existing vendors and
clients. These obligations generally include protecting such
confidential information in the same manner and to the same
extent as we protect our own confidential information.
In addition, we must develop, implement and maintain a
comprehensive written information security program with
appropriate administrative, technical and physical safeguards to
protect such confidential information. If we do not properly
comply with privacy regulations and protect confidential
information, we could experience adverse consequences, including
regulatory sanctions, such as penalties, fines and loss of
license, as well as loss of reputation and possible litigation.
Our
business could be interrupted or compromised if we experience
difficulties arising from outsourcing
relationships.
We outsource certain technology and business functions to third
parties, including a significant portion of our information
technology function, and expect to continue to do so in the
future. If we do not maintain an effective outsourcing strategy
or third-party providers do not perform as contracted, we may
experience operational difficulties, increased costs and a loss
of business that could have a material adverse effect on our
consolidated results of operations.
Our
new credit facility subjects us to restrictive covenants that
impose operating and financial restrictions on our operations
and could limit our ability to grow our business.
We entered into a $200.0 million revolving credit facility
on August 16, 2007. As of September 30, 2007, we had
no balance outstanding under this facility. In connection with
this facility, we have made covenants that may impose
significant operating and financial restrictions on us. These
restrictions limit the incurrence of additional indebtedness by
our subsidiaries, limit the ability of us and our subsidiaries
to create liens, and impose certain other operating limitations.
These restrictions could limit our ability to obtain future
financing or take advantage of business opportunities.
Furthermore, our credit facility requires us and our insurance
subsidiaries to maintain specified financial ratios. Our ability
to comply with these ratios may be affected by events beyond our
control, including prevailing economic, financial and industry
conditions. If we are unable to comply with the covenants and
ratios in our new credit facility, we may be deemed in default
under the facility, or we may be required to pay substantial
fees or penalties to the lenders to obtain a waiver of any such
default. Either development could have a material adverse effect
on our business.
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We may
need additional capital in the future, which may not be
available to us on favorable terms. Raising additional capital
could dilute your ownership in the company and may cause the
market price of our common stock to fall.
We may need to raise additional funds through public or private
debt or equity financings in order to:
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fund liquidity needs;
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refinance our senior notes;
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satisfy letter of credit or guarantee bond requirements that may
be imposed by our clients or by regulators;
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acquire new businesses or invest in existing businesses;
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expand our business into new regions; or
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otherwise respond to competitive pressures.
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Any additional capital raised through the sale of equity will
dilute your ownership percentage in our company and may decrease
the market price of our common stock. Furthermore, the
securities may have rights, preferences and privileges that are
senior or otherwise superior to those of our common stock. Any
additional financing we may need may not be available on terms
favorable to us.
To be eligible for borrowing under our $200.0 million
revolving credit facility, we must not be in default of any
payment obligations, covenants or other requirements set forth
in the facility, and the representations and warranties that we
make under the facility must continue to be true in all material
respects. Accordingly, it is possible that we may not meet these
requirements in the future and may not be eligible to borrow
under our credit facility.
In addition, we entered into a covenant in connection with our
recent $150.0 million CENts offering that may limit our
ability to undertake certain additional types of financing to
repay or redeem the CENts.
Our
recent offering of CENts, the net proceeds of which we applied
to pay a special cash dividend to our stockholders, may affect
our ability to obtain future financing on favorable
terms.
On October 10, 2007, we issued $150.0 million
aggregate principal amount of CENts. We applied the net proceeds
from the CENts to pay a special cash dividend to our
stockholders on October 19, 2007. The CENts offering may prevent
us from obtaining future financing on favorable terms, such as
favorable interest rates. The increased cost of obtaining
additional financing may adversely affect our ability to fund
future working capital and other general corporate requirements,
make strategic acquisitions or carry out other aspects of our
business plan. Furthermore, our increased debt due to our
offering of CENts may adversely impact our net income and cash
flows and reduce our liquidity. In particular, we expect to
incur interest expense from the CENts of $2.7 million for
the fourth quarter of 2007 and $13.1 million for our 2008
fiscal year, the first full calendar in which the CENts accrue
interest. In addition, in connection with the CENts offering, we
entered into a covenant that may limit our ability to undertake
certain additional types of financing to repay or redeem the
CENts.
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Risks
Related to Our Industry
Our
industry is highly regulated and changes in regulations
affecting our businesses may reduce our profitability and limit
our growth.
Our insurance businesses are heavily regulated and are subject
to a wide variety of laws and regulations in various
jurisdictions. State insurance laws regulate most aspects of our
insurance businesses and our insurance subsidiaries are
regulated by the insurance departments of the various states in
which they are domiciled and licensed.
State laws in the United States grant insurance regulatory
authorities broad administrative powers with respect to various
aspects of our insurance businesses, including:
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licensing companies and agents to transact business;
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calculating the value of assets to determine compliance with
statutory requirements;
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mandating certain insurance benefits;
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regulating certain premium rates;
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reviewing and approving policy forms;
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regulating unfair trade and claims practices, including the
imposition of restrictions on marketing and sales practices,
distribution arrangements and payment of inducements;
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establishing statutory capital and reserve requirements and
solvency standards;
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fixing maximum interest rates on insurance policy loans and
minimum rates for guaranteed crediting rates on life insurance
policies and annuity contracts;
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requiring regular market conduct examinations;
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approving changes in control of insurance companies;
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restricting the payment of dividends and other transactions
between affiliates; and
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regulating the types, amounts and valuation of investments.
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State insurance regulators and the National Association of
Insurance Commissioners, or NAIC, regularly re-examine existing
laws and regulations applicable to insurance companies and their
products. Changes in these laws and regulations or in
interpretations thereof, are often made for the benefit of the
consumer at the expense of the insurer and thus could have an
adverse effect on our business.
Currently, the U.S. federal government does not regulate
directly the business of insurance. However, federal legislation
and administrative policies in several areas can significantly
and adversely affect insurance companies. These areas include
financial services regulation, securities regulation, pension
regulation, privacy, tort reform legislation and taxation. In
addition, various forms of direct federal regulation of
insurance have been proposed. These proposals include the
National Insurance Act, which would allow insurance
companies to choose to be regulated by a federal regulator
rather than by multiple state regulators and The State
Modernization and Regulatory Transparency Act, which would
maintain state-based regulation of insurance but would affect
state regulation of certain aspects of the business of insurance
including rates, agent and company licensing, and market conduct
examinations. We cannot predict whether these or other proposals
will be adopted, or what impact, if any, such proposals or, if
enacted, such laws may have on our financial condition, results
of operations and cash flows.
Many of our customers and independent sales intermediaries also
operate in regulated environments. Changes in the regulations
that affect their operations also may affect our business
relationships with them and their ability to purchase or to
distribute our products.
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Compliance with applicable laws and regulations is time
consuming and personnel-intensive, and changes in these laws and
regulations may materially increase our direct and indirect
compliance efforts and other expenses of doing business.
U.S. federal and state securities laws apply to investment
products that are also securities, including variable annuities
and variable life insurance policies. As a result, some of our
subsidiaries and the policies and contracts they offer are
subject to regulation under these federal and state securities
laws. Our insurance subsidiaries separate accounts are
registered as investment companies under the Investment Company
Act of 1940. Some subsidiaries are registered as broker-dealers
under the Securities Exchange Act of 1934, as amended, or
Exchange Act, and are members of, and subject to regulation by,
the Financial Industry Regulatory Authority. In addition, one of
our subsidiaries also is registered as an investment adviser
under the Investment Advisers Act of 1940.
Securities laws and regulations are primarily intended to ensure
the integrity of the financial markets and to protect investors
in the securities markets or investment advisory or brokerage
clients. These laws and regulations generally grant supervisory
agencies broad administrative powers, including the power to
limit or restrict the conduct of business for failure to comply
with those laws and regulations.
Legal
and regulatory investigations and actions are increasingly
common in the insurance business and may result in financial
losses and harm our reputation.
We face a significant risk of litigation and regulatory
investigations and actions in the ordinary course of operating
our businesses, including the risk of class action lawsuits. Our
pending legal and regulatory actions include proceedings
specific to us and others generally applicable to business
practices in the industries in which we operate. In our
insurance operations, we are or may become subject to class
actions, individual suits and regulatory proceedings relating,
among other things, to sales or underwriting practices, payment
of contingent or other sales commissions, claims payments and
procedures, payment of interest on claims, product design,
disclosure, administration, additional premium charges for
premiums paid on a periodic basis, denial or delay of benefits
and breaches of fiduciary or other duties to customers.
Plaintiffs in class action and other lawsuits against us may
seek very large or indeterminate amounts, including punitive and
treble damages, which may remain unknown for substantial periods
of time.
For example, the mutual fund and insurance industry has been the
focus of increased scrutiny and class action lawsuits related to
revenue sharing practices by mutual funds with
service providers and others in offering mutual fund investments
in qualified retirement plans. The lawsuits allege that service
providers were involved in self-dealing and prohibited
transactions under the Employee Retirement Income Security Act,
or ERISA. The outcome of these lawsuits is unknown. We have not
been the subject of any inquiries or lawsuits regarding these
practices.
We are also subject to various regulatory inquiries, such as
information requests, subpoenas, market conduct exams and books
and record examinations, from state and federal regulators and
other authorities which may result in fines, recommendations for
corrective action or other regulatory actions.
Current or future investigations and proceedings could have an
adverse effect on our business. A substantial legal liability or
a significant regulatory action against us could have an adverse
effect on our business. Moreover, even if we ultimately prevail
in the litigation, regulatory action or investigation, we could
suffer significant reputational harm, which could have an
adverse effect on our business. Increased regulatory scrutiny
and any resulting investigations or proceedings could result in
new legal actions or precedents and industry-wide regulations or
practices that could adversely affect our business.
Proposals
for national health care reform could have a material adverse
effect on the profitability or marketability of the health
insurance products and services we sell.
In our Group segment, we sell group medical stop-loss insurance
and limited benefit employee health plans to employer groups.
Reform of the health care system is a topic of discussion at
both the state and federal levels in the United States and by
Presidential candidates from both major political parties.
Proposals
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for change vary widely and range from reform of the existing
employer-based system of insurance to a single-payer, public
program. Several groups are urging consideration by Congress of
a national health care plan. If any of these initiatives
ultimately becomes effective, it could have a material effect on
the profitability or marketability of the health insurance
products and services we sell and on our financial condition,
results of operations and cash flows.
Medical
advances, such as genetic research and diagnostic imaging, and
related legislation could adversely affect the financial
performance of our life insurance and annuities
businesses.
Genetic research includes procedures focused on identifying key
genes that render an individual predisposed to specific diseases
such as particular types of cancer and other diseases. Other
medical advances, such as diagnostic imaging technologies, may
be used to detect the early onset of diseases such as cancer and
cardiovascular disease. We believe that if individuals learn
through medical advances that they are predisposed to particular
conditions that may reduce life longevity or require long-term
care, they will be more likely to purchase our life insurance
policies or not to permit existing polices to lapse. In
contrast, if individuals learn that they lack the genetic
predisposition to develop the conditions that reduce longevity,
they will be less likely to purchase our life insurance products
but more likely to purchase certain annuity products. In
addition, such individuals that are existing policyholders will
be more likely to permit their policies to lapse.
If we were to gain access to the same genetic or medical
information as our prospective policyholders and
contractholders, then we would be able to take this information
into account in pricing our life insurance policies and annuity
contracts. However, there are a number of regulatory proposals
that would make genetic and other medical information
confidential and unavailable to insurance companies. Legislation
that would prohibit group health plans, health insurers and
employers from making enrollment decisions or adjusting premiums
on the basis of genetic testing information has been introduced
in Congress as well as in certain state legislatures. If these
regulatory proposals were enacted, prospective policyholders and
contractholders would only disclose this information if they
chose to do so voluntarily. These factors could lead us to
reduce sales of products affected by these regulatory proposals
and could result in a deterioration of the risk profile of our
portfolio, which could lead to payments to our policyholders and
contractholders that are higher than currently anticipated.
Medical advances also could lead to new forms of preventive
care. Preventive care could extend the life and improve the
overall health of individuals. If this were to occur, the
duration of payments under certain of our annuity products
likely would increase, thereby reducing net earnings in that
business.
Changes
in tax laws could make some of our products less attractive to
consumers and as a result have an adverse effect on our
business.
Changes in tax laws could make some of our products less
attractive to consumers. For example, the Treasury Department
and the Internal Revenue Service, or IRS, recently issued new
final regulations relating to Section 403(b) plans that
will impact the 403(b) marketplace, including tax sheltered
annuities. While the impact of the new regulations is uncertain,
it is likely that employers offering Section 403(b) plans
will be required to change how their plans operate. Those
changes may include re-evaluation of their plan investment
offerings, including annuities currently offered by us in those
plans.
Furthermore, the federal estate tax, which has undergone a
gradual repeal since 2001 that will continue to be phased in
through 2010, is scheduled to revert to pre-2001 law as of
January 1, 2011. The repeal of and continuing uncertainty
regarding the federal estate tax may adversely affect sales and
surrenders of some of our estate planning products. In addition,
from time to time, legislation is proposed to eliminate the tax
deferred nature of certain non-qualified annuities.
Any such legislation or changes to existing legislation could
have a material adverse effect on our financial condition and
results of operations. We cannot predict whether any such
legislation or changes will be enacted, what the specific terms
will be or how, if at all, they would have an adverse effect on
our business.
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Failures
elsewhere in the insurance industry could obligate us to pay
assessments through guaranty associations.
When an insurance company becomes insolvent, guaranty
associations in each of the 50 states levy assessments upon
all companies licensed to write insurance in the relevant lines
of business in that state, and use the proceeds to pay claims of
policyholder residents of that state, up to the state-specific
limit of coverage. The total amount of the assessment is based
on the number of insured residents in each state, and each
companys assessment is based on its proportionate share of
premium volume in the relevant lines of business and could have
an adverse effect on our results of operations. The failure of a
large life, health or annuity insurer could trigger guaranty
association assessments we would be obligated to pay.
Risks
Relating to this Offering and Ownership of Our Common
Stock
As a
holding company, Symetra Financial Corporation depends on the
ability of its subsidiaries to transfer funds to it to meet its
obligations and pay dividends.
Symetra Financial Corporation is a holding company for its
insurance and financial subsidiaries with no significant
operations of its own. Its principal sources of cash to meet its
obligations and to pay dividends consist of dividends from its
subsidiaries and permitted payments under tax sharing agreements
with its subsidiaries. State insurance regulatory authorities
limit the payment of dividends by insurance subsidiaries. Based
on our statutory results as of December 31, 2006, our
insurance subsidiaries may pay dividends to us of up to
$166.4 million in the aggregate during 2007 without
obtaining regulatory approval, provided that the aggregate
dividends paid over the twelve months preceding any dividend
payment made during 2007 do not exceed the $166.4 million limit.
Our insurance subsidiaries paid $100.0 million in dividends in
December 2006, $66.4 million in dividends during the nine
months ended September 30, 2007 and declared a $100.0
million in October 2007, which will be paid in the fourth
quarter upon regulatory approval or in December 2007 once
allowed under our $166.4 million 2007 twelve-month rolling
limit. In addition, competitive pressures generally require our
insurance subsidiaries to maintain financial strength ratings,
which are partly based on maintaining certain levels of capital.
These restrictions and other regulatory requirements, such as
minimum required risk-based capital ratios, affect the ability
of our insurance subsidiaries to make dividend payments. Limits
on the ability of the insurance subsidiaries to pay dividends
could adversely affect our liquidity, including our ability to
pay dividends to stockholders and service our debt.
There are a number of other factors that could affect our
ability to pay dividends, including the following:
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lack of availability of cash to pay dividends due to changes in
our operating cash flow, capital expenditure requirements,
working capital requirements and other cash needs;
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unexpected or increased operating or other expenses or changes
in the timing thereof;
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restrictions under Delaware law or other applicable law on the
amount of dividends that we may pay;
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a decision by our board of directors to modify or revoke its
policy to pay dividends; and
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the other risks described under Risk Factors.
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The failure to maintain or pay dividends could adversely affect
the trading price of our common stock.
There
may not be an active, liquid trading market for our common
stock.
Prior to this offering, there has been no public market for our
common stock. We cannot predict the extent to which an active
trading market with adequate liquidity will develop. If an
active trading market does not develop, you may have difficulty
selling any of our common stock that you purchase and the value
of your shares may be impaired.
23
If
securities or industry analysts do not publish research or
reports about our business, if they change their recommendations
regarding our stock adversely or if our operating results do not
meet their expectations, our stock price could
decline.
The trading market for our common stock will be influenced by
the research and reports that industry or securities analysts
publish about us, our business or our industry. If one or more
of these analysts cease coverage of our company or fail to
publish reports on us regularly, we could lose visibility in the
financial markets, which in turn could cause our stock price or
trading volume to decline. Moreover, if one or more of the
analysts who cover our company downgrade our stock or if our
operating results do not meet their expectations, our stock
price could decline.
As a
public company, we will become subject to additional financial
and other reporting and corporate governance
requirements.
We have historically operated our business as a private company.
After this offering, we will become obligated to file with the
Securities and Exchange Commission, or SEC, annual and quarterly
information and other reports that are specified in
Section 13 of the Exchange Act. We will also be required to
ensure that we have the ability to prepare financial statements
that are fully compliant with all SEC reporting requirements on
a timely basis. We will also become subject to other reporting
and corporate governance requirements, including the
requirements of the NYSE and certain provisions of the
Sarbanes-Oxley Act of 2002 and the regulations promulgated
thereunder, which will impose significant compliance obligations
upon us. As a public company, we will be required to:
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prepare and distribute periodic public reports and other
stockholder communications in compliance with our obligations
under the federal securities laws and NYSE rules;
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create or expand the roles and duties of our board of directors
and committees of the board;
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institute more comprehensive financial reporting and disclosure
compliance functions;
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involve and retain to a greater degree outside counsel and
accountants in the activities listed above;
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enhance our investor relations function;
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establish new internal policies, including those relating to
disclosure controls and procedures; and
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comply with the Sarbanes-Oxley Act of 2002, in particular
Section 404.
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These changes will require a significant commitment of
additional expense and other resources. We may not be successful
in implementing these requirements and implementing them could
adversely affect our business or operating results. In addition,
if we fail to implement the requirements with respect to our
internal accounting and audit functions, our ability to report
our operating results on a timely and accurate basis could be
impaired.
Significant
stockholders may be able to influence the direction of our
business.
Upon completion of this offering, our principal stockholders,
affiliates of White Mountains Insurance Group, Ltd. and
Berkshire Hathaway Inc., will collectively continue to
beneficially own approximately 33.4% of our outstanding shares
of common stock. If they chose to act together on matters that
are brought to stockholders for their vote, they would continue
to have the collective ability to significantly influence all
matters requiring stockholder approval, including the nomination
and election of directors and the determination of the outcome
of any corporate transaction or other matter submitted to our
stockholders for approval, including amendments to our
certificate of incorporation, potential mergers or acquisitions,
asset sales and other significant corporate transactions. The
interests of our principal stockholders may not coincide with
the interests of the other holders of our common stock.
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Our
internal control over financial reporting does not currently
meet the standards required by Section 404 of the
Sarbanes-Oxley Act of 2002, and failure to achieve and maintain
effective internal control over financial reporting in
accordance with Section 404 of the Sarbanes-Oxley Act could
have a material adverse effect on our business and stock
price.
As a privately-held company, we have not been required to
maintain internal control over financial reporting in a manner
that meets the standards of publicly-traded companies required
by Section 404 of the Sarbanes-Oxley Act, standards that we
will be required to meet in the course of preparing our
financial statements as of and for the year ended
December 31, 2008. We do not currently have comprehensive
documentation of our internal controls, nor do we document or
test our compliance with these controls on a periodic basis in
accordance with Section 404 of the Sarbanes-Oxley Act.
Furthermore, we have not tested our internal controls in
accordance with Section 404 and, due to our lack of
documentation, such a test would not be possible to perform at
this time.
If, as a public company, we are not able to implement the
requirements of Section 404 in a timely manner or with
adequate compliance, our independent registered public
accounting firm may not be able to attest to the adequacy of our
internal control over financial reporting. If we are unable to
maintain adequate internal control over financial reporting, we
may be unable to report our financial information on a timely
basis, may suffer adverse regulatory consequences or violations
of applicable stock exchange listing rules and may breach the
covenants under our revolving credit facilities and our senior
notes. There could also be a negative reaction in the financial
markets due to a loss of investor confidence in us and the
reliability of our financial statements. Confidence in our
financial statements is also likely to suffer if our independent
registered public accounting firm reports a material weakness in
our internal control over financial reporting.
In addition, we will incur incremental costs in order to improve
our internal control over financial reporting and comply with
Section 404, including increased auditing and legal fees
and costs associated with hiring additional accounting and
administrative staff.
Our
stock price may fluctuate significantly, and you may not be able
to resell your shares at or above the initial public offering
price.
The trading price of our common stock may be volatile and
subject to wide price fluctuations in response to various
factors, including:
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market conditions in the broader stock market in general;
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actual or anticipated fluctuations in our quarterly financial
and operating results;
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changes in interest rates;
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introduction of new services or announcements of significant
contracts, acquisitions or capital commitments by us or our
competitors;
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regulatory or political developments;
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issuance of new or changed securities analysts reports or
recommendations, or the announcement of any changes to our
credit rating;
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additions or departures of key personnel;
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availability of capital;
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litigation and government investigations;
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legislative and regulatory developments;
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future sales of our common stock;
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investor perceptions of us and the life insurance
industry; and
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economic conditions.
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These and other factors may cause the market price of our common
stock to fluctuate substantially, which may limit or prevent
investors from readily selling their shares of common stock and
may otherwise negatively affect the liquidity of our common
stock. Even factors that do not specifically relate to our
company may materially reduce the market price of our common
stock, regardless of our operating performance.
Future
sales, or the perception of future sales, of a substantial
amount of our common stock may depress the market price of our
common stock.
Future sales, or the perception of future sales, of a
substantial number of shares of our common stock in the public
market after this offering could have a material adverse effect
on the prevailing market price of our common stock.
Upon completion of this offering, we will have
92,646,295 shares of common stock outstanding, or
111,622,039 shares if we give effect to the exercise of all
outstanding warrants. All shares sold in this offering will be
freely tradable without restriction under the Securities Act,
except for any shares that may be held or acquired by affiliates
of the company, as that term is defined in the Securities Act.
In connection with this offering, we, each of our executive
officers and directors and the selling stockholders will have
entered into
lock-up
agreements that prevent the sale of shares of our common stock
for up to 180 days after the date of this prospectus,
subject to an extension in certain circumstances described under
Underwriting. Following the expiration of the
lock-up period, the remaining 53,146,295 shares outstanding
held by current stockholders of the company will be available
for sale pursuant to Rule 144, subject to compliance with the
volume, manner of sale and other limitations under Rule 144 in
the case of shares held by affiliates. Furthermore, our existing
stockholders will have the right, subject to certain conditions,
to require us to register the sale of 53,146,295 of their shares
of our common stock under the Securities Act. By exercising
their registration rights, and selling a large number of shares,
our stockholders could cause the prevailing market price of our
common stock to decline.
Anti-takeover
provisions in our charter documents could delay or prevent a
change of control of our company and may result in an
entrenchment of management and diminish the value of our common
stock.
Upon completion of this offering, our certificate of
incorporation and bylaws will contain provisions that could
depress the trading price of our common stock by acting to
discourage, delay or prevent a change of control of our company
or changes in management that our stockholders might deem
advantageous. Specific provisions in our certificate of
incorporation will include:
|
|
|
|
|
our ability to issue preferred stock with terms that the board
of directors may determine, without stockholder approval;
|
|
|
|
a classified board of directors;
|
|
|
|
advance notice requirements for stockholder proposals and
nominations;
|
|
|
|
the absence of cumulative voting in the election of
directors; and
|
|
|
|
limitations on convening stockholder meetings.
|
These provisions in our certificate of incorporation and bylaws
may frustrate attempts to effect a takeover transaction that is
in the best interests of our minority stockholders. Even in the
absence of a takeover attempt, the existence of these provisions
may adversely affect the prevailing market price of our common
stock if they are viewed as discouraging future takeover
attempts.
Applicable
insurance laws may make it difficult to effect a change of
control of our company.
Before a person can acquire control of a U.S. insurance
company, prior written approval must be obtained from the
insurance commissioner of the state where the insurer is
domiciled. Generally, state statutes provide that control over a
domestic insurer is presumed to exist if any person, directly or
indirectly, owns, controls, holds with the power to vote, or
holds proxies representing, 10% or more of the voting securities
of the domestic insurer. These statutes may frustrate or delay
attempts to effect a takeover transaction that would benefit our
stockholders.
26
FORWARD-LOOKING
STATEMENTS
This prospectus contains forward-looking statements
that are intended to enhance the readers ability to assess
our future financial and business performance. Forward-looking
statements include, but are not limited to, statements that
represent our beliefs concerning future operations, strategies,
financial results or other developments, and contain words and
phrases such as may, expects,
should, believes,
anticipates, estimates,
intends or similar expressions. In addition,
statements that refer to our future financial performance,
anticipated growth and trends in our business and in our
industry and other characterizations of future events or
circumstances are forward-looking statements. Because these
forward-looking statements are based on estimates and
assumptions that are subject to significant business, economic
and competitive uncertainties, many of which are beyond our
control or are subject to change, actual results could be
materially different. The following uncertainties, among others,
may have such an impact:
|
|
|
|
|
changes in economic conditions, including changes in interest
rates and the performance of financial markets, which may:
|
|
|
|
|
|
increase defaults on and impairments of our bond portfolio;
|
|
|
|
reduce sales of our variable and investment management products
and the fees we receive on assets under management; and
|
|
|
|
increase the level of our guaranteed minimum death benefit and
reserves.
|
|
|
|
|
|
a change in our ratings by nationally recognized ratings
organizations;
|
|
|
|
changes in laws, regulations and taxes;
|
|
|
|
competitive pressures on product pricing and services, including
competition by other insurance companies and financial services
companies;
|
|
|
|
terrorist attacks and military and other actions;
|
|
|
|
changes in lapse rates, morbidity, mortality or unemployment
rates which differ significantly from our pricing expectations,
including as a result of extremely rare, severe and widespread
events, such as a possible global avian flu pandemic; and
|
|
|
|
the relative success and timing of our business strategies.
|
Consequently, such forward-looking statements should be regarded
solely as our current plans, estimates and beliefs with respect
to, among other things, future events and financial performance.
Except as required under the federal securities laws, we do not
intend, and do not undertake, any obligation to update any
forward-looking statements to reflect future events or
circumstances after the date of such statements.
You should review carefully the section captioned Risk
Factors in this prospectus for a more complete discussion
of the risks of an investment in our common stock.
This prospectus includes industry and government data and
forecasts that we have prepared based, in part, upon industry
and government data and forecasts obtained from industry and
government publications and surveys. These sources include
publications and data compiled by the Employee Benefit Research
Institute, Kaiser Family Foundation, U.S. Census Bureau,
U.S. Department of Health & Human Services
Centers for Disease Control, Spectrem Group and Variable Annuity
Research and Data Service. Third-party industry publications,
surveys and forecasts generally state that the information
contained therein has been obtained from sources believed to be
reliable, but there can be no assurance as to the accuracy or
completeness of included information. We have not independently
verified any of the data from third-party sources nor have we
ascertained the underlying economic assumptions relied upon
therein. Forecasts are particularly likely to be inaccurate,
especially over long periods of time. While we are not aware of
any misstatements regarding the industry data presented herein,
our estimates involve risks and uncertainties and are subject to
change based on various factors, including those discussed under
the heading Risk Factors.
27
All of the shares of common stock offered by this prospectus are
being sold by the selling stockholders. For information about
the selling stockholders, see Principal and Selling
Stockholders. We will not receive any of the proceeds from
the shares of common stock sold by the selling stockholders.
We intend to pay quarterly cash dividends on our common stock at
an initial rate of approximately $0.09 per share. The
declaration, payment and amount of future dividends to holders
of our common stock will be at the discretion of our board of
directors and will depend on many factors, including our
financial condition and results of operations, liquidity
requirements, market opportunities, capital requirements of our
subsidiaries, legal requirements, regulatory constraints and
other factors as the board of directors deems relevant.
Dividends on our common shares will also be paid to holders of
our outstanding warrants.
On October 19, 2007, we paid two dividends to our
stockholders totaling $200.0 million, of which
approximately $146.8 million was funded with the net
proceeds, after offering expenses, from our issuance of CENts in
October 2007.
We are a holding company with no significant business operations
of our own. All of our business operations are conducted through
our subsidiaries. Dividends and loans from, and cash generated
by, our subsidiaries will be our principal sources of cash to
repay indebtedness, fund operations and pay dividends.
Accordingly, our ability to pay dividends to our stockholders
will depend on the earnings and distributions of funds from our
subsidiaries. See Risk Factors Risks Relating
to this Offering and Ownership of Our Common Stock
As a holding company, Symetra Financial Corporation depends on
the ability of its subsidiaries to transfer funds to it to meet
its obligations and pay dividends.
28
The following table sets forth our cash and cash equivalents and
capitalization as of September 30, 2007 on an actual basis
and on an as adjusted basis after giving effect to:
|
|
|
|
|
the offering of $150.0 million aggregate principal amount
of CENts in October 2007; and
|
|
|
|
the payment of two dividends to our stockholders totaling
$200.0 million in the aggregate on October 19, 2007,
of which approximately $146.8 million was funded from the
offering of the CENts.
|
You should read this table in conjunction with our consolidated
financial statements and related notes and the information
provided under the captions Selected Historical
Consolidated Financial Data and Managements
Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2007
|
|
(In Millions)
|
|
Actual
|
|
|
As Adjusted
|
|
|
Cash and cash equivalents
|
|
$
|
251.0
|
|
|
$
|
195.9
|
(1)
|
|
|
|
|
|
|
|
|
|
Borrowings and other obligations:
|
|
|
|
|
|
|
|
|
Revolving credit facilities(2)
|
|
$
|
|
|
|
$
|
|
|
Senior notes
|
|
|
298.8
|
|
|
|
298.8
|
|
CENts
|
|
|
|
|
|
|
149.8
|
(3)
|
|
|
|
|
|
|
|
|
|
Total borrowings and other obligations
|
|
|
298.8
|
|
|
|
448.6
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value; 750.0 million shares
authorized, 92.6 million shares issued and outstanding
|
|
|
0.9
|
|
|
|
0.9
|
|
Additional paid-in capital
|
|
|
1,165.5
|
|
|
|
1,165.5
|
|
|
|
|
|
|
|
|
|
|
Total paid-in capital
|
|
|
1,166.4
|
|
|
|
1,166.4
|
|
Retained earnings
|
|
|
301.5
|
|
|
|
101.5
|
|
Accumulated other comprehensive income (loss), net of taxes
|
|
|
(102.3
|
)
|
|
|
(102.8
|
)(4)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
1,365.6
|
|
|
|
1,165.1
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
1,664.4
|
|
|
$
|
1,613.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Cash and cash equivalents were reduced by the $53.2 million
portion of the dividends to our stockholders paid out of our
existing cash balance, and a $1.9 million loss on the settlement
of an interest rate swap designated as a cash flow hedge
relating to the issuance of the CENts. |
|
(2) |
|
The revolving credit facilities collectively provide for
borrowings of up to $250 million. As of September 30,
2007, we had no balance outstanding under our revolving credit
facilities. |
|
(3) |
|
The CENts were issued at a price of $149.8 million with an
initial aggregate principal amount of $150.0 million. |
|
(4) |
|
Reflects an adjustment to record the final settlement of the
interest rate swap designated as a cash flow hedge relating to
the issuance of the CENts. |
29
SELECTED
HISTORICAL CONSOLIDATED FINANCIAL DATA
The selected historical consolidated financial data, except for
non-GAAP financial measures, as of September 30, 2007 and
for the nine months ended September 30, 2007 and 2006 have
been derived from our unaudited interim historical consolidated
financial statements, which have been prepared on a basis
consistent with our annual consolidated financial statements,
included in this prospectus. In the opinion of management, such
unaudited financial data, except for non-GAAP financial
measures, reflects all historical and recurring adjustments
necessary for a fair presentation of the results for these
periods. The results of operations for the nine months ended
September 30, 2007 are not necessarily indicative of the
results to be expected for the full year or any future period.
The selected historical consolidated financial data, except for
non-GAAP
financial measures, as of December 31, 2006 and 2005 and
for the years ended December 31, 2006 and 2005, and for the
period from August 2, 2004 through December 31, 2004,
and the period from January 1, 2004 through August 1,
2004 have been derived from our audited consolidated financial
statements that are included elsewhere in this prospectus. The
selected historical consolidated financial data, except for
non-GAAP financial measures, presented below as of
December 31, 2004 and as of and for the year ended
December 31, 2003 have been derived from our audited
consolidated financial statements that are not included in this
prospectus. The unaudited selected historical consolidated
financial data, except for non-GAAP financial measures, as of
and for the year ended December 31, 2002 were derived from
unaudited carve-outs of the acquired businesses from our
predecessors audited consolidated financial statements,
which are not included in this prospectus.
We do not believe the predecessor financial results for the
years ended December 31, 2003 and 2002 and for the period
from January 1, 2004 through August 1, 2004 are
comparable to the results of our new independent company. This
lack of comparability is primarily due to significant changes in
our operating costs and also because of purchase accounting
adjustments impacting net investment income, policyholder
benefits and claims, interest amortization of deferred
acquisition costs, intangible assets and net realized investment
gains (losses). Additionally, due to the short period from our
inception as an independent company to the end of 2004, as well
as the effect of transitional expense charges associated with
the Acquisition, we do not consider our financial results for
the period from August 2, 2004 through December 31,
2004 to be comparable to those for the years ended
December 31, 2006 and 2005. This summary data should be
read in conjunction with other information contained in this
prospectus, including Managements Discussion and
Analysis of Financial Condition and Results of Operations
and our historical consolidated financial statements and related
notes included elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 2
|
|
|
January 1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
through
|
|
|
through
|
|
|
Year Ended
|
|
|
|
Nine Months Ended September 30,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
August 1,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
(In millions, except per share data)
|
|
|
Consolidated Income Statement Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
|
|
$
|
397.9
|
|
|
$
|
398.0
|
|
|
$
|
525.7
|
|
|
$
|
575.5
|
|
|
$
|
263.2
|
|
|
$
|
357.9
|
|
|
$
|
680.5
|
|
|
$
|
599.6
|
|
Net investment income
|
|
|
732.3
|
|
|
|
734.0
|
|
|
|
984.9
|
|
|
|
994.0
|
|
|
|
411.1
|
|
|
|
693.7
|
|
|
|
1,210.6
|
|
|
|
1,205.3
|
|
Other revenues
|
|
|
50.4
|
|
|
|
42.7
|
|
|
|
56.1
|
|
|
|
58.6
|
|
|
|
27.1
|
|
|
|
43.9
|
|
|
|
63.9
|
|
|
|
62.1
|
|
Net realized investment gains (losses)
|
|
|
23.8
|
|
|
|
(4.9
|
)
|
|
|
1.7
|
|
|
|
14.1
|
|
|
|
7.0
|
|
|
|
34.9
|
|
|
|
(9.6
|
)
|
|
|
(152.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
1,204.4
|
|
|
|
1,169.8
|
|
|
|
1,568.4
|
|
|
|
1,642.2
|
|
|
|
708.4
|
|
|
|
1,130.4
|
|
|
|
1,945.4
|
|
|
|
1,714.7
|
|
Benefits and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder benefits and claims
|
|
|
196.5
|
|
|
|
209.8
|
|
|
|
264.3
|
|
|
|
327.4
|
|
|
|
127.5
|
|
|
|
223.6
|
|
|
|
381.9
|
|
|
|
341.7
|
|
Interest credited
|
|
|
564.9
|
|
|
|
571.9
|
|
|
|
765.9
|
|
|
|
810.9
|
|
|
|
360.2
|
|
|
|
556.4
|
|
|
|
990.8
|
|
|
|
968.7
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 2
|
|
|
January 1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
through
|
|
|
through
|
|
|
Year Ended
|
|
|
|
Nine Months Ended September 30,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
August 1,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
(In millions, except per share data)
|
|
|
Other underwriting and operating expenses
|
|
|
209.9
|
|
|
|
191.9
|
|
|
|
260.5
|
|
|
|
273.2
|
|
|
|
123.3
|
|
|
|
182.3
|
|
|
|
324.9
|
|
|
|
267.5
|
|
Fair value of warrants issued to investors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
14.1
|
|
|
|
14.5
|
|
|
|
19.1
|
|
|
|
12.4
|
|
|
|
3.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred policy acquisition costs
|
|
|
14.2
|
|
|
|
11.0
|
|
|
|
14.6
|
|
|
|
11.9
|
|
|
|
1.6
|
|
|
|
34.2
|
|
|
|
51.3
|
|
|
|
40.8
|
|
Intangible asset amortization
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.9
|
|
|
|
8.3
|
|
|
|
8.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses
|
|
|
999.8
|
|
|
|
999.1
|
|
|
|
1,324.4
|
|
|
|
1,435.8
|
|
|
|
717.6
|
|
|
|
1,001.4
|
|
|
|
1,757.2
|
|
|
|
1,627.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
|
204.6
|
|
|
|
170.7
|
|
|
|
244.0
|
|
|
|
206.4
|
|
|
|
(9.2
|
)
|
|
|
129.0
|
|
|
|
188.2
|
|
|
|
87.2
|
|
Provisions for income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
41.6
|
|
|
|
72.5
|
|
|
|
92.4
|
|
|
|
22.2
|
|
|
|
21.3
|
|
|
|
0.9
|
|
|
|
42.1
|
|
|
|
58.8
|
|
Deferred
|
|
|
20.9
|
|
|
|
(12.7
|
)
|
|
|
(7.9
|
)
|
|
|
39.7
|
|
|
|
10.7
|
|
|
|
30.5
|
|
|
|
9.1
|
|
|
|
(30.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision for income taxes
|
|
|
67.0
|
|
|
|
59.8
|
|
|
|
84.5
|
|
|
|
61.9
|
|
|
|
32.0
|
|
|
|
31.4
|
|
|
|
51.2
|
|
|
|
28.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
137.6
|
|
|
|
110.9
|
|
|
|
159.5
|
|
|
|
144.5
|
|
|
|
(41.2
|
)
|
|
|
97.6
|
|
|
|
137.0
|
|
|
|
58.7
|
|
Income (loss) from discontinued operations (net of taxes)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.0
|
|
|
|
(2.4
|
)
|
|
|
2.3
|
|
|
|
1.7
|
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
137.6
|
|
|
$
|
110.9
|
|
|
$
|
159.5
|
|
|
$
|
145.5
|
|
|
$
|
(43.6
|
)
|
|
$
|
99.9
|
|
|
$
|
138.7
|
|
|
$
|
60.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.23
|
|
|
$
|
0.99
|
|
|
$
|
1.43
|
|
|
$
|
1.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
1.23
|
|
|
$
|
0.99
|
|
|
$
|
1.43
|
|
|
$
|
1.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
111.622
|
|
|
|
111.622
|
|
|
|
111.622
|
|
|
|
111.622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
111.622
|
|
|
|
111.622
|
|
|
|
111.622
|
|
|
|
111.622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 2
|
|
|
January 1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
through
|
|
|
through
|
|
|
Year Ended
|
|
|
|
Nine Months Ended September 30,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
August 1,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
(In millions, except per share data)
|
|
|
Non-GAAP Financial Measures(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income (loss)
|
|
$
|
126.1
|
|
|
$
|
121.6
|
|
|
$
|
172.1
|
|
|
$
|
141.9
|
|
|
$
|
(46.0
|
)
|
|
$
|
75.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation to Net Income (Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
137.6
|
|
|
$
|
110.9
|
|
|
$
|
159.5
|
|
|
$
|
145.5
|
|
|
$
|
(43.6
|
)
|
|
$
|
99.9
|
|
|
|
|
|
|
|
|
|
Less: Net realized investment gains (losses) (net of taxes)
|
|
|
15.5
|
|
|
|
(3.2
|
)
|
|
|
1.1
|
|
|
|
9.2
|
|
|
|
4.6
|
|
|
|
22.7
|
|
|
|
|
|
|
|
|
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized and unrealized investment gains (losses) on FIA
options (net of taxes)
|
|
|
0.5
|
|
|
|
(0.2
|
)
|
|
|
1.4
|
|
|
|
(2.9
|
)
|
|
|
1.3
|
|
|
|
(1.7
|
)
|
|
|
|
|
|
|
|
|
Net realized and unrealized investment gains on equity
securities (net of taxes)
|
|
|
3.5
|
|
|
|
7.7
|
|
|
|
12.3
|
|
|
|
8.5
|
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income (loss)
|
|
$
|
126.1
|
|
|
$
|
121.6
|
|
|
$
|
172.1
|
|
|
$
|
141.9
|
|
|
$
|
(46.0
|
)
|
|
$
|
75.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30,
|
|
|
As of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
16,864.2
|
|
|
$
|
17,305.3
|
|
|
$
|
18,332.8
|
|
|
$
|
19,244.8
|
|
|
$
|
19,197.6
|
|
|
$
|
17,913.1
|
|
Total assets
|
|
|
19,729.2
|
|
|
|
20,114.6
|
|
|
|
20,980.1
|
|
|
|
22,182.0
|
|
|
|
22,512.0
|
|
|
|
21,393.6
|
|
Total debt
|
|
|
298.8
|
|
|
|
298.7
|
|
|
|
300.0
|
|
|
|
300.0
|
|
|
|
|
|
|
|
|
|
Separate account assets
|
|
|
1,260.5
|
|
|
|
1,233.9
|
|
|
|
1,188.8
|
|
|
|
1,228.4
|
|
|
|
1,137.4
|
|
|
|
899.2
|
|
Accumulated other comprehensive income (loss) (AOCI) (net of
taxes)
|
|
|
(102.3
|
)
|
|
|
(0.5
|
)
|
|
|
136.6
|
|
|
|
312.9
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
1,365.6
|
|
|
|
1,327.3
|
|
|
|
1,404.9
|
|
|
|
1,435.8
|
|
|
|
2,566.7
|
|
|
|
2,244.7
|
|
Book value per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic(3)
|
|
$
|
15.84
|
|
|
$
|
14.33
|
|
|
$
|
13.69
|
|
|
$
|
12.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted(4)
|
|
$
|
15.10
|
|
|
$
|
13.85
|
|
|
$
|
13.32
|
|
|
$
|
12.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30,
|
|
|
As of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
U.S. Statutory Financial Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory capital and surplus
|
|
$
|
1,309.7
|
|
|
$
|
1,266.2
|
|
|
$
|
1,260.1
|
|
|
$
|
1,138.4
|
|
|
$
|
1,059.6
|
|
|
$
|
903.4
|
|
Asset valuation reserve (AVR)
|
|
|
172.2
|
|
|
|
158.4
|
|
|
|
140.9
|
|
|
|
107.6
|
|
|
|
71.5
|
|
|
|
39.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory capital and surplus and AVR
|
|
$
|
1,481.9
|
|
|
$
|
1,424.6
|
|
|
$
|
1,401.0
|
|
|
$
|
1,246.0
|
|
|
$
|
1,131.1
|
|
|
$
|
942.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Net income per common share (basic and diluted) assumes that all
participating securities, including warrants, have been
outstanding since the beginning of the period, using the
two-class method. |
|
(2) |
|
Management considers certain non-GAAP financial measures,
including net operating income (loss), to be a useful supplement
to comparable GAAP measures in evaluating our financial
performance and condition. These unaudited measures have been
reconciled to their most comparable GAAP financial measures. We
believe that the non-GAAP presentation of net operating income
is valuable because excluding certain realized capital gains and
losses, many of which are driven by investment decisions and
external economic developments unrelated to the insurance and
underwriting aspects of the business reveals trends that may be
otherwise obscured. For a definition of these non-GAAP measures
and other metrics used in our analysis, see
Managements Discussion and Analysis of Financial
Condition and Results of Operations Use of
non-GAAP Financial Measures. |
|
|
|
(3) |
|
Basic book value per common share is calculated based on total
stockholders equity less AOCI divided by 92,646,295 shares
of common stock outstanding. |
|
|
|
(4) |
|
Diluted book value per common share is calculated based on total
stockholders equity less AOCI plus the proceeds from the
assumed exercise of outstanding warrants, divided by the sum of
the outstanding shares of common stock and shares subject to
outstanding warrants, equal to 111,622,039 in the aggregate. |
33
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with
the audited and unaudited historical financial statements and
the accompanying notes included in this prospectus, as well as
the discussion under Selected Historical Consolidated
Financial Data. 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
Risk Factors and Forward-Looking
Statements. Our fiscal year ends on December 31 of each
calendar year.
Management considers certain non-GAAP financial measures,
including net operating income (loss) and segment pre-tax
operating income, 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 and other metrics used
in our analysis, see Use of non-GAAP Financial
Measures.
Overview
We are a life insurance company focused on profitable growth in
select group health, retirement, life insurance and employee
benefits markets. Our first day of operations as an independent
company was August 2, 2004 when Symetra acquired a group of
life insurance and investment companies from Safeco Corporation
(the Acquisition). Our operations date back to 1957,
and many of our agency and distribution relationships have been
in place for decades. We are headquartered in Bellevue,
Washington and employ approximately 1,300 people in 25
offices across the United States, serving approximately
1.7 million customers. As of September 30, 2007, we
had total stockholders equity of $1.4 billion,
regulatory capital of $1.5 billion and total assets of
$19.7 billion. Our operating return on average equity, or
operating ROAE, was 12.6%, and 12.1%, for the twelve month
periods ended September 30, 2007 and 2006, and 13.0% and
11.9% for the years ended December 31, 2006 and
December 31, 2005, respectively. We define operating ROAE
as net operating income, a non-GAAP financial measure, divided
by average stockholders equity excluding accumulated other
comprehensive income. For a reconciliation of net operating
income to net income, please see page 43.
Our
Operations
We conduct our business through five segments, four of which are
operating:
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Group. We offer medical stop-loss insurance,
limited medical benefit plans, group life insurance, accidental
death and dismemberment insurance and disability insurance
mainly to employer groups of 50 to 1,000 individuals. As a
result of our recent acquisition of Medical Risk Managers, Inc.,
or MRM, we also offer MGU services.
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Retirement Services. We offer fixed and
variable deferred annuities, including tax sheltered annuities,
IRAs, and group annuities to qualified retirement plans,
including Section 401(k) and 457 plans. We also provide
record keeping services for qualified retirement plans invested
in mutual funds.
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Income Annuities. We offer SPIAs for customers
seeking a reliable source of retirement income and structured
settlement annuities to fund third-party personal injury
settlements.
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Individual. We offer a wide array of term,
universal and variable life insurance as well as BOLI.
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Other. This segment consists of unallocated
corporate income, composed primarily of investment income on
unallocated surplus, unallocated corporate expenses, interest
expense on debt, the results of small, non-insurance businesses
that are managed outside of our operating segments and
inter-segment elimination entries.
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34
Revenues
and Expenses
We earn revenues and generate cash primarily from premiums
earned on group life and health and individual insurance
products, cost of insurance, or COI, charges primarily from our
universal life and BOLI products, net investment income, net
realized investment gains and other revenues. Other revenues
include mortality and expense, surrender, and other
administrative charges, revenues from our non-insurance
businesses and revenues from fee arrangements with our
reinsurance partners.
Each operating segment maintains its own portfolio of invested
assets. The realized gains (losses) incurred are reported in the
segment in which they occur. The unallocated portion of net
investment income is reported in the Other segment.
Our primary expenses include interest credited, benefits and
claims and general business and operating expenses, including
commissions. We allocate corporate expenses to each of our
operating segments using multiple factors which include
headcount, allocated capital, account values and time study
results.
Critical
Accounting Policies and Estimates and Recently Issued Accounting
Standards
The accounting policies discussed in this section are those that
we consider to be particularly critical to an understanding of
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. For all
of these policies, we caution that future events rarely develop
exactly as forecast, and our managements best estimates
may require adjustment. For a discussion of recently adopted and
not yet adopted accounting standards, see note 2,
Summary of Significant Accounting Policies, from the
notes to our consolidated financial statements included in this
prospectus.
Other-Than-Temporary
Impairments
We analyze investments that meet our impairment criteria to
determine whether the decline in value is other-than-temporary.
The impairment review involves the finance investment management
team, as well as the portfolio asset manager. To make this
determination for each security, we consider both quantitative
and qualitative criteria including:
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how long and by how much the fair value has been below cost or
amortized cost;
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the financial condition and near-term prospects of the issuer of
the security, including any specific events that may affect its
operations or earnings potential, or compliance with terms and
covenants of the security;
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our intent and ability to keep the security long enough for it
to recover its value;
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any downgrades of the security by a rating agency; and
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any reduction or elimination of dividends or nonpayment of
scheduled interest payments.
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Based on the analysis, we make a judgment as to whether the loss
is other-than-temporary. If the loss is other-than-temporary, we
record an impairment charge within net realized investment gains
(losses) in our consolidated statements of operations in the
period that we make the determination. Our impairment policy may
result in an other-than-temporary impairment charge recorded for
a security that has no credit default or credit issues if we do
not have the intent or ability to hold an impaired security long
enough to recover its value. This situation can exist as a
result of certain portfolio management or cash management
strategies. Accordingly, we categorize impairments as either
credit related or other. If we determine that we are not likely
to receive interest or principal amounts based upon the
expectations of the security or due in accordance with the
contractual terms of the security, the impairment is
characterized as credit related. We may also characterize an
impairment as credit related if substantially all of the
decrease in security value is related to issuer credit spreads
widening. The other-than-temporary impairments categorized as
other are primarily related to securities that have declined in
value and for which we are uncertain of our intent and ability
to retain the investment for a period of time to allow recovery
to book value.
35
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. We limit our deferral to acquisition expenses
contained in our product pricing assumptions.
The following table summarizes our DAC balances by segment:
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As of
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As of
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As of
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September 30,
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December 31,
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December 31,
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2007
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2006
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2005
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(Unaudited)
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(In Millions)
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Group
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$
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3.4
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$
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4.0
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$
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5.3
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Retirement Services
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73.1
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54.5
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25.5
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Income Annuities
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9.6
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6.8
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4.3
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Individual
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31.6
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22.9
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13.9
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Total
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$
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117.7
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$
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88.2
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$
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49.0
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In our Group segment, the DAC amortization period for group
medical stop-loss policies is one year as these policies are
re-priced on an annual basis.
In our Retirement Services, Income Annuities and Individual
segments, we amortize acquisition costs over the premium paying
period or over the lives of the policies in proportion to the
future estimated gross profits, or EGPs, of each of these
product lines, as follows:
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Retirement Services. The DAC amortization
period is typically 20 years for the deferred annuities,
although most of the DAC amortization occurs within the first
10 years because the EGPs are highest during that period.
It is common for deferred annuity policies to lapse after the
surrender charge period expires.
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Income Annuities. The DAC amortization period
for SPIAs, including structured settlement annuities, is the
benefit payment period. The benefit payment periods vary by
policy; however, most benefits are paid within 80 years of
contract issue.
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Individual. The DAC amortization period
related to universal life and variable life policies is
typically 25 years and 20 years, respectively. DAC
amortization related to our term life insurance policies is the
premium paying period, which ranges from 10 to 30 years.
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To determine the EGPs, we make assumptions as to lapse and
withdrawal rates, expenses, interest margins, mortality
experience, long term equity market returns and investment
performance.
Changes to assumptions can have a significant impact on DAC
amortization. In the event actual experience differs from our
assumptions or our future assumptions are revised, we adjust our
EGPs, which could result in a significant increase in
amortization expense. The following would generally cause an
increase in DAC amortization expense: increases to lapse and
withdrawal rates in the current period, increases to expected
future lapse and withdrawal rates, increases to future expected
expense levels, increases to interest margins in the current
period, decreases to expected future interest margins and
decreases to current or expected equity market returns. EGPs are
adjusted quarterly to reflect actual experience to date or to
change underlying key assumptions based on experience studies.
We regularly conduct DAC recoverability analyses. We compare the
current DAC balance with the estimated present value of future
profitability of the underlying business. The DAC balances are
considered recoverable if the present value of future profits is
greater than the current DAC balance.
In connection with our recoverability analyses, we perform
sensitivity analyses on our two most significant DAC balances,
which currently consist of our Retirement Services deferred
annuity product and our Individual universal life product DAC
balances, to capture the effect that certain key assumptions
have on
36
DAC balances. The sensitivity tests are performed independently,
without consideration for any correlation among the key
assumptions.
The following depicts the sensitivities for our deferred annuity
and universal life DAC balances: If we changed our future lapse
and withdrawal rate assumptions by a factor of 10%, the effect
on the DAC balance is less than $0.5 million. If we changed
our future expense assumptions by a factor of 10%, the effect on
the DAC balance is less than $0.1 million.
The DAC balance on the date of our acquisition, August 2,
2004 was reset to zero in accordance with purchase accounting.
See Our Historical Financial Information and
Purchase Accounting. Because of this, since the
Acquisition, quarterly updates to our DAC models to reflect
actual experience have led to immaterial changes in the DAC
asset and amortization, and the magnitude of the sensitivities
is currently relatively small. We expect the DAC balance to grow
as we continue to write new business, and as this occurs, we
would expect the sensitivities to grow accordingly. In addition,
depending on the amount and the type of new business written in
the future we may determine that other of our assumptions may
produce significant variations in our financial results.
Funds
Held Under Deposit Contracts
Liabilities for fixed deferred annuity contracts, guaranteed
investment contracts, and universal life policies, including
BOLI, are computed as deposits net of withdrawals made by the
policyholder, plus amounts credited based on contract
specifications, less contract fees and charges assessed, plus
any additional interest. The unamortized purchase accounting
reserve is also included in this balance. See Our
Historical Financial Information and Purchase Accounting.
For SPIAs, including structured settlements, liabilities are
based on discounted amounts of estimated future benefits.
Contingent future benefits are discounted with best-estimate
mortality assumptions, which include provisions for longer life
spans over time. The interest rate pattern used to calculate the
reserves for SPIAs is set at issue for policies issued
subsequent to the Acquisition or based upon prevailing market
interest rates on August 2, 2004 for policies in existence
on the Acquisition date. The interest rates within the pattern
vary over time and start with interest rates that prevailed at
contract issue or on the Acquisition date. As of
September 30, 2007, the weighted average implied interest
rate on the existing book of business is currently at 5.9% and
will grade to an ultimate assumed level of 6.7% in approximately
20 years.
Future
Policy Benefits
We compute liabilities for future policy benefits under
traditional individual life and group life insurance policies on
the level premium method, which uses a level premium assumption
to fund reserves. We select the level of premiums at issuance so
that the actuarial present value of future benefits equals the
actuarial present value of future premiums. We set the interest,
mortality and persistency assumptions in the year of issue and
include provisions for adverse deviations. These liabilities are
contingent upon the death of the insured while the policy is in
force. We derive mortality assumptions from both
company-specific and industry statistics. We discount future
benefits at interest rates that vary by year of policy issue,
are graded to the statutory valuation interest rate over time,
and range from 4.0% to 6.0%. Assumptions are made at the time
each policy is issued, and do not change over time unless the
liability amount is determined to be inadequate to cover future
policy benefits. The provisions for adverse deviations are
intended to provide coverage for the risk that actual experience
may be worse than locked-in best-estimate assumptions.
We periodically compare our actual experience with our estimates
of actuarial liabilities for future policy benefits. To the
extent that actual policy benefits differ from the reserves
established for future policy benefits, such differences are
recorded in the results of operations in the period in which the
variances occur, which could result in a decrease in profits, or
possibly losses. No revisions to assumptions within the Future
Policy Benefits liabilities have been necessary and therefore we
have not experienced any impact in our financial results due to
changes in assumptions.
37
Policy
and Contract Claims
Liabilities for policy and contract claims primarily represent
liabilities for claims under group medical coverages and are
established on the basis of reported losses. We also provide for
claims incurred but not reported, or IBNR, based on expected
loss ratios, claims paying completion patterns and historical
experience. We continually review estimates for reported but
unpaid claims and IBNR. Any necessary adjustments are reflected
in current operating results. If expected loss ratios increase
or expected claims paying completion patterns extend, the IBNR
amount increases.
Use of
non-GAAP Financial Measures
Certain tables in this prospectus include non-GAAP financial
measures. We believe these measures to provide useful
information to investors in evaluating our financial performance
and condition. In the following paragraphs, we provide a
definition of these non-GAAP measures.
Net
operating income
Net 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
equity-related securities held in our Income Annuities segment
and on our FIA hedges.
We believe that net operating income provides greater
transparency than GAAP net income regarding the underlying
performance of our insurance operations. As an example, we could
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.
Realized gains (losses) on our investment portfolio (except for
the realized gains (losses) on our Income Annuities
equity-related securities and on our FIA hedges, as discussed
below) are primarily driven by investment decisions and external
economic developments, the nature and timing of which are
unrelated to the operating aspects of our business. By
disclosing net operating income in addition to net income, we
aim to provide investors with a view into the performance of our
operations that might otherwise be masked by unrelated factors.
We believe that it is useful for investors to evaluate both net
income and net operating income.
Net operating income includes equity-related realized and
unrealized investment gains (losses) in our Income Annuities
business and realized and unrealized investment gains (losses)
on our FIA hedges in our Retirement Services business. We
include these items because they specifically reflect our
management of certain of our insurance liabilities. For
instance, each year we use the realized gains from our FIA
hedges to fund the interest credited on our FIA product.
Additionally, over the long-term we expect to produce investment
returns in support of our long duration liabilities within
Income Annuities by investing in equities. Since the investment
performance from our FIA hedge program and equity investment
program is reported in realized and unrealized gains (losses),
we include these in our net operating income measure. See
Segment pre-tax operating income on this page for
further information regarding realized gains (losses) related to
our Income Annuities and Retirement Services segments.
Our management and board of directors use net operating income
to evaluate our operations, including assessing the
effectiveness of operating and strategic decisions, management
of insurance liabilities and financial planning. For instance,
we use net operating income to help determine the renewal
interest rates to credit to policyholders in Retirement
Services. Because net operating income excludes the net realized
investment gains (losses) described above, 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 our GAAP net income as part of their review of
the overall financial results of the company.
Net income (loss) is the most directly comparable GAAP measure.
Net operating income should not be considered a substitute for
net income. A reconciliation of net operating income to net
income is provided on page 43.
38
Segment
pre-tax operating income
We use the non-GAAP financial measure segment pre-tax operating
income as an important measure of our operating performance. We
believe that this measure provides investors with a valuable
measure of the performance of our ongoing businesses because it
reveals trends that may be obscured by the effect of certain
realized capital gains and losses. Some realized capital gains
and losses are primarily driven by investment decisions and
external economic developments for which the nature and timing
are unrelated to the insurance and underwriting aspects of our
business. Accordingly, segment pre-tax operating income excludes
the effect of most realized gains and losses. For segment
pre-tax operating income, segment pre-tax income is the most
directly comparable GAAP measure. Segment pre-tax operating
income should not be considered as a substitute for segment
pre-tax income.
When evaluating our Retirement Services segment operating
results, we consider the impact of our hedging program related
to our FIA products. This program consists of buying S&P
500 Index call options. Although we use index options to hedge
the equity return component of our FIA products, the options do
not qualify as hedge instruments or for hedge accounting
treatment. These assets are recorded at fair value as
free-standing derivative assets with the mark-to-market gains or
losses to record the options at fair value recognized in net
realized investment gains (losses). The realized gain or loss on
the options is also recorded in net investment realized gains
(losses). Since the interest incurred on these FIA products is
included as a component of interest credited in our statement of
operations, we believe it is more meaningful to evaluate results
inclusive of the results of the hedge program. Accordingly,
segment pre-tax operating income in our Retirement Services
segment excludes all realized investments gains (losses), except
for realized and unrealized investment gains or (losses) from
our options related to our FIA hedging program.
For our Income Annuities segment, we evaluate the results of
operations including the impact of both realized and unrealized
investment gains (losses) on our equity portfolio because we
believe that equities are an effective investment to fund the
long duration benefit payments in our structured settlements and
SPIA policies. The majority of our investment returns on the
equities in our Income Annuities investment portfolio are
recorded in net realized investment gains (losses) on our
statement of operations and through changes in unrealized gains
(losses) as a component of other comprehensive income. Since the
interest incurred on the long duration benefit payments is
recorded as a component of interest credited, we believe it is
more meaningful to evaluate the results inclusive of our equity
investment program. Accordingly, segment pre-tax operating
income in our Income Annuities segment excludes all realized
investment gains (losses), except for realized and unrealized
investment gains (losses) arising from our equity investment
program held in this segment.
Our
Historical Financial Information and Purchase
Accounting
On August 2, 2004, we completed the Acquisition. The
Acquisition was accounted for using the purchase method under
the Financial Accounting Standards Boards Statement of
Financial Accounting Standards, or SFAS, No. 141,
Business Combinations. We refer to this purchase method
as purchase GAAP accounting, or PGAAP. Under
SFAS No. 141, the purchase price is allocated to the
estimated fair value of the tangible and identifiable assets
acquired less liabilities assumed at the date of acquisition. In
conjunction with PGAAP for the Acquisition, we were required to
adjust our consolidated balance sheet to fair value. This
resulted in the following:
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the book values of our invested assets were increased by
$1.0 billion to reset the book value to fair value, based
on the prevailing market rates on August 2, 2004. The
prevailing market interest rates were relatively low at the time
of the Acquisition, which resulted in a significant increase in
the book value of our invested assets. We recorded a PGAAP
adjustment representing the difference between book value and
the fair value of our invested assets. The difference between
the updated book value and the par value of our fixed maturities
invested assets of $27.0 million is amortized against
investment income over the expected life of the invested assets,
resulting in a lower earned yield;
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our funds held under deposit contracts, which our invested
assets support, were increased to reflect the lower market
interest rates compared to interest rates originally used to
determine policy pricing and
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39
reserving. As a result, our reserves related to fixed deferred
annuities, structured settlements, immediate annuities and BOLI
products were increased by $1.2 billion;
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our deferred policy acquisition costs, goodwill and intangible
asset balances at August 2, 2004 were reset to zero. PGAAP
resulted in a $30.0 million intangible asset related to our
discontinued operations, which was received in cash in 2004. In
our continuing operations, the purchase accounting resulted in
minimal intangibles and no goodwill; and
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all other assets and liabilities were recorded at fair value on
August 2, 2004.
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The impact of PGAAP on operating performance for periods
subsequent to the Acquisition resulted in a decrease to
investment income and a decrease to policyholder benefits and
interest credited. In our Retirement Services and Individual
segments, a purchase accounting reserve, or PGAAP reserve, was
established related to the fair value adjustment for our
deferred annuities and BOLI policies. This PGAAP reserve is
amortized as a reduction to policyholder benefits according to
the pattern of profitability of the book of business of policies
in force at the date of the Acquisition. This profitability is
determined based on assumptions regarding the present value of
estimated future gross profits related to the policies in force
on August 2, 2004. In this estimation process, we made
assumptions as to lapse rates, mortality rates, maintenance
expenses, COI charges, credited interest rates, and investment
performance. This pattern resulted in higher PGAAP reserve
amortization in the years immediately following the Acquisition.
Actual profits can vary from the estimates and can thereby
result in increases or decreases to the PGAAP reserve
amortization rate.
The PGAAP adjustment associated with our immediate annuity book
of business was recorded in our income annuities reserve model
by updating the mortality assumptions and the interest rate
pattern used for discounting future benefit payments. This
adjustment resulted in a decrease in interest credited in the
years subsequent to the Acquisition.
As a result of the Acquisition and resulting PGAAP adjustments,
the results of operations for periods prior to August 2,
2004 are not comparable to periods subsequent to that date. Our
2004 results discussed below represent the mathematical addition
of the historical results for (i) the predecessor period
from January 1, 2004 through August 1, 2004 and
(ii) the successor period from August 2, 2004 through
December 31, 2004. This approach is not consistent with
U.S. GAAP and yields results that are not comparable on a
period-to-period basis. However, we believe it is a meaningful
way to compare our operating results for 2004 to our operating
results for 2005 because it would not be meaningful to discuss
the partial period from January 1, 2004 through
August 1, 2004 (Predecessor) separately from the period
from August 2, 2004 through December 31, 2004. The
following table provides a summary of the combination of the
audited consolidated statements of operations for the periods
January 1, 2004 through August 1, 2004 and
August 2, 2004 through December 31, 2004 to the
Combined 2004 (non-GAAP), results:
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Predecessor
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Period From
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Period From
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January 1,
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August 2,
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2004
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2004
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through
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through
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Combined
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August 1,
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December 31,
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2004
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2004
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2004
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(non-GAAP)
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(In millions)
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Revenues:
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Premiums
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$
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357.9
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$
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263.2
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$
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621.1
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Net investment income
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693.7
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411.1
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1,104.8
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Other revenues
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43.9
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27.1
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71.0
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Net realized investment gains
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34.9
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7.0
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41.9
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Total revenues
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1,130.4
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708.4
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1,838.8
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40
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Predecessor
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Period From
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Period From
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January 1,
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August 2,
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2004
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2004
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through
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through
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Combined
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August 1,
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December 31,
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2004
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2004
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2004
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(non-GAAP)
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(In millions)
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Benefits and Expenses:
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Policyholder benefits and claims
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223.6
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127.5
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351.1
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|
Interest credited
|
|
|
556.4
|
|
|
|
360.2
|
|
|
|
916.6
|
|
Other underwriting and operating expenses
|
|
|
182.3
|
|
|
|
123.3
|
|
|
|
305.6
|
|
Fair value of warrants issued to investors
|
|
|
|
|
|
|
101.5
|
|
|
|
101.5
|
|
Interest expense
|
|
|
|
|
|
|
3.5
|
|
|
|
3.5
|
|
Amortization of deferred policy acquisition costs
|
|
|
34.2
|
|
|
|
1.6
|
|
|
|
35.8
|
|
Intangible asset amortization
|
|
|
4.9
|
|
|
|
|
|
|
|
4.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses
|
|
|
1,001.4
|
|
|
|
717.6
|
|
|
|
1,719.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
|
129.0
|
|
|
|
(9.2
|
)
|
|
|
119.8
|
|
Provisions for income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
0.9
|
|
|
|
21.3
|
|
|
|
22.2
|
|
Deferred
|
|
|
30.5
|
|
|
|
10.7
|
|
|
|
41.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision for income taxes
|
|
|
31.4
|
|
|
|
32.0
|
|
|
|
63.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
97.6
|
|
|
|
(41.2
|
)
|
|
|
56.4
|
|
Income (loss) from discontinued operations (net of taxes)
|
|
|
2.3
|
|
|
|
(2.4
|
)
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
99.9
|
|
|
$
|
(43.6
|
)
|
|
$
|
56.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP Financial Measures:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income (loss)
|
|
$
|
75.5
|
|
|
$
|
(46.0
|
)
|
|
$
|
29.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation to Net Income (Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
99.9
|
|
|
$
|
(43.6
|
)
|
|
$
|
56.3
|
|
Less: Net realized investment gains (net of taxes)
|
|
|
22.7
|
|
|
|
4.6
|
|
|
|
27.3
|
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized and unrealized investment gains (losses) on FIA
options (net of taxes)
|
|
|
(1.7
|
)
|
|
|
1.3
|
|
|
|
(0.4
|
)
|
Net realized and unrealized investment gains on equity
securities (net of taxes)
|
|
|
|
|
|
|
0.9
|
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income (loss)
|
|
$
|
75.5
|
|
|
$
|
(46.0
|
)
|
|
$
|
29.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The consolidated statements of operations for the Combined 2004
(non-GAAP) period include allocations of certain expenses from
Safeco Corporation. Safeco Corporation and its affiliates
provided us with personnel, property and facilities in carrying
out certain of our corporate functions. These expenses included
charges for corporate overhead, data processing systems, payroll
and other miscellaneous charges. The allocations were made using
relative percentages, as compared to Safeco Corporations
other businesses, of headcount or time studies or on a
specifically identifiable basis such as actual usage, or other
reasonable methods. Safeco Corporation charged us expenses of
$25.2 million for the seven months ended August 1,
2004. Our comparable expenses as a separate, stand alone company
have been lower than the amounts reflected in the Combined 2004
(non-GAAP) statement of operations.
In addition to our four operating segments and our Other
segment, during the year ended December 31, 2005 and prior,
our historical financial statements also include the results of
Symetra Asset Management Company and the majority of the
business of Symetra Services Corporation which are presented in
our
41
historical financial statements as discontinued operations. For
more information, see note 15, Discontinued
Operations, in the notes to our consolidated financial
statements included in this prospectus. These discontinued
operations are not included in the discussions under
Results of Operations section due to their
immateriality and lack of impact on future operating results.
The historical financial information included in this prospectus
has been derived from our financial statements, which have been
prepared as if Symetra had been in existence throughout all
periods shown. The discussions that appear under
Results of Operations encompass our results of operations
and financial condition for the nine months ended
September 30, 2007 and 2006 and for the years ended
December 31, 2006, 2005 and Combined 2004 (non-GAAP).
Results
of Operations
Total
Company
The following discussion should be read in conjunction with our
audited consolidated financial statements and the related notes
included elsewhere in this report. Set forth below is a summary
of our consolidated financial results for the nine months ended
September 30, 2007 and 2006 and for the years ended
December 31, 2006, 2005 and Combined 2004 (non-GAAP):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
Combined
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
(non-GAAP)
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except per share data)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
|
|
$
|
397.9
|
|
|
$
|
398.0
|
|
|
$
|
525.7
|
|
|
$
|
575.5
|
|
|
$
|
621.1
|
|
Net investment income
|
|
|
732.3
|
|
|
|
734.0
|
|
|
|
984.9
|
|
|
|
994.0
|
|
|
|
1,104.8
|
|
Other revenues
|
|
|
50.4
|
|
|
|
42.7
|
|
|
|
56.1
|
|
|
|
58.6
|
|
|
|
71.0
|
|
Net realized investment gains (losses)
|
|
|
23.8
|
|
|
|
(4.9
|
)
|
|
|
1.7
|
|
|
|
14.1
|
|
|
|
41.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
1,204.4
|
|
|
|
1,169.8
|
|
|
|
1,568.4
|
|
|
|
1,642.2
|
|
|
|
1,838.8
|
|
Benefits and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder benefits and claims
|
|
|
196.5
|
|
|
|
209.8
|
|
|
|
264.3
|
|
|
|
327.4
|
|
|
|
351.1
|
|
Interest credited
|
|
|
564.9
|
|
|
|
571.9
|
|
|
|
765.9
|
|
|
|
810.9
|
|
|
|
916.6
|
|
Other underwriting and operating expenses
|
|
|
209.9
|
|
|
|
191.9
|
|
|
|
260.5
|
|
|
|
273.2
|
|
|
|
305.6
|
|
Fair value of warrants issued to investors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101.5
|
|
Interest expense
|
|
|
14.1
|
|
|
|
14.5
|
|
|
|
19.1
|
|
|
|
12.4
|
|
|
|
3.5
|
|
Amortization of deferred policy acquisition costs
|
|
|
14.2
|
|
|
|
11.0
|
|
|
|
14.6
|
|
|
|
11.9
|
|
|
|
35.8
|
|
Intangible asset amortization
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses
|
|
|
999.8
|
|
|
|
999.1
|
|
|
|
1,324.4
|
|
|
|
1,435.8
|
|
|
|
1,719.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
204.6
|
|
|
|
170.7
|
|
|
|
244.0
|
|
|
|
206.4
|
|
|
|
119.8
|
|
Provisions for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
46.1
|
|
|
|
72.5
|
|
|
|
92.4
|
|
|
|
22.2
|
|
|
|
22.2
|
|
Deferred
|
|
|
20.9
|
|
|
|
(12.7
|
)
|
|
|
(7.9
|
)
|
|
|
39.7
|
|
|
|
41.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision for income taxes
|
|
|
67.0
|
|
|
|
59.8
|
|
|
|
84.5
|
|
|
|
61.9
|
|
|
|
63.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
137.6
|
|
|
|
110.9
|
|
|
|
159.5
|
|
|
|
144.5
|
|
|
|
56.4
|
|
Income (loss) from discontinued operations (net of taxes)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.0
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
137.6
|
|
|
$
|
110.9
|
|
|
$
|
159.5
|
|
|
$
|
145.5
|
|
|
$
|
56.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.23
|
|
|
$
|
0.99
|
|
|
$
|
1.43
|
|
|
$
|
1.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
1.23
|
|
|
$
|
0.99
|
|
|
$
|
1.43
|
|
|
$
|
1.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
Combined
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
(non-GAAP)
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except per share data)
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
111.622
|
|
|
|
111.622
|
|
|
|
111.622
|
|
|
|
111.622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
111.622
|
|
|
|
111.622
|
|
|
|
111.622
|
|
|
|
111.622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP Financial Measures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income
|
|
$
|
126.1
|
|
|
$
|
121.6
|
|
|
$
|
172.1
|
|
|
$
|
141.9
|
|
|
$
|
29.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation to Net Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
137.6
|
|
|
$
|
110.9
|
|
|
$
|
159.5
|
|
|
$
|
145.5
|
|
|
$
|
56.3
|
|
Less: Net realized investment gains (losses) (net of taxes)
|
|
|
15.5
|
|
|
|
(3.2
|
)
|
|
|
1.1
|
|
|
|
9.2
|
|
|
|
27.3
|
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized and unrealized investment gains (losses) on FIA
options (net of taxes)
|
|
|
0.5
|
|
|
|
(0.2
|
)
|
|
|
1.4
|
|
|
|
(2.9
|
)
|
|
|
(0.4
|
)
|
Net realized and unrealized investment gains on equity
securities (net of taxes)
|
|
|
3.5
|
|
|
|
7.7
|
|
|
|
12.3
|
|
|
|
8.5
|
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income
|
|
$
|
126.1
|
|
|
$
|
121.6
|
|
|
$
|
172.1
|
|
|
$
|
141.9
|
|
|
$
|
29.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Net income per common share (basic and diluted) assumes that all
participating securities including warrants have been
outstanding since the beginning of the period, using the
two-class method. |
Nine
Months Ended September 30, 2007 Compared to Nine Months
Ended September 30, 2006
Summary of results. Net income increased
$26.7 million, or 24.1%, to $137.6 million from
$110.9 million. Net operating income increased
$4.5 million, or 3.7%, to $126.1 million from
$121.6 million. This increase was driven by a decrease in
the loss ratio in our Group segment, primarily the medical
stop-loss ratio which decreased to 54.6% from 66.9% as a result
of lower paid claims. This increase was partially offset by
lower profitability in our Retirement Services segment due to a
decrease in account value as withdrawals of older fixed annuity
products exceeded new deposits and decreased interest spreads
driven by a decrease in PGAAP reserve amortization, as more
fully described in Policyholder benefits and
claims.
Premiums. Premiums consist primarily of
revenues from our group life and health and individual life
insurance products and COI charges on our universal life
insurance and BOLI policies. Premiums decreased
$0.1 million, or less than 0.1%, to $397.9 million
from $398.0 million. Premiums decreased primarily due to
lower premiums in our Group segment, offset by an increase in
our Individual segment related to our BOLI block of policies.
Net investment income. Net investment income
represents the income earned on our investments. Net investment
income decreased $1.7 million, or 0.2%, to
$732.3 million from $734.0 million. Of this decrease,
$26.0 million was a result of a decrease in the average
invested assets to $17.4 billion from $18.1 billion,
primarily in our Retirement Services segment. This decrease was
offset by a positive rate variance of $24.3 million due to
improved yields which increased to 5.60% from 5.42%. The
increase in yield was primarily due to the reinvestment of funds
in higher yielding securities, an increase in the yield on
short-term investments, strong performance on limited
partnerships, the receipt of prepayment consent fees and a
reduction in investment advisory rates.
Other revenues. Other revenues include
mortality and expense, surrender and other administrative
charges, revenues from our non-insurance businesses and revenues
from fee arrangements with our reinsurance partners. Other
revenues increased $7.7 million, or 18.0%, to
$50.4 million from $42.7 million. The increase is
primarily due to increased fee revenue in our broker-dealer
operations and an increase in fee revenue related to the
acquisition of our newly acquired subsidiary MRM.
43
Net realized investment gains (losses). Net
realized investment gains (losses) consist of realized gains and
losses from the sale or impairment of our investments and
unrealized and realized gains from our derivatives instruments,
including equity options which provide an economic hedge on our
FIA book of business. Net realized investment gains increased
$28.7 million, to $23.8 million from a loss of
$4.9 million. For the nine months ended September 30,
2007, gross realized gains were $53.0 million and gross
realized losses were $29.2 million, including impairments
of $8.2 million. For the nine months ended
September 30, 2006, gross realized gains were
$40.2 million and gross realized losses were
$45.1 million, including impairments of $24.4 million.
Policyholder benefits and claims. Policyholder
benefits and claims consist of benefits paid and reserve
activity on group life and health and individual life products.
In addition, we record, as a reduction of this expense, PGAAP
reserve amortization related to our fixed deferred annuities and
BOLI policies. The PGAAP reserve is amortized as a reduction to
policyholder benefits according to our expected pattern of
profitability of the book of business of policies in force on
the date of the Acquisition. This pattern resulted in higher
PGAAP reserve amortization in the years immediately following
the Acquisition. Policyholder benefits and claims decreased
$13.3 million, or 6.3%, to $196.5 million from
$209.8 million. This decrease was primarily due to a
$37.1 million reduction in our Group paid claims,
predominantly medical stop-loss claims, offset by a
$17.9 million decrease in PGAAP reserve amortization, a
$2.6 million increase in Individual paid claims and a
$3.0 million increase in Group reserves.
Interest credited. Interest credited
represents interest credited to policyholder reserves and
contractholder general account balances. Interest credited
decreased $7.0 million, or 1.2%, to $564.9 million
from $571.9 million. Of this decrease, $12.3 million
was the result of a decrease in fixed account values in our
Retirement Services segment, partially offset by a
$7.7 million increase related to increasing BOLI account
values in our Individual segment.
Interest expense. Interest expense represents
interest on debt. Interest expense will be affected in the
fourth quarter of 2007 and in future fiscal years as a result of
additional interest expense we will incur from our issuance of
CENts in October 2007. We expect to record interest expense from
the CENts of $2.7 million in the fourth quarter of 2007,
and $13.1 million for the year ended December 31, 2008.
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 commissions, policy issuance expenses and
other general operating costs. Other underwriting and operating
expenses increased $18.0 million, or 9.4%, to
$209.9 million from $191.9 million. The increase is
primarily due to a $10.6 million increase in corporate
shared service expenses, which includes $2.0 million of
expenses related to our initial public offering, an increase in
employee and related benefit expenses and an increase in various
professional services fees including accounting fees and
advertising costs. In addition, distribution expenses increased
$3.5 million due to an increase in incentive compensation
and an increase in distribution employee headcount, and a
$2.6 million increase in segment operating expenses related
to the acquisition of MRM in the second quarter of 2007 and
certain direct segment expenses.
Other underwriting and operating expenses will be affected in
the fourth quarter of 2007 and in future fiscal years as a
result of equity grants we intend to make under our IPO grant
program, which will consist of fully-vested shares that we will
issue upon the closing of this offering and restricted stock
units and stock options that will vest over four and five years
respectively, following this offering. We expect this
compensation expense to increase other underwriting and
operating expenses by $3.1 million for the fourth quarter
of 2007, and by $1.8 million for the year ended
December 31, 2008.
Provision for income taxes. The provision for
income taxes increased $7.2 million, to $67.0 million
from $59.8 million. The effective tax rate decreased 2.3%
to 32.7% from 35.0% due primarily to an increase in the
affordable housing credits, a decrease in the adjustment for
unrecognized tax benefits and a reduction in provision to return
true-up
adjustments, offset by the effect of the increase in pre-tax
income from continuing operations and non-deductible transaction
expenses related to our initial public offering.
44
Year
Ended December 31, 2006 Compared to Year Ended
December 31, 2005
Summary of results. Net income increased by
$14.0 million, or 9.6%, to $159.5 million from
$145.5 million. Net operating income increased by
$30.2 million, or 21.3%, to $172.1 million from
$141.9 million, which was primarily due to a decrease in
the loss ratio in our Group segment from 67.5% to 59.6%
resulting from better underwriting experience. Our results also
benefited from an increase in interest spreads on reserves in
our Income Annuities segment and, in our Individual segment,
improved mortality and an increase in our return on assets on
our BOLI policies. This was offset by a decrease in segment
pre-tax operating income in Retirement Services.
Premiums. Premiums decreased
$49.8 million, or 8.7%, to $525.7 million from
$575.5 million. Premiums in our Group segment decreased
$51.0 million, primarily due to higher lapses in our
medical stop-loss business and the termination of an assumed
reinsurance relationship in 2004.
Net investment income. Net investment income
decreased $9.1 million, or 0.9%, to $984.9 million
from $994.0 million. Of this decrease, $36.1 million
was the result of a decrease in the average invested assets to
$18.0 billion from $18.7 billion, primarily in our
Retirement Services segment. This decrease was partially offset
by a positive rate variance of $27.0 million due to
improved yields which increased to 5.48% from 5.33%. The
increase in yield was primarily the result of portfolio
rebalancing.
Net realized investment gains. Net realized
investment gains decreased $12.4 million, or 87.9%, to
$1.7 million from $14.1 million. For 2006, gross
realized gains were $55.1 million and gross realized losses
were $53.4 million, including impairments of
$25.7 million. For 2005, gross realized gains were
$75.5 million and gross realized losses were
$61.3 million, including impairments of $7.7 million.
Policyholder benefits and claims. Policyholder
benefits and claims decreased $63.1 million, or 19.3%, to
$264.3 million from $327.4 million. This decrease was
primarily driven by a $65.2 million decrease in our Group
segments medical stop-loss paid claims and a
$7.1 million decrease in our Individual segments
claims and benefits, offset by a $9.2 million increase in
our Retirement Services segment related to differences in the
amount of PGAAP reserve amortization.
Interest credited. Interest credited decreased
$45.0 million, or 5.5%, to $765.9 million from
$810.9 million. The decrease was primarily due to a
$25.3 million decrease in interest credited in our
Retirement Services segment related to a decrease in fixed
account values and a $20.7 million decrease in interest
credited in our Income Annuities segment due to a decrease in
reserves as benefit payments exceeded new deposits, mortality
gains and funding services activities.
Other underwriting and operating
expenses. Other underwriting and operating
expenses decreased $12.7 million, or 4.6%, to
$260.5 million from $273.2 million. This was primarily
due to a $6.7 million decrease in operating expenses and a
$7.0 million increase in DAC deferral. The decrease in
operating expenses included $2.4 million related to
information technology transition and $3.2 million related
to distribution expense incurred in 2005.
Interest expense. Interest expense increased
$6.7 million, or 54.0%, to $19.1 million from
$12.4 million, due to an increase in our average interest
rate of 6.0% in 2006 from the average interest rate of 4.1% in
2005. See Liquidity and Capital
Resources for further information.
Amortization of deferred policy acquisition
costs. Amortization of DAC increased
$2.7 million, or 22.7%, to $14.6 million from
$11.9 million. This was related to an increase in the
underlying DAC asset, which increased $39.2 million, or
80%, to $88.2 million from $49.0 million. In
connection with the Acquisition, our DAC asset was reset to zero
on August 2, 2004 and has subsequently been growing as a
result of sales. Our amortization expense is expected to
increase as the underlying DAC asset increases.
Provision for income taxes. The provision for
income taxes increased $22.6 million, to $84.5 million
from $61.9 million, which reflects an increase of the
effective tax rate to 34.6% from 30.0%. In 2005, the effective
tax rate of 30.0% reflects a non-recurring tax benefit for the
release of a valuation allowance related to the utilization of
capital loss carryforwards. In addition, the effective tax rate
in 2006 of 34.6% reflects an increase due to a
true-up of
the permanent tax benefits related to the 2005 federal tax
return as filed.
45
Year
Ended December 31, 2005 compared to Year Ended
December 31, 2004 (Combined Non-GAAP)
Summary of results. Net income increased by
$89.2 million to $145.5 million from
$56.3 million. Net operating income increased by
$112.4 million to $141.9 million from
$29.5 million. This was primarily related to the
$101.5 million charge in 2004 to record the fair value of
warrants issued to investors. Net operating income in 2005,
benefiting from lower other underwriting and operating expenses
as a result of not incurring corporate overhead expenses from
Safeco and not incurring Acquisition related expenses. In
addition, amortization of deferred policy acquisition costs
decreased due to the Acquisition when DAC was reset to zero.
These positive factors were partially offset by an increase in
the loss ratio in our Group segment from 64.0% to 67.5%.
Premiums. Premiums decreased
$45.6 million, or 7.3%, to $575.5 million from
$621.1 million primarily due to decreased premiums in our
Group segment which decreased $62.3 million as a result of
higher lapses in our medical stop-loss business and the
termination of an assumed reinsurance relationship in 2004. This
was offset by an increase in our Individual segment premiums of
$16.8 million due to a $14.1 million adjustment
related to ceded term reinsurance.
Net investment income. Net investment income
decreased $110.8 million, or 10.0%, to $994.0 million
from $1,104.8 million. This was related to the Acquisition
purchase accounting which resulted in an overall reduction in
investment yields for periods subsequent to the Acquisition.
Other revenues. Other revenues decreased
$12.4 million, or 17.5% to $58.6 million from
$71.0 million. This was primarily due to a
$4.0 million decrease in our Retirement Services segment
fees related to our variable annuities. In addition, in 2004 our
Individual segment recorded a $5.9 million favorable
adjustment related to ceded term reinsurance expense allowances,
which increased 2004 other revenue.
Net realized investment gains. Net realized
investment gains decreased $27.8 million, or 66.3%, to
$14.1 million from $41.9 million. For 2005, gross
realized gains were $75.5 million and gross realized losses
were $61.3 million, including impairments of
$7.7 million. For 2004, gross realized gains were
$110.7 million and gross realized losses were
$68.8 million, including impairments of $10.4 million.
Policyholder benefits and claims. Policyholder
benefits and claims decreased $23.7 million, or 6.8%, to
$327.4 million from $351.1 million. This decrease was
primarily due to a $24.5 million decrease in our Group
segments reserves, which corresponds with a related
decrease in premium and a $10.0 million decrease, which
relates to having a full year in the Retirement Services
segments PGAAP reserve amortization. This was offset by a
$10.8 million increase in our Individual segment related to
an increase in claims and an adjustment in reserves for a bonus
interest feature on one of our universal life, or UL, products.
Interest credited. Interest credited decreased
$105.7 million, or 11.5%, to $810.9 million from
$916.6 million. This decrease was due to a
$53.1 million decrease in interest credited in our
Retirement Services segment related to a decrease in fixed
account values, a $46.4 million decrease in interest
credited in our Income Annuities segment related to PGAAP and a
$6.2 million decrease in interest credited in our
Individual segment related to BOLI claims experience, which
impacts the credited interest rate.
Other underwriting and operating
expenses. Other underwriting and operating
expenses decreased $32.4 million, or 10.6%, to
$273.2 million from $305.6 million. This was primarily
due to a $17.8 million decrease in our Group segments
commission and premium tax expense, corresponding to our lower
sales. The 2005 other underwriting and operating expenses
reflected are not comparable to 2004 during which Safeco
Corporation allocated us costs for the first seven months of
2004 and charged us for transition services for the remaining
five months of 2004.
Fair value of warrants issued to investors. In
connection with the Acquisition, on August 2, 2004, we
issued warrants to the two lead investors to purchase
18,975,744 shares of common stock at an exercise price of
$11.49 per share. We recorded the $101.5 million estimated
fair value of the warrants as an expense during the year ended
December 31, 2004.
Interest expense. Interest expense increased
$8.9 million, to $12.4 million from $3.5 million.
This increase in interest expense was related to the
Acquisition. Prior to August 2, 2004, we had no debt
obligations. On August 2, 2004, we borrowed
$300.0 million against a revolving credit facility to
purchase the
46
life and investment companies. The increase in interest expense
reflects twelve months of interest expense in 2005 compared to
five months in 2004.
Amortization of deferred policy acquisition
costs. Amortization of deferred policy
acquisition costs decreased $23.9 million, or 66.8%, to
$11.9 million from $35.8 million. The deferred policy
acquisition costs asset was reset to zero on August 2, 2004
in connection with the Acquisition resulting in lower DAC
amortization in the subsequent periods. The 2004 expense
includes $1.6 million of expense for the five-month period
subsequent to the Acquisition.
Intangible asset amortization. Intangible
asset amortization decreased $4.9 million, or 100%, to zero
from $4.9 million as a result of intangible assets being
reset to zero on the acquisition date.
Provision for income taxes. The provision for
income taxes decreased $1.5 million, to $61.9 million
from $63.4 million which reflects an effective tax rate
decrease to 30.0% from 52.9%. The 2005 effective rate of 30.0%
reflects a non-recurring tax benefit of the release of a tax
valuation allowance related to the utilization of capital loss
carryforward. The 2004 effective tax rate of 52.9% was
significantly in excess of the statutory rate of 35.0% due to
the GAAP expense associated with the issuance of the warrant
certificates, of which the majority is not deductible for tax
purposes. This increase in the 2004 effective rate was offset by
the completion of an IRS audit cycle for tax years 1998 through
2001 and the related favorable adjustment of $8.7 million.
Group
The following table sets forth the results of operations
relating to our Group segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
Nine Months
|
|
|
|
|
|
|
|
|
Combined
|
|
|
|
Ended September 30,
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
(non-GAAP)
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
|
|
$
|
293.1
|
|
|
$
|
294.0
|
|
|
$
|
387.3
|
|
|
$
|
438.3
|
|
|
$
|
500.6
|
|
Net investment income
|
|
|
13.5
|
|
|
|
13.5
|
|
|
|
18.0
|
|
|
|
19.3
|
|
|
|
22.4
|
|
Other revenues
|
|
|
10.7
|
|
|
|
8.0
|
|
|
|
10.2
|
|
|
|
11.8
|
|
|
|
14.0
|
|
Net realized investment gains (losses)
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
(0.1
|
)
|
|
|
(0.1
|
)
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
317.2
|
|
|
|
315.5
|
|
|
|
415.4
|
|
|
|
469.3
|
|
|
|
537.1
|
|
Benefits and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder benefits and claims
|
|
|
157.7
|
|
|
|
186.9
|
|
|
|
230.8
|
|
|
|
296.0
|
|
|
|
320.5
|
|
Other underwriting and operating expenses
|
|
|
82.8
|
|
|
|
77.9
|
|
|
|
105.7
|
|
|
|
115.3
|
|
|
|
133.1
|
|
Amortization of deferred policy acquisition costs
|
|
|
6.4
|
|
|
|
8.4
|
|
|
|
10.9
|
|
|
|
10.5
|
|
|
|
11.9
|
|
Intangible asset amortization
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses
|
|
|
247.1
|
|
|
|
273.2
|
|
|
|
347.4
|
|
|
|
421.8
|
|
|
|
466.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pre-tax income
|
|
$
|
70.1
|
|
|
$
|
42.3
|
|
|
$
|
68.0
|
|
|
$
|
47.5
|
|
|
$
|
70.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
Nine Months
|
|
|
|
|
|
|
|
|
Combined
|
|
|
|
Ended September 30,
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
(non-GAAP)
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
Non-GAAP Financial Measures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pre-tax operating income
|
|
$
|
70.2
|
|
|
$
|
42.3
|
|
|
$
|
68.1
|
|
|
$
|
47.6
|
|
|
$
|
70.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation to segment pre-tax income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pre-tax income
|
|
$
|
70.1
|
|
|
$
|
42.3
|
|
|
$
|
68.0
|
|
|
$
|
47.5
|
|
|
$
|
70.8
|
|
Less: Net realized investment gains (losses)
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
(0.1
|
)
|
|
|
(0.1
|
)
|
|
|
0.1
|
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized and unrealized investment gains on FIA options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized and unrealized investment gains on equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pre-tax operating income
|
|
$
|
70.2
|
|
|
$
|
42.3
|
|
|
$
|
68.1
|
|
|
$
|
47.6
|
|
|
$
|
70.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth unaudited selected historical
operating metrics relating to our Group segment for the nine
months ended September 30, 2007 and 2006 and for the years
ended December 31, 2006, 2005 and Combined 2004 (non-GAAP):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
Combined
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
(non-GAAP)
|
|
|
|
(In millions)
|
|
|
Group loss ratio(1)
|
|
|
53.8
|
%
|
|
|
63.6
|
%
|
|
|
59.6
|
%
|
|
|
67.5
|
%
|
|
|
64.0
|
%
|
Expense ratio(2)
|
|
|
27.8
|
%
|
|
|
27.0
|
%
|
|
|
27.7
|
%
|
|
|
26.4
|
%
|
|
|
24.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio(3)
|
|
|
81.6
|
%
|
|
|
90.6
|
%
|
|
|
87.3
|
%
|
|
|
93.9
|
%
|
|
|
88.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical stop-loss loss ratio(4)
|
|
|
54.6
|
%
|
|
|
66.9
|
%
|
|
|
62.4
|
%
|
|
|
69.4
|
%
|
|
|
62.3
|
%
|
Total sales(5)
|
|
$
|
75.1
|
|
|
$
|
60.4
|
|
|
$
|
69.1
|
|
|
$
|
81.9
|
|
|
$
|
84.1
|
|
|
|
|
(1) |
|
Group loss ratio represents policyholder benefits and claims
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 claims divided by medical
stop-loss premiums earned. |
|
(5) |
|
Total sales represents annualized first-year premiums for group
life and health policies and represents earned premiums for our
limited medical benefit policies. |
Nine
Months Ended September 30, 2007 Compared to Nine Months
Ended September 30, 2006
Group summary of results. Our Group
segments pre-tax income increased $27.8 million, or
65.7%, to $70.1 million from $42.3 million. Segment
pre-tax operating income increased $27.9 million, or 66.0%,
to $70.2 million from $42.3 million. This increase was
primarily due to lower paid claims, which was reflected in the
reduction of our medical stop-loss loss ratio to 54.6% from
66.9%. Lower paid claims were driven by a decrease in the number
or frequency of medical stop-loss paid claims which decreased by
approximately 22% for the nine months ended September 30,
2007 as compared to the same period in 2006.
Premiums. Premiums decreased
$0.9 million, or 0.3%, to $293.1 million from
$294.0 million. Premiums decreased $1.8 million due to
decreased sales of our limited medical benefits product and
$1.1 million due to
48
policy lapses of retired products. This decrease was partially
offset by a $1.4 million increase in stop-loss premiums as
a result of increased sales.
Other revenues. Other revenues increased
$2.7 million, or 33.8%, to $10.7 million from
$8.0 million. Our newly acquired subsidiary, MRM, generated
revenues of $4.0 million, partially offset by a
$1.3 million decrease in revenues from our third party
administrator as a result of lower production.
Policyholder benefits and claims. Policyholder
benefits and claims decreased $29.2 million, or 15.6%, to
$157.7 million from $186.9 million. Paid claims
decreased $37.1 million, partially offset by a $3.0
increase in reserves. In addition, reserves decreased
$4.2 million in 2006 related to a block of assumed medical
stop-loss policies in run-off. The decrease in paid claims is
primarily related to strong underwriting results in 2007 as well
as a decrease of approximately 22% in the number of paid medical
stop-loss claims between the nine months ended
September 30, 2007 as compared to the same period in 2006.
The increase in reserves is the net impact of increases related
to changes in distribution mix partially offset by updates to
assumptions within the reserve models.
Other underwriting and operating
expenses. Other underwriting and operating
expenses increased $4.9 million, or 6.3%, to
$82.8 million from $77.9 million. This increase was
primarily due to increases in direct expenses due to the
acquisition of MRM, increases in sales incentive compensation
and increases in allocated corporate expenses of
$3.8 million and $1.5 million, respectively, and a
$1.9 million reduction in DAC deferrals. This increase was
partially offset by $2.9 million of decreased commissions,
which was related to lower average commission costs on business
written in 2007.
Amortization of deferred policy acquisition
costs. Amortization of deferred policy
acquisition costs decreased $2.0 million, or 23.8%, to
$6.4 million from $8.4 million. This decrease was
related to a decrease in the underlying DAC asset, which
decreased to $3.4 million from $4.6 million at
September 30, 2006 due to a refinement in our methodology
for measuring deferrable expense in 2007 which decreased DAC
deferrals.
Year
Ended December 31, 2006 Compared to Year Ended
December 31, 2005
Group summary of results. Our Group segment
pre-tax income increased $20.5 million, or 43.2%, to
$68.0 million from $47.5 million. Segment pre-tax
operating income increased $20.5 million, or 43.1%, to
$68.1 million from $47.6 million. This increase was
primarily due to lower paid claims, which was reflected in the
reduction of our loss ratio to 59.6% from 67.5%.
Premiums. Premiums decreased
$51.0 million, or 11.6%, to $387.3 million from
$438.3 million. Premiums decreased $32.6 million due
to higher lapses in our medical stop-loss business and lower new
sales due to disciplined pricing in an aggressive pricing
environment and $15.2 million due to the termination of an
assumed reinsurance relationship at the end of 2004. Group life
premiums decreased $8.2 million because we entered into a
reinsurance arrangement where we cede 50% of premium and risk.
Over the long run we expect this reinsurance arrangement will
enable us to become more competitive in group life insurance.
Partially offsetting these decreases was a $5.0 million
increase related to increased sales of our limited medical
benefits product.
Policyholder benefits and claims. Policyholder
benefits and claims decreased $65.2 million, or 22.0%, to
$230.8 million from $296.0 million. The decrease in
total benefits and claims was primarily related to a decrease in
the book of business, as indicated by the $51.0 million
decrease in premiums described above. In addition, the 2006 loss
ratio decreased 7.9% from 2005 due to a decrease in paid claims
of $69.7 million. The lower total loss ratio was driven by
the 2006 favorable paid claims experience and the corresponding
impact on assumptions within the reserve models.
Other underwriting and operating
expenses. Other underwriting and operating
expenses decreased $9.6 million, or 8.3%, to
$105.7 million from $115.3 million in 2005. This
decrease was due to a $7.0 million decrease in operating
expenses, and a $5.0 million decrease in commission and
premium tax expense, offset by decreased DAC deferrals,
consistent with decreased premiums.
Year
Ended December 31, 2005 Compared to Year Ended
December 31, 2004 (Combined Non-GAAP)
Group summary of results. Our Group segment
pre-tax income decreased $23.3 million, or 32.9%, to
$47.5 million from $70.8 million. Segment pre-tax
operating income decreased $23.1 million, or 32.7%, to
49
$47.6 million from $70.7 million. This decrease was
primarily due to an increase in the loss ratio to 67.5% from
64.0%. During a period of aggressive industry pricing, we have
maintained a disciplined underwriting and pricing strategy for
targeted returns, which has resulted in a reduction in the size
of our medical stop-loss premiums written and, correspondingly,
policyholder benefits and claims.
Premiums. Premiums decreased
$62.3 million, or 12.4%, to $438.3 million from
$500.6 million. Premiums decreased $26.4 million due
to higher lapses in our medical stop-loss business and lower new
sales. We relinquished $26.7 million in premiums due to our
decision to terminate an assumed reinsurance relationship in the
fourth quarter of 2004 because we were not confident in the
direction of underwriting and pricing at the ceding company. We
also relinquished $14.8 million in premiums due to our
decision to not renew a significant group life policy on
December 31, 2004 because the employees were concentrated
in a small geographic location, potentially exposing us to a
significant claim in the event of a catastrophic event.
Policyholder benefits and claims. Policyholder
benefits and claims decreased $24.5 million, or 7.6%, to
$296.0 million from $320.5 million. The decrease in
total claims was primarily related to a declining book of
business, as indicated by the $62.3 million decrease in
premiums described above. The total loss ratio increased from
64.0% to 67.5% due to higher paid claim experience of
$3.7 million and the corresponding impact of assumptions
within the reserve models. In addition, reserves were increased
during 2004 mainly as a result of the integration to a single
reserve methodology for acquired books of business and direct
written medical-stop loss business.
Other underwriting and operating
expenses. Other underwriting and operating
expenses decreased $17.8 million, or 13.4%, to
$115.3 million from $133.1 million. In 2005,
commission and premium tax expenses were lower consistent with
lower premiums. In addition, the 2004 results include higher
corporate expense allocations from Safeco Corporation and the
allocation of expenses related to the Acquisition. The 2005
other underwriting and operating expenses reflected are not
comparable to 2004 during which Safeco Corporation allocated us
costs for the first seven months of 2004 and charged us for
transition services for the remaining five months of 2004.
Amortization of deferred policy acquisition
costs. Amortization of deferred policy
acquisition costs decreased $1.4 million, or 11.8%, to
$10.5 million from $11.9 million. In connection with
the Acquisition, our DAC asset was reset to zero on
August 2, 2004. Our 2004 amortization included seven months
of DAC amortization prior to the Acquisition.
Retirement
Services
The following table sets forth the results of operations
relating to our Retirement Services segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
Year Ended December 31,
|
|
|
|
Ended
|
|
|
|
|
|
|
|
|
Combined
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
(non-GAAP)
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
|
|
$
|
|
|
|
$
|
0.1
|
|
|
$
|
0.1
|
|
|
$
|
0.1
|
|
|
$
|
0.2
|
|
Net investment income
|
|
|
185.0
|
|
|
|
204.3
|
|
|
|
269.8
|
|
|
|
292.8
|
|
|
|
349.2
|
|
Other revenues
|
|
|
18.4
|
|
|
|
16.4
|
|
|
|
22.8
|
|
|
|
23.2
|
|
|
|
27.2
|
|
Net realized investment gains (losses)
|
|
|
(6.4
|
)
|
|
|
(19.1
|
)
|
|
|
(17.0
|
)
|
|
|
(17.1
|
)
|
|
|
6.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
197.0
|
|
|
|
201.7
|
|
|
|
275.7
|
|
|
|
299.0
|
|
|
|
383.1
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
Year Ended December 31,
|
|
|
|
Ended
|
|
|
|
|
|
|
|
|
Combined
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
(non-GAAP)
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Benefits and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder benefits and claims
|
|
|
(6.0
|
)
|
|
|
(14.5
|
)
|
|
|
(16.5
|
)
|
|
|
(25.7
|
)
|
|
|
(15.7
|
)
|
Interest credited
|
|
|
126.1
|
|
|
|
138.4
|
|
|
|
186.2
|
|
|
|
211.5
|
|
|
|
264.6
|
|
Other underwriting and operating expenses
|
|
|
52.4
|
|
|
|
45.6
|
|
|
|
61.7
|
|
|
|
62.6
|
|
|
|
63.5
|
|
Amortization of deferred policy acquisition costs
|
|
|
5.1
|
|
|
|
0.6
|
|
|
|
1.1
|
|
|
|
0.1
|
|
|
|
16.5
|
|
Intangible asset amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses
|
|
|
177.6
|
|
|
|
170.1
|
|
|
|
232.5
|
|
|
|
248.5
|
|
|
|
329.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pre-tax income
|
|
$
|
19.4
|
|
|
$
|
31.6
|
|
|
$
|
43.2
|
|
|
$
|
50.5
|
|
|
$
|
53.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP Financial Measures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pre-tax operating income
|
|
$
|
26.6
|
|
|
$
|
50.4
|
|
|
$
|
62.4
|
|
|
$
|
63.2
|
|
|
$
|
46.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation to segment pre-tax income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pre-tax income
|
|
$
|
19.4
|
|
|
$
|
31.6
|
|
|
$
|
43.2
|
|
|
$
|
50.5
|
|
|
$
|
53.4
|
|
Less: Net realized investment gains (losses)
|
|
|
(6.4
|
)
|
|
|
(19.1
|
)
|
|
|
(17.0
|
)
|
|
|
(17.1
|
)
|
|
|
6.5
|
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized and unrealized investment gains (losses) on FIA
options
|
|
|
0.8
|
|
|
|
(0.3
|
)
|
|
|
2.2
|
|
|
|
(4.4
|
)
|
|
|
(0.6
|
)
|
Net realized and unrealized investment gains on equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pre-tax operating income
|
|
$
|
26.6
|
|
|
$
|
50.4
|
|
|
$
|
62.4
|
|
|
$
|
63.2
|
|
|
$
|
46.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth unaudited selected historical
operating metrics relating to our Retirement Services segment as
of, or for the nine months ended September 30, 2007 and
2006 and for the years ended December 31, 2006, 2005 and
Combined 2004 (non-GAAP):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
Combined
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
(non-GAAP)
|
|
|
|
(In millions)
|
|
|
Account values Fixed annuities
|
|
$
|
4,520.1
|
|
|
$
|
5,131.4
|
|
|
$
|
4,922.5
|
|
|
$
|
5,580.8
|
|
|
$
|
6,416.4
|
|
Account values Variable annuities
|
|
|
1,133.3
|
|
|
|
1,068.8
|
|
|
|
1,115.5
|
|
|
|
1,074.5
|
|
|
|
1,114.8
|
|
PGAAP reserve balance
|
|
|
12.2
|
|
|
|
20.5
|
|
|
|
18.4
|
|
|
|
35.3
|
|
|
|
62.3
|
|
Interest spread on average account values(1)
|
|
|
1.69
|
%
|
|
|
1.81
|
%
|
|
|
1.76
|
%
|
|
|
1.58
|
%
|
|
|
1.59
|
%
|
Total sales(2)
|
|
$
|
429.9
|
|
|
$
|
432.7
|
|
|
$
|
573.2
|
|
|
$
|
390.4
|
|
|
$
|
326.6
|
|
|
|
|
(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.
Interest spread tends to move gradually over time to reflect
market interest rate movements and may reflect actions by
management to respond to competitive pressures and profit
targets. |
|
(2) |
|
Total sales represent deposits for new policies. |
51
Nine
Months Ended September 30, 2007 Compared to Nine Months
Ended September 30, 2006
Retirement Services summary of results. Our
Retirement Services segment pre-tax income decreased
$12.2 million, or 38.6%, to $19.4 million from
$31.6 million. Segment pre-tax operating income decreased
$23.8 million, or 47.2%, to $26.6 million from
$50.4 million. The decrease in segment pre-tax operating
income is due to a decline in the account value of fixed
annuities as withdrawals exceeded new deposits, a decrease in
interest spread on average account value driven by lower
amortization of the PGAAP reserve, increased operating expenses
and increased DAC amortization. The interest spread on average
account value includes the impact of PGAAP amortization.
Interest spreads, without PGAAP amortization, have increased due
to the addition of business with higher pricing spreads and
improved yields on supporting assets.
Net investment income. Net investment income
decreased $19.3 million, or 9.4%, to $185.0 million
from $204.3 million. Of this decrease, $26.7 million
was the result of a decrease in the average invested assets to
$4.8 billion from $5.5 billion. This decrease was
partially offset by a positive rate variance of
$7.4 million due to improved yields related to our
investment portfolio rebalancing strategy, which increased to
5.14% from 4.94%.
Other revenues. Other revenues increased
$2.0 million, or 12.2%, to $18.4 million from
$16.4 million. This increase consisted primarily of
asset-based fee revenue received in our affiliated broker-dealer
operation.
Net realized investment gains (losses). Net
realized investment losses decreased $12.7 million, or
66.5%, to $(6.4) million from $(19.1) million. For the
nine months ended September 30, 2007, gross realized gains
were $7.2 million and gross realized losses were
$13.6 million, including impairments of $3.9 million.
For the nine months ended September 30, 2006, gross
realized gains were $3.9 million and gross realized losses
were $23.0 million, including impairments of
$11.4 million.
Policyholder benefits and claims. Policyholder
benefits and claims increased $8.5 million, or 58.6%, to
$(6.0) million from $(14.5) million. This increase was
primarily driven by differences in the amount of PGAAP reserve
amortization. The PGAAP reserve is amortized as a reduction to
policyholder benefits according to our expected pattern of
profitability of the book of business of policies in force at
the time of the Acquisition. This pattern resulted in higher
PGAAP reserve amortization in the years immediately following
the Acquisition.
Interest credited. Interest credited decreased
$12.3 million, or 8.9%, to $126.1 million from
$138.4 million. This decrease was primarily due to a
decrease in fixed account values as withdrawals exceeded
deposits, partially offset by improved persistency of higher
crediting rate products.
Other underwriting and operating
expenses. Other underwriting and operating
expenses increased $6.8 million, or 14.9%, to
$52.4 million from $45.6 million. This increase was
primarily due to a $3.3 million increase in allocated
corporate expenses, a $1.9 million increase in distribution
expenses, a $0.7 million increase in commission expenses,
and a $0.6 million reduction in DAC deferrals.
Amortization of deferred policy acquisition
costs. Amortization of deferred policy
acquisition costs increased $4.5 million, to
$5.1 million from $0.6 million. This increase was
related to an increase in the underlying DAC asset, which
increased to $73.1 million from $46.8 million at
September 30, 2006. In connection with the Acquisition, our
DAC asset was reset to zero on August 2, 2004 and has
subsequently been growing as a result of sales of our insurance
products. Our amortization expense is expected to increase as
the underlying DAC asset increases.
Year
Ended December 31, 2006 Compared to Year Ended
December 31, 2005
Retirement Services summary of results. Our
Retirement Services segment pre-tax income decreased
$7.3 million, or 14.5%, to $43.2 million from
$50.5 million due to decreases in our fixed account values
of 11.8%, offset by an increase in our interest spread on
average account values. Segment pre-tax operating income
decreased $0.8 million, or 1.3%, to $62.4 million from
$63.2 million.
Net investment income. Net investment income
decreased $23.0 million, or 7.9%, to $269.8 million
from $292.8 million. Net investment income decreased
$37.0 million primarily due to a decline in the average
52
invested assets to $5.4 billion from $6.2 billion.
This was partially offset by a positive rate variance of
$14.0 million due to improved yields related to our
investment portfolio rebalancing strategy, which increased to
4.97% from 4.71%.
Net realized investment (losses). Net realized
investment losses decreased $0.1 million, or 0.6%, to
$(17.0) million from $(17.1) million. In 2006, gross
realized gains were $8.7 million, including
$2.2 million related to FIA options and gross realized
losses were $25.7 million, including impairments of
$11.8 million. In 2005, gross realized gains were
$25.5 million and gross realized losses were
$42.6 million, including impairments of $6.6 million
and $4.4 million related to the FIA options. In 2006,
realized gains on FIA options increased $6.6 million, which
offset the increase in interest credited on FIA contracts.
Policyholder benefits and claims. Policyholder
benefits and claims increased $9.2 million, or 35.8%, to
$(16.5) million from $(25.7) million. This was driven
by a reduction in the benefit received from the differences in
the amount of PGAAP reserve amortization.
Interest credited. Interest credited decreased
$25.3 million, or 12.0%, to $186.2 million from
$211.5 million. This decrease was primarily due to a
decrease in contractholder account values, but offset by a
$5.5 million increase in FIA interest credited.
Amortization of deferred policy acquisition
costs. Amortization of deferred policy
acquisition costs increased $1.0 million to
$1.1 million from $0.1 million. This was related to an
increase in the underlying DAC asset, which increased to
$54.5 million from $25.5 million at December 31,
2005. In connection with the Acquisition, our DAC asset was
reset to zero on August 2, 2004 and has subsequently been
growing as a result of sales of our insurance products. Our
amortization expense is expected to increase as the underlying
DAC asset increases.
Year
Ended December 31, 2005 Compared to Year Ended
December 31, 2004 (Combined Non-GAAP)
Retirement Services summary of results. Our
Retirement Services segment pre-tax income decreased
$2.9 million, or 5.4%, to $50.5 million from
$53.4 million. Segment pre-tax operating income increased
$16.9 million, or 36.5% to $63.2 million from
$46.3 million. This was primarily due to reduced DAC
amortization.
Net investment income. Net investment income
decreased $56.4 million, or 16.2%, to $292.8 million
from $349.2 million. This decrease was related to the
Acquisition purchase accounting, which resulted in an overall
reduction in investment yields for periods subsequent to the
purchase date. We subsequently implemented an investment
portfolio rebalancing strategy, which improved investment yields.
Other revenues. Other revenues decreased
$4.0 million, or 14.7%, to $23.2 million from
$27.2 million. This decrease was primarily due to a
$3.3 million decrease of mutual fund fees related to
variable annuities resulting from the sale of mutual funds
operation in 2004. Such fees were not received in 2005.
Net realized investment gains (losses). Net
realized investment gains decreased $23.6 million to
$(17.1) million from $6.5 million. The 2005 gross
realized gains were $25.5 million and gross realized losses
were $42.6 million, including impairments of
$6.6 million. The 2004 realized gains were
$50.8 million and gross realized losses were
$44.2 million, including impairments of $5.0 million.
In 2004, we repositioned the asset portfolio to more effectively
match the duration of our liabilities. This activity generated
realized gains that were not repeated in 2005.
Policyholder benefits and claims. Policyholder
benefits and claims decreased $10.0 million, or 63.7%, to
$(25.7) million from $(15.7) million. This was driven
by an increase in the benefit received from the change in the
PGAAP reserve. The 2004 PGAAP reserve reduction represented a
five month period compared to twelve months in 2005.
Interest credited. Interest credited decreased
$53.1 million, or 20.1%, to $211.5 million from
$264.6 million. This decrease was primarily due to a
decrease in contractholder account values.
53
Other underwriting and operating
expenses. Other underwriting and operating
expenses decreased $0.9 million, or 1.4%, to
$62.6 million from $63.5 million. The 2005 other
underwriting and operating expenses reflected are not comparable
to 2004 during which Safeco Corporation allocated us costs for
the first seven months of 2004 and charged us for transition
services for the remaining five months of 2004.
Amortization of deferred policy acquisition
costs. Amortization of deferred policy
acquisition costs decreased $16.4 million, or 99.4%, to
$0.1 million from $16.5 million. In connection with
the Acquisition, our DAC asset was reset to zero on
August 2, 2004. Our 2004 amortization included seven months
of DAC amortization prior to the Acquisition.
Income
Annuities
The following table sets forth the results of operations
relating to our Income Annuities segment:
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|
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Year Ended December 31,
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Nine Months
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|
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Combined
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Ended September 30,
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|
|
|
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|
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2004
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|
|
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2007
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|
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2006
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|
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2006
|
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2005
|
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|
(non-GAAP)
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(Unaudited)
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(In millions)
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|
Revenues:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Net investment income
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$
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331.9
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$
|
326.1
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$
|
439.0
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$
|
441.4
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$
|
474.4
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Other revenues
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|
|
0.6
|
|
|
|
0.6
|
|
|
|
0.8
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|
|
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0.5
|
|
|
|
0.5
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|
Net realized investment gains
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27.1
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|
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14.8
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|
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16.8
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17.4
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9.5
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|
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Total revenues
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359.6
|
|
|
|
341.5
|
|
|
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456.6
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|
|
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459.3
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|
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484.4
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Benefits and Expenses:
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|
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Interest credited
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278.0
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|
|
|
280.0
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|
|
|
371.8
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|
|
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392.5
|
|
|
|
438.9
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Other underwriting and operating expenses
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|
|
17.1
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|
|
|
15.8
|
|
|
|
21.6
|
|
|
|
19.4
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|
|
|
16.8
|
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Amortization of deferred policy acquisition costs
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0.8
|
|
|
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0.5
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|
|
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0.6
|
|
|
|
0.3
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|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
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Total benefits and expenses
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295.9
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|
|
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296.3
|
|
|
|
394.0
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|
|
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412.2
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|
|
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455.7
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|
|
|
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|
|
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Segment pre-tax income
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$
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63.7
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|
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$
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45.2
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|
|
$
|
62.6
|
|
|
$
|
47.1
|
|
|
$
|
28.7
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|
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|
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|
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|
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Non-GAAP Financial Measures:
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|
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Segment pre-tax operating income
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$
|
42.0
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|
|
$
|
42.2
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|
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$
|
64.7
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|
|
$
|
42.8
|
|
|
$
|
20.5
|
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Reconciliation to segment pre-tax income:
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Segment pre-tax income
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$
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63.7
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|
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$
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45.2
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|
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$
|
62.6
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|
|
$
|
47.1
|
|
|
$
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28.7
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Less: Net realized investment gains
|
|
|
27.1
|
|
|
|
14.8
|
|
|
|
16.8
|
|
|
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17.4
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|
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9.5
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|
Add:
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Net realized and unrealized investment gains on FIA options
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized and unrealized investment gains on equity securities
|
|
|
5.4
|
|
|
|
11.8
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|
|
|
18.9
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|
|
|
13.1
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|
|
1.3
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|
|
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Segment pre-tax operating income
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$
|
42.0
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|
|
$
|
42.2
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$
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64.7
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|
|
$
|
42.8
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|
|
$
|
20.5
|
|
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54
The following table sets forth unaudited selected historical
operating metrics relating to our Income Annuities segment as
of, or for the nine months ended September 30, 2007 and
2006 and for the years ended December 31, 2006, 2005, and
Combined 2004 (non-GAAP):
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Year Ended December 31,
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Nine Months Ended
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Combined
|
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|
|
September 30,
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2004
|
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2007
|
|
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2006
|
|
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2006
|
|
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2005
|
|
|
(non-GAAP)
|
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|
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(In millions)
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Reserves(1)
|
|
$
|
6,927.1
|
|
|
$
|
7,045.3
|
|
|
$
|
7,012.6
|
|
|
$
|
7,176.0
|
|
|
$
|
7,285.0
|
|
Interest spread on reserves(2)
|
|
|
0.69
|
%
|
|
|
0.68
|
%
|
|
|
0.76
|
%
|
|
|
0.67
|
%
|
|
|
0.16
|
%
|
Mortality gains(3)
|
|
$
|
1.0
|
|
|
$
|
3.9
|
|
|
$
|
6.3
|
|
|
$
|
0.8
|
|
|
$
|
3.8
|
|
Total sales(4)
|
|
|
101.2
|
|
|
|
68.8
|
|
|
|
96.6
|
|
|
|
93.1
|
|
|
|
76.0
|
|
|
|
|
(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
in the general account attributed to the segment. This yield
includes both realized and unrealized gains on our equity
investments that back the policyholder reserves. The credited
interest rate is the approximate rate credited on policyholder
reserves within the segment and excludes the gains and losses
from funding services and mortality. |
|
(3) |
|
Mortality gains (losses) represents the difference between
actual and expected reserves released on death of a life
contingent annuity. |
|
(4) |
|
Sales represent deposits for new policies. |
Nine
Months Ended September 30, 2007 Compared to Nine Months
Ended September 30, 2006
Income Annuities summary of results. Our
Income Annuities segment pre-tax income increased
$18.5 million, or 40.9%, to $63.7 million from
$45.2 million. Segment pre-tax operating income decreased
$0.2 million, or 0.5%, to $42.0 million from
$42.2 million. Segment pre-tax operating income decreased
due to a $6.9 million reduction in net realized and
unrealized gains on equity securities. The Income Annuities
reserve covers payout commitments that extend well beyond
40 years. We invest in equities and equity-like investments
to fund the longest part of this liability. The Income
Annuities equity portfolio underperformed the S&P 500
by 0.6% for the nine months ended September 30, 2007. This
decrease was offset by a $5.8 million increase in net
investment income driven by improved net investment yields
primarily from the reinvestment of funds in higher yielding
securities, strong performance on limited partnerships, and a
reduction in investment advisory rates.
Net investment income. Net investment income
increased $5.8 million, or 1.8%, to $331.9 million
from $326.1 million. Of this increase, $10.4 million
related to positive rate variances from improved yields which
increased to 6.18% from 5.98%. This was partially offset by a
$4.6 million decrease, which was the result of a decrease
in the average invested assets to $7.2 billion from
$7.3 billion. The increase in yield was primarily due to
the reinvestment of funds in higher yielding securities, strong
performance on limited partnerships, and a reduction in
investment advisory rates.
Net realized investment gains (losses). Net
investment gains increased $12.3 million, or 83.1%, to
$27.1 million from $14.8 million. For the nine months
ended September 30, 2007, gross realized gains were
$35.1 million and gross realized losses were
$8.0 million, including impairments of $1.6 million.
For the nine months ended September 30, 2006, gross
realized gains were $27.1 million and gross realized losses
were $12.3 million, including impairments of
$8.8 million. We had higher realized gains in 2007
primarily due to gains on certain significant tender offers
related to certain fixed maturities in our investment portfolio.
Interest credited. Interest credited decreased
$2.0 million, or 0.7%, to $278.0 million from
$280.0 million. Of this decrease, $4.1 million was due
to a decrease in reserves as a result of benefit payments
55
exceeding new deposits and $1.9 million related to funding
services activity. This was partially offset by a decrease in
mortality gains of $2.9 million.
Other underwriting and operating
expenses. Other underwriting and operating
expenses increased $1.3 million, or 8.2%, to
$17.1 million from $15.8 million. This increase was
mainly due to a $1.1 million increase in allocated
corporate expenses.
Year
Ended December 31, 2006 Compared to Year Ended
December 31, 2005
Income Annuities summary of results. Our
Income Annuities segment pre-tax income increased
$15.5 million, or 32.9%, to $62.6 million from
$47.1 million. This was due to an increase in mortality
gains, increased interest spread on reserves from improved
yields and funding services activity. Segment pre-tax operating
income increased $21.9 million, or 51.2%, to
$64.7 million from $42.8 million. This was due to the
increase in segment pre-tax income and $5.8 million
increase in net realized and unrealized investment gains on
equity securities. Our total equity portfolio, mainly in Income
Annuities, outperformed the S&P 500 by 10.3% and 26.0%
for the years ended December 31, 2006 and 2005,
respectively.
Net investment income. Net investment income
decreased $2.4 million, or 0.5%, to $439.0 million
from $441.4 million. Of this decrease, $6.3 million
was related to a decrease in the average invested assets, which
decreased to $7.2 billion at December 31, 2006 from
$7.4 billion at December 31, 2005. This decrease was
offset by a $3.9 million increase related to improved
yields, which increased to 6.06% from 6.00%.
Net realized investment gains. Net realized
investment gains decreased $0.6 million, or 3.4%, to
$16.8 million from $17.4 million. In 2006, gross
realized gains were $32.9 million and gross realized losses
were $16.0 million, including impairments of
$9.4 million. In 2005, gross realized gains were
$27.0 million and gross realized losses were
$9.6 million, including impairments of $0.3 million.
Interest credited. Interest credited decreased
$20.7 million, or 5.3%, to $371.8 million from
$392.5 million. This decrease was due to a decrease in
reserves as a result of benefit payments exceeding new deposits,
favorable mortality gains and funding services activity.
Other underwriting and operating
expenses. Other underwriting and operating
expenses increased $2.2 million, or 11.3%, to
$21.6 million from $19.4 million. The increase of
$2.2 million was primarily due to the launching of our
funding services operations in mid 2005.
Amortization of deferred policy acquisition
costs. Amortization of deferred policy
acquisition costs increased $0.3 million, or 100.0%, to
$0.6 million from $0.3 million. This increase in
amortization was related to an increase in the underlying DAC
asset, which increased to $6.8 million from
$4.3 million. Our DAC asset has been growing since the
Acquisition as a result of sales of our insurance products. Our
amortization expense was expected to increase as the underlying
DAC asset increases.
Year
Ended December 31, 2005 Compared to Year Ended
December 31, 2004 (Combined Non-GAAP)
Income Annuities summary of results. Our
Income Annuities segment pre-tax income increased
$18.4 million, or 64.1%, to $47.1 million from
$28.7 million and segment pre-tax operating income
increased $22.3 million, to $42.8 million from
$20.5 million. The segment pre-tax operating income
increased due to an increase in our interest spread on reserves
and an $11.8 million increase in net realized and
unrealized investment gains on equity securities. We gradually
built up our equity portfolio over the course of 2005.
Net investment income. Net investment income
decreased $33.0 million, or 7.0%, to $441.4 million
from $474.4 million. This decrease was primarily related to
the Acquisition purchase accounting, which resulted in an
overall reduction in investment yields for periods subsequent to
the Acquisition.
Net realized investment gains. Net realized
investment gains increased $7.9 million, or 83.2%, to
$17.4 million from $9.5 million. In 2005, gross
realized gains were $27.0 million and gross realized losses
were $9.6 million, including impairments of
$0.3 million. In 2004, gross realized gains were
$23.3 million and gross realized losses were
$13.8 million, including impairments of $2.6 million.
56
Interest credited. Interest credited decreased
$46.4 million, or 10.6%, to $392.5 million from
$438.9 million. The credited rate inherent in the reserves
was reduced as a result of purchase accounting.
Other underwriting and operating
expenses. Other underwriting and operating
expenses increased $2.6 million, or 15.5%, to
$19.4 million from $16.8 million. This increase was
primarily due to increased professional services fees and costs
of launching our funding services operations. The 2005 other
underwriting and operating expenses reflected are not comparable
to 2004 during which Safeco Corporation allocated us costs for
the first seven months of 2004 and charged us for transition
services for the remaining five months of 2004.
Individual
The following table sets forth the results of operations
relating to our Individual segment:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
Nine Months
|
|
|
|
|
|
|
|
|
Combined
|
|
|
|
Ended September 30,
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
(non-GAAP)
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
|
|
$
|
104.8
|
|
|
$
|
103.9
|
|
|
$
|
138.3
|
|
|
$
|
137.1
|
|
|
$
|
120.3
|
|
Net investment income
|
|
|
181.4
|
|
|
|
172.2
|
|
|
|
232.8
|
|
|
|
222.6
|
|
|
|
228.3
|
|
Other revenues
|
|
|
10.9
|
|
|
|
9.9
|
|
|
|
12.9
|
|
|
|
14.0
|
|
|
|
21.0
|
|
Net realized investment gains (losses)
|
|
|
(1.6
|
)
|
|
|
(3.9
|
)
|
|
|
(3.8
|
)
|
|
|
1.3
|
|
|
|
8.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
295.5
|
|
|
|
282.1
|
|
|
|
380.2
|
|
|
|
375.0
|
|
|
|
377.6
|
|
Benefits and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder benefits and claims
|
|
|
44.8
|
|
|
|
37.4
|
|
|
|
50.0
|
|
|
|
57.1
|
|
|
|
46.3
|
|
Interest credited
|
|
|
161.4
|
|
|
|
153.7
|
|
|
|
208.2
|
|
|
|
206.9
|
|
|
|
213.1
|
|
Other underwriting and operating expenses
|
|
|
43.1
|
|
|
|
42.5
|
|
|
|
57.4
|
|
|
|
61.4
|
|
|
|
64.6
|
|
Amortization of deferred policy acquisition costs
|
|
|
1.9
|
|
|
|
1.5
|
|
|
|
2.0
|
|
|
|
1.0
|
|
|
|
7.4
|
|
Intangible asset amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses
|
|
|
251.2
|
|
|
|
235.1
|
|
|
|
317.6
|
|
|
|
326.4
|
|
|
|
333.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pre-tax income
|
|
$
|
44.3
|
|
|
$
|
47.0
|
|
|
$
|
62.6
|
|
|
$
|
48.6
|
|
|
$
|
44.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP Financial Measures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pre-tax operating income
|
|
$
|
45.9
|
|
|
$
|
50.9
|
|
|
$
|
66.4
|
|
|
$
|
47.3
|
|
|
$
|
36.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation to segment pre-tax income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pre-tax income
|
|
$
|
44.3
|
|
|
$
|
47.0
|
|
|
$
|
62.6
|
|
|
$
|
48.6
|
|
|
$
|
44.5
|
|
Less: Net realized investment gains (losses)
|
|
|
(1.6
|
)
|
|
|
(3.9
|
)
|
|
|
(3.8
|
)
|
|
|
1.3
|
|
|
|
8.0
|
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized and unrealized investment gains on FIA options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized and unrealized investment gains on equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pre-tax operating income
|
|
$
|
45.9
|
|
|
$
|
50.9
|
|
|
$
|
66.4
|
|
|
$
|
47.3
|
|
|
$
|
36.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57
The following table sets forth unaudited selected historical
operating metrics relating to our Individual segment as of, or
for the nine months ended September 30, 2007 and 2006 and
for the years ended December 31, 2006, 2005 and Combined
2004 (non-GAAP):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
Combined
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
(non-GAAP)
|
|
|
|
(In millions)
|
|
|
Insurance in force(1)
|
|
$
|
52,214.1
|
|
|
$
|
52,310.5
|
|
|
$
|
52,295.3
|
|
|
$
|
51,796.9
|
|
|
$
|
50,499.3
|
|
Mortality ratio(2)
|
|
|
87.1
|
%
|
|
|
79.8
|
%
|
|
|
74.7
|
%
|
|
|
79.4
|
%
|
|
|
79.6
|
%
|
BOLI account value(3)
|
|
$
|
3,488.6
|
|
|
$
|
3,314.3
|
|
|
$
|
3,346.8
|
|
|
$
|
3,224.6
|
|
|
$
|
3,115.2
|
|
UL account value(3)
|
|
|
572.5
|
|
|
|
562.9
|
|
|
|
565.1
|
|
|
|
561.1
|
|
|
|
561.2
|
|
PGAAP reserve balance
|
|
|
65.3
|
|
|
|
81.0
|
|
|
|
77.1
|
|
|
|
94.5
|
|
|
|
115.0
|
|
BOLI ROA(4)
|
|
|
1.25
|
%
|
|
|
1.17
|
%
|
|
|
1.18
|
%
|
|
|
0.97
|
%
|
|
|
1.04
|
%
|
UL interest spread(5)
|
|
|
1.17
|
%
|
|
|
1.34
|
%
|
|
|
1.31
|
%
|
|
|
0.66
|
%
|
|
|
1.51
|
%
|
Total sales(6)
|
|
$
|
10.6
|
|
|
$
|
6.9
|
|
|
$
|
9.3
|
|
|
$
|
11.8
|
|
|
$
|
14.8
|
|
|
|
|
(1) |
|
Insurance in force represents dollar face amounts of policies. |
|
(2) |
|
Mortality ratio represents actual mortality experience as a
percentage of benchmark. Benchmark is based on the
90-95
Society of Actuaries, or SOA, mortality table applied to current
in force business. This ratio excludes BOLI mortality experience. |
|
(3) |
|
Account Value BOLI Accounts and UL represents
Symetras liability to the policyholder. |
|
(4) |
|
The 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 total revenues
net of allocated surplus investment income 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) |
|
Interest spread is the difference between the 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 market interest rate
movements and may reflect actions by management to respond to
competitive pressures and profit targets. |
|
(6) |
|
Total sales represent annualized first year premiums and
deposits for new policies. |
Nine
Months Ended September 30, 2007 Compared to Nine Months
Ended September 30, 2006
Individual Summary of Results. Our Individual
segment pre-tax income decreased $2.7 million, or 5.7%, to
$44.3 million from $47.0 million. Segment pre-tax
operating income decreased $5.0 million, or 9.8%, to
$45.9 million from $50.9 million. This decrease was
primarily due to an increase in mortality in 2007 compared to
2006 and reserve increases, partially offset by increased BOLI
ROA on growing BOLI and higher UL account values and improved
investment yields.
Premiums. Premiums increased
$0.9 million, or 0.9%, to $104.8 million from
$103.9 million. This is primarily due to a
$1.8 million increase in BOLI COI charges, partially offset
by a $1.6 million decrease in term life premiums.
Net investment income. Net investment income
increased $9.2 million, or 5.3%, to $181.4 million
from $172.2 million. Of this increase, $4.5 million
was a result of an increase in the average invested assets to
$4.5 billion from $4.4 billion. This increase was
enhanced by a positive rate variance of $4.7 million due to
improved yields which increased to 5.37% from 5.23%. The
increase in yield was primarily due to the
58
reinvestment of funds in higher yielding securities, an increase
in the yield on short-term investments and a reduction in
investment advisory rates.
Net realized investment gains (losses). Net
realized investment losses decreased $2.3 million to
$(1.6) million from $(3.9) million. For the nine
months ended September 30, 2007, gross realized gains were
$1.8 million and gross realized losses were
$3.4 million, including impairments of $1.8 million.
For the nine months ended September 30, 2006, gross
realized gains were $1.6 million and gross realized losses
were $5.5 million, including impairments of
$2.9 million.
Policyholder benefits and claims. Policyholder
benefits and claims increased $7.4 million, or 19.8%, to
$44.8 million from $37.4 million. Claims increased
$2.6 million mainly related to UL and BOLI general account
claims. Reserves increased $4.8 million due to changes in
reserve assumptions and a refinement of our reserve methodology
implemented in connection with an actuarial reserving software
conversion and a reduction in the benefit received from PGAAP
reserve amortization, partially offset by a decrease of our term
life reserves due to a reduction in the block size.
Interest credited. Interest credited increased
$7.7 million, or 5.0%, to $161.4 million from
$153.7 million. This increase was primarily due to an
increase in our BOLI account values and new BOLI sales, offset
by decreased interest related to our BOLI separate account
policies, for which policyholder interest credited is adjusted
based on claims experience.
Year
Ended December 31, 2006 Compared to Year Ended
December 31, 2005
Individual summary of results. Our Individual
segment pre-tax income increased $14.0 million, or 28.8%,
to $62.6 million from $48.6 million. Segment pre-tax
operating income increased $19.1 million, or 40.4%, to
$66.4 million from $47.3 million. This increase was
primarily the result of a higher return on our average BOLI
account values, as evidenced by the increase in the BOLI ROA,
and favorable mortality. In addition, our UL/VUL account values
and interest spreads increased.
Net investment income. Net investment income
increased $10.2 million, or 4.6%, to $232.8 million
from $222.6 million in 2005. There was a $5.3 million
increase related to improved yields which increased to 5.30%
from 5.18%. In addition, there was a $4.8 million increase
related to a higher average invested assets, which increased to
$4.4 billion at December 31, 2006 from
$4.3 billion at December 31, 2005.
Net realized investment gains (losses). Net
realized investment gains (losses) decreased $5.1 million
to $(3.8) million from $1.3 million. In 2006, gross
realized gains were $2.1 million and gross realized losses
were $5.9 million, including impairments of
$2.9 million. In 2005, gross realized gains were
$8.7 million and gross realized losses were
$7.4 million, including impairments of $0.7 million.
Policyholder benefits and claims. Policyholder
benefits and claims decreased $7.1 million, or 12.4%, to
$50.0 million from $57.1 million. This decrease was
due to favorable mortality experience in 2006 and non-recurring
reserve adjustments in 2005 offset by lower PGAAP reserve
amortization in 2006. The PGAAP reserve is amortized as a
reduction to policyholder benefits according to our expected
pattern of profitability of the policies in force at the date of
the Acquisition. This pattern resulted in increased PGAAP
reserve amortization in the years immediately following the
Acquisition. In 2005, we experienced a reserve increase for a
persistency bonus interest feature in one of our universal life
contracts due to a refinement in our calculation methodology. In
addition, we increased reserves on an old book of term policies
to apply consistent reserve factors for all term policies.
Other underwriting and operating
expenses. Other underwriting and operating
expenses decreased $4.0 million, or 6.5%, to
$57.4 million from $61.4 million. This decrease was
due to a decrease in sales-related expenses including
commissions and premium taxes.
Year
Ended December 31, 2005 Compared to Year Ended
December 31, 2004 (Combined Non-GAAP)
Individual summary of results. Our Individual
segment pre-tax income increased $4.1 million, or 9.2%, to
$48.6 million from $44.5 million. Segment pre-tax
operating income increased $10.8 million, or 29.6%, to
59
$47.3 million from $36.5 million. This increase was
primarily due to a $6.4 million reduction in DAC
amortization and a $1.7 million reduction in intangible
asset amortization. The increase was offset by a decrease in UL
spreads.
Premiums. Premiums increased
$16.8 million, or 14.0%, to $137.1 million from
$120.3 million. Individual premiums increased primarily due
to a $14.1 million adjustment in 2004 related to ceded term
reinsurance, which resulted in a decrease in 2004 premiums and a
$2.3 million increase in BOLI COI charges.
Net investment income. Net investment income
decreased $5.7 million, or 2.5%, to $222.6 million
from $228.3 million. This decrease was related to the
Acquisition purchase accounting, which resulted in an overall
reduction in investment yields for periods subsequent to the
purchase date.
Other revenues. Other revenues decreased
$7.0 million, or 33.3%, to $14.0 million from
$21.0 million. This decrease was primarily due to a
$5.9 million adjustment in 2004 related to ceded term
reinsurance expense allowances, which resulted in an increase in
2004 other revenues.
Policyholder benefits and claims. Policyholder
benefits and claims increased $10.8 million, or 23.3%, to
$57.1 million from $46.3 million. This increase was
primarily driven by an increase of $8.5 million in BOLI
claims.
Interest credited. Interest credited decreased
$6.2 million, or 2.9%, to $206.9 million from
$213.1 million. This decrease was related to our BOLI
separate account policies, for which policyholder interest
credited is adjusted based on claims experience.
Other underwriting and operating
expenses. Other underwriting and operating
expenses decreased $3.2 million, or 5.0%, to
$61.4 million from $64.6 million. This decrease was
due to a decrease in sales-related expenses including
commissions and premium taxes. The 2005 other underwriting and
operating expenses reflected are not comparable to 2004 during
which Safeco Corporation allocated us costs for the first seven
months of 2004 and charged us for transition services for the
remaining five months of 2004.
Amortization of deferred policy acquisition
costs. Amortization of deferred policy
acquisition costs decreased $6.4 million, or 86.5%, to
$1.0 million from $7.4 million. In connection with the
Acquisition, our DAC asset was reset to zero on August 2,
2004. Our 2004 amortization included seven months of DAC
amortization prior to the Acquisition.
60
Other
The following table sets forth the results of operations
relating to our Other segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
Year Ended December 31,
|
|
|
|
Ended
|
|
|
|
|
|
|
|
|
Combined
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
(non-GAAP)
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
20.5
|
|
|
$
|
17.9
|
|
|
$
|
25.3
|
|
|
$
|
17.9
|
|
|
$
|
30.5
|
|
Other revenues
|
|
|
9.8
|
|
|
|
7.8
|
|
|
|
9.4
|
|
|
|
9.1
|
|
|
|
8.3
|
|
Net realized investment gains
|
|
|
4.8
|
|
|
|
3.3
|
|
|
|
5.8
|
|
|
|
12.6
|
|
|
|
17.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
35.1
|
|
|
|
29.0
|
|
|
|
40.5
|
|
|
|
39.6
|
|
|
|
56.6
|
|
Benefits and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest credited
|
|
|
(0.6
|
)
|
|
|
(0.2
|
)
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
Other underwriting and operating expenses
|
|
|
14.5
|
|
|
|
10.1
|
|
|
|
14.1
|
|
|
|
14.5
|
|
|
|
27.6
|
|
Fair value of warrants issued to investors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101.5
|
|
Interest expense
|
|
|
14.1
|
|
|
|
14.5
|
|
|
|
19.1
|
|
|
|
12.4
|
|
|
|
3.5
|
|
Intangible asset amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses
|
|
|
28.0
|
|
|
|
24.4
|
|
|
|
32.9
|
|
|
|
26.9
|
|
|
|
134.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pre-tax income (loss)
|
|
$
|
7.1
|
|
|
$
|
4.6
|
|
|
$
|
7.6
|
|
|
$
|
12.7
|
|
|
$
|
(77.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP Financial Measures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pre-tax operating income (loss)
|
|
$
|
2.3
|
|
|
$
|
1.3
|
|
|
$
|
1.8
|
|
|
$
|
0.1
|
|
|
$
|
(95.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation to segment pre-tax income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pre-tax income (loss)
|
|
$
|
7.1
|
|
|
$
|
4.6
|
|
|
$
|
7.6
|
|
|
$
|
12.7
|
|
|
$
|
(77.6
|
)
|
Less: Net realized investment gains
|
|
|
4.8
|
|
|
|
3.3
|
|
|
|
5.8
|
|
|
|
12.6
|
|
|
|
17.8
|
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized and unrealized investment gains on FIA options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized and unrealized investment gains on equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pre-tax operating income (loss)
|
|
$
|
2.3
|
|
|
$
|
1.3
|
|
|
$
|
1.8
|
|
|
$
|
0.1
|
|
|
$
|
(95.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended September 30, 2007 Compared to Nine Months
Ended September 30, 2006
Other segment summary of results. Our Other
segment pre-tax income increased $2.5 million, to
$7.1 million from $4.6 million. Segment pre-tax
operating income increased $1.0 million, to
$2.3 million from $1.3 million. This increase was
primarily due to an increase in unallocated investment income
and an increase in revenues from our broker-dealer operations,
partially offset by increased operating expenses due to our
initial public offering process and increased amortization of
information technology assets.
Net investment income. Net investment income
increased $2.6 million, or 14.5%, to $20.5 million
from $17.9 million. This increase is a result of an
increase in the average invested assets to $0.6 billion
from $0.5 billion.
Other revenues. Other revenues increased
$2.0 million, or 25.6%, to $9.8 million from
$7.8 million, due to increased revenue from our
broker-dealer operations.
Net realized investment gains. Net realized
investment gains increased by $1.5 million, or 45.5%, to
$4.8 million from $3.3 million. For the nine months
ended September 30, 2007, gross realized gains were
$8.9 million and gross realized losses were
$4.1 million, including impairments of $0.9 million.
For the nine
61
months ended September 30, 2006, gross realized gains were
$7.6 million and gross realized losses were
$4.3 million, including impairments of $1.3 million.
Other underwriting and operating
expenses. Other underwriting and operating
expenses increased $4.4 million, or 43.6%, to
$14.5 million from $10.1 million in 2006. This
increase was primarily due to $2.0 million of additional
operating expenses related to our initial public offering
process and $1.1 million of increased amortization of
information technology assets. In addition, commission expenses
from our broker-dealer operations increased $1.3 million
consistent with the increase in other revenues.
Year
Ended December 31, 2006 Compared to Year Ended
December 31, 2005
Other summary of results. Our Other segment
pre-tax income decreased $5.1 million, or 40.2%, to
$7.6 million from $12.7 million. Segment pre-tax
operating income increased $1.7 million to
$1.8 million from $0.1 million. This increase was
primarily due to a $7.4 million increase in unallocated
investment income, offset by an increase in interest expense of
$6.7 million.
Net investment income. Net investment income
increased $7.4 million, or 41.3%, to $25.3 million
from $17.9 million. This increase was primarily due to a
$151.4 million increase in the non-allocated average
invested assets, which increased to $536.1 million from
$384.7 million.
Net realized investment gains. Net realized
gains decreased by $6.8 million, or 54.0% to
$5.8 million from $12.6 million. For 2006, gross
realized gains were $11.6 million and gross realized losses
were $5.8 million, including impairments of
$1.6 million. For 2005, gross realized gains were
$14.2 million and gross realized losses were
$1.6 million, including minimal impairments. In addition,
in 2005 we recorded a $6.3 million gain as a result of a
methodology refinement in the calculation of our mortgage loan
allowance.
Year
Ended December 31, 2005 compared to Year Ended
December 31, 2004 (Combined Non-GAAP)
Other summary of results. Our Other segment
pre-tax income increased $90.3 million to a gain of
$12.7 million from a loss of $77.6 million. Segment
pre-tax operating income increased $95.5 million to a gain
of $0.1 million from a loss of $95.4 million. This
increase was primarily due to our 2004 expense related to the
issuance of warrants to investors for services provided in
connection with the Acquisition.
Net investment income. Net investment income
decreased $12.6 million, or 41.3%, to $17.9 million
from $30.5 million. This decrease was related to the
Acquisition purchase accounting, which resulted in an overall
reduction in investment yields for periods subsequent to the
purchase date.
Net realized investment gains. Net realized
gains decreased $5.2 million, or 29.2%, to
$12.6 million from $17.8 million. For 2005, gross
realized gains were $14.2 million and gross realized losses
were $1.6 million, including minimal impairments. For 2004,
gross realized gains were $22.5 million and gross realized
losses were $4.7 million. There were no impairments in 2004.
Other underwriting and operating
expenses. Other underwriting and operating
expenses decreased $13.1 million, or 47.5%, to
$14.5 million from $27.6 million. The 2005 other
underwriting and operating expenses reflected are not comparable
to 2004 during which Safeco Corporation allocated us costs for
the first seven months of 2004 and charged us under a transition
services agreement for the remaining five months of 2004.
Fair value of warrants issued to
investors. See Results of
Operations Total Company for a discussion of
this line item.
Investments
Our investment portfolio mix as of September 30, 2007
consisted in large part of high quality, fixed maturity
securities, commercial mortgage loans and short-term securities,
as well as a smaller allocation to marketable equity securities
and other investments, such as investments in limited
partnerships, which include hedge funds and private equity. Our
management believes that prudent levels of investments in
marketable
62
equity securities and other investments within our investment
portfolio are likely to enhance long term after-tax total
returns without significantly increasing the risk profile of the
portfolio.
The following table presents the composition of our investment
portfolio as of September 30, 2007 and December 31,
2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30,
|
|
|
As of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
Types of Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
$
|
15,587.4
|
|
|
$
|
16,049.9
|
|
|
$
|
17,183.2
|
|
Marketable equity securities
|
|
|
203.8
|
|
|
|
201.7
|
|
|
|
162.3
|
|
Mortgage loans
|
|
|
818.6
|
|
|
|
794.3
|
|
|
|
776.9
|
|
Policy loans
|
|
|
77.9
|
|
|
|
79.2
|
|
|
|
80.5
|
|
Short-term investments
|
|
|
5.0
|
|
|
|
48.9
|
|
|
|
7.4
|
|
Investments in limited partnerships
|
|
|
160.1
|
|
|
|
112.6
|
|
|
|
93.4
|
|
Other invested assets(1)
|
|
|
11.4
|
|
|
|
18.7
|
|
|
|
29.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
16,864.2
|
|
|
$
|
17,305.3
|
|
|
$
|
18,332.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As of September 30, 2007 this amount includes investments
such as notes receivable and options. As of December 31,
2006 and 2005, this amount includes investments such as embedded
derivatives, notes receivable and options. |
Investment
Returns
Return on invested assets is an important element of our
financial results. Significant fluctuations in the fixed income
or equity markets could weaken our financial condition or
results of operations. Additionally, changes in market interest
rates may impact the period of time over which certain
investments, such as mortgage-backed securities, are repaid and
whether certain investments are called by the issuers. Such
changes may in turn impact the yield on these investments and
may also result in the re-investment of funds received from
calls and prepayments at rates below the average portfolio yield.
Fluctuations in interest rates affect our return on, and the
fair value of, fixed maturity investments. Other events beyond
our control could also adversely impact the fair value of these
investments. Specifically, a default of payment by an issuer
could reduce our investment return.
63
The following table summarizes our investment results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
Nine Months
|
|
|
|
|
|
|
|
|
Combined
|
|
|
|
Ended September 30,
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
(Non-GAAP)
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
Net investment income
|
|
$
|
732.3
|
|
|
$
|
734.0
|
|
|
$
|
984.9
|
|
|
$
|
994.0
|
|
|
$
|
1,104.8
|
|
Yield on average invested assets(1)
|
|
|
5.60
|
%
|
|
|
5.42
|
%
|
|
|
5.48
|
%
|
|
|
5.33
|
%
|
|
|
6.02
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross gains on sales
|
|
$
|
44.3
|
|
|
$
|
32.9
|
|
|
$
|
47.6
|
|
|
$
|
40.4
|
|
|
$
|
80.4
|
|
Gross losses on sales
|
|
|
(14.7
|
)
|
|
|
(14.1
|
)
|
|
|
(19.9
|
)
|
|
|
(28.2
|
)
|
|
|
(46.6
|
)
|
Impairments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit related
|
|
|
(0.7
|
)
|
|
|
(8.8
|
)
|
|
|
(8.9
|
)
|
|
|
(6.3
|
)
|
|
|
(3.5
|
)
|
Other
|
|
|
(7.5
|
)
|
|
|
(15.6
|
)
|
|
|
(16.8
|
)
|
|
|
(1.4
|
)
|
|
|
(6.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impairments
|
|
|
(8.2
|
)
|
|
|
(24.4
|
)
|
|
|
(25.7
|
)
|
|
|
(7.7
|
)
|
|
|
(10.4
|
)
|
Other net investment gains (losses)(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other gross gains
|
|
|
8.7
|
|
|
|
7.3
|
|
|
|
7.5
|
|
|
|
35.1
|
|
|
|
30.3
|
|
Other gross losses
|
|
|
(6.3
|
)
|
|
|
(6.6
|
)
|
|
|
(7.8
|
)
|
|
|
(25.5
|
)
|
|
|
(11.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains (losses) before taxes
|
|
$
|
23.8
|
|
|
$
|
(4.9
|
)
|
|
$
|
1.7
|
|
|
$
|
14.1
|
|
|
$
|
41.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents annualized net investment income (excluding income
related to marketable equity securities available for sale)
divided by the monthly weighted average invested assets at cost
or amortized cost, as applicable, excluding marketable equity
securities available for sale. Information presented is
unaudited. |
|
(2) |
|
Primarily consists of changes in fair value on derivatives
instruments, the impact on DAC and gains (losses) on calls and
redemptions. |
Impairments during the nine months ended September 30, 2007
were $8.2 million. The following table summarizes our five
largest aggregate losses on sales and impairments by each
issuers industry for the nine months ended
September 30, 2007. No other issuer together with its
affiliates had an aggregate loss on dispositions and impairments
that was greater than 5.0% of total gross realized losses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
|
|
at Sale
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
Issuers Industry
|
|
(Proceeds)
|
|
|
Loss on Sale
|
|
|
Impairment
|
|
|
Holdings
|
|
|
Unrealized Loss
|
|
|
|
(In millions)
|
|
|
Publishing
|
|
$
|
4.6
|
|
|
$
|
(0.4
|
)
|
|
$
|
(2.7
|
)
|
|
$
|
14.9
|
|
|
$
|
|
|
Brewer
|
|
|
44.3
|
|
|
|
(0.5
|
)
|
|
|
(1.7
|
)
|
|
|
8.3
|
|
|
|
0.1
|
|
Packaged Food & Meats
|
|
|
0.1
|
|
|
|
(1.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Integrated Telecom Services
|
|
|
31.2
|
|
|
|
(1.5
|
)
|
|
|
|
|
|
|
25.4
|
|
|
|
(0.1
|
)
|
FHA
|
|
|
14.1
|
|
|
|
(0.7
|
)
|
|
|
(0.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
94.3
|
|
|
$
|
(5.0
|
)
|
|
$
|
(5.2
|
)
|
|
$
|
48.6
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64
Impairments for the year ended December 31, 2006 were
$25.7 million. The following table summarizes our five
largest aggregate losses on sales and impairments by each
issuers industry for the year ended December 31,
2006. No other issuer together with its affiliates had an
aggregate loss on dispositions and impairments that was greater
than 3.0% of total gross realized losses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
at Sale
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
Industry
|
|
(Proceeds)
|
|
|
Loss on Sale
|
|
|
Impairment
|
|
|
Holdings
|
|
|
Gain (Loss)
|
|
|
|
(In millions)
|
|
|
Business services
|
|
$
|
36.5
|
|
|
$
|
(2.2
|
)
|
|
$
|
(8.1
|
)
|
|
$
|
|
|
|
$
|
|
|
Paper products
|
|
|
|
|
|
|
|
|
|
|
(7.5
|
)
|
|
|
17.6
|
|
|
|
1.8
|
|
Food retail
|
|
|
21.0
|
|
|
|
(1.4
|
)
|
|
|
(1.7
|
)
|
|
|
22.0
|
|
|
|
(0.8
|
)
|
Electronics store
|
|
|
27.8
|
|
|
|
(1.0
|
)
|
|
|
(0.8
|
)
|
|
|
|
|
|
|
|
|
Wireless telecom
|
|
|
9.5
|
|
|
|
(0.0
|
)
|
|
|
(1.8
|
)
|
|
|
9.9
|
|
|
|
1.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
94.8
|
|
|
$
|
(4.6
|
)
|
|
$
|
(19.9
|
)
|
|
$
|
49.5
|
|
|
$
|
2.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our equity investment portfolio is managed by Prospector
Partners, LLC, or Prospector. Prospector, a registered
investment adviser, oversees our portfolio of equity-like
investments including publicly-traded common stocks, convertible
securities and distressed debt. Prospector has a strong track
record of investment performance on both an absolute and
relative basis. Prospector has helped us to produce strong
annual investment results, evidenced in part by the returns of
our equity portfolio, which outperformed the total return of the
benchmark S&P 500 Index for the nine months ended
September 30, 2007 by 0.1% and for years ended
December 31, 2006 and 2005 by 10.3% and 26.0%,
respectively. We believe that these equity and equity-like
investments are ideal for funding certain long duration
liabilities in our Income Annuities segment. See
Business Investments
Overview for further information regarding Prospector.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
|
|
|
Ended September 30,
|
|
Year Ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
|
Public equity
|
|
|
9.2
|
%
|
|
|
26.1
|
%
|
|
|
30.9
|
%
|
S&P 500 Index (total return)
|
|
|
9.1
|
%
|
|
|
15.8
|
%
|
|
|
4.9
|
%
|
Liquidity
and Capital Resources
We conduct all our operations through our operating
subsidiaries. Dividends from our subsidiaries and permitted
payments under our tax sharing arrangements with our
subsidiaries are Symetras principal sources of cash to pay
stockholder dividends and meet Symetras obligations,
including payments of principal and interest on notes payable.
Our primary uses of funds at our holding company level include
payment of general operating expenses, payment of principal,
interest and other expenses related to holding company debt and
payment of dividends to our stockholders. We paid two dividends
to our stockholders totaling $200.0 million in the
aggregate on October 19, 2007. After our initial public
offering, we intend to pay quarterly cash dividends on our
common stock, as described on page 28. The declaration and
payment of future dividends to holders of our common stock will
be at the discretion of our board of directors.
Dividends
and Regulatory Requirements
The payment of dividends and other distributions to us by our
insurance subsidiaries is regulated by insurance laws and
regulations. In general, dividends in excess of prescribed
limits are deemed extraordinary and require
insurance regulatory approval. Based on our statutory results as
of December 31, 2006, our insurance subsidiaries may pay
dividends to us of up to $166.4 million in the aggregate
during 2007, without obtaining regulatory approval, provided
that aggregate dividends paid over the twelve months preceding
any dividend payment made during 2007 do not exceed the
$166.4 million limit. Our insurance subsidiaries paid
$100.0 million in dividends in December 2006 and $66.4 million
in dividends during the nine months ended September 30,
2007. Our non-insurance subsidiaries paid $4.6 million in
dividends during the nine months ended September 30, 2007.
On
65
October 18, 2007, one of our insurance subsidiaries
declared a $100.0 million dividend, which will be paid in the
fourth quarter upon regulatory approval or in December 2007 once
allowed under our $166.4 million 2007
twelve-month
rolling limit.
During 2006, we received $122.5 million in dividends from
our insurance subsidiaries, including $100.0 million in
December 2006. During 2005, we did not receive dividends from
our insurance subsidiaries. For 2005 and the period from
August 2, 2004 through December 31, 2004, we received
$35.2 million and $20.0 million, respectively, from
our discontinued operations and our non-insurance subsidiaries.
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 us, 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.
Our 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-term fixed maturities. In addition, our
insurance subsidiaries hold highly liquid, high-quality,
short-term investment securities and other liquid
investment-grade fixed maturities to fund anticipated operating
expenses, surrenders and withdrawals. As of September 30,
2007, our total cash and invested assets were
$17.1 billion. As of December 31, 2006, our total cash
and invested assets were $17.6 billion. Our fixed maturity
portfolio included below investment grade securities that
comprised 3.9% and 4.4% of the total fair value of our total
fixed maturity securities as of September 30, 2007 and
December 31, 2006, respectively. In addition, our fixed
maturity portfolio included non-rated securities that comprised
4.1% and 3.9% of the total fair value of our fixed maturity
securities as of these dates.
The short-term and long-term liquidity requirements are
monitored regularly to match cash inflows with cash
requirements. We review our short-term projected sources and
uses of funds and the asset/liability matching, investment and
cash flow assumptions underlying these projections. We
periodically make adjustments to our investment policies to
reflect changes in short-term and long-term cash needs and
changing business and economic conditions.
A primary liquidity concern with respect to fixed deferred
annuity and life insurance products is the risk of early
withdrawal. Our insurance subsidiaries attempt to mitigate this
risk by offering variable products whereby the investment risk
is transferred to the policyholder, charging surrender fees at
the time of withdrawal for certain products, applying a fair
value adjustment to withdrawals for certain products in our
general accounts, and monitoring and matching anticipated cash
inflows and outflows. Policyholder charges such as surrender
fees and fair value adjustments vary by product as follows:
|
|
|
|
|
For group annuity products ($1.0 billion of reserves as of
September 30, 2007), the surrender charge amounts and
periods can vary significantly, depending on the terms of each
contract and the compensation structure for the producer.
Generally, surrender charge percentages for group products are
less than individual products because we incur lower expenses at
contract origination for group products. In addition,
approximately 17% of the general account group annuity reserves
are subject to a fair value adjustment at withdrawal.
|
|
|
|
For individual annuity products ($3.5 billion of reserves
as of September 30, 2007), the surrender charge is
generally calculated as a percentage of the withdrawal amount
and is assessed at declining rates generally during the first
three to eight years after the initial deposit is made.
|
|
|
|
Approximately 36.0% of the combined individual and group
deferred annuities fund value is subject to surrender charges.
|
66
|
|
|
|
|
Life insurance policies are less susceptible to withdrawal than
annuity products because policyholders generally must undergo a
new underwriting process and may incur a surrender fee in order
to obtain a new insurance policy.
|
Capitalization
Our capital structure consists of notes payable and
stockholders equity. The following table summarizes our
capital structure as of the following dates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
Senior notes payable
|
|
$
|
298.8
|
|
|
$
|
298.7
|
|
|
$
|
300.0
|
|
Stockholders equity, excluding accumulated other
comprehensive income (loss) or AOCI
|
|
|
1,467.9
|
|
|
|
1,327.8
|
|
|
|
1,268.3
|
|
AOCI
|
|
|
(102.3
|
)
|
|
|
(0.5
|
)
|
|
|
136.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
1,365.6
|
|
|
|
1,327.3
|
|
|
|
1,404.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital
|
|
$
|
1,664.4
|
|
|
$
|
1,626.0
|
|
|
$
|
1,704.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt to capital ratio, excluding AOCI
|
|
|
16.9
|
%
|
|
|
18.4
|
%
|
|
|
19.1
|
%
|
Our capitalization increased $38.4 million as of
September 30, 2007, as compared to December 31, 2006.
This increase was due to a $38.3 million increase in total
stockholders equity. Total stockholders equity
increased primarily due to net income of $137.6 million,
which was partially offset by a $101.8 million reduction in
AOCI, caused primarily by unrealized losses of
$83.9 million in our investment portfolio.
Our capitalization decreased $78.9 million as of
December 31, 2006 as compared with December 31, 2005.
This decrease was due to a $77.6 million decrease in total
stockholders equity. Total stockholders equity
decreased due to a $137.1 million reduction in AOCI, which
was primarily caused by unrealized losses in our fixed maturity
portfolio and the payment of a $100.0 million dividend to
stockholders. These decreases were partially offset by net
income of $159.5 million.
On October 10, 2007 we issued $150.0 million aggregate
principal amount of CENts at an issue price of
$149.8 million. We applied the net proceeds from the CENts
to pay two dividends to our stockholders, totaling
$200.0 million, on October 19, 2007. The CENts
offering increases our outstanding debt by $149.8 million,
and the stockholder dividend reduces stockholders equity
by $200.0 million. These events, had they occurred as of
September 30, 2007, would have increased our debt to
capital ratio, excluding AOCI, to 26.1%.
Debt
The following table summarizes our debt instruments as of
September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Amount Available as of
|
|
|
Amount Outstanding as of
|
|
Description
|
|
Maturity Date
|
|
|
9/30/2007
|
|
|
12/31/2006
|
|
|
12/31/2005
|
|
|
9/30/2007
|
|
|
12/31/2006
|
|
|
12/31/2005
|
|
|
|
(In millions)
|
|
|
Senior notes payable
|
|
|
4/1/2016
|
|
|
$
|
300.0
|
|
|
$
|
300.0
|
|
|
$
|
|
|
|
$
|
300.0
|
|
|
$
|
300.0
|
|
|
$
|
|
|
Revolving credit facilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank of America, N.A.
|
|
|
8/16/2012
|
|
|
|
200.0
|
|
|
|
70.0
|
|
|
|
370.0
|
|
|
|
|
|
|
|
|
|
|
|
300.0
|
|
The Bank of New York:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Holding company
|
|
|
n/a
|
|
|
|
25.0
|
|
|
|
25.0
|
|
|
|
25.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance subsidiary
|
|
|
n/a
|
|
|
|
25.0
|
|
|
|
25.0
|
|
|
|
25.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total notes payable and revolving credit facilities
|
|
|
|
|
|
$
|
550.0
|
|
|
$
|
420.0
|
|
|
$
|
420.0
|
|
|
$
|
300.0
|
|
|
$
|
300.0
|
|
|
$
|
300.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67
Senior
Notes Payable
On March 30, 2006, we issued $300.0 million of
6.125% senior notes due April 1, 2016, which were
issued at a discount yielding $298.7 million. Proceeds from
the notes were used to pay down the outstanding principal on a
variable rate revolving line of credit. Interest on the notes is
payable semiannually on April 1 and October 1 of each
year.
For a description of the additional terms of the notes, see
page 132.
Capital
Efficient Notes
On October 10, 2007, we issued $150.0 million
aggregate principal amount of CENts. We applied the proceeds
from the CENts to pay a special cash dividend on
October 19, 2007. The CENts bear interest at a fixed annual
rate of 8.30% to, but not including, October 15, 2017, and
thereafter at a floating annual rate equal to three-month LIBOR
plus 4.177%. The CENts have a scheduled maturity date of
October 15, 2037, subject to certain limitations, with a
final maturity date of October 15, 2067.
In connection with the offering of the CENts, we entered into a
covenant in favor of the holders of our $300.0 million
principal amount senior notes, pursuant to which we may not
repay or redeem the CENts prior to October 15, 2047 unless
the redemption or repayment is financed from the offering of
replacement capital securities, as specified in the CENts.
For a description of additional terms of the CENts, see
page 132.
Revolving
Credit Facilities
New Credit Facility. On August 16, 2007,
we entered into a $200.0 million senior unsecured revolving
credit agreement with a syndicate of lending institutions led by
Bank of America, N.A. The credit facility matures on
August 16, 2012, and loans under this facility bear
interest at varying rates depending on our credit rating. This
facility requires us to maintain specified financial ratios, and
includes other customary restrictive and affirmative covenants.
The revolving credit facility is available to provide support
for working capital, capital expenditures and other general
corporate purposes.
For a description of additional terms of this facility, see
page 133.
Other Facilities. In addition, in 2005, we
entered into two $25.0 million revolving credit facilities
with The Bank of New York to support our overnight repurchase
agreements program, which provides us with the liquidity to meet
general funding requirements. We have not borrowed under these
facilities since they were created.
Prior Facilities. In June 2004, we entered
into a $370.0 million revolving credit facility with
several lending institutions, led by Bank of America, N.A. In
August 2004, we borrowed $300.0 million against this
facility to help fund the purchase of our company from Safeco
Corporation. In March 2006, in conjunction with the issuance of
the notes described above, we repaid the $300.0 million
outstanding under this facility and reduced the amount that
could be borrowed from $370.0 million to
$70.0 million. Since then, we have not borrowed any funds
under this facility, and this facility has been replaced by the
new $200.0 million credit facility described above.
Cash
Flows
The following table sets forth a summary of our consolidated
cash flows for the nine months ended September 30, 2007 and
2006 and the years ended December 31, 2006, 2005 and
Combined 2004 (non-GAAP). Our consolidated cash flows for the
years ended December 31, 2005 and 2004 combine cash flows
68
from discontinued operations with cash flows from continuing
operations within each cash flow statement category of
operating, investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
Year Ended December 31,
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
Combined
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
2004
|
|
(In millions)
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
(Non-GAAP)
|
|
|
Net cash flows from operating activities
|
|
$
|
566.4
|
|
|
$
|
621.2
|
|
|
$
|
841.6
|
|
|
$
|
866.2
|
|
|
$
|
963.9
|
|
Net cash flows from investing activities
|
|
|
271.2
|
|
|
|
439.7
|
|
|
|
758.0
|
|
|
|
620.4
|
|
|
|
(1,178.1
|
)
|
Net cash flows from financing activities
|
|
|
(839.8
|
)
|
|
|
(977.8
|
)
|
|
|
(1,457.3
|
)
|
|
|
(1,527.9
|
)
|
|
|
260.0
|
|
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, group life and term life insurance
products, income including dividends and interest on our general
account 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:
|
|
|
|
|
Nine months ended September 30, 2007 and
2006 Net cash flows from operating
activities for the nine months ended September 30, 2007
were $566.4 million, a $54.8 million decrease over the
same period in 2006. This decrease was primarily the result of
the timing of certain cash settlements related to other assets
and other liabilities.
|
|
|
|
Years ended December 31, 2006 and 2005
Net cash flows from operating activities during
the year ended December 31, 2006 were $841.6 million,
a $24.6 million decrease from 2005, which for 2005 included
net cash flows used in discontinued operations of
$3.7 million. The decrease was primarily the result of the
amounts and timing of certain cash settlements related to other
assets and other liabilities and a decline in premiums received
from our group medical stop-loss products, partially offset by a
reduced level of cash disbursed to fund policyholder benefits
and claims, primarily group medical stop-loss products, as well
as decreased underwriting and operating expenses.
|
|
|
|
Years ended December 31, 2005 and 2004
Net cash flows from operating activities for the year ended
December 31, 2005 were $866.2 million, a
$97.7 million decrease from 2004, which included net cash
flows used in discontinued operations of $3.7 million in
2005 and $3.0 million in 2004. The decrease was primarily
the result of a decline in premiums received from our group
medical stop-loss products, increased amounts of cash paid to
settle policyholder benefits and claims and a reduced amount of
cash arising from other receivables and other assets and
liabilities, partially offset by a reduction in cash disbursed
to fund underwriting and operating expenses.
|
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. The following discussion
highlights key drivers in the level of cash flows generated from
our investing activities:
|
|
|
|
|
Nine months ended September 30, 2007 and
2006 Net cash flows from investing
activities for the nine months ended September 30, 2007
were $271.2 million, a $168.5 million decrease from
the same period in 2006. Net cash outflows from the routine
management of our investment portfolio increased $209.4 million
and we paid $21.9 million to acquire MRM. These outflows
were offset by a $55.5 million increase in cash from
short-term investments.
|
|
|
|
Years ended December 31, 2006 and 2005
Net cash flows from investing activities during
the year ended December 31, 2006 were $758.0 million,
a $137.6 million increase from 2005, which for 2005
included net cash flows provided by discontinued operations of
$29.6 million. The increase was
|
69
|
|
|
|
|
primarily the result of a $543.5 million reduction of cash
used in net purchases of investments and a $31.5 million
reduction of cash used in purchases of property, equipment and
leasehold improvements, partially offset by a
$437.7 million decrease in proceeds from maturities and
calls of fixed maturity investments.
|
|
|
|
|
|
Years ended December 31, 2005 and 2004
Net cash flows from investing activities during
the year ended December 31, 2005 were $620.4 million,
a $1,798.5 million increase from 2004, which included net
cash flows provided by discontinued operations of
$29.6 million in 2005 and $22.4 million in 2004. The
increase was primarily the result of consideration paid during
2004 of $1,349.9 million in conjunction with the
acquisition of the life insurance and investment companies from
Safeco Corporation, and a $1,000.3 million reduction of
cash used in net purchases of investments, partially offset by a
$487.5 million decrease in proceeds from maturities and
calls of fixed maturity investments, a $34.6 million
increase in cash used in purchases of property, equipment and
leasehold improvements and our receipt in 2004 of
$30.0 million related to our sale of our mutual funds
business.
|
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 capital stock and debt, 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 stockholders. The following
discussion highlights key drivers in the level of cash flows
generated from our financing activities:
|
|
|
|
|
Nine months ended September 30, 2007 and 2006
Net cash flows from financing activities for the
nine months ended September 30, 2007 were
$(839.8) million, an $138.0 million increase over the
same period in 2006. We incurred a net cash outflow from
financing activities in both periods as policyholder withdrawals
exceeded deposits; however, the increase in the interim 2007
period relative to the same period in 2006 was primarily the
result of an increase in policyholder deposits and a reduction
in policyholder withdrawals.
|
|
|
|
Years ended December 31, 2006 and 2005
Net cash flows from financing activities during
the year ended December 31, 2006 were
$(1,457.3) million, a $70.6 million increase from
2005, which for 2005 included net cash flows used in
discontinued operations of $29.2 million. The increase was
primarily the result of a $170.1 million reduction in net
policyholder withdrawals from certain life insurance and annuity
policies, partially offset by our payment during 2006 of a
$100.0 million dividend to our stockholders.
|
|
|
|
Years ended December 31, 2005 and 2004
Net cash flows from financing activities during the year ended
December 31, 2005 were $(1,527.9) million, a
$1,787.9 million decrease from 2004, which included net
cash flows used in discontinued operations of $29.2 million
in 2005 and $20.0 million in 2004. The decrease was
primarily the result of a $486.1 million increase in net
policyholder withdrawals from certain life insurance and annuity
policies and our receipt during 2004 of financing proceeds of
$1,364.9 million that were used to fund the purchase of the
life insurance and investment companies from Safeco Corporation,
partially offset by our payment during 2004 of
$64.3 million of dividends to Safeco Corporation.
|
Contractual
Obligations and Commitments
We enter into obligations with third parties in the ordinary
course of our operations. These obligations as of
December 31, 2006, are set forth in the table below.
However, we do not believe that our cash flow requirements can
be assessed based upon an analysis of these obligations as the
funding of these future cash obligations will be from future
cash flows from premiums, deposits, fees and investment income
that are not reflected in the table below. In addition, our
operations involve significant expenditures that are not based
upon commitments, including expenditures for income taxes and
payroll.
70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012 and
|
|
Contractual Obligations
|
|
Total
|
|
|
2007
|
|
|
2008-2009
|
|
|
2010-2011
|
|
|
thereafter
|
|
|
|
(In millions)
|
|
|
Senior notes payable
|
|
$
|
300.0
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
300.0
|
|
Interest on notes payable
|
|
|
183.8
|
|
|
|
18.4
|
|
|
|
36.8
|
|
|
|
36.8
|
|
|
|
91.8
|
|
Operating lease obligations(1)
|
|
|
56.1
|
|
|
|
6.9
|
|
|
|
13.4
|
|
|
|
12.7
|
|
|
|
23.1
|
|
Licensing fees(2)
|
|
|
48.8
|
|
|
|
13.2
|
|
|
|
27.2
|
|
|
|
8.4
|
|
|
|
|
|
Purchase and lending commitments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in limited partnerships(3)
|
|
|
68.7
|
|
|
|
24.3
|
|
|
|
29.3
|
|
|
|
15.1
|
|
|
|
|
|
Commercial mortgage loans(4)
|
|
|
14.5
|
|
|
|
14.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities collateral on securities lending(5)
|
|
|
439.3
|
|
|
|
439.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance obligations(6)
|
|
|
37,611.0
|
|
|
|
1,965.9
|
|
|
|
2,672.6
|
|
|
|
2,392.2
|
|
|
|
30,580.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
38,722.2
|
|
|
$
|
2,482.5
|
|
|
$
|
2,779.3
|
|
|
$
|
2,465.2
|
|
|
$
|
30,995.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes minimum rental commitments on leases for office space,
commercial real estate and certain equipment. For more
information, see note 14, Commitments and
Contingencies, of the notes to our 2006 consolidated
financial statements included in this prospectus. |
|
(2) |
|
Includes contractual commitments for a service agreement to
outsource the majority of our information technology
infrastructure. For more information, see note 14,
Commitments and Contingencies, of the notes to our
2006 consolidated financial statements included in this
prospectus. |
|
(3) |
|
Related to investments in six limited partnership interests
related to tax sheltered affordable housing projects and state
tax credit funds and two private equity partnerships. We will
provide capital contributions to the two private equity
partnerships through 2015 up to a committed amount of
$17.5 million at the discretion of the general partner,
subject to certain contribution limits. Since the timing of
payment is uncertain, the unfunded amount has been included in
the payment due in less than one year. For more information, see
note 14, Commitments and Contingencies, of the
notes to our consolidated financial statements included in this
prospectus. Amounts recorded on the balance sheet are included
in other liabilities. |
|
(4) |
|
Unfunded mortgage loan commitments as of December 31, 2006. |
|
(5) |
|
We have accepted cash collateral of $439.3 million in
connection with our securities lending program. Since the timing
of the return of collateral is uncertain, the return of
collateral has been included in the payments due in less than
one year. For more information, see note 5,
Securities Lending Program, of the notes to our 2006
consolidated financial statements included in this prospectus. |
|
(6) |
|
Includes estimated claim and benefit, policy surrender and
commission obligations on in-force insurance policies and
deposit contracts. Estimated claim and benefit obligations are
based on mortality, morbidity and lapse assumptions comparable
with our historical experience. In contrast to this table, our
obligations recorded in our consolidated balance sheets do not
incorporate future credited interest for deposit contracts or
tabular interest for insurance policies. Therefore, the
estimated obligations for insurance liabilities presented in
this table significantly exceed the liabilities recorded in
reserves for future annuity and contract benefits and the
liability for policy and contract claims. Due to the
significance of the assumptions used, the amounts presented
could materially differ from actual results. We have not
included the variable separate account obligations as these
obligations are legally insulated from general account
obligations and will be fully funded by cash flows from separate
account assets. We expect to fund the obligations for insurance
liabilities from cash flows from general account investments and
future deposits and premiums. |
Off-balance
Sheet Transactions
We do not have off-balance sheet transactions.
71
Quantitative
and Qualitative Disclosures about Market Risk
We are subject to potential fluctuations in earnings, cash flows
and the fair value of certain assets and liabilities due to
changes in market interest rates and equity prices.
We enter into market-sensitive instruments primarily for
purposes other than trading.
Interest
Rate Risk
Our exposure to interest rate risk relates to the market price
and/or cash
flow variability associated with changes in market interest
rates.
An increase in market interest rates from current levels would
generally be a favorable development for us. If market interest
rates increase, we would expect to earn additional investment
income, to have increased annuity and universal life insurance
sales, and to limit the potential risk of margin erosion due to
minimum guaranteed crediting rates. However, an increase in
interest rates would also reduce the net unrealized gain and
could produce an unrealized net loss position of the investment
portfolio. In addition, if interest rates rise quickly enough
within a short time period, certain lines of business that are
interest sensitive are exposed to lapses as policyholders seek
higher yielding investments.
Our investment portfolios primarily consist of investment grade
fixed maturity securities, including public and privately-placed
corporate bonds, asset-backed securities, commercial
mortgage-backed securities, and collateralized mortgage
obligations. The carrying value of our investment portfolio as
of December 31, 2006 and 2005 was $17.3 billion and
$18.3 billion, respectively, of which 92.7% in 2006 and
93.7% in 2005 was invested in fixed maturity securities. The
primary market risk to our investment portfolio is interest rate
risk associated with investments in fixed maturity securities.
The fair value of our fixed maturities fluctuates depending on
the interest rate environment. During periods of declining
interest rates, paydowns on mortgage-backed securities and
collateralized mortgage obligations increase and we would
generally be unable to reinvest the proceeds of such prepayments
at comparable yields. The weighted-average duration of our fixed
maturity portfolio was approximately 6.2 and 6.8 years as
of December 31, 2006 and 2005, respectively.
We manage our exposure to interest rate risk through asset
allocation limits, limiting the purchase of negatively convex
assets, and asset/liability duration matching. Each line of
business has an investment policy based on its specific
liability characteristics.
Equity
Risk
We are exposed to equity price risk on our common stocks and
other equity holdings. In addition, asset fees calculated as a
percentage of the separate account assets are a source of
revenue to us. Gains and losses in the equity markets result in
corresponding increases and decreases in our separate account
assets and asset fee revenue.
In addition, a decrease in the value of separate account assets
may cause an increase in guaranteed minimum death benefit
claims, most of which are reinsured.
We manage equity price risk on investment holdings through
industry and issuer diversification and asset allocation
techniques.
Derivative
Financial Instruments
We make minimal use of derivative financial instruments as part
of our risk management strategy. We use indexed call options to
hedge our exposure to changes in the S&P 500 Index. Our
exposure is related to our FIA block of business, which credits
policyholders account values based on gains in the
S&P 500.
As a matter of policy, we have not and do not intend to engage
in derivative market-making, speculative derivative trading or
other speculative derivatives activities.
72
Sensitivity
Analysis
Sensitivity analysis measures the impact of hypothetical changes
in interest rates and other market rates or prices on the
profitability of market-sensitive financial instruments.
The following discussion about the potential effects of changes
in interest rates and equity market prices is based on so-called
shock-tests, which model the effects of interest
rate and equity market price shifts on our financial condition
and results of operations. Although we believe shock tests
provide the most meaningful analysis, they are constrained by
several factors, including the necessity to conduct the analysis
based on a single point in time and by their inability to
include the extraordinarily complex market reactions that
normally would arise from the market shifts modeled. Although
the following results of shock tests for changes in interest
rates and equity market prices may have some limited use as
benchmarks, they should not be viewed as forecasts. These
forward-looking disclosures also are selective in nature and
address only the potential impacts on our financial instruments.
They do not include a variety of other potential factors that
could affect our business as a result of these changes in
interest rates and equity market prices.
One means of assessing exposure of our fixed maturity securities
portfolio to interest rate changes is a duration-based analysis
that measures the potential changes in fair value resulting from
a hypothetical change in interest rates of 100 basis points
across all maturities. This is sometimes referred to as a
parallel shift in the yield curve. Our investment manager uses
Derivative Solutions, a fixed-income analytics tool, to model
and calculate the duration and convexity of our asset portfolio.
Under this model, with all other factors constant and assuming
no offsetting change in the fair value of our liabilities, we
estimated that such an increase in interest rates would cause
the fair value of our fixed maturity securities portfolio to
decline by approximately $0.98 billion and
$1.14 billion, based on our securities positions as of
December 31, 2006 and 2005, respectively.
One means of assessing exposure to changes in equity market
prices is to estimate the potential changes in values on our
equity investments resulting from a hypothetical broad-based
decline in equity market prices of 10%. Using this assumption,
with all other factors constant, we estimate that such a decline
in equity market prices would cause the fair value of our
investment portfolio to decline by approximately
$27.4 million and $19.9 million as of
December 31, 2006 and 2005, respectively. In addition,
fluctuations in equity market prices affect our revenues and
returns related to our variable annuity and life products, which
depend upon fees that are related primarily to the fair value of
the underlying assets.
73
Overview
Our
Business
We are a life insurance company focused on profitable growth in
select group health, retirement, life insurance and employee
benefits markets. Our first day of operations as an independent
company was August 2, 2004 when Symetra completed the
Acquisition. Our operations date back to 1957, and many of our
agency and distribution relationships have been in place for
decades. We are headquartered in Bellevue, Washington and employ
approximately 1,300 people in 25 offices across the United
States, serving approximately 1.7 million customers.
We manage our business through the following five segments, four
of which are operating:
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Group. We offer medical stop-loss insurance,
limited medical benefit plans, group life insurance, accidental
death and dismemberment insurance and disability insurance
mainly to employer groups of 50 to 1,000 individuals. Our Group
segment generated segment pre-tax income of $68.0 million
during 2006 and $70.1 million during the nine months ended
September 30, 2007. As a result of our recent acquisition
of Medical Risk Managers, Inc., we also offer MGU services.
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Retirement Services. We offer fixed and
variable deferred annuities, including tax sheltered annuities,
IRAs, and group annuities to qualified retirement plans,
including Section 401(k) and 457 plans. We also provide record
keeping services for qualified retirement plans invested in
mutual funds. Our Retirement Services segment generated segment
pre-tax income of $43.2 million during 2006 and
$19.4 million during the nine months ended
September 30, 2007.
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Income Annuities. We offer SPIAs for customers
seeking a reliable source of retirement income and structured
settlement annuities to fund third-party personal injury
settlements. Our Income Annuities segment generated segment
pre-tax income of $62.6 million during 2006 and
$63.7 million during the nine months ended
September 30, 2007.
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|
Individual. We offer a wide array of term,
universal and variable life insurance as well as BOLI. Our
Individual segment generated segment pre-tax income of
$62.6 million during 2006 and $44.3 million during the
nine months ended September 30, 2007.
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|
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|
Other. This segment consists of unallocated
corporate income, composed primarily of investment income on
unallocated surplus, unallocated corporate expenses, interest
expense on debt, the results of small, non-insurance businesses
that are managed outside of our operating segments and
inter-segment elimination entries. Our Other segment generated
segment pre-tax income of $7.6 million during 2006 and
$7.1 million during the nine months ended
September 30, 2007.
|
We distribute our products nationally through an extensive and
diversified independent distribution network. Our distributors
include financial institutions, employee benefits brokers, third
party administrators, worksite specialists, specialty brokers
and independent agents. We believe that our multi-channel
distribution network allows us to access a broad share of the
distributor and consumer markets for insurance and financial
services products. For example, we currently distribute our
annuity and life insurance products through approximately 23,000
independent agents, 28 key financial institutions and 3,300
independent employee benefits brokers. We have recently signed
selling agreements with an additional 10 key financial
institutions.
Market
Environment and Opportunities
We believe we are well positioned to benefit from a number of
demographic and market trends, including the following:
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|
|
|
|
Growing demand for affordable health
insurance. According to the Kaiser Family
Foundation, health insurance premiums in the U.S. increased
87% from
2000-2006,
while the Consumer Price Index increased only 17% over the same
period. As increases in health care costs continue to outpace
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74
|
|
|
|
|
inflation, the demand for affordable health insurance options
has increased. We believe we can grow our business by providing
employees with affordable access to health insurance through
employer-sponsored limited benefit employee health plans and by
offering group medical stop-loss insurance to medium and large
businesses. We also believe that the trend toward reductions in
employer-paid benefits and the uncertainty over the future of
government benefit programs provide us with the opportunity to
successfully offer other attractive employee benefits products.
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|
Increasing retirement savings and income
needs. According to the U.S. Department of
Health and Human Services, from approximately 1950 to 2004,
U.S. life expectancy at birth increased from
65.6 years to 75.2 years for men and from
71.1 years to 80.4 years for women and is expected to
increase further. In addition, the U.S. Census Bureau
estimates that approximately 77 million Americans born
between 1946 and 1964 are approaching retirement age. However,
according to the Employee Benefit Research Institute, in 2006,
52% of workers over the age of 55 and their spouses had
accumulated less than $50,000 in retirement savings and only 14%
of workers report that a traditional pension plan will be their
primary source of retirement income. These projected demographic
trends, along with a shift in the burden for funding retirement
needs from governments and employers to individuals, increase
the need for retirement savings and income. We expect greater
demand for additional sources of retirement savings, such as our
annuities and other investment products that will help consumers
supplement their social security benefits with reliable
retirement income.
|
|
|
|
Expanding mass affluent market. As of June
2006, the mass affluent market included 13.7 million
households with investible assets between $250,000 and
$1.0 million, representing 28% of total financial assets.
We believe that the mass affluent population is growing and that
it underutilizes various financial products, such as insurance
to protect assets, annuities to provide adequate income to
support a desired future lifestyle and wealth transfer products
to ensure its legacy. We believe we are well positioned to reach
consumers in this target market given our relationships with
financial institutions and independent agents, which are often
their sources of guidance and advice. As such, we expect
increased demand for our life insurance, variable and fixed
annuity and wealth transfer products.
|
Our
Competitive Strengths
We leverage the following competitive strengths to capitalize on
opportunities in our targeted markets:
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|
|
Innovative and collaborative product development
capabilities. We design innovative products to meet the
changing demands of the market. By working closely with our
distributors, we are able to anticipate opportunities in the
marketplace and rapidly address them. For example, we introduced
Complete, an innovative variable life insurance policy designed
for wealth transfer and centered on minimizing the inherent COI
and thus maximizing the underlying account value. We also
recently introduced our Focus variable annuity, which features
low total cost to the contractholders, well-respected investment
options and simplified product features.
|
|
|
|
High-quality distribution relationships. We
offer consumers access to our products through a national
multi-channel network, including financial institutions,
employee benefits brokers, third party administrators, worksite
specialists, specialty brokers and independent agents. We have
cultivated many of these relationships over decades by treating
our distributors as clients and providing them with outstanding
levels of service. We provide them with products specifically
tailored to their needs, and supported by customized training
and education services for their sales representatives. They
value our reputation for our easy processes, simple forms and
rapid turnaround time. By providing our distributors with
excellent levels of service, we are able to develop strong
relationships and avoid competing on price alone.
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|
Leading group medical stop-loss insurance
provider. We believe we have been a leading
provider of group medical stop-loss insurance since 1976. We
have built a consistently profitable platform with high-levels
of customer service and disciplined underwriting practices. In
the last 25 years, our group medical stop-loss insurance
business has experienced only two calendar years of net losses.
We have driven profitable growth in our Group segment through
disciplined underwriting practices, by
|
75
developing related products, such as our Select Benefits limited
medical benefit product, by using and by making strategic
acquisitions, including, most recently, Medical Risk Managers in
2007. For the nine months ended September 2007, our group
medical stop-loss insurance business drove a favorable loss
ratio while experiencing improved persistency in our Group
segment.
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|
Diverse businesses provide flexibility, earnings stability
and capital efficiency. We have an attractive and diverse
mix of businesses that allows us to make profitability-driven
decisions in each business across various market environments.
In general, our four operating business segments are not
affected in the same way by economic and operating trends. For
example, the level of competitive pricing and performance varies
across our segments over time. We believe that this mix offers
us a greater level of financial stability than many of our
similarly-sized competitors across business and economic cycles.
Our diverse business mix also allows us to reallocate our
resources to product lines that generate the most attractive
returns on capital while reducing our overall capital
requirements.
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Flexible information technology platform integrated with our
distributors. We have a flexible information technology
platform that allows us to seamlessly integrate our products
onto the operating platforms of our distributors, which we
believe provides us with a competitive advantage in attracting
new distributors. We also continuously develop innovative tools
designed to enhance the service levels and operational
performance of our distributors, which strengthens these
relationships. For example, our
ExpressTM
tool allows our distributors to capture all the necessary data
to make products and services instantly available at the point
of sale. We will continue to leverage our information technology
platform to market our current and future product offerings.
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Experienced management team with investor-aligned
compensation. We have a high-quality management team with an
average of 24 years of insurance-industry experience, led
by Randy Talbot who has been our chief executive officer since
1998. Mr. Talbot has spent a significant portion of his
30-year
career in the insurance industry operating an insurance
brokerage, providing him with the knowledge to intimately
understand the needs of our distributors. We have enhanced our
original team with several key additions since the Acquisition,
each of whom brings substantial experience in their discipline.
We also have an experienced board of directors, consisting of
industry professionals who have worked closely with us since the
Acquisition to develop our strategies and operating
philosophies. Our compensation structure aligns
managements incentives with our stockholders through our
long-term incentive plan that rewards long-term growth in
tangible book value and in the intrinsic value of our business.
|
Our
Growth Strategies
To maximize stockholder value, we pursue the following
strategies:
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|
Target large and growing markets. We will
continue to capitalize on favorable demographic trends,
including the growing demand for affordable health insurance,
increasing retirement savings and income needs and an expanding
mass affluent market. For example, our Select Benefits product
allows employers who cannot afford to provide comprehensive
health care coverage to offer some level of benefits to their
employees. Additionally, as consumers live longer after
retirement, their need for life-long financial security is
expanding. We will continue to identify key opportunities within
these markets and provide tailored solutions that address the
evolving needs of these customers.
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|
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|
Broaden and deepen distribution
relationships. Our distribution strategy is to
deliver multiple products through a single point of sale,
thereby leveraging the cost of distribution. We utilize diverse
distribution channels, including financial institutions,
employee benefits brokers, third party administrators, worksite
specialists, specialty brokers and independent agents. We intend
to deepen our long-standing distribution relationships while
adding new large-scale and high quality distribution partners.
As an example, since September 30, 2006, we have increased
our relationships with major financial institutions from 10 to
28 and we have recently signed selling agreements with an
additional 10 key financial institutions. Through this growth,
we currently have approximately 20,000 financial institution
representatives selling our products. We will continue to
leverage our existing relationships by
|
76
|
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|
distributing additional products through our existing
partnerships. Since the Acquisition, we have maintained
distribution staff and new business processing staff to support
higher levels of new sales, making incremental sales relatively
more profitable.
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|
Be innovative in anticipating customer
needs. We work closely with our distributors to
develop customer-responsive products that meet our stringent
return requirements, address our target markets and can be
delivered efficiently across our information technology
platforms. Recent examples include the Focus Variable Annuity
product for retirement savings and Complete, our new Variable
Life product designed for the wealth transfer market. We will
continue to pursue non-traditional avenues of product
development. For example, we recently began offering funding
services to holders of our structured settlements to offer them
an attractive financial alternative. We continually seek to be
the first to improve upon an existing leading product. For
example, we believe we were the first to offer a hybrid BOLI
separate account and an experience rating to customers, both of
which provide greater transparency of the investment portfolio.
We have also introduced a commutation benefit on a SPIA, which
gives the owner greater flexibility to cash out some of his or
her future benefits after a certain period of time.
|
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|
Effectively manage capital. We intend to
manage our capital prudently to maximize our profitability and
long-term growth in stockholder value. Our capital management
strategy is to maintain financial strength through conservative
and disciplined risk management practices while deploying or
returning excess capital as situations warrant. We will also
maintain our conservative investment management philosophy,
which includes holding a high quality investment portfolio and
carefully matching our investment assets against the duration of
our insurance product liabilities.
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|
Pursue complementary acquisitions. We will
continue to seek acquisition opportunities that fit
strategically within our existing business lines, provide us
with a larger distribution presence and meet our stringent
return objectives. For example, our recent acquisition of
Medical Risk Managers has provided us with key benefits in our
group medical stop-loss business. As part of the acquisition, we
acquired a database of underwriting experience, which provides
us with superior underwriting knowledge. We also gained an MGU
that provides us with fee income in addition to access to an
existing book of business, a portion of which we may be able to
integrate with our existing book of group medical stop-loss
business. We believe we have ample financial capacity to remain
a prudent acquirer while maintaining a conservative balance
sheet.
|
Group
Overview
We offer a full range of employment-based benefit products and
services targeted primarily at employers, unions and public
agencies with 50 to 1,000 employees, as well as select
larger groups that meet our targeted pricing and underwriting
parameters. Groups products include group medical
stop-loss insurance sold to employer self-funded health plans;
limited benefits medical insurance for employees not able to
participate in a traditional health plan, such as part-time,
seasonal and temporary workers; group life, accidental death and
dismemberment insurance, and disability products. We purchase
reinsurance coverage to limit our exposure to losses from our
group medical stop-loss, life, short-term disability and
long-term disability products. We retain group medical stop-loss
risk up to $1.0 million and reinsure the remainder. We
reinsure 50% of our Group life risk and cap our liability at
$0.5 million. Our short-term and long-term disability risk
is 100% reinsured.
We sell through several types of distributors within the Group
segment, including third-party administrators or TPAs, employee
benefits brokers, consultants and Administrative Services Only,
or ASO, arrangements. ASOs are fully insured networks that
also offer our group medical stop-loss insurance.
We work closely with employee benefits brokers, consultants and
the employer to design benefit plans to meet the employers
particular requirements. Our customers primarily are small and
mid-size employers that require knowledgeable employee benefits
brokers, consultants and insurance company representatives to
understand their individual financial needs and employee
profiles, and to customize benefit plans that are
77
appropriate for them. We believe our extensive experience and
expertise in group medical stop-loss insurance, limited benefits
medical insurance, group life, accidental death and
dismemberment insurance and disability products provide us with
opportunities to support close broker relationships and to
provide employers innovative and customer-centric benefit plans.
Pricing in the medical stop-loss insurance market has proven to
be cyclical. Over the past two years, we have experienced a
cycle where the market had been offering this product at
competitively low prices. However, we continued our disciplined
medical stop-loss pricing strategy. More recently, we have seen
evidence of the medical stop-loss insurance market firming,
which may suggest a developing trend towards higher pricing for
this product line, based on our experience with previous pricing
cycles.
Products
Group
Medical Stop-Loss
Our group medical stop-loss insurance is provided to employer
self-funded health plans and covers the risk of higher than
expected claims experience. The group medical stop-loss coverage
reimburses for claims in excess of a predetermined amount.
Limited
Medical Benefits
Our limited medical benefits insurance is provided to employers
for health coverage to employees not otherwise eligible to
participate in traditional plans, such as part-time, seasonal
and temporary workers.
Life
Insurance, Accidental Death and Dismemberment
Our group term life insurance product provides benefits in the
event of an insured employees death. The death benefit can
be based upon an individuals earnings or occupation, or
can be fixed at a set dollar amount. Our products also include
optional accidental death and dismemberment coverage as a
supplement to our term life insurance policies. This coverage
provides benefits for an insured employees loss of life,
limb or sight as a result of accidental death or injury.
Disability
Insurance
Our group long-term disability coverage is designed to cover the
risk of employee loss of income during prolonged periods of
disability. Our group short-term disability coverage provides
partial replacement of an insured employees weekly
earnings in the event of disability resulting from an injury or
illness. Benefits can be a set dollar amount or based upon a
percentage of earnings.
Underwriting
and Pricing
We face significant competition in the Group segment operations.
Our competitors include large and highly rated insurance
carriers. Some of these competitors have greater resources than
we do, and many of them offer similar products and use similar
distribution channels. We have consistently written or renewed
business that meets our return requirements, and this discipline
has recently had a slightly negative impact on our market share.
However, this was by design with our focus on profitability.
Competition is based primarily upon product pricing and
features, compensation and benefits structure and support
services offered.
Group insurance pricing reflects the employer groups
claims experience, when appropriate. The risk characteristics of
each employer group are reviewed at the time the policy is
issued and each renewal year thereafter, resulting in ongoing
adjustments to pricing. The key pricing and underwriting
criteria are medical cost trends, the employer groups
demographic composition, including the age, gender and family
composition of the employer groups members, the industry,
geographic location, regional economic trends, plan design and
prior claims experience.
78
Retirement
Services
Overview
Through our Retirement Services segment, we offer fixed and
variable deferred annuities in both the qualified and
non-qualified markets. Qualified contracts include tax-sheltered
annuities (marketed to teachers and not-for-profit
organizations), IRAs, Roth IRAs and Section 457 plans. We
also issue group annuities to qualified retirement plans and
provide record keeping services to qualified retirement plans
invested in mutual funds. We offer these products and services
to a broad range of individual consumers who want to accumulate
tax-deferred assets for retirement, desire a reliable source of
income during their retirement, or seek to protect against
outliving their assets during retirement. We also target the
small to mid-size employer market with cost effective products
and services that provide a broad range of diverse investment
options for employers that offer defined contribution plans.
Although the demand for fixed annuities has been negatively
impacted by the low interest rate environment, we believe that
higher interest rates will result in increased demand for fixed
annuities and other investment products that help consumers
supplement their social security benefits with reliable
retirement income.
We have a variety of fixed annuity products and a broad range of
distribution relationships that position us to increase sales to
consumers looking for stable returns. With our new Focus
variable product, we are positioned to increase sales to
consumers that are looking to maximize earnings and have a
tolerance for some volatility in their underlying investments.
Furthermore, we believe that the small to mid-sized employer
market place will be an area of growth as more employers
eliminate traditional pensions and offer defined contribution
plans with lower administrative costs. As employers drive down
employee costs, we believe they still want to offer competitive
benefit retirement plans so long as the administrative costs are
reasonable. We have partnered with a third party to offer
employers a turnkey 401(k) package of plan administration and
non-proprietary mutual fund investment options that is easy to
sell through financial advisors. In addition, our products are
designed to allow employers to provide their employees with
attractive retirement investments for a relatively low cost.
Furthermore, once those retirement plan customers decide to
retire or rollover their funds, we offer a suite of IRAs, Roth
IRAs, immediate annuities, and other retirement vehicles. It is
our goal to capture and hold those customers by offering
products that address their evolving needs and through excellent
service to our distribution partners and customers.
We develop our annuity products through a rigorous pricing and
underwriting process designed to achieve targeted returns based
upon each products risk profile and our expected rate of
investment returns. We compete for sales of annuities through
competitive pricing policies and innovative product design. For
example, we have introduced a single premium bonus annuity with
a choice of multi-year interest guarantee periods.
We offer our annuities and other investment products primarily
through financial institutions, broker-dealers, independent
agents and financial advisors, and worksite employee benefits
specialists.
Products
Fixed
Annuities
We offer fixed single premium and flexible premium deferred
annuities that provide for a premium payment at time of issue,
an accumulation period and an annuity payout period at some
future date. For example, our fixed deferred annuities include
our Custom product, which has a seven-year surrender charge
penalty period and a choice of one year, three year or five year
interest rate lock periods. During the accumulation period, we
credit the account value of the annuity with interest earned at
an interest rate, called the crediting rate. The crediting rate
is guaranteed generally for one year, or the guarantee period
selected by the contract owner. After each guarantee period, the
crediting rate is subject to change at our discretion (subject
to the minimum guaranteed rate in the contract), based upon
competitive factors, portfolio earnings
79
rate, prevailing market rates and product profitability. Our
fixed annuity contracts are funded by our general account, and
the accrual of interest during the accumulation period is
generally on a tax-deferred basis to the owner. The majority of
our fixed annuity contract owners retain their contracts through
the surrender penalty period. After one year in the annuity
contract, the contract owner may elect to take the accumulated
value of the annuity and convert it to a series of payments that
are received over a selected period of time of not less than
five years.
Our fixed annuity contracts permit the contract owners at any
time during the accumulation period to withdraw all or part of
the premium paid, plus the amount credited to their accounts,
subject to contract provisions such as surrender charges that
vary depending upon the terms of the product. The contracts
impose surrender charges that typically vary from 5.0% to 8.0%
of the amount withdrawn, starting in the year of contract issue
and decreasing to zero over a three to eight-year period. The
contract owner also may withdraw annually up to 10% of the
account value without any contractual penalty. Approximately
$1.7 billion, or 37.2% of the total account value of our
fixed annuities as of September 30, 2007, were subject to
surrender charges.
Historically, withdrawals on fixed annuities have increased
during periods with lower or no surrender charge penalties. Our
Secure fixed annuity product includes surrender charges during
the first eight years of the contract term, with a
30-day
window without such charges at the end of the fourth year. We
issued most of our outstanding Secure fixed annuity contracts in
2003, and accordingly withdrawals on Secure fixed annuity
contracts increased during 2007 as holders exercised withdrawal
rights during the
30-day
window. The account values of our Secure fixed annuity contracts
with respect to which the
30-day
window without surrender charges occurs during 2008 will be less
than during any calendar quarter in 2007.
As market conditions change, we change the initial crediting
rate for newly issued fixed single premium deferred annuities,
or SPDAs. We maintain the initial crediting rate for a minimum
period of one year or the guarantee period, whichever is longer.
Thereafter, we may adjust the crediting rate no more frequently
than once every six months for any given deposit. Most of our
recently issued annuity contracts have minimum guaranteed
crediting rates between 1.0% and 3.0%.
Our earnings from fixed annuities are based upon the spread
between the crediting rate on our fixed annuity contracts and
the returns we earn in our general account on our investment of
premiums.
Variable
Annuities
We offer variable annuities that allow the contract owner to
make payments into a guaranteed-rate account and separate
accounts divided into subaccounts that invest in underlying
investment portfolios. Like a deferred fixed annuity, a deferred
variable annuity has an accumulation period and a payout period.
Although the fixed-rate account is credited with interest in a
manner similar to a fixed deferred annuity, there is no
guaranteed minimum rate of return for investments in the
subaccounts, and the contract owner bears the entire risk
associated with the performance of these subaccounts, subject to
the guaranteed minimum death benefit or any other benefit
offered under the contract.
Similar to our fixed annuities, our variable annuity contracts
permit the contract owner to withdraw all or part of the
premiums paid, plus the amount credited to the contract
owners account, subject to contract terms such as
surrender charges. The cash surrender value of a variable
annuity contract depends upon the value of the assets that have
been allocated to the contract, how long those assets have been
in the contract and the investment performance of the
subaccounts to which the contract owner has allocated assets.
Variable annuities provide us with fee revenue in the form of
flat-fee charges, mortality and expense risk charges, and asset
related administration charges. The mortality and expense risk
charge and asset related administration charge equal a
percentage of the contract owners assets in the separate
account and typically range from 1.00% to 1.55% per annum. In
addition, some contracts may offer the option for contract
owners to purchase additional features, such as guaranteed
minimum death benefits, for additional fees that are paid for
through charges equal to a percentage of the contract
owners assets. Substantially all of our guaranteed
80
minimum death benefit risk on our individual variable annuities
is reinsured. We continue to evaluate our pricing of such
features and intend to change prices if appropriate.
We recently introduced the Symetra Focus Variable Annuity, which
we believe is one of the most cost-effective such products on
the market. Focus is one of the few variable annuities available
featuring index investment options from Vanguard. The
products low-cost structure and well-respected investment
options are designed to benefit the clients. The average total
cost with Focus is 36% less than the industry average according
to Variable Annuity Research and Data Service, a leading source
of variable annuities data.
We continually review potential new fixed and variable annuity
products and pursue only those where we believe we can achieve
targeted returns in light of the risks involved. Unlike several
of our competitors, we have not offered variable annuity
products with guaranteed minimum withdrawal benefits, or GMWB,
or with guaranteed minimum income benefits, or GMIB.
Corporate
Retirement Plans
We offer a wide range of employer-sponsored retirement plans,
which include 401(k) plans, including traditional, Safe Harbor
and SIMPLE profit sharing plans, 403(b) plans and
Section 457 plans.
Additional retirement plans can be purchased by individual
business owners. These include one-person 401(k) plans designed
for business owners with no employees, other than a spouse and
defined benefit plans, commonly known as traditional retirement
plans, designed to distribute a specific monthly benefit at
retirement. The formula used to calculate this benefit can be
based on many factors, but most commonly on salary and years of
service. Contributions can only be made by the employer and are
a federally tax-deductible business expense.
Underwriting
and Pricing
We generally do not use an underwriting selection process for
our annuity products. We price our products based upon our
expected investment returns and our expectations for mortality,
longevity and the probability that a policy or contract will
remain in-force from one period to the next, or persistency, for
the group of our contract owners as a whole, taking into account
mortality improvements in the general population and our
historical experience. We price deferred annuities by analyzing
longevity and persistency risk, volatility of expected earnings
on our assets under management, risk profile of the product,
special reserving and capital requirements, and the expected
expenses we will incur.
Income
Annuities
Overview
We offer income annuities, which guarantee a series of payments
that continue either for a certain number of years or for the
remainder of an annuitants life.
Also, we offer structured settlement contracts that provide an
alternative to a lump sum settlement, generally in a personal
injury lawsuit or workers compensation claim, and
typically are purchased by property and casualty insurance
companies for the benefit of an injured claimant. The structured
settlements provide scheduled payments over a fixed period or,
in the case of a life-contingent structured settlement, for the
life of the claimant with a guaranteed minimum period of
payments.
Products
Income
Annuities
Our income annuities differ from deferred annuities in that they
provide for contractually guaranteed payments that generally
begin within one year of issue. Income annuities generally do
not provide for surrender or policy loans by the contractholder,
and therefore they provide us with the opportunity to match
closely the underlying investment of the deposit received to the
cash benefits to be paid under a policy and provide for an
anticipated margin for expenses and profit, subject to credit,
reinvestment and, in some cases,
81
longevity risk. We have recently added a liquidity feature that
allows the contractholder to withdraw portions of the future
payments.
The most common types of income annuities are the
life-contingent annuity, which makes payments for the life of an
annuitant, the joint and survivor annuity, which continues to
make payments to a second annuitant, such as a spouse, after the
death of the contractholder, and period certain annuities, which
generally make payments for a minimum period from five to
30 years even if the contractholder dies within the certain
period. Income annuities typically are sold to people that are
near, at, or in retirement. We anticipate higher sales of income
annuities with the demographic shift toward more people reaching
retirement age and their need for dependable retirement income
that lasts their entire life.
Structured
Settlements
Structured settlement contracts provide an alternative to a lump
sum settlement, generally in a personal injury lawsuit or
workers compensation claim, and typically are purchased by
property and casualty insurance companies for the benefit of an
injured claimant. The structured settlements provide scheduled
payments over a fixed period or, in the case of a
life-contingent structured settlement, for the life of the
claimant with a guaranteed minimum period of payments.
Structured settlement contracts also may provide for irregularly
scheduled payments to coincide with anticipated medical or other
claimant needs. These settlements offer tax-advantaged,
long-term financial security to the injured party and facilitate
claim settlement for the property and casualty insurance
carrier. Structured settlement contracts are long-term in
nature, guarantee a fixed benefit stream and generally do not
permit surrender or borrowing against the amounts outstanding
under the contract. In 2005, we introduced funding services to
clients with financial circumstances that may have changed from
the time they originally received a structured settlement. Our
funding service provides an immediate lump sum payment to
replace future benefit payments and includes coordinating the
court approval process.
Our current financial strength ratings limit our ability to
offer structured settlement contracts. If our principal life
insurance company subsidiary, Symetra Life Insurance Company,
increases its financial strength ratings from A
(Excellent) to A+ (Excellent) from A.M. Best,
courts will be more willing to approve structured settlement
contract arrangements from us. Improving this key rating will
allow us to participate fully in this market.
Underwriting
and Pricing
In substandard cases, we maintain medical underwriting for these
annuities. We price income annuities and structured settlements
using industry produced annuity mortality information, our
mortality experience and assumptions regarding continued
improvement in annuitant longevity, as well as assumptions
regarding investment yields at the time of issue and thereafter.
Our structured settlement contracts and traditional income
annuities can be underwritten in our medical department by
medical doctors and other trained medical personnel.
Individual
Overview
Individual life insurance provides protection against financial
hardship after the death of an insured by providing cash
payments to the beneficiaries of the policyholder. Single
premium life and universal life insurance products also provide
an efficient way for assets to be transferred to heirs.
Our principal life insurance product is term life, which
provides life insurance coverage with guaranteed level premiums
for a specified period of time with little or no buildup of cash
value that is payable upon lapse of the coverage. We have been a
provider of term life insurance since 1957. In addition to term
life insurance, we offer universal life insurance products,
which are designed to provide protection for the entire life of
the insured and may include a buildup of cash value that can be
used to meet the policyholders particular financial needs
during the policyholders lifetime.
82
We price our traditional insurance policies based primarily upon
our own historical experience in the risk categories that we
target. Our pricing strategy is geared toward individuals in
preferred risk categories and offer them attractive products at
competitive prices. Persons in preferred risk categories include
healthier individuals who generally have family histories that
do not present increased mortality risk. We also have
significant expertise in evaluating people with health problems
and offer appropriately priced coverage for people who meet our
underwriting criteria.
We offer our life insurance products primarily through three
distribution channels: independent agents and financial
advisors, worksite benefit brokers and financial institutions,
and we offer BOLI through specialty agents. We believe there are
opportunities to expand our sales through each of these
distribution channels.
Products
Term Life
Insurance
Our term life insurance policies provide a death benefit if the
insured dies while the coverage is in force. Term life policies
have little to no cash value buildup and therefore rarely have a
payment due if and when a policyholder decides to lapse the
policy.
Our primary term life insurance products have guaranteed level
premiums for initial terms of 10, 15, 20 or 30 years. After
the guaranteed period expires, premiums increase annually and
the policyholder has the option to continue under the current
policy by paying the increased premiums without demonstrating
insurability or qualifying for a new policy by submitting again
to the underwriting process. Coverage continues until the
insured reaches the policy expiration age or the policyholder
ceases to make premium payments or otherwise terminates the
policy, including potentially converting to a permanent plan of
insurance. The termination of coverage is called a lapse. For
newer policies, we seek to reduce lapses at the end of the
guaranteed period by gradually grading premiums to the attained
age scale of the insured over the five years following the
guaranteed period. After this phase-in period, premiums continue
to increase as the insured ages.
Because of how we design and price our term insurance, we have
limited the impact from statutory reserves mandated by the
valuation of life insurance policies model regulation, also
known in the insurance industry as XXX deficiency reserves.
BOLI
Our life insurance business also includes BOLI. During the past
few years, many of the nations largest financial
institutions have purchased several billion dollars of BOLI as a
means of generating the cash flow needed to fund benefit
liabilities. A BOLI program can create significant assets and
earnings gains that can closely match the emerging liabilities.
BOLI is a highly stable, low-risk source of financing that can
offer net annual after-tax returns that are generally higher
than traditional bank investments.
Universal
Life Insurance
Our universal life insurance policies provide policyholders with
lifetime death benefit coverage, the ability to accumulate
assets on a flexible, tax-deferred basis, and the option to
access the cash value of the policy through a policy loan,
partial withdrawal or full surrender. Our universal life
products also allow policyholders to adjust the timing and
amount of premium payments. We credit premiums paid, less
certain expenses, to the policyholders account and from
that account deduct regular expense charges and certain risk
charges, known as COI, which generally increase from year to
year as the insured ages. Our universal life insurance policies
accumulate cash value that we pay to the insured when the policy
lapses or is surrendered. Most of our universal life policies
also include provisions for surrender charges for early
termination and partial withdrawals.
We credit interest on policyholder account balances at a rate
determined by us, but not less than a contractually guaranteed
minimum. Our in-force universal life insurance policies
generally have minimum guaranteed crediting rates ranging from
3.0% to 4.5% for the life of the policy.
83
Because of how we design and price our universal life insurance,
we have limited the impact from AXXX deficiency reserves. We
sell only two products with secondary guarantees and these are
limited to the first 20 years of the policy.
Worksite
Life
Our worksite life product is voluntary universal life insurance
coverage that provides lifetime death benefit protection if
minimum premium payments are made. The premiums are paid by
payroll deduction while the employee remains with the employer
and the product is portable after the policyowner leaves the
employer. Policies are available for employees, their spouses,
children and grandchildren.
The product has an Automatic Increase Option (AIO) that allows
the policyowner to elect at issue to have the option of paying
an incremental amount in future policy years to obtain
additional coverage. We credit interest on policyholder account
balances at a rate determined by us, subject to the guaranteed
minimum interest rate of 2.0%.
Because of how we design and price our worksite life insurance,
we have limited the impact from AXXX deficiency reserves.
Variable
Life Insurance
Our variable life insurance policies provide policyholders with
lifetime death benefit coverage, the ability to accumulate
assets on a flexible, tax-deferred basis, and the option to
access the cash value of the policy through a policy loan,
partial withdrawal or full surrender. We offer a variable
universal life insurance product with either a fixed or
increasing death benefit for traditional life insurance needs
and policyholders are allowed to adjust the timing and amount of
premium payments. We also offer a variable life insurance
product that is designed to maximize cash value accumulation by
minimizing the COI charges. This product provides the minimum
amount of insurance necessary to qualify as life insurance under
the IRS tax code and has a variable death benefit that adjusts
based on the investment performance of the underlying account
value. This product is designed for the financial planning
market, primarily for wealth transfer purposes for high net
worth individuals.
Because of how we design and price our variable universal life
insurance, we have limited the impact from AXXX deficiency
reserves. We sell only one product with secondary guarantees.
Underwriting
and Pricing
We believe effective underwriting and pricing are significant
drivers of the profitability of our life insurance business, and
we have established rigorous underwriting and pricing practices
designed to maximize our profitability. Our fully underwritten
term life insurance is reinsured 50% to 85%, which limits
retained mortality risk for the company. We set pricing
assumptions for expected claims, lapses, investment returns,
expenses and customer demographics based on our own relevant
experience and other factors. Our strategy is to price our
products competitively for our target risk categories and not
necessarily to be equally competitive in all categories.
Our fully underwritten policies place each insurable life
insurance applicant in one of eight primary risk categories,
depending upon current health, medical history and other
factors. Each of these eight categories has specific health
criteria, including the applicants history of using
nicotine products. We consider each life insurance application
individually and apply our guidelines to place each applicant in
the appropriate risk category, regardless of face value or net
amount at risk. We may decline an applicants request for
coverage if the applicants health or other risk factor
assessment is unacceptable to us. We do not delegate
underwriting decisions to independent sales intermediaries.
Instead, all underwriting decisions are made by our own
underwriting personnel or by our automated underwriting system.
We often share information with our reinsurers to gain their
insights on potential mortality and underwriting risks and to
benefit from their broad expertise. We use the information we
obtain from the reinsurers to help us develop effective
strategies to manage our underwriting risks. For specific
markets where fully underwritten products are not preferred by
the
84
distributor, we have developed specially priced products to
support a simplified issue process. This process
enables us to reach applicants not called on by traditional
insurance agents. Simplified issue contracts are
typically generated via worksite sales to employees and sales to
retail bank customers. Insurance amounts are limited and
separate underwriting guidelines are applied for simplified
issue policies.
Other
Our Other segment consists primarily of unallocated surplus net
investment income and unallocated operating expenses including
interest expense on debt, the results of small, non-insurance
businesses that are managed outside of our operating segments
and inter segment elimination entries.
Operating
Subsidiaries
Symetra Financial Corporation is a holding company, and we
conduct business through our subsidiaries. Our primary operating
subsidiaries are as follows:
|
|
|
|
|
Name
|
|
Operating Segment
|
|
Other Information
|
|
Symetra Life Insurance Company
|
|
All segments
|
|
Primary operating subsidiary
|
First Symetra National Life Insurance Company of New York
|
|
Primarily Retirement Services
|
|
|
Clearscape Funding Corporation
|
|
Other
|
|
|
Employee Benefit Consultants, Inc.
|
|
Group
|
|
Third party administrator
|
Symetra Assigned Benefits Service Company
|
|
Income Annuities
|
|
Structured settlements
|
Symetra Securities, Inc.
|
|
Retirement Services
|
|
Broker-dealer; distributor
|
Symetra Investment Services, Inc.
|
|
Other
|
|
Broker-dealer; distributor
|
Medical Risk Managers, Inc.
|
|
Group
|
|
Managing general underwriter
|
Health Network Strategies, LLC
|
|
Group
|
|
60% owned joint venture
|
Distribution
We distribute our products through an extensive and diversified
distribution network. We believe access to a variety of
distribution channels enables us to respond effectively to
changing consumer needs and distribution trends. We compete with
other financial services companies to attract and retain
relationships in each of these channels. Some of the factors
that lead to our success in competing for sales through these
channels include amount of sales commissions and fees we pay,
breadth of our product offerings, our perceived stability and
our financial strength ratings, marketing and training we
provide and maintenance of key relationships with individuals at
those firms. We believe we have a well diversified multi-channel
distribution network to capture a broad share of the distributor
and consumer markets for insurance and financial services
products.
Our Group segment distributes their products through the
following channels:
|
|
|
|
|
employee benefits brokers and TPAs; and
|
|
|
|
worksite specialists.
|
Our Individual, Retirement Services and Income Annuities
segments distribute their products through the following
channels:
|
|
|
|
|
financial institutions;
|
85
|
|
|
|
|
worksite specialists; and
|
|
|
|
brokerage general agencies and independent agents.
|
The following table sets forth our annualized first-year
premiums and deposits on new policies in our Group, Retirement
Services, Income Annuities and Individual segments:
Sales for
the Year Ended December 31, 2006
by Distribution Channel
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
|
|
|
|
|
|
|
Retirement
|
|
|
Income
|
|
|
|
|
Distribution Channel
|
|
Group(1)
|
|
|
Services(2)
|
|
|
Annuities(3)
|
|
|
Individual(4)
|
|
|
|
(Unaudited)
|
|
|
|
(In millions)
|
|
|
Financial institutions
|
|
$
|
|
|
|
$
|
374.8
|
|
|
$
|
14.8
|
|
|
$
|
1.4
|
|
Employee benefits brokers/TPAs
|
|
|
59.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Worksite specialists
|
|
|
9.2
|
|
|
|
160.3
|
|
|
|
5.4
|
|
|
|
1.6
|
|
Independent agents/BGAs
|
|
|
|
|
|
|
38.1
|
|
|
|
65.3
|
|
|
|
6.2
|
|
Structured settlements/BOLI
|
|
|
|
|
|
|
|
|
|
|
11.1
|
|
|
|
|
|
|
|
|
(1) |
|
Includes medical stop-loss, health insurance and life and
disability and limited medical benefits. |
|
(2) |
|
Includes deferred and variable annuities and retirement programs. |
|
(3) |
|
Includes immediate annuities and structured settlements. |
|
(4) |
|
Includes term, universal, single premium, BOLI and variable life
insurance. |
Financial Institutions. We have agency
agreements with 28 key financial institutions, accounting for
approximately 20,000 agents and registered representatives in
50 states. We use financial institutions to distribute a
significant portion of our fixed and variable annuities, as well
as a growing portion of our life insurance policies.
Two financial institutions, Washington Mutual Financial Services
and U.S. Bank, accounted for a significant portion of our
total sales in 2006, with each selling primarily fixed annuity
products. Each of these two distributors operates under an
agency agreement with us. Each agreement may be terminated at
any time, for any reason, upon thirty days notice. We pay each
distributor commissions and other compensation at various rates
depending on the product sold. We retain the right to change
compensation paid under these agreements with respect to future
sales. Generally, if premiums are returned to the policyholder
or withdrawals are made during the first contract year, the
distributor is obligated to pay back all or a portion of the
commissions and other compensation received for such product.
Employee Benefits Brokers, Third-Party
Administrators. We distribute most of our Group
segment products through approximately 2,500 agencies in the
employee benefits broker/third-party administrator channel. This
distribution channel is also supported by approximately 60 of
our employees located strategically in a nationwide network of
24 regional offices.
Worksite Specialists. We distribute limited
benefits medical insurance of our Group segment, retirement
programs of our Retirement Services segment, and voluntary life
insurance of our Individual segment through the worksite
channel. Employer sponsored retirement plans are sold through
more than 1,100 independent employee benefits brokers and
registered representatives from approximately 870 agencies.
Limited benefits medical insurance and voluntary life insurance
are sold through approximately 390 independent retail brokers,
agents and consultants in 49 states and the District of
Columbia.
Independent Agents, Brokerage General
Agencies. We distribute life insurance and fixed
and deferred annuities through approximately 21,000 independent
agents located throughout the U.S. from approximately
12,500 different agencies. These independent agents market our
products and those of other insurance companies.
86
Structured Settlements. We distribute
structured settlements through approximately 570 settlement
consultants representing 67 agencies in 49 states and the
District of Columbia. We believe our ability to participate and
compete effectively in the sales of structured settlements will
depend on our ability to achieve upgrades from the ratings
agencies.
Marketing
We promote and differentiate our products and services through
the breadth of our product offerings, technology services,
specialized support for our distributors and innovative
marketing programs to help distributors grow their business with
our products.
Since the completion of the Acquisition, we have customized our
marketing approach to promote our new brand to distributors of
our products whom we believe have the most influence in our
customers purchasing decisions. We chose to build our
brand among this constituency in three phases: an outreach to
our employees to understand and deliver on the new brand, an
outreach to our independent producers in our sales channels and
a prudent consumer outreach. These programs include advertising
in trade and business periodicals, consumer advertising with a
small, prudent budget leveraged by its ties to our producers,
outreach from a media perspective to both trade and consumer
periodicals and community outreach to include partnering with
distributors.
At the product level, we simplify the sales process so that the
recommendation to purchase our product is as easy and seamless
as possible. This is accomplished through our product
collateral, technology in the sales process and ease of service
after the sale.
We seek to build recognition of our new brand and maintain
strong relationships with leading distributors by providing a
high level of specialized support, such as product training,
sales solutions, and financial product design for targeted
customers. In addition, we host several annual meetings with
independent sales intermediaries to gather their feedback on
industry trends, new product suggestions and ways to enhance our
relationships with distributors.
Reserves
Overview
We calculate and maintain reserves for estimated future benefit
payments to our policyholders and contractholders in accordance
with U.S. GAAP. We establish reserves at amounts which we
expect to be sufficient to satisfy our policy obligations. We
release these reserves as those future obligations are
extinguished. The reserves we establish necessarily reflect
estimates and actuarial assumptions with regard to our future
experience. These estimates and actuarial assumptions involve
the exercise of significant judgment. Our future financial
results depend significantly upon the extent to which our actual
future experience is consistent with the assumptions we have
used in pricing our products and determining our reserves. Many
factors can affect future experience, including economic and
social conditions, inflation, healthcare costs, changes in
doctrines of legal liability and damage awards in litigation.
Therefore, we cannot determine with complete precision the
ultimate amounts we will pay for actual future benefits or the
timing of those payments.
Individual
and Group Life Insurance and Group Health
Insurance
We establish reserves for life insurance policies based upon
generally recognized actuarial methods. We use mortality tables
in general use in the U.S., modified where appropriate to
reflect relevant historical experience and our underwriting
practices. Persistency, expense and interest rate assumptions
are based upon relevant experience and expectations for future
development.
The liability for policy benefits for universal life insurance
and BOLI policies is equal to the balance that accrues to the
benefit of policyholders, including credited interest, plus any
amount needed to provide for additional benefits. We also
establish reserves for amounts that we have deducted from the
policyholders
87
balance to compensate us for services to be performed in future
periods. The BOLI life reserves were reset to fair value on the
date of acquisition, August 2, 2004.
Our reserves for unpaid group life and health insurance claims,
including our stop-loss medical and other lines, are estimates
of the ultimate net cost of both reported losses that have not
yet been settled and incurred but as yet unreported losses.
Reserves for IBNR claims are based upon historic incidence
rates, severity rates, reporting delays and any known events
which we believe will materially affect claim levels.
Reserves for long-term disability claims are based upon factors
including recovery, mortality, expenses, Social Security and
other benefit offsets, and investment income. They represent the
actuarial present value of benefits and associated expenses for
current claims, reported claims that have not yet completed the
applicable elimination period and for covered disabilities that
have been incurred but have not yet been reported. Claims on
long-term disability insurance policies consist of payments to
be made periodically, generally monthly, in accordance with the
contractual terms of the policy.
Retirement
Services and Income Annuities
For our investment contracts, including annuities and guaranteed
investment contracts, contractholder liabilities are equal to
the accumulated contract account values, which generally consist
of an accumulation of deposit payments, less withdrawals, plus
investment earnings and interest credited to the account, less
expense, mortality, and profit charges, if applicable. We also
maintain a separate reserve for any expected future payments in
excess of the account value due to the potential death of the
contractholder. The reserves were reset to fair value on
August 2, 2004.
Reserves for future policy benefits on our immediate fixed
annuity contracts are calculated based upon actuarial
assumptions regarding the interest to be earned on the assets
underlying the reserves and, if applicable, the annuitants
life expectancy. The reserves were reset to fair value on
August 2, 2004 with adjustments to future interest and
mortality assumptions.
Investments
Overview
Our investment portfolios are currently managed under an
agreement with White Mountains Advisors LLC, or WM Advisors, a
registered investment adviser that is owned by White Mountains
Insurance Group, Ltd. Prior to the completion of this
transaction we will enter into an amended agreement with WM
Advisors and a new agreement with Prospector Partners, LLC, or
Prospector. See Certain Relationships and Related
Transactions. WM Advisors and Prospector are
value-oriented investment managers whose overall investment
objective is to consistently achieve positive results and to
maximize long-term results with a focus on downside protection,
all within client constraints. Among the keys to their success
are an emphasis on capital preservation, a strong focus on
fundamental, value-oriented security selection and quick action
as a securitys outlook changes. Their moderate size allows
them to remain selective and opportunistic in implementing this
approach. WM Advisors has entered into two sub-advisory
agreements with Principal Global Investors, or Principal, and
Pioneer Investment Management, or Pioneer, to perform the
following:
|
|
|
|
|
Principals objective is to invest in investment grade
private placements with target average lives of three to
30 years.
|
|
|
|
Pioneers investment objective is to provide a consistently
high current yield, maintain preservation of principal and,
provided the first two objectives are met, seek to achieve a
competitive total rate of return relative to the Merrill Lynch
U.S. High Yield BB/B combined index.
|
Prospectors investment strategy is to maximize absolute
total return through investments in a variety of equity and
equity-related instruments, including convertible preferred and
convertible debt securities. Using a value orientation,
Prospector invests in relatively concentrated positions in the
United States and other developed markets. Prospectors
philosophy is to invest for total risk-adjusted return using a
bottom-up,
value discipline. Preservation of capital is of the utmost
importance.
88
In addition, we have a mortgage loan department that originates
new commercial mortgages and manages our existing commercial
mortgage loan portfolio. The commercial mortgage holdings are
secured by first-mortgage liens on income-producing commercial
real estate, primarily in the retail, industrial, and office
building sectors.
We invest primarily in fixed maturities, including government,
municipal and corporate bonds, mortgage-backed and other
asset-backed securities and mortgage loans on commercial real
estate. We also invest in short-term securities and other
investments, including a position in equity securities. In all
cases, investments for our insurance subsidiaries are required
to comply with restrictions imposed by applicable laws and
insurance regulatory authorities.
Our investment department includes accounting, reporting and
analysis functions. We establish investment policies and
strategies, as well as reviewing portfolio performance and
asset-liability management allocations. We incurred expenses for
investment management and related administrative services of
$24.0 million for 2006 and $22.9 million for 2005.
Our primary investment objective is to meet our obligations to
policyholders and contractholders while increasing value to our
stockholders by investing in a diversified portfolio of
high-quality, income producing securities and other assets. Our
investment strategy for our non-equity portfolio seeks to
optimize investment income without relying on realized
investment gains. Our strategy for our equity portfolio is to
maximize total return. We deliberately forego investment income
to receive realized and unrealized investment gains from our
equity investments.
We are exposed to two primary sources of investment risk. One of
these investment risks is credit risk, and is associated with
the uncertainty of the continued ability of a given issuer to
make timely payments of principal and interest. Another
investment risk is interest rate risk, where market price and
cash flow variability are associated with changes in market
interest rates.
We manage credit risk by analyzing issuers, transaction
structures and real estate properties. We use analytic
techniques to monitor credit risk. For example, we regularly
measure the probability of credit default and estimated loss in
the event of such a default, which provides us with early
notification of worsening credit. If an issuer downgrade causes
our holdings of that issuer to exceed our risk thresholds, we
automatically undertake a detailed review of the issuers
credit. We also manage credit risk through industry and issuer
diversification and asset allocation practices. For commercial
real estate loans, we manage credit risk through geographic and
product type diversification and asset allocation. We routinely
review different issuers and sectors and conduct more formal
quarterly portfolio reviews.
We mitigate interest rate risk through rigorous management of
the relationship between the duration of our assets and the
duration of our liabilities, seeking to minimize risk of loss in
both rising and falling interest rate environments.
For a summary of the composition of our investment portfolio see
Managements Discussion and Analysis of Financial
Condition and Results of Operations
Investments.
Fixed
Maturities
Fixed maturities consist principally of publicly traded and
privately placed debt securities, and represented 92.4% and
92.7% of invested assets as of September 30, 2007 and
December 31, 2006, respectively.
Based upon estimated fair value, public fixed maturities
represented 95.8% of total fixed maturities as of
September 30, 2007. Private fixed maturities represented
4.2% of total fixed maturities as of September 30, 2007. We
invest in privately placed fixed maturities in an attempt to
enhance the overall value of the portfolio, increase
diversification and obtain higher yields than can ordinarily be
obtained with comparable public market securities.
There are several credit ratings of the nationally recognized
statistical rating organizations such as S&P, Moodys
and Fitch and the Securities Valuation Office of the NAIC for
marketable bonds. The following
89
tables present our unaudited public, private and aggregate fixed
maturities by S&P credit ratings and the equivalent NAIC
designation, as well as the percentage, based upon estimated
fair value, that each designation comprises:
Fixed
Maturities Credit Quality
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2007
|
|
|
As of December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
Amortized
|
|
|
|
|
|
Total
|
|
|
Amortized
|
|
|
|
|
|
Total
|
|
S&P
|
|
NAIC
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Fair Value
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Fair Value
|
|
|
|
(In millions)
|
|
|
AAA
|
|
|
1
|
|
|
$
|
5,285.4
|
|
|
$
|
5,252.7
|
|
|
|
33.7
|
%
|
|
$
|
5,192.8
|
|
|
$
|
5,160.5
|
|
|
|
32.1
|
%
|
AA
|
|
|
1
|
|
|
|
1,097.5
|
|
|
|
1,083.7
|
|
|
|
7.0
|
|
|
|
1,112.3
|
|
|
|
1,122.8
|
|
|
|
7.0
|
|
A
|
|
|
1
|
|
|
|
3,524.9
|
|
|
|
3,496.1
|
|
|
|
22.4
|
|
|
|
3,639.2
|
|
|
|
3,653.4
|
|
|
|
22.8
|
|
BBB
|
|
|
2
|
|
|
|
4,610.5
|
|
|
|
4,508.6
|
|
|
|
28.9
|
|
|
|
4,838.3
|
|
|
|
4,782.3
|
|
|
|
29.8
|
|
BB
|
|
|
3
|
|
|
|
302.8
|
|
|
|
310.6
|
|
|
|
2.0
|
|
|
|
394.9
|
|
|
|
419.4
|
|
|
|
2.6
|
|
B
|
|
|
4
|
|
|
|
280.3
|
|
|
|
269.9
|
|
|
|
1.7
|
|
|
|
253.9
|
|
|
|
256.5
|
|
|
|
1.6
|
|
CCC
|
|
|
5
|
|
|
|
35.7
|
|
|
|
34.8
|
|
|
|
0.2
|
|
|
|
23.5
|
|
|
|
23.5
|
|
|
|
0.2
|
|
D
|
|
|
6
|
|
|
|
0.9
|
|
|
|
1.9
|
|
|
|
0.0
|
|
|
|
1.1
|
|
|
|
2.2
|
|
|
|
0.0
|
|
NR
|
|
|
|
|
|
|
636.1
|
|
|
|
629.1
|
|
|
|
4.1
|
|
|
|
630.6
|
|
|
|
629.3
|
|
|
|
3.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
15,774.1
|
|
|
$
|
15,587.4
|
|
|
|
100.0
|
%
|
|
$
|
16,086.6
|
|
|
$
|
16,049.9
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the amortized cost and estimated
fair value of our fixed maturities by contractual maturity dates
as of the dates indicated, which have been derived from our
unaudited consolidated financial statements for the nine months
ended September 30, 2007 and from our audited consolidated
financial statements for the year ended December 31, 2006:
Maturity
Table
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
|
December 31, 2006
|
|
|
|
Amortized
|
|
|
Estimated
|
|
|
Amortized
|
|
|
Estimated
|
|
Years to Maturity
|
|
Cost
|
|
|
Fair Value
|
|
|
Cost
|
|
|
Fair Value
|
|
|
|
(In millions)
|
|
|
Due in one year or less
|
|
$
|
307.6
|
|
|
$
|
306.8
|
|
|
$
|
377.1
|
|
|
$
|
374.6
|
|
Due after one year through five years
|
|
|
2,692.5
|
|
|
|
2,665.9
|
|
|
|
2,655.7
|
|
|
|
2,613.7
|
|
Due after five years through ten years
|
|
|
2,556.7
|
|
|
|
2,502.3
|
|
|
|
2,746.5
|
|
|
|
2,701.7
|
|
Due after ten years
|
|
|
5,718.9
|
|
|
|
5,651.3
|
|
|
|
5,919.7
|
|
|
|
6,014.2
|
|
Mortgage-backed securities
|
|
|
4,498.4
|
|
|
|
4,461.1
|
|
|
|
4,387.6
|
|
|
|
4,345.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
15,774.1
|
|
|
$
|
15,587.4
|
|
|
$
|
16,086.6
|
|
|
$
|
16,049.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We diversify our fixed maturities by security sector. The
following table sets forth the estimated fair value of our fixed
maturities by sector, as well as the percentage of the total
fixed maturities each sector comprises of the total as of the
dates indicated, which have been derived from our unaudited
consolidated financial statements for the nine months ended
September 30, 2007 and from our audited consolidated
financial statements for the year ended December 31, 2006:
90
Sector
Table
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
|
December 31, 2006
|
|
|
|
Estimated
|
|
|
% of
|
|
|
Estimated
|
|
|
% of
|
|
Security Sector
|
|
Fair Value
|
|
|
Total
|
|
|
Fair Value
|
|
|
Total
|
|
|
|
(In millions)
|
|
|
U.S. Government and agencies
|
|
$
|
188.7
|
|
|
|
1.2
|
%
|
|
$
|
157.9
|
|
|
|
1.0
|
%
|
State and political subdivisions
|
|
|
498.5
|
|
|
|
3.2
|
|
|
|
670.9
|
|
|
|
4.2
|
|
Foreign governments
|
|
|
136.6
|
|
|
|
0.9
|
|
|
|
208.9
|
|
|
|
1.3
|
|
Corporate securities
|
|
|
10,302.5
|
|
|
|
66.1
|
|
|
|
10,666.5
|
|
|
|
66.4
|
|
Mortgage-backed securities
|
|
|
4,461.1
|
|
|
|
28.6
|
|
|
|
4,345.7
|
|
|
|
27.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
15,587.4
|
|
|
|
100.0
|
%
|
|
$
|
16,049.9
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the unaudited estimated fair
value by major industry types that comprise our fixed maturities
holdings as of the dates indicated, based primarily on standard
industrial codes:
Industry
Table
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
|
December 31, 2006
|
|
|
|
Estimated
|
|
|
% of
|
|
|
Estimated
|
|
|
% of
|
|
Security Sector
|
|
Fair Value
|
|
|
Total
|
|
|
Fair Value
|
|
|
Total
|
|
|
|
(In millions)
|
|
|
Consumer discretionary
|
|
$
|
913.0
|
|
|
|
5.9
|
%
|
|
$
|
1,012.4
|
|
|
|
6.3
|
%
|
Consumer staples
|
|
|
1,342.6
|
|
|
|
8.6
|
|
|
|
1,247.7
|
|
|
|
7.8
|
|
Energy
|
|
|
464.0
|
|
|
|
3.0
|
|
|
|
650.4
|
|
|
|
4.0
|
|
Financials
|
|
|
4,020.5
|
|
|
|
25.8
|
|
|
|
3,882.2
|
|
|
|
24.2
|
|
Foreign governments
|
|
|
136.6
|
|
|
|
0.9
|
|
|
|
193.7
|
|
|
|
1.2
|
|
Health care
|
|
|
483.3
|
|
|
|
3.1
|
|
|
|
457.3
|
|
|
|
2.8
|
|
Industrials
|
|
|
1,374.5
|
|
|
|
8.8
|
|
|
|
1,325.1
|
|
|
|
8.3
|
|
Information technology
|
|
|
176.8
|
|
|
|
1.1
|
|
|
|
186.7
|
|
|
|
1.1
|
|
Internal/other
|
|
|
22.4
|
|
|
|
0.1
|
|
|
|
23.1
|
|
|
|
0.1
|
|
Materials
|
|
|
713.2
|
|
|
|
4.6
|
|
|
|
694.7
|
|
|
|
4.3
|
|
Supranationals
|
|
|
9.8
|
|
|
|
0.0
|
|
|
|
24.2
|
|
|
|
0.2
|
|
Telecommunication services
|
|
|
593.2
|
|
|
|
3.8
|
|
|
|
688.1
|
|
|
|
4.3
|
|
U.S. federal government
|
|
|
2,848.5
|
|
|
|
18.3
|
|
|
|
2,994.4
|
|
|
|
18.7
|
|
U.S. municipals
|
|
|
498.5
|
|
|
|
3.2
|
|
|
|
571.1
|
|
|
|
3.6
|
|
Utilities
|
|
|
1,990.5
|
|
|
|
12.8
|
|
|
|
2,098.8
|
|
|
|
13.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
15,587.4
|
|
|
|
100.0
|
%
|
|
$
|
16,049.9
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2007 our combined
corporate bond holdings in the ten issuers in which we had the
greatest exposure was $966.8 million, or approximately 5.7%
of our total investments as of such date. Our exposure to the
largest single issuer of corporate bonds held as of
September 30, 2007 was $170.9 million, which was 1.0%
of our total investments as of such date.
Mortgage-backed,
Asset-backed Securities
We purchase mortgage-backed and asset-backed securities to
diversify the portfolio risk from primarily corporate credit
risk to a mix of credit and cash flow risk. We believe the
inherent risks of prepayment and extension with the
mortgage-backed securities will impact when cash flow is
received, and the majority of our holdings have low variability
in monthly cash flow. Our total mortgage-backed securities
holdings estimated fair value was $4.5 billion and
$4.3 billion as of September 30, 2007 and
December 31, 2006, respectively.
91
We held minimal investments in asset-backed securities which had
an estimated fair value of $154.8 million and
$92.7 million as of September 30, 2007 and
December 31, 2006, respectively. Based on market values as
of September 30, 2007, we classified approximately
$2.1 million of our mortgage-backed securities as
sub-prime, and approximately $245.1 million of our
mortgage-backed securities as Alt-A, representing approximately
0.1% and 5.7%, respectively, of our total mortgage-backed
securities. The $2.1 million in value of sub-prime
securities were issued from a dedicated second-lien shelf, which
we consider to be a sub-prime risk regardless of credit score or
other metrics. We do not own any securities from dedicated
sub-prime shelves. We classified $245.1 million of
securities as Alt-A because we viewed each to have overall
collateral credit quality between prime and sub-prime, based on
a review of the characteristics of their underlying mortgage
loan pools, such as credit scores and financial ratios. We do
not own any residential collateralized debt obligations.
Mortgage
Loans
Our mortgage loans holdings are collateralized by commercial
properties. These holdings are reported at carrying value
composed of original cost net of prepayments and amortization.
We diversify our mortgage loans by geographic region, loan size
and scheduled maturities. We held total mortgage loans net of
allowances of $818.6 million and $794.3 million as of
September 30, 2007 and December 31, 2006,
respectively. As of September 30, 2007, 82.1% of our total
mortgage loans were under $5 million, and 92.2% of our
total mortgage loans had scheduled maturities due after five
years. Also, holdings in the top four states, California,
Washington, Texas and Oregon, comprised 64.2% of our total
mortgage loans as of September 30, 2007. We monitor our
mortgage loans on a continual basis for any that may be
potentially delinquent. Our allowance for losses on mortgage
loans was $4.1 million and $4.0 million as of
September 30, 2007 and December 31, 2006, respectively.
Equity
Securities
We purchase preferred and common stocks of publicly traded
U.S. companies, and hold investments in other limited
partnerships. The majority of our equity securities are held in
our Income Annuities segment where we believe it is appropriate
to match equity exposure against long-tailed structured
settlement liabilities. Our equity holdings, which include
investments in limited partnerships when the ownership
percentage is less than 3%, are classified as available-for-sale
and are carried at fair value. We held total equity securities
of $203.8 million and $201.7 million as of
September 30, 2007 and December 31, 2006, respectively.
Investments
in Limited Partnerships
Our investments in limited partnerships are accounted for under
the equity method when our ownership interest is 3% or greater.
These investments are carried at fair value with the difference
between fair value and cost recorded in investment income. We
held total investments in limited partnerships of
$160.1 million and $112.6 million as of
September 30, 2007 and December 31, 2006, respectively.
Reinsurance
Through both treaty and facultative reinsurance agreements, we
engage in the industry practice of reinsuring portions of our
insurance risk with reinsurance companies. We use reinsurance to
diversify our risks and manage loss exposures primarily in our
Group and Individual segments. The use of reinsurance permits us
to write policies in amounts larger than the risk we are willing
to retain.
We cede insurance primarily on a treaty basis, under which risks
are ceded to a reinsurer on specific books of business where the
underlying risks meet certain predetermined criteria. To a
lesser extent, we cede insurance risks on a facultative basis,
under which the reinsurers prior approval is required on
each risk reinsured. The use of reinsurance does not discharge
us, as the insurer, from liability on the insurance ceded. We,
as the insurer, are required to pay the full amount of our
insurance obligations even in circumstances where we are
entitled or able to receive payments from our reinsurer. The
principal reinsurers to which we
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cede risks have A.M. Best financial strength ratings
ranging from A+ to A−.
Historically, we have not had significant concentrations of
reinsurance risk with any one reinsurer.
We had reinsurance recoverables of $247.0 million and
$238.8 million as of September 30, 2007 and
December 31, 2006, respectively. The following table sets
forth our exposure to our principal reinsurers, including
reinsurance recoverables as of December 31, 2006 and the
A.M. Best ratings of those reinsurers as of that date:
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Reinsurance
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recoverable
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A.M. Best rating
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(In millions)
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Reinsurance Group of America
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$
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70.7
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A+
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Transamerica Life Insurance Company
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$
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66.1
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A+
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UNUM Life Insurance Company of America
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$
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64.9
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A
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Lincoln National Life Insurance Company
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$
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25.1
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A+
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In the table above, the reinsurance recoverables under our
agreements with RGA, UNUM and Lincoln represent the reinsurance
exposure of these parties to us under the reinsurance policies.
The reinsurance recoverable under our agreement with
Transamerica represents our share of the proceeds generated
under this policy.
Under most of our reinsurance agreements, we obtain reinsurance
to mitigate some or all of the risk of the policies we issue,
particularly the risk of substantial loss from death of an
individual or catastrophic loss, and in other cases where the
reinsurer offers a particular expertise. Some of these
agreements are coinsurance arrangements, whereby we only obtain
reinsurance for a portion of the risk, and retain the remainder.
In some cases, we instead act as a reinsurer (or coinsurer) of
another life insurance company.
The following is a brief summary of our reinsurance agreements
with the parties listed in the table above:
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Reinsurance Group of America Under our agreements
with RGA, RGA reinsures the risk of a large loss on term life
insurance and universal life insurance policies. These are
typically coinsurance arrangements, whereby we cede fifty
percent or more of the claims liability to RGA. These agreements
do not have a fixed term. Either party can terminate these
agreements with respect to future business with
90 days written notice to the other party.
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Lincoln National Life Insurance Company Under our
agreements with Lincoln, we primarily cede claims liability
under 10, 15 and
20-year term
life insurance policies to Lincoln. These are typically
coinsurance arrangements, whereby we cede fifty percent or more
of the claims liability to Lincoln. These agreements do not have
a fixed term. Either party can terminate these agreements with
respect to future business upon 90 days written
notice to the other party.
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UNUM Life Insurance Company of America We cede
nearly all of our Group Long-Term-Disability and
Short-Term-Disability claims liability through a reinsurance
pool. The pool of reinsurers may change each year for new
claims. UNUM covers the substantial majority of this business.
This agreement does not have a fixed term. Either party can
terminate the agreement with respect to future business by
providing 90 days written notice to the other party
on or before October 1 of any given year.
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Transamerica Life Insurance Company Under an
agreement with Transamerica, we act as their reinsurer with
respect to 28.6% of a bank owned life insurance (BOLI) policy.
BOLI is life insurance purchased by a bank to insure the lives
of bank employees, usually officers and other highly compensated
employees. BOLI policies are commonly used by banks to fund
employee pension plans and benefit plans. Transamerica invests
the policy premiums paid by the bank, and manages those
investments subject to the terms of the policy. We have assumed
28.6% of the claims liability under this policy, and receive
28.6% of the proceeds generated under the policy. The term of
this agreement is perpetual. We are only allowed to terminate
this agreement in the event Transamerica fails to pay amounts
due to us under this agreement, or in the event of fraud,
misrepresentation or breach of this agreement by Transamerica.
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Risk
Management
Overview
Risk management is a critical part of our business and we have
adopted risk management processes in virtually every aspect of
our operations, including product development, underwriting,
investment management, asset-liability management and technology
development projects. The primary objective of these risk
management processes is to reduce the variations we experience
from our expected results.
We use a risk model that draws on the risk-based capital
concepts. Risks are classified into four main categories:
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investment risks;
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pricing risks, including determination of adequate spreads or
premiums, and estimation of claims, both expected and
catastrophic;
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interest rate risk, including asset liability duration matching
exposures; and
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other business risks, including business continuity, data
security and other operational risks.
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Operations
and Technology
Service
and Support
We have a dedicated team of service and support personnel, as
well as Affiliated Computer Services, or ACS, based in Dallas,
Texas, our outsourced provider, that deliver automation
solutions to drive competitive advantage, to achieve earnings
growth objectives, and to control the cost of doing business. We
mainly follow a buy-versus-build approach in providing
application and business processing services that accelerate
delivery and responsiveness. We also develop proprietary
software for competitive or economic benefits.
Operating
Centers
In October 2004, we entered into an outsourcing agreement with
ACS. The initial term of the agreement expires in
July 2010, with two
one-year
extensions at our election. The scope of the contract with ACS
includes the management of the following:
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Data center: mainframe, Wintel systems, storage, web services,
disaster recovery;
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Distributed computing: field office services, desktop support,
asset management;
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Data network: network infrastructure, carrier services, secured
remote access;
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Voice communications: voice systems, wireless, contact center
technologies;
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Help desk supporting: infrastructure, packaged software,
password resets;
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Output processing: print and mail fulfillment, archive and
online viewing; and
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Content management: imaging and content management system.
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Under this agreement, we are obligated to pay an annual service
fee, which for the current year and the two remaining years
under the initial term are $12.5 million,
$13.1 million and $13.8 million, respectively. These
fees are subject to adjustments based on a variety of factors,
including product utilization and reductions for failure to meet
service level standards.
The agreement may be terminated by us for convenience prior to
the end of the five-year term upon ninety days notice and
payment by us of a termination fee, which is currently
$2.6 million, but which decreases monthly over the
remaining term. In the event of termination, we will own most
critical application
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software and desktop hardware, and may elect to purchase other
assets used by ACS in connection with the outsourced services.
Competition
We face significant competition for customers and distributors
from insurance and other financial services companies in each of
our businesses. Our competitors include other large and highly
rated insurance carriers. Some of these competitors have greater
resources than we do, and many of them offer similar products
and use similar distribution channels. Competition in our
operating business segments is based on a number of factors,
including:
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quality of service;
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product features;
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price;
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scope of distribution;
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financial strength ratings; and
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name recognition.
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The relative importance of these factors depends on the
particular product and market. We compete for customers and
distributors with insurance companies and other financial
services companies in our various businesses.
Financial
Strength Ratings
Rating organizations continually review the financial
performance and condition of most insurers and provide financial
strength ratings based on a companys operating performance
and ability to meet obligations to policyholders. Ratings
provide both industry participants and insurance consumers
meaningful information on specific insurance companies and are
an important factor in establishing the competitive position of
insurance companies. In addition, ratings are important to
maintaining public confidence in us and our ability to market
our products.
Symetra Life Insurance Company, our principal life insurance
subsidiary, is rated by A.M. Best, S&P, Moodys
and Fitch as follows as of September 30, 2007:
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Financial Strength Rating
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A.M. Best
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S&P
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Moodys
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Fitch
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Symetra Life Insurance Company
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A
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A−
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A2
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A+
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A.M. Best states that its A (Excellent) rating
is assigned to those companies that have, in its opinion, an
excellent ability to meet their ongoing obligations to
policyholders. The A (Excellent) is the third
highest of 15 ratings assigned by A.M. Best, which range
from A++ to F.
Symetra Life Insurance Companys Financial Size Category,
or FSC, ranking, as determined by A.M. Best is XII, the
fourth highest of 15. A.M. Best indicates that the FSC is
designed to provide an indicator of the size of a company in
terms of its statutory surplus and related accounts.
Standard & Poors states that an insurer rated
A (Strong) has strong financial security
characteristics, that outweigh any vulnerabilities, and is
highly likely to have the ability to meet financial commitments,
but is somewhat more likely to be affected by adverse business
conditions than are insurers with higher ratings. The
A range is the third highest of the four ratings
ranges that meet these criteria, and also is the third highest
of nine financial strength ratings ranges assigned by S&P,
which range from AAA to R. A plus (+) or
minus
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(−) shows relative standing in a rating category.
Accordingly, the A− rating is the seventh
highest of S&Ps 22 ratings categories.
Moodys Investors Service states that insurance companies
rated A2 (Good) offer good financial security.
However, elements may be present that suggest a susceptibility
to impairment sometime in the future. The A range is
the third highest of nine financial strength rating ranges
assigned by Moodys which range from Aaa to
C. Numeric modifiers are used to refer to the
ranking within the group, with 1 being the highest
and 3 being the lowest. Accordingly, the
A2 rating is the sixth highest of Moodys 21
ratings categories.
Fitch states that insurance companies rated A
(Strong) are viewed as possessing strong capacity to meet
policyholder and contract obligations. Risk factors are
moderate, and the impact of any adverse business and economic
factors is expected to be small. The A rating
category is the third highest of eight financial strength
categories, which range from AAA to D.
The symbol (+) or (−) may be appended to a rating to
indicate the relative position of a credit within a rating
category. These suffixes are not added to ratings in the
AAA category or to ratings below the CCC
category. Accordingly, the A+ rating is the fifth
highest of Fitchs 24 ratings categories.
A.M. Best, S&P, Moodys and Fitch review their
ratings periodically and we cannot assure you that we will
maintain our current ratings in the future. Other agencies may
rate Symetra or our insurance subsidiaries on a solicited or
unsolicited basis.
The A.M. Best, S&P, Moodys and Fitch ratings
included are not designed to be, and do not serve as, measures
of protection or valuation offered to investors in this
offering. These financial strength ratings should not be relied
on with respect to making an investment in our securities.
Employees
As of September 30, 2007, we had approximately
1,300 full-time and part-time employees. We believe our
employee relations are satisfactory. To the best of our
knowledge, none of our employees is subject to a collective
bargaining agreement.
Facilities
We lease approximately 343,000 square feet of office space
in various locations throughout the U.S. which consists
primarily of 292,000 square feet of office space at our
headquarters in Bellevue, Washington.
Most of our leases have lease terms ranging from one to ten
years. Our aggregate annual rental expense under these leases
was $8.2 million during 2006.
We believe our properties are adequate for our business as
presently conducted.
Legal
Proceedings
We are regularly a party to litigation, arbitration proceedings
and governmental examinations in the ordinary course of our
business. While we cannot predict the outcome of any pending or
future litigation or examination, we do not believe that any
pending matter, individually or in the aggregate, will have a
material adverse effect on our business.
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Our insurance operations are subject to a wide variety of laws
and regulations. State insurance laws regulate most aspects of
our insurance businesses, and our insurance subsidiaries are
regulated by the insurance departments of the states in which
they are domiciled and licensed. Our insurance products and thus
our businesses also are affected by U.S. federal, state and
local tax laws. Insurance products that constitute
securities, such as variable annuities and variable
life insurance, also are subject to federal and state securities
laws and regulations. The SEC, the Financial Industry Regulatory
Authority, or FINRA, and state securities authorities regulate
these products.
Our broker-dealers are subject to federal and state securities
and related laws. The SEC, FINRA and state securities
authorities are the principal regulators of these operations.
The purpose of the laws and regulations affecting our insurance
and securities businesses is primarily to protect our customers
and not our noteholders or stockholders. Many of the laws and
regulations to which we are subject are regularly re-examined,
and existing or future laws and regulations may become more
restrictive or otherwise adversely affect our operations.
In addition, insurance and securities regulatory authorities
increasingly make inquiries regarding compliance by us and our
subsidiaries with insurance, securities and other laws and
regulations regarding the conduct of our insurance and
securities businesses. We cooperate with such inquiries and take
corrective action when warranted.
Many of our customers and agents also operate in regulated
environments. Changes in the regulations that affect their
operations also may affect our business relationships with them
and their ability to purchase or to distribute our products.
Insurance
Regulation
Our insurance subsidiaries are licensed and regulated in all
states in which they conduct insurance business. The extent of
this regulation varies, but most states have laws and
regulations governing the financial condition of insurers,
including standards of solvency, types and concentration of
investments, establishment and maintenance of reserves, credit
for reinsurance and requirements of capital adequacy, and the
business conduct of insurers, including marketing and sales
practices and claims handling. In addition, statutes and
regulations usually require the licensing of insurers and their
agents, the approval of policy forms and related materials and
the approval of rates for certain lines of insurance. The types
of insurance laws and regulations applicable to us or our
insurance subsidiaries are described below.
Insurance
Holding Company Regulation
All states in which our insurance subsidiaries conduct insurance
business have enacted legislation that requires each insurance
company in a holding company system, except captive insurance
companies, to register with the insurance regulatory authority
of its state of domicile and to furnish that regulatory
authority financial and other information concerning the
operations of, and the interrelationships and transactions
among, companies within its holding company system that may
materially affect the operations, management or financial
condition of the insurers within the system. These laws and
regulations also regulate transactions between insurance
companies and their parents and affiliates. Generally, these
laws and regulations require that all transactions within a
holding company system between an insurer and its affiliates be
fair and reasonable and that the insurers statutory
surplus following any transaction with an affiliate be both
reasonable in relation to its outstanding liabilities and
adequate to its financial needs. Statutory surplus is the excess
of admitted assets over statutory liabilities. For certain types
of agreements and transactions between an insurer and its
affiliates, these laws and regulations require prior
notification to, and non-disapproval or approval by, the
insurance regulatory authority of the insurers state of
domicile.
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Policy
Forms
Our insurance subsidiaries policy forms are subject to
regulation in every state in which such subsidiaries are
licensed to transact insurance business. In most states, policy
forms must be filed prior to their use.
Dividend
Limitations
As a holding company with no significant business operations of
its own, Symetra depends on dividends or other distributions
from its subsidiaries as the principal source of cash to meet
its obligations, including the payment of interest on and
repayment of principal of any debt obligations and payment of
dividends to stockholders and stock repurchases. The payment of
dividends or other distributions to Symetra by its insurance
subsidiaries is regulated by the insurance laws and regulations
of their respective states of domicile. In the state of
Washington, the state of domicile of Symetras principal
insurance subsidiary, Symetra Life Insurance Company, an
insurance company subsidiary may not pay an
extraordinary dividend or distribution until
30 days after the insurance commissioner has received
sufficient notice of the intended payment and has not objected
or has approved the payment within the
30-day
period. An extraordinary dividend or distribution is
defined under Washington law as a dividend or distribution that,
together with other dividends and distributions made within the
preceding 12 months, exceeds the greater of:
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10% of the insurers statutory surplus as of the
immediately prior year end; or
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the statutory net gain from the insurers operations for
the prior year.
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State laws and regulations also prohibit an insurer from
declaring or paying a dividend except out of its statutory
surplus or require the insurer to obtain regulatory approval
before it may do so. In addition, insurance regulators may
prohibit the payment of ordinary dividends or other payments by
our insurance subsidiaries to Symetra (such as a payment under a
tax sharing agreement or for employee or other services) if they
determine that such payment could be adverse to our
policyholders or contractholders.
Market
Conduct Regulation
The laws and regulations of U.S. jurisdictions include
numerous provisions governing the marketplace activities of
insurers, including provisions governing the form and content of
disclosure to consumers, product illustrations, advertising,
product replacement, sales and underwriting practices, complaint
handling and claims handling. State jurisdictions generally
enforce these provisions through periodic market conduct
examinations.
Statutory
Examinations
As part of their regulatory oversight process, state insurance
departments conduct periodic detailed examinations of the books,
records, accounts and business practices of insurers domiciled
in their jurisdictions. These examinations generally are
conducted in cooperation with the insurance departments of
several other states under guidelines promulgated by the NAIC.
In the three year period ended December 31, 2006, we have
not received any material adverse findings resulting from any
insurance department examinations of our insurance subsidiaries.
Guaranty
Associations and Similar Arrangements
Most states require life insurers doing business within the
state to participate in guaranty associations, which are
organized to pay contractual benefits owed pursuant to insurance
policies of insurers who become impaired or insolvent. These
associations levy assessments, up to prescribed limits, on all
member insurers in a particular state on the basis of the
proportionate share of the premiums written by member insurers
in the lines of business in which the impaired, insolvent or
failed insurer is engaged. Some states permit member insurers to
recover assessments paid through full or partial premium tax
offsets.
We had aggregate assessments levied against our insurance
subsidiaries totaling $0.1 million, $0.2 million and
$1.0 million for the nine months ended September 30,
2007 and for the years ended December 31, 2006
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and 2005, respectively. Although the amount and timing of future
assessments are not predictable, we have established reserves
for guaranty fund assessments that we consider adequate for
assessments with respect to insurers that currently are subject
to insolvency proceedings.
Change
of Control
The laws and regulations of the states in which our insurance
subsidiaries are domiciled require that a person obtain the
approval of the insurance commissioner of the insurance
companys jurisdiction of domicile prior to acquiring
control of the insurer. Generally, such laws provide that
control over an insurer is presumed to exist if any person,
directly or indirectly, owns, controls, holds with the power to
vote, or holds proxies representing 10% or more of the voting
securities of the insurer. In considering an application to
acquire control of an insurer, the insurance commissioner
generally will consider such factors as the experience,
competence and financial strength of the applicant, the
integrity of the applicants board of directors and
executive officers, the acquirors plans for the management
and operation of the insurer, and any anti-competitive results
that may arise from the acquisition. In addition, a person
seeking to acquire control of an insurance company is required
in some states to make filings prior to completing an
acquisition if the acquiror and the target insurance company and
their affiliates have sufficiently large market shares in
particular lines of insurance in those states. Approval of an
acquisition may not be required in these states, but the state
insurance departments could take action to impose conditions on
an acquisition that could delay or prevent its consummation.
These laws may discourage potential acquisition proposals and
may delay, deter or prevent a change of control involving us,
including through transactions, and in particular unsolicited
transactions, that some or all of our stockholders might
consider to be desirable.
Policy
and Contract Reserve Sufficiency Analysis
Under the laws and regulations of their states of domicile, our
life insurance subsidiaries are required to conduct annual
analyses of the sufficiency of their life and health insurance
and annuity statutory reserves. In addition, other jurisdictions
in which these subsidiaries are licensed may have certain
reserve requirements that differ from those of their domiciliary
jurisdictions. In each case, a qualified actuary must submit an
opinion that states that the aggregate statutory reserves, when
considered in light of the assets held with respect to such
reserves, make good and sufficient provision for the associated
contractual obligations and related expenses of the insurer. If
such an opinion cannot be provided, the affected insurer must
set up additional reserves by moving funds from surplus. Our
life insurance subsidiaries submit these opinions annually to
applicable insurance regulatory authorities.
Surplus
and Capital Requirements
Insurance regulators have the discretionary authority, in
connection with the ongoing licensing of our insurance
subsidiaries, to limit or prohibit the ability of an insurer to
issue new policies if, in the regulators judgment, the
insurer is not maintaining a minimum amount of surplus or is in
hazardous financial condition. Insurance regulators may also
limit the ability of an insurer to issue new life insurance
policies and annuity contracts above an amount based upon the
face amount and premiums of policies of a similar type issued in
the prior year. We do not believe that the current or
anticipated levels of statutory surplus of our insurance
subsidiaries present a material risk that any such regulator
would limit the amount of new policies that our insurance
subsidiaries may issue.
Risk-based
Capital
The NAIC has established risk-based capital standards for life
insurance companies as well as a model act with the intention
that these standards be applied at the state level. The model
act provides that life insurance companies must submit an annual
risk-based capital report to state regulators reporting their
risk-based capital based upon four categories of risk: asset
risk, insurance risk, interest rate risk and business risk. For
each category, the capital requirement is determined by applying
factors to various asset, premium and reserve items, with the
factor being higher for those items with greater underlying risk
and lower for less risky
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items. The formula is intended to be used by insurance
regulators as an early warning tool to identify possible weakly
capitalized companies for purposes of initiating further
regulatory action.
If an insurers risk-based capital falls below specified
levels, the insurer would be subject to different degrees of
regulatory action depending upon the level. These actions range
from requiring the insurer to propose actions to correct the
capital deficiency to placing the insurer under regulatory
control. As of December 31, 2006, the risk-based capital of
each of our life insurance subsidiaries exceeded the level of
risk-based capital that would require any of them to take or
become subject to any corrective action.
Statutory
Accounting Principles
Statutory accounting principles, or SAP, is a basis of
accounting developed by state insurance regulators to monitor
and regulate the solvency of insurance companies. In developing
SAP, insurance regulators were primarily concerned with assuring
an insurers ability to pay all its current and future
obligations to policyholders. As a result, statutory accounting
focuses on conservatively valuing the assets and liabilities of
insurers, generally in accordance with standards specified by
the insurers domiciliary state. Uniform statutory
accounting practices are established by the NAIC and generally
adopted by regulators in the various states. These accounting
principles and related regulations determine, among other
things, the amounts our insurance subsidiaries may pay to us as
dividends. The values for assets, liabilities and equity
reflected in financial statements prepared in accordance with
U.S. GAAP may be different from those reflected in
financial statements prepared under SAP.
Regulation
of Investments
Each of our insurance subsidiaries is subject to laws and
regulations that require diversification of its investment
portfolio and limit the amount of investments in certain asset
categories, such as below investment grade fixed maturities,
real estate, equity investments and derivatives. Failure to
comply with these laws and regulations would cause investments
exceeding regulatory limitations to be treated as non-admitted
assets for purposes of measuring surplus, and, in some
instances, would require divestiture of such non-complying
investments. We believe the investments held by our insurance
subsidiaries comply with these laws and regulations.
Federal
Regulation
Our variable life insurance and variable annuity products
generally are securities within the meaning of
federal and state securities laws. As a result, they are
registered under the Securities Act of 1933 and are subject to
regulation by the SEC, the FINRA and state securities
authorities. Federal and state securities regulation similar to
that discussed below under Other Laws and
Regulations Securities Regulation affect
investment advice, sales and related activities with respect to
these products. In addition, although the federal government
does not comprehensively regulate the business of insurance,
federal legislation and administrative policies in several other
areas, including taxation, privacy regulation, financial
services regulation and pension and welfare benefits regulation,
can also significantly affect the insurance industry. In
addition, various forms of direct federal regulation of
insurance have been proposed. These proposals include the
National Insurance Act, which would allow insurance
companies to choose to be regulated by a federal regulator
rather than by multiple state regulators, and The State
Modernization and Regulatory Transparency Act, which would
maintain state-based regulation of insurance but would affect
state regulation of certain aspects of the business of
insurance, including rates, agent and company licensing and
market conduct examinations.
Federal
Initiatives
Although the federal government generally does not directly
regulate the insurance business, federal initiatives often and
increasingly have an impact on the business in a variety of
ways. From time to time, federal measures are proposed that may
significantly affect the insurance business, including
limitations on antitrust immunity, tax incentives for lifetime
annuity payouts, simplification bills affecting tax-advantaged
or
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tax-exempt savings and retirement vehicles, and proposals to
modify or make permanent the estate tax repeal enacted in 2001.
In addition, various forms of direct federal regulation of
insurance have been proposed in recent years. We cannot predict
whether these or other proposals will be adopted, or what
impact, if any, such proposals may have on our business.
Changes
in Tax Laws
Changes in tax laws could make some of our products less
attractive to consumers. For example, in November 2004, the
Treasury Department and the Internal Revenue Service, or IRS,
issued proposed regulations relating to Section 403(b)
plans that will impact the 403(b) marketplace, including tax
sheltered annuities. While the terms of the proposed regulations
are not final and the impact of the new regulations is
uncertain, it is likely that employers offering
Section 403(b) plans will be required to change how their
plans operate. Those changes may include re-evaluation of their
plan investment offerings, including annuities currently offered
by us in those plans.
Furthermore, the federal estate tax, which has undergone a
gradual repeal since 2001 that will continue to be phased in
through 2010, is scheduled to revert to pre-2001 law as of
January 1, 2011. The repeal of and continuing uncertainty
regarding the federal estate tax may adversely affect sales and
surrenders of some of our estate planning products.
Other
Laws and Regulations
Securities
Regulation
Certain of our U.S. subsidiaries and certain policies and
contracts offered by them, are subject to various levels of
regulation under the federal securities laws administered by the
SEC. Certain of our U.S. subsidiaries are investment
advisers registered under the Investment Advisers Act of 1940.
Certain of their respective employees are licensed as investment
advisory representatives in the states where those employees
have clients. Some of our insurance company separate accounts
are registered under the Investment Company Act of 1940. Some
annuity contracts and insurance policies issued by some of our
U.S. subsidiaries are funded by separate accounts, the
interests in which are registered under the Securities Act of
1933. Certain of our subsidiaries are registered and regulated
as broker-dealers under the Exchange Act and are members of, and
subject to regulation by, the FINRA, as well as by various state
and local regulators. The registered representatives of our
broker-dealers are also regulated by the SEC and FINRA and are
further subject to applicable state and local laws.
These laws and regulations are primarily intended to protect
investors in the securities markets and generally grant
supervisory agencies broad administrative powers, including the
power to limit or restrict the conduct of business for failure
to comply with such laws and regulations. In such event, the
possible sanctions that may be imposed include suspension of
individual employees, limitations on the activities in which the
investment adviser or broker/dealer may engage, suspension or
revocation of the investment adviser or broker/dealer
registration, censure or fines. We may also be subject to
similar laws and regulations in the states and other countries
in which we provide investment advisory services, offer the
products described above or conduct other securities-related
activities.
Certain of our U.S. subsidiaries also sponsor and manage
investment vehicles that rely on certain exemptions from
registration under the Investment Company Act of 1940 and the
Securities Act of 1933. Nevertheless, certain provisions of the
Investment Company Act of 1940 and the Securities Act of 1933
apply to these investment vehicles and the securities issued by
such vehicles. The Investment Company Act of 1940, the
Investment Advisers Act of 1940 and the Securities Act of 1933,
including the rules promulgated thereunder, are subject to
change which may affect our U.S. subsidiaries that sponsor
and manage such investment vehicles.
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ERISA
Considerations
We provide certain products and services to certain employee
benefits plans that are subject to ERISA or the Internal Revenue
Code. As such, our activities are subject to the restrictions
imposed by ERISA and the Internal Revenue Code, including the
requirement under ERISA that fiduciaries must perform their
duties solely in the interests of ERISA plan participants and
beneficiaries and the requirement under ERISA and the Internal
Revenue Code that fiduciaries may not cause a covered plan to
engage in certain prohibited transactions with persons who have
certain relationships with respect to such plans. The applicable
provisions of ERISA and the Internal Revenue Code are subject to
enforcement by the U.S. Department of Labor, the IRS and
the Pension Benefit Guaranty Corporation.
USA
Patriot Act
The USA Patriot Act of 2001, or the Patriot Act, which was
renewed for an additional four years in 2006, contains
anti-money laundering and financial transparency laws and
mandates the implementation of various new regulations
applicable to broker/dealers and other financial services
companies including insurance companies. The Patriot Act seeks
to promote cooperation among financial institutions, regulators
and law enforcement entities in identifying parties that may be
involved in terrorism or money laundering. The increased
obligations of financial institutions to identify their
customers, watch for and report suspicious transactions, respond
to requests for information by regulatory authorities and law
enforcement agencies, and share information with other financial
institutions, require the implementation and maintenance of
internal practices, procedures and controls. We believe that we
have implemented, and that we maintain, appropriate internal
practices, procedures and controls to enable us to comply with
the provisions of the Patriot Act.
Privacy
of Consumer Information
U.S. federal and state laws and regulations require
financial institutions, including insurance companies, to
protect the security and confidentiality of consumer financial
information and to notify consumers about their policies and
practices relating to their collection and disclosure of
consumer information and their policies relating to protecting
the security and confidentiality of that information. Similarly,
federal and state laws and regulations also govern the
disclosure and security of consumer health information. In
particular, regulations promulgated by the U.S. Department
of Health and Human Services regulate the disclosure and use of
protected health information by health insurers and others, the
physical and procedural safeguards employed to protect the
security of that information and the electronic transmission of
such information. Congress and state legislatures are expected
to consider additional legislation relating to privacy and other
aspects of consumer information.
102
Directors
and Executive Officers
Set forth below is a list of the directors and principal
executive officers of Symetra as of October 15, 2007. The
positions listed are of Symetra unless otherwise indicated.
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Name
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Age
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Positions
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David T. Foy
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41
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Director, Chairman of the Board
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Randall H. Talbot
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54
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Director, President and Chief Executive Officer
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Roger F. Harbin
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56
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Executive Vice President and Chief Operating Officer
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Margaret A. Meister
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42
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Executive Vice President and Chief Financial Officer
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Jennifer V. Davies
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49
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Senior Vice President Enterprise Development
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Richard J. Lindsay
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51
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Senior Vice President Life & Annuities
Division, Symetra Life Insurance Company
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Patrick B. McCormick
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50
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Senior Vice President Distribution, Symetra Life
Insurance Company
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M. Scott Taylor
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64
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Senior Vice President Group Department, Symetra Life
Insurance Company
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George C. Pagos
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57
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Senior Vice President, General Counsel and Secretary
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Tommie D. Brooks
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37
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Vice President and Chief Actuary, Symetra Life Insurance Company
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Christine A. Katzmar
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48
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Vice President Human Resources
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Troy J. Olson-Blair
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52
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Vice President Information Technology
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Lois W. Grady
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62
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Director
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Sander M. Levy
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45
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Director
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Robert R. Lusardi
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50
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Director
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David I. Schamis
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33
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Director
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Lowndes A. Smith
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68
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Director
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David T. Foy has been Chairman of the Board of Symetra
since 2004. He has been Executive Vice President and Chief
Financial Officer of White Mountains Insurance Group, Ltd. since
2003. Previously, he was Senior Vice President and Chief
Financial Officer of Hartford Life, Inc., which he joined in
1993. From 1989 to 1993, Mr. Foy was with Milliman and
Robertson, an actuarial consulting firm. He is also a director
of OneBeacon Insurance Group, Ltd. He received his B.S. degree
from the Rochester Institute of Technology.
Randall H. Talbot has been a director, Chief Executive
Officer and President of Symetra since 2004. Mr. Talbot
joined Symetra Life Insurance Company in 1998, and from 1998 to
2004, he served as its President. He is also President and a
director of various affiliates of Symetra. From 1988 to 1998, he
was Chief Executive Officer and President of Talbot Financial
Corporation. Mr. Talbot is a member of the board of
directors of the American Council of Life Insurers.
Mr. Talbot received his B.A. degree from Arizona State
University.
Roger F. Harbin has been Executive Vice President and
Chief Operating Officer of Symetra since 2004. Mr. Harbin
joined Symetra Life Insurance Company in 1977, and served in a
variety of positions, most recently Executive Vice President of
Symetra Life Insurance Company, before he was promoted to his
current positions. He is also an officer and director of various
affiliates of Symetra. Mr. Harbin is a fellow of the
Society of Actuaries and has served on the boards of several
industry organizations. He is currently a member of the boards
of state insurance guaranty associations in Washington,
Virginia, North Carolina and Montana. Mr. Harbin received
his B.A. and M.A. degrees from the University of Montana.
Margaret A. Meister has been Executive Vice President and
Chief Financial Officer of Symetra since 2006. She is an officer
and director of various affiliates of Symetra. Ms. Meister
is a fellow of the Society of Actuaries. Ms. Meister joined
Symetra Life Insurance Company in 1988, and served in a variety
of positions,
103
most recently Chief Actuary and Vice President prior to her
promotion to her current position. Ms. Meister received her
B.A. degree from Whitman College.
Jennifer V. Davies has been Senior Vice President of
Symetra since June 2007 and is responsible for Enterprise
Development. Ms. Davies joined Symetra Life Insurance
Company in 1992, and served in a variety of positions, most
recently Vice President, prior to being promoted to her current
position. She is also an officer and director of various of our
affiliates. Ms. Davies was employed by Sons of Norway from
1986 to 1992, and ITT/Hartford Life Insurance Company from 1982
to 1986. Ms. Davies received her B.A. degree from the
University of Minnesota and her M.A. degree from the University
of Virginia.
Richard J. Lindsay has been Senior Vice President of
Symetra Life Insurance Company since 2006. He is responsible for
the operations of the Life & Annuities division of
Symetra Life Insurance Company. Prior to joining Symetra Life
Insurance Company, Mr. Lindsay had worked for AIG VALIC
since 1998, where his last position was as an executive vice
president of AIG VALIC and as president of VALIC Financial
Advisors, an affiliated broker-dealer. Prior to joining AIG
VALIC, Mr. Lindsay spent 11 years with CoreStates
Financial Corp. Mr. Lindsay received his B.A. degree from
Brown University, his M.B.A. degree from Wharton School of the
University of Pennsylvania, and his J.D. degree from Temple
University.
Patrick B. McCormick has been Senior Vice President of
Symetra Life Insurance Company since 1999 and is responsible for
Distribution. Mr. McCormick joined Symetra Life Insurance
Company in 1995, and served in a variety of positions, most
recently Vice President, before he was promoted to his current
position after the Acquisition. He is also an officer and
director of various affiliates of Symetra.
M. Scott Taylor has been Senior Vice President of
Symetra Life Insurance Company since 2000 and is responsible for
Symetra Life Insurance Companys Group Department.
Mr. Taylor joined Safeco Life Insurance Company in 1971,
and served in a variety of positions, most recently Vice
President, before he was promoted to his current position. He is
also an officer and director of various affiliates of Symetra.
Mr. Taylor served in the U.S. Air Force and received
his B.A. degree from the University of Washington.
George C. Pagos has been Senior Vice President, General
Counsel and Secretary of Symetra since September 2007.
Mr. Pagos joined Symetra Life Insurance Company in 1976,
and served in a variety of positions, most recently Vice
President, prior to being promoted to his current position. He
is also an officer and director of various affiliates of
Symetra. Mr. Pagos received his B.A. degree from George
Washington University and his J.D. degree from the University of
Maryland.
Tommie D. Brooks has been Vice President and Chief
Actuary of Symetra since March 2007. Mr. Brooks joined
Symetra Life Insurance Company in 1992, and served in a variety
of managerial positions throughout the company. Mr. Brooks
attained the Fellow of the Society of Actuaries in 1998 and
earned his B.S. in math and actuarial sciences from Central
Washington University.
Christine A. Katzmar has been Vice President of Symetra
since 2004 and is responsible for Human Resources.
Ms. Katzmar joined Symetra Life Insurance Company in 2001
as Vice President. From 1991 to 2001, she was with Safeco
Insurance Company, where she held a variety of positions, most
recently Human Resources Director. She is also an officer of
various affiliates of Symetra. Ms. Katzmar received her
B.A. degree from Miami University, Ohio.
Troy J. Olson-Blair has been Vice President of Symetra
since June 2007 and is responsible for Information Technology.
She has been Vice President of Symetra Life Insurance Company
since 2000 and also served as Chief Information Officer since
2004. She has been responsible for Information Technology since
joining the company. Prior to Symetra, Ms. Olson-Blair held
a variety of technical and managerial positions with Safeco
Insurance Company that span twenty years; her last position was
AVP and director for IT Operations. Ms. Olson-Blairs
background includes application development, voice and data
communications, networking, web services and ITIL service level
management.
Lois W. Grady has been a director of Symetra since 2004.
Ms. Grady served as Executive Vice President and Director
of Investment Products Services of Hartford Life, Inc. from 2002
through 2004 and as Senior Vice President and Director of
Investment Products Services of Hartford Life, Inc. from 1998
through 2002.
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She began her career with Hartford Life in 1983. She is also a
director of OneBeacon Insurance Group, Ltd. Ms. Grady
received her B.S. degree from Southern Connecticut State
University.
Sander M. Levy has been a director of Symetra since 2004.
He has been Managing Director of Vestar Capital Partners, a
private equity firm, since 1988. He was previously a member of
the management buyout group of First Boston Corporation. He
received his B.S. degree from The Wharton School, University of
Pennsylvania, and his M.B.A. degree from Columbia Business
School.
Robert R. Lusardi has been a director of Symetra since
2005. He has been Executive Vice President and Managing Director
of White Mountains Capital, Inc. since 2005. From 1998 until
2005, Mr. Lusardi served at XL Capital Ltd., first as Chief
Financial Officer and later as Chief Executive
Officer Financial Products and Services. Previously,
Mr. Lusardi was a Managing Director at Lehman Brothers,
which he joined in 1980. He is also a director of OneBeacon
Insurance Group, Ltd. and Primus Guaranty, Ltd. He received his
B.A. and M.A. degrees from Oxford University, and his M.B.A.
from Harvard Business School.
David I. Schamis has been a director of Symetra since
2004. He has been Managing Director of J.C. Flowers &
Co. LLC since 2000. He received his B.A. degree from Yale
University.
Lowndes A. Smith has been a director of the Company since
2007. Mr. Smith serves as Managing Partner of Whittington
Gray Associates. Mr. Smith formerly served as Vice Chairman
of The Hartford Financial Services Group, Inc. and President and
CEO of Hartford Life, Inc. He joined The Hartford in 1968.
Mr. Smith also serves as Chairman of OneBeacon Insurance
Group, Ltd. and is a director of 85 investment companies in the
mutual funds of The Hartford. He received his B.S. degree from
Babson College.
Composition
of the Board of Directors
Our business and affairs are managed under the direction of our
board of directors. Our board of directors currently consists of
seven members, four of whom we believe are independent directors
under currently applicable listing standards of the NYSE.
Effective upon completion of this offering, our board of
directors will be divided into three classes of directors who
will serve in staggered three-year terms, as follows:
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Class 1 directors will be Messrs. Lusardi and Schamis, and
their terms will expire at the annual meeting of stockholders to
be held in 2008;
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Class 2 directors will be Messrs. Levy and Smith, and their
terms will expire at the annual meeting of stockholders to be
held in 2009; and
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Class 3 directors will be Messrs. Foy and Talbot and
Ms. Grady, and their terms will expire at the annual
meeting of stockholders to be held in 2010.
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At each annual meeting of our stockholders beginning in 2008,
the successors to the directors whose terms expire at each such
meeting will be elected to serve until the third annual meeting
after their election or until their successor has been elected.
As a result, only one class of directors will be elected at each
annual meeting of our stockholders, with the other classes
serving for the remainder of their respective three-year terms.
Committees
of the Board of Directors
Upon completion of this offering, our board of directors will
conduct its business through three standing committees: the
audit committee, the compensation committee and the nominating
and corporate governance committee. In addition, from time to
time, special committees may be established under the direction
of the board of directors when necessary to address specific
issues. Our audit committee, our compensation committee and our
nominating and corporate governance committee will be required
to be composed of a majority of independent directors within
90 days following the completion of this offering and
entirely of independent directors within one year following the
completion of this offering.
105
Audit
Committee
Upon completion of this offering, we will have an audit
committee that will have responsibilities that meet all NYSE and
SEC requirements.
The audit committee will have the power to investigate any
matter brought to its attention within the scope of its duties
and to retain counsel for this purpose where appropriate.
Upon the completion of this offering, our audit committee will
consist of Mr. Foy, Mr. Levy and Mr. Schamis.
Within a year of the completion of this offering, all members of
the audit committee will be independent directors according to
the rules and regulations of the SEC and the NYSE and at least
one member will be an audit committee financial
expert, as such term is defined in Item 407 of
Regulation S-K.
Our board of directors has adopted a written charter for the
audit committee to be effective upon the completion of this
offering, which will be available on our website as of the date
of this offering.
Compensation
Committee
Upon completion of this offering, we will have a compensation
committee that will have responsibilities that meet all NYSE
requirements.
Upon the completion of this offering, our compensation committee
will consist of Mr. Foy, Ms. Grady and Mr. Smith.
Within a year of completion of this offering, all members of the
compensation committee will be independent directors according
to the rules and regulations of the NYSE.
Our board of directors has adopted a written charter for the
compensation committee to be effective upon the completion of
this offering, which will be available on our website as of the
date of this offering.
Nominating
and Corporate Governance Committee
Upon completion of this offering, we will have a nominating and
corporate governance committee that will have responsibilities
that meet all NYSE requirements.
Upon completion of the offering, our nominating and corporate
governance committee will consist of Mr. Foy, Mr. Levy
and Mr. Smith. Within a year of completion of this
offering, all members of the nominating and corporate governance
committee will be independent directors according to the rules
and regulations of the NYSE.
Our board of directors has adopted a written charter for the
corporate governance and nominating committee to be effective
upon the completion of this offering, which will be available on
our website as of the date of this offering.
Compensation
Committee Interlocks and Insider Participation
Upon completion of this offering, our board of directors will
have a compensation committee as described above. None of our
executive officers will serve as a member of our compensation
committee, and none of them have served, or will be permitted to
serve, on the compensation committee (or any other committee
serving a similar function) of any entity of which an executive
officer is expected to serve as a member of our compensation
committee.
Code of
Business and Financial Conduct and Corporate Governance
Guidelines
Our board of directors has adopted a Code of Business and
Financial Conduct applicable to our directors, officers and
employees, to be effective upon the completion of this offering,
as well as corporate governance guidelines, each in accordance
with applicable rules and regulations of the SEC and the NYSE.
The Code of Business and Financial Conduct and the corporate
governance guidelines will be available on our website as of the
date of this offering.
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Compensation
Discussion and Analysis
Named
Executive Officers
The following Compensation Discussion and Analysis describes the
compensation earned by, awarded to or paid to our Chief
Executive Officer, our Chief Financial Officer and our three
other most highly paid executive officers as determined under
the rules of the SEC, collectively referred to as the Named
Executive Officers and listed below:
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Randall H. Talbot, President and Chief Executive Officer
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Roger F. Harbin, Executive Vice President and Chief Operating
Officer
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Margaret A. Meister, Executive Vice President and Chief
Financial Officer
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M. Scott Taylor, Senior Vice President, Group Department,
Symetra Life Insurance Company
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Patrick B. McCormick, Senior Vice President, Distribution,
Symetra Life Insurance Company
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Oscar C. Tengtio, Former Executive Vice President and Chief
Financial Officer. Mr. Tengtio resigned as an executive
officer and employee on February 17, 2006.
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Compensation
Philosophy
Our overall executive compensation program was redesigned after
the Acquisition by the acquiring stockholder group to align the
financial interests of our executives with those of our
stockholders. We focus on pay-for-performance (both individual
and company performance) by providing incentives that emphasize
long-term value creation, therefore putting a large portion of
our executives pay at risk. Based on this philosophy, the
compensation committee has maintained base salaries that may be
lower than those paid by other financial services companies and
life insurers and has chosen not to provide pensions or other
perquisites, choosing instead to grant the largest portion of
compensation as long-term incentive compensation which is based
on the growth of intrinsic business value per share.
Pay-for-performance. A majority of our
executive officers compensation is directly linked to our
short- and long-term financial goals, thereby providing
incentives for both short- and long-term results. Our Annual
Incentive Bonus Plan rewards performance relative to short-term
results based on a combination of meeting company performance
goals and individual performance goals. The Symetra Financial
Corporation Performance Share Plan (the Performance Share
Plan) rewards long-term performance relative to financial
goals set on three-year cycles.
Pay at risk. The pay at risk approach of our
incentive compensation is intended to align with the executive
officers impact on company performance over the short-and
long-term. Our Chief Executive Officer receives the largest
portion (approximately 90%) of his target total annual
compensation as performance-based incentive compensation. All
executive officers have a significant amount of their total
annual compensation at risk through performance-based incentives.
Competitive. As we grow and strive to reach
competitive financial goals, our need for experienced executive
talent will continue. Our compensation opportunities must be
competitive to allow us to attract and retain talented
executives in our field.
Compensation
Process
The compensation committee, according to its charter, is
responsible for approving all compensation for our Named
Executive Officers as well as our other executive officers and
for administering the Performance Share Plan with respect to all
participants.
The compensation committee relies on Randy Talbot, our Chief
Executive Officer, and Chris Katzmar, our Vice President of
Human Resources, for recommending compensation programs and
awards for executive officers subject to committee approval and
for administering approved programs for all employees.
Mr. Talbot and Ms. Katzmar attend committee meetings
and, at the committees request, present managements
analysis
107
and recommendations regarding compensation actions to include
base salary, Annual Incentive Bonus Plan and Performance Share
Plan grants.
Compensation actions are usually presented at the first meeting
of the compensation committee of each year after financial
results for the prior year are available. In the meeting,
Mr. Talbot also presents a self-evaluation outlining his
performance to assist the compensation committee in determining
his total compensation for the year. The compensation committee
then holds a private session to discuss and determine
Mr. Talbots total compensation.
The compensation committee is comprised of experienced investors
who have, based on their experience, set compensation levels and
performance targets at what they believe to be appropriate
levels.
Elements
of Compensation
We currently compensate our executives through a combination of
base salary, annual incentive compensation or, in the case of
our sales executive, sales incentive compensation and long-term
incentive compensation.
Base salary. Our philosophy is to make base
salary a relatively smaller portion of the overall compensation
package of our executive officers relative to what we believe to
be common in the industry. While executive performance is
annually reviewed, base salaries for executives are not
regularly adjusted. The base salaries for Messrs. Talbot,
Harbin, Taylor and McCormick have not been increased since
August 2004. Ms. Meister received an increase in her base
salary in connection with her promotion to Chief Actuary in
August 2004 and again in connection with her promotion to Chief
Financial Officer in February 2006. Our practice of not
adjusting base salaries based on performance is consistent with
our philosophy that the majority of compensation should be
variable based on our actual long-term and short-term
performance and that of the executive.
Annual incentive compensation. We pay annual
incentive cash awards to our Named Executive Officers, other
than Mr. McCormick, through the Annual Incentive Bonus Plan
in March of each year for performance in the prior calendar
year. The Annual Incentive Bonus Plan awards are based on our
fulfillment of performance goals set at the beginning of the
year and the executives individual role in that goal
fulfillment.
The compensation committee determines the performance goals and
approves the target aggregate bonus pool for the Annual
Incentive Bonus Plan each year. The actual aggregate bonus pool
for the Annual Incentive Bonus Plan is determined by the sum of
all participants target awards and can range from 0% to
200% of this target, based on our fulfillment of performance
goals. The metric currently used to determine the actual
aggregate bonus pool for the plan is the growth in our intrinsic
business value per share, which is the average of the growth of
both our GAAP book value per share and enterprise value per
share during the plan year. Currently, the growth target is 13%.
If the average growth is 10% or lower, the plan will not be
funded and no bonus awards will be paid. If the average growth
falls between 10% and 13%, the aggregate bonus pool will be less
than 100% of the target. If the average growth meets or exceeds
the 13% goal, the aggregate bonus pool will grow proportionately
to a maximum of 200% of the target at 16%. The aggregate bonus
pool for the Annual Incentive Bonus Plan for 2006 (for bonuses
paid in March 2007) was 92% of the target.
After the aggregate bonus pool for the Annual Incentive Bonus
Plan is established, each executive is allocated a portion of
the pool based on his or her individual target and such
executives individual performance. The individual target
bonus for each of the CEO, COO and CFO is equal to 50% of his or
her base salary while the individual annual target bonus for
Mr. Taylor is 35% of his base salary. After reviewing
performance of the executive, Mr. Talbot recommends to the
compensation committee a percentage of each executives
individual target to be paid out for the plan year based on such
executives individual performance compared to goals or
expectations set by such executive and Mr. Talbot.
Mr. Talbots recommended annual incentive bonus is
subject to the total funding level for the Annual Incentive
Bonus Plan and the average percentage of target bonuses paid to
the executive team. The compensation committee then makes the
final determination of the amount to be received by each
executive. In 2006, Mr. Talbot, Mr. Harbin,
Ms. Meister
108
and Mr. Taylor received 100%, 85%, 112% and 112%,
respectively, of their target bonuses under the Annual Incentive
Bonus Plan.
Combining our overall performance and individual performance
ensures the executive is aligned with our goals for financial
success as well as rewarded for individual performance.
In 2006, the Annual Incentive Bonus was designed to comprise 5%,
8%, 10% and 10% of total target compensation for
Mr. Talbot, Mr. Harbin, Ms. Meister and
Mr. Taylor, respectively.
Sales incentive compensation. All sales
employees, including Mr. McCormick, participate in a sales
incentive program. The targets for Mr. McCormicks
Sales Incentive Plan are designed to motivate him to develop new
distribution relationships and expand existing relationships.
Mr. McCormick earns a percentage of sales for each product
line for new net sales volumes. The percentages decrease after a
prescribed sales-volume threshold is met. The percentages and
thresholds differ from product to product within each product
line. The range of percentages that applies before a sales
threshold is met is 0.00001%-0.003% and the range of sales
thresholds is $20,000,000-$1,000,000,000. The range of
percentages that applies after a sales threshold is met is
0.000005%-0.001%. Mr. McCormicks sales incentive
target was 22% of his target total compensation for 2006.
Long-term incentive compensation. We provide
long-term incentives to our Named Executive Officers and other
executive officers through the Performance Share Plan. This
long-term incentive compensation is in the form of unit-based
performance awards. Awards are granted annually. Each award
period is typically three years, therefore overlapping other
award periods. At the time of grant, each target performance
unit has the financial value of $100.00. Thereafter, each target
performance unit has a notional value of $100.00 x
(1 + aggregate percentage growth in intrinsic business
value per share). At the end of the award period, the
compensation committee determines the level of attainment of the
performance goal and assigns a harvest percentage of
0-200% of
target based on that determination. The matured performance
units are paid in cash in an amount equal to the then notional
value of the target shares multiplied by the harvest percentage.
For all currently running performance cycles, the performance
goal is 13% compound annualized growth in our intrinsic business
value per share. Growth in our intrinsic business value per
share equals the average of the compound annualized growth rates
during the award period of the GAAP book value per share and the
enterprise value per share, excluding unrealized gains or losses
other than unrealized gains or losses on equities held as
investments.
The harvest percentage ranges from 0% to 200% for the currently
running performance cycles. If the compound annualized growth is
10% or less, no award is made. If the compound annualized growth
is 16% or higher, the maximum harvest percentage of 200%
applies. For annualized percentage growth between 10% and 16%,
the harvest percentage is determined on the basis of straight
line interpolation.
The Grant of Plan-Based Awards table on page 112
sets forth the grants made under this plan to each Named
Executive Officer for 2006. Our Chief Executive Officers
recommendations and compensation committees determination
with respect to the size of awards to participants are
subjective, and no proportional or other mathematical formula is
applied, nor are any specific factors considered. Moreover, the
allocation of performance shares among our Named Executive
Officers is not based on any performance criteria, although no
payouts are made with respect to any performance shares granted
unless the performance goal described above is satisfied. Our
Chief Executive Officer receives the largest grant because he is
responsible for the companys overall business and
financial performance. Our Chief Operating Officer receives a
relatively larger grant than our Senior Vice President Group
Division, because Mr. Harbin is accountable for all product
line results, while Mr. Taylor leads our most significant
product line. Our Chief Financial Officers awards under
this plan have increased over each of the past three years due
to her increased responsibilities within the company during this
period, ultimately culminating in her promotion to Chief
Financial Officer in 2006. Our Senior Vice President, Sales and
Distribution receives a relatively smaller grant since his sales
incentive plan, which is also performance-based, already
comprises a significant component of his overall compensation.
The target grants for the
2006-2008
performance share award period comprised 85%, 75%, 70%, 61% and
52% of target total compensation for Mr. Talbot,
Mr. Harbin, Ms. Meister, Mr. Taylor and
Mr. McCormick,
109
respectively. While awards of performance shares were not
specifically designed around these percentages, this program is
designed such that our Named Executive Officers have a
substantial proportion of their target total compensation
subject to the achievement of performance targets.
With respect to the
2004-2006
performance share award period, the company exceeded the target
compound annualized growth rate per share. Accordingly, the
payouts indicated in the Summary Compensation Table reflected
106% of the target performance share awards for our Named
Executive Officers.
IPO Grant Program. In October 2007, our board
of directors approved an IPO grant program to better align the
interests of our management team with the interests of our
stockholders and to serve as a long-term retention tool.
Participants in our Performance Share Plan as of the date of
this offering are eligible to participate in this grant program.
Under this program, we will make the following one-time grants
at or following the date of this offering:
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Shares of Common Stock. A portion of the
awards will be in the form of fully-vested shares of common
stock, having an aggregate value of $2.9 million. We
estimate that we will grant 153,684 shares, based on an
assumed initial public offering price of $19.00 per share; the
actual number of shares will be determined based on the actual
initial public offering price per share.
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Restricted Stock Units. A portion of the
awards will be in the form of restricted stock units, having an
aggregate value of $5.8 million. We estimate that we will
issue 307,368 restricted stock units, based on an assumed
initial public offering price of $19.00 per share; the actual
number of units will be determined based on the actual initial
public offering price per share. The units will become 50%
vested on the second anniversary of this offering, and the
remainder will vest on the fourth anniversary of this offering,
subject to continuous employment of the participant with us
through each such date.
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Stock Options. A portion of the awards will be
in the form of stock options. We estimate that we will grant
options to purchase 450,100 shares, based on an assumed
initial public offering price of $19.00 per share; the actual
number of options will be determined based on the actual initial
public offering price per share. The options will have an
exercise price of $20.90 per share (110% of the midpoint of the
stock price range set forth on the cover page of this
prospectus) or equal to the initial public offering price if the
initial public offering price is greater than $20.90, and will
have a seven-year term. The options will vest as to 50% of the
shares on the third anniversary of this offering, and will vest
as to the remaining shares on the fifth anniversary of this
offering, subject to continuous employment of the participant
with us through each such date.
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Awards under this program are made pursuant to our Equity Plan
(described under Management Employee Benefit
Plans) and are subject to the terms of that plan. All of
these awards are contingent upon the closing of this offering.
The restricted stock units and stock options are subject to
time-based vesting, and are not subject to further
performance-based criteria.
Of the awards to be granted under this program, our Named
Executive Officers will receive approximately 30%, 10%, 10%, 1%
and 3% for Mr. Talbot, Mr. Harbin, Ms. Meister,
Mr. Taylor and Mr. McCormick, respectively. Our
compensation committee arrived at this allocation by starting
with the percentage of the Performance Share Plan pool for 2007
awarded to each Named Executive Officer, and adjusting these
percentages to factor in contributions made by particular Named
Executive Officers to the initial public offering process. This
determination was subjective, and these percentages are not
based on any formula or performance targets.
Employment/severance/change of control
arrangements. We have no employment agreements
with our executive officers. All of our executive officers are
at will employees. We have an Executive Severance
Pay Plan that provides for payment of severance in the event of
either termination without cause, or, in the event of a change
of control of the company, constructive termination. This plan
terminates upon the closing of the initial public offering. The
terms of this plan are summarized on page 117.
In addition, in the event of a termination of an executive
officers employment by the company without cause or by the
executive due to a constructive termination, in either case
within 24 months of a change of control, executives receive
certain payments under our Performance Share Plan as described
in more detail on
110
page 116. We provide for this change in control-related
benefit as an incentive and retention mechanism by providing
security to our executives in the event that we experience a
change in ownership.
Retirement benefits. All of our employees,
including our Named Executive Officers, may participate in our
qualified 401(k) plan, which includes a safe harbor employer
match. The safe harbor employer match is equal to 100% of the
employee contributions up to the first 6% of eligible
compensation. We have no defined benefit pension plans,
non-qualified deferred compensation plans or retiree medical
plans.
Perquisites. Our executive officers receive
the same benefits that are available to all employees. Benefits
such as medical and dental insurance, life insurance, short- and
long-term disability, vacation and sick leave, tuition
reimbursement and professional education funding, charitable
gift matching, employee referral program, and relocation
assistance are available to all employees. All employees are
also eligible for several discount programs including fitness
club memberships, computers/software, wireless programs, office
supplies, rental cars and hotels for personal use.
Tax
and accounting implications of executive compensation
programs
After the consummation of this offering, Section 162(m) of
the Internal Revenue Code would limit the deductibility of the
compensation of our Named Executive Officers to $1,000,000 per
individual to the extent that such compensation is not
performance-based as defined in Section 162(m).
We intend to rely on an exemption from Internal Revenue Code
Section 162(m) for compensation plans adopted prior to a
companys initial public offering. This transition
exemption for our compensation plans will no longer be available
to us after the date of our annual meeting that occurs after the
third calendar year following the year of our initial public
offering, or if we materially modify the plan earlier. We will
continue to consider the implications of Internal Revenue Code
Section 162(m) and the limits of deductibility of
compensation in excess of $1,000,000 as we design our
compensation programs going forward.
Summary
Compensation Table
The following table presents compensation earned during 2006 by
the companys CEO, CFO and its three most highly
compensated executive officers other than the chief executive
officer and chief financial officer (the Named Executive
Officers):
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Non-Equity
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Incentive Plan
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All Other
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Total
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Name and
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Salary
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Compensation
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Compensation
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Compensation
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Principal Position
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Year
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($)
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($)(a)
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($)(b)
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($)
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Randall H. Talbot
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2006
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525,000
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4,523,083
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13,200
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5,061,283
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President and Chief Executive Officer
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Roger F. Harbin
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2006
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400,000
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3,010,789
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13,200
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3,423,989
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Executive Vice President and COO
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Margaret A. Meister(c)
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2006
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269,615
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380,331
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11,560
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661,506
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Executive Vice President and Chief Financial Officer
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Oscar C. Tengtio(d)
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2006
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48,750
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13,180
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61,930
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Executive Vice President and Chief Financial Officer
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M. Scott Taylor
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2006
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276,050
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492,033
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13,200
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781,283
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Senior Vice President Group Division
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Patrick B. McCormick
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2006
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200,000
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494,154
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12,092
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706,246
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Senior Vice President Sales and Distribution
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(a) |
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Represents (i) 2006 annual incentive bonuses paid in March
2007 (other than with respect to Mr. McCormick),
(ii) in the case of Mr. McCormick, amounts earned
under the 2006 Sales Incentive Plan, and (iii) amounts
earned under the
2004-2006
Performance Share Plan and paid in March 2007. |
111
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Mr. Talbot earned $241,500 for the 2006 annual incentive
bonus and $4,281,583 for the
2004-2006
Performance Share Plan. Mr. Harbin earned $156,400 for the
2006 annual incentive bonus and $2,854,389 for the
2004-2006
Performance Share Plan. Ms. Meister earned $130,572 for the
2006 annual incentive bonus and $249,759 for the
2004-2006
Performance Share Plan. Mr. Taylor earned $99,555 for the
2006 annual incentive bonus and $392,478 for the
2004-2006
Performance Share Plan. Mr. McCormick earned $137,355 in
his Sales Incentive Plan and $356,799 for the
2004-2006
Performance Share Plan. |
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(b) |
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Represents employer contributions to the Symetra Retirement
Savings Plan. In addition, in the case of Ms. Meister, this
amount also includes a grossed up employee referral bonus of
$1,360. In the case of Mr. Tengtio, this amount also
includes payment of $10,231 for accrued vacation upon the
resignation of his employment. |
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Ms. Meister was promoted to Executive Vice President and
Chief Financial Officer on February 17, 2006. |
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(d) |
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Mr. Tengtio resigned as an executive officer and employee
on February 17, 2006. |
Grant of
Plan-Based Awards
The following table summarizes the estimated future payouts
under grants made by us to the Named Executive Officers in 2006
under our incentive plans:
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Estimated Future Payouts Under
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Number of
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Non-Equity Incentive Plan Awards
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Non-Equity
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Units
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Threshold
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Target
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Maximum
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Name
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Incentive Plan(a)
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Cycle
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Granted
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($)
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($)
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($)
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Randall H. Talbot
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Annual Incentive Bonus Plan
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2006
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n/a
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0
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262,500
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525,000
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Performance Share Plan
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2006 - 2008
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30,000
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0
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4,320,000
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9,360,000
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Roger F. Harbin
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Annual Incentive Bonus Plan
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2006
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n/a
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0
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200,000
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400,000
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Performance Share Plan
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2006 - 2008
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12,500
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0
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1,800,000
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3,900,000
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Margaret A. Meister
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Annual Incentive Bonus Plan
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2006
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n/a
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0
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126,719
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253,438
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Performance Share Plan
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2006 - 2008
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6,500
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0
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936,000
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2,028,000
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M. Scott Taylor
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Annual Incentive Bonus Plan
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2006
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n/a
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0
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96,618
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193,235
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Performance Share Plan
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2006 - 2008
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4,000
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0
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576,000
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1,248,000
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Patrick B. McCormick
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Sales Incentive Plan
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2006
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n/a
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0
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171,190
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456,506
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Performance Share Plan
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2006 - 2008
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2,750
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0
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396,000
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858,000
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(a) |
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On May 17, 2006, the 2006 targets of the Annual Incentive
Bonus Plan were approved for Messrs. Talbot, Harbin, Taylor
and Ms. Meister. Mr. McCormicks 2006 Sales
Incentive Plan was approved by Mr. Talbot on
January 25, 2006. On May 17, 2006, all Named Executive
Officers were granted units in the
2006-2008
Performance Share Plan. Each unit was initially valued at
$100.00. |
Please see Compensation Discussion and Analysis
Elements of Compensation starting on page 108 for a
description of the material terms of the Annual Incentive Bonus
Plan, the Sales Incentive Plan and the Performance Share Plan.
Employee
Benefit Plans
The following is a summary of our primary employee benefit plans:
Equity
Plan
Background. The purpose of the Symetra
Financial Corporation Equity Plan (the Equity Plan)
is to advance our and our stockholders interests by
providing long-term incentives to our employees, directors and
consultants. Our board of directors adopted the Equity Plan in
October 2007. The Equity Plan became effective upon adoption,
and has a ten-year term.
Administration. Our compensation
committee will administer the Equity Plan, and will determine
which individuals are eligible to receive awards, the type of
awards and number of shares or units to be granted, the
112
exercise or purchase price for awards, the vesting schedule for
each award and the maximum term of each award (subject to the
limits set forth in the Equity Plan). The compensation committee
will have authority to interpret the Equity Plan, and any
determination by the compensation committee will be final.
Share Reserve. We have reserved
7,830,000 shares of our common stock for issuance under the
Equity Plan. This reserve, and all limits referenced below, are
subject to adjustment in the event of stock splits or similar
capitalization events.
Eligibility. The individuals eligible
to participate in the Equity Plan include our officers and other
employees, our non-employee directors and any consultants.
Limit on Awards. During any calendar
year, the maximum aggregate number of shares subject to awards
granted to any individual shall be 435,000.
Equity Awards. The Equity Plan permits
us to grant the following types of awards:
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Stock Options. The Equity Plan provides
for the grant of incentive stock options (commonly referred to
as ISOs) to employees and nonqualified stock options (commonly
referred to as NSOs) to employees, directors and consultants.
The compensation committee determines the terms of options,
provided that ISOs are subject to statutory limitations. The
compensation committee determines the exercise price for a stock
option, within the terms and conditions of the Equity Plan and
applicable law, provided that the exercise price of an ISO may
not be less than 100% (or 110% in the case of a recipient who is
a ten percent stockholder) of the fair market value of our
common stock on the date of grant. ISOs exercisable for no more
than 435,000 shares may be issued to a participant in any
one year.
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Options granted under the Equity Plan will vest at the rate
specified by the compensation committee, with the vesting
schedule for each stock option to be set forth in the stock
option agreement for such option grant. Generally, the committee
determines the term of stock options granted under the Equity
Plan, up to a maximum term of ten years.
After termination of an optionees employment, the optionee
may exercise the vested portion of each option for the period of
time stated in the option agreement to which such option
relates. The committee also has the discretion to permit
exercise of the unvested portion of an option in the event of
voluntary resignation or retirement. Generally, if termination
is due to disability, the vested portion of each option will
remain exercisable for three years following the date of
disability, and in the event of death of an optionee, the vested
portion of each option will remain exercisable by such
optionees estate for one year. In all other cases, the
vested portion of each option will generally remain exercisable
for three months following termination of employment. However,
an option may not be exercised later than its expiration date.
Notwithstanding the above, in the event of a change of control
of Symetra, followed by termination without cause or
constructive termination (as such terms are defined in the
Equity Plan) of an optionee within 12 months of the change
of control, such optionees stock options will become 100%
vested and exercisable for up to 30 days following such
termination.
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Stock Appreciation Rights. Stock
appreciation rights provide for a payment, or payments, in cash
or shares of common stock, to the participant based upon the
difference between the fair market value of our common stock on
the date of exercise and the stated exercise price. The exercise
price of a stock appreciation right may not be less than 100% of
the fair market value of our common stock on the date of grant
of the stock appreciation right. Stock appreciation rights are
otherwise generally subject to the same terms and limitations as
described above for stock options, including vesting
acceleration upon termination following a change of control.
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Restricted Stock. A restricted stock
award is an offer by us to sell shares of our common stock
subject to a right of repurchase by us upon the termination of
employment of the participant on such terms (including price and
timing) as may be determined by the compensation committee. This
right of repurchase may lapse according to vesting conditions,
which may include performance conditions, a time-based schedule
or a combination thereof, to be determined in each case by the
compensation
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113
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committee. In the event of death or disability of a holder of
restricted stock subject to vesting other than monthly vesting,
our right to repurchase such shares shall lapse with respect to
a pro rata portion of the restricted shares equal to the
percentage of the vesting period that has elapsed. The
compensation committee also has the discretion to waive all or a
portion of our right to repurchase shares of restricted stock in
the event of a participants voluntary resignation or
retirement. In the event of a change of control followed by
termination without cause or constructive termination of the
participant within 12 months, the restrictions on such
participants restricted stock will lapse.
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Restricted Stock Units. Restricted
stock units represent the right to receive, without payment to
the company, an amount of shares of our common stock equal to
the number of shares underlying the restricted stock units
multiplied by the fair market value of a share on the date of
vesting of the restricted stock units. The compensation
committee may, at its discretion, impose vesting conditions,
which may include performance conditions, a time-based vesting
schedule or a combination thereof, on the exercise of such
units. A participants restricted stock units generally
terminate in the event the participants employment
terminates prior to payment with respect to the units. However,
in the event of death or disability of a holder of restricted
stock units that are subject to vesting other than monthly
vesting, the holder will receive payment for a pro rata
percentage of the unvested units equal to the percentage of the
vesting period that has elapsed. The committee also has the
discretion to make payment with respect to all or a portion of
the unvested restricted stock units held by a participant in the
event of such participants voluntary resignation or
retirement. In the event of a change of control followed by
termination without cause or constructive termination of the
participant within 12 months, such participants
restricted stock units that were outstanding on the date of
termination will be cancelled and such participant will receive
a cash payment equal to the product of the number of restricted
stock units and the fair market value of a share of our common
stock on the date of termination.
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Performance Shares/Units. A performance
share award entitles a participant to receive all or part of the
value of a specified number of hypothetical shares if specified
performance objectives, as determined by the committee, are
satisfied during a specified award period. The payout under a
performance share award is the product of (i) the target
number of performance shares subject to award, (ii) the
performance percentage and (iii) the fair market value of a
share on the date the award is paid or becomes payable to the
participant.
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Performance units are similar to performance shares, except that
the value is based on a fixed dollar value or formula specified
by the committee, rather than the fair market value of a share
on the date the award is paid or payable (as with performance
shares). The maximum value of performance units that may be
earned by a participant for any single award period of one year
or longer may not exceed $25 million.
At the end of the award period for performance shares or
performance units, the committee assigns a performance
percentage that is between 0% and 200% depending on the extent
to which the applicable performance objectives were met during
the award period. Performance shares and units may be settled in
cash, shares of our common stock, other securities, other
awards, other property or any combination thereof, as determined
by the committee.
A participants performance shares or units are cancelled
if the participants employment is terminated prior to end
of the award period. However, if a participant dies or becomes
disabled during the performance period, such award is paid to
such participant (or such participants estate) on a
pro-rata basis. In the event of a change of control followed by
termination without cause or constructive termination of the
participant within 12 months, the participants
performance share/unit award shall be paid out on a pro rata
basis according to the percentage of months during the award
period that have elapsed, with a performance percentage of 100%.
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Other Stock-Based Awards. The
compensation committee also has the discretion to issue other
equity-based awards under the Equity Plan, including
fully-vested shares of common stock.
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114
Awards Not Transferable. Awards under
the Equity Plan are generally non-transferable, except to a
participants estate in the event of the participants
death.
Adjustments. The compensation committee
is authorized to make adjustments to the terms and conditions of
awards in recognition of certain unusual or nonrecurring events,
including but not limited to extraordinary dividends, stock
splits, mergers or a change in control of Symetra. In such
events, the committee has the discretion to do what it
determines is appropriate or desirable, including providing for
the substitution or assumption or awards, accelerating the
vesting of or the lapse of restrictions on awards, terminating
the awards, or making a cash payment in consideration for the
cancellation of the awards.
Amendment and Termination. The Equity
Plan may be amended or terminated at any time upon approval of
our board of directors, provided that no amendment or
termination will adversely affect outstanding awards. The Equity
Plan will terminate on the earlier of the termination of the
Equity Plan by our board of directors or ten years from the
effective date of the Equity Plan.
Employee
Stock Purchase Plan
Background. Our employee stock purchase
plan is designed to enable eligible employees to periodically
purchase shares of our common stock at a discount. Purchases are
accomplished through participation during discrete offering
periods. Our employee stock purchase plan is intended to qualify
as an employee stock purchase plan under section 423 of the
Internal Revenue Code of 1986, as amended. Our board of
directors adopted our employee stock purchase plan in October
2007.
Share Reserve. We have initially
reserved 870,000 shares of our common stock for issuance
under our 2008 employee stock purchase plan.
Administration. Our compensation
committee will administer our employee stock purchase plan.
Our employees generally are eligible to participate in our
employee stock purchase plan if they are employed on a salaried
basis by us, or a subsidiary of ours that we designate, for 20
or more hours per week and more than five months in a calendar
year. Employees who are 5% stockholders, or would become 5%
stockholders as a result of their participation in our employee
stock purchase plan, are ineligible to participate in our
employee stock purchase plan. We may impose additional
restrictions on eligibility as well.
Under our employee stock purchase plan, eligible employees may
acquire shares of our common stock by accumulating funds through
payroll deductions. Our eligible employees may select a rate of
payroll deduction up to 15% of their cash compensation (or such
lower limit as determined by the compensation committee). We
also have the right to amend or terminate our employee stock
purchase plan, except that, subject to certain exceptions, no
such action may adversely affect any outstanding rights to
purchase stock under the plan. Our employee stock purchase plan
will remain in effect until terminated by our compensation
committee.
Purchase Rights. When an offering
period commences, our employees who meet the eligibility
requirements for participation in that offering period and who
elect to participate are granted a non-transferable option to
purchase shares in that offering period. An employees
participation automatically ends upon termination of employment
for any reason. An employee may withdraw from the plan at any
time at least five business days prior to a purchase date, and
in such event shall receive a refund of all of such
employees payroll deductions deposited to date into the
plan.
Each offering period will be for approximately six months
(commencing on the first trading day on or immediately after
February 15 and August 15 of each year and terminating on the
trading day on or immediately preceding the next August 14 or
February 14, respectively). The first offering period under
the plan shall commence on February 15, 2008. Each purchase
period will be for approximately three months (commencing on the
first day of the offering period). The first purchase period in
this first offering period will run until May 14, 2008, and
the second purchase period in this first offering period will
run from May 15, 2008 until August 14, 2008. The
duration and timing of offering periods may be changed by the
compensation committee without shareholder approval if such
change is announced prior to the scheduled beginning of the
offering period to be effected thereafter.
115
No participant will have the right to purchase our shares at a
rate which, when aggregated with purchase rights under all our
employee stock purchase plans that are also outstanding in the
same calendar year(s), have a fair market value of more than
$25,000, determined as of the first trading day of the
applicable offering period, for each calendar year in which such
right is outstanding. The purchase price for shares of our
common stock purchased under our employee stock purchase plan
will be 85% of the closing trading price per share of our common
stock as reported by the New York Stock Exchange on the last
date of each purchase period.
Change in Control. In the event of a
change in control of Symetra, the acquiring entity shall assume
the outstanding purchase rights. In the event the acquiring
entity refuses to do so, the purchase and offering periods then
in progress shall terminate prior to the date of closing of the
change of control transaction.
401(k)
Plan
We offer a 401(k) plan to all employees who meet specified
eligibility requirements. Eligible employees may contribute up
to 100% of their eligible compensation, subject to limitations
established by the Internal Revenue Code. We match participant
contributions dollar-for-dollar, up to 6% of their compensation.
Participants are immediately vested in their contributions.
Potential
Payments Upon Termination or Change in Control
We have no employment agreements with our Named Executive
Officers that would provide payments upon termination of
employment.
Annual
Incentive Bonus Plan
The Annual Incentive Bonus Plan requires that an executive be an
active employee on December 31 of the plan year, and remain
continuously employed by the company through the award payout
date, in order to be eligible to receive a bonus award.
Exceptions to this include death, disability, retirement at
age 65 or older or position elimination. In these cases,
the bonus will be based on eligible earnings paid through the
executives last day of work within the plan year.
Sales
Incentive Plan
Mr. McCormicks Sales Incentive Plan provides that if
he leaves his position for any reason, he will be paid for
production earned through the end of the last full month of
employment.
Performance
Share Plan
The Performance Share Plan provides that, except for the change
of control provision described below, the executive would
immediately forfeit all outstanding awards upon termination of
employment prior to the end of the applicable award period. The
board of directors, at its discretion, may provide that if an
executive dies, retires, is disabled or is granted a leave of
absence, or if the executive is otherwise terminated in a manner
reasonably judged to be not seriously detrimental to the
company, then all or a portion of the executives award, as
determined by the board, may be paid to the executive (or
beneficiary).
The Performance Share Plan includes a double trigger
change in control provision which provides that if a
participants employment is terminated without cause or
constructively terminated within 24 months after a change
in control, each award held by the participant prior to the
change in control is cancelled and the participant is entitled
to receive an award payment equal to the product of (i) the
then financial value of 100% of the performance shares and
(ii) the harvest percentage, which is based on the level of
attainment of the performance goal as of the last day of the
calendar quarter ending prior to the date of the termination
event. Alternatively, following the change in control, if the
participant remains continuously employed through the end of the
award period, then the participant will receive those awards for
which the participant would have been paid had the change of
control not occurred. For purposes of this plan, a change of
control occurs when any person or group,
116
other than White Mountains or Berkshire Hathaway, an underwriter
or an employee benefit plan of the company, becomes the
beneficial owner of 35% or more of the companys
outstanding common stock.
Under the Performance Share Plan, a constructive
termination is defined as a termination of the
participants employment at the initiative of the
participant following a material decrease in salary or a
material diminution in the participants authority, duties
or responsibilities.
Executive
Severance Pay Plan
Our Named Executive Officers each participate in our Executive
Severance Pay Plan. This plan was adopted in 2007, but
terminates upon the closing of our initial public offering. The
plan provides for payment of severance in the event of a
qualifying termination, in an amount equal to:
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a multiple, ranging from 1.5 to 2.0, of such officers
annual base salary at the time of termination; and
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the officers target annual incentive bonus in the year of
termination, or in the case of Mr. McCormick, the sales
incentive bonus earned in the year prior to termination.
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A qualifying termination is defined as termination of an officer
without cause, or, in the event of a change of control of the
company, constructive termination. For purposes of this plan, a
change of control occurs when any person, entity or group
becomes, whether by merger or otherwise, the beneficial owner of
securities representing 100% of the combined voting power of the
companys outstanding voting securities. Constructive
termination means termination following a material decrease in
base salary or target total annual compensation, a material
diminution in authority or duties, or relocation to a location
that is more than 100 miles away from the officers
current office, subject in each case to cure by the company
following notice.
Potential
Payments Upon Termination or Change in Control
The following table shows the potential payments that would have
been made by us to each of the Named Executive Officers,
assuming that each executives employment was terminated on
December 31, 2006.
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2006 Annual
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2005-2007
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2006-2008
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Incentive
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Performance
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Performance
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Executive
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Bonus Plan ($)(a)
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Share Plan ($)(b)
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Share Plan ($)(b)
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Total ($)
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Randall H. Talbot
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262,500
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3,413,110
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3,087,610
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6,763,220
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Roger F. Harbin
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200,000
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1,422,129
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1,286,504
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2,908,633
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Margaret A. Meister
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126,719
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255,983
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668,982
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1,051,684
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M. Scott Taylor
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96,618
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455,081
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411,681
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963,380
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Patrick B. McCormick
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137,355
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312,868
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283,031
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733,254
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(a) |
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Reflects the amount payable under the 2006 Annual Incentive
Bonus Plan, except with respect to Mr. McCormick, who would
instead receive payment under his Sales Incentive Plan. This
amount is payable in the event of death, disability, retirement
at age 65 or older or elimination of position, whether or
not a change of control of the company has occurred. |
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(b) |
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Payable in the event a Named Executive Officers employment
is terminated without cause or constructively terminated within
24 months following a change of control of the company. In
addition, the board of directors, at its discretion, may elect
to award all or a portion of such amounts to an officer in the
event of such executives death, retirement, disability or
leave of absence, or in the event of termination in a manner not
determined to be seriously detrimental to the company. |
117
Compensation
of Directors
The following table presents compensation paid to our board of
directors for the year ended December 31, 2006:
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Fees Earned
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or Paid in
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Name
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Cash ($)
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Total ($)
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David T. Foy, Chairman(a)
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67,000
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67,000
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John D. Gillespie(b)
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28,000
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28,000
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Lois W. Grady(c)
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32,800
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32,800
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Sander M. Levy(d)
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54,500
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54,500
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Robert R. Lusardi(e)
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30,000
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30,000
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Ronald P. McIntosh(f)
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30,700
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30,700
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David I. Schamis(g)
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38,800
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38,800
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Randall H. Talbot(h)
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(a) |
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Includes Chairman of the Board retainer, annual retainer, and
Board, Audit Committee and Compensation Committee meeting fees. |
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(b) |
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Includes annual retainer and Board meeting fees.
Mr. Gillespie retired as a member of the Board as of
June 26, 2007. |
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(c) |
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Includes annual retainer, and Board and Compensation Committee
meeting fees. Ms. Grady also serves on the First Symetra
National Life Insurance Company of New York Board of Directors
and Audit Committee. |
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(d) |
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Includes Chairman of the Audit Committee retainer, annual
retainer and Board and Audit Committee meeting fees.
Mr. Levy also serves on the First Symetra National Life
Insurance Company of New York Board of Directors and Audit
Committee. All compensation is paid to Vestar Capital Partners. |
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(e) |
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Includes annual retainer and Board meeting fees. |
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(f) |
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Includes annual retainer and Board meeting fees.
Mr. McIntosh also served on the First Symetra National Life
Insurance Company of New York Board of Directors.
Mr. McIntosh retired as a member of the Board of Symetra
Financial Corporation as of June 21, 2007 and from the
board of directors of First Symetra National Life Insurance
Company of New York as of June 25, 2007. |
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(g) |
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Includes annual retainer, and Board and Audit Committee meeting
fees. Mr. Schamis also serves on the First Symetra National
Life Insurance Company of New York Board of Directors and Audit
Committee. All compensation is paid to JC Flowers &
Co. LLC. |
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(h) |
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Mr. Talbot is our employee and receives no additional
retainer or fee for Board participation. |
Our directors, who are not employees of the Company, are
entitled to the following compensation for service on our board
of directors and board committees:
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Chairman of the Board Annual Retainer: $150,000
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Board (excluding Chair) Annual Retainer: $75,000
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Attendance at Board Meeting: $2,000
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Audit Committee Chair retainer: $30,000
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Audit Committee member (excluding Chair) retainer: $10,000
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Compensation Committee Chair retainer: $10,000
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Nominating and Corporate Governance Committee Chair retainer:
$10,000
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Attendance at each Committee Meeting: $2,000
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In addition, members of the Board of Directors of First Symetra
National Life Insurance Co. of New York receive an annual
retainer of $500, and fees of $100 per board meeting and $50 per
committee meeting attended.
We reimburse our directors for reasonable costs and expenses
incurred in connection with attendance at board and committee
meetings.
118
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
The following is a summary of each transaction or series of
similar transactions since August 2, 2004, the date of the
Acquisition, to which we were or are a party in which the amount
involved exceeded or exceeds $120,000 and in which any of our
directors or executive officers, any holder of 5% of our capital
stock or any member of the immediate family of any of the
foregoing persons had or will have a direct or indirect material
interest.
Investment
Management Agreement with White Mountains Advisors LLC
Certain of our investments are managed by WM Advisors, a wholly
owned subsidiary of White Mountains Insurance Group, Ltd. The
total fees paid to WM Advisors under our existing investment
management agreements, or IMAs, with them during 2006 were
$20.2 million. We and certain of our subsidiaries intend to
enter into an amended investment management agreement, or the
WMA Agreement, with WM Advisors pursuant to which WM Advisors
will continue to supervise and direct the fixed income and
alternative investment portion of our investment portfolio in
accordance with our investment philosophy described under
Business Investments.
Under this agreement and consistent with the existing IMA, WM
Advisors will have full discretion and authority to make all
investment decisions in respect of the fixed income and
alternative investment portion of our investment portfolio on
our behalf and at our sole risk, and to do anything which WM
Advisors deems is required, appropriate or advisable in
connection with the foregoing.
The assets of our portfolio will be held in one or more
separately identifiable accounts in the custody of a bank or
similar entity designated by us and acceptable to WM Advisors.
We will be responsible for custodial arrangements and the
payment of all custodial charges and fees.
We will agree to pay annual investment management fees generally
based on the month-end market / book values held under
custody as set forth in the table below:
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Value
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Annual Fee
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Investment grade fixed income:
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Up to $1 billion
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Book
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10.0 basis points
(0.1% or 0.001)
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$1 billion $2 billion
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Book
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8.5 basis points
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$2 billion $5 billion
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Book
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7.5 basis points
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Greater than $5 billion
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Book
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2.5 basis points
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High yield debt
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Market
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25.0 basis points
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Equities
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Market
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100.0 basis points
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Fully funded hedge funds, limited partnerships &
limited liability companies
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Market
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100.0 basis points
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Private equities & other deferred fundings:
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First two years of funds life
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Committed
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100.0 basis points
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Thereafter
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Market
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100.0 basis points
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We will pay WM Advisors a quarterly fee for Portfolio Management
Services computed at the annual rate of one basis point (0.01%)
of the aggregate value of the net assets of the Aggregate
Investment Account, which includes equities and commercial
mortgage loans in addition to the items managed by WM Advisors.
WM Advisors will provide reports containing a detailed listing
of invested assets and transactions in our investment portfolio,
as well as various other analytical reports as outlined by
Symetra, at least quarterly. We will review periodically the
performance of and the fees paid to WM Advisors under the WMA
Agreement.
The WMA Agreement will provide for an initial fixed term of
one year, which will be extendible by us for an additional
year (a second year), and if so extended, for a second
additional year (a third year).
119
Following the end of the initial term and any extensions, the
WMA Agreement may be terminated by either party upon
60 days written notice.
WM Advisors also provides investment advisory services to White
Mountains Insurance Group, Ltd., its subsidiaries and a number
of its affiliates.
Investment
Management Agreement with Prospector Partners, LLC
Prospector is a registered investment adviser managing assets
for corporations, foundations, endowments, and high net worth
individuals. Mr. John D. Gillespie, the founder and
Managing Member of Prospector, is a former director of the
Company. Mr. Gillespie resigned his board seat on
June 26, 2007. Historically, Prospector managed most of the
publicly-traded common equity and convertible securities in our
portfolio through a sub-advisory agreement with WM Advisors. As
of September 30, 2007, Prospector served as a discretionary
advisor to WM Advisors under the sub-advisory agreement with
respect to approximately $0.2 billion of specified assets
in our combined insurance and non-insurance portfolios. During
2006, we paid $1.6 million in fees with respect to our
portfolio.
We intend to enter into a separate investment management
agreement with Prospector, or the Prospector Agreement, pursuant
to which Prospector will agree to supervise and direct the
publicly-traded common equity and convertible securities portion
of our investment portfolio in accordance with our investment
guidelines described under Business
Investments. Under the Prospector Agreement, Prospector
will have discretion and authority with respect to the portfolio
it manages for us that is substantially similar to WM
Advisors discretion and authority under the WMA Agreement.
The assets of our portfolio will be held in one or more
separately identifiable accounts in the custody of a bank or
similar entity designated by us and acceptable to Prospector. We
will be responsible for custodial arrangements and the payment
of all custodial charges and fees.
We will agree to pay annual investment management fees based on
aggregate net assets under management according to the following
schedule:
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Assets Under Management
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Annual Fee
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Up to $200 million
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100.0 basis points
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$200 million to $400 million
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50.0 basis points
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Greater than $400 million
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25.0 basis points
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The Prospector Agreement will have an initial fixed term of
three years, which will be extendible by us for an additional
year (a fourth year) at or prior to the end of the second year
of the term, and if so extended, for a second additional year (a
fifth year) at or prior to the end of the third year of the
term. The Prospector Agreement will be terminable by us only
(i) for cause (including material non-performance by
Prospector), (ii) if either John D. Gillespie or Richard P.
Howard are no longer affiliated with Prospector, or
(iii) if there is a change in control of Prospector.
Following the end of the initial term and any extensions, the
Prospector Agreement may be terminated by either party on
60 days written notice. We will review periodically the
performance of and the fees paid to Prospector under the
Prospector Agreement.
Relationships
and Transactions with White Mountains Insurance Group, Ltd. and
its Affiliates
We are party to certain shareholders agreements, dated as of
March 8, 2004, March 19, 2004 and April 16, 2004,
with our stockholders. The shareholders agreements will
terminate on the consummation of this offering other than
certain provisions relating to registration rights, transfer
restrictions, tag-along rights, competition and confidentiality.
In addition, following an initial public offering and so long as
White Mountains Insurance Group, Ltd. holds at least 20% of our
outstanding common stock, assuming exercise of any outstanding
warrants, each stockholder party to a shareholders
agreement is required to vote its shares for two board members
designated by White Mountains Insurance Group, Ltd. which will
be reduced to one nominee so long as White Mountains Insurance
Group, Ltd. holds at least 10%, but less than 20%, of our
outstanding common stock.
120
Relationships
and Transactions with Others
We are parties to certain agency agreements with various
insurance agencies affiliated with Talbot Financial Corporation,
or TFC. Mr. Randall H. Talbot, our President, Chief
Executive Officer and a director of Symetra, is a member of
Talman, LLC which owned stock constituting a minority interest
in Satellite Acquisition Corporation (Satellite),
the parent company of TFC. Talman, LLC sold its interest in
Satellite on April 2, 2007 and has no continuing interest
in Satellite or TFC. We paid commissions of $0.1 million,
$0.6 million and $2.4 million for 2006, 2005 and 2004,
respectively, to agencies affiliated with TFC. Additionally, TFC
provided training, consulting and other marketing services for
which we paid fees of $0.6 million for 2005. The
contractual relationship with the TFC agencies, including
negotiations, establishment of contract terms, and setting of
commission levels, was managed by members of our senior
management other than Mr. Talbot. At the time the
transactions occurred, Mr. Talbot had recused himself from
all activities surrounding management of the relationship with
the TFC agencies or any related administrative decisions.
Mr. Talbot disclosed his indirect ownership interest in
Satellite Acquisition Corporation to the audit committee, which
ratified the relationship.
Another of our subsidiaries, Symetra Life Insurance Company, in
the ordinary course of business, has issued medical stop-loss
and group life insurance policies to related parties MidAmerican
Energy Holdings Company, an affiliate of Berkshire Hathaway
Inc., and Talbot Agency, Inc., an affiliated company of one of
our directors and officers. Premiums received from MidAmerican
Energy Holding Company were $2.7 million and
$2.2 million during 2006 and 2005, respectively. Premiums
received from Talbot Agency, Inc. were $0.5 million for
2005.
During 2005, Symetra Life Insurance Company, in the ordinary
course of business, entered into a coinsurance agreement with
Wilton Reassurance Company, or Wilton Re. We recorded ceded
reinsurance premiums of $1.4 million and $0.7 million
during 2006 and 2005, respectively. Vestar Capital Partners,
which holds 6,899,999 shares of our common stock, has an
investment interest in Wilton Re. Mr. Sander M. Levy, one
of our directors and our audit committee chair, serves on the
board of directors of Wilton Re. Mr. Levy is not directly
involved in the business dealings between the two companies but
disclosed the relationship to our audit committee, which
ratified the relationship.
Procedures
for Approval of Related Party Transactions
Prior to this offering, we did not have a written policy
relating to the approval of related party transactions. Any such
transactions were approved by our board of directors or audit
committee in accordance with applicable law.
In connection with this offering, we will adopt a written policy
relating to the approval of related party transactions. We will
review all relationships and transactions in which we and our
directors and executive officers or their immediate family
members are participants to determine whether such persons have
a direct or indirect material interest. Our legal staff will be
primarily responsible for the development and implementation of
processes and controls to obtain information from our directors
and executive officers with respect to related party
transactions and for determining, based on the facts and
circumstances, whether we or a related person have a direct or
indirect material interest in the transaction.
In addition, our audit committee will review and approve or
ratify any related party transaction reaching a certain
threshold of significance. As will be set forth in the audit
committees charter upon completion of this offering, in
the course of its review and approval or ratification of a
related party transaction, the committee will consider:
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the nature of the related persons interest in the
transaction;
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the material terms of the transaction, including, without
limitation, the amount and type of transaction;
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121
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the importance of the transaction to the related person;
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the importance of the transaction to us;
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whether the transaction would impair the judgment of a director
or executive officer to act in the best interest of the
company; and
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any other matters the audit committee deems appropriate.
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Any member of the audit committee who is a related person with
respect to a transaction under review will not be permitted to
participate in the deliberations or vote respecting approval or
ratification of the transaction. However, such director may be
counted in determining the presence of a quorum at a meeting of
the committee that considers the transaction.
122
PRINCIPAL
AND SELLING STOCKHOLDERS
The following table sets forth, as of September 30, 2007,
information regarding the beneficial ownership of our common
stock by:
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each person known by us to beneficially own more than 5% of the
outstanding shares of our common stock;
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each selling stockholder;
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each of our current directors;
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each of our named executive officers; and
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our directors and named executive officers as a group.
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Beneficial ownership is determined in accordance with the SEC
rules and includes voting or investment power with respect to
the securities. Shares of common stock subject to options and
warrants that are currently exercisable or exercisable within
60 days are deemed to be outstanding and beneficially owned
by the person holding such options and warrants. Such shares,
however, are not deemed to be outstanding for the purposes of
computing the percentage ownership of any other person.
Percentage of beneficial ownership is based on
92,646,295 shares of our common stock outstanding as of
September 30, 2007, and to be outstanding after completion
of the offering. Unless otherwise indicated, the address for all
beneficial owners is
c/o Symetra
Financial Corporation, 777 108th Ave. NE, Suite 1200,
Bellevue, WA 98004.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Beneficially Owned
|
|
|
|
|
|
|
Shares Offered Hereby
|
|
After Offering
|
|
|
Shares of
|
|
Assuming No
|
|
Assuming Full
|
|
Assuming No
|
|
Assuming Full
|
|
|
Common Stock
|
|
Exercise of
|
|
Exercise of
|
|
Exercise of
|
|
Exercise of
|
|
|
Beneficially Owned
|
|
Over-Allotment
|
|
Over-Allotment
|
|
Over-Allotment
|
|
Over-Allotment
|
|
|
Prior to the Offering
|
|
Option
|
|
Option
|
|
Option
|
|
Option
|
Beneficial Owner
|
|
Number
|
|
%
|
|
Number
|
|
Number
|
|
Number
|
|
%
|
|
Number
|
|
%
|
|
Selling Stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Berkshire Hathaway Inc.
|
|
|
26,887,872
|
(1)(2)
|
|
|
26.3
|
%
|
|
|
9,870,306
|
|
|
|
11,350,852
|
|
|
|
17,017,566
|
|
|
|
16.7
|
|
|
|
15,537,020
|
|
|
|
15.2
|
|
White Mountains Insurance Group, Ltd.
|
|
|
26,887,872
|
(1)(3)
|
|
|
26.3
|
|
|
|
9,870,306
|
|
|
|
11,350,852
|
|
|
|
17,017,566
|
|
|
|
16.7
|
|
|
|
15,537,020
|
|
|
|
15.2
|
|
Franklin Mutual Advisers, LLC
|
|
|
10,875,000
|
(4)
|
|
|
11.7
|
|
|
|
3,992,119
|
|
|
|
4,590,937
|
|
|
|
6,882,881
|
|
|
|
7.4
|
|
|
|
6,284,063
|
|
|
|
6.8
|
|
Highfields Capital Management LP
|
|
|
6,089,998
|
(5)
|
|
|
6.6
|
|
|
|
2,235,586
|
|
|
|
2,570,924
|
|
|
|
3,854,412
|
|
|
|
4.2
|
|
|
|
3,519,074
|
|
|
|
3.8
|
|
Caxton Associates, L.L.C.
|
|
|
6,090,000
|
(6)
|
|
|
6.6
|
|
|
|
2,235,586
|
|
|
|
2,570,924
|
|
|
|
3,854,414
|
|
|
|
4.2
|
|
|
|
3,519,076
|
|
|
|
3.8
|
|
OZ Master Fund, Ltd.
|
|
|
6,090,000
|
(7)
|
|
|
6.6
|
|
|
|
2,235,586
|
|
|
|
2,570,924
|
|
|
|
3,854,414
|
|
|
|
4.2
|
|
|
|
3,519,076
|
|
|
|
3.8
|
|
Vestar Capital Partners
|
|
|
6,089,999
|
(8)
|
|
|
6.6
|
|
|
|
2,235,586
|
|
|
|
2,570,923
|
|
|
|
3,854,413
|
|
|
|
4.2
|
|
|
|
3,519,076
|
|
|
|
3.8
|
|
Prospector Partners, LLC
|
|
|
3,480,000
|
(9)
|
|
|
3.8
|
|
|
|
1,277,478
|
|
|
|
1,469,100
|
|
|
|
2,202,522
|
|
|
|
2.4
|
|
|
|
2,010,900
|
|
|
|
2.2
|
|
CSFB Private Equity- DLJ Growth Capital Partners
|
|
|
2,175,000
|
(10)
|
|
|
2.3
|
|
|
|
798,423
|
|
|
|
918,187
|
|
|
|
1,376,577
|
|
|
|
1.5
|
|
|
|
1,256,813
|
|
|
|
1.4
|
|
J.C. Flowers & Co. LLC
|
|
|
2,175,000
|
(11)
|
|
|
2.3
|
|
|
|
798,424
|
|
|
|
918,188
|
|
|
|
1,376,576
|
|
|
|
1.5
|
|
|
|
1,256,812
|
|
|
|
1.4
|
|
Fairholme Capital Management, LLC
|
|
|
1,740,000
|
(12)
|
|
|
1.9
|
|
|
|
638,738
|
|
|
|
734,548
|
|
|
|
1,101,262
|
|
|
|
1.2
|
|
|
|
1,005,452
|
|
|
|
1.1
|
|
Marshfield Associates
|
|
|
1,740,000
|
(13)
|
|
|
1.9
|
|
|
|
638,739
|
|
|
|
734,550
|
|
|
|
1,101,261
|
|
|
|
1.2
|
|
|
|
1,005,450
|
|
|
|
1.1
|
|
Scion Capital, LLC
|
|
|
1,739,999
|
(14)
|
|
|
1.9
|
|
|
|
638,739
|
|
|
|
734,550
|
|
|
|
1,101,260
|
|
|
|
1.2
|
|
|
|
1,005,449
|
|
|
|
1.1
|
|
Montpelier Reinsurance Ltd.
|
|
|
1,740,000
|
(15)
|
|
|
1.9
|
|
|
|
638,739
|
|
|
|
734,550
|
|
|
|
1,101,261
|
|
|
|
1.2
|
|
|
|
1,005,450
|
|
|
|
1.1
|
|
Sayro Fund Investors III, LLC
|
|
|
974,400
|
(16)
|
|
|
1.1
|
|
|
|
357,694
|
|
|
|
411,348
|
|
|
|
616,706
|
|
|
|
*
|
|
|
|
563,052
|
|
|
|
*
|
|
Wellington Management Company, LLP
|
|
|
870,000
|
(17)
|
|
|
*
|
|
|
|
319,369
|
|
|
|
367,274
|
|
|
|
550,631
|
|
|
|
*
|
|
|
|
502,726
|
|
|
|
*
|
|
Ulysses Partners, L.P.
|
|
|
739,500
|
(18)
|
|
|
*
|
|
|
|
271,464
|
|
|
|
312,184
|
|
|
|
468,036
|
|
|
|
*
|
|
|
|
427,316
|
|
|
|
*
|
|
123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Beneficially Owned
|
|
|
|
|
|
|
Shares Offered Hereby
|
|
After Offering
|
|
|
Shares of
|
|
Assuming No
|
|
Assuming Full
|
|
Assuming No
|
|
Assuming Full
|
|
|
Common Stock
|
|
Exercise of
|
|
Exercise of
|
|
Exercise of
|
|
Exercise of
|
|
|
Beneficially Owned
|
|
Over-Allotment
|
|
Over-Allotment
|
|
Over-Allotment
|
|
Over-Allotment
|
|
|
Prior to the Offering
|
|
Option
|
|
Option
|
|
Option
|
|
Option
|
Beneficial Owner
|
|
Number
|
|
%
|
|
Number
|
|
Number
|
|
Number
|
|
%
|
|
Number
|
|
%
|
|
Rho Capital Partners, Inc.
|
|
|
650,325
|
(19)
|
|
|
*
|
|
|
|
238,729
|
|
|
|
274,538
|
|
|
|
411,596
|
|
|
|
*
|
|
|
|
375,787
|
|
|
|
*
|
|
The Sulam Trust
|
|
|
239,250
|
(20)
|
|
|
*
|
|
|
|
87,827
|
|
|
|
101,001
|
|
|
|
151,423
|
|
|
|
*
|
|
|
|
138,249
|
|
|
|
*
|
|
Chou Associates Management, Inc.
|
|
|
174,000
|
(21)
|
|
|
*
|
|
|
|
63,874
|
|
|
|
73,455
|
|
|
|
110,126
|
|
|
|
*
|
|
|
|
100,545
|
|
|
|
*
|
|
Roger Taylor
|
|
|
87,000
|
(22)
|
|
|
*
|
|
|
|
31,937
|
|
|
|
36,728
|
|
|
|
55,063
|
|
|
|
*
|
|
|
|
50,272
|
|
|
|
*
|
|
Terry Baxter
|
|
|
43,500
|
|
|
|
*
|
|
|
|
15,968
|
|
|
|
18,363
|
|
|
|
27,532
|
|
|
|
*
|
|
|
|
25,137
|
|
|
|
*
|
|
Snyder, Cahoon & Co., PLLC Profit Sharing Plan
|
|
|
17,400
|
(23)
|
|
|
*
|
|
|
|
6,387
|
|
|
|
7,345
|
|
|
|
11,013
|
|
|
|
*
|
|
|
|
10,055
|
|
|
|
*
|
|
Michael J. Batal III
|
|
|
6,525
|
|
|
|
*
|
|
|
|
2,395
|
|
|
|
2,754
|
|
|
|
4,130
|
|
|
|
*
|
|
|
|
3,771
|
|
|
|
*
|
|
Directors and Executive Officers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David T. Foy
|
|
|
26,887,872
|
(1)(24)
|
|
|
26.3
|
%
|
|
|
9,870,306
|
|
|
|
11,350,852
|
|
|
|
17,017,566
|
|
|
|
16.7
|
|
|
|
15,537,020
|
|
|
|
15.2
|
|
Randall H. Talbot
|
|
|
65,250
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
65,250
|
|
|
|
*
|
|
|
|
65,250
|
|
|
|
*
|
|
Roger F. Harbin
|
|
|
21,750
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
21,750
|
|
|
|
*
|
|
|
|
21,750
|
|
|
|
*
|
|
Patrick B. McCormick
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Margaret A. Meister
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
M. Scott Taylor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lois W. Grady
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sander M. Levy
|
|
|
6,089,999
|
(25)
|
|
|
6.6
|
|
|
|
2,235,586
|
|
|
|
2,570,923
|
|
|
|
3,854,413
|
|
|
|
4.2
|
|
|
|
3,519,076
|
|
|
|
3.8
|
|
Robert R. Lusardi
|
|
|
26,887,872
|
(1)(26)
|
|
|
26.3
|
|
|
|
9,870,306
|
|
|
|
11,350,852
|
|
|
|
17,017,566
|
|
|
|
16.7
|
|
|
|
15,537,020
|
|
|
|
15.2
|
|
David I. Schamis
|
|
|
2,175,000
|
(27)
|
|
|
2.3
|
|
|
|
798,424
|
|
|
|
918,188
|
|
|
|
1,376,576
|
|
|
|
1.5
|
|
|
|
1,256,812
|
|
|
|
1.4
|
|
Lowndes A. Smith
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directors and executive officers as a group (18 persons)
|
|
|
35,239,871
|
|
|
|
34.5
|
%
|
|
|
12,904,316
|
|
|
|
14,839,963
|
|
|
|
22,335,555
|
|
|
|
21.9
|
%
|
|
|
20,399,908
|
|
|
|
20.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Represents ownership of less than 1% |
|
|
|
(1) |
|
Includes warrants exercisable for 9,487,872 shares. |
|
|
|
(2) |
|
Represents shares held by General Reinsurance Corporation. |
|
(3) |
|
Represents shares held by White Mountains Holdings (NL) B.V. |
|
|
|
(4) |
|
Represents 1,183,200 shares held by Franklin Mutual Beacon
Fund, 445,440 shares held by Franklin Mutual Recovery Fund,
255,780 shares held by Mutual Beacon Fund (Canada),
1,020,510 shares held by Mutual Financial Services Fund,
3,434,760 shares held by Mutual Qualified Fund,
84,390 shares held by Mutual Recovery Fund, Ltd. and
4,450,920 shares held by Mutual Beacon Fund, collectively
the Funds. Franklin Mutual Advisers, LLC
(FMA), an indirect wholly owned subsidiary of
Franklin Resources, Inc. (FRI), is the investment
manager for each of the Funds. Charles B. Johnson and Rupert H.
Johnson, Jr. are the principal shareholders of FRI. However,
because FMA exercises voting and investment control on behalf of
its advisory clients independently of FRI, the principal
shareholders, and their respective affiliates, beneficial
ownership of the shares is being attributed only to FMA. FMA
disclaims any economic interest or beneficial ownership in any
of the shares. The address of FMA is 101 John F. Kennedy
Parkway, Short Hills, NJ 07078. |
|
|
|
(5) |
|
Represents 553,876 shares held by Highfields Capital I LP,
1,306,426 shares held by Highfields Capital II LP and
4,229,696 shares held by Highfields Capital III L.P.,
collectively the Funds. Highfields Capital
Management LP serves as the investment manager to each of the
Funds. Highfields GP LLC is the general partner of Highfields
Capital Management LP. Highfields Associates LLC is the general
partner of the Funds. Jonathon S. Jacobson and Richard L.
Grubman are Senior Managing Directors of |
124
|
|
|
|
|
Highfields Capital Management LP, Managing Members of Highfields
GP LLC, and Senior Managing Members of Highfields Associates
LLC. Each of Highfields Capital Management LP, Highfields GP
LLC, Highfields Associates LLC, Mr. Jacobson and
Mr. Grubman has complete voting and investment control over
the shares. The address of Highfields Capital Management LP,
Highfields GP LLC, Highfields Associates LLC, Mr. Jacobson
and Mr. Grubman is
c/o Highfields
Capital Management LP, John Hancock Tower, 200 Clarendon Street,
59th Floor, Boston, MA 02116. |
|
(6) |
|
Represents shares held by CxLife, LLC. Caxton Associates, L.L.C.
is the manager of CxLife, LLC. Bruce S. Kovner is the Chairman
of Caxton Associates, L.L.C. and the sole shareholder of Caxton
Corporation, the manager and majority owner of Caxton
Associates, L.L.C. As a result of the foregoing, Mr. Kovner
may be deemed to beneficially own the shares. The address of
Caxton Associates, L.L.C. is 500 Park Avenue, New York, NY
10022. The address of Caxton Corporation is 731 Alexander Road,
Building 2, Princeton, NJ 08540. |
|
|
|
(7) |
|
Represents shares held by OZ Management LP. Daniel S. Och,
Senior Managing Member of Och-Ziff GP, LLC may be deemed to have
investment and/or voting control of OZMD. The address of OZ
Management LP is 9 West 57th Street, 39th Floor, New York,
NY 10019. |
|
|
|
(8) |
|
Represents 128,424 shares held by Vestar Symetra LLC and
5,961,575 shares held by Vestar Capital Partners IV, LP,
entities which are affiliated with or managed by Vestar Capital
Partners. Sander M. Levy is a managing director of Vestar
Capital Partners. Mr. Levy disclaims beneficial ownership
in the shares except to the extent of any pecuniary interest
therein. The address of Vestar Capital Partners is 245 Park
Avenue, 41st Floor, New York, NY 10167. |
|
|
|
(9) |
|
Represents (i) 3,306,000 common shares owned by various
funds (2,047,110 shares held by Prospector Partners Fund,
LP, 976,140 shares held by Prospector Offshore Fund
(Bermuda), Ltd., 243,600 shares held by Prospector Partners
Small Cap Fund, LP, and 39,150 shares held by Prospector
Turtle Fund, LP) of Prospector Partners, LLC in which John D.
Gillespie is a managing member, (ii) 87,000 shares
held by Main Street America Assurance Corporation to which
Mr. Gillespie serves as an investment manager and
(iii) 87,000 shares held by National Grange Mutual
Insurance Company to which Mr. Gillespie serves as an
investment manager. Mr. Gillespie disclaims beneficial
ownership of such common shares owned by Prospector Partners,
LLC, except to the extent of his pecuniary interest therein. The
address of Prospector Partners, LLC is 370 Church Street,
Guilford, CT 06437. |
|
|
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(10) |
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Represents 1,757,574 shares held by DLJ Growth Capital
Partners, L.P. and 417,426 shares held by GCP Plan
Investors, L.P. Voting and investment control over the shares
held by DLJ Growth Capital Partners, L.P. and GCP Plan
Investors, L.P. are exercised by an investment committee of DLJ
Growth Capital, L.P., which is the Associate General Partner of
DLJ Growth Capital Partners, L.P. The investment committee
consists of the following individuals: Nicole S. Arnaboldi,
Edward A. Johnson and Thompson Dean. Such individuals disclaim
beneficial ownership of the shares, except to the extent of
their direct pecuniary interest therein. The business address of
DLJ Growth Capital Partners, L.P. and GCP Plan Investors, L.P.
is 11 Madison Avenue, New York, NY 10010. |
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(11) |
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Represents shares held by J.C. Flowers I L.P. JCF Associates I
LLC is the general partner of J.C. Flowers I L.P., and J.
Christopher Flowers is the managing member of JCF Associates I
LLC and possesses voting and investment control over the shares
held by J.C. Flowers I L.P. J. Christopher Flowers disclaims
beneficial ownership of the shares, except to the extent of his
direct pecuniary interest therein. The business address of J.C.
Flowers I L.P. is 717 Fifth Avenue, 26th Floor, New York,
NY 10022. |
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(12) |
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Represents 870,000 shares held by Fairholme
Ventures II, LLC and 870,000 shares held by Fairholme
Holdings, Ltd. Fairholme Capital Management, LLC acts as the
Managing Member of Fairholme Ventures II, LLC and is the
Investment Manager to Fairholme Holdings, Ltd. Bruce R.
Berkowitz is the Managing Member of Fairholme Capital
Management, LLC, and the Chairman and Director of Fairholme
Holdings, Ltd., a Bermuda exempted mutual fund, and has the sole
voting and investment control over the shares. The address of
Fairholme Capital Management, LLC is 1001 Brickell Bay Drive,
Suite 3112, Miami, FL 33131. |
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(13) |
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Represents shares held by Marshfield Insurance II, LLC.
Marshfield Management II, LLC is the Managing Member of
Marshfield Insurance II, LLC. Christopher M. Niemczewski,
Melissa Vinick, Elise Hoffmann, Carolyn Miller, Sara J.
Cavendish and William G. Stott are the Managers of Marshfield
Management II, LLC and share voting and investment control over
the shares held by Marshfield Insurance II, LLC. The Managers of
Marshfield Management II, LLC disclaim beneficial ownership of
the shares, except to the extent of their direct pecuniary
interest in the shares. The address of Marshfield Management II,
LLC is 21 Dupont Circle, Washington, DC 20036. |
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(14) |
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Represents 1,439,110 shares held by Scion Qualified Value
Fund and 300,889 shares held by Scion Value Fund. Scion
Capital, LLC is the managing member of both Scion Value Fund and
Scion Qualified Value Fund. Dr. Michael J. Burry is the
managing member of Scion Capital, LLC and has sole voting and
investment control over the shares held by Scion Value Fund and
Scion Qualified Value Fund. The managing member of Scion
Capital, LLC disclaims beneficial ownership of the shares,
except to the extent of his direct pecuniary interest in the
shares. The address of Scion Capital, LLC is 20400 Stevens Creek
Blvd., Suite 840, Cupertino, CA 95014. |
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(15) |
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The board of directors of Montpelier Reinsurance Ltd.,
consisting of Anthony Taylor, Thomas G.S. Busher and Christopher
L. Harris, exercises shared voting and investment control over
such shares. Each of Messrs. Taylor, Busher and Harris
disclaim beneficial ownership of the shares owned by Montpelier
Reinsurance Ltd., except to the extent of their direct pecuniary
interest in the shares. The address of Montpelier Reinsurance
Ltd. is 94 Pitts Bay Road, Pembroke HM08, Bermuda. |
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(16) |
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Sayro Ventures, Ltd. is the managing member of Sayro
Fund Investors III, LLC. George D. Kean, Kenneth J.
Simpson, and Ashley Cox are the directors of Sayro Ventures,
Ltd., and possess shared voting and investment control over the
shares. The address of Sayro Ventures, Ltd. is Barclays Wealth,
P.O. Box 487, First Caribbean House, 4th Floor, 25
Main Street, Grand Cayman KY1-1106, Cayman Islands. |
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(17) |
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Represents 652,500 shares held by Bay Pond Partners, L.P.
and 217,500 shares held by Bay Pond Investors (Bermuda) LP.
Wellington Management Company, LLP (Wellington) is
an investment adviser registered under the Investment Advisers
Act of 1940, as amended. Wellington, in such capacity, may be
deemed to share beneficial ownership over the shares held by its
client accounts. The address of Wellington is 75 State Street,
Boston, MA 02109. |
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(18) |
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Joshua Nash LLC is a general partner of Ulysses Partners, L.P.
and has voting and investment control over the shares held by
Ulysses Partners, L.P. Joshua Nash is the managing member of
Joshua Nash LLC and has the sole power to vote, direct the
voting of, dispose of and direct the disposition of the shares
of common stock beneficially owned by Ulysses Partners, L.P.
Joshua Nash expressly disclaims any such beneficial ownership
which exceeds the proportionate interest in the common stock
which he may be deemed to own indirectly through Ulysses
Partners, L.P. The address of Joshua Nash is
c/o Ulysses
Partners, L.P., 280 Park Avenue, New York, NY 10017. |
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(19) |
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Represents shares held by Rho Management Trust I (RMT
I). Pursuant to an Investment Advisory Agreement between
RMT I and Rho Management Partners L.P. (Rho), Rho
exercises sole voting and investment control over the shares
held of record by RMT I. Altas Capital Corp., a Delaware
corporation, is sole general partner of Rho. As sole stockholder
of Atlas Capital Corp., Joshua Ruch may be deemed to have sole
voting and investment control over the shares held by RMT I.
Joshua Ruch disclaims beneficial ownership of the shares held of
record by RMT I, except to the extent of his indirect
pecuniary interest in such shares. The address of RMT I,
Rho, and Joshua Ruch is
c/o Rho
Capital Partners, Inc., 152 W. 57th Street, 23rd
Floor, New York, NY 10019. |
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(20) |
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Represents shares held by JP Morgan Trust Co. of Delaware
as Trustee for the Sulam Trust. Pursuant to the Trust
instrument, Moris Tabacinic serves as investment adviser to the
Trust and possesses sole voting and investment control over the
shares. The address of JP Morgan Trust Co. of Delaware is
500 Stanton Christiana Road, Newark, DE 19713. |
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(21) |
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Represents shares held by Chou RRSP Fund. The manager of Chou
RRSP Fund is Chou Associates Management, Inc. Francis Chou is
the Chief Executive Officer of the manager and portfolio manager
for Chou RRSP Fund. The address of Chou Associates Management,
Inc. is 95 Wellington St., West, Suite 701, Toronto,
Ontario M5J 2N7. |
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(22) |
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Represents 5,000 shares held by Mr. Taylor, and
5,000 shares held by the 2007 GRAT, of which
Mr. Taylor serves as trustee. |
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(23) |
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Robert E. Snyder and Michael Cahoon, trustees of the Snyder,
Cahoon & Co., PLLC Profit Sharing Plan
(Plan) possess voting and investment control over
the shares. The address of the Plan and trustees is
c/o Snyder,
Cahoon & Co., PLLC, 80 South S. Main Street,
Suite 202, Hanover, NH 03755. |
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(24) |
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Represents shares owned by affiliates of White Mountains
Insurance Group, Ltd. of which Mr. Foy is an executive
officer. Mr. Foy disclaims beneficial ownership of all such
shares. |
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(25) |
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Represents shares owned by affiliates of Vestar Capital Partners
of which Mr. Levy is a Managing Director. Mr. Levy
disclaims beneficial ownership of all such shares. |
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(26) |
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Represents shares owned by affiliates of White Mountains
Insurance Group, Ltd. of which Mr. Lusardi is an executive
officer. Mr. Lusardi disclaims beneficial ownership of all
such shares. |
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(27) |
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Represents shares owned by affiliates of J.C.
Flowers & Co. LLC of which Mr. Schamis is a
Managing Director. Mr. Schamis disclaims beneficial
ownership of all such shares. |
127
DESCRIPTION
OF CAPITAL STOCK
The following information reflects our certificate of
incorporation and restated bylaws as these documents will be in
effect upon completion of this offering. Our certificate of
incorporation and bylaws will be filed as exhibits to the
registration statement of which this prospectus forms a part.
The summaries of these documents are qualified in their entirety
by reference to the full text of the documents.
General
Immediately following the completion of this offering, our
authorized capital stock will consist of 750,000,000 shares
of common stock, $0.01 par value per share and
10,000,000 shares of preferred stock, $0.01 par value per
share. As of September 30, 2007, there were
92,646,295 shares of our common stock issued and
outstanding held by 55 shareholders of record, and no
shares of preferred stock outstanding.
Immediately prior to this offering, there was no public market
for our common stock. Although our common stock has been
approved for listing, subject to official notice of issuance, on
the NYSE, we cannot assure you that a market for our common
stock will develop or if it develops that it will be sustained.
Common
Stock
Voting
Rights
Each share of common stock entitles the holder to one vote with
respect to each matter presented to our stockholders on which
the holders of common stock are entitled to vote. Our common
stock votes as a single class on all matters relating to the
election and removal of directors on our board of directors and
as provided by law, with each share of common stock entitling
its holder to one vote. Holders of our common stock will not
have cumulative voting rights.
Dividends
Holders of common stock and warrant holders will share equally
in any dividend declared by our board of directors, subject to
the rights of the holders of any outstanding preferred stock.
Liquidation
Rights
In the event of any voluntary or involuntary liquidation,
dissolution or winding up of our affairs, holders of our common
stock would be entitled to share ratably in our assets that are
legally available for distribution to stockholders after payment
of liabilities. If we have any preferred stock outstanding at
such time, holders of the preferred stock may be entitled to
distributions
and/or
liquidation preferences. In either such case, we must pay the
applicable distribution to the holders of our preferred stock
before we may pay distributions to the holders of our common
stock.
Other
Rights
Our stockholders have no preemptive or other rights to subscribe
for additional shares. All holders of our common stock are
entitled to share equally on a share-for-share basis in any
assets available for distribution to common stockholders upon
our liquidation, dissolution or winding up. All outstanding
shares are, and all shares offered by this prospectus will be,
when sold, validly issued, fully paid and nonassessable.
Stock
Options, Restricted Stock Units and Share Grants
We have committed to grant stock options to purchase
approximately 450,100 shares of our common stock, 307,368
restricted stock units and 153,684 shares of our common
stock to employees on or about the date of this offering under
our Equity Plan. The above figures are estimates based on an
assumed initial public offering price of $19.00 per share; the
actual figures will be determined based on the actual initial
public offering price per share.
The stock options will have an exercise price per share of
$20.90, equal to 110% of the midpoint of the range set forth on
the cover page of this prospectus, and will vest as to 50% of
the shares on the third anniversary of the date of this offering
and as to the remaining shares on the fifth anniversary of the
date of this
128
offering. The restricted stock units will vest as to 50% of the
units on the second anniversary of the date of this offering,
and as to the remaining units on the fourth anniversary of the
date of this offering. The estimated 153,684 shares of
common stock will be fully vested as of the date of grant. All
awards will be subject to the terms of our Equity Plan, as
described in further detail under Management
Employee Benefit Plans.
Warrants
We currently have outstanding warrants to purchase
18,975,744 shares of our common stock at an exercise price
of $11.49 per share. If our warrants were exercised on a
cashless basis, we would have had 7,758,777, 7,451,896,
7,529,748 and 6,494,576 additional shares of common stock
outstanding for the nine months ended September 30, 2007
and 2006, and for the years ended December 31, 2006 and
2005, respectively.
The exercise price and number of shares of common stock for each
warrant are subject to anti-dilution adjustments in respect of
certain events. If certain of these events occur, the warrant
holders will receive the right to receive the full intrinsic
value of the warrants instead of the stock acquirable and
receivable upon exercise. In the event we pay cash or stock
dividends or other distributions to our common stockholders, the
warrant holders will also receive such dividends or
distributions.
Preferred
Stock
Following the offering, our board of directors will be
authorized, subject to the limits imposed by the Delaware
General Corporation Law, or DGCL, to issue to up
10,000,000 shares of preferred stock in one or more series,
to establish from time to time the number of shares to be
included in each series, and to fix the rights, preferences,
privileges, qualifications, limitations and restrictions of the
shares of each wholly unissued series. Our board of directors
will also be authorized to increase or decrease the number of
shares of any series, but not below the number of shares of that
series then outstanding, without any further vote or action by
our stockholders.
Our board of directors may authorize the issuance of preferred
stock with voting or conversion rights that affect adversely the
voting power or other rights of our common stockholders. The
issuance of preferred stock, while providing flexibility in
connection with possible acquisitions and other corporate
purposes, could have the effect of delaying, deferring or
preventing a change in control, causing the market price of our
common stock to decline, or impairing the voting and other
rights of the holders of our common stock. We have no current
plans to issue any shares of preferred stock.
Certain
Anti-Takeover Provisions of our Charter and Bylaws and the
Delaware Law
Upon completion of this offering, we will have the following
provisions in our certificate of incorporation and bylaws that
could deter, delay or prevent a third-party from acquiring us,
even if doing so would benefit our stockholders.
Undesignated
Preferred Stock
The ability to authorize undesignated preferred stock makes it
possible for our board of directors to issue preferred stock
with super voting, special approval, dividend or other rights or
preferences on a discriminatory basis that could impede the
success of any attempt to acquire us. These and other provisions
may have the effect of deferring, delaying or discouraging
hostile takeovers, or changes in control or management of our
Company.
Classified
Board of Directors
Our certificate of incorporation will provide that our board of
directors is divided into three classes. Each class of directors
will serve three-year terms except that the term of the first
class of directors will expire at the first annual meeting after
the consummation of this offering and the second and third
classes of directors will expire at the second and third annual
meetings, respectively, after the consummation of this offering.
129
Requirements
for Advance Notification of Stockholder Meetings, Nominations
and Proposals
Our bylaws will provide that special meetings of the
stockholders may be called only upon the request of the majority
of the board of directors or upon request of the president. Our
bylaws will prohibit the conduct of any business at a special
meeting other than as specified in the notice for such meeting.
Our bylaws will establish advance notice procedures with respect
to stockholder proposals for annual meetings and the nomination
of candidates for election as directors, other than nominations
made by or at the direction of the board of directors or a
committee of the board of directors. In order for any matter to
be properly brought before a meeting, a stockholder
will have to comply with advance notice requirements and provide
us with certain information. Additionally, vacancies and newly
created directorships may be filled only by a vote of a majority
of the directors then in office, even though less than a quorum,
and not by the stockholders. Our bylaws will allow the chairman
of a meeting of the stockholders to adopt rules and regulations
for the conduct of meetings that may have the effect of
precluding the conduct of certain business at a meeting if the
rules and regulations are not followed. These provisions may
also defer, delay or discourage a potential acquiror from
conducting a solicitation of proxies to elect the
acquirors own slate of directors or otherwise attempting
to obtain control of us.
No
Stockholder Action by Written Consent
Pursuant to Section 228 of the DGCL, any action required to
be taken at any annual or special meeting of the stockholders
may be taken without a meeting, without prior notice and without
a vote if a consent or consents in writing, setting forth the
action so taken, is signed by the holders of outstanding stock
having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which
all shares of our stock entitled to vote thereon were present
and voted, unless our certificate of incorporation provides
otherwise. Our certificate of incorporation will provide that
any action required or permitted to be taken by our stockholders
may be effected at a duly called annual or special meeting of
our stockholders and may not be effected by consent in writing
by such stockholders.
Certain
Other Provisions of our Charter and Bylaws and the Delaware
Law
Board
of Directors
Our certificate of incorporation will provide that the number of
directors will be fixed in the manner provided in our bylaws.
Our bylaws will provide that the number of directors will be
fixed from time to time solely pursuant to a resolution adopted
by the board of directors. Upon completion of this offering, our
board of directors will have seven members who will serve
staggered terms as described above.
Limitations
of Liability and Indemnification of Officers and
Directors
The DGCL authorizes corporations to limit or eliminate the
personal liability of directors to corporations and their
stockholders for monetary damages for breaches of
directors fiduciary duties. Our certificate of
incorporation will include a provision that eliminates the
personal liability of directors for monetary damages for actions
taken as a director to the fullest extent authorized by the
DGCL. The DGCL does not permit exculpation for liability:
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for breach of duty of loyalty;
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for acts or omissions not in good faith or involving intentional
misconduct or knowing violation of law;
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under Section 174 of the DGCL (unlawful dividends); or
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for transactions from which the director derived improper
personal benefit.
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Our certificate of incorporation and bylaws will provide that we
shall indemnify our directors and officers to the fullest extent
permitted by law. We are also expressly authorized to carry
directors and officers insurance providing
indemnification for our directors, officers and certain
employees and agents for some liabilities. We believe that these
indemnification provisions and insurance are useful to attract
and retain qualified directors and executive officers.
130
The limitation of liability and indemnification provisions in
our certificate of incorporation and bylaws may discourage
stockholders from bringing a lawsuit against directors for
breach of their fiduciary duty. These provisions may also have
the effect of reducing the likelihood of derivative litigation
against directors and officers, even though such an action, if
successful, might otherwise benefit us and our stockholders. In
addition, your investment may be adversely affected to the
extent we pay the costs of settlement and damage awards against
directors and officers pursuant to these indemnification
provisions.
There is currently no pending material litigation or proceeding
involving any of our directors, officers or employees for which
indemnification is sought.
Transfer
Agent and Registrar
The transfer agent and registrar of our common stock is Mellon
Investor Services.
New York
Stock Exchange Listing
Our common stock has been approved for listing, subject to
official notice of issuance, on the NYSE under the symbol
SYA.
131
DESCRIPTION
OF CERTAIN INDEBTEDNESS
6.125% Senior
Notes due 2016
In March 2006, we issued $300.0 million aggregate principal
amount of 6.125% senior notes due 2016, at a price of
$298.7 million in proceeds prior to commissions and discounts
for the initial purchasers and offering expenses. Interest on
the notes is payable semi-annually on April 1 and
October 1 of each year.
The notes are unsecured senior obligations and are equal in
right of payment to all existing and future unsecured senior
indebtedness. The senior notes are redeemable at our option at
any time, in whole or in part, at a redemption price equal to
the greater of (i) 100% of the principal amount of the
senior notes or (ii) the sum of the present values of the
remaining scheduled payments of principal and interest on the
notes (exclusive of interest accrues to the date of redemption),
discounted to the redemption date on a semiannual basis
(assuming a
360-day year
consisting of twelve
30-day
months) at the U.S. Treasury rate plus 25 basis
points, plus, in each case accrued and unpaid interest thereon
to the date of redemption.
The indenture for the senior notes contains covenants that,
among other things, limit the ability of our subsidiaries to:
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create liens;
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enter into certain sale and leaseback transactions; and
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enter into certain mergers and acquisitions.
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The notes do not contain any financial covenants or any
provisions restricting us from purchasing or redeeming capital
stock, paying dividends or entering into a highly leveraged
transaction, reorganization, restructuring, merger or similar
transaction. In addition, we are not required to repurchase,
redeem or modify the terms of any of the notes upon a change of
control or other event involving us.
The indenture provides for events of default that, if any of
them occurs, would permit or require the principal of, premium,
if any, interest and any other monetary obligations on the
senior notes to become or to be declared to be immediately due
and payable. These events of default include default in the
payment of interest or principal, default in the performance of
covenants under the indenture and default under the terms of any
instrument evidencing or securing indebtedness of us that
results in the acceleration of the payment of such indebtedness
or constitutes the failure to pay the principal of such
indebtedness when due, in each case where the total amount of
such indebtedness has an outstanding aggregate principal amount
greater than $25.0 million.
Capital
Efficient Notes due 2067
On October 4, 2007, we issued $150.0 million aggregate
principal amount of CENts. The CENts were purchased by a
syndicate of initial purchasers, led by J.P. Morgan
Securities Inc. and Lehman Brothers Inc., and were eligible for
resale to qualified institutional buyers pursuant to
Rule 144A under the Securities Act or to
non-U.S. persons
pursuant to Regulation S under the Securities Act.
The CENts bear interest at a fixed annual rate of 8.30% to but
not including October 15, 2017, and at a floating annual
rate equal to three-month LIBOR plus 4.177% thereafter. We may
elect to defer the payment of interest for up to ten years. The
CENts have a scheduled maturity date of October 15, 2037,
provided that we raise sufficient funds from the sale of
qualifying capital securities. If we do not raise sufficient
funds, we are obligated to use commercially reasonable efforts
to sell enough qualifying capital securities to permit repayment
of the CENts in full on each interest payment date thereafter.
On October 15, 2067, we must pay any remaining amounts due
under the CENts, whether or not we have sold sufficient
qualifying capital securities.
We may redeem the CENts, in whole or in part, at any time before
October 15, 2017, at a redemption price equal to the
greater of 100% of the principal amount or a make-whole price as
set forth in the CENts, in either case plus accrued and unpaid
interest, including deferred interest. However, if a special
event occurs, we may redeem the CENts, in whole but not in part,
at a redemption price equal to the greater of 100% of the
principal amount or a special event make-whole price as set
forth in the CENts, in either case plus accrued
132
and unpaid interest, including deferred interest. We may redeem
the CENts after October 15, 2017 on each interest payment
date thereafter, at a price equal to 100% of the principal
amount of the CENts plus accrued and unpaid interest, including
deferred interest.
In connection with this offering, we entered into a covenant in
favor of the holders of our $300.0 million principal amount
senior notes, pursuant to which we may not repay or redeem the
CENts prior to October 15, 2047 unless the repayment or
redemption is financed from the offering of replacement capital
securities, as specified in the CENts.
Revolving
Credit Facilities
Long-Term
Facility
On August 16, 2007, we entered into a $200.0 million
senior unsecured revolving credit agreement with a syndicate of
lending institutions led by Bank of America, N.A. The credit
facility matures on August 16, 2012. The revolving credit
facility is available to provide support for working capital,
capital expenditures and other general corporate purposes,
including permitted acquisitions, issuance of letters of
credits, refinancing and payment of fees in connection with this
facility. This new credit facility replaced our prior
$70.0 million revolving credit facility.
The facility enables us to obtain letters of credit of up to
$50.0 million and short-term loans of up to
$10.0 million, which would count against the
$200.0 million limit. We can increase the
$200.0 million limit by up to an additional
$100.0 million, upon the agreement of any lender to lend
such additional amount, without the consent of the other
lenders. In addition, we may, with the consent of individual
lenders, elect to extend the term of the facility by up to two
additional one-year periods.
Loans under the credit facility bear interest, at our election,
at a spread above LIBOR, or at a base rate. The initial spread
above the LIBOR rate is 36 basis points, and may vary from 19 to
60 basis points depending on our credit rating. The base rate is
equal to the higher of 50 basis points above the federal funds
rate, and the Bank of America prime rate. Interest under
LIBOR-based loans is payable periodically, with the period at
the election of the company (but at most annually). Interest
under base rate loans is payable quarterly. In addition, we are
obligated to pay a facility fee of between 6 and 15 basis
points, depending on our credit rating, quarterly over the term
of the facility, as well as letter of credit and other fees as
applicable.
Under the terms of the credit agreement, we are required to
maintain certain financial ratios. In particular, each of our
material insurance subsidiaries must maintain a risk-based
capital ratio of at least 200%, measured at the end of each
year, and our debt-to-capitalization ratio may not exceed 37.5%,
measured at the end of each quarter. In addition, we have agreed
to other covenants restricting the ability of our subsidiaries
to incur additional indebtedness, our ability to create liens,
and our ability to change our fiscal year and to enter into new
lines of business, as well as other customary affirmative
covenants.
To be eligible for borrowing funds under this facility, the
representations and warranties that we make in the credit
agreement must continue to be true in all material respects, and
we must not be in default under the facility, including failure
to comply with the covenants described above.
As of September 30, 2007, we had no borrowings outstanding
under this facility.
Short-term
Facilities
On October 17, 2005, we entered into two $25.0 million
revolving credit facilities with The Bank of New York to support
our overnight repurchase agreements program which provides us
with the liquidity to meet general funding requirements.
Borrowings under the revolving credit agreement bear interest at
the federal funds rate plus 0.2%.
133
SHARES
ELIGIBLE FOR FUTURE SALE
Before this offering, there has been no public market for our
common stock. We cannot predict the effect, if any, that market
sales of shares or the availability of shares will have on the
market price of our common stock. Sales of substantial amounts
of common stock in the public market, or the perception that
such sales could occur, could cause the prevailing market price
to decrease or to be lower than it might be in the absence of
those sales or perceptions.
Sales of
Restricted Securities
Upon the closing of this offering, we will have outstanding
approximately 92,646,295 shares of common stock. We have no
shares of common stock held in treasury. All of the shares of
our common stock sold in this offering will be freely tradeable
without restriction under the Securities Act of 1933, as amended
(the Securities Act), except for any shares that may
be acquired by an affiliate of us, as the term
affiliate is defined in Rule 144 under the
Securities Act. Persons who may be deemed to be affiliates
generally include individuals or entities that control, are
controlled by, or are under common control with, us and may
include our directors and officers as well as our significant
stockholders. Following the expiration of the lock-up agreements
described below, the remaining 53,146,295 shares
outstanding held by current stockholders of the company will be
available for sale pursuant to Rule 144, subject to compliance
with the volume, manner of sale and other limitations under Rule
144 in the case of shares held by affiliates, all as further
described below.
Rule 144
Generally, Rule 144 provides that a person who has
beneficially owned restricted shares for at least
one year will be entitled to sell on the open market in
brokers transactions, within any three-month period, a
number of shares that does not exceed the greater of:
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1% of the then outstanding shares of common stock, which will
equal approximately 926,463 shares of common stock
immediately after this offering; and
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the average weekly trading volume of the common stock on the
open market during the four calendar weeks preceding the filing
of notice with respect to such sale.
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Sales under Rule 144 are also subject to manner of sale
provisions and notice requirements and the availability of
current public information about our company.
In the event that any person who is deemed to be our affiliate
purchases shares of our common stock in this offering or
acquires shares of our common stock pursuant to one of our
employee benefits plans, sales under Rule 144 of the shares
held by that person are subject to the volume limitations and
other restrictions (other than the one-year holding period
requirement) described in the preceding two paragraphs.
Under Rule 144(k), a person who is not deemed to have been
one of our affiliates for purposes of the Securities Act at any
time during the 90 days preceding a sale and who has
beneficially owned the shares proposed to be sold for at least
two years, including the holding period of any prior owner other
than our affiliates, is entitled to sell such shares without
complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144. Therefore,
unless otherwise restricted, 144(k) shares may be
sold immediately upon the closing of this offering.
Lock-Up
Arrangements
In connection with this offering, each of our executive
officers, directors and stockholders have agreed to enter into
lock-up
agreements described under Underwriting that
restrict the sale of shares of our common stock and securities
convertible into or exchangeable or exercisable for common stock
for up to 180 days after the date of this prospectus,
subject to an extension in certain circumstances. Following the
expiration of the
lock-up
period, our stockholders will have the right, subject to certain
conditions, to require us to register the sale of their
remaining shares of our common stock under federal securities
laws. By exercising their registration rights, and selling a
large number of shares, our stockholders could cause the
prevailing market price of our common stock to decline.
134
Stock
Options, Restricted Stock Units and Share Grants
We have committed to grant stock options to purchase
approximately 450,100 shares of our common stock,
307,368 restricted stock units and 153,684 shares of
our common stock to employees on or about the date of this
offering. The above figures are estimates based on an assumed
initial public offering price of $19.00 per share; the actual
figures will be determined based on the actual initial public
offering price per share. We intend to file a registration
statement on
Form S-8
under the Securities Act to register all shares of our common
stock issuable pursuant to these awards and all shares of our
common stock issuable under our Equity Plan and our Employee
Stock Purchase Plan. Accordingly, shares of our common stock
issued under these plans will be eligible for sale in the public
markets. Restricted stock units and stock options are subject to
vesting restrictions as described above.
Warrants
We currently have outstanding warrants to purchase
18,975,744 shares of our common stock at an exercise price
of $11.49 per share. The warrants permit the holders to exercise
either by paying the full exercise price in cash, or by means of
a cashless exercise, whereby the holders would surrender a right
to receive that number of shares having a value equal to the
exercise price of the warrants. In the event the holders pay the
exercise price in cash, the shares will be subject to the
one-year holding period described above, in addition to the
other requirements of Rule 144. In the event of a cashless
exercise, the shares will be deemed to have been acquired at the
time of issuance of the warrants, in which case the holding
period will be met and the shares will be eligible for resale
subject to compliance with the other requirements of
Rule 144 and the lock-up agreements described above.
135
MATERIAL
UNITED STATES FEDERAL TAX CONSEQUENCES
TO NON-U.S.
STOCKHOLDERS
This is a general summary of material U.S. federal income
and estate tax considerations with respect to your acquisition,
ownership and disposition of common stock if you purchase your
common stock in this offering, you will hold the common stock as
a capital asset and you are a beneficial owner of shares other
than:
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an individual citizen or resident of the United States;
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a corporation or other entity taxable as a corporation created
or organized in, or under the laws of, the United States or any
political subdivision of the United States;
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an estate, the income of which is subject to U.S. federal
income taxation regardless of its source;
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a trust, if a court within the United States is able to exercise
primary supervision over the administration of the trust and one
or more U.S. persons have the authority to control all
substantial decisions of the trust; or
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a trust that has a valid election in place to be treated as a
U.S. person.
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This summary does not address all of the U.S. federal
income and estate tax considerations that may be relevant to you
in light of your particular circumstances or if you are a
beneficial owner subject to special treatment under
U.S. income tax laws (such as a controlled foreign
corporation, passive foreign investment
company, a company that accumulates earnings to avoid
U.S. federal income tax, foreign tax-exempt organization,
financial institution, broker or dealer in securities, insurance
company, regulated investment company, real estate investment
trust, financial asset securitization investment trust, person
who holds common stock as part of a hedging or conversion
transaction or as part of a short-sale or straddle, or former
U.S. citizen or resident). This summary does not discuss
any aspect of U.S. federal alternative minimum tax, state,
local or
non-U.S. taxation.
This summary is based on current provisions of the Internal
Revenue Code (Code), Treasury regulations, judicial
opinions, published positions of the United States Internal
Revenue Service (IRS) and all other applicable
authorities, all of which are subject to change, possibly with
retroactive effect.
If a partnership holds our common stock, the tax treatment of a
partner will generally depend on the status of the partner and
the activities of the partnership. If you are a partner of a
partnership holding our common stock, you should consult your
tax advisor.
WE URGE PROSPECTIVE
NON-U.S. STOCKHOLDERS
TO CONSULT THEIR TAX ADVISORS REGARDING THE UNITED STATES
FEDERAL, STATE, LOCAL AND
NON-UNITED
STATES INCOME AND OTHER TAX CONSIDERATIONS OF ACQUIRING, HOLDING
AND DISPOSING OF SHARES OF COMMON STOCK.
Dividends
In general, any distributions we make to you with respect to
your shares of common stock that constitute dividends for
U.S. federal income tax purposes will be subject to
U.S. withholding tax at a rate of 30% of the gross amount,
unless you are eligible for a reduced rate of withholding tax
under an applicable income tax treaty and you provide proper
certification of your eligibility for such reduced rate. A
distribution will constitute a dividend for U.S. federal
income tax purposes to the extent of our current or accumulated
earnings and profits as determined under the Code. Any
distribution not constituting a dividend will be treated first
as reducing your basis in your shares of common stock and, to
the extent it exceeds your basis, as capital gain.
Dividends we pay to you that are effectively connected with your
conduct of a trade or business within the United States (and, if
certain income tax treaties apply, are attributable to a
U.S. permanent establishment maintained by you) generally
will not be subject to U.S. withholding tax if you comply
with applicable
136
certification and disclosure requirements. Instead, such
dividends generally will be subject to U.S. federal income
tax, net of certain deductions, at the same graduated individual
or corporate rates applicable to U.S. persons. If you are a
corporation, effectively connected income may also be subject to
a branch profits tax at a rate of 30% (or such lower
rate as may be specified by an applicable income tax treaty).
Dividends that are effectively connected with your conduct of a
trade or business but that under an applicable income tax treaty
are not attributable to a U.S. permanent establishment
maintained by you may be eligible for a reduced rate of
U.S. withholding tax under such treaty, provided you comply
with certification and disclosure requirements necessary to
obtain treaty benefits.
Sale or
Other Disposition of Common Stock
You generally will not be subject to U.S. federal income
tax on any gain realized upon the sale or other disposition of
your shares of common stock unless:
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the gain is effectively connected with your conduct of a trade
or business within the United States (and, under certain income
tax treaties, is attributable to a U.S. permanent
establishment you maintain);
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you are an individual, you are present in the United States for
183 days or more in the taxable year of disposition and you
meet other conditions, and you are not eligible for relief under
an applicable income tax treaty; or
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we are or have been a United States real property holding
corporation for U.S. federal income tax purposes
(which we believe we are not and have never been, and do not
anticipate we will become) and you hold or have held, directly
or indirectly, at any time within the shorter of the five-year
period preceding disposition or your holding period for your
shares of common stock, more than 5% of our common stock.
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Gain that is effectively connected with your conduct of a trade
or business within the United States generally will be subject
to U.S. federal income tax, net of certain deductions, at
the same rates applicable to U.S. persons. If you are a
corporation, the branch profits tax (described above) also may
apply to such effectively connected gain. If the gain from the
sale or disposition of your shares is effectively connected with
your conduct of a trade or business in the United States but
under an applicable income tax treaty is not attributable to a
permanent establishment you maintain in the United States, your
gain may be exempt from U.S. tax under the treaty. If you
are described in the second bullet point above, you generally
will be subject to U.S. tax at a rate of 30% on the gain
realized, although the gain may be offset by some
U.S. source capital losses realized during the same taxable
year.
Information
Reporting and Backup Withholding
We must report annually to the IRS the amount of dividends or
other distributions we pay to you on your shares of common stock
and the amount of tax we withhold on these distributions
regardless of whether withholding is required. The IRS may make
copies of the information returns reporting those distributions
and amounts withheld available to the tax authorities in the
country in which you reside pursuant to the provisions of an
applicable income tax treaty or exchange of information treaty.
The United States imposes a backup withholding tax on dividends
and certain other types of payments to U.S. persons. You
will not be subject to backup withholding tax on dividends you
receive on your shares of common stock if you provide proper
certification of your status as a
non-U.S. person
or you are a corporation or one of several types of entities and
organizations that qualify for exemption (an exempt
recipient).
Information reporting and backup withholding generally are not
required with respect to the amount of any proceeds from the
sale of your shares of common stock outside the United States
through a foreign office of a foreign broker that does not have
certain specified connections to the United States. However, if
you sell your shares of common stock through a U.S. broker
or the U.S. office of a foreign broker, the broker will be
137
required to report the amount of proceeds paid to you to the IRS
and also perform backup withholding on that amount unless you
provide appropriate certification to the broker of your status
as a
non-U.S. person
or you are an exempt recipient. Information reporting will also
apply if you sell your shares of common stock through a foreign
broker deriving more than a specified percentage of its income
from U.S. sources or having certain other connections to
the United States, unless such broker has documenting evidence
in its records that you are a
non-U.S. person
and certain other conditions are met or you are an exempt
recipient.
Any amounts withheld with respect to your shares of common stock
under the backup withholding rules will be refunded to you or
credited against your U.S. federal income tax liability, if
any, by the IRS if the required information is furnished in a
timely manner.
Estate
Tax
Common stock owned or treated as owned by an individual who is
not a citizen or resident (as defined for U.S. federal
estate tax purposes) of the United States at the time of his or
her death will be included in the individuals gross estate
for U.S. federal estate tax purposes and therefore may be
subject to U.S. federal estate tax unless an applicable
treaty provides otherwise.
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We intend to offer the shares in the U.S. and Canada
through the underwriters. Merrill Lynch, Pierce,
Fenner & Smith Incorporated, Goldman,
Sachs & Co., J.P. Morgan Securities Inc., and
Lehman Brothers Inc. are acting as representatives of the
underwriters named below. Subject to the terms and conditions
described in an underwriting agreement among us, the selling
stockholders and the underwriters, the selling stockholders have
agreed to sell to the underwriters, and the underwriters
severally have agreed to purchase from the selling stockholders,
the number of shares listed opposite their names below.
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Underwriter
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Number of Shares
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Merrill Lynch, Pierce, Fenner & Smith
Incorporated
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Goldman, Sachs & Co.
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J.P. Morgan Securities Inc.
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Lehman Brothers Inc.
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UBS Securities LLC
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Banc of America Securities LLC
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Dowling & Partners Securities, LLC
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Fox-Pitt
Kelton Cochran Caronia Waller (USA) LLC
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Keefe, Bruyette & Woods, Inc.
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Wells Fargo Securities, LLC
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Total
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39,500,000
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The underwriters have agreed to purchase all of the shares sold
under the underwriting agreement if any of these shares are
purchased. If an underwriter defaults, the underwriting
agreement provides that the purchase commitments of the
nondefaulting underwriters may be increased or the underwriting
agreement may be terminated.
The underwriters are offering the shares, subject to prior sale,
when, as and if issued to and accepted by them, subject to
approval of legal matters by their counsel, including the
validity of the shares, and other conditions contained in the
underwriting agreement, such as the receipt by the underwriters
of officers certificates and legal opinions. The
underwriters reserve the right to withdraw, cancel or modify
offers to the public and to reject orders in whole or in part.
Commissions
and Discounts
The representatives have advised the selling stockholders that
the underwriters propose initially to offer the shares to the
public at the initial public offering price on the cover page of
this prospectus and to dealers at that price less a concession
not in excess of $ per share. The
underwriters may allow, and the dealers may reallow, a discount
not in excess of $ per share to
other dealers. After the initial public offering, the public
offering price, concession and discount may be changed.
The following table shows the public offering price,
underwriting discount and proceeds before expenses to the
selling stockholders. The information assumes either no exercise
or full exercise by the underwriters of their over-allotment
options.
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Per Share
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Without Option
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With Option
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Public offering price
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$
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$
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$
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Underwriting discount
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$
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$
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$
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Proceeds, before expenses, to the selling stockholders
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$
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$
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$
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The expenses of the offering, not including the underwriting
discount, are estimated at $2.7 million and are payable by
us.
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Over-allotment
Option
The selling stockholders have granted options to the
underwriters to purchase up to 5,925,000 additional shares
at the public offering price less the underwriting discount. The
underwriters may exercise these options for 30 days from
the date of this prospectus solely to cover any over-allotments.
If the underwriters exercise these options, each will be
obligated, subject to conditions contained in the underwriting
agreement, to purchase a number of additional shares
proportionate to that underwriters initial amount
reflected in the above table.
Indemnification
We and the selling stockholders have agreed to indemnify the
underwriters against certain liabilities and to contribute to
payments that the underwriters may be required to make for these
liabilities.
No Sales
of Similar Securities
We and each of our executive officers, directors and
stockholders have agreed, with exceptions, not to sell or
transfer any common stock for 180 days after the date of
this prospectus without first obtaining the written consent of
the representatives. Specifically, we and these other
individuals and entities have agreed not to directly or
indirectly
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offer, pledge, sell or contract to sell any common stock;
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sell any option or contract to purchase any common stock;
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purchase any option or contract to sell any common stock;
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grant any option, right or warrant for the sale of any common
stock;
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lend or otherwise dispose of or transfer any common stock;
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request or demand that we file a registration statement related
to the common stock; or
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enter into any swap or other agreement that transfers, in whole
or in part, the economic consequence of ownership of any common
stock whether any such swap or transaction is to be settled by
delivery of shares or other securities, in cash or otherwise.
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This lock-up provision applies to common stock and to securities
convertible into or exchangeable or exercisable for or repayable
with common stock. It also applies to common stock owned now or
acquired later by the person executing the agreement or for
which the person executing the agreement later acquires the
power of disposition.
Notwithstanding the foregoing, if: (1) during the last
17 days of the
180-day
lock-up period, we issue an earnings release or material news or
a material event relating to the company occurs; or
(2) prior to the expiration of the
180-day
lock-up period, we announce that we will release earnings
results or become aware that material news or a material event
will occur during the
16-day
period beginning on the last day of the
180-day
lock-up period, then the restrictions imposed by this lock-up
provision shall continue to apply until the expiration of the
18-day
period beginning on the issuance of the earnings release or the
occurrence of the material news or material event, as
applicable, unless the representatives waive, in writing, such
extension.
New York
Stock Exchange Listing
Our common stock has been approved for listing, subject to
official notice of issuance, on the NYSE under the symbol
SYA. In order to meet the requirements for listing
on that exchange, the underwriters have undertaken to sell a
minimum number of shares to a minimum number of beneficial
owners as required by that exchange. Before this offering, there
has been no public market for our common stock. The initial
public offering price will be determined through negotiations
among the selling stockholders and the representatives. In
addition to prevailing market conditions, the factors to be
considered in determining the initial public offering price are
as follows:
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the valuation multiples of publicly traded companies that the
representatives believe to be comparable to us;
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our financial information;
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the history of, and the prospects for, our company and the
industry in which we compete;
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an assessment of our management, its past and present
operations, and the prospects for, and timing of, our future
revenues;
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the present state of our development; and
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the above factors in relation to market values and various
valuation measures of other companies engaged in activities
similar to ours.
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An active trading market for the shares may not develop. It is
also possible that after the offering the shares will not trade
in the public market at or above the initial public offering
price.
The underwriters do not expect to sell more than 5% of the
shares in the aggregate to accounts over which they exercise
discretionary authority.
Price
Stabilization, Short Positions and Penalty Bids
Until the distribution of the shares is completed, SEC rules may
limit underwriters and selling group members from bidding for
and purchasing our common stock. However, the representatives
may engage in transactions that stabilize the price of the
common stock, such as bids or purchases to peg, fix or maintain
that price.
If the underwriters create a short position in the common stock
in connection with the offering (i.e., if they sell more shares
than are listed on the cover of this prospectus), the
representatives may reduce that short position by purchasing
shares in the open market. The representatives may also elect to
reduce any short position by exercising all or part of the
over-allotment option described above. Purchases of the common
stock to stabilize its price or to reduce a short position may
cause the price of the common stock to be higher than it might
be in the absence of such purchases.
The representatives may also impose a penalty bid on
underwriters and selling group members. This means that if the
representatives purchase shares in the open market to reduce the
underwriters short position or to stabilize the price of
such shares, they may reclaim the amount of the selling
concession from the underwriters and selling group members who
sold those shares. The imposition of a penalty bid may also
affect the price of the shares in that it discourages resales of
those shares.
Neither we nor any of the underwriters makes any representation
or prediction as to the direction or magnitude of any effect
that the transactions described above may have on the price of
the common stock. In addition, neither we nor any of the
underwriters makes any representation that the representatives
will engage in these transactions or that these transactions,
once commenced, will not be discontinued without notice.
Other
Relationships
Some of the underwriters and their affiliates have engaged in,
and may in the future engage in, investment banking and other
commercial banking and other dealings in the ordinary course of
business with us, our affiliates, and White Mountains Insurance
Group, Ltd. They have received customary fees and commissions
for these transactions.
For example, J.P. Morgan Securities Inc., Lehman Brothers
Inc. and Banc of America Securities LLC were initial purchasers
in connection with the offering of our 6.125% senior notes due
2016 and were initial purchasers, along with UBS Securities LLC,
in connection with the offering of our Capital Efficient Notes
due 2067. JPMorgan Chase Bank, N.A., an affiliate of
J.P. Morgan Securities Inc., and Lehman Commercial Paper
Inc., an affiliate of Lehman Brothers Inc., were involved in the
financing of the Acquisition. JPMorgan Chase Bank, N.A., Lehman
Commercial Paper Inc., Merrill Lynch Bank USA (an affiliate of
Merrill Lynch, Pierce, Fenner & Smith Incorporated),
an affiliate of Goldman, Sachs & Co. and Bank of America,
N.A., an affiliate of Banc of America Securities LLC, are
lenders under our revolving credit facility. Under such same
facility, Bank of America, N.A. also serves as administrative
agent, swing line lender and issuing lender, Banc of America
Securities LLC serves as sole lead arranger and sole book
manager and JPMorgan Chase Bank, N.A. serves as syndication
agent. We are party to an arms length sales agreement with
Wells Fargo Investments, LLC (an affiliate of Wells Fargo
Securities, LLC) for the distribution of variable insurance
products, which
141
agreement was entered into in 2002 by our predecessor, Safeco
Life Insurance Company, and we recently entered into an
arms length distribution relationship with Chase Insurance
Agency, Inc. (an affiliate of J.P. Morgan Securities Inc.)
in connection with the sale of our income annuity products.
Howard L. Clark, Jr., Vice Chairman of Lehman Brothers
Inc., is a director of White Mountains Insurance Group, Ltd. In
addition, an affiliate of Fox-Pitt Kelton Cochran Caronia Waller
(USA) LLC, which affiliate is a selling stockholder, holds
approximately 2% of our outstanding common stock.
Offering
Restrictions
In relation to each Member State of the European Economic Area
which has implemented the Prospectus Directive (each, a Relevant
Member State), each underwriter has represented and agreed that
with effect from and including the date on which the Prospectus
Directive is implemented in that Relevant Member State (the
Relevant Implementation Date) it has not made and will not make
an offer of shares to the public in that Relevant Member State
prior to the publication of a prospectus in relation to the
shares which has been approved by the competent authority in
that Relevant Member State or, where appropriate, approved in
another Relevant Member State and notified to the competent
authority in that Relevant Member State, all in accordance with
the Prospectus Directive, except that it may, with effect from
and including the Relevant Implementation Date, make an offer of
shares to the public in that Relevant Member State at any time:
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to legal entities which are authorized or regulated to operate
in the financial markets or, if not so authorized or regulated,
whose corporate purpose is solely to invest in securities;
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to any legal entity which has two or more of (1) an average
of at least 250 employees during the last financial year;
(2) a total balance sheet of more than 43,000,000 and
(3) an annual net turnover of more than 50,000,000,
as shown in its last annual or consolidated accounts;
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to fewer than 100 natural or legal persons (other than qualified
investors as defined in the Prospectus Directive) subject to
obtaining the prior consent of the representatives for any such
offer; or
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in any other circumstances which do not require the publication
by the Issuer of a prospectus pursuant to Article 3 of the
Prospectus Directive.
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For the purposes of this provision, the expression an
offer of shares to the public in relation to any
shares in any Relevant Member State means the communication in
any form and by any means of sufficient information on the terms
of the offer and the shares to be offered so as to enable an
investor to decide to purchase or subscribe the shares, as the
same may be varied in that Relevant Member State by any measure
implementing the Prospectus Directive in that Relevant Member
State and the expression Prospectus Directive means Directive
2003/71/EC and includes any relevant implementing measure in
each Relevant Member State.
Each underwriter has represented and agreed that:
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it has only communicated or caused to be communicated and will
only communicate or cause to be communicated an invitation or
inducement to engage in investment activity (within the meaning
of Section 21 of the FSMA) received by it in connection
with the issue or sale of the shares in circumstances in which
Section 21(1) of the FSMA does not apply to the
Issuer; and
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it has complied and will comply with all applicable provisions
of the FSMA with respect to anything done by it in relation to
the shares in, from or otherwise involving the United Kingdom.
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The shares may not be offered or sold by means of any document
other than (i) in circumstances which do not constitute an
offer to the public within the meaning of the Companies
Ordinance (Cap. 32, Laws of Hong Kong), or (ii) to
professional investors within the meaning of the
Securities and Futures Ordinance (Cap. 571, Laws of Hong
Kong) and any rules made thereunder, or (iii) in other
circumstances which do not result in the document being a
prospectus within the meaning of the Companies
Ordinance (Cap. 32, Laws of Hong Kong), and no
advertisement, invitation or document relating to the shares may
be issued or may be in the possession of any person for the
purpose of issue (in each case whether in Hong Kong or
elsewhere), which is directed at, or the contents of which are
likely to be accessed or read by, the public in Hong Kong
(except if permitted to do so under the laws of Hong Kong) other
than with respect to shares which are or are
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intended to be disposed of only to persons outside Hong Kong or
only to professional investors within the meaning of
the Securities and Futures Ordinance (Cap. 571, Laws of Hong
Kong) and any rules made thereunder.
This prospectus has not been registered as a prospectus with the
Monetary Authority of Singapore. Accordingly, this prospectus
and any other document or material in connection with the offer
or sale, or invitation for subscription or purchase, of the
shares may not be circulated or distributed, nor may the shares
be offered or sold, or be made the subject of an invitation for
subscription or purchase, whether directly or indirectly, to
persons in Singapore other than (i) to an institutional
investor under Section 274 of the Securities and Futures
Act, Chapter 289 of Singapore (the SFA),
(ii) to a relevant person, or any person pursuant to
Section 275(1A), and in accordance with the conditions,
specified in Section 275 of the SFA or (iii) otherwise
pursuant to, and in accordance with the conditions of, any other
applicable provision of the SFA.
Where the shares are subscribed or purchased under
Section 275 by a relevant person which is: (a) a
corporation (which is not an accredited investor) the sole
business of which is to hold investments and the entire share
capital of which is owned by one or more individuals, each of
whom is an accredited investor; or (b) a trust (where the
trustee is not an accredited investor) whose sole purpose is to
hold investments and each beneficiary is an accredited investor,
shares, debentures and units of shares and debentures of that
corporation or the beneficiaries rights and interest in
that trust shall not be transferable for 6 months after
that corporation or that trust has acquired the shares under
Section 275 except: (1) to an institutional investor
under Section 274 of the SFA or to a relevant person, or
any person pursuant to Section 275(1A), and in accordance
with the conditions, specified in Section 275 of the SFA;
(2) where no consideration is given for the transfer; or
(3) by operation of law.
The securities have not been and will not be registered under
the Securities and Exchange Law of Japan (the Securities and
Exchange Law) and each underwriter has agreed that it will not
offer or sell any securities, directly or indirectly, in Japan
or to, or for the benefit of, any resident of Japan (which term
as used herein means any person resident in Japan, including any
corporation or other entity organized under the laws of Japan),
or to others for re-offering or resale, directly or indirectly,
in Japan or to a resident of Japan, except pursuant to an
exemption from the registration requirements of, and otherwise
in compliance with, the Securities and Exchange Law and any
other applicable laws, regulations and ministerial guidelines of
Japan.
No underwriter will participate in any offering or distribution,
or will effect any sales, of shares in any non-U.S. jurisdiction
in which it is registered to do so, except in compliance with
applicable laws and regulations.
143
The validity of our common stock offered hereby will be passed
upon for us by Cravath, Swaine & Moore LLP, New York,
New York. The underwriters are being represented in connection
with this offering by Simpson Thacher & Bartlett LLP,
New York, New York.
The consolidated financial statements of Symetra Financial
Corporation at December 31, 2006 and 2005 and for the years
ended December 31, 2006 and 2005, and for the period from
August 2, 2004 through December 31, 2004, and the
period from January 1, 2004 through August 1, 2004
(Predecessor), appearing in this prospectus and registration
statement have been audited by Ernst & Young LLP,
independent registered public accounting firm, as set forth in
their report thereon appearing elsewhere herein, and are
included in reliance upon such report given on the authority of
such firm as experts in accounting and auditing.
WHERE
YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on
Form S-1
under the Securities Act of 1933, as amended, with respect to
the common stock we propose to sell in this offering. This
prospectus, which constitutes part of the registration
statement, does not contain all of the information set forth in
the registration statement. For further information about us and
the common stock we propose to sell in this offering, we refer
you to the registration statement and the exhibits and schedules
filed as a part of the registration statement. Statements
contained in this prospectus as to the contents of any contract
or other document filed as an exhibit to the registration
statement are not necessarily complete. If a contract or
document has been filed as an exhibit to the registration
statement, we refer you to the copy of the contract or document
that has been filed. The registration statement may be inspected
without charge at the principal office of the SEC in
Washington, D.C. and copies of all or any part of the
registration statement may be inspected and copied at the public
reference facilities maintained by the SEC at
100 F Street, N.E., Washington, D.C. 20549.
Copies of such material can also be obtained at prescribed rates
by mail from the Public Reference Section of the SEC at
100 F Street, N.E., Washington, D.C. 20549. The
SECs toll-free number is
1-800-SEC-0330.
In addition, the SEC maintains a website
(http://www.sec.gov)
that contains reports, proxy and information statements and
other information regarding registrants that file electronically
with the SEC. Prior to this offering, we were not required to
file reports with the SEC.
Upon completion of this offering, we will become subject to the
information and periodic reporting requirements of the Exchange
Act. The periodic reports and other information that we file
with the SEC will be available for inspection and copying at the
SECs public reference facilities and on the website of the
SEC referred to above.
144
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page
|
|
Audited Consolidated Financial Statements of Symetra
Financial Corporation
|
|
|
|
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
|
|
|
F-9
|
|
|
|
|
|
|
Unaudited Consolidated Financial Statements
|
|
|
|
|
|
|
|
F-44
|
|
|
|
|
F-45
|
|
|
|
|
F-46
|
|
|
|
|
F-47
|
|
|
|
|
F-48
|
|
|
|
|
F-49
|
|
F-1
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
Symetra Financial Corporation
We have audited the accompanying consolidated balance sheets of
Symetra Financial Corporation (the Company) as of
December 31, 2006 and 2005, and the related consolidated
statements of operations, changes in stockholders equity,
comprehensive income (loss), and cash flows for the years ended
December 31, 2006 and 2005, and for the period from
August 2, 2004 through December 31, 2004, and the
period from January 1, 2004 through August 1, 2004
(Predecessor). These financial statements are the responsibility
of the Companys management. Our responsibility is to
express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. We were not engaged to perform an
audit of the Companys internal control over financial
reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of the Company at December 31, 2006 and
2005, and the consolidated results of its operations and its
cash flows for the years ended December 31, 2006 and 2005
and for the period from August 2, 2004 through
December 31, 2004, and the period from January 1, 2004
through August 1, 2004 (Predecessor), in conformity with
U.S. generally accepted accounting principles.
Seattle, Washington
February 20, 2007,
except for Note 22, as to which the date is
October 26, 2007
F-2
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
ASSETS
|
Investments: (Note 3)
|
|
|
|
|
|
|
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
Fixed maturities, at fair value (amortized cost:
|
|
|
|
|
|
|
|
|
$16,086,596 and $16,987,097, respectively)
|
|
$
|
16,049,878
|
|
|
$
|
17,183,197
|
|
Marketable equity securities, at fair value (cost:
|
|
|
|
|
|
|
|
|
$171,003 and $148,917, respectively)
|
|
|
201,706
|
|
|
|
162,301
|
|
Mortgage loans
|
|
|
794,283
|
|
|
|
776,923
|
|
Policy loans
|
|
|
79,244
|
|
|
|
80,463
|
|
Short-term investments
|
|
|
48,882
|
|
|
|
7,364
|
|
Investments in limited partnerships
|
|
|
112,648
|
|
|
|
93,400
|
|
Other invested assets
|
|
|
18,705
|
|
|
|
29,125
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
|
17,305,346
|
|
|
|
18,332,773
|
|
Cash and cash equivalents
|
|
|
253,210
|
|
|
|
111,023
|
|
Accrued investment income
|
|
|
206,717
|
|
|
|
213,914
|
|
Accounts receivable and other receivables
|
|
|
81,993
|
|
|
|
50,909
|
|
Reinsurance recoverables (Note 7)
|
|
|
238,764
|
|
|
|
229,888
|
|
Deferred policy acquisition costs (Note 8)
|
|
|
88,237
|
|
|
|
49,017
|
|
Goodwill
|
|
|
3,687
|
|
|
|
3,687
|
|
Current income tax recoverable
|
|
|
|
|
|
|
26,281
|
|
Deferred income tax assets, net (Note 12)
|
|
|
219,091
|
|
|
|
137,347
|
|
Property, equipment, and leasehold improvements, net
(Note 9)
|
|
|
28,076
|
|
|
|
30,522
|
|
Other assets
|
|
|
16,275
|
|
|
|
7,429
|
|
Securities lending collateral (Note 5)
|
|
|
439,292
|
|
|
|
598,451
|
|
Separate account assets
|
|
|
1,233,929
|
|
|
|
1,188,820
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
20,114,617
|
|
|
$
|
20,980,061
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Funds held under deposit contracts
|
|
$
|
15,986,198
|
|
|
$
|
16,697,903
|
|
Future policy benefits
|
|
|
376,363
|
|
|
|
371,457
|
|
Policy and contract claims (Note 10)
|
|
|
119,514
|
|
|
|
135,655
|
|
Unearned premiums
|
|
|
11,721
|
|
|
|
11,560
|
|
Other policyholders funds
|
|
|
46,369
|
|
|
|
47,532
|
|
Notes payable (Note 11)
|
|
|
298,737
|
|
|
|
300,000
|
|
Current income taxes payable (Note 12)
|
|
|
2,551
|
|
|
|
|
|
Other liabilities
|
|
|
272,630
|
|
|
|
223,815
|
|
Securities lending payable (Note 5)
|
|
|
439,292
|
|
|
|
598,451
|
|
Separate account liabilities
|
|
|
1,233,929
|
|
|
|
1,188,820
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
18,787,304
|
|
|
|
19,575,193
|
|
Commitments and contingencies (Note 14)
|
|
|
|
|
|
|
|
|
Capital stock (Note 1)
|
|
|
926
|
|
|
|
926
|
|
Additional paid-in capital
|
|
|
1,165,505
|
|
|
|
1,165,505
|
|
Retained earnings
|
|
|
161,432
|
|
|
|
101,902
|
|
Accumulated other comprehensive income (loss), net of taxes
(Note 13)
|
|
|
(550
|
)
|
|
|
136,535
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
1,327,313
|
|
|
|
1,404,868
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
20,114,617
|
|
|
$
|
20,980,061
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-3
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
August 2, 2004
|
|
|
January 1, 2004
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
through
|
|
|
through
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
August 1,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2004
|
|
|
|
(In thousands, except per share data)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums (Note 7)
|
|
$
|
525,657
|
|
|
$
|
575,459
|
|
|
$
|
263,195
|
|
|
$
|
357,925
|
|
Net investment income (Note 3)
|
|
|
984,927
|
|
|
|
994,048
|
|
|
|
411,120
|
|
|
|
693,702
|
|
Other revenues
|
|
|
56,172
|
|
|
|
58,559
|
|
|
|
27,050
|
|
|
|
43,943
|
|
Net realized investment gains (Note 3)
|
|
|
1,680
|
|
|
|
14,140
|
|
|
|
7,003
|
|
|
|
34,892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
1,568,436
|
|
|
|
1,642,206
|
|
|
|
708,368
|
|
|
|
1,130,462
|
|
Benefits and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder benefits and claims
|
|
|
264,252
|
|
|
|
327,427
|
|
|
|
127,499
|
|
|
|
223,578
|
|
Interest credited
|
|
|
765,871
|
|
|
|
810,928
|
|
|
|
360,196
|
|
|
|
556,433
|
|
Other underwriting and operating expenses
|
|
|
260,541
|
|
|
|
273,247
|
|
|
|
123,242
|
|
|
|
182,334
|
|
Fair value of warrants issued to investors
|
|
|
|
|
|
|
|
|
|
|
101,531
|
|
|
|
|
|
Interest expense (Note 11)
|
|
|
19,155
|
|
|
|
12,388
|
|
|
|
3,466
|
|
|
|
|
|
Amortization of deferred policy acquisition costs
(Note 8)
|
|
|
14,589
|
|
|
|
11,861
|
|
|
|
1,626
|
|
|
|
34,164
|
|
Intangible asset amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses
|
|
|
1,324,408
|
|
|
|
1,435,851
|
|
|
|
717,560
|
|
|
|
1,001,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
|
244,028
|
|
|
|
206,355
|
|
|
|
(9,192
|
)
|
|
|
129,024
|
|
Provision (benefit) for income taxes (Note 12):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
92,414
|
|
|
|
22,193
|
|
|
|
21,299
|
|
|
|
916
|
|
Deferred
|
|
|
(7,916
|
)
|
|
|
39,720
|
|
|
|
10,683
|
|
|
|
30,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision for income taxes
|
|
|
84,498
|
|
|
|
61,913
|
|
|
|
31,982
|
|
|
|
31,402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
159,530
|
|
|
|
144,442
|
|
|
|
(41,174
|
)
|
|
|
97,622
|
|
Income (loss) from discontinued operations (net of taxes of
$(0), $536, $(1,335), and $1,235, respectively)
(Note 15)
|
|
|
|
|
|
|
1,045
|
|
|
|
(2,411
|
)
|
|
|
2,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
159,530
|
|
|
$
|
145,487
|
|
|
$
|
(43,585
|
)
|
|
$
|
99,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.43
|
|
|
$
|
1.30
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
1.43
|
|
|
$
|
1.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
111,622
|
|
|
|
111,622
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
111,622
|
|
|
|
111,622
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-4
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
August 2, 2004
|
|
|
January 1, 2004
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
through
|
|
|
through
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
August 1,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Capital stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
926
|
|
|
$
|
926
|
|
|
$
|
7,459
|
|
|
$
|
7,459
|
|
Purchase method accounting adjustment
|
|
|
|
|
|
|
|
|
|
|
(7,459
|
)
|
|
|
|
|
Capital contribution from stockholders
|
|
|
|
|
|
|
|
|
|
|
926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
926
|
|
|
|
926
|
|
|
|
926
|
|
|
|
7,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
|
1,165,505
|
|
|
|
1,165,505
|
|
|
|
407,683
|
|
|
|
397,354
|
|
Purchase method accounting adjustment
|
|
|
|
|
|
|
|
|
|
|
(407,683
|
)
|
|
|
|
|
Capital contribution from Safeco
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,834
|
|
Capital contributions from stockholders
|
|
|
|
|
|
|
|
|
|
|
1,063,974
|
|
|
|
|
|
Issuance of warrants to investors
|
|
|
|
|
|
|
|
|
|
|
101,531
|
|
|
|
|
|
Stock option expense allocation from Safeco
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
1,165,505
|
|
|
|
1,165,505
|
|
|
|
1,165,505
|
|
|
|
407,683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings (deficit):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
|
101,902
|
|
|
|
(43,585
|
)
|
|
|
1,367,690
|
|
|
|
1,332,072
|
|
Purchase method accounting adjustment
|
|
|
|
|
|
|
|
|
|
|
(1,367,690
|
)
|
|
|
|
|
Net income (loss)
|
|
|
159,530
|
|
|
|
145,487
|
|
|
|
(43,585
|
)
|
|
|
99,918
|
|
Dividend distributions
|
|
|
(100,000
|
)
|
|
|
|
|
|
|
|
|
|
|
(64,300
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
161,432
|
|
|
|
101,902
|
|
|
|
(43,585
|
)
|
|
|
1,367,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss), net of taxes
(Note 13):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
|
136,535
|
|
|
|
312,931
|
|
|
|
636,149
|
|
|
|
829,772
|
|
Purchase method accounting adjustment
|
|
|
|
|
|
|
|
|
|
|
(636,149
|
)
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
(137,085
|
)
|
|
|
(176,396
|
)
|
|
|
312,931
|
|
|
|
(193,623
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
(550
|
)
|
|
|
136,535
|
|
|
|
312,931
|
|
|
|
636,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
$
|
1,327,313
|
|
|
$
|
1,404,868
|
|
|
$
|
1,435,777
|
|
|
$
|
2,418,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-5
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
August 2, 2004
|
|
|
January 1, 2004
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
through
|
|
|
through
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
August 1,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Net income (loss)..
|
|
$
|
159,530
|
|
|
$
|
145,487
|
|
|
$
|
(43,585
|
)
|
|
$
|
99,918
|
|
Other comprehensive income (loss), net of taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in unrealized gains and losses on available-for-sales
securities (net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$(75,838), $(91,878), $170,296, and $(103,157), respectively)
|
|
|
(140,843
|
)
|
|
|
(170,629
|
)
|
|
|
316,262
|
|
|
|
(191,578
|
)
|
Reclassification adjustment for net realized investment (gains)
losses included in net income (net of tax: $383, $(3,525),
$(1,551), and $(12,395), respectively)
|
|
|
712
|
|
|
|
(6,547
|
)
|
|
|
(2,879
|
)
|
|
|
(23,018
|
)
|
Derivatives qualifying as cash flow hedges net
change in fair value (net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$1,601, $(0), $(0), and $(2,390), respectively)
|
|
|
2,976
|
|
|
|
|
|
|
|
|
|
|
|
(4,439
|
)
|
Adjustment for deferred policy acquisition costs valuation
allowance (net of tax: $38, $421, $(243), and $13,683,
respectively)
|
|
|
70
|
|
|
|
780
|
|
|
|
(452
|
)
|
|
|
25,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
(137,085
|
)
|
|
|
(176,396
|
)
|
|
|
312,931
|
|
|
|
(193,623
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
22,445
|
|
|
$
|
(30,909
|
)
|
|
$
|
269,346
|
|
|
$
|
(93,705
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-6
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
August 2, 2004
|
|
|
January 1, 2004
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
through
|
|
|
through
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
August 1,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
159,530
|
|
|
$
|
145,487
|
|
|
$
|
(43,585
|
)
|
|
$
|
99,918
|
|
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment gains
|
|
|
(1,680
|
)
|
|
|
(16,394
|
)
|
|
|
(7,129
|
)
|
|
|
(35,017
|
)
|
Accretion of fixed maturity investments and mortgage loans
|
|
|
72,474
|
|
|
|
99,068
|
|
|
|
62,768
|
|
|
|
4,109
|
|
Accrued interest on accrual bonds
|
|
|
(43,444
|
)
|
|
|
(45,383
|
)
|
|
|
(19,502
|
)
|
|
|
(27,504
|
)
|
Amortization and depreciation
|
|
|
12,077
|
|
|
|
9,069
|
|
|
|
1,090
|
|
|
|
6,104
|
|
Deferred income tax provision (benefit)
|
|
|
(7,916
|
)
|
|
|
39,994
|
|
|
|
10,764
|
|
|
|
30,486
|
|
Interest credited on deposit contracts
|
|
|
765,871
|
|
|
|
810,928
|
|
|
|
360,196
|
|
|
|
556,433
|
|
Mortality and expense charges and administrative fees
|
|
|
(91,187
|
)
|
|
|
(89,185
|
)
|
|
|
(35,825
|
)
|
|
|
(50,718
|
)
|
Fair value of warrants issued to investors
|
|
|
|
|
|
|
|
|
|
|
101,531
|
|
|
|
|
|
Changes in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued investment income
|
|
|
7,197
|
|
|
|
15,459
|
|
|
|
9,539
|
|
|
|
(7,522
|
)
|
Deferred policy acquisition costs
|
|
|
(39,112
|
)
|
|
|
(33,438
|
)
|
|
|
(13,816
|
)
|
|
|
11,011
|
|
Other receivables
|
|
|
(28,957
|
)
|
|
|
(7,790
|
)
|
|
|
(3,359
|
)
|
|
|
20,143
|
|
Policy and contract claims
|
|
|
(16,141
|
)
|
|
|
(17,518
|
)
|
|
|
(113
|
)
|
|
|
14,061
|
|
Future policy benefits
|
|
|
4,906
|
|
|
|
16,545
|
|
|
|
(5,234
|
)
|
|
|
5,710
|
|
Unearned premiums
|
|
|
161
|
|
|
|
2,157
|
|
|
|
(710
|
)
|
|
|
275
|
|
Accrued income taxes
|
|
|
28,832
|
|
|
|
(27,436
|
)
|
|
|
11,889
|
|
|
|
(37,579
|
)
|
Other assets and liabilities
|
|
|
17,793
|
|
|
|
(34,910
|
)
|
|
|
4,248
|
|
|
|
(59,893
|
)
|
Other, net
|
|
|
1,170
|
|
|
|
(415
|
)
|
|
|
247
|
|
|
|
863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustments
|
|
|
682,044
|
|
|
|
720,751
|
|
|
|
476,584
|
|
|
|
430,962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
841,574
|
|
|
|
866,238
|
|
|
|
432,999
|
|
|
|
530,880
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
|
(1,613,303
|
)
|
|
|
(2,931,413
|
)
|
|
|
(1,229,884
|
)
|
|
|
(1,685,424
|
)
|
Equity securities
|
|
|
(114,008
|
)
|
|
|
(121,143
|
)
|
|
|
(42,992
|
)
|
|
|
(3,375
|
)
|
Other invested assets and investments in limited partnerships
|
|
|
(12,457
|
)
|
|
|
(68,659
|
)
|
|
|
(19,410
|
)
|
|
|
(173
|
)
|
Issuance of mortgage loans
|
|
|
(121,987
|
)
|
|
|
(101,992
|
)
|
|
|
(15,543
|
)
|
|
|
(40,854
|
)
|
Issuance of policy loans
|
|
|
(19,574
|
)
|
|
|
(17,895
|
)
|
|
|
(7,546
|
)
|
|
|
(12,550
|
)
|
Maturities and calls of fixed maturities available-for-sale
|
|
|
840,885
|
|
|
|
1,278,633
|
|
|
|
791,391
|
|
|
|
974,773
|
|
Sales of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
|
1,603,453
|
|
|
|
2,370,396
|
|
|
|
386,719
|
|
|
|
724,198
|
|
Equity securities
|
|
|
106,657
|
|
|
|
81,776
|
|
|
|
42,578
|
|
|
|
4,478
|
|
Other invested assets and investments in limited partnerships
|
|
|
13,235
|
|
|
|
1,525
|
|
|
|
17,320
|
|
|
|
1,621
|
|
Repayment of mortgage loans
|
|
|
99,085
|
|
|
|
134,774
|
|
|
|
70,230
|
|
|
|
152,745
|
|
Repayment of policy loans
|
|
|
20,663
|
|
|
|
19,244
|
|
|
|
8,555
|
|
|
|
12,956
|
|
Net (increase) decrease in short-term investments
|
|
$
|
(41,518
|
)
|
|
$
|
10,158
|
|
|
$
|
(6,067
|
)
|
|
$
|
18,857
|
|
Purchase of Safeco Life & Investments
|
|
|
|
|
|
|
|
|
|
|
(1,349,911
|
)
|
|
|
|
|
F-7
CONSOLIDATED
STATEMENTS OF CASH FLOWS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
August 2, 2004
|
|
|
January 1, 2004
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
through
|
|
|
through
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
August 1,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Purchase of property, equipment, and leasehold improvements
|
|
|
(3,164
|
)
|
|
|
(34,614
|
)
|
|
|
|
|
|
|
|
|
Cash received from sale of discontinued operations
|
|
|
|
|
|
|
|
|
|
|
30,000
|
|
|
|
|
|
Other, net
|
|
|
(10
|
)
|
|
|
(356
|
)
|
|
|
(1,099
|
)
|
|
|
281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
757,957
|
|
|
|
620,434
|
|
|
|
(1,325,659
|
)
|
|
|
147,533
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital contributions received
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,131
|
|
Policyholder account balances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposit
|
|
|
656,526
|
|
|
|
444,638
|
|
|
|
179,250
|
|
|
|
211,851
|
|
Withdrawals
|
|
|
(2,014,315
|
)
|
|
|
(1,972,483
|
)
|
|
|
(675,351
|
)
|
|
|
(757,495
|
)
|
Repayment of notes payable
|
|
|
(300,000
|
)
|
|
|
|
|
|
|
(15,000
|
)
|
|
|
|
|
Proceeds from notes payable
|
|
|
298,671
|
|
|
|
|
|
|
|
315,000
|
|
|
|
|
|
Proceeds from sale of capital stock
|
|
|
|
|
|
|
|
|
|
|
1,064,900
|
|
|
|
|
|
Dividend distributions
|
|
|
(100,000
|
)
|
|
|
|
|
|
|
|
|
|
|
(64,300
|
)
|
Other, net
|
|
|
1,774
|
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(1,457,344
|
)
|
|
|
(1,527,856
|
)
|
|
|
868,799
|
|
|
|
(608,813
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
142,187
|
|
|
|
(41,184
|
)
|
|
|
(23,861
|
)
|
|
|
69,600
|
|
Cash and cash equivalents at beginning of period
|
|
|
111,023
|
|
|
|
148,832
|
|
|
|
165,617
|
|
|
|
102,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plus: Cash and cash equivalents at beginning of period,
discontinued operations
|
|
|
|
|
|
|
3,375
|
|
|
|
10,451
|
|
|
|
3,988
|
|
Less: Cash and cash equivalents at end of period, discontinued
operations
|
|
|
|
|
|
|
|
|
|
|
(3,375
|
)
|
|
|
(10,451
|
)
|
Cash and cash equivalents at end of period
|
|
$
|
253,210
|
|
|
$
|
111,023
|
|
|
$
|
148,832
|
|
|
$
|
165,617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
17,840
|
|
|
$
|
12,040
|
|
|
$
|
3,312
|
|
|
$
|
|
|
Income taxes
|
|
|
62,795
|
|
|
|
59,756
|
|
|
|
7,898
|
|
|
|
39,817
|
|
Non-cash transactions during the year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of warrants to investors
|
|
|
|
|
|
|
|
|
|
|
101,531
|
|
|
|
|
|
Investments in limited partnerships and capital obligation
incurred
|
|
|
19,864
|
|
|
|
31,599
|
|
|
|
|
|
|
|
|
|
Other capital contribution
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,703
|
|
Acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase price adjustment to intangible assets
|
|
|
|
|
|
|
4,200
|
|
|
|
|
|
|
|
|
|
Fair value of assets acquired:
|
|
|
|
|
|
|
|
|
|
|
21,912,561
|
|
|
|
|
|
Cash paid in acquisition
|
|
|
|
|
|
|
|
|
|
|
1,349,910
|
|
|
|
|
|
Liabilities assumed in acquisition
|
|
|
|
|
|
|
|
|
|
|
20,562,651
|
|
|
|
|
|
See accompanying notes.
F-8
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(All Dollar Amounts in Thousands, Unless Otherwise
Stated)
|
|
1.
|
Organization
and Description of Business
|
Symetra Financial Corporation is a Delaware corporation
privately owned by an investor group led by White Mountains
Insurance Group, Ltd. and Berkshire Hathaway Inc.
On March 15, 2004, Symetra Financial Corporation entered
into a definitive agreement to purchase a group of life and
investment companies from Safeco Corporation (Safeco).
The following companies which are wholly owned directly or
indirectly by Symetra Financial Corporation were included in the
transaction:
|
|
|
|
|
Symetra Life Insurance Company (formerly Safeco Life Insurance
Company)
|
|
|
|
Symetra National Life Insurance Company (formerly Safeco
National Life Insurance Company)
|
|
|
|
American States Life Insurance Company
|
|
|
|
First Symetra National Life Insurance Company of New York
(formerly First Safeco National Life Insurance Company of New
York)
|
|
|
|
Symetra Administrative Services, Inc. (formerly Safeco
Administrative Services, Inc.)
|
|
|
|
Symetra Asset Management Company (formerly Safeco Asset
Management Company)
|
|
|
|
Symetra Securities, Inc. (formerly Safeco Securities, Inc.)
|
|
|
|
Symetra Services Corporation (formerly Safeco Services
Corporation)
|
|
|
|
Symetra Investment Services, Inc. (formerly Safeco Investment
Services, Inc.)
|
|
|
|
Symetra Assigned Benefits Service Company (formerly Safeco
Assigned Benefits Service Company)
|
The acquisition was completed effective August 2, 2004, at
a purchase price of $1,349.9 million, representing the
amount paid to Safeco at closing of $1,350 million, plus
capitalized transaction costs of $11.0 million, and less a
purchase price adjustment of $11.1 million. The acquisition
was financed through investor capital contributions of
$1,065 million and the issuance of a note payable of
$300 million. On December 29, 2004, Symetra Financial
Corporation received $22.8 million from Safeco in final
settlement of its tax sharing agreement and purchase price
related to the August 2, 2004 transaction.
The acquisition was accounted for using the purchase method
under Statement of Financial Accounting Standards (SFAS)
No. 141, Business Combinations. Under
SFAS No. 141, the purchase price is allocated to the
estimated fair value of the tangible and identifiable assets
acquired less liabilities assumed at the date of acquisition.
Deferred policy acquisition costs (DAC), intangible assets, and
goodwill were reset to zero on August 2, 2004.
During 2005, the Company adjusted the deferred tax asset
valuation allowance that resulted from the realization of
certain income tax benefits related to the acquisition. The
adjustment increased the amount of deferred tax assets and
decreased the amount of intangible assets by $4,200. See
Note 12 for more information.
F-9
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following pro forma results for the seven months ended
August 1, 2004, are based on the historical financial
statements of the Predecessor, adjusted to include the effect of
the acquisition as if the acquisition had occurred at the
beginning of each period presented:
|
|
|
|
|
|
|
Seven Months Ended
|
|
|
|
August 1, 2004
|
|
|
Net income as reported in Consolidated Statements of Operations
|
|
$
|
99,918
|
|
Add back: Amortization of DAC and intangibles
|
|
|
25,410
|
|
|
|
|
|
|
Pro forma net income
|
|
$
|
125,328
|
|
|
|
|
|
|
Symetra Financial Corporations subsidiaries offer group
and individual insurance products and retirement products,
including annuities marketed through professional agents and
distributors in all states and the District of Columbia. The
Companys principal products include stop-loss medical
insurance, fixed deferred annuities, variable annuities, single
premium immediate annuities, and individual life insurance.
The accompanying financial statements include on a consolidated
basis the accounts of Symetra Financial Corporation and its
subsidiaries which are referred to as Symetra
Financial or the Company, and the new names of
the entities have been used as if those names were in effect
prior to August 2, 2004. The discontinued mutual fund
business, including the transfer agent business, is referred to
as discontinued operations. In addition, all
references to affiliated companies in the periods prior to
August 2, 2004, refer to former Safeco affiliates.
Capital
Stock (in thousands, except par value and share
amounts)
Capital stock for Symetra Financial is comprised of
750,000,000 shares authorized and 92,646,295 shares
issued and outstanding at $0.01 par value per share, for a
total value of $926. In 2004, the Company issued warrants to its
two lead investors and incurred expense in connection with their
issuance. The warrants are exercisable at any time for
18,975,744 shares of common stock in the aggregate. The
fair value of the warrants was calculated using the
Black-Scholes model with the following assumptions: dividend
yield of 0.0%; expected volatility of 25.0%; risk-free interest
rate of 4.48%, and expected term of ten years.
On December 4, 2006, the Company declared a cash dividend
of $0.896 per share to its stockholders. The dividend in the
amount of $100,000 was paid on December 26, 2006.
The outstanding shares of common stock and outstanding warrants
to purchase common stock have been retroactively adjusted to
reflect the impact of a common stock split effected in the form
of a dividend (see Note 22 for more information).
|
|
2.
|
Summary
of Significant Accounting Policies
|
Basis
of Presentation and Use of Estimates
The Consolidated Financial Statements have been prepared in
conformity with U.S. generally accepted accounting
principles (GAAP). 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
Consolidated Financial Statements and accompanying notes. Actual
results could differ from those estimates.
The most significant estimates include those used in determining
reserves for future policy benefits, DAC, valuation of
investments and evaluation of other-than-temporary impairments,
income taxes, and contingencies. All significant intercompany
transactions and balances have been eliminated in the
Consolidated Financial Statements.
Certain reclassifications have been made to the prior year
financial information for it to conform to the current period
presentation.
F-10
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Recognition
of Insurance Revenue and Related Benefits
Premiums from group life and health insurance products are
recognized as revenue when earned over the life of the policy.
The Company reports the portion of premiums unearned as a
liability for unearned premiums on the Consolidated Balance
Sheets. These policies are short-duration contracts.
Traditional individual life insurance products, primarily term
and whole life insurance products, are long-duration contracts
consisting principally of products with fixed and guaranteed
premiums and benefits. Premiums from these products are
recognized as revenue when due. Benefits and expenses are
associated with earned premiums to result in the recognition of
profits over the life of the policy. This association is
accomplished by the provision for future policy benefits and the
deferral and amortization of policy acquisition costs.
Deposits related to universal life-type, limited payment-type,
and investment-type products are credited to policyholder
account balances and reflected as liabilities rather than as
premium income when received. Revenues from these contracts
consist of investment income on the policyholders fund
balances and amounts assessed during the period against
policyholders account balances for cost of insurance
charges, policy administration charges, and surrender charges.
The Company includes these cost of insurance charges in
premiums. Policy administration charges and surrender charges
are included in other revenue in the Consolidated Statements of
Operations. Amounts that are charged to operations include
interest credited and benefit claims incurred in excess of
related policyholder account balances.
Variable product fees are charged to variable annuity and
variable life policyholders accounts based upon the daily
net assets of the policyholders account values, and are
recognized as other revenue when charged. Cost of insurance
charges, policy administration charges, and surrender charges
are included in other revenue in the Consolidated Statements of
Operations.
Investments
In accordance with the provisions of SFAS No. 115,
Accounting for Certain Investments in Debt and Equity
Securities, the Company classifies its investments into one
of three categories: held-to-maturity, available-for-sale, or
trading. Fixed maturities include bonds, mortgage-backed
securities, and redeemable preferred stocks. The Company
classifies all fixed maturities as available-for-sale and
carries them at fair value. The Company reports net unrealized
investment gains and losses related to available-for-sale
securities in accumulated other comprehensive income (loss)
(OCI) in Shareholders Equity, net of related DAC and
deferred income taxes.
For mortgage-backed securities, the Company recognizes income
using a constant effective yield based on anticipated
prepayments and the estimated economic life of the securities.
Quarterly, the Company compares actual prepayments to
anticipated prepayments and recalculates the effective yield to
reflect actual payments to date plus anticipated future
payments. The Company includes any resulting adjustment in net
investment income.
Marketable equity securities include common stocks,
nonredeemable preferred stocks, and investments in other limited
partnerships when the ownership percentage of such investment is
less than 3%. The Company classifies marketable equity
securities as available-for-sale and carries them at fair value.
Changes in net unrealized investment gains and losses are
recorded directly to OCI in Shareholders Equity, net of
related DAC and deferred income taxes.
When the collectibility of interest income for fixed maturities
is considered doubtful, any accrued but uncollectible interest
income is reversed against investment income in the current
period. The Company then places the securities on nonaccrual
status, and they are not restored to accrual status until all
delinquent interest and principal are paid.
Investments are considered to be impaired when a decline in fair
value is judged to be other-than-temporary. The Companys
review of investment securities includes both quantitative and
qualitative criteria.
F-11
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Quantitative criteria include the length of time and amount that
each security is in an unrealized position, and for fixed
maturities, whether the issuer is in compliance with the terms
and covenants of the security.
The Companys review of its fixed maturities and marketable
equity securities for impairments includes an analysis of the
total gross unrealized losses by three categories of securities:
(i) securities where the estimated fair value has declined
and remained below cost or amortized cost by less than 20%,
(ii) securities where the estimated fair value has declined
and remained below cost or amortized cost by 20% or more for
less than six months, and (iii) securities where the
estimated fair value has declined and remained below cost or
amortized cost by 20% or more for six months or greater. While
all securities are monitored for impairment, the Companys
experience indicates that the first two categories 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 value of any of the Companys investments falls into
the third category, the Company analyzes the decrease to
determine whether it is an other-than-temporary decline in
value. To make this determination for each security, the Company
considers:
|
|
|
|
|
How long and by how much the fair value has been below its 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 or earnings potential.
|
|
|
|
The Companys intent and ability to hold the security long
enough for it to recover its value, considering any long-range
plans that may affect the Companys ability to hold
securities.
|
|
|
|
Any downgrades of the security by a rating agency.
|
|
|
|
Any reduction or elimination of dividends, or nonpayment of
scheduled interest payments.
|
Based on the analysis, the Company makes a judgment as to
whether the loss is other-than-temporary. If the loss is
other-than-temporary, the Company records an impairment charge
within net realized investment gains in its Consolidated
Statements of Operations in the period that the Company makes
the determination. In addition, any impaired investments where
the Company does not have the intent and ability to hold the
security long enough for it to recover its value is recorded as
an other-than-temporary impairment.
The Company uses public market pricing information to determine
the fair value of its investments when such information is
available. When such information is not available for
investments, as in the case of securities that are not publicly
traded, the Company uses other valuation techniques. Such
techniques include using independent pricing sources, evaluating
discounted cash flows, identifying comparable securities with
quoted market prices, and using internally prepared valuations
based on certain modeling and pricing methods. The
Companys investment portfolio at December 31, 2006
and 2005, included $604,313 and $619,751, respectively, of fixed
maturities and $25,770 and $23,967, respectively, of marketable
equity securities that were not publicly traded, and values for
these securities were determined using these other valuation
techniques.
The cost of securities sold is determined by the
specific-identification method.
The Company carries mortgage loans at outstanding principal
balances, less a valuation allowance for mortgage loan losses.
The Company considers a mortgage loan impaired when it is
probable that the Company will be unable to collect principal
and interest amounts due according to the contractual terms of
the mortgage loan agreement. For mortgage loans that the Company
determines to be impaired, the Company charges the difference
between the amortized cost and fair value of the underlying
collateral to the valuation allowance. Changes in the valuation
allowance are recorded in net realized investment gains. The
Company accrues interest income on impaired loans to the extent
that it is deemed collectible and the loan continues to perform
under its original or restructured terms. Interest income on
nonperforming loans is generally recognized on a cash basis.
Policy loans are carried at unpaid principal balances, which
approximate fair value.
F-12
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Cash and cash equivalents consist of short-term highly liquid
investments with original maturities of three months or less at
the time of purchase. Short-term investments consist of highly
liquid debt instruments with maturities of greater than three
months and less than twelve months when purchased.
Investments in limited partnership interests are accounted for
under the equity method when the Company has more than a minor
interest of 3% or greater, has influence over the
partnerships operating and financial policies, and does
not have a controlling interest. The Company has identified
certain investments in limited partnerships that meet the
definition of a variable interest entity (VIE) under Financial
Accounting Standards Board (FASB) Interpretation No. (FIN) 46R,
Consolidation of Variable Interest Entities. Based on the
analysis of these interests, the Company does not meet the
FIN No. 46R definition of primary
beneficiary of any of these partnerships and therefore has
not consolidated these entities.
Derivative
Financial Instruments
Derivative financial instruments are included in other invested
assets on the Companys Consolidated Balance Sheets. The
Companys financial statement recognition of the change in
fair value of a derivative depends on the intended use of the
derivative and the extent to which it is effective as part of a
hedging transaction. Derivatives that are highly effective and
designated as either fair value or cash flow hedges receive
hedge accounting treatment.
Derivatives that hedge the change in fair value of recognized
assets or liabilities are designated as fair value hedges. For
such derivatives, the Company recognizes the changes in the fair
value of both the derivative and the hedged items in net
realized investment gains in the Consolidated Statements of
Operations.
Derivatives that hedge variable rate assets or liabilities or
forecasted transactions are designated as cash flow hedges. For
such derivatives, the Company recognizes the changes in the fair
value of the derivative as a component of OCI, net of deferred
income taxes, until the hedged transaction affects current
earnings. At the time current earnings are affected by the
variability of cash flows, the related portion of deferred gains
or losses on cash flow hedge derivatives are reclassified from
OCI and recorded in the Consolidated Statements of Operations.
When the changes in the fair value of such derivatives do not
perfectly offset the changes in the fair value of the hedged
transaction, the Company recognizes the ineffective portion in
the Consolidated Statements of Operations. For derivatives that
do not qualify for hedge accounting treatment, the Company
records the changes in the fair value of these derivatives in
net realized investment gains in the Consolidated Statements of
Operations.
The Company formally documents all relationships between the
hedging instruments and hedged items, as well as risk-management
objectives and strategies for undertaking various hedge
transactions. The Company links all hedges that are designated
as fair value hedges to specific assets or liabilities on the
Consolidated Balance Sheets. The Company links all hedges that
are designated as cash flow hedges to specific variable rate
assets or liabilities or to forecasted transactions. The Company
also assesses, both at the inception of the hedge and on an
ongoing basis, whether the derivatives that are used in hedging
transactions are highly effective in offsetting the changes in
fair values or cash flows of hedged items. When it is determined
that a derivative is not highly effective as a hedge, the
Company discontinues hedge accounting on a prospective basis.
Reinsurance
The Company utilizes reinsurance agreements to manage its
exposure to potential losses. The Company reinsures all or a
portion of its risk to reinsurers for certain types of directly
written business. In addition, the Company reinsures through
pools to cover catastrophic losses. Reinsurance does not affect
the Companys liability to the policyholders. Accordingly,
the policy and contract claims liabilities and future policy
benefit reserves are reported gross of any related reinsurance
recoverables. The Company reports premiums, benefits,
F-13
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and settlement expenses net of reinsurance ceded on the
Consolidated Statements of Operations. The Company accounts for
reinsurance premiums, commissions, expense reimbursements,
benefits, and reserves related to reinsured business on bases
consistent with those used in accounting for the original
policies issued and the terms of the reinsurance contracts. The
Company remains liable to the policyholders to the extent that
counterparties to reinsurance ceded contracts do not meet their
contractual obligations.
Deferred
Policy Acquisition Costs
The Company defers as assets certain costs, principally
commissions, distribution costs, and other underwriting costs,
that vary with and are primarily related to the production of
business. The Company amortizes acquisition costs for deferred
and immediate annuity contracts and universal life insurance
policies over the lives of the contracts or policies in
proportion to the present value of the estimated future gross
profits of each of these product lines. In this estimation
process, the Company makes assumptions as to surrender rates,
mortality experience, maintenance expenses, and investment
performance. Actual profits can vary from the estimates and can
thereby result in increases or decreases to DAC amortization
rates. For interest-sensitive life products, the Company
regularly evaluates its assumptions and, when necessary, revises
the estimated gross profits of these contracts, resulting in
adjustments to DAC amortization which are recorded in earnings
when such estimates are revised. The Company adjusts the
unamortized balance of DAC for the impact on estimated future
gross profits as if net unrealized investment gains and losses
on securities had been realized as of the balance sheet date.
The Company includes the impact of this adjustment, net of tax,
in OCI in Stockholders Equity.
The Company amortizes acquisition costs for traditional
individual life insurance policies over the premium paying
period of the related policies, using assumptions consistent
with those used in computing policy benefit liabilities. The
Company amortizes acquisition costs for group life and medical
policies over the policy period of one year.
The Company conducts regular recoverability analyses for
deferred and immediate annuity contract, universal life
contract, and traditional life contract DAC balances. The
Company compares the current DAC balance with the estimated
present value of future profitability of the underlying
business. The DAC balances are considered recoverable if the
present value of future profits is greater than the current DAC
balance. As of December 31, 2006, all of the DAC balances
were considered recoverable.
Goodwill
Goodwill represents the excess of the cost of businesses
acquired over the fair value of the net assets. Goodwill is not
amortized but is tested for impairment at least annually using a
fair value approach, which requires the use of estimates and
judgment.
In December 1999, Symetra Life Insurance Company purchased
the assets of Sound Benefits Administration and Sound Benefits
Marketing (collectively, referred to as Sound Benefits), the
agency involved in selling and supporting the Companys
Select Benefits group medical product. This transaction resulted
in adjustments to goodwill in the amounts of $287 and $3,400 for
the years ended December 31, 2005 and 2004, respectively.
Such adjustments were based on the 2004 earnings performance of
Sound Benefits. The Company paid the purchase price adjustment
of $3,687 in January 2005.
During 2005, $4,200 of other identifiable intangible assets were
written down to zero due to a purchase price allocation
adjustment resulting from the realization of certain income tax
benefits. See Note 12 for more information.
Property,
Equipment, and Leasehold Improvements
Property, equipment, and leasehold improvements are stated at
cost, less accumulated depreciation and amortization.
Depreciation is determined using the straight-line method over
the estimated useful lives of the
F-14
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
assets. Estimated useful lives generally range from one to ten
years for leasehold improvements and three to ten years for all
other property and equipment. Leasehold improvements are
amortized over the shorter of their economic useful lives or the
term of the lease.
Leases
Certain of the Companys operating leases provide for
minimum annual payments that change over the life of the lease.
The aggregate minimum annual payments are expensed on the
straight-line basis over the minimum lease term. The Company
recognizes a deferred rent liability for minimum step rents when
the amount of rent expense exceeds the actual lease payments and
it reduces the deferred rent liability when the actual lease
payments exceed the amount of straight-line rent expense. Rent
holidays, rent incentives, and tenant improvement allowances are
amortized on the straight-line basis over the initial term of
the lease and any option period that is reasonably assured.
Sales
Inducements
The Company defers sales inducements to contract holders for
bonus interest features on deferred annuities. The bonus
interest entitles the contract holder to an incremental amount
of interest to be credited to the account value over the twelve
month period following the initial deposit. The incremental
interest causes the first year credited rate to be higher than
the contracts expected ongoing crediting rates for periods
after the inducement. Deferred sales inducements to contract
holders are reported as other assets and amortized into interest
credited to policy holder account values using the same
methodology and assumptions used to amortize DAC.
Separate
Accounts
Separate account assets and liabilities reported on the
accompanying Consolidated Balance Sheets consist of the fair
value of variable annuity and variable universal life contracts
and represent funds that the Company administers and invests to
meet the specific fund allocations of the policyholder. The
assets of each separate account are legally segregated and are
not subject to claims that arise out of the Companys other
business activities. Net investment income and net realized and
unrealized investment gains and losses accrue directly to such
policyholder who bears the investment risk, subject to
guaranteed minimum death benefits (GMDB). For variable annuity
contracts with GMDB, the Company contractually guarantees total
deposits made to the contract, less any partial withdrawals, in
the event of death. The Company offers three types of GMDB
contracts consisting of return of premium and two versions of
ratchet, which are evaluated every fifth and eighth year,
respectively.
The Company reinsures nearly all of the GMDB risk on its
individual variable annuity contracts. Therefore, the liability
balance is not material. The Company does not include investment
results accruing directly to the policyholder in its revenues.
Fees charged to policyholders include mortality, policy
administration, and surrender charges and are included in other
revenues.
Funds
Held Under Deposit Contracts
Liabilities for fixed deferred annuity contracts, guaranteed
investment contracts, and universal life policies are computed
as deposits net of withdrawals made by the policyholder, plus
amounts credited based on contract specifications, less contract
fees and charges assessed, plus any additional interest. For
single premium immediate annuities (SPIAs), including structured
settlements, future benefits are either fully guaranteed or are
contingent on the survivorship of the annuitant. Liabilities are
based on discounted amounts of estimated future benefits.
Contingent future benefits are discounted with current pricing
mortality assumptions, which include provisions for longer life
spans over time. The interest rate pattern used to calculate the
reserves for SPIAs is set at issue. The interest rates within
the pattern vary over time and start
F-15
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
with interest rates that prevailed at the contract issue. The
weighted-average implied interest rate on the existing block is
currently 5.9% and will grade to an ultimate assumed level of
6.7% in about 20 years.
Future
Policy Benefits
The Company computes liabilities for future policy benefits
under traditional individual life and group life insurance
policies on the level premium method, which uses a level premium
assumption to fund reserves. The Company selects the level
premiums so that the actuarial present value of future benefits
equals the actuarial present value of future premiums. The
Company sets the interest, mortality, and persistency
assumptions in the year of issue and includes provisions for
adverse deviations. These liabilities are contingent upon the
death of the insured while the policy is in force. The Company
derives mortality assumptions from both company-specific and
industry statistics. The Company discounts future benefits at
interest rates that vary by year of policy issue, are graded to
the statutory valuation interest rate over time, and range from
6.0% to 4.0%.
Policy
and Contract Claims
Liabilities for policy and contract claims primarily represent
liabilities for claims under group medical coverages and are
established on the basis of reported losses (case basis method).
The Company also provides for claims incurred but not reported
(IBNR), based on expected loss ratios, claims paying completion
patterns, and historical experience. The Company periodically
reviews estimates for reported but unpaid claims and IBNR. Any
necessary adjustments are reflected in current operating results.
Income
Taxes
Through the date of acquisition, the Company was included in a
consolidated federal income tax return filed by Safeco. Tax
payments (credits) were made to or received from Safeco in
accordance with the tax allocation agreement on a separate
company tax return filing basis. Subsequent to the acquisition,
the Symetra Life insurance companies file a separate life
consolidated tax return. The non-life insurance companies file a
separate non-life consolidated tax return. Pursuant to Internal
Revenue Code (IRC) § 1504(c), the life insurance
companies will file a separate life consolidated tax return for
five years subsequent to the acquisition.
Income taxes have been provided using the liability method in
accordance with SFAS No. 109, Accounting for Income
Taxes. The provision for income taxes has two components:
amounts currently payable or receivable and deferred income
taxes. The deferred income taxes are calculated as the
difference between the book and tax basis of the appropriate
assets and liabilities. Deferred tax assets are recognized only
to the extent that it is probable that future tax profits will
be available. A valuation allowance is established where
deferred tax assets cannot be recognized.
Recently
Issued Accounting Standards
SFAS No. 157,
Fair Value Measurements
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements. SFAS No. 157 defines
fair value, establishes a framework for measuring fair value
under GAAP, and expands disclosures about fair value
measurements. SFAS No. 157 does not require any new
fair value measurements, but provides guidance on how to measure
fair value by providing a fair value hierarchy used to classify
the source of the information. SFAS No. 157 is
effective for financial statements issued for fiscal years
beginning after November 15, 2007. The Company is currently
evaluating the impact the adoption of this Statement could have
on its financial condition, results of operations, and cash
flows.
F-16
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FASB
Interpretation No. 48, Accounting for Uncertainty in Income
Taxes An Interpretation of FASB Statement
No. 109
In June 2006, the FASB issued FASB Interpretation (FIN)
No. 48, Accounting for Uncertainty in Income Taxes, an
Interpretation of FASB Statement No. 109, Accounting for
Income Taxes. FIN No. 48 clarifies the accounting
for uncertainty in income taxes recognized in an
enterprises financial statements in accordance with
SFAS No. 109. FIN No. 48 prescribes a
recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return.
FIN No. 48 also provides guidance on de-recognition,
classification, interest and penalties, accounting in interim
periods, disclosure, and transition. FIN No. 48 is
effective for fiscal years beginning after December 15,
2006. The Company adopted FIN No. 48 as of
January 1, 2007, as required. The adoption did not have a
material impact on the Companys consolidated financial
statements.
SFAS No. 155,
Accounting for Certain Hybrid Financial Instruments
In February 2006, the FASB issued SFAS No. 155,
Accounting for Certain Hybrid Financial Instruments.
SFAS No. 155 amends certain paragraphs of
SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, and SFAS No. 140,
Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities. SFAS No. 155
also resolves issues addressed in SFAS No. 133
Implementation Issue No. D1, Application of Statement
133 to Beneficial Interests in Securitized Financial Assets.
In summary, SFAS No. 155: (1) permits an entity
to make an irrevocable election to measure any hybrid financial
instrument that contains an embedded derivative that otherwise
would require bifurcation at fair value in its entirety, with
changes in fair value recognized in earnings; (2) clarifies
which interest-only strips and principal-only strips are not
subject to the requirements of SFAS No. 133;
(3) establishes a requirement to evaluate interests in
securitized financial assets to identify interests that are
freestanding derivatives or that are hybrid financial
instruments that contain an embedded derivative requiring
bifurcation; (4) clarifies that concentrations of credit
risk in the form of subordination are not embedded derivatives;
and (5) amends SFAS No. 140 to eliminate the
prohibition on a qualifying special purpose entity from holding
a derivative financial instrument that pertains to a beneficial
interest other than another derivative financial instrument.
SFAS No. 155 is effective for all financial
instruments acquired or issued after the beginning of an
entitys first fiscal year that begins after
September 15, 2006. Provisions of
SFAS No. 155 may be applied to instruments that
an entity holds at the date of adoption on an
instrument-by-instrument
basis. The Company adopted SFAS No. 155 as of
January 1, 2007, as required. The adoption did not have a
material impact on the Companys consolidated financial
statements.
American
Institute of Certified Public Accountants (AICPA) Statement of
Position (SOP)
05-1,
Accounting by Insurance Enterprises for Deferred Acquisition
Costs in Connection with Modifications or Exchanges of Insurance
Contracts
In September 2005, the AICPA issued
SOP 05-1,
Accounting by Insurance Enterprises for Deferred Acquisition
Costs in Connection with Modifications or Exchanges of Insurance
Contracts.
SOP 05-1
provides guidance on accounting by insurance enterprises for
deferred acquisition costs on internal replacements of insurance
and investment contracts other than those specifically described
in SFAS No. 97, Accounting and Reporting by
Insurance Enterprises for Certain Long-Duration Contracts and
For Realized Gains and Losses from the Sale of Investments.
SOP 05-1
defines an internal replacement as a modification in product
benefits, features, rights, or coverages that occurs by the
exchange of a contract for a new contract, or by amendment,
endorsement, or rider to a contract, or by the election of a
feature or coverage within a contract. Under
SOP 05-1,
modifications that result in a substantially unchanged contract
will be accounted for as a continuation of the replaced
contract. A replacement contract that is substantially changed
will be accounted for as an extinguishment of the replaced
contract, resulting in a release of unamortized DAC, unearned
revenue, and deferred sales inducements associated with the
replaced contract.
F-17
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The provisions of
SOP 05-1
are effective for fiscal years beginning after December 15,
2006. The Company adopted
SOP 05-1
effective on January 1, 2007 as required. The adoption of
SOP 05-1
did not have a material impact on the Companys
consolidated financial statements.
The following tables summarize the Companys fixed
maturities and marketable equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost or
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies
|
|
$
|
157,000
|
|
|
$
|
1,775
|
|
|
$
|
(879
|
)
|
|
$
|
157,896
|
|
State and political subdivisions
|
|
|
666,101
|
|
|
|
9,329
|
|
|
|
(4,532
|
)
|
|
|
670,898
|
|
Foreign governments
|
|
|
205,186
|
|
|
|
4,166
|
|
|
|
(477
|
)
|
|
|
208,875
|
|
Corporate securities
|
|
|
10,670,752
|
|
|
|
164,266
|
|
|
|
(168,550
|
)
|
|
|
10,666,468
|
|
Mortgage-backed securities
|
|
|
4,387,557
|
|
|
|
26,750
|
|
|
|
(68,566
|
)
|
|
|
4,345,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
16,086,596
|
|
|
|
206,286
|
|
|
|
(243,004
|
)
|
|
|
16,049,878
|
|
Marketable equity securities
|
|
|
171,003
|
|
|
|
32,046
|
|
|
|
(1,343
|
)
|
|
|
201,706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
16,257,599
|
|
|
$
|
238,332
|
|
|
$
|
(244,347
|
)
|
|
$
|
16,251,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost or
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies
|
|
$
|
652,304
|
|
|
$
|
49,460
|
|
|
$
|
(799
|
)
|
|
$
|
700,965
|
|
State and political subdivisions
|
|
|
741,671
|
|
|
|
25,217
|
|
|
|
(1,636
|
)
|
|
|
765,252
|
|
Foreign governments
|
|
|
353,333
|
|
|
|
13,119
|
|
|
|
(227
|
)
|
|
|
366,225
|
|
Corporate securities
|
|
|
10,881,369
|
|
|
|
267,274
|
|
|
|
(137,063
|
)
|
|
|
11,011,580
|
|
Mortgage-backed securities
|
|
|
4,358,420
|
|
|
|
42,290
|
|
|
|
(61,535
|
)
|
|
|
4,339,175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
16,987,097
|
|
|
|
397,360
|
|
|
|
(201,260
|
)
|
|
|
17,183,197
|
|
Marketable equity securities
|
|
|
148,917
|
|
|
|
15,234
|
|
|
|
(1,850
|
)
|
|
|
162,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
17,136,014
|
|
|
$
|
412,594
|
|
|
$
|
(203,110
|
)
|
|
$
|
17,345,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-18
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
3.
|
Investments (Continued)
|
The following table shows the Companys investments
gross unrealized losses and fair values, aggregated by
investment category and length of time that individual
securities have been in a continuous unrealized loss position.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies
|
|
$
|
52,723
|
|
|
$
|
(671
|
)
|
|
$
|
24,683
|
|
|
$
|
(208
|
)
|
|
$
|
77,406
|
|
|
$
|
(879
|
)
|
State and political subdivisions
|
|
|
219,608
|
|
|
|
(2,922
|
)
|
|
|
65,722
|
|
|
|
(1,610
|
)
|
|
|
285,330
|
|
|
|
(4,532
|
)
|
Foreign governments
|
|
|
14,404
|
|
|
|
(214
|
)
|
|
|
11,103
|
|
|
|
(263
|
)
|
|
|
25,507
|
|
|
|
(477
|
)
|
Corporate securities
|
|
|
2,732,600
|
|
|
|
(55,864
|
)
|
|
|
3,686,854
|
|
|
|
(112,686
|
)
|
|
|
6,419,454
|
|
|
|
(168,550
|
)
|
Mortgage-backed securities
|
|
|
1,501,485
|
|
|
|
(22,776
|
)
|
|
|
1,888,331
|
|
|
|
(45,790
|
)
|
|
|
3,389,816
|
|
|
|
(68,566
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
4,520,820
|
|
|
|
(82,447
|
)
|
|
|
5,676,693
|
|
|
|
(160,557
|
)
|
|
|
10,197,513
|
|
|
|
(243,004
|
)
|
Marketable equity securities
|
|
|
9,829
|
|
|
|
(206
|
)
|
|
|
2,926
|
|
|
|
(1,137
|
)
|
|
|
12,755
|
|
|
|
(1,343
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,530,649
|
|
|
$
|
(82,653
|
)
|
|
$
|
5,679,619
|
|
|
$
|
(161,694
|
)
|
|
$
|
10,210,268
|
|
|
$
|
(244,347
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies
|
|
$
|
43,881
|
|
|
$
|
(642
|
)
|
|
$
|
10,547
|
|
|
$
|
(157
|
)
|
|
$
|
54,428
|
|
|
$
|
(799
|
)
|
State and political subdivisions
|
|
|
87,574
|
|
|
|
(675
|
)
|
|
|
51,278
|
|
|
|
(961
|
)
|
|
|
138,852
|
|
|
|
(1,636
|
)
|
Foreign governments
|
|
|
20,927
|
|
|
|
(225
|
)
|
|
|
2,502
|
|
|
|
(2
|
)
|
|
|
23,429
|
|
|
|
(227
|
)
|
Corporate securities
|
|
|
4,956,275
|
|
|
|
(123,274
|
)
|
|
|
697,497
|
|
|
|
(13,789
|
)
|
|
|
5,653,772
|
|
|
|
(137,063
|
)
|
Mortgage-backed securities
|
|
|
2,077,490
|
|
|
|
(36,639
|
)
|
|
|
1,044,399
|
|
|
|
(24,896
|
)
|
|
|
3,121,889
|
|
|
|
(61,535
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
7,186,147
|
|
|
|
(161,455
|
)
|
|
|
1,806,223
|
|
|
|
(39,805
|
)
|
|
|
8,992,370
|
|
|
|
(201,260
|
)
|
Marketable equity securities
|
|
|
10,729
|
|
|
|
(1,759
|
)
|
|
|
228
|
|
|
|
(91
|
)
|
|
|
10,957
|
|
|
|
(1,850
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,196,876
|
|
|
$
|
(163,214
|
)
|
|
$
|
1,806,451
|
|
|
$
|
(39,896
|
)
|
|
$
|
9,003,327
|
|
|
$
|
(203,110
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006 and 2005, $148,552 and $36,480,
respectively, of unrealized losses for a period of twelve months
or more relate to investment grade fixed income securities.
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. As of December 31, 2006 and 2005, the Company had
the intent and ability to hold these investments for a period of
time sufficient for them to recover in value.
F-19
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
3.
|
Investments (Continued)
|
The Company reviewed all its investments with unrealized losses
at the end of 2006 and 2005 in accordance with the impairment
policy described in Note 2. The Companys evaluation
determined that these declines in fair value were temporary and
it had the intent and ability to hold them until recovery.
At December 31, 2006 and 2005, the Company held
below-investment-grade fixed maturities with a fair value of
$1,332,000 and $1,387,000, respectively, and an amortized cost
of $1,305,000 and $1,359,000, respectively. These holdings
amounted to 8.3% and 8.1%, respectively, of the Companys
investments in fixed maturities at fair value at
December 31, 2006 and 2005.
The following table summarizes the cost or amortized cost and
fair value of fixed maturities at December 31, 2006, 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.
|
|
|
|
|
|
|
|
|
|
|
Cost or
|
|
|
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Value
|
|
|
One year or less
|
|
$
|
377,113
|
|
|
$
|
374,632
|
|
Over one year through five years
|
|
|
2,655,755
|
|
|
|
2,613,674
|
|
Over five years through ten years
|
|
|
2,746,470
|
|
|
|
2,701,652
|
|
Over ten years
|
|
|
5,919,701
|
|
|
|
6,014,179
|
|
Mortgage-backed securities
|
|
|
4,387,557
|
|
|
|
4,345,741
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
$
|
16,086,596
|
|
|
$
|
16,049,878
|
|
|
|
|
|
|
|
|
|
|
The carrying value of certain securities and cash on deposit
with state regulatory authorities was $8,302 and $14,103 at
December 31, 2006 and 2005, respectively.
No industry represented more than 9.1% of the amortized cost of
fixed maturities and equity securities at December 31, 2006
and 2005.
The following table summarizes the Companys consolidated
pretax net investment income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
January 1,
|
|
|
|
|
|
|
|
|
|
August 2, 2004
|
|
|
2004
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
through
|
|
|
through
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
August 1,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2004
|
|
|
Interest:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
$
|
926,678
|
|
|
$
|
945,737
|
|
|
$
|
390,111
|
|
|
$
|
633,756
|
|
Mortgage loans
|
|
|
48,849
|
|
|
|
46,052
|
|
|
|
21,943
|
|
|
|
44,233
|
|
Short-term investments and cash and cash equivalents
|
|
|
9,851
|
|
|
|
4,156
|
|
|
|
1,159
|
|
|
|
2,000
|
|
Dividends:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable equity securities
|
|
|
6,759
|
|
|
|
3,967
|
|
|
|
2,671
|
|
|
|
3,302
|
|
Redeemable preferred stock
|
|
|
3,640
|
|
|
|
3,387
|
|
|
|
492
|
|
|
|
2,965
|
|
Policy loans
|
|
|
4,870
|
|
|
|
5,112
|
|
|
|
2,241
|
|
|
|
3,067
|
|
Income from equity method investments
|
|
|
4,658
|
|
|
|
2,514
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
3,612
|
|
|
|
6,058
|
|
|
|
3,208
|
|
|
|
9,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income
|
|
|
1,008,917
|
|
|
|
1,016,983
|
|
|
|
421,825
|
|
|
|
698,610
|
|
Investment expenses
|
|
|
(23,990
|
)
|
|
|
(22,935
|
)
|
|
|
(10,705
|
)
|
|
|
(4,908
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
984,927
|
|
|
$
|
994,048
|
|
|
$
|
411,120
|
|
|
$
|
693,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-20
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
3.
|
Investments (Continued)
|
The carrying value of investments in fixed maturities that have
not produced income for the last 12 months was $30,453 and
$10,354 at December 31, 2006 and 2005, respectively. All of
the Companys mortgage loans produced income during 2006
and 2005.
The following table summarizes the Companys consolidated
net realized investment gains before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
January 1,
|
|
|
|
|
|
|
|
|
|
August 2, 2004
|
|
|
2004
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
through
|
|
|
through
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
August
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
1, 2004
|
|
|
Fixed maturities
|
|
$
|
(16,089
|
)
|
|
$
|
1,840
|
|
|
$
|
4,117
|
|
|
$
|
34,345
|
|
Marketable equity securities
|
|
|
14,842
|
|
|
|
8,221
|
|
|
|
291
|
|
|
|
972
|
|
Other invested assets
|
|
|
1,737
|
|
|
|
3,992
|
|
|
|
2,584
|
|
|
|
92
|
|
Deferred policy acquisition costs adjustment
|
|
|
1,190
|
|
|
|
87
|
|
|
|
11
|
|
|
|
(517
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment gains
|
|
$
|
1,680
|
|
|
$
|
14,140
|
|
|
$
|
7,003
|
|
|
$
|
34,892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2006, the Company recorded impairment charges of fixed
maturity investments and equity securities totaling $25,719.
These write-downs were primarily from investments in the
paper-related industry totaling $15,655, or 60.9%. The
additional write-downs represent securities that the Company
does not intend to hold until recovery. The following tables
summarize the proceeds from sales of investment securities and
related net realized investment gains before income taxes for
2006, 2005 and 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006
|
|
|
|
|
|
|
Marketable
|
|
|
|
|
|
|
|
|
|
Fixed
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
Maturities
|
|
|
Securities
|
|
|
Other
|
|
|
Total
|
|
|
Proceeds from sales
|
|
$
|
1,603,453
|
|
|
$
|
106,657
|
|
|
$
|
13,235
|
|
|
$
|
1,723,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized investment gains
|
|
$
|
26,847
|
|
|
$
|
18,274
|
|
|
$
|
2,497
|
|
|
$
|
47,618
|
|
Gross realized investment losses
|
|
|
(18,373
|
)
|
|
|
(1,437
|
)
|
|
|
(112
|
)
|
|
|
(19,922
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment gains
|
|
|
8,474
|
|
|
|
16,837
|
|
|
|
2,385
|
|
|
|
27,696
|
|
Impairments
|
|
|
(24,608
|
)
|
|
|
(1,111
|
)
|
|
|
|
|
|
|
(25,719
|
)
|
Other, including gains (losses) on calls and redemptions
|
|
|
45
|
|
|
|
(884
|
)
|
|
|
542
|
|
|
|
(297
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment gains (losses)
|
|
$
|
(16,089
|
)
|
|
$
|
14,842
|
|
|
$
|
2,927
|
|
|
$
|
1,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-21
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
3.
|
Investments (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2005
|
|
|
|
|
|
|
Marketable
|
|
|
|
|
|
|
|
|
|
Fixed
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
Maturities
|
|
|
Securities
|
|
|
Other
|
|
|
Total
|
|
|
Proceeds from sales
|
|
$
|
2,364,806
|
|
|
$
|
59,782
|
|
|
$
|
1,525
|
|
|
$
|
2,426,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized investment gains
|
|
$
|
30,782
|
|
|
$
|
9,626
|
|
|
$
|
|
|
|
$
|
40,408
|
|
Gross realized investment losses
|
|
|
(27,027
|
)
|
|
|
(1,184
|
)
|
|
|
|
|
|
|
(28,211
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment gains
|
|
|
3,755
|
|
|
|
8,442
|
|
|
|
|
|
|
|
12,197
|
|
Impairments
|
|
|
(7,664
|
)
|
|
|
|
|
|
|
|
|
|
|
(7,664
|
)
|
Other, including gains (losses) on calls and redemptions
|
|
|
5,749
|
|
|
|
(221
|
)
|
|
|
4,079
|
|
|
|
9,607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment gains
|
|
$
|
1,840
|
|
|
$
|
8,221
|
|
|
$
|
4,079
|
|
|
$
|
14,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from August 2,
|
|
|
|
2004 through December 31, 2004
|
|
|
|
|
|
|
Marketable
|
|
|
|
|
|
|
|
|
|
Fixed
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
Maturities
|
|
|
Securities
|
|
|
Other
|
|
|
Total
|
|
|
Proceeds from sales
|
|
$
|
363,859
|
|
|
$
|
41,573
|
|
|
$
|
17,320
|
|
|
$
|
422,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized investment gains
|
|
$
|
8,379
|
|
|
$
|
978
|
|
|
$
|
6,345
|
|
|
$
|
15,702
|
|
Gross realized investment losses
|
|
|
(7,862
|
)
|
|
|
(224
|
)
|
|
|
(5,747
|
)
|
|
|
(13,833
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment gains
|
|
|
517
|
|
|
|
754
|
|
|
|
598
|
|
|
|
1,869
|
|
Impairments
|
|
|
(27
|
)
|
|
|
(87
|
)
|
|
|
|
|
|
|
(114
|
)
|
Other, including gains (losses) on calls and redemptions
|
|
|
3,627
|
|
|
|
(376
|
)
|
|
|
1,997
|
|
|
|
5,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment gains
|
|
$
|
4,117
|
|
|
$
|
291
|
|
|
$
|
2,595
|
|
|
$
|
7,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from January 1, 2004 through
|
|
|
|
August 1, 2004 Predecessor
|
|
|
|
|
|
|
Marketable
|
|
|
|
|
|
|
|
|
|
Fixed
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
Maturities
|
|
|
Securities
|
|
|
Other
|
|
|
Total
|
|
|
Proceeds from sales
|
|
$
|
713,652
|
|
|
$
|
4,491
|
|
|
$
|
1,621
|
|
|
$
|
719,764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized investment gains
|
|
$
|
45,705
|
|
|
$
|
1,137
|
|
|
$
|
17,846
|
|
|
$
|
64,688
|
|
Gross realized investment losses
|
|
|
(17,163
|
)
|
|
|
(165
|
)
|
|
|
(15,467
|
)
|
|
|
(32,795
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment gains
|
|
|
28,542
|
|
|
|
972
|
|
|
|
2,379
|
|
|
|
31,893
|
|
Impairments
|
|
|
(10,272
|
)
|
|
|
|
|
|
|
|
|
|
|
(10,272
|
)
|
Other, including gains (losses) on calls and redemptions
|
|
|
16,075
|
|
|
|
|
|
|
|
(2,804
|
)
|
|
|
13,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment gains (losses)
|
|
$
|
34,345
|
|
|
$
|
972
|
|
|
$
|
(425
|
)
|
|
$
|
34,892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-22
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
3.
|
Investments (Continued)
|
The following table summarizes the Companys allowance for
mortgage loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
August 2,
|
|
|
January 1,
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2004
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
through
|
|
|
through
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
August 1,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2004
|
|
|
Allowance at beginning of period
|
|
$
|
3,903
|
|
|
$
|
10,172
|
|
|
$
|
10,172
|
|
|
$
|
10,172
|
|
Provision
|
|
|
109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment
|
|
|
|
|
|
|
(6,269
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance at end of period
|
|
$
|
4,012
|
|
|
$
|
3,903
|
|
|
$
|
10,172
|
|
|
$
|
10,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
This allowance relates to mortgage loan investments of $798,295
and $780,826 at December 31, 2006 and 2005, respectively.
All of the Companys mortgage loan investments were in good
standing at December 31, 2006.
At December 31, 2006, mortgage loans constituted
approximately 3.9% of total assets and are secured by
first-mortgage liens on income-producing commercial real estate,
primarily in the retail, industrial, and office building
sectors. The majority of the properties are located in the
western United States, with 27% of the total in California and
22% in Washington. Individual loans generally do not exceed
$15,000.
The carrying value of other invested assets approximates fair
value. The following table summarizes the Companys other
invested assets:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Options
|
|
$
|
2,053
|
|
|
$
|
3,331
|
|
Note receivable agency
|
|
|
7,823
|
|
|
|
7,930
|
|
Embedded derivatives
|
|
|
8,257
|
|
|
|
17,164
|
|
Other
|
|
|
572
|
|
|
|
700
|
|
|
|
|
|
|
|
|
|
|
Total other invested assets
|
|
$
|
18,705
|
|
|
$
|
29,125
|
|
|
|
|
|
|
|
|
|
|
|
|
4.
|
Derivative
Financial Instruments
|
Derivatives are instruments whose values are derived from
underlying instruments, indices, or rates, have a notional
amount, and can be net settled. This may include derivatives
that are embedded in financial instruments or in
certain existing assets or liabilities. The Company uses
derivative financial instruments, including interest rate swaps
and options, as a means of hedging exposure to equity price
changes
and/or
interest rate risk on anticipated transactions or on existing
assets and liabilities.
Interest rate risk is the risk of economic loss due to changes
in the level of interest rates. The Company manages interest
rate risk through active portfolio management and selective use
of interest rate swaps as hedges to change the characteristics
of certain assets and liabilities. With interest rate swap
agreements, the Company exchanges with a counterparty, at
specified intervals, interest rate payments of differing
character (e.g., fixed-rate payments exchanged for variable-rate
payments), based on an underlying principal balance (notional
amount). No cash is exchanged at the outset of the contract, and
no principal payments are made by either party. The net interest
accrued and the net interest payments made at each interest
payment due date are recorded to interest income or expense,
depending on the hedged item.
F-23
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Fair
Value Hedges
In August 2004, all fair value hedges, totaling $330,409 of
notional amount outstanding, were terminated resulting in a
realized investment loss of $3,491. Prior to August 2004, the
Company used interest rate swaps to hedge the change in fair
value of certain fixed-rate assets. As discussed in Note 2,
derivatives that were determined to be highly effective were
given hedge accounting treatment and changes in their fair
values and the fair values of the related assets that they
hedged were recognized in net realized investment gains (losses)
in the Consolidated Statements of Operations.
Cash
Flow Hedges
In January 2006, the Companys Board of Directors
authorized a private offering to qualified institutional buyers
of $300,000 fixed rate senior subordinated notes due in ten
years (the Notes). The Company was exposed to interest rate risk
as it expected to issue the Notes on or about March 31,
2006 at or near par at the then current market interest rate. To
manage this risk, the Company bought a $300,000 forward-starting
interest rate swap at 5.0575%, maturing on March 31, 2006,
and designated the derivative as a hedge of a forecasted
transaction carried at fair value with changes recorded in OCI.
Since the critical terms of the derivative were the same as the
forecasted transaction, the Company did not record any
ineffectiveness.
On March 30, 2006, the Company issued $300,000 of
6.125% senior notes due on April 1, 2016
(Note 11). As a result, the Company recorded a $4,814 gain
in OCI related to the swap which will be reclassified into
income concurrent with the interest expense over the life of the
Notes. For the year ended December 31, 2006, $237 was
reclassified from OCI to interest expense.
In August 2004, all cash flow interest rate swaps were
terminated, resulting in a net realized investment gain of $393.
Prior to August 2004, the Company used interest rate swaps to
hedge the variability of future cash flows arising from changes
in interest rates associated with certain variable rate assets
and forecasted transactions. Amounts recorded in OCI related to
derivatives qualifying as cash flow hedges resulted in a
decrease in OCI of $4,439 after tax for the seven month period
ended August 1, 2004.
In August 2004, interest rate swaps related to the forecasted
transactions were terminated resulting in a realized investment
gain of $3,640.
Prior to August 2004, the interest rate swaps related to
forecasted transactions that were considered probable of
occurring were considered to be highly effective and qualified
for hedge treatment under SFAS No. 133.
SFAS No. 133 requires that amounts deferred in OCI be
reclassified into earnings either when the forecasted
transaction occurs or when it is considered not probable of
occurring, whichever happens sooner. In the seven month period
ended August 1, 2004, $7,442 after tax was reclassified
from OCI to net realized investment gains and losses relating to
forecasted transactions that were no longer probable of
occurring.
Other
Derivatives
The Company has a closed block of fixed indexed annuity (FIA)
product that credits the policyholders account based on a
percentage of the gain in the S&P 500 Index. In connection
with this product, the Company has a hedging program with the
objective to hedge the exposure to changes in the S&P 500
Index. This program consists of buying S&P 500 Index
options. Although the Company uses index options to hedge the
equity return component of the FIA, the options do not qualify
as hedging instruments or for hedge accounting treatment
pursuant to SFAS No. 133. Accordingly, the assets are
recorded as a free-standing derivative asset or options in other
invested assets, and mark-to-market gains or losses to record
the options at fair value are recognized in net realized
investment gains. The Company recognized pretax gains (losses)
on these options of $2,227, $(4,413), $2,007, and $(2,611) for
the years ended December 31, 2006 and 2005, the five month
period ended December 31, 2004, and the seven month period
ended August 1, 2004, respectively.
The Company has convertible bonds that contain embedded options.
The values of these options are bifurcated from the host value
of the respective bonds and are accounted for as derivatives.
During 2006 and
F-24
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
2005, the embedded derivatives are recorded in other invested
assets, and mark-to-market gains or losses to record the
embedded derivatives at fair value are recognized in net
realized investment gains. The value of these options is $8,257
and $17,164 at December 31, 2006 and 2005, respectively.
Counterparty credit risk is the risk that a counterparty to a
derivative contract will be unable to perform its obligations.
The Company manages counterparty credit risk on an individual
counterparty basis, and gains and losses are netted by
counterparty. The Company mitigates counterparty credit risk
through credit reviews, approval controls, and by only entering
into agreements with credit-worthy counterparties. The Company
performs ongoing monitoring of counterparty credit exposure risk
against credit limits. The contract or notional amounts of these
instruments reflect the extent of involvement the Company has in
a particular class of derivative financial instrument. However,
the maximum loss of cash flow associated with these instruments
can be less than these amounts. For interest rate swaps, credit
risk is limited to the amount that it would cost the Company to
replace the contract.
|
|
5.
|
Securities
Lending Program
|
The Company participates in a securities lending program whereby
blocks of securities included in investments are loaned to third
parties, primarily major brokerage firms. The Company requires a
minimum of 102% of the fair value of the loaned securities to be
separately maintained as collateral for the loans. Securities
with a cost or amortized cost of $395,942 and $577,877 and an
estimated fair value of $427,660 and $574,824 were on loan under
the program at December 31, 2006 and 2005, respectively.
The Company was liable for cash collateral under its control of
$439,292 and $598,451 at December 31, 2006 and 2005,
respectively.
|
|
6.
|
Fair
Value of Financial Instruments
|
The Company estimates the fair values for mortgage loans by
discounting the projected cash flows using the current rate at
which the loans would be made to borrowers with similar credit
ratings and for the same maturities.
For cash and cash equivalents, policy loans, short-term
investments, accounts receivable, and other liabilities the
carrying value is a reasonable estimate of fair value.
The fair value of investments in limited partnerships is
provided by the general partner or manager of each investment.
Included in investments in limited partnerships are investments
in tax-sheltered affordable housing projects for which the fair
values are calculated as the sum of cash contributions and the
present value of future commitments.
The carrying amount of the note receivable approximates fair
value.
All derivatives are carried at fair value on the Consolidated
Balance Sheets. The fair values of the derivative financial
instruments generally represent the estimated amounts that the
Company would expect to receive or pay upon termination of the
contracts as of the reporting date. Quoted fair values are
available for certain derivatives. For derivative instruments
not actively traded, the Company estimates fair value using
values obtained from independent pricing services, internal
modeling, or quoted market prices of comparable instruments.
The carrying value of securities lending collateral and
securities lending payable approximates fair value.
Separate account assets and the related liabilities are reported
at fair value using quoted market prices.
The Company estimates the fair values of investment contracts
(funds held under deposit contracts) with defined maturities by
discounting projected cash flows using rates that would be
offered for similar contracts with the same remaining
maturities. For investment contracts with no defined maturities,
the Company estimates fair values to be the present surrender
value.
F-25
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the carrying or reported values
and corresponding fair values of financial instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
December 31, 2005
|
|
|
|
Carrying
|
|
|
|
|
|
Carrying
|
|
|
|
|
|
|
Amount
|
|
|
Fair Value
|
|
|
Amount
|
|
|
Fair Value
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
$
|
16,049,878
|
|
|
$
|
16,049,878
|
|
|
$
|
17,183,197
|
|
|
$
|
17,183,197
|
|
Marketable equity securities
|
|
|
201,706
|
|
|
|
201,706
|
|
|
|
162,301
|
|
|
|
162,301
|
|
Mortgage loans
|
|
|
794,283
|
|
|
|
796,078
|
|
|
|
776,923
|
|
|
|
798,430
|
|
Investment in limited partnerships
|
|
|
112,648
|
|
|
|
112,648
|
|
|
|
93,400
|
|
|
|
93,400
|
|
Other invested assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
2,053
|
|
|
|
2,053
|
|
|
|
3,331
|
|
|
|
3,331
|
|
Embedded derivatives
|
|
|
8,257
|
|
|
|
8,257
|
|
|
|
17,164
|
|
|
|
17,164
|
|
Note receivable agency
|
|
|
7,823
|
|
|
|
7,823
|
|
|
|
7,930
|
|
|
|
7,930
|
|
Other
|
|
|
572
|
|
|
|
572
|
|
|
|
|
|
|
|
|
|
Securities lending collateral
|
|
|
439,292
|
|
|
|
439,292
|
|
|
|
598,451
|
|
|
|
598,451
|
|
Separate account assets
|
|
|
1,233,929
|
|
|
|
1,233,929
|
|
|
|
1,188,820
|
|
|
|
1,188,820
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds held under deposit contracts
|
|
|
15,986,198
|
|
|
|
15,954,265
|
|
|
|
16,697,903
|
|
|
|
16,960,272
|
|
Other liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Limited partnership contributions payable
|
|
|
44,646
|
|
|
|
44,646
|
|
|
|
31,599
|
|
|
|
31,599
|
|
Securities lending payable
|
|
|
439,292
|
|
|
|
439,292
|
|
|
|
598,451
|
|
|
|
598,451
|
|
Separate account liabilities
|
|
|
1,233,929
|
|
|
|
1,233,929
|
|
|
|
1,188,820
|
|
|
|
1,188,820
|
|
The Company evaluates the financial condition of its reinsurers
to minimize the exposure to losses from reinsurer insolvencies.
Management of the Company is not aware of any of the
Companys major reinsurers currently experiencing material
financial difficulties. The Company analyzes reinsurance
recoverables according to the credit ratings of its reinsurers.
Of the total amount due from reinsurers at December 31,
2006, 99.7% was with reinsurers rated A− or higher by
A.M. Best. The Company had no reserve for uncollectible
reinsurance in 2006 or 2005. None of the Companys
reinsurance contracts exclude certified terrorist acts.
For the individual life business, the Company has coinsurance
agreements on policies exceeding $500,000 and other
miscellaneous policies where the reinsurer reimburses the
Company based on the percentage in the contract, which ranges
from 50% to 80% based upon the year that the policy was written.
The Company reinsures 100% of its group long-term disability and
group short-term disability business. The reinsurer is
responsible for paying all claims.
F-26
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Reinsurance recoverables are comprised of the following amounts:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Life insurance
|
|
|
|
|
|
|
|
|
Reinsurance recoverables on:
|
|
|
|
|
|
|
|
|
Policy and contract claims
|
|
$
|
5,861
|
|
|
$
|
6,694
|
|
Paid claims
|
|
|
10
|
|
|
|
77
|
|
Future policy benefits
|
|
|
166,621
|
|
|
|
149,853
|
|
|
|
|
|
|
|
|
|
|
Total life insurance
|
|
|
172,492
|
|
|
|
156,624
|
|
Accident and health insurance
|
|
|
|
|
|
|
|
|
Reinsurance recoverables on:
|
|
|
|
|
|
|
|
|
Policy and contract claims
|
|
|
725
|
|
|
|
338
|
|
Paid claims
|
|
|
79
|
|
|
|
295
|
|
Future policy benefits
|
|
|
65,468
|
|
|
|
72,631
|
|
|
|
|
|
|
|
|
|
|
Total accident and health insurance
|
|
|
66,272
|
|
|
|
73,264
|
|
|
|
|
|
|
|
|
|
|
Total reinsurance recoverables
|
|
$
|
238,764
|
|
|
$
|
229,888
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth net life insurance in-force as of
December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Direct life insurance in-force
|
|
$
|
55,656,360
|
|
|
$
|
56,928,623
|
|
|
$
|
69,610,844
|
|
Amounts assumed from other companies
|
|
|
211,656
|
|
|
|
219,626
|
|
|
|
228,006
|
|
Amounts ceded to other companies
|
|
|
(21,944,907
|
)
|
|
|
(20,266,656
|
)
|
|
|
(19,081,945
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net life insurance in-force.
|
|
$
|
33,923,109
|
|
|
$
|
36,881,593
|
|
|
$
|
50,756,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of amount assumed to net
|
|
|
0.62
|
%
|
|
|
0.59
|
%
|
|
|
0.44
|
%
|
F-27
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The effects of reinsurance on earned premiums are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
August 2,
|
|
|
January 1,
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2004
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
through
|
|
|
through
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
August 1,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2004
|
|
|
Direct:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accident and health premiums
|
|
$
|
390,873
|
|
|
$
|
430,821
|
|
|
$
|
185,464
|
|
|
$
|
264,032
|
|
Life insurance premiums
|
|
|
191,881
|
|
|
|
192,854
|
|
|
|
84,743
|
|
|
|
118,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
582,754
|
|
|
|
623,675
|
|
|
|
270,207
|
|
|
|
382,258
|
|
Assumed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accident and health premiums
|
|
|
(1
|
)
|
|
|
15,277
|
|
|
|
18,753
|
|
|
|
23,220
|
|
Life insurance premiums
|
|
|
209
|
|
|
|
240
|
|
|
|
165
|
|
|
|
229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
208
|
|
|
|
15,517
|
|
|
|
18,918
|
|
|
|
23,449
|
|
Ceded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accident and health premiums
|
|
|
(10,215
|
)
|
|
|
(22,529
|
)
|
|
|
(8,544
|
)
|
|
|
(11,804
|
)
|
Life insurance premiums
|
|
|
(47,090
|
)
|
|
|
(41,204
|
)
|
|
|
(17,386
|
)
|
|
|
(35,978
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(57,305
|
)
|
|
|
(63,733
|
)
|
|
|
(25,930
|
)
|
|
|
(47,782
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total premiums
|
|
$
|
525,657
|
|
|
$
|
575,459
|
|
|
$
|
263,195
|
|
|
$
|
357,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of amount assumed to net
|
|
|
0.04
|
%
|
|
|
2.70
|
%
|
|
|
7.19
|
%
|
|
|
6.55
|
%
|
Ceded reinsurance reduced policy benefits by $45,533, $39,253,
$11,529, and $23,722 for the years ended December 31, 2006
and 2005, the five months ended December 31, 2004, and the
seven months ended August 1, 2004, respectively.
|
|
8.
|
Deferred
Policy Acquisition Costs and Deferred Sales
Inducements
|
Activities impacting deferred policy acquisition costs are as
follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Unamortized balance at beginning of period
|
|
$
|
48,511
|
|
|
$
|
15,073
|
|
Deferral of acquisition costs
|
|
|
52,511
|
|
|
|
45,213
|
|
Amortization related to investment gains
|
|
|
1,190
|
|
|
|
86
|
|
Amortization related to other expenses
|
|
|
(14,589
|
)
|
|
|
(11,861
|
)
|
|
|
|
|
|
|
|
|
|
Unamortized balance at end of period
|
|
|
87,623
|
|
|
|
48,511
|
|
Accumulated effect of net unrealized investment gains
|
|
|
614
|
|
|
|
506
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
88,237
|
|
|
$
|
49,017
|
|
|
|
|
|
|
|
|
|
|
F-28
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table provides a reconciliation of the beginning
and ending balance for sales inducements, which are included in
other assets:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Unamortized balance at beginning of period
|
|
$
|
2,905
|
|
|
$
|
293
|
|
Capitalizations
|
|
|
6,113
|
|
|
|
2,612
|
|
Amortization
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized balance at end of period
|
|
$
|
9,010
|
|
|
$
|
2,905
|
|
|
|
|
|
|
|
|
|
|
|
|
9.
|
Property,
Equipment, and Leasehold Improvements
|
Property, equipment, and leasehold improvements are comprised of
the following amounts:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Computer equipment and software
|
|
$
|
6,151
|
|
|
$
|
4,060
|
|
Office equipment, furniture, and fixtures
|
|
|
8,977
|
|
|
|
8,785
|
|
Equipment and software under capital leases
|
|
|
13,825
|
|
|
|
13,586
|
|
Leasehold improvements
|
|
|
13,728
|
|
|
|
13,598
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,681
|
|
|
|
40,029
|
|
Less accumulated depreciation and amortization
|
|
|
14,605
|
|
|
|
9,507
|
|
|
|
|
|
|
|
|
|
|
Total property, equipment, and leasehold improvements, net
|
|
$
|
28,076
|
|
|
$
|
30,522
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expenses associated with property,
equipment, and leasehold improvements, including equipment and
software under capital leases, amounted to $5,610, $4,554, $159,
and $367, for the years ended December 31, 2006 and 2005,
the five months ended December 31, 2004, and the seven
months ended August 1, 2004, respectively.
F-29
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
10.
|
Policy
and Contract Claims
|
The following table provides a reconciliation of the beginning
and ending reserve balances for policy and contract claims for
2006, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Balance as of January 1
|
|
$
|
135,655
|
|
|
$
|
153,173
|
|
|
$
|
139,113
|
|
Less: reinsurance recoverable
|
|
|
7,032
|
|
|
|
4,176
|
|
|
|
5,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net balance as of January 1
|
|
|
128,623
|
|
|
|
148,997
|
|
|
|
133,542
|
|
Incurred related to insured events of:
|
|
|
|
|
|
|
|
|
|
|
|
|
The current year
|
|
|
298,269
|
|
|
|
364,832
|
|
|
|
369,948
|
|
Prior years
|
|
|
(1,445
|
)
|
|
|
1,807
|
|
|
|
12,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total incurred
|
|
|
296,824
|
|
|
|
366,639
|
|
|
|
382,106
|
|
Paid related to insured events of:
|
|
|
|
|
|
|
|
|
|
|
|
|
The current year
|
|
|
231,890
|
|
|
|
292,482
|
|
|
|
290,857
|
|
Prior years
|
|
|
80,629
|
|
|
|
94,531
|
|
|
|
75,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total paid
|
|
|
312,519
|
|
|
|
387,013
|
|
|
|
366,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net balance as of December 31
|
|
|
112,928
|
|
|
|
128,623
|
|
|
|
148,997
|
|
Add: reinsurance recoverable
|
|
|
6,586
|
|
|
|
7,032
|
|
|
|
4,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31
|
|
$
|
119,514
|
|
|
$
|
135,655
|
|
|
$
|
153,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company uses estimates for determining its liability for
policy and contract claims, which are based on historical claim
payment patterns, and expected loss ratios to provide for the
inherent variability in claim patterns and severity. For the
year ended December 31, 2006, the change in prior year
incurred liabilities primarily relates to a favorable
development in contract claims. For the years ended
December 31, 2005 and 2004, the change in incurred
liabilities was primarily from higher-than-expected loss and
claims experience, and a change in estimates.
Revolving
Credit Facilities
On June 14, 2004, the Company entered into a $370,000
revolving credit agreement with several lending institutions,
with Bank of America, N.A. acting as administrative agent for
the lenders. On August 2, 2004, the Company borrowed
$300,000 against the revolving credit facility, which was used
to purchase the life and investment companies, and $15,000,
which was used to purchase a loan from Safeco. On
August 31, 2004, $15,025 was repaid, which included $25 of
interest expense.
During the year ended December 31, 2006, the Company repaid
the $300,000 outstanding revolving credit line, and the line of
credit was subsequently reduced to $70,000. The credit agreement
contains restrictive covenants, which include maintaining
certain financial ratios. The interest rate is currently three
months at LIBOR, plus a margin of 0.60%. The margin is adjusted
based on the Companys debt-to-capitalization ratio. There
was no borrowing activity on this facility in 2006. At
December 31, 2005, the balance outstanding was $300,000 and
the rate was 4.52%. Interest expense for 2006 and 2005 was
$3,851 and $12,388, respectively.
In 2005, the Company entered into two $25,000 revolving credit
facilities with The Bank of New York to support the
Companys overnight repurchase agreement program, which
provides the Company liquidity to meet its general funding
requirements. There was no borrowing activity on these
facilities in 2006 and 2005.
F-30
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Senior
Notes Payable
On March 30, 2006, the Company issued $300,000 of
6.125% senior notes due on April 1, 2016, which were
issued at a discount yielding $298,671. As a result of this
transaction, the Company paid $3,040 in debt issuance costs
which have been capitalized and included in other assets and
realized $4,814 of deferred gains related to a hedging
transaction (Note 4). Both amounts are being amortized
using the effective-interest method over the term of the Notes,
yielding to an effective interest rate of 6.11%.
These senior notes are unsecured senior obligations and will be
equal in right of payment to all existing and future unsecured
senior indebtedness. These notes are redeemable, in whole or in
part, at the option of the Company at any time or from time to
time at a redemption price equal to the greater of:
(1) 100% of the aggregate principal amount of the notes to
be redeemed; or (2) the sum of the present value of the
remaining scheduled payments of principal and interest on the
Notes, discounted to the redemption date on a semi-annual basis
at a prevailing U.S. Treasury rate plus 25 basis
points, together in each case with accrued interest payments to
the redemption date.
Proceeds from the Notes were used to pay down the outstanding
principal on the revolving line of credit. Interest on the notes
is payable semi-annually in arrears, beginning on
October 2, 2006. The Company made interest payments on the
senior notes of $9,239 in 2006.
The terms of the senior notes contain various business and
financial covenants, including limitations on the disposition of
subsidiaries. As of December 31, 2006, the Company was in
compliance with all such covenants.
The Company uses the liability method of accounting for income
taxes in accordance with SFAS No. 109, under which
deferred income tax assets and liabilities are determined based
on the differences between their financial reporting and tax
bases and are measured using the enacted tax rates.
Differences between income taxes computed by applying the
U.S. federal income tax rate of 35% to income from
continuing operations before income taxes and the provision for
income taxes were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
August 2, 2004
|
|
|
January 1, 2004
|
|
|
|
|
|
|
|
|
|
through
|
|
|
through
|
|
|
|
Year Ended December 31, 2006
|
|
|
Year Ended December 31, 2005
|
|
|
December 31, 2004
|
|
|
August 1, 2004
|
|
|
Income (loss) from continuing operations before income taxes
|
|
$
|
244,028
|
|
|
|
|
|
|
$
|
206,355
|
|
|
|
|
|
|
$
|
(9,192
|
)
|
|
|
|
|
|
$
|
129,024
|
|
|
|
|
|
Computed expected tax expense
|
|
|
85,410
|
|
|
|
35.00
|
%
|
|
|
72,224
|
|
|
|
35.00
|
%
|
|
|
(3,217
|
)
|
|
|
35.00
|
%
|
|
|
45,158
|
|
|
|
35.00
|
%
|
Separate account dividend received deduction
|
|
|
(1,981
|
)
|
|
|
(0.81
|
)
|
|
|
(3,960
|
)
|
|
|
(1.92
|
)
|
|
|
(1,103
|
)
|
|
|
12.00
|
|
|
|
(1,461
|
)
|
|
|
(1.13
|
)
|
Purchase transaction costs
|
|
|
(402
|
)
|
|
|
(0.17
|
)
|
|
|
(413
|
)
|
|
|
(0.20
|
)
|
|
|
(455
|
)
|
|
|
4.95
|
|
|
|
|
|
|
|
|
|
Miscellaneous permanent differences
|
|
|
(308
|
)
|
|
|
(0.13
|
)
|
|
|
(158
|
)
|
|
|
(0.08
|
)
|
|
|
(237
|
)
|
|
|
2.58
|
|
|
|
117
|
|
|
|
0.09
|
|
IRS audit adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,749
|
)
|
|
|
(6.78
|
)
|
Warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,536
|
|
|
|
(386.60
|
)
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
|
|
|
|
|
|
|
|
(5,440
|
)
|
|
|
(2.64
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Low income housing credits
|
|
|
(838
|
)
|
|
|
(0.34
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
true-up
adjustments
|
|
|
2,617
|
|
|
|
1.08
|
|
|
|
(340
|
)
|
|
|
(0.16
|
)
|
|
|
1,458
|
|
|
|
(15.86
|
)
|
|
|
(3,663
|
)
|
|
|
(2.84
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
84,498
|
|
|
|
34.63
|
%
|
|
$
|
61,913
|
|
|
|
30.00
|
%
|
|
$
|
31,982
|
|
|
|
(347.93
|
)%
|
|
$
|
31,402
|
|
|
|
24.34
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-31
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The warrant adjustment for the period from August 2, 2004
through December 31, 2004, reflects the reduction of
current income from continuing operations related to warrants
issued to investors for certain services provided. For tax
purposes, warrants for services are not deductible until the
time of exercise. As of December 31, 2006, $2,720 of the
warrant expense is accounted for as a temporary difference for
which a deferred tax asset has been established. For tax-basis,
the remaining portion of $32,816 has been allocated to
non-amortizable
capital expenditures.
The tax effects of temporary differences which give rise to the
deferred income tax assets and deferred income tax liabilities
were as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Deferred income tax assets:
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
3,453
|
|
|
$
|
5,289
|
|
Intangibles
|
|
|
18,408
|
|
|
|
19,036
|
|
Adjustment to life policy liabilities
|
|
|
343,120
|
|
|
|
369,329
|
|
Capitalization of policy acquisition costs
|
|
|
50,150
|
|
|
|
57,785
|
|
Long-term incentive plan
|
|
|
4,451
|
|
|
|
4,266
|
|
Warrants
|
|
|
2,720
|
|
|
|
35,536
|
|
Investment impairments
|
|
|
9,002
|
|
|
|
8,927
|
|
Uncollected premium adjustment
|
|
|
194
|
|
|
|
|
|
Guaranty fund assessments
|
|
|
502
|
|
|
|
522
|
|
Furniture and fixtures
|
|
|
510
|
|
|
|
2,262
|
|
Bond discount accrual
|
|
|
504
|
|
|
|
|
|
Unrealized depreciation of investment securities (net of
deferred policy acquisition costs adjustment: $(215) and $(0),
respectively)
|
|
|
296
|
|
|
|
|
|
Other
|
|
|
6,442
|
|
|
|
11,019
|
|
|
|
|
|
|
|
|
|
|
Total deferred income tax assets
|
|
|
439,752
|
|
|
|
513,971
|
|
Deferred income tax liabilities:
|
|
|
|
|
|
|
|
|
Unrealized appreciation of investment securities (net of
deferred policy acquisition costs adjustment: $(0) and $(177),
respectively)
|
|
|
|
|
|
|
73,520
|
|
Securities basis adjustment
|
|
|
185,164
|
|
|
|
242,909
|
|
Mortgage loans
|
|
|
1,234
|
|
|
|
3,170
|
|
Warrants
|
|
|
2,720
|
|
|
|
35,536
|
|
Deferred policy acquisition costs
|
|
|
30,668
|
|
|
|
16,641
|
|
Bond discount accrual
|
|
|
|
|
|
|
4,546
|
|
Other
|
|
|
875
|
|
|
|
302
|
|
Total deferred income tax liabilities
|
|
|
220,661
|
|
|
|
376,624
|
|
|
|
|
|
|
|
|
|
|
Net deferred income tax asset
|
|
$
|
219,091
|
|
|
$
|
137,347
|
|
|
|
|
|
|
|
|
|
|
On August 2, 2004, the Company established a valuation
allowance related to capital loss carryforwards of $27,392
($9,587 at the effective tax rate). The Company determined the
need for a valuation allowance due to the fact that the capital
losses generated in 2002 and 2003 continued to be available for
carryback purposes by the Companys former parent, Safeco.
During 2005, the valuation allowance was reduced in its entirety
as a result of a change in the anticipated realizability of
deferred tax assets. The adjustment resulted in a write-down of
other intangible assets in the amount of $4,200.
F-32
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Prior to 1984, as provided for under the Life Insurance Company
Tax Act of 1959, a portion of statutory income was not subject
to current taxation, but was accumulated for income tax purposes
in a memorandum account referred to as the
policyholders surplus account (PSA). In any
taxable year beginning after 2004 and before 2007, direct and
indirect distributions from the PSA will be treated as zero (no
tax due). At December 31, 2005 the balance in the
Companys PSA account was $7,448. During 2006, direct
dividends from the insurance companies of $123,030 were
distributed, which reduced the balance in the Companys PSA
account to zero.
Comprehensive income is defined as all changes in
Stockholders Equity, except those arising from
transactions with stockholders. Comprehensive income includes
net income and OCI, which consists of changes in unrealized
gains or losses of investments and derivatives carried at fair
value and the DAC valuation allowance.
The components of OCI are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Net unrealized gains (losses) on available-for-sale securities
|
|
$
|
(6,037
|
)
|
|
$
|
209,549
|
|
Net unrealized gains on derivative financial instruments
|
|
|
4,577
|
|
|
|
|
|
Adjustment for deferred policy acquisition costs
|
|
|
614
|
|
|
|
506
|
|
Deferred income taxes
|
|
|
296
|
|
|
|
(73,520
|
)
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss)
|
|
$
|
(550
|
)
|
|
$
|
136,535
|
|
|
|
|
|
|
|
|
|
|
The following summarizes the net changes in OCI:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
August 2,
|
|
|
January 1,
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2004
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
through
|
|
|
through
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
August 1,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2004
|
|
|
Increase (decrease) in unrealized appreciation/depreciation of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
$
|
(215,586
|
)
|
|
$
|
(272,579
|
)
|
|
$
|
482,128
|
|
|
$
|
(330,148
|
)
|
Derivative financial instruments
|
|
|
4,577
|
|
|
|
|
|
|
|
|
|
|
|
(6,829
|
)
|
Adjustment for deferred policy acquisition costs
|
|
|
108
|
|
|
|
1,201
|
|
|
|
(695
|
)
|
|
|
39,095
|
|
Deferred income taxes
|
|
|
73,816
|
|
|
|
94,982
|
|
|
|
(168,502
|
)
|
|
|
104,259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in accumulated OCI
|
|
$
|
(137,085
|
)
|
|
$
|
(176,396
|
)
|
|
$
|
312,931
|
|
|
$
|
(193,623
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14.
|
Commitments
and Contingencies
|
Under state insolvency and guaranty laws, insurers licensed to
do business in a state can be assessed or required to contribute
to state guaranty funds to cover policyholder losses resulting
from insurer insolvencies. Liabilities for guaranty funds are
not discounted or recorded net of premium taxes and are included
in other liabilities in the Consolidated Balance Sheets. At
December 31, 2006, the Company had liabilities of $7,278
for estimated guaranty fund assessments. The Company has a
related asset for premium tax offsets of $5,843, which are
available for a period of five to twenty years.
F-33
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
At December 31, 2006 the Company was invested in six
limited partnership interests related to tax sheltered
affordable housing projects and state tax credit funds, four of
which were entered into during 2006. The Company unconditionally
committed to provide capital contributions of approximately
$64,298 over a period of four years. These investments were
accounted for under the equity method and are recorded at
present value in investments in limited partnerships with the
corresponding amount in other liabilities. Capital contributions
of $10,584 were paid as of December 31, 2006, with the
remaining expected cash capital contributions payable as follows:
|
|
|
|
|
2007
|
|
$
|
9,262
|
|
2008
|
|
|
7,867
|
|
2009
|
|
|
21,439
|
|
2010
|
|
|
15,146
|
|
|
|
|
|
|
Total capital contributions payable
|
|
$
|
53,714
|
|
|
|
|
|
|
The Company has committed to invest $17,500 in two private
equity limited partnerships. The Company will provide capital
contributions to the partnerships up to the committed amount at
the discretion of the general partners, subject to certain
incremental contribution limits. The term of the capital
commitment ranges from five to ten years ending in 2015.
Investments in both partnerships amounted to $2,495 for the year
ended December 31, 2006.
Because of the nature of the business, the Company is subject to
legal actions filed or threatened in the ordinary course of its
business operations. The Company does not believe that such
litigation will have a material adverse effect on its
consolidated financial condition, future operating results, or
liquidity.
The Company leases office space, commercial real estate, and
certain equipment under leases that expire at various dates
through 2015. The Company accounts for these leases as operating
leases. Certain leases include renewal options.
Future minimum lease commitments, including cost escalation
clauses, for the next five years and thereafter, are as follows:
|
|
|
|
|
|
|
Operating
|
|
|
|
Leases
|
|
|
2007
|
|
$
|
6,853
|
|
2008
|
|
|
6,692
|
|
2009
|
|
|
6,747
|
|
2010
|
|
|
6,550
|
|
2011
|
|
|
6,192
|
|
Thereafter
|
|
|
23,072
|
|
|
|
|
|
|
Total
|
|
$
|
56,106
|
|
|
|
|
|
|
The amount of rent expense was $8,244, $9,592, $4,500, and
$5,867 for the years ended December 31, 2006 and 2005, the
five months ended December 31, 2004, and the seven months
ended August 1, 2004, respectively.
In October 2004, the Company entered into a service agreement
with a third-party service provider to outsource the majority of
its information technology infrastructure. The term of the
service agreement is for five years, subject to certain renewal
options and early termination provisions. Under the terms of the
service agreement, the Company agreed to pay an annual service
fee ranging from $13,194 to $14,664 for five years. The
remaining annual service fee is $13,224 for 2007, $13,269 for
2008, $13,928 for 2009, and $8,362 for 2010, subject to certain
annual service fee adjustments based on actual benchmarks and
production utilization.
F-34
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
During 2005, the Company entered into an agreement and paid the
service provider a fixed transition fee in the amount of $15,488
related to the acquisition of the initial equipment and software
used by the service provider to fulfill and perform its
services. The ownership of these assets will be conveyed to the
Company upon the termination of the service agreement. The
Company recorded the equipment and software as a capital lease
with no related future minimum lease payment. Additional
equipment and software may be purchased by the service provider
based on capacity and demand. Equipment and software costs under
the capital lease were $13,825 and $13,586, respectively, at
December 31, 2006 and 2005 with accumulated amortization of
$5,885 and $3,057, respectively. There were no capitalized
leases at December 31, 2004.
At December 31, 2006 and 2005, unfunded mortgage loan
commitments were $14,465 and $35,175, respectively. The Company
had no other material commitments or contingencies at
December 31, 2006 and 2005.
|
|
15.
|
Discontinued
Operations
|
On August 2, 2004, the Company announced it would exit the
mutual fund business through a sale agreement with Pioneer
Investment Management Inc. (Pioneer) for $30,000, subject to
adjustment based on the value of the assets under management at
closing and stockholder and trustee approval. Symetra Asset
Management (SAM), manager of the Safeco mutual funds, was
replaced with Pioneer. On December 10, 2004,
$3.1 billion in assets from Safecos 22 mutual funds
merged into the Pioneer family of funds and the Company received
$30,000. No realized investment gain or loss was recorded.
Accordingly, the Company has presented the asset management
segment, which is primarily composed of activity related to the
mutual fund business, as discontinued operations in the
Consolidated Financial Statements in accordance with
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets.
Included in discontinued operations are the operations of SAM
and the majority of the business component of Symetra Services
Corporation. SAM provided fund accounting and other
administrative services to the funds through the sale date. The
other asset management entity, Symetra Services Corporation,
functioned as the transfer agent for the Safeco mutual funds.
Results of discontinued operations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
August 2,
|
|
|
January 1,
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2004
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
through
|
|
|
through
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
August 1,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2004
|
|
|
Revenues
|
|
$
|
|
|
|
$
|
2,426
|
|
|
$
|
932
|
|
|
$
|
14,608
|
|
Benefits and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other underwriting and operating expenses
|
|
|
|
|
|
|
845
|
|
|
|
4,678
|
|
|
|
11,077
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes:
|
|
|
|
|
|
|
1,581
|
|
|
|
(3,746
|
)
|
|
|
3,531
|
|
Provision (benefit) for income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
262
|
|
|
|
8,764
|
|
|
|
1,166
|
|
Deferred
|
|
|
|
|
|
|
274
|
|
|
|
(10,099
|
)
|
|
|
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
536
|
|
|
|
(1,335
|
)
|
|
|
1,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
|
|
|
$
|
1,045
|
|
|
$
|
(2,411
|
)
|
|
$
|
2,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-35
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
16.
|
Employee
Benefit Plans
|
The Company sponsors a defined contribution plan for all
eligible employees. Prior to 2006, the Symetra Financial
Retirement Plan was a 401(k)/profit-sharing retirement plan that
included a matching contribution of 66.6% of a
participants contributions up to 6% of eligible
compensation, a profit-sharing feature comprised of a minimum
contribution of 3% of each eligible participants
compensation, and a variable component based on the Board of
Directors discretion. No variable profit-sharing
contributions were made for the year ended December 31,
2005 and the five month period ended December 31, 2004.
Effective on January 1, 2006, the plan was amended to
include only an immediate safe harbor contribution of 100% of a
participants contributions up to 6% of eligible
compensation. The expense related to this plan was $2,155,
$5,141, and $2,526 for the years ended December 31, 2006
and 2005, and the five months ended December 31, 2004,
respectively.
The Company also sponsors a performance share plan (the
Performance Share Plan) that provides incentives to selected
executives based on the long-term success of the Company. The
Board of Directors of the Company may grant to an executive an
award of performance shares. Each performance share reflects the
financial value of the growth in both the book value and the
enterprise value, conditional upon attainment of a stated
performance goal over the award period specified in the grant.
The performance shares are exchanged for a cash payment at the
end of the award period. The amount expensed for the years ended
December 31, 2006 and 2005 and the five months ended
December 31, 2004, related to the Performance Share Plan,
was $11,801, $10,262, and $1,928, respectively. The Company does
not offer any healthcare, life insurance, or other
post-retirement benefits to retired employees.
Predecessor
Plans
Through the date of acquisition, Safeco sponsored defined
contribution and defined benefit plans covering substantially
all employees of the Company and its subsidiaries and provided a
postretirement benefit program for certain retired employees.
Eligibility for participation in the various plans was generally
based on completion of a specified period of continuous service
or date of hire. Employer contributions to these plans were made
in cash. Costs allocated to the Company for these plans were
$2,363 for the seven months ended August 1, 2004.
The Safeco 401(k)/Profit-Sharing Retirement Plan was a defined
contribution plan. It included a minimum contribution of 3% of
each eligible participants compensation, a matching
contribution of 66.6% of participants contributions up to
6% of eligible compensation, and a profit-sharing component
based on Safecos income. No profit-sharing contributions
were made for the seven month period ended August 1, 2004.
The Safeco Employees Cash Balance Plan (CBP) was a
noncontributory defined benefit plan that provided benefits for
each year of service after 1988, based on the participants
eligible compensation, plus a stipulated rate of return on the
benefit balance. Safeco made contributions to the CBP based on
the funding requirements set by the Employee Retirement Income
Security Act of 1974. Costs allocated to the Company for the CBP
were 1% or less of income before income taxes for the seven
months ended August 1, 2004.
The Company participated in Safecos Long-Term Incentive
Plan of 1997 (the Plan), as amended. Incentive stock options,
non-qualified stock options, restricted stock rights,
performance stock rights, and stock appreciation rights were
authorized under the Plan. Stock-based compensation expense
allocated to the Company was $1,873 for the seven months ended
August 1, 2004.
|
|
17.
|
Dividend
Restrictions
|
Insurance companies are restricted by state regulations as to
the aggregate amount of dividends they may pay in any
consecutive
12-month
period without regulatory approval. Generally, dividends may be
paid out of earned surplus without approval with
30 days prior written notice, within certain limits.
The limits are generally based on the greater of 10% of the
prior year statutory surplus or the prior year statutory net
gain
F-36
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
from operations. Dividends in excess of the prescribed limits or
earned surplus require formal state insurance commission
approval. Based on statutory limits as of December 31,
2006, the amount of surplus available for the payment of
dividends without prior regulatory approval is $166,415.
|
|
18.
|
Statutory-Basis
Information
|
State insurance regulatory authorities require insurance
companies to file annual statements prepared on an accounting
basis prescribed or permitted by their respective states of
domicile. Prescribed statutory accounting practices include
state laws, regulations, and general administrative rules, as
well as a variety of publications of the National Association of
Insurance Commissioners (NAIC), including the revised
Accounting Practices and Procedures Manual. Permitted
statutory accounting practices encompass all accounting
practices not so prescribed.
During 2005, American States Life Insurance Company (ASL) was
statutorily merged into Symetra Life Insurance Company.
Statutory net income and surplus of ASL for the years ended
December 31, 2006 and 2005, are included in Symetra Life
Insurance Company. Statutory net income (loss) and capital and
surplus, by company, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Statutory net income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Symetra Life Insurance Company
|
|
$
|
145,020
|
|
|
$
|
162,210
|
|
|
$
|
222,104
|
|
Symetra National Life Insurance Company
|
|
|
1,107
|
|
|
|
(936
|
)
|
|
|
119
|
|
First Symetra National Life Insurance Company of New York
|
|
|
35
|
|
|
|
(3,016
|
)
|
|
|
857
|
|
American States Life Insurance Company
|
|
|
|
|
|
|
|
|
|
|
23,237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
146,162
|
|
|
$
|
158,258
|
|
|
$
|
246,317
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
2006
|
|
2005
|
|
Statutory capital and surplus:
|
|
|
|
|
|
|
|
|
Symetra Life Insurance Company
|
|
$
|
1,266,222
|
|
|
$
|
1,260,136
|
|
|
|
|
|
|
|
|
|
|
Statutory net income differs from income reported in accordance
with GAAP primarily because policy acquisition costs are
expensed when incurred, reserves are based on different
assumptions, and income tax expense reflects only taxes paid or
currently payable.
Statutory capital and surplus differs from amounts reported in
accordance with GAAP primarily because of the effect of GAAP
purchase price accounting adjustments, policy acquisition costs
are expensed when incurred, reserves are based on different
assumptions, and fixed maturities are carried at amortized cost.
Life and health insurance companies are subject to certain
Risk-Based Capital (RBC) requirements as specified by the NAIC.
Under those requirements, the amount of capital and surplus
maintained by a life and health insurance company is to be
determined based on various risk factors related to it. At
December 31, 2006, Symetra Life Insurance Company and its
subsidiaries met the RBC requirements.
The Company entered into an Investment Management Agreement on
March 14, 2004 with White Mountains Advisors, LLC. This
agreement provides for investment advisory services related to
the Companys invested assets and portfolio management
services. Fees are paid quarterly and amounted to $20,187,
$18,533, and $7,768 for the years ended December 31, 2006
and 2005, and the five months ended December 31, 2004.
F-37
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On August 2, 2004, the Company issued warrants to two lead
investors. At December 31, 2006, warrants to purchase
18,975,744 shares of the Companys common stock remain
outstanding at an exercise price of $11.49 per share.
Predecessor
During 2005, the Company relocated its main office location to
Bellevue, Washington. Prior to August 2, 2004, the Company
was obligated under a real estate lease with General America
Corporation, a subsidiary of Safeco, through July 31, 2005.
The current minimum aggregate rental commitment under this lease
obligation was $5,281 at December 31, 2004. Total
related-party rent expense for all facilities charged to
operations was $5,408 for the seven months ended August 1,
2004.
Prior to August 2, 2004, Safeco and its affiliates provided
the Company with personnel, property, and facilities in carrying
out certain of its corporate functions. Safeco annually
determined allocation factors based on headcount, time studies,
actual usage, or other relevant allocation bases in order to
allocate expenses for these services and facilities. These
expenses were included in net investment income and other
operating expenses within the Companys Consolidated
Statements of Operations. Safeco charged the Company expenses of
$25,167 for the seven months ended August 1, 2004. These
expenses included charges for corporate overhead, data
processing systems, payroll, and other miscellaneous charges.
On July 30, 2004, as part of the purchase of Safecos
Life & Investment companies, $7,703 of fixed assets
and software were transferred to the Company and reflected as a
capital contribution. The remaining $1,131 of the total $8,834
was a cash contribution.
The Company provides a broad range of products and services that
include group and individual insurance products, pension
products, annuities, and investment advisory services. These
operations are managed separately as five reportable segments
based on product groupings: Group, Income Annuities, Retirement
Services, Individual, and Other:
|
|
|
|
|
Groups principal product is stop-loss medical insurance
sold to employers with self-insured medical plans. Also included
in this segment are group life, accidental death and
dismemberment insurance, and disability products.
|
|
|
|
Retirement Services products are primarily fixed and
variable deferred annuities (both qualified and non-qualified),
tax-sheltered annuities (marketed to teachers and not-for-profit
organizations), and corporate retirement funds.
|
|
|
|
Income Annuities principal products are the structured
settlement annuities that are sold to fund third-party personal
injury settlements, providing a reliable income stream to the
injured party and immediate annuities purchased to fund income
after retirement.
|
|
|
|
Individuals products include term, universal and variable
universal life, and bank-owned life insurance.
|
|
|
|
Other includes Symetra Financial Corporation (the holding
company), inter-segment elimination entries, and various
non-insurance companies.
|
|
|
|
Discontinued operations are comprised of the discontinued mutual
fund businesses (see Notes 1 and 15).
|
The accounting policies of the reportable segments are the same
as those described in the summary of significant accounting
policies (Note 2).
The Company allocates capital and related investment income to
each segment using a risk-based capital formula. The Company
evaluates its results based upon segment operating income, GAAP
and non-GAAP financial measure that excludes net realized
investment gains (losses). Management believes the presentation
F-38
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
of segment pretax operating income enhances the understanding of
its results of operations by highlighting earnings attributable
to the normal recurring operations of the business.
The following tables present selected financial information by
segment and reconciles to segment income before income taxes
operating earnings to amounts reported in the Consolidated
Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006
|
|
|
|
|
|
|
Retirement
|
|
|
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Group
|
|
|
Services
|
|
|
Annuities
|
|
|
Individual
|
|
|
Other
|
|
|
Total
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
|
|
$
|
387,231
|
|
|
$
|
130
|
|
|
$
|
|
|
|
$
|
138,296
|
|
|
$
|
|
|
|
$
|
525,657
|
|
Net investment income
|
|
|
18,030
|
|
|
|
269,821
|
|
|
|
439,001
|
|
|
|
232,759
|
|
|
|
25,316
|
|
|
|
984,927
|
|
Other revenue
|
|
|
10,195
|
|
|
|
22,831
|
|
|
|
797
|
|
|
|
12,939
|
|
|
|
9,410
|
|
|
|
56,172
|
|
Net realized investment gains (losses)
|
|
|
(66
|
)
|
|
|
(17,061
|
)
|
|
|
16,798
|
|
|
|
(3,807
|
)
|
|
|
5,816
|
|
|
|
1,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
415,390
|
|
|
|
275,721
|
|
|
|
456,596
|
|
|
|
380,187
|
|
|
|
40,542
|
|
|
|
1,568,436
|
|
Benefits and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder benefits and claims
|
|
|
230,753
|
|
|
|
(16,501
|
)
|
|
|
|
|
|
|
50,000
|
|
|
|
|
|
|
|
264,252
|
|
Interest credited
|
|
|
|
|
|
|
186,232
|
|
|
|
371,786
|
|
|
|
208,180
|
|
|
|
(327
|
)
|
|
|
765,871
|
|
Other underwriting and operating expenses
|
|
|
105,742
|
|
|
|
61,738
|
|
|
|
21,591
|
|
|
|
57,370
|
|
|
|
14,100
|
|
|
|
260,541
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,155
|
|
|
|
19,155
|
|
Amortization of deferred policy acquisition costs
|
|
|
10,882
|
|
|
|
1,081
|
|
|
|
580
|
|
|
|
2,046
|
|
|
|
|
|
|
|
14,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses
|
|
|
347,377
|
|
|
|
232,550
|
|
|
|
393,957
|
|
|
|
317,596
|
|
|
|
32,928
|
|
|
|
1,324,408
|
|
Segment pre-tax income
|
|
|
68,013
|
|
|
|
43,171
|
|
|
|
62,639
|
|
|
|
62,591
|
|
|
|
7,614
|
|
|
|
244,028
|
|
Less: Net realized investment gains (losses)
|
|
|
(66
|
)
|
|
|
(17,061
|
)
|
|
|
16,798
|
|
|
|
(3,807
|
)
|
|
|
5,816
|
|
|
|
1,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pre-tax operating income
|
|
$
|
68,079
|
|
|
$
|
60,232
|
|
|
$
|
45,841
|
|
|
$
|
66,398
|
|
|
$
|
1,798
|
|
|
$
|
242,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
168,743
|
|
|
$
|
4,443,302
|
|
|
$
|
6,967,906
|
|
|
$
|
4,074,927
|
|
|
$
|
1,650,468
|
|
|
$
|
17,305,346
|
|
Separate account assets
|
|
|
|
|
|
|
1,115,519
|
|
|
|
|
|
|
|
118,410
|
|
|
|
|
|
|
|
1,233,929
|
|
Total assets
|
|
|
300,084
|
|
|
|
5,904,981
|
|
|
|
7,273,385
|
|
|
|
4,601,697
|
|
|
|
2,034,470
|
|
|
|
20,114,617
|
|
F-39
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2005
|
|
|
|
|
|
|
Retirement
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
|
|
|
Discontinued
|
|
|
|
|
|
|
Group
|
|
|
Services
|
|
|
Income Annuities
|
|
|
Individual
|
|
|
Other
|
|
|
Operations
|
|
|
Operations
|
|
|
Total
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
|
|
$
|
438,276
|
|
|
$
|
121
|
|
|
$
|
|
|
|
$
|
137,062
|
|
|
$
|
|
|
|
$
|
575,459
|
|
|
$
|
|
|
|
$
|
575,459
|
|
Net investment income
|
|
|
19,270
|
|
|
|
292,801
|
|
|
|
441,438
|
|
|
|
222,613
|
|
|
|
17,926
|
|
|
|
994,048
|
|
|
|
172
|
|
|
|
994,220
|
|
Other revenue
|
|
|
11,801
|
|
|
|
23,223
|
|
|
|
515
|
|
|
|
13,968
|
|
|
|
9,052
|
|
|
|
58,559
|
|
|
|
|
|
|
|
58,559
|
|
Net realized investment gains (losses)
|
|
|
(74
|
)
|
|
|
(17,122
|
)
|
|
|
17,382
|
|
|
|
1,344
|
|
|
|
12,610
|
|
|
|
14,140
|
|
|
|
2,254
|
|
|
|
16,394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
469,273
|
|
|
|
299,023
|
|
|
|
459,335
|
|
|
|
374,987
|
|
|
|
39,588
|
|
|
|
1,642,206
|
|
|
|
2,426
|
|
|
|
1,644,632
|
|
Benefits and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder benefits and claims
|
|
|
296,036
|
|
|
|
(25,697
|
)
|
|
|
|
|
|
|
57,088
|
|
|
|
|
|
|
|
327,427
|
|
|
|
|
|
|
|
327,427
|
|
Interest credited
|
|
|
|
|
|
|
211,538
|
|
|
|
392,534
|
|
|
|
206,856
|
|
|
|
|
|
|
|
810,928
|
|
|
|
|
|
|
|
810,928
|
|
Other underwriting and operating expenses
|
|
|
115,342
|
|
|
|
62,636
|
|
|
|
19,383
|
|
|
|
61,374
|
|
|
|
14,512
|
|
|
|
273,247
|
|
|
|
845
|
|
|
|
274,092
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,388
|
|
|
|
12,388
|
|
|
|
|
|
|
|
12,388
|
|
Amortization of deferred policy acquisition costs
|
|
|
10,478
|
|
|
|
94
|
|
|
|
272
|
|
|
|
1,017
|
|
|
|
|
|
|
|
11,861
|
|
|
|
|
|
|
|
11,861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses
|
|
|
421,856
|
|
|
|
248,571
|
|
|
|
412,189
|
|
|
|
326,335
|
|
|
|
26,900
|
|
|
|
1,435,851
|
|
|
|
845
|
|
|
|
1,436,696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pre-tax income
|
|
|
47,417
|
|
|
|
50,452
|
|
|
|
47,146
|
|
|
|
48,652
|
|
|
|
12,688
|
|
|
|
206,355
|
|
|
|
1,581
|
|
|
|
207,936
|
|
Less: Net realized investment gains (losses)
|
|
|
(74
|
)
|
|
|
(17,122
|
)
|
|
|
17,382
|
|
|
|
1,344
|
|
|
|
12,610
|
|
|
|
14,140
|
|
|
|
2,254
|
|
|
|
16,394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pre-tax operating income (loss)
|
|
$
|
47,491
|
|
|
$
|
67,574
|
|
|
$
|
29,764
|
|
|
$
|
47,308
|
|
|
$
|
78
|
|
|
$
|
192,215
|
|
|
$
|
(673
|
)
|
|
$
|
191,542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
137,826
|
|
|
$
|
5,096,016
|
|
|
$
|
7,276,295
|
|
|
$
|
4,130,472
|
|
|
$
|
1,692,164
|
|
|
$
|
18,332,773
|
|
|
$
|
|
|
|
$
|
18,332,773
|
|
Separate account assets
|
|
|
|
|
|
|
1,074,463
|
|
|
|
|
|
|
|
114,357
|
|
|
|
|
|
|
|
1,188,820
|
|
|
|
|
|
|
|
1,188,820
|
|
Total assets
|
|
|
242,751
|
|
|
|
6,526,179
|
|
|
$
|
7,451,961
|
|
|
|
4,638,575
|
|
|
|
2,120,595
|
|
|
|
20,980,061
|
|
|
|
|
|
|
|
20,980,061
|
|
F-40
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from August 2, 2004 through December 31,
2004
|
|
|
|
|
|
|
Retirement
|
|
|
Income
|
|
|
|
|
|
|
|
|
Continuing
|
|
|
Discontinued
|
|
|
|
|
|
|
Group
|
|
|
Services
|
|
|
Annuities
|
|
|
Individual
|
|
|
Other
|
|
|
Operations
|
|
|
Operations
|
|
|
Total
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
|
|
$
|
207,396
|
|
|
$
|
105
|
|
|
$
|
|
|
|
$
|
55,694
|
|
|
$
|
|
|
|
$
|
263,195
|
|
|
$
|
|
|
|
$
|
263,195
|
|
Net investment income
|
|
|
8,764
|
|
|
|
124,188
|
|
|
|
184,074
|
|
|
|
89,229
|
|
|
|
4,865
|
|
|
|
411,120
|
|
|
|
393
|
|
|
|
411,513
|
|
Other revenue
|
|
|
5,621
|
|
|
|
11,480
|
|
|
|
207
|
|
|
|
6,224
|
|
|
|
3,518
|
|
|
|
27,050
|
|
|
|
413
|
|
|
|
27,463
|
|
Net realized investment gains (losses)
|
|
|
(1
|
)
|
|
|
4,166
|
|
|
|
(3,277
|
)
|
|
|
2,809
|
|
|
|
3,306
|
|
|
|
7,003
|
|
|
|
126
|
|
|
|
7,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
221,780
|
|
|
|
139,939
|
|
|
|
181,004
|
|
|
|
153,956
|
|
|
|
11,689
|
|
|
|
708,368
|
|
|
|
932
|
|
|
|
709,300
|
|
Benefits and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder benefits and claims
|
|
|
124,008
|
|
|
|
(15,849
|
)
|
|
|
|
|
|
|
19,340
|
|
|
|
|
|
|
|
127,499
|
|
|
|
|
|
|
|
127,499
|
|
Interest credited
|
|
|
|
|
|
|
109,211
|
|
|
|
164,100
|
|
|
|
86,885
|
|
|
|
|
|
|
|
360,196
|
|
|
|
|
|
|
|
360,196
|
|
Other underwriting and operating expenses
|
|
|
54,410
|
|
|
|
26,682
|
|
|
|
7,226
|
|
|
|
28,566
|
|
|
|
6,358
|
|
|
|
123,242
|
|
|
|
4,678
|
|
|
|
127,920
|
|
Fair Value of warrants issued to investors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101,531
|
|
|
|
101,531
|
|
|
|
|
|
|
|
101,531
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,466
|
|
|
|
3,466
|
|
|
|
|
|
|
|
3,466
|
|
Amortization of deferred policy acquisition costs
|
|
|
1,352
|
|
|
|
236
|
|
|
|
|
|
|
|
38
|
|
|
|
|
|
|
|
1,626
|
|
|
|
|
|
|
|
1,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses
|
|
|
179,770
|
|
|
|
120,280
|
|
|
|
171,326
|
|
|
|
134,829
|
|
|
|
111,355
|
|
|
|
717,560
|
|
|
|
4,678
|
|
|
|
722,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pre-tax income
|
|
|
42,010
|
|
|
|
19,659
|
|
|
|
9,678
|
|
|
|
19,127
|
|
|
|
(99,666
|
)
|
|
|
(9,192
|
)
|
|
|
(3,746
|
)
|
|
|
(12,938
|
)
|
Less: Net realized investment gains (losses)
|
|
|
(1
|
)
|
|
|
4,166
|
|
|
|
(3,277
|
)
|
|
|
2,809
|
|
|
|
3,306
|
|
|
|
7,003
|
|
|
|
126
|
|
|
|
7,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pre-tax operating income (loss)
|
|
$
|
42,011
|
|
|
$
|
15,493
|
|
|
$
|
12,955
|
|
|
$
|
16,318
|
|
|
$
|
(102,972
|
)
|
|
$
|
(16,195
|
)
|
|
$
|
(3,872
|
)
|
|
$
|
(20,067
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
534,402
|
|
|
$
|
6,724,045
|
|
|
$
|
7,752,785
|
|
|
$
|
4,271,000
|
|
|
$
|
(37,471
|
)
|
|
$
|
19,244,761
|
|
|
$
|
32,290
|
|
|
$
|
19,277,051
|
|
Separate account assets
|
|
|
|
|
|
|
1,114,843
|
|
|
|
|
|
|
|
113,517
|
|
|
|
|
|
|
|
1,228,360
|
|
|
|
|
|
|
|
1,228,360
|
|
Total assets
|
|
|
639,582
|
|
|
|
8,247,675
|
|
|
|
7,885,813
|
|
|
|
4,737,864
|
|
|
|
606,492
|
|
|
|
22,117,426
|
|
|
|
64,556
|
|
|
|
22,181,982
|
|
F-41
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from January 1, 2004 through August 1,
2004 Predecessor
|
|
|
|
|
|
|
Retirement
|
|
|
Income
|
|
|
|
|
|
|
|
|
Continuing
|
|
|
Discontinued
|
|
|
|
|
|
|
Group
|
|
|
Services
|
|
|
Annuities
|
|
|
Individual
|
|
|
Other
|
|
|
Operations
|
|
|
Operations
|
|
|
Total
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
|
|
$
|
293,213
|
|
|
$
|
92
|
|
|
$
|
|
|
|
$
|
64,620
|
|
|
$
|
|
|
|
$
|
357,925
|
|
|
$
|
|
|
|
$
|
357,925
|
|
Net investment income
|
|
|
13,632
|
|
|
|
225,008
|
|
|
|
290,328
|
|
|
|
139,063
|
|
|
|
25,671
|
|
|
|
693,702
|
|
|
|
754
|
|
|
|
694,456
|
|
Other revenue
|
|
|
8,323
|
|
|
|
15,755
|
|
|
|
276
|
|
|
|
14,774
|
|
|
|
4,815
|
|
|
|
43,943
|
|
|
|
13,729
|
|
|
|
57,672
|
|
Net realized investment gains
|
|
|
143
|
|
|
|
2,372
|
|
|
|
12,751
|
|
|
|
5,225
|
|
|
|
14,401
|
|
|
|
34,892
|
|
|
|
125
|
|
|
|
35,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
315,311
|
|
|
|
243,227
|
|
|
|
303,355
|
|
|
|
223,682
|
|
|
|
44,887
|
|
|
|
1,130,462
|
|
|
|
14,608
|
|
|
|
1,145,070
|
|
Benefits and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder benefits and claims
|
|
|
196,468
|
|
|
|
172
|
|
|
|
|
|
|
|
26,938
|
|
|
|
|
|
|
|
223,578
|
|
|
|
|
|
|
|
223,578
|
|
Interest credited
|
|
|
|
|
|
|
155,403
|
|
|
|
274,800
|
|
|
|
126,230
|
|
|
|
|
|
|
|
556,433
|
|
|
|
|
|
|
|
556,433
|
|
Other underwriting and operating expenses
|
|
|
78,727
|
|
|
|
36,789
|
|
|
|
9,522
|
|
|
|
36,059
|
|
|
|
21,237
|
|
|
|
182,334
|
|
|
|
11,077
|
|
|
|
193,411
|
|
Amortization of deferred policy acquisition costs
|
|
|
10,537
|
|
|
|
16,313
|
|
|
|
|
|
|
|
7,314
|
|
|
|
|
|
|
|
34,164
|
|
|
|
|
|
|
|
34,164
|
|
Intangibles and goodwill amortization
|
|
|
794
|
|
|
|
801
|
|
|
|
|
|
|
|
1,746
|
|
|
|
1,588
|
|
|
|
4,929
|
|
|
|
|
|
|
|
4,929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses
|
|
|
286,526
|
|
|
|
209,478
|
|
|
|
284,322
|
|
|
|
198,287
|
|
|
|
22,825
|
|
|
|
1,001,438
|
|
|
|
11,077
|
|
|
|
1,012,515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pre-tax income
|
|
|
28,785
|
|
|
|
33,749
|
|
|
|
19,033
|
|
|
|
25,395
|
|
|
|
22,062
|
|
|
|
129,024
|
|
|
|
3,531
|
|
|
|
132,555
|
|
Less: Net realized investment gains
|
|
|
143
|
|
|
|
2,372
|
|
|
|
12,751
|
|
|
|
5,225
|
|
|
|
14,401
|
|
|
|
34,892
|
|
|
|
125
|
|
|
|
35,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pre-tax operating income
|
|
$
|
28,642
|
|
|
$
|
31,377
|
|
|
$
|
6,282
|
|
|
$
|
20,170
|
|
|
$
|
7,661
|
|
|
$
|
94,132
|
|
|
$
|
3,406
|
|
|
$
|
97,538
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share represent the amount of earnings for
the period available to each share of common stock outstanding
during the reporting period. Diluted earnings per share
represent 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. All outstanding warrants are considered participating
securities or potential common stock securities that are
included in weighted average common shares outstanding for
purposes of computing basic earnings per share using the
two-class method. The warrants are considered participating
securities or potential common stock securities because the
terms of the warrants entitle the holders to receive any
dividends declared on the common stock concurrently with the
holders of outstanding shares of common stock, without regard to
whether the warrants are exercised prior to the record date for
any such dividend. The outstanding shares of common stock and
outstanding warrants to purchase common stock have been
retroactively adjusted to reflect the impact of a common stock
split effected in the form of a dividend (see Note 22 for
more information).
F-42
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table presents information relating to the
Companys calculations of basic and diluted earnings per
share (EPS) for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
December 31, 2005
|
|
|
|
|
|
|
Basic
|
|
|
Diluted
|
|
|
|
|
|
Basic
|
|
|
Diluted
|
|
|
|
Amount
|
|
|
EPS
|
|
|
EPS
|
|
|
Amount
|
|
|
EPS
|
|
|
EPS
|
|
|
|
(In thousands, except for per share data)
|
|
|
Income from continuing operations
|
|
$
|
159,530
|
|
|
$
|
1.43
|
|
|
$
|
1.43
|
|
|
$
|
144,442
|
|
|
$
|
1.29
|
|
|
$
|
1.29
|
|
Discontinued operations, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,045
|
|
|
|
0.01
|
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
159,530
|
|
|
$
|
1.43
|
|
|
$
|
1.43
|
|
|
$
|
145,487
|
|
|
$
|
1.30
|
|
|
$
|
1.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributed
|
|
$
|
83,000
|
|
|
$
|
0.90
|
|
|
$
|
0.90
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Undistributed
|
|
|
49,410
|
|
|
|
0.53
|
|
|
|
0.53
|
|
|
|
120,754
|
|
|
|
1.30
|
|
|
|
1.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
132,410
|
|
|
$
|
1.43
|
|
|
$
|
1.43
|
|
|
$
|
120,754
|
|
|
$
|
1.30
|
|
|
$
|
1.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributed
|
|
$
|
17,000
|
|
|
$
|
0.90
|
|
|
$
|
0.90
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Undistributed
|
|
|
10,120
|
|
|
|
0.53
|
|
|
|
0.53
|
|
|
|
24,733
|
|
|
|
1.30
|
|
|
|
1.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
27,120
|
|
|
$
|
1.43
|
|
|
$
|
1.43
|
|
|
$
|
24,733
|
|
|
$
|
1.30
|
|
|
$
|
1.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
Diluted
|
|
|
|
|
Basic
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
|
|
92,646
|
|
|
|
92,646
|
|
|
|
|
|
92,646
|
|
|
|
92,646
|
|
Warrants
|
|
|
|
|
18,976
|
|
|
|
18,976
|
|
|
|
|
|
18,976
|
|
|
|
18,976
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shares
|
|
|
|
|
111,622
|
|
|
|
111,622
|
|
|
|
|
|
111,622
|
|
|
|
111,622
|
|
|
|
22.
|
Common
Stock Dividend and Amendment to Certificate of
Incorporation
|
On September 28, 2007, the Company filed an amendment to
its Certificate of Incorporation with the Delaware Secretary of
State which increased the Companys authorized shares of
common stock to 750,000,000 shares.
On October 26, 2007, the Company executed a 7.7-for-1 stock
dividend (substantially equivalent to an 8.7-for-1 stock split)
that increased the shares of common stock outstanding from
10,649,000 to 92,646,295, and the number of shares subject to
outstanding warrants from 2,181,120 to 18,975,744. The stock
split, effected in the form of a dividend, has been reflected
retroactively in these financial statements for all periods
presented.
F-43
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
(In millions)
|
|
|
ASSETS
|
Investments:
|
|
|
|
|
|
|
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
Fixed maturities, at fair value (amortized cost:
|
|
|
|
|
|
|
|
|
$15,774.1 and $16,086.6, respectively)
|
|
$
|
15,587.4
|
|
|
$
|
16,049.9
|
|
Marketable equity securities, at fair value (cost:
|
|
|
|
|
|
|
|
|
$171.8 and $171.0, respectively)
|
|
|
203.8
|
|
|
|
201.7
|
|
Mortgage loans
|
|
|
818.6
|
|
|
|
794.3
|
|
Policy loans
|
|
|
77.9
|
|
|
|
79.2
|
|
Short-term investments
|
|
|
5.0
|
|
|
|
48.9
|
|
Investments in limited partnerships
|
|
|
160.1
|
|
|
|
112.6
|
|
Other invested assets
|
|
|
11.4
|
|
|
|
18.7
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
|
16,864.2
|
|
|
|
17,305.3
|
|
Cash and cash equivalents
|
|
|
251.0
|
|
|
|
253.2
|
|
Restricted funds
|
|
|
8.6
|
|
|
|
|
|
Accrued investment income
|
|
|
214.0
|
|
|
|
206.7
|
|
Accounts receivable and other receivables
|
|
|
67.7
|
|
|
|
82.0
|
|
Reinsurance recoverables
|
|
|
247.0
|
|
|
|
238.8
|
|
Deferred policy acquisition costs
|
|
|
117.7
|
|
|
|
88.2
|
|
Goodwill
|
|
|
21.8
|
|
|
|
3.7
|
|
Current income tax recoverable
|
|
|
6.0
|
|
|
|
|
|
Deferred income tax assets, net
|
|
|
249.3
|
|
|
|
219.1
|
|
Property, equipment, and leasehold improvements, net
|
|
|
24.7
|
|
|
|
28.1
|
|
Other assets
|
|
|
28.9
|
|
|
|
16.3
|
|
Securities lending collateral
|
|
|
367.8
|
|
|
|
439.3
|
|
Separate account assets
|
|
|
1,260.5
|
|
|
|
1,233.9
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
19,729.2
|
|
|
$
|
20,114.6
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Funds held under deposit contracts
|
|
$
|
15,630.4
|
|
|
$
|
15,986.2
|
|
Future policy benefits
|
|
|
384.4
|
|
|
|
376.4
|
|
Policy and contract claims
|
|
|
117.5
|
|
|
|
119.5
|
|
Unearned premiums
|
|
|
11.6
|
|
|
|
11.7
|
|
Other policyholders funds
|
|
|
59.4
|
|
|
|
46.4
|
|
Notes payable
|
|
|
298.8
|
|
|
|
298.7
|
|
Current income taxes payable
|
|
|
|
|
|
|
2.6
|
|
Other liabilities
|
|
|
233.2
|
|
|
|
272.6
|
|
Securities lending payable
|
|
|
367.8
|
|
|
|
439.3
|
|
Separate account liabilities
|
|
|
1,260.5
|
|
|
|
1,233.9
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
18,363.6
|
|
|
|
18,787.3
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Capital stock
|
|
|
0.9
|
|
|
|
0.9
|
|
Additional paid-in capital
|
|
|
1,165.5
|
|
|
|
1,165.5
|
|
Retained earnings
|
|
|
301.5
|
|
|
|
161.4
|
|
Accumulated other comprehensive income (loss), net of taxes
|
|
|
(102.3
|
)
|
|
|
(0.5
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
1,365.6
|
|
|
|
1,327.3
|
|
Total liabilities and stockholders equity
|
|
$
|
19,729.2
|
|
|
$
|
20,114.6
|
|
|
|
|
|
|
|
|
|
|
F-44
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
(In millions, except for per share data)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
|
|
$
|
132.9
|
|
|
$
|
128.8
|
|
|
$
|
397.9
|
|
|
$
|
398.0
|
|
Net investment income
|
|
|
241.4
|
|
|
|
243.5
|
|
|
|
732.3
|
|
|
|
734.0
|
|
Other revenues
|
|
|
17.7
|
|
|
|
13.0
|
|
|
|
50.4
|
|
|
|
42.7
|
|
Net realized investment gains (losses)
|
|
|
(0.7
|
)
|
|
|
(4.4
|
)
|
|
|
23.8
|
|
|
|
(4.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
391.3
|
|
|
|
380.9
|
|
|
|
1,204.4
|
|
|
|
1,169.8
|
|
Benefits and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder benefits and claims
|
|
|
60.4
|
|
|
|
62.2
|
|
|
|
196.5
|
|
|
|
209.8
|
|
Interest credited
|
|
|
190.8
|
|
|
|
189.7
|
|
|
|
564.9
|
|
|
|
571.9
|
|
Other underwriting and operating expenses
|
|
|
68.7
|
|
|
|
62.1
|
|
|
|
209.9
|
|
|
|
191.9
|
|
Interest expense
|
|
|
4.8
|
|
|
|
4.7
|
|
|
|
14.1
|
|
|
|
14.5
|
|
Amortization of deferred policy acquisition costs
|
|
|
4.8
|
|
|
|
3.4
|
|
|
|
14.2
|
|
|
|
11.0
|
|
Intangible asset amortization
|
|
|
0.2
|
|
|
|
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses
|
|
|
329.7
|
|
|
|
322.1
|
|
|
|
999.8
|
|
|
|
999.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes
|
|
|
61.6
|
|
|
|
58.8
|
|
|
|
204.6
|
|
|
|
170.7
|
|
Provision for income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
(2.9
|
)
|
|
|
13.1
|
|
|
|
46.1
|
|
|
|
72.5
|
|
Deferred
|
|
|
23.1
|
|
|
|
7.5
|
|
|
|
20.9
|
|
|
|
(12.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision for income taxes
|
|
|
20.2
|
|
|
|
20.6
|
|
|
|
67.0
|
|
|
|
59.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
41.4
|
|
|
$
|
38.2
|
|
|
$
|
137.6
|
|
|
$
|
110.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.37
|
|
|
$
|
0.34
|
|
|
$
|
1.23
|
|
|
$
|
0.99
|
|
Diluted
|
|
$
|
0.37
|
|
|
$
|
0.34
|
|
|
$
|
1.23
|
|
|
$
|
0.99
|
|
Weighted average number of common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
111.622
|
|
|
|
111.622
|
|
|
|
111.622
|
|
|
|
111.622
|
|
Diluted
|
|
|
111.622
|
|
|
|
111.622
|
|
|
|
111.622
|
|
|
|
111.622
|
|
F-45
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Comprehensive
|
|
|
Total
|
|
|
|
Capital
|
|
|
Paid-in
|
|
|
Retained
|
|
|
Income (loss),
|
|
|
Stockholders
|
|
|
|
Stock
|
|
|
Capital
|
|
|
Earnings
|
|
|
Net of Taxes
|
|
|
Equity
|
|
|
|
(Unaudited)
|
|
|
|
(In millions)
|
|
|
Balances at January 1, 2006
|
|
|
0.9
|
|
|
|
1,165.5
|
|
|
|
101.9
|
|
|
|
136.6
|
|
|
|
1,404.9
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
110.9
|
|
|
|
|
|
|
|
110.9
|
|
Other comprehensive income (loss), after tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(141.0
|
)
|
|
|
(141.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at September 30, 2006
|
|
|
0.9
|
|
|
|
1,165.5
|
|
|
|
212.8
|
|
|
|
(4.4
|
)
|
|
|
1,374.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at January 1, 2007
|
|
|
0.9
|
|
|
|
1,165.5
|
|
|
|
161.4
|
|
|
|
(0.5
|
)
|
|
|
1,327.3
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
137.6
|
|
|
|
|
|
|
|
137.6
|
|
Other comprehensive income (loss), after tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(99.3
|
)
|
|
|
(99.3
|
)
|
Cumulative effect adjustment upon adoption of
SFAS No. 155
|
|
|
|
|
|
|
|
|
|
|
2.5
|
|
|
|
(2.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at September 30, 2007
|
|
|
0.9
|
|
|
|
1,165.5
|
|
|
|
301.5
|
|
|
|
(102.3
|
)
|
|
|
1,365.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-46
CONSOLIDATED
STATEMENT OF COMPREHENSIVE INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
(In millions)
|
|
|
Net income
|
|
|
41.4
|
|
|
|
38.2
|
|
|
|
137.6
|
|
|
|
110.9
|
|
Other comprehensive income (loss), net of taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in unrealized gains and losses on available-for-sales
securities
|
|
|
80.4
|
|
|
|
341.1
|
|
|
|
(83.9
|
)
|
|
|
(147.8
|
)
|
Reclassification adjustment for net realized investment gains
included in net income
|
|
|
0.8
|
|
|
|
4.2
|
|
|
|
(15.4
|
)
|
|
|
3.8
|
|
Derivatives qualifying as cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net change in fair value
|
|
|
(3.6
|
)
|
|
|
(0.1
|
)
|
|
|
(3.7
|
)
|
|
|
3.0
|
|
Adjustment for deferred policy acquisition costs valuation
allowance
|
|
|
(1.0
|
)
|
|
|
(0.4
|
)
|
|
|
1.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
76.6
|
|
|
|
344.8
|
|
|
|
(101.8
|
)
|
|
|
(141.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
|
118.0
|
|
|
|
383.0
|
|
|
|
35.8
|
|
|
|
(30.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-47
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
(In millions)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
137.6
|
|
|
$
|
110.9
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
Net realized investment (gains) losses
|
|
|
(23.8
|
)
|
|
|
4.9
|
|
Accretion of fixed maturity investments and mortgage loans
|
|
|
46.8
|
|
|
|
54.3
|
|
Accrued interest on accrual bonds
|
|
|
(29.5
|
)
|
|
|
(32.8
|
)
|
Amortization and depreciation
|
|
|
10.0
|
|
|
|
8.7
|
|
Deferred income tax provision
|
|
|
20.9
|
|
|
|
(12.7
|
)
|
Interest credited on deposit contracts
|
|
|
564.9
|
|
|
|
571.9
|
|
Mortality and expense charges and administrative fees
|
|
|
(70.3
|
)
|
|
|
(68.2
|
)
|
Changes in:
|
|
|
|
|
|
|
|
|
Accrued investment income
|
|
|
(7.3
|
)
|
|
|
(11.7
|
)
|
Deferred policy acquisition costs
|
|
|
(27.6
|
)
|
|
|
(29.2
|
)
|
Other receivables
|
|
|
22.6
|
|
|
|
5.0
|
|
Policy and contract claims
|
|
|
(2.0
|
)
|
|
|
(10.2
|
)
|
Future policy benefits
|
|
|
8.0
|
|
|
|
2.9
|
|
Unearned premiums
|
|
|
(0.1
|
)
|
|
|
0.6
|
|
Accrued income taxes
|
|
|
(8.2
|
)
|
|
|
40.1
|
|
Other assets and liabilities
|
|
|
(84.6
|
)
|
|
|
(4.9
|
)
|
Other policyholder funds
|
|
|
8.4
|
|
|
|
(8.5
|
)
|
Other, net
|
|
|
0.6
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
Total adjustments
|
|
|
428.8
|
|
|
|
510.3
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
566.4
|
|
|
|
621.2
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases of:
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
|
(1,985.1
|
)
|
|
|
(1,277.3
|
)
|
Equity securities
|
|
|
(44.9
|
)
|
|
|
(51.8
|
)
|
Other invested assets and investments in limited partnerships
|
|
|
(33.0
|
)
|
|
|
(1.6
|
)
|
Issuance of mortgage loans
|
|
|
(99.0
|
)
|
|
|
(105.3
|
)
|
Issuance of policy loans
|
|
|
(13.3
|
)
|
|
|
(15.3
|
)
|
Maturities, calls, paydowns, other
|
|
|
762.7
|
|
|
|
639.0
|
|
Purchase of subsidiary, net of cash received
|
|
|
(21.9
|
)
|
|
|
|
|
Other assets
|
|
|
(0.5
|
)
|
|
|
(0.6
|
)
|
Sales of:
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
|
1,526.9
|
|
|
|
1,139.9
|
|
Equity securities
|
|
|
52.0
|
|
|
|
38.6
|
|
Other invested assets and investments in limited partnerships
|
|
|
|
|
|
|
1.2
|
|
Repayment of mortgage loans
|
|
|
71.6
|
|
|
|
71.7
|
|
Repayment of policy loans
|
|
|
13.7
|
|
|
|
15.6
|
|
Purchase of property, equipment and leasehold improvements
|
|
|
(1.9
|
)
|
|
|
(2.8
|
)
|
Net decrease in short-term investments
|
|
|
43.9
|
|
|
|
(11.6
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities
|
|
|
271.2
|
|
|
|
439.7
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Policyholder account balances:
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
543.5
|
|
|
|
497.6
|
|
Withdrawals
|
|
|
(1,377.9
|
)
|
|
|
(1,475.9
|
)
|
Repayments of notes payable
|
|
|
|
|
|
|
(300.0
|
)
|
Proceeds from notes payable
|
|
|
|
|
|
|
298.7
|
|
Other, net
|
|
|
(5.4
|
)
|
|
|
1.8
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(839.8
|
)
|
|
|
(977.8
|
)
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(2.2
|
)
|
|
|
83.1
|
|
Cash and cash equivalents at the beginning of the period
|
|
|
253.2
|
|
|
|
111.0
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of the period
|
|
$
|
251.0
|
|
|
$
|
194.1
|
|
|
|
|
|
|
|
|
|
|
F-48
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
1.
|
Nature of
Operations and Summary of Significant Accounting
Policies
|
Organization,
Capital Stock and Description of Business
The accompanying interim financial statements include on a
consolidated basis the accounts of Symetra Financial Corporation
and its subsidiaries which are referred to as Symetra
Financial or the Company. Symetra Financial
Corporation is a Delaware corporation privately owned by an
investor group led by White Mountains Insurance Group, Ltd. and
Berkshire Hathaway Inc.
On September 28, 2007, the Company filed an amendment to
its Certificate of Incorporation with the Delaware Secretary of
State which increased the Companys authorized shares of
common stock to 750,000,000 shares.
Symetra Financial Corporations subsidiaries offer group
and individual insurance products and retirement products,
including annuities marketed through professional agents and
distributors in all states and the District of Columbia. The
Companys principal products include medical stop-loss
insurance, fixed deferred annuities, variable annuities, single
premium immediate annuities, and individual life insurance.
Basis
of presentation
The Consolidated Financial Statements have been prepared in
conformity with U.S. generally accepted accounting
principles (GAAP). 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
Consolidated Financial Statements and accompanying notes. Actual
results could differ from those estimates.
The most significant estimates include those used in determining
reserves for future policy benefits, deferred policy acquisition
costs (DAC), valuation of investments and evaluation of
other-than-temporary impairments, income taxes, and
contingencies. All significant intercompany transactions and
balances have been eliminated in the Consolidated Financial
Statements.
Certain reclassifications have been made to the prior year
financial information for it to conform to the current period
presentation.
Recently
Adopted Changes in Accounting Principles
FASB Interpretation No. 48, Accounting for Uncertainty
in Income Taxes An Interpretation of FASB Statement
No. 109
In June 2006, the FASB issued FASB Interpretation (FIN)
No. 48, Accounting for Uncertainty in Income Taxes, an
Interpretation of FASB Statement No. 109, Accounting
for Income Taxes. FIN No. 48 clarifies the
accounting for uncertainty in income taxes recognized in an
enterprises financial statements in accordance with
SFAS No. 109. FIN No. 48 prescribes a
recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return.
FIN No. 48 also provides guidance on de-recognition,
classification, interest and penalties, accounting in interim
periods, disclosure, and transition. FIN No. 48 is
effective for fiscal years beginning after December 15,
2006. The Company adopted FIN No. 48 as of
January 1, 2007, as required.
Upon adoption of FIN No. 48, the Company did not
recognize an increase in the liability for unrecognized tax
benefits or an adjustment to retained earnings.
The Company includes penalties and interest accrued related to
unrecognized tax benefits in the calculation of income tax
expense. During the three and nine month periods ended
September 30, 2007 and 2006, amounts recognized for
interest and penalties and amounts accrued for the payment of
interest and penalties were not material.
The Company files income tax returns in the U.S. Federal
and various state jurisdictions. The Companys Federal
income tax returns have been examined and closing agreements
have been executed with the Internal
F-49
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Revenue Service through the tax period ended December 31,
2003. Final computations are being reviewed by the Joint
Committee on Taxation. The Internal Revenue Service has
commenced an audit of our returns for tax years ended
July 31, 2004, December 31, 2004 and December 31,
2005. To date, no significant tax issues or proposed adjustments
have been raised by the examiners. The Company is not currently
subject to any state income tax examinations.
SFAS No. 155,
Accounting for Certain Hybrid Financial Instruments
In February 2006, the FASB issued SFAS No. 155,
Accounting for Certain Hybrid Financial Instruments.
SFAS No. 155 amends certain paragraphs of
SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, and SFAS No. 140,
Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities. SFAS No. 155
also resolves issues addressed in SFAS No. 133
Implementation Issue No. D1, Application of Statement
133 to Beneficial Interests in Securitized Financial Assets.
In summary, SFAS No. 155 eliminates the requirement to
bifurcate financial instruments with embedded derivatives if the
holder of the instrument elects to account for the entire
instrument on a fair value basis. Changes in fair value are
recorded as realized gains. The fair value election may be
applied upon adoption of the statement for hybrid instruments
that had been bifurcated under SFAS 133 prior to adoption.
SFAS No. 155 is effective for all financial
instruments acquired or issued after the beginning of an
entitys first fiscal year that begins after
September 15, 2006. Provisions of SFAS No. 155
may be applied to instruments that an entity holds at the date
of adoption on an
instrument-by-instrument
basis.
The Company adopted SFAS No. 155 as of January 1,
2007, as required. Prior to adoption, the Company bifurcated the
equity conversion option in its investment in convertible bonds.
Changes in fair value of the host instrument, the convertible
bonds, were recorded as unrealized gains (losses) on investments
while changes in the fair value of the equity conversion option
were recorded as realized investment gains (losses). At
December 31, 2006, the Company recorded $68.3 million
related to the fair value of host instrument in fixed maturity
investments and $8.3 million related to the fair value of
the equity conversion options in other investments. Upon
adoption of SFAS No. 155, the Company recorded an
adjustment of $2.5 million, net of tax, to reclassify net
unrealized gains on investments to beginning retained earnings
to reflect the cumulative effective of adoption. At
September 30, 2007 the Company recorded $84.9 million
of convertible bonds recorded in fixed maturities, and at
December 31, 2006, the Company had $76.6 million.
American
Institute of Certified Public Accountants (AICPA) Statement of
Position (SOP)
05-1,
Accounting by Insurance Enterprises for Deferred Acquisition
Costs in Connection with Modifications or Exchanges of Insurance
Contracts
In September 2005, the AICPA issued
SOP 05-1,
Accounting by Insurance Enterprises for Deferred Acquisition
Costs in Connection with Modifications or Exchanges of Insurance
Contracts.
SOP 05-1
provides guidance on accounting by insurance enterprises for
deferred acquisition costs on internal replacements of insurance
and investment contracts other than those specifically described
in SFAS No. 97, Accounting and Reporting by
Insurance Enterprises for Certain Long-Duration Contracts and
For Realized Gains and Losses from the Sale of Investments.
SOP 05-1
defines an internal replacement as a modification in product
benefits, features, rights, or coverages that occurs by the
exchange of a contract for a new contract, or by amendment,
endorsement, or rider to a contract, or by the election of a
feature or coverage within a contract. Under
SOP 05-1,
modifications that result in a substantially unchanged contract
will be accounted for as a continuation of the replaced
contract. A replacement contract that is substantially changed
will be accounted for as an extinguishment of the replaced
contract, resulting in a release of unamortized DAC, unearned
revenue, and deferred sales inducements associated with the
replaced contract.
The provisions of
SOP 05-1
are effective for fiscal years beginning after December 15,
2006. The Company adopted
SOP 05-1
effective on January 1, 2007 as required. The adoption of
SOP 05-1
did not have a material impact on the Companys financial
position.
F-50
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Recent
Accounting Pronouncements
Fair
Value Measurements
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements. The Statement provides a revised
definition of fair value and guidance on the methods used to
measure fair value. The Statement also expands financial
statement disclosure requirements for fair value information.
The Statement establishes a fair value hierarchy that
distinguishes between assumptions based on market data from
independent sources (observable inputs) and a
reporting entitys internal assumptions based upon the best
information available when external market data is limited or
unavailable (unobservable inputs). The fair value
hierarchy in SFAS No. 157 prioritizes inputs within
three levels: quoted prices in active markets have the highest
priority (Level 1) followed by observable inputs other
than quoted prices (Level 2) and unobservable inputs
having the lowest priority (Level 3). The Statement is
effective for financial statements issued for fiscal years
beginning after November 15, 2007, with earlier application
allowed for entities that have not issued financial statements
in the fiscal year of adoption. The Company is in the process of
determining the effect, if any, the adoption of SFAS
No. 157 will have on its consolidated financial statements.
Fair
Value Option
In February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities. The Statement allows companies to make an
election, on an individual instrument basis, to report financial
assets and liabilities at fair value. The election must be made
at the inception of a transaction and may not be reversed. The
election may also be made for existing financial assets and
liabilities at the time of adoption. Unrealized gains and losses
on assets or liabilities for which the fair value option has
been elected are to be reported in earnings. The Statement
requires additional disclosures for instruments for which the
election has been made, including a description of
managements reasons for making the election. SFAS
No. 159 is effective as of fiscal years beginning after
November 15, 2007 and is to be adopted prospectively and
concurrent with the adoption of SFAS No. 157. The Company
is in the process of determining the effect, if any, the
adoption of SFAS No. 159 will have on its consolidated
financial statements.
The following tables summarize the Companys fixed
maturities and marketable equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2007
|
|
|
|
Cost or
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies
|
|
$
|
190.8
|
|
|
$
|
0.9
|
|
|
$
|
(3.0
|
)
|
|
$
|
188.7
|
|
State and political subdivisions
|
|
|
498.3
|
|
|
|
4.8
|
|
|
|
(4.6
|
)
|
|
|
498.5
|
|
Foreign government
|
|
|
136.0
|
|
|
|
1.0
|
|
|
|
(0.4
|
)
|
|
|
136.6
|
|
Corporate securities
|
|
|
10,450.6
|
|
|
|
88.0
|
|
|
|
(236.1
|
)
|
|
|
10,302.5
|
|
Mortgage-backed securities
|
|
|
4,498.4
|
|
|
|
22.6
|
|
|
|
(59.9
|
)
|
|
|
4,461.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
15,774.1
|
|
|
|
117.3
|
|
|
|
(304.0
|
)
|
|
|
15,587.4
|
|
Marketable equity securities
|
|
|
171.8
|
|
|
|
34.9
|
|
|
|
(2.9
|
)
|
|
|
203.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
15,945.9
|
|
|
$
|
152.2
|
|
|
$
|
(306.9
|
)
|
|
$
|
15,791.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-51
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006
|
|
|
|
Cost or
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
(In millions)
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies
|
|
$
|
157.0
|
|
|
$
|
1.8
|
|
|
$
|
(0.9
|
)
|
|
$
|
157.9
|
|
State and political subdivisions
|
|
|
666.1
|
|
|
|
9.3
|
|
|
|
(4.5
|
)
|
|
|
670.9
|
|
Foreign government
|
|
|
205.2
|
|
|
|
4.2
|
|
|
|
(0.5
|
)
|
|
|
208.9
|
|
Corporate securities
|
|
|
10,670.7
|
|
|
|
164.3
|
|
|
|
(168.5
|
)
|
|
|
10,666.5
|
|
Mortgage-backed securities
|
|
|
4,387.6
|
|
|
|
26.7
|
|
|
|
(68.6
|
)
|
|
|
4,345.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
16,086.6
|
|
|
|
206.3
|
|
|
|
(243.0
|
)
|
|
|
16,049.9
|
|
Marketable equity securities
|
|
|
171.0
|
|
|
|
32.0
|
|
|
|
(1.3
|
)
|
|
|
201.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
16,257.6
|
|
|
$
|
238.3
|
|
|
$
|
(244.3
|
)
|
|
$
|
16,251.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table shows the Companys investments
gross unrealized losses and fair values, aggregated by
investment category and length of time that individual
securities have been in a continuous unrealized loss position.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
|
(In millions)
|
|
|
September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies
|
|
$
|
43.0
|
|
|
$
|
(0.6
|
)
|
|
$
|
80.9
|
|
|
$
|
(2.4
|
)
|
|
$
|
123.9
|
|
|
$
|
(3.0
|
)
|
State and political subdivisions
|
|
|
89.7
|
|
|
|
(1.3
|
)
|
|
|
141.6
|
|
|
|
(3.3
|
)
|
|
|
231.3
|
|
|
|
(4.6
|
)
|
Foreign government
|
|
|
55.2
|
|
|
|
(0.2
|
)
|
|
|
16.7
|
|
|
|
(0.2
|
)
|
|
|
71.9
|
|
|
|
(0.4
|
)
|
Corporate securities
|
|
|
3,268.8
|
|
|
|
(105.1
|
)
|
|
|
3,848.3
|
|
|
|
(131.0
|
)
|
|
|
7,117.1
|
|
|
|
(236.1
|
)
|
Mortgage-backed securities
|
|
|
1,137.1
|
|
|
|
(18.8
|
)
|
|
|
1,972.8
|
|
|
|
(41.1
|
)
|
|
|
3,109.9
|
|
|
|
(59.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
4,593.8
|
|
|
|
(126.0
|
)
|
|
|
6,060.3
|
|
|
|
(178.0
|
)
|
|
|
10,654.1
|
|
|
|
(304.0
|
)
|
Marketable equity securities
|
|
|
45.2
|
|
|
|
(1.6
|
)
|
|
|
2.7
|
|
|
|
(1.3
|
)
|
|
|
47.9
|
|
|
|
(2.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,639.0
|
|
|
$
|
(127.6
|
)
|
|
$
|
6,063.0
|
|
|
$
|
(179.3
|
)
|
|
$
|
10,702.0
|
|
|
$
|
(306.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-52
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
|
(In millions)
|
|
|
December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies
|
|
$
|
52.7
|
|
|
|
(0.7
|
)
|
|
$
|
24.7
|
|
|
$
|
(0.2
|
)
|
|
$
|
77.4
|
|
|
$
|
(0.9
|
)
|
State and political subdivisions
|
|
|
219.6
|
|
|
|
(2.9
|
)
|
|
|
65.7
|
|
|
|
(1.6
|
)
|
|
|
285.3
|
|
|
|
(4.5
|
)
|
Foreign government
|
|
|
14.4
|
|
|
|
(0.2
|
)
|
|
|
11.1
|
|
|
|
(0.3
|
)
|
|
|
25.5
|
|
|
|
(0.5
|
)
|
Corporate securities
|
|
|
2,732.6
|
|
|
|
(55.8
|
)
|
|
|
3,686.9
|
|
|
|
(112.7
|
)
|
|
|
6,419.5
|
|
|
|
(168.5
|
)
|
Mortgage-backed securities
|
|
|
1,501.5
|
|
|
|
(22.8
|
)
|
|
|
1,888.3
|
|
|
|
(45.8
|
)
|
|
|
3,389.8
|
|
|
|
(68.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
4,520.8
|
|
|
|
(82.4
|
)
|
|
|
5,676.7
|
|
|
|
(160.6
|
)
|
|
|
10,197.5
|
|
|
|
(243.0
|
)
|
Marketable equity securities
|
|
|
9.8
|
|
|
|
(0.2
|
)
|
|
|
2.9
|
|
|
|
(1.1
|
)
|
|
|
12.7
|
|
|
|
(1.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,530.6
|
|
|
$
|
(82.6
|
)
|
|
$
|
5,679.6
|
|
|
$
|
(161.7
|
)
|
|
$
|
10,210.2
|
|
|
$
|
(244.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company recorded impairment charges of fixed maturity
investments and equity securities totaling $3.3 million and
$10.7 million for the three months ended September 30,
2007 and 2006, respectively, and impairment charges totaling
$8.2 million and $24.4 million for the nine months
ended September 30, 2007
F-53
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and 2006, respectively. The following tables summarize the net
realized investment gains before income taxes for the three and
nine months ended September 30, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
For the Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(In millions)
|
|
|
Gross realized gain on sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Maturities
|
|
$
|
5.4
|
|
|
$
|
4.9
|
|
|
$
|
32.5
|
|
|
$
|
21.4
|
|
Marketable equity securities
|
|
|
1.4
|
|
|
|
4.1
|
|
|
|
11.8
|
|
|
|
11.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross realized gains on sales
|
|
|
6.8
|
|
|
|
9.0
|
|
|
|
44.3
|
|
|
|
32.9
|
|
Gross realized losses on sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Maturities
|
|
|
(3.7
|
)
|
|
|
(4.4
|
)
|
|
|
(11.6
|
)
|
|
|
(13.9
|
)
|
Marketable equity securities
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
(2.3
|
)
|
|
|
(0.1
|
)
|
Other
|
|
|
(0.8
|
)
|
|
|
|
|
|
|
(0.8
|
)
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross realized losses on sales
|
|
|
(4.8
|
)
|
|
|
(4.4
|
)
|
|
|
(14.7
|
)
|
|
|
(14.1
|
)
|
Impairments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Maturities
|
|
|
(3.3
|
)
|
|
|
(10.7
|
)
|
|
|
(7.8
|
)
|
|
|
(23.3
|
)
|
Marketable equity securities
|
|
|
|
|
|
|
|
|
|
|
(0.4
|
)
|
|
|
(1.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impairments
|
|
|
(3.3
|
)
|
|
|
(10.7
|
)
|
|
|
(8.2
|
)
|
|
|
(24.4
|
)
|
Other, including gains (losses) on calls and redemptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Maturities
|
|
|
(0.6
|
)
|
|
|
0.8
|
|
|
|
1.6
|
|
|
|
0.6
|
|
Marketable equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.9
|
)
|
Other
|
|
|
1.2
|
|
|
|
0.9
|
|
|
|
0.8
|
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other
|
|
|
0.6
|
|
|
|
1.7
|
|
|
|
2.4
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment gains (losses)
|
|
$
|
(0.7
|
)
|
|
$
|
(4.4
|
)
|
|
$
|
23.8
|
|
|
$
|
(4.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the Companys consolidated
pretax net investment income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine
|
|
|
|
For the Three Months Ended
|
|
|
Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(In millions)
|
|
|
Net investment income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
$
|
226.9
|
|
|
$
|
231.4
|
|
|
$
|
682.6
|
|
|
$
|
696.4
|
|
Marketable equity securities
|
|
|
1.6
|
|
|
|
1.3
|
|
|
|
5.4
|
|
|
|
6.5
|
|
Mortgage loans
|
|
|
12.2
|
|
|
|
12.6
|
|
|
|
36.7
|
|
|
|
36.3
|
|
Policy loans
|
|
|
1.2
|
|
|
|
1.2
|
|
|
|
3.6
|
|
|
|
3.7
|
|
Investments in limited partnerships
|
|
|
(1.0
|
)
|
|
|
(0.6
|
)
|
|
|
2.8
|
|
|
|
0.1
|
|
Other invested assets(1)
|
|
|
5.3
|
|
|
|
3.6
|
|
|
|
15.8
|
|
|
|
9.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investment Income
|
|
|
246.2
|
|
|
|
249.5
|
|
|
|
746.9
|
|
|
|
752.0
|
|
Less investment expense
|
|
|
(4.8
|
)
|
|
|
(6.0
|
)
|
|
|
(14.6
|
)
|
|
|
(18.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income, pre-tax
|
|
$
|
241.4
|
|
|
$
|
243.5
|
|
|
$
|
732.3
|
|
|
$
|
734.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-54
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
(1) |
|
Includes income from investments such as short-term, embedded
derivatives, a note receivable and options, and from cash and
cash equivalents. |
|
|
3.
|
Deferred
Policy Acquisitions Costs
|
Activities impacting deferred policy acquisition costs were as
follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In millions)
|
|
|
Unamortized balance at beginning of period
|
|
$
|
87.6
|
|
|
$
|
48.5
|
|
Deferral of acquisition costs
|
|
|
41.1
|
|
|
|
52.5
|
|
Amortization related to investment gains
|
|
|
0.7
|
|
|
|
1.2
|
|
Amortization related to other expenses
|
|
|
(14.2
|
)
|
|
|
(14.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
115.2
|
|
|
|
87.6
|
|
Accumulated effect of net unrealized gains
|
|
|
2.5
|
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
117.7
|
|
|
$
|
88.2
|
|
|
|
|
|
|
|
|
|
|
The Company provides a broad range of products and services that
include group and individual insurance products, pension
products, annuities, and investment advisory services. These
operations are managed separately as five reportable segments
based on product groupings: Group, Income Annuities, Retirement
Services, Individual, and Other:
|
|
|
|
|
Groups principal product is stop-loss medical insurance
sold to employers with self-insured medical plans. Also included
in this segment are group life, accidental death and
dismemberment insurance, and disability products.
|
|
|
|
Retirement Services products are primarily fixed and
variable deferred annuities (both qualified and non-qualified),
tax-sheltered annuities (marketed to teachers and not-for-profit
organizations), and section 457 plans, and group variable
annuities for qualified structured retirement plans. We also
provide record keeping services for qualified retirement plans
invested in mutual funds.
|
|
|
|
Income Annuities principal products are the structured
settlement annuities that are sold to fund third-party personal
injury settlements and single premium immediate annuities
purchased to fund income after retirement.
|
|
|
|
Individuals products include a wide array of term,
universal and variable universal life, and bank-owned life
insurance.
|
|
|
|
Other includes Symetra Financial Corporation (the holding
company), inter-segment elimination entries, various
non-insurance businesses managed outside of our operating
segments and unallocated income and expenses.
|
The accounting policies of the reportable segments are the same
as those described in the summary of significant accounting
policies.
F-55
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following tables present selected financial information by
segment, and reconciles pretax operating earnings to amounts
reported in the Consolidated Statements of Operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2007
|
|
|
|
|
|
|
Retirement
|
|
|
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Group
|
|
|
Services
|
|
|
Annuities
|
|
|
Individual
|
|
|
Other
|
|
|
Total
|
|
|
|
(In millions)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
|
|
$
|
98.1
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
34.8
|
|
|
$
|
|
|
|
$
|
132.9
|
|
Net investment income
|
|
|
4.7
|
|
|
|
60.5
|
|
|
|
108.1
|
|
|
|
61.1
|
|
|
|
7.0
|
|
|
|
241.4
|
|
Other revenues
|
|
|
4.4
|
|
|
|
6.0
|
|
|
|
0.1
|
|
|
|
3.8
|
|
|
|
3.4
|
|
|
|
17.7
|
|
Net realized investment gains (losses)
|
|
|
|
|
|
|
(2.7
|
)
|
|
|
2.9
|
|
|
|
(1.7
|
)
|
|
|
0.8
|
|
|
|
(0.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
107.2
|
|
|
|
63.8
|
|
|
|
111.1
|
|
|
|
98.0
|
|
|
|
11.2
|
|
|
$
|
391.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder benefits and claims
|
|
|
50.0
|
|
|
|
(2.0
|
)
|
|
|
|
|
|
|
12.4
|
|
|
|
|
|
|
|
60.4
|
|
Interest credited
|
|
|
|
|
|
|
41.8
|
|
|
|
94.2
|
|
|
|
55.0
|
|
|
|
(0.2
|
)
|
|
|
190.8
|
|
Other underwriting and operating expenses
|
|
|
27.7
|
|
|
|
16.6
|
|
|
|
5.4
|
|
|
|
13.8
|
|
|
|
5.2
|
|
|
|
68.7
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.8
|
|
|
|
4.8
|
|
Amortization of deferred policy acquisition costs
|
|
|
1.9
|
|
|
|
1.4
|
|
|
|
0.3
|
|
|
|
1.1
|
|
|
|
0.1
|
|
|
|
4.8
|
|
Intangible asset amortization
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses
|
|
|
79.8
|
|
|
|
57.8
|
|
|
|
99.9
|
|
|
|
82.3
|
|
|
|
9.9
|
|
|
|
329.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment income before income taxes
|
|
|
27.4
|
|
|
|
6.0
|
|
|
|
11.2
|
|
|
|
15.7
|
|
|
|
1.3
|
|
|
|
61.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Net realized investment gains (losses)
|
|
|
|
|
|
|
(2.7
|
)
|
|
|
2.9
|
|
|
|
(1.7
|
)
|
|
|
0.8
|
|
|
|
(0.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income before income taxes
|
|
$
|
27.4
|
|
|
$
|
8.7
|
|
|
$
|
8.3
|
|
|
$
|
17.4
|
|
|
$
|
0.5
|
|
|
$
|
62.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
235.9
|
|
|
$
|
4,032.4
|
|
|
$
|
6,826.9
|
|
|
$
|
4,163.0
|
|
|
$
|
1,606.0
|
|
|
$
|
16,864.2
|
|
Separate account assets
|
|
|
|
|
|
|
1,133.3
|
|
|
|
|
|
|
|
127.2
|
|
|
|
|
|
|
|
1,260.5
|
|
Total assets
|
|
|
358.0
|
|
|
|
5,477.6
|
|
|
|
7,201.7
|
|
|
|
4,728.7
|
|
|
|
1,963.2
|
|
|
|
19,729.2
|
|
F-56
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2006
|
|
|
|
|
|
|
Retirement
|
|
|
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Group
|
|
|
Services
|
|
|
Annuities
|
|
|
Individual
|
|
|
Other
|
|
|
Total
|
|
|
|
(In millions)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
|
|
$
|
94.5
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
34.3
|
|
|
$
|
|
|
|
$
|
128.8
|
|
Net investment income
|
|
|
4.5
|
|
|
|
66.6
|
|
|
|
108.4
|
|
|
|
57.5
|
|
|
|
6.5
|
|
|
|
243.5
|
|
Other revenues
|
|
|
2.5
|
|
|
|
4.8
|
|
|
|
0.2
|
|
|
|
3.1
|
|
|
|
2.4
|
|
|
|
13.0
|
|
Net realized investment gains (losses)
|
|
|
0.1
|
|
|
|
(2.7
|
)
|
|
|
(0.6
|
)
|
|
|
(2.0
|
)
|
|
|
0.8
|
|
|
|
(4.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
101.6
|
|
|
|
68.7
|
|
|
|
108.0
|
|
|
|
92.9
|
|
|
|
9.7
|
|
|
$
|
380.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder benefits and claims
|
|
|
54.7
|
|
|
|
(4.8
|
)
|
|
|
|
|
|
|
12.3
|
|
|
|
|
|
|
|
62.2
|
|
Interest credited
|
|
|
|
|
|
|
47.0
|
|
|
|
93.0
|
|
|
|
49.8
|
|
|
|
(0.1
|
)
|
|
|
189.7
|
|
Other underwriting and operating expenses
|
|
|
24.5
|
|
|
|
15.2
|
|
|
|
5.2
|
|
|
|
13.9
|
|
|
|
3.3
|
|
|
|
62.1
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.7
|
|
|
|
4.7
|
|
Amortization of deferred policy acquisition costs
|
|
|
2.7
|
|
|
|
0.1
|
|
|
|
0.2
|
|
|
|
0.5
|
|
|
|
(0.1
|
)
|
|
|
3.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses
|
|
|
81.9
|
|
|
|
57.5
|
|
|
|
98.4
|
|
|
|
76.5
|
|
|
|
7.8
|
|
|
|
322.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment income before income taxes
|
|
|
19.7
|
|
|
|
11.2
|
|
|
|
9.6
|
|
|
|
16.4
|
|
|
|
1.9
|
|
|
|
58.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Net realized investment gains (losses)
|
|
|
0.1
|
|
|
|
(2.7
|
)
|
|
|
(0.6
|
)
|
|
|
(2.0
|
)
|
|
|
0.8
|
|
|
|
(4.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income before income taxes
|
|
$
|
19.6
|
|
|
$
|
13.9
|
|
|
$
|
10.2
|
|
|
$
|
18.4
|
|
|
$
|
1.1
|
|
|
$
|
63.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
146.0
|
|
|
$
|
4,629.7
|
|
|
$
|
7,028.5
|
|
|
$
|
4,161.7
|
|
|
$
|
1,674.5
|
|
|
$
|
17,640.4
|
|
Separate account assets
|
|
|
|
|
|
|
1,068.8
|
|
|
|
|
|
|
|
113.1
|
|
|
|
|
|
|
$
|
1,181.9
|
|
Total assets
|
|
|
277.3
|
|
|
|
6,001.6
|
|
|
|
7,296.1
|
|
|
|
4,678.3
|
|
|
|
2,091.9
|
|
|
$
|
20,345.2
|
|
F-57
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2007
|
|
|
|
|
|
|
Retirement
|
|
|
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Group
|
|
|
Services
|
|
|
Annuities
|
|
|
Individual
|
|
|
Other
|
|
|
Total
|
|
|
|
(In millions)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
|
|
$
|
293.1
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
104.8
|
|
|
$
|
|
|
|
$
|
397.9
|
|
Net investment income
|
|
|
13.5
|
|
|
|
185.0
|
|
|
|
331.9
|
|
|
|
181.4
|
|
|
|
20.5
|
|
|
|
732.3
|
|
Other revenues
|
|
|
10.7
|
|
|
|
18.4
|
|
|
|
0.6
|
|
|
|
10.9
|
|
|
|
9.8
|
|
|
|
50.4
|
|
Net realized investment gains (losses)
|
|
|
(0.1
|
)
|
|
|
(6.4
|
)
|
|
|
27.1
|
|
|
|
(1.6
|
)
|
|
|
4.8
|
|
|
|
23.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
317.2
|
|
|
|
197.0
|
|
|
|
359.6
|
|
|
|
295.5
|
|
|
|
35.1
|
|
|
|
1,204.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder benefits and claims
|
|
|
157.7
|
|
|
|
(6.0
|
)
|
|
|
|
|
|
|
44.8
|
|
|
|
|
|
|
|
196.5
|
|
Interest credited
|
|
|
|
|
|
|
126.1
|
|
|
|
278.0
|
|
|
|
161.4
|
|
|
|
(0.6
|
)
|
|
|
564.9
|
|
Other underwriting and operating expenses
|
|
|
82.8
|
|
|
|
52.4
|
|
|
|
17.1
|
|
|
|
43.1
|
|
|
|
14.5
|
|
|
|
209.9
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14.1
|
|
|
|
14.1
|
|
Amortization of deferred policy acquisition costs
|
|
|
6.4
|
|
|
|
5.1
|
|
|
|
0.8
|
|
|
|
1.9
|
|
|
|
|
|
|
|
14.2
|
|
Intangible asset amortization
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses
|
|
|
247.1
|
|
|
|
177.6
|
|
|
|
295.9
|
|
|
|
251.2
|
|
|
|
28.0
|
|
|
|
999.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment income before income taxes
|
|
|
70.1
|
|
|
|
19.4
|
|
|
|
63.7
|
|
|
|
44.3
|
|
|
|
7.1
|
|
|
|
204.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Net realized investment gains (losses)
|
|
|
(0.1
|
)
|
|
|
(6.4
|
)
|
|
|
27.1
|
|
|
|
(1.6
|
)
|
|
|
4.8
|
|
|
|
23.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income before income taxes
|
|
$
|
70.2
|
|
|
$
|
25.8
|
|
|
$
|
36.6
|
|
|
$
|
45.9
|
|
|
$
|
2.3
|
|
|
$
|
180.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
235.9
|
|
|
$
|
4,032.4
|
|
|
$
|
6,826.9
|
|
|
$
|
4,163.0
|
|
|
$
|
1,606.0
|
|
|
$
|
16,864.2
|
|
Separate account assets
|
|
|
|
|
|
|
1,133.3
|
|
|
|
|
|
|
|
127.2
|
|
|
|
|
|
|
|
1,260.5
|
|
Total assets
|
|
|
358.0
|
|
|
|
5,477.6
|
|
|
|
7,201.7
|
|
|
|
4,728.7
|
|
|
|
1,963.2
|
|
|
|
19,729.2
|
|
F-58
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2006
|
|
|
|
|
|
|
Retirement
|
|
|
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Group
|
|
|
Services
|
|
|
Annuities
|
|
|
Individual
|
|
|
Other
|
|
|
Total
|
|
|
|
(In millions)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
|
|
$
|
294.0
|
|
|
$
|
0.1
|
|
|
$
|
|
|
|
$
|
103.9
|
|
|
$
|
|
|
|
$
|
398.0
|
|
Net investment income
|
|
|
13.5
|
|
|
|
204.3
|
|
|
|
326.1
|
|
|
|
172.2
|
|
|
|
17.9
|
|
|
|
734.0
|
|
Other revenues
|
|
|
8.0
|
|
|
|
16.4
|
|
|
|
0.6
|
|
|
|
9.9
|
|
|
|
7.8
|
|
|
|
42.7
|
|
Net realized investment gains (losses)
|
|
|
|
|
|
|
(19.1
|
)
|
|
|
14.8
|
|
|
|
(3.9
|
)
|
|
|
3.3
|
|
|
|
(4.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
315.5
|
|
|
|
201.7
|
|
|
|
341.5
|
|
|
|
282.1
|
|
|
|
29.0
|
|
|
$
|
1,169.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder benefits and claims
|
|
|
186.9
|
|
|
|
(14.5
|
)
|
|
|
|
|
|
|
37.4
|
|
|
|
|
|
|
|
209.8
|
|
Interest credited
|
|
|
|
|
|
|
138.4
|
|
|
|
280.0
|
|
|
|
153.7
|
|
|
|
(0.2
|
)
|
|
|
571.9
|
|
Other underwriting and operating expenses
|
|
|
77.9
|
|
|
|
45.6
|
|
|
|
15.8
|
|
|
|
42.5
|
|
|
|
10.1
|
|
|
|
191.9
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14.5
|
|
|
|
14.5
|
|
Amortization of deferred policy acquisition costs
|
|
|
8.4
|
|
|
|
0.6
|
|
|
|
0.5
|
|
|
|
1.5
|
|
|
|
|
|
|
|
11.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses
|
|
|
273.2
|
|
|
|
170.1
|
|
|
|
296.3
|
|
|
|
235.1
|
|
|
|
24.4
|
|
|
|
999.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment income before income taxes
|
|
|
42.3
|
|
|
|
31.6
|
|
|
|
45.2
|
|
|
|
47.0
|
|
|
|
4.6
|
|
|
|
170.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Net realized investment gains (losses)
|
|
|
|
|
|
|
(19.1
|
)
|
|
|
14.8
|
|
|
|
(3.9
|
)
|
|
|
3.3
|
|
|
|
(4.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income before income taxes
|
|
$
|
42.3
|
|
|
$
|
50.7
|
|
|
$
|
30.4
|
|
|
$
|
50.9
|
|
|
$
|
1.3
|
|
|
$
|
175.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
146.0
|
|
|
$
|
4,629.7
|
|
|
$
|
7,028.5
|
|
|
$
|
4,161.7
|
|
|
$
|
1,674.5
|
|
|
$
|
17,640.4
|
|
Separate account assets
|
|
|
|
|
|
|
1,068.8
|
|
|
|
|
|
|
|
113.1
|
|
|
|
|
|
|
$
|
1,181.9
|
|
Total assets
|
|
|
277.3
|
|
|
|
6,001.6
|
|
|
|
7,296.1
|
|
|
|
4,678.3
|
|
|
|
2,091.9
|
|
|
$
|
20,345.2
|
|
On May 1, 2007, the Company acquired 100% ownership of
Medical Risk Managers Holding Inc, or MRM. MRM is a full-service
managing general underwriter and health care network consulting
firm specializing in the stop-loss market. This acquisition
provides the Company with pricing and underwriting competitive
advantages, and an additional source of revenue.
The aggregate purchase price was $32.2 million, of which
$22.0 million was paid in cash and the remaining
$10.2 million is subject to purchase price adjustment,
contingently payable over the next five years based upon the
achievement of certain annual profitability targets. In
connection with the acquisition, $5.3 million of the cash
paid was held in escrow and we have classified such amount as
restricted funds. We classified an additional $3.3 million
as restricted funds as such amount represents cash held in
fiduciary accounts.
The acquisition was accounted for using the purchase method of
accounting in accordance with SFAS No. 141,
Business Combinations. The results of operations are
presented in our Group segment and consolidated in the
accompanying financial statements from the date of acquisition.
The purchase price allocation resulted in $6.9 million of
identifiable intangible assets including customer relationships,
F-59
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
employment contracts, non-compete agreements, and the MRM trade
name with useful lives ranging from 5 to 10 years.
Preliminary goodwill of $18.2 million has been recognized
as of September 30, 2007 for the amount in excess of the
initial purchase price paid over the fair market value of the
net assets acquired.
6. Revolving
Credit Facilities
New
Credit Facility
On August 16, 2007, the Company entered into a
$200.0 million senior unsecured revolving credit agreement
with a syndicate of lending institutions led by Bank of America,
N.A. The credit facility matures on August 16, 2012. The
revolving credit facility is available to provide support for
working capital, capital expenditures and other general
corporate purposes, including permitted acquisitions, issuance
of letters of credits, refinancing and payment of fees in
connection with this facility. This new credit facility replaced
the Companys prior $70.0 million revolving credit
facility.
The facility enables the Company to obtain letters of credit of
up to $50.0 million and short-term loans of up to
$10.0 million, which would count against the
$200.0 million limit. The Company can increase the
$200.0 million limit by up to an additional
$100.0 million, upon the agreement of any lender to lend
such additional amount, without the consent of the other
lenders. In addition, the Company may, with the consent of
individual lenders, elect to extend the term of the facility by
up to two additional one-year periods.
Loans under the credit facility bear interest, at the
Companys election, at a spread above LIBOR, or at a base
rate. The initial spread above the LIBOR rate is 36 basis
points, and may vary from 19 to 60 basis points depending
on the Companys credit rating. The base rate is equal to
the higher of 50 basis points above the federal funds rate,
and the Bank of America prime rate. Interest under LIBOR-based
loans is payable periodically, with the period at the election
of the Company (but at most annually). Interest under base rate
loans is payable quarterly. In addition, we are obligated to pay
a facility fee of between 6 and 15 basis points, depending
on the Companys credit rating, quarterly over the term of
the facility, as well as letter of credit and other fees as
applicable.
Under the terms of the credit agreement, the Company is required
to maintain certain financial ratios. In particular, each of the
Companys material insurance subsidiaries must maintain a
risk-based capital ratio of at least 200%, measured at the end
of each year, and the Companys debt-to-capitalization
ratio may not exceed 37.5%, measured at the end of each quarter.
In addition, the Company has agreed to other covenants
restricting the ability of its subsidiaries to incur additional
indebtedness, its ability to create liens, and its ability to
change its fiscal year and to enter into new lines of business,
as well as other customary affirmative covenants.
To be eligible for borrowing funds under this facility, the
representations and warranties that the Company makes in the
credit agreement must continue to be true in all material
respects, and the Company must not be in default under the
facility, including failure to comply with the covenants
described above.
As of September 30, 2007, the Company had no borrowings
outstanding under this facility.
Basic earnings per share represent the amount of earnings for
the period available to each share of common stock outstanding
during the reporting period. Diluted earnings per share
represent 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. All outstanding warrants are considered participating
securities or potential common stock securities that are
included in weighted average common shares outstanding for
purposes of computing basic earnings per share using the
two-class method. The warrants are considered participating
securities or potential common stock securities because the
terms of the warrants entitle the holders to receive any
dividends declared on the common stock concurrently with the
F-60
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
holders of outstanding shares of common stock, without regard to
whether the warrants are exercised prior to the record date for
any such dividend.
The following table presents information relating to the
Companys calculations of basic and diluted earnings per
share (EPS) for the three and nine months ended
September 30, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
September 30, 2007
|
|
|
September 30, 2006
|
|
|
|
|
|
|
Basic
|
|
|
Diluted
|
|
|
|
|
|
Basic
|
|
|
Diluted
|
|
|
|
Amount
|
|
|
EPS
|
|
|
EPS
|
|
|
Amount
|
|
|
EPS
|
|
|
EPS
|
|
|
|
(In millions, except for per share data)
|
|
|
Net income
|
|
$
|
41.4
|
|
|
$
|
0.37
|
|
|
$
|
0.37
|
|
|
$
|
38.2
|
|
|
$
|
0.34
|
|
|
$
|
0.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributed
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Undistributed
|
|
|
34.4
|
|
|
|
0.37
|
|
|
|
0.37
|
|
|
|
31.7
|
|
|
|
0.34
|
|
|
|
0.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
34.4
|
|
|
$
|
0.37
|
|
|
$
|
0.37
|
|
|
$
|
31.7
|
|
|
$
|
0.34
|
|
|
$
|
0.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributed
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Undistributed
|
|
|
7.0
|
|
|
|
0.37
|
|
|
|
0.37
|
|
|
|
6.5
|
|
|
|
0.34
|
|
|
|
0.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7.0
|
|
|
$
|
0.37
|
|
|
$
|
0.37
|
|
|
$
|
6.5
|
|
|
$
|
0.34
|
|
|
$
|
0.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
Diluted
|
|
|
|
|
Basic
|
|
|
Diluted
|
|
Weighted average common and warrant shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
|
|
|
|
92.646
|
|
|
|
92.646
|
|
|
|
|
|
92.646
|
|
|
|
92.646
|
|
Warrants
|
|
|
|
|
|
|
18.976
|
|
|
|
18.976
|
|
|
|
|
|
18.976
|
|
|
|
18.976
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shares
|
|
|
|
|
|
|
111.622
|
|
|
|
111.622
|
|
|
|
|
|
111.622
|
|
|
|
111.622
|
|
F-61
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2007
|
|
|
September 30, 2006
|
|
|
|
|
|
|
Basic
|
|
|
Diluted
|
|
|
|
|
|
Basic
|
|
|
Diluted
|
|
|
|
Amount
|
|
|
EPS
|
|
|
EPS
|
|
|
Amount
|
|
|
EPS
|
|
|
EPS
|
|
|
|
(In millions, except for per share data)
|
|
|
Net income
|
|
$
|
137.6
|
|
|
$
|
1.23
|
|
|
$
|
1.23
|
|
|
$
|
110.9
|
|
|
$
|
0.99
|
|
|
$
|
0.99
|
|
Common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributed
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Undistributed
|
|
|
114.2
|
|
|
|
1.23
|
|
|
|
1.23
|
|
|
|
92.0
|
|
|
|
0.99
|
|
|
|
0.99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
114.2
|
|
|
|
1.23
|
|
|
$
|
1.23
|
|
|
$
|
92.0
|
|
|
$
|
0.99
|
|
|
$
|
0.99
|
|
Warrants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributed
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Undistributed
|
|
|
23.4
|
|
|
|
1.23
|
|
|
|
1.23
|
|
|
|
18.9
|
|
|
|
0.99
|
|
|
|
0.99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
23.4
|
|
|
$
|
1.23
|
|
|
$
|
1.23
|
|
|
$
|
18.9
|
|
|
$
|
0.99
|
|
|
$
|
0.99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
Diluted
|
|
|
|
|
Basic
|
|
|
Diluted
|
|
Weighted average common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
|
|
92.646
|
|
|
|
92.646
|
|
|
|
|
|
92.646
|
|
|
|
92.646
|
|
Warrants
|
|
|
|
|
18.976
|
|
|
|
18.976
|
|
|
|
|
|
18.976
|
|
|
|
18.976
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shares
|
|
|
|
|
111.622
|
|
|
|
111.622
|
|
|
|
|
|
111.622
|
|
|
|
111.622
|
|
8. Subsequent
Events
Capital
Efficient Notes due 2067
On October 10, 2007, the Company issued $150.0 million
aggregate principal amount Capital Efficient Notes (or
CENts) with a scheduled maturity date of
October 15, 2037 and subject to certain limitations, with a
final maturity date of October 15, 2067. For the initial
10-year
period, to but not including October 15 2017, the CENts carry a
fixed interest rate of 8.30% payable semi-annually. From
October 15, 2017 until the final maturity date of
October 15, 2067, interest on the CENts will accrue at a
variable annual rate equal to the three-month LIBOR plus 4.177%,
payable quarterly. The Company applied the net proceeds from the
issuance to pay a special cash dividend to its stockholders on
October 19, 2007.
The Company is required to use commercially reasonable efforts
to sell enough qualifying capital securities to permit repayment
of the CENts at the scheduled maturity date or on each interest
payment date thereafter. Qualifying capital securities are
replacement capital securities other than common stock,
qualifying warrants, mandatorily convertible preferred stock,
debt exchangeable for common equity or debt exchangeable for
preferred equity and are generally treated by the ratings
agencies as having similar equity content to the CENts. Any
remaining outstanding principal amount will be due on
October 15, 2067.
Subject to certain conditions, the Company has the right, on one
or more occasions, to defer the payment of interest on the CENts
during any period up to ten years without giving rise to an
event of default. The Company will not be required to settle
deferred interest subject to certain conditions until it has
deferred interest for five consecutive years or, if earlier,
made a payment of current interest during a deferral period.
Deferred interest will accumulate additional interest at an
annual rate equal to the annual interest rate then applicable to
the CENts.
The CENts are unsecured junior subordinated obligations. The
Company can redeem the CENts at its option, in whole or in part,
on October 15, 2017 and on each interest payment date
thereafter at a redemption price of 100% of the principal amount
being redeemed plus accrued but unpaid interest. The Company can
redeem the CENts at its option, prior to October 15, 2017,
in whole or in part, at a redemption price of 100% of the
principal amount being redeemed or, if greater, a make-whole
price, plus accrued and unpaid interest.
F-62
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In connection with the offering of the CENts, the Company
entered into a replacement capital covenant for the
benefit of the holders of the $300.0 million Senior Notes
due April 1, 2016. Under the terms of the replacement
capital covenant, the Company may not redeem or repay the CENts
prior to October 15, 2047 unless the redemption or
repayment is financed from the offering of replacement capital
securities, as specified in the CENts.
Cash
Flow Hedge
On July 11, 2007, the Company entered into an interest rate
swap agreement totaling $150.0 million, which qualified as
a cash flow hedge of the planned CENts offering. The Company
terminated the swap agreement on September 24, 2007 and
recorded the related loss of $5.3 million in accumulated
other comprehensive income. The Company entered into another
interest rate swap agreement totaling $150.0 million on
September 24, 2007, which also qualified as a cash flow
hedge of the planned CENts offering. The Company terminated the
swap agreement on October 4, 2007 when the Company entered
into the agreement to sell the CENts and recorded the related
loss of $1.9 million in accumulated other comprehensive
income. Since the critical terms of the derivative were the same
as the forecasted transaction, the Company did not record any
ineffectiveness and the combined losses on the interest rate
swaps of $7.2 million will be amortized into interest
expense concurrent with the interest expense over the life of
the CENts. Considering the impact of the hedge, as well as the
discount on the notes and the debt issuance costs, the effective
interest rate on the CENts is 9.39%.
Adoption
of Equity Plans and Related Grants
In October 2007, the board of directors of the Company adopted
the Equity Plan and Employee Stock Purchase Plan, and reserved
7,830,000 and 870,000 shares of common stock, respectively,
for issuance under these plans. The board of directors approved
grants of restricted stock units having an aggregate value of
$5.8 million and shares of fully-vested common stock having an
aggregate value of $2.9 million to employees under the Equity
Plan. These grants are contingent upon the initial public
offering occurring, and the actual numbers of units and shares
will be determined based on the initial public offering price
per share. The board of directors also approved option grants to
employees under the Equity Plan, but the aggregate value and
number of such option grants will not be determinable until the
initial public offering occurs.
Stockholder
Dividend
On October 12, 2007, the Board of Directors declared two
dividend payments totaling $200.0 million, which were paid
on October 19, 2007 to shareholders of record on
October 12, 2007.
Common
Stock Dividend
On October 26, 2007, the Company executed a 7.7-for-1 stock
dividend (substantially equivalent to an 8.7-for-1 stock split)
that increased the shares of common stock outstanding from
10,649,000 to 92,646,295, and the number of shares subject to
outstanding warrants from 2,181,120 to 18,975,744. The common
stock split, effected in the form of a dividend, has been
reflected retroactively in these financial statements for all
periods presented.
Amendment
to Certificate of Incorporation
On August 6, 2007 and October 19, 2007, respectively,
the Board of Directors and the Companys stockholders
approved an Amended and Restated Certificate of Incorporation
which, among other things, authorized the issuance of 10,000,000
shares of a new class of preferred stock with rights,
preferences and privileges to be designated by the Board of
Directors. The Amended and Restated Certificate of Incorporation
will be filed with the Delaware Secretary of State and will
become effective prior to the effective date of the
Companys initial public offering of common stock.
F-63
GLOSSARY
OF SELECTED INSURANCE AND DEFINED TERMS
|
|
|
Contract values |
|
The amounts held for the benefit of policyholders or contract
holders within investment products. For variable products,
account value is equal to fair value. |
|
Accumulation period |
|
The period during which deferred annuity accumulate interest or
investment gains (losses). The period ends when the income
payments begin. |
|
Annualized first-year premiums (AFYP) |
|
This term applies to our Group and Individual segments. For
recurring premium products it represents the total expected
premium payments over the first 12 months on new sales. The
entire 12 months of expected premium is reported AFYP in
the period during which the policy is issued. For single-premium
products, the AFYP is 10% of the single premium. |
|
Annuity |
|
A contract sold by insurance companies that offers tax-deferred
savings and a choice of payout options to meet the owners
income needs in retirement. |
|
Bank-owned life insurance (BOLI) |
|
A life insurance policy purchased to insure the life of certain
bank employees, usually officers and other highly compensated
employees. The policies are commonly used to fund employee
pension and benefit plans. |
|
Brokerage general agent |
|
An independent contractor of the insurance company who has the
authority to appoint brokers on behalf of the insurance company. |
|
Cash value |
|
The amount of cash available to a policyholder on the surrender
of or withdrawal from a life insurance policy or annuity
contract. |
|
Cede |
|
Reinsuring with another insurance company all or a portion of
the risk we insure. |
|
Deferred annuities |
|
Annuity contracts that delay income payments until the holder
chooses to receive them. These contracts might also be
surrendered for cash, exchanged for another contract, or rolled
over to another contract. |
|
Defined benefit plan |
|
A pension plan that promises to pay a specified amount to each
eligible plan member who retires. |
|
Defined contribution plan |
|
A plan established under Section 401(a), 401(k), 403(b) or
457(b) of the Internal Revenue Code, under which the benefits to
a participant depend on contributions made to, and the
investment return on, the participants account. |
|
Earned premiums |
|
The portion of a premium, net of any amount ceded, that
represents coverage already provided or that belongs to the
insurer based on the part of the policy period that has passed. |
|
Expense risk |
|
The measure of the sensitivity of the insurance companys
liability for the resultant higher expense rates than charged
for in the premium, expense charge or margin. |
|
Experience rating |
|
The statistical procedure used to calculate a premium rate based
on the loss experience of an insured group. |
G-1
|
|
|
Fixed annuity |
|
An annuity that guarantees that a specific sum of money will be
paid in the future, usually as monthly income, to an annuitant.
The dollar amount will not fluctuate regardless of adverse
changes in the insurance companys mortality experience,
investment return, and expenses. |
|
Fixed indexed annuity (FIA) |
|
Modifications of the single premium deferred annuity, which
usually guarantees at a minimum a return of the premium.
Additional interest can be earned that is linked to a specified
stock index. Thus, this insurance product usually guarantees the
principal of the investment, while at the same time providing
the opportunity for increasing values tied to the equities
market. |
|
General account |
|
All of the assets of our insurance companies recognized for
statutory accounting purposes other than those specifically
allocated to separate accounts. We bear the risk of our
investments held in our general account. |
|
Group insurance |
|
A single contract or policy under which individuals in a natural
group (such as employees of a business firm) and potentially
their dependants are covered. |
|
Group medical stop-loss insurance |
|
Coverage purchased by employers in order to limit their exposure
under self-insured medical plans. |
|
Guaranteed investment contract |
|
A contract, usually purchased by ERISA qualified plans, that
guarantees a minimum rate of return on the amount invested. |
|
Guaranteed minimum income benefit (GMIB) |
|
A benefit that guarantees a specified minimum appreciation rate
for a defined period of time, after which annuity payments
commence. |
|
Guaranteed minimum withdrawal benefit (GMWB) |
|
A benefit that guarantees a customers minimum stream of
income, equal to the return of the contracts principal
provided it is withdrawn within specified limits over time. |
|
Immediate annuities |
|
Annuity contracts under which the benefits payable to the
annuitant begin to be paid within one year of contract issuance. |
|
In-force |
|
Policies and contracts reflected on our applicable records that
have not expired or been terminated as of a given date. |
|
Interest spread |
|
Yield on investments less the interest rate credited on
liabilities. |
|
Managing general underwriter (MGU) |
|
An MGU is a business that acts as a sales intermediary between
an insurance company and medical stop-loss policyholder.
MGUs can provide marketing, premium administration, claims
administration, claims adjudication and pricing. The MGU is
generally paid a percentage of premium and does not share in any
of the risk. |
|
Market value adjustment (MVA) |
|
A market value adjustment is a feature that adjusts the
surrender value of a contract in the event of surrender prior to
the end of the contract period to protect an insurer against
losses due to higher interest rates at the time of the surrender. |
|
Morbidity |
|
The incidence of disease or disability in a specific population
over a specific period of time. |
G-2
|
|
|
Mortality |
|
The number of deaths in a specific population over a specific
period of time. |
|
Mortality gains |
|
Mortality gains may arise if mortality rates are higher or lower
than expected. For structured settlements and SPIAs mortality
gains occur if policyholders die sooner than expected. For life
insurance, mortality gains occur if policyholders die later than
expected. |
|
Non-admitted assets |
|
Certain assets or portions thereof that are not permitted to be
reported as admitted assets in an insurers annual
statement prepared in accordance with statutory accounting
principles. As a result, certain assets that normally would be
accorded value in the financial statements of non-insurance
corporations are accorded no value and thus reduce the reported
statutory surplus of the insurer. |
|
Non-qualified plan |
|
An employee benefits plan that does not have the federal tax
advantages of a qualified pension plan, in which employers
receive a federal tax deduction for contributions paid into the
plan on behalf of their employees. For an employer, not having a
tax deduction can be a serious disadvantage, but a nonqualified
plan has these advantages. |
|
|
|
1) otherwise
discriminatory coverage for some employees is allowed,
|
|
|
|
2) benefits
can be allocated to certain employees whom the employer wishes
to reward. The result could be that the total cost of the
benefits for a particular group of employees may be less under a
non-qualified plan than for all employees under a qualified plan.
|
|
Persistency |
|
Measurement by premiums of the percentage of insurance policies
or annuity contracts remaining in force between specified
measurement dates. |
|
Premiums |
|
Payments and other consideration received on insurance policies
issued or reinsurance assumed by an insurance company. Under
generally accepted accounting principles, premiums on variable
life and other investment-type contracts are not accounted for
as revenues. |
|
Regulatory capital |
|
Regulatory capital is the sum of statutory capital and surplus
and asset valuation reserve (AVR). |
|
Reinsurance |
|
A form of insurance that insurance companies buy for their own
protection, a sharing of insurance. An insurer (the
reinsured) reduces its possible maximum loss on either an
individual risk or a large number of risks by giving a portion
of its liability to another insurance company (the reinsurer).
Reinsurance enables an insurance company to (1) expand its
capacity; (2) stabilize its underwriting results;
(3) finance its expanding volume; (4) secure
catastrophe protection against shock losses; (5) withdraw
from a class or line of business, or a geographical area, within
a relatively short time period and (6) share large risks
with other companies. |
|
Reserves |
|
Liabilities established by insurers and reinsurers to reflect
the estimated costs of claim payments and benefits and the
related |
G-3
|
|
|
|
|
expenses that the insurer or reinsurer will ultimately be
required to pay in respect of insurance or reinsurance it has
written. |
|
Section 403(b) plan |
|
A retirement plan which is available primarily to public school
employees and non-profit organizations that allows individuals
to defer compensation on a pre-tax basis through payroll
deductions and to defer federal and sometimes state taxes until
the assets are withdrawn. |
|
Section 457 plan |
|
A retirement plan available to government employees that allows
an individual to defer compensation on a pre-tax basis through
payroll deductions and to defer federal and sometimes state
taxes until the assets are withdrawn. |
|
Single Premium Immediate Annuities (SPIAs) |
|
An annuity that is purchased for a single premium at the time of
issue and guarantees a series of payments beginning within one
year of the issue date and continuing over a fixed number of
years or for the life of the annuitant. |
|
Statutory reserves |
|
Liabilities established by state insurance law that an insurer
must have available to provide for future obligations with
respect to all policies. Statutory reserves are liabilities on
the balance sheet of financial statements prepared in conformity
with statutory accounting principles. |
|
Statutory surplus |
|
The excess of admitted assets over statutory liabilities as
shown on an insurers statutory financial statements. |
|
Structured settlement |
|
A customized annuity used to provide a claimant ongoing periodic
payments instead of a lump sum payment. A structured settlement
provides an alternative to a lump sum settlement generally in a
personal injury lawsuit and typically is purchased by a property
and casualty insurance company for the benefit of an injured
claimant with benefits scheduled to be paid throughout a fixed
period or for the life of the claimant. |
|
Surrender charge |
|
An amount specified in an insurance policy or annuity contract
that is charged to a policyholder or contractholder for early
cancellation of, or withdrawal under, that policy or contract. |
|
Surrenders and withdrawals |
|
Amounts taken from life insurance policies and annuity contracts
representing the full or partial values of these policies or
contracts. |
|
Tax sheltered annuity |
|
An annuity issued as part of a Section 403(b) plan.
Tax-sheltered annuities are also referred to as
Section 403(b) annuities. |
|
Term life insurance |
|
Life insurance that stays in effect for only a specified,
limited period. If an insured dies within that period, the
beneficiary receives the death payments. If the insured
survives, the policy ends and the beneficiary receives nothing. |
|
Third party administrator (TPA) |
|
A person or entity that, pursuant to a service contract,
processes claims or provides administrative services for an
employee benefits plan. |
|
Underwriting |
|
The insurers process of reviewing applications submitted
for insurance coverage, deciding whether to accept all or part
of the coverage requested and determining the applicable
premiums. |
G-4
|
|
|
Universal life (UL) insurance |
|
Adjustable life insurance under which (1) premiums are
flexible, not fixed; (2) protection is adjustable, not
fixed and (3) insurance company expenses and other charges
are specifically disclosed to a purchaser. This policy is
referred to as unbundled life insurance because its three basic
elements (investment earnings, pure cost of protection, and
company expenses) are separately identified both in the policy
and in an annual report to the policyowner. After the first
premium, additional premiums can be paid at any time. A
specified percentage expense charge is deducted from each
premium before the balance is credited to the cash value, along
with interest. The pure cost of protection is subtracted from
the cash value monthly. As selected by the insured, the death
benefit can be a specified amount plus the cash value or the
specified amount that includes the cash value. After payment of
the minimal initial premium required, there are no contractually
scheduled premium payments (provided the cash value account
balance is sufficient to pay the pure cost of protection each
month and any other expenses and charges.) Expenses and charges
may take the form of a flat dollar amount for the first policy
year, a sales charge for each premium received, and a monthly
expense charge for each policy year. An annual report is
provided the policy owner that shows the status of the policy. |
|
Variable annuity |
|
An annuity in which premium payments are used to purchase
accumulation units, their number depending on the value of each
unit. The value of a unit is determined by the value of the
portfolio of stocks in which the insurance company invests the
premiums. |
|
Variable life (VL) insurance |
|
An investment-oriented life insurance policy that provides a
return linked to an underlying portfolio of securities. The
investment offered through the policy is typically established
as a separate account, which is divided into subaccounts that
invest in underlying mutual funds. The policyholder has
discretion in choosing among the available subaccounts, such as
a common stock fund, bond fund, or money market fund. The life
insurance policy benefits payable to the beneficiary upon the
death of the insured or the surrender of the policy will vary to
reflect the investment performance of the subaccounts chosen by
the policy owner. |
|
Waiver of premium |
|
A provision of a life insurance policy pursuant to which an
insured with total disability that lasts for a specified period
no longer has to pay premiums for the duration of the disability
or for a stated period, during which time the life insurance
policy provides continued coverage. |
|
Wealth transfer life insurance |
|
A life insurance policy purchased with the primary intent to
transfer wealth to chosen beneficiaries. |
|
Whole life insurance |
|
Level premium life insurance that covers the lifetime of the
individual instead of a fixed term. |
G-5
PART II
INFORMATION
NOT REQUIRED IN PROSPECTUS
|
|
Item 13.
|
Other
Expenses of Issuance and Distribution.
|
The following table sets forth the expenses (other than
underwriting compensation expected to be incurred) in connection
with this offering. All of such amounts (except the SEC
registration fee and FINRA filing fee) are estimated.
|
|
|
|
|
SEC registration fee
|
|
$
|
27,891
|
|
Listing fee
|
|
|
200,000
|
|
FINRA filing fee
|
|
|
75,500
|
|
Blue Sky fees and expenses
|
|
|
14,450
|
|
Printing and engraving costs
|
|
|
450,000
|
|
Legal fees and expenses
|
|
|
900,000
|
|
Accounting fees and expenses
|
|
|
700,000
|
|
Transfer Agent and Registrar fees and expenses
|
|
|
11,450
|
|
Miscellaneous expenses
|
|
|
320,709
|
|
|
|
|
|
|
Total
|
|
$
|
2,700,000
|
|
|
|
|
* |
|
To be provided by amendment |
|
|
Item 14.
|
Indemnification
of Directors and Officers.
|
Section 145(a) of the Delaware General Corporation Law (the
DGCL) provides in relevant part that a corporation
may indemnify any officer or director who was or is a party or
is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding (other than an action by or
in the right of the corporation) by reason of the fact that such
person is or was a director or officer of the corporation, or is
or was serving at the request of the corporation as a director
or officer of another entity, against expenses (including
attorneys fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding if such person
acted in good faith and in a manner such person reasonably
believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe such
persons conduct was unlawful.
Section 145(b) of the DGCL provides in relevant part that a
corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation
to procure a judgment in its favor by reason of the fact that
the person is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other
enterprise against expenses (including attorneys fees)
actually and reasonably incurred by the person in connection
with the defense or settlement of such action or suit if the
person acted in good faith and in a manner the person reasonably
believed to be in or not opposed to the best interests of the
corporation and except that no indemnification shall be made in
respect of any claim, issue or matter as to which such person
shall have been adjudged to be liable to the corporation unless
and only to the extent that the Court of Chancery or the court
in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly
and reasonably entitled to indemnity for such expenses which the
Court of Chancery or such other court shall deem proper.
Our bylaws generally provide that we will indemnify our
directors and officers to the fullest extent permitted by law.
The registrant also obtained officers and directors
liability insurance which insures against liabilities that
officers and directors of the registrant may, in such
capacities, incur. Section 145(g) of the DGCL provides that
a corporation shall have power to purchase and maintain
insurance on behalf of any person who is or was
II-1
a director, officer, employee or agent of the corporation, or is
or was serving at the request of the corporation as a director,
officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against any liability
asserted against such person and incurred by such person in any
such capacity, or arising out of such persons status as
such, whether or not the corporation would have the power to
indemnify such person against such liability under that section.
Reference is made to the form of underwriting agreement to be
filed as Exhibit 1.1 hereto for provisions providing that
the underwriters are obligated under certain circumstances to
indemnify our directors, officers and controlling persons
against certain liabilities under the Securities Act of 1933, as
amended.
|
|
Item 15.
|
Recent
Sales of Unregistered Securities.
|
In the three years preceding the filing of this registration
statement, the Registrant has issued the following securities
that were not registered under the Securities Act:
On multiple dates between July 29, 2004 and August 2,
2004, we issued 92,646,295 shares of common stock and
warrants to purchase an aggregate of 18,975,744 shares of
common stock in connection with Symetra Financial
Corporations initial formation, in reliance on
Section 4(2) of the Securities Act of 1933 and/or
Regulation D promulgated thereunder.
On March 30, 2006, we issued $300.0 million aggregate
principal amount of senior notes due 2016 to Lehman Brothers
Inc., Banc of America Securities LLC and J.P. Morgan
Securities Inc. as representatives of several initial purchasers
for $298.7 million. These transactions were conducted in
reliance upon the available exemptions from the registration
requirements of the Securities Act, including those contained in
Section 4(2) of the Securities Act of 1933. The net
proceeds of this offering were used to repay borrowing
outstanding under the Registrants revolving credit
facility.
On October 10, 2007, we issued $150.0 million
aggregate principal amount of Capital Efficient Notes due 2067
to a syndicate of initial purchasers, led by J.P. Morgan
Securities Inc. and Lehman Brothers Inc. in reliance on
Section 4(2) of the Securities Act of 1933, which may be
resold to qualified institutional buyers in compliance with
Rule 144A
and/or
Regulation S under the Securities Act of 1933. We applied
the net proceeds from the CENts to pay a special cash dividend
to our stockholders on October 19, 2007.
Share and per share amounts contained in the numbered paragraphs
above have been adjusted retroactively to give effect to a
7.7-for-1 common stock dividend (substantially equivalent to a
8.7-for-1 stock split) which occurred on October 26, 2007.
All sales indicated as having been made in reliance on
Section 4(2) of the Securities Act of 1933 and/or
Regulation D promulgated thereunder were made without
general solicitation or advertising. Each purchaser was a
sophisticated investor with access to all relevant information
necessary to evaluate the investment and represented to the
Registrant that the shares were being acquired for investment.
|
|
Item 16.
|
Exhibits
and Financial Statement Schedules.
|
(a) Exhibits
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
1
|
.1
|
|
Underwriting Agreement
|
|
2
|
.1
|
|
Stock Purchase Agreement by and among Safeco Corporation,
General America Corporation, White Mountains Insurance Group,
Ltd. and Occum Acquisition Corp. dated as of March 15,
2004**
|
|
3
|
.1
|
|
Amended and Restated Certificate of Incorporation of Symetra
Financial Corporation**
|
|
3
|
.2
|
|
Bylaws of Symetra Financial Corporation**
|
|
4
|
.1
|
|
Specimen Common Stock Certificate**
|
|
4
|
.2
|
|
Fiscal Agency Agreement between Symetra Financial Corporation
and U.S. Bank dated March 30, 2006**
|
II-2
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
4
|
.3
|
|
Master Promissory Note between The Bank of New York and Symetra
Financial Corporation dated October 17, 2005**
|
|
4
|
.4
|
|
Security Agreement between The Bank of New York and Symetra
Financial Corporation dated October 17, 2005**
|
|
4
|
.5
|
|
Master Promissory Note between The Bank of New York and Symetra
Life Insurance Company dated October 17, 2005**
|
|
4
|
.6
|
|
Security Agreement between The Bank of New York and Symetra Life
Insurance Company dated October 17, 2005**
|
|
4
|
.7
|
|
Warrant Certificate Berkshire Hathaway, Inc. dated
July 29, 2004**
|
|
4
|
.8
|
|
Warrant Certificate White Mountains Re Group, Ltd.
dated July 29, 2004**
|
|
4
|
.9
|
|
Credit Agreement among Occum Acquisition Corp. and the seven
lenders and Bank of America, N.A. as Administrative Agent dated
June 14, 2004**
|
|
4
|
.10
|
|
Credit Agreement among Symetra Financial Corporation, the
lenders and Bank of America, N.A., as administrative agent,
dated August 16, 2007**
|
|
4
|
.11
|
|
Purchase Agreement between Symetra Financial Corporation and the
purchasers listed therein, dated October 4, 2007**
|
|
4
|
.12
|
|
Indenture between Symetra Financial Corporation and
U.S. Bank National Association, as trustee, dated
October 10, 2007**
|
|
5
|
.1
|
|
Opinion of Cravath, Swaine & Moore LLP**
|
|
9
|
.1
|
|
Shareholders Agreement among Occum Acquisition Corp. and
the persons listed on the signature page thereto dated as of
March 8, 2004**
|
|
9
|
.2
|
|
Shareholders Agreement among Occum Acquisition Corp. and
the persons listed on the signature page thereto dated as of
March 19, 2004**
|
|
9
|
.3
|
|
Shareholders Agreement among Occum Acquisition Corp. and
the persons listed on the signature page thereto dated as of
April 16, 2004**
|
|
10
|
.1
|
|
Service Agreement between ACS Commercial Solutions, Inc. and
Symetra Financial Corporation dated October 28, 2004**
|
|
10
|
.2
|
|
Reinsurance Agreement dated as of January 1, 1998 between
Safeco Life Insurance Company and Reinsurance Group of
America**
|
|
10
|
.3
|
|
Group Short Term Disability Reinsurance Agreement dated
January 1, 1999 between Safeco Life Insurance Company and
Duncanson & Holt Services, Inc.**
|
|
10
|
.4
|
|
Group Long Term Disability Reinsurance Agreement dated
January 1, 1999 between Safeco Life Insurance Company and
Duncanson & Holt Services, Inc.**
|
|
10
|
.5
|
|
Reinsurance Agreement dated as of August 24, 2001 between
Safeco Life Insurance Company and Lincoln National Life
Insurance Company**
|
|
10
|
.6
|
|
Reinsurance Agreement dated as of December 1, 2001 between
Safeco Life Insurance Company and Transamerica Life Insurance
Company**
|
|
10
|
.7
|
|
White Mountains Advisors LLC Investment Management Agreement**
|
|
10
|
.8
|
|
Reserved
|
|
10
|
.9
|
|
Agency Agreement dated as of March 10, 2006 among Symetra
Life Insurance Company, WM Financial Services, Inc. and WMFS
Insurance Services, Inc.**
|
|
10
|
.10
|
|
Agency Agreement dated as of June 1, 2005 between Symetra
Life Insurance Company and US Bancorp Investments Inc.**
|
|
10
|
.11
|
|
Symetra Financial Corporation Performance Share Plan
2007-2009**
|
II-3
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.12
|
|
Annual Incentive Bonus Plan**
|
|
10
|
.13
|
|
Symetra Financial Corporation Material Terms and Conditions of
the Executive Severance Pay Plan**
|
|
10
|
.14
|
|
2006 Sales Incentive Plan for Patrick B. McCormick**
|
|
10
|
.15
|
|
IPO Grant Program**
|
|
10
|
.16
|
|
Symetra Financial Corporation Equity Plan**
|
|
10
|
.17
|
|
Symetra Financial Corporation Employee Stock Purchase Plan**
|
|
21
|
.1
|
|
Subsidiaries of Symetra Financial Corporation**
|
|
23
|
.1
|
|
Consent of Ernst & Young LLP, Independent Registered
Public Accounting Firm
|
|
23
|
.2
|
|
Consent of Cravath, Swaine & Moore LLP (included in
the opinion filed as Exhibit 5.1)**
|
|
24
|
.1
|
|
Power of Attorney (included in signature page to the
Registration Statement filed June 29, 2007)**
|
** Previously filed.
|
|
|
|
|
An application for confidential treatment of selected portions
of this agreement has been filed with the Commission.
|
(b) Financial Statement Schedules.
|
|
|
Schedule I
|
|
Summary of Investments Other than Investments in
Related Parties
|
Schedule II
|
|
Condensed Statements of Financial Position, Operations and Cash
Flows
|
Schedule III
|
|
Supplemental Insurance Information
|
The undersigned registrant hereby undertakes as follows:
(1) The undersigned will provide to the underwriters at the
closing specified in the underwriting agreement certificates in
such denominations and registered in such names as required by
the underwriters to permit prompt delivery to each purchaser.
(2) For purposes of determining any liability under the
Securities Act of 1933, as amended, the information omitted from
the form of prospectus filed as part of this registration
statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities
Act shall be deemed to be part of this registration statement as
of the time it is declared effective.
(3) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered
therein and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended may be permitted to
directors, officers and controlling persons of the registrant
pursuant to the provisions described in Item 14 or
otherwise, the registrant has been advised that in the opinion
of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Securities Act of
1933, as amended, and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid
by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant
will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this Amendment No. 7 to the
Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of New York,
state of New York, on October 29, 2007.
SYMETRA FINANCIAL CORPORATION
|
|
|
|
By:
|
/s/ Margaret
A. Meister
|
Name: Margaret A. Meister
|
|
|
|
Title:
|
Chief Financial Officer
|
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 7 to the Registration Statement has been
signed by the following persons in the capacities indicated on
the 29th day of October, 2007.
|
|
|
|
|
Signature
|
|
Title
|
|
|
|
|
*
|
|
Randall H. Talbot
President, Chief Executive Officer and Director
(Principal Executive Officer)
|
|
|
|
/s/ Margaret
A. Meister
|
|
Margaret A. Meister
Chief Financial Officer
(Principal Financial and Accounting Officer)
|
|
|
|
*
|
|
David T. Foy
(Director)
|
|
|
|
*
|
|
Lois W. Grady
(Director)
|
|
|
|
*
|
|
Sander M. Levy
(Director)
|
|
|
|
*
|
|
Robert R. Lusardi
(Director)
|
|
|
|
*
|
|
David I. Schamis
(Director)
|
|
|
|
*
|
|
Lowndes A. Smith
(Director)
|
|
|
|
|
|
*By:
|
|
/s/ Margaret
A. Meister
|
|
Margaret A. Meister
(Attorney-in-Fact)
|
EXHIBIT INDEX
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
1
|
.1
|
|
Underwriting Agreement
|
|
2
|
.1
|
|
Stock Purchase Agreement by and among Safeco Corporation,
General America Corporation, White Mountains Insurance Group,
Ltd. and Occum Acquisition Corp. dated as of March 15,
2004**
|
|
3
|
.1
|
|
Amended and Restated Certificate of Incorporation of Symetra
Financial Corporation**
|
|
3
|
.2
|
|
Bylaws of Symetra Financial Corporation**
|
|
4
|
.1
|
|
Specimen Common Stock Certificate**
|
|
4
|
.2
|
|
Fiscal Agency Agreement between Symetra Financial Corporation
and U.S. Bank dated March 30, 2006**
|
|
4
|
.3
|
|
Master Promissory Note between The Bank of New York and Symetra
Financial Corporation dated October 17, 2005**
|
|
4
|
.4
|
|
Security Agreement between The Bank of New York and Symetra
Financial Corporation dated October 17, 2005**
|
|
4
|
.5
|
|
Master Promissory Note between The Bank of New York and Symetra
Life Insurance Company dated October 17, 2005**
|
|
4
|
.6
|
|
Security Agreement between The Bank of New York and Symetra Life
Insurance Corporation dated October 17, 2005**
|
|
4
|
.7
|
|
Warrant Certificate Berkshire Hathaway, Inc. dated
July 29, 2004**
|
|
4
|
.8
|
|
Warrant Certificate White Mountains Re Group, Ltd.
dated July 29, 2004**
|
|
4
|
.9
|
|
Credit Agreement among Occum Acquisition Corp. and the seven
lenders and Bank of America, N.A. as Administrative Agent dated
June 14, 2004**
|
|
4
|
.10
|
|
Credit Agreement among Symetra Financial Corporation, the
lenders and Bank of America, N.A., as administrative agent,
dated August 16, 2007**
|
|
4
|
.11
|
|
Purchase Agreement between Symetra Financial Corporation and the
purchasers listed therein, dated October 4, 2007**
|
|
4
|
.12
|
|
Indenture between Symetra Financial Corporation and
U.S. Bank National Association, as trustee**
|
|
5
|
.1
|
|
Opinion of Cravath, Swaine & Moore LLP**
|
|
9
|
.1
|
|
Shareholders Agreement among Occum Acquisition Corp. and
the persons listed on the signature page thereto dated as of
March 8, 2004**
|
|
9
|
.2
|
|
Shareholders Agreement among Occum Acquisition Corp. and
the persons listed on the signature page thereto dated as of
March 19, 2004**
|
|
9
|
.3
|
|
Shareholders Agreement among Occum Acquisition Corp. and
the persons listed on the signature page thereto dated as of
April 16, 2004**
|
|
10
|
.1
|
|
Service Agreement between ACS Commercial Solutions, Inc. and
Symetra Financial Corporation dated October 28, 2004**
|
|
10
|
.2
|
|
Reinsurance Agreement dated as of January 1, 1998 between
Safeco Life Insurance Company and Reinsurance Group of
America**
|
|
10
|
.3
|
|
Group Short Term Disability Reinsurance Agreement dated
January 1, 1999 between Safeco Life Insurance Company and
Duncanson & Holt Services, Inc.**
|
|
10
|
.4
|
|
Group Long Term Disability Reinsurance Agreement dated
January 1, 1999 between Safeco Life Insurance Company and
Duncanson & Holt Services, Inc.**
|
|
10
|
.5
|
|
Reinsurance Agreement dated as of August 24, 2001 between
Safeco Life Insurance Company and Lincoln National Life
Insurance Company**
|
|
10
|
.6
|
|
Reinsurance Agreement dated as of December 1, 2001 between
Safeco Life Insurance Company and Transamerica Life Insurance
Company**
|
|
10
|
.7
|
|
White Mountains Advisors LLC Investment Management Agreement**
|
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.8
|
|
Reserved
|
|
10
|
.9
|
|
Agency Agreement dated as of March 10, 2006 among Symetra
Life Insurance Company, WM Financial Services, Inc. and WMFS
Insurance Services, Inc.**
|
|
10
|
.10
|
|
Agency Agreement dated as of June 1, 2005 between Symetra
Life Insurance Company and US Bancorp Investment Inc.**
|
|
10
|
.11
|
|
Symetra Financial Corporation Performance Share Plan
2007-2009**
|
|
10
|
.12
|
|
Annual Incentive Bonus Plan**
|
|
10
|
.13
|
|
Symetra Financial Corporation
Material Terms and Conditions of the Executive Severance Pay
Plan**
|
|
10
|
.14
|
|
2006 Sales Incentive Plan for Patrick B. McCormick**
|
|
10
|
.15
|
|
IPO Grant Program**
|
|
10
|
.16
|
|
Symetra Financial Corporation Equity Plan**
|
|
10
|
.17
|
|
Symetra Financial Corporation Employee Stock Purchase Plan**
|
|
21
|
.1
|
|
Subsidiaries of Symetra Financial Corporation**
|
|
23
|
.1
|
|
Consent of Ernst & Young LLP, Independent Registered
Public Accounting Firm
|
|
23
|
.2
|
|
Consent of Cravath, Swaine & Moore LLP (included in
the opinion filed as Exhibit 5.1)**
|
|
24
|
.1
|
|
Power of Attorney (included in signature page to the
Registration Statement filed June 29, 2007)**
|
** Previously filed.
|
|
|
|
|
An application for confidential treatment of selected portions
of this agreement has been filed with the Commission.
|
Report of
Independent Registered Public Accounting Firm
The Board of Directors
Symetra Financial Corporation
We have audited the consolidated financial statements of Symetra
Financial Corporation as of December 31, 2006 and 2005, and
for the years ended December 31, 2006 and 2005, and for the
period from August 2, 2004 through December 31, 2004,
and the period from January 1, 2004 through August 1,
2004, and have issued our report thereon dated February 20,
2007 (except for Note 22, as to which the date is
October 26, 2007) (included elsewhere in this Registration
Statement). Our audits also included the financial statement
schedules listed in Item 16(b) of
Form S-1
of this Registration Statement. These schedules are the
responsibility of the Companys management. Our
responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedules referred to
above, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material
respects the information set forth therein.
/s/ Ernst & Young LLP
Seattle, Washington
February 20, 2007,
except for Note 3, as to which the date is
October 26, 2007
S-1
SUMMARY
OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED
PARTIES
Year
Ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount as
|
|
|
|
Cost or
|
|
|
Fair
|
|
|
Shown on the
|
|
Type of Investment
|
|
Amortized Cost
|
|
|
Value
|
|
|
Balance Sheet
|
|
|
|
(In thousands)
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States government and government agencies and authorities
|
|
$
|
157,000
|
|
|
$
|
157,896
|
|
|
$
|
157,896
|
|
States, municipalities, and political subdivisions
|
|
|
666,101
|
|
|
|
670,898
|
|
|
|
670,898
|
|
Foreign governments
|
|
|
205,186
|
|
|
|
208,875
|
|
|
|
208,875
|
|
Public utilities
|
|
|
2,032,006
|
|
|
|
2,037,298
|
|
|
|
2,037,298
|
|
Convertibles and bonds with warrants attached
|
|
|
64,556
|
|
|
|
68,315
|
|
|
|
68,315
|
|
All other corporate bonds
|
|
|
12,901,309
|
|
|
|
12,846,824
|
|
|
|
12,846,824
|
|
Redeemable preferred stock
|
|
|
60,438
|
|
|
|
59,772
|
|
|
|
59,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
16,086,596
|
|
|
|
16,049,878
|
|
|
|
16,049,878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks:
|
|
|
|
|
|
|
|
|
|
|
|
|
Public utilities
|
|
|
8,617
|
|
|
|
11,665
|
|
|
|
11,665
|
|
Banks, trusts, and insurance companies
|
|
|
16,312
|
|
|
|
19,372
|
|
|
|
19,372
|
|
Industrial, miscellaneous, and all other
|
|
|
93,483
|
|
|
|
115,811
|
|
|
|
115,811
|
|
Nonredeemable preferred stocks
|
|
|
52,591
|
|
|
|
54,858
|
|
|
|
54,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities
|
|
|
171,003
|
|
|
|
201,706
|
|
|
|
201,706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans on real estate(1)
|
|
|
798,295
|
|
|
|
796,078
|
|
|
|
794,283
|
|
Policy loans
|
|
|
79,244
|
|
|
|
79,244
|
|
|
|
79,244
|
|
Other long-term investments
|
|
|
124,229
|
|
|
|
131,353
|
|
|
|
131,353
|
|
Short-term investments
|
|
|
48,893
|
|
|
|
48,882
|
|
|
|
48,882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
17,308,260
|
|
|
$
|
17,307,141
|
|
|
$
|
17,305,346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The amount shown in the consolidated balance sheets for mortgage
loans on real estate differs from cost as these investments are
presented net of a $4,012 allowance. |
S-2
SCHEDULE II
CONDENSED
STATEMENTS OF FINANCIAL POSITION
(PARENT
COMPANY ONLY)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
ASSETS
|
Cash and investments:
|
|
|
|
|
|
|
|
|
Investments
|
|
$
|
100,899
|
|
|
$
|
83,938
|
|
Investment in subsidiaries
|
|
|
1,516,626
|
|
|
|
1,617,147
|
|
Cash and cash equivalents
|
|
|
12,800
|
|
|
|
1,893
|
|
|
|
|
|
|
|
|
|
|
Total cash and investments
|
|
|
1,630,325
|
|
|
|
1,702,978
|
|
Current and deferred tax receivables
|
|
|
4,213
|
|
|
|
2,695
|
|
Receivables due from affiliates
|
|
|
22,665
|
|
|
|
8,560
|
|
Other assets
|
|
|
15,627
|
|
|
|
14,730
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,672,830
|
|
|
$
|
1,728,963
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Notes payable
|
|
$
|
298,737
|
|
|
$
|
300,000
|
|
Current and deferred taxes payable
|
|
|
|
|
|
|
419
|
|
Other liabilities
|
|
|
47,258
|
|
|
|
23,795
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
345,995
|
|
|
|
324,214
|
|
Capital stock, par value $0.01 per share, 750,000 shares
authorized and 92,646 shares issued and outstanding
(Note 3)
|
|
|
926
|
|
|
|
926
|
|
Additional
paid-in-capital
|
|
|
1,165,505
|
|
|
|
1,165,505
|
|
Retained earnings
|
|
|
161,815
|
|
|
|
102,485
|
|
Accumulated other comprehensive income (loss)
|
|
|
(1,411
|
)
|
|
|
135,833
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
1,326,835
|
|
|
|
1,404,749
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
1,672,830
|
|
|
$
|
1,728,963
|
|
|
|
|
|
|
|
|
|
|
S-3
SCHEDULE II
(CONTINUED)
CONDENSED
STATEMENTS OF OPERATIONS
(PARENT
COMPANY ONLY)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
August 2,
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
through
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends from subsidiaries:
|
|
|
|
|
|
|
|
|
|
|
|
|
Symetra Life Insurance Company
|
|
$
|
122,500
|
|
|
$
|
|
|
|
$
|
|
|
Other subsidiaries
|
|
|
|
|
|
|
6,000
|
|
|
|
|
|
Net investment income
|
|
|
2,160
|
|
|
|
2,374
|
|
|
|
523
|
|
Net realized investment gains
|
|
|
7,365
|
|
|
|
1,976
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
132,025
|
|
|
|
10,350
|
|
|
|
523
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of warrants issued to investors
|
|
|
|
|
|
|
|
|
|
|
101,531
|
|
Interest expense on debt
|
|
|
19,155
|
|
|
|
12,388
|
|
|
|
3,466
|
|
Operating expenses
|
|
|
610
|
|
|
|
276
|
|
|
|
1,888
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
19,765
|
|
|
|
12,664
|
|
|
|
106,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
|
112,260
|
|
|
|
(2,314
|
)
|
|
|
(106,362
|
)
|
Income tax benefits
|
|
|
(3,884
|
)
|
|
|
(2,856
|
)
|
|
|
(2,146
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before equity in undistributed net income (loss) of
subsidiaries
|
|
|
116,144
|
|
|
|
542
|
|
|
|
(104,216
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in undistributed net income (loss) of subsidiaries:
|
|
|
|
|
|
|
|
|
|
|
|
|
Symetra Life Insurance Company
|
|
|
38,556
|
|
|
|
150,486
|
|
|
|
62,416
|
|
Other subsidiaries
|
|
|
4,629
|
|
|
|
(5,870
|
)
|
|
|
493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43,185
|
|
|
|
144,616
|
|
|
|
62,909
|
|
Net income (loss) from continuing operations
|
|
|
159,329
|
|
|
|
145,158
|
|
|
|
(41,307
|
)
|
Income (loss) from equity in discontinued operations (net of
taxes of $(0), $536, and $(1,335), respectively)
|
|
|
|
|
|
|
1,045
|
|
|
|
(2,411
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
159,329
|
|
|
$
|
146,203
|
|
|
$
|
(43,718
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S-4
SCHEDULE II
(CONTINUED)
CONDENSED
STATEMENTS OF CASH FLOWS
(PARENT
COMPANY ONLY)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
August 2,
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
through
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
159,329
|
|
|
$
|
146,203
|
|
|
$
|
(43,718
|
)
|
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from equity in discontinued operations, net of
taxes
|
|
|
|
|
|
|
(1,045
|
)
|
|
|
2,411
|
|
Equity in undistributed net income of subsidiaries
|
|
|
(43,185
|
)
|
|
|
(144,616
|
)
|
|
|
(62,909
|
)
|
Net realized investment gains
|
|
|
(7,365
|
)
|
|
|
(1,976
|
)
|
|
|
|
|
Fair value of warrants issued to investors
|
|
|
|
|
|
|
|
|
|
|
101,531
|
|
Changes in accrued items and other adjustments, net
|
|
|
7,180
|
|
|
|
2,495
|
|
|
|
10,642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustments
|
|
|
(43,370
|
)
|
|
|
(145,142
|
)
|
|
|
51,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
115,959
|
|
|
|
1,061
|
|
|
|
7,957
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of investments
|
|
|
(46,686
|
)
|
|
|
(94,490
|
)
|
|
|
(40,773
|
)
|
Sales of investments
|
|
|
52,965
|
|
|
|
51,920
|
|
|
|
5,539
|
|
Purchases of Safeco Life & Investments
|
|
|
|
|
|
|
|
|
|
|
(1,349,911
|
)
|
Cash received from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
30,000
|
|
Dividends from discontinued operations
|
|
|
|
|
|
|
29,236
|
|
|
|
20,001
|
|
Other, net
|
|
|
(11,062
|
)
|
|
|
(21,286
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(4,783
|
)
|
|
|
(34,620
|
)
|
|
|
(1,335,144
|
)
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital contributions/loans to subsidiaries
|
|
|
(715
|
)
|
|
|
(202
|
)
|
|
|
|
|
Proceeds from sale of capital stock
|
|
|
|
|
|
|
|
|
|
|
1,064,900
|
|
Cash dividend to investors
|
|
|
(100,000
|
)
|
|
|
|
|
|
|
|
|
Proceeds from note payable
|
|
|
298,671
|
|
|
|
|
|
|
|
315,000
|
|
Repayments of note payable
|
|
|
(300,000
|
)
|
|
|
|
|
|
|
(15,000
|
)
|
Other, net
|
|
|
1,775
|
|
|
|
|
|
|
|
(2,059
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(100,269
|
)
|
|
|
(202
|
)
|
|
|
1,362,841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents from
continuing operations
|
|
|
10,907
|
|
|
|
(33,761
|
)
|
|
|
35,654
|
|
Cash and cash equivalents at beginning of period
|
|
|
1,893
|
|
|
|
35,654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
12,800
|
|
|
$
|
1,893
|
|
|
$
|
35,654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S-5
SCHEDULE II
(CONTINUED)
NOTES TO
CONDENSED FINANCIAL STATEMENTS
(PARENT COMPANY ONLY)
(In Thousands)
Year
Ended December 31, 2006
|
|
1.
|
Organization
and Presentation
|
The accompanying financial statements comprise a condensed
presentation of financial position, results of operations, and
cash flows of Symetra Financial Corporation (the Company) on a
separate-company basis. These condensed financial statements do
not include the accounts of the Companys wholly owned
subsidiaries, but instead include the Companys investment
in those subsidiaries, stated at amounts which are substantially
equal to the Companys equity in the subsidiaries net
assets. Therefore, the accompanying financial statements are not
those of the primary reporting entity.
Additional information about accounting policies pertaining to
investments and other significant accounting policies applied by
the Company and its subsidiaries, debt, and commitments and
contingencies are as set forth in Notes 2, 11, and 14,
respectively, to the audited consolidated financial statements
of the Company.
The Company received dividends of $122,500, $35,236, and $20,001
from its consolidated subsidiaries for the years ended
December 31, 2006 and 2005 and the five months ended
December 31, 2004.
See Note 19 to the audited consolidated financial
statements of the Company included earlier in this report for a
description of other related-party transactions.
|
|
3.
|
Common
Stock Dividend and Amendment to Certificate of
Incorporation
|
On September 28, 2007, the Company filed an amendment to
its Certificate of Incorporation with the Delaware Secretary of
State which increased the Companys authorized shares of
common stock to 750,000 shares.
On October 26, 2007, the Company executed a
7.7-for-1
stock dividend (substantially equivalent to a
8.7-for-1
stock split) that increased the shares of common stock
outstanding from 10,649 to 92,646 and the number of shares
subject to outstanding warrants from 2,181 to 18,976. The stock
split, effected in the form of a dividend, has been reflected
retroactively in these financial statements for all periods
presented.
S-6
SCHEDULE III
SUPPLEMENTAL
INSURANCE INFORMATION
Year Ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits,
|
|
|
Amortization
|
|
|
|
|
|
|
Deferred
|
|
|
Losses,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims,
|
|
|
of Deferred
|
|
|
|
|
|
|
Policy
|
|
|
Claims,
|
|
|
|
|
|
Other
|
|
|
|
|
|
Net
|
|
|
Losses, and
|
|
|
Policy
|
|
|
Other
|
|
|
|
Acquisition
|
|
|
and Loss
|
|
|
Unearned
|
|
|
Policyholder
|
|
|
Premium
|
|
|
Investment
|
|
|
Settlement
|
|
|
Acquisition
|
|
|
Operating
|
|
Segment
|
|
Costs
|
|
|
Expenses(1)
|
|
|
Premiums
|
|
|
Funds
|
|
|
Revenue
|
|
|
Income
|
|
|
Expenses
|
|
|
Costs
|
|
|
Expenses
|
|
|
|
(In thousands)
|
|
|
December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Group
|
|
$
|
3,998
|
|
|
$
|
185,215
|
|
|
$
|
2,522
|
|
|
$
|
8,376
|
|
|
$
|
387,231
|
|
|
$
|
18,030
|
|
|
$
|
230,753
|
|
|
$
|
10,882
|
|
|
$
|
105,742
|
|
Retirement Services
|
|
|
54,472
|
|
|
|
4,916,869
|
|
|
|
|
|
|
|
5,677
|
|
|
|
130
|
|
|
|
269,821
|
|
|
|
169,731
|
|
|
|
1,081
|
|
|
|
61,738
|
|
Income Annuities
|
|
|
6,813
|
|
|
|
7,010,585
|
|
|
|
|
|
|
|
1,989
|
|
|
|
|
|
|
|
439,001
|
|
|
|
371,786
|
|
|
|
580
|
|
|
|
21,591
|
|
Individual
|
|
|
22,954
|
|
|
|
4,370,104
|
|
|
|
9,199
|
|
|
|
22,016
|
|
|
|
138,296
|
|
|
|
232,759
|
|
|
|
258,180
|
|
|
|
2,046
|
|
|
|
57,370
|
|
Other
|
|
|
|
|
|
|
(698
|
)
|
|
|
|
|
|
|
8,311
|
|
|
|
|
|
|
|
25,316
|
|
|
|
(327
|
)
|
|
|
|
|
|
|
14,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
88,237
|
|
|
$
|
16,482,075
|
|
|
$
|
11,721
|
|
|
$
|
46,369
|
|
|
$
|
525,657
|
|
|
$
|
984,927
|
|
|
$
|
1,030,123
|
|
|
$
|
14,589
|
|
|
$
|
260,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Group
|
|
$
|
5,288
|
|
|
$
|
208,122
|
|
|
$
|
2,795
|
|
|
$
|
8,423
|
|
|
$
|
438,276
|
|
|
$
|
19,270
|
|
|
$
|
296,036
|
|
|
$
|
10,478
|
|
|
$
|
115,342
|
|
Retirement Services
|
|
|
25,537
|
|
|
|
5,576,531
|
|
|
|
|
|
|
|
5,313
|
|
|
|
121
|
|
|
|
292,801
|
|
|
|
185,841
|
|
|
|
94
|
|
|
|
62,636
|
|
Income Annuities
|
|
|
4,291
|
|
|
|
7,173,678
|
|
|
|
|
|
|
|
2,363
|
|
|
|
|
|
|
|
441,438
|
|
|
|
392,534
|
|
|
|
272
|
|
|
|
19,383
|
|
Individual
|
|
|
13,901
|
|
|
|
4,246,684
|
|
|
|
8,765
|
|
|
|
24,058
|
|
|
|
137,062
|
|
|
|
222,613
|
|
|
|
263,944
|
|
|
|
1,017
|
|
|
|
61,374
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,375
|
|
|
|
|
|
|
|
17,926
|
|
|
|
|
|
|
|
|
|
|
|
14,512
|
|
Discontinued Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
172
|
|
|
|
|
|
|
|
|
|
|
|
845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
49,017
|
|
|
$
|
17,205,015
|
|
|
$
|
11,560
|
|
|
$
|
47,532
|
|
|
$
|
575,459
|
|
|
$
|
994,220
|
|
|
$
|
1,138,355
|
|
|
$
|
11,861
|
|
|
$
|
274,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 2, 2004 Through December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Group
|
|
$
|
3,946
|
|
|
$
|
231,193
|
|
|
$
|
1,315
|
|
|
$
|
7,018
|
|
|
$
|
207,396
|
|
|
$
|
8,764
|
|
|
$
|
124,008
|
|
|
$
|
1,352
|
|
|
$
|
54,410
|
|
Retirement Services
|
|
|
5,914
|
|
|
|
6,413,824
|
|
|
|
|
|
|
|
3,741
|
|
|
|
105
|
|
|
|
124,188
|
|
|
|
93,362
|
|
|
|
236
|
|
|
|
26,682
|
|
Income Annuities
|
|
|
1,257
|
|
|
|
7,282,235
|
|
|
|
|
|
|
|
3,996
|
|
|
|
|
|
|
|
184,074
|
|
|
|
164,100
|
|
|
|
|
|
|
|
7,226
|
|
Individual
|
|
|
3,260
|
|
|
|
4,123,410
|
|
|
|
8,088
|
|
|
|
24,189
|
|
|
|
55,694
|
|
|
|
89,229
|
|
|
|
106,225
|
|
|
|
38
|
|
|
|
28,566
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,344
|
|
|
|
|
|
|
|
4,865
|
|
|
|
|
|
|
|
|
|
|
|
6,358
|
|
Discontinued Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
393
|
|
|
|
|
|
|
|
|
|
|
|
4,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
14,377
|
|
|
$
|
18,050,662
|
|
|
$
|
9,403
|
|
|
$
|
43,288
|
|
|
$
|
263,195
|
|
|
$
|
411,513
|
|
|
$
|
487,695
|
|
|
$
|
1,626
|
|
|
$
|
127,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1, 2004 Through August 1, 2004
(Predecessor)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Group
|
|
$
|
14,261
|
|
|
$
|
244,684
|
|
|
$
|
1,658
|
|
|
$
|
8,333
|
|
|
$
|
293,213
|
|
|
$
|
13,632
|
|
|
$
|
196,468
|
|
|
$
|
10,537
|
|
|
$
|
78,727
|
|
Retirement Services
|
|
|
146,432
|
|
|
|
6,540,337
|
|
|
|
|
|
|
|
2,999
|
|
|
|
92
|
|
|
|
225,008
|
|
|
|
155,575
|
|
|
|
16,313
|
|
|
|
36,789
|
|
Income Annuities
|
|
|
|
|
|
|
6,339,003
|
|
|
|
|
|
|
|
4,725
|
|
|
|
|
|
|
|
290,328
|
|
|
|
274,800
|
|
|
|
|
|
|
|
9,522
|
|
Individual
|
|
|
192,156
|
|
|
|
3,910,168
|
|
|
|
8,456
|
|
|
|
24,231
|
|
|
|
64,620
|
|
|
|
139,063
|
|
|
|
153,168
|
|
|
|
7,314
|
|
|
|
36,059
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,184
|
|
|
|
|
|
|
|
25,671
|
|
|
|
|
|
|
|
|
|
|
|
21,237
|
|
Discontinued Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
754
|
|
|
|
|
|
|
|
|
|
|
|
11,077
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
352,849
|
|
|
$
|
17,034,192
|
|
|
$
|
10,114
|
|
|
$
|
43,472
|
|
|
$
|
357,925
|
|
|
$
|
694,456
|
|
|
$
|
780,011
|
|
|
$
|
34,164
|
|
|
$
|
193,411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Funds held under deposit contracts, future policy benefits, and
policy and contract claims are included in this column. |
S-7
exv1w1
Exhibit 1.1
SYMETRA FINANCIAL CORPORATION
(a Delaware corporation)
39,500,000 Shares of Common Stock
PURCHASE AGREEMENT
Dated: l, 2007
SYMETRA FINANCIAL CORPORATION
(a Delaware corporation)
39,500,000 Shares of Common Stock
(Par Value $0.01 Per Share)
PURCHASE AGREEMENT
l, 2007
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Goldman, Sachs & Co.
J.P. Morgan Securities Inc.
Lehman Brothers Inc.
as Representatives of the several Underwriters
|
|
|
c/o
|
|
Merrill Lynch & Co. |
|
|
Merrill Lynch, Pierce, Fenner & Smith |
|
|
Incorporated |
4 World Financial Center
New York, New York 10080
Ladies and Gentlemen:
Symetra Financial Corporation, a Delaware corporation (the Company), and the persons listed
in Schedule B hereto (the Selling Shareholders), confirm their respective agreements with Merrill
Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated (Merrill Lynch) and each of the
other Underwriters named in Schedule A hereto (collectively, the Underwriters, which term shall
also include any underwriter substituted as hereinafter provided in Section 10 hereof), for whom
Merrill Lynch, Goldman, Sachs & Co., J.P. Morgan Securities Inc. and Lehman Brothers Inc. are
acting as representatives (in such capacity, the Representatives), with respect to (i) the sale
by the Selling Shareholders, acting severally and not jointly, and the purchase by the
Underwriters, acting severally and not jointly, of the respective numbers of shares of Common
Stock, par value $0.01 per share, of the Company (Common Stock) set forth in Schedules A and B
hereto and (ii) the grant by the Selling Shareholders to the Underwriters, acting severally and not
jointly, of the option described in Section 2(b) hereof to purchase all or any part of 5,925,000
additional shares of Common Stock to cover overallotments, if any. The aforesaid 39,500,000 shares
of Common Stock (the Initial Securities) to be purchased by the Underwriters and all or any part
of the 5,925,000 shares of Common Stock subject to the option described in Section 2(b) hereof (the
Option Securities) are hereinafter called, collectively, the Securities.
The Company and the Selling Shareholders understand that the Underwriters propose to make a
public offering of the Securities as soon as the Representatives deem advisable after this
Agreement has been executed and delivered.
The Company has filed with the Securities and Exchange Commission (the Commission) a
registration statement on Form S-1 (No. 333-144162), including the related preliminary prospectus
or prospectuses, covering the registration of the Securities under the Securities Act of 1933, as
amended (the 1933 Act). Promptly after execution and delivery of this Agreement, the Company
will prepare and file a prospectus in accordance with the provisions of Rule 430A (Rule 430A) of
the rules and regulations of the Commission under the 1933 Act (the 1933 Act Regulations) and
paragraph (b) of Rule 424 (Rule 424(b)) of the 1933 Act Regulations. The information included in
such prospectus that was omitted from such registration statement at the time it became effective
but that is deemed to be part of such registration statement at the time it became effective
pursuant to paragraph (b) of Rule 430A is referred to as Rule 430A Information. Each prospectus
used before such registration statement became effective, and any prospectus that omitted the Rule
430A Information, that was used after such effectiveness and prior to the execution and delivery of
this Agreement, is herein called a preliminary prospectus. Such registration statement,
including the amendments thereto, the exhibits and any schedules thereto, at the time it became
effective, and including the Rule 430A Information, is herein called the Registration Statement.
Any registration statement filed pursuant to Rule 462(b) of the 1933 Act Regulations is herein
referred to as the Rule 462(b) Registration Statement, and after such filing the term
Registration Statement shall include the Rule 462(b) Registration Statement. The final
prospectus in the form first furnished to the Underwriters for use in connection with the offering
of the Securities is herein called the Prospectus. For purposes of this Agreement, all
references to the Registration Statement, any preliminary prospectus, the Prospectus or any
amendment or supplement to any of the foregoing shall be deemed to include the copy filed with the
Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval system (EDGAR).
SECTION 1. Representations and Warranties.
(a) Representations and Warranties by the Company. The Company represents and warrants to
each Underwriter as of the date hereof, as of the Applicable Time referred to in Section 1(a)(i)
hereof, as of the Closing Time referred to in Section 2(c) hereof, and as of each Date of Delivery
(if any) referred to in Section 2(b) hereof, and agrees with each Underwriter, as follows:
(i) Compliance with Registration Requirements. Each of the Registration
Statement, any Rule 462(b) Registration Statement and any post-effective amendment thereto
has become effective under the 1933 Act and no stop order suspending the effectiveness of
the Registration Statement, any Rule 462(b) Registration Statement or any post-effective
amendment thereto has been issued under the 1933 Act and no proceedings for that purpose
have been instituted or are pending or, to the knowledge of the Company, are contemplated by
the Commission, and any request on the part of the Commission for additional information has
been complied with.
At the respective times the Registration Statement, any Rule 462(b) Registration
Statement and any post-effective amendments thereto became effective and at the Closing Time
(and, if any Option Securities are purchased, at the Date of Delivery), the Registration
Statement, the Rule 462(b) Registration Statement and any amendments and supplements thereto
complied and will comply in all material respects with the requirements of the 1933 Act and
the 1933 Act Regulations and did not and will not contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary to make the
statements therein not misleading. Neither the Prospectus nor any amendments or supplements
thereto (including any prospectus wrapper), at the time the Prospectus or any such amendment
or supplement was issued and at the Closing Time (and, if any Option Securities are
purchased, at the Date of Delivery), included or will include an untrue statement of a
material fact or omitted or will omit to state a
2
material fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
As of the Applicable Time (as defined below), neither (x) the Issuer General Use Free
Writing Prospectus(es) (as defined below) issued at or prior to the Applicable Time and the
Statutory Prospectus (as defined below) as of the Applicable Time, all considered together
(collectively, the General Disclosure Package), nor (y) any individual Issuer Limited Use
Free Writing Prospectus, when considered together with the General Disclosure Package,
included any untrue statement of a material fact or omitted to state any material fact
necessary in order to make the statements therein, in the light of the circumstances under
which they were made, not misleading.
As used in this subsection and elsewhere in this Agreement:
Applicable Time means l: 00 [a/p]m (Eastern time) on l, 2007 or such other
time as agreed by the Company and the Representatives.
Statutory Prospectus as of any time means the prospectus relating to the Securities
that is included in the Registration Statement immediately prior to that time, including any
document incorporated by reference therein.
Issuer Free Writing Prospectus means any issuer free writing prospectus, as defined
in Rule 433 of the 1933 Act Regulations (Rule 433), relating to the Securities that (i) is
required to be filed with the Commission by the Company, (ii) is a road show that is a
written communication within the meaning of Rule 433(d)(8)(i) whether or not required to be
filed with the Commission or (iii) is exempt from filing pursuant to Rule 433(d)(5)(i)
because it contains a description of the Securities or of the offering that does not reflect
the final terms, in each case in the form filed or required to be filed with the Commission
or, if not required to be filed, in the form retained in the Companys records pursuant to
Rule 433(g).
Issuer General Use Free Writing Prospectus means any Issuer Free Writing Prospectus
that is intended for general distribution to prospective investors (other than a Bona Fide
Electronic Road Show (as defined below)), as evidenced by its being specified in Schedule E
hereto.
Issuer Limited Use Free Writing Prospectus means any Issuer Free Writing Prospectus
that is not an Issuer General Use Free Writing Prospectus.
The Company has made available a bona fide electronic road show, as defined in Rule
433, in compliance with Rule 433(d)(8)(ii) (the Bona Fide Electronic Road Show) such that
no filing of any road show (as defined in Rule 433(h)) is required in connection with the
offering of the Securities.
Each Issuer Free Writing Prospectus, as of its issue date and at all subsequent times
through the completion of the public offer and sale of the Securities or until any earlier
date that the issuer notified or notifies the Representatives as described in the next
sentence, did not, does not and will not include any information that conflicted, conflicts
or will conflict with the information contained in the Registration Statement or the
Prospectus, and any preliminary or other prospectus deemed to be a part thereof that has not
been superseded or modified.
3
The representations and warranties in this Section 1(a)(i) shall not apply to
statements in or omissions from the Registration Statement, the Prospectus or any Issuer
Free Writing Prospectus made in reliance upon and in conformity with written information
furnished to the Company by any Underwriter through the Representatives expressly for use
therein.
Each preliminary prospectus (including the prospectus filed as part of the Registration
Statement as originally filed or as part of any amendment thereto) complied when so filed in
all material respects with the 1933 Act Regulations.
At the time of filing the Registration Statement, any 462(b) Registration Statement and
any post-effective amendments thereto, at the earliest time thereafter that the Company or
another offering participant made a bona fide offer (within the meaning of Rule 164(h)(2) of
the 1933 Act Regulations) of the Securities and at the date hereof, the Company was not and
is not an ineligible issuer, as defined in Rule 405 of the 1933 Act Regulations.
(ii) Independent Accountants. Ernst & Young LLP, who have certified certain
financial statements of the Company, whose report appears in the Registration Statement and
who have delivered the letter referred to in Section 5(g) hereof, are independent public
accountants as required by the 1933 Act and the 1933 Act Regulations and were independent
public accountants as required by the 1933 Act and the 1933 Act Regulations during the
periods covered by the financial statements on which they reported contained in the
Registration Statement.
(iii) Financial Statements. The historical financial statements (including the
related notes and supporting schedules) included in the Registration Statement, the General
Disclosure Package and the Prospectus present fairly the financial condition, results of
operations and cash flows of the entities purported to be shown thereby, at the dates and
for the periods indicated, and have been prepared in conformity with accounting principles
generally accepted in the United States applied on a consistent basis throughout the periods
involved.
(iv) No Material Adverse Change in Business. Neither the Company nor any of
its subsidiaries has sustained, since the date of the latest audited financial statements
included in the Registration Statement, the General Disclosure Package and the Prospectus,
any material loss or interference with its business from fire, explosion, flood or other
calamity, whether or not covered by insurance, or from any labor dispute or court or
governmental action, order or decree and, since such date, there has not been any change in
the capital stock or long-term debt of the Company or any of its subsidiaries, except with
respect to changes that are disclosed in the Registration Statement, the General Disclosure
Package and the Prospectus, or any material adverse change, or any development involving a
prospective material adverse change, in or affecting the condition (financial or otherwise),
results of operations, stockholders equity, properties, management, business or prospects
of the Company and its subsidiaries, taken as a whole. Since the date as of which
information is given in the Registration Statement, the General Disclosure Package and the
Prospectus through the date hereof, and except as may otherwise be disclosed therein, the
Company has not (i) issued or granted any securities other than pursuant to the Symetra
Financial Corporation Equity Plan as described in the Registration Statement, the General
Disclosure Package and the Prospectus, (ii) incurred any liability or obligation, direct or
contingent, other than liabilities and obligations that were incurred in the ordinary course
of business, (iii) entered into any material transaction not in the ordinary course of
business or (iv) declared or paid any dividend or distribution on its capital stock.
(v) Good Standing of the Company and Subsidiaries. The Company and each of its
subsidiaries (i) has been duly organized and is validly existing and in good standing (with
respect
4
to those jurisdictions that recognize such concept) as a corporation or other business
entity under the laws of its jurisdiction of organization and (ii) is duly qualified to do
business and in good standing as a foreign corporation or other business entity in each
jurisdiction in which its ownership or lease of property or the conduct of its businesses
requires such qualification, except where the failure to so qualify or to be in good
standing would not, individually or in the aggregate, have a material adverse effect on the
condition (financial or otherwise), results of operations, stockholders equity, properties,
management, business or prospects of the Company and its subsidiaries, taken as a whole
(Material Adverse Effect); and have all corporate power and authority necessary to
own or hold its properties and to conduct the businesses in which they are engaged; and none
of the subsidiaries of the Company (other than Symetra Life Insurance Company) is a
significant subsidiary (as defined in Rule 405 under the 1933 Act) (a Significant
Subsidiary).
(vi) Capitalization. The authorized, issued and outstanding capital stock of
the Company is as set forth in the Prospectus in the column entitled Actual under the
caption Capitalization (except for subsequent issuances, if any, pursuant to this
Agreement, pursuant to reservations, agreements or employee benefit plans referred to in the
Prospectus or pursuant to the exercise of convertible securities or options referred to in
the Prospectus). The shares of issued and outstanding capital stock, including the
Securities to be purchased by the Underwriters from the Selling Shareholders, have been duly
authorized and validly issued and are fully paid and non-assessable; all of the issued and
outstanding shares of capital stock of each subsidiary of the Company have been duly
authorized and validly issued, are fully paid and non-assessable and are owned directly or
indirectly by the Company, free and clear of all liens, encumbrances, equities or claims;
provided that with respect to Health Network Strategies, LLC, the Company owns 60% of the
capital stock; none of the outstanding shares of capital stock, including the Securities to
be purchased by the Underwriters from the Selling Shareholders, was issued in violation of
the preemptive or other similar rights of any securityholder of the Company; none of the
outstanding shares of capital stock of any subsidiary was issued in violation of the
preemptive or similar rights of any securityholder of such subsidiary.
(vii) Authorization of Agreement. The Company has all requisite corporate
power to execute, deliver and perform its obligations under this Agreement. This Agreement
has been duly and validly authorized, executed and delivered by the Company.
(viii) Description of Securities. The Common Stock conforms to all statements
relating thereto contained in the Prospectus and such description conforms to the rights set
forth in the instruments defining the same.
(ix) Absence of Defaults and Conflicts. Neither the Company nor any of its
subsidiaries (i) is in violation of its certificate of incorporation or by-laws (or similar
organizational documents), (ii) is in default in any respect, and no event has occurred
that, with notice or lapse of time or both, would constitute such a default, in the due
performance or observance of any term, covenant, condition or other obligation contained in
any indenture, mortgage, deed of trust, loan agreement, license or other agreement or
instrument to which it is a party or by which it is bound or to which any of its properties
or assets is subject or (iii) is in violation in any respect of any statute or any order,
rule or regulation of any court or governmental agency or body having jurisdiction over it
or its property or assets or has failed to obtain or maintain any license, permit,
certificate, franchise or other governmental authorization or permit necessary to the
ownership of its property or to the conduct of its business, except in the case of clauses
(ii) and (iii), to the extent that any such conflict, breach, violation or default would
not, individually or in the aggregate, reasonably be expected to have a Material Adverse
Effect;
5
and the execution, delivery and performance of this Agreement by the Company and the
consummation of the transactions contemplated herein and in the Registration Statement
(including the sale of the Securities) and compliance by the Company with its obligations
hereunder do not and will not, (i) conflict with or result in a breach or violation of any
of the terms or provisions of, impose any lien, charge or encumbrance upon any property or
assets of the Company or its subsidiaries, or constitute a default under, any indenture,
mortgage, deed of trust, loan agreement, lease or other agreement or instrument to which the
Company or any of its subsidiaries is a party or by which the Company or any of its
subsidiaries is bound or to which any of the property or assets of the Company or any of its
subsidiaries is subject, (ii) result in any violation of the provisions of the certificate
of incorporation or bylaws (or similar organizational documents) of the Company or any of
its subsidiaries or (iii) result in any violation of any statute or any order, rule or
regulation of any court or governmental agency or body having jurisdiction over the Company
or any of its subsidiaries or any of their properties or assets.
(x) Absence of Labor Dispute. No labor disturbance by the employees of the
Company or any of its subsidiaries exists or, to the knowledge of the Company or any of its
subsidiaries, is imminent that would reasonably be expected to have a Material Adverse
Effect.
(xi) Absence of Proceedings. There are no legal or governmental proceedings
pending to which the Company or any of its subsidiaries is a party or of which any property
or assets of the Company or any of its subsidiaries is the subject that would, individually
or in the aggregate, reasonably be expected to have a Material Adverse Effect, and to the
Companys knowledge, no such proceedings are threatened or contemplated by governmental
authorities or others.
(xii) Accuracy of Exhibits. There are no contracts or documents which are
required to be described in the Registration Statement or the Prospectus or to be filed as
exhibits thereto which have not been so described and filed as required.
(xiii) Possession of Intellectual Property. The Company and each of its
subsidiaries own or possess adequate rights to use all material patents, patent
applications, trademarks, service marks, trade names, trademark registrations, service mark
registrations, copyrights, licenses, know-how, software, systems and technology (including
trade secrets and other unpatented and/or unpatentable proprietary or confidential
information, systems or procedures) necessary for the conduct of their respective
businesses and have no reason to believe that the conduct of their respective businesses
will conflict with, and have not received any notice of any claim of conflict with, any such
rights of others.
(xiv) Absence of Further Requirements. No consent, approval, authorization or
order of, or filing, registration or qualification with any court or governmental agency or
body having jurisdiction over the Company or any of its subsidiaries is required for the
performance by the Company of its obligations hereunder, in connection with the offering,
issuance or sale of the Securities hereunder or the consummation of the transactions
contemplated by this Agreement, except for the registration of the Shares under the
Securities Act and such consents, approvals, authorizations, registrations or qualifications
as may be required under the Exchange Act and applicable state securities or blue sky laws,
or insurance securities laws and from the NASD in connection with the purchase and sale of
the Shares by the Underwriters.
(xv) Absence of Manipulation. The Company, its controlled affiliates (as
defined in the Securities Act) and to its knowledge its non-controlled affiliates have not
taken, directly or indirectly, any action designed to or that has constituted or that
reasonably be expected to cause
6
or result in the stabilization or manipulation of the price of any security of the
Company in connection with the offering of the Securities.
(xvi) Possession of Licenses and Permits. Except as may be disclosed in the
Registration Statement, the General Disclosure Package and the Prospectus, (i) the Company
and its subsidiaries possess all material permits, licenses, orders, exemptions,
registrations approvals, consents and other authorizations (collectively, Governmental
Licenses) issued by the appropriate federal, state, local or foreign regulatory
agencies or bodies necessary to conduct the business now operated by them, except where the
failure so to possess would not, singly or in the aggregate, have a Material Adverse Effect
and except for such Governmental Licenses that have been deemed unnecessary by the
appropriate regulatory agency or body; (ii) the Company and its subsidiaries are in
compliance with the terms and conditions of all the Governmental Licenses, except where the
failure so to comply would not, singly or in the aggregate, have a Material Adverse Effect;
(iii) all of the Governmental Licenses are valid and in full force and effect, except where
the invalidity of such Governmental Licenses or the failure of such Governmental Licenses to
be in full force and effect would not have a Material Adverse Effect; and (iv) neither the
Company nor any of its subsidiaries has received any written notice of proceedings relating
to the revocation or modification of any such Governmental Licenses which, individually or
in the aggregate, if the subject of an unfavorable decision, ruling or finding, would result
in a Material Adverse Effect.
(xvii) Possession of Insurance Licenses. Each subsidiary of the Company that
is engaged in the business of insurance or reinsurance (each an Insurance
Subsidiary, collectively the Insurance Subsidiaries) is licensed or
authorized to conduct an insurance or reinsurance business, as the case may be, under the
insurance statutes of each jurisdiction in which the conduct of its business requires such
licensing or authorization, except for such jurisdictions in which the failure of the
Insurance Subsidiary to be so licensed or authorized would not, singly or in the aggregate,
have a Material Adverse Effect. The Insurance Subsidiaries have made all required filings
under applicable insurance statutes in each jurisdiction where such filings are required,
except for such filings the failure of which to make would not, singly or in the aggregate,
have a Material Adverse Effect. Except as disclosed in the Registration Statement, General
Disclosure Package and the Prospectus, each of the Insurance Subsidiaries has all other
necessary Governmental Licenses, of and from all insurance regulatory authorities necessary
to conduct their respective existing businesses as described in the Registration Statement,
the General Disclosure Package and Prospectus, except where the failure to have such
authorizations would not, singly or in the aggregate, have a Material Adverse Effect and no
Insurance Subsidiary has received any notification from any insurance regulatory authority
to the effect that any additional authorizations are needed to be obtained by any Insurance
Subsidiary in any case where it could reasonably be expected that the failure to obtain such
additional authorizations or the limiting of the writing of such business would have a
Material Adverse Effect, and no insurance regulatory authority having jurisdiction over any
Insurance Subsidiary has issued any order or decree impairing, restricting or prohibiting
(i) the payment of dividends by any Insurance Subsidiary to its parent, other than those
restrictions applicable to insurance or reinsurance companies under such jurisdiction
generally, or (ii) the continuation of the business of the Company or any of the Insurance
Subsidiaries in all material respects as presently conducted, in each case, except where
such orders or decrees would not, singly or in the aggregate, have a Material Adverse
Effect.
(xviii) Reinsurance Contracts. Except as described in the Registration
Statement, the General Disclosure Package and the Prospectus, (i) all ceded reinsurance and
retrocessional treaties, contracts, agreements and arrangements (Reinsurance
Contracts) to which the
7
Company or any Insurance Subsidiary is a party and as to which any of them reported
recoverables, premiums due or other amounts in its most recent statutory financial
statements are in full force and effect, except where the failure of such Reinsurance
Contracts to be in full force and effect would not, singly or in the aggregate, have a
Material Adverse Effect, and (ii) neither the Company nor any Insurance Subsidiary has
received any notice from any other party to any Reinsurance Contract that such other party
intends not to perform such Reinsurance Contract in any material respect, and the Company
has no knowledge that any of the other parties to such Reinsurance Contracts will be unable
to perform its obligations thereunder in any material respect, except where (A) the Company
or the Insurance Subsidiary has established reserves in its financial statements that it
deems adequate for potential uncollectible reinsurance or (B) such nonperformance would not
have a Material Adverse Effect.
(xix) Title to Property. The Company and each of its subsidiaries has good and
marketable title in fee simple to all real property and good and marketable title to all
personal property owned by them, in each case free and clear of all liens, encumbrances and
defects, except such as are described in the Registration Statement, the General Disclosure
Package and Prospectus or such as do not materially affect the value of such property and do
not materially interfere with the use made and proposed to be made of such property by the
Company or any of its subsidiaries; and all real property and buildings held under lease by
the Company or any of its subsidiaries are held by them under valid, subsisting and
enforceable leases, with such exceptions as do not materially interfere with the use made
and proposed to be made of such property and buildings by the Company or any of its
subsidiaries.
(xx) Investment Company Act. Neither the Company nor any subsidiary is, and
after the Closing Date will be, an investment company or a company controlled by an
investment company within the meaning of the Investment Company Act of 1940, as amended,
and the rules and regulations of the Commission thereunder.
(xxi) Registration Rights. Except as disclosed in the Registration Statement,
the General Disclosure Package and Prospectus, there are no contracts, agreements or
understandings between the Company and any person granting such person the right to require
the Company to file a registration statement under the 1933 Act with respect to any
securities of the Company owned or to be owned by such person or to require the Company to
include such securities in the securities being registered pursuant to any registration
statement filed by the Company under the 1933 Act.
(xxii) Accounting Controls. The Company and each of its subsidiaries (i) makes
and keeps accurate books and records and (ii) maintains and has maintained a system of
internal accounting controls sufficient to provide reasonable assurance that (A)
transactions are executed in accordance with managements general or specific authorization,
(B) transactions are recorded as necessary to permit preparation of its financial statements
in conformity with accounting principles generally accepted in the United States and to
maintain accountability for its assets, (C) access to its assets is permitted only in
accordance with managements general or specific authorization and (D) the reported
accountability for its assets is compared with existing assets at reasonable intervals and
appropriate action is taken with respect to any differences. Since the date of the most
recent balance sheet of the Company and its consolidated subsidiaries reviewed or audited by
Ernst & Young LLP and the audit committee of the board of directors of the Company, (i) the
Company has not been advised of (A) any significant deficiencies in the design or operation
of internal controls that could adversely affect the ability of the Company and each of its
subsidiaries to record, process, summarize and report financial data, or any material
weaknesses in internal controls and (B) any fraud, whether or not material, that involves
8
management or other employees who have a significant role in the internal controls of
the Company and each of its subsidiaries, and (ii) since that date, there have been no
significant changes in internal controls or in other factors that could significantly affect
internal controls, including any corrective actions with regard to significant deficiencies
and material weaknesses.
(xxiii) Compliance with the Sarbanes-Oxley Act. The Company has taken all
necessary actions to ensure that, upon the effectiveness of the Registration Statement, it
will be in compliance with all provisions of the Sarbanes-Oxley Act of 2002 and all rules
and regulations promulgated thereunder or implementing the provisions thereof (the
Sarbanes-Oxley Act) that are then in effect and which the Company is required to comply
with as of the effectiveness of the Registration Statement, and is actively taking steps to
ensure that it will be in compliance with other provisions of the Sarbanes-Oxley Act not
currently in effect, upon the effectiveness of such provisions, or which will become
applicable to the Company at all times after the effectiveness of the Registration
Statement.
(xxiv) Payment of Taxes. The Company and each of its subsidiaries has filed
all material federal, state, local and foreign income and franchise tax returns required to
be filed through the date hereof, subject to permitted extensions, and has paid all taxes
due thereon; and no tax deficiency has been determined adversely to the Company or any of
its subsidiaries that has had (nor does the Company have any knowledge of any tax
deficiencies that, if determined adversely to the Company or any of its subsidiaries would
have) a Material Adverse Effect.
(xxv) Insurance. The Company and each of its subsidiaries carry, or are
covered by, insurance from insurers of recognized financial responsibility in such amounts
and covering such risks as is adequate for the conduct of their respective businesses and
the value of their respective properties and is customary for companies engaged in similar
businesses in similar industries (other than, in each case, reinsurance of insurance
policies issued).
(xxvi) Statistical and Market-Related Data. The statistical data,
market-related, industry-related and customer-related data and estimates included under the
captions Prospectus Summary, Managements Discussion and Analysis of Financial Condition
and Results of Operations and Business in Registration Statement, the General Disclosure
Package and Prospectus are based on or derived from sources that the Company believes to be
reliable and accurate in all material respects.
(xxvii) Foreign Corrupt Practices Act. Neither the Company nor any of its
subsidiaries, nor, to the knowledge of the Company, any director, officer, agent, employee
or other person associated with or acting on behalf of the Company or any of its
subsidiaries, has (i) used any corporate funds for any unlawful contribution, gift,
entertainment or other unlawful expense relating to political activity; (ii) made any direct
or indirect unlawful payment to any foreign or domestic government official or employee from
corporate funds; (iii) violated or is in violation of any provision of the Foreign Corrupt
Practices Act of 1977; or (iv) made any bribe, rebate, payoff, influence payment, kickback
or other unlawful payment.
(xxviii) Ratings. The Company has no knowledge of any threatened or pending
downgrading of the Companys or any of its subsidiaries claims-paying ability rating or
financial strength rating by A.M. Best Company, Inc., Standard & Poors Rating Group,
Moodys Investor Service, Inc., Fitch Ratings, Ltd., or any other nationally recognized
statistical rating organizations, as such term is defined for purposes of Rule 436(g)(2)
under the 1933 Act, which currently has publicly released a rating of the claims-paying
ability or financial strength of the Company or any of its subsidiaries.
9
(xxix) Dividends. Except as may be disclosed in the Registration Statement,
the General Disclosure Package and Prospectus, no subsidiary of the Company is currently
prohibited, directly or indirectly, from paying any dividends to the Company, from making
any other distribution on such subsidiarys capital stock, from repaying to the Company any
loans or advances to such subsidiary from the Company or from transferring any of such
subsidiarys property or assets to the Company or any other subsidiary of the Company.
(xxx) Employees. Neither the Company nor any subsidiary is in violation of or
has received notice of any violation with respect to any federal or state law relating to
discrimination in the hiring, promotion or pay of employees, nor any applicable federal or
state wage and hour laws, nor any state law precluding the denial of credit due to the
neighborhood in which a property is situated, the violation of any of which would reasonably
be expected to have a Material Adverse Affect.
(xxxi) Minute Books. The minute books and records of the Company and its
subsidiaries relating to proceedings of their respective shareholders, boards of directors,
and committees of their respective boards of directors made available to Simpson Thacher &
Bartlett LLP, counsel for the underwriters, are their original minute books and records or
are true, correct and complete copies thereof, with respect to all proceedings of said
shareholders, boards of directors and committees since March 1, 2006 through the date
hereof. In the event that definitive minutes have not been prepared with respect to any
proceedings of such shareholders, boards of directors or committees, the Company has
provided Simpson Thacher & Bartlett LLP with originals or true, correct and complete copies
of draft minutes or written agendas relating thereto, which drafts and agendas, if any,
reflect all events that occurred in connection with such proceedings.
(xxxii) Statements in Registration Statement, General Disclosure Package and
Prospectus. The statements set forth in the Registration Statement, General Disclosure
Package and the Prospectus under the caption Description of Capital Stock, insofar as they
purport to constitute a summary of the terms of the capital stock and under the captions
Material United States Federal Tax Consequences to Non-U.S. Stockholders, Regulation,
Certain Relationships and Related Transactions and Underwriting, insofar as they purport
to describe the provisions of the laws and documents referred to therein, are accurate in
all material respects.
(xxxiii) Relationships. No relationship, direct or indirect exists between or
among the Company on the one hand, and the directors, officers or stockholders of the
Company on the other hand, in which the amount involved exceeds $120,000 per year and is
required to be reported under Regulation S-K Item 404 that has not been described in
Registration Statement, the General Disclosure Package and the Prospectus.
(b) Representations and Warranties by the Selling Shareholders. Each Selling Shareholder
severally represents and warrants to each Underwriter as of the date hereof, as of the Applicable
Time, as of the Closing Time, and, if the Selling Shareholder is selling Option Securities on a
Date of Delivery, as of each such Date of Delivery, and agrees with each Underwriter, as follows:
(i) Accurate Disclosure. None of the General Disclosure Package, the
Prospectus any amendments or supplements thereto (including any prospectus wrapper) includes
any untrue statement of a material fact or omits to state a material fact necessary in order
to make the statements therein, in the light of the circumstances under which they were
made, not misleading; provided that the Selling Shareholder makes no representation or
warranty other than with respect to the information furnished by such Selling Shareholder to
the Company expressly for use in the
10
General Disclosure Package and the Prospectus, and it being understood and agreed that
such information consists solely of the information with respect to such Selling Shareholder
under the caption Principal and Selling Stockholders of the Registration Statement (the
Selling Shareholders Information).
(ii) Authorization of this Agreement. This Agreement has been duly authorized,
executed and delivered by or on behalf of such Selling Shareholder.
(iii) Authorization of Power of Attorney and Custody Agreement. The Power of
Attorney and Custody Agreement, in the form heretofore furnished to the Representatives (the
Power of Attorney and Custody Agreement), has been duly authorized, executed and delivered
by such Selling Shareholder and is the valid and binding agreement of such Selling
Shareholder.
(iv) Noncontravention. The execution and delivery of this Agreement and the
Power of Attorney and Custody Agreement and the sale and delivery of the Securities to be
sold by such Selling Shareholder and the consummation of the transactions contemplated
herein and compliance by such Selling Shareholder with its obligations hereunder (i) do not
and will not, whether with or without the giving of notice or passage of time or both,
conflict with or constitute a breach of, or default under, or result in the creation or
imposition of any tax, lien, charge or encumbrance upon the Securities to be sold by such
Selling Shareholder or any property or assets of such Selling Shareholder pursuant to any
contract, indenture, mortgage, deed of trust, loan or credit agreement, note, license, lease
or other agreement or instrument to which such Selling Shareholder is a party or by which
such Selling Shareholder may be bound, or to which any of the property or assets of such
Selling Shareholder is subject, (ii) nor will such action result in any violation of the
provisions of the charter or by-laws or other organizational instrument of such Selling
Shareholder, if applicable, or (iii) any applicable treaty, law, statute, rule, regulation,
judgment, order, writ or decree of any government, government instrumentality or court,
domestic or foreign, having jurisdiction over such Selling Shareholder or any of its
properties, except in the case of clauses (i) and (iii) that would not, individually or in
the aggregate, reasonably be expected to have a Material Adverse Effect.
(v) Certificates Suitable for Transfer. The Securities to be sold by such
Selling Shareholder pursuant to this Agreement are certificated securities in registered
form and are not held in any securities account or by or through any securities intermediary
within the meaning of the Uniform Commercial Code as in effect in the State of New York (the
UCC). Certificates for all of the Securities to be sold by such Selling Shareholder
pursuant to this Agreement, in suitable form for transfer by delivery or accompanied by duly
executed instruments of transfer or assignment in blank with signatures guaranteed, have
been placed in custody with Mellon Investor Services LLC (the Custodian) with irrevocable
conditional instructions to deliver such Securities to the Underwriters pursuant to this
Agreement.
(vi) Delivery of Securities. Upon the Underwriters acquiring possession of
the Securities to be sold by such Selling Shareholder and paying the purchase price therefor
pursuant to this Agreement, the Underwriters (assuming that no such Underwriter has notice
of any adverse claim, within the meaning of Section 8-105 of the New York Uniform
Commercial Code, to such Securities) will acquire their respective interests in such
Securities (including, without limitation, all rights that such Selling Shareholder had or
has the power to transfer in such Securities) free and clear of any adverse claim within the
meaning of Section 8-102 of the New York Uniform Commercial Code.
11
(vii) Absence of Manipulation. Such Selling Shareholder has not taken, and
will not take, directly or indirectly, any action which is designed to or which has
constituted or would be expected to cause or result in stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale of the Securities.
(viii) Absence of Further Requirements. No filing with, or consent, approval,
authorization, order, registration, qualification or decree of, any court or governmental
authority or agency, domestic or foreign, is necessary or required for the performance by
each Selling Shareholder of its obligations hereunder or in the Power of Attorney and
Custody Agreement, or in connection with the sale and delivery of the Securities hereunder
or the consummation of the transactions contemplated by this Agreement, except for the
registration of the Shares under the Securities Act and such consents, approvals,
authorizations, registrations or qualifications as may be required under the Exchange Act
and applicable state securities or blue sky laws, or insurance securities laws and from the
NASD in connection with the purchase and sale of the Shares by the Underwriters.
(c) Officers Certificates. Any certificate signed by any officer of the Company or any of
its subsidiaries delivered to the Representatives or to counsel for the Underwriters shall be
deemed a representation and warranty by the Company to each Underwriter as to the matters covered
thereby; and any certificate signed by or on behalf of the Selling Shareholders as such and
delivered to the Representatives or to counsel for the Underwriters pursuant to the terms of this
Agreement shall be deemed a representation and warranty by such Selling Shareholder to the
Underwriters as to the matters covered thereby.
SECTION 2. Sale and Delivery to Underwriters; Closing.
(a) Initial Securities. On the basis of the representations and warranties herein contained
and subject to the terms and conditions herein set forth, the Selling Shareholders, severally and
not jointly, agree to sell to each Underwriter, severally and not jointly, the number of Initial
Securities set forth in Schedule B opposite the name of such Selling Shareholder, and each
Underwriter, severally and not jointly, agrees to purchase from each Selling Shareholder the number
of Initial Securities set forth in Schedule A opposite the name of such Underwriter, plus any
additional number of Initial Securities which such Underwriter may become obligated to purchase
pursuant to the provisions of Section 10 hereof, subject, in each case, to such adjustments among
the Underwriters as the Representatives in their sole discretion shall make to eliminate any sales
or purchases of fractional securities, in each case at the price per share set forth in Schedule C.
(b) Option Securities. In addition, on the basis of the representations and warranties herein
contained and subject to the terms and conditions herein set forth, the Selling Shareholders,
acting severally and not jointly, hereby grant(s) an option to the Underwriters, severally and not
jointly, to purchase up to an additional 5,925,000 shares of Common Stock, from the Selling
Shareholders on a pro rata basis, as set forth in Schedule B, at the price per share set forth in
Schedule C, less an amount per share equal to any dividends or distributions declared by the
Company and payable on the Initial Securities but not payable on the Option Securities. The option
hereby granted will expire 30 days after the date hereof and may be exercised in whole or in part
from time to time only for the purpose of covering overallotments which may be made in connection
with the offering and distribution of the Initial Securities upon notice by the Representatives to
the Selling Shareholders setting forth the number of Option Securities as to which the several
Underwriters are then exercising the option and the time and date of payment and delivery for such
Option Securities. Any such time and date of delivery (a Date of Delivery) shall be determined
by the Representatives, but shall not be later than seven full business days after the exercise of
said option, nor in any event prior to the Closing Time, as hereinafter defined.
12
(c) Payment. Payment of the purchase price for, and delivery of certificates for, the Initial
Securities shall be made at the offices of Simpson Thacher & Bartlett LLP, 425 Lexington Avenue,
New York, New York 10017, or at such other place as shall be agreed upon by the Representatives and
the Company and the Selling Shareholders, at 9:00 A.M. (Eastern time) on the third (fourth, if the
pricing occurs after 4:30 P.M. (Eastern time) on any given day) business day after the date hereof
(unless postponed in accordance with the provisions of Section 10), or such other time not later
than ten business days after such date as shall be agreed upon by the Representatives and the
Company and the Selling Shareholders (such time and date of payment and delivery being herein
called Closing Time).
In addition, in the event that any or all of the Option Securities are purchased by the
Underwriters, payment of the purchase price for, and delivery of certificates for, such Option
Securities shall be made at the above-mentioned offices, or at such other place as shall be agreed
upon by the Representatives and the Company and the Selling Shareholders, on each Date of Delivery
as specified in the notice from the Representatives to the Company and the Selling Shareholders.
Payment shall be made to the Selling Shareholders by wire transfer of immediately available
funds to bank account(s) designated by the Custodian pursuant to each Selling Shareholders Power
of Attorney and Custody Agreement against delivery to Merrill Lynch for the respective accounts of
the Underwriters of certificates for the Securities to be purchased by them. It is understood that
each Underwriter has authorized Merrill Lynch, for its account, to accept delivery of, receipt for,
and make payment of the purchase price for, the Initial Securities and the Option Securities, if
any, which it has agreed to purchase. Merrill Lynch, individually and not as representative of the
Underwriters, may (but shall not be obligated to) make payment of the purchase price for the
Initial Securities or the Option Securities, if any, to be purchased by any Underwriter whose funds
have not been received by the Closing Time or the relevant Date of Delivery, as the case may be,
but such payment shall not relieve such Underwriter from its obligations hereunder.
(d) Denominations; Registration. Certificates for the Initial Securities and the Option
Securities, if any, shall be in such denominations and registered in such names as the
Representatives may request in writing at least one full business day before the Closing Time or
the relevant Date of Delivery, as the case may be. The certificates for the Initial Securities and
the Option Securities, if any, will be made available for examination and packaging by the
Representatives in The City of New York not later than 10:00 A.M. (Eastern time) on the business
day prior to the Closing Time or the relevant Date of Delivery, as the case may be.
SECTION 3. Covenants of the Company and the Selling Shareholders. The Company
covenants with each Underwriter as follows:
(a) Compliance with Securities Regulations and Commission Requests. The Company, subject to
Section 3(b), will comply with the requirements of Rule 430A, and will notify the Representatives
immediately, and confirm the notice in writing, (i) when any post-effective amendment to the
Registration Statement shall become effective, or any supplement to the Prospectus or any amended
Prospectus shall have been filed, (ii) of the receipt of any comments from the Commission relating
to the offering of the Securities, (iii) of any request by the Commission for any amendment to the
Registration Statement or any amendment or supplement to the Prospectus or for additional
information, (iv) of the issuance by the Commission of any stop order suspending the effectiveness
of the Registration Statement or of any order preventing or suspending the use of any preliminary
prospectus, or of the suspension of the qualification of the Securities for offering or sale in any
jurisdiction, or of the initiation or threatening of any proceedings for any of such purposes or of
any examination pursuant to Section 8(e) of the 1933 Act concerning the Registration Statement and
(v) if the Company becomes the subject of a proceeding under Section 8A of the 1933 Act in
connection with the offering of the Securities. The Company will
13
effect the filings required under Rule 424(b), in the manner and within the time period
required by Rule 424(b) (without reliance on Rule 424(b)(8)), and will take such steps as it deems
necessary to ascertain promptly whether the form of prospectus transmitted for filing under Rule
424(b) was received for filing by the Commission and, in the event that it was not, it will
promptly file such prospectus. The Company will make every reasonable effort to prevent the
issuance of any stop order and, if any stop order is issued, to obtain the lifting thereof at the
earliest possible moment.
(b) Filing of Amendments and Exchange Act Documents. The Company will give the
Representatives reasonable notice of its intention to file or prepare any amendment to the
Registration Statement (including any filing under Rule 462(b)) or any amendment, supplement or
revision to either the prospectus included in the Registration Statement at the time it became
effective or to the Prospectus, and will furnish the Representatives with copies of any such
documents a reasonable amount of time prior to such proposed filing or use, as the case may be, and
will not file or use any such document to which the Representatives or counsel for the Underwriters
and counsel for the Company shall reasonably object. The Company has given the Representatives
notice of any filings made pursuant to the 1934 Act or 1934 Act Regulations within 48 hours prior
to the Applicable Time; the Company will give the Representatives notice of its intention to make
any such filing from the Applicable Time to the Closing Time and will furnish the Representatives
with copies of any such documents a reasonable amount of time prior to such proposed filing, as the
case may be, and will not file or use any such document to which the Representatives or counsel for
the Underwriters and counsel for the Company shall reasonably object.
(c) Delivery of Registration Statements. The Company has furnished or will deliver to the
Representatives and counsel for the Underwriters, without charge, signed copies of the Registration
Statement as originally filed and of each amendment thereto (including exhibits filed therewith,
which may be provided electronically) and signed copies of all consents and certificates of
experts, and will also deliver to the Representatives, without charge, a conformed copy of the
Registration Statement as originally filed and of each amendment thereto (without exhibits) for
each of the Underwriters.
(d) Delivery of Prospectuses. The Company has delivered to each Underwriter, without charge,
as many copies of each preliminary prospectus as such Underwriter reasonably requested, and the
Company hereby consents to the use of such copies for purposes permitted by the 1933 Act. The
Company will furnish to each Underwriter, without charge, during the period when the Prospectus is
required to be delivered under the 1933 Act, such number of copies of the Prospectus (as amended or
supplemented) as such Underwriter may reasonably request.
(e) Continued Compliance with Securities Laws. The Company will comply with the 1933 Act and
the 1933 Act Regulations so as to permit the completion of the distribution of the Securities as
contemplated in this Agreement and in the Prospectus. If at any time when a prospectus is required
by the 1933 Act to be delivered in connection with sales of the Securities, any event shall occur
or condition shall exist as a result of which it is necessary, in the opinion of counsel for the
Underwriters and the opinion of counsel for the Company, to amend the Registration Statement or
amend or supplement the Prospectus in order that the Prospectus will not include any untrue
statements of a material fact or omit to state a material fact necessary in order to make the
statements therein not misleading in the light of the circumstances existing at the time it is
delivered to a purchaser, or if it shall be necessary, in the opinion of such counsel, at any such
time to amend the Registration Statement or amend or supplement the Prospectus in order to comply
with the requirements of the 1933 Act or the 1933 Act Regulations, the Company will promptly
prepare and file with the Commission, subject to Section 3(b), such amendment or supplement as may
be necessary to correct such statement or omission or to make the Registration Statement or the
Prospectus comply with such requirements, and the Company will furnish to the Underwriters such
number of copies of such amendment or supplement as the Underwriters may reasonably request. If at
any time following issuance of an Issuer Free Writing Prospectus there occurred
14
or occurs an event or development as a result of which such Issuer Free Writing Prospectus
conflicted or would conflict with the information contained in the Registration Statement relating
to the Securities or included or would include an untrue statement of a material fact or omitted or
would omit to state a material fact necessary in order to make the statements therein, in the light
of the circumstances, prevailing at that subsequent time, not misleading, the Company will promptly
notify the Representatives and will promptly amend or supplement, at its own expense, such Issuer
Free Writing Prospectus to eliminate or correct such conflict, untrue statement or omission.
(f) Blue Sky Qualifications. The Company will use its reasonable best efforts, in cooperation
with the Underwriters, to qualify the Securities for offering and sale under the applicable
securities laws of such states and other jurisdictions (domestic or foreign) as the Representatives
may reasonably designate and to maintain such qualifications in effect as long as may be necessary
to complete the distribution of the Securities; provided, however, that the Company
shall not be obligated to file any general consent to service of process or to qualify as a foreign
corporation or as a dealer in securities in any jurisdiction in which it is not so qualified or to
subject itself to taxation in respect of doing business in any jurisdiction in which it is not
otherwise so subject.
(g) Rule 158. The Company will timely file such reports pursuant to the Securities Exchange
Act of 1934 (the 1934 Act) as are necessary in order to make generally available to its
securityholders as soon as practicable an earnings statement for the purposes of, and to provide to
the Underwriters the benefits contemplated by, the last paragraph of Section 11(a) of the 1933 Act.
(h) Listing. The Company will use its best efforts to effect the listing of the Common Stock
(including the Securities) on the New York Stock Exchange.
(i) Restriction on Sale of Securities. During a period of 180 days from the date of the
Prospectus, the Company will not, without the prior written consent of each of the Representatives,
(i) directly or indirectly, offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase
or otherwise transfer or dispose of any share of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock or file any registration statement under the 1933 Act
with respect to any of the foregoing or (ii) enter into any swap or any other agreement or any
transaction that transfers, in whole or in part, directly or indirectly, the economic consequence
of ownership of the Common Stock, whether any such swap or transaction described in clause (i) or
(ii) above is to be settled by delivery of Common Stock or such other securities, in cash or
otherwise. The foregoing sentence shall not apply to (A) the Securities to be sold hereunder, (B)
any shares of Common Stock issued by the Company upon the exercise of a warrant or the conversion
of a security outstanding on the date hereof and referred to in the Prospectus, (C) grants, offers,
sales, or issuances of shares of Common Stock or securities convertible or exchangeable into shares
of Common Stock pursuant to an employee benefit plan described in the Prospectus, (D) the filing of
any registration statement on Form S-8 with respect to any stock incentive plan or stock ownership
plan relating to securities described in clauses (B) or (C) above, and (E) offers, sales and
issuances of up to 10% of the shares of Common Stock outstanding at the time of the issuance as
consideration or partial consideration for acquisitions of businesses, provided that the recipient
of any such securities shall agree to be bound by the terms of this section. Notwithstanding the
foregoing, if (1) during the last 17 days of the 180-day restricted period the Company issues an
earnings release or material news or a material event relating to the Company occurs or (2) prior
to the expiration of the 180-day restricted period, the Company announces that it will release
earnings results or becomes aware that material news or a material event will occur during the
16-day period beginning on the last day of the 180-day restricted period, the restrictions imposed
in this clause (i) shall continue to apply until the expiration of the 18-day period beginning on
the issuance of the earnings release or the occurrence of the material news or material event.
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(j) Reporting Requirements. The Company, during the period when the Prospectus is required to
be delivered under the 1933 Act, will file all documents required to be filed with the Commission
pursuant to the 1934 Act within the time periods required by the 1934 Act and the rules and
regulations of the Commission thereunder.
(k) Issuer Free Writing Prospectuses. Each of the Company and each Selling Shareholder
represents and agrees that, unless it obtains the prior consent of the Representatives, and each
Underwriter represents and agrees that, unless it obtains the prior consent of the Company and the
Representatives, it has not made and will not make any offer relating to the Securities that would
constitute an issuer free writing prospectus, as defined in Rule 433, or that would otherwise
constitute a free writing prospectus, as defined in Rule 405, required to be filed with the
Commission or, in the case of each Selling Shareholder, whether or not required to be filed with
the Commission. Any such free writing prospectus consented to by the Company and the
Representatives is hereinafter referred to as a Permitted Free Writing Prospectus. Each of the
Company and each Selling Shareholder represents that it has treated or agrees that it will treat
each Permitted Free Writing Prospectus as an issuer free writing prospectus, as defined in Rule
433, and has complied and will comply with the requirements of Rule 433 applicable to any Permitted
Free Writing Prospectus, including timely filing with the Commission where required, legending and
record keeping.
SECTION 4. Payment of Expenses.
(a) Expenses. The Company will pay or cause to be paid all expenses incident to the
performance of their obligations under this Agreement, including (i) the preparation, printing and
filing of the Registration Statement (including financial statements and exhibits) as originally
filed and of each amendment thereto, (ii) the preparation, printing and delivery to the
Underwriters of this Agreement, any Agreement among Underwriters and such other documents as may be
required in connection with the offering, purchase, sale, issuance or delivery of the Securities,
(iii) the preparation, issuance and delivery of the certificates for the Securities to the
Underwriters, including any stock or other transfer taxes and any stamp or other duties payable
upon the sale, issuance or delivery of the Securities to the Underwriters, (iv) the fees and
disbursements of the Companys counsel, accountants and other advisors, (v) the qualification of
the Securities under securities laws in accordance with the provisions of Section 3(f) hereof,
including filing fees and the reasonable fees and disbursements of counsel for the Underwriters in
connection therewith and in connection with the preparation of the Blue Sky Survey and any
supplement thereto, (vi) the printing and delivery to the Underwriters of a reasonable number of
copies of each preliminary prospectus, any Permitted Free Writing Prospectus and of the Prospectus
and any amendments or supplements thereto and any costs associated with electronic delivery of any
of the foregoing by the Underwriters to investors, (vii) the preparation, printing and delivery to
the Underwriters of copies of the Blue Sky Survey and any supplement thereto, (viii) the fees and
expenses of any transfer agent or registrar for the Securities, (ix) the costs and expenses of the
Company relating to investor presentations on any road show undertaken in connection with the
marketing of the Securities, including without limitation, expenses associated with the production
of road show slides and graphics, fees and expenses of any consultants engaged in connection with
the road show presentations, travel and lodging expenses of the representatives and officers of the
Company and any such consultants, and 50% of the costs and expenses of aircraft chartered in
connection with the road show, (x) the filing fees incident to, and the reasonable fees and
disbursements of counsel to the Underwriters in connection with, the review by the National
Association of Securities Dealers, Inc. (the NASD) of the terms of the sale of the Securities,
(xi) the fees and expenses incurred in connection with the listing of the Securities on the New
York Stock Exchange, (xii) the preparation, printing and distribution of one or more versions of
the preliminary prospectus and the Prospectus for distribution in Canada, often in the form of a
Canadian wrapper (including related fees and expenses of Canadian counsel to the Underwriters)
and (xiii) all other costs and expenses incident to the performance of their obligations hereunder
which are not
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otherwise specifically provided for in this Section; provided that, the Underwriters shall pay
the remaining 50% of the costs and expenses of aircraft chartered in connection with the road
show, and except as provided in this Section 4 and Sections 6 and 7, the Underwriters shall pay
their own costs and expenses, including the costs and expenses of their own counsel, stock transfer
taxes payable on resale of any of the Securities by them and any advertising expenses connected
with any offers they may make.
(b) Expenses of the Selling Shareholders. Each Selling Shareholder, severally and not
jointly, will pay all expenses incident to the performance of its respective obligations under, and
the consummation of the transactions contemplated by this Agreement, including (i) any stamp
duties, capital duties and stock transfer taxes, if any, payable upon the sale of the Securities by
the Selling Shareholder to the Underwriters, and their transfer between the Underwriters pursuant
to an agreement between such Underwriters, and (ii) the fees and disbursements of their respective
counsel and other advisors.
(c) Termination of Agreement. If this Agreement is terminated by the Representatives in
accordance with the provisions of Section 5, Section 9(a) or Section 11 hereof, the Company shall
reimburse the Underwriters for all of their reasonable out-of-pocket expenses, including the
reasonable fees and disbursements of counsel for the Underwriters.
(d) Allocation of Expenses. The provisions of this Section shall not affect any agreement
that the Company and the Selling Shareholders may make for the sharing of such costs and expenses.
SECTION 5. Conditions of Underwriters Obligations. The obligations of the several
Underwriters hereunder are subject to the accuracy of the representations and warranties of the
Company and the Selling Shareholders contained in Section 1 hereof or in certificates of any
officer of the Company or any subsidiary of the Company or on behalf of any Selling Shareholder
delivered pursuant to the provisions hereof, to the performance by the Company of its covenants and
other obligations hereunder, and to the following further conditions:
(a) Effectiveness of Registration Statement. The Registration Statement, including any Rule
462(b) Registration Statement, has become effective and at Closing Time no stop order suspending
the effectiveness of the Registration Statement shall have been issued under the 1933 Act or
proceedings therefor initiated or threatened by the Commission, and any request on the part of the
Commission for additional information shall have been complied with to the reasonable satisfaction
of counsel to the Underwriters. A prospectus containing the Rule 430A Information shall have been
filed with the Commission in the manner and within the time frame required by Rule 424(b) without
reliance on Rule 424(b)(8) or a post-effective amendment providing such information shall have been
filed and declared effective in accordance with the requirements of Rule 430A.
(b) Opinion of Counsel for Company. At Closing Time, the Representatives shall have received
(i) the opinion and 10b-5 statement, dated as of Closing Time, of Cravath, Swaine & Moore LLP,
counsel for the Company, and (ii) the opinion, dated as of Closing Time of Thomas Hall, Esq.,
Senior Counsel, each in form and substance satisfactory to counsel for the Underwriters, together
with signed or reproduced copies of each such letter for each of the other Underwriters to the
effect set forth in Exhibits A-1 and A-2 hereto and to such further effect as counsel to the
Underwriters may reasonably request.
(c) Opinion of Counsel for the Selling Shareholders. At Closing Time, the Representatives
shall have received the opinion, dated as of Closing Time, of Cravath, Swaine & Moore LLP, counsel
for the Selling Shareholders, in form and substance satisfactory to counsel for the Underwriters,
together with signed or reproduced copies of such letter for each of the other Underwriters to the
effect set forth in Exhibit B hereto and to such further effect as counsel to the Underwriters may
reasonably request.
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(d) Opinion of Counsel for Underwriters. At Closing Time, the Representatives shall have
received the opinion and 10b-5 statement, dated as of Closing Time, of Simpson Thacher & Bartlett
LLP, counsel for the Underwriters, together with signed or reproduced copies of such letter for
each of the other Underwriters with respect to the matters set forth in clauses (i), (ii), (v),
(vi) (solely as to preemptive or other similar rights arising by operation of law or under the
charter or by-laws of the Company), (viii) through (x), inclusive, (xi), (xiv) (solely as to the
information in the Prospectus under Description of Capital StockCommon Stock) and the
penultimate paragraph of Exhibit A hereto. In giving such opinion such counsel may rely, as to all
matters governed by the laws of jurisdictions other than the law of the State of New York, the
federal law of the United States and the General Corporation Law of the State of Delaware, upon the
opinions of counsel satisfactory to the Representatives. Such counsel may also state that, insofar
as such opinion involves factual matters, they have relied, to the extent they deem proper, upon
certificates of officers of the Company and its subsidiaries and certificates of public officials.
(e) Officers Certificate. At Closing Time, there shall not have been, since the date hereof
or since the respective dates as of which information is given in the Prospectus or the General
Disclosure Package, any material adverse change, or any development involving a prospective
material adverse change, in or affecting the condition (financial or otherwise), results of
operations, stockholders equity, properties, management, business or prospects of the Company and
its subsidiaries, taken as a whole, and the Representatives shall have received a certificate of
the President or a Vice President of the Company and of the chief financial or chief accounting
officer of the Company, dated as of Closing Time, to the effect that to the best of their knowledge
(i) there has been no such material adverse change, (ii) the representations and warranties in
Section 1(a) hereof are true and correct with the same force and effect as though expressly made at
and as of Closing Time, (iii) the Company has complied with all agreements and satisfied all
conditions on its part to be performed or satisfied at or prior to Closing Time, and (iv) no stop
order suspending the effectiveness of the Registration Statement has been issued and no proceedings
for that purpose have been instituted or are pending or, to their knowledge, contemplated by the
Commission.
(f) Certificate of Selling Shareholders. At Closing Time, the Representatives shall have
received a certificate of an Attorney-in-Fact on behalf of each Selling Shareholder, dated as of
Closing Time, to the effect that (i) the representations and warranties of each Selling Shareholder
contained in Section 1(b) hereof are true and correct in all respects with the same force and
effect as though expressly made at and as of Closing Time and (ii) each Selling Shareholder has
complied in all material respects with all agreements and all conditions on its part to be
performed under this Agreement at or prior to Closing Time.
(g) Accountants Comfort Letter. At the time of the execution of this Agreement, the
Representatives shall have received from Ernst & Young LLP a letter dated such date, in form and
substance satisfactory to the Representatives, together with signed or reproduced copies of such
letter for each of the other Underwriters containing statements and information of the type
ordinarily included in accountants comfort letters to underwriters with respect to the financial
statements and certain financial information contained in the Registration Statement and the
Prospectus.
(h) Bring-down Comfort Letter. At Closing Time, the Representatives shall have received from
Ernst & Young LLP a letter, dated as of Closing Time, to the effect that they reaffirm the
statements made in the letter furnished pursuant to subsection (g) of this Section, except that the
specified date referred to shall be a date not more than three business days prior to Closing Time.
(i) Approval of Listing. At Closing Time, the Securities shall have been approved for listing
on the New York Stock Exchange, subject only to official notice of issuance.
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(j) No Objection. The NASD has confirmed that it has not raised any objection with respect to
the fairness and reasonableness of the underwriting terms and arrangements.
(k) Lock-up Agreements. At the date of this Agreement, the Representatives shall have
received an agreement substantially in the form of Exhibit C hereto signed by the persons listed on
Schedule D hereto.
(l) Maintenance of Rating. Since the execution of this Agreement, there shall not have been
any decrease in any rating of the Companys financial strength or claims-paying ability or in the
rating of any of the Companys securities by any nationally recognized statistical rating
organization (as defined for purposes of Rule 436(g) under the 1933 Act) or any notice given of
any intended or potential decrease in any such ratings or of a possible change in any such ratings
that does not indicate the direction of the possible change.
(m) Conditions to Purchase of Option Securities. In the event that the Underwriters exercise
their option provided in Section 2(b) hereof to purchase all or any portion of the Option
Securities, the representations and warranties of the Company and the Selling Shareholders
contained herein and the statements in any certificates furnished by the Company, any subsidiary of
the Company and the Selling Shareholders hereunder shall be true and correct as of each Date of
Delivery and, at the relevant Date of Delivery, the Representatives shall have received:
(i) Officers Certificate. A certificate, dated such Date of Delivery, of the
President or a Vice President of the Company and of the chief financial or chief accounting
officer of the Company confirming that the certificate delivered at the Closing Time
pursuant to Section 5(e) hereof remains true and correct to the best of their knowledge as
of such Date of Delivery.
(ii) Certificate of Selling Shareholders. A certificate, dated such Date of
Delivery, of an Attorney-in-Fact on behalf of each Selling Shareholder confirming that the
certificate delivered at Closing Time pursuant to Section 5(f) remains true and correct as
of such Date of Delivery.
(iii) Opinion of Counsel for Company. The opinion and 10b-5 statement of
Cravath, Swaine & Moore LLP, counsel for the Company, together with the opinion of Thomas
Hall, Esq., Senior Counsel, internal counsel for the Company, each in form and substance
satisfactory to counsel for the Underwriters, dated such Date of Delivery, relating to the
Option Securities to be purchased on such Date of Delivery and otherwise to the same effect
as the opinion required by Section 5(b) hereof.
(iv) Opinion of Counsel for the Selling Shareholders. The opinion of Cravath,
Swaine & Moore LLP, counsel for the Selling Shareholders, in form and substance satisfactory
to counsel for the Underwriters, dated such Date of Delivery, relating to the Option
Securities to be purchased on such Date of Delivery and otherwise to the same effect as the
opinion required by Section 5(c) hereof.
(v) Opinion of Counsel for Underwriters. The opinion and 10b-5 statement of
Simpson Thacher & Bartlett LLP, counsel for the Underwriters, dated such Date of Delivery,
relating to the Option Securities to be purchased on such Date of Delivery and otherwise to
the same effect as the opinion required by Section 5(d) hereof.
(vi) Bring-down Comfort Letter. A letter from Ernst & Young LLP, in form and
substance satisfactory to the Representatives and dated such Date of Delivery, substantially
in the
19
same form and substance as the letter furnished to the Representatives pursuant to
Section 5(g) hereof, except that the specified date in the letter furnished pursuant to
this paragraph shall be a date not more than five days prior to such Date of Delivery.
(n) Additional Documents. At Closing Time and at each Date of Delivery counsel for the
Underwriters shall have been furnished with such documents and opinions as they may reasonably
require for the purpose of enabling them to pass upon the issuance and sale of the Securities as
herein contemplated, or in order to evidence the accuracy of any of the representations or
warranties, or the fulfillment of any of the conditions, herein contained; and all proceedings
taken by the Company and the Selling Shareholders in connection with the issuance and sale of the
Securities as herein contemplated shall be reasonably satisfactory in form and substance to the
Representatives and counsel for the Underwriters.
(o) Termination of Agreement. If any condition specified in this Section shall not have been
fulfilled when and as required to be fulfilled, this Agreement, or, in the case of any condition to
the purchase of Option Securities on a Date of Delivery which is after the Closing Time, the
obligations of the several Underwriters to purchase the relevant Option Securities, may be
terminated by the Representatives by notice to the Company and the Selling Shareholders at any time
at or prior to Closing Time or such Date of Delivery, as the case may be, and such termination
shall be without liability of any party to any other party except as provided in Section 4 and
except that Sections 1, 6, 7 and 8 shall survive any such termination and remain in full force and
effect.
SECTION 6. Indemnification.
(a) Indemnification of Underwriters. The Company agrees to indemnify and hold harmless each
Underwriter, its affiliates, as such term is defined in Rule 501(b) under the 1933 Act (each, an
Affiliate), its selling agents and each person, if any, who controls any Underwriter within the
meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act as follows:
(i) against any and all loss, liability, claim, damage and expense whatsoever, as
incurred, arising out of any untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement (or any amendment thereto), including the Rule 430A
Information, in or the omission or alleged omission therefrom of a material fact required to
be stated therein or necessary to make the statements therein not misleading or arising out
of any untrue statement or alleged untrue statement of a material fact included in any
preliminary prospectus, any Issuer Free Writing Prospectus, any issuer information filed
or required to be filed pursuant to Rule 433(d), any road show (as defined in Rule 433)
not constituting an Issuer Free Writing Prospectus or the Prospectus (or any amendment or
supplement thereto), or the omission or alleged omission therefrom of a material fact
necessary in order to make the statements therein not misleading;
(ii) against any and all loss, liability, claim, damage and expense whatsoever, as
incurred, to the extent of the aggregate amount paid in settlement of any litigation, or any
investigation or proceeding by any governmental agency or body, commenced or threatened, or
of any claim whatsoever based upon any such untrue statement or omission, or any such
alleged untrue statement or omission; provided that (subject to Section 6(d) below) any such
settlement is effected with the written consent of the Company;
(iii) against any and all expense whatsoever, as incurred (including the fees and
disbursements of counsel chosen by the Representatives), reasonably incurred in
investigating, preparing or defending against any litigation, or any investigation or
proceeding by any
20
governmental agency or body, commenced or threatened, or any claim whatsoever based
upon any such untrue statement or omission, or any such alleged untrue statement or
omission, to the extent that any such expense is not paid under (i) or (ii) above;
provided, however, that this indemnity agreement shall not apply to any loss,
liability, claim, damage or expense to the extent arising out of any untrue statement or omission
or alleged untrue statement or omission made in reliance upon and in conformity with written
information furnished to the Company by any Underwriter through the Representatives expressly for
use in the Registration Statement (or any amendment thereto), including the Rule 430A Information,
or any preliminary prospectus, any Issuer Free Writing Prospectus or the Prospectus (or any
amendment or supplement thereto).
(b) Indemnification of Underwriters. Each Selling Shareholder, severally and not jointly,
agrees to indemnify and hold harmless each Underwriter, its Affiliates and selling agents and each
person, if any, who controls any Underwriter within the meaning of Section 15 of the 1933 Act or
Section 20 of the 1934 Act to the extent and in the manner set forth in clauses (a)(i), (ii) and
(iii) above (it being understood and agreed that each Selling Shareholder shall be obligated to
indemnify only with respect to losses, liabilities, claims, damages or expenses caused by or
arising out of an untrue statement or omission or alleged untrue statement or omission of a
material fact made in reliance upon and in conformity with such Selling Shareholders Information);
provided, however, that with respect to its indemnification obligations hereunder no Selling
Shareholder shall be required to pay an amount in excess of the gross proceeds (before deducting
expenses) received by such Selling Shareholder from the Securities sold by it hereunder.
(c) Indemnification of Company, Directors and Officers and Selling Shareholders. Each
Underwriter severally agrees to indemnify and hold harmless the Company, its directors, each of its
officers who signed the Registration Statement, and each person, if any, who controls the Company
within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act, and each Selling
Shareholder and each person, if any, who controls any Selling Shareholder within the meaning of
Section 15 of the 1933 Act or Section 20 of the 1934 Act against any and all loss, liability,
claim, damage and expense described in the indemnity contained in subsection (a) of this Section,
as incurred, but only with respect to untrue statements or omissions, or alleged untrue statements
or omissions, made in the Registration Statement (or any amendment thereto), including the Rule
430A Information or any preliminary prospectus, any Issuer Free Writing Prospectus or the
Prospectus (or any amendment or supplement thereto) in reliance upon and in conformity with written
information furnished to the Company by such Underwriter through the Representatives expressly for
use therein.
(d) Actions against Parties; Notification. Each indemnified party shall give notice as
promptly as reasonably practicable to each indemnifying party of any action commenced against it in
respect of which indemnity may be sought hereunder, but failure to so notify an indemnifying party
shall not relieve such indemnifying party from any liability hereunder to the extent it is not
materially prejudiced as a result thereof and in any event shall not relieve it from any liability
which it may have otherwise than on account of this indemnity agreement. In the case of parties
indemnified pursuant to Sections 6(a) or 6(b) above, counsel to the indemnified parties shall be
selected by the Representatives, and, in the case of parties indemnified pursuant to Section 6(c)
above, counsel to the indemnified parties shall be selected by the Company. An indemnifying party
may participate at its own expense in the defense of any such action; provided,
however, that counsel to the indemnifying party shall not (except with the consent of the
indemnified party) also be counsel to the indemnified party. In no event shall the indemnifying
parties be liable for fees and expenses of more than one counsel (in addition to any local counsel)
separate from their own counsel for all indemnified parties in connection with any one action or
separate but similar or related actions in the same jurisdiction arising out of the same general
allegations or circumstances. No indemnifying party shall, without the prior written consent of
the indemnified
21
parties, settle or compromise or consent to the entry of any judgment with respect to any
litigation, or any investigation or proceeding by any governmental agency or body, commenced or
threatened, or any claim whatsoever in respect of which indemnification or contribution could be
sought under this Section 6 or Section 7 hereof (whether or not the indemnified parties are actual
or potential parties thereto), unless such settlement, compromise or consent (i) includes an
unconditional release of each indemnified party from all liability arising out of such litigation,
investigation, proceeding or claim and (ii) does not include a statement as to or an admission of
fault, culpability or a failure to act by or on behalf of any indemnified party.
(e) Other Agreements with Respect to Indemnification. The provisions of this Section shall
not affect any agreement among the Company and the Selling Shareholders with respect to
indemnification.
SECTION 7. Contribution. If the indemnification provided for in Section 6 hereof is
for any reason unavailable to or insufficient to hold harmless an indemnified party in respect of
any losses, liabilities, claims, damages or expenses referred to therein, then each indemnifying
party shall contribute to the aggregate amount of such losses, liabilities, claims, damages and
expenses incurred by such indemnified party, as incurred, (i) in such proportion as is appropriate
to reflect the relative benefits received by the Company and the Selling Shareholders on the one
hand and the Underwriters on the other hand from the offering of the Securities pursuant to this
Agreement or (ii) if the allocation provided by clause (i) is not permitted by applicable law, in
such proportion as is appropriate to reflect not only the relative benefits referred to in clause
(i) above but also the relative fault of the Company and the Selling Shareholders on the one hand
and of the Underwriters on the other hand in connection with the statements or omissions which
resulted in such losses, liabilities, claims, damages or expenses, as well as any other relevant
equitable considerations.
The relative benefits received by the Company and the Selling Shareholders on the one hand and
the Underwriters on the other hand in connection with the offering of the Securities pursuant to
this Agreement shall be deemed to be in the same respective proportions as the total net proceeds
from the offering of the Securities pursuant to this Agreement (before deducting expenses) received
by the Company and the Selling Shareholders and the total underwriting discount received by the
Underwriters, in each case as set forth on the cover of the Prospectus bear to the aggregate
initial public offering price of the Securities as set forth on the cover of the Prospectus.
The relative fault of the Company and the Selling Shareholders on the one hand and the
Underwriters on the other hand shall be determined by reference to, among other things, whether any
such untrue or alleged untrue statement of a material fact or omission or alleged omission to state
a material fact relates to information supplied by the Company or the Selling Shareholders or by
the Underwriters and the parties relative intent, knowledge, access to information and opportunity
to correct or prevent such statement or omission.
The Company, the Selling Shareholders and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 7 were determined by pro rata allocation (even
if the Underwriters were treated as one entity for such purpose) or by any other method of
allocation which does not take account of the equitable considerations referred to above in this
Section 7. The aggregate amount of losses, liabilities, claims, damages and expenses incurred by
an indemnified party and referred to above in this Section 7 shall be deemed to include any legal
or other expenses reasonably incurred by such indemnified party in investigating, preparing or
defending against any litigation, or any investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim whatsoever based upon any such untrue or alleged untrue
statement or omission or alleged omission.
22
Notwithstanding the provisions of this Section 7, no Underwriter shall be required to
contribute any amount in excess of the amount by which the total price at which the Securities
underwritten by it and distributed to the public were offered to the public exceeds the amount of
any damages which such Underwriter has otherwise been required to pay by reason of any such untrue
or alleged untrue statement or omission or alleged omission.
Notwithstanding the provisions of this Section 7, no Selling Shareholder shall be required to
contribute any amount in excess of its respective gross proceeds received from this offering.
Furthermore, it is understood and agreed that each Selling Shareholder shall be obligated to
contribute only with respect to losses, liabilities, claims, damages or expenses caused by or
arising out of an untrue statement or omission of a material fact made in reliance upon and in
conformity with such Selling Shareholders Information.
No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the
1933 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation.
For purposes of this Section 7, each person, if any, who controls an Underwriter within the
meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act and each Underwriters
Affiliates and selling agents shall have the same rights to contribution as such Underwriter, and
each director of the Company, each officer of the Company who signed the Registration Statement,
and each person, if any, who controls the Company or any Selling Shareholder within the meaning of
Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution
as the Company or such Selling Shareholder, as the case may be. The Underwriters respective
obligations to contribute pursuant to this Section 7 are several in proportion to the number of
Initial Securities set forth opposite their respective names in Schedule A hereto and not joint.
The provisions of this Section shall not affect any agreement among the Company and the
Selling Shareholders with respect to contribution.
SECTION 8. Representations, Warranties and Agreements to Survive. All
representations, warranties and agreements contained in this Agreement or in certificates of
officers of the Company or any of its subsidiaries or the Selling Shareholders submitted pursuant
hereto, shall remain operative and in full force and effect regardless of (i) any investigation
made by or on behalf of any Underwriter or its Affiliates or selling agents, any person controlling
any Underwriter, its officers or directors, any person controlling the Company or any person
controlling any Selling Shareholder and (ii) delivery of and payment for the Securities.
SECTION 9. Termination of Agreement.
(a) Termination; General. The Representatives may terminate this Agreement, by notice to the
Company and the Selling Shareholders, at any time at or prior to Closing Time (i) if there has
been, since the time of execution of this Agreement or since the respective dates as of which
information is given in the Prospectus or General Disclosure Package, any material adverse change,
or any development involving a prospective material adverse change, in or affecting the condition
(financial or otherwise), results of operations, stockholders equity, properties, management,
business or prospects of the Company and its subsidiaries, taken as a whole, or (ii) if there has
occurred any material adverse change in the financial markets in the United States or the
international financial markets, any outbreak of hostilities or escalation thereof or other
calamity or crisis or any change or development involving a prospective change in national or
international political, financial or economic conditions, in each case the effect of which is such
as to make it, in the judgment of the Representatives, impracticable or inadvisable
23
to market the Securities or to enforce contracts for the sale of the Securities, or (iii) if
trading in any securities of the Company has been suspended or materially limited by the Commission
or the New York Stock Exchange, or if trading generally on the American Stock Exchange or the New
York Stock Exchange or in the Nasdaq National Market has been suspended or materially limited, or
minimum or maximum prices for trading have been fixed, or maximum ranges for prices have been
required, by any of said exchanges or by such system or by order of the Commission, the National
Association of Securities Dealers, Inc. or any governmental authority, or (iv) a material
disruption has occurred in commercial banking or securities settlement or clearance services in the
United States, or (v) if a banking moratorium has been declared by either Federal or New York
authorities.
(b) Liabilities. If this Agreement is terminated pursuant to this Section, such termination
shall be without liability of any party to any other party except as provided in Section 4 hereof,
and provided further that Sections 1, 6, 7 and 8 shall survive such termination and remain in full
force and effect.
SECTION 10. Default by One or More of the Underwriters. If one or more of the
Underwriters shall fail at Closing Time or a Date of Delivery to purchase the Securities which it
or they are obligated to purchase under this Agreement (the Defaulted Securities), the
Representatives shall have the right, within 24 hours thereafter, to make arrangements for one or
more of the non-defaulting Underwriters, or any other underwriters, to purchase all, but not less
than all, of the Defaulted Securities in such amounts as may be agreed upon and upon the terms
herein set forth; if, however, the Representatives shall not have completed such arrangements
within such 24-hour period, then:
(i) if the number of Defaulted Securities does not exceed 10% of the number of
Securities to be purchased on such date, each of the non-defaulting Underwriters shall be
obligated, severally and not jointly, to purchase the full amount thereof in the proportions
that their respective underwriting obligations hereunder bear to the underwriting
obligations of all non-defaulting Underwriters, or
(ii) if the number of Defaulted Securities exceeds 10% of the number of Securities to
be purchased on such date, this Agreement or, with respect to any Date of Delivery which
occurs after the Closing Time, the obligation of the Underwriters to purchase and of the
Selling Shareholders to sell the Option Securities to be purchased and sold on such Date of
Delivery shall terminate without liability on the part of any non-defaulting Underwriter.
No action taken pursuant to this Section shall relieve any defaulting Underwriter from
liability in respect of its default.
In the event of any such default which does not result in a termination of this Agreement or,
in the case of a Date of Delivery which is after the Closing Time, which does not result in a
termination of the obligation of the Underwriters to purchase and the Selling Shareholders to sell
the relevant Option Securities, as the case may be, either (i) the Representatives or (ii) the
Company and any Selling Shareholder shall have the right to postpone Closing Time or the relevant
Date of Delivery, as the case may be, for a period not exceeding seven days in order to effect any
required changes in the Registration Statement or Prospectus or in any other documents or
arrangements. As used herein, the term Underwriter includes any person substituted for an
Underwriter under this Section 10.
SECTION 11. Default by one or more of the Selling Shareholders. If a Selling
Shareholder shall fail at Closing Time or at a Date of Delivery to sell and deliver the number of
Securities which such Selling Shareholder is obligated to sell hereunder, and the remaining Selling
Shareholders do not exercise the right hereby granted to increase, pro rata or otherwise, the
number of Securities to be sold by them
24
hereunder to the total number to be sold by all Selling Shareholders as set forth in Schedule
B hereto, then the Underwriters may, at option of the Representatives, by notice from the
Representatives to the Company and the non-defaulting Selling Shareholders, either (i) terminate
this Agreement without any liability on the fault of any non-defaulting party except that the
provisions of Sections 1, 4, 6, 7 and 8 shall remain in full force and effect or (ii) elect to
purchase the Securities which the non-defaulting Selling Shareholders have agreed to sell
hereunder. No action taken pursuant to this Section 11 shall relieve any Selling Shareholder so
defaulting from liability, if any, in respect of such default.
In the event of a default by any Selling Shareholder as referred to in this Section 11, each
of the Representatives, the Company and the non-defaulting Selling Shareholders shall have the
right to postpone Closing Time or Date of Delivery for a period not exceeding seven days in order
to effect any required change in the Registration Statement or Prospectus or in any other documents
or arrangements.
SECTION 12. Tax Disclosure. Notwithstanding any other provision of this Agreement,
immediately upon commencement of discussions with respect to the transactions contemplated hereby,
the Company (and each employee, representative or other agent of the Company) may disclose to any
and all persons, without limitation of any kind, the tax treatment and tax structure of the
transactions contemplated by this Agreement and all materials of any kind (including opinions or
other tax analyses) that are provided to the Company relating to such tax treatment and tax
structure. For purposes of the foregoing, the term tax treatment is the purported or claimed
federal income tax treatment of the transactions contemplated hereby, and the term tax structure
includes any fact that may be relevant to understanding the purported or claimed federal income tax
treatment of the transactions contemplated hereby.
SECTION 13. Notices. All notices and other communications hereunder shall be in
writing and shall be deemed to have been duly given if mailed or transmitted by any standard form
of telecommunication. Notices to the Underwriters shall be directed to the Representatives at
Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, 4 World Financial Center,
New York, New York 10080, attention of l (Fax: ), Goldman, Sachs & Co., 85 Broad Street,
New York, New York 10004, attention of l (Fax: ), J.P. Morgan Securities Inc., 277 Park
Avenue, New York, New York 10172, attention of Syndicate Desk (Fax: (212) 622-8358), and Lehman
Brothers Inc., 745 Seventh Avenue, New York, New York 10019, attention of Syndicate Registration
(Fax: 646-834-8133), with a copy, in the case of any notice pursuant to Section 6, to the Director
of Litigation, Office of the General Counsel, Lehman Brothers Inc., 399 Park Avenue,
10th Floor, New York, New York 10022 (Fax: (212) 520-0421); notices to the Company
shall be directed to it at P.O. Box 34690, Seattle, Washington 98124-1690, attention of George C.
Pagos, Esq., General Counsel (Fax: 425-256-8780); and notices to the Selling Shareholders shall be
directed to them at P.O. Box 34690, Seattle, Washington 98124-1690,
attention of Margaret A. Meister (Fax: 425-256-8780).
SECTION 14. No Advisory or Fiduciary Relationship. Each of the Company and each
Selling Shareholder acknowledges and agrees that (a) the purchase and sale of the Securities
pursuant to this Agreement, including the determination of the public offering price of the
Securities and any related discounts and commissions, is an arms-length commercial transaction
between the Company and the Selling Shareholder, on the one hand, and the several Underwriters, on
the other hand, (b) in connection with the offering contemplated hereby and the process leading to
such transaction each Underwriter is and has been acting solely as a principal and is not the agent
or fiduciary of the Company or any Selling Shareholder, or its respective stockholders, creditors,
employees or any other party, (c) no Underwriter has assumed or will assume an advisory or
fiduciary responsibility in favor of the Company or any Selling Shareholder with respect to the
offering contemplated hereby or the process leading thereto (irrespective of whether such
Underwriter has advised or is currently advising the Company or any Selling Shareholder on other
matters) and no Underwriter has any obligation to the Company or any
25
Selling Shareholder with respect to the offering contemplated hereby except the obligations
expressly set forth in this Agreement, (d) the Underwriters and their respective affiliates may be
engaged in a broad range of transactions that involve interests that differ from those of each of
the Company and each Selling Shareholder, and (e) the Underwriters have not provided any legal,
accounting, regulatory or tax advice with respect to the offering contemplated hereby and the
Company and each of the Selling Shareholders has consulted its own respective legal, accounting,
regulatory and tax advisors to the extent it deemed appropriate. The Company agrees that it will
not claim that the Underwriters, or any of them, has rendered advisory services of any nature or
respect, or owes a fiduciary duty to the Company, in connection with such transaction or the
process leading thereto.
SECTION 15. Parties. This Agreement shall each inure to the benefit of and be binding
upon the Underwriters, the Company and the Selling Shareholders and their respective successors.
Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any
person, firm or corporation, other than the Underwriters, the Company and the Selling Shareholders
and their respective successors and the controlling persons and officers and directors referred to
in Sections 6 and 7 and their heirs and legal representatives, any legal or equitable right, remedy
or claim under or in respect of this Agreement or any provision herein contained. This Agreement
and all conditions and provisions hereof are intended to be for the sole and exclusive benefit of
the Underwriters, the Company and the Selling Shareholders and their respective successors, and
said controlling persons and officers and directors and their heirs and legal representatives, and
for the benefit of no other person, firm or corporation. No purchaser of Securities from any
Underwriter shall be deemed to be a successor by reason merely of such purchase.
SECTION 16. Research Analyst Independence. The Company acknowledges that the
Underwriters research analysts and research departments are required to be independent from their
respective investment banking divisions and are subject to certain regulations and internal
policies, and that such Underwriters research analysts may hold views and make statements or
investment recommendations and/or publish research reports with respect to the Company and/or the
offering that differ from the views of their respective investment banking divisions. The Company
and the Selling Shareholders hereby waive and release, to the fullest extent permitted by law, any
claims that the Company or the Selling Shareholders may have against the Underwriters with respect
to any conflict of interest that may arise from the fact that the views expressed by their
independent research analysts and research departments may be different from or inconsistent with
the views or advice communicated to the Company or the Selling Shareholders by such Underwriters
investment banking divisions. The Company and the Selling Shareholders acknowledge that each of
the Underwriters is a full service securities firm and as such from time to time, subject to
applicable securities laws, may effect transactions for its own account or the account of its
customers and hold long or short positions in debt or equity securities of the companies that may
be the subject of the transactions contemplated by this Agreement.
SECTION 17. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
SECTION 18. TIME. TIME SHALL BE OF THE ESSENCE OF THIS AGREEMENT. EXCEPT AS OTHERWISE
SET FORTH HEREIN, SPECIFIED TIMES OF DAY REFER TO NEW YORK CITY TIME.
SECTION 19. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all such counterparts shall
together constitute one and the same Agreement.
26
SECTION 20. Effect of Headings. The Section headings herein are for convenience only
and shall not affect the construction hereof.
27
If the foregoing is in accordance with your understanding of our agreement, please sign and
return to the Company and the Attorney-in-Fact for the Selling Shareholders a counterpart hereof,
whereupon this instrument, along with all counterparts, will become a binding agreement among the
Underwriters, the Company and the Selling Shareholders in accordance with its terms.
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Very truly yours, |
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SYMETRA FINANCIAL CORPORATION |
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By |
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Title: |
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By |
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As Attorney-in-Fact acting on behalf of
the Selling Shareholders named in
Schedule B hereto |
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CONFIRMED AND ACCEPTED,
as of the date first above written:
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
GOLDMAN, SACHS & CO.
J.P. MORGAN SECURITIES INC.
LEHMAN BROTHERS INC.
By: MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
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By |
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Authorized Signatory
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By: GOLDMAN, SACHS & CO. |
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By |
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(Goldman, Sachs & Co.)
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By: J.P. MORGAN SECURITIES INC. |
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By |
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Name:
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Title: |
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By: LEHMAN BROTHERS INC. |
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By |
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Authorized Signatory
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For themselves and as Representatives of the other Underwriters named in Schedule A hereto.
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SCHEDULE A
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Number of |
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Name of Underwriter |
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Initial Securities |
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Merrill Lynch, Pierce, Fenner & Smith
Incorporated |
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Goldman, Sachs & Co. |
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J.P. Morgan Securities Inc. |
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Lehman Brothers Inc. |
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Banc of America Securities LLC |
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Fox-Pitt Kelton Cochran Caronia Waller (USA) LLC |
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Keefe Bruyette & Woods, Inc. |
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UBS Securities LLC |
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Wells Fargo Securities, LLC |
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Total |
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Sch A-1
SCHEDULE B
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Number of Initial |
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Maximum Number of Option |
Name of Selling Shareholder |
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Securities to be Sold |
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Securities to Be Sold |
Berkshire Hathaway Inc.
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White Mountains Insurance
Group, Ltd. |
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Franklin Mutual Advisers, LLC |
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Highfields Capital Management LP |
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Caxton Associates, L.L.C. |
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OZ Master Fund, Ltd. |
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Vestar Capital Partners |
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Prospector Partners, LLC |
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CSFB Private Equity- DLJ Growth
Capital Partners |
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J.C. Flowers & Co. LLC |
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Fairholme Capital Management,
LLC |
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Marshfield Associates |
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Scion Capital, LLC |
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Montpelier Reinsurance Ltd. |
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Sayro Fund Investors III, LLC |
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Wellington
Management Company, LLP |
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Ulysses Partners, L.P. |
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Rho Capital Partners, Inc. |
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The Sulam Trust |
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Chou Associates Management, Inc. |
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James A. Stern |
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Roger Taylor |
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Terry Baxter |
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Snyder, Cahoon & Co., PLLC
Profit Sharing Plan |
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Michael J. Batal III |
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Gene Lee |
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Total ................................ |
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Sch B - 1
SCHEDULE C
Symetra Financial Corporation
39,500,000 Shares of Common Stock
(Par Value $0.01 Per Share)
1. The initial public offering price per share for the Securities, determined as provided in said
Section 2, shall be $l.
2. The purchase price per share for the Securities to be paid by the several Underwriters shall be
$l, being an amount equal to the initial public offering price set forth above less $l
per share; provided that the purchase price per share for any Option Securities purchased upon the
exercise of the overallotment option described in Section 2(b) shall be reduced by an amount per
share equal to any dividends or distributions declared by the Company and payable on the Initial
Securities but not payable on the Option Securities.
Sch C - 1
[Form of lock-up from directors, officers or other stockholders pursuant to Section 5(k)]
Exhibit C
l, 2007
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith Incorporated,
Goldman, Sachs & Co.
J.P. Morgan Securities Inc.
Lehman Brothers Inc.
as
Representatives of the several
Underwriters
to be named in the
within-mentioned
Purchase Agreement (the Representatives)
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
4 World Financial Center
New York, New York 10080
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Re: Proposed Public Offering by Symetra Financial Corporation |
Dear Sirs:
The undersigned, a stockholder [and an officer and/or director] of Symetra Financial
Corporation, a Delaware corporation (the Company), understands that Merrill Lynch & Co., Merrill
Lynch, Pierce, Fenner & Smith Incorporated (Merrill Lynch), Goldman, Sachs & Co., J.P. Morgan
Securities Inc. and Lehman Brothers Inc. propose(s) to enter into a Purchase Agreement (the
Purchase Agreement) with the Company and the Selling Shareholders providing for the public
offering of shares (the Securities) of the Companys common stock, par value $0.01 per share (the
Common Stock). In recognition of the benefit that such an offering will confer upon the
undersigned as a stockholder [and an officer and/or director] of the Company, and for other good
and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the
undersigned agrees with each underwriter to be named in the Purchase Agreement that, during a
period of 180 days from the date of the Purchase Agreement, the undersigned will not, without the
prior written consent of each of the Representatives, directly or indirectly, (i) offer, pledge,
sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to
sell, grant any option, right or warrant for the sale of, or otherwise dispose of or transfer any
shares of the Companys Common Stock or any securities convertible into or exchangeable or
exercisable for Common Stock, whether now owned or hereafter acquired by the undersigned or with
respect to which the undersigned has or hereafter acquires the power of disposition, or file, or
cause to be filed, any registration statement under the Securities Act of 1933, as amended, with
respect to any of the foregoing (collectively, the Lock-Up Securities) or (ii) enter into any
swap or any other agreement or any transaction that transfers, in whole or in part, directly or
indirectly, the economic consequence of ownership of the Lock-Up Securities, whether any such swap
or transaction is to be settled by delivery of Common Stock or other securities, in cash or
otherwise.
Notwithstanding the foregoing, if:
C-1
(1) during the last 17 days of the 180-day lock-up period, the Company issues an earnings
release or material news or a material event relating to the Company occurs; or
(2) prior to the expiration of the 180-day lock-up period, the Company announces that it will
release earnings results or becomes aware that material news or a material event will occur during
the 16-day period beginning on the last day of the 180-day lock-up period,
the restrictions imposed by this lock-up agreement shall continue to apply until the expiration of
the 18-day period beginning on the issuance of the earnings release or the occurrence of the
material news or material event, as applicable, unless the Representatives waive, in writing, such
extension.
Notwithstanding the foregoing, the undersigned (i) may transfer any or all of the
undersigneds shares of Common Stock (in the case of an individual, either during his or her
lifetime or upon death), by bona fide gift, will or intestacy, (ii) if an individual, may transfer
any or all of the undersigneds shares of Common Stock to any trust for the direct or indirect
benefit of the undersigned or the immediate family of the undersigned for estate planning purposes,
(iii) if a trust, may distribute any or all of the undersigneds shares of Common Stock to its
beneficiaries, and (iv) if a corporation, partnership or a limited liability company, may
distribute any or all of the undersigneds shares of Common Stock to its shareholders,
subsidiaries, partners, members or affiliates; provided, however, that in the case
of transfer under each of clauses (i), (ii), (iii) and (iv), it shall be a condition to such
transfer or distribution that: (a) such transfer or distribution shall result in no dispensation of
value; (b) no filing by any party (transferor or transferee) with the Securities and Exchange
Commission shall be required or shall be voluntarily made in connection with such transfer during
the lock-up period, as such may be extended; (c) no party shall be required by law to make, and
shall agree to not voluntarily make, any public announcement of such transfer during the lock-up
period, as such may be extended; (d) each of the Representatives has been advised in writing at
least two business days prior to the proposed transfer; and (e) the transferee shall execute an
agreement stating that the transferee agrees to take and hold such Common Stock subject to the
terms of this lock-up agreement and there shall be no further transfer of such Common Stock except
in accordance with this lock-up agreement. For purposes of this lock-up agreement, immediate
family means relationships by blood, marriage or adoption, not more remote than first cousin.
Notwithstanding the foregoing, (i) the undersigned may transfer any or all of the undersigneds
shares of Common Stock acquired in open market transactions after the date of the final prospectus
relating to the offering of the Securities; provided, however, that clauses (b) and
(c) above shall apply and (ii) the undersigned may transfer any or all of the undersigneds shares
of Common Stock to a parent entity that wholly-owns the undersigned or to any other wholly-owned
subsidiary of such parent entity; provided, however, that (1) no filing by any
party (transferor or transferee) with the Securities and Exchange Commission shall be voluntarily
made in connection with such transfer during the lock-up period, as such may be extended, (2) the
undersigned provides each of the Representatives with prior notice of any required filing with the
Securities and Exchange Commission and (3) clause (e) above shall apply.
Notwithstanding any of the foregoing, the restrictions set forth in this lock-up agreement
shall not apply (1) to the establishment of a trading plan that complies with Rule 10b5-1 under the
Securities Exchange Act of 1934, as amended; provided, however, that the
restrictions in this lock-up agreement shall apply in full force to any sales pursuant to such
trading plan during the lock-up period, as such may be extended, or (2) to the exercise of stock
options granted pursuant to the Companys stock option or incentive plans disclosed in the final
prospectus; provided, however, that the restrictions in this lock-up agreement
shall apply in full force to any shares of the Companys capital stock issued upon such exercise
during the lock-up period, as such may be extended.
The undersigned hereby acknowledges and agrees that written notice of any extension of the
180-day lock-up period pursuant to the previous paragraph will be delivered by the Representatives
to the
C-2
Company (in accordance with Section 13 of the Purchase Agreement) and that any such notice
properly delivered will be deemed to have been given to, and received by, the undersigned. The
undersigned further agrees that, prior to engaging in any transaction or taking any other action
that is subject to the terms of this lock-up agreement during the period from the date of this
lock-up agreement to and including the 34th day following the expiration of the initial
180-day lock-up period, unless it has received prior written notice from the Company that the
lock-up period has expired, it will give notice thereof to the Company and will not consummate such
transaction or take any such action if at the time of such notice the Company notifies the
undersigned that the 180-day lock-up period (as may have been extended pursuant to the previous
paragraph) has been extended.
The undersigned also agrees and consents to the entry of stop transfer instructions with the
Companys transfer agent and registrar against the transfer of the Lock-Up Securities except in
compliance with the foregoing restrictions.
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Very truly yours, |
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Signature: |
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Print Name: |
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C-3
exv23w1
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
We consent to the reference to our firm under the caption Experts and to the use of our
report dated February 20, 2007 (except for Note 22, as to which the date is October 26, 2007) with
respect to the consolidated financial statements, and our report dated February 20, 2007 (except
for Note 3, as to which the date is October 26, 2007) with respect to the financial statement
schedules, in Amendment No. 7 to the Registration Statement (Form S-1 No. 333-144162) and related
Prospectus of Symetra Financial Corporation dated October 29, 2007.
/s/ Ernst & Young LLP
Seattle, Washington
October 26, 2007