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Executives

Jim Pirak - Senior Vice President, Investor Relations and Marketing

Tom Marra - President and Chief Executive Officer

Margaret Meister - Executive Vice President and Chief Financial Officer

Michael Fry - Executive Vice President, Benefits Division

Dan Guilbert - Executive Vice President, Retirement Division

Analysts

Humphrey Lee - UBS

Ryan Krueger - Dowling & Partners

Steven Schwartz - Raymond James & Associates

John Nadel - Sterne Agee

Seth Weiss - Bank of America/Merrill Lynch

Chris Giovanni - Goldman Sachs

Symetra Financial Corporation (SYA) Q4 2012 Earnings Conference Call February 5, 2013 10:00 AM ET

Operator

Good day, ladies and gentlemen and welcome to the Fourth Quarter 2012 Symetra Financial Corporation Earnings Conference Call. My name is Eric and I’ll be your operator for today. At this time, all participants are in a listen-only mode. We shall facilitate a question-and-answer session at the end of the conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to Mr. Jim Pirak, Senior Vice President, Investor Relations and Marketing. Please proceed.

Jim Pirak - Senior Vice President, Investor Relations and Marketing

Thank you. Good morning and welcome to Symetra Financial Corporation’s review of fourth quarter 2012 results and 2013 outlook. Before we begin, I would like to call your attention to the Safe Harbor statement on slide two of the presentation materials, which are posted on Symetra’s website.

Some of the information discussed on the call, is based upon information as of today and contains forward-looking statements that involve risk and uncertainty. To the extent that any of the comments on the call are forward-looking statements, they are qualified by the risk factors in Symetra’s public filings, including the press release issued yesterday.

During this call, we will discuss GAAP and non-GAAP financial measures, reconciliations between the two are available in yesterday’s earnings press release and in the presentation materials, which are posted on Symetra’s website.

On the call today, you will hear from President and CEO, Tom Marra; and Executive Vice President and CFO, Margaret Meister. Michael Fry, from the Benefits Division and Dan Guilbert, from the Retirement Division would join in the Q&A discussion.

Now, I will turn it over to Tom.

Tom Marra - President and Chief Executive Officer

Thanks, Jim and good morning, everyone. On the call today, we will discuss our results for the fourth quarter and we’ll introduce our plans and expectations for 2013. On the wrap of 2012, I would tell you that we accomplished a lot last year, while we also had some big messes. We improved our capabilities across the company, and while they fell short of several key sales goals for the year, we delivered our several important objectives that positioned us to deliver better results in 2013.

First, in Benefits, we have built our group life and disability income business. We have put in place an excellent team, brought our underwriting and administration in-house and implemented a state-of-the-art claims and asset management system and other tools that will differentiate us in our target market, which is companies with 500 to 5000 employees. We didn’t meet our sales goal for 2012, but we did grow the business. We have posted group life and disability sales of over 15 million for the full year, including $6 million in the fourth quarter compared with $4 million in 2011.

Second, in Retirement, an important initiative which really took off in 2012 was our Edge Pro Fixed Indexed Annuity, which we sell through banks and broker dealers. In less than three years, we have seen Edge Pro growing to a franchise product for Symetra. With a $115 million in sales in the fourth quarter, we reached nearly $300 million for full year 2012, up from just $45 million in the previous year. We’ll continue to enhance this product offering that we expect this to be a real growth opportunity. We also aim for the fee-based advisor with a new non-living benefits VA product and we have yet to gain any traction. In 2013, we’ll continue to assess this fee-based market. Later in the year, we have planned to leverage the VA platform by launching a no limit in living benefit commissioned version of True for bank and broker dealer market, where of course bank and broker dealers where we already have strong distribution relationships.

Third, in Individual Life, we really missed the target on our initial launch of Classic Universal Life. We made a course correction with a change to the product design, but it was too late in the year to recover for 2012, but I want to remind you we did enhance our Individual Life product and distribution capabilities adding a team based in Boston, and last month hiring Meg Skinner who has a proven track record of leading life distribution. I believe we are finally positioned to generate some meaningful sales of Classic UL in 2013. So, in 2012, we finished our critical construction foot phase and I am pleased with what we have built at Symetra. In 2013 we will be focused primarily on driving product sales not on further development and construction.

I would also make an important point here about how we have positioned the company for future success. Across Benefits, Retirement and Individual Life, we have maintained the risk management discipline that really defines Symetra. We have not chased growth by putting unacceptable risks on our balance sheet. For example our Benefits business and here is the strict underwriting standards, our VA has no guaranteed living benefits, our FIA lends itself to straight forward hedging strategies again with no living benefit. In our UL in this last protection benefit riders, our price for today’s low interest rate environment. So we are maintaining our discipline. Our book value and tangible book value are nearly equal. The value we are creating at Symetra is real.

Now turning to slide four, for the results for the quarter just ended, here we have our consolidated financial results for the fourth quarter and the year. As you just can see this was not a good quarter for us. Net income was $31 million, which was down sharply from $74 million in fourth quarter 2011 due to lower net realized investment gains and lower adjusted operating income. Adjusted operating income was $33 million, down from $51 million in fourth quarter of 2011. Less favorable claims experienced in the Benefits and the Individualized segments largely drove the fourth quarter decline in operating results.

The Benefits segment reported higher loss ratios for both medical stop loss and limited benefit medical. And the drop in Individualized segment earnings was largely a result of less favorable claims experienced in BOLI and Individual Life. The Deferred Annuities and Income Annuities segment posted consistent earnings for the quarter driven by solid interest spreads on stable account values. The Symetra team continues to work hard everyday to maintain our margins through disciplined pricing actions combined with very effective asset liability management and investment strategies. Return on equity was 6.1% for the year ended December 31st compared with 7.2% for the prior year. Operating return on average equity which excludes the unrealized gains on our investment portfolio was 8.5% for the year ended December 31, 2012, down from 9.5% for 2011.

Now I will turn it Margaret who will discuss the main drivers of our segments and then we will come back – I will come back to say more about 2013 and then we well take the questions. Margaret?

Margaret Meister - Executive Vice President and Chief Financial Officer

Thank you, Tom and good morning. We have finished the year with a very disappointing fourth quarter reflecting much less favorable claims experience in the Benefits and Individual Life segments than in the fourth quarter of 2011. Before going through the segment results I want to update you on our growing diversified spend and discuss several items of note that occurred in the quarter. We have items that reduced adjusted operating income by $2.2 million pre-tax and $6.1 million after tax.

Fourth quarter investment income benefited from $10.8 million in prepayment income, primarily in the Deferred Annuities segment, which was partially offset by $2.5 million in related amortization expense. This was down from fourth quarter 2011 where bond prepayments net of amortization contributed $13 million to pre-tax operating income. We have incurred operating expenses of $4.6 million including expenses to evaluate a potential acquisition opportunity that did not come to fruition. $3.8 million in higher claims and an increase to reserves for our select benefits, limited benefit medical business. And we had $2.1 million of reserve increases split evenly between Income Annuities and Individual Life.

Finally, we recorded a deferred tax asset write down resulting in a $4.7 million increase in our income tax expense. As a result of this adjustment the effective income tax rate increased to 29.4% in the fourth quarter. Our Grow & Diversify program ended its billed year with a full year impact on operating earnings per share of negative $0.11 per share. This includes $0.02 of spend on M&A activity throughout the year versus our guidance of negative $0.09. For the quarter we incurred operating earnings per share of negative $0.05 per share including $0.01 for M&A related expenses. Excluding the M&A costs our Grow & Diversify effort tracked from a spend perspective, but we are behind from a revenue perspective.

Moving now to the Benefits segment on slide five, Benefits operating revenue was up year over year with increased premiums across business lines. Pre-tax adjusted operating income was down sharply from the prior year as a result of less favorable claims experience. The Benefits loss ratio was 67.7% in the fourth quarter, up from 59.6% in the year ago period reflecting higher loss ratios in both medical stop-loss and limited benefit medical, medical stop-loss claims rose on higher frequency and higher severity compared with fourth quarter 2011, which had unusually favorable claims experience. And our limited benefit medical loss ratio popped up on higher claims on some policies and an associated reserve increase. With the full year, the benefit loss ratio was 65.1% or just above our long term target range of 63% to 65%.

On slide six, we have Deferred Annuities, which reported a slight decline in operating revenue. Pre-tax adjusted operating income rose from the same period of last year as a result of higher account values and lower DAC amortization and this was offset in part by higher operating expenses. DAC amortization was down mostly due to favorable lapse experience, though down slightly from a year ago, I am pleased that the base interest spread held at strong at 1.78% in the fourth quarter. As we have said before, we have made changes to our Deferred Annuities guarantees and commissions over the past couple of years allowing us to earn our required return at lower interest spreads.

Turning to Income Annuities on slide seven, operating revenue was down from fourth quarter 2011. Pre-tax adjusted operating income was down due to lower funding services activity, and that impact of $1.1 million reserve increase reflecting a new liquidity benefit in some of our SPIA products. Year-over-year results benefited from lower mortality losses of $900,000 in fourth quarter 2012, compared with a $3.9 million in the fourth quarter 2011.

On slide eight, the Individual Life segment reported lower operating revenue in the fourth quarter than in the year ago. Fourth quarter 2011, benefited from over $4 million of prepayment income. Pre-tax operating income fell as a result of higher claims and lower reinvestment yields BOLI, higher claims in Individual Life, a modest addition to Individual Life reserves together with higher operating expenses. It is important to note that about half of our BOLI account value has credited a rate resets in December and January, which will improve the ROA. Mortality in the fourth quarter 2011 was very favorable versus the relative high this quarter. Overall we view this as normal period-to-period movement and see no fundamental shift in our mortality expectations.

On slide nine, we have our earnings guidance for 2013. As Tom said this year we are focused on driving sales result and on realizing returns on the investments we have made in our products and capabilities. We are expecting operating earnings per share this year to be in the range of $1.30 to a $1.50. In our plan for 2013, we assume that we achieve reasonable sales levels and particularly we expect year-over-year growth from the products we rolled out in 2012. Our sales targets and planned margins reflect that interest rate environment remains stable at low levels with 1.7% 10-year treasury rate. We assume that we will hold our operating expenses flat versus 2012 levels, so that we close the gap between top line growth and expense growth. Frankly we have gotten ahead of our revenues. We have already taken some actions in late 2012 and early 2013 to scale back on costs including making some changes to our VA operation and managing hiring across the company.

The Benefits loss ratio is expected to remain at the higher end of our long-term target range of 63% to 65%. We expect the supply of commercial mortgages will be the same in 2012 with new funding at about 300 basis points spread over comparable treasury securities. Our mortality experience will be comparable to our historical experience or about neutral with our long-term expectation. We expect our effective tax rate to continue to be quite favorable coming in the low 20% range. We are estimating completing about half of the announced 10 million share buyback ratably over the course of 2013. Of course, differences between any of our major assumptions for 2013 and actual experience could drive results higher or lower than guidance.

And with that, I will turn the call back to Tom.

Tom Marra - President and Chief Executive Officer

Okay, thank you, Margaret for that assessment of how we view the range of $1.30 to $1.50. From an operating perspective, I am expecting some effort to deliver improved results, including growth in sales and of course full year EPS. Of course, the low interest rate environment remains the biggest challenge to our business. ROE improvements will continue to be slow to develop in the current interest rate environment. We are working toward achieving the double-digit operating ROE, but it would take us longer to reach than we previously expected. And we have capital that we need to put to work. Organic growth has been more elusive than we planned for and expected.

In 2012, we looked long and hard at several potential acquisitions that were aligned with our growth strategies, and in fact spent about $0.02 per share doing so. But ultimately, we had to walk away from them because of our pricing discipline. We are very interested in doing a deal at the right price however. Individual Life and Group Benefits remain our targets for acquisition. So, we’ll continue to work hard to drive sales of course and we will continue to look at attractive and accretive acquisition opportunities. However, in 2013 we are also turning to our third priority of capital management. As we announced last night, our board has authorized management to repurchase up to 10 million shares of our common stock.

We remain committed to our three capital management priorities, first organic growth, second attractive M&A opportunities, and third capital actions. All-in, we expect our operating ROE to hold steady in 2013. You can expect us to remain disciplined in our underwriting and pricing. Despite the pressures imposed by the interest rate environment and our own discipline, I expect solid sales results for 2013. In medical stop-loss, we expect a good sales year, but not another record breaking year. While we continue to see a large amount of new business opportunities, this is the business that we manage for bottom-line results bottom-line profits versus top-line growth or market share.

In Deferred Annuities, because we have strong working relationships with our major bank partners, we continue to add distribution. We expect to get our fair share of the fixed Deferred Annuities sold in banks again in 2013. And I expect we will see sales pickup substantially across all our newer product lines. For Group Life and Disability, we will continue to build on the momentum created in 2012. We will work to further expand shelf space for our Edge Pro Fixed Indexed Annuity on both bank and broker dealer platforms. Again, we see this as an emerging core product for Symetra. And we’ll leverage our strong distribution relationships also in banks and broker dealers to launch a new commissioned True variable annuity. And we are accounting on recent product changes to drive growth of Classic UL.

And finally, I expect variable COLI sales to develop this year as the sales case pipeline matures. So, we have a lot of work to do as we leverage the heavy investments made in 2012, but I am confident about our prospects for success. Okay, Derrick, please open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question was coming from the line of Humphrey Lee from UBS.

Humphrey Lee - UBS

Hi good morning, everyone.

Tom Marra

Good morning.

Margaret Meister

Good morning.

Humphrey Lee - UBS

I didn’t quite catch the buyback amount based in the 2013 guidance, is that 50% you said?

Margaret Meister

Yeah. What we have estimated is about half of it done evenly throughout the course of the year.

Humphrey Lee - UBS

Okay. So, well 50% of the buyback assumed in the 2013 guidance, it seems like the EPS growth seems to be implied at the operating earnings growth to be limited in 2013. What was estimated to the lack of operating earnings growth in your projection given you are expecting stronger sales in ‘13 and some of the kind of the Grow & Diversify strategy to come through?

Margaret Meister

Well, when we look at our guidance, we actually think the combination of the share repurchase, which is a couple cents from our perspective. We still think we are putting up a pretty healthy growth. In 2012, we did benefit – net benefit over the course of the year with some favorable, so if you back that out, we still need to have growth in the company a little bit of improvement in our loss ratio within the Benefits division and also an expectation of a good tax rate to drive our results. So, everything has to come into play.

Humphrey Lee - UBS

Okay and then I remember in your original 2012 outlook presentation, the net operating EPS impact from the Grow & Diversify strategy was originally guided to be a negative $0.02 in 2013. So, given the challenges you see with some of the newer products, is that negative $0.02 still an appropriate number and any updates for the long-term EPS impacts from the Grow & Diversify strategy?

Tom Marra

So, the $0.02 is the original is too low in a sense we’re blending it in with our overall results, but obviously we are well behind on the revenue. We do have taken some actions to bring the expenses in and actually certain things changed along the way for instance we added the claims capability and group disability that wasn’t in the original plan, but we thought it made – it was smart to because we saw an opportunity to really enhance our capabilities in that area. But now the $0.02 is light, but from going forward we won’t be spiking it out as such.

Humphrey Lee - UBS

Okay. If I can click in one more, looking at the full year medical stop loss ratio is only slightly above the target range of 63% to 65%, but the second half figure seems to be a little bit more elevated. Are there any specific drivers that you see that would lead to weaker loss ratios? And also can you comment on the January 1st renewal in terms of pricing?

Mike Fry

Hi, Humphrey, this is Michael Fry, thanks for your question. What you are seeing with regard to our loss ratio quarter-to-quarter, we feel that’s within expected range as you know in following our operations, the loss ratio does fluctuate from quarter-to-quarter. So, there is no trend there that we’re concerned about. With regard to January also on our renewals, it’s very important that we keep up with leverage medical inflation, which we estimate kind of to be in the low-teens area. And I’m happy to report that we did get our pricing. And in fact we actually retained a little bit more of our business than what we had planned for. So, things are looking pretty good.

Humphrey Lee - UBS

Okay, got it, thanks.

Operator

Your next question is coming from the line of Ryan Krueger from Dowling & Partners.

Ryan Krueger - Dowling & Partners

Hi, guys, good morning.

Tom Marra

Good morning Ryan.

Ryan Krueger - Dowling & Partners

I want to – I had to a couple of questions on I guess the capital management outlook and the buyback, you had talked in last quarter about evaluating debt structure at the company and given the low debt to cap here and can you give an update on that and in fact it’s part of the plan going forward?

Margaret Meister

Sure, last quarter we did mention that we do have an overall pretty low debt to cap ratio. And for the share buyback that we’ve just announced, we certainly aren’t using that as a way of funding that buyback given that we are looking at organic growth and M&A activities, we would like to keep some balance sheet flexibility.

Ryan Krueger - Dowling & Partners

Got you. And is there – I mean is there a number actually to think of in terms of the size of the deals you think you would feel comfortable of doing that that you could do without going to the equity market just using cash and the same debt?

Margaret Meister

Yeah, I mean, obviously with the share buyback given the timing of it that indicates that we probably have 100 million to 150 million there plus we do have some leverage capacity, so we have some means to execute it down.

Ryan Krueger - Dowling & Partners

Okay and then lastly the 1.7% in your treasury assumption for the full year, my assumption is may be the guidance, EPS guidance wouldn’t really in any given year be all that sensitive but if instead of 1.7% we were at 2.25% for the rest of the year, will that have any material impact on the near-term EPS result?

Margaret Meister

Sure, so, I mean, the 1.7% of course that wasn’t so long ago that we were there, but I’m happier to be here at the 2% level. Clearly if we find our self in a bit higher interest rate environment that offers some benefits for the pace of growth in some of our annuities areas and I think also it bolsters Individual Life. I think it fits within the context though with the range that we put out there that wouldn’t cause us to probably radically revisit the high-end.

Ryan Krueger - Dowling & Partners

Okay, thank you.

Tom Marra

Thanks Ryan.

Operator

Your next question is coming from the line of Steven Schwartz from Raymond James & Associates.

Steven Schwartz - Raymond James & Associates

Hey, good morning everybody. A few as well. First, I want to talk about the stop-loss business, you said there was a lot of business out there. I am wondering if the market is expanding yet because of ACA, I believe that the NAIC put aside the small employer model that it was looking for as well, if that’s accurate?

Michael Fry

Yeah, Steven, this is Michael, that is accurate for now. And I can’t really say definitively if the market is expanding, but I will say that the opportunities that we have been afforded to us to quote are definitely up over last year. We are getting a lot of opportunities to write new business, but as Tom mentioned, it is a business that we manage to bottom line profit. So, we are being very disciplined in terms of our pricing, but, yeah lots of activity.

Steven Schwartz - Raymond James & Associates

Okay. And then Tom on True VA is what do you think the issue has been there? Is it a Symetra internal issue or is it this is a product that the market just hasn’t adopted yet?

Tom Marra

I am going to let Dan jump in. I think we have a great product and the funds are also nice, what we are finding is the advisors are still slow to emerge even with our hands-on wholesaling, which is a little different in this market, but it’s yeah it just hasn’t jumped on yet. We see little, very, very tiny pockets, but it just hasn’t taken off, but again Dan’s in this everyday, he can give some insight, I am sure.

Dan Guilbert

Good morning, Steven.

Steven Schwartz - Raymond James & Associates

Good morning.

Dan Guilbert

Yeah. As Tom mentioned, it has been a challenge. We went into this knowing that we will be fighting some inertia. The VA market has obviously been dominated by living benefits for over a decade. And so by going out the product without a living benefit, it was much more of tax deferral story. We know we would be fighting through challenges. That said it’s slower than we’d even liked and getting fee-based advisors to use a product that they haven’t really focused on to a large extent and really telling our story and having them move business into what is proven harder than what we thought. So, we have gotten great feedback in terms of the product, specifically the fund line-up and some of the tools we have built. So, we’ve gotten good qualitative feedback, but obviously hasn’t shown the results yet. So, we are still going to continue to focus on that and see what we can do to get some results. And as Tom mentioned earlier, we are also going to take the investment and the platform we made and see if there is an opportunity to leverage that in terms of creating a commissionable version of the product.

Steven Schwartz - Raymond James & Associates

So, Dan, it’s not a question of getting shelf spaces, it’s a question of the advisors actually using the product, that’s on the shelf?

Dan Guilbert

We think good discussions across many broker dealers and we have good selling arrangements with broker dealers in addition to having good discussions with RIAs. And so I don’t think it’s been an issue of the shelf space and sort of access, it’s really been getting folks to move money into the product.

Steven Schwartz - Raymond James & Associates

Okay.

Dan Guilbert

From the bigger challenge.

Steven Schwartz - Raymond James & Associates

Alright. And then Margaret, when you said expenses are going to be flat, what’s the definition of expenses here?

Margaret Meister

I am talking about operating expenses.

Steven Schwartz - Raymond James & Associates

So, it would not include DAC amortization?

Margaret Meister

No, it wouldn’t include DAC amortization or commission type expenses.

Steven Schwartz - Raymond James & Associates

Okay. And then finally, if I can, I think last year you kind of gave a roadmap of this is where we think that this is our target for sales in these new products?

Tom Marra

Yeah.

Steven Schwartz - Raymond James & Associates

If I am right, you are not doing it this year, is there a reason why?

Tom Marra

Well, we are actually looking at those are the new products and I guess I am actually looking at those new products merging in with everything. So -- and we’ll see growth in all of our new products, True VA. Some of it is just because we are a low base in Individual Life and True VA, but group life and disability will see outstanding growth and establish as a business. So, we just figure we’ll report one quarter at a time, you will see that we are making progress and the newer products going to merging in with everything else we have, holding expenses and kind of using this year as a execution year as opposed to a massive construction year. I think you will see it and we expect to do well this year and we’ll report a quarter at a time.

Steven Schwartz - Raymond James & Associates

Okay, alright. Thank you, guys.

Tom Marra

Thanks Steve.

Margaret Meister

Thanks.

Operator

(Operator Instructions) The next question is come from the line of John Nadel from Sterne Agee.

John Nadel - Sterne Agee

Hey, good morning. I guess my first question for you is just on the expected tax rate for 2013. I believe you’ve indicated that we should expect something in the low-20s I might have missed that for 2013. But if memory serves, I think that’s actually much lower than what we were previously assuming maybe something more in the high-20s. So, first do I have the numbers right? And second, I guess I’m just trying to understand what’s the driver of the lower rate is it that you’ve actually added to your sort of low income, tax driven or tax motivated investments or is it that change in your outlook for pre-tax income such that the tax credits that you already have will be that much more efficient?

Margaret Meister

So, John, it’s Margaret. So, I did say that we expect in the tax rate to be in the low 20s, which I think is a little lower than previously expected. It’s a combination one is that we over the course of time have built up a little bit of tax preferred investments. And secondly, given that we are a little bit behind on the revenues side, our Grow & Diversify is where we are projecting our pre-tax income was a little bit lower than before so that also.

John Nadel - Sterne Agee

Okay. Thank you for that. And then I guess Tom, I think it was also mentioned probably take a little bit longer that it make sense to me to get to that double-digit ROE target. I guess now that you’ve sort to gone through your sort of longer range updated budgeting process, can you give us a sense for at what point in that forecasting you expect to get there?

Tom Marra

We’ll we are looking flat for this year, so it’s probably couple of years out. But if we get a pop on interest rates maybe a breakthrough and I still expect some time having done this for a long time, you do get a hard product or something that can really leverage your position in the market. And then I think we have a few seats for that I am not going to predict those, but we need a few things to go right and obviously we need help from the economy particularly interest rates.

John Nadel - Sterne Agee

Okay, okay. And then last question for you Tom is, obviously we’ve get the buyback introduced, you mentioned that there was maybe a penny or two of costs in the current period that related to a deal that you are interested in but just going get across the finish line. I guess, what’s your outlook for the potential anyway for M&A, as you look out over the next one to two years I mean do you still think that that environment is reasonably robust?

Tom Marra

Yes, particularly in Individual Life maybe a little less than group benefits, but that could change to. But yeah I think there are still foreign companies that are rationalizing their position in the U.S. there appears to be a lot of activities you’ve seen in the second half in 2012. So, we expect to be players in those processes, but I think you need to be patient to make sure you get the exact right deal. If you do I think it could be potentially, obviously within the range market. Margaret suggested $100 million to $150 million you are more Bolton. But we will keep our – that revved up. But given what’s happened we felt there was time to turn on the third lever, which we announced the buyback and Board was very appreciative of what we tried to do in 2012. But obviously supports that we couldn’t get over the finish line for the right reasons and hence we have turned on the third lever.

John Nadel - Sterne Agee

Can you – would it be fair to ask you, the deal that you couldn’t quite get across the finish line. Can you give us a sense not for the name or type of business but for the size, in terms of the capital outlay?

Tom Marra

That would be unfair…

John Nadel - Sterne Agee

Okay.

Tom Marra

We are not going to play that game.

John Nadel - Sterne Agee

So then, I’ll ask one more question around this, an M&A transaction comes along, Tom, what size do you have to choose the deal over buybacks, what size transaction?

Tom Marra

You have to look at the terms of the transaction all aspects of it. That’s the leader in the clubhouse is the buyback. And so within the next – what is the alternative would have to go up against the results of that. Margaret, do you want to?

Margaret Meister

Yeah, I think that’s (the same).

John Nadel - Sterne Agee

Okay, thanks very much. Look forward to seeing you soon.

Operator

Your next question is coming from the line of Seth Weiss, Bank of America/Merrill Lynch.

Seth Weiss - Bank of America/Merrill Lynch

Hi, good morning.

Tom Marra

Good morning.

Margaret Meister

Good morning.

Seth Weiss - Bank of America/Merrill Lynch

Just a quick question about the product too, you said you had mentioned earlier on the call I think you mentioned that the UL offering would be a little bit changed. Could you just give a little bit of color in terms of what the changes are and maybe why the old offering wasn’t getting the uptake you expected?

Tom Marra

Yeah, the original product had no guarantee. We obviously think that we want to stress more of a cash value orientation, because that has less interest rate risk and some of the risk that low-cost – period low-cost no lapse guarantee UL has, but what we felt we needed to do was offer a rider that while the product still had cash value, you could get a premium guarantee. So, our proposition is our premium guarantee will be a little higher than the very low no cash value NLG products, but in combination with the cash values we offer, it’s getting a pretty positive response. Now, it’s still going to ramp up slowly, because we are finding that it takes time to penetrate these new distribution channels and relationships, but now we have a product that they actually are very positive on, because what it does is it gives you base premium guarantee, but still the option for – or still the product has substantial cash values that are another damage to the product. So, it took us a couple of times to get it right and that’s regrettable, but we think now we have the right product and now we are kind of hit the reset button and we’ll start to penetrate.

Seth Weiss - Bank of America/Merrill Lynch

Okay, great. Thanks helpful. And one more question on just the commission-based VA product, I suppose, what’s your confidence level in the uptake there and when we think about the – that the margins and profitability, is it a little bit of a different profitability profile since you are paying the commissions now?

Dan Guilbert

Good morning, Seth, this is Dan Guilbert. Thanks for your question. In terms of the VA, the commissionable version again as Tom said we are not going to be offering any living benefits on VA. And so anything that we do in the space for our living benefit, we wouldn’t expect to have massive growth early on. And one of the reasons we are looking at this in fact is that we have already built up the platform, we have already made investments and so we are able to leverage those investments and do in a way such that it’s cost effective. So, we expect to get some traction in ‘13, but really just getting that chassis out there and really again explore the part of the market that where brokers expect a commission and still provide great investment lineups and tax deferral. So, I wouldn’t expect explosive growth, but rather just to get the chassis launched. We’re really spending a lot more time frankly on our index products, where we actually have already gotten traction. We are already seeing growth and we think there is a lot more upside going forward as well. In terms of the margins, we expect to hit our profit targets as always consistent with the rest of our business, so no degradation there at all.

Seth Weiss - Bank of America/Merrill Lynch

But because of the commission?

Dan Guilbert

It generally be higher margin just to cover your commission expense, and so pound for pound, it will have a higher margin than a fee-based annuity, but again still hitting our ROE targets.

Seth Weiss - Bank of America/Merrill Lynch

Okay, very helpful. Thanks a lot.

Tom Marra

Thank you, Seth.

Operator

(Operator Instructions) Your next question is coming from the line of Chris Giovanni, Goldman Sachs.

Chris Giovanni - Goldman Sachs

Thanks so much. Good morning. I guess first question is tied to the loss experience you have seen within the stop-loss business, you’ve now been I guess above your targeted range for the past three quarters. So, just curious if you can talk some about trends you are seeing there and if there are any changes to the longer term target?

Michael Fry

This is Michael. Thanks Chris. There is no change to the long-term target. Actually, if you kind of looked at the select benefits experience that’s kind of a one-off and you took that out of the equation, we’d be right smack in the middle of the range for the year. And again we went aggressively for our price increases as we went into January business cycle. So, I think that we’ll able to maintain our loss ratio within that range, but no change to the target.

Chris Giovanni - Goldman Sachs

Okay. And then Margaret, I guess for the outlook it looks like there is a few more kind of caveats and considerations to make in terms of the potential range. I guess is that the driver for may be the bit wider range. And then specifically as I mentioned around expenses relate to legal proceedings or regulatory investigations. Can you maybe is that just generic or is there a specific incidence we should be aware off?

Margaret Meister

Okay, well, on the second part that is just generic, that’s certainly not really something it was built-in and contemplated within the range.

Chris Giovanni - Goldman Sachs

Okay.

Margaret Meister

As far as just a bit wider, there is a lot more moving factors, but we just decided to start the year with a slightly wider range of $0.20, which we’ve had that in the past, last year we did $0.15, but previously we’ve also had $0.20 range.

Chris Giovanni - Goldman Sachs

Okay, that’s all I have. Thank you.

Tom Marra

Thank you, Chris.

Operator

We have a follow-up question coming from the line of Humphrey Lee, UBS.

Humphrey Lee - UBS

Hi, just have a question related to Income Annuities, I guess now you are more focusing on the shorter duration product and also the continued sales for structured settlement products. Does your appetite for commercial mortgage loans change going forward?

Margaret Meister

I’ll answer that. Our appetite for commercial mortgage is in line with what we did in 2012, it still is a very healthy asset class for us. And we feel like we have capacity and it’s very useful in the Income Annuities line. And I’ll turn it over to Dan for any additional comments.

Dan Guilbert

I think, good morning, Humphrey, I think that the asset class still aligns well with the shorter term period certain payout annuity products that we are seeing. So, the duration of that which is a still good fit for that business and we’ve seen growth in that business, so I think we are still well-positioned there.

Humphrey Lee - UBS

Okay, thank you.

Operator

And at this time, I’m sure no further questions in the queue. I would like to turn the call back over to Mr. Tom Marra for any closing remarks.

Tom Marra - President and Chief Executive Officer

Okay. Thanks Derrick. I know everyone is busy. Again, we thank you for your attention. We’ll – where, we’ll be fighting the fight here at Symetra and we look forward to update you in three months. Thanks again. Have a good day.

Operator

Ladies and gentlemen, this concludes today’s conference. We thank you for your participation. You may now disconnect. Have a great day.

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