Symetra Financial Corporation (NYSE:SYA)
J.P. Morgan 2013 Insurance Conference
March 21, 2013 2:15 PM ET
Margaret Meister – CFO
So our next speaker is Margaret Meister. Margaret is the CFO of Symetra. She has been with the company since 1988 and has been the CFO since 2006. Margaret?
Thank you, (Alan). Thank you for joining me today. Here is our standard forward-looking statements, protective thing. So I am going to go over basic background on the company and so that you guys who may not be familiar with the name hopefully will come out with a good overview of who we are. We’ve been around for 56 years. Publicly traded started in January of 2010. Just shy of $30 billion of total assets and finished last year with net income of about $205 million and our revenues broke over $2 billion last year.
As a company, we view ourselves under three operating divisions; our biggest division is the retirement division which houses all of the different kinds of annuities that we sell. And then we have a benefits division which is anchored by a franchise stop-loss benefit book. And then we also have an individual life division that we have both institutional BOLI and retail life insurance products.
As a company, we enjoy a wide range of distribution relationships. So it’s supporting our benefits divisions, we have relationships with benefits brokers like Aon, Mercer, the big names. That goes back 30-plus years. We’ve been in the financial institutions selling deferred annuities for about 25 years and have relationships with almost all major banks selling annuities. And then we are also building out distribution relationships with some broker dealers.
Newer to us is what we are doing in support of our individual life. We’ve been signing up some brokerage general agents. And in the last 15 or so months we signed on Capitas, Crump and Highland which are three of the biggest and we are expanding in that area as we build out our Life division.
One of the things as a company that’s been very important to us is just kind of a core philosophy is to win the game you have to make sure that you are alive and playing in the game. And so to do that in the world of life insurance, you have to have a high quality balance sheet.
We are very conservative in how we manage the asset side of our balance sheet. So if you were to go back and look at our historical financials, you would see during the financial crisis, we certainly had a certain amount of bond impairments, but it was very modest especially if you kind of compared it across the industry.
We are very rigorous in how we approach our asset liability management for every division on every product type within divisions, we design an asset strategy so that we are aligned and aligned on a cash flow timing basis. We buy very high quality bonds to make sure that we have the principal protectant.
One area that we have been building in the last few years, if you were to look back at us is our commercial mortgages. Pre the crisis, our partial mortgage portfolio had actually shrunk because it was very aggressive lending environment and so we couldn't get the underwriting criteria that we wanted.
And so we are letting that part of our portfolio to decline and then as we came through the crisis, what we found is of course others were backing away from that asset class and that was a great opportunity for us, and we’ve had this commercial lending operation in our company for about 30 years. It was a great opportunity for us to get in there and we have built that up to about 12% of our asset part of the balance sheet.
Our liabilities are mostly illiquid so we have a large book of immediate annuities and structured settlements which of course by their very nature are just scheduled payments and then we have a fairly young book of deferred annuities. So good amount of that book of business is in its surrender charge. So we expect that our core asset base is going to be with us generating good profit margins in the coming years.
We are very conservative in our capital management. So, we right now have an RBC ratio that’s just under 500% which is certainly higher than what we need to sustain some of our endeavors. In fact we like to draw that down. When we think about capital management as a company, the first thing we focus on is that we need to maintain our ratings.
Our distribution partners like to do business with companies that have A and better ratings and this is also important to our BOLI clients, BOLI brokers and frankly some of our new broker channel agents who are very focused on where ratings are.
So as a goal we keep our RBC above 400% and as far as our priority of how to use our capital, we are focused on deploying it organically and I’ll be taking you through kind of what we are trying to do to grow the company and put the capital out on an organic basis. We are looking at acquisitions in our fourth quarter we did announced that we had the $0.01 of expenses that were associated from an acquisition that we looked out that didn’t actually come to fruition.
And then also, the final priority is some level of capital actions returning money to shareholders and with our fourth quarter earnings release, we did announce that we have received a Board authorization to do the $10 million share – not $10 million, 10 million share buyback, half of which we think we'll get done through the course of 2013 and then the other half in 2014.
Our debt-to-capital ratio is very low at 11%. That’s with AOCI it is at about 17% if you look at it as debt-to-book value. Still very low. And as a company, we have always had a very low intangible asset balance really all we have is DAC balance. So our stockholders equity, tangible book value is 93% of that.
In 2012, we accomplished a lot of things and then we were dissatisfied with some of the results. So we built out a lot of capabilities through our various three operating divisions, because each of the operating divisions had a growth...initiative. In the Benefit division, we have always done stop-loss and what we wanted to do is augment that by building out a group life and disability platform.
So in 2012, we brought in systems, hired teams and built out our sales force to get these initiatives started and we were pleased we got $60 million worth of sales which fell short of our sales goal, but was four times as much as what we sold in 2011. And we built out the capability, so we feel very good about the prospects of growing that part of the Benefits division in 2013 and beyond.
In the Retirement division, we expanded our bank distribution channel. We added a few new banks. But in particular we rolled out our index annuity product which we first introduced in 2011. So we rolled that out to more banks and sold just under $300 million over last year and have high hopes for what that would mean for us in 2013 and beyond.
And then we also built out capabilities to support variable annuity. We rolled out a variable annuity that was for fee-based advisors with no commissions, no surrender charge very low cost. We were very disappointed with the sales we got on that particular variable annuity, but we have added to our company’s capabilities to sell a different type of annuity product.
Then in individual life, in addition to signing up those new brokers general agent relationships we rolled out our first universal life product meant for those distribution partners in the middle of the year. Unfortunately, the first time we were a little over weighted to cash value versus having some kind of premium guarantee.
So we quickly re-tweaked that and re-rolled that product out in the fourth quarter of last year. So it didn’t help our sales in 2012, but hopefully positions us to a better year in 2013. So, infrastructure built revenue not where we wanted it to be, so that’s where our focus for this year. A key thing when we are trying to do all of these new efforts though is making sure that what we have historically built the company on continues to perform well and we are really pleased that our medical stop-loss had a record sales year.
And the loss ratio was consistent with our long-term target range. So we took care of the core product. And then our fixed deferred annuities, sales were down in line with industry trends because of the pressure from interest rates. But we still maintained our relationships and we were able to work with the relationships to at least sustain a certain amount of volume and we were pleased with the pricing that we were able to achieve on the business we wrote last year.
So I am going to go through each of the divisions with a little bit more detail. In the Benefit division this makes it clear medical stop-loss is very important to the operating revenues, 87%. We have been in stop-loss for about 37 years and to be in that line, what you have to focus on is making sure that you are getting your price year in year out. That’s a line of business that every year you renew the contracts.
And what you are focusing on when you are renewing those contracts is making sure you are keeping up with medical leverage trend expense. If you do that, then you can stay in that line of business and do quite well. And we regularly achieve mid-teens ROE on that line of business. Since we’ve been in that for 35 years that’s why we feel like we can go and grow that 2% slice of the group life MDI, and that’s a focal point for us.
The limited benefit medical we don’t expect a lot of future growth there. But it is a nice little medical benefit product that we can offer kind of an ancillary benefit pockets for certain employers. This is something that we take a great deal of pride in. Our loss ratio performance we expect it to come in between 63% and 65% and so you can see through time we have largely been able to land under or in that range and we have actually averaged at 62.7%.
So we beat our long-term target on loss ratio which means that we have been able to achieve that mid-teen ROE that we like out of this division. So, on a go forward basis, the Benefits strategic priorities are, of course to maintain our leadership position in stop-loss and stay disciplined on the pricing there. And then to continue to focus on the revenue side of our group life and disability initiative, since we have got the infrastructure largely in place to support that.
Moving on to the Retirement division, as I mentioned earlier, all things annuity are for the company, vast majority of this of course is the fixed deferred annuities, a lot of which we have written over the course of the last five years and almost all of this is sold through banks. We have got some retail payout annuities.
Again, we sell those through banks. So that’s just immediate annuities, a very small kind of old block of variable annuities. There are no living benefits on those products at all. So it’s just kind of old 403b type of business. And then 31% of this book of business is structured settlements, which is of course a very long tail liability.
We decided at the end of last year that we will shut that down just it’s just not a key focal point for the company. This shows you what we’ve been able to achieved as far as growth in our fixed deferred annuities; very good growth over the last several years. And we have enjoyed really high rankings or ranked number two selling annuities through banks and so we feel really good that we have the name recognition that we can continue to expand and build out what we are trying to achieve with our index annuity product.
As everyone knows, we have enjoyed kind of a downward trend in the 10-year treasury. So in this graph you can see that we have seen the 10-year treasury go from about a 3.60 to at times as well as 1.40 at its lows at last year. It’s taken a lot of effort and a focus through time, not just in the last couple of years, but through time to make sure that our asset liability management is doe very effectively.
So that we are able to hold the margins on our in-force books of business. So you can see that over the last couple of years, both our income annuities and deferred annuity books of business we’ve been able to maintain our interest margins in the face of rather dramatic movement in the 10-year treasury.
For the Retirement division, our strategic priorities of course are to – for the fixed deferred annuities are to maintain our leadership position, especially within the bank channel. Make sure that we are sticking to our pricing discipline as we still find ourselves sitting in a relatively low interest rate environment.
We are trying to build out some more variable annuity capabilities, but we are shying away completely from the living benefits space. So we really kind of need the market to shift a bit towards what our risk philosophy for us to feel like there are a lot of growth prospects here.
The True VA – we haven't seen the growth that we had hoped to see there. But we do believe that with the ongoing pressures, that there will be a time for us to get a little bit more variable annuity traction. And then within income annuities, we do believe that we can make some more traction with the ordinary immediate annuities that we are selling through banks but again we are not doing anything with structured settlements.
And then finally, within the deferred annuities, it almost deserves its own column now, is the indexed annuities. We are really pleased with the sales growth we are seeing there and we think that there is so much product design flexibility that there are a lot of things we could do there that could drive future growth.
Within the Individual Life, this gives you a sense of how important BOLI is relative to the retail products we sell. In a normalized year, it would be about 50-50 split. Last year, BOLI slightly outperformed the retail products. We have about $4.5 billion of BOLI, it’s a very persistent book.
A lot of that was written in the late 1990s and early 2000s. So we’ve enjoyed a good long run of healthy profits off of that. Across all of our individual life products we have enjoyed very good mortality experience. So the key for this division is to get the growth engines turned on. So the strategic priority is, we have one for both sides.
For the individual side, we’ve gotten our new UL product out and so now it’s getting that the BGA relationships that we have in any new ones we bring on familiar with Symetra and how we do business and get done selling our product and then as time goes on clearly we will have to add to that product menu for them.
And then on the institutional side, during 2012 we rolled out a variable COLI product. A lot of the people who sell that variable COLI have the same brokers that sell BOLI. So we have those brokerage relationships that we can go to and so we are out prospecting now with that product.
So that when we develop that product, we work with a lot of those brokers to make sure that we hit the market right with the proper product designs. So now we are out soliciting quotes. And initially we would expect anything there to be a bit lumpy and then as we get more traction, hopefully get a little bit more steady state of sales going on there.
And then as we look further, we are assessing whether we need to bring on some other distributions. So one of the areas we are looking at is what distribution opportunities would help us maybe penetrate middle-market and then what kind of products we might need to bring to that kind of market place as well.
So, the focal point for 2013 is leveraging all the work that we got done in 2012. We’ve built the infrastructure throughout the company. We’ve rolled out a lot of new products. We’ve been able to do that while we attended to the core. So the key this year is to achieve our revenue goals for group life and disability, the fixed index annuities and for our new life insurance products.
And then of course, we will make sure that we are doing all of this while we attend very carefully to maintaining a high quality balance sheet and we are starting to look further in 2013, so that we can get some plans built out for driving ROE expansion in 2014 and beyond.
And with that brief presentation, very brief, I am going to open it up to Q&A.
Maybe first on just M&A activity, there was an acquisition that didn’t go through last year that didn’t go through last year that you were targeting. Could you talk about what the markets of interest or products that you are interested in expanding into through M&A?
Sure. So our priorities are, any kind of M&A activity that supports to strategic initiatives that we were focused on in 2012. Number one, top of the heap would be for the Individual Life build out. It would be great to be able to find a nice book of business as well as having some infrastructure and distribution relationships that we could take advantage of and to be able to kind of accelerate the growth.
The second area of focus would be our group life and disability. We’ve built a lot of infrastructure, but again just getting some extra volume and scale would be very helpful there. And then, we are always looking at stop-loss as a company we have done four different acquisitions of stop-loss books of business. So we are very capable of doing that and it’s been very fruitful for the company with those kinds of acquisitions.
And what is the environment like in these areas? Because group life and disability, especially, we have heard a lot of companies express interest, but it doesn't seem like there are that many properties out there?
Yes, well, for sure that’s the price position of the industry right now. So it offers pretty attractive ROE. So we aren’t seeing a lot in that space at all. Much more, you see a lot of annuity books which of course we don’t need to buy. There is activity in the individual lines space that, we’ve been able to take a few lifts at that. But, so there is other interested players.
First excuse me that I haven’t followed Symetra closely. The medical stop-plus, I am going to assume that that’s self-insured plans.
What is the typical case size there in that market, that you target? And as there is also any implications coming up through Obama Care potential for those clients to be shifting to in exchange and if there is a role for you to play in that?
Sure, so the case size is that as our sweet spot is about 500 to 5000 employees. As far as what happened with Obama Care, it was fairly limited impact to just a couple of features in there where you had to have unlimited lifetime and unlimited annual benefits. So we need to just secure a little extra reinsurance to be able to support that for employers.
And net, what we are seeing is that, employers are assessing, if they have first dollar coverage, maybe this self-insurance is a way for them to cost-effectively address providing healthcare. So it’s net actually been a little bit beneficial to us.
As far as a play with some of the exchanges, some of these big benefit brokers are kind of building their own exchanges and so we are in active communications to see how come we either support their efforts and of course continue to do what we do. Or how would we have to shift what we do, so that it parallels and dovetails with whatever the benefits brokers are doing for their own exchange type programs.
Is there any risk of your clients going to the federal or state exchanges and losing business that way?
Well, to-date we have not seen that. Certainly, it’s been, you see a lot of articles that smaller employers that’s a risk, but that’s not the space that we plan. So we haven’t felt concerned about it. We are happy though to see the benefits brokers kind of developing some exchange things, because I think that might be, if there were bigger employers considering going to an exchange, there might be a way that we can maintain our revenues. But partnering with what they are doing in the exchange is, but largely we don’t see this as an issue.
On the variable annuities, other than and maybe the teachers market, no one has really had a lot of success selling without guarantees. So, if you are in the market, it seems you0 probably will have to sell guarantees to be able to sell. So what’s your strategy there? Would you eventually consider selling living benefits or a less rich version of living benefits?
Well, this is an internal topic that comes up probably every six months. When you look at the living benefits and certainly what people have gotten used to, we are not comfortable, still not comfortable that they are priced properly and ultimately, where the price is going, whether there is much value proposition left in the variable annuity for the end-client, that’s beyond the living benefit itself.
We actively monitor it because it maybe these things will evolve or there will be a space for something that’s a little bit more conservatively designed that which fits the Symetra risk profile, but at this point we are not seeing it.
And then maybe just on your spreads, they have held up fairly well. And then you have taken actions on crediting rates, you have had good prepayment income as well. What’s your expectation there if we are in this type of rate environment?
For the prepayment income?
Just for spreads overall, because – and how much and maybe if you could talk about how much of your block is sitting at minimum crediting rates already where you can't really adjust crediting rates?
Right, so, we have about 50-50 split of business that’s at the guarantee and still not at the guarantee. So we have a good amount of ability to manage the rates. We, through time also, for new contracts, we have been lowering the embedded minimum guarantee. So that we have good ability to manage that new business.
So, from a prospect of what I think our future margins are going to be, we’ve been able to hold them very well. And what we have looked at is, where do we think our reinvestment exposure is over the next several years and for both the deferred annuities and the immediate annuities, we think we have about less than $50 million that we are going to be reinvesting in each of those different business segments. So it stays very tight. That’s assuming, it’s kind of comparable prepayment activity that’s what we’ve been experiencing. So if there is some dramatic shift in that, of course that will produce a different result.
Okay, and maybe I will ask one more on your buyback plan, your stock trades at a significant discount to book value. And in the last few years management has been reluctant to really deploy the excess capital. You have announced the buyback. And I think you are saying half of the $10 million worth you are intending to do in 2013. How should we think about the timing of that? Would you be more opportunistic? Or why wouldn't you front-end more of that, given where your stock price is?
Well, when we announced it and I’ve planted a bad thought in your mind. It’s 10 million shares as opposed to $10 million.
Yes, yes it’s…
I am the one who created that.
Yes, yes, yes.
We said that we would be paced in deploying it and that’s because, we are looking to get good prices as we execute on this buyback, but also to make sure that we keep maximum flexibility for all the different things we are trying to do on an M&A and organic basis.
Okay, thank you.
All right. Thank you.
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