Symetra Financial's CEO Discusses Q1 2013 Results - Earnings Call Transcript

Apr.25.13 | About: Symetra Financial (SYA)

Symetra Financial Corporation (NYSE:SYA)

Q1 2013 Earnings Call

April 25, 2013, 10:00 am ET

Executives

Jim Pirak - SVP, Marketing & Investor Relations

Tom Marra - President & CEO

Margaret Meister - EVP & CFO

Michael Fry - EVP, Benefits Division

Dan Guilbert - EVP, Retirement Division

Analysts

Ryan Krueger - Dowling & Partners

Humphrey Lee - UBS

Chris Giovanni - Goldman Sachs

Steven Schwartz - Raymond James & Associates

John Nadel - Sterne Agee

Ed Shields - Sandler O’Neill

Seth Weiss - Bank of America Merrill Lynch

Operator

Good day, ladies and gentlemen, and welcome to the Quarter One 2013 Symetra Financial Corporation Earnings Conference Call. My name is Lisa and I’ll be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

I would now like to turn the call over to Mr. Jim Pirak, Investor Relations, Symetra. Please proceed sir.

Jim Pirak

Thank you. Good morning and welcome to Symetra Financial Corporation’s review of first quarter 2013 results.

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 financial supplement 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

Thanks, Jim and good morning, everyone. This morning I will review results for the first quarter at a high level and then Margaret will take you through the business segment results. Then of course we will take your questions.

So the first quarter had a top comparison against the record first quarter 2012, but I am pleased to report a much improved result compared with the fourth quarter. On slide three, I will start with the highlights for the first quarter and some of the challenges that we are working through.

Beginning with a list of positives; we continue to maintain solid base interest spreads on our fixed deferred and income annuities. We attribute the success to our disciplined financial and asset liability management and in particular to our superior in-house commercial mortgage loan operation. This operation continues to perform very well and offers us significant yield advantage over other fixed rate investments.

I am also very pleased to report strong momentum in the sales of fixed indexed annuities and group life and disability income. We ended 2012 on a strong note for both and we achieved very good growth in the first quarter and these new product lines as you know bring important diversification to our business.

In group life and disability, of course it represents additional earnings source that are mortality and morbidity risk based. And the fixed indexed annuities positions Symetra to profitably grow revenues in a broader range of market environments. Accordingly, we have and will shift resources from the (inaudible) effort to this indexed annuity effort and FIA sales came on very strong at the end of the first quarter and we expect significant sequential growth again in the second quarter. And we also launched our share repurchase program but not until late in the first quarter. Margaret will elaborate on this in a moment.

Turning now to the challenges we face. The first quarter benefits loss ratio of 68.5% exceeded our long-term target. This quarter we had higher medical stop-loss frequency than in the first quarter of last year which as you remember experienced a very favorable loss ratio. As we’ve explained, the loss ratio will fluctuate from quarter-to-quarter and over the long-term we underwrite to achieve a range of 63% to 65%. Margaret will have more to say about this in a moment, but we currently expect full-year 2013 loss ratio to come in a couple points above the long-term target range.

The second challenge; we continue to believe that building distribution for our individual life products will be a long and steady process. It's not easy being a new entrant, but we're making strides and each quarter’s results should be better than the previous.

And third of course, we continue to deal with low interest rate environment and the impact it has on margins and sales growth for life and annuity products. We are maintaining our discipline as it looks likely that lower interest rates are here for a while.

Now to slide four; we have consolidated financial results for the first quarter. Net income was $66 million, down from $75 million in the first quarter of 2012, reflecting lower operating income. Adjusted operating income was $50 million, compared with $59 million in the first quarter of 2012. Return on equity was 5.6% for the 12 months ended March 31st, down from 7.6% for the same period last year. Operating return on average equity for the 12 months ended March 31st was 7.9% compared with 10% for the same period last year.

So now I will turn it to Margaret, she will walk through the business results and then I will come back and we will open it up for questions.

Margaret Meister

Thank you, Tom and good morning. Compared with the fourth quarter of 2012, our results improved very nicely and contained fewer notable items.

Before reviewing segment results, I wanted to discuss a few overarching topics. In the first quarter, we had pre-payment income net of related amortization expense, which contributed $11.7 million to pre-tax operating income compared with $5.5 million in the first quarter of 2012 and $8.3 million in the fourth quarter. It is important to recognize that as we received this bond pre-payment fee income, we are also increasing amortization and unlocking the related DAC and DSI balances. The effect of this concurrent unlocking protects future profits by lowering needed interest margin to cover future amortization expense.

Operating expenses across business segments were generally higher in the first quarter than in the same period last year reflecting the build-out of capabilities across the company during 2012. We are tracking with our plans to hold operating expenses flat for the year versus 2012’s full year operating expenses.

Overall, mortality experience was less favourable in the first quarter than in the first quarter of 2012, mainly due to $4.4 million less mortality gains in our income annuities segments. Claims experience on individual life insurance book was inline versus the same period last year and inline with our expectation.

We reviewed our operating earnings per share guidance taking into consideration the performance in the quarter and what we expect for the full year and are reiterating our range at a $1.30 to a $1.50. We initiated our share repurchase program late in the quarter buying back 309,000 shares at a total cost of $4.2 million. As we discussed in our last earnings call, we expect to complete about half of the repurchase authorization in 2013 and all of it by year-end 2014.

On slide five, we have the benefits segment; benefits operating revenue grew to $156.6 million, up 5% from the first quarter of 2012. Pre-tax adjusted operating income was $13.5 million, down from the prior years $25.1 million as a result of the higher loss ratio. The benefits loss ratio for the first quarter was 68.5% up from very favorable loss ratio of 61.6% in the first quarter of 2012. As Tom explained, this also result of higher claims frequency in our medical stop-loss, but reflecting normal quarterly volatility.

Now that all the January 1st renewals are in and we have reviewed our achieved pricing, we believe that we should have achieved a couple of more points of premium increase. As a result, we expect that this will cause the full year loss ratio to be a couple of points higher than our long term target range.

January is roughly half of our business in a given year and we are working hard to get more rate increases on the remaining book of business as we renew it. An underlying strength of the stop-loss business is that our book of business is repriced on an annual basis.

First quarter 2013 medical stop-loss sales were down from a year ago period. We are starting to see some increased competition. We will continue to manage this business for profitability and focus on the bottomline than topline growth.

Moving to slide six, the deferred annuity segment reported operating revenue of $151.5 million, up from $140.7 million and pre-tax adjusted operating income increased to $30.7 million from $25.8 million. The improvement was largely driven by higher prepayment income. First quarter sales for the segment were $322 million versus $354 million in the same quarter last year. Fixed annuity sales were down slightly from fourth quarter and it continues to be challenging to write fixed annuities in this low rate environment. A real bright spot as Tom already highlighted has been the rapid growth in our indexed annuity sales. If interest rates remain at current levels we expect our index annuities sales to outpace fixed annuity sales for the remainder of the year.

Turning to income annuities on slide seven. Operating revenue was $103.6 million compared to $105.3 million in the first quarter of 2012. Pretax adjusted operating income was $8.8 million down from $14.5 million primarily due to lower mortality gains. We expect mortality gains and losses to fluctuate from quarter-to-quarter and to be near neutral to earning over the long term. We continue to manage the downward pressure on income annuities interest spreads by investing cash flow in commercial mortgage loan origination. In the first quarter we funded loans at spreads over treasuries of about 300 basis points and the performance in this performance remains very good. On slide eight the individual life segment contributed a $111.3 million of operating revenue down from $113.1 million in first quarter of 2012; and it produced pretax adjusted operating income of $11.2 million down from $14.5 million in the prior period. Lower earnings are being generated by a term book as that book-of-business shrinks over time and the [bully] base margin also decreased in this quarter as a result of lower reinvestment yields and higher expense.

With that I will turn the call back to Tom.

Tom Marra

Okay, thanks Margaret. On slide now I'll summarize our outlook for Symetra. First we remain committed to our hallmark financial and underwriting discipline, which has served us well over time. Second we remain focused on our core franchise businesses. Over many years now Symetra has established its position as a leader in both medical stop loss and fixed annuities sold in banks. Our strength in these core lines of business is marked by a consistency of presence in risk appetite in the marketplace. We take pride in the transparency in our product offering and straightforward value delivered to distributors and customers. Third, we are also working to make Symetra even stronger by diversifying into complementary newer product lines. For individualize, we continue to see strong opportunities and we are working to build our distribution network. We expect progress to be gradual, but steady. And we are leveraging the strength of our established distribution channels to propel growth in group life and disability and fixed indexed annuities both areas were already seeing success.

Okay, Lisa please open up the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from Ryan Krueger from Dowling & Partners.

Ryan Krueger - Dowling & Partners

I had a couple of questions about the competitive environment. I guess first on medical stop loss, I was curious if your comments around increasing competitive pressures is really coming from existing participants or is there new entrants that have come into this space that are causing that?

Michael Fry

Ryan this is Michael and thanks for your question. We're not really seeing a lot of new entrants in to the market place. We did see additional competition from our traditional competitors, but something that we're seeing maybe a little bit more aggressive are the first dollar carriers that have been out there, that have been in this market space but kind of on the periphery and we're seeing them get a little bit more aggressive in this space. I think that’s because they agree with us that the stop loss business is a good business and self funding does provide a great alternative to employers for their employee benefit plan. I’d say we've seeing you know different shifting competition forces before and you know, we're confident we know how to weather through this.

Ryan Krueger - Dowling & Partners

Okay, thanks and then question on M&A. Could you just give an update on your thoughts, any potential size of a deal that you can give capacity for and I guess if you are seeing much activity out there?

Tom Marra

Well, we reiterate that we will acquire in both the Individual Life and Benefits division, in the Retirement business I think we kind of cracked the code with just organic sales, which I think offers great potential with this FIA. You know, size is an interesting aspect to looking at it. We can do small one within current capabilities, but that by not limit us if we can fund the bigger one. So we remain active. Obviously, Ryan, we can’t get specifics but we remain interested and our read is that at least on the life side there is more activity little less so on the benefit side.

Ryan Krueger - Dowling & Partners

Just in terms of what you would consider to be small and able to fund internally that’s still around 100 million type market that you have talked about...?

Tom Marra

(Inaudible) but yes in that range 100 to 200.

Operator

Your next question comes from the line of Humphrey Lee from UBS. Please proceed.

Humphrey Lee - UBS

So about the higher medical stop-loss claim frequency, I notice that the medical stop-loss ratio has been higher than your long term target for a few quarters now, is there any structural development that you are seeing?

Michael Fry

Humphrey this is Michael. No if you go back and you look at our history and you look at the first quarter, you will see some fluctuation actually last year, I think as Margaret and Tom both said we had a very favourable loss ratio in the first quarter of last year. But if you go to previous years, you will see that we did see some higher, in previous year. So we are just talking this up to our normal quarterly volatility in the business.

Humphrey Lee - UBS

Okay and then in terms of the guidance, it appears to be reaffirmation does reflect the benefit-loss ratio of being a couple of points above your long term targets. So I guess my question is where do you see an offset that keeps your EPS guidance intact?

Margaret Meister

This is Margaret, Humphrey. When we set up the original guidance we look at all the factors that can come in to drive our earnings so we took into consideration and always do take into consideration a couple of points of up and down movement in the benefit-loss ratio and then we also looked at what might happen with some level of pre-payment activity, so one of the things that we did consider that we would see comparable levels and what we have seen in previous years about and obviously that is contributing in a positive and then there is overall kind of our expectations with regards to the share repurchase as well as operating expenses.

Tom Marra

But in terms of prepayments expected and we are outsized in the first quarter, so we don't need that to continue at that place to get guidance, so I want to be clear there.

Margaret Meister

No, in the original part of the (inaudible).

Humphrey Lee - UBS

If I can just make one more in, so for deferred annuities the base spread is being relatively stable, but just looking at the base earned yield, so for this quarter it was 470. Is this drop of 11 basis point sequentially versus 1 basis point sequential drop in the previous quarter? So while I understand low interest rate would continue to pressure the new money rate, but looking at the treasury yield and the corporate spread for the first quarter, I am little surprised to see the level of decline in the first quarter, anything unusual happened in the quarter that hurts the overall base on yield and then also what do you see in terms of new money rates for this segment?

Margaret Meister

So with regards to the movement between fourth quarter and first quarter there is quite a few little pieces, but I will talk to a few of them, I think are going to be ongoing. First of all obviously we do find ourselves in a little bit lower interest rate environment. When you look at the total yields that you can achieve on both our commercial mortgages and then in the corporate bonds space. So as we write new business that in and of itself will cause that gross earned rate to go down. The other thing is this we added a new sub-advisors so that we can buy from European corporate. That caused us a little bit more in investment management, so that’s a very small increment to the gross earned yield, as well as we liquidated some of our seed money in some of the funds that we had for our (inaudible) and when we reinvested that, it was came in at lower yields. That was a little bit of an outsized reinvestment there. All in all that's favorable because now we’re getting investment income earnings off of that money which we were not previously.

Operator

The next question comes from the line of Chris Giovanni of Goldman Sachs.

Chris Giovanni - Goldman Sachs

Thanks so much. Good morning. In terms of the comment around the January 1 renewals, maybe being a bit lower on the price side than you would have needed to kind of get in retrospect. Just curious if you can comment what was the level of rate increase you kind of pushed through versus maybe what you thought in hindsight you needed to get?

Michael Fry

Chris, this is Michael. You know what we target to get on our renewals is to keep up with leverage medical trend and we were able to achieve that for January, but keep in mind that when we do set our targets for the January cycle which can be in the middle of the previous year, that business does continue to develop so that business has developed for a couple of quarters since we went out and we’re renewing that business. So that's when we took stock as Margaret mentioned in terms of where we came out and that's where we had a little bit of a gap, but just a couple of points. And again I want to reiterate that January is only half for the business that we write in the year so we've got work to do and we are on it. We knew the remainder of our business in the year at an appropriate price.

Tom Marra

Chris I was just going to say we still get really even above the range which we give you kind of a mid-teens ROE, even at this level higher, still a good return business. So I just want to make sure we keep that in mind as we you know and obviously we've done, historically we've stayed within the range over the last 10 years and since I have been here it’s been real, you know it’s been a real positive story, but it’s good even at these levels. Obviously Michael and his team can do everything we can in pricing and underwriting to get us back in there, but I just want to underscore even at this, this is good return.

Chris Giovanni - Goldman Sachs

Okay. And then, are you kind of far enough ahead on say the 3Q renewals that you can reflect that pricing there or those been sort of already out to market?

Michael Fry

We are actively quoting that business now and so we do have the ability to influence that, so it’s very much in play. And just as a reminder to that Margaret mentioned you know a real advantage of this business is our ability to renew our pricing every year, that's a big strength of course.

Chris Giovanni - Goldman Sachs

And then I guess in the past kind of in the history of the company when we've seen periods where you know losses maybe have been elevated, the markets are bit more competitive. You guys have done some acquisitions in the past in this space. So is this a time where we would be looking potentially a stop loss acquisitions or would you be more focused on kind of the group business ex stop loss from an M&A perspective?

Michael Fry

Chris, again, this is Michael. I guess I would say that we are always out there looking for a good bolt-on acquisition to this business, but it needs to be accretive to our earnings and something that's aligned with our strategic direction. So I'd say its status quo, we are always looking.

Chris Giovanni - Goldman Sachs

Then I guess just last one around variable annuities, obviously those initiatives there they hadn't really materialized and I understand you guys are maybe pulling back a bit there now. So can you try and maybe quantify from an expense side the opportunity to get some of the costs out of that business? And then also, is there kind of any interest at all you know enticed at all to get into the living benefit space just given kind of the firming up of the product offerings as well as some retrenchment from some competitors?

Dan Guilbert

Good morning, Chris. This is Dan Gilbert. Thanks for your question. In terms of the VA that we launched yes has not so like we had hoped, though what we think is a good product for the fee based market and hasn’t resonated yet. Frankly, what we've done in terms of expenses is reallocate a lot of expenses towards other things that are working well, predominantly our Edge Pro Indexed Annuity product and so. Whether it's wholesaling or home office staff, we really try to put our chips where things are working and that’s served us well. And I think as Tom mentioned earlier, we expect substantial growth going forward in that business.

In terms of living benefits on VA, I would tell you that we continue to look at the VA market beyond the fee-based product. I think it's likely we will still launch a commissional version but not doing a living benefit. I think you are right the market’s changed quite a bit. The benefits have definitely come down. The prices have gone up. So I think we're also going to look at the consumer value aspects as well and make sure we're comfortable with the whole equation. And so for us that still means in terms of living benefits for VA not likely and still focusing more so, we're actually getting a lot of success now which is indexed products.

Tom Marra

Just to give my take on this, Chris. I think the Indexed Annuity, without a living benefit that we write through banks which means low commission which means more plowed back in to the products for the consumer is responses to what they are looking for. What they want go get, what they hate now because of what we've gone through as a country is they hate losing money, but interest rates are so low that if you want to just not lose money, you are not going to make any money and the indexed annuity kind of gets us that. It gives you an opportunity to participate, but the worse you can do in any year is zero, you can’t lose money in any year and once you get the credit, which of course is cap because you know we have to make it work, is yours to keep, that will never go down.

And I think it's responsive to the underlying thing that kind of drove the variable annuity craze. So I’m predicting that indexed annuity isn’t going to take out all the market share of variable annuities, but I think they will take some and I think the way we are doing it is really the right way to do it in responsive to what customers want. And it's great to see it picking up and as we said I think second quarter you will see even more growth and we want to keep the streak on, but it's somewhat interest rate driven and that’s not win our back but even with that we are seeing some nice results.

Operator

Thank you. The next question comes from Steven Schwartz from Raymond James & Associates. Please proceed.

Steven Schwartz - Raymond James & Associates

Hi, good morning, everybody. Couple of follow-ups if I could. First real quick Tom did you just say Edge Pro does not have a lifetime income benefit right around?

Tom Marra

That’s correct.

Steven Schwartz - Raymond James & Associates

Is that comment in the [bank channel]?

Dan Guilbert

Actually, good morning Steve, this is Dan.

Steven Schwartz - Raymond James & Associates

Hey, Dan.

Dan Guilbert

A lot of competitors actually do have living benefits and even in the indexed basis Thomas talked about in the variable annuity space. In the indexed space, it's actually become quite common as well. Just take another out, again we are trying to go for much I will call it a clean value proposition, it's more of an accumulation play. In fact a lot of money we are getting is coming from cash and so we are seeing people who are currently on the sidelines, they are not sure to do with their assets. And as Tom said they are still scared, but interest rates are low, they look at equities and then our share perhaps a high level as well. So we are getting a lot of cash into this product, it doesn’t require living benefit. Again we will continue to consider that, but we are a little bit unique in that regard.

Steven Schwartz - Raymond James & Associates

Okay. Dan, I get that, yes, the lifetime income benefit riders is table stakes in the independent marketing organizations, but obviously it’s not on the banks, but I just -- my question is (inaudible) banks, so they have lifetime income benefit riders to others and the banks have lifetime income benefit riders and you stand out that way?

Dan Guilbert

Yes, even with the banks and [BDs] actually it’s still common and so where that differentiation for us and where we talks energy and beyond the product again, in some banks actually we are one of the first to get in there and what we have demonstrated is a real ability to do a great job of training, wholesaling and work with advisors. They teach them how to use this product and how to get cash up the side lines. So it hasn't been just about the product or about living benefit, we think our value proposition is much broader and that is really service well.

Steven Schwartz - Raymond James & Associates

Okay, great. And then if beat the dead horse of stop loss again. I am a little confused what I am hearing is that I think Margaret said you know normal volatility -- normal volatility to me kind of means things go up and down the quarter when you’re staying rates are or that we are going to have to raise rates for looking at raising rates, that doesn't sound to me like normal volatility, but what am I missing here?

Tom Marra

Well, Steve, I think the differentiating we are trying to make is the paid clients that we paid in the first quarter with regard to our view of looking forward. Please remember that this is excess loss risk and so that is why we continue to signal that from quarter-to-quarter we are going to have some fluctuation because we are talking about the large catastrophic type claims.

What we are trying to tell you is based on kind of coming out of our January renewals and we are trying to seeing where our book is that. We are looking forward and signaling to you that we’ve got a little bit of work to do and that is the difference. It’s kind of the short-term versus the long-term.

Steven Schwartz - Raymond James & Associates

Okay. I would assume that most of the losses would come from business that was written, I guess a lot of it is renewal right, but it would come from business written in 2012. And the January renewal writings if they were written at kind of the same rate, you are suggesting that the frequency is going to remain high for the foreseeable future is that the way to look at it.

Michael Fry

Not necessarily. Again I think if you look at quarter-to-quarter I think its going to bounce around, but you are correct at the claims that we paid in the first quarter were predominantly from business that we did right in 2012.

Operator

The next question comes from John Nadel from Sterne Agee.

John Nadel - Sterne Agee

You know Tom I guess my first question is this, it sounds like not only is your distribution or not only are you getting a little bit deeper penetrated with existing banks with the fixed index annuity product, but you are also adding some new banks for that particular product and so growth seems like we are on a good trajectory for growth. I guess the question is how much capacity do you feel comfortable with providing for that product, how big can the sales get in the year before you get a little bit nervous it’s too big.

Tom Marra

Bring it on Dan.

Dan Guilbert

Tom’s telling me bringing it on. So yeah we have plenty of capacity, I mean in the end if you look at our current sales in this quarter, little over $300 million deferred annuities, multiply that by four we have much more capacity than what that implies and as we said we have increasing growth right now. So capacity right now is not our challenge, but as you pointed out it’s really in some cases going to bank where they haven't traditionally sold much of this business. They have sold fixed traditional fixed annuities, but not fixed index. So the challenge for us isn't capacity rather it’s really education, its really increasing the penetration and we continue to add new banks and we continue to go deeper in existing partnerships. So that's really our challenge, it’s not a capacity issue at all right now. So its fun problem to have and we are fighting through pretty well.

John Nadel - Sterne Agee

And I mean in the continuum of some of your best ROE products to maybe some of your lower ROE products, where's the fixed indexed annuity in and the scale as your growth rate here changes the scale really factor in to driving the return on that book higher.

Dan Guilbert

I think like any business the scale is going to help us significantly. This process is a little bit less capital intensive than some of our traditional fixed annuities that helps the ROE as well and so it’s a good ROE product over the horizon and given our investment results and expense management everything else we do the results are coming in well. So you know continue to add to the pile is really useful and we are going to continue to do that.

Margaret Meister

I'll add a couple of things. First of all we are able to leverage our existing fixed deferred annuities infrastructure for this, so its taking advantage of that scale and if you think about it we've crossed the half billion, that's standing next to about 10 billion of pure fix. So to reiterate Dan that we have capacity; this to us is definitely something we like to see growing within the context of his division.

Tom Marra

Yeah I think and maybe we are over-making the case here, but I've been waiting to find the right formula for because we are not going to take delivering benefit risk. It just doesn't seem from a capital risk management standpoint that's just not been a place we wanted to go and trying to find a response that resonated with that need and I think I actually think we’ve had it in banks have tremendous amount of sideline money to put to work and it's been historically kind of a CD alternative, we are like dude this is safe money. I actually think we will start to see some VA business, some VA type of sale that will migrate to this, because this will never go down. You will never have a statement that shows less money in this year than you have at the beginning of the year and that’s pretty powerful and we're bolstering the wholesaling capability and, again I’ve been waiting to find a hot product that we like and I think we got one.

John Nadel - Sterne Agee

Okay, and then I got a separate question on prepayment and obviously this is an alleviated quarter for pre-pays. I am more interested in you know, the dollar amount of principal that was repaid that came back to you that’s forcing you to reinvest when you might not have otherwise and how we think about that impact. You know, the prepay show up this quarter and it boosts up your current period income, but I suspect it's just is leaning to some pressure, downward pressure. I just wonder how much we are to consider there?

Margaret Meister

Thank you for the question. The dollar amount associated with any dollar amount of prepay can fluctuate quite a bit just because it really is associated with what's the prepayment penalty for bonds. So sometimes we’ll see bonds having prepayment penalties that they are willing to pay up 15% plus and other times it might be just 5%. So we haven't been calling out that dollar amount figure so much. I think the most important thing I want you to take is that as we're getting that, we recognize that that is taking away some future investment income as that was invested in a higher environment and so that’s why we are doing some unlocking of our DAC against it.

John Nadel - Sterne Agee

Yeah.

Margaret Meister

So that when we are reinvesting at lower rate, we are reflecting that and not needing to hold that margin as much. So far we have been able to mitigate if you see in the margins mitigate and hold our margins pretty well using taking advantage of our commercial mortgage operation. In addition, we did expand that we can add some European corporates which are offering some better yields than US corporates.

John Nadel - Sterne Agee

Okay. And then sorry just one last one, it may be directed to Tom. Obviously, I know you are in search of bolt-on deals, you have got capacity to do that, you have got capacity for the buyback given the authorization. These are things that can happen in concert, correct. We shouldn’t be concerned about a deal derailing the 5 million shares of buyback this year and next.

Tom Marra

You know John that’s depends on all the specifics of the size of the deal, the accretion that the deal would provide. We continue to say organic okay, but we haven’t used this as fast as organic. So we’ve kind of moved on to two or three which is acquisitions and then shareholder actions and we will always wait against it and you should know the board is totally on this and we are -- we didn’t get started with the buyback until late in the quarter. Margaret already told you what we have planned to have it completed by the end of ‘14 and half this year. So I can't give you this specific, I just can't give you that.

Operator

Thank you. The next question comes from Ed Shields from Sandler O’Neill. Please proceed.

Ed Shields - Sandler O’Neill

I guess this is really a question for Margaret on the NAIC proposed changes to RMBS and CMBS modeling, do you anticipate any issue here for you guys with the holdings you have currently?

Margaret Meister

That is a very good question. We actually all the time have been tracking assuming that that may be revisited because obviously they made a change in approach during the financial crisis. I don't expect that to produce much of an issue for us.

Ed Shields - Sandler O’Neill

That's just largely because of the conservatism you have (inaudible).

Margaret Meister

We didn't get a whole lot of pick up when it came, when they move to the model that they have and so we are not going to have a lot of change with the current changes proposed.

Operator

(Operator Instructions) Your next question comes from Seth Weiss from Bank of America. Please proceed.

Seth Weiss - Bank of America Merrill Lynch

Good morning. Question on the benefits division and just thinking about for 2014 and ’15, if that long-term 63% to 65% target loss ratio, is still how should we thinking about that considering that as you commented we're in a increasing market competitive environment and especially if that business is earning above hurdle rate returns even at a higher loss ratio?

Michael Fry

Good question, Seth. This is Michael. Yeah, we continue everyday to price the business to be in that 63% to 65% range and even though we have got a little bit of challenge here this year, the target is still going forward would be in that range. Again just to reiterate if we have to see our top line dip a little bit, we are going to do that because we do focus on the bottom line. This is about profitable growth and we will be doing this for quite a long time. And I think that approach to the business has really served us well over time.

Seth Weiss - Bank of America Merrill Lynch

Okay. And then just clarification on the January renewals and I apologize if I missed this, is it that the rate you got was a little bit lower or you didn't get the renewal that you had hoped for when you talked about a little bit of the disappointment on the competitive landscape.

Michael Fry

As we kind of looked back and as the business has kind of matured, we would have liked to have gotten a couple percentage points higher on our renewals on average.

Operator

Thank you. I would now like to turn the call over to Tom Marra, President and CEO for closing remarks.

Tom Marra

Okay, thanks, Lisa. Thanks, everybody. I appreciate your attention. We will stay the course, stay disciplined, you know continue to emphasize our core strengths and stop loss and our bank fixed sales, but we are building out the things that are going to be part of the future which is the things like the life and disability and indexed annuity and we are pleased that those are on the right track and we are working hard to get life, the individual life business going which would be steady but probably not as gangbuster growth as we are seeing in the other areas. So we will catch up with you again next quarter. And again thanks for joining us today.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

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