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Symetra Financial Corporation (NYSE:SYA)

Q2 2013 Earnings Call

July 25, 2013 10:00 AM ET

Executives

Jim Pirak – SVP, Marketing and IR

Tom Marra – President and CEO

Margaret Meister – EVP and CFO

Michael Fry – EVP, Benefits Division

Dan Guilbert – EVP, Retirement Division

Analysts

Chris Giovanni – Goldman Sachs

Jimmy Bhullar – JP Morgan

John Nadel – Sterne Agee

Humphrey Lee – UBS

Steven Schwartz – Raymond James

Ed Shields – Sandler O'Neill

Jeff Schuman – Keefe, Bruyette & Woods

Seth Weiss – BofA Merrill Lynch

Operator

Good day, ladies and gentlemen, and welcome to the Quarter Two 2013 Symetra Financial Corporation Earnings Conference Call. My name is Julianne and I’ll be your operator for today. At this time, all participants are in a 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, Senior Vice President, Marketing and Investor Relations. Please proceed sir.

Jim Pirak

Thank you. Good morning and welcome to Symetra Financial Corporation’s review of second 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 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

Okay, thank you Jim and good morning everyone. On the call this morning I will review results for the second quarter and discuss some of our priorities for the second half of the year. Next Margaret will take you through the highlights of the business segments and then we will take your questions.

So starting on slide 3, we have a summary of earnings drivers and current areas of focus. Let me start by saying I am pleased with the results of our second quarter. We are continuing to work through some areas of challenge but overall our businesses have performed well.

Beginning with a review of the key drivers for the quarterly results, first, we maintained strong interest spreads on our deferred annuity balances and stable spreads on our income annuities. We attribute this success to our diligent asset liability management and an investment strategy that includes our in-house commercial mortgage loan operation which continues to perform very well and provides significant yield advantage over other fixed rate investments.

Second, I am very pleased with our continued momentum in the sales of fixed index annuities. FIA sales in the second quarter topped $3 million which was more than double our sales in the first quarter. In the current rate environment we expect sales to finish strong in the second half of 2013 with continued sequential quarterly growth.

Third, the benefits loss ratio remained elevated relative to our target range though it did improved significantly from the first quarter results and finally, we took capital actions that reduced our outstanding share count including warrants by over 20 million shares.

Turning now to areas of focus for the second half of the year, we expect the benefits loss ratio to remain above our target range of 63 to 65%. We are sharply focused on achieving adequate pricing on new and renewed medical stop loss business in the third and fourth quarters. However we still expect the full year 2013 loss ratio will be a couple of points above the target range.

We are also seeing heightened competition in the medical stop loss market and our stop loss sales are down from last year’s levels. Consistent with the past, we’ve only pursued top line growth that is aligned with our pricing targets. Second, we will continue to drive strong sales of our traditional and fixed index deferred annuities through our excellent network of bank and broker dealer distribution. Third, we continue to work to gain traction for individual life business in the BGA channel and we are moving in the right direction.

While individual life insurance sales in the second quarter remained below our expectations, they were up from the first quarter. Our sales team is working to penetrate existing BGA relationships and we added up some new BGA partners creating more distribution opportunities. Our timing is good because some large players are exiting the BGA channel.

Building distribution for our UL product has been a slow process but we are tough minded and confident in our efforts. We continue to believe that the long term benefits of growing our individual life business will be substantial and well worth the work. Looking ahead I expect that each quarter’s individual life sales will be better than last with improvement that is steady.

Fourth, we need to accelerate growth in our group life and disability income unit. We have a good infrastructure in place and we’ve had success in leveraging our relationships with benefits brokers. Now we need sales to ramp up. And last, we are committed to driving ROE improvement. We expect to do this through profitable growth supplemented with modest capital actions.

In the last six months we fine-tuned our grow and diversify efforts. We determined that our new VA product was not gaining traction, so we reacted quickly to contain costs and redirect these resources to our successful new retirement product or FIA which has grown to 850 million in account value in just over two years.

We also told you that we would hold operating expense flat with last year and we are making the tough decisions needed to accomplish just that, and because capital build had outpaced business growth in this slow rate environment, we did put in place a share repurchase program and took actions in the first half of 2013 that significantly reduced outstanding shares. We are very pleased with the value of these actions which together with dividends deployed 116 million of capital.

Now at the midpoint of 2013, we stand poised to capitalize on a more favorable environment of rising interest rates. Organic growth continues to our preferred method for capital deployment. If interest rates continue to rise we expect to be putting more capital to work to support growth in annuities and life insurance during the second half of this year. The most immediate benefit of higher rates will be continued growth in our sales of fixed index annuities as well as a pickup in sales of traditional deferred annuity. We are well positioned to benefit from increased demand for these products.

Of course, the rising rate environment also reduces the pressure on our interest spreads. Meanwhile we will continue to gradually build our sales in the individual life and group life and disability and we will continue to closely manage expenses. So I believe we are on the right path to improve ROE over the next few years as we drive for profitable growth, look for M&A opportunities and take prudent capital actions.

Now the slide four briefly cover consolidated financial results for the quarter. Net income was 45 million, up from 44 million in the second quarter 2012. Adjusted operating income was 51 million, up from 47 million in second-quarter 2012.

And operating return on average equity for the 12 months ended June 30th was 8% compared with 9.8% for the same period last year. So I will turn it to Margaret who will have more to say about the business segment results and then I will come back to wrap it up and then we will open it up for questions. Margaret?

Margaret Meister

Thank you Tom and good morning. We posted a solid second quarter with strong earnings in our deferred annuities and improvement in our individual life segment. Before I move to the segment results I will touch on a few overarching topics. First, prepayment income net of related amortization expense contributed 5.8 million of pre-tax operating income in the second quarter compared with 4.2 million in the second-quarter of 2012. It is important to note that as we received voluntary payment fee income we are also unlocking the related DAC and DSI balances. So those charges are reflected as an offset to income in the current period.

Operating expenses across most business segments were down from the second quarter of last year although the benefits segment had higher expenses associated with the new group life and disability operation. We are tracking with our plans to hold operating expenses flat year-over-year.

Mortality experience was less favorable in the second-quarter than in the same period last year, including the impact of lower mortality gains in income annuities and higher BOLI claims which were partially offset by lower claims in individual life insurance. Despite the less favorable reserves, I feel very good about our mortality experience for the quarter.

The other segment results included a 6.2 million increase in net investment income, mostly related to mark to market gains on our private equity funds investments. The effective income tax rate was 18.2% lower than last year due to increased benefits from tax credit investments. We expect the effective tax rate for 2013 to be in line with the first six months results or approximately 20%.

Through June 30th, we repurchased 7 million shares, or nearly half of the 16 million share repurchase authorization and more than the 5 million we expected to do in all of 2013. Given our strong prospects for growth in annuities and our current share price, we would not expect to be as active of a buyer of shares in the second half of 2013. We have revised our guidance for 2013 operating EPS to a range of $1.45 to $1.55 which includes the impacts of the lower diluted share count and a review of all business consumption.

Finally I want to comment on interest rates. I am very happy to see the recent rise on rates but I recognize that it’s too early to assume that the extremely low interest rates of the past two years are fully behind us. Even though we are well historical norms the current rate environment will support better growth and interest margin management. I am pleased with the speed with that we jumped on opportunities presented – as evidenced by the strong sales in the quarter. As Tom said, we have been managing Symetra for success through the depressed interest rate environment but we are positioned to thrive as interest rates begin to rise.

Turning now to the business segments results, I will begin with benefits on slide five. Pre-tax adjusted operating income held flat at 16.3 million versus a year ago and the loss ratio was up modestly at 66.2% compared to 65.5%. Though the benefits loss ratio improved from the first-quarter we still expect that the loss ratio for the full year 2013 will exceed our target range by a couple of points because – with hindsight we should price our January renewal premiums a couple points higher.

January business represents about half of our book and the medical stop loss business reprices annually. So we will get this back on track quickly. We feel very good about the pricing achieved on business we wrote in the second quarter and we will price new and renewal business in the second half of 2013 with discipline in an increasingly competitive environment.

Moving to deferred annuities on slide six, we finished the quarter with a record high account balance that pierced $12 billion and the base interest spread held strong at 1.80% in line with our targets. Fixed index annuities drove the sales growth for the quarter. At current interest rate levels we expect continued sequential growth in fixed index annuities sales and also a pickup in sales of our traditional fixed deferred annuities. In this market we have a strong appetite to fill both traditional and fixed index annuities and this is the kind of profitable growth that is key to our ROE expansion goals.

Turning to income annuities on slide seven, pretax operating income was down to $10 million versus 16.8 million due to lower mortality gains and a declining interest margin. Our focus here continues to be one of managing the downward pressure on interest spreads. We’ve had a good success in investing cash flows in commercial mortgage loan origination. In the second quarter we funded loans at spreads over treasuries of just under 300 basis points and the performance in this portfolio remains very good. Testament to the effectiveness of our efforts is seen in the fact that our base spread for income annuities have held steady over the past three years.

On slide eight, individual life earnings improved to 14.5 million from 13.2 million a year ago. The results were driven by a lower individual life claims and lower operating expense, offset in part by lower BOLI ROA. Individual life mortality experience in the second quarter was more favorable in the same period last year and was slightly better than our expectations.

With that, I will turn the call back to Tom.

Tom Marra

Okay, thank you Margaret. Turning now to slide nine, let me just briefly summarize our outlook. First as you know we remain committed to our financial and underwriting discipline. Second, we will remain focused on our core franchise businesses. We have established trends and demonstrated success in medical stop loss and bank sold fixed and fixed index annuities.

Third, we are building on our strengths to expand at the complementary newer product lines, including group life disability and individual life through new BGA distribution. One factor that has actually held us back somewhat is Symetra’s lack of a national brand. You may have seen (inaudible) announcement yesterday that Symetra is the founding sparks of their new Rising Star’s multi-media program focused on promising on the athletes. Rising Star’s launches with NFL features in the July 29, 2013 issue, and later issues will feature the Rising Star’s college football, Winter Olympics, [CAA Events] Basketball. This right-size co-branded marketing investment will help us build recognition for the Symetra name across our distribution channels.

So we expect going back to business, we expected achieving each of our strategic priorities, we will drive ROE expansion steadily over time and with that, Julianne we will open it up for questions. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Christopher Giovanni, Goldman Sachs.

Chris Giovanni – Goldman Sachs

I guess first question, Tom, you made a reference around kind of seeing some better growth opportunities in the back half of the year in the annuity space or life space, based on higher rates. So can you talk about maybe some trends you are seeing here in July, what type of ROEs that you are writing on this business and then following up on kind of Margaret’s point around buybacks expected, to potentially slow as you allocate capital to these areas, would you still expect to complete the $16 million or 60 million share buyback through 2014?

Tom Marra

Thanks Chris. Let me start, and I will hand it over to Dan Guilbert on the annuity side. The life business is – I would say a little immediately boosted by the increase in interest rates but it makes for a better pricing environment. And so we will see steady progress there but I think the real story is on the annuity side. We said we will at – at least we will see nice sequential growth in the index annuity but probably the biggest story we are seeing as we speak is the traditional deferred annuities is bouncing back and I will let Dan talk about the margins because that’s a good story too.

Dan Guilbert

Good morning Chris. As Tom said, we are seeing a strong growth in both of our index business which we started a couple years ago. We have seen massive growth from the first quarter, second quarters. We’d expect to continue to see growth there, in addition, our traditional fixed becomes more attractive, as interest rates are higher this regular fixed business can become an attractive value proposition for clients. So I think we see growth in both going forward. And actually we have been able to hit a pricing margin on this margin in our targets of 12% ROE. So we are happy with both the top line and bottom line with what we are writing right now.

Tom Marra

Margaret, just one quick follow up just on the sales aspect there, I mean how do you – I presumably it’s an area that many will want to get back into the market in a rising rate environment, I mean how do you differentiate yourself in the traditional fixed base and the bank channel there?

Dan Guilbert

Good question and actually there is a number of ways. First off, our product is a little bit unique in that it doesn’t focus on things like living benefits with a very clean value proposition, we provide strong accumulation for clients. And so our partners are aware of our value proposition in that in this market when you can get 5 or 6% compounded returns of no red, and at least a 1% return, that’s actually resonating quite a bit. Secondly as Tom mentioned, we have strong partnerships in the banks and BDs. We’ve had these for many years and in many cases, so we are actually going deeper in these partnerships and we actually have been expanding as well. And so our ability to actually work with these partners as a strong track record was not the one that necessary has and we have done a lot of things like tailoring our product in our programs to their needs in terms of commissions specials and the like.

And so I would say those things along with our overall execution our wholesaling team is very well experience and has been together for a few years now. They have deep relationships at the advisory level. And so we are really executing in all fronts and I think again given the product’s value proposition we can stand out and continue to stand out with rates going up.

Margaret Meister

All right, Chris, this is Margaret, I will talk about the repurchase. First of all, we are really pleased with the pace that we have achieved in the first half of the year, we are getting 7 million done which is more than we thought we’d do for the full year with 5 million. With looking at the outstanding authorization and the growth prospects in front of us, I have always said that growth is our preferred way to put capital at work. As we roll into developing guidance for 2014, we will be assessing what do we think our growth looks like and then also revisiting what would our pace of buybacks be alongside of that.

Chris Giovanni – Goldman Sachs

I mean obviously the stock had a nice run here, are you able to assess at all, as you guys communicate with investors, is the excitement around kind of the acceleration of capital management actions that you clearly have done in the quarter, is it around sort of that interest rate environment and what it does to your growth opportunities moving forward?

Margaret Meister

Well, we couldn’t parse between the two but I think both of those would be positive factors.

Chris Giovanni – Goldman Sachs

Obviously there was some speculation earlier this year, you guys were looking to participate alongside a private equity player in terms of a transaction and that didn’t come through fruition. But as the regulatory increase picked up on private equity players, do you continue to kind of have conversations with them in those types of transactions or would you be more likely to kind of go at it on your own as you move forward in an M&A strategy?

Tom Marra

And I think we will look at any structure that makes sense from an M&A perspective, particularly individual life and group, although most of the deals have had individual life attachment and group really hasn’t come to market. But we have a really open platform and we consider everything but as you can see we are extremely disciplined and everything has to go aligned for us to either prevail in a bid or to continue to participate. So we are going to do it our way if we do it at all.

Operator

Your next question comes from the line of Jimmy Bhullar, JP Morgan.

Jimmy Bhullar – JP Morgan

I had a few questions, first, you mentioned that high competition in the medical stop loss market. Maybe if you could talk about what you are seeing and where the competition is coming from and what price actions you are taking to improve your margin? And then secondly on the index annuities, what’s driving the growth there? Is it just rates going up a little bit or are you doing something on the distribution side? And then finally, on buybacks, there is a little bit of a discussion before but should – if the rates do keep going up should we expect any buybacks in the second half of the year or would you think about those more maybe in 2014?

Tom Marra

This is goo done for me, Jimmy, that’s all I have to do it a quarter back and I am going to ask Michael and then Dan and Margaret to cover your three questions.

Michael Fry

With regard to your questions about the medical stop loss business the market continues to be extremely competitive similar to what we saw during the first quarter. We are not seeing any innings in the market in terms of competition but we are seeing increased competition from first dollar medical or fully insured carriers. We are suspecting that they are focusing more their attention on stop loss business due to some of the impact of the healthcare reform legislation that’s out there. We are working very hard to get our pricing targets on the business that we are writing and renewing in the second half of the year. I feel good about the price that we achieved on our business that was effective in July and I would just say that we’ve successfully weathered a competitive environments over the 37 years that we've been in this business and I think we will be successful again.

Dan Guilbert

In terms of whether it was more interest rates being up or partnerships, of course, it’s always a bit of both but I would say is – I would start with the partnerships because we’ve had those partnerships for several years. We put ourselves and get positioned by executing even when interest rates were lower and really getting some traction in the index and fixed annuities space. So as interest rate had gone up because we are well-positioned, what we’re seeing is we are actually maintaining a strong market share in a market that’s growing, so I think that positions us well going forward as well.

Margaret Meister

With regard to buybacks in the second half of the year again, we are really pleased that we’ve essentially done what we thought we would do in 2013. We do have an open authorization but as I said in my comments earlier we don’t expect to be as active in the second half of the year, and we’ll just be monitoring things as we look at what’s happening from a growth perspective to see how we should deploy capital.

Operator

Your next question comes from the line of John Nadel, Sterne Agee.

John Nadel – Sterne Agee

Just a couple of questions, Margaret, I think in your opening remarks, you mentioned something about prepayment income but in the corresponding unlock of DAC and DSI – as I look at the segments where you guys articulated that the positive impact of prepayment income, it certainly does look like bottom line results benefited but I am just trying to square that with what you said, I don’t know if you were trying to suggest that there was an offset?

Margaret Meister

John, we do and unlike it’s not a dollar for dollar offset so we do net the bottom line does have some favorable result. My key point there is that we do go into our DAC and DSI models and reflect that activity and what that would mean to any future expected gross profit and increase the amount of DAC amortization in current period. And so if you look in – we break out under the unlocking where you can see what’s happening there. But net, there is still a bottom-line positive.

John Nadel – Sterne Agee

And can you give us a sense or maybe if it’s in the supplemental I’ll just find it, can you give us a sense for how much dollar amount is securities actually prepaid? I suspect obviously you’d be looking to reinvest those proceeds pretty quickly, and just curious as to what the forward impact on net investment income might be?

Margaret Meister

Yeah so it was around $80 million, most of the money has already been put back to work again. When we set up the guidance range for this year and reviewed it again, we did have some expectation that there would be at least some amount of prepayment activity and so when we look at our cash flow management that was part of why in some of the deferred annuity segment we thought we might have a positive 50 million to reinvest this year. Part of it went into commercial mortgages, you see our margins are holding up quite well in line with what we expected and what investment strategies would've been.

John Nadel – Sterne Agee

And then two more if – is there a way maybe a reasonable rule of thumb for us to think about how much capital you are deploying when you're writing fixed indexed annuities or maybe a combination of index and traditional fixed annuities, as I am sort of trained to expect something like 5 to 6% of deposits, is that reasonable or has that changed with the pricing environment and capital requirement etc?

Margaret Meister

I am going to go ahead and let Dan answer that question.

Dan Guilbert

I think the range you mentioned 5 or 6% is reasonable, I would say on average our index business is on the lower end because it’s a little bit less risky, it’s got a market – and the traditional in the higher end. But that 5 or 6 is a good estimate in terms of the capital usage.

John Nadel – Sterne Agee

And then the last one, maybe it does come back to Margaret, when I think about the change in the guidance there was one – it seems very huge factor and that is the share count with better buybacks earlier in the year coupled with the early exercise of the warrants and we are sort of calculating that that’s added relative to your original guidance something like 8 or $0.10 for the full year, I don’t know if you can confirm that or not. But and then it looks like the tax rate is also going to be a little bit lower and the benefit ratio and benefits are little bit higher, are there any other sort of important factors for us to take into account?

Margaret Meister

No, I mean those are the right factors, we do everything and so you are kind of in line with what we would say that EPS movement was from the change in the share count. We did reflect that where the benefits loss ratio is. We are obviously writing more annuities but I pound think everyone understands that that’s good for growing the account value now but the real impact of that will be felt in going forward quarters in particular as we go into future years.

John Nadel – Sterne Agee

And that was going to be my last sort of follow up question and that is how quickly should we expect this annuity that – in the deferred annuity segment, how quickly can we expect that annuity sales growth, you obviously have a very favorable outlook as you look back – as you look into the back half of the year, especially how quickly does that start to contribute to earnings? Is it a one quarter lag on sales or is it something where there is some other upfront expenses maybe not DAC, then we need to think about little bit of a lag there?

Margaret Meister

It should be about a quarter lag just to get money put to work and any acquisition, non-deferrable acquisition cost behind you.

John Nadel – Sterne Agee

And is it immediate at that 12% targeted return or does it have to ramp?

Margaret Meister

You have to ramp a bit. It’s fairly consistent – or stable.

Operator

Our next question comes from the line of Humphrey Lee, UBS.

Humphrey Lee – UBS

Just a question on benefits loss ratio, with respect to repricing to your stop loss book, can you comment on maybe quantify the recent renewals in terms of the increase in retention and given the intensified competition were you able to get the level of increase that you pushed for?

Michael Fry

We don’t typically talk about specific numbers but I will tell you that we are laser focused on our profitability and do feel that the increases that we got on our July business will meet our pricing targets.

Humphrey Lee – UBS

And because of the competition, would you characterize the pricing in the market to rationale at this point?

Michael Fry

I would say overall pockets of rational pricing and I would say pockets being a little bit irrational. As Tom said, we will only pursue revenue that meets our pricing targets and our goal is to get the business back in the target range during 2014. So if we have to let go some of our top line revenue we will do that to achieve profitability.

Humphrey Lee – UBS

And then you mentioned that traditional medical insurers or carriers are coming into the stop loss market, do you feel this is a phenomenon just because of the healthcare reform or is this going to be something that is going to change the landscape going forward?

Michael Fry

They have always the – the first dollar carriers have always been in this space. So we have been competing with them for years but I do think that they are focusing more attention on this space because of the impact of healthcare reform, though it’s kind of a new environment and we are adjusting in the new environment and I still feel very confident we can compete.

Tom Marra

Just jumping in on Michael’s comments, I think our position in the long-standing and the consistency with the way Symetra has played in this market allows us to play it smart and get through which is what’s a little bit of a more competitive environment but it’s all chase the (inaudible). If we keep our discipline, work real hard to get back within the range for next year we will still have healthy premium, that’s not where you chase all the business away. So I think Michael is doing all the right things, last year was a little bit of a different environment and we really won in that scenario and I think we are adjusting to what’s happening now, we are here to win again.

Humphrey Lee – UBS

Just one more on the fixed annuity sales, you talked about kind of the rising interest rate environment that you're seeing good growth opportunity. Looking a few years back, I think for the fixed annuity our sales were as high as $2 billion a year. Do you feel like going forward you can get back to that level or even surpass that level? And then in terms of mix, do you see a more even mix now because of both the fixed investment annuity and the traditional fixed annuities going forward or you are kind of seeing double the size because you have a two-pronged approach?

Dan Guilbert

On the first question yes, I think we can easily get to 2 billion type level particularly interest rates hang in there, 250 10-year treasury sounds like feels like a pretty high level but we can have that level grow higher especially we will have real large strong opportunity. In terms of the bounces in the products, I would say – I would still expect index right now resonate because while interest rates are high compared to 3 months ago, they’re still at a historical lows and I would say the index product really resonates because you cannot have the opportunity to get a little bit more upside, if interest rates keep going higher and higher I can see things shifting a little bit even more back to fixed. I think it would be more balanced going forward than we maybe saw in the second quarter and to some extent it is a function of interest rates.

Operator

Our next question comes from the line of Steven Schwartz, Raymond James.

Steven Schwartz – Raymond James

Before I start, it occurred to me that I didn't know something on how you classify. People who go into the fixed account of the indexed annuity, do you consider that an index sale or do you consider that a fixed sale, a traditional fixed sale?

Dan Guilbert

That’s an index sale.

Steven Schwartz – Raymond James

It's what I figured. I just realized I didn't know that for a fact. Sticking with indexed annuities for a sec, the increase in the quarter, which was substantial sequentially, was that through a lot of distributors, a lot of partners, or was that particularly concentrated with one or a few, I guess?

Dan Guilbert

There were a couple big increase and in some cases some of our larger partners, we actually had programs where we would reduce commission levels in order to attract new advisors to the product and so what we have seen is we are able to bring on new advisors. So there was a particular program at the larger partner and that works well but then I would also say there was just sort of an overall increase in our remaining partners. So it was actually bit of both, it wasn’t just one partner but there was other couple of big ones that certainly came through.

Steven Schwartz – Raymond James

Dan, did you just say reduce commissions?

Dan Guilbert

In some cases what we will do is we will actually reduce commissions and we will put that amount back into the fines of pocket and essentially provide higher caps or interest rates and it tends to run a program like that for a pretty darn time period and the goal is really to increase overall production and actually to have new advisors learn the story, I think the index story is really resonating right now just given the fact that the alternatives in the market aren’t necessarily that attractive, it’s an easy story to learn particularly our products and again you can get strong accumulation and have minimum downtime, and so these types of programs have been successful.

Steven Schwartz – Raymond James

I want to follow up on that, because there was a comment that I think you made with regards to potential upside of 5%, 6%. Is that the type of cap rates you're offering now?

Dan Guilbert

It varies, again it depends on which particular time period, which particular distributor – I would say low end of that range of our current product and sort of base situation, it’s actually even higher in programs were lower --

Steven Schwartz – Raymond James

And then just on the -- going back to the stop loss side anything new out of the NAIC?

Michael Fry

No, nothing really notable.

Operator

Your next question comes from the line of Ed Shields, Sandler O'Neill.

Ed Shields – Sandler O'Neill

Got a quick question on policyholder behavior in relationship to the fixed index annuities. Obviously, the interest rates have moved upwards here a little bit, and I noted that in terms of the account value roll-forward in the supplement withdrawal rate picked up a little bit. I'm just wondering if you're seeing preliminary evidence of policyholder's using that 10% annual penalty-free withdrawal benefit in order to pursue higher yields and other products. Are you seeing any development there at all?

Dan Guilbert

We track that pretty closely and what I would tell you is actually overall our lapses in withdrawals are pretty low. So we have not seen them at this point. Other products might have different features, might incent that kind of behavior things like withdrawals benefits and what not which we don’t have, so I would say we haven’t had it and there would be differences as why others might have seen that as well.

Tom Marra

Our banks distribution you tend to get a behavior just by nature. Right, it’s really a CD alternative and it seems like that would be attractive to somebody. You never lose the money in any year, getting guaranteed 1% over the 7 year period and the chance to make 6 or higher percent in any year of markets up, people think that’s a pretty good deal and they are just kind of sticking with it. And so our persistency has been great.

Operator

Our next question comes from the line of Jeff Schuman, KBW.

Jeff Schuman – Keefe, Bruyette & Woods

I was wondering if we could talk a little bit about how your current growth opportunities square with kind of bigger picture strategic and risk management concerns. In other words, you're trying to grow a number of product lines, but it looks like what's maybe most available to you right now is to grow the annuities. And I'm thinking, Tom, back to when you came on board, kind of did your initial review, I was thinking about at that time you had some sensitivity around exactly how big you wanted annuities to be as you thought about the company's asset leverage and exposure and credit cycle. So, if annuity's really going to be the growth area for now, does that still work for you in terms of the business mix you want to create?

Tom Marra

I stand by what I was – what I said when I first joined and I love the annuity business actually, it probably offers as good overall risk management return, offering is anything that’s out there in the wealth management markets right now. These are diversified and that’s why it’s imperative that we grow our other businesses and that’s why we started group life and disability that’s why we have tried to reinvigorate the individual life, we are committed to that, it’s very important. We are changing the risk profile of the business we write, the index annuity is market value adjusted and to some degree we didn’t write as much last year as we had thought, so that gives me a little room. If you really look at it leverage, this is really not going up but I stand by what we started out to do at the same time, I really love the annuity business that we are writing. I think it all together we do need to diversify, our theme continues to grow and diversify and that won’t change, but we really like this annuity business too. So that’s hopefully responsive.

Operator

Your next question comes from the line of Seth Weiss, Bank of America

Seth Weiss – BofA Merrill Lynch

I guess I'm a bit surprised at the elasticity of demand of the fixed annuity product. I know rates are up a lot, but they're still on an absolute level very low. Could you help us think through that? Is there some threshold here? Maybe a rule of them on the 10 year where you see a big pick-up in demand, if it's 2.5% or -- because we're still at a very low environment, so there seems to be a fair amount of enthusiasm at least in the commentary on the traditional annuity products.

Dan Guilbert

Couple of things to think about, first off as I mentioned earlier, it’s all relative to what else you can invest in and when you look at other alternatives like CDs, when CDs are creating right now I think suddenly – it becomes very attractive. The second point is that I think the level of interest rates now where they are at historical lows, they have been even lower for the last couple of years and so suddenly having sat on cash, people are looking at these rates and saying, I don’t know how much higher they are going to go or how long it’s going to take them to go higher. The fact that we have been sitting now for a couple years at lower rates, suddenly makes those types of credit rates that are much more attractive. If we have these levels for the next six to 12, 18 months perhaps at some point you could see sort of initial money coming in and slow down but I still think it’s all relative to other competitive products and I think we stand out well compared to those with our products.

Operator

We have no questions at this time. I would now like to turn the call over to Tom Marra, CEO and President of Symetra Financial Cooperation.

Tom Marra

Okay, thank you Julianne and I know everyone is busy but we really appreciate your attention today and your questions. We are starting to get a pretty good rhythm here. So we are really trying to make it happen and we look forward to reporting again as we complete the year out. So have a good day and thank you very much.

Operator

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

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Source: Symetra Financial Corporation (SYA) CEO Discusses Q2 2013 Results - Earnings Call Transcript
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