Symetra Financial's CEO Discusses Q1 2014 Results - Earnings Call Transcript

Apr.24.14 | About: Symetra Financial (SYA)

Symetra Financial Corporation (NYSE:SYA)

Q1 2014 Earnings Conference Call

April 24, 2014 10:00 a.m. ET

Executives

Tom Marra - President and CEO

Margaret Meister - EVP and CFO

Dan Guilbert - EVP, Retirement Division

Michael Fry - EVP, Benefits Division

Jim Pirak – SVP, Investor Relations

Analysts

Jimmy Bhullar – JPMorgan Chase & Co.

Humphrey Lee – UBS

Steven Schwartz – Raymond James & Associates

John Nadel – Sterne, Agee & Leach, Inc.

Seth Weiss – Banc of America Merrill Lynch

Chris Giovanni – Goldman Sachs

Steven Schwartz – Raymond James & Associates

Ryan Krueger – Keefe, Bruyette & Woods

Chris Giovanni – Goldman Sachs

Operator

Good day, ladies and gentlemen and welcome to the Symetra Financial Corporation’s First Quarter 2014 Earnings Conference Call. My name is Alison and I'll be your operator for today. Today's conference is being recorded. At this time, all participants are in listen-only mode.

We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions). I’d like to advise all parties this conference is being recorded for training purposes.

I’d now like to hand the call over to Mr. Jim Pirak, Senior Vice President of Corporate Marketing and Investor Relations. Please proceed, sir.

Jim Pirak

Thank you, Alison. Good morning and welcome to Symetra Financial Corporation’s review of first quarter 2014 results. Before we begin, I’d like to call your attention to the Safe Harbor statement on Slide 2 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 Symetra’s most recent annual report on Form 10-K. Symetra assumes no obligation to update these forward-looking statements. 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 will join the Q&A discussion.

Now we’ll turn it over to Tom.

Tom Marra

Okay. Thank you, Jim and good morning everyone. On the call this morning I’ll review our results for the first quarter and talk about our recent priorities for the remainder of the year, then Margaret will walk you through the business segment highlights and our change in guidance for 2014 and then we’ll take your questions.

Okay, getting started. As you would expect, we are very pleased with these results. We kicked off 2014 with all three divisions performing well. Everyone focused on the right initiatives and with good sales momentum across the company. So with that, and starting on Slide 3, here we have a summary of our earnings drivers for the first quarter in our current areas of focus. We reported an excellent quarter earnings, driven by the very favorable benefits loss ratio. And each of our business segments reported higher operating earnings than in the first quarter of last year, revealing the key drivers for the quarter. First the Benefits Davison reported an extremely low loss ratio. This was clearly a big driver of our very strong results for the quarter and the primary reason why we’re raising our earnings guidance for the year.

During the first quarter of 2014, we experienced an unusually low frequency of paid claims, particularly on business written in January 2013. Claim severity during the most recent quarter was also below expected levels. Although we are pleased with the results for the quarter, we do not expect the loss ratio to remain at this unusually low level. For the remaining three quarters of 2014, we expect the loss ratio to be in the target range of 64% to 66%.

Second, we continued to maintain solid interest spreads on our deferred annuity balances, which remain in line with our 12% return target. We continue to deploy strict asset liability matching and an investments strategy that includes our in house commercial mortgage loan operation, which continues to perform very well and provide significant yield advantage over other fixed rate investments.

Third, as expected we saw meaning earnings contribution from last year’s growth in fixed index annuities and in Universal Life. As we have explained, earnings are muted in the period of sale as a result of non-deferrable acquisition related expenses. In 2014 we’re seeing and we expect to see continued positive contributions from our strong growth of 2013.

Fourth, I’m very pleased to report another strong quarter of sales in deferred annuities in Individual Life. I’ll say more about sales on the next slide.

Finally our earnings per share in the quarter benefited from a lower average share count due to the capital actions we took in the first half of 2013.

Turning now to our areas of current focus, these have not changed. For our first priority, we intend to manage the benefits loss ratio to within the target range for the remainder of 2014. The quality of the business written over the 12 months gives us confidence. It is important to remember the medical stop-loss business is annually renewable, so we are able to act quickly when necessary to keep underwriting result in line with our target range.

Second, in the current interest rate environment, we expect to continue to drive strong sales of fixed and fixed index annuities sold through our bank and broker dealer distribution. For the second quarter, I expect another solid sales result for deferred annuities well above the year ago level.

Third, we look for continued healthy ramp up in Individual Life sales. And fourth, we will continue to focus on accelerating the growth in our Group Life and Disability Income Unit. Premiums in Group Life and DI were up from prior year, still need to grow significantly from here to reach scale. We have our infrastructure in place and we’re working to achieve meaningful improvement in sales through 2014. Finally, we’re committed to driving ROE improvement. We expect to do this over time through profitable growth, supplemented with some capital actions.

Now moving to slide four, we have our sales by division for the first quarter and the trailing 12 months. I’m very pleased with our continued sales momentum, which reflects both the improved interest rate environment and our successful efforts to expand distribution. I devote a lot of my time to meetings with key distribution partners across our product lines and I’m really encouraged by their commitment to grow their business with Symetra.

We had a strong sales result in the Retirement division. This includes Traditional Fixed, Fixed Index and Single Premium Immediate Annuities. We achieved this growth even though interest rates came down during the first quarter. And at current interest rates, we expect that sales results will continue to be strong at levels similar to those of the first quarter of 2014 and the fourth quarter of 2013.

As expected we had another very strong result for Individual Life. We continued to make headway in establishing Symetra as an increasingly important carrier in the BGA channel. First quarter sales were down a bit sequentially, but in our target market the fourth quarter is by far the largest quarter for life sales. So we’re right on track. In the second quarter, we’re planning to launch our Survivorship UL which is an important product for this market. In benefits, the decline in medical stop-loss was more than offset– stop-loss sales was more than offset by higher sales in limited benefit medical and group life and DI. The market for medical stop-loss continues to be highly competitive and though the market is not irrational overall, there is price competition. We are focused on premium growth, but of course only at the right price.

On Slide 5, we have our consolidated financial results for the quarter. Net income was $79 million, up from $66 million in the first quarter of 2013 as a result of our higher operating income. Adjusted operating income was $66 million, up from $49 million in the first quarter of 2013. And operating return on average equity for the 12 months ended March 31 was 9.4% compared with 67.9% for the same period last year.

Now I’ll turn it to Margaret for more on business segment results and revised guidance and then I’ll come back and we’ll open it up for questions. Margaret?

Margaret Meister

Thank you, Tom and good morning. I’m very pleased with our excellent earnings and the continued sales momentum.

Starting on Slide 6, I’ll address a few overarching topics before getting into the business segment results. First, we had mortality gains of $5.3 million in income annuities, up from $1million a year ago and more favorable than normal expectations. We’ve discussed on prior calls that mortality moves around from period to period and we generally expect slightly favorable mortality in this line, but not at the level seen in the first quarter. Our mortality experience in individual life was slightly better than the first quarter of 2013 and in line with our expectation.

Prepayment income net of related amortization expense, contributed $5.3 million of pretax operating income in the first quarter, down significantly from the $11.8 million in the first quarter of 2013. Though substantially lower than a year ago, prepayment related income still exceeded our expectations. Given the interest rate environment, we included a moderate amount of prepayment income in our guidance. It is important to remember that as we receive bond prepayment fee income, where allowed, we are also unlocking the related DAC and DSI balances, which buffers the impact of margin compression created by the prepayment activity. We are very thorough about assessing all the future actual assumptions that might be impacted by the change in portfolio yield.

The effective income tax rate in the first quarter was 15.7%, which was lower than last year’s 20.9% due to increased benefit from additional tax credit investments. This investment strategy has worked very well for us and we are pleased with the returns on these investments. The first quarter’s effective tax rate was lower than the 18.5% we contemplated in our original earning guidance for 2014. We now expect our effective tax rate to be in the range of 16% to 18%.

On the topic of earnings guidance, we expect to see continued good earnings for the remainder of 2014. However, as you’ve just heard, several factors in the first quarter came in more favorably than we expected. Taking into account each of these factors and the low benefits loss ratio, we have raised our operating earnings per share guidance for the full year by $0.15. So our guidance range is now a $1.80 to $2.

Finishing on the subject of capital, we ended the first quarter with an estimated risk-based capital ratio of 469% which is up eight points from yearend, driven by solid statutory earnings even after supporting strong sales results in the first quarter. Our statutory results benefited from many of the same things that we’ve discussed here.

We repurchased 1.4 million shares under our buyback plan. As always, our first priority for capital use is to support our organic business growth. We also expect to continue to take modest capital actions.

Now let’s move to the business segments results, starting with benefits on Slide 7. Pretax operating income was $27.8 million, up $14.3 million from the year ago period, driven by the unusually low loss ratio of 57.1%. We feel good about the business written over the past year, including the very important January 1, 2014 new sales and renewals. And as Tom said, we expect the loss ratio for the remaining quarters of the year to be within our target range.

Switching gears to other topics and benefits, I want to bring you up to date on our strategy for the new private insurance exchanges. We expect that over the next few years, private exchanges will be at the center of a shift in the way employers deliver benefits to their employees. For Symetra, we believe that private exchanges will offer us the opportunity to expand and strengthen our existing partnerships for years to come. Eventually we plan to market all of our benefits products on our distribution partners’ private exchanges. The first phase of our work is getting our limited benefit medical product added to several of these private exchanges out of voluntary offering to employees. We have already placed more than a dozen cases on Liazon Private Exchange, one of the largest private exchanges.

Moving to deferred annuities on Slide 8, earnings increased $1.1 million to $30.2 million, driven by 2013 account value growth. I’m really pleased by the $5.2 million growth in interest margin on fixed index annuities. Unfortunately this impact was marginally obscured by the drop in prepayment related income. The point here is that we’re seeing the earnings contributions from our strong FIA growth in 2013. And as expected, this should be a meaningful driver of our results throughout the year.

Beginning in the first quarter, we’re disclosing interest spread metrics for our fixed index annuities. The base interest spread of 1.24% is below our target for this book because we’ve not achieved target asset portfolio allocation yet. In particular, we’ve had more cash in treasuries in this portfolio as we sourced appropriate commercial mortgage loans and corporate bonds. We expect the FIA interest spread to expand from here. The target spread to achieve our 12% ROE objective is lower for the FIA than it is for our traditional fixed annuities because FIA is less capital incentives.

Turning to income annuities on Slide 9, operating income of $9.4 million was up from $8.8 million a year ago due to higher mortality gains. Our margin is down this quarter due to higher cash balances, timing of a few recurring income items on certain investments and because we are experiencing margin pressure from re-investment. We estimate the margin pressure to be about two basis points.

We’ve continued to manage the downward pressure on interest spreads, aided by our investment on commercial mortgage loan origination. In the first quarter, we funded loans at spreads over treasuries about 240 basis points and the performance in this portfolio remains very good. Also the majority of our equity portfolio supports the long duration liabilities in income annuities. We’re giving up investment income operating earnings in exchange for non-operating net realized gains and losses and better asset liability management.

Finishing with the Individual Life segment on Slide 10, operating income of $12.3 million was up from $11.2 million in the first quarter of 2013. Several drivers contributed to this improvement, including higher BOLI return on assets, increased revenues from the recent growth in Classic Universal Life and lower claims.

Operating expenses were up in this segment due to non-deferrable underwriting and other expenses associated with the ramp up of our UL business. Similar to our experience with deferred annuities, we expect incurred expenses to mute individualized earnings in the period of sale. And as we sell more UL and build this new block, we expect meaningful improvement in the segment’s earnings. Again we’re very pleased with this business and look for continued strong sales and growth in account values through 2014 driven by expanded distribution and new products such as our forthcoming Survivorship UL.

With that I’ll turn it back to Tom.

Tom Marra

Thank you, Margaret. So turning to Slide 11, I’ll close by reiterating that we had a great first quarter. We don’t expect the loss ratio to stay this low for the remainder of the year, but given that this quarter is already in the books, we expect the full year loss ratio to be quite favorable. Certainly we expect to maintain the strength of our balance sheet in our pricing and underwriting discipline. And armed with what I believe are the right products and the right distribution in our target markets, I expect that we’ll continue to achieve profitable growth that positions us to drive improvement in operating ROE over time. So I’m optimistic about the prospects for the rest of 2014 and beyond. I fully recognize that most of the year still lies ahead of us and we have a lot to accomplish to keep us on the path, but I’m confident in our ability to accomplish our goals.

So with that, Alison I’d like you to open up the line for questions please.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Jimmy Bhullar of JP Morgan. Please go ahead, Jimmy.

Jimmy Bhullar – JPMorgan Chase & Co.

The first question is just on the medical stop-loss business. Maybe if you could talk about how you expect healthcare reform to impact this business and could you see the market expand as more employers go towards self-funding and have you seen that? Related to that, if you could talk about the competitive trends in the medical stop-loss market as well and maybe just where you're seeing the competition come from? And then secondly, on Individual Life sales, your sales have obviously been growing at a decent pace, obviously off of a small base. But maybe talk about your comfort with selling Universal Life with secondary guarantees, because a lot of other companies have pulled back from that market, and then what type of returns you're able to price new business for in this type of rate environment.

Michael Fry

Hi Jimmy, this is Michael. I can address your question about stop-loss. With regard to healthcare reform, we are still very optimistic about that. What we did see in 2013 were a lot of smaller and midsized employers asking a lot of questions and making inquiries through their brokers and consultants about self-funding. So I kind of view that as the year of education. As we move in to 2014 and 2015, the employer mandate under healthcare reform is going to start kicking in. And so we do believe that some of those inquiries will turn to action. So I do think that there’ll be more new business opportunities coming our way with regard to self-funding and then obviously stop-loss coverage that goes with it.

With regard to the competition, still very competitive out there as Tom mentioned, not an irrational market. The biggest competition we are facing today are the first dollar health insurers that are out there. They are paying more and more attention and focusing more on stop-loss business because I do believe they see growth potential there as well. So that’s kind of where our competition is coming from.

Tom Marra

I’ll take Individual Life. I think our timing is just good here. Actually prices have gone up in that market as you know and some have exited altogether. So as a new entrant and not encumbered by past sales that probably won’t be profitability as targets, we are pretty fresh and we are finding that with the higher prices it’s actually a pretty benign competitive environment. And therefore we are able as a new entrant to make some inroads, but also price at our expected return. So just the benefit of good timing and now really good execution in terms of our ability to partner up and meet the needs on both product and service and sales support. So it’s a good story for us.

Operator

And your next question comes from Humphrey Lee of UBS. Please proceed.

Humphrey Lee – UBS

I just wanted to touch up on medical stop-loss a little bit more. So looking at the sales, they've been kind of declining for year-over-year for six consecutive quarters. And you talked about expecting a greater potential coming through with healthcare reform. When will be a realistic timeframe to expect sales to turn around?

Michael Fry

Humphrey, this is Michael. Thanks for your question. I think we would probably start seeing those opportunities for new business coming to fruition probably later this year which is when we would start quoting business that would be effective in January of 2015.

Humphrey Lee – UBS

Okay. So we should probably expect sales to continue to be a little bit pressured in maybe next quarter or coming through third quarter as well? Is that a realistic expectation?

Michael Fry

Yeah. I think the expectation for this year that any increase I think in premium in the sight of business it’s got to be modest in 2014. But I think you’ll start seeing an uptick as we move in to early 2015.

Humphrey Lee – UBS

Okay. And then if I could, an extension for that, so premiums was actually down year-over-year, I think, probably as a result of pruning action --

Michael Fry

Correct.

Humphrey Lee – UBS

-- And your repricing. So because of the weaker sales in 2013, should we expect premiums to be depressured in 2014?

Michael Fry

Again I think we are projecting that we should be pretty flat if not just a slight increase, but pretty flat.

Humphrey Lee – UBS

Okay. All right. In terms of the large case win in limited benefit medical, how big was that for the quarter?

Michael Fry

The large case that we sold in the first quarter represented about two thirds of the total sale number.

Humphrey Lee – UBS

Okay. Got it. Thanks.

Operator

And our next question comes from Steven Schwartz of Raymond James & Associates. Please proceed.

Steven Schwartz – Raymond James & Associates

Just for Michael, following up again on exchanges and stop-loss, in the private exchanges today, you can still -- if you're an employer and you're self-funding, you could still self-fund. However, a lot of people think that the private exchanges are eventually going to lead to a move from where we are at now, defined benefit, to a defined contribution system where Raymond James gives me some money and I've got to go out and shop on an exchange. In that kind of world, does stop-loss still exist?

Michael Fry

Yes, definitely. We actually think they’ll be in a quite few business opportunity out there. So our strategy as I believe Margaret mentioned, it is strategic focus for us in 2014 and beyond to get all of our products on the private exchanges. So that would include stop-loss but also life and disability and our limited benefit medical coverage.

Steven Schwartz – Raymond James & Associates

Would it be very difficult for you to right now explain how stop-loss might work in a DC environment?

Michael Fry

Some of the details surrounding how that’s all going to work is still coming together, Steven. But it would be very similar I think to some of the cafeteria type options that employers provide to their employees today. So one of the advantages for a carrier like Symetra is that if an employer provides different networks to their employees because they may be in different locations across the country, Symetra can write that stop-loss coverage across all those networks and some of our competition can’t do that. So I hope that helps a little bit.

Steven Schwartz – Raymond James & Associates

Okay. Yes. I appreciate it. And then if I could, I just discussed this yesterday with Jim and Karen, but this case that you sold, this was hospital indemnity. That's correct? That's what your limited benefit is?

Michael Fry

Yes, fixed indemnity.

Steven Schwartz – Raymond James & Associates

Okay. Is this type of business currently at risk because of proposals coming out of HHS with regards to people using this instead of the essential benefits?

Michael Fry

Yeah. I know what article you’re referring to, Steven and in that article what they were concerned about was using this type of product as a substitute for traditional coverage.

Steven Schwartz – Raymond James & Associates

Right.

Michael Fry

How we write this business is supplemental to our coverage. So, we are writing this as supplemental to high deductible health plans that actually are becoming more prevalent with healthcare reform. Also we write it as supplemental to minimum essential coverage plans. So it’s a supplemental play, not a replacement play. And ’'d also point out that this product was originally developed to focus on part time, temporary and seasonal employees and that’s still a market area that we’re getting new business opportunities in.

Steven Schwartz – Raymond James & Associates

Okay, great. And then one more if I may for Margaret. Could you give us maybe a rule of thumb for what -- I think your FIAs have MPAs on them, so a little bit different maybe from other companies. But could you give us a rule of thumb maybe about how much capital is used, say per dollar of FIA reserve? I'm having difficulty trying to figure out how a targeted spread that's going to be less than 175 bps gets you to 12% ROEs?

Margaret Meister

So as far as about a rough rule of thumb and it does vary depending on if you have a guaranteed return on premiums in it, around 5%.

Steven Schwartz – Raymond James & Associates

Around 5%?

Margaret Meister

You do have to take into consideration when you’re looking at what the margin needs to be, also what is the commission rates associated with it. So there are multiple dynamics that come into play. And if Dan wants to add anything here, jump in.

Dan Guilbert

No. I think that sums it up well.

Operator

The next question comes from John Nadel of Sterne, Agee. Please proceed.

John Nadel – Sterne, Agee & Leach, Inc.

Michael, maybe, just wanted to follow-up on the commentary about premium levels being flat for medical stop-loss. Is that flat from the current level i.e. 1Q ‘14 or were you really inferring that stop loss premiums could be flat year over year in 2014?

Michael Fry

My comment meant -- thank you, John. My comment meant -- I meant it to say that we expect it to be flat year over year. We feel really good about the business that we wrote in January and we’re able to retain the level of business we wanted to. But new business was a little below what we wanted. So we’re working very hard with our producers out there attacking the market. We love this business. And so we are actively pursuing growth but obviously at the right price.

John Nadel – Sterne, Agee & Leach, Inc.

Okay. So maybe I have the numbers wrong, but I think 1Q, your premiums for stop-loss were down just shy of 6% year-over-year. So we should expect that, essentially, 1Q is a trough level of premiums and is it just that sales haven't quite kicked into the 1Q number yet?

Michael Fry

Yeah. We expect to continue to have continued growth as we go through the year.

John Nadel – Sterne, Agee & Leach, Inc.

Okay. And then maybe just comment on the pricing environment for those 1/1 sales. I think in the past you've talked a little bit or given a little bit of color around pricing, renewal price increases versus let's say lapse rates.

Michael Fry

Yeah. As I mentioned before John, we were able to retain almost exactly kind of what we planned in terms of our renewals in January and based on the business that we retained and how it was performing, we feel really good about the increases we got on that business. That will allow us, as Tom mentioned, to be in the range for the remainder of the year.

John Nadel – Sterne, Agee & Leach, Inc.

Have those price increases begun to moderate a little bit at this point, Mike? I know there was a period of time not too long ago where the price increases were strong double-digit rate increases. Has that come down more in line with, if you will, maybe comparative to just normal medical inflation?

Michael Fry

Yeah. We haven’t seen first hour medical trends being this low for quite a while. I think the recent estimates are in the 5% to 7% range. Obviously when it’s that low, that does impact our increases as well because it impacts our claims.

John Nadel – Sterne, Agee & Leach, Inc.

Yes. Understood. And then if I could just -- I know I'm sort of asking for a little bit of color here that maybe you do, maybe you don't want to give and this is more for on the capital side, I think both Tom and Margaret, I think you both used the term, continue to take modest capital actions as part of your forward outlook. Should we take that to infer that the repurchase activity in 1Q was probably front end-loaded for the year and we should expect that to moderate? I'm just trying to just to get a little bit more color around the commentary

Tom Marra

Thanks John. Margaret, feel free to jump in if you want to here. We’re happy with what we did. Obviously our price is higher now. It’s probably trading just a little bit above book value. And you should expect these prices, it will moderate. Hopefully that answered your question.

John Nadel – Sterne, Agee & Leach, Inc.

Yes. That's helpful. And then Tom, I've asked you before. As you think about longer-term ROE improvement, can you give us some gauge in how you guys are planning internally for that? Is that something where we might expect as much as 50 basis points-type improvement a year or something higher or lower than that? Just to give us some ballpark sense on that.

Tom Marra

Actually it takes a while. We have a block that holds us back as you know in settlements. By writing a lot of new business and letting it season because this non-deferrable situation that we’re now actually seeing the benefits of the ‘13 sales come through, that’s a pretty good range. Margaret, are you comfortable with that?

Margaret Meister

Yeah, Tom.

John Nadel – Sterne, Agee & Leach, Inc.

Okay. I’m going to sneak in one more that’s been on my mind. I know you've got this longer-term strategy to sort of shift the business mix a bit maybe away -- more towards fee-based business away from spread, more balance sheet-heavy type business. When I'm looking at invested assets divided by your GAAP equity excluding AOCI, that's been around 12 times. At what point -- how high do you think you're willing to let that go? I know the annuity business is really important to you.

Tom Marra

Keep in mind that when I first got here, we didn’t have the index annuities. So I think some of those quotes maybe should be tamped down a little bit because the index annuity risks characteristics were a lot different. It does have an equity component and specifically has the market value adjustment protection partial. So that true and the margins we’re able to get on that are good. And then I don’t think we’ll be heavy in fee income because every time we look at the VA world, you have to do living benefits which we’re just reticent to do. But I do think our insurance opportunities are going to increase. You’ll probably get more balance to this. What I said four years ago is -- I look at the world differently now. Maybe at some point we need to lay out how we’re viewing that. But we’re actually quite happy with the portfolio and the way it’s kind of filling in, based on the risk dynamics and frankly the increased amount of insurance I think we can write with things like individual life growing and group life and disability. I feel like I’ll get balanced that way and I’m not now looking that we’ll guess the income. It’s just doesn’t set for us. And so we’re kind of modifying the outlook from that regard.

John Nadel – Sterne, Agee & Leach, Inc.

It’s crazy how fast four years has gone, huh?

Tom Marra

Maybe for you.

Operator

And your next question comes from Seth Weiss, Banc of America Merrill Lynch. Please proceed.

Seth Weiss – Banc of America Merrill Lynch

Tom, you highlighted in your prepared remarks that the unusually low frequency of paid claims and employee benefits was weighted to the business written last year. It just sounds like you have maybe some visibility into what drove this quarter and that it won't persist, so perhaps you could just give us a little bit of color on that?

Tom Marra

Yes. It really was with the 1/1 13, the early 13 business that we expected would complete in a way and it completely just, it’s almost complete now. Just a heck of a lot better than we had expected. That was the big driver. And so that is almost at the end of its wire. That’s why we forecast the remaining three quarters to kind of be what we normally expect, which is within the 64 to 66, but yes. The overwhelming positive has run its course.

Seth Weiss – Banc of America Merrill Lynch

Okay, thanks. And in terms of the strategy to target voluntary benefits on the private exchanges, could you just remind me if there's any, I don't believe there's any voluntary business right now in Benefits, or is there a small piece already embedded in there?

Michael Fry

Yeah Seth, this is Michael. There’s a small piece already embedded in there. We do sell our limited benefit medical products on a voluntary basis and we also can sell a new sale sum of our life and disability on a voluntary basis as well.

Seth Weiss – Banc of America Merrill Lynch

Okay. That limited voluntary product, is that typically bundled to corporates that you already provide the stop-loss to?

Michael Fry

Some yes, and some standalone. In my previous remark again, what we’re starting to see is employers that are offering high deductible health plans to their employees. There’s a bigger gap obviously now that we have to cover or the employee has to cover. So we’re seeing more opportunities to cross sell the limits in benefit medical to our stop-loss customers.

Seth Weiss – Banc of America Merrill Lynch

Okay, great. Thanks a lot. I’m just going to just sneak one more just to follow on to Steven Schwartz' question just on the deferred annuities. The rule of thumb of 5% for FIAs is helpful in terms of required capital. Do you have a similar rule of thumb for the traditional deferred products?

Dan Guilbert

Morning, Seth. This is Dan. Yes, the deferred products really also vary depending on whether it’s a guarantee return of premium or not. The guarantee return on premium can be a little bit higher, probably more like 7% or so level, and then the non-guarantee return premium deferred annuity is somewhere between that and index annuity. As Margaret said, to some extent, you also have commissions varying across products and that can create some differences as well in terms of the gross margin.

Operator

And your next question comes from Chris Giovanni of Goldman Sachs. Please proceed.

Chris Giovanni – Goldman Sachs

Obviously, still a lot of uncertainties as it relates to reform in exchanges and you guys clearly view yourselves as beneficiaries, if this plays out. But curious, in this environment, if there are M&A opportunities out there that could help accelerate this opportunity for you. And then just broader comments on M&A, given you seem to have a decent rhythm here around both sales growth and implementing some buybacks?

Tom Marra

Let me take the overall and then we’ll kick it to Michael as it pertains to some of the changes going on in healthcare. We look at things. I think I said the last time it’s what probable that we do something that you would regard as transformational, in part Chris because of what you just said. We really have established organic systems and distribution strength that I think will be able to feed ourselves quite well. But still Individual Life and employee benefits are probably the two areas where I still think we could take advantage of opportunistic acquisition if the right situation presented itself. And as a result, the bankers fully know that we will consider things and might use -- have capital, at least some capital that could be utilized. And we are kind of open, but at this point I wouldn’t expect anything.

Michael Fry

Chris, this is Michael. I don’t have a whole lot to add to Tom’s comments. But I do -- Because we’ve done past transactions specifically on the stop-loss side, I think we are on the look so that if something does come to market that’s attractive I think we’ll get a call. I’m pretty confident of that. But having said that, we are not seeing a ton of opportunities in the employee benefit space right now and it does seem like most people are holding on to those businesses because of the high returns or relatively high returns. So the market knows we are a player but I don’t expect a lot to come to market at least in the short run.

Chris Giovanni – Goldman Sachs

Okay. And then Margaret, I know I asked last quarter as well, but just any updated thoughts around debt capacity and how that's evolving and your thoughts there?

Margaret Meister

As always we are looking at our debt capacity.

Tom Marra

We’re giving some water to Margaret. Hang on one second. She’ll get there.

Margaret Meister

We know we run an extremely low leverage ratio and we look at whether we have capacity, but again we look at our capital and keep it available to us as we see our organic growth needs there to consume it.

Operator

Our next question comes from Steven Schwartz of Raymond James & Associates. Please proceed.

Steven Schwartz – Raymond James & Associates

Just a quick follow up based on the comment. I think, Tom, you made the comment that it was the business that was written in the first quarter of 2013 on the stop-loss side that had very, very good experience. It doesn't change the guidance any, but I'm just wondering, so are you implying that there was a reserve release maybe from prior quarters in this quarter as you saw that business come to fruition?

Tom Marra

Really just how it emerged. Michael could add -- I think the question was along the lines of this thing in the 57% range and then you were saying, well it’s going to go back to 64% to 66% for the last three quarters, why the differentiated? And it was really just the fact that the way that business is completed. Did I get that right, Mike?

Michael Fry

Yeah. You got it right, Steven and I would say that there was no unusual reserve, at least in the first quarter reserves were managed in the normal course of business consistent with how we’ve always managed them before.

Operator

And your next question comes from Ryan Krueger of KBW. Please proceed.

Ryan Krueger – Keefe, Bruyette & Woods

First, a follow-up on the leverage question. I guess I just wanted to make sure I understood the answer correctly. Is the idea that you know you’re under-levered, you could increase leverage, but you just don't have a use for the capital at this point, so you'll wait until there is one?

Margaret Meister

Pretty much. Sorry you couldn’t understand the first attempt at answering this.

Ryan Krueger – Keefe, Bruyette & Woods

No.

Margaret Meister

But yes, that’s the key. We like to keep our powder dry so to speak and clearly that’s the source of powder. But we will look at it because we also recognized that right now is a good time when you look at the relative cost of debt.

Ryan Krueger – Keefe, Bruyette & Woods

Okay. And then I guess a related question. You’ve ramped up sales a lot in annuities. You’re starting to gain some traction in Individual Life, but your RBC ratio has still remained ready steady even as you're buying back stock. So I guess just any color you could give on how you expect the RBC ratio to trend over the next couple of years based on the growth you expect?

Margaret Meister

We certainly do expect it to head down. We did have a little bit of it going down, but with such positive stop-loss loss ratio in this quarter, that definitely contributed more statutory earnings than was on our radar. As Individual Life continues to ramp up, which you could expect fourth quarter of this year to be significant compared to fourth quarter of last year, that’s going to be the biggest consumer. So I expect it to be going down and heading towards the 400 level over the next couple of years.

Operator

(Operator instructions). Our next question however comes from Chris Giovanni of Goldman Sachs. Please proceed.

Chris Giovanni – Goldman Sachs

Tom, I just had one follow up question. I wanted to hear your thoughts around just the pricing environment broadly. I guess the reason I ask is, you've been involved in product design and pricing over the years and certainly across the industry we've moved to kind of a bit of a hard market here over the past several years as carriers turned more disciplined. But now it seems almost every carrier is really focused on trying to grow again. So curious how much of a runway you think you and the industry could have before you start to get a few people looking to get even more aggressive?

Tom Marra

Yeah, it’s actually -- Chris, it’s a perceptive observation as I talk to peers in the industry. Obviously things are a lot better than they were a few years ago. People have husbanded their capital quite well and credit markets have been good and all those kind of things. Right now I guess at Individual Life, I think the timing was just good. It just is a market where prices have increased such where a new entrant does pretty well I’d say. Why don’t I let Michael and Dan talk about their businesses and how they’re seeing it. Nothing’s easy. I’ll just state that as an overarching theme. But I don’t see any markets that I’d just say boy this is no longer a good place to be, but they all vary a little bit nuance wise. .

Michael Fry

Chris, this is Michael. With regard to employee benefits, if you look at our three businesses there, I’ve made a comment. I think Tom did as well that stop-loss is very competitive. It’s not irrational. So this is our 38th year in the business this year. So, we’ve got a lot of experience on how to price the business. I think on Life and Disability that also is very competitive, but as you know some of the companies that we’re competing against out there are trying to correct past problems in their blocks of business. So they’re showing more discipline which I think bodes well for us when we’re competing against them. And I think lastly I’d say with our limited benefit medical product, that actually tends to be less competitive than some of our traditional products because what’s really, really important with that product is service. And that’s like the number one reason businesses won and lost. And we’ve got a very, very good service platform for that product and it’s nice not to have as much competition there price wise.

Dan Guilbert

Morning Chris. This is Dan. In terms of the annuity markets, I would say the fixed annuity markets and index annuity markets are always competitive. We’re seeing that. I’ve seen it for four years. The pie is also getting bigger. I think we’ve been part of the growth story for index annuities and banks and broker dealers. So if the pie gets larger I think we expect to get our fair share. We continue to add new bank platforms. We continue to go deeper in existing partners. And so as we expand distribution and also add some features and benefits, I see us having a great opportunity going forward. It’s never easy, but I still see a large opportunity for us.

Operator

You have no further questions at this time. So I’d now like to turn the call over to Tom Marra for closing remarks.

Tom Marra

Okay. Thank you, Alison and thanks everyone for joining us on the call. A good quarter, but just one of four and we do like our position. So we feel we should keep at least the market momentum even if our loss ratio tracks back more to our standard margin. So it’s a good story. We’re working hard and we appreciate being able to report in forums like this, especially when you have such a good quarter. Thanks. Good luck with the rest of the earnings season. Take care.

Operator

Thank you for your participation in today’s conference. Ladies and gentlemen, this concludes the presentation. You may now disconnect and good day.

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Symetra Financial Corporation (SYA): Q1 EPS of $0.56 beats by $0.15. Revenue of $545.5M (-2.1% Y/Y) beats by $14.38M.