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Symetra Financial Corporation (NYSE:SYA)

Q2 2012 Earnings Call

July 26, 2012 10:00 am ET

Executives

Jim Pirak – Investor Relations

Thomas M. Marra – President and Chief Executive Officer

Margaret A. Meister – Executive Vice President and Chief Financial Officer

Michael W. Fry – Executive Vice President, Benefits Division

Daniel R. Guilbert – Executive Vice President, Retirement Division

Analysts

Jimmy Bhullar – JPMorgan

Chris Giovanni – Goldman Sachs

John M. Nadel – Sterne, Agee & Leach, Inc.

Steven Schwartz – Raymond James

Jeffrey R. Schuman – Keefe, Bruyette & Woods, Inc.

Humphrey Lee – UBS

Ryan Krueger – Dowling & Partners

Operator

Good day, ladies and gentlemen and thank you for standing by. Welcome to the Q2 2012 Symetra Financial Corporation Conference Call, hosted by Jim Pirak. My name is Marie and I will be your operator today.

During the presentation all participants will be in a listen-only-mode and after the speakers’ remarks, you will be invited to participate in the question-and-answer session. As a reminder ladies and gentlemen, this conference is being recorded.

I would now like to hand the call over to the host for today's call Mr. Jim Pirak, please proceed.

Jim Pirak

Thank you, Marie. Good morning and welcome to Symetra Financial Corporation review of second quarter 2012 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, 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, a reconciliation between the two is available in yesterday's earnings press release and in the presentation materials which are posted on Symetra's website.

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

Now I'll turn it over to Tom.

Thomas M. Marra

Thank you Jim and good morning everyone, Margaret and I will review the financial results and update our key initiatives. And then, of course we’ll take your questions, so I’ll begin on slide three, where we have a summary of current highlights and challenges.

So this is another strong quarter for our Retirement division, with solid interest spreads earned and by both the Deferred Annuities and the Income Annuities segments. This is especially impressive in the current interest rate environment, which continues to apply pressure to our products margins.

Sales of fixed deferred annuities were lower in the quarter, but sales of our fixed indexed annuity product continue to pick up the pace, and in fact we posted our fourth consecutive quarter of higher sales – sequential sales, over up by product. Immediately, that trend will probably end here as we expect third quarter FIA sales to be down from the second quarter again due to low interest rates.

At 63.5%, our benefits loss ratio for the first half of 2012 remains well within our long term target range of 63% to 65%. The ratio was 65.5% in the second quarter Margaret will have more to say about that in a moment. While clearly the medical stop-loss business is performing in line with our underwriting objectives.

Now turning to challenges; first we continue to deal with the interest rate environment, the impact it has on margins and sales. As you know, we’re maintaining our discipline despite this low rate environment and while this may negatively impact sales in the short-term, we believe the finest discipline is the prudent way to run the business.

Second, we’re not satisfied with sales levels in individual item. And the near-term outlook remains challenging, you recall that we told you last quarter that we’re lowering commissions on our single premium life product, as a result of interest rates that change went into effect on July 1, and we expect that to be our sales drop off dramatically for the remainder of the year.

For now, I’ll take a personal charge of the Life business, I have a lot of experience here and we’ll be working with a very capable team to carefully evaluate ways to historic growth. We still need a more complete product offering and we obviously need to drive sales through our distribution relationships.

With regard to our grow and diversify campaign, we’ve done a lot of optimal work across the company to expand our products and capabilities. The retirement division launched our True Variable Annuity products in June and the Benefits division implemented the state-of-the-art Life & DI claims in asset management system. The Life team introduced a Lapse Protection Benefit rider for Classic UL and a new variable COLI product. Now our focus is on driving increased revenues as a result of these initiatives. It’s critical that we were quickly to drive sales of our new products, while we also keep our core business going strong. We build good products and service capabilities, but now it’s time to execute on the sales side.

Turning to slide four, we have our consolidated financial results for the second quarter. Net income was $44 million down from $58 million in second quarter 2011 reflecting lower net realized investment gains. Adjusted operating income was $47 million compared with $49 million in second quarter of 2011. Return on equity was 6.6% for the 12 months ended June 30, down from 9.1% for the same period last year, mostly due to growth in total stockholders’ equity, which includes higher unrealized gains in the investment portfolio.

Operating return an average equity for the 12 months ended June 30 was 9.8%, up from 9.4% with the same period of last year.

So I’ll now turn it over to Margaret and she walk through the business segments and then I’ll come back and say more on our progress on the Grow & Diversify initiatives and of course, we’ll open up for questions. Margaret.

Margaret A. Meister

Thank you, Tom and good morning. We had a solid quarter with particular strength in our Deferred Annuities and Income Annuities segments. Before I move to the operating segment results, I want to update you on our investment and our Grow & Diversify initiatives and our effective tax rate. Grow & Diversify costs $0.04 of after-tax operating income per share in the second quarter 2012, which represents the heaviest spend quarter of the program. This is consistent with our previous guidance.

For the second half of the year we expect Grow & Diversify to contribute a net negative $0.05 per share of after-tax operating income as certain non-recurring cost roll up and revenues from the new initiative begin. We expect the third quarter to be more effective reflecting a gradual ramp in revenues from quarter to quarter. In our other segment, the second quarter pre-tax operating income was down $5.1 million from the same period last year, primarily driven by lower investment income on alternative assets and higher amortization of our affordable housing investment. The benefit of our affordable housing investment of course is lower effective income tax rate. We expect our effective tax rate to remain favorable for the remainder of 2012.

Moving now to the benefit segment on slide five, benefits operating revenue grew to $146.7 million, up 24% from second quarter 2011. Pre-tax adjusted operating income was $16.3 million, down from prior year’s $19 million as a result of higher loss ratio and higher operating expenses, versus a year ago and last quarter, our loss ratio increased primarily due to a higher loss ratio on the AUL business.

However, the AUL block continues to be more profitable than we assumed in our deal pricing. The second quarter results also reflected the impact of $3.3 million in reinsurance adjustment, which impacted both the premium and claims expense lines. For the first six months benefits loss ratio was 63.5%, we expect the full year result to be in line with our long term target range of 63% to 65%. Expenses increased as a result of the build out of the sales team and administrative capabilities supporting our group life and disability initiative. Though we managed the medical stop-loss by the bottom line we were pleased with to show strong sales for the quarter. And we continue to write new businesses at premium that meet our profitability hurdles for this line.

On slide six, we illustrate the quarterly volatility in the benefits loss ratio. Overtime we expect the loss ratio to be within the target range of 63% to 65%. Year-to-day our loss ratio is the same as the average for the past nine quarters.

Moving to slide 7, the deferred annuities segment reported operating revenue of $139.1 million, up from a $133.1 million and pretax adjusted operating income increased to $23.8 million from $21.1 million. The improvement was driven by growth of $942 million in average fixed annuity, account bias and higher interest spreads. The base interest spread, which is close to impact the pre-payment income was 3 basis points higher than a year ago, as a result of disciplined pricing and renewal crediting rate management.

In the face of a challenging interest-rate environment, second-quarter sales held up pretty well at $326 million, versus $354 million in the first quarter. We do expect sales in the third quarter to be lower given the interest-rate environment. Operating expenses, reflected cost associated with the developing of our new variable annuities of Symetra True VA.

Turning to income annuities on slide 8, operating revenue was $106.5 million, up from a $102.7 million in the second quarter 2011. Pre-tax adjusted operating income was $16.8 million up from $12.6 million, primarily due to more favorable mortality gains, and higher interest spreads. Mortality was favorable again in the second quarter 2012 with net gains totaling $6.4 million, which was up $1.5 million year-over-year and up $1 million on a sequential quarter basis.

In the current quarter, the net gain was driven by several large tasks. We expect mortality gains and losses to fluctuate from quarter-to-quarter and to be near neutral to earnings over the long term.

Income Annuities based interest spread was 59 basis points, a 9 basis point improvement from second-quarter 2011. We continue to invest excess cash flows in superior yielding, commercial mortgages that we originate.

And in the second quarter, we funded loans that spreads over treasuries of 377 basis points. And the performance in this portfolio remains quite good. We invest in equities and REITs to support the longest sales reserves in this segment. The equity and REIT portfolio totaled 385.4 million of assets on which we give up investment income operating earnings in exchange for non-operating net realized gains and losses.

For the second quarter, our equity portfolio had a total return of negative 4.9% compared with negative 2.8% for the S&P 500 total return index. And the total return on our REIT portfolio was 1.5% for the second quarter versus 1.6% earned by the benchmark index.

On slide nine, the life segment contributed $113.3 million of operating revenue, up from $111.6 million in the second quarter 2011. Life produced pretax adjusted operating income of $13.2 million down from $17.3 million in the prior year period.

Individual life claims were $3 million higher in the second quarter of 2012 than in the same period last year. Life results also reflected higher administrative expenses associated with the build out of the Life division team, the opening of our Boston office and the on-boarding of our new BGA distribution partners.

Turning to our investment portfolio on slide 10, a $27 billion portfolio is primarily invested in investment grade and fixed maturity bonds. Pretax impairments in the second quarter increased to 9.4 million, largely due to a write down on a holding that we had year marked for sale and have subsequently sold in the early part of the third quarter.

We ended the quarter at $1.2 billion of unrealized gains in our AOCI.

In the second quarter, commercial mortgages grew to 10.5% of our total invested assets and we still have capacity to add to the commercial mortgage portfolio particularly in the Income Annuities segment and we continue to see attractive opportunities in this asset class.

Moving to Slide 11, given the record low interest rate environment, we updated our analysis of the impacts to Symetra of low interest rates for the next several years. The key takeaway is our expected reinvestment is about the same as – what we assess that to be nine months ago.

As I’ve discussed in previous earnings call, we work diligently to tighten our asset, liability, cash, manage in an effort to minimize reinvestments. Both our annuity areas representing $17.6 billion of assets are very tightly managed and we expect less than $50 million of reinvestment a year through the end of the year or end of 2014 in each of those segment portfolios.

Due to the nature of investment strategies supporting our BOLI business, we do expect higher reinvestments here averaging less than $350 million a year through the end of 2014. Our surplus portfolio holds the assets supporting the capital of the company. We expect about $250 million a year of reinvestment in this portfolio.

In all of these portfolios, we are investing in commercial mortgages to help protect yield. In addition, we are diligently managing our margins by pricing with discipline and renewal rate resets. This level of reinvestments is inline with previous estimates, but subject to change if there are adverse changes in monetary policy and significant increases in the level of corporate refinancing activities.

On Slide 12, we illustrate how effective matching of asset and liability cash flows have produced stability in interest spreads on our annuities over the past nine quarters.

With that I’ll turn the call back to Tom.

Thomas M. Marra

Okay. Thank you, Margaret. As we’ve done each quarter, I’ll review briefly the progress we’ve made towards achieving our broad diversified objectives.

Turning to Slide 13, we recap by division. In benefits, the buildout of our Group Life and DI capabilities is essentially complete with the implementation of our new claims and absence management system. In my view, the Life and DI buildout has extremely well and I believe that this will help us deliver differentiated service to our middle market corporate claims.

The big news in retirement was the introduction of True VA. We are existed about this new product, though we're realistic in our expectation for sales, which we expect will ramp up gradually. For Individual Life, my view is it remains a very comparative market, as such we expect Individual Life sales to remain sluggish for at least the remainder of 2012. We’re of course maintaining our discipline in all of these areas.

Finishing up with Slide 14, we look again at 2012 sales target for grow and diversify initiatives. The first goal is to hit $25 million in group life and disability sales this year. Through the first six months we’ve posted $6.5 million, but we’ve always expected it to ramp up in the second half and therefore, we expect to meet the $25 million in [2000], but it will be close.

For the retirement division, sales to date are squarely on track. In the low interest rate environment, we expect Fixed Index Annuity sales to slow. But we are looking for True VA to pick up gradually throughout the remainder of the year and particularly contributed to the fourth quarter. So we believe, we’re on track to achieve $250 million in 2012 sales of FIA and VA products.

For the life division, the fact is that we did not expect to reach our goal of $25 million in sales unless of course, we’d write a few large COLI or BOLI cases. As I explained, we need to fill out our individual life product offering and expand our distribution to drive meaningful sales and I’m personally diving in to lead these efforts.

So to conclude, our financial results for the second quarter and through the first half of year were good. And we are pressing hard to deliver on our growth initiatives in this second half of 2012 and into 2013.

Okay, Marie, let’s please open up the call for questions.

Question-and-Answer Session

Operator

Okay. Thank you. So ladies and gentlemen, your question-and-answer will now being. (Operator Instructions) And we have our first question in the queue and it’s coming from the line of Jimmy Bhullar from JPMorgan. Please go ahead.

Jimmy Bhullar – JPMorgan

Hi, good morning. I have a few questions. First on your stop-loss sales, they’ve been strong, I think group sales were up 52% in the second quarter, what’s the – and the markets are going, but not in that rate. So just what’s enabling you to gain share in the market and how you see the pricing environment? And then any comments on the initial reception of the new True Variable AnnuitySM product? And finally, your expectation for the tax rate, I think you expect it to be lower than before, but is the 24.8% in the second quarter ongoing?

Thomas M. Marra

Thanks, Jimmy. We will take it in order. So, Michael will do medical stop-loss sales, Dan will do the VA, and then Margaret will do the tax rate. Go ahead, Michael

Jimmy Bhullar – JPMorgan

Sure.

Michael W. Fry

Good morning, Jimmy. This is Michael. Thanks for your question. Yeah, we are very pleased with the sales results that we achieved in the second quarter. Again, to reiterate, this is a business that we focus on bottom line profits, but having said that, we are thrilled with the sales that we’ve achieved. All the business that we did right this quarter, I’m confident that the pricing does meet our profit targets. But I tribute the increased sales in the quarter really to the strong relationships my sales force has with our benefit brokers probably the average tenure of my sales reps and their physicians are probably close to 15 years. They’ve been doing this for a long time. And I think the strength of those relationships in addition with there being just a favorable market for self funding employee benefit plans really helped us out this quarter.

Daniel R. Guilbert

Good morning, Jimmy, this is Dan. In terms of the True VA, as Tom mentioned, we launched this towards the end of the second quarter, and so we are in the process now of building distribution. With that said, we have hired some great wholesalers with great experience and relationships. We're getting some good feedback. And we’re optimistic that we can get the ramp up that Tom mentioned in the third and fourth quarter. So we will see this build throughout the year, and we think this will contribute towards the overall retirement to go up $250 million.

Beyond that I’d also comment on the VA market in general. We’ve been looking at this for a long time, we’ve been evaluating it for a longtime. And at this point, we’re confident in starting to build a product that would more or like to be a 2013 product. We are – when you look at the VA market and we have talked about this before, the living benefits is not a place we’re going to play. That said, we do think there is plenty of opportunity to build a commissionable product that’s not living benefits space, would have other forms of benefits and again a strong investment lineup. So in addition to Ture, we see us really moving forward more broadly into VA space.

Margaret A. Meister

Hi, Jimmy, this is Margaret. With regard to the effect of tax rate, we dipped all the way down to 23.7 in the second quarter. It’s better to look at our effective tax rate on a year-to-date basis, which is just under 25% to get a view of what we think the full-year is going to be, so I’d say 25% is a better number if you’re looking forward.

Jimmy Bhullar – JPMorgan

Okay, thanks.

Thomas M. Marra

Thanks, Jimmy.

Operator

Okay, thank you. And our next question comes from the line of Chris Giovanni from Goldman Sachs. Please go ahead.

Chris Giovanni – Goldman Sachs

Thanks so much. Good morning. Margaret, question for you in terms of recalibrating the low interest rate environment and sorry if I missed this. I think last year, in the third quarter, you talked about the impact on statutory cash flow testing. And I think at the time, you said at a 2% 10-year, the impact would be roughly $50 million or so, curious again as you recalibrated what the impact of that would be today?

Margaret A. Meister

Okay, good question. So last year we did when we talked about cash-flow testing for the first time, we gave a range of what we thought we would do with our cash flow testing and subsequently we actually did put up $60 million of cash flow testing reserve. Now we are stepping back and clearly will be watching this as we finish off the year. It’s really going to blow down to what price assessment of future interest rates and if there is any action that says that we are going to be at these levels definitely for some known period of time.

At this point we are not thinking that we need to put up more cash-flow testing reserve but we have to watch that overall environment, for the remainder of the year before we can absolutely say. Again I wouldn’t’ think if we had to put up additional – it wouldn’t be in the same magnitude as what we did last year.

Chris Giovanni – Goldman Sachs

So are you saying you don’t think you need to put up additional reserves at this point of time because you don’t need, because you don’t think you need to reset your longer term yield assumption or is that something different.

Margaret A. Meister

That’s correct, I mean one of the things we looked out last year was assuming you were in a 2% environment and stay in that kind of environment fairly prolong period, what was the reserves needed. Now stepping back in the plain judgment, do we think we are going to be in 141, 150, 10 year treasury environment for 25, 30, 40 years unless we hear something that says that would be our whole view. I don’t think that will be how we determine reserve adequately.

Chris Giovanni – Goldman Sachs

Okay and then at the time, I think you said this would be just sort of the one time hit with the 2% yield assumption that’s still the right case, right?

Margaret A. Meister

That’s correct, that’s correct. So we did the $60 million, we established that on a permanent basis. That reserve is in our system and it’s just kind of grow with some interest overtime. So there is a little bit of muting of our statutory earnings about a couple of million of interest on that $60 million that other than that the one-time big hit with the $60 million in itself.

Chris Giovanni – Goldman Sachs

Okay. And then related to the stop-loss business, could you just comment in terms of what you are seeing from competition and kind of where you think we are sort of in this cycle for this business line?

Michael W. Fry

Yeah, Chris, this is Michael. We – given the sales that we had in the second quarter, I’d say that the rate environment is pretty stable. I do think there has been a little bit of a flight to quality in the marketplace where we are seeing more business opportunities. I think Symetra is offering in terms of our services and our product is being really recognized by the marketplace and I think we’re the beneficiary of that. So right now, I’d say it’s pretty stable, in terms of pricing, I’m not seeing any deterioration at all at this point.

Chris Giovanni – Goldman Sachs

Okay. And then lastly just on the capital position, which built in the quarter, obviously I think some of your sales initiatives have been a bit lower than you originally expected, so I assume you are not using as much capital as you expected. So what are the plans I guess for the incremental capital that isn’t being put to work for the growth initiative?

Thomas M. Marra

Yeah, we are staying where we were on the last call or like I said in the fourth quarter call, we said that we are not planning to do a buyback, we do think that organic is the proper and – most appropriate first place to go there I wish sales were stronger and using that capital, but we have to maintain a discipline, and we’re doing that.

Secondly there are acquisition opportunities and certainly we clearly said that in the benefits group, benefits areas and the individual life areas, it would be in a market working for them. So we think that is the proper way to go and so we continue to look at it in that order organic, then acquisition and if we change our mind, we’ll let you know in terms of shareholder actions we might take.

Chris Giovanni – Goldman Sachs

Okay, thanks so much.

Operator

Okay, thank you. And our next question comes from the line of John Nadel of Sterne, Agee. Please go ahead.

John M. Nadel – Sterne, Agee & Leach, Inc.

Hi, good morning everybody.

Margaret A. Meister

Good morning.

Thomas M. Marra

Hi, John.

John M. Nadel – Sterne, Agee & Leach, Inc.

So, two follow-ups and sort of related to Chris’s questions, I guess if I use 400% risk based capital is a reasonable base line target, and I am not sure that’s right or wrong. But if we use that as a target, I estimate that you’ve got somewhere between $350 million and $400 million of deployable capital or excess capital. In your outlook Tom, about how much of that are you estimating you will be able to deploy to support organic growth, let’s say over like 12 months period.

Thomas M. Marra

Okay, John actually, RBC is used by Moody’s of course but it’s not our limiting factor right now. So we’re really looking at other rating agencies as the driver of our capital management. So we’re concerned to that this RBC kind of mantra or utilization kind of industry wide may not be the right way to look at it certainly not for us, where we have to – we have to manage to all of the rating agencies. We are stable in our position and feel good about our debt position, obviously our discipline I think is noteworthy and being noted by the agencies, but I wouldn’t just look at RBC.

John M. Nadel – Sterne, Agee & Leach, Inc.

Okay.

Thomas M. Marra

Let me…

John M. Nadel – Sterne, Agee & Leach, Inc.

Just as a quick – Tom, just as a quick follow then I mean recognizing we don’t have access to some of the other rating agency models and maybe some of the other inputs that they make, if $350 million to $400 million of deployable capital is wrong, is the wrong way to think about it, as an outsider looking in, what’s a better estimate then in your view?

Thomas M. Marra

Well, I don’t think we're going to want to get into a quarterly tally of that. I would just say that in our capital management order, organic then acquisition then finally capital, we feel that we are being prudent to follow in that order and not to do anything that’s going to reduce capital like a buyback.

John M. Nadel – Sterne, Agee & Leach, Inc.

Yeah, understood.

Thomas M. Marra

Margaret is waiting to jump in. Why don't I have her add color? She will probably do a better job than I just did. Thank you.

Margaret A. Meister

So, John, I agree with Tom. First of all, the rating agencies are the constraining factor, so they are driving us to a higher overall RBC level. The other is, though, that we have the capital to support the growth initiative that we put out in front of ourselves. And we are looking at that more than just a six months or 12 months horizon. We’re wanting to look at it from the perspective of over the next couple of years as all of these initiatives have had enough time to be out in the marketplace and start consuming the capital, are we going to still be able to maintain or improve our ratings and support good growth in those new initiative. And when we look at it from that perspective, we will gradually see a drawdown on capital ratios whether you’re looking at the RBC or at various rating agency models, but at the same time, we expect to see our ROAs improving with the grow and diversify initiative are getting traction over 2013 and ’14.

John M. Nadel – Sterne, Agee & Leach, Inc.

Okay. I was just trying to get a better sense for – about how much of a runway, about how long a runway in terms of number of years or some sense before, based on your outlook and your expectations for growth before you’d be essentially deploying all of that capital? Is that sort of a two-year period or is it a five-year period, I’m just…?

Margaret A. Meister

Yeah, I mean when we look at things with a three-year look forward. And when we last were looking at it, and of course we’ll be doing more of that as we finish out this year. We were starting to see ourselves kind of get to a crossing over point at that three-year, four-year horizon.

John M. Nadel – Sterne, Agee & Leach, Inc.

Okay, that’s helpful. And then one last follow-up, so maybe another way of thinking about trying to quantify what your appetite might be. Tom, if you had a deal in front of you that was – of sufficient size, or I guess let me put it – let me ask it differently, how big of an acquisition do you think you’d have the capacity to do?

Thomas M. Marra

Well, it’s just on – you mean just on our own, with our own capital or…

John M. Nadel – Sterne, Agee & Leach, Inc.

Yeah.

Thomas M. Marra

Okay.

John M. Nadel – Sterne, Agee & Leach, Inc.

Without sacrificing ratings, assuming ratings are important to you and it’s a deal that would fit your business mix?

Thomas M. Marra

It’s somewhere in the 100 million range John, we could swallow and not have it impact us, quite obviously when you do a deal the rating agencies look at the value that the deal brings to the overall company.

John M. Nadel – Sterne, Agee & Leach, Inc.

Certainly.

Thomas M. Marra

And so that’s it’s not just the three ratio again, but that’s how we look at it.

John M. Nadel – Sterne, Agee & Leach, Inc.

Understood.

Margaret A. Meister

Going back to what we did last year that was accretive right out of the sheet, if you’ve got a deal like that that’s very helpful.

John M. Nadel – Sterne, Agee & Leach, Inc.

Understood thanks you that’s all very helpful.

Thomas M. Marra

Thanks John.

Operator

Thank you and our next question comes from the line of Steven Schwartz from Raymond James. Please go ahead.

Steven Schwartz – Raymond James

Hey, good morning everybody.

Thomas M. Marra

Good morning.

Steven Schwartz – Raymond James

Hey, I got a few here, the first and foremost I do want to ask, if there is anything new regulatory wise vis-a-via the any IC

Michael W. Fry

Hi, Steve this is Michael.

Steven Schwartz – Raymond James

All right.

Michael W. Fry

Nothing really new obviously the recent news in terms of continuing to support healthcare reform movement that was certainly something we were watching but bottom line for us that business is usual we’ve been very diligent in terms of making sure we were prepared for that and I’m glad that we are, so I think we’re in a good position to move forward. With regard to the NAIC they are talking about putting some guidelines in place that might restrict smaller employers from self funding that’s something we’re obviously watching as well, but I’ll remind you that our average client is above 1,000 lives and our average [deduct] on our block is like 200,000. So even though we’re watching that because we’re a leader in this market, if that would come to fruition it’s really not a big threat for our current block of business.

Steven Schwartz – Raymond James

Okay. That’s what – I wanted to make sure it was still below your threshold.

Thomas M. Marra

Yeah, (inaudible) Tom, just to jump out, medical stop-loss is I think such an important and needed product in society. We think the industry is going to do well, just simply for the fact that it’s very valuable, self-insurance options for companies is just – it is a way or maybe the way that they’ll actually offer these kind of benefits to their employees. So I think the industry will prevail in this regard, but as Michael said, even if there is some negative the impact of Symetra would be minimal, but I like the industries chances on this.

Steven Schwartz – Raymond James

Okay. And then a couple of more, you did the lift-out of the Massachusetts Life team. And I guess I’m trying to think about this within the grow and diversify framework, is this – the cost associated with that, was that included in the $0.05 and is this really kind of a – I don’t think it was foreseen, but I guess you spent it now as opposed to spending it later, building it up?

Thomas M. Marra

Yeah, it was a rare opportunity, Steve. I mean, this is – these are the (inaudible) on Life team, professional team, and they are highly capable and were available, and I think keeping them together as a group preserved their culture and some of their working relationships. So it really advances our capabilities and yes, so we're very pleased with the Waltham, Mass. group and I think they are going to be very helpful to our success in Life going forward. And yes, it is in the $0.05.

Steven Schwartz – Raymond James

It was in the $0.05.

Thomas M. Marra

Yeah.

Steven Schwartz – Raymond James

Okay, and then Margaret you mentioned partnership returns in Income Annuity, I was wondering if you can give us some numbers on that?

Margaret A. Meister

I think in the Income Annuities I talked about our equity portfolio performance which was under the S&P 500 and it’s mostly driven by really where is our mix of investments versus where was the performance in the S&P per say, we are a little underweighted in the IT and industrial. So we kind of missed out on some of the return there.

In our other segment, I did say that our investment income was down, we do have some alternative investments of pretty small amount that was not – I’m not disappointed with the performance, relative to what we had in the second quarter of last year was a little less performance on that part of our portfolio.

Steven Schwartz – Raymond James

Okay. So I was thinking about other than – and okay, so would you consider the performance in the quarter normal or less than normal?

Margaret A. Meister

A little less than normal, nothing notable, but it’s kind of stood out versus second quarter of last year which was a decent quarter for that small part of our portfolio.

Steven Schwartz – Raymond James

Okay. Thanks a lot.

Operator

Okay. Thank you. And our next question comes from the line of Jeff Schuman from KBW. Please go ahead.

Jeffrey R. Schuman – Keefe, Bruyette & Woods, Inc.

Thanks. Good morning.

Thomas M. Marra

Good morning, Jeff.

Jeffrey R. Schuman – Keefe, Bruyette & Woods, Inc.

Tom, I was wondering if you could talk a little more about the outlook for ramping the life sales, I mean it seems like there are couple of issues, one is just the market conditions and the competitive conditions are ideal and then it sounds like the second issue as you are looking to improve your execution, or made some leadership changes, I think you guys are getting more involved. I guess I’m wondering, is this solvable or are the marketing competitive conditions maybe just not right now, it’s really pushier?

Thomas M. Marra

Yeah, Jeff, it’s not easy. The easy thing to do – we’ve declined, is to sell a very low minimum premium, no lapse guarantee UL, that's what is selling out there. It's got awful interest rate risk and we've just made a firm decision we're not going to down that path, that's a headwind in a big, big way, but I think we're building a good team, we’re gaining relationship, we've got all the institutional relationships in banks and we expect to add broker dealers, we think that will be an area of focus and the BGA is at large – is the current path, and yeah I'm jumping in there. I’ve taken control of the division directly.

I won’t do that forever, but I am not in a hurry right now to find a replacement, I’m going to get in there and figure out and it is a tough market for us that’s the way we apply this discipline. But I'm in there and I'm going to plug away and I think there are obviously I mean I'm optimistic that we will find happiness, where we can be successful, within the realm of what determine success for a company of our size. I think that's doable while staying discipline, but you know I've got to get in there and work with the team – it’s great team and try to figure this out, that's what I am doing.

Jeffrey R. Schuman – Keefe, Bruyette & Woods, Inc.

Yeah, I think you touched on this to some extent, but I guess, part of what I am wondering is, if conditions are that difficult, what is the incremental return from you pushing there as them, may be you pushing even harder on some of the areas where the headwinds are quite too severe?

Thomas M. Marra

Well, I mean it's within the industry, that seem to be headwinds are pretty much in both retirement and like because, interest rates are low and that's going to affect the retirement side, we think the VA way with non-living benefits is the our way to apply that, I actually think the group benefits were all – it’s pretty good place to play. And I am so pleased that we took the initiative to bring the group life and disability team in place. You may not be thrilled with the results through the second quarter, but I can tell you that, this is right on track, and it’s an awesome team. And we’re going to be successful there. And then individual life is a place where we – I feel we need to play. I think we have to have three successful divisions and I am not in the mood to pawn on any of them, I’ll make them all work.

Jeffrey R. Schuman – Keefe, Bruyette & Woods, Inc.

Okay, thanks for that. And I wanted to go to Margaret and this is something you may have covered before and I apologize, but I guess I need to refresh here. The commercial loan strategy obviously is important lever to manage the rate exposure. Have you articulated for us what the caps or feelings are on your ability to go to that asset class, and where do you stand now?

Margaret A. Meister

So right now, we’re at 10.5% of our portfolio. And now, I’ve articulated before mid teens, so we have plenty of room for this asset class. In particular where in the income annuities portfolio pretty much, any free cash flow and as you can see it’s a pretty price amount of free cash flow being generated there. We’re able to use that asset class, so we feel good about it and frankly it’s – I’ll look at it as coming over the next several years. It’s more about can we make sure that we’re getting good underwriting versus I am not going to hit my feeling.

Jeffrey R. Schuman – Keefe, Bruyette & Woods, Inc.

Okay. And in terms of spreads, I think kind of remaining at levels that are attractive and any sense of that dynamic could change.

Margaret A. Meister

Spreads have held up remarkably in this asset class. So again, we’ve achieved over 370 basis point spread through the comparable treasury, we were at some – one point over 400 basis points, but still compared to other asset classes being in the high 300s is really good. And we think that that’s going to hold up, it might come down a little bit to 370, but still comparatively speaking it seems to be a class that’s holding its own on a yield basis.

Jeffrey R. Schuman – Keefe, Bruyette & Woods, Inc.

Okay, great. It was helpful. Thank you.

Thomas M. Marra

Thank you, Jeff.

Operator

Okay, thank you. (Operator Instructions) Now we have another question and it comes from the line of Humphrey Lee from UBS. Please go ahead.

Humphrey Lee – UBS

Good morning, everybody.

Margaret A. Meister

Good morning.

Thomas M. Marra

Good morning.

Humphrey Lee – UBS

I was just looking in the press release and you mentioned the 2012 EPS guidance of $1.35 to $1.50 is reaffirmed. But then, since the tax rate is lower at 25% probably for the rest of the year versus your original guidance of 29% to 30% as mentioned back in December. So are you implying for the second half of this year could be more challenging than expected and if so what are the drivers?

Margaret A. Meister

Actually when we did put out this guidance, which was an increase from the original 2012 guidance, we did say that we expected a favorable full-year 2012 effective tax rate. So that was part of how we put that out there. So now we are not saying anything with regards to it. The other thing is that when we put out this new guidance, which was a $0.10 increase, we wanted everyone to realize that we expected the last part of the year, second quarter and the second half of the year to be where we saw the bulk of our grow and diversify expense coming in and that – so that is actually showing up as expected.

Humphrey Lee – UBS

Okay, got it. And then in terms of income annuities, there is single premium income annuities those were really good, and then I think pretty driven by those shorter duration product. What percentage of this sales were actually for this product and what do you think the – it’s going to be for the rest of the year

Daniel R. Guilbert

Yes, morning Humphry this is Dan. In terms of income annuities as you mentioned we did have strong what we call period certain sales. This is a product that we really like the cash-flows are much more short dated and we’ve a much better asset liability match with this product. And so we really like this product, hope that 70% of the sales was second quarter actually period ceratin. So we see this is a really good opportunity and something like can take a look at going forward we’ve create some great marketing programs here and so we think we can help our partners.

Humphrey Lee – UBS

Okay, got it, thanks.

Operator

Okay, thank you. And our next question comes from the line of Ryan Krueger. Please go ahead.

Ryan Krueger – Dowling & Partners

Hey, good morning. And a question on the spreads in income annuities based, (inaudible) uptick this quarter, I was wondering how sustainable you think that is, if you continue to get the same type of spreads in your commercial mortgages, but rates also remaining at these types of level.

Margaret A. Meister

While we did see an uptick in the spreads in the quarter certainly the commercial mortgage strategy has helped us quite a bit as well as actually the fundamental pricing of the business that we are writing is that good spread that are helping us. The key thing here to maintaining that spread is that management of the reimbursement and again given that we cap that tight, if we can continue to find that commercial mortgages, it should be generally sustainable.

Ryan Krueger – Dowling &Partners

Okay, great. And then just wanting to get back to – I guess the capital question. You mentioned that the rating agencies are the limiting factor. And I guess I was as curious what is that they are being more cautious about the RBC ratio would suggest when it comes to your business, is it stressing the investment portfolio or is it interest rates you’re just hoping to get.

Margaret A. Meister

The key thing is that they have a fundamental different view on investment portfolio and the amount of capital you have to put behind investments and that really is, they look at it based on how long are the assets, so longer assets they have singed a higher capital. And that’s a granularity that you don’t find in the RBC formula.

Ryan Krueger – Dowling & Partners

Okay. So it’s really, it’s credit risk not interest risk?

Margaret A. Meister

No. That’s correct.

Ryan Krueger – Dowling & Partners

Thank you.

Thomas M. Marra

Thanks, Ryan.

Operator

Okay. Thanks you. Ladies and gentlemen, I’d now like to hand back to Tom Marra for any closing remarks.

Thomas M. Marra

Okay. Thanks, Marie and thank you everyone. I know you are busy today. So we are just going to set you free. We thank you for your attention. Obviously, we are going to – we are sticking out at it, we will start with and always have disciple at Symetra. We have, and there are headwinds in the market, but we are attacking them and we look forward giving you an update in three months. Have a good day.

Operator

Thank you, ladies and gentlemen. That concludes the conference call for today. Thank you for joining us. And you may now disconnect.

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