demiensymetra

INVESTMENT MANAGEMENT CERTIFICATE PROGRAM May 2, 2013

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Life Insurance

Symetra

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Source: FactSet Prices

Key Drivers:

Low Interest Rate Environment: The majority of Symetra's income is derived from the company's investments. Historically low interest rates have placed tremendous downward pressure on Symetra’s ability to invest new money coming into the company at a rate above the guarantees in its products.

Product Diversification: The “Grow and Diversify” initiative aimed to increase Symetra’s ROE by expanding the product line to more profitable products. This investment was expensive for the company in 2012 but has positioned the firm for greater profits in the years ahead.

Demographics: The aging US population requires income protection as the baby boom generation enters retirement. Annuities can be a key component to the financial security that older Americans need.

Conservative Management: Symetra’s conservative leadership manages for growth in the long term. The company insulates itself from unnecessary risks by not offering risky product guarantees and by pricing its products appropriately.

Valuation: Symetra was valued by relating its fundamental multiples to those of other insurance firms, a three stage DCF model, an analysis of comparable transactions and a computation of the residual value of the company. Symetra is currently fairly valued with a target price of $13.80. Risks: Threats to the business include economic sensitivity, credit risk on its many income investments, liquidity risk, government intervention, pricing risk and competition.

Recommendation HOLD

Target (today’s value) $13.80

Current Price $13.34

52 week range $10.77- $14.00

Share Data

Ticker: SYA

Market Cap. (Million): $1,576

Inside Ownership 6.0%

Inst. Ownership 94.1%

Beta 1.25

Dividend Yield 2.2%

Payout Ratio 19%

Cons. Long-Term Growth Rate 5.9%

‘10 ‘11 ‘12 ‘13E ‘14E Revenue (billions)

Year $1.9 $2.0 $2.1 $2.2 $2.3

Chg 9.6% 6.4% 5.1% 4.9% 2.2%

Cons - - - $2.1 $2.1

EPS

Year $1.48 $1.45 $1.49 $1.40 $1.53

Chg 28.9% -2.0% 2.5% -5.7% 8.9%

Cons - - - $1.38 $1.47

Ratio ‘10 ‘11 ‘12 ‘13E ‘14E ROE (%) 7.8 5.2 6.1 5.1 5.2

Industry 10.4 10.0 7.8 9.4 9.9

NPM (%) 10.7 10.0 9.8 8.5 8.7

Industry 9.0 9.0 6.9 13.6 9.4

A. T/O 0.08 0.07 0.07 0.07 0.07

ROA (%) 0.8 0.6 0.7 0.6 0.6

Industry 0.8 0.8 0.6 1.0 0.7

A/E 10.22 8.12 8.53 8.12 8.12

Valuation ‘11 ‘12 ‘13E ‘14E P/E 6.2x 8.7x 9.9x 9.6x

Industry 6.6x 8.7x 8.7x 7.7x

P/S 0.6x 0.8x 0.7x 0.8x

P/B 0.4x 0.5x 0.6x 0.7x

P/CF 0.1x 0.1x 0.4x 0.3x

EV/EBITDA 3.3x 4.9x 7.9x 7.0x

PEG 1.7x 1.6x 1.7x 1.6x

Performance Stock Industry 1 Month -0.8% 1.6%

3 Month -4.3% 7.7%

YTD 1.9% 17.4%

52-week 8.4% 22.3%

3-year -2.0% 28.2%

Contact: Kent Demien Email: [email protected] Phone: 414-665-2771

Analyst: Kent Demien

Summary: Symetra is currently fairly valued with a target price of $13.80. The company benefits from a strong balance sheet, long-term focused and conservative management and favorable demographic trends for its annuity product lines. The company faces challenges as well. Most notably is the low interest rate environment which reduces the return Symetra can earn on its investments relative to the guaranteed rates on the company’s inforce policies. Symetra currently is struggling to increase its return on equity to bring it in line with that of its competition.

mailto:[email protected]?subject=Symetra%20Report


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Company Overview Symetra is a life insurance company based in Bellevue, WA. Although company operations date back to 1957, the company became publicly traded on January 22, 2010. Symetra is a market leader in medical stop loss insurance and is in the top 25 in market share of ordinary individual annuities (SNL Financial, 2012). The company offers group life insurance, group disability benefits, BOLI and COLI to middle market corporations. The firm also sells universal life insurance, fixed deferred indexed annuities, variable annuities, deferred annuities, term insurance and immediate annuities to individuals through arrangements the company has with banks, benefits brokers, brokerage general agents and fee-based investment advisors.

The largest component of Symetra's revenue is from the company's investments. While the life insurance industry as a whole derives about 30% of its revenue from investments, Symetra obtains a far larger percentage of its revenue (61%) from the company’s investments. For annuities, Symetra generates revenue from the interest rate spread between investments and the guaranteed interest rate offered in its products. The company's revenues derive from the following sources:

Premiums: Payments to the company by the policyowners of medical stop-loss policies and life insurance policies.

Net investment income: Income earned by the company’s investments net of investment expenses. Prepayments on bonds or mortgages held by the company are also included in net investment income.

Policy fees: Cost of insurance charges, policy fees and other contract charges on life insurance policies and surrender charges on annuities.

Net realized investment gains: Income derived from gains from the sale of investment assets, changes in portfolio fair value and impairment losses.

Source: Symetra 10k Source: Symetra 10k

Figures 1 and 2: Revenue Sources of Symetra at year-end 2012 (left) and revenue growth rate (right)

Net investment income 61%

Premiums 29%

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9%

Net realized investment gains 1%

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Business Drivers Though several factors contribute to Symetra’s future success, the following are the most important business drivers:

Low interest rate environment

Grow and Diversify Initiative

Demographics

Conservative Management

Distribution System

Low interest rate environment Nearly from the moment that CEO Thomas Marra started his job at the head of Symetra in June of 2010, he spoke of the need for Symetra to expand its product line into less interest rate sensitive products (Symetra 2Q 2010 Earnings Webcast, 2010). Almost three years later, it is doubtful that he could have envisioned how low rates would go. The majority of Symetra's income is derived from its investments. Symetra generally holds its investments until maturity. Gains and losses on its portfolio due to interest rate fluctuations are generally not realized. However, every year old investments at higher interest rates mature and must be reinvested at lower rates.

To determine if Symetra is taking larger risks in its investments than the firm’s competition, I analyzed investment risk information from the 10k of Symetra and as the company’s eight closest competitors. I first compared the duration of Symetra’s investments with the investment duration of other insurance companies. Symetra has a proportionately high amount of mortgage backed securities in its portfolio relative to other companies in its industry. Symetra’s CFO considers this a relative strength as the MBS asset class has been out of favor since the recent housing bubble. As can been seen from Figure 4, Symetra’s exposure to long-term assets is relatively mild when compared with the risks that other companies in the insurance industry are taking. With the exception of Primerica, Symetra has the lowest percentage of its fixed maturity investments with duration over ten years of any of the life insurance companies I investigated.

Over one

year throughfive years18%

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MBS 13%

Commercial MBS 7%One year or less 2%Other asset-backed securities 2%

Figure 3: Duration on Symetra's Investments: Mortgage Loans (left) and Available for Sale Securities (right) as of December 31, 2012

Source: Symetra 10k

99% of Symetra’s investment assets have a duration to maturity of more than 1 year.

Source: Symetra 10k

Over one year through

five years 7%

Over five yearsthrough ten years50%

Over ten years 42%

One year or less 1%


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Mortgages held by the company or backed by mortgage securities suffer from prepayment risk as rates drop lower. In the first quarter of 2013, Symetra had $11.7 million in prepayment income compared with $5.5 million in the first quarter of 2012 and $8.3 million in the fourth quarter of 2012. Governmental programs such as HARP (Housing Affordability Refinance Program) could result in large numbers of homeowners refinancing to lower rates. This has the unfortunate effect of forcing the company to replace higher interest bearing investments with lower ones. To mitigate the lower returns on investments due to the lower interest rate environment, Symetra has expanded its use of commercial mortgage loans that offer attractive yields. However, it can be difficult to find enough quality loans suitable to Symetra's tough underwriting standards. Also, such loans are less liquid (and are therefore more risky) than other fixed maturity securities.

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SYA LNC MET PFG PL PRU PRI FFG AELDue in one year or less Due in one year to five yearsDue in five years to ten years Due after ten yearsMortgage-backed securities

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Figure 4: Percentage of fixed maturity investments by duration in the life insurance industry as of December 31, 2012

Source: Company 10ks

Figure 5: Percentage of fixed maturity investment grade holdings in the life insurance industry as of December 31, 2012



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In addition to the examination of the duration of Symetra’s investments, I also compared the default risks that Symetra takes on its investments relative to the default risks of its competition. Figures 5 and 6 show that with the exception of Met Life, FBL Financial and Principal Financial Group, the default risk on Symetra’s investment portfolio is as safe or is safer than other insurance companies.

The prevailing interest rates also impact the discount rate on reserve liabilities. In 2013, the rate on statutory reserve liabilities for life insurance dropped from 4.0% to 3.5%. This will increase the cost of insuring all life insurance from 2013 forward. This can be a problem for products that were priced under a 4.0% statutory reserve assumption. Annuity rates have also declined. As of 2012, the statutory valuation interest rate on immediate annuities is 4.25% down from 5% in 2011 (Towers Watson, 2012). Symetra’s cash flow testing in the third quarter of 2011 showed a need to bolster reserves by $60 million. This was a one-time only step up in reserves (Symetra 2Q 2012 Earnings Webcast, 2012). A period of sustained low interest rates could have impacts on other balance sheet items as well. It is possible that Symetra will have to reassess its DAC assets if rates remain low for a significant length of time. Additionally, GAAP accounting requires that investment assets be marked to market while liabilities are valued at historic cost. Therefore, the decline of interest rates has resulted in Symetra's long-term asset valuation and book value to increase at the same time as its ROE has decreased. This has resulted in Symetra's price to be below its GAAP book value which is rare historically (White Mountain 10k, 2011). In addition to increased reserve costs and lower returns from investments, the low interest rate environment has had an impact on product sales. Deferred annuities are a more difficult sell when rate guarantees are so low. To keep the single premium life (SPL) product profitable, the company had to lower sales commissions. In turn, it is expected that SPL sales will decline. Despite volatility in interest rates, Symetra has done a good job maintaining a stable interest spread on its UL, deferred and fixed annuity products (see Figure 7.) While spreads have narrowed in the industry, the company maintains a relatively flat interest spread on the two annuity products by effectively matching assets and liability cash flows. Even the spread on universal life is relatively flat

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SYA LNC MET PFG PRU FFG AEL

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Figure 6: Percentage of fixed maturity holdings below investment grade in the life insurance industry as of December 31, 2012



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when compared the yield on the 10 year US treasury. Asset and liability matching helps to immunize the company to interest rate risk on its annuity products.

Not all companies manage interest rate risk like Symetra. Companies are exiting interest rate sensitive products en masse. Many products have minimum guarantees that are internal to the product or mandated by the government that squeeze margins when interest rates remain low. Products like long-term care (LTC), BOLI, single premium life, term insurance, universal life (UL) with secondary guarantees as well as variable annuities are all being closed down or the product lines are being sold. Hartford Financial Services Group Inc., Sun Life Financial Inc. and Genworth Financial Inc. exited the variable annuity market. Unum Group, Berkshire Life Insurance Co. of America, MetLife and Prudential have stopped selling LTC (McMillan, 2012). For the interest rate sensitive products that are kept, sophisticated hedging programs are being explored to try to mitigate the interest rate risk. In 2011, MetLife reported that its earnings in 2012 would be unaffected even if the 10 year treasury rates remain low in 2012 due to its risk hedging practices. (McMillan, 2012)

Before 2012, Symetra's stock price was heavily influenced by the easy money policies of the Federal Reserve. The Fed's bond purchasing programs, intended to drive down rates to lower the cost of borrowing to get the economy jump started, had a massive impact on Symetra. In 2011 alone, Symetra's stock price showed over a 95% correlation with the 30 year treasury rate and over a 92% correlation with the 10 year treasury rate (see Figure 8.) Given the data from 2011, the regression shows a 95% confidence interval of about a $2.85 to $3.01 decrease in stock price for every 1% drop in the 30 year treasury rate (highly significant at p-value < .001).

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Deferred Annuities Income Annuities UL 10 Year Treasury

Source: US Treasury, Company Reports

Figure 7: 10 Year Treasury Rate, UL, Deferred and Fixed Annuity Interest Rate Spreads

The spread earned on Symetra annuities has remained flat even in a challenging interest rate environment.

Interest rates and Symetra’s price were highly correlated in 2011


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The interpretation here is that investors saw the interest rates being driven down, took the Fed Chairman at his word that rates would remain low through 2014, realized the impact this policy had on the long-term investments of life insurers like Symetra, and sold their stock accordingly. What is puzzling, however, is that the market did not stick with this line of reasoning. In 2012, with interest rates still at historic lows, Symetra's stock price rose. Investors may have become comfortable with the idea of insurance companies surviving even in an era of low interest rates.

Alternatively, perhaps other Fed actions drew their attention. The 2012 price rise came in conjunction with the Fed's so-called Operation Twist which began in September 2011 (see Figure 9) and still further with "Quantitative Easing 3" (QE3). These policies had a large impact on driving asset prices for the market as a whole (Parker, Hayes, Ortega, Gould, Neuhart, & Ba, 2013).

y = 0.3264x + 0.2151R² = 0.9572

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Source: FactSet, Bloomberg, Morgan Stanley Research

QE2

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Figure 9: Symetra's price with monetary policy

Figure 8: Symetra's price against the 30 year treasury rate in 2011

Source: US Treasury, FactSet


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Grow and Diversify Initiative

The Grow and Diversify initiative was introduced in early 2011. It was apparent to management that the low interest rate environment would linger after the Federal Reserve had announced QE2 in November of 2010. The Fed made it clear that it would continue to make purchases of government debt to help a flailing economy by driving borrowing rates down. Symetra's products are interest rate sensitive necessitating product expansion into index and variable annuities and other products with less exposure to interest rates. Research began to develop the new products in early 2011 (Symetra Financial Corporation Investor Day, 2011).

The new products added were group life and group disability income insurance to be sold to middle-market businesses. Symetra will leverage its existing corporate customers of medical stop-loss to sell these policies. The company sold $60 million in 2012 in the new products in the benefit product line which is about 10% of benefits revenue (Symetra Financial Corp. at J.P. Morgan Insurance Conference, 2013). In addition, Symetra added a fixed indexed annuity product, new universal life (UL) products, a new variable COLI product and the "True VA" variable annuity. Universal life makes up 41% of Symetra’s pretax adjusted operating income in its life segment while variable annuities comprise 4% of the account values in the retirement division. Unlike many insurance companies that sell UL and variable annuities, Symetra's new products will not expose the company to uncompensated risk (Symetra 2Q 2012 Earnings Webcast, 2012). The new UL product has a lapse protection benefit rider; however, the product is higher premium than other products that offer similar guarantees making it less sensitive to interest rates (Symetra 3Q 2012 Earnings Webcast, 2012). Likewise, the new variable annuity does not offer any living benefits in stark contrast with the industry. These riders offer customers a guaranteed minimum rate of return regardless of how the stock market performs. Many companies that sold variable annuities with such riders have exited the business such as Genworth Financial Inc. in January 2011 and Sun Life Financial Inc. in December of 2011. Other companies are increasing pricing, reducing benefits or increasing fees (McMillan, 2012).

Figure 10: Symetra’s product line breakdown (left) and revenue growth rate (right) by product as of December 31, 2012

Source: Symetra 10k

Benefits 29%

DeferredAnnuities 27%

Other 3%

Life 21%

IncomeAnnuities

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Benefits Deferred Annuities Income Annuities LifeSource: Symetra 10k


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The company projected the cost and benefit in terms of earnings per share through 2015 (see Figure 12.) Symetra spent 3 cents per share more than originally anticipated in 2012 but this is largely due to missing target sales on the new group life, group DI, universal life and variable annuity products.

Symetra's ROE has declined at a CAGR of -18.7% since the second quarter of 2010 (see the trend line in Figure 13.) However, Symetra spent 11 cents a share in 2012 building the infrastructure for the new products. Management is hopeful that with the main construction phase of the Grow and Diversify Initiative out of the way, 2013 sales results will be driven ever higher because of the

Figure 12: Estimated and Actual Impact to EPS for Grow and Diversify

Source: Company reports

Figure 11: Industry growth rates for products added or changed as a part of Grow and Diversify

Source: LIMRA

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investments made in 2012. In the 4Q 2012 earnings call, management cautiously added that the challenging interest rate environment lengthens their path to improvement in ROE.

Figure 14 is a longer-term look at Symetra’s ROE compared with that of the life insurance industry. During the financial crisis in 2008, Symetra management kept ROE more stable than the industry. However, since Symetra went public in 2010, Symetra’s ROE has lagged the industry.

Symetra priced the new products to deliver a 12% ROE or higher. To test this claim, I analyzed the segment information for annuities, life insurance and group life and DI benefits in the 10k reports of twelve competing insurers to determine if Symetra’s competition earned a 12% ROE. From the 10k

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Figure 13: Quarterly Annualized Return on Equity Including Realized Gains and Losses

Source: Bloomberg

Source: FactSet

Symetra’s ROE is declining at a faster rate than the insurance industry. However, the insurance industry’s ROE is also decreasing due to the difficult interest rate environment.

Figure 14: Symetra and the life insurance industry’s ROE and growth rates


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reports I pulled the operating income, investment income, the amortization of DAC assets as well as any expenses by segment. I also recorded the assets by segment. I gathered data for years 2009, 2010 and 2011. As of December 31, 2012, Symetra has an Assets/Equity ratio of about 8.1. This implies that a ROA of just less than 1.5% would yield a ROE of 12%. In Figures 15, 16 and 17, which plot ROA for each company surveyed for 2009, 2010 and 2011 by segment, I have highlighted the ROA = 1.5% line in bright red.

Figure 15: Life insurance segment return on assets by company

Figure 16: Annuity segment return on assets by company

Source: Industry 10ks

The red line indicates a ROA level that would yield a 12% ROE for Symetra.

Many companies fall short of a 12% ROE for annuities and life insurance.

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As you can see from the above charts, achieving a return on equity of 12% is by no means guaranteed regardless of the product line. The average is above 12% ROE for all products but that is largely due to strong investment results in just a few companies such as FBL Financial Group Inc. With the exception of group benefits, more than 50% of the insurers are below and some are well below 12% ROE for the products that Symetra added in 2012.

Admittedly, the data is noisy. For example, the life insurance segment from a competing company could contain traditional cash value life insurance. In the cases of Primerica and the Principal Financial Group, the annuities segment contained other managed assets like mutual funds. The annuities segment may also include deferred annuities even though that product is not a part of Grow and Diversify. Similarly, the benefits segment could contain other benefits like dental. Finally, I only included the company in my sample if the Grow and Diversify benefit was a major part of the segment. Demographics

The 82 million Americans born between the years 1946 and 1964 have already or will soon enter retirement. The US Census Bureau indicates that the segment of the US population age 65 or older is expected to increase from 13% in 2010 to 17.9% in 2025 and 20.2% in the year 2050 (US Census Bureau, 2010). Two large waves of retirees will hit 65 in the next 40 years (Hokenson, Global Demographics: Health Care and the Baby Boom Tsunami, 2012). While the baby boom generation will peak at that milestone in the late 2020's, a second "echo boom" will reach 65 in the late 2040's. This growing group of retirees will be seeking income solutions to replace the wages that they currently receive. Symetra sees the tremendous opportunity of these demographic waves and is working to fill this projected need.

Figure 17: Group life and disability benefits return on assets by company


It is not a sure thing that Symetra’s new products will achieve a 12% ROE

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Figures 19 and 20 display graphically the demographic change in the US population between 2012 and 2050 (Hokenson, Global Demographics: Demographics of Obama's Second Term, 2012). The baby boom generation (ages 50-54) is easy to pick out in Figure 19 as the noticeable "bump" just prior to the dramatic drop off in population numbers. The "echo boomer bump" can also be spotted in their teens and early 20's. By comparison, note the rounded shape in Figure 20 as the baby boomers make their way into late retirement and the "echo boomers" enter their late 50's and early 60's. The need for retirement fixed income is ramping up right now with the baby boomers but remains strong for the next 40 years.

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Figure 19: Total US Population in 2012 (millions)

Source: US Census Bureau



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Defined benefit plans such as pensions and cash balance plans have declined in number especially in the private sector since the 1980's (see Figure 21.) Pensions were once a major source of income for retirees. However, many people had their pensions frozen in the middle of their careers by employers who could no longer afford the required plan contributions and replaced with defined contribution plans like 401(k) plans and IRAs. Defined contribution plans transfer investment risk from the employer to the employee.

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Figure 21: Percentage of workers with a defined benefit plan between 1975 and 2009

The number of defined benefit plans peaked in the early 1980’s.

Source: US Department of Labor


Figure 20: Total US Population in 2050 (millions)

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are the only way to convert a large sum of money into a guaranteed stream of income that will last for the insured's entire lifetime. Symetra has positioned itself to get a piece of this growing income-hungry consumer base by coming out with its new variable annuity and fixed indexed annuity in 2012 as a part of the Grow and Diversify initiative.

Symetra's medical stop loss segment also stands to benefit from Americans aging. As employees increase in age, employers' health experience will deteriorate (see Figure 22.) This will make it easier to sell companies on the need to cap their risk of exposure to medical insurance costs.

Conservative Management Symetra is a conservatively run company. Management's focus is on the good of the company in the long-term. Managing this way may hurt sales in the short term, but pays dividends in the long run. Five of the nine executive officers at Symetra are actuaries including both the CEO and CFO. Such a large concentration of actuaries in management is rare (see Figure 23.) Actuarial training ensures that company leadership understands risk management and comprehends that it is a future generation that will benefit from the promises that Symetra makes to its policyowners today. The actuarial profession has a certain ethical standard increasing the probability that shareholders can trust that Symetra will not throw away money on dubious risky ventures to increase sales in the current period. Products will be priced correctly, reinsurance will be used effectively and policies will be underwritten with the mindset that it is better to have a few of the right risks than sell many unacceptable risks. Reserves are not seen as onerous expenses by company executives that are continuously dreaming up loop holes to get around reserve requirements.

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Figure 22: Percentage of household income spent on healthcare by age

Source: Bureau of Labor Statistics


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Conservative management is evident from the new variable annuity design without a living benefits rider option. The lack of the option makes the VA less competitive than other VA products in the market. Management concedes that this will hurt sales, but is willing to make that concession to avoid the costly liability of funding such a rider. The requirement that the new universal life product contain a minimum amount of cash value to keep its lapse protection benefit rider in force saves the company from added interest rate risk. Many companies that wrote UL policies with secondary guarantees that offered lapse protection even if the cash value inside the policy went to zero in the last decade may experience difficulty funding these policies in the current low interest rate environment (McMillan, 2012).

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Long term target range


Figure 24: Long-term Benefits Loss Ratio


Figure 23: Percentage of management with membership in the Society of Actuaries


17

The benefits segment has been a source of strength for Symetra. As a result of the company's conservative underwriting, Symetra has enjoyed a healthy benefits loss ratio. The past four quarters have been above the long-term target range (see Figure 24) though the average for 2012 was just above the long-term target. Management explained in the first quarter earnings report that the 2013 medical stop loss product is a couple of points underpriced which will likely result in a loss ratio that exceeds the target range of 63% to 65%. Fortunately, the medical stop loss product is priced annually so any mispricing will only impact the current year.

The benefits loss ratio is a volatile measure, but the long-term results remain within a comfortable tolerance for the original pricing assumptions. For comparison purposes, Figure 25 shows the long-term benefits loss ratio for other companies that sell medical stop-loss insurance. Over the past 6 years, Symetra has consistently had a lower loss ratio than other medical-stop loss providers.

50%

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2007 2008 2009 2010 2011 2012

SYA AMIC IHC

Source: Symetra, American Independence Corp. and Independence Holding Corp. 10ks

Figure 25: Industry Comparison of Long-term Benefits Loss Ratios

Figure 26: Symetra and the life insurance industry historical net margin

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Industry Average Symetra

Source: FactSet


18

During the financial crisis, Symetra’s net margin was more volatile than the industry average. Several managers at that time, including the CEO, are no longer at the company having left after Symetra went public. Net margin since 2010 when the current management has been installed has exceeded the industry average. The company's risk based capital ratio (RBC) as of March 2013 was 486% (Symetra Financial Corp. at J.P. Morgan Insurance Conference, 2013). This is exceptionally strong and is in line with the top insurers in the industry. Major insurers experienced RBC ratios in the 400's in 2012 (McMillan, 2012). Symetra’s capital structure is far more conservative than its industry. The company hasn’t added debt to its balance sheet since 2007. One of the reasons why Symetra has a low ROE relative to its industry is that the firm’s debt to equity ratio is small relative to its industry (see Figure 27.) Since the financial crisis, the company has had a greater net profit margin (see Figure 26) than its industry but the company’s conservative balance sheet costs it a few points in ROE relative to its industry.

Finally, as a conservatively run company, Symetra enjoys excellent ratings from all of the insurance rating agencies. The company's debt is rated investment grade or better (see Figure 28.) High ratings come at a price of tying up capital but leave a distinct marketing benefit to customers of Symetra’s product. Higher ratings also enable the company to borrow at lower rates than what otherwise would be available.

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SYA LNC MET PFG PL PRU SFG TMK UNM AFL CNO PRI FFG AEL

A.M. Best S&P Moody s Fitch

Financial Strength Ratings

Symetra Life Insurance Company A A A3 A+

First Symetra National Life Insurance Company of New York A A NR* A+

Issuer Credit/Default Ratings

Symetra Financial Corporation bbb+ BBB Baa3 A-

Symetra Life Insurance Company a+ A NR* NR*

First Symetra National Life Insurance Company of New York a+ A NR* NR*

Source: Symetra 10k

Figure 28: Symetra financial strength ratings and debt ratings

Source: FactSet

Source: FactSet

Figure 27: Insurance industry LT Debt/Equity ratios

Source: FactSet

Symetra is not using leverage to increase its ROE


19

Distribution System Symetra utilizes a variety of distribution methods to sell its product. The company competes with other financial services firms to attract and retain its sales force. The company relies on its financial strength ratings, marketing and the training it provides to its distributors to keep its relationships strong.

The company sells most of its deferred annuities and life insurance through financial institutions like JPMorgan Chase. Symetra is the second ranked company in terms of market share for fixed deferred annuity sales by banks (see Figure 29.) Symetra utilizes employee benefits brokers to sell its medical stop loss insurance, group life and group DI insurance. Symetra also retains the service of brokerage general agents to sell annuities and life insurance. Symetra is targeting fee-based financial advisors to sell the new variable annuity product.

Industry Overview

The Life and Health Insurance industry is a mature industry dominated by a relatively small number of large companies but well fragmented with over 900 life insurance companies according to the ACLI as of 2010. The largest 20 companies control 70% of the industry's total assets as of year-end 2010. The industry has been consolidating since peaking at 2,225 life insurers in the US in 1988. Standard and Poor's Industry Surveys indicate that consolidation will likely continue, "Driven by a need to offset slowing revenue growth…cut costs, and achieve economies of scale." (McMillan, 2012) The end of Glass-Steagall in 1999 impacted the industry as banks and brokerage houses started competing with the industry by selling insurance products.

Figure 29: Fixed deferred annuity market share ranking in the bank channel

Source: Symetra Financial Corp. at Keefe, Bruyette & Woods, Inc 2012 Insurance Conference

2007 2008 2009 2010 2011 2012

Rank: 9

Rank: 6

Rank: 5

Rank: 3

Rank: 2 Rank: 2

http://investors.symetra.com/phoenix.zhtml?c=213723&p=irol-EventDetails&EventId=4829232


20

Industry Trends Figure 31 shows the growth in accident and health insurance premiums and annuity consideration and Figure 32 shows the growth in life insurance premiums. While accident and health insurance and life insurance premiums have shown gains coming out of the financial crisis in line with industry trends, deferred and variable annuities have been in decline as customers react to low guaranteed rates and higher fees. The lone bright spot for the annuity industry in the first half of 2012 was indexed annuities which were up 10%.

SYA, 0.9%

LNC, 5.1%

MET, 30.6%

PFG, 4.1%

PL, 1.6%

PRU, 36.0%

SFG, 1.3%

TMK, 1.3%

UNM, 4.6% AFL,

11.2%

CNO, 1.9%

PRI, 0.5%FFG, 0.3%

AEL, 0.6%

Source: FactSet Source: FactSet

Source: SNL Financial

Figure 31: Growth in accident and health insurance premiums (left) and annuity consideration (right) (millions)

Source: A. M. Best Source: A. M. Best

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Figure 30: Life insurance market capitalization (left) and sales (right) as of April 2013

Source: A. M. Best

SYA, 1.2%

LNC, 6.6%

MET, 30.0%

PFG, 7.6%

PL, 2.1%

PRU, 19.7%

SFG, 1.4%

TMK, 4.1%

UNM, 5.4%

AFL, 17.1%

CNO, 1.9%

PRI, 1.4%FFG, 0.7%

AEL, 0.7%

Source: A. M. Best


21

Symetra’s net margin has declined partially due to the low interest rate environment. However, recently the insurance industry’s net margin has declined at a faster rate. This is partially reflected in Symetra's price. However, Symetra’s price relative to its sales is attractive relative to the industry’s P/S. Figure 33 shows that the increase in net margin has been greater on a relative basis than the increase in P/S.

Figure 34 shows the earnings per share for the life insurance industry over the past ten years as well as the return relative to the S&P 500. The industry's earnings have lagged those of the S&P 500 for most of the past decade. The financial crisis and the current low interest rate environment have depressed the life insurance industry's earnings.

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NM Relative P/S Relative

Figure 32: Growth in life insurance premiums (millions) (millions)

Figure 33: Symetra’s net margin and P/S relative to comparables in its industry

Source: FactSet



22

The life insurance industry's price to book multiple historically is cheap when compared with the S&P 500. However, the ratio has been declining since the financial crisis to the point that the industry's ratio is about a third of the S&P 500's P/B.

Source: FactSet

Figure 34: Life insurance industry EPS (left, blue line) and EPS relative (right, pink bar) to the S&P 500

Source: FactSet

Figure 35: Life insurance industry P/B (left, blue line) and P/B relative (right, pink bar) to the S&P 500

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23

Financial Analysis

The benefits segment, partially due to acquisitions, has historically been a strong driver of growth. The segment will be reinforced by the new group life and group DI products which will offset some pricing issues with the stop loss product in 2013. Management announced in the 2013 first quarter earnings call that it expects the benefits loss ratio to remain above target for all of 2013.

I expect EPS to fall from $1.49 in 2012 to $1.40 per share in 2013. Deferred annuities should add five cents per share due to the new fixed index annuity product. The termination of the structured settlement product as well as continued low interest rates should result in a decline in earnings from income annuities in 2013. I anticipate a modest increase in earnings from life products. I expect a large decline in earnings per share due to a much lower gross margin percentage in the two annuity product lines as well as a higher than target loss ratio in the benefits product line. Long term low interest rates, resulting in higher reserve requirements on new annuity contracts and lower returns on investments backing the liabilities for existing annuities will result in the gross margin to decline dramatically. The announced share buyback of 10 million shares over the next two years will provide a five cents boost to earnings per share in 2013. 2014 EPS is forecasted to rise to $1.53 per share from $1.40 in 2013. 2014 should see some of the new products from the Grow and Diversify initiative bolster the earnings of the benefits and deferred annuity product lines. Annuity earnings will be further improved thanks to the nation’s demographics as more retirees discover their need for guaranteed income. I expect that some of the losses in margin experienced in 2013 will be gained back in 2014 with a return of the benefits loss ratio to the target range of 63% to 65%. Half of the 10 million shares that Symetra announced it will be buying back to occur in 2014 which will increase EPS five cents.

$.05 $.05 -$.02 $.01-$.23 $.05

$1.40 $1.49

$0.00 $0.20 $0.40 $0.60 $0.80 $1.00 $1.20 $1.40 $1.60 $1.80

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Figure 36: Earnings per share quantification in 2013



24

Management has given guidance on earnings for 2013 of $1.30 to $1.50 per share. I anticipate earnings to be $1.40 in 2013 and $1.53 in 2014 which is a bit more than the consensus estimates of $1.38 and $1.47 respectively. I calculated bear and bull estimates of earnings per share by varying rates that Symetra will earn on its investments, growth rates in sales and gross margins.

Revenues The consensus estimates anticipate Symetra’s revenue to decline by about $20 million in 2013. I disagree. Between demographic pressures for more guaranteed fixed income retirement solutions, diligent investing of the company’s assets by management and the new products from Grow and Diversify, I see Symetra’s revenues increasing. Figure 39 shows my revenue estimate for Symetra along with bear and bull cases for the company.

$.04 $0 $0 $.03 $.05

$1.53

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2014 vs 2013 EPS

$1.40

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Figure 37: Earnings per share quantification in 2014


Figure 38: Symetra EPS bear and bull estimates

My estimates call for higher EPS than consensus.


25

Symetra’s investments have a large impact upon its revenue. Coming out of the financial crisis, Symetra’s revenue growth rate rocketed upward in line with the enormous increase in Symetra’s revenue from investments in 2009. This growth has normalized somewhat over the succeeding years. Although I anticipate growth will slow in sales, I do predict sales growth will remain positive in both 2013 and 2014.

Figure 41 shows the spike in revenue growth in 2009 was largely due to the enormous growth in investments backing deferred and income annuities coming out of the financial crisis. I expect the growth rate in deferred annuities due to new products like the fixed index annuity to drive revenue growth in 2013 and 2014.

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Figure 40: Symetra’s growth rate (left) and revenue (right)

Figure 39: Symetra bear and bull revenue estimates (millions)

Growth from deferred annuities expected to rise to high single digits.


26

Operating Income and Margins

Symetra’s operating expenses are comprised of reserve expenses set up for both active policies and policies on claim, interest credited to policyholders’ accounts, the amortization of DAC and other underwriting expenses and operating expenses. Symetra’s expenses have shown less variability when compared with the company’s revenues (see Figure 43). While the growth rate in expenses has declined, the rate has remained positive since the financial crisis. See Figure 44 for the historical growth rate in operating expenses by product line.

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Benefits Deferred Annuities Income Annuities Life

Figure 41: Growth in revenue by product line


Figure 42: Symetra’s composition of 2012 operating expenses (left) and operating expense growth and operating expenses (right)


Benefits 29%

DeferredAnnuities25%

IncomeAnnuities

20%

Life 22%

Other 3%

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27

Symetra's operating margin has been in decline since 2010 and I expect it to decline once again in 2013 before bottoming out. My estimate of operating margin builds in some conservative estimates that the company’s gross margin, which has been increasing since the financial crisis, will revert towards the historical average. In this assumption, I am more conservative than analyst estimates. However, a degree of conservatism is warranted with Symetra’s gross margin because of its income annuity exposure. The financial crisis starting in 2008 had an outsized impact on the company's operating margin mostly due to a sharp decline in revenue from investments in the income annuity product line (see Figure 46.)

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Figure 43: Symetra revenue growth rate against expense growth rate


Figure 44: Symetra operating expense growth rate by product

Operating margin will bottom in 2013.


28

Return on Equity I expect Symetra's net income to bottom in 2013 and start to rise in 2014 as the Grow and Diversify products begin to impact overall sales. The low net profit margin in 2013 will drag down Symetra's ROE though I see the ROE improving going forward. I expect that Symetra’s conservative management will not substantially change the company’s capital structure to utilize more leverage as is done in the industry. It is unlikely that the assets/equity ratio will change much since the company has not added debt since 2007 and does not aggressively buy back shares.

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Figure 45: Symetra operating margin



Figure 46: Symetra historical operating margin by product


29

Free Cash Flow Symetra’s FCFE in 2012 declined 40% to $118 million from $197 million in 2011. I expect FCFE to continue to decline in 2013 to $36 million before improving to $51 million in 2014. My estimates depend greatly on the increase in policy reserves and funds held under deposit contracts changes in which are difficult to estimate. These liability accounts have increased in line with sales in past years and my estimates expect them to have a slight lag to the increase in sales in 2013 and 2014. Figure 48 shows the historical NOPAT growth rate. The rate turned negative during the financial crisis as earnings from income annuities dragged down the company. Symetra’s 2009 NOPAT nearly doubled that of 2008 as the firm’s investments grew in 2009. Symetra’s NOPAT has been relatively stable since 2011. I expect an 8% dip in the NOPAT growth rate in 2013 followed by a nearly 5% increase in the NOPAT growth rate in 2014.

Management announced its intention to repurchase 10 million shares of Symetra stock over 2013 and 2014. Furthermore, management is on the lookout for acquisitions particularly in the benefits line. Symetra has over $700 million in cash and marketable securities sitting on its balance sheet which provides ample resources for management to make acquisitions before needing to add more debt.

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3 Stage Du Pont 2006 2007 2008 2009 2010 2011 2012 2013E 2014E

Net income / sales 10.2% 10.5% 13.8% 7.5% 10.7% 9.8% 9.8% 8.5% 8.7%

Sales / avg assets 0.08 0.07 0.05 0.08 0.07 0.07 0.07 0.07 0.07

ROA 0.8% 0.7% 0.7% 0.6% 0.8% 0.6% 0.7% 0.6% 0.6%

Avg assets / avg equity 15.04 12.34 9.76 24.23 10.22 8.10 8.53 8.12 8.10

ROE 11.7% 9.0% 7.2% 14.9% 7.8% 5.2% 6.1% 5.1% 5.2%

Figure 47: Symetra ROE from 2006 to 2014

Figure 48: Symetra historical NOPAT growth rate


30

Valuation Symetra was valued utilizing various fundamental multiples to compare the company to other life insurance firms, a three stage DCF model, an analysis of comparable transactions and a computation of the residual value of the company from the surplus on Symetra’s statutory annual statement. After taking all of these valuation measures into consideration, I determined that the stock is currently fairly valued with a target price of $13.80. Trading History Symetra's P/E has been volatile over its relatively short history as a public company. The multiple has ranged from over 9x to nearly 4.5x. The company's price has recently increased more rapidly than its earnings giving the company a P/E of about 9x today.

Items Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-13 Dec-14 Dec-13 Dec-14

Sales

Sales $1,642 $1,569 $1,589 $1,451 $1,714 $1,879 $1,999 $2,101 $2,206 $2,252 $2,422 $2,711 $2,076 $2,063

SPS $14.71 $14.05 $14.24 $13.00 $15.36 $13.85 $14.54 $15.22 $16.53 $17.48 $18.15 $21.05 $15.56 $16.02

Growth -4.5% 1.3% -8.7% 18.1% -9.8% 5.0% 4.7% 8.6% 5.7% 19.2% 16.0% 2.2% 2.9%

EBIT and EBITDA

EBIT $219 $263 $270 $45 $213 $321 $311 $303 $279 $292 $353 $412 $260 $265

EBIT per share $1.96 $2.36 $2.42 $0.40 $1.91 $2.37 $2.26 $2.19 $2.09 $2.27 $2.65 $3.20 $1.95 $2.06

Growth 20.3% 2.7% -83.4% 374.2% 24.1% -4.4% 445.6% -4.7% 8.4% 20.7% 20.7% -11.2% 5.8%

EBITDA $263 $270 $45 $213 $321 $311 $303 $279 $292 $353 $412 $260 $265

EBITDA per share $2.36 $2.42 $0.40 $1.91 $2.37 $2.26 $2.19 $2.09 $2.27 $2.65 $3.20 $1.95 $2.06

Growth 2.7% -83.4% 374.2% 24.1% -4.4% -3.0% -4.7% 8.4% 20.7% 20.7% -11.2% 5.8%

Earnings

Continuing earnings $145 $160 $167 $22 $128 $201 $200 $205 $187 $197 $244 $288 $173 $177

Earnings $146 $160 $167 $22 $128 $201 $200 $205 $187 $197 $244 $288 $173 $177

Continuing EPS $1.30 $1.43 $1.50 $0.20 $1.15 $1.48 $1.45 $1.49 $1.40 $1.53 $1.83 $2.24 $1.30 $1.37

Growth 10.4% 4.9% -86.8% 480.5% 28.9% -2.0% 2.5% -5.7% 9.1% 22.8% 22.4% -13.0% 6.1%

EPS $1.30 $1.43 $1.50 $0.20 $1.15 $1.48 $1.45 $1.49 $1.40 $1.53 $1.83 $2.24 $1.30 $1.37

Growth 9.6% 4.9% -86.8% 480.5% 28.9% -2.0% 2.5% -5.7% 9.1% 22.8% 22.4% -13.0% 6.1%

Free Cash Flow

FCFF per share $9.72 $6.46 ($4.26) ($19.85) ($15.86) ($11.65) ($4.41) ($4.04) ($4.07) ($3.80) ($3.57) ($4.04) ($4.17)

Growth -33.5% -165.9% 366.3% -20.1% -26.5% -62.1% -8.4% 0.6% -14.0% -6.0% -8.4% 3.2%

FCFE per share $2.55 $1.74 $1.25 ($1.61) $0.60 $1.43 $0.86 $0.27 $0.40 $0.51 $0.90 $0.27 $0.29

Growth -31.6% -28.5% -229.0% -137.2% 139.6% -31.2% -68.6% 47.8% -39.9% 74.1% -68.6% 8.9%

NOPAT $153 $172 $182 $76 $151 $223 $223 $230 $212 $222 $269 $313 $198 $202

Growth 12.3% 5.6% -58.0% 97.6% 47.9% -0.2% 3.5% -7.9% 4.7% 16.6% 16.5% -14.2% 2.1%

NWC $73 $117 $61 $80 $78 $56 $70 $232 $243 $248 $267 $299 $229 $228

Net Fixed Assets 20,622 19,529 19,033 18,525 21,897 25,059 27,456 28,496 29,176 29,856 29,176 29,856 29,176 29,856

Total Net Inv in Op Capital $20,695 $19,645 $19,094 $18,605 $21,975 $25,116 $27,526 $28,728 $29,419 $30,105 $29,443 $30,155 $29,405 $30,084

Growth -5.1% -2.8% -2.6% 18.1% 14.3% 9.6% 4.4% 2.4% 2.3% 2.5% 2.4% 2.4% 2.3%

- Change in NWC 44 (55) 19 (2) (22) 14 162 12 5 35 32 (3) (1)

- Change in NFA (1,093) (496) (508) 3,372 3,163 2,397 1,040 680 681 680 681 680 681

+ Change equity other than RE (137) (12) (1,040) 1,003 767 585 362 (60) (60) (60) (60) (60) (60)

FCFF $1,085 $721 ($475) ($2,215) ($2,151) ($1,602) ($609) ($539) ($524) ($506) ($460) ($539) ($537)

Growth -33.5% -165.9% 366.3% -2.9% -25.5% -62.0% -11.5% -2.8% -16.8% -9.2% -11.5% -0.3%

- After-tax interest expense 9 13 14 54 23 22 23 25 25 25 25 25 25 25

+ Increase in Liabilities (788) (512) 668 2,059 2,254 1,822 752 600 600 600 600 600 600

FCFE $284 $194 $139 ($179) $81 $197 $118 $36 $51 $69 $115 $36 $38

Growth -31.6% -28.5% -229.0% -145.2% 142.9% -40.0% -69.6% 42.7% -41.9% 68.0% -69.7% 5.1%

Bull Case Bear Case

Figure 49: Free cash flow to equity model


31

Symetra’s P/B (0.43) is low compared with comparable companies in its industry (0.86). In part, this is due to the company's ROE (4.6%) lagging the insurance industry (9.4%). If Symetra’s management is able to generate a larger ROE from its investments in Grow and Diversify to bring it more in line with the ROE of the industry, the company’s stock price would likely rise. In Figure 50, I show Symetra's P/B and ROE relative to its industry. I also plotted the difference between Symetra's relative P/B and relative ROE to its industry. Symetra's ROE has recently been increasing relative to its industry but still remains below the average for the industry. The company's P/B has been declining relative to the average industry P/B since peaking in mid-2012. This indicates that Symetra is becoming relatively cheaper compared with its industry.

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P/B Relative (left) ROE Relative (left) SYA P/B Less Industry P/B (right)

Figure 50: Symetra’s ROE and P/B relative to comparable companies in its industry

Source: FactSet

Source: FactSet

Figure 51: Symetra’s ROE and P/B relative to the S&P 500

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PB Relative (left) ROE Relative (left) SYA PB Less S&P 500 PB (right)

Source: FactSet


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I did the same plots for Figure 51 but this time relative to the S&P 500. Symetra's ROE relative to the S&P has been in decline since the company first reported earnings as a public company. Symetra's P/B is also falling relative to the S&P 500 though at a slower rate than ROE. Whether comparing Symetra to the industry or the S&P 500, it appears that the current valuation more than fully accounts for the company’s lower ROE. It is pricing in Symetra as a more risky firm and/or offering less growth than the industry and market. If this expectation turns out to be wrong, then the stock is poised to outperform. Relative Valuation Symetra is currently trading at a P/B multiple significantly below its peers (0.49 vs. 0.86) due to the company’s slower than average growth, low growth and higher than average interest rate risk and volatility. Symetra also has a lower than average industry price to sales multiple (0.79 vs. 0.96). Comparing P/B with ROE as shown in Figure 52 indicates that Symetra is approximately fairly valued relative to its industry at its current price. The regression is statistically significant (F value 62.7) and ROE’s impact on P/B is highly significant (P value < .001). Plugging anticipated ROE and book value per share into the regression equation yields an estimated price of $12.52.

y = 9.0869x + 0.0057R² = 0.8394

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0.6

0.8

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1.2

1.4

1.6

1.8

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P/B

ROE

SYA

Figure 52: Life insurance industry P/B and ROE

Source: FactSet

Source: FactSet


33

While P/B is the best valuation measure for the life insurance industry, I also wanted to compare P/S with net profit margin. Figure 53 shows that Symetra is about fairly valued relative to its industry at its current price. This regression was also statistically significant (F value 57.0) and net margin was a statistically significant variable (P value < .001). Symetra price per share can be estimated at $13.23 by substituting projected values into the regression equation.

I performed a multiple regression using data available from Factset for comparable companies in Symetra’s industry. I started with thirteen different fundamental valuation variables and used the Mallow’s Cp model diagnostic and the Schwartz Bayesian Criteria (Beal, 2007) available from the PROC REG procedure in the SAS programming language to trim my model down to three independent variables. The dependent variable for my model is P/B. The independent variables are beta, the estimated growth in sales over the next twelve months and the ROE. Given the data, the model was statistically significant (F value 65.7) and had a R² of 0.95. The intercept term, ROE and Beta were statistically significant to p<0.003 and the growth term was significant to p<0.1.

Source: FactSet

Figure 53: Life insurance industry P/S and net profit margin

y = 13.787x - 0.4111R² = 0.826

0.00.20.40.60.81.01.21.41.61.82.0

0.0% 5.0% 10.0% 15.0%

P/S

NPM

SYA

Symetra is fairly valued based on P/B and P/S and its current level of profitability.


34

Using the above regression equation to find an estimate for price, we have:

Figure 54: Comparable companies to Symetra

Source: FactSet


35

Finally, I did the same comparison of fundamental variables but on a percentage of the maximum value of each variable. All variables were adjusted so that the maximum value was the best. For example, for this regression, I used 1/β instead of Beta so that the lowest Beta stock would be the maximum value. Because all variables are scaled in this model (between 0 and 1), I used the coefficients on each variable from the regression as the weights that were used to calculate a weighted average for the fundamental variables for each company. This weighted average was then regressed against the percent of maximum P/B for each company. I used the Mallow’s Cp model diagnostic and the Schwartz Bayesian Criteria in SAS (Beal, 2007) to determine the best model. The information criteria showed that a four factor model containing ROE, 1/β, earnings growth in 2012 and estimated NTM earnings growth was the best. The model had an R² of 0.96 and was statistically significant (F value 52.1). Earnings growth (NTM), ROE and 1/β were all significant to p<0.003. Earnings growth in 2012 was significant to p<0.1.

Source: FactSet

Figure 55: Comparable company relative valuation

Weight -17.6% -10.2% 28.6% 99.2% 100.0%

1/ NTM Weighted Target P/B

Ticker Name NTM 2012 Beta ROE P/B Fund Value Value Diff

SYA SYMETRA FINANCIAL CORP 0% 1% 50% 25% 27% 39% 27% 33% 6%

LNC LINCOLN NATIONAL CORP 1% 100% 30% 46% 38% 44% 38% 38% 0%

MET METLIFE INC 36% -22% 32% 50% 41% 54% 41% 46% 4%

PFG PRINCIPAL FINANCIAL GRP INC 9% 5% 39% 57% 67% 65% 67% 61% -9%

PL PROTECTIVE LIFE CORP 3% -2% 36% 38% 40% 48% 40% 42% 2%

PRU PRUDENTIAL FINANCIAL INC 100% -24% 37% 53% 45% 48% 45% 43% -3%

SFG STANCORP FINANCIAL GROUP INC 5% 0% 54% 45% 55% 60% 55% 54% -2%

TMK TORCHMARK CORP 1% 4% 58% 69% 83% 84% 83% 79% -6%

UNM UNUM GROUP 1% 84% 47% 57% 54% 61% 54% 56% 1%

AFL AFLAC INC 0% 13% 38% 100% 100% 109% 100% 105% 5%

CNO CNO FINANCIAL GROUP INC 14% -11% 37% 25% 30% 35% 30% 30% -1%

PRI PRIMERICA INC 3% 4% 100% 74% 92% 101% 92% 97% 2%

FFG FBL FINANCIAL GROUP INC-CL A 3% -3% 49% 37% 50% 51% 50% 46% -7%

AEL AMERICAN EQTY INVT LIFE HLDG 18% -10% 41% 38% 34% 47% 34% 42% 7%

Earnings Growth


36

Symetra’s P/B would be 0.52 if it fell on the above regression line. This P/B along with next year’s anticipated book value per share yields a price of $14.15.

While these models provide some indication that Symetra is undervalued, they are based on the criteria that the market currently believes is important to the valuation of insurance companies which may or may not matter tomorrow. With this being said, risk, ROE, growth and P/B are normally important metrics for the industry so the models stand the test of time. Discounted Cash Flow Valuation A three stage DCF model was used to value Symetra. For the purposes of this analysis, Symetra’s cost of equity was calculated to be 11.2% using the CAPM. The underlying assumptions used to calculate this rate were as follows:

The 10 year US Treasury yield on April 30, 2013 (1.7%) was used to approximate the risk free rate.

Symetra’s beta was assumed to be 1.25.

The market risk premium was taken to be 7.6%. Academic studies have shown this to be a proper assumption for the market risk premium.

Stage 1: The model’s first stage simply discounts fiscal years 2013 and 2014 free cash flow to equity (FCFE). These per share cash flows were forecasted to be 27 cents in 2013 and 40 cents in 2014. Discounting and summing these cash flows by the cost of equity calculated above, resulted in a value of 56 cents per share. Stage 2: Stage two of the model focused on fiscal years 2015 to 2019. During this period, I project sales to grow at 2.2% annually. FCFE is projected to grow at about 5% which is approximately the

R² = 0.9586y = 1.026x - 0.0673

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Source: FactSet

Figure 56: Comparable company relative valuation


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growth rate of the economy plus the rate of inflation. The resulting cash flows were then discounted using the company’s 11.2% cost of equity. The cash flows per share for stage 2 summed to $2.77.

First Stage Second Stage

Cash flows 2013 2014 2015 2016 2017 2018 2019

Sales $2,206 $2,252 $2,301 $2,352 $2,404 $2,456 $2,510

Growth 5.0% 2.1% 2.2% 2.2% 2.2% 2.2% 2.2%

NOPAT $212 $222 $227 $232 $237 $242 $247

% of sales 9.6% 9.9% 9.9% 9.9% 9.9% 9.9% 9.9%

- Change in NWC 12 5 5 5 5 6 6

% of sales 0.5% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2%

- Chg NFA 680 681 696 711 727 743 759

% of sales 30.8% 30.2% 30.2% 30.2% 30.2% 30.2% 30.2%

Total investments 691 686 701 716 732 748 765

% of sales 31.3% 30.5% 30.5% 30.5% 30.5% 30.5% 30.5%

+ change in equity (60) (60) 0 0 0 0 0

FCFF ($539) ($524) ($474) ($484) ($495) ($506) ($517)

% of sales -24.4% -23.3% -20.6% -20.6% -20.6% -20.6% -20.6%

- Interest (1-tax rate) 25 25 25 25 25 25 25

% of sales 1.1% 1.1% 1.1% 1.1% 1.0% 1.0% 1.0%

+ Increase in Liabi l i ties 600 600 613 627 640 655 669

% of sales 27.2% 26.6% 26.6% 26.6% 26.6% 26.6% 26.6%

FCFE $36 $51 $114 $117 $120 $124 $127

% of sales 1.6% 2.3% 5.0% 5.0% 5.0% 5.0% 5.1%

Growth -69.6% 42.7% 123.0% 2.7% 2.7% 2.7% 2.6%

/ No Shares 133.4 128.8 128.8 128.8 128.8 128.8 128.8

Growth -3.3% -3.5% 0.0% 0.0% 0.0% 0.0% 0.0%

FCFE $0.27 $0.40 $0.89 $0.91 $0.93 $0.96 $0.99

Growth -68.6% 47.8% 123.0% 2.7% 2.7% 2.7% 2.6%

* Discount factor 0.90 0.81 0.73 0.65 0.59 0.53 0.48

Discounted FCFE $0.24 $0.32 $0.64 $0.60 $0.55 $0.51 $0.47

Third Stage

Terminal value

Net income $187 $197 $201 $206 $210 $215 $220

% of sales 8.5% 8.7% 8.7% 8.7% 8.7% 8.7% 8.7%

EPS $1.40 $1.53 $1.56 $1.60 $1.63 $1.67 $1.71

Growth -5.7% 9.1% 2.2% 2.2% 2.2% 2.2% 2.2%

Terminal P/E 9.00

* Terminal EPS $1.71

Terminal value $15.35

* Discount factor 0.48

Discounted terminal value 7.30$

Summary

First stage $0.56 Present value of first 2 year cash flow

Second stage $2.77 Present value of year 3-7 cash flowThird stage $7.30 Present value of terminal value

Value of stock $10.63 = value at beg of fiscal yr 2013

Figure 57: Three stage DCF model


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Stage 3: I assumed that Symetra’s earnings per share would grow at 2.2% starting in 2015. This yields an EPS of $1.71 per share in 2019. I further assumed that Symetra’s terminal P/E ratio would be 9.0. The average P/E for the insurance industry is currently about 9.5 and about 10 over the past 3 years. The terminal P/E and the estimated $1.71 in earnings for Symetra in 2019 yield a terminal value of $15.35 that is then discounted to the present at the company’s cost of equity. The present value for stage 3 is $7.30. The sum of the values of all three stages is $10.63, which suggests that the stock is overpriced at its current price of $13.34. Sensitivity Analysis – Much of the DCF model’s value is embedded in the third stage. That stage relies on the terminal P/E assumption and the assumption for the growth rate in EPS. It is therefore proper to review how sensitive the price given by the DCF model is to those assumptions. It appears that the market is pricing in an 11 P/E and a second stage growth rate about twice as high (4.2%) as my projection.

Statutory Statement Valuation Insurance companies are required by the various state regulators to report financial results in statutory financial statements. These statements generally use more conservative assumptions for policy reserve liabilities. The regulators for the states in which the company does business have a vested interest in ensuring that insurance companies are stable and solvent. Because statutory statements are inherently conservative, company surplus can serve as a proxy for the residual value of an insurance company. In 2012, Symetra had $1.9 billion in surplus up from $1.8 billion in 2011. This implies a residual value, after all policyowner claims have been accounted for, of $13.82 per share at the end of 2012. Comparable Transactions I investigated recent insurance company transactions of sufficient size to determine a share price for Symetra. All transactions were from the period of August of 2008 to December 2012. I computed a weighted average of the deal value based on the equity weighting of each transaction. I also computed the weighted average of the target’s equity. I then calculated the ratio of Symetra’s equity to the target companies’ equity.

Growth Rate

0.2% 0.7% 1.2% 1.7% 2.2% 2.7% 3.2% 3.7% 4.2%

7.0 $8.47 $8.60 $8.74 $8.87 $9.01 $9.15 $9.29 $9.44 $9.59

E 7.5 $8.84 $8.98 $9.12 $9.27 $9.41 $9.56 $9.72 $9.87 $10.03

/ 8.0 $9.21 $9.36 $9.51 $9.66 $9.82 $9.98 $10.14 $10.31 $10.48

P 8.5 $9.58 $9.73 $9.89 $10.06 $10.23 $10.40 $10.57 $10.75 $10.93

9.0 $9.94 $10.11 $10.28 $10.45 $10.63 $10.81 $11.00 $11.18 $11.37

m 9.5 $10.31 $10.49 $10.67 $10.85 $11.04 $11.23 $11.42 $11.62 $11.82

r 10.0 $10.68 $10.86 $11.05 $11.25 $11.44 $11.64 $11.85 $12.06 $12.27

e 10.5 $11.05 $11.24 $11.44 $11.64 $11.85 $12.06 $12.27 $12.49 $12.71

T 11.0 $11.41 $11.62 $11.83 $12.04 $12.25 $12.47 $12.70 $12.93 $13.16

Figure 56: Three stage DCF model

Figure 58: Price sensitivity to terminal P/E and EPS growth rate assumptions


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That ratio multiplied by the weighted average of the deal values gave me an estimate for a sales price for Symetra of $1.6 billion. This price indicates a per share price for Symetra’s stock of $11.61 per share. Often, a premium must be paid when purchasing a business. To be conservative in my estimate, I did not include any margin in my calculations for a potential premium.

Figure 59: Comparable transactions


Buyer Name Target Name

Target

Equity

($000) Equity %

Equity

Weighted

Target

Equity

Date

Annouced

Deal

Value

($M)

Equity

Weighted

Deal

Value

Athene Holding Ltd. Aviva USA Corporation 5,018,819 29.48% 1,479,763 12/21/2012 1,550.0 457.0

Banco Financiero y de Ahorros SA

Aseguradora Valenciana,

Sociedad Anonima de

Seguros y Reaseguros 418,758 2.46% 10,302 12/18/2012 800.4 19.7

Pacific Century Group

Insurance and pension

business 1,132,347 6.65% 75,327 10/19/2012 2,140.0 142.4

Taishin Financial Holding Co., Ltd.

New York Life Insurance

Taiwan Corporation 147,119 0.86% 1,272 8/9/2012 3.3 0.0

Athene Group Ltd.

Presidential Life

Corporation 797,492 4.69% 37,363 7/12/2012 414.3 19.4

Guggenheim Capital, LLC

EquiTrust Life Insurance

Company 525,688 3.09% 16,235 10/6/2011 440.0 13.6

SCOR SE

Mortality reinsurance

business of Transamerica

Re 1,700,000 9.99% 169,780 4/26/2011 917.3 91.6

Investor group Scottish Re Group Limited 139,444 0.82% 1,142 4/15/2011 20.5 0.2

Chinatrust Financial Holding Co.

MetLife Taiwan Insurance

Company Limited 253,443 1.49% 3,774 3/28/2011 180.0 2.7

Chesnara Plc

Save & Prosper Insurance

Limited 234,930 1.38% 3,242 11/26/2010 100.2 1.4

Investor group

Liberty Life Insurance

Company 669,326 3.93% 26,319 10/22/2010 628.1 24.7

Protective Life Corporation

United Investors Life

Insurance Company 613,944 3.61% 22,144 9/13/2010 310.7 11.2

Nationwide Mutual Group

Nationwide Financial

Services, Inc. 5,370,700 31.55% 1,694,537 8/6/2008 2,470.7 779.5

Weighted Average 3,541,198 1,563

Symetra Financial Corporation 3,630,100

Symetra Equity/Target Equity

Weighted Average 1.03

Symetra Sahres Outstanding

(millions) 138.093

Price Per Share 11.61$

Reflects data at announcement event. Market pricing data as of 4/24/2013.

Terminated deals and Merger of Equals are not included.


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Business Risks

There are several risks that impact Symetra’s future outlook:

Economic sensitivity

Credit risk

Liquidity risk

Government intervention

Competitive marketplace

Pricing risk

Large stockholders Economic sensitivity The low interest rate environment is difficult for insurance companies. Sales of annuities are more difficult to make when guaranteed interest rates are low. Investment returns are low relative to guaranteed rates on products. Should interest rates start to rise, insurance companies can face disintermediation risk. This occurred in the 1970’s when life insurance policyowners abandoned their policies with 5% guaranteed rates in droves in favor of savings accounts earning 15%. Not only could this result in the company being forced to sell assets to return policyowner cash values, but DAC assets would have to be expensed immediately upon termination of the policy. Insurance companies invest current assets to pay future promised liabilities. In times of deep market stress, when all assets save for treasuries decline in value, insurance companies' income on distressed assets can squeeze profit margins. In such times, there is no corresponding reduction in reserve expenses. Symetra felt this profit margin squeeze to a significant level in its income annuity product line during the financial crisis of 2008 (see Figure 60).

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2005 2006 2007 2008 2009 2010 2011 2012

Sales Interest Credited

Figure 60: Income annuity product line sales and direct costs



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Credit risk Symetra's largest source of income is its investments. Many of these investments are in debt such as corporate bonds, commercial mortgages and mortgage backed securities. There is risk that debtors’ ratings may decline and/or may default on some of their obligation. During the financial crisis, the government retroactively reordered the structure of some debt arrangements when it bailed out the American car companies. Many insurance companies were burned as the government pushed aside their claims. There are no assurances that such tampering with the order of creditors could not happen again in the future. Liquidity risk Symetra is investing in increasing numbers in private equity and commercial mortgages that generally have higher yields but are less liquid. There is risk that Symetra may have to sell these assets at the exact time that it would be unfavorable to do so. In a period of rising rates, enough policyowners could cancel their policies for their cash value forcing the company to sell assets it may wish to keep. If the assets are illiquid, the company might be forced to take significantly less than the value of the asset. Government intervention Insurance companies are regulated by the individual states. However, due to the government's rescue of AIG during the financial crisis, Congress has begun review of an optional federal charter that would replace state oversight of insurance companies. The Dodd-Frank Act created a Federal Insurance Office to study the potential efficiency of federal insurance regulation. A study conducted by the ACLI in 2004 estimated that a federal charter would reduce the cost of regulation compliance by more than $2.5 billion annually.

From time to time, accounting rules may change that could impact company earnings. For example, starting in January of 2012, insurance companies were required to follow new DAC accounting rules which required that only costs related to the successful acquisition of new or renewal business be deferrable. The result was costs expensed immediately instead of being amortized over long periods. The result of this rule change for Symetra was a charge expensed to the DAC asset of $29.4 million which reduced net income 1.9% for the year ended December 31, 2011.

Rules and regulations for both Dodd-Frank and the Patient Protection and Affordable Care Act (PPACA) have yet to be written by various federal agencies. It is impossible to predict what effect rules yet to be written by the creative minds in the federal government may have upon the insurance industry. Symetra expects that its medical stop loss coverage will be exempt from the PPACA due to its limited indemnity design. Management believes that more companies will likely self insure after PPACA goes into full effect to save costs and will then use medical stop loss insurance to manage their risks. One negative impact to Symetra from the PPACA legislation is the unlimited lifetime and unlimited annual benefits. This has caused Symetra to seek out extra reinsurance to cover the added risk.

Life insurance cash values grow tax deferred provided it remains in policies. The taxation of the inside buildup of cash value in life insurance policies is always a potential target of a federal government in search of revenue.


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Competitive marketplace The life insurance industry is enormously competitive. There are over 900 life insurance companies in the US. While there are differences in company financial ratings and service, life insurance is largely a commodity product. There are very few sustained competitive advantages in the insurance industry. It is relatively easy to have an agent perform a 1035 exchange to move cash in one policy to a competitor. Therefore, companies compete on price. In the past decade, competition has led to several companies pricing their products too aggressively. Many of those companies are now exiting unprofitable product lines. Insurance companies also compete with one another for sales talent. The company's distribution system is a source of risk for Symetra. In 2011, 61% of Symetra's deferred annuity sales and 34% of the company's medical stop loss sales derive from the top five distributors. 22% of deferred annuity sales originated at JPMorgan Chase. The company does not have minimum purchase requirements. Contracts can be terminated upon short notice. Finally, there is no requirement that a distributor sell exclusively Symetra products. Pricing risk Insurance companies make much of their revenue on their ability to predict future benefit payments correctly. Assumptions on investment return, mortality and morbidity, interest rates and underwriting standards made decades before benefits are payable can have enormous impact on an insurer’s profitability. Insurance companies must not only effectively price their products in a competitive landscape, but they also must accurately determine policy reserves to ensure that the funds to pay future claims will be available when needed. Symetra’s mispricing of its medical stop loss insurance in 2013 will impact the margin of that product line in all of 2013. Symetra’s competitors in the market are becoming more aggressive in their pricing. Fortunately, medical stop loss is priced annually so normal loss ratios should resume in 2014. Large Stockholders Including warrants, Berkshire Hathaway and White Mountains each own 21% of Symetra’s stock respectively. Given Warren Buffett’s stature as an investor, if Berkshire sold a large portion of its share of Symetra, the stock would be adversely impacted.

Appendix 1: Sales model


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Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14

Revenue 1,642.4 1,568.5 1,589.4 1,451.3 1,714.3 1,878.5 1,999.1 2,101.2 2,205.7 2,251.6

Growth -4.5% 1.3% -8.7% 18.1% 9.6% 6.4% 5.1% 5.0% 2.1%

Premiums

Accident and health premiums 431 391 396 456 437 439 457 567 584 600

Growth -9.3% 1.3% 15.3% -4.1% 0.4% 4.1% 24.1% 2.9% 2.8%

% of sales 26.2% 24.9% 24.9% 31.4% 25.5% 23.4% 22.9% 27.0% 26.5% 26.7%

Life insurance premiums 193 192 194 195 88 88 86 86 86 86

% of sales 11.7% 12.2% 12.2% 13.5% 5.1% 4.7% 4.3% 4.1% 3.9% 3.8%

Total assumed premiums 15.5 0.2 0.2 0.8 0.6 0.6 56.5 16.3 5 1

Growth -98.7% 0.0% 300.0% -25.0% 0.0% 9316.7% -71.2% -71.2% -71.2%

% of sales 0.9% 0.0% 0.0% 0.1% 0.0% 0.0% 2.8% 0.8% 0.2% 0.1%

Ceded accident and health premiums -22.5 -10.2 -9.9 -13.6 -12.6 -13.2 -19.9 -23.6 (28) (33)

Growth -54.7% -2.9% 37.4% -7.4% 4.8% 50.8% 18.6% 18.6% 18.6%

% of sales -1.4% -0.7% -0.6% -0.9% -0.7% -0.7% -1.0% -1.1% -1.3% -1.5%

Ceded life insurance premiums -41.2 -47 -49.9 -54 -42.9 -41.2 -39.1 -41.2 (43) (46)

Growth 14.1% 6.2% 8.2% -20.6% -4.0% -5.1% 5.4% 5.4% 5.4%

% of sales -2.5% -3.0% -3.1% -3.7% -2.5% -2.2% -2.0% -2.0% -2.0% -2.0%

Investments

Fixed maturities 945.7 926.7 911.4 930.7 1048.1 1119.9 1151.9 1122.5 1,203 1,216

Growth -2.0% -1.7% 2.1% 12.6% 6.9% 2.9% -2.6% 7.2% 1.1%

% of sales 57.6% 59.1% 57.3% 64.1% 61.1% 59.6% 57.6% 53.4% 54.5% 54.0%

Mortgage loans 46 48.8 50 59.4 67.4 89.1 133.3 172 184 190

Growth 6.1% 2.5% 18.8% 13.5% 32.2% 49.6% 29.0% 7.2% 3.1%

% of sales 2.8% 3.1% 3.1% 4.1% 3.9% 4.7% 6.7% 8.2% 8.4% 8.4%

Marketable equity securities 4 6.8 5.8 6.1 5.9 6.4 11.1 16.5 20 20

Growth 70.0% -14.7% 5.2% -3.3% 8.5% 73.4% 48.6% 18.8% 3.4%

% of sales 0.2% 0.4% 0.4% 0.4% 0.3% 0.3% 0.6% 0.8% 0.9% 0.9%

Policy loans 5.1 4.9 4.5 4.7 4.4 4.3 3.4 3.9 4 4

Growth -3.9% -8.2% 4.4% -6.4% -2.3% -20.9% 14.7% -4.2% 5.7%

% of sales 0.3% 0.3% 0.3% 0.3% 0.3% 0.2% 0.2% 0.2% 0.2% 0.2%

Short term investments and cash and cash equivalents 4.2 9.9 0 0 0 0 0 0 0 0

Redeemable peferred stock 3.4 3.6 0 0 0 0 0 0 0 0

Investments in l imited partnerships 2.5 4.7 0 -36.4 -0.1 -4.3 -9.7 -19.2 -25.47 -31.74

Other 6.1 3.6 20.9 11.5 7.5 4.9 6.3 7.5 7.5 7.5

Other net investment income 16.2 21.8 20.9 -24.9 7.4 0.6 -3.4 -11.7 -17.97 -24.24

Growth 34.6% -4.1% -219.1% -129.7% -91.9% -666.7% 244.1% 53.6% 34.9%

% of sales 1.0% 1.4% 1.3% -1.7% 0.4% 0.0% -0.2% -0.6% -0.8% -1.1%

Investment expenses 22.9 24 19.2 19.3 19.6 20.9 25.4 28 32 35

Growth 4.8% -20.0% 0.5% 1.6% 6.6% 21.5% 10.2% 12.7% 11.3%

% of sales 1.4% 1.5% 1.2% 1.3% 1.1% 1.1% 1.3% 1.3% 1.4% 1.6%

Policy fees and contract charges 58.6 56.1 68.7 67.8 159.9 166.3 180.7 189.9 210 240

Growth -4.3% 22.5% -1.3% 135.8% 4.0% 8.7% 5.1% 10.6% 14.3%

% of sales 3.6% 3.6% 4.3% 4.7% 9.3% 8.9% 9.0% 9.0% 9.5% 10.7%

Net Realized Investment Gains (Losses)

Gross realized investment gains 30.8 26.8 37.1 10.3 25.5 31.3 38.9 54.3 54 54

% of sales 1.9% 1.7% 2.3% 0.7% 1.5% 1.7% 1.9% 2.6% 2.5% 2.4%

Gross realized investment losses -27 -18.4 -15.1 -7 -23.3 -10.1 -8.1 -27 (27) (27)

% of sales -1.6% -1.2% -1.0% -0.5% -1.4% -0.5% -0.4% -1.3% -1.2% -1.2%

Impairments -7.7 -24.6 -16.2 -86.4 -86.5 -20.9 -14.1 -29 (29) (29)

% of sales -0.5% -1.6% -1.0% -6.0% -5.0% -1.1% -0.7% -1.4% -1.3% -1.3%

Other, including gains (losses) on calls and redemptions 5.7 0 0 0 9.7 16.5 7.5 0 - -

Total marketable equity securities 8.4 14.9 10.9 -62.9 36.4 32.6 -9.1 36.7 37 37

% of sales 0.5% 0.9% 0.7% -4.3% 2.1% 1.7% -0.5% 1.7% 1.7% 1.6%

Other invested assets 4 1.7 0.1 -12 -2.7 -5 -4.3 -3.9 (4) (4)

% of sales 0.2% 0.1% 0.0% -0.8% -0.2% -0.3% -0.2% -0.2% -0.2% -0.2%

Deferred policy acquisition costs adjustment 0 1.2 0 0 11.6 -4.6 -3.8 0 - -

Appendix 1: Sales model


44

Appendix 2: Income statement model


Revenue 1,642.4 1,568.5 1,589.4 1,451.3 1,714.3 1,878.5 1,999.1 2,101.2 2,205.7 2,251.6

Growth -4.5% 1.3% -8.7% 18.1% 9.6% 6.4% 5.1% 5.0% 2.1%

Benefits

Revenue $469 $415 $425 $487 $461 $463 $533 $602 $656 $665

Growth -11.5% 2.4% 14.4% -5.2% 0.5% 15.1% 12.8% 9.0% 1.5%

Direct Costs 296 231 213 296 295 281 316 370 406 413

Growth -22.1% -7.7% 38.9% -0.2% -4.8% 12.4% 17.1% 9.8% 1.5%

% of sales 63.1% 55.6% 50.1% 60.8% 64.1% 60.7% 59.3% 61.6% 62.0% 62.0%

Gross Margin 173 185 212 191 166 182 217 231 249.1 252.9

Growth 6.6% 14.9% -10.2% -13.1% 9.9% 19.2% 6.5% 7.8% 1.5%

% of sales 36.9% 44.4% 49.9% 39.2% 35.9% 39.3% 40.7% 38.4% 38.0% 38.0%

Deferred Annuities

Revenue $299 $276 $259 $261 $384 $494 $554 $572 $625 $666

Growth -7.8% -6.1% 0.6% 47.5% 28.6% 12.1% 3.4% 9.2% 6.6%

Direct Costs 186 170 157 170 255 294 323 331 384 409

Growth -8.7% -7.4% 7.9% 50.2% 15.3% 9.9% 2.5% 16.0% 6.6%

% of sales 62.1% 61.6% 60.7% 65.1% 66.3% 59.4% 58.3% 57.8% 61.4% 61.4%

Gross Margin $113 $106 $102 $91 $130 $200 $231 $242 241.2 257.2

Growth -6.4% -4.0% -10.6% 42.4% 54.6% 15.3% 4.6% -0.2% 6.6%

% of sales 37.9% 38.4% 39.3% 34.9% 33.7% 40.6% 41.7% 42.2% 38.6% 38.6%

Income Annuities

Revenue $459 $457 $463 $325 $443 $450 $421 $426 $420 $411

Growth -0.6% 1.4% -29.9% 36.4% 1.6% -6.5% 1.3% -1.5% -2.0%

Direct Costs 393 372 372 365 358 366 353 346 360 351

Growth -5.3% -0.1% -1.9% -1.8% 2.3% -3.6% -2.0% 4.1% -2.5%

% of sales 85.5% 81.4% 80.2% 112.3% 80.8% 81.4% 83.9% 81.2% 85.8% 85.4%

Gross Margin $67 $85 $92 ($40) $85 $84 $68 $80 59.6 60.1

Growth 27.0% 8.0% -143.4% -313.8% -1.5% -19.1% 18.1% -25.6% 0.8%

% of sales 14.5% 18.6% 19.8% -12.3% 19.2% 18.6% 16.1% 18.8% 14.2% 14.6%

Life

Revenue $375 $380 $396 $389 $406 $431 $453 $444 $449 $452

Growth 1.4% 4.2% -1.8% 4.4% 6.3% 5.1% -2.0% 1.0% 0.8%

Direct Costs 264 258 279 287 293 296 318 327 332 335

Growth -2.2% 7.9% 3.1% 1.9% 1.3% 7.3% 2.8% 1.6% 0.8%

% of sales 70.4% 67.9% 70.4% 73.9% 72.1% 68.7% 70.2% 73.6% 74.0% 74.0%

Gross Margin $111 $122 $117 $102 $113 $135 $135 $117 116.7 117.5

Growth 9.9% -3.8% -13.5% 11.3% 19.4% 0.2% -13.2% -0.6% 0.8%

% of sales 29.6% 32.1% 29.6% 26.1% 27.9% 31.3% 29.8% 26.4% 26.0% 26.0%


45

Appendix 2: Income statement model, continued


Other

Revenue $40 $41 $46 ($9) $20 $40 $38 $57 $57 $57

Growth 2.4% 14.0% -120.3% -314.9% 95.5% -3.8% 50.0% -0.6% -0.2%

Direct Costs - (0) (1) (3) (3) (3) (3) (2) - -

Growth 205.8% 150.0% 32.0% -6.1% -16.1% -19.2% -100.0%

% of sales 0.0% -0.8% -2.2% 26.6% -16.3% -7.8% -6.8% -3.7% 0.0% 0.0%

Gross Margin $40 $41 $47 ($7) $24 $43 $41 $59 56.7 56.5

Growth 3.2% 15.5% -114.6% -440.6% 81.3% -4.7% 45.6% -4.1% -0.2%

% of sales 100.0% 100.8% 102.2% 73.4% 116.3% 107.8% 106.8% 103.7% 100.0% 100.0%

Total Gross Margin 503.851 538.313 570.2 336.5 517 643.9 691.8 729.4 723.3 744.2

Growth 6.8% 5.9% -41.0% 53.6% 24.5% 7.4% 5.4% -0.8% 2.9%

% of sales 30.7% 34.3% 35.9% 23.2% 30.2% 34.3% 34.6% 34.7% 32.8% 33.1%

SG&A 273 261 282 266 253 257 296 361 378 386

Growth -4.6% 8.2% -5.7% -4.9% 1.6% 15.3% 21.7% 5.0% 2.1%

% of sales 16.6% 16.6% 17.7% 18.3% 14.7% 13.7% 14.8% 17.2% 17.2% 17.2%

Other except interest 12 15 18 26 51 66 85 66 66 66

Growth 22.7% 23.3% 43.3% 99.2% 28.8% 27.8% -22.0% 0.0% 0.0%

% of sales 0.7% 0.9% 1.1% 1.8% 3.0% 3.5% 4.2% 3.1% 3.0% 2.9%

EBIT 219 263 270 45 213 321 311 303 279 292

Growth 20.3% 2.7% -83.4% 374.2% 50.8% -3.1% -2.6% -7.9% 4.7%

% of sales 13.3% 16.8% 17.0% 3.1% 12.4% 17.1% 15.6% 14.4% 12.6% 13.0%

Interest exp 12 19 22 32 32 32 32 33 33 33

Growth 56.1% 12.0% 48.4% -0.3% 0.3% 0.6% 2.2% 0.0% 0.0%

Rate on debt 6.4% 5.8% 7.1% 7.1% 7.1% 7.1% 7.3% 7.3% 7.3%

Income before tax $206 $244 $249 $13 $181 $289 $279 $270 $246 $259

Growth 18.2% 2.0% -94.8% 1293.1% 59.6% -3.5% -3.2% -8.9% 5.3%

% of sales 12.6% 15.6% 15.7% 0.9% 10.6% 15.4% 14.0% 12.9% 11.2% 11.5%

Taxes 62 85 82 -9 53 88 79 65 59 62

Growth 36.5% -3.6% -111.2% -680.2% 67.0% -10.0% -18.5% -8.9% 5.3%

Tax rate 30.0% 34.6% 32.8% -70.0% 29.2% 30.5% 28.5% 24.0% 24.0% 24.0%

Continuing income $145 $160 $167 $22 $128 $201 $200 $205 $187 $197

Growth 10.4% 4.9% -86.8% 480.5% 56.6% -0.6% 2.9% -8.9% 5.3%

% of sales 8.8% 10.2% 10.5% 1.5% 7.5% 10.7% 10.0% 9.8% 8.5% 8.7%

Other 1 0 0 0 0 0 0 0 0 0

Net income $146 $160 $167 $22 $128 $201 $200 $205 $187 $197

Growth 9.6% 4.9% -86.8% 480.5% 56.6% -0.6% 2.9% -8.9% 5.3%

% of sales 8.9% 10.2% 10.5% 1.5% 7.5% 10.7% 10.0% 9.8% 8.5% 8.7%

Basic shares 111.6 111.6 111.6 111.6 111.6 135.6 137.5 138.0 133.4 128.8

EPS $1.30 $1.43 $1.50 $0.20 $1.15 $1.48 $1.45 $1.49 $1.40 $1.53

Growth 9.6% 4.9% -86.8% 480.5% 28.9% -2.0% 2.5% -5.7% 9.1%

DPS $0.00 $0.90 $1.79 $0.00 $0.00 $0.15 $0.23 $0.28 $0.33 $0.40


46

Appendix 3: Balance sheet


Operating assets and liabilities

Operating assets $196 $384 $327 $560 $348 $343 $325 $363 $342 $422

Growth 96.4% -14.9% 71.5% -37.9% -1.4% -5.4% 11.7% -5.8% 23.6%

% of sales 11.9% 24.5% 20.6% 38.6% 20.3% 18.3% 16.2% 17.3% 15.5% 18.8%

% of assets 0.9% 1.9% 1.7% 2.9% 1.6% 1.3% 1.2% 1.2% 1.1% 1.4%

Cash $111 $253 $254 $468 $258 $275 $242 $131 $98 $174

Growth 128.1% 0.3% 84.3% -44.9% 6.5% -11.8% -46.0% -24.8% 76.7%

% of sales 6.8% 16.1% 16.0% 32.2% 15.0% 14.6% 12.1% 6.2% 4.5% 7.7%

% of assets 0.5% 1.3% 1.3% 2.4% 1.1% 1.1% 0.9% 0.4% 0.3% 0.6%

Oper assets ex cash $85 $131 $73 $92 $90 $69 $83 $232 $243 $248

Growth 54.7% -44.4% 26.6% -2.1% -24.0% 20.3% 181.1% 5.0% 2.1%

% of sales 5.2% 8.3% 4.6% 6.4% 5.3% 3.7% 4.1% 11.0% 11.0% 11.0%

% of assets 0.4% 0.7% 0.4% 0.5% 0.4% 0.3% 0.3% 0.8% 0.8% 0.8%

Operating l iabilities $12 $14 $12 $12 $12 $12 $12 $0 $0 $0

NOWC $184 $370 $315 $548 $336 $331 $313 $363 $342 $422

Growth 101.0% -14.8% 74.0% -38.7% -1.5% -5.6% 16.1% -5.8% 23.6%

% of sales 11.2% 23.6% 19.8% 37.8% 19.6% 17.6% 15.6% 17.3% 15.5% 18.8%

% of assets 0.9% 1.8% 1.6% 2.9% 1.5% 1.3% 1.1% 1.2% 1.1% 1.4%

NOWC ex cash $73 $117 $61 $80 $78 $56 $70 $232 $243 $248

Growth 59.7% -47.4% 31.0% -2.6% -27.9% 24.5% 230.3% 5.0% 2.1%

% of sales 4.4% 7.4% 3.9% 5.5% 4.6% 3.0% 3.5% 11.0% 11.0% 11.0%

% of assets 0.3% 0.6% 0.3% 0.4% 0.3% 0.2% 0.2% 0.8% 0.8% 0.8%

Long-term Investments

Fixed maturities, at fair value $17,183 $16,050 $15,600 $14,888 $18,594 $21,282 $22,905 $23,519 $23,519 $23,519

Growth -6.6% -2.8% -4.6% 24.9% 14.5% 7.6% 2.7% 0.0% 0.0%

Mortgage loans $777 $794 $846 $989 $1,200 $1,713 $2,518 $3,094 $3,743 $4,392

Growth 2.2% 6.4% 16.9% 21.3% 42.8% 47.0% 22.9% 21.0% 17.3%

Policy loans $81 $79 $77 $75 $74 $72 $69 $66 $64 $62

Growth -1.6% -2.5% -2.6% -1.7% -3.2% -3.5% -4.6% -3.0% -3.1%

Investments in l imited partnerships $93 $113 $159 $138 $110 $187 $227 $239 252 266

Growth 20.6% 41.0% -12.9% -20.3% 69.6% 21.4% 5.5% 5.5% 5.5%

Other invested assets $29 $19 $12 $9 $12 $13 $21 $36 42 48

Growth -35.7% -36.4% -25.2% 37.1% 3.3% 66.7% 69.5% 16.9% 14.4%

Accrued investment income $214 $207 $195 $206 $237 $258 $269 $276 283 290

Growth -3.4% -5.9% 6.1% 15.0% 8.6% 4.6% 2.5% 2.5% 2.5%

Reinsurance recoverables $230 $239 $254 $264 $277 $281 $296 $302 309 316

Growth 3.9% 6.3% 4.1% 4.7% 1.5% 5.3% 2.2% 2.2% 2.2%

Deferred policy acquisition costs $49 $88 $133 $248 $250 $250 $215 $156 156 156

Growth 80.0% 50.7% 86.2% 1.2% -0.2% -13.8% -27.7% 0.0% 0.0%

Gross PP&E $31 $28 $23 $19 $0 $0 $0 $0 $0 $0

Gross other intangible assets $4 $4 $22 $24 $26 $28 $30 $0 $0 $0


47

Appendix 3: Balance sheet, continued


Other assets

Marketable equity securities, at fair value $162 $202 $201 $38 $37 $45 $50 $50 49 48

Growth 24.3% -0.4% -81.0% -3.7% 22.9% 11.5% -1.4% -1.4% -1.4%

Marketable equity securities, trading $0 $0 $0 $106 $154 $189 $382 $553 578 503

Growth 45.0% 22.8% 101.6% 44.8% 4.5% -13.0%

Other assets $1,932 $1,909 $1,713 $1,665 $1,116 $977 $905 $808 808 808

Growth -1.2% -10.3% -2.8% -33.0% -12.5% -7.3% -10.8% 0.0% 0.0%

Net Fixed Assets

Net Fixed Assets $20,622 $19,529 $19,033 $18,525 $21,897 $25,059 $27,456 $28,496 $29,176 $29,856

Growth -5.3% -2.5% -2.7% 18.2% 14.4% 9.6% 3.8% 2.4% 2.3%

Asset turnover 0.08 0.08 0.08 0.08 0.08 0.07 0.07 0.07 0.08 0.08

Total assets

Total assets $20,980 $20,115 $19,560 $19,230 $22,435 $25,637 $28,213 $29,461 $30,144 $30,830

Growth -4.1% -2.8% -1.7% 16.7% 14.3% 10.0% 4.4% 2.3% 2.3%

Asset turnover 0.08 0.08 0.08 0.08 0.08 0.07 0.07 0.07 0.07 0.07

Debt, equity, other

Short-term debt 300 299 449 449 449 449 449 449 449 449

Growth -0.4% 50.2% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

% of assets 1.4% 1.5% 2.3% 2.3% 2.0% 1.8% 1.6% 1.5% 1.5% 1.5%

Other liabilities $19,275 $18,489 $17,827 $18,495 $20,553 $22,807 $24,630 $25,381 $25,981 $26,581

Growth -4.1% -3.6% 3.7% 11.1% 23.4% 8.0% 3.1% 2.4% 2.3%

% of assets 91.9% 91.9% 91.1% 96.2% 91.6% 89.0% 87.3% 86.2% 86.2% 86.2%

Total l-t/s-t/other 19,575 18,787 18,275 18,943 21,002 23,256 25,079 25,831 26,431 27,031

Growth -4.0% -2.7% 3.7% 10.9% 23.8% 7.8% 3.0% 2.3% 2.3%

% of assets 93.3% 93.4% 93.4% 98.5% 93.6% 90.7% 88.9% 87.7% 87.7% 87.7%

Equity

Common equity $1,166 $1,166 $1,166 $1,166 $1,167 $1,451 $1,456 $1,461 $1,466 $1,471

Treasury stock 0 0 0 0 0 0 0 0 65 130

AOCI 137 -1 -13 -1053 -50 433 1014 1371 1371 1371

Total $1,303 $1,166 $1,154 $114 $1,117 $1,884 $2,469 $2,832 $2,772 $2,712

Growth -10.5% -1.0% -90.1% 881.5% 68.7% 31.1% 14.7% -2.1% -2.2%

% of assets 6.2% 5.8% 5.9% 0.6% 5.0% 7.3% 8.8% 9.6% 9.2% 8.8%

Retained earnings 102 161 131 172 316 497 665 798 942 1087

Total equity $1,405 $1,327 $1,285 $286 $1,433 $2,381 $3,134 $3,630 $3,713 $3,799

Growth -5.5% -3.2% -77.7% 400.8% 66.1% 31.6% 15.8% 2.3% 2.3%

% of assets 6.7% 6.6% 6.6% 1.5% 6.4% 9.3% 11.1% 12.3% 12.3% 12.3%

Total l iab and equity 20,980 20,115 19,560 19,230 22,435 25,637 28,213 29,461 30,144 30,830

Growth -4.1% -2.8% -1.7% 16.7% 14.3% 10.0% 4.4% 2.3% 2.3%


48

Appendix 4: Ratios

Ratios

Items Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14

Profitability

Gross margin 30.7% 34.3% 35.9% 23.2% 30.2% 34.3% 34.6% 34.7% 32.8% 33.1%

EBIT Margin 13.3% 16.8% 17.0% 3.1% 12.4% 17.1% 15.6% 14.4% 12.6% 13.0%

Net Margin 8.9% 10.2% 10.5% 1.5% 7.5% 10.7% 10.0% 9.8% 8.5% 8.7%

ROIC 0.8% 0.9% 0.4% 0.7% 0.9% 0.8% 0.8% 0.7% 0.7%

Activity

Total asset turnover 0.08 0.08 0.07 0.08 0.08 0.07 0.07 0.07 0.07

Fixed asset turnover 0.08 0.08 0.08 0.08 0.08 0.08 0.08 0.08 0.08

Accounts Receivables Turnover 23.60 22.80 24.37 26.01 27.09 26.46 13.37

Receivables collection period 15 16 15 14 13 14 27

Liquidity

CA / CL 1.15 1.87 1.15 1.53 1.17 1.25 1.64 2.15 2.15 2.17

CA ex cash / CL 0.79 1.06 0.59 0.51 0.61 0.66 1.11 1.86 1.94 1.78

Quick ratio 1.15 1.87 1.15 1.53 1.17 1.25 1.64 2.15 2.15 2.17

Cash / current l iab 0.36 0.81 0.55 1.02 0.56 0.60 0.53 0.29 0.22 0.39

Solvency

Total debt $300 $299 $449 $449 $449 $449 $449 $449 $449 $449

L-T debt/assets 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Interest coverage 17.8 13.7 12.6 1.4 6.7 10.1 9.7 9.2 8.5 8.9

Debt to long-term capital 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Equity/assets 6.7% 6.6% 6.6% 1.5% 6.4% 9.3% 11.1% 12.3% 12.3% 12.3%

DuPondt ROE

5-stage

EBIT / sales 13.3% 16.8% 17.0% 21.4% 12.4% 17.1% 14.6% 14.4% 12.6% 13.0%

Sales / avg assets 0.08 0.07 0.05 0.08 0.07 0.07 0.07 0.07 0.07

EBT/EBIT 94.4% 92.7% 92.0% 89.7% 85.1% 90.1% 88.8% 89.2% 88.2% 88.8%

Net income /EBT 70.0% 65.4% 67.2% 71.5% 70.8% 69.5% 76.0% 76.0% 76.0% 76.0%

ROA 0.8% 0.7% 0.7% 0.6% 0.8% 0.6% 0.7% 0.6% 0.6%

Avg assets / avg equity 15.04 12.34 9.76 24.23 10.22 8.12 8.53 8.12 8.12

ROE 11.7% 9.0% 7.2% 14.9% 7.8% 5.2% 6.1% 5.1% 5.2%

Other information

Payout Ratio 0.0% 62.7% 119.5% 0.0% 0.0% 10.3% 15.8% 18.9% 23.5% 26.1%

Retention Ratio 100.0% 37.3% -19.5% 100.0% 100.0% 89.7% 84.2% 81.1% 76.5% 73.9%

Sustainable Growth Rate 4.4% -1.8% 7.2% 14.9% 7.0% 4.4% 4.9% 3.9% 3.9%


49

Glossary

1035 Exchange – A tax free method for moving policy cash values that exceed the tax basis in the policy from one company to another without triggering a taxable event.

Accumulated Other Comprehensive Income (AOCI) – This is a plug value to hold unrealized gains and losses attributable to changes in value of securities held as available for sale on the balance sheet. It is industry practice to adjust GAAP book value by removing AOCI to get a picture of the book value of the company assuming all assets are held to maturity.

American Council of Life Insurers (ACLI) - A life insurance industry trade association.

Bank Owned Life Insurance (BOLI) – A single premium life insurance product sold to banks to fund future benefits for employees.

Brokerage General Agent (BGA) – One of the distribution channels for Symetra’s products.

Corporate Owned Life Insurance (COLI) - A cash value life insurance product sold to companies to fund future benefits for employees.

Deferred Acquisition Costs (DAC) - The first year of a policy's life is very expensive for an insurance company. Not only must it pay home office expenses for underwriting, but agent first year commissions tend to be very high. Under GAAP accounting, insurance companies can amortize this initial start up cost over multiple years.

Deferred Annuity – An insurance policy that will pay a stream of payments starting at some point in the future. This time is usually determined when the policy is sold.

Deferred Sales Inducements (DSI) – Bonus interest and excess interest mainly on fixed deferred annuity products, which are deferred and reported in other assets on consolidated balance sheets and amortized as interest credited over the estimated life of the related contracts. (Symetra 10k, 2011)

Estimated Gross Profits (EGP) – An actuarially calculated number based on projections for lapse rates, withdrawals, expenses, interest margins, mortality/morbidity experience and investment performance.

Medical Stop Loss Insurance – Protects against severe medical claims to companies with self-funded medical insurance.

Risk based capital ratio (RBC) - Calculated by the National Association of Insurance Commissioners (NAIC), it is a formula that compares a company against the minimum amount of capital required in order to prevent regulatory action.


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Self-funded medical insurance plan – A plan in which the employer assumes the entire financial risk for providing healthcare benefits for its employees.

Surplus – In statutory accounting, surplus is the difference between assets and liabilities. The more surplus an insurance company has, the greater its solvency and the safer its long-term guarantees to policyowners.

Bibliography

Associated Press. (2013, January 3). JPMorgan sees weak returns from life insurers.

Beal, D. J. (2007). Information Criteria Methods in SAS for Multiple Linear Regression Models. Oak Ridge, TN: Insitute for Advanced Analytics.

Hokenson, D. (2012). Global Demographics: Demographics of Obama's Second Term. International Strategy and Investment.

Hokenson, D. (2012). Global Demographics: Health Care and the Baby Boom Tsunami. International Strategy and Investment , 1.

McMillan, R. (2012, October 18). Insurance: Life and Health. Standard and Poor's Industry Surveys .

Parker, A. S., Hayes, B. T., Ortega, A., Gould, A. J., Neuhart, P., & Ba, Y. A. (2013). US Equity Strategy: The Fed is Winning a Battle; Can it Win the War? Morgan Stanley Research , 1, 7.

SNL Financial. (2012). Retrieved from www.snl.com: http://www.snl.com/SNLWebPlatform/Content/Companies/CompaniesAndAssets.aspx

Symetra 10k. (2011, December 31). 10k. Retrieved from www.sec.gov: http://www.sec.gov/Archives/edgar/data/1403385/000119312512088563/d243643d10k.htm

Symetra 2Q 2010 Earnings Webcast. (2010, 7 29). Events and Presentations. Retrieved from investors.symetra.com: http://investors.symetra.com/phoenix.zhtml?c=213723&p=irol-presentations

Action Level RBC Ratio

No Action Needed Level >100%

Company Action Level ≤ 100%

Regulatory Action Level ≤ 75%

Authorized Control Level ≤50%

Mandatory Control Level ≤ 35%


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Symetra 2Q 2012 Earnings Webcast. (2012, 7 26). Events and Presentations. Retrieved from investors.symetra.com: http://investors.symetra.com/phoenix.zhtml?c=213723&p=irol-presentations

Symetra 3Q 2012 Earnings Webcast. (2012, 10 25). Events & Presentations. Retrieved from investors.symetra.com: http://investors.symetra.com/phoenix.zhtml?c=213723&p=irol-presentations

Symetra Financial Corp. at J.P. Morgan Insurance Conference. (2013)., (p. 6).

Symetra Financial Corp. at Keefe, Bruyette & Woods Inc. 2012 Insurance Conference. (2012, 9 5). Events & Presentations. Retrieved from investors.symetra.com: http://investors.symetra.com/phoenix.zhtml?c=213723&p=irol-presentations

Symetra Financial Corporation Investor Day. (2011, 2 7). Events and Presentations. Retrieved from investors.symetra.com: http://investors.symetra.com/phoenix.zhtml?c=213723&p=irol-presentations

Towers Watson. (2012). Prescribed US Statutory and Tax Interest Rates for the Valuation of Life Insurance and Annuity Products.

US Census Bureau. (2010).

White Mountain 10k. (2011). White Mountain 10k.

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