KEY RATING DRIVERS

Fitch’s affirmation of Symetra’s ratings reflects the company’s strong balance sheet, consistent and diversified earnings, moderate financial leverage and lower-risk products. Additional strengths include the company’s good competitive position in the group medical stop-loss market and fixed annuities sold through banks.

The ratings also consider Symetra’s lack of significant scale compared to other highly rated life insurers and the company’s reliance on its niche group medical stop-loss business, which generates a significant but sometimes volatile source of earnings, and moderate profitability compared to similarly rated peers.

The Outlook is revised to Negative based primarily on Symetra’s high exposure to the continuing low interest rate environment and the effect on profitability, GAAP based fixed charge coverage and additional statutory reserving related to asset adequacy testing over the next 12 to 18 months. Longer-term, Fitch is concerned with the earnings implications of a prolonged low interest rate environment as spreads between earned rates and credited rates narrow. Given its liability mix, Symetra is more exposed to this risk than peers.

Symetra’s August 2014 $250 million debt issuance removed some of the cushion in GAAP fixed charge coverage and financial leverage ratios relative to downgrade triggers. Fixed charge coverage declined to 7.9x for the first nine months of 2014 from 8.2x in 2013 and is expected to be pressured in 2015 as interest expenses increase and earnings are challenged by low rates. Statutory interest coverage based on maximum dividend coverage is expected to remain strong at over 4.5 times in 2015. Year end 2014 financial leverage is expected to increase to approximately 23% at yearend 2014 from 16% at year-end 2013.

The company’s pretax operating earnings growth through the first nine months has been flat at $183 million while net income increased 19.5% to $187 million. Favorable underwriting results from its medical stop loss business and acceptable margins in its deferred annuity segment have been offset by low interest rate pressure on its structured settlement book, higher expenses related to its life insurance growth and lower prepayment and limited partnership income. Sales of deferred and fixed index annuities continue to be strong while universal life sales are beginning to gain traction in the broker general agent channel.

Profitability in 2015 is expected to be pressured by low interest rates and more normal loss ratios in its Benefit division but boosted by moderately higher invested assets. Symetra’s operating ROE improved modestly to 10.4% through the first three quarters of 2014.

Symetra’s profitability as measured by ROE has been consistently in the high single digits over the past five years. A key driver of Symetra’s earnings consistency is the broad product line that provides diverse sources of revenue and earnings. Each of the company’s three business segments generates meaningful portions of Symetra’s revenue and earnings.

Symetra’s risky asset ratio is in line with life industry levels, declining to 84% at Sept. 30, 2014 from 91% at year-end 2013. Symetra takes its equity exposure in the form of greater weighting of commons stocks and carries a lower exposure to private equity. Symetra’s bond portfolio has normally carried a greater than industry allocation of ‘BBB’ rated bonds and an average exposure to below investment grade bonds (BIGs). The company’s bond portfolio has avoided concentrations in troubled asset classes.

The company’s investment portfolio has higher than average exposure to commercial mortgages than the life insurance industry as this asset class has grown to over 15.5% of invested assets. Mortgage credit quality is considered high and mortgage performance has been very good with 99.9% of mortgages in good standing at Sept. 30, 2014.

RATING SENSITIVITIES

Key rating triggers that could lead to a downgrade include:

–Material additional statutory reserve strengthening driven by asset adequacy testing;

–A decline in run rate profitability to below 8% ROE on a sustained basis;

–A deterioration in operating company capitalization sustained below 400% Risk Based Capital (RBC);

–An increase in financial leverage above 25% or a decline in GAAP-based fixed charge coverage to below 8x on a sustained basis;

–Material realized or unrealized losses in the company’s long-duration bond portfolio derived from sudden changes in market conditions, spiked interest rate levels, and credit spreads that lead to significant cash flow stresses or declines in capital.

Rating triggers that could lead to an upgrade would be achieved over an extended period of time, and include:

–Enhanced profitability to double-digit ROE levels;

–Successful execution of its product diversification strategy;

–Maintenance of strong capital levels in excess of 450% RBC and operating company leverage maintained near current levels or improved;

–financial leverage below 20% and fixed charge coverage exceeding 12X.

Fitch has affirmed the following ratings and revised the Outlook to Negative from Stable:

Symetra Financial Corp.

–IDR at ‘A-‘;

–6.125% senior unsecured notes due April 1, 2016 at ‘BBB+’;

–4.25%. senior unsecured notes due July 15, 2024 at ‘BBB+’;

–8.3% junior subordinated CENts due Oct. 15, 2067 at ‘BBB-‘

Symetra Life Insurance Company

–IFS at ‘A+’.

First Symetra National Life Insurance Company of New York

–IFS at ‘A+’.

Additional information is available at ‘www.fitchratings.com’.

Applicable Criteria and Related Research:

–‘Insurance Rating Methodology’, Sept. 4, 2014.

Applicable Criteria and Related Research:

Insurance Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=756650

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=950255

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SOURCE: Fitch Ratings

Fitch Ratings
Primary Analyst
R. Andrew Davidson, CFA
Senior Director
+1-312-368-3144
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Julie A. Burke, CPA, CFA
Managing Director
+1-312-368-3158
or
Committee Chairperson
Douglas Pawlowski, CFA
Senior Director
+1-312-368-2054
or
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