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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
August 2, 2004
Date of Report (Date of earliest event reported)
WHITE MOUNTAINS INSURANCE GROUP, LTD.
(Exact name of registrant as specified in its charter)
Bermuda
(State or other jurisdiction of
incorporation or organization) |
|
1-8993
(Commission
file number) |
|
94-2708455
(I.R.S. Employer
Identification No.) |
80 South Main Street, Hanover, New Hampshire 03755
(Address of principal executive offices) |
(603) 640-2200
(Registrant's telephone number, including area code)
Check
the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
- o
- Written
communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
- o
- Soliciting
material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
- o
- Pre-commencement
communications pursuant to Rule 14d-2(b) under the Exchange Act
(17 CFR 240.14d-2(b))
- o
- Pre-commencement
communications pursuant to Rule 13e-4(c) under the Exchange Act
(17 CFR 240.13e-4(c))
ITEM 2.01 COMPLETION OF ACQUISITION OF ASSETS.
On
August 2, 2004, White Mountains Insurance Group, Ltd. ("White Mountains" or the "Registrant") issued a press release stating that the investor group led by White Mountains and
Berkshire Hathaway Inc. had completed its previously announced acquisition of the life and investments business of Safeco Corporation ("Symetra Financial"). The press release was previously
furnished as Exhibit 99.2 on the Registrant's Form 8-K dated August 2, 2004. This current report on Form 8-K/A amends the Registrant's
Form 8-K dated August 2, 2004 (filed on August 12, 2004) by furnishing the financial statements and pro forma financial information required pursuant to Item 9.01 of
Form 8-K.
The
Stock Purchase Agreement by and among Safeco Corporation, General America Corporation, White Mountains Insurance Group, Ltd. and Occum Acquisition Corp. was filed previously as
Exhibit 10 to the Registrant's Form 8-K dated March 15, 2004.
ITEM 9.01 FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of Businesses Acquired.
The
audited combined financial statements of Symetra Financial as of and for the year ended December 31, 2003 are filed herewith as Exhibit 99.3. The unaudited interim combined financial
statements for Symetra Financial as of June 30, 2004 and for the six months ended June 30, 2004 and 2003 are filed herewith as Exhibit 99.4. The GAAP financial statements of
Symetra Financial filed herewith as Exhibits 99.3 and 99.4 were prepared by the management of Symetra Financial for the indicated pre-acquisition periods. The investor group that purchased
Symetra Financial is in the process of reviewing Symetra Financial's statutory accounting records for potential purchase price adjustments pursuant to the terms of the Stock Purchase Agreement.
(b) Pro Forma Financial Information.
The
unaudited pro forma condensed combined balance sheet of the Registrant as of June 30, 2004 and the unaudited pro forma condensed combined income statements of the Registrant for the six
months ended June 30, 2004 and year ended December 31, 2003 are furnished herewith as Exhibit 99.5.
(c)
Exhibits. The following exhibits are attached herewith:
EXHIBIT INDEX
| 99.3 |
|
The audited combined financial statements of Symetra Financial as of and for the year ended December 31, 2003. |
99.4 |
|
The unaudited combined financial statements for Symetra Financial as of June 30, 2004 and for the six months ended June 30, 2004 and 2003. |
99.5 |
|
The unaudited pro forma condensed combined balance sheet of the Registrant as of June 30, 2004 and the unaudited pro forma condensed combined income statements of the Registrant for the six months ended June 30, 2004 and the year ended
December 31, 2003. |
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| |
|
WHITE MOUNTAINS INSURANCE GROUP, LTD. |
DATED: October 15, 2004 |
|
By: |
/s/ J. BRIAN PALMER
J. Brian Palmer
Chief Accounting Officer |
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EXHIBIT INDEX
SIGNATURES
Exhibit 99.3
COMBINED FINANCIAL STATEMENTS
Symetra Financial
Year Ended December 31, 2003
With Report of Independent Auditors
Symetra Financial
Combined Financial Statements
Year Ended December 31, 2003
CONTENTS
Report of Independent Auditors.................................................1
Combined Financial Statements
Combined Balance Sheet.........................................................2
Combined Statement of Income...................................................4
Combined Statement of Changes in Shareholder's Equity..........................5
Combined Statement of Comprehensive Income.....................................6
Combined Statement of Cash Flows...............................................7
Notes to Combined Financial Statements.........................................9
Report of Independent Registered Public Accounting Firm
Board of Directors
Symetra Financial Corporation
We have audited the accompanying combined balance sheet of Symetra Financial
(formerly wholly owned subsidiaries of Safeco Corporation) as of December 31,
2003, and the related combined statements of income, changes in shareholder's
equity, comprehensive income and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position of the Company at
December 31, 2003, and the combined results of their operations and their cash
flows for the year then ended, in conformity with U.S. generally accepted
accounting principles.
/s/ Ernst & Young LLP
September 24, 2004
1
Symetra Financial
Combined Balance Sheet
December 31, 2003
(In thousands)
ASSETS
Investments:
Available-for-sale securities:
Fixed maturities, at fair value
(cost or amortized cost: $16,710,722) $ 18,044,154
Marketable equity securities, at fair value
(cost: $97,511) 109,881
Mortgage loans:
Nonaffiliates 926,286
Affiliates 33,518
Policy loans 85,590
Short-term investments 121,751
Other invested assets 20,957
--------------
Total investments 19,342,137
Cash and cash equivalents 15,028
Accrued investment income 231,390
Other notes and accounts receivable 114,871
Reinsurance recoverables 179,754
Deferred policy acquisition costs 282,291
Intangibles and goodwill 150,864
Other assets 3,583
Securities lending collateral 1,054,495
Separate account assets 1,137,439
--------------
Total assets $ 22,511,852
==============
2
LIABILITIES AND SHAREHOLDER'S EQUITY
Funds held under deposit contracts $ 16,582,390
Future policy benefits 331,855
Policy and contract claims 139,114
Unearned premiums 9,838
Other policyholders' funds 46,555
Other liabilities 236,446
Current income taxes payable 26,926
Deferred income tax liability 380,137
Securities lending payable 1,054,495
Separate account liabilities 1,137,439
--------------
Total liabilities 19,945,195
Commitments and contingencies (Note 9)
Capital stock (Note 1) 7,459
Additional paid-in capital 397,354
Retained earnings 1,332,072
Accumulated other comprehensive income, net of taxes:
Unrealized gains and losses on available-for-sale securities and derivative
financial instruments 886,980
Deferred policy acquisition costs valuation allowance (57,208)
--------------
Total accumulated other comprehensive income 829,772
Total shareholder's equity 2,566,657
--------------
Total liabilities and shareholder's equity $ 22,511,852
==============
SEE NOTES TO COMBINED FINANCIAL STATEMENTS.
3
Symetra Financial
Combined Statement of Income
Year Ended December 31, 2003
(In thousands)
Revenues:
Premiums $ 680,518
Net investment income 1,211,680
Other revenues 86,199
Net realized investment losses (25,573)
--------------
Total 1,952,824
--------------
Benefits and expenses:
Policy benefits 1,355,768
Other underwriting and operating expenses 346,753
Amortization of deferred policy acquisition costs 51,327
Intangibles and goodwill amortization 8,331
--------------
Total 1,762,179
--------------
Income before income taxes 190,645
Provision for income taxes:
Current 42,597
Deferred 9,358
--------------
Total 51,955
--------------
Net income $ 138,690
==============
SEE NOTES TO COMBINED FINANCIAL STATEMENTS.
4
Symetra Financial
Combined Statement of Changes in Shareholder's Equity
Year Ended December 31, 2003
(In thousands)
Capital stock $ 7,459
--------------
Additional paid-in capital:
Balance at beginning of year 390,874
Capital contribution from Safeco 4,537
Stock option expense allocation from Safeco 1,943
--------------
Balance at end of year 397,354
--------------
Retained earnings:
Balance at beginning of year 1,193,382
Net income 138,690
--------------
Balance at end of year 1,332,072
--------------
Accumulated other comprehensive income,
net of taxes:
Balance at beginning of year 702,074
Other comprehensive income 127,698
--------------
Balance at end of year 829,772
--------------
Shareholder's equity $ 2,566,657
==============
SEE NOTES TO COMBINED FINANCIAL STATEMENTS.
5
Symetra Financial
Combined Statement of Comprehensive Income
Year Ended December 31, 2003
(In thousands)
Net income $ 138,690
--------------
Other comprehensive income, net of taxes:
Change in unrealized gains and losses on available-for-sale securities (net of
tax: $72,357) 134,376
Reclassification adjustment for net realized investment losses included in net
income (net of tax: $8,936) 16,594
Derivatives qualifying as cash flow hedges --net change in fair value
(net of tax: $(765)) (1,421)
Adjustment for deferred policy acquisition costs valuation allowance
(net of tax: $(11,766)) (21,851)
--------------
Other comprehensive income 127,698
--------------
Comprehensive income $ 266,388
==============
SEE NOTES TO COMBINED FINANCIAL STATEMENTS.
6
Symetra Financial
Combined Statement of Cash Flows
Year Ended December 31, 2003
(In thousands)
OPERATING ACTIVITIES
Insurance premiums received $ 592,664
Dividends and interest received 1,146,172
Other operating receipts 88,238
Insurance claims and policy benefits paid (525,843)
Underwriting, acquisition and operating costs paid (401,503)
Income taxes paid (11,232)
--------------
Net cash provided by operating activities 888,496
INVESTING ACTIVITIES
Purchases of:
Fixed maturities available-for-sale (4,468,976)
Equity securities available-for-sale (9,953)
Other invested assets (8,737)
Issuance of nonaffiliated mortgage loans (117,810)
Issuance of policy loans (22,229)
Maturities and calls of fixed maturities available-for-sale 2,110,144
Sales of:
Fixed maturities available-for-sale 1,286,177
Equity securities available-for-sale 27,101
Other invested assets 10,140
Repayment of nonaffiliated mortgage loans 111,456
Repayment of policy loans 23,327
Repayment of affiliated mortgage loans 1,669
Net decrease in short-term investments 43,767
Other, net (370)
--------------
Net cash used in investing activities (1,014,294)
FINANCING ACTIVITIES
Funds received under deposit contracts 1,219,314
Return of funds held under deposit contracts (1,124,411)
--------------
Net cash provided by financing activities 94,903
--------------
Net decrease in cash (30,895)
Cash and cash equivalents at beginning of year 45,923
--------------
Cash and cash equivalents at end of year $ 15,028
==============
SEE NOTES TO COMBINED FINANCIAL STATEMENTS.
7
Symetra Financial
Combined Statement of Cash Flows
Reconciliation of Net Income to Net Cash Provided by Operating Activities
Year Ended December 31, 2003
(In thousands)
Net income $ 138,690
--------------
Adjustments to reconcile net income to net cash provided by operating
activities:
Net realized investment losses 25,573
Accretion of fixed maturity investments (21,451)
Accrued interest on accrual bonds (45,937)
Amortization and depreciation 15,733
Deferred income tax provision 9,358
Interest expense on deposit contracts 905,785
Mortality and expense charges and administrative fees (84,238)
Other, net (980)
Changes in:
Accrued investment income (3,091)
Deferred policy acquisition costs (22,490)
Other receivables (32,821)
Policy and contract claims (30,918)
Future policy benefits (8,052)
Unearned premiums 287
Accrued income taxes 28,016
Other assets and liabilities 15,032
--------------
Total adjustments 749,806
--------------
Net cash provided by operating activities $ 888,496
==============
There were no significant noncash financing or investing activities for the year
ended December 31, 2003, with the exception of the $4,537 capital contribution
from Safeco disclosed in Note 13.
SEE NOTES TO COMBINED FINANCIAL STATEMENTS.
8
Symetra Financial
Notes to Combined Financial Statements
(All dollar amounts in thousands, unless otherwise stated)
December 31, 2003
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Symetra Financial is a group of stock life insurance and financial services
companies. We began as wholly owned subsidiaries of Safeco Corporation (Safeco),
a Washington State corporation whose subsidiaries were engaged in two principal
businesses: (1) property and casualty insurance, including surety; and (2) life
insurance and asset management. As part of Safeco we were included in the
segment known as Safeco Life and Investments. We are comprised primarily of
Safeco Life Insurance Company, a stock life insurance company organized under
the laws of the state of Washington, and its three wholly owned subsidiaries:
Safeco National Life Insurance Company, American States Life Insurance Company,
and First Safeco National Life Insurance Company of New York.
These companies offer individual and group insurance products, pension products,
and annuity products marketed through professional agents in all states and the
District of Columbia. Our principal products, measured by 2003 premiums and
deposit volume, include: fixed deferred annuities, stop-loss medical insurance,
variable annuities, single premium immediate annuities, and individual life
insurance.
Also included in this group are Safeco Administrative Services, Inc., a
third-party administrator of employee benefit programs; Safeco Asset Management
Company, the investment advisor for the Safeco Mutual Funds; Safeco Securities,
Inc., the principal underwriter of the Safeco Mutual Funds; Safeco Services
Corporation, the transfer agent for the Safeco Mutual Funds; Safeco Investment
Services, Inc., a broker-dealer; and Safeco Assigned Benefits Service Company.
These affiliates were wholly owned subsidiaries of Safeco.
On September 29, 2003, Safeco announced its intent to sell Safeco Life and
Investments. In the fourth quarter of 2003, $8,818 was accrued for employee
retention bonuses associated with this planned sale, which is included in other
underwriting and operating expenses in the Combined Statement of Income (see
Note 15).
9
Symetra Financial
Notes to Combined Financial Statements (continued)
(All dollar amounts in thousands, unless otherwise stated)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
NATURE OF OPERATIONS (CONTINUED)
On August 2, 2004, the following companies were purchased by an investor group
led by White Mountains Insurance Group, Ltd., and Berkshire Hathaway, Inc., and
became the privately held group of companies known today as Symetra Financial:
- Symetra Life Insurance Company (formerly Safeco Life Insurance Company)
- Symetra National Life Insurance Company (formerly Safeco National Life
Insurance Company)
- American States Life Insurance Company
- First Symetra National Life Insurance Company of New York (formerly
First Safeco National Life Insurance Company of New York)
- Symetra Administrative Services, Inc. (SAS) (formerly Safeco
Administrative Services, Inc.)
- Symetra Asset Management Company (formerly Safeco Asset Management
Company)
- Symetra Securities, Inc. (formerly Safeco Securities, Inc.)
- Symetra Services Corporation (formerly Safeco Services Corporation)
- Symetra Investment Services, Inc. (formerly Safeco Investment Services,
Inc.)
- Symetra Assigned Benefits Service Company (formerly Safeco Assigned
Benefits Service Company)
Throughout our Combined Financial Statements, the member companies of Symetra
Financial are referred to as "the Company," "we," and "our" and the new names of
the entities have been used as if those names were in effect in 2003. In
addition, all references to affiliated companies refer to former Safeco
affiliates.
BASIS OF COMBINATION AND REPORTING AND USE OF ESTIMATES
The Combined Financial Statements are prepared in conformity with accounting
principles generally accepted in the United States (GAAP). The preparation of
financial statements in conformity with GAAP requires us to make estimates and
assumptions that may affect the amounts reported in the Combined Financial
Statements and accompanying notes. Actual results could differ from those
estimates.
All significant intercompany transactions and balances have been eliminated in
the Combined Financial Statements.
10
Symetra Financial
Notes to Combined Financial Statements (continued)
(All dollar amounts in thousands, unless otherwise stated)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
REVENUE RECOGNITION
We report life insurance premiums for traditional individual life policies as
income when due from the policyholder. These policies, which include guaranteed
renewable term and whole life policies, are long-duration contracts.
We report premiums from group life and health policies as income when earned,
over the life of the policy. We report the portion of premiums unearned as a
liability for unearned premiums on the Combined Balance Sheet.
We report premiums from universal life and investment-type contracts as deposits
to policyholders' account balances and reflect these amounts as liabilities
rather than as premium income when received. Funds received under these
contracts were $1,219,314 in 2003. Revenues from these contracts consist of
investment income on these funds and amounts assessed during the period against
policyholders' account balances for mortality charges, policy administration
charges and surrender charges. We include these amounts in premium and other
revenue in the Combined Statement of Income.
Dealers' concession income and commission expense on variable annuity and
variable life insurance products and mutual funds are recorded on the trade date
as related transactions occur. Commissions paid on the sale of Class B mutual
fund shares are capitalized and amortized over a period of six years, matching
expected revenues (12b-1 fees and contingent deferred sales charges (CDSC)) with
commission expenses. We include these amounts in other revenue and other
underwriting and operating expenses in the Combined Statement of Income.
Commissions on the sale of various benefit products and fees received from the
administration of employee benefit plans are recognized as income at the time
the sale is consummated or the service is rendered.
11
Symetra Financial
Notes to Combined Financial Statements (continued)
(All dollar amounts in thousands, unless otherwise stated)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
INVESTMENTS
In accordance with the provisions of Statement of Financial Accounting Standards
(SFAS) 115, "Accounting for Certain Investments in Debt and Equity Securities,"
we classify our investments into one of three categories: held-to-maturity,
available-for-sale or trading. We determine the appropriate classification of
both fixed maturities and equity securities at the time of purchase and
re-evaluate such designation as of each balance sheet date. Fixed maturities
include bonds, mortgage-backed securities and redeemable preferred stocks. We
classify all fixed maturities as available-for-sale and carry them at fair
value. We report net unrealized investment gains and losses related to
available-for-sale securities in accumulated other comprehensive income (OCI) in
Shareholder's Equity, net of related deferred policy acquisition costs and
deferred income taxes.
For mortgage-backed securities we recognize income using a constant effective
yield based on anticipated prepayments and the estimated economic life of the
securities. Quarterly, we compare actual prepayments to anticipated prepayments
and recalculate the effective yield to reflect actual payments-to-date plus
anticipated future payments. We include any resulting adjustment in net
investment income.
Marketable equity securities include common stocks and nonredeemable preferred
stocks. We classify marketable equity securities as available-for-sale and carry
them at fair value. Changes in net unrealized investment gains and losses are
recorded directly to OCI in Shareholder's Equity, net of related deferred policy
acquisition costs and deferred income taxes; Symetra Investment Services records
changes in net unrealized investment gains and losses as a component of net
realized investment losses in the Combined Statement of Income.
When the collectibility of interest income for fixed maturities is considered
doubtful, any accrued but uncollectible interest income is reversed against
investment income in the current period. We then place the securities on
nonaccrual status and they are not restored to accrual status until all
delinquent interest and principal are paid.
12
Symetra Financial
Notes to Combined Financial Statements (continued)
(All dollar amounts in thousands, unless otherwise stated)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
INVESTMENTS (CONTINUED)
We regularly review the value of our investments. If the value of any of our
investments falls below our cost basis in the investment, we analyze the
decrease to determine whether it is an other-than-temporary decline in value. To
make this determination for each security, we consider:
- How long and by how much the fair value has been below its cost
- The financial condition and near-term prospects of the issuer of the
security, including any specific events that may affect its operations
or earnings potential
- Our intent and ability to keep the security long enough for it to
recover its value
- Any downgrades of the security by a rating agency
- Any reduction or elimination of dividends, or nonpayment of scheduled
interest payments
Based on our analysis, we make a judgment as to whether the loss is
other-than-temporary. If the loss is other-than-temporary, we record an
impairment charge within Net Realized Investment Losses in our Combined
Statement of Income in the period that we make the determination.
We use public market pricing information to determine the fair value of our
investments when such information is available. When such information is not
available for investments, as in the case of securities that are not publicly
traded, we use other valuation techniques. Such techniques include using
independent pricing sources, evaluating discounted cash flows, identifying
comparable securities with quoted market prices and using internally prepared
valuations based on certain modeling and pricing methods. Our investment
portfolio at December 31, 2003 included $232,190 of fixed maturities that were
not publicly traded, and values for these securities were determined using these
other valuation techniques. We owned no equity securities that were not publicly
traded.
The cost of securities sold is determined by the "identified cost" method.
We carry mortgage loans at outstanding principal balances, less an allowance for
mortgage loan losses. We consider a mortgage loan impaired when it is probable
that we will be unable to collect principal and interest amounts due according
to the contractual terms of the mortgage loan agreement. For mortgage loans that
we determine to be impaired, we charge the difference between the amortized cost
and fair value of the underlying collateral to the reserve. We accrue interest
income on impaired loans to the extent it is deemed collectible and the loan
continues to perform under its original or restructured terms. Interest income
on nonperforming loans is generally recognized on a cash basis.
13
Symetra Financial
Notes to Combined Financial Statements (continued)
(All dollar amounts in thousands, unless otherwise stated)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
INVESTMENTS (CONTINUED)
Cash and cash equivalents consist of short-term highly liquid investments with
original maturities of less than three months at the time of purchase.
Short-term investments consist of highly liquid debt instruments with maturities
of greater than three months and less than twelve months when purchased. We
carry cash and cash equivalents and short-term investments at cost, which
approximates fair value.
We engage in securities lending whereby we loan certain securities from our
portfolio to other institutions for short periods of time. We require initial
collateral at 102% of the market value of a loaned security. The borrower
deposits the collateral with a lending agent. The lending agent invests the
collateral to generate additional income according to our guidelines. The market
value of the loaned securities is monitored on a daily basis, with additional
collateral obtained or refunded as the market value of the loaned securities
fluctuates to maintain a collateral value of 102%. We maintain full ownership
rights to the securities loaned, and accordingly, the loaned securities are
classified as investments. We report the securities lending collateral and the
corresponding securities lending payable on the Combined Balance Sheet as an
asset and liability.
DERIVATIVE FINANCIAL INSTRUMENTS
Other invested assets on our Combined Balance Sheet are comprised primarily of
derivative financial instruments. The Financial Accounting Standards Board
(FASB) issued SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities" in June 1998. SFAS 133 amends or supersedes several previous FASB
statements relating to derivatives and requires us to recognize all derivatives
as either assets or liabilities in the Combined Balance Sheet at fair value. In
June 2000, the FASB issued SFAS 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities," an amendment of SFAS 133, which
addressed a limited number of implementation issues arising from the original
statement (collectively, SFAS 133). We adopted SFAS 133, as amended, in January
2001.
Our financial statement recognition of the change in fair value of a derivative
depends on the intended use of the derivative and the extent to which it is
effective as part of a hedging transaction. Derivatives that are highly
effective and designated as either fair value or cash flow hedges receive hedge
accounting treatment under SFAS 133.
14
Symetra Financial
Notes to Combined Financial Statements (continued)
(All dollar amounts in thousands, unless otherwise stated)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
Derivatives that hedge the change in fair value of recognized assets or
liabilities are designated as fair value hedges. For derivatives designated as
fair value hedges, we recognize the changes in the fair value of both the
derivative and the hedged items in net realized investment losses in the
Combined Statement of Income.
Derivatives that hedge variable rate assets or liabilities or forecasted
transactions are designated as cash flow hedges. For derivatives designated as
cash flow hedges, we recognize the changes in fair value of the derivative as a
component of OCI, net of deferred income taxes, until the hedged transaction
affects current earnings. At the time current earnings are affected by the
variability of cash flows, the related portion of deferred gains or losses on
cash flow hedge derivatives are reclassified from OCI and recorded in the
Combined Statement of Income.
When the changes in fair value of such derivatives do not perfectly offset the
changes in fair value of the hedged transaction, we recognize the ineffective
portion in the Combined Statement of Income. For derivatives that do not qualify
for hedge accounting treatment under SFAS 133, we record the changes in fair
value of these derivatives in net realized investment losses in the Combined
Statement of Income.
We formally document all relationships between the hedging instruments and
hedged items, as well as risk-management objectives and strategies for
undertaking various hedge transactions. We link all hedges that are designated
as fair value hedges to specific assets or liabilities on the Combined Balance
Sheet. We link all hedges that are designated as cash flow hedges to specific
variable rate assets or liabilities or to forecasted transactions. We also
assess, both at the inception of the hedge and on an ongoing basis, whether the
derivatives that are used in hedging transactions are highly effective in
offsetting the changes in fair values or cash flows of hedged items. When it is
determined that a derivative is not highly effective as a hedge, we discontinue
hedge accounting on a prospective basis.
15
Symetra Financial
Notes to Combined Financial Statements (continued)
(All dollar amounts in thousands, unless otherwise stated)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
REINSURANCE
We utilize reinsurance agreements to manage our exposure to potential losses. We
reinsure all or a portion of our risk to reinsurers for certain types of
directly written business. In addition, we reinsure through pools to cover
catastrophic losses. Reinsurance does not affect our liability to our
policyholders. We remain primarily liable to policyholders for the risks we
insure. Accordingly, our policy and contract claims liabilities and future
policy benefit reserves are reported gross of any related reinsurance
recoverables. We report premiums, benefits and settlement expenses net of
reinsurance ceded on the Combined Statement of Income. We account for
reinsurance premiums, commissions, expense reimbursements, benefits and reserves
related to reinsured business on bases consistent with those used in accounting
for the original policies issued and the terms of the reinsurance contracts. We
remain liable to our policyholders to the extent that counterparties to
reinsurance ceded contracts do not meet their contractual obligations.
DEFERRED POLICY ACQUISITION COSTS
We defer as assets certain costs, principally commissions and other underwriting
costs that vary with and are primarily related to the production of business. We
amortize acquisition costs for deferred annuity contracts and universal life
insurance policies over the lives of the contracts or policies in proportion to
the present value of estimated future gross profits of each of these product
lines. In this estimation process, we make assumptions as to surrender rates,
mortality experience and investment performance. Actual profits can vary from
our estimates and can thereby result in increases or decreases to deferred
policy acquisition cost (DAC) amortization rates. We regularly evaluate our
assumptions and, when necessary, revise the estimated gross profits of these
contracts resulting in adjustments to DAC amortization that are recorded in
earnings when such estimates are revised. We adjust the unamortized balance of
DAC for the impact on estimated future gross profits as if net unrealized
investment gains and losses on securities had been realized as of the balance
sheet date. We include the impact of this adjustment, net of tax, in OCI in
Shareholder's Equity.
16
Symetra Financial
Notes to Combined Financial Statements (continued)
(All dollar amounts in thousands, unless otherwise stated)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
DEFERRED POLICY ACQUISITION COSTS (CONTINUED)
We amortize acquisition costs for traditional individual life insurance policies
over the premium paying period of the related policies using assumptions
consistent with those used in computing policy benefit liabilities. We amortize
acquisition costs for group life and medical policies over a one-year period.
We conduct regular DAC recoverability analyses for deferred annuity contract,
universal life contract and traditional life contract DAC balances. We do a
separate recoverability analysis for the DAC balances in each of our business
segments. We compare the current DAC balance with the estimated present value of
future profitability of the underlying business. The DAC balances are considered
recoverable if the present value of future profits is greater than the current
DAC balance. As of December 31, 2003, all of our DAC balances were considered
recoverable.
INTANGIBLES AND GOODWILL
Goodwill represents the excess of the cost of businesses acquired over the fair
value of their net assets, separate from other identifiable intangibles. Other
identifiable intangibles for businesses acquired consist mainly of the value of
existing blocks of business. We review goodwill annually for impairment, or more
frequently if impairment indicators arise. We amortize other purchased
intangible assets over their estimated useful lives.
SEPARATE ACCOUNTS
Separate account assets and liabilities reported on the accompanying Combined
Balance Sheet consist principally of variable annuities and represent funds that
we administer and invest to meet specific investment objectives of the
contractholders. The assets of each separate account are legally segregated and
are not subject to claims that arise out of our other business activities. We
report separate account assets at fair value. Net investment income and net
realized and unrealized investment gains and losses generally accrue directly to
such contractholders who bear the investment risk, subject in some cases to
minimum guaranteed rates. Accordingly, we do not include these investment
results in our revenues. Fees charged to contractholders include mortality,
policy administration and surrender charges, and are included in premiums and
other revenues.
17
Symetra Financial
Notes to Combined Financial Statements (continued)
(All dollar amounts in thousands, unless otherwise stated)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
FUNDS HELD UNDER DEPOSIT CONTRACTS
Liabilities for fixed deferred annuity contracts and guaranteed investment
contracts are equal to the accumulated account value of such policies or
contracts as of the valuation date. Liabilities for universal life insurance
policies are equal to the accumulated account value plus a mortality reserve as
of the valuation date. For structured settlement annuities, future benefits are
either fully guaranteed or are contingent on the survivorship of the annuitant.
Liabilities for fully guaranteed benefits are based on discounted amounts of
estimated future benefits. Contingent future benefits are discounted with
best-estimate mortality assumptions, which include provisions for longer life
spans over time. The interest rate pattern used to calculate the reserve for a
structured settlement policy is set at issue. The pattern varies over time
starting with interest rates that prevailed at issue and grading to a future
level. As of December 31, 2003, the current reserve had near term benefits
discounted at 7.89% and long-term benefits discounted at 7.15%.
FUTURE POLICY BENEFITS
We compute liabilities for future policy benefits under traditional individual
life and group life insurance policies on the level premium method, which uses a
level premium assumption to fund reserves. We select the level premiums so that
the actuarial present value of future benefits equals the actuarial present
values of future premiums. We set the interest, mortality and persistency
assumptions in the year of issue. These liabilities are contingent upon the
death of the insured while the policy is in force. We derive mortality
assumptions from both company-specific and industry statistics. We discount
future benefits at interest rates that vary by year of policy issue, which
averaged 4.55% at December 31, 2003.
POLICY AND CONTRACT CLAIMS
Liabilities for policy and contract claims primarily represent liabilities for
claims under group medical coverages and are established on the basis of
reported losses ("case basis" method). We also provide for claims incurred but
not reported (IBNR), based on historical experience. We continually review
estimates for reported but unpaid claims and IBNR. Any necessary adjustments are
reflected in current operating results. The majority of these claims are
incurred and paid in full within a one-year period. Policy and contract claims
liabilities amounted to less than 1% of total liabilities at December 31, 2003.
18
Symetra Financial
Notes to Combined Financial Statements (continued)
(All dollar amounts in thousands, unless otherwise stated)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
CAPITAL STOCK
Capital stock for Symetra Financial is comprised of the following (in thousands,
except par value and share amounts):
SHARES
CAPITAL PAR SHARES ISSUED AND
COMPANY STOCK VALUE AUTHORIZED OUTSTANDING VALUE
- --------------------------------------------------------------------------------------------------------------------------
Symetra Life Insurance Company Common Stock $ 250 20,000 20,000 $ 5,000
Symetra Administrative Services, Inc. Common Stock 100 10,000 10,000 1,000
Symetra Asset Management Company Common Stock 1 3,000 600 .6
Common Stock
(non-voting) 1 3,000 2,400 2.4
Preferred Stock
(6% non-
cumulative, non-
participating) 100 4,000 4,000 400
Symetra Securities, Inc. Common Stock 100 10,000 10,000 1,000
Symetra Services Corporation Common Stock 100 500 500 50
Symetra Investment Services, Inc. Common Stock .10 50,000,000 50,000 5
Symetra Assigned Benefits Service
Company Common Stock 1 1,000 1,000 1
-------
Total $ 7,459
=======
19
Symetra Financial
Notes to Combined Financial Statements (continued)
(All dollar amounts in thousands, unless otherwise stated)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
INCOME TAXES
Through the date of acquisition, we are included in a combined federal income
tax return filed by Safeco. Tax payments (credits) are made to or received from
Safeco on a separate tax return filing basis. Income taxes have been provided
using the liability method in accordance with SFAS 109, "Accounting for Income
Taxes." The provision for income taxes has two components: amounts currently
payable or receivable and deferred income taxes. Deferred income taxes are
recognized when assets and liabilities have different values for financial
statement and tax reporting purposes. A valuation allowance is recorded to
reduce a deferred income tax asset to the amount expected to be recoverable.
Although realization of deferred income tax assets is not assured, it was
considered more likely than not that the deferred income tax assets would be
realized through future earnings, including, but not limited to, the generation
of future operating income, reversal of existing temporary differences and
available tax planning strategies. Accordingly, no valuation allowance was
recorded at December 31, 2003.
RESTRICTED ASSETS
Symetra Investment Services, Inc. and Symetra Securities, Inc. are subject to
the Securities and Exchange Commission Uniform Capital Rule 15c3-1, which
requires maintenance of minimum net capital. At December 31, 2003, Symetra
Investment Services, Inc. and Symetra Securities, Inc. maintained minimum net
capital of $217 and $10, respectively, and were in compliance with this
requirement.
NEW ACCOUNTING STANDARDS
New accounting pronouncements that we have recently adopted, or will adopt in
the near future, are as follows:
SFAS 146, "ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES"
The FASB issued SFAS 146 in June 2002. The standard requires companies to
recognize costs associated with exit and disposal activities when they are
incurred rather than the date of a commitment to an exit or disposal plan. It
also expands disclosure requirements to include costs by reportable segment. The
standard is effective for exit or disposal activities that were initiated after
December 31, 2002. We adopted SFAS 146 with no impact on our Combined Financial
Statements.
20
Symetra Financial
Notes to Combined Financial Statements (continued)
(All dollar amounts in thousands, unless otherwise stated)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
SFAS 149, "AMENDMENT OF STATEMENT 133 ON DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES"
The FASB issued SFAS 149 in April 2003. This statement amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments imbedded in other contracts, and for hedging activities
under SFAS 133. We adopted SFAS 149 with no impact on our Combined Financial
Statements.
FASB INTERPRETATION NUMBER (FIN) 45, "GUARANTOR'S ACCOUNTING AND DISCLOSURE
REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF
OTHERS"
FIN 45 was issued in November 2002. FIN 45 elaborates on the disclosures
required to be made by a guarantor in its financial statements and clarifies
that a guarantor is required to recognize, at the inception of certain
guarantees, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The recognition provisions are effective prospectively
for guarantees issued or modified after December 15, 2002. The disclosure
requirements for all guarantees are effective for periods ending after December
15, 2002. We do not have any guarantees subject to the recognition provisions of
FIN 45. In accordance with the disclosure provisions under FIN 45, the following
guarantees were in effect at December 31, 2003:
In June 2000, we issued a guarantee to General America Corporation (GAC),
an affiliate. Under the guarantee, we guarantee repayment of a loan made by
GAC to Investar Holdings (Investar), an insurance agency. The loan was made
in June 2000 and matures in June 2017. The principal balance of the loan
was $15.9 million at December 31, 2003. On August 2, 2004, Symetra
Financial Corporation acquired this loan from GAC and the guarantee is no
longer in effect. We do not have any guarantees subject to the recognition
provisions of FIN 45.
FIN 46R, "CONSOLIDATION OF VARIABLE INTEREST ENTITIES"
The FASB issued FIN 46R in December 2003. FIN 46R changes the method of
determining whether certain entities should be combined in our Combined
Financial Statements. Except for entities considered to be special purpose
entities, FIN 46R is effective in the first period ending after March 15, 2004.
We adopted FIN 46R effective December 31, 2003. An entity is subject to FIN 46R
and is called a Variable Interest Entity (VIE) if it has:
21
Symetra Financial
Notes to Combined Financial Statements (continued)
(All dollar amounts in thousands, unless otherwise stated)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
FIN 46R, "CONSOLIDATION OF VARIABLE INTEREST ENTITIES" (CONTINUED)
- Equity that is insufficient to permit the entity to finance its
activities without additional subordinated financial support from other
parties
- Equity investors that cannot make significant decisions about the
entity's operations, or do not absorb the expected losses or receive
the expected returns of the entity
All other entities are evaluated for combination under existing guidance. FIN
46R requires VIEs to be combined by their primary beneficiary, which is the
party that has a majority of the expected losses or a majority of the expected
residual returns of the VIE, or both.
We have identified certain interests in VIEs as defined by FIN 46R. Based on our
analysis of these interests, we do not meet the FIN 46R definition of "primary
beneficiary" of any of these entities and therefore have not combined these
entities. Even though combination is not required, FIN 46R requires disclosure
of the nature of any significant interests in a VIE, a description of the VIE's
activities and the maximum exposure to potential losses due to our involvement.
In June 2000, GAC extended a loan to Investar that we guaranteed. Safeco's
analysis of Investar determined Investar's equity at risk was not
sufficient to finance its activities and is therefore considered a VIE
under FIN 46R. The loan is secured by the assets of Investar and personally
guaranteed by its equity holders. Based on Safeco's analysis of Investar's
expected losses and expected residual returns, neither GAC nor the Company
is the primary beneficiary. The potential exposure to losses is limited to
the senior debt holding, which was $15.9 million as of December 31, 2003,
excluding the value of rights to the assets of the agency and personal
guarantees provided by the equity holders. On August 2, 2004, Symetra
Financial Corporation acquired this loan from GAC and the guarantee is no
longer in effect.
AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS (AICPA) STATEMENT OF POSITION
(SOP) 03-1, "ACCOUNTING AND REPORTING BY INSURANCE ENTERPRISES FOR CERTAIN
NONTRADITIONAL LONG-DURATION CONTRACTS AND FOR SEPARATE ACCOUNTS"
The provisions of SOP 03-1 are effective for fiscal years beginning after
December 15, 2003. SOP 03-1 provides guidance in three areas: separate account
presentation and valuation; the accounting recognition given sales inducements;
and the classification and valuation of long-duration contract liabilities. We
adopted SOP 03-1 effective January 1, 2004. Upon adoption, there was no material
impact to our Combined Financial Statements.
22
Symetra Financial
Notes to Combined Financial Statements (continued)
(All dollar amounts in thousands, unless otherwise stated)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
EMERGING ISSUES TASK FORCE (EITF) 03-1, "THE MEANING OF OTHER-THAN-TEMPORARY
IMPAIRMENT AND ITS APPLICATION TO CERTAIN INVESTMENTS"
The provisions of EITF 03-1 are effective for fiscal years ending after December
15, 2003. EITF 03-1 provides disclosure requirements for investments in debt and
marketable equity securities that are accounted for under SFAS 115. We have
included the required disclosures within this report.
2. INVESTMENTS
The following tables summarize our fixed maturities and marketable equity
securities:
DECEMBER 31, 2003
-----------------------------------------------------------------------------
COST OR GROSS GROSS NET
AMORTIZED UNREALIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES GAINS VALUE
-----------------------------------------------------------------------------
Fixed maturities:
U.S. Government and agencies $ 395,684 $ 76,380 $ (638) $ 75,742 $ 471,426
State and political subdivisions 585,405 63,595 (3,569) 60,026 645,431
Foreign governments 236,843 75,344 - 75,344 312,187
Corporate securities 11,291,051 1,034,829 (64,644) 970,185 12,261,236
Mortgage-backed securities 4,201,739 189,290 (37,155) 152,135 4,353,874
-----------------------------------------------------------------------------
Total fixed maturities 16,710,722 1,439,438 (106,006) 1,333,432 18,044,154
Marketable equity securities 97,511 14,034 (1,664) 12,370 109,881
-----------------------------------------------------------------------------
Total $ 16,808,233 $ 1,453,472 $ (107,670) $ 1,345,802 $ 18,154,035
=============================================================================
23
Symetra Financial
Notes to Combined Financial Statements (continued)
(All dollar amounts in thousands, unless otherwise stated)
2. INVESTMENTS (CONTINUED)
The following table shows our investments' gross unrealized losses and fair
values, aggregated by investment category and length of time that individual
securities have been in a continuous unrealized loss position, at December 31,
2003.
LESS THAN 12 MONTHS 12 MONTHS OR MORE TOTAL
--------------------------- --------------------------- ---------------------------
GROSS GROSS GROSS
UNREALIZED UNREALIZED UNREALIZED
FAIR VALUE LOSSES FAIR VALUE LOSSES FAIR VALUE LOSSES
--------------------------- --------------------------- ---------------------------
Fixed maturities:
U.S. Government and agencies $ 29,890 $ (343) $ 4,528 $ (295) $ 34,418 $ (638)
State and political subdivisions 102,690 (3,569) - - 102,690 (3,569)
Corporate securities 1,322,216 (56,372) 92,056 (8,272) 1,414,272 (64,644)
Mortgage-backed securities 1,177,166 (36,524) 43,917 (631) 1,221,083 (37,155)
--------------------------- --------------------------- ---------------------------
Total fixed maturities 2,631,962 (96,808) 140,501 (9,198) 2,772,463 (106,006)
Marketable equity securities 6,964 (1,068) 5,304 (596) 12,268 (1,664)
--------------------------- --------------------------- ---------------------------
Total $ 2,638,926 $ (97,876) $ 145,805 $ (9,794) $ 2,784,731 $ (107,670)
=========================== =========================== ===========================
We reviewed all our investments with unrealized losses at the end of 2003 in
accordance with our impairment policy described in Note 1. After considering the
number of investment positions that were in unrealized loss positions and other
evidence, such as volatility of the security's market price, our evaluation
determined that these declines in fair value were temporary.
At December 31, 2003, we held below investment grade fixed maturities of $1,324
million at amortized cost. The respective fair values of these investments were
approximately $1,445 million. These holdings amounted to 8.0% of our investments
in fixed maturities at fair value at December 31, 2003.
24
Symetra Financial
Notes to Combined Financial Statements (continued)
(All dollar amounts in thousands, unless otherwise stated)
2. INVESTMENTS (CONTINUED)
The following table summarizes the cost or amortized cost and fair value of
fixed maturities at December 31, 2003, by contractual years-to-maturity.
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without prepayment
penalties.
COST OR
AMORTIZED FAIR
COST VALUE
-----------------------------
One year or less $ 612,078 $ 629,500
Over one year through five years 2,967,961 3,164,879
Over five years through ten years 2,712,353 2,859,874
Over ten years 6,216,591 7,036,027
Mortgage-backed securities 4,201,739 4,353,874
-----------------------------
Total fixed maturities $ 16,710,722 $ 18,044,154
=============================
The carrying value of securities on deposit with state regulatory authorities
was $10,966 at December 31, 2003.
No industry represented more than 8.8% of the amortized cost of fixed maturities
and equity securities at December 31, 2003.
The following table summarizes our combined pretax net investment income:
YEAR ENDED
DECEMBER 31,
2003
--------------
Interest:
Fixed maturities $ 1,109,561
Mortgage loans 75,513
Short-term investments 4,578
Dividends:
Marketable equity securities 5,578
Redeemable preferred stock 8,939
Other 14,501
--------------
Total investment income 1,218,670
Investment expenses (6,990)
--------------
Net investment income $ 1,211,680
==============
25
Symetra Financial
Notes to Combined Financial Statements (continued)
(All dollar amounts in thousands, unless otherwise stated)
2. INVESTMENTS (CONTINUED)
The carrying value of investments in fixed maturities that have not produced
income for the last twelve months was $30,384 at December 31, 2003. All of our
mortgage loans produced income during 2003.
The following table summarizes our combined net realized investment losses
before income taxes:
YEAR ENDED
DECEMBER 31,
2003
--------------
Fixed maturities $ (11,555)
Marketable equity securities 561
Other invested assets (12,068)
Deferred policy acquisition costs adjustment (2,511)
--------------
Net realized investment losses before income taxes $ (25,573)
==============
The following tables summarize the proceeds from sales of investment securities
and related net realized investment gains (losses) before income taxes for 2003.
YEAR ENDED DECEMBER 31, 2003
------------------------------------------------------------
FIXED OTHER
MATURITIES MARKETABLE FINANCIAL
AVAILABLE-FOR- EQUITY INSTRUMENTS
SALE SECURITIES AND OTHER TOTAL
------------------------------------------------------------
Proceeds from sales $ 1,286,177 $ 27,101 - $ 1,313,278
============================================================
Gross realized investment gains $ 88,560 $ 2,774 $ 877 $ 92,211
Gross realized investment losses (13,404) (800) (4,327) (18,531)
------------------------------------------------------------
Net realized investment gains (losses) 75,156 1,974 (3,450) 73,680
Impairments (96,621) (1,413) - (98,034)
Other, including gains on calls and redemptions 9,910 - (11,129) (1,219)
------------------------------------------------------------
Net realized investment gains (losses) $ (11,555) $ 561 $ (14,579) $ (25,573)
============================================================
26
Symetra Financial
Notes to Combined Financial Statements (continued)
(All dollar amounts in thousands, unless otherwise stated)
2. INVESTMENTS (CONTINUED)
The following table summarizes our allowance for mortgage loan losses:
YEAR ENDED
DECEMBER 31,
2003
------------
Allowance at beginning of year $ 10,554
Loans charged off as uncollectible (382)
------------
Allowance at end of year $ 10,172
============
This allowance relates to mortgage loan investments of $969,756 at December 31,
2003. All of our mortgage loan investments were in good standing at December 31,
2003.
At December 31, 2003, mortgage loans constituted approximately 4.3% of total
assets and are secured by first-mortgage liens on income-producing commercial
real estate, primarily in the retail, industrial and office building sectors.
The majority of the properties are located in the western United States, with
23.9% of the total in California. Individual loans generally do not exceed $10
million.
3. DERIVATIVE FINANCIAL INSTRUMENTS
Derivatives are instruments whose values are derived from an underlying
instrument, indices or rates, have a notional amount and can be net settled.
This may include derivatives that are "embedded" in derivative instruments or in
certain existing assets or liabilities. We use derivative financial instruments,
including interest rate swaps, options and financial futures, as a means of
hedging exposure to equity price changes and/or interest rate risk on
anticipated transactions or on existing assets and liabilities.
Interest rate risk is the risk of economic loss due to changes in the level of
interest rates. We manage interest rate risk through active portfolio management
and selective use of interest rate swaps as hedges to change the characteristics
of certain assets and liabilities. With interest rate swap agreements, we
exchange with a counterparty, at specified intervals, interest rate payments of
differing character (for example, fixed-rate payments exchanged for
variable-rate payments), based on an underlying principal balance (notional
amount). No cash is exchanged at the outset of the contract and no principal
payments are made by either party. The net interest accrued and the net interest
payments made at each interest payment due date are recorded to interest income
or expense, depending on the hedged item.
27
Symetra Financial
Notes to Combined Financial Statements (continued)
(All dollar amounts in thousands, unless otherwise stated)
3. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
FAIR VALUE HEDGES
We use interest rate swaps to hedge the change in fair value of certain
fixed-rate assets. At December 31, 2003, we had $317,080 of notional amounts
outstanding relating to such hedges. As discussed in Note 1, these derivatives
have been designated as fair value hedges and, because they have been determined
to be highly effective, changes in their fair value and the related assets that
they hedge are recognized on a net basis in net realized investment losses in
the Combined Statement of Income. There were no significant fair value hedges
discontinued during 2003.
Differences between the changes in fair value of these derivatives and the
hedged item(s) represent hedged ineffectiveness. In 2003, no amounts were
recognized in earnings due to hedge ineffectiveness.
CASH FLOW HEDGES
We also use interest rate swaps to hedge the variability of future cash flows
arising from changes in interest rates associated with certain variable rate
assets and forecasted transactions. At December 31, 2003, we had $414,370 of
notional amounts outstanding relating to such hedges. As discussed in Note 1,
these derivatives have been designated as cash flow hedges and, because they
have been determined to be highly effective, we recognize the changes in fair
value of the derivative as a component of OCI, net of deferred income taxes,
until the hedged transaction affects current earnings. At the time current
earnings are affected by the variability of cash flows due to interest rate
changes, the related portion of deferred gains or losses on cash flow hedge
derivatives are reclassified from OCI and recorded in the Combined Statement of
Income. Amounts recorded in OCI related to derivatives qualifying as cash flow
hedges resulted in a decrease in OCI of $1,421, after tax, for 2003. The change
in OCI for 2003 included an after tax decrease of $11,110 related to the changes
in fair value of the derivatives and an after tax increase of $9,689 related to
amounts reclassified into the Combined Statement of Income.
An estimated $4,680 of derivative instruments and hedging activity gains
included in OCI will be reclassified into the Combined Statement of Income
during 2004 to offset the estimated amount of earnings that will be affected by
the variability of cash flows due to interest rate changes.
28
Symetra Financial
Notes to Combined Financial Statements (continued)
(All dollar amounts in thousands, unless otherwise stated)
3. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
CASH FLOW HEDGES (CONTINUED)
The interest rate swaps related to forecasted transactions that are considered
probable of occurring are considered to be highly effective and qualify for
hedge treatment under SFAS 133. SFAS 133 requires that amounts deferred in OCI
be reclassified into earnings either when the forecasted transaction occurs, or
when it is considered not probable of occurring, whichever happens sooner. In
2003, $9,890 after tax was reclassified from OCI to net realized investment
losses relating to forecasted transactions that were no longer probable of
occurring.
At December 31, 2003, the maximum length of time over which we were hedging our
exposure to future cash flows for forecasted transactions was approximately 30
months.
Differences between the changes in fair value of cash flow hedges and the hedged
item(s) represent hedge ineffectiveness and are recognized in interest expense.
In 2003, no amounts were recognized in interest expense due to hedge
ineffectiveness.
OTHER DERIVATIVES
In 1997, we introduced an equity indexed annuity (EIA) product that credits the
policyholder based on a percentage of the gain in the S&P 500 Index. Sales of
the EIA product were suspended in the fourth quarter of 1998. In connection with
this product, we have a hedging program with the objective to hedge the exposure
to changes in the S&P 500 Index. This program consists of buying S&P 500 index
options. As permitted under a grandfathering clause in SFAS 133, we elected not
to apply the fair value adjustment requirement of this statement to the embedded
derivatives contained in the liability related to EIA products sold prior to
January 1, 1999. The change in fair value of the options used to economically
hedge the EIA liability is recognized as an adjustment to Policy Benefits in the
Combined Statement of Income. We recognized pretax gains of $16,985 in 2003 on
these options.
Investments in mortgage-backed securities (see Note 2) principally include
collateralized mortgage obligations, pass-through and commercial loan-backed
mortgage obligations, which are technically defined as derivative instruments.
However, they are exempt from derivative disclosure and accounting requirements
under SFAS 133.
29
Symetra Financial
Notes to Combined Financial Statements (continued)
(All dollar amounts in thousands, unless otherwise stated)
3. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
OTHER DERIVATIVES (CONTINUED)
Counterparty credit risk is the risk that a counterparty to a derivative
contract will be unable to perform its obligations. We manage counterparty
credit risk on an individual counterparty basis and gains and losses are netted
by counterparty. We mitigate counterparty credit risk through credit reviews,
approval controls and by only entering into agreements with credit-worthy
counterparties. We perform ongoing monitoring of counterparty credit exposure
risk against credit limits. The contract or notional amounts of these
instruments reflect the extent of involvement we have in a particular class of
derivative financial instrument. However, the maximum loss of cash flow
associated with these instruments can be less than these amounts. For interest
rate swaps, forward contracts and financial futures, credit risk is limited to
the amount that it would cost us to replace the contract.
4. FAIR VALUE OF FINANCIAL INSTRUMENTS
The aggregate fair value amounts disclosed here do not represent our underlying
value and, accordingly, care should be exercised in drawing conclusions about
our business or financial condition based on the fair value information
disclosed below.
We determine fair value amounts for financial instruments using available
third-party market information. When such information is not available, we
determine the fair value amounts using appropriate valuation methodologies
including discounted cash flows and market prices of comparable instruments.
Significant judgment is required in developing certain of these estimates of
fair value and the estimates may not represent amounts at December 31, 2003 that
would be realized in a current market exchange.
Estimated fair values for fixed maturities and marketable equity securities,
other than non-publicly traded fixed maturities, are based on quoted market
prices or prices obtained from independent pricing services.
Our investment portfolio includes $232,190 of non-publicly traded fixed maturity
securities, representing 1.2% of the portfolio at December 31, 2003. Our
portfolio does not include any non-publicly traded equity securities.
We estimate the fair values for mortgage loans by discounting the projected cash
flows using the current rate at which loans would be made to borrowers with
similar credit ratings and for the same maturities.
30
Symetra Financial
Notes to Combined Financial Statements (continued)
(All dollar amounts in thousands, unless otherwise stated)
4. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
For cash and cash equivalents, policy loans, short-term investments, accounts
receivable and other liabilities, carrying value is a reasonable estimate of
fair value.
We estimate the fair values of investment contracts (funds held under deposit
contracts) with defined maturities by discounting projected cash flows using
rates that would be offered for similar contracts with the same remaining
maturities. For investment contracts with no defined maturities, we estimate
fair values to be the present surrender value.
Separate account assets and the related liabilities are reported at fair value
using quoted market prices.
In accordance with SFAS 133, all derivatives are carried at fair value on the
Combined Balance Sheet. The fair values of the derivative financial instruments
generally represent the estimated amounts that we would expect to receive or pay
upon termination of the contracts as of the reporting date. Quoted fair values
are available for certain derivatives. For derivative instruments not actively
traded, we estimate fair values using values obtained from independent pricing
services, internal modeling or quoted market prices of comparable instruments.
Other insurance-related financial instruments are exempt from fair value
disclosure requirements.
31
Symetra Financial
Notes to Combined Financial Statements (continued)
(All dollar amounts in thousands, unless otherwise stated)
4. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The following table summarizes the carrying or reported values and corresponding
fair values of financial instruments:
DECEMBER 31, 2003
---------------------------
CARRYING
AMOUNT FAIR VALUE
---------------------------
Financial assets:
Fixed maturities $ 18,044,154 $ 18,044,154
Marketable equity securities 109,881 109,881
Mortgage loans 959,804 1,016,000
Separate account assets 1,137,439 1,137,439
Derivative financial instruments:
Interest rate swaps 14,631 14,631
Options 6,189 6,189
Financial liabilities:
Funds held under deposit contracts 16,582,390 17,543,000
Separate account liabilities 1,137,439 1,137,439
Derivative financial instruments:
Options 607 607
5. REINSURANCE
We use reinsurance to manage exposure to potential losses. Although the
reinsurer is liable to us to the extent of the reinsurance ceded, we remain
primarily liable to the policyholders as the direct insurer on all risks
reinsured. We evaluate the financial condition of our reinsurers to minimize our
exposure to losses from reinsurer insolvencies. To our knowledge, none of our
major reinsurers is currently experiencing material financial difficulties. We
analyze reinsurance recoverables according to the credit ratings and types of
our reinsurers. Of the total amount due from reinsurers at December 31, 2003,
93.7% was with reinsurers rated A or higher by A.M. Best. We had no reserve for
uncollectible reinsurance in 2003. None of our reinsurance contracts exclude
certified terrorist acts.
Individual Life Reinsurance - For our individual life business, we have
coinsurance agreements where the reinsurer reimburses us based on the percentage
in the contract that range from 50% to 80%, based upon the year that the policy
was written. For policies written prior to 2000, we recover 50% of the death
benefit that we pay on covered claims from the reinsurer. This percentage was
increased in 2000 to 80% for a majority of the policies written and was
increased in 2002 to cover 80% of all new business written.
32
Symetra Financial
Notes to Combined Financial Statements (continued)
(All dollar amounts in thousands, unless otherwise stated)
5. REINSURANCE (CONTINUED)
Group Long-Term Disability and Group Short-Term Disability - We reinsure 100% of
our Group Long-Term Disability and Group Short-Term Disability business. The
reinsurer is responsible for paying all claims.
Reinsurance recoverables are comprised of the following amounts:
DECEMBER 31,
2003
-------------
LIFE INSURANCE
Reinsurance recoverables on:
Policy and contract claim reserves $ 3,689
Paid claims 1,841
Life policy liabilities 90,607
-------------
Total life insurance 96,137
-------------
ACCIDENT AND HEALTH INSURANCE
Reinsurance recoverables on:
Policy and contract claim reserves 83,425
Paid claims 192
-------------
Total accident and health insurance 83,617
-------------
Total reinsurance recoverables $ 179,754
=============
33
Symetra Financial
Notes to Combined Financial Statements (continued)
(All dollar amounts in thousands, unless otherwise stated)
5. REINSURANCE (CONTINUED)
The effects of reinsurance on earned premiums are as follows:
YEAR ENDED
DECEMBER 31,
2003
-------------
EARNED PREMIUMS
Direct:
Accident and health premiums $ 465,734
Life insurance premiums 164,704
-------------
Total 630,438
-------------
Ceded:
Accident and health premiums (18,618)
Life insurance premiums (29,911)
-------------
Total (48,529)
-------------
Assumed:
Accident and health premiums 97,985
Life insurance premiums 624
-------------
Total 98,609
-------------
Total earned premiums $ 680,518
=============
Ceded reinsurance reduced our policy benefits by $32,964 in 2003. Included in
this amount are accident and health amounts of $10,813.
6. INTANGIBLES AND GOODWILL
We review goodwill and indefinite-lived intangible assets annually (or more
frequently if impairment indicators arise) for impairment. We amortize separable
intangible assets over their useful lives (but with no maximum life) unless we
deem them to have an indefinite life.
34
Symetra Financial
Notes to Combined Financial Statements (continued)
(All dollar amounts in thousands, unless otherwise stated)
6. INTANGIBLES AND GOODWILL (CONTINUED)
Included in the intangibles and goodwill balance on our Combined Balance Sheet
is the present value of future profits (PVFP). PVFP represents the actuarially
determined present value of anticipated profits to be realized from annuity and
life insurance business purchased. We determine the present value of anticipated
profits using the credited interest rate. For annuity contracts, amortization of
the PVFP is in relation to the present value of the expected gross profits on
the contracts, discounted using the interest rate credited to the underlying
policies. The change in the PVFP is comprised of amortization and an adjustment
to amortization for realized losses on investment securities of $138 for the
year ended December 31, 2003. We review the PVFP periodically to determine that
the unamortized portion does not exceed expected recoverable amounts. We did not
record any impairment adjustments in 2003.
The following table presents our intangible assets and goodwill at December 31,
2003. The PVFP, distribution agreement and renewal rights acquired have been
amortized over a useful life of 20 years. All other intangible assets have been
amortized over a useful life of five years or less.
DECEMBER 31, 2003
------------------------------------------------
GROSS CARRYING ACCUMULATED NET CARRYING
AMOUNT AMORTIZATION AMOUNT
------------------------------------------------
Unamortized intangible assets:
Goodwill $ 54,192 $ - $ 54,192
Amortizable intangible assets:
Present value of future profits 82,272 (37,075) 45,197
Distribution agreement 35,000 (11,900) 23,100
Renewal rights 25,700 (1,820) 23,880
Administrative agreement 8,766 (4,451) 4,315
Other intangible assets 288 (108) 180
------------------------------------------------
Total $ 206,218 $ (55,354) $ 150,864
================================================
Amortization expense for intangible assets, pretax, was $8,331 for 2003.
Estimated future pretax amortization for the year ended December 31, 2004, is
$4,384.
There were no changes in the carrying value of goodwill in 2003.
35
Symetra Financial
Notes to Combined Financial Statements (continued)
(All dollar amounts in thousands, unless otherwise stated)
7. INCOME TAXES
We use the liability method of accounting for income taxes in accordance with
SFAS 109 under which deferred income tax assets and liabilities are determined
based on the differences between their financial reporting and their tax bases
and are measured using the enacted tax rates.
The difference of $14,771 between income tax computed by applying the U.S.
federal income tax rate of 35% to income before income taxes and the combined
provision for income taxes was primarily due to the tax effect of the separate
accounts dividend received deduction for 2003, and the recording of a
recoverable from the Internal Revenue Service for the separate accounts dividend
received deduction for the period 1995 through 2001, which amounted to $2,771
and $13,174, respectively.
The tax effects of temporary differences which give rise to the deferred income
tax assets and deferred income tax liabilities were as follows:
DECEMBER 31,
2003
------------
Deferred income tax assets:
Goodwill $ 4,515
Adjustment to life policy liabilities 93,094
Adjustment to claims reserves 3,627
Capitalization of policy acquisition costs 76,060
Investment impairments 44,719
Capital loss carryforwards 8,400
Postretirement benefits 4,210
Uncollected premium adjustment 8,109
Guaranty fund assessments 728
Other 7,338
------------
Total deferred income tax assets 250,800
------------
Deferred income tax liabilities:
Unrealized appreciation of investment securities (net of deferred policy
acquisition costs adjustment: $38,804) 446,797
Deferred policy acquisition costs 129,606
Bond discount accrual 29,145
Present value of future profits 15,819
Intangible assets 8,086
Other 1,484
------------
Total deferred income tax liabilities 630,937
------------
Net deferred income tax liability $ 380,137
============
36
Symetra Financial
Notes to Combined Financial Statements (continued)
(All dollar amounts in thousands, unless otherwise stated)
8. COMPREHENSIVE INCOME
Comprehensive income is defined as all changes in Shareholder's Equity, except
those arising from transactions with shareholders. Comprehensive income includes
net income and OCI, which for us consists of changes in unrealized gains or
losses of investments carried at fair value and deferred policy acquisition
costs valuation allowance.
The components of OCI are as follows:
DECEMBER 31,
2003
------------
Net unrealized gains on available-for-sale securities $ 1,345,641
Net unrealized gains on derivative financial instruments 18,773
Adjustment for deferred policy acquisition costs (88,012)
Deferred income taxes (446,630)
------------
Accumulated OCI $ 829,772
============
The following summarizes the net changes in OCI:
YEAR ENDED
DECEMBER 31,
2003
------------
Increase (decrease) in unrealized appreciation/depreciation of:
Available-for-sale securities $ 232,263
Derivative financial instruments (2,186)
Adjustment for deferred policy acquisition costs (33,617)
Deferred income taxes (68,762)
------------
Net change in accumulated OCI $ 127,698
============
9. COMMITMENTS AND CONTINGENCIES
At December 31, 2003, unfunded mortgage loan commitments were $16,475. We had no
other material commitments or contingencies at December 31, 2003.
Under state insolvency and guaranty laws, insurers licensed to do business in
the state can be assessed or required to contribute to state guaranty funds to
cover policyholder losses resulting from insurer insolvencies. Liabilities for
guaranty funds are not discounted or recorded net of premium taxes and are
included in other liabilities in the Combined Balance Sheet. At December 31,
2003, we had liabilities of $7,948 for estimated guaranty fund assessments. We
had a related asset for premium tax offsets of $6,877 at December 31, 2003.
37
Symetra Financial
Notes to Combined Financial Statements (continued)
(All dollar amounts in thousands, unless otherwise stated)
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Because of the nature of our business, we are subject to legal actions filed or
threatened in the ordinary course of our business operations. We do not believe
that such litigation will have a material adverse effect on our combined
financial condition, future operating results or liquidity.
10. EMPLOYEE BENEFIT PLANS
Safeco sponsors defined contribution and defined benefit plans covering
substantially all employees of the Company and its subsidiaries and provides a
postretirement benefit program for certain retired employees. Eligibility for
participation in the various plans is generally based on completion of a
specified period of continuous service or date of hire. Employer contributions
to these plans are made in cash. Costs allocated to the Company for these plans
were $6,925 for the year ended December 31, 2003.
The Safeco 401(k)/Profit Sharing Retirement Plan is a defined contribution plan.
It includes a minimum contribution of 3% of each eligible participant's
compensation, a matching contribution of 66.6% of participant's contributions,
up to 6% of eligible compensation, and a profit sharing component based on
Safeco's income. No profit-sharing contributions were made in 2003.
The Safeco Employee's Cash Balance Plan (CBP) is a noncontributory defined
benefit plan that provides benefits for each year of service after 1988, based
on the participant's eligible compensation plus a stipulated rate of return on
the benefit balance. Safeco makes contributions to the CBP based on the funding
requirements set by the Employee Retirement Income Security Act (ERISA). Costs
allocated to the Company for this plan were 1% or less of income before income
taxes for the year ended December 2003.
SAS has a profit sharing plan in which all employees over the age of 21 with one
year of service are eligible for participation. The Plan is funded entirely by
SAS through discretionary contributions. The discretionary contribution charged
to operations was $271 for the year ended December 31, 2003.
SAS also has a defined contribution 401(k) salary deferral plan (the 401(k)
Plan) in which all employees over the age of 21 with three months of service are
eligible for participation. Eligible employees may contribute up to 15% of their
annual compensation, subject to annual limitations under the Internal Revenue
Code. SAS matches employee contributions at a rate of 33% on the first 6% of
salary contributed. Contributions by SAS to the 401(k) Plan were $90 for the
year ended December 31, 2003.
38
Symetra Financial
Notes to Combined Financial Statements (continued)
(All dollar amounts in thousands, unless otherwise stated)
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
In addition, Safeco provides certain healthcare and life insurance benefits and
other post-retirement benefits (collectively, OPRB) for certain retired
employees, their beneficiaries, and eligible dependents. During 2003, Safeco's
OPRB program was amended. For current retirees and employees age 50 and over
with sufficient service time, Safeco will continue to subsidize a portion of the
cost of retiree healthcare benefits, but at a reduced rate. The rate of increase
in the subsidy for these healthcare benefits will be capped in future years.
Safeco will also continue to provide a capped amount of retiree life insurance
benefits to current retirees and employees age 50 and over with sufficient
service time. For current employees age 36 or older, who do not otherwise meet
the above requirements, Safeco will provide access to their group healthcare
plan at retirement, but participants will pay the entire cost of coverage.
Retiree life insurance benefits will no longer be offered to this employee
group. For current employees age 35 and under, and any employee hired after
December 31, 2003, (regardless of age) retiree healthcare and life insurance
benefits will no longer be provided. In addition, Safeco's OPRB benefit
obligation was revalued to reflect the reduction in staff that is part of a
restructuring plan. Due to these actions, Safeco recognized a curtailment gain
in 2003, of which $1,329 was allocated to the Company.
Early in 2004, the FASB issued a staff position paper that permits sponsors of
retiree benefit programs subject to SFAS 106, "Employers' Accounting for
Postretirement Benefits, Other Than Pensions," to make an election to defer
accounting for the effects of the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the Act) until further authoritative guidance is
issued. Safeco has elected to make this deferral and, accordingly, has not
reflected the effects of the Act on the obligation or annual costs of the OPRB
program.
The Company participates in Safeco's Long-Term Incentive Plan of 1997 (the
Plan), as amended. Incentive stock options, non-qualified stock options,
restricted stock rights (RSR), performance stock rights (PSR) and stock
appreciation rights are authorized under the Plan. Stock-based compensation
expense allocated to the Company was $2,966 for 2003, which includes stock
option expense of $1,943.
Stock options are granted at exercise prices not less than the fair market value
of the stock on the date of the grant. The terms and conditions upon which
options become exercisable may vary among grants, however, option rights expire
no later than ten years from the date of grant. Safeco grants options and rights
to key employees. Options generally vest on a straight-line basis over four
years.
39
Symetra Financial
Notes to Combined Financial Statements (continued)
(All dollar amounts in thousands, unless otherwise stated)
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
RSRs provide for the holder to receive a stated number of share rights if the
holder remains employed for a stated number of years. PSRs provide for the
holder to receive a stated number of share rights if the holder attains certain
specified performance goals within a stated performance cycle. Performance goals
may include operating income, return on equity, relative stock price
appreciation and/or other criteria.
As a result of Safeco's sale of the Safeco Life and Investment companies, Safeco
retained the liabilities related to OPRB, CBP and Safeco's Long-Term Incentive
Plan of 1997.
11. DIVIDEND RESTRICTIONS
Insurance companies are restricted by state regulations as to the aggregate
amount of dividends they may pay in any consecutive twelve-month period without
regulatory approval. Generally, dividends may be paid out of earned surplus
without approval with 30 days prior written notice within certain limits. The
limits are generally based on the greater of 10% of the prior year statutory
surplus or prior year statutory net gain from operations. Dividends in excess of
the prescribed limits or earned surplus require formal state insurance
commission approval. Based on statutory limits as of December 31, 2003, the
amount of retained earnings available for the payment of dividends without prior
regulatory approval is $166,586.
12. STATUTORY-BASIS INFORMATION
State insurance regulatory authorities require insurance companies to file
annual statements prepared on an accounting basis prescribed or permitted by
their respective state of domicile. Prescribed statutory accounting practices
include state laws, regulations and general administrative rules, as well as a
variety of publications of the National Association of Insurance Commissioners
(NAIC), including the revised Accounting Practices and Procedures Manual.
Permitted statutory accounting practices encompass all accounting practices not
so prescribed.
40
Symetra Financial
Notes to Combined Financial Statements (continued)
(All dollar amounts in thousands, unless otherwise stated)
12. STATUTORY-BASIS INFORMATION (CONTINUED)
Statutory net income (loss) and capital and surplus, by company, are as follows:
YEAR ENDED
DECEMBER 31,
2003
------------
Statutory net income (loss):
Symetra Life Insurance Company $ 156,699
Symetra National Life Insurance Company 507
First Symetra National Life Insurance Company of New York (29)
American States Life Insurance Company 14,103
------------
Total $ 171,280
============
DECEMBER 31,
2003
------------
Statutory capital and surplus:
Symetra Life Insurance Company $ 1,059,564
============
Statutory net income differs from income reported in accordance with GAAP
primarily because policy acquisition costs are expensed when incurred, reserves
are based on different assumptions and income tax expense reflects only taxes
paid or currently payable.
Statutory capital and surplus differs from amounts reported in accordance with
GAAP primarily because policy acquisition costs are expensed when incurred,
reserves are based on different assumptions and fixed maturities are carried at
amortized cost.
Life and health insurance companies are subject to certain Risk-Based Capital
(RBC) requirements as specified by the NAIC. Under those requirements, the
amount of capital and surplus maintained by a life and health insurance company
is to be determined based on various risk factors related to it. At December 31,
2003, Symetra Life Insurance Company and its subsidiaries met the RBC
requirements.
13. RELATED PARTIES
We are obligated under a real estate lease with GAC, an affiliate. The current
minimum annual rental commitment under this obligation is $5,467 at December 31,
2003. The minimum aggregate rental commitment under this lease is $10,750. The
lease expires on July 31, 2005.
The amount of rent expense charged to operations was $10,488 for 2003.
41
Symetra Financial
Notes to Combined Financial Statements (continued)
(All dollar amounts in thousands, unless otherwise stated)
13. RELATED PARTIES (CONTINUED)
Safeco and its affiliates provide us with personnel, property, and facilities in
carrying out certain of its corporate functions. Safeco annually determines
allocation factors based on headcount, time studies, actual usage or other
relevant allocation bases in order to allocate expenses for these services and
facilities. These expenses are included in net investment income and other
operating expenses within our Combined Statement of Income. Safeco charged us
expenses of $46,710 for the year ended December 31, 2003. These expenses include
charges for corporate overhead, data processing systems, payroll, and other
miscellaneous charges.
As of December 31, 2003, we owed Safeco and its affiliates $12,636, which is
included in other liabilities on our Combined Balance Sheet. These balances were
settled within 30 days.
No shareholder dividends were paid to Safeco during 2003.
During 2003, liabilities of $4,537 owed to Safeco were forgiven and reflected as
a capital contribution.
Various affiliated property and casualty companies directly purchased structured
settlement annuities from the Company totaling $4,399 in 2003. Symetra Assigned
Benefits Service Company and Symetra National Life Insurance Company also
purchased structured settlement annuities, which were assigned from various
affiliated property and casualty companies totaling $29,308 in 2003.
14. SEGMENT INFORMATION
We provide a broad range of products and services that include individual and
group insurance products, pension products, annuities, mutual funds and
investment advisory services. These operations are managed separately as six
reportable segments: Group, Income Annuities, Retirement Services, Individual,
Asset Management and Other based on product groupings:
Group's principal product is stop-loss medical insurance sold to employers
with self-insured medical plans. Also included in this segment are group
life, accidental death and dismemberment insurance and disability
products.
42
Symetra Financial
Notes to Combined Financial Statements (continued)
(All dollar amounts in thousands, unless otherwise stated)
14. SEGMENT INFORMATION (CONTINUED)
Income Annuities' principal product is the structured settlement annuity
that is sold to fund third-party personal injury settlements, providing a
reliable income stream to the injured party.
Retirement Services' products are primarily fixed and variable deferred
annuities (both qualified and non-qualified), tax-sheltered annuities
(marketed to teachers and not-for-profit organizations), guaranteed
investment contracts and corporate retirement funds.
Individual's products include term, universal and variable universal life
and bank owned life insurance.
Asset Management is comprised of managing the assets of Safeco Mutual
Funds and the investment portfolios supporting our variable annuity and
variable universal life products.
Other is comprised mainly of investment income resulting from the
investment of capital and accumulated earnings of the operating lines of
business.
We evaluate our results based upon pretax operating earnings, a non-GAAP
financial measure that excludes net realized investment losses. Management
believes the presentation of segment pretax operating earnings enhances the
understanding of our results of operations by highlighting earnings attributable
to the normal, recurring operations of the business.
43
Symetra Financial
Notes to Combined Financial Statements (continued)
(All dollar amounts in thousands, unless otherwise stated)
14. SEGMENT INFORMATION (CONTINUED)
The following table presents selected financial information by segment and
reconciles pretax operating earnings to amounts reported in the Combined
Statement of Income.
INCOME RETIREMENT
GROUP ANNUITIES SERVICES INDIVIDUAL
-------------------------------------------------------------------
Revenues:
Premiums $ 545,102 $ - $ 316 $ 135,100
Net investment income 6,552 513,793 364,709 234,239
Other revenue 1,243 425 23,229 14,179
-------------------------------------------------------------------
Total (excluding net realized
investment gains (losses)) 552,897 514,218 388,254 383,518
Benefits and expenses:
Policy benefits 310,848 468,617 283,085 293,218
Other underwriting and
operating expenses 138,857 20,317 59,994 68,376
Amortization of deferred
policy acquisition costs 12,817 - 26,570 11,940
Intangibles and goodwill
amortization 1,361 - 596 3,652
-------------------------------------------------------------------
Total 463,883 488,934 370,245 377,186
Pretax operating earnings 89,014 25,284 18,009 6,332
Net realized investment gains
(losses) 337 (8,624) (3,759) (6,210)
-------------------------------------------------------------------
Income before income taxes $ 89,351 $ 16,660 $ 14,250 $ 122
===================================================================
Assets:
Total investments $ 158,885 $ 7,291,134 $ 6,393,137 $ 3,900,041
Separate account assets - - 1,032,272 105,167
Total assets 343,391 7,544,307 8,036,974 4,485,061
ASSET
MANAGEMENT OTHER TOTAL
-------------------------------------------------
Revenues:
Premiums $ - $ - $ 680,518
Net investment income 1,067 91,320 1,211,680
Other revenue 23,333 23,790 86,199
-------------------------------------------------
Total (excluding net realized
investment gains (losses)) 24,400 115,110 1,978,397
Benefits and expenses:
Policy benefits - - 1,355,768
Other underwriting and
operating expenses 23,098 36,111 346,753
Amortization of deferred
policy acquisition costs - - 51,327
Intangibles and goodwill
amortization - 2,722 8,331
-------------------------------------------------
Total 23,098 38,833 1,762,179
Pretax operating earnings 1,302 76,277 216,218
Net realized investment gains
(losses) 969 (8,286) (25,573)
-------------------------------------------------
Income before income taxes $ 2,271 $ 67,991 $ 190,645
=================================================
Assets:
Total investments $ 58,003 $ 1,540,937 $ 19,342,137
Separate account assets - - 1,137,439
Total assets 79,736 2,022,383 22,511,852
15. SUBSEQUENT EVENTS
Safeco entered into a definitive agreement (Stock Purchase Agreement or SPA),
dated March 15, 2004, to sell the Company to an investor group led by White
Mountains Insurance Group, Ltd. and Berkshire Hathaway, Inc. The purchase price
is $1.35 billion, subject to adjustment based on the Company's June 30, 2004
Adjusted Statutory Book Value as defined in the SPA. The sale was completed on
August 2, 2004.
44
Symetra Financial
Notes to Combined Financial Statements (continued)
(All dollar amounts in thousands, unless otherwise stated)
15. SUBSEQUENT EVENTS (CONTINUED)
On March 12, 2004, the Company purchased three mortgage loans from Safeco
Insurance Company of America at current book value plus accrued interest
totaling $7,237, which approximated fair value.
On June 30, 2004, the Company declared a dividend of $64,300 payable to Safeco
in accordance with the SPA.
On July 12, 2004, Safeco contributed capital of $1,131 in cash to the Company.
The contribution represented additional proceeds realized upon the sale of
certain Company invested assets that were liquidated in accordance with the SPA.
On July 31, 2004, Safeco contributed furniture, equipment, and software to the
Company with a total book value of $7,708.
Symetra Financial announced on August 2, 2004, that it will exit the mutual fund
business. Effective immediately, Symetra Asset Management, manager of the Safeco
mutual funds, has been replaced with a new manager, Boston-based Pioneer
Investment Management, Inc. Subject to trustee and fund shareholder approval, it
is proposed that the $3.6 billion in assets currently held in Safeco's 22 mutual
funds will become part of the Pioneer family of funds. This change is expected
to be finalized before the end of the year.
45
Exhibit 99.4
COMBINED FINANCIAL STATEMENTS
Symetra Financial
Six Months Ended June 30, 2004 and 2003
Symetra Financial
Combined Financial Statements
Six Months Ended June 30, 2004 and 2003
CONTENTS
Combined Financial Statements
Combined Balance Sheets........................................................1
Combined Statements of Income..................................................3
Combined Statements of Changes in Shareholder's Equity.........................4
Combined Statements of Comprehensive Income (Loss).............................5
Combined Statements of Cash Flows..............................................6
Notes to Combined Financial Statements.........................................8
Symetra Financial
Combined Balance Sheets
(In thousands)
JUNE 30, DECEMBER 31,
2004 2003
-------------------------------
(UNAUDITED)
ASSETS
Investments:
Available-for-sale securities:
Fixed maturities, at fair value
(cost or amortized cost: $16,792,727 and $16,710,722) $ 17,659,883 $ 18,044,154
Marketable equity securities, at fair value
(cost: $97,372 and $97,511) 109,027 109,881
Mortgage loans:
Nonaffiliates 914,019 926,286
Affiliates - 33,518
Policy loans 84,810 85,590
Short-term investments 49,074 121,751
Other invested assets 14,699 20,957
-------------------------------
Total investments 18,831,512 19,342,137
Cash and cash equivalents 79,659 15,028
Accrued investment income 227,791 231,390
Other notes and accounts receivable 154,331 114,871
Current income taxes recoverable 22,227 -
Reinsurance recoverables 180,341 179,754
Deferred policy acquisition costs 322,746 282,291
Intangibles and goodwill 146,524 150,864
Other assets 2,786 3,583
Securities lending collateral 1,137,755 1,054,495
Separate account assets 1,169,403 1,137,439
-------------------------------
Total assets $ 22,275,075 $ 22,511,852
===============================
1
JUNE 30, DECEMBER 31,
2004 2003
-------------------------------
(UNAUDITED)
LIABILITIES AND SHAREHOLDER'S EQUITY
Funds held under deposit contracts $ 16,562,890 $ 16,582,390
Future policy benefits 334,725 331,855
Policy and contract claims 154,849 139,114
Unearned premiums 10,135 9,838
Other policyholders' funds 41,154 46,554
Dividends payable to Safeco 64,300 --
Other liabilities 223,994 236,447
Current income taxes payable - 26,926
Deferred income tax liability 269,301 380,137
Securities lending payable 1,137,755 1,054,495
Separate account liabilities 1,169,403 1,137,439
-------------------------------
Total liabilities 19,968,506 19,945,195
Commitments and contingencies (Note 7)
Capital stock (Note 1) 7,459 7,459
Additional paid-in capital 398,721 397,354
Retained earnings 1,345,824 1,332,072
Accumulated other comprehensive income, net of taxes:
Unrealized gains on available-for-sale securities and derivative
financial instruments 579,372 886,980
Deferred policy acquisition costs valuation allowance (24,807) (57,208)
-------------------------------
Total accumulated other comprehensive income 554,565 829,772
Total shareholder's equity 2,306,569 2,566,657
-------------------------------
Total liabilities and shareholder's equity $ 22,275,075 $ 22,511,852
===============================
SEE CONDENSED NOTES TO COMBINED FINANCIAL STATEMENTS.
2
Symetra Financial
Combined Statements of Income
(In thousands)
SIX MONTHS ENDED JUNE 30
2004 2003
-------------------------------
(UNAUDITED)
Revenues:
Premiums $ 319,773 $ 350,159
Net investment income 595,023 607,230
Other revenues 44,414 42,610
Net realized investment gains (losses) 33,089 (51,454)
-------------------------------
Total 992,299 948,545
-------------------------------
Benefits and expenses:
Policy benefits 682,979 684,365
Other underwriting and operating expenses 169,640 163,545
Amortization of deferred policy acquisition costs 29,367 24,317
Intangibles and goodwill amortization 4,225 3,729
-------------------------------
Total 886,211 875,956
-------------------------------
Income before income taxes 106,088 72,589
Provision (benefit) for income taxes:
Current (9,316) 23,044
Deferred 37,352 1,302
-------------------------------
Total 28,036 24,346
-------------------------------
Net income $ 78,052 $ 48,243
===============================
SEE CONDENSED NOTES TO COMBINED FINANCIAL STATEMENTS.
3
Symetra Financial
Combined Statements of Changes in Shareholder's Equity
(In thousands)
SIX MONTHS ENDED JUNE 30
2004 2003
-------------------------------
(UNAUDITED)
Capital stock $ 7,459 $ 7,459
-------------------------------
Additional paid-in capital:
Balance at beginning of year 397,354 390,874
Capital contribution from Safeco - 4,537
Stock option expense allocation from Safeco 1,367 -
-------------------------------
Balance at end of period 398,721 395,411
-------------------------------
Retained earnings:
Balance at beginning of year 1,332,072 1,193,382
Net income 78,052 48,243
Dividend to Safeco (64,300) -
-------------------------------
Balance at end of period 1,345,824 1,241,625
-------------------------------
Accumulated other comprehensive income,
net of taxes:
Balance at beginning of year 829,772 702,074
Other comprehensive income (loss) (275,207) 419,218
-------------------------------
Balance at end of period 554,565 1,121,292
-------------------------------
Shareholder's equity $ 2,306,569 $ 2,765,787
===============================
SEE CONDENSED NOTES TO COMBINED FINANCIAL STATEMENTS.
4
Symetra Financial
Combined Statements of Comprehensive Income (Loss)
(In thousands)
SIX MONTHS ENDED JUNE 30
2004 2003
-------------------------------
(UNAUDITED)
Net income $ 78,052 $ 48,243
-------------------------------
Other comprehensive income (loss), net of taxes:
Change in unrealized gains and losses on available-for-sale
securities (net of tax: $(151,827); $221,449) (281,964) 411,261
Reclassification adjustment for net realized investment losses
included in net income (net of tax: $(11,581); $18,009) (21,508) 33,444
Derivatives qualifying as cash flow hedges--net change in fair
value (net of tax: $(2,227); $(2,239)) (4,136) (4,158)
Adjustment for deferred policy acquisition costs valuation
allowance (net of tax: $17,447; $(11,486)) 32,401 (21,330)
-------------------------------
Other comprehensive income (loss) (275,207) 419,217
-------------------------------
Comprehensive income (loss) $ (197,155) $ 467,460
===============================
SEE CONDENSED NOTES TO COMBINED FINANCIAL STATEMENTS.
5
Symetra Financial
Combined Statements of Cash Flows
(In thousands)
SIX MONTHS ENDED JUNE 30
2004 2003
-------------------------------
(UNAUDITED)
OPERATING ACTIVITIES
Insurance premiums received $ 280,769 $ 304,033
Dividends and interest received 568,136 556,473
Other operating receipts 46,065 44,694
Insurance claims and policy benefits paid (223,369) (260,784)
Underwriting, acquisition and operating costs paid (228,621) (201,824)
Income taxes paid (39,837) (22,759)
-------------------------------
Net cash provided by operating activities 403,143 419,833
INVESTING ACTIVITIES
Purchases of:
Fixed maturities available-for-sale (1,502,397) (2,298,811)
Equity securities available-for-sale (3,373) (3,807)
Other invested assets (46,631) (4,574)
Issuance of nonaffiliated mortgage loans - (61,155)
Issuance of policy loans - (12,045)
Maturities and calls of fixed maturities available-for-sale 865,141 1,060,910
Sales of:
Fixed maturities available-for-sale 575,061 649,229
Equity securities available-for-sale 4,471 4,508
Other invested assets 1,621 (227)
Repayment of nonaffiliated mortgage loans 45,203 49,396
Repayment of policy loans 11,172 12,301
Repayment of affiliated mortgage loans 33,518 818
Net decrease in short-term investments 72,676 21,387
Other, net 281 208
-------------------------------
Net cash provided by (used in) investing activities 56,743 (581,862)
FINANCING ACTIVITIES
Funds received under deposit contracts 175,375 674,900
Return of funds held under deposit contracts (570,630) (540,412)
-------------------------------
Net cash provided by (used in) financing activities (395,255) 134,488
-------------------------------
Net increase (decrease) in cash 64,631 (27,541)
Cash and cash equivalents at beginning of period 15,028 45,922
-------------------------------
Cash and cash equivalents at end of period $ 79,659 $ 18,381
===============================
SEE CONDENSED NOTES TO COMBINED FINANCIAL STATEMENTS.
6
Symetra Financial
Combined Statements of Cash Flows
Reconciliation of Net Income to Net Cash Provided by Operating Activities
(In thousands)
SIX MONTHS ENDED JUNE 30
2004 2003
-------------------------------
(UNAUDITED)
Net income $ 78,052 $ 48,243
-------------------------------
Adjustments to reconcile net income to net cash provided by operating
activities:
Net realized investment (gains) losses (33,089) 51,454
Accretion of fixed maturity investments 4,003 (17,779)
Accrued interest on accrual bonds (23,608) (22,483)
Amortization and depreciation 4,862 4,393
Deferred income tax provision 37,352 1,302
Interest expense on deposit contracts 418,843 452,560
Mortality and expense charges and administrative fees (43,553) (42,443)
Other, net 1,415 1,301
Changes in:
Accrued investment income 3,599 5,378
Deferred policy acquisition costs 9,393 (17,901)
Other receivables 25,660 (10,385)
Policy and contract claims 15,735 (14,352)
Future policy benefits 2,870 (16,354)
Unearned premiums 297 557
Accrued income taxes (49,153) 235
Other assets and liabilities (49,535) (3,893)
-------------------------------
Total adjustments 325,091 371,590
-------------------------------
Net cash provided by operating activities $ 403,143 $ 419,833
===============================
There were no significant noncash financing or investing activities in the six
months ended June 30, 2004 and 2003, with the exception of the $4,537 capital
contribution in 2003 from Safeco disclosed in Note 9.
SEE CONDENSED NOTES TO COMBINED FINANCIAL STATEMENTS.
7
Symetra Financial
Notes to Combined Financial Statements--Unaudited
(All dollar amounts in thousands, unless otherwise stated)
June 30, 2004
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Symetra Financial is a group of affiliated stock life insurance and financial
services companies. We began as wholly owned subsidiaries of Safeco Corporation
(Safeco), which is a Washington State corporation whose subsidiaries were
engaged in two principal businesses: (1) property and casualty insurance,
including surety; and (2) life insurance and asset management. As a part of
Safeco, we were included in the segment known as Safeco Life and Investments. We
are comprised primarily of Safeco Life Insurance Company, a stock life insurance
company organized under the laws of the state of Washington, and its three
wholly-owned subsidiaries: Safeco National Life Insurance Company, American
States Life Insurance Company, and First Safeco National Life Insurance Company
of New York.
These companies offer individual and group insurance products, pension products,
and annuity products marketed through professional agents in all states and the
District of Columbia. Our principal products measured by 2003 premiums and
deposit volume include: fixed deferred annuities, stop-loss medical insurance,
variable annuities, single premium immediate annuities, and individual life
insurance.
Also included in this group are Safeco Administrative Services, Inc., a
third-party administrator of employee benefit programs; Safeco Asset Management
Company, the investment advisor for the Safeco Mutual Funds; Safeco Securities,
Inc., the principal underwriter of the Safeco Mutual Funds; Safeco Investment
Services, Inc., a broker-dealer; and Safeco Assigned Benefits Service Company.
These affiliates were wholly-owned subsidiaries of Safeco.
On September 29, 2003, Safeco announced its intent to sell Safeco Life and
Investments. For the six months ended June 30, 2004, $15,228 was accrued for
employee retention bonuses associated with this planned sale, which is included
in other underwriting and operating expenses in the Combined Statement of
Income. See Subsequent Event Note 11.
8
Symetra Financial
Notes to Combined Financial Statements--Unaudited (continued)
(All dollar amounts in thousands, unless otherwise stated)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
On August 2, 2004, the following companies were purchased by an investor group
led by White Mountains Insurance Group, Ltd., and Berkshire Hathaway, Inc., and
became the privately held group of companies known today as Symetra Financial:
- Symetra Life Insurance Company (formerly Safeco Life Insurance Company)
- Symetra National Life Insurance Company (formerly Safeco National Life
Insurance Company)
- American States Life Insurance Company
- First Symetra National Life Insurance Company of New York (formerly
First Safeco National Life Insurance Company of New York)
- Symetra Administrative Services, Inc. (SAS) (formerly Safeco
Administrative Services, Inc.)
- Symetra Asset Management Company (formerly Safeco Asset Management
Company)
- Symetra Securities, Inc. (formerly Safeco Securities, Inc.)
- Symetra Services Corporation (formerly Safeco Services Corporation)
- Symetra Investment Services, Inc. (formerly Safeco Investment Services,
Inc.)
- Symetra Assigned Benefits Service Company (formerly Safeco Assigned
Benefits Service Company)
Throughout our Combined Financial Statements the member companies of Symetra
Financial are referred to as "the Company," "we," and "our" and the new names of
the entities have been used as if those names were in effect in 2003. In
addition, references to affiliated companies refer to former Safeco affiliates.
BASIS OF COMBINATION AND REPORTING AND USE OF ESTIMATES
The unaudited Combined Financial Statements are prepared in conformity with
accounting principles generally accepted in the United States (GAAP) for interim
financial information. Certain financial information, which is required in the
annual financial statements prepared in conformity with GAAP, may not be
required for interim financial reporting purposes and has been condensed or
omitted. In the opinion of management, all adjustments (consisting of normal and
recurring adjustments) considered necessary for a fair presentation of results
for the interim periods have been included. Results for the six months ended
June 30, 2004 are not necessarily indicative of the results that may be expected
for the year ending December 31, 2004.
The preparation of financial statements in conformity with GAAP requires us to
make estimates and assumptions that may affect the amounts reported in the
unaudited Combined Financial Statements and accompanying notes. Actual results
could differ from those estimates.
9
Symetra Financial
Notes to Combined Financial Statements--Unaudited (continued)
(All dollar amounts in thousands, unless otherwise stated)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
All significant intercompany transactions and balances have been eliminated in
the Combined Financial Statements.
CAPITAL STOCK
Capital stock for Symetra Financial is comprised of the following (in thousands,
except par value and share amounts):
SHARES
CAPITAL PAR SHARES ISSUED AND
COMPANY STOCK VALUE AUTHORIZED OUTSTANDING VALUE
- --------------------------------------------------------------------------------------------------------------------------
Symetra Life Insurance Company Common Stock $ 250 20,000 20,000 $ 5,000
Symetra Administrative Services, Inc. Common Stock 100 10,000 10,000 1,000
Symetra Asset Management Company Common Stock 1 3,000 600 .6
Common Stock
(non-voting) 1 3,000 2,400 2.4
Preferred Stock
(6% non-
cumulative, non-
participating) 100 4,000 4,000 400
Symetra Securities, Inc. Common Stock 100 10,000 10,000 1,000
Symetra Services Corporation Common Stock 100 500 500 50
Symetra Investment Services, Inc. Common Stock .10 50,000,000 50,000 5
Symetra Assigned Benefits Service
Company Common Stock 1 1,000 1,000 1
-------
Total $ 7,459
=======
10
Symetra Financial
Notes to Combined Financial Statements--Unaudited (continued)
(All dollar amounts in thousands, unless otherwise stated)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
NEW ACCOUNTING STANDARDS
New accounting pronouncements that we have recently adopted, or will adopt in
the near future, are as follows:
AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS (AICPA) STATEMENT OF POSITION
(SOP) 03-1, "ACCOUNTING AND REPORTING BY INSURANCE ENTERPRISES FOR CERTAIN
NONTRADITIONAL LONG-DURATION CONTRACTS AND FOR SEPARATE ACCOUNTS"
The provisions of SOP 03-1 are effective for fiscal years beginning after
December 15, 2003. SOP 03-1 provides guidance in three areas: separate account
presentation and valuation; the accounting recognition given sales inducements;
and the classification and valuation of long-duration contract liabilities. We
adopted SOP 03-1 effective January 1, 2004. Upon adoption, there was no material
impact to our Combined Financial Statements.
EMERGING ISSUES TASK FORCE (EITF) 03-1, "THE MEANING OF OTHER-THAN-TEMPORARY
IMPAIRMENT AND ITS APPLICATION TO CERTAIN INVESTMENTS"
The provisions of EITF 03-1 are effective for fiscal years ending after December
15, 2003. EITF 03-1 provides disclosure requirements for investments in debt and
marketable equity securities that are accounted for under SFAS 115. We have
included the required disclosures within this report.
11
Symetra Financial
Notes to Combined Financial Statements--Unaudited (continued)
(All dollar amounts in thousands, unless otherwise stated)
2. INVESTMENTS
The following tables summarize our fixed maturities and marketable equity
securities:
JUNE 30, 2004
-----------------------------------------------------------------------------
COST OR GROSS GROSS NET
AMORTIZED UNREALIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES GAINS VALUE
-----------------------------------------------------------------------------
Fixed maturities:
U.S. Government and agencies $ 827,077 $ 151,879 $ (4,509) $ 147,370 $ 974,447
State and political subdivisions 688,892 53,126 (8,876) 44,250 733,142
Foreign governments 238,646 66,181 (14) 66,167 304,813
Corporate securities 10,852,355 650,730 (116,024) 534,706 11,387,061
Mortgage-backed securities 4,185,757 135,571 (60,908) 74,663 4,260,420
-----------------------------------------------------------------------------
Total fixed maturities 16,792,727 1,057,487 (190,331) 867,156 17,659,883
Marketable equity securities 97,372 13,415 (1,760) 11,655 109,027
-----------------------------------------------------------------------------
Total $ 16,890,099 $ 1,070,902 $ (192,091) $ 878,811 $ 17,768,910
=============================================================================
DECEMBER 31, 2003
-----------------------------------------------------------------------------
COST OR GROSS GROSS NET
AMORTIZED UNREALIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES GAINS VALUE
-----------------------------------------------------------------------------
Fixed maturities:
U.S. Government and agencies $ 395,684 $ 76,380 $ (638) $ 75,742 $ 471,426
State and political subdivisions 585,405 63,595 (3,569) 60,026 645,431
Foreign governments 236,843 75,344 - 75,344 312,187
Corporate securities 11,291,051 1,034,829 (64,644) 970,185 12,261,236
Mortgage-backed securities 4,201,739 189,290 (37,155) 152,135 4,353,874
-----------------------------------------------------------------------------
Total fixed maturities 16,710,722 1,439,438 (106,006) 1,333,432 18,044,154
Marketable equity securities 97,511 14,034 (1,664) 12,370 109,881
-----------------------------------------------------------------------------
Total $ 16,808,233 $ 1,453,472 $ (107,670) $ 1,345,802 $ 18,154,035
=============================================================================
12
Symetra Financial
Notes to Combined Financial Statements--Unaudited (continued)
(All dollar amounts in thousands, unless otherwise stated)
2. INVESTMENTS (CONTINUED)
The following table shows our investments' gross unrealized losses and fair
values, aggregated by investment category and length of time that individual
securities have been in a continuous unrealized loss position, at June 30, 2004:
LESS THAN 12 MONTHS 12 MONTHS OR MORE TOTAL
----------------------------- --------------------------- ----------------------------
GROSS GROSS GROSS
UNREALIZED UNREALIZED UNREALIZED
FAIR VALUE LOSSES FAIR VALUE LOSSES FAIR VALUE LOSSES
----------------------------- --------------------------- ----------------------------
Fixed maturities:
U.S. Government and agencies $ 148,769 $ (4,509) $ -- $ -- $ 148,769 $ (4,509)
State and political subdivisions 188,107 (4,679) 40,619 (4,197) 228,726 (8,876)
Foreign governments 1,438 (14) -- -- 1,438 (14)
Corporate securities 2,383,423 (78,233) 442,184 (37,791) 2,825,607 (116,024)
Mortgage-backed securities 1,537,349 (40,700) 261,345 (20,208) 1,798,694 (60,908)
--------------------------- --------------------------- ---------------------------
Total fixed maturities 4,259,086 (128,135) 744,148 (62,196) 5,003,234 (190,331)
Marketable equity securities 8,171 (827) 5,100 (933) 13,271 (1,760)
--------------------------- --------------------------- ---------------------------
Total $ 4,267,257 $(128,962) $749,248 $(63,129) $5,016,505 $(192,091)
=========================== =========================== ===========================
The unrealized losses of these investments represented approximately 1.1% of the
cost of our investment portfolio at June 30, 2004.
We reviewed all our investments with unrealized losses at June 30, 2004 in
accordance with our impairment policy. Our evaluation concluded that these
declines in fair value were temporary after considering:
- - That the majority of such losses for securities in an unrealized loss
position for less than 12 months were interest rate related
- - For securities in an unrealized loss position for 12 months or more, the
financial condition and near term prospects of the issuer of the security,
including any specific events that may affect its operation or earnings
potential
- - Our intent and ability to hold the security long enough to recover its value
13
Symetra Financial
Notes to Combined Financial Statements--Unaudited (continued)
(All dollar amounts in thousands, unless otherwise stated)
2. INVESTMENTS (CONTINUED)
The following table summarizes the cost or amortized cost and fair value of
fixed maturities at June 30, 2004, by contractual years-to-maturity. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without prepayment penalties.
COST OR
AMORTIZED FAIR
COST VALUE
-----------------------------
One year or less $ 677,245 $ 694,258
Over one year through five years 2,769,652 2,894,067
Over five years through ten years 2,921,428 2,994,504
Over ten years 6,238,645 6,816,634
Mortgage-backed securities 4,185,757 4,260,420
-----------------------------
Total fixed maturities $ 16,792,727 $ 17,659,883
=============================
The carrying value of securities on deposit with state regulatory authorities
was $10,981 at June 30, 2004, and $10,966 at December 31, 2003.
The following table summarizes our combined net investment income:
SIX MONTHS ENDED
JUNE 30
2004 2003
-----------------------------
Interest:
Fixed maturities $ 541,994 $ 555,993
Mortgage loans 35,964 37,413
Short-term investments 1,954 2,433
Dividends:
Marketable equity securities 2,232 2,766
Redeemable preferred stock 3,349 5,081
Other 13,708 7,069
-----------------------------
Total investment income 599,201 610,755
Investment expenses (4,178) (3,525)
-----------------------------
Net investment income $ 595,023 $ 607,230
=============================
14
Symetra Financial
Notes to Combined Financial Statements--Unaudited (continued)
(All dollar amounts in thousands, unless otherwise stated)
2. INVESTMENTS (CONTINUED)
The following table summarizes our combined net realized investment gains
(losses) before income taxes:
SIX MONTHS ENDED JUNE 30
2004 2003
-----------------------------
Fixed maturities $ 30,189 $ (54,799)
Marketable equity securities 958 (1,657)
Other invested assets 1,890 3,130
Deferred policy acquisition costs adjustment 52 1,872
-----------------------------
Net realized investment gains (losses) before income taxes $ 33,089 $ (51,454)
=============================
3. DERIVATIVE FINANCIAL INSTRUMENTS
Derivatives are instruments whose values are derived from an underlying
instrument, indices or rates, have notional amounts and can be net settled. This
may include derivatives that are "embedded" in other derivative instruments or
in certain existing assets or liabilities. We use derivative financial
instruments, including interest rate swaps and options, as a means of hedging
exposure to equity price changes and/or interest rate risk on anticipated
transactions or on existing assets and liabilities.
Interest rate risk is the risk of economic losses due to changes in the level of
interest rates. We manage interest rate risk through active portfolio management
and selective use of interest rate swaps as hedges to change the characteristics
of certain assets and liabilities. With interest rate swap agreements, we
exchange with a counterparty, at specified intervals, interest rate payments of
differing character (for example, fixed-rate payments exchanged for
variable-rate payments), based on an underlying principal balance (notional
amount). No cash is exchanged at the outset of the contract and no principal
payments are made by either party. The net interest accrued and the net interest
payments made at each interest payment due date are recorded to interest income
or expense, depending on the hedged item.
15
Symetra Financial
Notes to Combined Financial Statements--Unaudited (continued)
(All dollar amounts in thousands, unless otherwise stated)
3. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
FAIR VALUE HEDGES
We use interest rate swaps to offset the change in fair value of certain
fixed-rate assets. At June 30, 2004, we had $317,075 of notional amounts
outstanding relating to such hedges. There was no hedge ineffectiveness
recognized in earnings related to these fair value hedges in the six months
ended June 30, 2004 and 2003.
CASH FLOW HEDGES
We also use interest rate swaps to hedge the variability of future cash flows
arising from changes in interest rates associated with certain variable rate
assets and forecasted transactions. At June 30, 2004, we had $75,000 of notional
amounts outstanding relating to such hedges. These derivatives have been
designated as cash flow hedges and, because they have been determined to be
highly effective, we recognize the changes in fair value of the derivative as a
component of Other Comprehensive Income (OCI), net of deferred income taxes,
until the hedged transaction affects current earnings. At the time current
earnings are affected by the variability of cash flows due to interest rate
changes, the related portion of deferred gains or losses on cash flow hedge
derivatives are reclassified from OCI and recorded in the Combined Statements of
Income. Amounts recorded in OCI related to derivatives qualifying as cash flow
hedges resulted in a decrease of $4,065 after tax for the six months ended June
30, 2004 and a decrease of $3,084 after tax for the same period in 2003.
The interest rate swaps related to forecasted transactions that are considered
probable of occurring are considered to be highly effective and qualify for
hedge treatment under Statement of Financial Accounting Standards (SFAS) 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS 133
requires that amounts deferred in OCI be reclassified into earnings either when
the forecasted transaction occurs, or when it is considered not probable of
occurring--whichever happens sooner. For the six months ended June 30, 2004,
$11,450 pretax ($7,443 after tax) was reclassified from OCI to earnings relating
to forecasted transactions that were considered no longer probable of occurring.
For the six months ended June 30, 2003, $15,215 pretax ($9,890 after tax) was
reclassified from OCI into earnings relating to forecasted transactions that
were considered no longer probable of occurring.
16
Symetra Financial
Notes to Combined Financial Statements--Unaudited (continued)
(All dollar amounts in thousands, unless otherwise stated)
3. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
OTHER DERIVATIVES
In 1997, we introduced an equity indexed annuity (EIA) product that credits the
policyholder based on a percentage of the gain in the S&P 500 Index. Sales of
the EIA product were suspended in the fourth quarter of 1998. In connection with
this product, we have a hedging program with the objective to hedge the exposure
to changes in the S&P 500 Index. This program consists of buying S&P 500 Index
options. As permitted under a grandfathering clause in SFAS 133, we elected not
to apply the fair value adjustment requirement of this statement to the embedded
derivatives contained in the liability related to EIA products sold prior to
January 1, 1999. The change in fair value of the options, as well as any gains
or losses when they expire or terminate, are recognized as an adjustment to
Policy Benefits in the Combined Statements of Income.
4. REINSURANCE
We use reinsurance to manage exposure to potential losses. Although the
reinsurer is liable to us to the extent of the reinsurance ceded, we remain
primarily liable to the policyholders as the direct insurer on all risks
reinsured. We evaluate the financial condition of our reinsurers to minimize our
exposure to losses from reinsurer insolvencies. To our knowledge, none of our
major reinsurers is currently experiencing material financial difficulties. We
analyze reinsurance recoverables according to the credit ratings and types of
our reinsurers. Of the total amounts due from reinsurers balance at June 30,
2004, 95.1% was with reinsurers rated A or higher by A.M. Best. We had no
reserve for uncollectible reinsurance in 2003. None of our reinsurance contracts
exclude certified terrorist acts.
Individual Life Reinsurance - For our individual life business, we have
coinsurance agreements where the reinsurer reimburses us based on the percentage
in the contract that range from 50% to 80%, based upon the year that the policy
was written. For policies written prior to 2000, we recover 50% of the death
benefit that we pay on covered claims from the reinsurer. This percentage was
increased in 2000 to 80% for a majority of the policies written, and was
increased in 2002 to cover 80% of all policies written.
17
Symetra Financial
Notes to Combined Financial Statements--Unaudited (continued)
(All dollar amounts in thousands, unless otherwise stated)
4. REINSURANCE (CONTINUED)
Group Long-Term Disability and Group Short-Term Disability - We reinsure 100% of
our Group Long-Term Disability and Group Short-Term Disability business. The
reinsurer is responsible for paying all claims.
Reinsurance recoverables are comprised of the following amounts:
JUNE 30, DECEMBER 31,
2004 2003
----------------------------
LIFE INSURANCE
Reinsurance recoverables on:
Policy and contract claim reserves $ 3,002 $ 3,689
Paid claims 1,139 1,841
Life policy liabilities 91,333 90,607
----------------------------
Total life insurance 95,474 96,137
----------------------------
ACCIDENT AND HEALTH INSURANCE
Reinsurance recoverables on:
Policy and contract claim reserves 84,493 83,425
Paid claims 374 192
----------------------------
Total accident and health insurance 84,867 83,617
----------------------------
Total reinsurance recoverables $ 180,341 $ 179,754
============================
18
Symetra Financial
Notes to Combined Financial Statements--Unaudited (continued)
(All dollar amounts in thousands, unless otherwise stated)
4. REINSURANCE (CONTINUED)
The effects of reinsurance on earned premiums are as follows:
SIX MONTHS ENDED JUNE 30
2004 2003
---------------------------
EARNED PREMIUMS
Direct:
Accident and health premiums $ 242,075 $ 221,018
Life insurance premiums 86,120 81,848
---------------------------
Total 328,195 302,866
---------------------------
Ceded:
Accident and health premiums (10,598) (8,160)
Life insurance premiums (17,546) (14,453)
---------------------------
Total (28,144) (22,613)
---------------------------
Assumed:
Accident and health premiums 19,586 69,343
Life insurance premiums 136 563
---------------------------
Total 19,722 69,906
---------------------------
Total earned premiums $ 319,773 $ 350,159
===========================
The decrease in assumed accident and health premiums reflects the completion of
renewals of acquired stop-loss medical business on to Symetra Life Insurance
Company paper.
Ceded reinsurance reduced our policy benefits by $10,947 and $13,091 for the six
months ended June 30, 2004 and 2003.
19
Symetra Financial
Notes to Combined Financial Statements--Unaudited (continued)
(All dollar amounts in thousands, unless otherwise stated)
5. INCOME TAXES
We use the liability method of accounting for income taxes in accordance with
SFAS 109, "Accounting for Income Taxes," under which deferred income tax assets
and liabilities are determined based on the differences between their financial
reporting and their tax bases and are measured using the enacted tax rates.
For the six months ended June 30, 2004, the difference of $9,095 between income
tax computed by applying the U.S. federal income tax rate of 35% to income
before income taxes and the combined provision for income taxes was primarily
due to the tax effect of the separate accounts dividend received deduction, and
the favorable resolution of outstanding tax contingency items, which amounted to
$1,432 and $8,037, respectively. For the six months ended June 30, 2003, the
difference of $1,060 was due to the separate accounts dividend received
deduction and other true-up adjustments, which amounted to $1,554 and $(494),
respectively.
The tax effects of temporary differences which give rise to the deferred income
tax assets and deferred income tax liabilities at June 30, 2004 and December 31,
2003 were as follows:
JUNE 30, DECEMBER 31,
2004 2003
---------------------------
Deferred income tax assets:
Goodwill $ 4,266 $ 4,515
Adjustment to life policy liabilities 69,979 93,094
Adjustment to claims reserves (64) 3,627
Capitalization of policy acquisition costs 71,357 76,060
Investment impairments 32,873 44,719
Capital loss carryforwards 11,536 8,400
Postretirement benefits 319 4,210
Uncollected premium adjustment 8,277 8,109
Guaranty fund assessments 726 728
Other 1,953 7,338
---------------------------
Total deferred income tax assets 201,222 250,800
---------------------------
Deferred income tax liabilities:
Unrealized appreciation of investment securities (net of deferred
policy acquisition costs adjustment of $13,357and $30,804) 298,570 446,797
Deferred policy acquisition costs 126,319 129,606
Bond discount accrual 18,589 29,145
Present value of future profits 15,015 15,819
Intangible assets 11,227 8,086
Other 803 1,484
---------------------------
Total deferred income tax liabilities 470,523 630,937
---------------------------
Net deferred income tax liability $ 269,301 $ 380,137
===========================
20
Symetra Financial
Notes to Combined Financial Statements--Unaudited (continued)
(All dollar amounts in thousands, unless otherwise stated)
6. COMPREHENSIVE INCOME
Comprehensive income is defined as all changes in Shareholder's Equity, except
those arising from transactions with shareholders. Comprehensive income includes
net income and OCI, which for us consists of changes in unrealized gains or
losses of investments carried at market value and deferred policy acquisition
costs valuation allowance.
The components of OCI are as follows:
JUNE 30, DECEMBER 31,
2004 2003
--------------------------
Net unrealized gains on available-for-sale securities $ 878,761 $ 1,345,641
Net unrealized gains on derivative financial instruments 12,410 18,773
Adjustment for deferred policy acquisition costs (38,164) (88,012)
Deferred income taxes (298,442) (446,630)
--------------------------
Accumulated OCI $ 554,565 $ 829,772
==========================
The following summarizes the net changes in OCI:
SIX MONTHS ENDED JUNE 30
2004 2003
--------------------------
Increase (decrease) in unrealized appreciation/depreciation of:
Available-for-sale securities $ (466,880) $ 684,163
Derivative financial instruments (6,363) (6,397)
Adjustment for deferred policy acquisition costs 49,848 (32,816)
Deferred income taxes 148,188 (225,733)
--------------------------
Net change in accumulated OCI $ (275,207) $ 419,217
==========================
7. COMMITMENTS AND CONTINGENCIES
At June 30, 2004 and December 31, 2003, unfunded mortgage loan commitments were
$13,340 and $16,475. We had no other material commitments or contingencies at
June 30, 2004 or December 31, 2003.
21
Symetra Financial
Notes to Combined Financial Statements--Unaudited (continued)
(All dollar amounts in thousands, unless otherwise stated)
8. EMPLOYEE BENEFIT PLANS
CASH BALANCE PLAN
The Safeco Employee's Cash Balance Plan (CBP) is a noncontributory defined
benefit plan that provides benefits for each year of service after 1988, based
on the participant's eligible compensation plus a stipulated rate of return on
the benefit balance. Safeco makes contributions to the CBP based on the funding
requirements set by the Employee Retirement Income Security Act (ERISA). Costs
allocated to the Company for this plan were 1% or less of income before income
taxes for the six months ended June 30, 2004 and 2003.
OTHER POSTRETIREMENT BENEFITS
In addition, Safeco provides certain healthcare and life insurance benefits and
other post-retirement benefits (collectively OPRB) for certain retired
employees, their beneficiaries, and eligible dependents.
Safeco amended their OPRB program in the third quarter of 2003. The amendments
created negative prior service cost, which will be amortized over the average
remaining service period of all active participants. The related amortization
resulted in a credit to OPRB expense. Amounts allocated to the Company related
to OPRB for the six months ended June 30, 2004 and 2003 were $(661) and $1,572.
STOCK BASED COMPENSATION
The Company participates in Safeco's Long-Term Incentive Plan of 1997 (the
Plan), as amended. Incentive stock options, non-qualified stock options,
restricted stock rights (RSR), performance stock rights (PSR) and stock
appreciation rights are authorized under the Plan. Safeco grants stock-based
compensation awards at the fair market value of the stock on the day of the
grant.
Prior to 2003, Safeco applied Accounting Principles Board (APB) Opinion 25 in
accounting for their stock options, as allowed under SFAS 123 "Accounting for
Stock-Based Compensation," as amended. Under APB 25, Safeco recognized no
compensation expense related to options because the exercise price of their
employee stock options equaled the fair market value of the underlying stock on
the date of grant. Effective in the second quarter of 2004, they replaced their
annual stock option program with a restricted stock program.
22
Symetra Financial
Notes to Combined Financial Statements--Unaudited (continued)
(All dollar amounts in thousands, unless otherwise stated)
8. EMPLOYEE BENEFIT PLANS (CONTINUED)
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," amending SFAS 123, to provide
alternative methods of transition to the fair value method of accounting for
stock-based employee compensation under SFAS 123. Safeco adopted the fair value
method for accounting for stock-based compensation effective January 1, 2003,
using the prospective basis transition method. Under this method, Safeco has
recognized stock-based compensation expense for options granted modified or
settled after January 1, 2003. Stock-based compensation expense allocated to the
company was $1,883 for the six months ended June 30, 2004, and $532 for the six
months ended June 30, 2003. These amounts include stock option expense of $1,367
and $0, respectively.
As a result of Safeco's sale of the Safeco Life and Investment companies, Safeco
retained the liabilities related to the OPRB, CBP and Safeco's Long-Term
Incentive Plan of 1997.
9. RELATED PARTIES
During the six months ended June 30, 2003, liabilities of $4,537 owed to Safeco
were forgiven and reflected as a capital contribution.
In June 2000, the Company issued a guarantee to General America Corporation
(GAC), an affiliate. Under the guarantee, the Company guarantees repayment of a
loan made by GAC to Investar Holdings (Investar), a life and investments
insurance agency. Safeco's analysis of Investar determined Investar's equity at
risk was not sufficient to finance its activities and is therefore considered a
Variable Interest Entity (VIE) as defined under Financial Interpretation Number
(FIN) "Consolidation of Variable Interest Entities" 45R. The loan is guaranteed
by the assets of Investar and personally guaranteed by its equity holders. Based
on Safeco's analysis of Investar's expected losses and expected residual
returns, neither GAC nor the Company is the primary beneficiary. The potential
exposure to losses is limited to the senior debt holding, which was $17,334 at
June 30, 2004, excluding the value of rights to the assets of the agency and
personal guarantees provided by the equity holders. The loan was made in June
2000 and matures in June 2017. On August 2, 2004, Symetra Financial Corporation
acquired this loan from GAC and the guarantee is no longer in effect. We do not
have any guarantees subject to the recognition provisions of FIN 45.
During the six months ended June 30, 2004, the Company declared a shareholder
dividend of $64,300 payable to Safeco in accordance with the terms of the Stock
Purchase Agreement (SPA) (See Note 11).
23
Symetra Financial
Notes to Combined Financial Statements--Unaudited (continued)
(All dollar amounts in thousands, unless otherwise stated)
9. RELATED PARTIES (CONTINUED)
On March 12, 2004, the Company purchased three mortgage loans from Safeco
Insurance Company of America at current book value plus accrued interest
totaling $7,237, which approximated fair value.
Various affiliated property and casualty insurance companies directly purchased
structured settlement annuities from the Company totaling $1,472 for the six
months ended June 30, 2004.
10. SEGMENT INFORMATION
We provide a broad range of products and services that include individual and
group insurance products, pension products and annuity products. These
operations are managed separately as five reportable segments: Group, Income
Annuities, Retirement Services, Individual and Other based on product groupings:
Group's principal product is stop-loss medical insurance sold to employers
with self-insured medical plans. Also included in this segment are group
life, accidental death and dismemberment insurance and disability
products.
Income Annuities' principal product is the structured settlement annuity
that is sold to fund third-party personal injury settlements, providing a
reliable income stream to the injured party.
Retirement Services' products are primarily fixed and variable deferred
annuities (both qualified and non-qualified), tax-sheltered annuities
(marketed to teachers and not-for-profit organizations), guaranteed
investment contracts and corporate retirement funds.
Individual's products include term, universal and variable universal life
and bank owned life insurance.
Asset Management is comprised of managing the assets of Safeco Mutual
Funds and the investment portfolios supporting our variable annuity and
variable universal life products.
Other is comprised mainly of investment income resulting from the
investment of capital and accumulated earnings of the operating lines of
business.
24
Symetra Financial
Notes to Combined Financial Statements--Unaudited (continued)
(All dollar amounts in thousands, unless otherwise stated)
10. SEGMENT INFORMATION (CONTINUED)
We evaluate our results based upon pretax operating earnings, a non-GAAP
financial measure that excludes net realized investment losses. Management
believes the presentation of segment pretax operating earnings enhances the
understanding of our results of operations by highlighting earnings attributable
to the normal, recurring operations of the business.
The following tables present selected financial information by segment and
reconcile pretax operating earnings to amounts reported in the Combined
Statements of Income.
SIX MONTHS ENDED JUNE 30, 2004
---------------------------------------------------------
INCOME RETIREMENT
GROUP ANNUITIES SERVICES INDIVIDUAL
---------------------------------------------------------
Revenues:
Premiums $ 251,063 $ - $ 71 $ 68,639
Net investment income 2,753 245,261 179,435 115,372
Other revenue 1 225 12,842 7,594
---------------------------------------------------------
Total (excluding net realized
investment gains) 253,817 245,486 192,348 191,605
Benefits and expenses:
Policy benefits 172,771 234,976 134,076 141,156
Other operating expenses 62,119 8,166 30,640 30,964
Amortization of deferred
policy acquisition costs 9,003 - 14,207 6,157
Intangibles and goodwill
amortization 681 - 687 1,497
---------------------------------------------------------
Total 244,574 243,142 179,610 179,774
Pretax operating earnings 9,243 2,344 12,738 11,831
Net realized investment gains 141 11,451 3,890 4,241
---------------------------------------------------------
Income before income taxes $ 9,384 $ 13,795 $ 16,628 $ 16,072
=========================================================
Assets:
Total investments $ 139,043 $ 7,075,981 $ 6,192,746 $ 3,898,867
Separate account assets - - 1,061,697 107,706
Total assets 314,422 7,345,293 7,958,485 4,567,436
SIX MONTHS ENDED JUNE 30, 2004
------------------------------------------
ASSET
MANAGEMENT OTHER TOTAL
------------------------------------------
Revenues:
Premiums $ - $ - $ 319,773
Net investment income 695 51,507 595,023
Other revenue 12,756 10,996 44,414
------------------------------------------
Total (excluding net realized
investment gains) 13,451 62,503 959,210
Benefits and expenses:
Policy benefits - - 682,979
Other operating expenses 11,034 26,717 169,640
Amortization of deferred
policy acquisition costs - - 29,367
Intangibles and goodwill
amortization - 1,360 4,225
------------------------------------------
Total 11,034 28,077 886,211
Pretax operating earnings 2,417 34,426 72,999
Net realized investment gains 204 13,162 33,089
------------------------------------------
Income before income taxes $ 2,621 $ 47,588 $ 106,088
==========================================
Assets:
Total investments $ 59,631 $ 1,465,244 $ 18,831,512
Separate account assets - - 1,169,403
Total assets 80,361 2,009,078 22,275,075
25
Symetra Financial
Notes to Combined Financial Statements--Unaudited (continued)
(All dollar amounts in thousands, unless otherwise stated)
10. SEGMENT INFORMATION (CONTINUED)
SIX MONTHS ENDED JUNE 30, 2003
-----------------------------------------------------------
INCOME RETIREMENT
GROUP ANNUITIES SERVICES INDIVIDUAL
-----------------------------------------------------------
Revenues:
Premiums $ 282,201 $ - $ 150 $ 67,808
Net investment income 3,454 261,998 180,812 117,458
Other revenue 1,117 172 11,503 6,470
-----------------------------------------------------------
Total (excluding net realized
investment gains (losses) 286,772 262,170 192,465 191,736
Benefits and expenses:
Policy benefits 158,650 234,123 141,521 150,071
Other operating expenses 69,195 9,617 27,627 32,387
Amortization of deferred
policy acquisition costs 4,684 - 13,522 6,111
Intangibles and goodwill
amortization 681 - (91) 1,778
-----------------------------------------------------------
Total 233,210 243,740 182,579 190,347
Pretax operating earnings 53,562 18,430 9,886 1,389
Net realized investment gains
(losses) 296 (15,183) (13,993) (15,098)
-----------------------------------------------------------
Income (loss) before income
taxes $ 53,858 $ 3,247 $ (4,107) $ (13,709)
===========================================================
SIX MONTHS ENDED JUNE 30, 2003
-------------------------------------------
ASSET
MANAGEMENT OTHER TOTAL
-------------------------------------------
Revenues:
Premiums $ - $ - $ 350,159
Net investment income 505 43,003 607,230
Other revenue 12,399 10,949 42,610
-------------------------------------------
Total (excluding net realized
investment gains (losses) 12,904 53,952 999,999
Benefits and expenses:
Policy benefits - - 684,365
Other operating expenses 12,666 12,053 163,545
Amortization of deferred
policy acquisition costs - - 24,317
Intangibles and goodwill
amortization - 1,361 3,729
-------------------------------------------
Total 12,666 13,414 875,956
Pretax operating earnings 238 40,538 124,043
Net realized investment gains
(losses) (738) (6,738) (51,454)
-------------------------------------------
Income (loss) before income
taxes $ (500) $ 33,800 $ 72,589
===========================================
DECEMBER 31, 2003
-----------------------------------------------------------
INCOME RETIREMENT
GROUP ANNUITIES SERVICES INDIVIDUAL
-----------------------------------------------------------
Assets: $ 158,885 $ 7,291,134 $ 6,393,137 $ 3,900,041
Total investments
Separate account assets - - 1,032,272 105,167
Total assets 343,391 7,544,307 8,036,974 4,485,061
DECEMBER 31, 2003
-------------------------------------------
ASSET
MANAGEMENT OTHER TOTAL
-------------------------------------------
Assets: $ 58,003 $ 1,540,937 $ 19,342,137
Total investments
Separate account assets - - 1,137,439
Total assets 79,736 2,022,383 22,511,852
26
Symetra Financial
Notes to Combined Financial Statements--Unaudited (continued)
(All dollar amounts in thousands, unless otherwise stated)
11. SUBSEQUENT EVENTS
On July 31, 2004, Safeco contributed furniture, equipment, and software to the
Company with a total book value of $7,708.
On August 2, 2004, Safeco Corporation completed the sale of the Company to an
investor group led by White Mountains Insurance Group, Ltd. and Berkshire
Hathaway, Inc. (the Purchasers). The sale was completed pursuant to a Stock
Purchase Agreement or SPA, dated March 15, 2004. The total purchase price was
$1.35 billion, subject to certain post- closing adjustments.
On July 12, 2004, Safeco contributed capital of $1,131 in cash to the Company.
The contribution represented additional proceeds realized upon the sale of
certain Company invested assets that were liquidated in accordance with the SPA.
Symetra Financial announced on August 2, 2004, it will exit the mutual fund
business. Effective immediately, Symetra Asset Management, manager of the
Symetra mutual funds, has been replaced with a new manager, Boston-based Pioneer
Investment Management, Inc. Subject to trustee and fund shareholder approval, it
is proposed that the $3.6 billion in assets currently held in Symetra's 22
mutual funds will become part of the Pioneer family of funds. This change is
expected to be finalized before the end of the year.
27
EXHIBIT 99.5
THE UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET OF THE
REGISTRANT AS OF JUNE 30, 2004 AND THE UNAUDITED PRO FORMA CONDENSED
COMBINED INCOME STATEMENTS OF THE REGISTRANT
FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND THE YEAR ENDED
DECEMBER 31, 2003.
WHITE MOUNTAINS INSURANCE GROUP, LTD.
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
INTRODUCTION AND OVERVIEW
On August 2, 2004, White Mountains Insurance Group, Ltd. (the "Company",
collectively with its subsidiaries "White Mountains") announced that the
investor group led by White Mountains and Berkshire Hathaway Inc. had
completed its acquisition (the "Acquisition") of the life and investments
business of Safeco Corporation ("Symetra Financial"). White Mountains paid
$200 million for approximately 19% of the outstanding shares of Symetra
Financial and warrants to acquire 1,099,600 common shares of Symetra
Financial. White Mountains' economic ownership of Symetra Financial is
approximately 24% on a fully converted basis (i.e., when considering all
outstanding warrants to acquire additional common shares of Symetra
Financial).
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma condensed combined income statement of White
Mountains for the year ended December 31, 2003 and the six months ended June 30,
2004 presents results for White Mountains as if the acquisition of Symetra
Financial had occurred as of January 1, 2003 and January 1, 2004, respectively.
The accompanying unaudited pro forma condensed combined balance sheet of White
Mountains as of June 30, 2004 presents White Mountains' financial position as if
the acquisition of Symetra Financial had occurred on June 30, 2004.
White Mountains' investment in the common shares of Symetra Financial will be
accounted for by the equity method of accounting. The unaudited pro forma
financial information is provided for informational purposes only. The
unaudited pro forma financial information does not purport to represent what
White Mountains' financial position or results of operations actually would
have been had the Acquisition in fact occurred as of the dates indicated, or
to project White Mountains' financial position or results of operations for
any future date or period. The pro forma adjustments are based on available
information and assumptions that the Company currently believes are
reasonable under the circumstances and that are considered to be material to
the overall pro forma presentation. The unaudited pro forma financial
information should be read in conjunction with White Mountains' Annual Report
on Form 10-K for the year ended December 31, 2003, White Mountains' Quarterly
Report on Form 10-Q for the period ended June 30, 2004, Symetra Financial's
audited consolidated financial statements as of and for the year ended
December 31, 2003, which are enclosed herein as Exhibit 99.3, and Symetra
Financial's unaudited combined financial statements as of June 30, 2004 and
for the six months ended June 30, 2004 and 2003, which are enclosed herein as
Exhibit 99.4.
WHITE MOUNTAINS INSURANCE GROUP, LTD.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
JUNE 30, 2004
(IN MILLIONS OF DOLLARS)
White Pro Forma Pro Forma
Mountains Adjustments Notes Combined
--------- ----------- ----- ---------
ASSETS
Total investments and cash $10,401.7 $ (200.0) [a] $10,201.7
Reinsurance recoverable on paid and unpaid losses 3,896.2 -- 3,896.2
Insurance and reinsurance premiums receivable 963.6 -- 963.6
Deferred acquisition costs 338.0 -- 338.0
Deferred tax asset 248.2 -- 248.2
Investment in unconsolidated insurance affiliates 151.6 200.00 [a] 351.6
Other assets 1,924.6 36.5 [b] 1,961.1
--------- -------- ---------
TOTAL ASSETS $17,923.9 $ 36.5 $17,960.4
========= ======== =========
LIABILITIES
Loss and loss adjustment expense reserves $ 9,329.1 $ -- $ 9,329.1
Unearned insurance and reinsurance premiums 1,824.5 -- 1,824.5
Debt 824.3 -- 824.3
Deferred tax liabilities 292.8 -- 292.8
Preferred stock subject to mandatory redemption 202.7 -- 202.7
Other liabilities 1,937.3 -- 1,937.3
--------- -------- ---------
TOTAL LIABILITIES 14,410.7 -- 14,410.7
--------- -------- ---------
SHAREHOLDERS' EQUITY 3,513.2 36.5 [b] 3,549.7
--------- -------- ---------
TOTAL SHAREHOLDERS' EQUITY 3,513.2 36.5 3,549.7
TOTAL LIABILITIES AND COMMON SHAREHOLDERS' EQUITY $17,923.9 $ 36.5 $17,960.4
========= ======== =========
Fully converted tangible book value per share (10,819,416
shares outstanding) $ 312.82 $ 316.20
Book value per share (10,819,416 shares outstanding) $ 314.65 $ 318.02
See the accompanying notes to the unaudited pro forma
condensed combined financial statements.
WHITE MOUNTAINS INSURANCE GROUP, LTD.
UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENT
FOR THE SIX MONTHS ENDED JUNE 30, 2004
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
White Pro Forma Pro Forma
Mountains Adjustments Notes Combined
--------- ----------- ----- ---------
REVENUES
Earned insurance and reinsurance premiums $ 1,829.1 $ -- $ 1,829.1
Net investment income 164.2 (3.0) [a] 161.2
Net realized investment gains 56.2 -- 56.2
Net unrealized investment gains -- -- --
Other revenues 93.8 -- 93.8
----------- ------ -----------
TOTAL REVENUES 2,143.3 (3.0) 2,140.3
EXPENSES
Losses and loss adjustment expenses 1,146.7 -- 1,146.7
Insurance and reinsurance acquisition expenses 340.7 -- 340.7
Other underwriting expenses 252.1 -- 252.1
General and administrative expenses 124.0 -- 124.0
Other expenses 69.6 -- 69.6
----------- ------ -----------
TOTAL EXPENSES 1,933.1 -- 1,933.1
----------- ------ -----------
PRETAX EARNINGS (LOSS) 210.2 (3.0) 207.2
Income tax benefit (provision) (89.3) 0.8 [a] (88.5)
Equity in earnings of unconsolidated affiliates 23.1 20.0 [c] 43.1
----------- ------ -----------
NET INCOME (LOSS) FROM CONTINUING OPERATIONS $ 144.0 $ 17.8 $ 161.8
=========== ====== ===========
Earnings per Common Share (Note d):
Average Common Shares used in computing basic earnings per share 9,040,207 9,040,207
Basic earnings per Common Share $ 15.93 $ 17.90
Average Common Shares used in computing diluted earnings per share 10,151,086 10,151,086
Diluted earnings per Common Share $ 14.11 $ 15.86
See the accompanying notes to the unaudited pro forma
condensed combined financial statements.
WHITE MOUNTAINS INSURANCE GROUP, LTD.
UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2003
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
White Pro Forma Pro Forma
Mountains Adjustments Notes Combined
--------- ----------- ----- ---------
REVENUES
Earned insurance and reinsurance premiums $ 3,137.7 $ -- $ 3,137.7
Net investment income 290.9 (6.0) [a] 284.9
Net realized investment gains 162.6 -- 162.6
Net unrealized investment gains -- --
Other revenues 215.4 -- 215.4
---------- ----- ----------
TOTAL REVENUES 3,806.6 (6.0) 3,800.6
EXPENSES
Losses and loss adjustment expenses 2,138.1 2,138.1
Insurance and reinsurance acquisition expenses 611.6 -- 611.6
Other underwriting expenses 363.3 -- 363.3
General and administrative expenses 201.8 201.8
Other expenses 119.5 -- 119.5
---------- ----- ----------
TOTAL EXPENSES 3,434.3 -- 3,434.3
---------- ----- ----------
PRETAX EARNINGS (LOSS) 372.3 (6.0) 366.3
Income tax benefit (provision) (127.6) 1.7 [a] (125.9)
Accretion and dividends on mandatorily redeemable preferred stock (21.5) -- (21.5)
Equity in earnings of unconsolidated affiliates 57.4 35.4 [c] 92.8
---------- ----- ----------
NET INCOME (LOSS) FROM CONTINUING OPERATIONS $ 280.6 $31.1 $ 311.7
========== ===== ==========
Earnings per Common Share (Note d):
Average Common Shares used in computing basic earnings per share 8,725,217 8,725,217
Basic earnings per Common Share $ 26.48 $ 30.05
Average Common Shares used in computing diluted earnings per share 9,668,732 9,668,732
Diluted earnings per Common Share $ 23.63 $ 26.85
See the accompanying notes to the unaudited pro forma
condensed combined financial statements.
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS
The following pro forma purchase accounting adjustments were undertaken to
reflect the Company's investment in Symetra Financial.
[a] INVESTMENT INCOME
The Company paid $200.0 MILLION in cash for its investment in Symetra
Financial. The Company estimates that it earned $3.0 MILLION and $6.0
MILLION for the periods ended June 30, 2004 and December 31, 2003,
respectively, on such balances which were held in short-term
investments. The yield of 3% approximates the Company's pre-tax yield
on its short-term investment portfolio during the period. As a result,
a Federal income tax benefit of $.8 MILLION and $1.7 MILLION, for the
periods ended June 30, 2004 and December 31, 2003, respectively, were
recorded for these transactions.
[b] EXTRAORDINARY GAINS
The Company paid $200.0 million for a 19% interest in the common
stock of Symetra Financial, which has a fair value at the date of
purchase of $200.0 million, and warrants to acquire 1,099,600 of
the common shares of Symetra Financial, which has a fair value
at the date of purchase of $36.5 million. As a result, the Company
has recognized a pro forma gain of $36.5 million representing the
excess of the fair value of assets acquired over the consideration
paid for its interests in Symetra Financial. The Company has valued
its warrants to acquire common shares of Symetra Financial using a
five-year expected term with a risk-free interest rate commensurate
with the term valued (3.8%) and using volatility of 30%.
[c] EQUITY IN EARNINGS OF UNCONSOLIDATED AFFILIATES
The Company recorded $20.0 MILLION and $35.4 MILLION representing the
Company's ownership of approximately 19% in the net income of Symetra
Financial for the periods ended June 30, 2004 and December 31, 2003,
respectively.
[d] EARNINGS PER COMMON SHARE
In determining both basic and diluted earnings per Common Share before
pro-forma adjustments, net income from continuing operations is reduced
by $49.5 million to reflect an adjustment to the redemption value on
the Company's convertible preference shares for the period ended
December 31, 2003. In determining diluted earnings per Common Share
before pro-forma adjustments, net income from continuing operations is
further reduced by $.8 million and $2.5 million for the periods ended
June 30, 2004 and December 31, 2003, respectively, resulting from
outstanding options and warrants to acquire common shares of an
unconsolidated affiliate of the Company. The basic earnings per Common
Share computation is determined using the weighted average number of
Common Shares outstanding during the period. The diluted earnings per
Common Share computation is determined using the weighted average
number of Common Shares and dilutive Common Share equivalents
outstanding during the period.
