S-1/A 1 v31293a8sv1za.htm AMENDMENT TO FORM S-1 sv1za
Table of Contents

As filed with the Securities and Exchange Commission on November 5, 2007.
Registration No. 333-144162
 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
Amendment No. 8
to
 
Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
 
 
 
 
SYMETRA FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
 
         
Delaware   6311   20-0978027
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)
 
777 108th Avenue NE, Suite 1200
Bellevue, WA 98004
(425) 256-8000
(Address, including zip code, and telephone number, including area code, of
registrant’s principal executive offices)
 
 
 
 
Randall H. Talbot
President and Chief Executive Officer
Symetra Financial Corporation
777 108th Avenue NE, Suite 1200
Bellevue, WA 98004
(425) 256-8000
(Name and address, including zip code, and telephone number,
including area code, of agent for service)
 
 
 
 
Copies to:
 
         
William J. Whelan III, Esq.
Cravath, Swaine & Moore LLP
Worldwide Plaza
825 Eighth Avenue
New York, NY 10019
(212) 474-1000
  George C. Pagos, Esq.
Senior Vice President, General Counsel and Secretary
Symetra Financial Corporation
777 108th Avenue NE, Suite 1200
Bellevue, WA 98004
(425) 256-8000
  Gary I. Horowitz, Esq.
Simpson Thacher & Bartlett LLP
425 Lexington Avenue
New York, NY 10017
(212) 455-2000
 
Approximate date of commencement of proposed sale to the public:  As soon as practicable after the effective date of this Registration Statement.
 
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  o
 
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering.  o
 
 
 
 
CALCULATION OF REGISTRATION FEE
 
                         
            Proposed
           
            Maximum
    Proposed
     
            Aggregate
    Maximum
     
Title of Each Class of
    Amount to be
    Offering Price
    Aggregate
    Amount of
Securities to be Registered     Registered(1)     per Share     Offering Price(2)     Registration Fee(3)
Common Stock, $0.01 par value per share
    45,425,000     $20.00     $908,500,000     $27,891
                         
 
(1) Includes 5,925,000 shares issuable upon exercise of the underwriters’ over-allotment option.
 
(2) Estimated solely for the purpose of calculating the amount of the registration fee pursuant to rule 457(a) under the Securities Act of 1933.
 
(3) Previously paid.
 
 
 
 
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
 


Table of Contents

The information in this preliminary prospectus is not complete and may be changed. The selling stockholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities, and we and the selling stockholders are not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
 
SUBJECT TO COMPLETION, DATED NOVEMBER 5, 2007.
 
PRELIMINARY PROSPECTUS
 
39,500,000 Shares
 
(SYMETRA FINANCIAL)
 
Common Stock
 
 
 
 
This is Symetra Financial Corporation’s initial public offering. The selling stockholders are selling all of the shares in the offering. We will not receive any of the proceeds from the sale of shares by the selling stockholders.
 
We expect the public offering price to be between $18.00 and $20.00 per share. Currently, no public market exists for the shares. Our common stock has been approved for listing, subject to official notice of issuance, on the New York Stock Exchange under the symbol “SYA.”
 
Investing in our common stock involves risks that are described in the “Risk Factors” section beginning on page 10 of this prospectus.
 
 
 
 
                 
    Per Share     Total  
 
Public offering price
  $           $        
Underwriting discount
  $       $    
Proceeds to selling stockholders
  $       $  
 
 
The underwriters may also purchase up to an additional 5,925,000 shares of common stock from the selling stockholders at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus to cover over-allotments.
 
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed on the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.
 
The shares will be ready for delivery on or about          , 2007.
 
 
 
 
Merrill Lynch & Co. Goldman, Sachs & Co. JPMorgan Lehman Brothers
 
     
UBS Investment Bank
   
    Banc of America Securities LLC
 
             
Dowling & Partners Securities, LLC
  Fox-Pitt Kelton Cochran Caronia Waller   Keefe, Bruyette & Woods   Wells Fargo Securities
 
 
 
The date of this prospectus is          , 2007.


 

 
TABLE OF CONTENTS
 
         
    Page
 
  1
  10
  27
  27
  28
  28
  29
  30
  34
  74
  97
  103
  119
  123
  128
  132
  134
  136
  139
  144
  144
  144
  F-1
  G-1
 EXHIBIT 23.1
 
 
You should rely only on the information contained in this prospectus or any free writing prospectus prepared by or on behalf of us. We have not authorized anyone to provide you with information that is different. We are not making an offer of our common stock in any state where the offer is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than the date on the front cover of this prospectus.
 
“Symetra,” “Symetra Financial” and their respective logos are our trademarks. Other service marks, trademarks and trade names referred to in this prospectus are the property of their respective owners.
 
Our insurance subsidiaries are domiciled in the states of Washington and New York. These states have enacted laws that require regulatory approval for the acquisition of “control” of insurance companies. Under these laws, there exists a presumption of “control” when an acquiring party acquires 10% or more of the voting securities of an insurance company or of a company which itself controls an insurance company. Therefore, any person acquiring 10% or more of our common stock would need the prior approval of the state insurance regulators of these states or a determination from such regulators that “control” has not been acquired.
 
 
Dealer Prospectus Delivery Obligation
 
Through and including          , 2007 (the 25th day after the date of this prospectus), all dealers that effect transactions in our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as an underwriter and with respect to unsold allotments or subscriptions.


Table of Contents

 
PROSPECTUS SUMMARY
 
The following is a summary of the information contained in this prospectus, and it may not contain all the information that is important to you. You should read the entire prospectus carefully, especially the “Risk Factors” section, the consolidated financial statements and the accompanying notes included in this prospectus.
 
Unless the context otherwise requires, references in this prospectus to “Symetra” refer to Symetra Financial Corporation on a stand-alone, non-consolidated basis. References to “we,” “our,” “us” and “the company” are to Symetra Financial Corporation together with its subsidiaries, including our predecessor operations.
 
A glossary of selected insurance terms and defined terms used throughout this prospectus can be found under “Glossary of Selected Insurance and Defined Terms” on page G-1.
 
Our Business
 
We are a life insurance company focused on profitable growth in select group health, retirement, life insurance and employee benefits markets. Our first day of operations as an independent company was August 2, 2004 when Symetra acquired a group of life insurance and investment companies from Safeco Corporation (the “Acquisition”). Our operations date back to 1957, and many of our agency and distribution relationships have been in place for decades. We are headquartered in Bellevue, Washington and employ approximately 1,300 people in 25 offices across the United States, serving approximately 1.7 million customers. As of September 30, 2007, we had total stockholders’ equity of $1.4 billion, regulatory capital of $1.5 billion and total assets of $19.7 billion. Our operating return on average equity, or operating ROAE, was 12.6% and 12.1% for the twelve month periods ended September 30, 2007 and 2006, and 13.0% and 11.9% for the years ended December 31, 2006 and December 31, 2005, respectively. We define operating ROAE as net operating income, a non-GAAP financial measure, divided by average stockholders’ equity excluding accumulated other comprehensive income. For a reconciliation of net operating income to net income, please see page 8.
 
We manage our business through the following five segments, four of which are operating:
 
  •  Group.  We offer medical stop-loss insurance, limited medical benefit plans, group life insurance, accidental death and dismemberment insurance and disability insurance mainly to employer groups of 50 to 1,000 individuals. Our Group segment generated segment pre-tax income of $68.0 million during 2006 and $70.1 million during the nine months ended September 30, 2007. As a result of our recent acquisition of Medical Risk Managers, Inc., we also offer managing general underwriting, or MGU, services.
 
  •  Retirement Services.  We offer fixed and variable deferred annuities, including tax sheltered annuities, individual retirement accounts, or IRAs, and group annuities to qualified retirement plans, including Section 401(k) and 457 plans. We also provide record keeping services for qualified retirement plans invested in mutual funds. Our Retirement Services segment generated segment pre-tax income of $43.2 million during 2006 and $19.4 million during the nine months ended September 30, 2007.
 
  •  Income Annuities.  We offer single premium immediate annuities, or SPIAs, for customers seeking a reliable source of retirement income and structured settlement annuities to fund third-party personal injury settlements. Our Income Annuities segment generated segment pre-tax income of $62.6 million during 2006 and $63.7 million during the nine months ended September 30, 2007.
 
  •  Individual.  We offer a wide array of term, universal and variable life insurance as well as bank-owned life insurance, or BOLI. Our Individual segment generated segment pre-tax income of $62.6 million during 2006 and $44.3 million during the nine months ended September 30, 2007.
 
  •  Other.  This segment consists of unallocated corporate income, composed primarily of investment income on unallocated surplus, unallocated corporate expenses, interest expense on debt, the results of


1


Table of Contents

  small, non-insurance businesses that are managed outside of our operating segments and inter-segment elimination entries. Our Other segment generated segment pre-tax income of $7.6 million during 2006 and $7.1 million during the nine months ended September 30, 2007.
 
We distribute our products nationally through an extensive and diversified independent distribution network. Our distributors include financial institutions, employee benefits brokers, third party administrators, worksite specialists, specialty brokers and independent agents. We believe that our multi-channel distribution network allows us to access a broad share of the distributor and consumer markets for insurance and financial services products. For example, we currently distribute our annuity and life insurance products through approximately 23,000 independent agents, 28 key financial institutions and 3,300 independent employee benefits brokers. We have recently signed selling agreements with an additional 10 key financial institutions.
 
Market Environment and Opportunities
 
We believe we are well positioned to benefit from a number of demographic and market trends, including the following:
 
  •  Growing demand for affordable health insurance.  According to the Kaiser Family Foundation, health insurance premiums in the U.S. increased 87% from 2000-2006, while the Consumer Price Index increased only 17% over the same period. As increases in health care costs continue to outpace inflation, the demand for affordable health insurance options has increased. We believe we can grow our business by providing employees with affordable access to health insurance through employer-sponsored limited benefit employee health plans and by offering group medical stop-loss insurance to medium and large businesses. We also believe that the trend toward reductions in employer-paid benefits and the uncertainty over the future of government benefit programs provide us with the opportunity to successfully offer other attractive employee benefits products.
 
  •  Increasing retirement savings and income needs.  According to the U.S. Census Bureau, approximately 77 million Americans born between 1946 and 1964 are approaching retirement age. However, according to the Employee Benefit Research Institute, in 2006, 52% of workers over the age of 55 and their spouses had accumulated less than $50,000 in retirement savings and only 14% of workers report that a traditional pension plan will be their primary source of retirement income. These projected demographic trends, along with a shift in the burden for funding retirement needs from governments and employers to individuals, increase the need for retirement savings and income. We expect greater demand for additional sources of retirement savings, such as our annuities and other investment products that will help consumers supplement their social security benefits with reliable retirement income.
 
  •  Expanding mass affluent market.  As of June 2006, the mass affluent market included 13.7 million households with investible assets between $250,000 and $1.0 million, representing 28% of total financial assets. We believe that the mass affluent population is growing and that it underutilizes various financial products, such as insurance to protect assets, annuities to provide adequate income to support a desired future lifestyle and wealth transfer products to ensure its legacy. We believe we are well positioned to reach consumers in this target market given our relationships with financial institutions and independent agents, which are often their primary sources of guidance and advice. As such, we expect increased demand for our life insurance, variable and fixed annuity and wealth transfer products.
 
Our Competitive Strengths
 
We leverage the following competitive strengths to capitalize on opportunities in our targeted markets:
 
  •  Innovative and collaborative product development capabilities.  We design innovative products to meet the changing demands of the market. By working closely with our distributors, we are able to anticipate opportunities in the marketplace and rapidly address them. For example, we introduced Complete, an innovative variable life insurance policy designed for wealth transfer and centered on minimizing the inherent cost of insurance and thus maximizing the underlying account value. We also recently


2


Table of Contents

  introduced our Focus variable annuity, which features low total cost to the contractholders, well-respected investment options and simplified product features.
 
  •  High-quality distribution relationships.  We offer consumers access to our products through a national multi-channel network, including financial institutions, employee benefits brokers, third party administrators, worksite specialists, specialty brokers and independent agents. By treating our distributors as clients and providing them with outstanding levels of service, we have cultivated strong relationships over decades and are able to avoid competing on price alone.
 
  •  Leading group medical stop-loss insurance provider.  We believe we have been a leading provider of group medical stop-loss insurance since 1976. We have built a consistently profitable platform with high levels of customer service and disciplined underwriting practices. In the last 25 years, our group medical stop-loss insurance business has experienced only two calendar years of net losses.
 
  •  Diverse businesses provide flexibility, earnings stability and capital efficiency.  We have an attractive and diverse mix of businesses that allows us to make profitability-driven decisions in each business across various market environments. We believe that this mix offers us a greater level of financial stability than many of our similarly-sized competitors across business and economic cycles. Our diverse business mix also allows us to reallocate our resources to product lines that generate the most attractive returns on capital invested while reducing our overall capital requirements.
 
  •  Flexible information technology platform integrated with our distributors.  We have a flexible information technology platform that allows us to seamlessly integrate our products onto the operating platforms of our distributors, which we believe provides us with a competitive advantage in attracting new distributors. For example, our ExpressTM tool allows our distributors to capture all the necessary data to make products and services instantly available at the point of sale. We will continue to leverage our information technology platform to market our current and future product offerings.
 
  •  Experienced management team with investor-aligned compensation.  We have a high-quality management team with an average of 24 years of insurance-industry experience, led by Randy Talbot who has been our chief executive officer since 1998. Mr. Talbot has spent a significant portion of his 30-year career in the insurance industry operating an insurance brokerage, providing him with the knowledge to intimately understand the needs of our distributors. We also have an experienced board of directors, consisting of industry professionals who have worked closely with us since the Acquisition to develop our strategies and operating philosophies. Our compensation structure aligns management’s incentives with our stockholders through our long-term incentive plan that rewards long-term growth in tangible book value and in the intrinsic value of our business.
 
Our Growth Strategies
 
To maximize stockholder value, we pursue the following strategies:
 
  •  Target large and growing markets.  We will continue to capitalize on favorable demographic trends, including the growing demand for affordable health insurance, increasing retirement savings and income needs and an expanding mass affluent market. We will continue to identify key opportunities within these markets and provide tailored solutions that address the evolving needs of these customers.
 
  •  Broaden and deepen distribution relationships.  Our distribution strategy is to deliver multiple products through a single point of sale, thereby leveraging the cost of distribution. We utilize diverse distribution channels, including financial institutions, employee benefits brokers, third party administrators, worksite specialists, specialty brokers and independent agents. We intend to deepen our long-standing distribution relationships while adding new large-scale and high quality distributors.
 
  •  Be innovative in anticipating customer needs.  We will continue to work closely with our distributors to develop customer-responsive products that meet our stringent return requirements, address our target markets and can be delivered efficiently across our information technology platforms. We will also continue to pursue non-traditional avenues of product development and be innovative in enhancing our


3


Table of Contents

product offering. For example, we recently began offering funding services to holders of our structured settlements to offer them an attractive financial alternative.
 
  •  Effectively manage capital.  We intend to manage our capital prudently to maximize our profitability and long-term growth in stockholder value. Our capital management strategy is to maintain financial strength through conservative and disciplined risk management practices while deploying or returning excess capital as situations warrant. We will also maintain our conservative investment management philosophy, which includes holding a high quality investment portfolio and carefully matching our investment assets against the duration of our insurance product liabilities. For example, we have a portfolio of equities that supports the longest duration benefits in our Income Annuities segment. We have experienced strong performance on this equity portfolio.
 
  •  Pursue complementary acquisitions.  We will continue to seek acquisition opportunities that fit strategically within our existing business lines, provide us with a larger distribution presence and meet our stringent return objectives. We believe we have ample financial capacity to remain a prudent acquirer while maintaining a conservative balance sheet.
 
Risks Related to Our Business, Our Industry and this Offering
 
Investing in shares of our common stock involves substantial risk. The factors that could adversely affect our results and performance are discussed under the heading “Risk Factors” immediately following this summary. Before you invest in our shares, you should carefully consider all of the information in this prospectus, including matters set forth under the heading “Risk Factors,” including:
 
  •  Exposure to interest rate fluctuations.  Many of our insurance and investment products are sensitive to interest rate fluctuations. Generally, declines in interest rates would have an adverse effect on our financial condition, results of operations and cash flows.
 
  •  Reserve requirements.  Our calculation of reserves for estimated future benefit payments are based upon estimates and assumptions with regard to our future experience. Future experience is subject to many uncertainties and we cannot predict the ultimate amounts we will pay for future benefits or the timing of the payments. If reserves are insufficient to cover actual benefits and payments, we could be required to increase our reserves, which could adversely affect our financial condition and results.
 
  •  Deviation from assumptions upon which pricing is established. The price and expected future profitability of our insurance and deferred annuity products are based in part upon expected patterns of premiums, expenses and benefits, using a number of assumptions, including those related to persistency, mortality and morbidity. Significant deviations from these assumptions could have an adverse affect on our financial condition, results of operations and cash flows.
 
  •  Amortization of deferred acquisition costs.  Deferred acquisition costs, or DAC, represent certain costs which vary with, and are primarily related to, the sale and issuance of insurance policies and investment contracts and are deferred and amortized over the estimated policy and contract lives. Unfavorable experience with regard to expenses, investment returns, mortality, morbidity, withdrawals or lapses may increase the amortization of DAC, resulting in higher expenses and lower profitability.
 
  •  Potential downgrade in financial strength ratings.  A downgrade in our financial strength ratings could have an adverse effect on our financial condition, results of operation, and cash flows in several ways, including reducing new sales of products; adversely affecting our relationship with sales agents; increasing the number of policy surrenders and withdrawals; requiring us to reduce prices and adversely impacting our ability to obtain reinsurance.
 
  •  Highly regulated industry.  Our insurance businesses are subject to a wide variety of laws and regulations in various jurisdictions. Compliance with applicable laws and regulations is time consuming and personnel intensive, and changes in these laws and regulations may materially increase our direct and indirect compliance efforts and other expenses of doing business.


4


Table of Contents

 
  •  Constraints related to holding company structure.  As a holding company, we have no significant direct operations. Dividends and other permitted distributions from subsidiaries are expected to be our principal source of funds to meet ongoing cash requirements. These payments are limited by regulations in the jurisdictions in which our subsidiaries operate. If our subsidiaries are unable to pay dividends, we may have difficulty servicing our debt, paying dividends on our common stock and meeting our holding company expenses.
 
Financial Strength Ratings
 
As of September 30, 2007, the financial strength ratings of our primary life insurance subsidiaries were “A” (“Excellent,” the third highest of 15 ratings) with a stable outlook from A.M. Best Company, Inc., “A–” (“Strong,” the seventh highest of 21 ratings) with a positive outlook from Standard & Poor’s Rating Service, “A2” (“Good,” the sixth highest of 21 ratings) with a stable outlook from Moody’s Investors Service, Inc. and “A+” (“Strong,” the fifth highest of 24 ratings) with a stable outlook from Fitch, Inc. These financial strength ratings should not be relied on with respect to making an investment in our common stock.
 
Recent Events
 
On October 10, 2007, we issued $150.0 million aggregate principal amount of Capital Efficient Notes due 2067 (the “CENts”). The CENts were purchased by a syndicate of initial purchasers, led by J.P. Morgan Securities Inc. and Lehman Brothers Inc., and may be resold to qualified institutional buyers in compliance with applicable securities laws. The CENts bear interest at a fixed annual rate of 8.30% to, but not including, October 15, 2017, and thereafter at a floating annual rate equal to three-month LIBOR plus 4.177%. The CENts have a scheduled maturity date of October 15, 2037, subject to certain limitations, with a final maturity date of October 15, 2067. We applied the net proceeds from the CENts to pay a special cash dividend to our stockholders on October 19, 2007.
 
On October 12, 2007, we declared two dividends, totaling $200.0 million, which we paid on October 19, 2007 to stockholders of record on October 12, 2007.
 
The Selling Stockholders
 
Symetra was formed for the purpose of acquiring our principal subsidiaries from Safeco Corporation. Affiliates of White Mountains Insurance Group, Ltd. and Berkshire Hathaway Inc. led the investor group that formed Symetra to consummate the Acquisition. In addition to the affiliates of White Mountains Insurance Group, Ltd. and Berkshire Hathaway Inc., others from the original investor group may participate in this offering as selling stockholders. Upon consummation of this offering, affiliates of White Mountains Insurance Group, Ltd. and Berkshire Hathaway Inc. will collectively continue to beneficially own approximately 33.4% of our outstanding common stock.
 
Our Executive Offices
 
Symetra was incorporated in 2004 under the laws of Delaware. Our principal executive offices are located at 777 108th Ave NE, Suite 1200, Bellevue, WA 98004. Our telephone number is (425) 256-8000. Our internet address is www.symetra.com. The information contained on or accessible from our website does not constitute a part of this prospectus and is not incorporated by reference herein.


5


Table of Contents

The Offering
 
Common stock offered by the selling stockholders 39,500,000 shares
 
Common stock to be outstanding after this offering 92,646,295 shares
 
Over-allotment option The underwriters have an option to purchase a maximum of 5,925,000 additional shares from the selling stockholders to cover over-allotments.
 
Use of proceeds We will not receive any proceeds from this offering. See “Use of Proceeds.”
 
Listing Our common stock has been approved for listing, subject to official notice of issuance, on the New York Stock Exchange, or NYSE, under the symbol “SYA.”
 
Dividend policy We intend to pay quarterly dividends on our common stock. The declaration, payment and amount of future dividends to holders of our common stock will be at the discretion of our board of directors and will depend on many factors, including our financial condition and results of operations, liquidity requirements, market opportunities, capital requirements of our subsidiaries, legal requirements, regulatory constraints and other factors that our board of directors deems relevant. Dividends on our common stock will also be paid to holders of our outstanding warrants.
 
Risk factors See “Risk Factors” for a discussion of factors you should consider before investing in our common stock.
 
All information in this prospectus, unless otherwise indicated or the context otherwise requires:
 
  •  assumes the common stock will be sold at $19.00 per share (the midpoint of the price range set forth on the cover of this prospectus);
 
  •  assumes no exercise of the underwriters’ over-allotment option;
 
  •  excludes 7,830,000 shares of common stock reserved for issuance pursuant to awards granted under our Equity Plan, of which 911,152 shares are subject to awards to be granted to employees, in the form of stock options, restricted stock units and shares, under an IPO grant program on or about the date of this offering (See “Management — Compensation Discussion and Analysis — Elements of Compensation — IPO Grant Program”);
 
  •  excludes 870,000 shares of common stock reserved for issuance pursuant to our Employee Stock Purchase Plan;
 
  •  assumes no exercise of outstanding warrants to purchase 18,975,744 shares of common stock at an exercise price of $11.49 per share; and
 
  •  has been adjusted to give effect to a 7.7-for-1 stock dividend (substantially equivalent to a 8.7-for-1 stock split) that occurred on October 26, 2007.


6


Table of Contents

SUMMARY HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA
 
The summary historical consolidated financial and other data, except for non-GAAP financial measures, as of September 30, 2007 and for the nine months ended September 30, 2007 and 2006 have been derived from our unaudited interim historical consolidated financial statements and the related notes, which have been prepared on a basis consistent with our annual consolidated financial statements and are included in this prospectus. In the opinion of management such unaudited financial data, except for non-GAAP financial measures, reflects all historical and recurring adjustments necessary for a fair presentation of the results for these periods. The results of operations for the nine months ended September 30, 2007 are not necessarily indicative of the results to be expected for the full year or any future period. The summary historical consolidated financial and other data, except for non-GAAP financial measures, as of and for the years ended December 31, 2006 and 2005, and for the period from August 2, 2004 through December 31, 2004, and the period from January 1, 2004 through August 1, 2004 have been derived from our audited consolidated financial statements and the related notes that are included in this prospectus. The summary historical consolidated financial and other data, except for non-GAAP financial measures, as of December 31, 2004 have been derived from our audited consolidated financial statements and the related notes, which are not included in this prospectus.
 
We do not believe the predecessor financial results for the period from January 1, 2004 through August 1, 2004 are comparable to the results of our new independent company, primarily because during and after the Acquisition we experienced significant changes in our operating costs and also because of purchase accounting adjustments impacting net investment income, policyholder benefits and claims, interest credited, amortization of deferred policy acquisition costs, intangible assets and net realized investment gains (losses). Additionally, due to the short period from our inception as an independent company to the end of 2004, as well as the effect of transitional expense charges associated with the Acquisition, we do not consider our financial results for the period from August 2, 2004 through December 31, 2004 to be comparable to those for the years ended December 31, 2006 and 2005. This summary data should be read in conjunction with our historical consolidated financial statements and related notes included in this prospectus, as well as our “Selected Historical Consolidated Financial Data” and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
 
                                                 
                                  Predecessor  
                            Period from  
                            August 2
    January 1
 
    Nine Months
    Year Ended
    through
    through
 
    Ended September 30,     December 31,     December 31,
    August 1,
 
    2007     2006     2006     2005     2004     2004  
    (Unaudited)                          
    (In millions, except per share data)  
 
Revenues:
                                               
Premiums
  $ 397.9     $ 398.0     $ 525.7     $ 575.5     $ 263.2     $ 357.9  
Net investment income
    732.3       734.0       984.9       994.0       411.1       693.7  
Other revenues
    50.4       42.7       56.1       58.6       27.1       43.9  
Net realized investment gains (losses)
    23.8       (4.9 )     1.7       14.1       7.0       34.9  
                                                 
Total revenues
    1,204.4       1,169.8       1,568.4       1,642.2       708.4       1,130.4  
Benefits and Expenses:
                                               
Policyholder benefits and claims
    196.5       209.8       264.3       327.4       127.5       223.6  
Interest credited
    564.9       571.9       765.9       810.9       360.2       556.4  
Other underwriting and operating expenses
    209.9       191.9       260.5       273.2       123.3       182.3  
Fair value of warrants issued to investors
                            101.5        
Interest expense
    14.1       14.5       19.1       12.4       3.5        
Amortization of deferred policy acquisition costs
    14.2       11.0       14.6       11.9       1.6       34.2  
Intangible asset amortization
    0.2                               4.9  
                                                 
Total benefits and expenses
    999.8       999.1       1,324.4       1,435.8       717.6       1,001.4  
                                                 


7


Table of Contents

                                                 
                                  Predecessor  
                            Period from  
                            August 2
    January 1
 
    Nine Months
    Year Ended
    through
    through
 
    Ended September 30,     December 31,     December 31,
    August 1,
 
    2007     2006     2006     2005     2004     2004  
    (Unaudited)                          
    (In millions, except per share data)  
 
Income (loss) from continuing operations before income taxes
    204.6       170.7       244.0       206.4       (9.2 )     129.0  
Provisions for income taxes:
                                               
Current
    46.1       72.5       92.4       22.2       21.3       0.9  
Deferred
    20.9       (12.7 )     (7.9 )     39.7       10.7       30.5  
                                                 
Total provision for income taxes
    67.0       59.8       84.5       61.9       32.0       31.4  
                                                 
Income (loss) from continuing operations
    137.6       110.9       159.5       144.5       (41.2 )     97.6  
Income (loss) from discontinued operations (net of taxes)
                      1.0       (2.4 )     2.3  
                                                 
Net income (loss)
  $ 137.6     $ 110.9     $ 159.5     $ 145.5     $ (43.6 )   $ 99.9  
                                                 
                                                 
Net income per common share(1):
                                               
Basic
  $ 1.23     $ 0.99     $ 1.43     $ 1.30                  
                                                 
Diluted
  $ 1.23     $ 0.99     $ 1.43     $ 1.30                  
                                                 
Weighted average common shares outstanding:
                                               
Basic
    111.622       111.622       111.622       111.622                  
                                                 
Diluted
    111.622       111.622       111.622       111.622                  
                                                 
                                                 
Non-GAAP Financial Measures(2):
                                               
Net operating income (loss)
  $ 126.1     $ 121.6     $ 172.1     $ 141.9     $ (46.0 )   $ 75.5  
                                                 
Reconciliation to Net Income (Loss):
                                               
Net income (loss)
  $ 137.6     $ 110.9     $ 159.5     $ 145.5     $ (43.6 )   $ 99.9  
Less: Net realized investment gains (losses) (net of taxes)
    15.5       (3.2 )     1.1       9.2       4.6       22.7  
Add:
                                               
Net realized and unrealized investment gains (losses) on fixed indexed annuities (FIA) options (net of taxes)
    0.5       (0.2 )     1.4       (2.9 )     1.3       (1.7 )
Net realized and unrealized investment gains on equity securities (net of taxes)
    3.5       7.7       12.3       8.5       0.9        
                                                 
Net operating income (loss)
  $ 126.1     $ 121.6     $ 172.1     $ 141.9     $ (46.0 )   $ 75.5  
                                                 
 

8


Table of Contents

                                 
    As of September 30,
  As of December 31,
Consolidated Balance Sheet Data:   2007   2006   2005   2004
    (Unaudited)            
    (In millions, except per share data)
 
Total investments
  $ 16,864.2     $ 17,305.3     $ 18,332.8     $ 19,244.8  
Total assets
    19,729.2       20,114.6       20,980.1       22,182.0  
Total debt
    298.8       298.7       300.0       300.0  
Separate account assets
    1,260.5       1,233.9       1,188.8       1,228.4  
Accumulated other comprehensive income (loss) (net of taxes) (AOCI)
    (102.3 )     (0.5 )     136.6       312.9  
Total stockholders’ equity
  $ 1,365.6     $ 1,327.3     $ 1,404.9     $ 1,435.8  
Book value per common share:
                               
Basic(3)
  $ 15.84     $ 14.33     $ 13.69     $ 12.12  
                                 
Diluted(4)
  $ 15.10     $ 13.85     $ 13.32     $ 12.01  
                                 
U.S. Statutory Financial Information:
                               
Statutory capital and surplus
  $ 1,309.7     $ 1,266.2     $ 1,260.1     $ 1,138.4  
Asset valuation reserve (AVR)
    172.2       158.4       140.9       107.6  
                                 
Statutory capital and surplus and AVR
  $ 1,481.9     $ 1,424.6     $ 1,401.0     $ 1,246.0  
                                 
 
 
(1) Net income per common share (basic and diluted) assumes that all participating securities, including warrants, have been outstanding since the beginning of the period, using the two-class method.
 
(2) Management considers certain non-GAAP financial measures, including net operating income (loss), to be a useful supplement to comparable GAAP measures in evaluating our financial performance and condition. These measures have been reconciled to their most comparable GAAP financial measures. We believe that the non-GAAP presentation of net operating income is valuable because excluding certain realized capital gains and losses, many of which are driven by investment decisions and external economic developments unrelated to the insurance and underwriting aspects of the business, reveals trends that may be otherwise obscured. For a definition of these non-GAAP measures and other metrics used in our analysis, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Use of non-GAAP Financial Measures.”
 
(3) Basic book value per common share is calculated based on total stockholders’ equity less AOCI divided by 92,646,295 shares of common stock outstanding.
 
(4) Diluted book value per common share is calculated based on total stockholders’ equity less AOCI plus the proceeds from the assumed exercise of outstanding warrants, divided by the sum of the outstanding shares of common stock and shares subject to outstanding warrants, equal to 111,622,039 in the aggregate.

9


Table of Contents

 
RISK FACTORS
 
You should carefully consider the following risks and other information in this prospectus before deciding to invest in shares of our common stock. Any of the risks described below could materially adversely affect our business, financial condition, results of operations and cash flows. In this event, the trading price of our common stock could decline and you could lose part or all of your investment.
 
Risks Related to Our Business
 
Interest rate fluctuations could adversely affect our financial condition, results of operations and cash flows.
 
Certain of our insurance and investment products, such as fixed annuities and universal life insurance, are sensitive to interest rate fluctuations and expose us to the risk that falling interest rates will reduce the “spread,” or the difference between the returns we earn on the investments that support our obligations under these products and the amounts that we must credit to policyholders and contractholders. This risk is exacerbated due to the existence of guaranteed minimum crediting rates established by regulatory authorities and restrictions on the timing and frequency with which we can adjust our crediting rates. Accordingly, falling interest rates could have an adverse effect on our financial condition, results of operations and cash flows.
 
Our interest rate spreads and gains related to these spreads vary by product as follows:
 
  •  The interest rate spread on our Retirement Services segment’s fixed deferred annuity products was 1.69%, 1.76% and 1.58% for the nine months ended September 30, 2007 and for the years ended December 31, 2006 and 2005, respectively, which yielded gains of $64.5 million, $102.3 million and $103.4 million, respectively.
 
  •  The interest rate spread on our Income Annuities segment’s variable annuity products was 0.69%, 0.76% and 0.67% for the nine months ended September 30, 2007 and for the years ended December 31, 2006 and 2005, respectively, which yielded gains of $47.0 million, $66.3 million and $59.6 million, respectively.
 
  •  The interest rate spread on our Individual segment’s universal life insurance products was 1.17%, 1.31% and 0.66% for the nine months ended September 30, 2007 and for the years ended December 31, 2006 and 2005, respectively, which yielded gains of $7.6 million, $10.8 million and $7.5 million, respectively.
 
During periods of rising interest rates, we may determine to offer higher crediting rates on new sales of interest-sensitive products and to increase crediting rates on existing in-force products, in each case in order to maintain or enhance product competitiveness. In addition, periods of rising interest rates may cause increased policy surrenders, withdrawals and requests for policy loans as policyholders and contractholders allocate their assets into higher yielding investments. Increases in crediting rates, as well as surrenders and withdrawals, could have an adverse effect on our financial condition, results of operations and cash flows.
 
We calculate reserves for long-term disability and life waiver of premium claims using net present value calculations based on the actual interest rates in effect at the time claims are funded, as well as our expectations for future interest rates. Waiver of premium refers to a provision in a life insurance policy pursuant to which an insured with total disability, which has lasted for a minimum specified period, continues to receive life insurance coverage but no longer has to pay premiums for the duration of the disability or for a stated period. During periods of declining interest rates, reserves for new claims are calculated using lower discount rates thereby increasing the net present value of those claims and the required reserves. Further, if actual interest rates used to establish reserves on open claims prove to be lower than our original expectations, we would be required to increase such reserves accordingly. As such, the increase in net present value calculations caused by declines in interest rates could have an adverse effect on our financial condition, results of operations and cash flows.


10


Table of Contents

Our term life insurance products also expose us to the risk of interest rate fluctuations. The pricing and expected future profitability of these products are based in part on expected investment returns. Over time, term life insurance products generally produce positive cash flows as customers pay periodic premiums, which we invest as we receive them. Lower than expected interest rates may reduce our ability to achieve our targeted investment margins and may adversely affect our financial condition, results of operations and cash flows.
 
If our reserves for future policy benefits and claims are inadequate, we may be required to increase our reserve liabilities.
 
We calculate and maintain reserves for estimated future benefit payments to our policyholders and contractholders in accordance with U.S. GAAP and industry accounting practices. We release these reserves as those future obligations are extinguished. The reserves we establish necessarily reflect estimates and actuarial assumptions with regard to our future experience. These estimates and actuarial assumptions involve the exercise of significant judgment. Our future financial results depend upon the extent to which our actual future experience is consistent with the assumptions we have used in pricing our products and determining our reserves. Many factors can affect future experience, including economic, political and social conditions, inflation, healthcare costs and changes in doctrines of legal liability and damage awards in litigation. Therefore, we cannot predict the ultimate amounts we will pay for actual future benefits or the timing of those payments.
 
We regularly monitor our reserves. If we conclude that our reserves are insufficient to cover actual or expected policy and contract benefits and claims payments, we would be required to increase our reserves and incur income statement charges in the period in which we make the determination, which could adversely affect our financial condition and results of operations.
 
We may face unanticipated losses if there are significant deviations from our assumptions regarding the probabilities that our insurance policies or annuity contracts will remain in-force from one period to the next or if morbidity and mortality rates differ significantly from our pricing expectations.
 
The prices and expected future profitability of our insurance and deferred annuity products are based in part upon expected patterns of premiums, expenses and benefits, using a number of assumptions, including those related to persistency, mortality and morbidity. Persistency is the probability that a policy or contract will remain in-force from one period to the next. The effect of persistency on profitability varies for different products. For most of our life insurance, group life and health insurance and deferred annuity products, actual persistency that is lower than our assumptions could have an adverse impact on profitability, especially in the early years of a policy or contract primarily because we would be required to accelerate the amortization of expenses we deferred in connection with the acquisition of the policy or contract. In addition, we may need to sell investments at a loss to fund withdrawals. For some of our health insurance policies, actual persistency in later policy durations that is higher than our persistency assumptions could have a negative impact on profitability. If these policies remain in-force longer than we assumed, then we could be required to make greater benefit payments than we had anticipated when we priced these products.
 
In addition, we set prices for our insurance and certain annuity products based upon expected claims and payment patterns, using assumptions for, among other factors, morbidity rates and mortality rates of our policyholders and contractholders. The long-term profitability of these products depends upon how our actual experience compares with our pricing assumptions. For example, if morbidity rates are higher, or mortality rates are lower, than our pricing assumptions, we could be required to make greater payments under certain annuity contracts than we had projected.
 
Because our assumptions are inherently uncertain, reserves for future policy benefits and claims may prove to be inadequate if actual experience is different from our assumptions. Although certain of our products permit us to increase premiums during the life of the policy or contract, these increases may not be sufficient to maintain profitability. Moreover, many of our products either do not permit us to increase premiums or limit those increases during the life of the policy or contract. Therefore, significant deviations in experience


11


Table of Contents

from our assumptions regarding persistency and mortality and morbidity rates could have an adverse effect on our financial condition, results of operations and cash flows.
 
We may be required to accelerate the amortization of deferred acquisition costs, which would increase our expenses and reduce profitability.
 
Deferred acquisition costs, or DAC, represent certain costs which vary with and are primarily related to the sale and issuance of our insurance policies and investment contracts and are deferred and amortized over the estimated life of the related insurance policies and contracts. These costs include commissions in excess of ultimate renewal commissions and certain other sales incentives, solicitation and printing costs, sales material and other costs, such as underwriting and contract and policy issuance expenses. Under U.S. GAAP, DAC is amortized through operations over the lives of the underlying contracts in relation to the anticipated recognition of premiums or gross profits.
 
Our amortization of DAC generally depends upon anticipated profits from investments, surrender and other policy and contract charges, mortality, morbidity and maintenance and expense margins. Unfavorable experience with regard to expected expenses, investment returns, mortality, morbidity, withdrawals or lapses may cause us to increase the amortization of DAC, resulting in higher expenses and lower profitability.
 
We regularly review our DAC asset balance to determine if it is recoverable from future income. The portion of the DAC balance deemed to be unrecoverable, if any, is charged to expense in the period in which we make this determination. For example, if we determine that we are unable to recover DAC from profits over the life of a book of business of insurance policies or annuity contracts, or if withdrawals or surrender charges associated with early withdrawals do not fully offset the unamortized acquisition costs related to those policies or annuities, we would be required to recognize the additional DAC amortization as a current-period expense. In general, we limit our deferral of acquisition costs to costs assumed in our pricing assumptions. As of September 30, 2007 and December 31, 2006, we had $117.7 million and $88.2 million of DAC, respectively. Our amortization of DAC was $14.2 million during the nine months ended September 30, 2007 and $14.6 million during the year ended December 31, 2006.
 
A downgrade or a potential downgrade in our financial strength ratings could result in a loss of business.
 
Financial strength ratings, which various ratings organizations publish as measures of an insurance company’s ability to meet contractholder and policyholder obligations, are important to maintaining public confidence in our company and our products, the ability to market our products and our competitive position. As of September 30, 2007, our principal life insurance company subsidiary, Symetra Life Insurance Company, has financial strength ratings of “A” (“Excellent”, third highest of 15 ratings) with a stable outlook from A.M. Best, “A−” (“Strong”, seventh highest of 21 ratings) with a positive outlook from Standard & Poor’s, or S&P, “A2” (“Good”, sixth highest of 21 ratings) with a stable outlook from Moody’s and “A+” (“Strong”, fifth highest of 24 ratings) with a stable outlook from Fitch.
 
A downgrade in our financial strength ratings, or the announced potential for a downgrade, could have an adverse effect on our financial condition, results of operations and cash flows in several ways, including:
 
  •  reducing new sales of insurance products, annuities and other investment products;
 
  •  limiting our ability to offer structured settlement products;
 
  •  adversely affecting our relationships with independent sales intermediaries and our dedicated sales specialists;
 
  •  materially increasing the number or amount of policy surrenders and withdrawals by contractholders and policyholders;
 
  •  requiring us to reduce prices for many of our products and services to remain competitive; and
 
  •  adversely affecting our ability to obtain reinsurance or obtain reasonable pricing on reinsurance.


12


Table of Contents

 
The occurrence of natural disasters, disease pandemics, terrorism or military actions could adversely affect our financial condition, results of operations and cash flows.
 
Our financial condition and results of operations are at risk of material adverse effects that could arise from catastrophic mortality and morbidity due to natural disasters, including floods, tornadoes, earthquakes and hurricanes, disease pandemics, terrorism and military actions. Such events could also lead to unexpected changes in persistency rates as policyholders and contractholders who are affected by the disaster may be unable to meet their contractual obligations, such as payment of premiums on our insurance policies or deposits into our investment products. The continued threat of terrorism and ongoing military actions may cause significant volatility in global financial markets, and a natural disaster or a disease pandemic could trigger an economic downturn in the areas directly or indirectly affected by the disaster. The effectiveness of external parties, including governmental and nongovernmental organizations, in combating the spread and severity of a disease pandemic could have a material impact on the losses experienced by us. Further, in our group insurance operations, a localized event that affects the workplace of one or more of our group insurance customers could cause a significant loss due to mortality or morbidity claims.
 
Our investment portfolio is subject to various risks that may diminish the value of our invested assets and reduce investment returns.
 
The performance of our investment portfolio depends in part upon the level of and changes in interest rates, the overall performance of the economy, the creditworthiness of the specific obligors included in our portfolio, equity prices, liquidity and other factors, some of which are beyond our control. Changes in these factors could materially affect our investment results in any period.
 
Interest rate risk
 
Changes in interest rates can negatively affect the performance of most of our investments. Interest rate volatility can reduce unrealized gains or create unrealized losses in our portfolios. Interest rates are highly sensitive to many factors, including governmental monetary policies, domestic and international economic and political conditions and other factors beyond our control. Fluctuations in interest rates affect our returns on, and the fair value of, our fixed maturity and short-term investments, which comprised $15.6 billion, or 92.4% of the fair value of our total invested assets as of September 30, 2007.
 
The fair value of the fixed maturity securities in our portfolio and the investment income from these securities fluctuate depending on general economic and market conditions. The fair value generally increases or decreases in an inverse relationship with fluctuations in interest rates, while net investment income realized by us from future investments in fixed maturity securities will generally increase or decrease in step with interest rates. In addition, actual net investment income or cash flows from investments that carry prepayment risk, such as mortgage-backed and certain other asset-backed securities, may differ from those anticipated at the time of investment as a result of interest rate fluctuations. In periods of declining interest rates, mortgage prepayments generally increase and mortgage-backed securities, commercial mortgage obligations and other bonds in our investment portfolio are more likely to be prepaid or redeemed as borrowers seek to borrow at lower interest rates, and we may be required to reinvest those funds in lower interest-bearing investments. As of September 30, 2007, mortgage-backed and other asset-backed securities represented $4.5 billion, or 28.6% of the fair value of our total invested assets.
 
Because all of our fixed maturity securities are classified as available for sale, changes in the fair value of these securities as described above are reflected as a component of comprehensive income. However, U.S. GAAP does not permit similar mark-to-market treatment to the insurance liabilities that the fixed maturity securities support. Therefore, changes in the fair value of our fixed maturity securities caused by interest rate fluctuations are not offset in whole or in part by similar adjustments to the fair value of our insurance liabilities.


13


Table of Contents

We employ asset/liability matching strategies to reduce the adverse effects of interest rate volatility and to ensure that cash flows are available to pay claims as they become due. Our asset/liability matching strategies include:
 
  •  asset/liability duration management;
 
  •  structuring our bond and commercial mortgage loan portfolios to limit the effects of prepayments; and
 
  •  consistent monitoring of, and making appropriate changes to, the pricing of our products.
 
However, because these strategies may fail to eliminate or reduce the adverse effects of interest rate volatility, significant fluctuations in the level of interest rates may have a material adverse effect on our financial condition, results of operations and cash flows.
 
Credit risk
 
From time to time, issuers of the fixed maturity securities that we own may default on principal and interest payments. Defaults by third parties in the payment or performance of their obligations could reduce our investment income and realized investment gains or result in realized investment losses. Further, the value of any particular fixed maturity security is subject to impairment based on the creditworthiness of a given issuer. As of September 30, 2007, we held $15.6 billion of fixed maturity securities, or 92.4% of the fair value of our total invested assets at that date. Our fixed maturity portfolio also includes below investment grade and non-rated securities, which comprised 3.9% and 4.1%, respectively, of the fair value of our total fixed maturity securities at September 30, 2007. These investments generally provide higher expected returns, but present greater risk and can be less liquid than investment grade securities. Further, the current trend of private equity buyouts could cause certain of our investment-grade fixed maturities to present more significant credit risk than when we first invested. A significant increase in defaults and impairments on our fixed maturity securities portfolio could materially adversely affect our financial condition, results of operations and cash flows.
 
Liquidity risk
 
Our investments in privately placed fixed maturities, mortgage loans, policy loans and limited partnership interests are relatively illiquid as compared to publicly-traded fixed maturities and equities. These asset classes represented approximately 10.1% of the carrying value of our total invested assets as of September 30, 2007. If we require significant amounts of cash on short notice in excess of our normal cash requirements, we may have difficulty selling these investments in a timely manner, be forced to sell them for less than we otherwise would have been able to realize, or both.
 
Downturns and volatility in equity markets could adversely affect the marketability of our products and our profitability.
 
Significant downturns and volatility in equity markets could have an adverse effect on our business in various ways. Market downturns and volatility may discourage purchases of separate account products, such as variable annuities and variable life insurance, which have returns linked to the performance of the equity markets and may cause some existing customers to withdraw cash values or reduce investments in those products.
 
Further, downturns and volatility in equity markets can have an adverse effect on the revenues and returns from our separate account products. Because these products depend on fees related primarily to the value of assets under management, a decline in the equity markets could reduce our revenues by reducing the value of the investment assets we manage.
 
We hold equity and equity-like investments in our Income Annuities and Other segments that represent 1.2% of the fair value of our general account investments as of September 30, 2007. Investments in common stock or equity-like securities generally provide higher expected total returns over the long term, but present greater risk to preservation of principal than do our fixed income investments.


14


Table of Contents

We rely on reinsurance arrangements to help manage our business risks, and failure to perform by the counterparties to our reinsurance arrangements may expose us to risks we had sought to mitigate.
 
We utilize reinsurance to mitigate our risks in various circumstances. Reinsurance does not relieve us of our direct liability to our policyholders, even when the reinsurer is liable to us. Accordingly, we bear credit risk with respect to our reinsurers. The total reinsurance recoverable amount due from reinsurers was $247.0 million as of September 30, 2007 and $238.8 million as of December 31, 2006. Our reinsurers may be unable or unwilling to pay the reinsurance recoverable owed to us now or in the future or on a timely basis. A reinsurer’s insolvency, inability or unwillingness to make payments under the terms of its reinsurance agreement with us could have an adverse effect on our financial condition, results of operations and cash flows.
 
Reinsurance may not be available, affordable or adequate to protect us against losses.
 
As part of our overall risk management strategy, we purchase reinsurance for certain risks underwritten by our various business segments. For example, we currently reinsure up to 85% of the mortality risk for new fully-underwritten individual term life insurance policies. We reinsure the mortality risk in excess of $0.5 million for most of the remainder of new individual life insurance policies. While reinsurance agreements generally bind the reinsurer for the life of the business reinsured at generally fixed pricing, market conditions beyond our control determine the availability and cost of the reinsurance protection for new business. In certain circumstances, the price of reinsurance for business already reinsured may also increase. Any decrease in the amount of reinsurance will increase our risk of loss and any increase in the cost of reinsurance will, absent a decrease in the amount of reinsurance, reduce our earnings. Accordingly, we may be forced to incur additional expenses for reinsurance or may not be able to obtain sufficient reinsurance on acceptable terms, which could adversely affect our ability to write future business or result in the assumption of more risk with respect to those policies we issue.
 
The availability and cost of these reinsurance arrangements are subject to market conditions that are beyond our control. As a result, in the future, we may not be able to enter into reinsurance arrangements on attractive terms, if at all.
 
We may be unable to attract and retain independent sales intermediaries and dedicated sales specialists.
 
We distribute our products through financial intermediaries, independent producers and dedicated sales specialists. We compete with other financial institutions to attract and retain commercial relationships in each of these channels, and our success in competing for sales through these sales intermediaries depends upon factors such as:
 
  •  the amount of sales commissions and fees we pay;
 
  •  the breadth of our product offerings;
 
  •  the strength of our brand;
 
  •  our perceived stability and our financial strength ratings;
 
  •  the marketing and services we provide to them; and
 
  •  the strength of the relationships we maintain with individuals at those firms.
 
Our competitors may be effective in providing incentives to existing and potential distribution partners to favor their products or to reduce sales of our products.
 
Our contracts with our distribution partners generally allow either party to terminate the relationship upon short notice. Our distribution partners do not make minimum purchase commitments, and our contracts do not prohibit our partners from offering products that compete with ours. Accordingly, our distribution partners may choose not to offer our products exclusively or at all, or may choose to exert insufficient resources and attention to selling our products.


15


Table of Contents

Our future success is highly dependent on maintaining and growing both existing and new distribution relationships. We may have little or no contact with end customers of our products, thereby resulting in little to no brand awareness with end customers and making it more difficult to respond to evolving customer needs, thereby increasing our reliance on our distribution partners.
 
From time to time, due to competitive forces, we may experience unusually high attrition in particular sales channels for specific products. An inability to recruit productive independent sales intermediaries and dedicated sales specialists, or our inability to retain strong relationships with the individual agents at our independent sales intermediaries, could have an adverse effect on our financial condition, results of operations and cash flows.
 
General economic, financial market and political conditions may adversely affect our business.
 
Our business may be materially adversely affected from time to time by general economic, financial market and political conditions, most of which are beyond our control. These conditions include economic cycles such as:
 
  •  cyclical movements in the insurance industry;
 
  •  levels of unemployment;
 
  •  levels of consumer lending;
 
  •  levels of inflation; and
 
  •  movements of the financial markets.
 
Fluctuations in interest rates, monetary policy, demographics, and legislative and competitive factors also influence our performance. During periods of economic downturn:
 
  •  individuals and businesses may choose not to purchase our insurance products and other related products and services, may terminate existing policies or contracts or permit them to lapse, may choose to reduce the amount of coverage purchased or, in our group employer health insurance, may have fewer employees requiring insurance coverage due to rising unemployment levels;
 
  •  new disability insurance claims and claims on other specialized insurance products tend to rise;
 
  •  there is a higher loss ratio due to rising unemployment levels; and
 
  •  insureds tend to increase their utilization of health benefits if they anticipate unemployment or loss of benefits.
 
In addition, general inflationary pressures may affect medical costs, increasing the costs of paying claims.
 
Intense competition could adversely affect our ability to maintain or increase our market share and profitability.
 
Our businesses are subject to intense competition. We believe the principal competitive factors in the sale of our products are product features, price, commission structure, marketing and distribution arrangements, brand, reputation, financial strength ratings and service. Many other companies actively compete for sales in our retirement services, income annuity, individual and group markets, including other major insurers, banks, other financial institutions, mutual fund and money asset management firms and specialty providers.
 
In many of our product lines, we face competition from companies that have greater market share or breadth of distribution, offer a broader range of products, services or features, assume a greater level of risk, have lower profitability expectations or have higher financial strength ratings than we do. Many competitors offer similar products and use similar distribution channels. The substantial expansion of banks’ and insurance companies’ distribution capacities and expansion of product features in recent years have intensified pressure on margins and production levels and have increased the level of competition in many of our product lines.


16


Table of Contents

Our risk management policies and procedures may not be effective or may leave us exposed to unidentified or unanticipated risk, which could negatively affect our business.
 
We are subject to substantial operational, legal and regulatory risks that require effective policies and procedures to record, verify and report on a large number of transactions and events. For instance, our distribution network consists of a large number of third party agents and requires the implementation and oversight of policies and procedures to ensure that we are not unduly subjected to reputational, financial or other risks. We must also monitor and accurately process large numbers of claims which, if not properly processed, could subject us to financial and regulatory risk. In addition, we regularly monitor changes in laws and regulations in order maintain our products and administrative procedures in compliance. We have developed policies and procedures to mitigate these and other risks, including establishing risk management teams to quantify risk exposures and make recommendations to our risk committee, and we have developed procedures to remediate compliance or other issues. Even so, these policies and procedures may not be fully effective to mitigate all of these risks. Many of our methods for managing these risks and exposures are based upon historical statistical models and observed market behavior. As such, our methods may not be able to predict all future exposures. These could be significantly greater than our historical measures have indicated. Other risk management methods depend upon the evaluation of information regarding markets and clients, or other matters that are publicly available or otherwise accessible to us. This information may not always be accurate, complete, up-to-date or properly evaluated.
 
The failure to maintain effective and efficient information systems could adversely affect our business.
 
Our business is dependent upon our ability to keep pace with technological advances. Our ability to keep our systems fully integrated with those of our clients is critical to the operation of our business. Our failure to update our systems to reflect technological advancements or to protect our systems may adversely affect our relationships and ability to do business with our clients.
 
In addition, our business depends significantly on effective information systems, and we have many different information systems for our various businesses. We have committed and will continue to commit significant resources to develop, maintain and enhance our existing information systems and develop new information systems in order to keep pace with continuing changes in information processing technology, evolving industry and regulatory standards and changing customer preferences. Our failure to maintain effective and efficient information systems could have a material adverse effect on our financial condition and results of operations. If we do not maintain adequate systems, we could experience adverse consequences, including:
 
  •  inadequate information on which to base pricing, underwriting and reserving decisions;
 
  •  the loss of existing customers;
 
  •  difficulty in attracting new customers;
 
  •  customer, provider and agent disputes;
 
  •  regulatory compliance problems, such as failure to meet prompt payment obligations;
 
  •  litigation exposure; or
 
  •  increases in administrative expenses.
 
If we are unable to maintain the availability of our systems and safeguard the security of our data, our ability to conduct business will likely be compromised, which may have a material adverse effect on our financial condition, results of operations and cash flows.
 
We use computer systems to store and retrieve, evaluate and use customer and company data and information. Additionally, our computer and information technology systems interface with and rely upon third-party systems. Our business is highly dependent on our ability, and the ability of our affiliates, to access these systems to perform necessary business functions. This includes providing insurance quotes, processing


17


Table of Contents

premium payments, providing customer support, filing and paying claims and making changes to existing policies. Systems outages or outright failures would compromise our ability to perform these functions in a timely manner. This could hurt our relationships with our business partners and customers and harm our ability to conduct business. In the event of a disaster such as a blackout, a computer virus, an industrial accident, a natural catastrophe, a terrorist attack or war, our systems may not be available to our employees, customers or business partners for an extended period of time. If our employees are able to report to work, yet our systems or our data are destroyed or disabled, they may be unable to perform their duties for an extended period of time. Our systems could also be subject to similar disruptions due to physical and electronic break-ins or other types of unauthorized tampering with our systems. This may interrupt our business operations and may have a material adverse effect on our financial condition, results of operations and cash flows.
 
Failure to protect our clients’ confidential information and privacy could adversely affect our business.
 
A number of our businesses are subject to privacy regulations and to confidentiality obligations. For example, the collection and use of patient data in our Group segment is the subject of national and state legislation, including the Health Insurance Portability and Accountability Act of 1996, or HIPAA, and certain of the activities conducted by our businesses are subject to the privacy regulations of the Gramm-Leach-Bliley Act. We also have contractual obligations to protect certain confidential information we obtain from our existing vendors and clients. These obligations generally include protecting such confidential information in the same manner and to the same extent as we protect our own confidential information.
 
In addition, we must develop, implement and maintain a comprehensive written information security program with appropriate administrative, technical and physical safeguards to protect such confidential information. If we do not properly comply with privacy regulations and protect confidential information, we could experience adverse consequences, including regulatory sanctions, such as penalties, fines and loss of license, as well as loss of reputation and possible litigation.
 
Our business could be interrupted or compromised if we experience difficulties arising from outsourcing relationships.
 
We outsource certain technology and business functions to third parties, including a significant portion of our information technology function, and expect to continue to do so in the future. If we do not maintain an effective outsourcing strategy or third-party providers do not perform as contracted, we may experience operational difficulties, increased costs and a loss of business that could have a material adverse effect on our consolidated results of operations.
 
Our new credit facility subjects us to restrictive covenants that impose operating and financial restrictions on our operations and could limit our ability to grow our business.
 
We entered into a $200.0 million revolving credit facility on August 16, 2007. As of September 30, 2007, we had no balance outstanding under this facility. In connection with this facility, we have made covenants that may impose significant operating and financial restrictions on us. These restrictions limit the incurrence of additional indebtedness by our subsidiaries, limit the ability of us and our subsidiaries to create liens, and impose certain other operating limitations. These restrictions could limit our ability to obtain future financing or take advantage of business opportunities. Furthermore, our credit facility requires us and our insurance subsidiaries to maintain specified financial ratios. Our ability to comply with these ratios may be affected by events beyond our control, including prevailing economic, financial and industry conditions. If we are unable to comply with the covenants and ratios in our new credit facility, we may be deemed in default under the facility, or we may be required to pay substantial fees or penalties to the lenders to obtain a waiver of any such default. Either development could have a material adverse effect on our business.


18


Table of Contents

 
We may need additional capital in the future, which may not be available to us on favorable terms. Raising additional capital could dilute your ownership in the company and may cause the market price of our common stock to fall.
 
We may need to raise additional funds through public or private debt or equity financings in order to:
 
  •  fund liquidity needs;
 
  •  refinance our senior notes;
 
  •  satisfy letter of credit or guarantee bond requirements that may be imposed by our clients or by regulators;
 
  •  acquire new businesses or invest in existing businesses;
 
  •  expand our business into new regions; or
 
  •  otherwise respond to competitive pressures.
 
Any additional capital raised through the sale of equity will dilute your ownership percentage in our company and may decrease the market price of our common stock. Furthermore, the securities may have rights, preferences and privileges that are senior or otherwise superior to those of our common stock. Any additional financing we may need may not be available on terms favorable to us.
 
To be eligible for borrowing under our $200.0 million revolving credit facility, we must not be in default of any payment obligations, covenants or other requirements set forth in the facility, and the representations and warranties that we make under the facility must continue to be true in all material respects. Accordingly, it is possible that we may not meet these requirements in the future and may not be eligible to borrow under our credit facility.
 
In addition, we entered into a covenant in connection with our recent $150.0 million CENts offering that may limit our ability to undertake certain additional types of financing to repay or redeem the CENts.
 
Our recent offering of CENts, the net proceeds of which we applied to pay a special cash dividend to our stockholders, may affect our ability to obtain future financing on favorable terms.
 
On October 10, 2007, we issued $150.0 million aggregate principal amount of CENts. We applied the net proceeds from the CENts to pay a special cash dividend to our stockholders on October 19, 2007. The CENts offering may prevent us from obtaining future financing on favorable terms, such as favorable interest rates. The increased cost of obtaining additional financing may adversely affect our ability to fund future working capital and other general corporate requirements, make strategic acquisitions or carry out other aspects of our business plan. Furthermore, our increased debt due to our offering of CENts may adversely impact our net income and cash flows and reduce our liquidity. In particular, we expect to incur interest expense from the CENts of $2.7 million for the fourth quarter of 2007 and $13.1 million for our 2008 fiscal year, the first full calendar in which the CENts accrue interest. In addition, in connection with the CENts offering, we entered into a covenant that may limit our ability to undertake certain additional types of financing to repay or redeem the CENts.


19


Table of Contents

 
Risks Related to Our Industry
 
Our industry is highly regulated and changes in regulations affecting our businesses may reduce our profitability and limit our growth.
 
Our insurance businesses are heavily regulated and are subject to a wide variety of laws and regulations in various jurisdictions. State insurance laws regulate most aspects of our insurance businesses and our insurance subsidiaries are regulated by the insurance departments of the various states in which they are domiciled and licensed.
 
State laws in the United States grant insurance regulatory authorities broad administrative powers with respect to various aspects of our insurance businesses, including:
 
  •  licensing companies and agents to transact business;
 
  •  calculating the value of assets to determine compliance with statutory requirements;
 
  •  mandating certain insurance benefits;
 
  •  regulating certain premium rates;
 
  •  reviewing and approving policy forms;
 
  •  regulating unfair trade and claims practices, including the imposition of restrictions on marketing and sales practices, distribution arrangements and payment of inducements;
 
  •  establishing statutory capital and reserve requirements and solvency standards;
 
  •  fixing maximum interest rates on insurance policy loans and minimum rates for guaranteed crediting rates on life insurance policies and annuity contracts;
 
  •  requiring regular market conduct examinations;
 
  •  approving changes in control of insurance companies;
 
  •  restricting the payment of dividends and other transactions between affiliates; and
 
  •  regulating the types, amounts and valuation of investments.
 
State insurance regulators and the National Association of Insurance Commissioners, or NAIC, regularly re-examine existing laws and regulations applicable to insurance companies and their products. Changes in these laws and regulations or in interpretations thereof, are often made for the benefit of the consumer at the expense of the insurer and thus could have an adverse effect on our business.
 
Currently, the U.S. federal government does not regulate directly the business of insurance. However, federal legislation and administrative policies in several areas can significantly and adversely affect insurance companies. These areas include financial services regulation, securities regulation, pension regulation, privacy, tort reform legislation and taxation. In addition, various forms of direct federal regulation of insurance have been proposed. These proposals include the “National Insurance Act,” which would allow insurance companies to choose to be regulated by a federal regulator rather than by multiple state regulators and “The State Modernization and Regulatory Transparency Act,” which would maintain state-based regulation of insurance but would affect state regulation of certain aspects of the business of insurance including rates, agent and company licensing, and market conduct examinations. We cannot predict whether these or other proposals will be adopted, or what impact, if any, such proposals or, if enacted, such laws may have on our financial condition, results of operations and cash flows.
 
Many of our customers and independent sales intermediaries also operate in regulated environments. Changes in the regulations that affect their operations also may affect our business relationships with them and their ability to purchase or to distribute our products.


20


Table of Contents

Compliance with applicable laws and regulations is time consuming and personnel-intensive, and changes in these laws and regulations may materially increase our direct and indirect compliance efforts and other expenses of doing business.
 
U.S. federal and state securities laws apply to investment products that are also securities, including variable annuities and variable life insurance policies. As a result, some of our subsidiaries and the policies and contracts they offer are subject to regulation under these federal and state securities laws. Our insurance subsidiaries’ separate accounts are registered as investment companies under the Investment Company Act of 1940. Some subsidiaries are registered as broker-dealers under the Securities Exchange Act of 1934, as amended, or Exchange Act, and are members of, and subject to regulation by, the Financial Industry Regulatory Authority. In addition, one of our subsidiaries also is registered as an investment adviser under the Investment Advisers Act of 1940.
 
Securities laws and regulations are primarily intended to ensure the integrity of the financial markets and to protect investors in the securities markets or investment advisory or brokerage clients. These laws and regulations generally grant supervisory agencies broad administrative powers, including the power to limit or restrict the conduct of business for failure to comply with those laws and regulations.
 
Legal and regulatory investigations and actions are increasingly common in the insurance business and may result in financial losses and harm our reputation.
 
We face a significant risk of litigation and regulatory investigations and actions in the ordinary course of operating our businesses, including the risk of class action lawsuits. Our pending legal and regulatory actions include proceedings specific to us and others generally applicable to business practices in the industries in which we operate. In our insurance operations, we are or may become subject to class actions, individual suits and regulatory proceedings relating, among other things, to sales or underwriting practices, payment of contingent or other sales commissions, claims payments and procedures, payment of interest on claims, product design, disclosure, administration, additional premium charges for premiums paid on a periodic basis, denial or delay of benefits and breaches of fiduciary or other duties to customers. Plaintiffs in class action and other lawsuits against us may seek very large or indeterminate amounts, including punitive and treble damages, which may remain unknown for substantial periods of time.
 
For example, the mutual fund and insurance industry has been the focus of increased scrutiny and class action lawsuits related to “revenue sharing” practices by mutual funds with service providers and others in offering mutual fund investments in qualified retirement plans. The lawsuits allege that service providers were involved in self-dealing and prohibited transactions under the Employee Retirement Income Security Act, or ERISA. The outcome of these lawsuits is unknown. We have not been the subject of any inquiries or lawsuits regarding these practices.
 
We are also subject to various regulatory inquiries, such as information requests, subpoenas, market conduct exams and books and record examinations, from state and federal regulators and other authorities which may result in fines, recommendations for corrective action or other regulatory actions.
 
Current or future investigations and proceedings could have an adverse effect on our business. A substantial legal liability or a significant regulatory action against us could have an adverse effect on our business. Moreover, even if we ultimately prevail in the litigation, regulatory action or investigation, we could suffer significant reputational harm, which could have an adverse effect on our business. Increased regulatory scrutiny and any resulting investigations or proceedings could result in new legal actions or precedents and industry-wide regulations or practices that could adversely affect our business.
 
Proposals for national health care reform could have a material adverse effect on the profitability or marketability of the health insurance products and services we sell.
 
In our Group segment, we sell group medical stop-loss insurance and limited benefit employee health plans to employer groups. Reform of the health care system is a topic of discussion at both the state and federal levels in the United States and by Presidential candidates from both major political parties. Proposals


21


Table of Contents

for change vary widely and range from reform of the existing employer-based system of insurance to a single-payer, public program. Several groups are urging consideration by Congress of a national health care plan. If any of these initiatives ultimately becomes effective, it could have a material effect on the profitability or marketability of the health insurance products and services we sell and on our financial condition, results of operations and cash flows.
 

Medical advances, such as genetic research and diagnostic imaging, and related legislation could adversely affect the financial performance of our life insurance and annuities businesses.
 
Genetic research includes procedures focused on identifying key genes that render an individual predisposed to specific diseases such as particular types of cancer and other diseases. Other medical advances, such as diagnostic imaging technologies, may be used to detect the early onset of diseases such as cancer and cardiovascular disease. We believe that if individuals learn through medical advances that they are predisposed to particular conditions that may reduce life longevity or require long-term care, they will be more likely to purchase our life insurance policies or not to permit existing polices to lapse. In contrast, if individuals learn that they lack the genetic predisposition to develop the conditions that reduce longevity, they will be less likely to purchase our life insurance products but more likely to purchase certain annuity products. In addition, such individuals that are existing policyholders will be more likely to permit their policies to lapse.
 
If we were to gain access to the same genetic or medical information as our prospective policyholders and contractholders, then we would be able to take this information into account in pricing our life insurance policies and annuity contracts. However, there are a number of regulatory proposals that would make genetic and other medical information confidential and unavailable to insurance companies. Legislation that would prohibit group health plans, health insurers and employers from making enrollment decisions or adjusting premiums on the basis of genetic testing information has been introduced in Congress as well as in certain state legislatures. If these regulatory proposals were enacted, prospective policyholders and contractholders would only disclose this information if they chose to do so voluntarily. These factors could lead us to reduce sales of products affected by these regulatory proposals and could result in a deterioration of the risk profile of our portfolio, which could lead to payments to our policyholders and contractholders that are higher than currently anticipated.
 
Medical advances also could lead to new forms of preventive care. Preventive care could extend the life and improve the overall health of individuals. If this were to occur, the duration of payments under certain of our annuity products likely would increase, thereby reducing net earnings in that business.
 
Changes in tax laws could make some of our products less attractive to consumers and as a result have an adverse effect on our business.
 
Changes in tax laws could make some of our products less attractive to consumers. For example, the Treasury Department and the Internal Revenue Service, or IRS, recently issued new final regulations relating to Section 403(b) plans that will impact the 403(b) marketplace, including tax sheltered annuities. While the impact of the new regulations is uncertain, it is likely that employers offering Section 403(b) plans will be required to change how their plans operate. Those changes may include re-evaluation of their plan investment offerings, including annuities currently offered by us in those plans.
 
Furthermore, the federal estate tax, which has undergone a gradual repeal since 2001 that will continue to be phased in through 2010, is scheduled to revert to pre-2001 law as of January 1, 2011. The repeal of and continuing uncertainty regarding the federal estate tax may adversely affect sales and surrenders of some of our estate planning products. In addition, from time to time, legislation is proposed to eliminate the tax deferred nature of certain non-qualified annuities.
 
Any such legislation or changes to existing legislation could have a material adverse effect on our financial condition and results of operations. We cannot predict whether any such legislation or changes will be enacted, what the specific terms will be or how, if at all, they would have an adverse effect on our business.


22


Table of Contents

Failures elsewhere in the insurance industry could obligate us to pay assessments through guaranty associations.
 
When an insurance company becomes insolvent, guaranty associations in each of the 50 states levy assessments upon all companies licensed to write insurance in the relevant lines of business in that state, and use the proceeds to pay claims of policyholder residents of that state, up to the state-specific limit of coverage. The total amount of the assessment is based on the number of insured residents in each state, and each company’s assessment is based on its proportionate share of premium volume in the relevant lines of business and could have an adverse effect on our results of operations. The failure of a large life, health or annuity insurer could trigger guaranty association assessments we would be obligated to pay.
 
Risks Relating to this Offering and Ownership of Our Common Stock
 
As a holding company, Symetra Financial Corporation depends on the ability of its subsidiaries to transfer funds to it to meet its obligations and pay dividends.
 
Symetra Financial Corporation is a holding company for its insurance and financial subsidiaries with no significant operations of its own. Its principal sources of cash to meet its obligations and to pay dividends consist of dividends from its subsidiaries and permitted payments under tax sharing agreements with its subsidiaries. State insurance regulatory authorities limit the payment of dividends by insurance subsidiaries. Based on our statutory results as of December 31, 2006, our insurance subsidiaries may pay dividends to us of up to $166.4 million in the aggregate during 2007 without obtaining regulatory approval, provided that the aggregate dividends paid over the twelve months preceding any dividend payment made during 2007 do not exceed the $166.4 million limit. Our insurance subsidiaries paid $100.0 million in dividends in December 2006, $66.4 million in dividends during the nine months ended September 30, 2007 and received regulatory approval to pay an additional $100.0 million dividend in the fourth quarter of 2007. Of this most recent $100.0 million dividend, $14.5 million was used to repay internal loans made to fund the $200.0 million in dividends that we paid to our stockholders in October 2007, and the remainder will be used, as necessary, for investment, operating expenses, payment of principal, interest and other expenses related to holding company debt and general corporate purposes. In addition, competitive pressures generally require our insurance subsidiaries to maintain financial strength ratings, which are partly based on maintaining certain levels of capital. These restrictions and other regulatory requirements, such as minimum required risk-based capital ratios, affect the ability of our insurance subsidiaries to make dividend payments. Limits on the ability of the insurance subsidiaries to pay dividends could adversely affect our liquidity, including our ability to pay dividends to stockholders and service our debt.
 
There are a number of other factors that could affect our ability to pay dividends, including the following:
 
  •  lack of availability of cash to pay dividends due to changes in our operating cash flow, capital expenditure requirements, working capital requirements and other cash needs;
 
  •  unexpected or increased operating or other expenses or changes in the timing thereof;
 
  •  restrictions under Delaware law or other applicable law on the amount of dividends that we may pay;
 
  •  a decision by our board of directors to modify or revoke its policy to pay dividends; and
 
  •  the other risks described under “Risk Factors.”
 
The failure to maintain or pay dividends could adversely affect the trading price of our common stock.
 
There may not be an active, liquid trading market for our common stock.
 
Prior to this offering, there has been no public market for our common stock. We cannot predict the extent to which an active trading market with adequate liquidity will develop. If an active trading market does not develop, you may have difficulty selling any of our common stock that you purchase and the value of your shares may be impaired.


23


Table of Contents

If securities or industry analysts do not publish research or reports about our business, if they change their recommendations regarding our stock adversely or if our operating results do not meet their expectations, our stock price could decline.
 
The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us, our business or our industry. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline. Moreover, if one or more of the analysts who cover our company downgrade our stock or if our operating results do not meet their expectations, our stock price could decline.
 
As a public company, we will become subject to additional financial and other reporting and corporate governance requirements.
 
We have historically operated our business as a private company. After this offering, we will become obligated to file with the Securities and Exchange Commission, or SEC, annual and quarterly information and other reports that are specified in Section 13 of the Exchange Act. We will also be required to ensure that we have the ability to prepare financial statements that are fully compliant with all SEC reporting requirements on a timely basis. We will also become subject to other reporting and corporate governance requirements, including the requirements of the NYSE and certain provisions of the Sarbanes-Oxley Act of 2002 and the regulations promulgated thereunder, which will impose significant compliance obligations upon us. As a public company, we will be required to:
 
  •  prepare and distribute periodic public reports and other stockholder communications in compliance with our obligations under the federal securities laws and NYSE rules;
 
  •  create or expand the roles and duties of our board of directors and committees of the board;
 
  •  institute more comprehensive financial reporting and disclosure compliance functions;
 
  •  involve and retain to a greater degree outside counsel and accountants in the activities listed above;
 
  •  enhance our investor relations function;
 
  •  establish new internal policies, including those relating to disclosure controls and procedures; and
 
  •  comply with the Sarbanes-Oxley Act of 2002, in particular Section 404.
 
These changes will require a significant commitment of additional expense and other resources. We may not be successful in implementing these requirements and implementing them could adversely affect our business or operating results. In addition, if we fail to implement the requirements with respect to our internal accounting and audit functions, our ability to report our operating results on a timely and accurate basis could be impaired.
 
Significant stockholders may be able to influence the direction of our business.
 
Upon completion of this offering, our principal stockholders, affiliates of White Mountains Insurance Group, Ltd. and Berkshire Hathaway Inc., will collectively continue to beneficially own approximately 33.4% of our outstanding shares of common stock. If they chose to act together on matters that are brought to stockholders for their vote, they would continue to have the collective ability to significantly influence all matters requiring stockholder approval, including the nomination and election of directors and the determination of the outcome of any corporate transaction or other matter submitted to our stockholders for approval, including amendments to our certificate of incorporation, potential mergers or acquisitions, asset sales and other significant corporate transactions. The interests of our principal stockholders may not coincide with the interests of the other holders of our common stock.


24


Table of Contents

Our internal control over financial reporting does not currently meet the standards required by Section 404 of the Sarbanes-Oxley Act of 2002, and failure to achieve and maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our business and stock price.
 
As a privately-held company, we have not been required to maintain internal control over financial reporting in a manner that meets the standards of publicly-traded companies required by Section 404 of the Sarbanes-Oxley Act, standards that we will be required to meet in the course of preparing our financial statements as of and for the year ended December 31, 2008. We do not currently have comprehensive documentation of our internal controls, nor do we document or test our compliance with these controls on a periodic basis in accordance with Section 404 of the Sarbanes-Oxley Act. Furthermore, we have not tested our internal controls in accordance with Section 404 and, due to our lack of documentation, such a test would not be possible to perform at this time.
 
If, as a public company, we are not able to implement the requirements of Section 404 in a timely manner or with adequate compliance, our independent registered public accounting firm may not be able to attest to the adequacy of our internal control over financial reporting. If we are unable to maintain adequate internal control over financial reporting, we may be unable to report our financial information on a timely basis, may suffer adverse regulatory consequences or violations of applicable stock exchange listing rules and may breach the covenants under our revolving credit facilities and our senior notes. There could also be a negative reaction in the financial markets due to a loss of investor confidence in us and the reliability of our financial statements. Confidence in our financial statements is also likely to suffer if our independent registered public accounting firm reports a material weakness in our internal control over financial reporting.
 
In addition, we will incur incremental costs in order to improve our internal control over financial reporting and comply with Section 404, including increased auditing and legal fees and costs associated with hiring additional accounting and administrative staff.
 
Our stock price may fluctuate significantly, and you may not be able to resell your shares at or above the initial public offering price.
 
The trading price of our common stock may be volatile and subject to wide price fluctuations in response to various factors, including:
 
  •  market conditions in the broader stock market in general;
 
  •  actual or anticipated fluctuations in our quarterly financial and operating results;
 
  •  changes in interest rates;
 
  •  introduction of new services or announcements of significant contracts, acquisitions or capital commitments by us or our competitors;
 
  •  regulatory or political developments;
 
  •  issuance of new or changed securities analysts’ reports or recommendations, or the announcement of any changes to our credit rating;
 
  •  additions or departures of key personnel;
 
  •  availability of capital;
 
  •  litigation and government investigations;
 
  •  legislative and regulatory developments;
 
  •  future sales of our common stock;
 
  •  investor perceptions of us and the life insurance industry; and
 
  •  economic conditions.


25


Table of Contents

 
These and other factors may cause the market price of our common stock to fluctuate substantially, which may limit or prevent investors from readily selling their shares of common stock and may otherwise negatively affect the liquidity of our common stock. Even factors that do not specifically relate to our company may materially reduce the market price of our common stock, regardless of our operating performance.
 
Future sales, or the perception of future sales, of a substantial amount of our common stock may depress the market price of our common stock.
 
Future sales, or the perception of future sales, of a substantial number of shares of our common stock in the public market after this offering could have a material adverse effect on the prevailing market price of our common stock.
 
Upon completion of this offering, we will have 92,646,295 shares of common stock outstanding, or 111,622,039 shares if we give effect to the exercise of all outstanding warrants. All shares sold in this offering will be freely tradable without restriction under the Securities Act, except for any shares that may be held or acquired by affiliates of the company, as that term is defined in the Securities Act.
 
In connection with this offering, we, each of our executive officers and directors and the selling stockholders will have entered into lock-up agreements that prevent the sale of shares of our common stock for up to 180 days after the date of this prospectus, subject to an extension in certain circumstances described under “Underwriting.” Following the expiration of the lock-up period, the remaining 53,146,295 shares outstanding held by current stockholders of the company will be available for sale pursuant to Rule 144, subject to compliance with the volume, manner of sale and other limitations under Rule 144 in the case of shares held by affiliates. Furthermore, our existing stockholders will have the right, subject to certain conditions, to require us to register the sale of 53,146,295 of their shares of our common stock under the Securities Act. By exercising their registration rights, and selling a large number of shares, our stockholders could cause the prevailing market price of our common stock to decline.
 
Anti-takeover provisions in our charter documents could delay or prevent a change of control of our company and may result in an entrenchment of management and diminish the value of our common stock.
 
Upon completion of this offering, our certificate of incorporation and bylaws will contain provisions that could depress the trading price of our common stock by acting to discourage, delay or prevent a change of control of our company or changes in management that our stockholders might deem advantageous. Specific provisions in our certificate of incorporation will include:
 
  •  our ability to issue preferred stock with terms that the board of directors may determine, without stockholder approval;
 
  •  a classified board of directors;
 
  •  advance notice requirements for stockholder proposals and nominations;
 
  •  the absence of cumulative voting in the election of directors; and
 
  •  limitations on convening stockholder meetings.
 
These provisions in our certificate of incorporation and bylaws may frustrate attempts to effect a takeover transaction that is in the best interests of our minority stockholders. Even in the absence of a takeover attempt, the existence of these provisions may adversely affect the prevailing market price of our common stock if they are viewed as discouraging future takeover attempts.
 
Applicable insurance laws may make it difficult to effect a change of control of our company.
 
Before a person can acquire control of a U.S. insurance company, prior written approval must be obtained from the insurance commissioner of the state where the insurer is domiciled. Generally, state statutes provide that control over a domestic insurer is presumed to exist if any person, directly or indirectly, owns, controls, holds with the power to vote, or holds proxies representing, 10% or more of the voting securities of the domestic insurer. These statutes may frustrate or delay attempts to effect a takeover transaction that would benefit our stockholders.


26


Table of Contents

 
FORWARD-LOOKING STATEMENTS
 
This prospectus contains “forward-looking” statements that are intended to enhance the reader’s ability to assess our future financial and business performance. Forward-looking statements include, but are not limited to, statements that represent our beliefs concerning future operations, strategies, financial results or other developments, and contain words and phrases such as “may,” “expects,” “should,” “believes,” “anticipates,” “estimates,” “intends” or similar expressions. In addition, statements that refer to our future financial performance, anticipated growth and trends in our business and in our industry and other characterizations of future events or circumstances are forward-looking statements. Because these forward-looking statements are based on estimates and assumptions that are subject to significant business, economic and competitive uncertainties, many of which are beyond our control or are subject to change, actual results could be materially different. The following uncertainties, among others, may have such an impact:
 
  •  changes in economic conditions, including changes in interest rates and the performance of financial markets, which may:
 
  •  increase defaults on and impairments of our bond portfolio;
 
  •  reduce sales of our variable and investment management products and the fees we receive on assets under management; and
 
  •  increase the level of our guaranteed minimum death benefit and reserves.
 
  •  a change in our ratings by nationally recognized ratings organizations;
 
  •  changes in laws, regulations and taxes;
 
  •  competitive pressures on product pricing and services, including competition by other insurance companies and financial services companies;
 
  •  terrorist attacks and military and other actions;
 
  •  changes in lapse rates, morbidity, mortality or unemployment rates which differ significantly from our pricing expectations, including as a result of extremely rare, severe and widespread events, such as a possible global avian flu pandemic; and
 
  •  the relative success and timing of our business strategies.
 
Consequently, such forward-looking statements should be regarded solely as our current plans, estimates and beliefs with respect to, among other things, future events and financial performance. Except as required under the federal securities laws, we do not intend, and do not undertake, any obligation to update any forward-looking statements to reflect future events or circumstances after the date of such statements.
 
You should review carefully the section captioned “Risk Factors” in this prospectus for a more complete discussion of the risks of an investment in our common stock.
 
INDUSTRY AND MARKET DATA
 
This prospectus includes industry and government data and forecasts that we have prepared based, in part, upon industry and government data and forecasts obtained from industry and government publications and surveys. These sources include publications and data compiled by the Employee Benefit Research Institute, Kaiser Family Foundation, U.S. Census Bureau, U.S. Department of Health & Human Services Centers for Disease Control, Spectrem Group and Variable Annuity Research and Data Service. Third-party industry publications, surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable, but there can be no assurance as to the accuracy or completeness of included information. We have not independently verified any of the data from third-party sources nor have we ascertained the underlying economic assumptions relied upon therein. Forecasts are particularly likely to be inaccurate, especially over long periods of time. While we are not aware of any misstatements regarding the industry data presented herein, our estimates involve risks and uncertainties and are subject to change based on various factors, including those discussed under the heading “Risk Factors.”


27


Table of Contents

 
USE OF PROCEEDS
 
All of the shares of common stock offered by this prospectus are being sold by the selling stockholders. For information about the selling stockholders, see “Principal and Selling Stockholders.” We will not receive any of the proceeds from the shares of common stock sold by the selling stockholders.
 
DIVIDEND POLICY
 
We intend to pay quarterly cash dividends on our common stock at an initial rate of approximately $0.09 per share. The declaration, payment and amount of future dividends to holders of our common stock will be at the discretion of our board of directors and will depend on many factors, including our financial condition and results of operations, liquidity requirements, market opportunities, capital requirements of our subsidiaries, legal requirements, regulatory constraints and other factors as the board of directors deems relevant. Dividends on our common stock will also be paid to holders of our outstanding warrants.
 
On October 19, 2007, we paid two dividends to our stockholders totaling $200.0 million, of which approximately $146.8 million was funded with the net proceeds, after offering expenses, from our issuance of CENts in October 2007.
 
We are a holding company with no significant business operations of our own. All of our business operations are conducted through our subsidiaries. Dividends and loans from, and cash generated by, our subsidiaries will be our principal sources of cash to repay indebtedness, fund operations and pay dividends. Accordingly, our ability to pay dividends to our stockholders will depend on the earnings and distributions of funds from our subsidiaries. See “Risk Factors — Risks Relating to this Offering and Ownership of Our Common Stock — As a holding company, Symetra Financial Corporation depends on the ability of its subsidiaries to transfer funds to it to meet its obligations and pay dividends.”


28


Table of Contents

 
CAPITALIZATION
 
The following table sets forth our cash and cash equivalents and capitalization as of September 30, 2007 on an actual basis and on an as adjusted basis after giving effect to:
 
  •  the offering of $150.0 million aggregate principal amount of CENts in October 2007; and
 
  •  the payment of two dividends to our stockholders totaling $200.0 million in the aggregate on October 19, 2007, of which approximately $146.8 million was funded from the offering of the CENts.
 
You should read this table in conjunction with our consolidated financial statements and related notes and the information provided under the captions “Selected Historical Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.
 
                 
    As of September 30, 2007  
(In Millions)   Actual     As Adjusted  
 
Cash and cash equivalents
  $ 251.0     $ 195.9 (1)
                 
Borrowings and other obligations:
               
Revolving credit facilities(2)
  $     $  
Senior notes
    298.8       298.8  
CENts
          149.8 (3)
                 
Total borrowings and other obligations
    298.8       448.6  
                 
Stockholders’ equity:
               
Common stock, $0.01 par value; 750.0 million shares authorized, 92.6 million shares issued and outstanding
    0.9       0.9  
Additional paid-in capital
    1,165.5       1,165.5  
                 
Total paid-in capital
    1,166.4       1,166.4  
Retained earnings
    301.5       101.5  
Accumulated other comprehensive income (loss), net of taxes
    (102.3 )     (102.8 )(4)
                 
Total stockholders’ equity
    1,365.6       1,165.1  
                 
Total capitalization
  $ 1,664.4     $ 1,613.7  
                 
 
 
(1) Cash and cash equivalents were reduced by the $53.2 million portion of the dividends to our stockholders paid out of our existing cash balance, and a $1.9 million loss on the settlement of an interest rate swap designated as a cash flow hedge relating to the issuance of the CENts.
 
(2) The revolving credit facilities collectively provide for borrowings of up to $250 million. As of September 30, 2007, we had no balance outstanding under our revolving credit facilities.
 
(3) The CENts were issued at a price of $149.8 million with an initial aggregate principal amount of $150.0 million.
 
(4) Reflects an adjustment to record the final settlement of the interest rate swap designated as a cash flow hedge relating to the issuance of the CENts.


29


Table of Contents

 
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
 
The selected historical consolidated financial data, except for non-GAAP financial measures, as of September 30, 2007 and for the nine months ended September 30, 2007 and 2006 have been derived from our unaudited interim historical consolidated financial statements, which have been prepared on a basis consistent with our annual consolidated financial statements, included in this prospectus. In the opinion of management, such unaudited financial data, except for non-GAAP financial measures, reflects all historical and recurring adjustments necessary for a fair presentation of the results for these periods. The results of operations for the nine months ended September 30, 2007 are not necessarily indicative of the results to be expected for the full year or any future period. The selected historical consolidated financial data, except for non-GAAP financial measures, as of December 31, 2006 and 2005 and for the years ended December 31, 2006 and 2005, and for the period from August 2, 2004 through December 31, 2004, and the period from January 1, 2004 through August 1, 2004 have been derived from our audited consolidated financial statements that are included elsewhere in this prospectus. The selected historical consolidated financial data, except for non-GAAP financial measures, presented below as of December 31, 2004 and as of and for the year ended December 31, 2003 have been derived from our audited consolidated financial statements that are not included in this prospectus. The unaudited selected historical consolidated financial data, except for non-GAAP financial measures, as of and for the year ended December 31, 2002 were derived from unaudited carve-outs of the acquired businesses from our predecessor’s audited consolidated financial statements, which are not included in this prospectus.
 
We do not believe the predecessor financial results for the years ended December 31, 2003 and 2002 and for the period from January 1, 2004 through August 1, 2004 are comparable to the results of our new independent company. This lack of comparability is primarily due to significant changes in our operating costs and also because of purchase accounting adjustments impacting net investment income, policyholder benefits and claims, interest amortization of deferred acquisition costs, intangible assets and net realized investment gains (losses). Additionally, due to the short period from our inception as an independent company to the end of 2004, as well as the effect of transitional expense charges associated with the Acquisition, we do not consider our financial results for the period from August 2, 2004 through December 31, 2004 to be comparable to those for the years ended December 31, 2006 and 2005. This summary data should be read in conjunction with other information contained in this prospectus, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our historical consolidated financial statements and related notes included elsewhere in this prospectus.
 
                                                                 
                                  Predecessor  
                            Period from              
                            August 2
    January 1
             
                Year Ended
    through
    through
    Year Ended
 
    Nine Months Ended September 30,     December 31,     December 31,
    August 1,
    December 31,  
    2007     2006     2006     2005     2004     2004     2003     2002  
    (Unaudited)                                   (Unaudited)  
    (In millions, except per share data)  
 
Consolidated Income Statement Data:
                                                               
Revenues:
                                                               
Premiums
  $ 397.9     $ 398.0     $ 525.7     $ 575.5     $ 263.2     $ 357.9     $ 680.5     $ 599.6  
Net investment income
    732.3       734.0       984.9       994.0       411.1       693.7       1,210.6       1,205.3  
Other revenues
    50.4       42.7       56.1       58.6       27.1       43.9       63.9       62.1  
Net realized investment gains (losses)
    23.8       (4.9 )     1.7       14.1       7.0       34.9       (9.6 )     (152.3 )
                                                                 
Total revenues
    1,204.4       1,169.8       1,568.4       1,642.2       708.4       1,130.4       1,945.4       1,714.7  
Benefits and Expenses:
                                                               
Policyholder benefits and claims
    196.5       209.8       264.3       327.4       127.5       223.6       381.9       341.7  
Interest credited
    564.9       571.9       765.9       810.9       360.2       556.4       990.8       968.7  


30


Table of Contents

                                                                 
                                  Predecessor  
                            Period from              
                            August 2
    January 1
             
                Year Ended
    through
    through
    Year Ended
 
    Nine Months Ended September 30,     December 31,     December 31,
    August 1,
    December 31,  
    2007     2006     2006     2005     2004     2004     2003     2002  
    (Unaudited)                                   (Unaudited)  
    (In millions, except per share data)  
 
Other underwriting and operating expenses
    209.9       191.9       260.5       273.2       123.3       182.3       324.9       267.5  
Fair value of warrants issued to investors
                            101.5                    
Interest expense
    14.1       14.5       19.1       12.4       3.5                    
Amortization of deferred policy acquisition costs
    14.2       11.0       14.6       11.9       1.6       34.2       51.3       40.8  
Intangible asset amortization
    0.2                               4.9       8.3       8.8  
                                                                 
Total benefits and expenses
    999.8       999.1       1,324.4       1,435.8       717.6       1,001.4       1,757.2       1,627.5  
                                                                 
Income (loss) from continuing operations before income taxes
    204.6       170.7       244.0       206.4       (9.2 )     129.0       188.2       87.2  
Provisions for income taxes:
                                                               
Current
    41.6       72.5       92.4       22.2       21.3       0.9       42.1       58.8  
Deferred
    20.9       (12.7 )     (7.9 )     39.7       10.7       30.5       9.1       (30.3 )
                                                                 
Total provision for income taxes
    67.0       59.8       84.5       61.9       32.0       31.4       51.2       28.5  
                                                                 
Income (loss) from continuing operations
    137.6       110.9       159.5       144.5       (41.2 )     97.6       137.0       58.7  
Income (loss) from discontinued operations (net of taxes)
                      1.0       (2.4 )     2.3       1.7       1.5  
                                                                 
Net income (loss)
  $ 137.6     $ 110.9     $ 159.5     $ 145.5     $ (43.6 )   $ 99.9     $ 138.7     $ 60.2  
                                                                 
Net income per common share:(1)
                                                               
Basic
  $ 1.23     $ 0.99     $ 1.43     $ 1.30                                  
                                                                 
Diluted
  $ 1.23     $ 0.99     $ 1.43     $ 1.30                                  
                                                                 
Weighted average common shares outstanding:
                                                               
Basic
    111.622       111.622       111.622       111.622                                  
                                                                 
Diluted
    111.622       111.622       111.622       111.622                                  
                                                                 

31


Table of Contents

                                                                 
                                  Predecessor  
                            Period from              
                            August 2
    January 1
             
                Year Ended
    through
    through
    Year Ended
 
    Nine Months Ended September 30,     December 31,     December 31,
    August 1,
    December 31,  
    2007     2006     2006     2005     2004     2004     2003     2002  
    (Unaudited)                                   (Unaudited)  
    (In millions, except per share data)  
 
Non-GAAP Financial Measures(2):
                                                               
Net operating income (loss)
  $ 126.1     $ 121.6     $ 172.1     $ 141.9     $ (46.0 )   $ 75.5                  
                                                                 
Reconciliation to Net Income (Loss):
                                                               
Net income (loss)
  $ 137.6     $ 110.9     $ 159.5     $ 145.5     $ (43.6 )   $ 99.9                  
Less: Net realized investment gains (losses) (net of taxes)
    15.5       (3.2 )     1.1       9.2       4.6       22.7                  
Add:
                                                               
Net realized and unrealized investment gains (losses) on FIA options (net of taxes)
    0.5       (0.2 )     1.4       (2.9 )     1.3       (1.7 )                
Net realized and unrealized investment gains on equity securities (net of taxes)
    3.5       7.7       12.3       8.5       0.9                        
                                                                 
Net operating income (loss)
  $ 126.1     $ 121.6     $ 172.1     $ 141.9     $ (46.0 )   $ 75.5                  
                                                                 
 
                                                 
    As of September 30,
    As of December 31,  
    2007     2006     2005     2004     2003     2002  
    (Unaudited)                             (Unaudited)  
 
Consolidated Balance Sheet Data:
                                               
Total investments
  $ 16,864.2     $ 17,305.3     $ 18,332.8     $ 19,244.8     $ 19,197.6     $ 17,913.1  
Total assets
    19,729.2       20,114.6       20,980.1       22,182.0       22,512.0       21,393.6  
Total debt
    298.8       298.7       300.0       300.0              
Separate account assets
    1,260.5       1,233.9       1,188.8       1,228.4       1,137.4       899.2  
Accumulated other comprehensive income (loss) (AOCI) (net of taxes)
    (102.3 )     (0.5 )     136.6       312.9                  
Total stockholders’ equity
    1,365.6       1,327.3       1,404.9       1,435.8       2,566.7       2,244.7  
Book value per common share:
                                               
Basic(3)
  $ 15.84     $ 14.33     $ 13.69     $ 12.12                  
                                                 
Diluted(4)
  $ 15.10     $ 13.85     $ 13.32     $ 12.01                  
                                                 

32


Table of Contents

                                                 
    As of September 30,
    As of December 31,  
    2007     2006     2005     2004     2003     2002  
    (Unaudited)                             (Unaudited)  
 
U.S. Statutory Financial Information:
                                               
Statutory capital and surplus
  $ 1,309.7     $ 1,266.2     $ 1,260.1     $ 1,138.4     $ 1,059.6     $ 903.4  
Asset valuation reserve (AVR)
    172.2       158.4       140.9       107.6       71.5       39.5  
                                                 
Statutory capital and surplus and AVR
  $ 1,481.9     $ 1,424.6     $ 1,401.0     $ 1,246.0     $ 1,131.1     $ 942.9  
                                                 
 
 
(1) Net income per common share (basic and diluted) assumes that all participating securities, including warrants, have been outstanding since the beginning of the period, using the two-class method.
 
(2) Management considers certain non-GAAP financial measures, including net operating income (loss), to be a useful supplement to comparable GAAP measures in evaluating our financial performance and condition. These unaudited measures have been reconciled to their most comparable GAAP financial measures. We believe that the non-GAAP presentation of net operating income is valuable because excluding certain realized capital gains and losses, many of which are driven by investment decisions and external economic developments unrelated to the insurance and underwriting aspects of the business reveals trends that may be otherwise obscured. For a definition of these non-GAAP measures and other metrics used in our analysis, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Use of non-GAAP Financial Measures.”
 
(3) Basic book value per common share is calculated based on total stockholders’ equity less AOCI divided by 92,646,295 shares of common stock outstanding.
 
(4) Diluted book value per common share is calculated based on total stockholders’ equity less AOCI plus the proceeds from the assumed exercise of outstanding warrants, divided by the sum of the outstanding shares of common stock and shares subject to outstanding warrants, equal to 111,622,039 in the aggregate.

33


Table of Contents

 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
 
You should read the following discussion in conjunction with the audited and unaudited historical financial statements and the accompanying notes included in this prospectus, as well as the discussion under “Selected Historical Consolidated Financial Data.” This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in or implied by any of the forward-looking statements as a result of various factors, including but not limited to those listed under “Risk Factors” and “Forward-Looking Statements.” Our fiscal year ends on December 31 of each calendar year.
 
Management considers certain non-GAAP financial measures, including net operating income (loss) and segment pre-tax operating income, to be useful to investors in evaluating our financial performance and condition. These measures have been reconciled to their most comparable GAAP financial measures. For a definition of these non-GAAP measures and other metrics used in our analysis, see “— Use of non-GAAP Financial Measures.”
 
Overview
 
We are a life insurance company focused on profitable growth in select group health, retirement, life insurance and employee benefits markets. Our first day of operations as an independent company was August 2, 2004 when Symetra acquired a group of life insurance and investment companies from Safeco Corporation (the “Acquisition”). Our operations date back to 1957, and many of our agency and distribution relationships have been in place for decades. We are headquartered in Bellevue, Washington and employ approximately 1,300 people in 25 offices across the United States, serving approximately 1.7 million customers. As of September 30, 2007, we had total stockholders’ equity of $1.4 billion, regulatory capital of $1.5 billion and total assets of $19.7 billion. Our operating return on average equity, or operating ROAE, was 12.6%, and 12.1%, for the twelve month periods ended September 30, 2007 and 2006, and 13.0% and 11.9% for the years ended December 31, 2006 and December 31, 2005, respectively. We define operating ROAE as net operating income, a non-GAAP financial measure, divided by average stockholders’ equity excluding accumulated other comprehensive income. For a reconciliation of net operating income to net income, please see page 43.
 
Our Operations
 
We conduct our business through five segments, four of which are operating:
 
  •  Group.  We offer medical stop-loss insurance, limited medical benefit plans, group life insurance, accidental death and dismemberment insurance and disability insurance mainly to employer groups of 50 to 1,000 individuals. As a result of our recent acquisition of Medical Risk Managers, Inc., or MRM, we also offer MGU services.
 
  •  Retirement Services.  We offer fixed and variable deferred annuities, including tax sheltered annuities, IRAs, and group annuities to qualified retirement plans, including Section 401(k) and 457 plans. We also provide record keeping services for qualified retirement plans invested in mutual funds.
 
  •  Income Annuities.  We offer SPIAs for customers seeking a reliable source of retirement income and structured settlement annuities to fund third-party personal injury settlements.
 
  •  Individual.  We offer a wide array of term, universal and variable life insurance as well as BOLI.
 
  •  Other.  This segment consists of unallocated corporate income, composed primarily of investment income on unallocated surplus, unallocated corporate expenses, interest expense on debt, the results of small, non-insurance businesses that are managed outside of our operating segments and inter-segment elimination entries.


34


Table of Contents

 
Revenues and Expenses
 
We earn revenues and generate cash primarily from premiums earned on group life and health and individual insurance products, cost of insurance, or COI, charges primarily from our universal life and BOLI products, net investment income, net realized investment gains and other revenues. Other revenues include mortality and expense, surrender, and other administrative charges, revenues from our non-insurance businesses and revenues from fee arrangements with our reinsurance partners.
 
Each operating segment maintains its own portfolio of invested assets. The realized gains (losses) incurred are reported in the segment in which they occur. The unallocated portion of net investment income is reported in the Other segment.
 
Our primary expenses include interest credited, benefits and claims and general business and operating expenses, including commissions. We allocate corporate expenses to each of our operating segments using multiple factors which include headcount, allocated capital, account values and time study results.
 
Critical Accounting Policies and Estimates and Recently Issued Accounting Standards
 
The accounting policies discussed in this section are those that we consider to be particularly critical to an understanding of our financial statements because their application places the most significant demands on our ability to judge the effect of inherently uncertain matters on our financial results. For all of these policies, we caution that future events rarely develop exactly as forecast, and our management’s best estimates may require adjustment. For a discussion of recently adopted and not yet adopted accounting standards, see note 2, “Summary of Significant Accounting Policies,” from the notes to our consolidated financial statements included in this prospectus.
 
Other-Than-Temporary Impairments
 
We analyze investments that meet our impairment criteria to determine whether the decline in value is other-than-temporary. The impairment review involves the finance investment management team, as well as the portfolio asset manager. To make this determination for each security, we consider both quantitative and qualitative criteria including:
 
  •  how long and by how much the fair value has been below cost or amortized 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, or compliance with terms and covenants of the security;
 
  •  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; and
 
  •  any reduction or elimination of dividends or nonpayment of scheduled interest payments.
 
Based on the 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 gains (losses) in our consolidated statements of operations in the period that we make the determination. Our impairment policy may result in an other-than-temporary impairment charge recorded for a security that has no credit default or credit issues if we do not have the intent or ability to hold an impaired security long enough to recover its value. This situation can exist as a result of certain portfolio management or cash management strategies. Accordingly, we categorize impairments as either credit related or other. If we determine that we are not likely to receive interest or principal amounts based upon the expectations of the security or due in accordance with the contractual terms of the security, the impairment is characterized as credit related. We may also characterize an impairment as credit related if substantially all of the decrease in security value is related to issuer credit spreads widening. The other-than-temporary impairments categorized as other are primarily related to securities that have declined in value and for which we are uncertain of our intent and ability to retain the investment for a period of time to allow recovery to book value.


35


Table of Contents

Deferred Policy Acquisition Costs
 
We defer as assets certain costs, generally commissions, distribution costs and other underwriting costs, that vary with, and are primarily related to, the production of new and renewal business. We limit our deferral to acquisition expenses contained in our product pricing assumptions.
 
The following table summarizes our DAC balances by segment:
 
                         
    As of
    As of
    As of
 
    September 30,
    December 31,
    December 31,
 
    2007     2006     2005  
    (Unaudited)              
    (In Millions)  
 
Group
  $ 3.4     $ 4.0     $ 5.3  
Retirement Services
    73.1       54.5       25.5  
Income Annuities
    9.6       6.8       4.3  
Individual
    31.6       22.9       13.9  
                         
Total
  $ 117.7     $ 88.2     $ 49.0  
                         
 
In our Group segment, the DAC amortization period for group medical stop-loss policies is one year as these policies are re-priced on an annual basis.
 
In our Retirement Services, Income Annuities and Individual segments, we amortize acquisition costs over the premium paying period or over the lives of the policies in proportion to the future estimated gross profits, or EGPs, of each of these product lines, as follows:
 
  •  Retirement Services.  The DAC amortization period is typically 20 years for the deferred annuities, although most of the DAC amortization occurs within the first 10 years because the EGPs are highest during that period. It is common for deferred annuity policies to lapse after the surrender charge period expires.
 
  •  Income Annuities.  The DAC amortization period for SPIAs, including structured settlement annuities, is the benefit payment period. The benefit payment periods vary by policy; however, most benefits are paid within 80 years of contract issue.
 
  •  Individual.  The DAC amortization period related to universal life and variable life policies is typically 25 years and 20 years, respectively. DAC amortization related to our term life insurance policies is the premium paying period, which ranges from 10 to 30 years.
 
To determine the EGPs, we make assumptions as to lapse and withdrawal rates, expenses, interest margins, mortality experience, long term equity market returns and investment performance.
 
Changes to assumptions can have a significant impact on DAC amortization. In the event actual experience differs from our assumptions or our future assumptions are revised, we adjust our EGPs, which could result in a significant increase in amortization expense. The following would generally cause an increase in DAC amortization expense: increases to lapse and withdrawal rates in the current period, increases to expected future lapse and withdrawal rates, increases to future expected expense levels, increases to interest margins in the current period, decreases to expected future interest margins and decreases to current or expected equity market returns. EGPs are adjusted quarterly to reflect actual experience to date or to change underlying key assumptions based on experience studies.
 
We regularly conduct DAC recoverability analyses. 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.
 
In connection with our recoverability analyses, we perform sensitivity analyses on our two most significant DAC balances, which currently consist of our Retirement Services deferred annuity product and our Individual universal life product DAC balances, to capture the effect that certain key assumptions have on


36


Table of Contents

DAC balances. The sensitivity tests are performed independently, without consideration for any correlation among the key assumptions.
 
The following depicts the sensitivities for our deferred annuity and universal life DAC balances: If we changed our future lapse and withdrawal rate assumptions by a factor of 10%, the effect on the DAC balance is less than $0.5 million. If we changed our future expense assumptions by a factor of 10%, the effect on the DAC balance is less than $0.1 million.
 
The DAC balance on the date of our acquisition, August 2, 2004 was reset to zero in accordance with purchase accounting. See “— Our Historical Financial Information and Purchase Accounting.” Because of this, since the Acquisition, quarterly updates to our DAC models to reflect actual experience have led to immaterial changes in the DAC asset and amortization, and the magnitude of the sensitivities is currently relatively small. We expect the DAC balance to grow as we continue to write new business, and as this occurs, we would expect the sensitivities to grow accordingly. In addition, depending on the amount and the type of new business written in the future we may determine that other of our assumptions may produce significant variations in our financial results.
 
Funds Held Under Deposit Contracts
 
Liabilities for fixed deferred annuity contracts, guaranteed investment contracts, and universal life policies, including BOLI, are computed as deposits net of withdrawals made by the policyholder, plus amounts credited based on contract specifications, less contract fees and charges assessed, plus any additional interest. The unamortized purchase accounting reserve is also included in this balance. See “— Our Historical Financial Information and Purchase Accounting.”
 
For SPIAs, including structured settlements, liabilities 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 reserves for SPIAs is set at issue for policies issued subsequent to the Acquisition or based upon prevailing market interest rates on August 2, 2004 for policies in existence on the Acquisition date. The interest rates within the pattern vary over time and start with interest rates that prevailed at contract issue or on the Acquisition date. As of September 30, 2007, the weighted average implied interest rate on the existing book of business is currently at 5.9% and will grade to an ultimate assumed level of 6.7% in approximately 20 years.
 
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 of premiums at issuance so that the actuarial present value of future benefits equals the actuarial present value of future premiums. We set the interest, mortality and persistency assumptions in the year of issue and include provisions for adverse deviations. 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, are graded to the statutory valuation interest rate over time, and range from 4.0% to 6.0%. Assumptions are made at the time each policy is issued, and do not change over time unless the liability amount is determined to be inadequate to cover future policy benefits. The provisions for adverse deviations are intended to provide coverage for the risk that actual experience may be worse than locked-in best-estimate assumptions.
 
We periodically compare our actual experience with our estimates of actuarial liabilities for future policy benefits. To the extent that actual policy benefits differ from the reserves established for future policy benefits, such differences are recorded in the results of operations in the period in which the variances occur, which could result in a decrease in profits, or possibly losses. No revisions to assumptions within the Future Policy Benefits liabilities have been necessary and therefore we have not experienced any impact in our financial results due to changes in assumptions.


37


Table of Contents

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. We also provide for claims incurred but not reported, or IBNR, based on expected loss ratios, claims paying completion patterns and historical experience. We continually review estimates for reported but unpaid claims and IBNR. Any necessary adjustments are reflected in current operating results. If expected loss ratios increase or expected claims paying completion patterns extend, the IBNR amount increases.
 
Use of non-GAAP Financial Measures
 
Certain tables in this prospectus include non-GAAP financial measures. We believe these measures to provide useful information to investors in evaluating our financial performance and condition. In the following paragraphs, we provide a definition of these non-GAAP measures.
 
Net operating income
 
Net operating income (loss) consists of net income (loss), less after-tax net realized investment gains (losses), plus after-tax net realized and unrealized investment gains (losses) on equity-related securities held in our Income Annuities segment and on our FIA hedges.
 
We believe that net operating income provides greater transparency than GAAP net income regarding the underlying performance of our insurance operations. As an example, we could produce a high level of net income in a given period, despite poor operating performance, if in that period we generate significant net realized gains from our investment portfolio. Realized gains (losses) on our investment portfolio (except for the realized gains (losses) on our Income Annuities’ equity-related securities and on our FIA hedges, as discussed below) are primarily driven by investment decisions and external economic developments, the nature and timing of which are unrelated to the operating aspects of our business. By disclosing net operating income in addition to net income, we aim to provide investors with a view into the performance of our operations that might otherwise be masked by unrelated factors. We believe that it is useful for investors to evaluate both net income and net operating income.
 
Net operating income includes equity-related realized and unrealized investment gains (losses) in our Income Annuities business and realized and unrealized investment gains (losses) on our FIA hedges in our Retirement Services business. We include these items because they specifically reflect our management of certain of our insurance liabilities. For instance, each year we use the realized gains from our FIA hedges to fund the interest credited on our FIA product. Additionally, over the long-term we expect to produce investment returns in support of our long duration liabilities within Income Annuities by investing in equities. Since the investment performance from our FIA hedge program and equity investment program is reported in realized and unrealized gains (losses), we include these in our net operating income measure. See “Segment pre-tax operating income” on this page for further information regarding realized gains (losses) related to our Income Annuities and Retirement Services segments.
 
Our management and board of directors use net operating income to evaluate our operations, including assessing the effectiveness of operating and strategic decisions, management of insurance liabilities and financial planning. For instance, we use net operating income to help determine the renewal interest rates to credit to policyholders in Retirement Services. Because net operating income excludes the net realized investment gains (losses) described above, our management and board of directors also separately review net realized investment gains (losses) in connection with their review of our investment portfolio. Additionally, our management and board of directors examine our GAAP net income as part of their review of the overall financial results of the company.
 
Net income (loss) is the most directly comparable GAAP measure. Net operating income should not be considered a substitute for net income. A reconciliation of net operating income to net income is provided on page 43.


38


Table of Contents

Segment pre-tax operating income
 
We use the non-GAAP financial measure segment pre-tax operating income as an important measure of our operating performance. We believe that this measure provides investors with a valuable measure of the performance of our ongoing businesses because it reveals trends that may be obscured by the effect of certain realized capital gains and losses. Some realized capital gains and losses are primarily driven by investment decisions and external economic developments for which the nature and timing are unrelated to the insurance and underwriting aspects of our business. Accordingly, segment pre-tax operating income excludes the effect of most realized gains and losses. For segment pre-tax operating income, segment pre-tax income is the most directly comparable GAAP measure. Segment pre-tax operating income should not be considered as a substitute for segment pre-tax income.
 
When evaluating our Retirement Services segment operating results, we consider the impact of our hedging program related to our FIA products. This program consists of buying S&P 500 Index call options. Although we use index options to hedge the equity return component of our FIA products, the options do not qualify as hedge instruments or for hedge accounting treatment. These assets are recorded at fair value as free-standing derivative assets with the mark-to-market gains or losses to record the options at fair value recognized in net realized investment gains (losses). The realized gain or loss on the options is also recorded in net investment realized gains (losses). Since the interest incurred on these FIA products is included as a component of interest credited in our statement of operations, we believe it is more meaningful to evaluate results inclusive of the results of the hedge program. Accordingly, segment pre-tax operating income in our Retirement Services segment excludes all realized investments gains (losses), except for realized and unrealized investment gains or (losses) from our options related to our FIA hedging program.
 
For our Income Annuities segment, we evaluate the results of operations including the impact of both realized and unrealized investment gains (losses) on our equity portfolio because we believe that equities are an effective investment to fund the long duration benefit payments in our structured settlements and SPIA policies. The majority of our investment returns on the equities in our Income Annuities investment portfolio are recorded in net realized investment gains (losses) on our statement of operations and through changes in unrealized gains (losses) as a component of other comprehensive income. Since the interest incurred on the long duration benefit payments is recorded as a component of interest credited, we believe it is more meaningful to evaluate the results inclusive of our equity investment program. Accordingly, segment pre-tax operating income in our Income Annuities segment excludes all realized investment gains (losses), except for realized and unrealized investment gains (losses) arising from our equity investment program held in this segment.
 
Our Historical Financial Information and Purchase Accounting
 
On August 2, 2004, we completed the Acquisition. The Acquisition was accounted for using the purchase method under the Financial Accounting Standards Board’s Statement of Financial Accounting Standards, or SFAS, No. 141, Business Combinations. We refer to this purchase method as purchase GAAP accounting, or PGAAP. Under SFAS No. 141, the purchase price is allocated to the estimated fair value of the tangible and identifiable assets acquired less liabilities assumed at the date of acquisition. In conjunction with PGAAP for the Acquisition, we were required to adjust our consolidated balance sheet to fair value. This resulted in the following:
 
  •  the book values of our invested assets were increased by $1.0 billion to reset the book value to fair value, based on the prevailing market rates on August 2, 2004. The prevailing market interest rates were relatively low at the time of the Acquisition, which resulted in a significant increase in the book value of our invested assets. We recorded a PGAAP adjustment representing the difference between book value and the fair value of our invested assets. The difference between the updated book value and the par value of our fixed maturities invested assets of $27.0 million is amortized against investment income over the expected life of the invested assets, resulting in a lower earned yield;
 
  •  our funds held under deposit contracts, which our invested assets support, were increased to reflect the lower market interest rates compared to interest rates originally used to determine policy pricing and


39


Table of Contents

reserving. As a result, our reserves related to fixed deferred annuities, structured settlements, immediate annuities and BOLI products were increased by $1.2 billion;
 
  •  our deferred policy acquisition costs, goodwill and intangible asset balances at August 2, 2004 were reset to zero. PGAAP resulted in a $30.0 million intangible asset related to our discontinued operations, which was received in cash in 2004. In our continuing operations, the purchase accounting resulted in minimal intangibles and no goodwill; and
 
  •  all other assets and liabilities were recorded at fair value on August 2, 2004.
 
The impact of PGAAP on operating performance for periods subsequent to the Acquisition resulted in a decrease to investment income and a decrease to policyholder benefits and interest credited. In our Retirement Services and Individual segments, a purchase accounting reserve, or PGAAP reserve, was established related to the fair value adjustment for our deferred annuities and BOLI policies. This PGAAP reserve is amortized as a reduction to policyholder benefits according to the pattern of profitability of the book of business of policies in force at the date of the Acquisition. This profitability is determined based on assumptions regarding the present value of estimated future gross profits related to the policies in force on August 2, 2004. In this estimation process, we made assumptions as to lapse rates, mortality rates, maintenance expenses, COI charges, credited interest rates, and investment performance. This pattern resulted in higher PGAAP reserve amortization in the years immediately following the Acquisition. Actual profits can vary from the estimates and can thereby result in increases or decreases to the PGAAP reserve amortization rate.
 
The PGAAP adjustment associated with our immediate annuity book of business was recorded in our income annuities reserve model by updating the mortality assumptions and the interest rate pattern used for discounting future benefit payments. This adjustment resulted in a decrease in interest credited in the years subsequent to the Acquisition.
 
As a result of the Acquisition and resulting PGAAP adjustments, the results of operations for periods prior to August 2, 2004 are not comparable to periods subsequent to that date. Our 2004 results discussed below represent the mathematical addition of the historical results for (i) the predecessor period from January 1, 2004 through August 1, 2004 and (ii) the successor period from August 2, 2004 through December 31, 2004. This approach is not consistent with U.S. GAAP and yields results that are not comparable on a period-to-period basis. However, we believe it is a meaningful way to compare our operating results for 2004 to our operating results for 2005 because it would not be meaningful to discuss the partial period from January 1, 2004 through August 1, 2004 (Predecessor) separately from the period from August 2, 2004 through December 31, 2004. The following table provides a summary of the combination of the audited consolidated statements of operations for the periods January 1, 2004 through August 1, 2004 and August 2, 2004 through December 31, 2004 to the Combined 2004 (non-GAAP), results:
 
                         
    Predecessor              
    Period From
    Period From
       
    January 1,
    August 2,
       
    2004
    2004
       
    through
    through
    Combined
 
    August 1,
    December 31,
    2004
 
    2004     2004     (non-GAAP)  
    (In millions)  
 
Revenues:
                       
Premiums
  $ 357.9     $ 263.2     $ 621.1  
Net investment income
    693.7       411.1       1,104.8  
Other revenues
    43.9       27.1       71.0  
Net realized investment gains
    34.9       7.0       41.9  
                         
Total revenues
    1,130.4       708.4       1,838.8  


40


Table of Contents

                         
    Predecessor              
    Period From
    Period From
       
    January 1,
    August 2,
       
    2004
    2004
       
    through
    through
    Combined
 
    August 1,
    December 31,
    2004
 
    2004     2004     (non-GAAP)  
    (In millions)  
 
Benefits and Expenses:
                       
Policyholder benefits and claims
    223.6       127.5       351.1  
Interest credited
    556.4       360.2       916.6  
Other underwriting and operating expenses
    182.3       123.3       305.6  
Fair value of warrants issued to investors
          101.5       101.5  
Interest expense
          3.5       3.5  
Amortization of deferred policy acquisition costs
    34.2       1.6       35.8  
Intangible asset amortization
    4.9             4.9  
                         
Total benefits and expenses
    1,001.4       717.6       1,719.0  
                         
Income (loss) from continuing operations before income taxes
    129.0       (9.2 )     119.8  
Provisions for income taxes:
                       
Current
    0.9       21.3       22.2  
Deferred
    30.5       10.7       41.2  
                         
Total provision for income taxes
    31.4       32.0       63.4  
                         
Income (loss) from continuing operations
    97.6       (41.2 )     56.4  
Income (loss) from discontinued operations (net of taxes)
    2.3       (2.4 )     (0.1 )
                         
Net income (loss)
  $ 99.9     $ (43.6 )   $ 56.3  
                         
                         
Non-GAAP Financial Measures:
                       
Net operating income (loss)
  $ 75.5     $ (46.0 )   $ 29.5  
                         
Reconciliation to Net Income (Loss):
                       
Net income (loss)
  $ 99.9     $ (43.6 )   $ 56.3  
Less: Net realized investment gains (net of taxes)
    22.7       4.6       27.3  
Add:
                       
Net realized and unrealized investment gains (losses) on FIA options (net of taxes)
    (1.7 )     1.3       (0.4 )
Net realized and unrealized investment gains on equity securities (net of taxes)
          0.9       0.9  
                         
Net operating income (loss)
  $ 75.5     $ (46.0 )   $ 29.5  
                         
 
The consolidated statements of operations for the Combined 2004 (non-GAAP) period include allocations of certain expenses from Safeco Corporation. Safeco Corporation and its affiliates provided us with personnel, property and facilities in carrying out certain of our corporate functions. These expenses included charges for corporate overhead, data processing systems, payroll and other miscellaneous charges. The allocations were made using relative percentages, as compared to Safeco Corporation’s other businesses, of headcount or time studies or on a specifically identifiable basis such as actual usage, or other reasonable methods. Safeco Corporation charged us expenses of $25.2 million for the seven months ended August 1, 2004. Our comparable expenses as a separate, stand alone company have been lower than the amounts reflected in the Combined 2004 (non-GAAP) statement of operations.
 
In addition to our four operating segments and our Other segment, during the year ended December 31, 2005 and prior, our historical financial statements also include the results of Symetra Asset Management Company and the majority of the business of Symetra Services Corporation which are presented in our

41


Table of Contents

historical financial statements as discontinued operations. For more information, see note 15, “Discontinued Operations,” in the notes to our consolidated financial statements included in this prospectus. These discontinued operations are not included in the discussions under “— Results of Operations” section due to their immateriality and lack of impact on future operating results.
 
The historical financial information included in this prospectus has been derived from our financial statements, which have been prepared as if Symetra had been in existence throughout all periods shown. The discussions that appear under “— Results of Operations” encompass our results of operations and financial condition for the nine months ended September 30, 2007 and 2006 and for the years ended December 31, 2006, 2005 and Combined 2004 (non-GAAP).
 
Results of Operations
 
Total Company
 
The following discussion should be read in conjunction with our audited consolidated financial statements and the related notes included elsewhere in this report. Set forth below is a summary of our consolidated financial results for the nine months ended September 30, 2007 and 2006 and for the years ended December 31, 2006, 2005 and Combined 2004 (non-GAAP):
 
                                         
                Year Ended December 31,  
    Nine Months Ended
                Combined
 
    September 30,                 2004
 
    2007     2006     2006     2005     (non-GAAP)  
    (Unaudited)                    
    (In millions, except per share data)  
 
Revenues:
                                       
Premiums
  $ 397.9     $ 398.0     $ 525.7     $ 575.5     $ 621.1  
Net investment income
    732.3       734.0       984.9       994.0       1,104.8  
Other revenues
    50.4       42.7       56.1       58.6       71.0  
Net realized investment gains (losses)
    23.8       (4.9 )     1.7       14.1       41.9  
                                         
Total revenues
    1,204.4       1,169.8       1,568.4       1,642.2       1,838.8  
Benefits and Expenses:
                                       
Policyholder benefits and claims
    196.5       209.8       264.3       327.4       351.1  
Interest credited
    564.9       571.9       765.9       810.9       916.6  
Other underwriting and operating expenses
    209.9       191.9       260.5       273.2       305.6  
Fair value of warrants issued to investors
                            101.5  
Interest expense
    14.1       14.5       19.1       12.4       3.5  
Amortization of deferred policy acquisition costs
    14.2       11.0       14.6       11.9       35.8  
Intangible asset amortization
    0.2                         4.9  
                                         
Total benefits and expenses
    999.8       999.1       1,324.4       1,435.8       1,719.0  
                                         
Income from continuing operations before income taxes
    204.6       170.7       244.0       206.4       119.8  
Provisions for income taxes
                                       
Current
    46.1       72.5       92.4       22.2       22.2  
Deferred
    20.9       (12.7 )     (7.9 )     39.7       41.2  
                                         
Total provision for income taxes
    67.0       59.8       84.5       61.9       63.4  
                                         
Income from continuing operations
    137.6       110.9       159.5       144.5       56.4  
Income (loss) from discontinued operations (net of taxes)
                      1.0       (0.1 )
                                         
Net income
  $ 137.6     $ 110.9     $ 159.5     $ 145.5     $ 56.3  
                                         
Net income per common share(1):
                                       
Basic
  $ 1.23     $ 0.99     $ 1.43     $ 1.30          
                                         
Diluted
  $ 1.23     $ 0.99     $ 1.43     $ 1.30          
                                         


42


Table of Contents

                                         
                Year Ended December 31,  
    Nine Months Ended
                Combined
 
    September 30,                 2004
 
    2007     2006     2006     2005     (non-GAAP)  
    (Unaudited)                    
    (In millions, except per share data)  
 
Weighted average common shares outstanding:
                                       
Basic
    111.622       111.622       111.622       111.622          
                                         
Diluted
    111.622       111.622       111.622       111.622          
                                         
Non-GAAP Financial Measures:
                                       
Net operating income
  $ 126.1     $ 121.6     $ 172.1     $ 141.9     $ 29.5  
                                         
Reconciliation to Net Income:
                                       
Net income
  $ 137.6     $ 110.9     $ 159.5     $ 145.5     $ 56.3  
Less: Net realized investment gains (losses) (net of taxes)
    15.5       (3.2 )     1.1       9.2       27.3  
Add:
                                       
Net realized and unrealized investment gains (losses) on FIA options (net of taxes)
    0.5       (0.2 )     1.4       (2.9 )     (0.4 )
Net realized and unrealized investment gains on equity securities (net of taxes)
    3.5       7.7       12.3       8.5       0.9  
                                         
Net operating income
  $ 126.1     $ 121.6     $ 172.1     $ 141.9     $ 29.5  
                                         
 
 
(1) Net income per common share (basic and diluted) assumes that all participating securities including warrants have been outstanding since the beginning of the period, using the two-class method.
 
Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006
 
Summary of results.  Net income increased $26.7 million, or 24.1%, to $137.6 million from $110.9 million. Net operating income increased $4.5 million, or 3.7%, to $126.1 million from $121.6 million. This increase was driven by a decrease in the loss ratio in our Group segment, primarily the medical stop-loss ratio which decreased to 54.6% from 66.9% as a result of lower paid claims. This increase was partially offset by lower profitability in our Retirement Services segment due to a decrease in account value as withdrawals of older fixed annuity products exceeded new deposits and decreased interest spreads driven by a decrease in PGAAP reserve amortization, as more fully described in “— Policyholder benefits and claims.”
 
Premiums.  Premiums consist primarily of revenues from our group life and health and individual life insurance products and COI charges on our universal life insurance and BOLI policies. Premiums decreased $0.1 million, or less than 0.1%, to $397.9 million from $398.0 million. Premiums decreased primarily due to lower premiums in our Group segment, offset by an increase in our Individual segment related to our BOLI block of policies.
 
Net investment income.  Net investment income represents the income earned on our investments. Net investment income decreased $1.7 million, or 0.2%, to $732.3 million from $734.0 million. Of this decrease, $26.0 million was a result of a decrease in the average invested assets to $17.4 billion from $18.1 billion, primarily in our Retirement Services segment. This decrease was offset by a positive rate variance of $24.3 million due to improved yields which increased to 5.60% from 5.42%. The increase in yield was primarily due to the reinvestment of funds in higher yielding securities, an increase in the yield on short-term investments, strong performance on limited partnerships, the receipt of prepayment consent fees and a reduction in investment advisory rates.
 
Other revenues.  Other revenues include mortality and expense, surrender and other administrative charges, revenues from our non-insurance businesses and revenues from fee arrangements with our reinsurance partners. Other revenues increased $7.7 million, or 18.0%, to $50.4 million from $42.7 million. The increase is primarily due to increased fee revenue in our broker-dealer operations and an increase in fee revenue related to the acquisition of our newly acquired subsidiary MRM.

43


Table of Contents

Net realized investment gains (losses).  Net realized investment gains (losses) consist of realized gains and losses from the sale or impairment of our investments and unrealized and realized gains from our derivatives instruments, including equity options which provide an economic hedge on our FIA book of business. Net realized investment gains increased $28.7 million, to $23.8 million from a loss of $4.9 million. For the nine months ended September 30, 2007, gross realized gains were $53.0 million and gross realized losses were $29.2 million, including impairments of $8.2 million. For the nine months ended September 30, 2006, gross realized gains were $40.2 million and gross realized losses were $45.1 million, including impairments of $24.4 million.
 
Policyholder benefits and claims.  Policyholder benefits and claims consist of benefits paid and reserve activity on group life and health and individual life products. In addition, we record, as a reduction of this expense, PGAAP reserve amortization related to our fixed deferred annuities and BOLI policies. The PGAAP reserve is amortized as a reduction to policyholder benefits according to our expected pattern of profitability of the book of business of policies in force on the date of the Acquisition. This pattern resulted in higher PGAAP reserve amortization in the years immediately following the Acquisition. Policyholder benefits and claims decreased $13.3 million, or 6.3%, to $196.5 million from $209.8 million. This decrease was primarily due to a $37.1 million reduction in our Group paid claims, predominantly medical stop-loss claims, offset by a $17.9 million decrease in PGAAP reserve amortization, a $2.6 million increase in Individual paid claims and a $3.0 million increase in Group reserves.
 
Interest credited.  Interest credited represents interest credited to policyholder reserves and contractholder general account balances. Interest credited decreased $7.0 million, or 1.2%, to $564.9 million from $571.9 million. Of this decrease, $12.3 million was the result of a decrease in fixed account values in our Retirement Services segment, partially offset by a $7.7 million increase related to increasing BOLI account values in our Individual segment.
 
Interest expense.  Interest expense represents interest on debt. Interest expense will be affected in the fourth quarter of 2007 and in future fiscal years as a result of additional interest expense we will incur from our issuance of CENts in October 2007. We expect to record interest expense from the CENts of $2.7 million in the fourth quarter of 2007, and $13.1 million for the year ended December 31, 2008.
 
Other underwriting and operating expenses.  Other underwriting and operating expenses represent non-deferrable costs related to the acquisition and ongoing maintenance of insurance and investment contracts, including commissions, policy issuance expenses and other general operating costs. Other underwriting and operating expenses increased $18.0 million, or 9.4%, to $209.9 million from $191.9 million. The increase is primarily due to a $10.6 million increase in corporate shared service expenses, which includes $2.0 million of expenses related to our initial public offering, an increase in employee and related benefit expenses and an increase in various professional services fees including accounting fees and advertising costs. In addition, distribution expenses increased $3.5 million due to an increase in incentive compensation and an increase in distribution employee headcount, and a $2.6 million increase in segment operating expenses related to the acquisition of MRM in the second quarter of 2007 and certain direct segment expenses.
 
Other underwriting and operating expenses will be affected in the fourth quarter of 2007 and in future fiscal years as a result of equity grants we intend to make under our IPO grant program, which will consist of fully-vested shares that we will issue upon the closing of this offering and restricted stock units and stock options that will vest over four and five years respectively, following this offering. We expect this compensation expense to increase other underwriting and operating expenses by $3.1 million for the fourth quarter of 2007, and by $1.8 million for the year ended December 31, 2008.
 
Provision for income taxes.  The provision for income taxes increased $7.2 million, to $67.0 million from $59.8 million. The effective tax rate decreased 2.3% to 32.7% from 35.0% due primarily to an increase in the affordable housing credits, a decrease in the adjustment for unrecognized tax benefits and a reduction in provision to return true-up adjustments, offset by the effect of the increase in pre-tax income from continuing operations and non-deductible transaction expenses related to our initial public offering.


44


Table of Contents

Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
 
Summary of results.  Net income increased by $14.0 million, or 9.6%, to $159.5 million from $145.5 million. Net operating income increased by $30.2 million, or 21.3%, to $172.1 million from $141.9 million, which was primarily due to a decrease in the loss ratio in our Group segment from 67.5% to 59.6% resulting from better underwriting experience. Our results also benefited from an increase in interest spreads on reserves in our Income Annuities segment and, in our Individual segment, improved mortality and an increase in our return on assets on our BOLI policies. This was offset by a decrease in segment pre-tax operating income in Retirement Services.
 
Premiums.  Premiums decreased $49.8 million, or 8.7%, to $525.7 million from $575.5 million. Premiums in our Group segment decreased $51.0 million, primarily due to higher lapses in our medical stop-loss business and the termination of an assumed reinsurance relationship in 2004.
 
Net investment income.  Net investment income decreased $9.1 million, or 0.9%, to $984.9 million from $994.0 million. Of this decrease, $36.1 million was the result of a decrease in the average invested assets to $18.0 billion from $18.7 billion, primarily in our Retirement Services segment. This decrease was partially offset by a positive rate variance of $27.0 million due to improved yields which increased to 5.48% from 5.33%. The increase in yield was primarily the result of portfolio rebalancing.
 
Net realized investment gains.  Net realized investment gains decreased $12.4 million, or 87.9%, to $1.7 million from $14.1 million. For 2006, gross realized gains were $55.1 million and gross realized losses were $53.4 million, including impairments of $25.7 million. For 2005, gross realized gains were $75.5 million and gross realized losses were $61.3 million, including impairments of $7.7 million.
 
Policyholder benefits and claims.  Policyholder benefits and claims decreased $63.1 million, or 19.3%, to $264.3 million from $327.4 million. This decrease was primarily driven by a $65.2 million decrease in our Group segment’s medical stop-loss paid claims and a $7.1 million decrease in our Individual segment’s claims and benefits, offset by a $9.2 million increase in our Retirement Services segment related to differences in the amount of PGAAP reserve amortization.
 
Interest credited.  Interest credited decreased $45.0 million, or 5.5%, to $765.9 million from $810.9 million. The decrease was primarily due to a $25.3 million decrease in interest credited in our Retirement Services segment related to a decrease in fixed account values and a $20.7 million decrease in interest credited in our Income Annuities segment due to a decrease in reserves as benefit payments exceeded new deposits, mortality gains and funding services activities.
 
Other underwriting and operating expenses.  Other underwriting and operating expenses decreased $12.7 million, or 4.6%, to $260.5 million from $273.2 million. This was primarily due to a $6.7 million decrease in operating expenses and a $7.0 million increase in DAC deferral. The decrease in operating expenses included $2.4 million related to information technology transition and $3.2 million related to distribution expense incurred in 2005.
 
Interest expense.  Interest expense increased $6.7 million, or 54.0%, to $19.1 million from $12.4 million, due to an increase in our average interest rate of 6.0% in 2006 from the average interest rate of 4.1% in 2005. See “— Liquidity and Capital Resources” for further information.
 
Amortization of deferred policy acquisition costs.  Amortization of DAC increased $2.7 million, or 22.7%, to $14.6 million from $11.9 million. This was related to an increase in the underlying DAC asset, which increased $39.2 million, or 80%, to $88.2 million from $49.0 million. In connection with the Acquisition, our DAC asset was reset to zero on August 2, 2004 and has subsequently been growing as a result of sales. Our amortization expense is expected to increase as the underlying DAC asset increases.
 
Provision for income taxes.  The provision for income taxes increased $22.6 million, to $84.5 million from $61.9 million, which reflects an increase of the effective tax rate to 34.6% from 30.0%. In 2005, the effective tax rate of 30.0% reflects a non-recurring tax benefit for the release of a valuation allowance related to the utilization of capital loss carryforwards. In addition, the effective tax rate in 2006 of 34.6% reflects an increase due to a true-up of the permanent tax benefits related to the 2005 federal tax return as filed.


45


Table of Contents

Year Ended December 31, 2005 compared to Year Ended December 31, 2004 (Combined Non-GAAP)
 
Summary of results.  Net income increased by $89.2 million to $145.5 million from $56.3 million. Net operating income increased by $112.4 million to $141.9 million from $29.5 million. This was primarily related to the $101.5 million charge in 2004 to record the fair value of warrants issued to investors. Net operating income in 2005, benefiting from lower other underwriting and operating expenses as a result of not incurring corporate overhead expenses from Safeco and not incurring Acquisition related expenses. In addition, amortization of deferred policy acquisition costs decreased due to the Acquisition when DAC was reset to zero. These positive factors were partially offset by an increase in the loss ratio in our Group segment from 64.0% to 67.5%.
 
Premiums.  Premiums decreased $45.6 million, or 7.3%, to $575.5 million from $621.1 million primarily due to decreased premiums in our Group segment which decreased $62.3 million as a result of higher lapses in our medical stop-loss business and the termination of an assumed reinsurance relationship in 2004. This was offset by an increase in our Individual segment premiums of $16.8 million due to a $14.1 million adjustment related to ceded term reinsurance.
 
Net investment income.  Net investment income decreased $110.8 million, or 10.0%, to $994.0 million from $1,104.8 million. This was related to the Acquisition purchase accounting which resulted in an overall reduction in investment yields for periods subsequent to the Acquisition.
 
Other revenues.  Other revenues decreased $12.4 million, or 17.5% to $58.6 million from $71.0 million. This was primarily due to a $4.0 million decrease in our Retirement Services segment fees related to our variable annuities. In addition, in 2004 our Individual segment recorded a $5.9 million favorable adjustment related to ceded term reinsurance expense allowances, which increased 2004 other revenue.
 
Net realized investment gains.  Net realized investment gains decreased $27.8 million, or 66.3%, to $14.1 million from $41.9 million. For 2005, gross realized gains were $75.5 million and gross realized losses were $61.3 million, including impairments of $7.7 million. For 2004, gross realized gains were $110.7 million and gross realized losses were $68.8 million, including impairments of $10.4 million.
 
Policyholder benefits and claims.  Policyholder benefits and claims decreased $23.7 million, or 6.8%, to $327.4 million from $351.1 million. This decrease was primarily due to a $24.5 million decrease in our Group segment’s reserves, which corresponds with a related decrease in premium and a $10.0 million decrease, which relates to having a full year in the Retirement Services segment’s PGAAP reserve amortization. This was offset by a $10.8 million increase in our Individual segment related to an increase in claims and an adjustment in reserves for a bonus interest feature on one of our universal life, or UL, products.
 
Interest credited.  Interest credited decreased $105.7 million, or 11.5%, to $810.9 million from $916.6 million. This decrease was due to a $53.1 million decrease in interest credited in our Retirement Services segment related to a decrease in fixed account values, a $46.4 million decrease in interest credited in our Income Annuities segment related to PGAAP and a $6.2 million decrease in interest credited in our Individual segment related to BOLI claims experience, which impacts the credited interest rate.
 
Other underwriting and operating expenses.  Other underwriting and operating expenses decreased $32.4 million, or 10.6%, to $273.2 million from $305.6 million. This was primarily due to a $17.8 million decrease in our Group segment’s commission and premium tax expense, corresponding to our lower sales. The 2005 other underwriting and operating expenses reflected are not comparable to 2004 during which Safeco Corporation allocated us costs for the first seven months of 2004 and charged us for transition services for the remaining five months of 2004.
 
Fair value of warrants issued to investors.  In connection with the Acquisition, on August 2, 2004, we issued warrants to the two lead investors to purchase 18,975,744 shares of common stock at an exercise price of $11.49 per share. We recorded the $101.5 million estimated fair value of the warrants as an expense during the year ended December 31, 2004.
 
Interest expense.  Interest expense increased $8.9 million, to $12.4 million from $3.5 million. This increase in interest expense was related to the Acquisition. Prior to August 2, 2004, we had no debt obligations. On August 2, 2004, we borrowed $300.0 million against a revolving credit facility to purchase the


46


Table of Contents

life and investment companies. The increase in interest expense reflects twelve months of interest expense in 2005 compared to five months in 2004.
 
Amortization of deferred policy acquisition costs.  Amortization of deferred policy acquisition costs decreased $23.9 million, or 66.8%, to $11.9 million from $35.8 million. The deferred policy acquisition costs asset was reset to zero on August 2, 2004 in connection with the Acquisition resulting in lower DAC amortization in the subsequent periods. The 2004 expense includes $1.6 million of expense for the five-month period subsequent to the Acquisition.
 
Intangible asset amortization.  Intangible asset amortization decreased $4.9 million, or 100%, to zero from $4.9 million as a result of intangible assets being reset to zero on the acquisition date.
 
Provision for income taxes.  The provision for income taxes decreased $1.5 million, to $61.9 million from $63.4 million which reflects an effective tax rate decrease to 30.0% from 52.9%. The 2005 effective rate of 30.0% reflects a non-recurring tax benefit of the release of a tax valuation allowance related to the utilization of capital loss carryforward. The 2004 effective tax rate of 52.9% was significantly in excess of the statutory rate of 35.0% due to the GAAP expense associated with the issuance of the warrant certificates, of which the majority is not deductible for tax purposes. This increase in the 2004 effective rate was offset by the completion of an IRS audit cycle for tax years 1998 through 2001 and the related favorable adjustment of $8.7 million.
 
Group
 
The following table sets forth the results of operations relating to our Group segment:
 
                                         
                Year Ended December 31,  
    Nine Months
                Combined
 
    Ended September 30,                 2004
 
    2007     2006     2006     2005     (non-GAAP)  
    (Unaudited)                    
    (In millions)  
 
Revenues:
                                       
Premiums
  $ 293.1     $ 294.0     $ 387.3     $ 438.3     $ 500.6  
Net investment income
    13.5       13.5       18.0       19.3       22.4  
Other revenues
    10.7       8.0       10.2       11.8       14.0  
Net realized investment gains (losses)
    (0.1 )           (0.1 )     (0.1 )     0.1  
                                         
Total revenues
    317.2       315.5       415.4       469.3       537.1  
Benefits and Expenses:
                                       
Policyholder benefits and claims
    157.7       186.9       230.8       296.0       320.5  
Other underwriting and operating expenses
    82.8       77.9       105.7       115.3       133.1  
Amortization of deferred policy acquisition costs
    6.4       8.4       10.9       10.5       11.9  
Intangible asset amortization
    0.2                         0.8  
                                         
Total benefits and expenses
    247.1       273.2       347.4       421.8       466.3  
                                         
Segment pre-tax income
  $ 70.1     $ 42.3     $ 68.0     $ 47.5     $ 70.8
 
                                         


47


Table of Contents

                                         
                Year Ended December 31,  
    Nine Months
                Combined
 
    Ended September 30,                 2004
 
    2007     2006     2006     2005     (non-GAAP)  
    (Unaudited)                    
    (In millions)  
 
Non-GAAP Financial Measures:
                                       
Segment pre-tax operating income
  $ 70.2     $ 42.3     $ 68.1     $ 47.6     $ 70.7  
                                         
Reconciliation to segment pre-tax income:
                                       
Segment pre-tax income
  $ 70.1     $ 42.3     $ 68.0     $ 47.5     $ 70.8  
Less: Net realized investment gains (losses)
    (0.1 )           (0.1 )     (0.1 )     0.1  
Add:
                                       
Net realized and unrealized investment gains on FIA options
                             
Net realized and unrealized investment gains on equity securities
                             
                                         
Segment pre-tax operating income
  $ 70.2     $ 42.3     $ 68.1     $ 47.6     $ 70.7  
                                         
 
The following table sets forth unaudited selected historical operating metrics relating to our Group segment for the nine months ended September 30, 2007 and 2006 and for the years ended December 31, 2006, 2005 and Combined 2004 (non-GAAP):
                                         
                Year Ended December 31,  
    Nine Months Ended
                Combined
 
    September 30,                 2004
 
    2007     2006     2006     2005     (non-GAAP)  
    (In millions)  
 
Group loss ratio(1)
    53.8 %     63.6 %     59.6 %     67.5 %     64.0 %
Expense ratio(2)
    27.8 %     27.0 %     27.7 %     26.4 %     24.0 %
                                         
Combined ratio(3)
    81.6 %     90.6 %     87.3 %     93.9 %     88.0 %
                                         
Medical stop-loss — loss ratio(4)
    54.6 %     66.9 %     62.4 %     69.4 %     62.3 %
Total sales(5)
  $ 75.1     $ 60.4     $ 69.1     $ 81.9     $ 84.1  
 
 
(1) Group loss ratio represents policyholder benefits and claims divided by premiums earned.
 
(2) Expense ratio is equal to other underwriting and operating expenses of our insurance operations and amortization of DAC divided by premiums earned.
 
(3) Combined ratio is equal to the sum of the loss ratio and the expense ratio.
 
(4) Medical stop-loss — loss ratio represents medical stop-loss policyholder benefits and claims divided by medical stop-loss premiums earned.
 
(5) Total sales represents annualized first-year premiums for group life and health policies and represents earned premiums for our limited medical benefit policies.
 
Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006
 
Group summary of results.  Our Group segment’s pre-tax income increased $27.8 million, or 65.7%, to $70.1 million from $42.3 million. Segment pre-tax operating income increased $27.9 million, or 66.0%, to $70.2 million from $42.3 million. This increase was primarily due to lower paid claims, which was reflected in the reduction of our medical stop-loss loss ratio to 54.6% from 66.9%. Lower paid claims were driven by a decrease in the number or frequency of medical stop-loss paid claims which decreased by approximately 22% for the nine months ended September 30, 2007 as compared to the same period in 2006.
 
Premiums.  Premiums decreased $0.9 million, or 0.3%, to $293.1 million from $294.0 million. Premiums decreased $1.8 million due to decreased sales of our limited medical benefits product and $1.1 million due to

48


Table of Contents

policy lapses of retired products. This decrease was partially offset by a $1.4 million increase in stop-loss premiums as a result of increased sales.
 
Other revenues.  Other revenues increased $2.7 million, or 33.8%, to $10.7 million from $8.0 million. Our newly acquired subsidiary, MRM, generated revenues of $4.0 million, partially offset by a $1.3 million decrease in revenues from our third party administrator as a result of lower production.
 
Policyholder benefits and claims.  Policyholder benefits and claims decreased $29.2 million, or 15.6%, to $157.7 million from $186.9 million. Paid claims decreased $37.1 million, partially offset by a $3.0 increase in reserves. In addition, reserves decreased $4.2 million in 2006 related to a block of assumed medical stop-loss policies in run-off. The decrease in paid claims is primarily related to strong underwriting results in 2007 as well as a decrease of approximately 22% in the number of paid medical stop-loss claims between the nine months ended September 30, 2007 as compared to the same period in 2006. The increase in reserves is the net impact of increases related to changes in distribution mix partially offset by updates to assumptions within the reserve models.
 
Other underwriting and operating expenses.  Other underwriting and operating expenses increased $4.9 million, or 6.3%, to $82.8 million from $77.9 million. This increase was primarily due to increases in direct expenses due to the acquisition of MRM, increases in sales incentive compensation and increases in allocated corporate expenses of $3.8 million and $1.5 million, respectively, and a $1.9 million reduction in DAC deferrals. This increase was partially offset by $2.9 million of decreased commissions, which was related to lower average commission costs on business written in 2007.
 
Amortization of deferred policy acquisition costs.  Amortization of deferred policy acquisition costs decreased $2.0 million, or 23.8%, to $6.4 million from $8.4 million. This decrease was related to a decrease in the underlying DAC asset, which decreased to $3.4 million from $4.6 million at September 30, 2006 due to a refinement in our methodology for measuring deferrable expense in 2007 which decreased DAC deferrals.
 
Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
 
Group summary of results.  Our Group segment pre-tax income increased $20.5 million, or 43.2%, to $68.0 million from $47.5 million. Segment pre-tax operating income increased $20.5 million, or 43.1%, to $68.1 million from $47.6 million. This increase was primarily due to lower paid claims, which was reflected in the reduction of our loss ratio to 59.6% from 67.5%.
 
Premiums.  Premiums decreased $51.0 million, or 11.6%, to $387.3 million from $438.3 million. Premiums decreased $32.6 million due to higher lapses in our medical stop-loss business and lower new sales due to disciplined pricing in an aggressive pricing environment and $15.2 million due to the termination of an assumed reinsurance relationship at the end of 2004. Group life premiums decreased $8.2 million because we entered into a reinsurance arrangement where we cede 50% of premium and risk. Over the long run we expect this reinsurance arrangement will enable us to become more competitive in group life insurance. Partially offsetting these decreases was a $5.0 million increase related to increased sales of our limited medical benefits product.
 
Policyholder benefits and claims.  Policyholder benefits and claims decreased $65.2 million, or 22.0%, to $230.8 million from $296.0 million. The decrease in total benefits and claims was primarily related to a decrease in the book of business, as indicated by the $51.0 million decrease in premiums described above. In addition, the 2006 loss ratio decreased 7.9% from 2005 due to a decrease in paid claims of $69.7 million. The lower total loss ratio was driven by the 2006 favorable paid claims experience and the corresponding impact on assumptions within the reserve models.
 
Other underwriting and operating expenses.  Other underwriting and operating expenses decreased $9.6 million, or 8.3%, to $105.7 million from $115.3 million in 2005. This decrease was due to a $7.0 million decrease in operating expenses, and a $5.0 million decrease in commission and premium tax expense, offset by decreased DAC deferrals, consistent with decreased premiums.
 
Year Ended December 31, 2005 Compared to Year Ended December 31, 2004 (Combined Non-GAAP)
 
Group summary of results.  Our Group segment pre-tax income decreased $23.3 million, or 32.9%, to $47.5 million from $70.8 million. Segment pre-tax operating income decreased $23.1 million, or 32.7%, to


49


Table of Contents

$47.6 million from $70.7 million. This decrease was primarily due to an increase in the loss ratio to 67.5% from 64.0%. During a period of aggressive industry pricing, we have maintained a disciplined underwriting and pricing strategy for targeted returns, which has resulted in a reduction in the size of our medical stop-loss premiums written and, correspondingly, policyholder benefits and claims.
 
Premiums.  Premiums decreased $62.3 million, or 12.4%, to $438.3 million from $500.6 million. Premiums decreased $26.4 million due to higher lapses in our medical stop-loss business and lower new sales. We relinquished $26.7 million in premiums due to our decision to terminate an assumed reinsurance relationship in the fourth quarter of 2004 because we were not confident in the direction of underwriting and pricing at the ceding company. We also relinquished $14.8 million in premiums due to our decision to not renew a significant group life policy on December 31, 2004 because the employees were concentrated in a small geographic location, potentially exposing us to a significant claim in the event of a catastrophic event.
 
Policyholder benefits and claims.  Policyholder benefits and claims decreased $24.5 million, or 7.6%, to $296.0 million from $320.5 million. The decrease in total claims was primarily related to a declining book of business, as indicated by the $62.3 million decrease in premiums described above. The total loss ratio increased from 64.0% to 67.5% due to higher paid claim experience of $3.7 million and the corresponding impact of assumptions within the reserve models. In addition, reserves were increased during 2004 mainly as a result of the integration to a single reserve methodology for acquired books of business and direct written medical-stop loss business.
 
Other underwriting and operating expenses.  Other underwriting and operating expenses decreased $17.8 million, or 13.4%, to $115.3 million from $133.1 million. In 2005, commission and premium tax expenses were lower consistent with lower premiums. In addition, the 2004 results include higher corporate expense allocations from Safeco Corporation and the allocation of expenses related to the Acquisition. The 2005 other underwriting and operating expenses reflected are not comparable to 2004 during which Safeco Corporation allocated us costs for the first seven months of 2004 and charged us for transition services for the remaining five months of 2004.
 
Amortization of deferred policy acquisition costs.  Amortization of deferred policy acquisition costs decreased $1.4 million, or 11.8%, to $10.5 million from $11.9 million. In connection with the Acquisition, our DAC asset was reset to zero on August 2, 2004. Our 2004 amortization included seven months of DAC amortization prior to the Acquisition.
 
Retirement Services
 
The following table sets forth the results of operations relating to our Retirement Services segment:
 
                                         
    Nine Months
    Year Ended December 31,  
    Ended
                Combined
 
    September 30,                 2004
 
    2007     2006     2006     2005     (non-GAAP)  
    (Unaudited)                    
    (In millions)  
Revenues:
                                       
Premiums
  $     $ 0.1     $ 0.1     $ 0.1     $ 0.2  
Net investment income
    185.0       204.3       269.8       292.8       349.2  
Other revenues
    18.4       16.4       22.8       23.2       27.2  
Net realized investment gains (losses)
    (6.4 )     (19.1 )     (17.0 )     (17.1 )     6.5  
                                         
Total revenues
    197.0       201.7       275.7       299.0       383.1  


50


Table of Contents

                                         
    Nine Months
    Year Ended December 31,  
    Ended
                Combined
 
    September 30,                 2004
 
    2007     2006     2006     2005     (non-GAAP)  
    (Unaudited)                    
    (In millions)  
Benefits and Expenses:
                                       
Policyholder benefits and claims
    (6.0 )     (14.5 )     (16.5 )     (25.7 )     (15.7 )
Interest credited
    126.1       138.4       186.2       211.5       264.6  
Other underwriting and operating expenses
    52.4       45.6       61.7       62.6       63.5  
Amortization of deferred policy acquisition costs
    5.1       0.6       1.1       0.1       16.5  
Intangible asset amortization
                            0.8  
                                         
Total benefits and expenses
    177.6       170.1       232.5       248.5       329.7  
                                         
                                         
Segment pre-tax income
  $ 19.4     $ 31.6     $ 43.2     $ 50.5     $ 53.4  
                                         
                                         
Non-GAAP Financial Measures:
                                       
Segment pre-tax operating income
  $ 26.6     $ 50.4     $ 62.4     $ 63.2     $ 46.3  
                                         
Reconciliation to segment pre-tax income:
                                       
Segment pre-tax income
  $ 19.4     $ 31.6     $ 43.2     $ 50.5     $ 53.4  
Less: Net realized investment gains (losses)
    (6.4 )     (19.1 )     (17.0 )     (17.1 )     6.5  
Add:
                                       
Net realized and unrealized investment gains (losses) on FIA options
    0.8       (0.3 )     2.2       (4.4 )     (0.6 )
Net realized and unrealized investment gains on equity securities
                             
                                         
Segment pre-tax operating income
  $ 26.6     $ 50.4     $ 62.4     $ 63.2     $ 46.3  
                                         
 
The following table sets forth unaudited selected historical operating metrics relating to our Retirement Services segment as of, or for the nine months ended September 30, 2007 and 2006 and for the years ended December 31, 2006, 2005 and Combined 2004 (non-GAAP):
 
                                         
                Year Ended December 31,  
    Nine Months Ended
                Combined
 
    September 30,                 2004
 
    2007     2006     2006     2005     (non-GAAP)  
    (In millions)  
 
Account values — Fixed annuities
  $ 4,520.1     $ 5,131.4     $ 4,922.5     $ 5,580.8     $ 6,416.4  
Account values — Variable annuities
    1,133.3       1,068.8       1,115.5       1,074.5       1,114.8  
PGAAP reserve balance
    12.2       20.5       18.4       35.3       62.3  
Interest spread on average account values(1)
    1.69 %     1.81 %     1.76 %     1.58 %     1.59 %
Total sales(2)
  $ 429.9     $ 432.7     $ 573.2     $ 390.4     $ 326.6  
 
 
(1) Interest spread is the difference between net investment yield earned and the credited interest rate to policyholders. The investment yield is the approximate yield on invested assets in the general account attributed to the segment. The credited interest rate is the approximate rate credited on policyholder fixed account values within the segment. Interest credited is subject to contractual terms, including minimum guarantees. Interest spread tends to move gradually over time to reflect market interest rate movements and may reflect actions by management to respond to competitive pressures and profit targets.
 
(2) Total sales represent deposits for new policies.

51


Table of Contents

Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006
 
Retirement Services summary of results.  Our Retirement Services segment pre-tax income decreased $12.2 million, or 38.6%, to $19.4 million from $31.6 million. Segment pre-tax operating income decreased $23.8 million, or 47.2%, to $26.6 million from $50.4 million. The decrease in segment pre-tax operating income is due to a decline in the account value of fixed annuities as withdrawals exceeded new deposits, a decrease in interest spread on average account value driven by lower amortization of the PGAAP reserve, increased operating expenses and increased DAC amortization. The interest spread on average account value includes the impact of PGAAP amortization. Interest spreads, without PGAAP amortization, have increased due to the addition of business with higher pricing spreads and improved yields on supporting assets.
 
Net investment income.  Net investment income decreased $19.3 million, or 9.4%, to $185.0 million from $204.3 million. Of this decrease, $26.7 million was the result of a decrease in the average invested assets to $4.8 billion from $5.5 billion. This decrease was partially offset by a positive rate variance of $7.4 million due to improved yields related to our investment portfolio rebalancing strategy, which increased to 5.14% from 4.94%.
 
Other revenues.  Other revenues increased $2.0 million, or 12.2%, to $18.4 million from $16.4 million. This increase consisted primarily of asset-based fee revenue received in our affiliated broker-dealer operation.
 
Net realized investment gains (losses).  Net realized investment losses decreased $12.7 million, or 66.5%, to $(6.4) million from $(19.1) million. For the nine months ended September 30, 2007, gross realized gains were $7.2 million and gross realized losses were $13.6 million, including impairments of $3.9 million. For the nine months ended September 30, 2006, gross realized gains were $3.9 million and gross realized losses were $23.0 million, including impairments of $11.4 million.
 
Policyholder benefits and claims.  Policyholder benefits and claims increased $8.5 million, or 58.6%, to $(6.0) million from $(14.5) million. This increase was primarily driven by differences in the amount of PGAAP reserve amortization. The PGAAP reserve is amortized as a reduction to policyholder benefits according to our expected pattern of profitability of the book of business of policies in force at the time of the Acquisition. This pattern resulted in higher PGAAP reserve amortization in the years immediately following the Acquisition.
 
Interest credited.  Interest credited decreased $12.3 million, or 8.9%, to $126.1 million from $138.4 million. This decrease was primarily due to a decrease in fixed account values as withdrawals exceeded deposits, partially offset by improved persistency of higher crediting rate products.
 
Other underwriting and operating expenses.  Other underwriting and operating expenses increased $6.8 million, or 14.9%, to $52.4 million from $45.6 million. This increase was primarily due to a $3.3 million increase in allocated corporate expenses, a $1.9 million increase in distribution expenses, a $0.7 million increase in commission expenses, and a $0.6 million reduction in DAC deferrals.
 
Amortization of deferred policy acquisition costs.  Amortization of deferred policy acquisition costs increased $4.5 million, to $5.1 million from $0.6 million. This increase was related to an increase in the underlying DAC asset, which increased to $73.1 million from $46.8 million at September 30, 2006. In connection with the Acquisition, our DAC asset was reset to zero on August 2, 2004 and has subsequently been growing as a result of sales of our insurance products. Our amortization expense is expected to increase as the underlying DAC asset increases.
 
Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
 
Retirement Services summary of results.  Our Retirement Services segment pre-tax income decreased $7.3 million, or 14.5%, to $43.2 million from $50.5 million due to decreases in our fixed account values of 11.8%, offset by an increase in our interest spread on average account values. Segment pre-tax operating income decreased $0.8 million, or 1.3%, to $62.4 million from $63.2 million.
 
Net investment income.  Net investment income decreased $23.0 million, or 7.9%, to $269.8 million from $292.8 million. Net investment income decreased $37.0 million primarily due to a decline in the average


52


Table of Contents

invested assets to $5.4 billion from $6.2 billion. This was partially offset by a positive rate variance of $14.0 million due to improved yields related to our investment portfolio rebalancing strategy, which increased to 4.97% from 4.71%.
 
Net realized investment (losses).  Net realized investment losses decreased $0.1 million, or 0.6%, to $(17.0) million from $(17.1) million. In 2006, gross realized gains were $8.7 million, including $2.2 million related to FIA options and gross realized losses were $25.7 million, including impairments of $11.8 million. In 2005, gross realized gains were $25.5 million and gross realized losses were $42.6 million, including impairments of $6.6 million and $4.4 million related to the FIA options. In 2006, realized gains on FIA options increased $6.6 million, which offset the increase in interest credited on FIA contracts.
 
Policyholder benefits and claims.  Policyholder benefits and claims increased $9.2 million, or 35.8%, to $(16.5) million from $(25.7) million. This was driven by a reduction in the benefit received from the differences in the amount of PGAAP reserve amortization.
 
Interest credited.  Interest credited decreased $25.3 million, or 12.0%, to $186.2 million from $211.5 million. This decrease was primarily due to a decrease in contractholder account values, but offset by a $5.5 million increase in FIA interest credited.
 
Amortization of deferred policy acquisition costs.  Amortization of deferred policy acquisition costs increased $1.0 million to $1.1 million from $0.1 million. This was related to an increase in the underlying DAC asset, which increased to $54.5 million from $25.5 million at December 31, 2005. In connection with the Acquisition, our DAC asset was reset to zero on August 2, 2004 and has subsequently been growing as a result of sales of our insurance products. Our amortization expense is expected to increase as the underlying DAC asset increases.
 
Year Ended December 31, 2005 Compared to Year Ended December 31, 2004 (Combined Non-GAAP)
 
Retirement Services summary of results.  Our Retirement Services segment pre-tax income decreased $2.9 million, or 5.4%, to $50.5 million from $53.4 million. Segment pre-tax operating income increased $16.9 million, or 36.5% to $63.2 million from $46.3 million. This was primarily due to reduced DAC amortization.
 
Net investment income.  Net investment income decreased $56.4 million, or 16.2%, to $292.8 million from $349.2 million. This decrease was related to the Acquisition purchase accounting, which resulted in an overall reduction in investment yields for periods subsequent to the purchase date. We subsequently implemented an investment portfolio rebalancing strategy, which improved investment yields.
 
Other revenues.  Other revenues decreased $4.0 million, or 14.7%, to $23.2 million from $27.2 million. This decrease was primarily due to a $3.3 million decrease of mutual fund fees related to variable annuities resulting from the sale of mutual funds operation in 2004. Such fees were not received in 2005.
 
Net realized investment gains (losses).  Net realized investment gains decreased $23.6 million to $(17.1) million from $6.5 million. The 2005 gross realized gains were $25.5 million and gross realized losses were $42.6 million, including impairments of $6.6 million. The 2004 realized gains were $50.8 million and gross realized losses were $44.2 million, including impairments of $5.0 million. In 2004, we repositioned the asset portfolio to more effectively match the duration of our liabilities. This activity generated realized gains that were not repeated in 2005.
 
Policyholder benefits and claims.  Policyholder benefits and claims decreased $10.0 million, or 63.7%, to $(25.7) million from $(15.7) million. This was driven by an increase in the benefit received from the change in the PGAAP reserve. The 2004 PGAAP reserve reduction represented a five month period compared to twelve months in 2005.
 
Interest credited.  Interest credited decreased $53.1 million, or 20.1%, to $211.5 million from $264.6 million. This decrease was primarily due to a decrease in contractholder account values.


53


Table of Contents

Other underwriting and operating expenses.  Other underwriting and operating expenses decreased $0.9 million, or 1.4%, to $62.6 million from $63.5 million. The 2005 other underwriting and operating expenses reflected are not comparable to 2004 during which Safeco Corporation allocated us costs for the first seven months of 2004 and charged us for transition services for the remaining five months of 2004.
 
Amortization of deferred policy acquisition costs.  Amortization of deferred policy acquisition costs decreased $16.4 million, or 99.4%, to $0.1 million from $16.5 million. In connection with the Acquisition, our DAC asset was reset to zero on August 2, 2004. Our 2004 amortization included seven months of DAC amortization prior to the Acquisition.
 
Income Annuities
 
The following table sets forth the results of operations relating to our Income Annuities segment:
 
                                         
                Year Ended December 31,  
    Nine Months
                Combined
 
    Ended September 30,                 2004
 
    2007     2006     2006     2005     (non-GAAP)  
    (Unaudited)                    
    (In millions)  
 
Revenues:
                                       
Net investment income
  $ 331.9     $ 326.1     $ 439.0     $ 441.4     $ 474.4  
Other revenues
    0.6       0.6       0.8       0.5       0.5  
Net realized investment gains
    27.1       14.8       16.8       17.4       9.5  
                                         
Total revenues
    359.6       341.5       456.6       459.3       484.4  
                                         
Benefits and Expenses:
                                       
Interest credited
    278.0       280.0       371.8       392.5       438.9  
Other underwriting and operating expenses
    17.1       15.8       21.6       19.4       16.8  
Amortization of deferred policy acquisition costs
    0.8       0.5       0.6       0.3        
                                         
Total benefits and expenses
    295.9       296.3       394.0       412.2       455.7  
                                         
Segment pre-tax income
  $ 63.7     $ 45.2     $ 62.6     $ 47.1     $ 28.7  
                                         
                                         
Non-GAAP Financial Measures:
                                       
Segment pre-tax operating income
  $ 42.0     $ 42.2     $ 64.7     $ 42.8     $ 20.5  
                                         
Reconciliation to segment pre-tax income:
                                       
Segment pre-tax income
  $ 63.7     $ 45.2     $ 62.6     $ 47.1     $ 28.7  
Less: Net realized investment gains
    27.1       14.8       16.8       17.4       9.5  
Add:
                                       
Net realized and unrealized investment gains on FIA options
                             
Net realized and unrealized investment gains on equity securities
    5.4       11.8       18.9       13.1       1.3  
                                         
Segment pre-tax operating income
  $ 42.0     $ 42.2     $ 64.7     $ 42.8     $ 20.5  
                                         


54


Table of Contents

The following table sets forth unaudited selected historical operating metrics relating to our Income Annuities segment as of, or for the nine months ended September 30, 2007 and 2006 and for the years ended December 31, 2006, 2005, and Combined 2004 (non-GAAP):
 
                                         
                Year Ended December 31,  
    Nine Months Ended
                Combined
 
    September 30,                 2004
 
    2007     2006     2006     2005     (non-GAAP)  
    (In millions)  
 
Reserves(1)
  $ 6,927.1     $ 7,045.3     $ 7,012.6     $ 7,176.0     $ 7,285.0  
Interest spread on reserves(2)
    0.69 %     0.68 %     0.76 %     0.67 %     0.16 %
Mortality gains(3)
  $ 1.0     $ 3.9     $ 6.3     $ 0.8     $ 3.8  
Total sales(4)
    101.2       68.8       96.6       93.1       76.0  
 
 
(1) Reserves represent the present value of future income annuity benefits and assumed expenses, discounted by the assumed interest rate. This metric represents the amount of our in-force book of business.
 
(2) Interest spread is the difference between net investment yield earned and the credited interest rate on policyholder reserves. The investment yield is the approximate yield on invested assets in the general account attributed to the segment. This yield includes both realized and unrealized gains on our equity investments that back the policyholder reserves. The credited interest rate is the approximate rate credited on policyholder reserves within the segment and excludes the gains and losses from funding services and mortality.
 
(3) Mortality gains (losses) represents the difference between actual and expected reserves released on death of a life contingent annuity.
 
(4) Sales represent deposits for new policies.
 
Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006
 
Income Annuities summary of results.  Our Income Annuities segment pre-tax income increased $18.5 million, or 40.9%, to $63.7 million from $45.2 million. Segment pre-tax operating income decreased $0.2 million, or 0.5%, to $42.0 million from $42.2 million. Segment pre-tax operating income decreased due to a $6.9 million reduction in net realized and unrealized gains on equity securities. The Income Annuities reserve covers payout commitments that extend well beyond 40 years. We invest in equities and equity-like investments to fund the longest part of this liability. The Income Annuities’ equity portfolio underperformed the S&P 500 by 0.6% for the nine months ended September 30, 2007. This decrease was offset by a $5.8 million increase in net investment income driven by improved net investment yields primarily from the reinvestment of funds in higher yielding securities, strong performance on limited partnerships, and a reduction in investment advisory rates.
 
Net investment income.  Net investment income increased $5.8 million, or 1.8%, to $331.9 million from $326.1 million. Of this increase, $10.4 million related to positive rate variances from improved yields which increased to 6.18% from 5.98%. This was partially offset by a $4.6 million decrease, which was the result of a decrease in the average invested assets to $7.2 billion from $7.3 billion. The increase in yield was primarily due to the reinvestment of funds in higher yielding securities, strong performance on limited partnerships, and a reduction in investment advisory rates.
 
Net realized investment gains (losses).  Net investment gains increased $12.3 million, or 83.1%, to $27.1 million from $14.8 million. For the nine months ended September 30, 2007, gross realized gains were $35.1 million and gross realized losses were $8.0 million, including impairments of $1.6 million. For the nine months ended September 30, 2006, gross realized gains were $27.1 million and gross realized losses were $12.3 million, including impairments of $8.8 million. We had higher realized gains in 2007 primarily due to gains on certain significant tender offers related to certain fixed maturities in our investment portfolio.
 
Interest credited.  Interest credited decreased $2.0 million, or 0.7%, to $278.0 million from $280.0 million. Of this decrease, $4.1 million was due to a decrease in reserves as a result of benefit payments


55


Table of Contents

exceeding new deposits and $1.9 million related to funding services activity. This was partially offset by a decrease in mortality gains of $2.9 million.
 
Other underwriting and operating expenses.  Other underwriting and operating expenses increased $1.3 million, or 8.2%, to $17.1 million from $15.8 million. This increase was mainly due to a $1.1 million increase in allocated corporate expenses.
 
Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
 
Income Annuities summary of results.  Our Income Annuities segment pre-tax income increased $15.5 million, or 32.9%, to $62.6 million from $47.1 million. This was due to an increase in mortality gains, increased interest spread on reserves from improved yields and funding services activity. Segment pre-tax operating income increased $21.9 million, or 51.2%, to $64.7 million from $42.8 million. This was due to the increase in segment pre-tax income and $5.8 million increase in net realized and unrealized investment gains on equity securities. Our total equity portfolio, mainly in Income Annuities, outperformed the S&P 500 by 10.3% and 26.0% for the years ended December 31, 2006 and 2005, respectively.
 
Net investment income.  Net investment income decreased $2.4 million, or 0.5%, to $439.0 million from $441.4 million. Of this decrease, $6.3 million was related to a decrease in the average invested assets, which decreased to $7.2 billion at December 31, 2006 from $7.4 billion at December 31, 2005. This decrease was offset by a $3.9 million increase related to improved yields, which increased to 6.06% from 6.00%.
 
Net realized investment gains.  Net realized investment gains decreased $0.6 million, or 3.4%, to $16.8 million from $17.4 million. In 2006, gross realized gains were $32.9 million and gross realized losses were $16.0 million, including impairments of $9.4 million. In 2005, gross realized gains were $27.0 million and gross realized losses were $9.6 million, including impairments of $0.3 million.
 
Interest credited.  Interest credited decreased $20.7 million, or 5.3%, to $371.8 million from $392.5 million. This decrease was due to a decrease in reserves as a result of benefit payments exceeding new deposits, favorable mortality gains and funding services activity.
 
Other underwriting and operating expenses.  Other underwriting and operating expenses increased $2.2 million, or 11.3%, to $21.6 million from $19.4 million. The increase of $2.2 million was primarily due to the launching of our funding services operations in mid 2005.
 
Amortization of deferred policy acquisition costs.  Amortization of deferred policy acquisition costs increased $0.3 million, or 100.0%, to $0.6 million from $0.3 million. This increase in amortization was related to an increase in the underlying DAC asset, which increased to $6.8 million from $4.3 million. Our DAC asset has been growing since the Acquisition as a result of sales of our insurance products. Our amortization expense was expected to increase as the underlying DAC asset increases.
 
Year Ended December 31, 2005 Compared to Year Ended December 31, 2004 (Combined Non-GAAP)
 
Income Annuities summary of results.  Our Income Annuities segment pre-tax income increased $18.4 million, or 64.1%, to $47.1 million from $28.7 million and segment pre-tax operating income increased $22.3 million, to $42.8 million from $20.5 million. The segment pre-tax operating income increased due to an increase in our interest spread on reserves and an $11.8 million increase in net realized and unrealized investment gains on equity securities. We gradually built up our equity portfolio over the course of 2005.
 
Net investment income.  Net investment income decreased $33.0 million, or 7.0%, to $441.4 million from $474.4 million. This decrease was primarily related to the Acquisition purchase accounting, which resulted in an overall reduction in investment yields for periods subsequent to the Acquisition.
 
Net realized investment gains.  Net realized investment gains increased $7.9 million, or 83.2%, to $17.4 million from $9.5 million. In 2005, gross realized gains were $27.0 million and gross realized losses were $9.6 million, including impairments of $0.3 million. In 2004, gross realized gains were $23.3 million and gross realized losses were $13.8 million, including impairments of $2.6 million.


56


Table of Contents

Interest credited.  Interest credited decreased $46.4 million, or 10.6%, to $392.5 million from $438.9 million. The credited rate inherent in the reserves was reduced as a result of purchase accounting.
 
Other underwriting and operating expenses.  Other underwriting and operating expenses increased $2.6 million, or 15.5%, to $19.4 million from $16.8 million. This increase was primarily due to increased professional services fees and costs of launching our funding services operations. The 2005 other underwriting and operating expenses reflected are not comparable to 2004 during which Safeco Corporation allocated us costs for the first seven months of 2004 and charged us for transition services for the remaining five months of 2004.
 
Individual
 
The following table sets forth the results of operations relating to our Individual segment:
 
                                         
                Year Ended December 31,  
    Nine Months
                Combined
 
    Ended September 30,                 2004
 
    2007     2006     2006     2005     (non-GAAP)  
    (Unaudited)                    
    (In millions)  
 
Revenues:
                                       
Premiums
  $ 104.8     $ 103.9     $ 138.3     $ 137.1     $ 120.3  
Net investment income
    181.4       172.2       232.8       222.6       228.3  
Other revenues
    10.9       9.9       12.9       14.0       21.0  
Net realized investment gains (losses)
    (1.6 )     (3.9 )     (3.8 )     1.3       8.0  
                                         
Total revenues
    295.5       282.1       380.2       375.0       377.6  
Benefits and Expenses:
                                       
Policyholder benefits and claims
    44.8       37.4       50.0       57.1       46.3  
Interest credited
    161.4       153.7       208.2       206.9       213.1  
Other underwriting and operating expenses
    43.1       42.5       57.4       61.4       64.6  
Amortization of deferred policy acquisition costs
    1.9       1.5       2.0       1.0       7.4  
Intangible asset amortization
                            1.7  
                                         
Total benefits and expenses
    251.2       235.1       317.6       326.4       333.1  
                                         
Segment pre-tax income
  $ 44.3     $ 47.0     $ 62.6     $ 48.6     $ 44.5  
                                         
                                         
Non-GAAP Financial Measures:
                                       
Segment pre-tax operating income
  $ 45.9     $ 50.9     $ 66.4     $ 47.3     $ 36.5  
                                         
Reconciliation to segment pre-tax income:
                                       
Segment pre-tax income
  $ 44.3     $ 47.0     $ 62.6     $ 48.6     $ 44.5  
Less: Net realized investment gains (losses)
    (1.6 )     (3.9 )     (3.8 )     1.3       8.0  
Add:
                                       
Net realized and unrealized investment gains on FIA options
                             
Net realized and unrealized investment gains on equity securities
                             
                                         
Segment pre-tax operating income
  $ 45.9     $ 50.9     $ 66.4     $ 47.3     $ 36.5  
                                         


57


Table of Contents

The following table sets forth unaudited selected historical operating metrics relating to our Individual segment as of, or for the nine months ended September 30, 2007 and 2006 and for the years ended December 31, 2006, 2005 and Combined 2004 (non-GAAP):
 
                                         
                Year Ended December 31,  
    Nine Months Ended
                Combined
 
    September 30,                 2004
 
    2007     2006     2006     2005     (non-GAAP)  
    (In millions)  
 
Insurance in force(1)
  $ 52,214.1     $ 52,310.5     $ 52,295.3     $ 51,796.9     $ 50,499.3  
Mortality ratio(2)
    87.1 %     79.8 %     74.7 %     79.4 %     79.6 %
BOLI account value(3)
  $ 3,488.6     $ 3,314.3     $ 3,346.8     $ 3,224.6     $ 3,115.2  
UL account value(3)
    572.5       562.9       565.1       561.1       561.2  
PGAAP reserve balance
    65.3       81.0       77.1       94.5       115.0  
BOLI ROA(4)
    1.25 %     1.17 %     1.18 %     0.97 %     1.04 %
UL interest spread(5)
    1.17 %     1.34 %     1.31 %     0.66 %     1.51 %
Total sales(6)
  $ 10.6     $ 6.9     $ 9.3     $ 11.8     $ 14.8  
 
 
(1) Insurance in force represents dollar face amounts of policies.
 
(2) Mortality ratio represents actual mortality experience as a percentage of benchmark. Benchmark is based on the 90-95 Society of Actuaries, or SOA, mortality table applied to current in force business. This ratio excludes BOLI mortality experience.
 
(3) Account Value — BOLI Accounts and UL represents Symetra’s liability to the policyholder.
 
(4) The BOLI ROA is a measure of the gross margin on our BOLI book of business. This metric is calculated as the difference between our BOLI revenue earnings rate and our BOLI policy benefits rate. The revenue earnings rate is calculated as total revenues net of allocated surplus investment income divided by average invested assets. The policy benefits rate is calculated as total policy benefits divided by average account value. The policy benefits used in this metric do not include expenses.
 
(5) Interest spread is the difference between the investment yield earned and the credited interest rate to policyholders. The investment yield is the approximate yield on invested assets in the general account attributed to the UL policies. The credited interest rate is the approximate rate credited on UL policyholder fixed account values. Interest credited to UL policyholders’ account values is subject to contractual terms, including minimum guarantees. Interest credited tends to move gradually over time to reflect market interest rate movements and may reflect actions by management to respond to competitive pressures and profit targets.
 
(6) Total sales represent annualized first year premiums and deposits for new policies.
 
Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006
 
Individual Summary of Results.  Our Individual segment pre-tax income decreased $2.7 million, or 5.7%, to $44.3 million from $47.0 million. Segment pre-tax operating income decreased $5.0 million, or 9.8%, to $45.9 million from $50.9 million. This decrease was primarily due to an increase in mortality in 2007 compared to 2006 and reserve increases, partially offset by increased BOLI ROA on growing BOLI and higher UL account values and improved investment yields.
 
Premiums.  Premiums increased $0.9 million, or 0.9%, to $104.8 million from $103.9 million. This is primarily due to a $1.8 million increase in BOLI COI charges, partially offset by a $1.6 million decrease in term life premiums.
 
Net investment income.  Net investment income increased $9.2 million, or 5.3%, to $181.4 million from $172.2 million. Of this increase, $4.5 million was a result of an increase in the average invested assets to $4.5 billion from $4.4 billion. This increase was enhanced by a positive rate variance of $4.7 million due to improved yields which increased to 5.37% from 5.23%. The increase in yield was primarily due to the


58


Table of Contents

reinvestment of funds in higher yielding securities, an increase in the yield on short-term investments and a reduction in investment advisory rates.
 
Net realized investment gains (losses).  Net realized investment losses decreased $2.3 million to $(1.6) million from $(3.9) million. For the nine months ended September 30, 2007, gross realized gains were $1.8 million and gross realized losses were $3.4 million, including impairments of $1.8 million. For the nine months ended September 30, 2006, gross realized gains were $1.6 million and gross realized losses were $5.5 million, including impairments of $2.9 million.
 
Policyholder benefits and claims.  Policyholder benefits and claims increased $7.4 million, or 19.8%, to $44.8 million from $37.4 million. Claims increased $2.6 million mainly related to UL and BOLI general account claims. Reserves increased $4.8 million due to changes in reserve assumptions and a refinement of our reserve methodology implemented in connection with an actuarial reserving software conversion and a reduction in the benefit received from PGAAP reserve amortization, partially offset by a decrease of our term life reserves due to a reduction in the block size.
 
Interest credited.  Interest credited increased $7.7 million, or 5.0%, to $161.4 million from $153.7 million. This increase was primarily due to an increase in our BOLI account values and new BOLI sales, offset by decreased interest related to our BOLI separate account policies, for which policyholder interest credited is adjusted based on claims experience.
 
Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
 
Individual summary of results.  Our Individual segment pre-tax income increased $14.0 million, or 28.8%, to $62.6 million from $48.6 million. Segment pre-tax operating income increased $19.1 million, or 40.4%, to $66.4 million from $47.3 million. This increase was primarily the result of a higher return on our average BOLI account values, as evidenced by the increase in the BOLI ROA, and favorable mortality. In addition, our UL/VUL account values and interest spreads increased.
 
Net investment income.  Net investment income increased $10.2 million, or 4.6%, to $232.8 million from $222.6 million in 2005. There was a $5.3 million increase related to improved yields which increased to 5.30% from 5.18%. In addition, there was a $4.8 million increase related to a higher average invested assets, which increased to $4.4 billion at December 31, 2006 from $4.3 billion at December 31, 2005.
 
Net realized investment gains (losses).  Net realized investment gains (losses) decreased $5.1 million to $(3.8) million from $1.3 million. In 2006, gross realized gains were $2.1 million and gross realized losses were $5.9 million, including impairments of $2.9 million. In 2005, gross realized gains were $8.7 million and gross realized losses were $7.4 million, including impairments of $0.7 million.
 
Policyholder benefits and claims.  Policyholder benefits and claims decreased $7.1 million, or 12.4%, to $50.0 million from $57.1 million. This decrease was due to favorable mortality experience in 2006 and non-recurring reserve adjustments in 2005 offset by lower PGAAP reserve amortization in 2006. The PGAAP reserve is amortized as a reduction to policyholder benefits according to our expected pattern of profitability of the policies in force at the date of the Acquisition. This pattern resulted in increased PGAAP reserve amortization in the years immediately following the Acquisition. In 2005, we experienced a reserve increase for a persistency bonus interest feature in one of our universal life contracts due to a refinement in our calculation methodology. In addition, we increased reserves on an old book of term policies to apply consistent reserve factors for all term policies.
 
Other underwriting and operating expenses.  Other underwriting and operating expenses decreased $4.0 million, or 6.5%, to $57.4 million from $61.4 million. This decrease was due to a decrease in sales-related expenses including commissions and premium taxes.
 
Year Ended December 31, 2005 Compared to Year Ended December 31, 2004 (Combined Non-GAAP)
 
Individual summary of results.  Our Individual segment pre-tax income increased $4.1 million, or 9.2%, to $48.6 million from $44.5 million. Segment pre-tax operating income increased $10.8 million, or 29.6%, to


59


Table of Contents

$47.3 million from $36.5 million. This increase was primarily due to a $6.4 million reduction in DAC amortization and a $1.7 million reduction in intangible asset amortization. The increase was offset by a decrease in UL spreads.
 
Premiums.  Premiums increased $16.8 million, or 14.0%, to $137.1 million from $120.3 million. Individual premiums increased primarily due to a $14.1 million adjustment in 2004 related to ceded term reinsurance, which resulted in a decrease in 2004 premiums and a $2.3 million increase in BOLI COI charges.
 
Net investment income.  Net investment income decreased $5.7 million, or 2.5%, to $222.6 million from $228.3 million. This decrease was related to the Acquisition purchase accounting, which resulted in an overall reduction in investment yields for periods subsequent to the purchase date.
 
Other revenues.  Other revenues decreased $7.0 million, or 33.3%, to $14.0 million from $21.0 million. This decrease was primarily due to a $5.9 million adjustment in 2004 related to ceded term reinsurance expense allowances, which resulted in an increase in 2004 other revenues.
 
Policyholder benefits and claims.  Policyholder benefits and claims increased $10.8 million, or 23.3%, to $57.1 million from $46.3 million. This increase was primarily driven by an increase of $8.5 million in BOLI claims.
 
Interest credited.  Interest credited decreased $6.2 million, or 2.9%, to $206.9 million from $213.1 million. This decrease was related to our BOLI separate account policies, for which policyholder interest credited is adjusted based on claims experience.
 
Other underwriting and operating expenses.  Other underwriting and operating expenses decreased $3.2 million, or 5.0%, to $61.4 million from $64.6 million. This decrease was due to a decrease in sales-related expenses including commissions and premium taxes. The 2005 other underwriting and operating expenses reflected are not comparable to 2004 during which Safeco Corporation allocated us costs for the first seven months of 2004 and charged us for transition services for the remaining five months of 2004.
 
Amortization of deferred policy acquisition costs.  Amortization of deferred policy acquisition costs decreased $6.4 million, or 86.5%, to $1.0 million from $7.4 million. In connection with the Acquisition, our DAC asset was reset to zero on August 2, 2004. Our 2004 amortization included seven months of DAC amortization prior to the Acquisition.


60


Table of Contents

Other
 
The following table sets forth the results of operations relating to our Other segment:
 
                                         
    Nine Months
    Year Ended December 31,  
    Ended
                Combined
 
    September 30,                 2004
 
    2007     2006     2006     2005     (non-GAAP)  
    (Unaudited)                    
    (In millions)  
 
Revenues:
                                       
Net investment income
  $ 20.5     $ 17.9     $ 25.3     $ 17.9     $ 30.5  
Other revenues
    9.8       7.8       9.4       9.1       8.3  
Net realized investment gains
    4.8       3.3       5.8       12.6       17.8  
                                         
Total revenues
    35.1       29.0       40.5       39.6       56.6  
Benefits and Expenses:
                                       
Interest credited
    (0.6 )     (0.2 )     (0.3 )            
Other underwriting and operating expenses
    14.5       10.1       14.1       14.5       27.6  
Fair value of warrants issued to investors
                            101.5  
Interest expense
    14.1       14.5       19.1       12.4       3.5  
Intangible asset amortization
                            1.6  
                                         
Total benefits and expenses
    28.0       24.4       32.9       26.9       134.2  
                                         
Segment pre-tax income (loss)
  $ 7.1     $ 4.6     $ 7.6     $ 12.7     $ (77.6 )
                                         
                                         
Non-GAAP Financial Measures:
                                       
Segment pre-tax operating income (loss)
  $ 2.3     $ 1.3     $ 1.8     $ 0.1     $ (95.4 )
                                         
Reconciliation to segment pre-tax income (loss):
                                       
Segment pre-tax income (loss)
  $ 7.1     $ 4.6     $ 7.6     $ 12.7     $ (77.6 )
Less: Net realized investment gains
    4.8       3.3       5.8       12.6       17.8  
Add:
                                       
Net realized and unrealized investment gains on FIA options
                             
Net realized and unrealized investment gains on equity securities
                             
                                         
Segment pre-tax operating income (loss)
  $ 2.3     $ 1.3     $ 1.8     $ 0.1     $ (95.4 )
                                         
 
Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006
 
Other segment summary of results.  Our Other segment pre-tax income increased $2.5 million, to $7.1 million from $4.6 million. Segment pre-tax operating income increased $1.0 million, to $2.3 million from $1.3 million. This increase was primarily due to an increase in unallocated investment income and an increase in revenues from our broker-dealer operations, partially offset by increased operating expenses due to our initial public offering process and increased amortization of information technology assets.
 
Net investment income.  Net investment income increased $2.6 million, or 14.5%, to $20.5 million from $17.9 million. This increase is a result of an increase in the average invested assets to $0.6 billion from $0.5 billion.
 
Other revenues.  Other revenues increased $2.0 million, or 25.6%, to $9.8 million from $7.8 million, due to increased revenue from our broker-dealer operations.
 
Net realized investment gains.  Net realized investment gains increased by $1.5 million, or 45.5%, to $4.8 million from $3.3 million. For the nine months ended September 30, 2007, gross realized gains were $8.9 million and gross realized losses were $4.1 million, including impairments of $0.9 million. For the nine


61


Table of Contents

months ended September 30, 2006, gross realized gains were $7.6 million and gross realized losse