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03 Oct 2007
Moody's rates Symetra Financial's junior debt Baa3, affirms ratings
New York, October 03, 2007 -- Moody's Investors Service assigned a Baa3 junior subordinated debt rating
to Symetra Financial's anticipated $150 million offering
of Capital Efficient Notes (CENts) due in 2067. It also affirmed
the A2 long-term insurance financial strength (IFS) rating and
the Prime-1 short-term IFS rating of Symetra Life Insurance
Company (Symetra Life) and the Baa2 senior debt rating of its holding
company, Symetra Financial Corporation. The rating of the
hybrid is subject to review and approval of final documentation.
The rating outlook for Symetra Financial and Symetra Life is stable.
Commenting on the rating affirmations and stable outlook, the rating
agency said that despite the issuance of the CENts, Moody's
expects Symetra Life's IFS rating to remain consistent with A2-rated
peers, with pro forma financial leverage (i.e.,
debt to capital) in the 20%-30% range, and
earnings and cash coverage between 9x-10x and 5x-6x,
respectively. However, Moody's said that it viewed
the Symetra Finacial group's financial flexibility as weaker,
because these proforma earnings and cash coverage ratios were materially
lower than before the issuance.
According to the rating agency, Symetra Life's A2 IFS rating
is based on its profitable block of structured settlement annuities and
its relatively stable retirement annuity business, the latter of
which is a source of recurring premiums. The rating is also supported
by Symetra Life's healthy investment profile, strong capitalization,
and solid cash and earning interest coverage metrics. In addition,
if and when Symetra Financial becomes a public company, it will
have access to the capital market to support new growth, should
the need arise.
Moody's noted that offsetting these strengths are the volatility
of Symetra Life's group health insurance business, the credit-sensitive
nature of its in-force bank-owned life insurance (BOLI)
contracts, and the challenges of re-igniting sales,
revenue, and balance sheet growth, while managing aging books
of interest-sensitive business (i.e., structured
settlement annuities, fixed annuities, BOLI). In addition,
if Symetra Financial does become a public company, it will face
greater short-term pressures from its new public shareholders for
higher quarterly returns, which may ultimately translate into higher
financial leverage and/or increased business risk.
Commenting on the Baa3 junior subordinated debt rating, Moody's
said that it is based on the junior subordinated ranking of these instruments,
the structural priority of claim of holders of the company's Baa2-rated
senior unsecured debt, and on the fundamental credit profile of
the Symetra Financial group.
Because of certain equity-like features contained in these junior
subordinated notes, Moody's has accorded them "Basket
D" treatment at the time of issuance on Moody's Hybrid Debt-Equity
Continuum, and will consider them initially to be 75% equity
and 25% debt for financial leverage calculations (please refer
to Moody's Rating Methodology "Refinements to Moody's Tool Kit:
Evolutionary, not Revolutionary!" of February 2005).
This basket designation will shift to Basket C (50% equity credit)
after 10 years, remain in Basket C for the next 20 years,
and then shift to Basket B (25% equity credit). The CENts
will be in Basket A (100% debt treatment) for the last 20 years
until maturity. The basket allocation is based on the following
rankings for the three dimensions of equity, subject to review and
approval of final documentation:
No Maturity -- Strong
The CENts will have a final maturity of 60 years, a 30-year
scheduled maturity, and are redeemable at the option of the issuer
after 10 years. All calls are subject to a legally binding Replacement
Capital Covenant (RCC). The RCC obligates Symetra Financial not
to redeem or repurchase the CENts on or before 2047 unless it refinances
them with proceeds from the issuance of the same or more equity-like
securities, which have been clearly specified. The RCC initially
runs in favor of a specified series of long-term indebtedness that
ranks senior to the CENts. Symetra Financial will provide a legal
opinion supporting the enforceability of the RCC.
No On-Going Payments - Moderate
The CENts will have an optional deferral feature for 10 years without
causing an event of default or acceleration. As an ongoing concern,
at the earlier of five years of optional deferral or when cash payments
are resumed, Symetra Financial must settle distributions through
the issuance of common stock or warrants, up to a cap of 2%
of shares outstanding, or of mandatory convertible preferred stock
or qualifying preferred stock up to a lifetime cap of 25% of the
principal amount of the CENTs. Qualifying preferred stock is defined
as non-cumulative perpetual preferred stock that contains intent-based
replacement disclosure and mandatory triggers or is subject to an RCC.
While in deferral period on the CENts, Symetra Financial may not
redeem, repurchase or make payments on pari passu or junior securities.
Because Symetra Financial is a private company, it does not currently
have the ability to issue mandatorily convertible preferred stock,
common equity, and warrants. The only Alternative Payment
Mechanism (APM)-eligible securities available today are qualifying
preferred shares. However, Symetra has taken steps toward
listing of its common stock. On June 2007, Symetra Financial
announced that it had filed form S-1 with the SEC. When
the filing is effective, it will enable its current owners to sell
a portion of their shares in an initial public offering (IPO), thus
providing Moody's with comfort that these types of settlement securities
will become available in the near future. In the event Symetra
Financial does not complete its IPO and issuance of APM securities is
required, company's current shareholders are possible purchasers
of the APM securities. In addition, the terms of the CENts
clearly specify that APM securities will be issued irrespective of pricing,
coupon, dividend rate or dilution considerations.
In bankruptcy, all deferred interest payments (including compounded
interest) will be limited to the sum of the first two years of deferred
distributions plus a preferred equity claim for the unused balance of
the 25% limit on the issuance of qualifying preferred stock and
mandatorily convertible preferred stock.
Loss Absorption - Moderate
The notes have deeply junior subordinated status, with limited creditor
The rating agency added that the following factors would place upward
pressure on the Symetra Financial companies' ratings: successful
rebuilding of Symetra Life's bank annuity distribution network,
resulting in consistent annualized statutory premiums and deposit growth
of 20% or more over several consecutive quarters; sustained
GAAP ROE of at least 13% on a consistent basis.
The following factors would place downward pressure on the Symetra Financial
companies' ratings: a decline in revenues and earnings of
20% at Symetra Life over several quarters; EBIT coverage below
4x and/or cash coverage falling below 3x. Pressure on the company's
ratings could also result from an RBC ratio below 325% or the pursuit
of new higher-risk business or expansion of its healthcare business.
Moody's most recent rating action on Symetra Financial was on March 30,
2007, when the rating agency affirmed the ratings of Symetra Financial
and Symetra Life but changed the rating outlook to stable from negative.
Moody's additionally commented on the company's proposed IPO
on July 11, 2007.
Symetra Financial Corporation is a Bellevue-based, private
holding company that sells insurance and related financial products.
At June 30, 2007, it reported consolidated GAAP assets of
approximately $19.8 billion and consolidated GAAP shareholders'
equity of $1.2 billion. Symetra Life Insurance Company,
its wholly owned life insurance subsidiary, reported total statutory
assets of approximately $18.4 billion and adjusted statutory
capital and surplus of $1.4 billion at June 30, 2007.
Moody's Insurance Financial Strength Ratings are opinions of the ability
of insurance companies to repay punctually senior policyholder claims
and obligations. For more information, please visit our Website
Life Insurance Group
Moody's Investors Service
VP - Senior Credit Officer
Life Insurance Group
Moody's Investors Service
No Related Data.
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