Executives
Jim Pirak - SVP, IR
Tom Marra - President and CEO
Margaret Meister - EVP and CFO
Dan Guilbert - EVP, Retirement Division
Michael Fry - EVP, Benefits Division
Analysts
Jimmy Bhullar - JPMorgan
Humphrey Lee - UBS
Steven Schwartz - Raymond James & Associates
Christopher Giovanni - Goldman Sachs
Seth Weiss - Bank of America Merrill Lynch
Ryan Kruger - Downing and Partners
Jeff Schumann - KBW
John Nadel - Sterne Agee
Symetra Financial Corporation (SYA) Q4 2013 Earnings Conference Call January 31, 2014 10:00 AM ET
Operator
A very good morning, ladies and gentlemen. Thank you all for joining. Welcome to the Fourth Quarter 2013 Symetra Financial Corporation Earnings Conference Call. My name is Lisa and I'll be your coordinator for today. Today's conference is being recorded. At this time, all participants are on listen-only mode. Following the prepared remarks there will be a question-and-answer session. [Operator Instructions].
I’d now like to turn the conference over to Mr. Jim Pirak, Senior Vice President of Investor Relations for opening remarks. Please proceed sir. Thank you.
Jim Pirak
Thank you. Good morning and welcome to Symetra Financial Corporation’s review of fourth quarter 2013 results and 2014 outlook. Before we begin, I’d like to call your attention to the Safe Harbor statement on Slide 2 of the presentation materials, which are posted on Symetra’s website. Some of the information discussed on the call is based upon information as of today and contains forward-looking statements that involve risk and uncertainty, to the extent that any comments on the call are forward-looking statements, they are qualified by the Risk Factors in Symetra’s public filings, including the press release issued yesterday.
During this call, we will discuss GAAP and non-GAAP financial measures. Reconciliations between the two are available in yesterday’s earnings press release and financial supplement, which are posted on Symetra’s website. On the call today, you will hear from President and CEO, Tom Marra; and Executive Vice President and CFO, Margaret Meister. Michael Fry from the Benefits Division and Dan Guilbert from the Retirement Division would join in the Q&A discussion.
Now we’ll turn it over to Tom.
Tom Marra
Okay thank you Jim and good morning everyone. On the call I will review results for the fourth quarter and our achievements for the year, then we’ll turn our attention to 2014. I’ll discuss our priorities and Margaret will walk you through our earnings guidance for this year and then afterwards we will take your questions.
So starting on Slide 3 we have highlights from our fourth quarter. We reported another solid quarter of earnings with a year-over-year improvements in benefits and individual life and very strong results in retirement -- very strong sales in retirement and individual life.
I’ll start with sales. I’m very pleased with our results. In fact we posted retirement division sales of $818 million, up from $786 million in the third quarter and $358 million in fourth quarter 2012. We attribute the success to the rise in interest rates during the second half of the year and also to our strong and expanding position in the bank and broker dealer channels. Our fixed index annuity account values now exceed $1.7 billion, up a full $1.3 billion from just a year ago. In the fourth quarter we saw continued strength in sales of our fixed index annuities, as well as renewed demand for traditional fixed annuities and the best quarter yet for single premium immediate annuities.
I’m also pleased to report excellent individual life sales, where we achieved our fifth quarter of sequential growth in UL. We are really beginning to see the results of our efforts to build strong relationships in the BGA channel and we also finished the year with a with another good size COLI case.
Fourth quarter earnings results reflected significant year over year improvement in claims experience for benefits and individual life. The benefit to loss ratio improved to 64% from 67.7% in fourth quarter 2012. While we do not expect the loss ratio to hold at the 64% level we are pleased with the impact of our corrective pricing actions taken during 2013.
Individual life mortality was also more favourable than in the year ago period. Like the benefits loss ratio mortality experiences fluctuate from period to period. Fourth quarter experience was favourable to our expectations, while the year ago quarter’s experience was unfavourable.
Fourth quarter results also benefited from solid interest spreads on our fixed deferred annuities and stable spreads on income annuities. We deploy strict asset liability matching and investment strategy that includes our in-house commercial mortgage loan operation which continues to form very well and provide significant yield advantage, over other fixed rate instruments.
On Slide 4 we show the sales results by division for the fourth quarter and full year, including the excellent growth in retirement and individual life. In benefits the drop in medical stop/loss offset an improved result in group life and DI. We believe we can continue the positive sales momentum and therefore expect further sales growth in 2014. As we look over the medium term, increasing sales of fully priced business is the best path to improving our operating ROE. Our businesses are now positioned within their markets to do just that and my confidence in achieving profitable growth is very high.
Turning to Slide 5, I’m pleased with what we accomplished in 2013, though we had some important challenges as well. Beginning with our successes, in addition to the great sales we just talked about, we maintained solid interest spreads on our deferred annuities balances. It has been extremely hard work to battle against spread compression in this still low interest rate environment. Even with the improvement in long term rates, new investment yields remain far below rates on our maturing investments.
Next we told you that we would hold the Company’s operating expenses flat for the year. We achieved this target excluding the non-deferrable commissions and sales incentive expenses that resulted from above planned sales. And finally we took capital actions in 2013, that returned nearly $140 million of capital to shareholders and reduced our weighted average outstanding share count by 15% on an annualized basis.
Our headwinds during 2013 included; first we realized early in 2013 that we had slightly underpriced the January 1 renewal business from medical stop loss, and we recalibrated our models to price more appropriately everything that we quoted for the remainder of 2013. I’m pleased to say that by year end the premium rates on the medical stop loss book were again consistent with our profitability targets. But the impact of the January 1 business puts upward pressure on the loss ratio for 2013 and as expected, the loss ratio of the full year came in a couple of points above our target range.
Second, also in benefits. Although we achieved sales growth in Group Life and DI in 2013, it fell short of our expectations. We still like this business and feel it will be a great contributor for us over the medium term. Finally we know that our growth initiatives must drive improvement in operating ROE and we remain committed to expanding that operating ROE but recognize that this will take some time.
On Slide 6, we have our consolidated financial results for the quarter. Net income was $64 million, up from $31 million in the fourth quarter 2012, the result of both higher operating earnings and higher net realized investment gains. Adjusted operating income was $50 million, up from $33 million in fourth quarter 2012, driven by the improved earnings in benefits in individual life and operating return on average equity for the year was 8.8%, up from 8.5% for 2012.
Turning our focus to 2014, on Slide 7. In our benefits division, the first priority is to restore the loss ratio to our target range which is now 64% to 66%. Let me explain; in 2014 we revised our target range to reflect the anticipated growth in our group life and DI business, which has a higher loss ratio than medical stop loss. We did see the competitive environment for medical stop loss heat up in 2013 and it remains highly competitive.
We’ll continue to manage our business for the bottom line but we also intend to retain our long held position as a top carrier in this generally rationale market. We expect sales for the coming year to be about flat with 2013. We’re pleased with the quality of business we renewed on January 1, 2014 and also with our premium retention rate.
We continue our work to establish Symetra in the Group Life and DI business. 2013 we achieved significant growth off a small base. We must continue to accelerate the rate of premium growth. We’re targeting the same mid-sized employer market that we serve in medical stop loss, leveraging our relationships with benefits brokers if we’re focused on delivering quality service to build this new business.
Finally we are working closely with our distribution partners to ensure that Symetra is positioned to offer stop loss and other benefits to employers that decide to participate in the new private exchanges. In 2014, the priority for the retirement division is straight forward, follow up a strong 2013 with an even better 2014. As we push forward the successes of last year, we’ll be working specifically to continue to drive sales of fixed and fixed index annuity through banks, taking advantage of the tremendous opportunities we see in improving interest rate environment.
We’ll continue to expand distribution adding new bank and broker dealer distribution partners and deepening existing relationships. Our products are being sold in most of the major U.S. banks and several of the largest broker dealers and we still have a lot of runway to increase production on each of these platforms.
On income annuities we’ll drive more sales of our single premium immediate annuity, which we sell through the same banks and broker dealers. As more baby boomers look for short-term retirement income solutions, we see an attractive opportunity for shorter duration [indiscernible]. Last but certainly not least in retirement we’ll continue to manage closely the profitability of our large annuity block working to maintain solid interest spreads on deferred annuities of stable spreads on income annuities.
In individual life, we are focused on continuing the strong momentum achieved in the fourth quarter. We expect to drive meaningful growth in sales of Universal Life through our BGA distribution partners. We have a well design competitive product which has begun to yield results. We’re making real progress in establishing Symetra as an important UL rider.
Our distribution expansion efforts will centre around increasing penetration of existing partners while we also look to add partners in 2014. In 2013 we increased these relationships from 3 to 10 major BGA players. The second half of 2014, we plan to introduce a secondary UL product and we’ll continue to expand our product offering for the BGA channel. Also at the end of 2013 we took advantage of improving interest rates to re-launch our single premium life product for the bank channels. In 2014 we’ll be reemphasizing this product with our bank and broker dealer partners.
And we expect some growth in COLI sales this year though the pace maybe choppy. We’ll pursue sales growth as consistent with long term profitability targets. We maintain our pricing and underwriting discipline and closely manage operating expenses and we will closely manage operating expenses in 2014.
Now I’ll turn it to Margaret. She’ll walk you through our earnings guidance for 2014 and then I’ll come back and we’ll open it up for questions. Margret?
Margaret Meister
Thank you, Tom and good morning. I’m very pleased with the solid earnings results in the fourth quarter and in the year on a strong note. We are confident that we will be able to build on the successes of last year and in particular the momentum of the second half. As Tom just told you we are feeling very confident of Symetra’s strong position in our target markets, our relationships with premier distribution partners and our try to product offerings. I will say a bit more about the year just ended before launching into 2014.
First, we are very pleased with the loss ratio improvement achieved by the end of 2013. We were over target for the year but the benefits team worked extremely hard to get our medical stop loss boat realigned with the profitability target. This effort has positioned us well for the New Year and we expect the benefits will report year-over-year improvement in a loss ratio for 2014.
Second we managed to hold our base interest spreads relatively stable in 2013, however we still experience some decline. Voluntary payments over the past couple of years have put reimbursement pressure on our margins but we have mitigated the impact to future periods by unlocking DAC and DSI, when we recognized the payment income and taking advantage of our balance sheet capacity for commercial mortgages.
Third, we posted much improved growth in annuity and individual life sales. In 2013, we did not enjoy much earnings from these sales due to non-deferrable sales and underwriting expenses, which dampened the earnings in the period of sale. We will see greater earnings contribution from last year’s growth in 2014.
Fourth, we originated nearly $700 million in high quality commercial mortgage loans at average price to U.S. treasuries of about 290 basis points. Fifth, we reported solid mortality results for the year, higher than our expectations for income annuities and generally in line with expectations for the individual life businesses.
Finally, our tax credit investment strategy has proven to be very successful, generating net income benefit of $23.5 million in 2013. These investments have attractive yields and we expect them to be solid earnings contributors in the next few years. Now, I will walk you through how we expect these efforts to drive meaningful earnings growth this year.
On Slide 8, we present our guidance range for 2014 operating earnings per share of $1.65 to a $1.85. In 2013, we reported operating EPS of a $1.59. Then we back out most of our mortality gains, unlocking adjustment and the outsize contribution from prepayment fee income in 2013, which together added $0.16 per share.
Next we add in the impact of major drivers of the year-over-year earnings growth. First, we have the impact of 2013 and’14 capital actions which we expect will add $0.14 to operating EPS. The bulk of this comes from share repurchases and the cashless exercise of warrants completed in the first half of 2013.
Second, we have $0.10 per share earnings contribution from 2013 growth index and annuity account buyers. We expect 2014 sales of fully priced products to be robust as well but again non-deferrable sales expense will create some new business strain as per to your earnings. Third, the improvement and benefits loss ratio should produce $0.04 earnings per share this year.
Other earnings drivers include growth in Group Life and DI premiums, growth in UL and various other positive items which are offset in part by the expected impact of spread compression on deferred and income annuities and the shrinking life of all the income annuities and term life. At the mid-point of the guidance range, the operating ROE for the year is around 8.5%.
On Slide 9, we have major assumptions underlining our guidance. We assume the 10 year U.S. Treasury is around 3% for the full year. The recent pull back in the 10 year rates is below our assumption but we feel confident about our ability to drive growth and achieve the earnings guidance.
We expect the benefits loss ratio to be near the mid-point of the targeted range of 64% to 66%. We expect significant growth in life and annuity sales year-over-year. In addition, we are planning on originating about $700 million of commercial mortgages, achieving spreads over treasuries of about 200 basis points.
Given the relatively higher interest rates, we are expecting more modest impact from prepayment related fees in the year. We expect the effective tax rate to be about 18.5%. And finally we expect favorable mortality in income annuities and inline mortality in individual life. The broader actuarial assumptions are expected to be in line with recent experience.
We do have some expected share buyback activity completing may be about a half of the remaining repurchase authorization. Obviously movement of any of these factors from our stated assumptions could shift the actual earnings results to be closer to the lower or upper end of our guidance range.
On slide 10, I review our capital management priority. We have always said we prefer to deploy capital through organic growth and we expect to really see this happen as we go through 2014 and beyond. As seen by our sales in the last half of 2013, we expect relatively better interest rate environment, expanded distribution and expanded product to drive faster deployment of capital. We’re still pricing product to achieve a 12% operating ROE target which should drive ROE higher through time. We’re committed to keeping capital to support strong growth and improving our ratings. That said we anticipate measured capital actions will play an important role in the future.
With that, I’ll turn the call back to Tom.
Tom Marra
Okay. Thank you, Margaret. Turning to Slide 11 to summarize briefly, then we’ll get to questions. We’re pleased with what we accomplished 2013. We maintained our excellent financial condition. We achieved strong sales growth in our retirement and individual life divisions and medical stop loss is now poised to deliver results in line with our profitability targets in 2014.
Also in ’14, we’ll continue to emphasize sales growth and we’ll focus onto expanding both top and bottom line results. I believe we have the right products in the right markets to take advantage of the improving interest rates and we are well positioned to act quickly to take advantage of changing market opportunities. We’ll maintain our discipline and we expect that achieving our strategic priorities will drive substantial essential operating ROE improvement overtime. We feel the best way to do this is to continue to grow our sales of fully priced products.
Okay, thank you. Lisa would please open up the line for questions.
Question-and-Answer Session
Operator
Certainly. Thank you, Mr. Marra. Ladies and gentlemen, we’ll now conduct the question-and-answer session. [Operator Instructions] Please stand-by for our first question. Okay and we have our first question from the line of Jimmy Bhullar of JPMorgan. Please go ahead.
Jimmy Bhullar - JPMorgan
Good quarter overall but I had a couple of questions. First, you didn’t buy back stock in the fourth quarter. So maybe could address why that was and was this in anyway influenced by the stock price running up? The second thing is you reported pretty strong sales in the fixed annuity market and we’ve seen industry wide sales actually go up a lot as rates increase in the second half of year? And maybe you could talk about what you’ve seen in 2014 thus far. As rates have backed off, have you seen a decline in overall fixed annuity demand with that?
Tom Marra
On buybacks and Margaret, feel free to jump in and then I’ll turn it to Dan on the annuities. We still think it should be part of the package. Obviously we’re writing more new business. So that’s what we believe the best way to use capital. But we expect there will be some buyback at this price range. The higher the price the less, we should be buying like with anything, but it will be a part of the package. You should expect to see it begin again in ’14 as Margaret said in sort of a moderate fashion.
Margaret Meister
And the only thing I would add is overall we feel very happy with the amount of repurchase activity we did accomplish in 2013 and it was in line with what we expected to accomplish.
Dan Guilbert
This is Dan. Thanks for your question. As you’ve mentioned, we did finish 2013 very strong. We’re happy with that and we will still have momentum going into 2014. We’d expect first quarter to be at similar levels. As you also pointed out, interest rates are down a little bit. We haven’t really seen the overall demand drop that much. I think it’s still early in the year. Also I think part of it is with the index business, what you see is a little bit less sensitivity in interest rates. I think that’s helped us by having that product in our portfolio. So I think so far so good and from our perspective, as we continue to expand distribution and get more shelf space that’s another mitigant. So we can get access to different opportunities.
Jimmy Bhullar - JPMorgan
Okay and then maybe one more; on the limited benefits business, your premiums had been growing pretty fast. They have declined in the past couple of quarters. So maybe if you could talk about how you expect the healthcare reform to affect the limited benefits or the supplemental products market?
Michael Fry
This is Michael. Actually, we anticipated the growth of that product line where that product is really resonating with employers. Because the healthcare reform and healthcare are cost continuing to go up, employers are shifting more dollars to employees and so we are actually selling this product kind of as a gap plan to traditional health insurance to the employees. So it helps them cover additional cost that’s been shifted to the employees. So we are seeing growth there, very pleased to see that.
Operator
Thank you for your questions. Our next question is from the line of Humphrey Lee of UBS. Please go ahead.
Humphrey Lee - UBS
Just follow up on the general renewal, can you talk about what you’re seeing in the renewal process and how should we think about the top line growth will benefit in 2014?
Michael Fry
This is Michael. I think as Tom mentioned in his introductory comments, with regard to the top line growth for sales, for stop loss, we’re expecting relatively flat sales although we are expecting to see year-over-year growth in our Group Life and disability. The January renewal cycle that we just went through, we’re very pleased with the results, I have confidence in the pricing that we did achieve during this renewal cycle. We were able to retain more of the better performing business. And based on how that business is performing, I feel very good about the price we were to get. So, I think we’re going to be back in our target range in 2014.
Tom Marra
So the advantage I see Humphrey and credit to Michael and his team is when we saw the January [ph] 1 2013 is running high, really responded very, very quickly and decisively and got at the July 1s and then throughout the year leading up to what we think is -- or what we expect, there is still a random nature to this business. We expect we’re right in with the medical staff offerings, which by the way, when we change the overall target loss ratio, the 64% to 66%, the mix of business.
Humphrey Lee - UBS
But in terms of the premiums for the statement [ph], should we just expect similar to the 2013 level or should we expect a modest growth?
Tom Marra
I think it’s going to be a modest growth, because we are, again, we are projecting increased revenue from Group Life and DI and also from our limited benefit medical. So there will be modest growth there in 2014.
Humphrey Lee - UBS
Okay. And then just shifting to retirement, so fixed annuity sales continue to see a strong year-over-year growth and then for -- the index annuities still continue to be strong level, but seems to me this is kind of the first time of this year sequential decline in the past five quarters. So, if there is -- because the two promised kind of similar in terms of proposition to the consumers. Is there some type of cannibalization going on there through your specific channels or it is just simply kind of you can still [indiscernible] that’s not an issue?
Dan Guilbert
This is Dan. In terms of the mix between traditional fixed annuities and fixed index, I think what you saw in the second half of 2013 is a bit of a resurgence in the traditional business, simply because interest rates are higher. And so, when interest rates go a little higher people say, if I can lock in a certain level of return, why not do that. So that wasn’t terribly surprising. I actually think you’ll see that relationship between the two products ebb and flow a little bit as interest rates are continuing to be volatile.
I still think the index products over time will continue to move past the traditional fixed. Within our index product, there is actually a fixed account. So if you want a fixed like experience you can still achieve that within our index product. So I think if interest rates were to continue to go up quite a bit, several 100 basis points from here, then I actually would say you’d see even more movement to the traditional fixed business.
Humphrey Lee - UBS
So, the way we should think about it going forward is seeing them as two such products should be more thinking as a whole bucket and then do you think the interest rate environment -- if there is some moving part in between?
Dan Guilbert
I think that’s fair. Yes, absolutely. And in the vast majority scenarios, our wholesalers are meeting with advisors and both products available on the shelf. So in the vast majority of scenarios they’re both available and depending on the client circumstances, either one could make sense.
Humphrey Lee - UBS
Okay. And then one last question. So on the 2014 EPS guidance, you mentioned the buyback assumption is probably roughly half of the remaining buyback authorization. When that prompts you to actually fully utilize the remaining buyback versus not using it at all?
Margaret Meister
What influences the pace at which we’re just looking at the combination of using our capital to support what we think is a very good outlook for our organic growth, and then prioritizing this in comparison as use of the capital.
Tom Marra
Just [ph] to say Humphrey and rule of thumb is five of the annuity -- new annuity business uses about 5%. 5% of that is used in new capital. And then for Individual Life, it’s actually about dollar-for-dollar. So the $10 million roughly in fourth quarter used 10 million of capital. So there is pretty hefty use in just running - writing profitable business which has to be factored in.
Humphrey Lee - UBS
So let’s say the first half sales is stronger than what you’re planning for, then you should expect the buyback activities to kind of be at a slower pace than what we’re thinking?
Margaret Meister
Well, we’re always looking at what’s our current run rate organically and balancing out that against share repurchase activity. But we feel pretty good about what we put into the guidance that we’re going to be able to accomplish both things at that line.
Operator
Thanks for your question. Our next question is from the line of Steven Schwartz of Raymond James & Associates. Please go ahead.
Steven Schwartz - Raymond James & Associates
Good morning everybody. A few, first on Life, Margaret, could you put a number maybe on the life mortality that you saw in the first quarter? You said it was pretty good.
Margaret Meister
In the fourth quarter, our life mortality was pretty good. In the first quarter of the year we were a little off. So overall for the year I think we’re pretty much in line for individual Life.
Steven Schwartz - Raymond James & Associates
Okay, that’s good guidance. And then on the question of Life sales and the increase in life sales, I always think of the business growth to be in line with the growth of in force. How much in sales do -- assuming that’s correct, how much in sales do you need to get the in force growing?
Margaret Meister
We need some pretty substantial growth in the sales because we do have some order books of term right now that are lapsing. So would experience in that a bit of a decline. We should be seeing that turn around probably not until after 2014 though.
Tom Marra
Let us work on that because as you know that business has been pretty stagnant front and most of the business was sold back in the Safe Co pre 2004 but it is our goal for that to be a meaningful contributor and the way to do that is to build the business. And so what we hope to do is give you maybe more detail on that in the future. It’s obviously a bigger in force than we’re able to replenish on new business. But if we keep going at this trajectory, then I think the goal is certainly to turn that around.
Steven Schwartz - Raymond James & Associates
Okay. And then, if could couple on ACA. You mentioned in the presentation on exchanges. I had read recently an article and the argument in the article was that exchanges may not make sense for larger employers who are self-ensured, their tax and other reasons for that. Is that an accurate statement?
Michael Fry
Steven, this is Michael. I’m not sure about that specific article that you read but we’ve been tracking this very closely and I’m not sure if you’re really talking private exchanges or public exchanges.
Steven Schwartz - Raymond James & Associates
Private exchanges -- move to private exchange.
Michael Fry
Private exchange. Okay. So, we are -- as Tom mentioned earlier, in ‘14 and beyond, focusing on these private exchanges is a strategic priority for us and from everything that I’ve read, there is not a lot of business on there now but there was an article out there recently that there was an estimated, they think there was going to be about 40 million employees that are on those private exchanges by 2018.
So, it’s a very big focus on growth and Symetra actually is already on the couple of these exchanges and we have sold some business already. Not a lot, not a material number. We have sold some. And I think it actually will make sense, primarily on some of the voluntary converges where again the employer is giving moneys to the employee and these exchanges are giving the employees ability to shop and make their own decisions with regard to some of their supplemental coverage.
Steven Schwartz - Raymond James & Associates
Okay, so you’re talking about supplemental type of coverages. You’re not talking about Raymond James certainly going from self-insured to not self-insured on some type of exchange?
Michael Fry
Yes. I agree.
Steven Schwartz - Raymond James & Associates
All right, okay. And then one more if I may, kind of the same topic. The question of the limited health plans came up. There was a -- and you mentioned there were GAAP plans. There was an article on the Wall Street general probably, I don’t know, a month ago or so talking about how there was a loophole if companies larger than 50 employees offered an ACA compliant plan, they could also offer a limited benefit health plan and employees could chose that and there wouldn’t be a penalty. Is that what’s going on here? Is that what we’re talking about?
Tom Marra
Yes. That is definitely true. I don’t know if I would characterize it is loop hole, but how the law is written, those laws or those types of plans are allowed and it is a growth opportunity for Symetra’s limited benefit medical product to actually provide more coverage to these employees that are out there. So we feel that we’re actually helping employees get more coverage above those plans.
Operator
Thank you for your questions. Our next question is from the line of Christopher Giovanni of Goldman Sachs. Please go ahead.
Christopher Giovanni - Goldman Sachs
I wanted to follow up on kind of the capital. I know we’ve discussed this in the past but at that time I think you guys had a fair amount of capital that you were sitting on that you couldn’t really use. But now with your outlook for growth really improving and still decided buyback stock, why not take on some additional leverage before rates really pickup and demand for your products potentially even increases further?
Margaret. Meister
Chris, this is Margaret. Thanks for the question. And we certainly are looking at where our leverage is and we recognize that we’re fairly low, so that is on our radar as something to look at within our overall context, the capital management for this year and going forward.
Christopher Giovanni - Goldman Sachs
Okay. And then I guess we’ve heard a lot around the build out of distribution, which clearly is starting to have the positive impact on the annuity and life sales that we’ve seen. But some of the products like the no lapse UL, the fixed index annuity, there may be products with different risk characteristics than maybe you guys have sold historically. So can you talk about maybe a little behind-the-scenes, what’s taking place in terms of risk management in kind of hedging associated with some of these products?
Tom Marra
Yes we’re happy to do that. So the UL product that we’re writing, assumes a modest increase in interest rate. We do have cash value which means it’s not new throughout the lapse supported nature of that and frankly the market has really rationalized quite a bit. So I will say the biggest difference in where I was when I entered the company in 2010, is the competitive environment has lessened up. So while you have to assume a little bit of an increase in interest rates, it’s nowhere near, what would have been the case three of four years ago and that’s just a function of a lot of companies who wrote that business in the earlier 2000s, have been stung by it and are sitting with those guarantees that aren’t - and the policies aren’t lapsing, and that has created an environment where from a new entrant standpoint, the timing is really good for us. So that’s kind of the story on UL and Dan will tell you on the indexed annuities.
Daniel Guilbert
Yes. The indexed annuities actually in the end are very similar to the traditional fixed annuities. The vast majority of the assets go into fixed income. We actually liked it a little bit better because it has a market value adjustment that actually protects us from some of the interest rate risk, but by and large it’s very similar. The main difference is, instead of the client getting paid 2% or 3% per year, we take that 2% or 3% and we do buy options on the S&P if that’s where they put their money. So the vast majority is in fixed income, a small amount goes into options and the complexity of that kind of hedging is very small compared to other stocks in our space. So we’re very comfortable with it and we think we’re in a good position.
Christopher Giovanni - Goldman Sachs
And the last one just following up on the move to Iowa. I guess my understanding was to take advantage of some of maybe the sophistication that the insurance department has around some of these growth products that you guys are having. But I guess thinking about specifically the UL and the redundant reserves that ultimately build here, how are you guys thinking about sort of the financing of that in terms of how big would growth need to get to before you would explore financing transaction and what would that structure potentially look like?
Tom Marra
Clearly the Iowa move is going to be an aid to that. As we look at a trajectory we are on now, we’re probably about a year away from setting up a capital. It’s pretty well experienced within Iowa companies. By the way just on the move, generally it obviously gives us an opportunity to create a capital but it’s also a good environment for indexed annuities and just generally, if you mention the sophistication and I want to underscore this; no impact on our operations. Over a little bit of time we’ll add some employees there but nothing else changes. So it’s been seamless from a rhythm standpoint, no disruption, but about a year away to set up the capital if we keep at this pace.
Christopher Giovanni - Goldman Sachs
Okay, and then Tom, one last quick one just around building up the leadership team. I know you’re kind of filling out on the Life site today. Any updates in terms of potentially where we are within executives there?
Tom Marra
Now, well if it’s me; I’m doing it. I got a good team around me. Michael and Dan are great in running their divisions, and I’m not looking to change it.
Operator
Thank you for your questions. Our next question is from the line of Seth Weiss, Bank of America Merrill Lynch.
Seth Weiss - Bank of America Merrill Lynch
I want to take one more stab at just sort of the capital assumptions and it seems that that higher capital base is really what’s keeping the ROE out of the double digit range. And you talk about organic growth as the number one priority for capital deployment, and 2013 was a very strong year for sales yet the RBC at 4.63 is still very, very robust. So could you help us think about is there a shift in sales mix of maybe higher UL sales? Does that accelerate a drawdown on the RBC ratio, or maybe you could help us think about kind of what the glide [ph] path is that RBC ratio, given your expectations for sales of the next couple of years.
Margaret Meister
This is Margaret. As Tom mentioned in the earlier question, the capital utilized by our deferred annuities versus the capital utilized for the Universal Life are -- they’re quite different. And with Universal Life, it’s practically dollar for dollar, day-1, and then when you do to have count, if you get some of that back. So we are now turning the corner on our Individual Life sales and expect this to be a good year, and the next year to be another good year. So that’s going to be a bigger consumer of capital. We are also expecting deferred annuity sales to continue to increase, but again it is capital demand per dollar written is relatively lower than what you see on the Universal Life side. So when we look at it, we definitely see because we’ve got a very fast growing sales pace, in particular with this UL product we will see some capital - increase in the capital consumption or pace of the capital consumption as we go through time.
Seth Weiss - Bank of America Merrill Lynch
Okay, great and then maybe if I could take a step back in terms of ROE targets and the broader picture, 2014 looks like it will relatively flat to what 2012 and 2013 was from a return standpoint. So EPS growth has a pretty decent pace but in terms of getting to that long term 12% target, it seems like a pretty big gap. If we think about it longer term, what’s the factor that helps you turn the corner in terms of actually expanding the ROE.
Margaret Meister
The fact of that get you around [ph], our EPS growth is definitely growing faster than the ROE and you know we did do a little bit of share repurchase in ’13, which benefited the ROE and the EPS in 2013. But the big thing is once we right the business each following year is you get earnings from it. So we are experiencing a little bit of drag on earnings and ROE in the period that we’re writing the business because of the lack of being able to defer. So it’s just stacking up good profitably written business and gradually drawing down those capital rates and we just finish 463 RBC. I know it’s healthy but that is down quite helpfully from where we begin 2013. So we’re working both sides of that equation.
Operator
Thank you for your question. Our next question is from the line of Ryan Kruger, Downing and Partners.
Ryan Kruger - Downing and Partners
I had a question about the Group Disability and Life. Just curious what have been the major challenges to the build out so far? Is it really distribution or price or service levels? Any color there would be helpful.
Michael Fry
Ryan, this is Michael. I’d say probably the key struggle I think that we faced in 2013 was on the sales front. We got started off very strong at the beginning of the year and then kind of hit some headwinds about midyear and I talked to some of my peers in different companies and read some things and that wasn’t a phenomenon that was unique to Symetra. I think a lot of employers were, and brokers were very much focused on what to do on their medical coverage with healthcare reform and things like that and so I think a lot of business I think we found was not shopped to the extent that we thought it would be in 2013. So I think there have been some headwinds in the marketplace. Having said that, there were some things we needed to shore up in our own shop and I think we took very quick action so that we could execute better on the sales front and on the service front. So I think we got things really well positioned for 2014 and beyond.
Ryan Kruger - Downing and Partners
Understood, thanks and then in terms of distribution of annuities and specifically index annuities in the bank channel, are you seeing much competition there? I think, I guess most index annuities there go through the independent channels. I’m just wondering if you’ve seen any new competitors trying to sell through the banks.
Dan Guilbert
Yes, good morning Ryan this is Dan. Yes we have seen folks getting interested. I think we’ve been a little bit of trailblazer in this space in terms of getting banks up and running on index products and the good news is that we’ve been able to get progress. I also think others have seen that progress when they look at the industry reporting. And so we’ve seen some folks who are already in the banks and selling fixed annuities, get into the index and we’ve heard rumblings of some other folks or maybe even sell variable annuities off looking at that space. And so I think we’re still positioned well. We have a great shelf space and great sales team and really clean product and so I think we’re still positioned well but I think over time others get into this space and that the bank-broker-dealer part of the market will grow and as know, the independent agent side is already large.
Operator
Thanks for the question. Our next question is from the line of Jeff Schumann of KBW, please go ahead.
Jeff Schumann - KBW
You talked a lot about deploying capital into what is now significant organic opportunity. You’ve talked about continuing to buy back some stock. I don’t recall that you’ve addressed M&A. Clearly you don’t need M&A as a capital deployment vehicle at this point but I’m wondering if there’s still some strategic reasons for you to maybe look at M&A in certain areas in order to maybe scale up or gain some additional advantages.
Tom Marra
Yes, Jeff, Tom. We had looked specifically as you know in Life as we kind of spiked that out when we had expenses associated with it. We would, we’re open to it. However I think when we’re trying to raise our ROE going forward, we’ve been out priced in the past. So we’re going to be a little more judicious as to whether we enter into auction type situations. So we would look at, frankly I think the organic life business is creating, because a lot of times with that we were hoping to find distribution and I might have put a little trait [ph] in my Individual Life answer before -- I’m going to run individual life which is true, but the reason is not just Dan and Michael doing a good job there, but I hired three people from the outside; Meg Skinner running sales; John Valickus running underwriting and Mike Roscoe, our Head of Products there, who are top players in that industry. So I almost feel like organically we might be better with than taking over an existing platform and try to integrate its culture and things like that. So I’m probably more looking at an in force acquisition, which again means there is going to be huge competition. So that’s a long answer but my guess is we probably won’t do a Life M&A but we’d be open to looking at it.
Jeff Schumann - KBW
As you grow the life organically, how scalable is the back office at this point?
Tom Marra
It’s good. Across the company that’s a big issue. I think -- but it’s one of our better systems setting up and we added a lot of people up in Boston when Sun Life got out of the business. We were able to pick up a lot of professional talent, including a new business and underwriting operation which really sets us up well. So I should wish we have to worry about too business coming in.
Operator
Thank you for your questions. Our next question is from the line of John Nadel of Sterne Agee. Please go ahead.
John Nadel - Sterne Agee
A couple of things that I think I really failed to realize in terms of the impact on earnings in 2013 and maybe looking forward; in the first you have talked quite a bit about non-deferrable expenses today; essentially the significant growth in 2013, particularly the back half really having very little impact on the bottom line because of non-deferrable expenses. Can you ballpark for us some way of thinking about or quantifying how big those non-deferrable expenses are relative to growth?
Dan Guilbert
This is Dan. I’ll start off and then Margret can jump in. So really in that first year, that non-deferrable portion eats up a good portion of the earnings and so it’s almost like you’re not merely making any earnings in the first year and then in the second year you’re obviously going to make a much higher margin, you get back to a more of a long-term run rate, and that’s why when you look at slide eight, you see that growth in FIA producing at $0.10 a share. And so that’s all that prior business, the $1.7 billion that Tom talked about.
Margaret Meister
And what I would add is clearly our biggest growth engine, where you would have expected to see more of earnings contribution in ‘13 was in the deferred annuities area. But Individual Life is also affected by this non-deferrable component. So in 2014 we expect our sales to improve and we won’t get much benefit in ’14 in the earnings because of that non-deferability but obviously that will stack up and play out into 2015. So as I foresee us rolling out guidance every year we’re going to say what’s the EPS growth that’s related to the prior year’s sales and be adding what’s coming from individual life as well as what’s coming from the retirement division.
John Nadel - Sterne Agee
And not to necessarily nail it down by quarters, but I mean literally when those non-deferrable expenses, do they get booked in the quarter of the sales?
Margaret Meister
Pretty much, because a big chunk of it is of course you’re paying your sales people and your new business people are processing. So to the extent you have any uptick in that kind of staff et cetera, so it’s kind of like a commission. When you write a piece of business you incur some expense there.
John Nadel - Sterne Agee
And then just shifting to pre-payment income, it was obviously a very big contributor in 2013. I think net of the DAC offsets it was about $35 million pre-tax. About how much of that are you assuming is sort of a normal, if we’re at an average 3% 10 year environment we expect x amount to be included in our earnings in ’14?
Margaret Meister
So we aren’t projecting anything of the magnitude of what was experienced in ’13. In fact what was experienced in ’13 was well above our expectations. When we rolled out guidance in ’13 we expected a modest level of activity and we’re holding that same kind of a function for 2014. So few pennies.
John Nadel - Sterne Agee
Okay a few pennies, that’s helpful. And then last and maybe this goes back to Dan. In terms of looking out to distribution adds if you will for 2014, are you expecting to add incrementally some new distribution relationships, whether it be banks, brokers or more independent marketing organizations or otherwise?
Dan Guilbert
Yeah I would say yes on all three. We’re actually in active discussions right now with some large potential partners and so we’re looking at all three channels. I’d say more on the bank and BD side but we have some really good opportunities and that’s why when earlier I was asked about sales levels despite industry being down a little bit, one of the things that gives us some confidence that we have a good opportunity going forward is the fact that we’re continuing to expand distribution.
John Nadel - Sterne Agee
Okay. And then last one just to go back I think you guys already addressed it but I just wanted to clarify. On the medical stop loss side, given the competitive environment, I know you guys want to defend market share to some degree. Should we expect in ’14 that premium levels are flat to slightly down on a year-over-year basis or should we, I know the benefits division overall ought to have some modest premium growth. But how do you feel about the medical stop loss?
Michael Fry
Hey John, this is Michael. Yes, we did cover that a little bit earlier but to reiterate we’re expecting it to be roughly flat, given the competitive environment.
Operator
Thank you for your question. [Operator Instructions]. Okay, we have another question and it’s from the line of Christopher Giovanni of Goldman Sachs. Please go ahead.
Christopher Giovanni - Goldman Sachs
Just a follow-up question on captives in UL market. You made the comment that the dollar-for-dollar capital, you could get some of that back once you establish a cap. Is there any rough estimate of how much really that will bring it down to?
Margaret Meister
We are refining that right now, but we do anticipate that we will be able to share some of that in the future.
Christopher Giovanni - Goldman Sachs
Got it. Okay, and then from an IRR, what are you pricing the UL product at today and does that assume that captive benefit or not?
Tom Marra
Yes, we do in ’12 but we are very - a lot of president or people who have kind of warehouse business and get captive. We are in -- even though we are year away we are talking to the players in that market. There is plenty of supply of financing available. So we should be able to trade, but we are pricing a little bit.
Christopher Giovanni - Goldman Sachs
Yes, and you said at the 12% IRR?
Tom Marra
Yes.
Operator
Thank you for your question. As we have no further questions I would now like to hand back to Mr. Tom Marra for closing remarks.
Tom Marra
Okay, thank you Lisa. Well, thanks everybody. It was obviously a good quarter. We are now going to move forward and really move toward continued success. And especially we set up extremely well for 2014 with the stop-loss pricing back in line and the momentum we have in life and retirement. I think this is really the first time since I have been here where I feel all three divisions are poised to simultaneously have a really good year and if we pull that off in 2014, it will unearth benefits for all of us. So, thank you. John Nadel kind of beat us to the punch where we’re excited about the Seahawks coming up this Sunday and go Hawks. And thank you again for your attention. We’ll talk to you next quarter.
Operator
Thank you, ladies and gentlemen thank you for your participation. That concludes today’s conference call. You may now disconnect your lines. Thank you.
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