SYA - Symetra Financial

[uncommonprofits]

I have not seen much of this one mentioned here so I thought I would initiate a discussion.  As a bit of background,  Berkshire Hathaway and White Mountains bought Symetra from Safeco in 2004. They subsequently tried to take it pubic in late 2007 at $18-$20/share (book value at the time was $15.10 – so a multiple of 1.2-1.3x). The 2007 IPO failed though due to the dire economic situation. It would seem they took some money out of it before finally taking it public in early 2010 at a slight discount to BV (BRK and White Mountains maintained their share of the company and were offered warrants).

 

SYA is a very small cap company in the group health, retirement, life insurance and employee benefits field. SYA had virtually no legacy issues coming out of the financial crisis (thanks probably to the BRK and WTM involvement). SYA seems to be getting punished extra hard due to worries of how a low interest environment might impact the company's business going forward, but giving zero credence to the unrealized gains piling up on the balance sheet.

 

New CEO (Thomas Maara) has been at the helm for 1+ year. He has a long term operating ROE target of 12% (currently achieving about 9.6%). Plans to get there by utilizing the company's over funded capacity as well as some operating efficiencies/synergies/etc.  Fully diluted Book Value before unrealized gains is $16.50 at June 30/11 (including unrealized gains -- BV was almost $21/share).  SYA is currently trading at $9.50ish -- which is just slightly more than 6x analyst concensus 2012 earnings ..... and less than 5x normalized earnings ($16.50 x 12% ROE target = $2/share EPS).

 

Fixed income portfolio is managed by White Mountains and equity portfolio is managed by (WM affiliate?) Prospector Partners. The portfolio is typically highly levered toward fixed maturities (about $160/share at June 30/11) – although they do need yield it's quite possible we could see some significant realized gains come out of this bond bubble. Equities at June 30 was only about $3/share but still could have substantial impact coming out of this down slide – especially considering this represents 30+ % of the current stock price (equities have achieved 11.7% return vs 3.4% for S&P 500 since the start of this investment relationship in 2005).

 

Assign a PE of 12x normalized earnings of $2 gets you a worth of $24 for the operating business alone. On top of this you have $4+ of unrealized gains plus future potential from the investing side. I think one can safely say this is a 40 cent dollar but perhaps more like a 30-35 cent dollar. Francis Chou owned a position (as at June 30). Bruce Berkowitz and Michael Price had some involvement with this one also — but not sure if both are still in it.

 

Here is a presentation from a couple days ago:

 

http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NDE4MjcwMHxDaGlsZElEPTQzOTI5OXxUeXBlPTI=&t=1

 

 

[A_Hamilton]

Yeah, I've been thinking about going long a basket of LNC, MET, PRU, and SYA (25% each) and then short GWO CN at 2x book. Great West Life has way too much US exposure to not be harmed by low rates here.

[uncommonprofits]

that's a good one. but you can basically throw darts at a listing of insurance stocks and hit ones that are trading at 60% of book or lower.

 

Agreed, the unique thing here is the investment portfolio being managed by White Mountains.  I also think there is a high possibility they can execute on their operating ROE goal of 12%.  Rather than throwing darts, I would like to focus on those that stand a high chance of outperforming their peers on these measures.  I believe strongly that SYA offers that as well as being one of the cheapest at present:  45% of June 30/11 BV.  This does include unrealized gains which has probably shot up significantly more since then -- thanks to this strong flight to AA+1/2 safety!

[Liberty]

that's a good one. but you can basically throw darts at a listing of insurance stocks and hit ones that are trading at 60% of book or lower.

 

Or you could get WRB at book and probably outperform all the others while taking on less risk, IMHO :)

[Cunninghamew]

I hate for my first post to be a question rather than a contribution, but I decided to get off my high horse and ask it anyway. Has anyone done any work on Symetra in the past?

 

I have been searching for conservatively managed insurance companies that give me a long-term play on rates recovering (if and when that ever happens... no opinon here). I stumbled upon Symetra. (Note there is a pretty old write-up on VIC with a lot of the info to follow). Symetra was purchased from Safeco in 2004 by a consortium of investors that included White Mountains, Berkshire, Berkowitz and JC Flowers. The company filed an S-1 with the intention of going public in late 2007, but ended up pushing the IPO back to 2010.

 

The company operates across four segments: medical stop-loss (benefits), deffered annuities, income annuities, and individual life. Needless to say, this is not an attractive area of biz. right now. I have only researched P&C companies, which is why the call for help. Over the past three years the company has generated returns on equity ranging from 9% to 6%, but in the past has generated returns as high as 14.9%.

 

The company currently trades at $13.56, while book value is $26.29. If you net out accumulated other comp. income and adjust for warrants (owned by WTM and General Re) the adjusted book value is $17.94. I would add that there are very few intangibles on the BS. This seemed like a pretty steep discount even if the life/annuities biz currently sucks.

 

I will add more info later when I get some free time, but here are some quick bullets

 

- Stock buyback in place that is accretive at these levels

- I read that the investment book is managed by White Mountians, but have not confirmed

- Positive underwriting profit on their second largest segment (benefits) every year... worst combined ratio was like 95%

 

 

[Cunninghamew]

The White Mountain 10-k has a decent discussion on SYA as it relate to how they mark their stake

 

http://www.whitemountains.com/pdf/WTM_2012_Form_10-K.pdf

 

Pages 100 - 103 and 75

 

 

[Cunninghamew]

Okay... I am starting to get a better understanding of the opportunity set here is. The investment is pretty boring and probably a B- in terms of return potential and a B to B+ in terms of risk/reward.

 

My price target is $17.94, which is a 32% premium to todays price. The target price is simply the latest adjusted book value per common share. You will notice that adjusted book value per common share is significantly less than book value. Because this is a life insurance company we want to net out accumulated other comp. income. Essentially, a lot of the bonds in their investment portfolio have appreciated significantly and likely trade at premiums (returns came up front), but those will be held to maturity. So the assets have temporarily appeciated, while the liability stayed the same which inflates book value. The target price also factors in dilution from the warrants, which are struck near $11.5 (owned by General Re and WTM).

 

The table below shows adjusted book value per common shares over time.

 

2012 $17.94

2011 $16.75

2010 $15.79

2009 $15.23

2008 $13.95

2007 $13.58

2006 $13.85

 

There is no near term catalyst for the shares to trade to adjusted book value. Obviously, an esculation in interest rates would help and the share buyback doesnt hurt either. If the multiple does not compress and rates do not change you are looking at pretty boring returns. If they can maintain approx. today's level of profitability they should accrue ~$1 to adjusted book value per year, which is a 7% return + dividends.

 

Right now profitability is depressed so multiples deserve to be low. The table below shows ROE and Adjusted ROE (same adjustment) over time

 

2012 6.07% / 5.48%

2011 7.22% / 7.02%

2010 9.03% / 7.82%

2009 14.92% / 17.36%

2008 1.63% /13.46%

2007 12.6% /

2006 12.77% /

 

The downside case seems low. The company has a history of very disciplined underwriting (for example, medical stop loss combined ratios 2012 93.4%, 2011 90.6%, 2010 90.6%, 2009 94.7%, 2008 93.3%) and the shares already trade at a pretty steep discount to smaller life insurers. Obviously, the longer rates stay low the more value deteriorates. They will sell less new life / annuties, so those books will naturally run off and the reinvestment of funds will be at lower rates.

 

Summary:

 

Potential to appreciate 32% (if multiples expand back to 1x adjusted book... prob. need a catalyst like higher rates) and 7% per year on no multiple expansion. Solid operators on the underwriting side that are very disciplined. Great oversight in terms of the board by White Mountains. Shareholder base is largely long-term value investors. White Mountain is your investment manager for the bond portfolio and they have a large stake in the company moving forward.

[mcliu]

The company seems to be expanding their business in current and new lines, anyone have any insights on profitability/ROE for the expansion? I'm worried that they're chasing top-line growth at the expense of ROE.

[Saidal]

I doubt that given White Mountains and General RE's oversight. The White Mountain analyst call which was recently posted on SA mentioned (from what I interrupted) SYA had the opportunity to purchase/bid on Aviva and a few other transactions. But then I could be completely wrong.

[constructive]

I doubt that given White Mountains and General RE's oversight. The White Mountain analyst call which was recently posted on SA mentioned (from what I interrupted) SYA had the opportunity to purchase/bid on Aviva and a few other transactions. But then I could be completely wrong.

 

To clarify, Aviva is not for sale. I think they were talking about WTM being outbid on a small Aviva deal, in the context of successful deals like SYA in the past.

 

http://seekingalpha.com/article/1488452-white-mountains-insurance-group-ltd-shareholder-analyst-call?part=single

[constructive]

Okay... I am starting to get a better understanding of the opportunity set here is. The investment is pretty boring and probably a B- in terms of return potential and a B to B+ in terms of risk/reward.

 

My price target is $17.94, which is a 32% premium to todays price. The target price is simply the latest adjusted book value per common share. You will notice that adjusted book value per common share is significantly less than book value. Because this is a life insurance company we want to net out accumulated other comp. income. Essentially, a lot of the bonds in their investment portfolio have appreciated significantly and likely trade at premiums (returns came up front), but those will be held to maturity. So the assets have temporarily appreciated, while the liability stayed the same which inflates book value. The target price also factors in dilution from the warrants, which are struck near $11.5 (owned by General Re and WTM).

 

Adjusted, diluted book value is $18.32 per share as of Q1.

 

http://media.symetra.com/images/20011/SYA1Q2013EarningsRelease.pdf

 

I disagree with the idea that adjusted book value is a more accurate representation of value than unadjusted. That assumes really poor future returns in fixed income. I think the fair value is somewhere in between.

 

"Inconsistent with analysts’ practice, excluding AOCI from book value significantly worsens rather than improves valuation accuracy, and this is true in almost all months."

 

http://www.columbia.edu/~dn75/Relative%20Valuation%20of%20U.S.%20Insurance%20Companies.pdf

[stahleyp]

http://www.bloomberg.com/news/2013-06-24/berkshire-white-mountains-get-symetra-stock-in-warrant-deal-1-.html