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Symetra became an independent company on Sept. 1, 2004, when an investment consortium led by Berkshire Hathaway (NYSE:BRK.B) and White Mountains Insurance Group (NYSE:WTM) bought Safeco Life & Investments for $1.35 billion. Safeco wanted to focus on property and casualty insurance, so Buffet and company took it off their hands. Symetra's revenues in 2004 were $1.8 billion, with net income of $56.3 million. On February 1, it announced 2011 revenues that were $900,000 short of $2 billion, with net income of $199.6 million. In the seven years since, Symetra management has increased net income 19.8% annually, while increasing revenues just 1.5% each year. Without looking closely at the numbers, this tells me it does a good job controlling expenses.
After Symetra's purchase from Safeco, its next big event was its IPO on Jan. 21, 2010, when it sold 30.4 million shares at $12 each. Neither Berkshire Hathaway nor White Mountains sold any stock into the offering, choosing to maintain their 53.8 million shares (including 19 million warrants) in the company. It had originally tried to go public in 2008, but pulled the deal because of the financial crisis. Both companies continue to hold a 21% interest (including warrants) in Symetra, and I expect they will for some time to come, as their warrants are exercisable at $11.49 a share, putting them underwater by 12% as of February 23.
SEE: A User's Guide To Warrants
In 2011, Symetra's operating return on average equity was 9.5%, 30 basis points less than in 2010 and 110 basis points less than its average between 2006 and 2010. Before closing the door on this investment, however, you might want to consider a few things. For instance, its adjusted operating income in 2011, which excludes after-tax investment gains, was 9.7% of revenue.
Since Symetra was sold in 2004, only once (2006) was its adjusted operating income margin higher than it was in 2011 and even then it was only by 30 basis points. Furthermore, Symetra went public at $12, which was a 21% discount to its adjusted book value per common share of $15.23. In the subsequent two years, it's increased its adjusted book value per share by 5.6% annually. More importantly, it increased adjusted operating income by 14.6% annually and yet its stock price has declined by 15.8% from its IPO. There's a disconnect here that will ultimately be rectified. Value investors, like Buffett, understand this.
Grow and Diversify
Due to the prolonged low interest rate environment, the company has undertaken an initiative to profitably grow through the diversification of its revenue streams. As I mentioned previously, its ROE isn't where management would like it to be, so they are targeting markets and products with higher returns. In addition to these new markets, it will continue to maintain its leading position in medical stop-loss coverage and the distribution of fixed annuities through the banking channel.
Because of this growth strategy, investors can expect an operating earnings-per-share hit of eight cents in 2012 and two cents in 2013, and positive contributions thereafter. By 2015, it should have recovered its entire investment from these growth initiatives. This year, its three main growth initiatives are for its retirement division to sell $250 million in fixed indexed annuities and variable annuities; its benefits division (includes medical stop-loss) to achieve $25 million in group life and disability income insurance sales; and its life division to generate $25 million in universal life business. It is looking for a third and fourth leg to add to its profit bucket so over time it may improve ROE.
The Bottom Line
Symetra's business isn't perfect. 2012 is going to be a year where it takes a slight step back in terms of profitability in order to strengthen its business for the long-term. However, given Warren Buffett owns a big chunk of its stock, I happen to like its chances. In addition, companies like Primerica (NYSE:PRI) and FBL Financial Group (NYSE:FFG) are trading at far richer multiples. Symetra runs a disciplined business.
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At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.