January 24, 2010, 11:49 am

Disclosure - We've no position in SYA currently. Piece was available to subscribers of tradingipos.com 1/16/10.


2010-01-16
SYA - Symetra Financial

SYA - Symetra Financial plans on offering 28 million shares at a range of $12-$14. Insiders are selling 9.7 million shares in the deal. BofA Merrill Lynch, JP Morgan, Goldman Sachs and Barclays are leading the deal, UBS, Wells Fargo, Dowling, KBW, Sandler O'Neill and Sterne Agee co-managing. Post-ipo SYA will have 114.1 million shares outstanding for a market cap of $1.483 billion on a pricing of $13.

Ipo proceeds will be used for general corporate purposes, including contributions of capital to insurance business.

Berkshire Hathaway will own 21% of SYA post-ipo.

From the prospectus:

'We are a life insurance company focused on profitable growth in select group health, retirement, life insurance and employee benefits markets. Our operations date back to 1957 and many of our agency and distribution relationships have been in place for decades.'

SYA is coming public right about at book value. Return on equity for the 12 months ending 9/30/09 was 13.9%.

SYA operates through four segments:

Group - 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 5,000 individuals.

Retirement Services - Fixed and variable deferred annuities, including tax sheltered annuities, individual retirement accounts, or IRAs, and group annuities to qualified retirement plans.

Income Annuities - single premium immediate annuities, or SPIAs, to customers seeking a reliable source of retirement income and structured settlement annuities to fund third party personal injury settlements.

Individual - Term, universal and variable life insurance as well as bank-owned life insurance, or BOLI.

Annuity and life insurance products are distributed through approximately 16,000 independent agents, 26 key financial institutions and 4,300 independent employee benefits brokers. SYA was a top-five seller of fixed annuities through banks in the first nine months of 2009.

Ratings by the credit agencies are solid across the board.

Market opportunities:

1 - Increasing need for retirement savings and income. 76.8 million baby boomers are approaching retirement age. In addition there 61.6 million Generation X'ers, most of whom will be funding retirement from personal savings/plans.

2 - Continued demand for affordable health insurance. Health insurance premiums in the United States increased 131% from 1999 to 2009. 75 million people in the United States under the age of 65 receive their benefits through self-funded plans, including 47% of workers in smaller firms and 76% of workers in midsize firms. SYA plans to grow their business by offering affordable health plans through employer-sponsored limited benefit employee health plans and by offering group medical stop-loss insurance to medium and large businesses that self-fund their medical plans.

SYA's asset portfolio has little subprime exposure, less than 1% invested in Alt-A mortgages and no exposure to ARM's.

SYA's strategy is to provide simple to understand products without adding product features that create liability-side balance sheet volatility.

Financials

SYA plans on paying a $0.05 dividend per quarter. On an annualized $0.20, SYA would yield 1.7% on a pricing of $13.

$20 billion in investments, $22 billion in assets.

**Book value of $12.42 on ipo. SYA is going to be priced right around book value which should allow this deal to price/work in range.

As with most financial institutions, 2008 was a disaster for SYA with $158 million in net realized investment losses. SYA did manage a bottom line gain in 2008 however. 2009's numbers appear as if SYA is heading back on track to normalized investment gains/losses with net investment losses of $29 million through 9/30. Historically these are still quite large, compared to 2008 though a vast improvement.

Big risk here is the obvious - Potential for future investment losses. SYA really does not invest much of their asset base in Treasuries, instead preferring corporate securities. These include corporate bonds, equities, preferred shares and private placements. Fully 2/3's of their investments are in corporate securities leaving SYA vulnerable to the broader economy as a whole. That they survived the 2008 meltdown intact is a positive here as it is doubtful a similar situation will arise again in the near term. Real estate risk: SYA does have 20% of their investments in residential mortgage backed securities and 10% in commercial mortgage backed securities. SYA sums it up well in the prospectus: 'If the current economic environment were to deteriorate further, it could lead to increased credit defaults, and additional write-downs of our securities for other-than-temporary impairments.'

2009 saw growth in SYA's fixed deferred annuity products and sales in single premium life insurance products.

In 2009, SYA's Group insurance line had a 92% ratio, anything below 100% indicates profitability.

2009:

Through the first nine months total 2009 revenues appear on track for $1.75 billion. This number does include writedowns and net investment losses. Operating expense ratio of 89%, operating profits 11%. Operating expenses include policyholder benefits/claims, interest credited to accounts, policy amortization, interest expense and general operating expenses. Net income 7 1/4%. Earnings per share of $1.10. On a pricing of $13, SYA would trade 12 X's 2009 earnings.

2010 - Assuming SYA's investment losses subside and performance of investment portfolio returns to normalcy, SYA should be able to add to the bottom line. The wild cards are numerous: 1) The current Federal government health plan overhaul and effect on health insurance plans are still unknown; 2) The performance of corporate bonds in 2010, of which SYA is heavily invested; 3) The performance of residential and commercial real estate, of which SYA has approximately 30% of investments.

A few things to keep in mind here. While the bulk of SYA's investment's are marketable/fixed and do have fair value pricings and/or pricing methods, SYA does have alternative and/or hard to price investments. We are in a position of 'taking SYA's word' for the value and impairments of those investments.

Conclusion - Overall a solid and well rounded insurance and retirement company. Coming book value(assuming SYA's investment marks on on target), SYA was able to generate positive cash flows in a difficult 2008 environment and appears poised to do quite well assuming a 'normalization' of the US economy and financial system. The key here is SYA's investment portfolio, and as long as those investments perform as SVA expects this deal should work short term and longer term. Priced to work in range