Symetra Financial IPO - White Mountains Insurance

The long awaited initial public offering of Symetra Financial Corp. has finally arrived. An S-1 filed by the company this morning has put a price range of $18-20 per share on the 39.5 million shares being offered in the IPO. Symetra was created in 2004 by an investment group led by Berkshire Hathaway and White Mountains Insurance. Both entities own 26,887,872 shares of Symetra. WTM will be selling from 9,870,306 to 11,350,852 shares.

If we assume a pricing of $19 per share then WTM will receive from $187 to $215 million in the IPO. Its remaining stake in Symetra Financial, which will trade under the symbol SYA, will be worth $295 to $323 million.

Book value per diluted share for Symetra as of 9/30/2007 is $15.10, so the IPO is being priced at 1.25 times book value assuming a final price of $19 per share. In my blog post from June I used 1.5 times book value so the value comes in a little less than I thought.

This was still a good deal for White Mountains Insurance as the investment group purchased these assets from Safeco at less than book value in 2004, and they have also withdrawn capital since the original purchase. Here is the lead paragraph from the WTM press release in 2004:

"HAMILTON, Bermuda, Mar 15, 2004 /PRNewswire-FirstCall via COMTEX/ -- White Mountains Insurance Group, Ltd. (NYSE: WTM) announced today that it and Berkshire Hathaway Inc. are leading an investor group that will acquire the life and investments business of Safeco Corporation for $1.35 billion, subject to adjustment based on June 30, 2004 adjusted statutory book value.

Safeco Life and Investments, with headquarters in Redmond, Washington, focuses mainly on group insurance, individual life insurance, structured settlements, retirement services and mutual funds. As of December 31, 2003, the business had approximately $22.5 billion of total assets and $2.57 billion in GAAP book value ($1.74 billion excluding FAS 115). President Randy Talbot and his management team will continue to run the business following the acquisition."

The S-1 is here at the Edgar web site.

Predictions for the Crisis

In the spirit of Byron Wien, I give you my humble predictions for the current financial crisis:

1) One or more major publicly held homebuilders will go into Chapter 11 bankruptcy, despite all we heard about how they were better prepared for a downturn this cycle.

2) The Fed will make at least one inter meeting emergency rate cut of 25 basis points, more to restore investor confidence than in any hope of having the practical effect of jump starting the credit markets. The stock market will surge, and have one of the biggest percentage gains in history, as short sellers scramble to cover.

3) Berkshire Hathaway and Warren Buffett will finally use that powder he has been saving all these years and step in and make an investment in a major brokerage firm or bank and prevent it from following Drexel Burnham and the Bank of New England into oblivion.

4) Domestic GDP growth will slow down to recession or near recession levels for at least a quarter. Due to the lag effect of financial data being reported, this will not be revealed until after the crisis ends.

5) A major marquee hedge fund will experience a "run" by investors and do an emergency halt to all redemptions, invoking an obscure clause buried deep in the offering memorandum. Investors will rant and rave but the agreement is ironclad and proves why the best lawyers in the world are worth a $1000 an hour.

6) The wheels will fall off the Chinese stock market and the miracle of Chinese "growth" will grind to a halt when U.S consumer demand limps along without the tailwind of cash out home refinancing and the psychology of stock market wealth effects.

7) A shocking drop in either new home sales or housing starts triggers a new sell off in the S & P Homebuilders (XHB) SPDR just when everyone thought that the industry had bottomed.

8) The National Association of Homebuilders, the mouthpiece for the industry, finally admits that - yes - it is possible for home prices to decline on a national basis.

9) Commercial Real Estate will begin its own down cycle, as lenders get stingier, and everyone finally realizes that overly optimistic estimates of NOI growth are no substitute for common sense.

10) Oil and other commodities will gap down in price as demand falls off sharply, and the recent classic book "Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy," will start showing up in the bargain bin section of the book store right next to:

"The Great Reckoning: Protecting Yourself in the Coming Depression" (1992),

"Dow 36,000: The New Strategy for Profiting From the Coming Rise in the Stock Market" (1999)

"Deflation: Strategies for Building Wealth in the Coming Wave of Deflation" (1999)

and my last prediction -

10) The investment staff of the Retirement Systems of Alabama finally convinces their boss to sell 55 Water Street (this one is an inside joke, so sorry if you don't get it.)

Smart Money vs. Dumb Money

Everyone knows the Wall Street concept of smart money. It’s a myth really since even great investors do stupid things every now and then, but assume it’s a viable concept for the purpose of this post. Here’s how smart money talks about investing capital in a business compared to how dumb money talks about investing in a business.

Smart Money

Warren Buffets six criteria of buying a business

We are eager to hear from principals or their representatives about businesses that meet all of the following criteria:

(1) Large purchases (at least $75 million of pre-tax earnings unless the business will fit into one of our existing units)

(2) Demonstrated consistent earning power (future projections are of no interest to us, nor are “turnaround” situations)

(3) Businesses earning good returns on equity while employing little or no debt

(4) Management in place (we can’t supply it)

(5) Simple businesses (if there’s lots of technology, we won’t understand it)

(6) An offering price (we don’t want to waste our time or that of the seller by talking, even preliminarily, about a transaction when price is unknown).

Ian Cumming of Leucadia National Corporation (LUK)

We tend to be buyers of assets and companies that are troubled or out of favor and as a result are selling substantially below the values which we believe are there. From time to time, we sell parts of these operations when prices available in the market reach what we believe to be advantageous levels. While we are not perfect in executing this strategy, we are proud of our long-term track record. We are not income statement driven and do not run your company with an undue emphasis on either quarterly or annual earnings. We believe we are conservative in our accounting practices and policies and that our balance sheet is conservatively stated.

LUK also has its "Rules of the Road

1. Don’t overpay, no matter what the madding crowd is up to.

2. Buy companies that make products and services that people need and want and provide them as cheaply as possible with consistently high quality. Lower cost and higher quality is a relentless and never-ending task.

3. Earnings sheltered by NOLs are more valuable than earnings that are taxed!

4. Compensate employees for performance and expect hard work and honesty in return.

5. Don’t overpay!

William Thomas of Capital Southwest Corporation (CSWC)

Capital Southwest emphasizes the following elements in evaluating potential investments:

Management – Believing that the most important factor in any venture is the quality and integrity of the people who lead the company, we invest in financially committed management teams who share a vision of the future and have the ability and determination to achieve their goals. We prefer managers who have significant operating experience as well as an in-depth knowledge of their industries.

Markets – We search for companies serving markets which are large or expanding rapidly and have the potential to reach revenues of $100 million or more. In more mature markets, we invest in growth companies that have a clear competitive advantage or a strong market position.

Products – We invest in companies whose products or services are well positioned versus their competitors, offer significant value to customers, and are continually improved and upgraded. Proprietary products and services are attractive if supported by continuing development programs.

Dumb Money

Excite@Home buys Blue Mountain Card for $780 million in cash and stock – Dec 1999

"Excite@Home plans to leverage the Bluemountain.com audience reach and page views almost immediately to create more Excite@Home registered users, broadband subscribers and, ultimately, revenue," the company said.

"For Excite@Home, this acquisition promises to be a significant platform for future growth in both narrow and broadband content to generate increases in registered users, @Home broadband subscribers and revenue,"

Excite@Home sells Blue Mountain Card for $35 million in cash – Sept 2001

Google buys YouTube for $1.65 Billion

"The YouTube team has built an exciting and powerful media platform that complements Google's mission to organize the world's information and make it universally accessible and useful. This is just the beginning of an Internet video revolution."

"So by joining forces with Google, we’ll be able to sharpen our focus on this vision to create a new media platform for consumers and partners to distribute their media worldwide. This will allow us to, you know, with Google’s success in building a revolutionary new ad platform, this has inspired us to create a new model, a new platform for video content on the web. With this new relationship, we’ll combine Google’s experience and have the resources to continue on our mission to offer the most entertaining online video experience."

“There is a new class of sites that have developed very quickly and are very successful and delivering a lot of value.”

The smart money talks mainly about the numbers that are involved with the purchase. Is the business profitable? Are we paying a reasonable price for the asset? Does it have a sustainable competitive advantage?

The dumb money talks about conceptual information regarding the business that was bought. It will allow us to do this and it will allow us to do that, and it will provide a platform for moving into the next era, etc. They are short on details on the financial side because there is no financial side.

Why is the Internet industry like this? What makes successful and smart people suspend the normal laws of physics? Is it because they are using stock and not cash? When an individual wants to buy a small business, the first question to ask is – does the business make money? Would you pay 50 times sales to buy a corner grocery store or a t-shirt shop? I sure as hell hope not. Yet it happens all the time in Internet related businesses. Is it because of growth? Who cares about growth if profits don’t follow?

And yet investors love these stocks and crowd around them like a pack of teenaged groupies girls waiting backstage at a rock concert for the band to leave. "Oh, pick me! Pick me, please," they scream.

We will not give in to this madness.

Quotations from the Google/YouTube Conference call courtesy of Seeking Alpha