Symetra Financial Corporation (SYA) is an undervalued insurance company with huge potential and solid growth prospects. This company has been overlooked because of the traditional, boring stigma associated with insurance companies and the fact that this company is not yet considered one of the big boys. Below is our introduction into the business model, the company's strengths, and the buying opportunity that continues to exist for Symetra. Investors will begin to realize strong value in this company as Symetra begins to undertake a huge marketing campaign in order to develop brand recognition and educate consumers and potential customers on what products the firm has to offer. The company has created a diverse product line and insurance offerings that have lured in major banks and financial institutions as customers. Symetra Financial Corporation is in a position to thrive going forward and we will take a detailed look at this company and why investors need to add this to its portfolio. Symetra has a market cap of $2.21 Billion and reports the next quarter on February 4, 2014. With this in mind, we value SYA at $20.00 by year-end of 2013 and $25.00 by June 1, 2014 (the end of the company's second quarter) an increase of 33% from current levels.
Symetra Financial Corporation at a Glance
Symetra Financial Corporation is a diversified financial services company based in Bellevue, Washington. In business since 1957, Symetra provides employee benefits, annuities, and life insurance through a national network of benefits consultants, financial institutions and independent agents and advisors.
Why Symetra is Overlooked
Symetra has long been involved in the insurance, annuity, and employee benefits area of financial services, but has really done so from behind the scenes. This is a company that will have a coming out party in 2014 as it has taken on a major advertising and sponsorship campaign in order to create amore recognizable brand for the company. Wall Street and investors typically focus on the major firms and companies like Symetra are forgotten about. Insurance has long had the stigma of being a boring business but underwriting profitable policies is something that Symetra excels at. This requires a certain amount of skill and expertise when evaluating risk. The company's high quality of underwriting and unique depth of market intelligence makes them an interesting play in the insurance business with a great deal of upside. The intelligence and strong management team is crucial to the business of underwriting large, complex risks. These are the capabilities that have become Symetra hallmarks. The company utilizes its resources to the max including risk management strategies, proprietary models, and expertise in collecting and analyzing facts and data.
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Symetra Competitive Advantages - An Overlooked, Stable Financial Services Company
Strong balance sheet provides a firm foundation for future growth
- Disciplined ALM and investment management
- No complex, opaque risks
- Strong capital position
Symetra has long established market leadership positions in banking
- Sold fixed deferred annuities and medical stop-loss
- Growth initiatives aim to generate additional growth from new, diversified earnings sources
- Leveraging existing distribution (fixed indexed annuities in banks, group life & disability income through premier benefits consultants)
- Developing brokerage general agency network for individual life sales
- Leveraging years of experience in the BOLI market to drive COLI sales
Expanding ROE and ROA over time
- Conservative investment strategy
- Asset/liability management - matching asset and liability cash flows
- Driving improved yield through commercial mortgage loan origination
- 77% of liabilities are illiquid or mostly illiquid
- Capital management (sustaining RBC ratio > 400% and strong ratings):
- Organic growth
- Aligned acquisitions
- Modest capital actions
- Debt to capital ratio = 13%
- Risk based capital ratio (estimated) = 480%
Medical Stop-Loss, Group Life & Disability Insurance
- Achieving profitability targets
- Maintain leadership position
- Capitalizing on opportunities that arise from healthcare reform
- Drive growth in group life and disability income premiums
- Focus on the corporate middle-market opportunity
SYA Broad Based Relationships with Large Customers
- A market leader in medical stop loss - Customers include Aon, Mercer, Arthur J. Gallagher and Company, and Willis
- A leading seller of fixed annuities and FIA - Customers in this space include JP Morgan Chase, Wells Fargo, SunTrust, LPL Financial, US Bank, and KeyBanc
- Partnerships with leading BGAs - Customers include Highland Capital Brokerage, Crump Life Insurance, and Capitas Financial
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The Company That You Have Never Heard Of, But Will Soon (Beginning in the End of 2013)
To increase brand awareness, Symetra is launching the company's first national advertising campaign through a partnership with the University of Notre Dame and the school's football program. Campaign Highlights include:
- Advertising and sponsorships with premium brands
- Multi-platform exposure: broadcast television, online, print, mobile and live events
- 250 million impressions, which means people will see or hear the name Symetra at least 250 million times
Heroes in the Classroom - Symetra honors over 72 public school teachers each year through a partnership with the Atlanta Falcons, Chicago Bears, San Francisco 49ers and Seattle Seahawks
The Symetra Tour - The world's largest international women's development tour - is committed to developing LPGA stars of tomorrow while creating exceptional role models for youth today.
Sponsor of Sports Illustrated Rising Stars - Symetra is recognizing emerging talent in amateur and professional sports. These up-and-comers will be profiled in SI's digital and print media throughout 2013-2014. Included in this stellar program will be rising stars in professional and college football, college basketball, and the 2014 Winter Games.
Symetra Financial Corporation in the Future
There are three core areas of focus for Symetra Financial Corporation in order to create higher ROE in the future. The company has consistently delivered in the areas of optimizing its business portfolio, solid capital efficiency, and enhancing investment return. This is a company that does not have much analyst coverage (8 analysts to be exact).
- Optimization of Business Portfolio
- Focus on new and profitable growth markets and lines delivering attractive risk-adjusted returns.
- Continue evaluating strategy and business line return, risk, and volatility.
- Reduce volatility and risk by reduction of catastrophe exposure in U.S. property insurance.
- Capital Efficiency
- Continue to underwrite highly profitable business.
- Return excess capital to shareholders.
- Execute on repurchase authorization of 10 Million Shares.
- Enhancing Investment Return
- Constantly evaluate ways to increase ROA within risk tolerance.
- Invested $100 million in equities markets in Q2 of 2013.
- Tactically adding to BB Bank Loans and High Yield Portfolio.
Outlook and Trends in 2013
For the first half of 2013, SYA achieved an average rate increase of 3% on policy renewals across all business segments with an overall average that was flat in reinsurance and a 7% increase on average in insurance. As the year winds down, SYA sees positives for insurance lines of business and better pricing for reinsurance. The company is also seeing some positive signs in the insurance lines as a result of increasing insurance rates and economic improvement domestically.
What is Reinsurance? An Important Aspect of the SYA Business Often Overlooked
Reinsurance is insurance that is purchased by an insurance company as a means of risk management. The original insuring company and the reinsurer enter into an agreement which details the conditions which the reinsurer would pay a share of the claims incurred. The reinsurer (SYA for instance) is paid a "reinsurance premium" by the ceding company, which issues insurance policies to policyholders. The ultimate goal of reinsurance is to reduce exposure to loss by passing part of the risk of loss to a reinsurer.
With reinsurance, the insurer can issue policies with higher limits than would normally be allowed. This allows them to take on more risk because some of that risk is now transferred to the reinsurer. Reinsurance has become a science rather than an art and reinsurers have become much more reliant on actuarial models. Reinsurance can make an insurance company's results more predictable by absorbing larger losses and reducing the amount of capital needed to provide coverage. The risks are diversified, with the reinsurer bearing some of the loss incurred by the insurance company. It is important to understand these facts because almost 10% of SYA's business comes from the reinsurance side.
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In the case for Symetra Financial Corporation, considering the future prospects and improved pricing surrounding annuities and insurance products, the company appears to be undervalued compared to peers. The company will see increased spending from customers as pricing continues to improve in the lower interest rate environments around the world. The recent pullback should be used as a buying opportunity as SYA continues to diversify business and expand operations. As we can see, it is trading at a discount in almost every valuation metric. Investor's should focus on the firm's extremely low Price/Sales ratio (1.02) compared to competitors trading at 2x this metric. When it comes to valuation, SYA appears to be a Strong Buy at this point in time. The company also boasts a nice dividend yield at 2.00%.
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Sales Growth is another key metric to look at in the Insurance space. This is an area that has slowed for many companies involved in this sector as many competitors needed to re-vamp product lines to accommodate the current economic environment. SYA has continued to lead the pack, even as margins have tightened a little but, the company is still able to create favorable and profitable spreads for the policies developed. With sales growth of 5.1%, Symetra has proven that a high quality product can be successful and a sustainable business. This sales growth does not appear to be slowing down based on the company outlook and sales thus far in 2013.
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Symetra boasts a nice Operating Profit Margin at 11.12%, which outpaces other best of breed companies in the insurance sector traditionally at 8.39%. This industry has been challenged by the high costs of developing policies and tightening margins, but SYA has been very successful in terms of cutting costs and structuring contracts in a manner that will make them profitable.
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When looking at SYA compared to peers, it trades at a significant discount when looking at the metrics Book Value/Share and Tangible Book Value/Share. We believe that there is significant, unrealized value in this company and that the stock a great deal of upside over the long-term. Book Value Per Share is an extremely important metric for investors to pay attention to, especially when evaluating insurance companies.
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Obviously when looking at these measures, SYA is succeeding on all fronts. When specifically focusing on the ROA of 0.63%, the company is performing well when it comes to the operating efficiency based on the firm's generated profits from total assets, but this is also an area where management has focused on improving. The ROE of 5.63% shows the solid performance in terms of the shareholders rate of return on investment in the company. SYA has outperformed peers in a tough environment and with big opportunities approaching in the near future, expect this outperformance to continue.
Financial Strength, Share Buyback, and Dividend History
On September 1, 2013, the board of directors authorized the repurchase of up to 10.0 million shares of Symetra's outstanding common stock. Under the stock repurchase program, purchases may be made from time to time in the open market, in accelerated stock buyback arrangements, in privately negotiated transactions or otherwise. This buyback would currently represent $187.5m worth of stock, or almost 8.5% of the company's total market capitalization.
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Symetra Financial Corporation is in a strong position from a financial standpoint as it currently has very low Debt/Capital ratio at 0.13 and a nice dividend payout ratio at 20.23% as the company continues to execute on its growth strategy going forward.
Another area for investors to focus is on the company's dividend payout ratio and overall financial strength. The company currently has a 2.0% Yield and has consistently raised the dividend over the past 4 years, even through difficult events from an insurance standpoint. Investors should look for this trend to continue as the company underwrites profitable policies.
Symetra Financial Corporation Products
Fixed Annuities
SYA offers fixed single premium deferred annuities that provide for a premium payment at time of issue, an accumulation period and an annuity payout period beginning at some future date. The fixed annuities include both traditional fixed-rate and fixed indexed annuities. As of December 31, 2012, the company had $11.1 billion of account value associated with fixed annuities, including $374.9 million of fixed indexed annuities.
Variable Annuities
Variable annuities provide the company with fee revenue in the form of flat-fee charges, mortality/expense risk charges, and asset related administration charges. The mortality/expense risk charge and asset related administration charge equal a percentage of the contract owner's assets in the separate account at annual rates ranging from 0.6% to 1.4%. Recently, the company had $723.3 million of variable account value held in a separate account.
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Income Annuities
SYA offers retail immediate annuities that guarantee a series of payments that continue either for a certain number of years or for the remainder of an annuitant's life. Payments can begin immediately or be deferred several years into the future. The company currently has $879.7 million of reserves associated with retail immediate annuities. In late 2012, SYA discontinued sales of structured settlement annuities, which provide an alternative to a lump sum settlement, generally for a personal physical injury or worker's compensation claims. The company will continue to service the existing block of business and has $5.7 billion of reserves associated with structured settlement annuities.
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Medical Stop-Loss
The medical stop-loss insurance plans for employers are self-fund health plans for employees that pay all claims and administrative costs. This product helps employers manage health expenses by reimbursing individual claim amounts above a certain dollar deductible and by reimbursing aggregate claims above specific total dollar thresholds. The key pricing and underwriting criteria are medical cost trends, the employer's selected provider's network discount structure, the employer group's demographic composition (including the age, gender and family composition of the employer group's members), industry, geographic location, regional economic trends, plan design, and prior claims experience. In general, SYA retains medical stop-loss risk up to $1.1 million per individual, and $1.0 million for aggregate claims, and reinsure the remainder. Medical stop-loss is the leading product in the Benefits Division, representing approximately 89% of premiums in 2012.
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Symetra Financial Corporation Investment Portfolio
Fixed Maturities
Fixed maturities include bonds, mortgage-backed securities, and redeemable preferred stock. Currently, SYA has a portfolio consisting of $23.519 Billion of Fixed Maturities. The company continues to diversify portfolio holdings as risk/return profiles change.
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Mortgage Loans
Symetra Financial Corporation originates and manages a portfolio of mortgage loans, which are secured by first-mortgage liens on income-producing commercial real estate, primarily in the retail, industrial and office building sectors. The Company's mortgage loan portfolio is generally diversified by geographic region, loan size, and scheduled maturity. Most recently, 29.1% of the company's commercial mortgage loans were located in California, primarily in the Los Angeles area, 11.5% were located in Texas, and 9.3% were located in Washington.
Residential Mortgage-backed Securities
As of September 30, 2013 the fair value of the Company's residential mortgage-backed securities (RMBS) was $3.0078 Billion. These securities are primarily fixed-rate, with a weighted-average coupon rate of 4.67%.
Commercial Mortgage-backed Securities
As of September 30, 2013 the fair value of the company's commercial mortgage-backed securities (CMBS) was $1.6889 Billion. The weighted-average coupon rate on these securities is 5.03%. The company's CMBS securities were primarily non-agency securities, which comprised 81.3% of the total CMBS portfolio. The non-agency CMBS had an estimated weighted-average credit enhancement of 31.0% and 97.2% in the most senior tranche as of September 30, 2013.
Marketable Equity Securities
Marketable equity securities are investments in common stock, including real estate investment trusts (REITs), certain non-redeemable preferred stocks and investments in mutual funds. The securities primarily consist of investments in publicly traded companies. Investments in limited partnerships are holdings in private equity funds, which totaled $28.6 Million.
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The Big Question - How Do Interest Rates Affect the SYA Business?
Interest rates are among the most important economic factors to consider when looking at a company like Symetra Financial Corporation. During July and August of 2013, the benchmark interest rate (10-year U.S. Treasury yield) continued an upward trajectory begun in second quarter, until reversing course in late September. The improved interest rate environment during most of the quarter helped drive sales growth of the fixed deferred annuities, including fixed indexed annuities. The company expects strong sales of fixed deferred annuities to continue in the fourth quarter. Yields on new asset purchases in the third quarter improved from the first half of 2013, but remain low relative to historical rates. To help maintain yields, SYA continues to pursue originations of commercial mortgage loans that the company underwrites, and have increased investments in foreign securities.
The level and movement of interest rates are crucial factors that SYA must consider in the management of the company and establishment of future strategic direction. Symetra continues to be impacted by the low interest rate environment in the U.S. In December 2012, the Federal Reserve announced plans to purchase longer-term U.S. Treasury securities outright, at a pace of $45 billion per month. Furthermore, the company reaffirmed plans to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. This announcement followed the conclusion of "Operation Twist", which involved buying longer-term U.S. Treasury securities and simultaneously selling shorter-dated issues in order to bring down interest rates. The low interest rate environment compresses margins on annuity and life insurance businesses and slows the company's pace of growth. To manage the company's investment yield in this environment, SYA plans to continue investing in commercial mortgage loans as well as increase investments in foreign securities. During 2012, the company originated $825.7 Million in commercial mortgage loans and expects to continue at least this pace of originations during 2013. While interest rates on recently written loans have decreased consistently with the overall level of interest rates, the company continues to be an attractive investment opportunity.
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What Investors Need To Know
The next earnings release will give investors insight into how the firm has positioned the product and investment portfolio for 2014 and beyond. Expect this company to outperform in the Insurance Industry as it has one of the industry's best business models and management teams. The 2013 fiscal year proved that the company has adapted to a new environment and can weather the tougher markets in this space, while positioning the company for strong future growth. This is a firm that has a great opportunity to grow and become recognized over the next year as the environment surrounding the company begins to become more favorable.
With this in mind, we value SYA at $20.00 by year-end of 2013 and $25.00 by June 1, 2014, an increase of 33% from current levels. We arrive at this number by assuming that Symetra Financial Corporation will see an earnings increase of 8% over the course of the next 7 months, the company will begin to trade at an industry average P/E multiple (currently 13.28 and the industry average P/E multiple is 16.93), which gives us multiple expansion of at least 15% even to the low end of the range, and continued share buybacks representing an additional 8.5% (8%+15%+8.5%=31.5%).
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)
Additional disclosure: AlphaStreetResearch is a team of Investment Research Analysts. This article was written by Mr. Hunter Orr, Director of Research, with research assistance from Mr. Aaron Zander, Junior Research Analyst.
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