Tuesday, October 13, 2009

Buffett selling means you shouldn't buy?
Jonathan Weil

It's not often that Warren Buffett gives the investing public a reason to believe he's not on their side.

Then again, it's not every day that Buffett's Berkshire Hathaway shows up on the list of selling shareholders in another company's initial public offering (IPO).

This brings us to today's question: If Buffett is a seller, should you be a buyer? Probably not. This is the same fellow, after all, who is famous for saying that the best time to sell a stock is never.

The possible IPO comes from Symetra Financial, a life-insurance carrier based in Bellevue, Washington. Berkshire began accumulating its 26% stake in Symetra in 2004 when a group led by Berkshire and White Mountains Insurance Group bought the business for $1.4 billion from the insurance company Safeco Corp.

Symetra filed this week to raise as much as $575 million from new shareholders, and said it intends to use its portion of the proceeds for general purposes, which may include fresh capital for its insurance subsidiaries. Naturally, if this is such a good investment opportunity, you might think Buffett would be increasing Berkshire's stake in the company. He's not.

Symetra didn't disclose how many shares Berkshire and White Mountains may sell though it did say they would continue to own some after the IPO, assuming it goes through. It's also possible they could decide not to sell any even though the company's prospectus identifies them as "selling stockholders."

Slick Math

When I looked through Symetra's registration statement - which is 1,000 pages long, including exhibits - what struck me was the slickness of its numbers. The first financial metric Symetra touted on the opening page of its prospectus was something it called adjusted book value, which was $1.4 billion as of June 30. That figure turns out to be a lot of hot air.

Symetra's actual book value, or shareholder equity, was $763.7 million. The company arrived at the $1.4 billion by adding back $642.9 million of pent-up losses, mainly from investments, and acting as if they don't matter. That's no small detail. Symetra's equity looks thin at 3.6% of the company's $21.1 billion of assets. Berkshire's equity, by comparison, is equivalent to 43% of assets.

Additionally, Symetra's prospectus said the company's "internal control over financial reporting does not currently meet the standards" required by federal law for publicly traded companies. That's quite a disclosure, considering Symetra was a unit of a large public company as recently as 2004. It tells you there's a chance that Symetra's financial statements might not be reliable.

Mining for Fees

As for the business itself, Symetra's owners have operated a lot like private-equity deal whizzes, extracting large sums of cash through dividends and fees.

For 2006, Symetra reported net income of $159.5 million and paid $100 million of dividends. In 2007, when net income was $167.3 million, Symetra paid its shareholders $200 million of dividends - which it financed in part by issuing $150 million of new debt. Perhaps if Symetra hadn't paid such large dividends before, it wouldn't need money from the public markets now.

The company hasn't paid dividends since 2007. Net income fell to $22.1 million in 2008, driven by investment losses, before rebounding to $52.1 million during the first six months of 2009. This year's earnings come with a caveat, though.

Help From FASB

Symetra's pretax profit would have been 92% less were it not for rule changes by the Financial Accounting Standards Board (FASB) last spring. That's when the FASB caved to pressure by Congress and rushed to expand the range of investment losses that banks and insurance companies can exclude from their reported earnings even when they conclude the losses aren't temporary.

Additionally, White Mountains collects fees for managing Symetra's investments - $57 million in all since the start of 2006. For example, when White Mountains invests Symetra's money in a hedge fund or in corporate equities, it gets an annual fee equivalent to 1% of the investment's value.

White Mountains' $14.6 million of fees last year exceeded Symetra's $13 million of pretax income. Nice work if you can get it. (Symetra's net income was greater than pretax profit because of a large deferred-tax benefit.) Like Berkshire, White Mountains has a 26% stake in Symetra. Berkshire also had been White Mountains' second-biggest shareholder until it sold its stake back to the company last year.

We can't blame Buffett for wanting to sell some of his company's Symetra shares, which amount to a tiny fraction of Berkshire's $275 billion of assets. Berkshire's shareholders should be pleased if he can. Symetra also filed to go public in 2007, only to cancel the offering when the IPO market dried up.

You have to wonder, though, why anyone would want to be on the other side of this trade.

(Jonathan Weil is a Bloomberg News columnist. The opinions expressed are his own.)

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