AIZ - Assurant Is Trading At A Nearly 5-Year Low Valuation Level

Summary

• AIZ has posted somewhat disappointing results in the last two quarters, mostly due to a strong dollar and excessive inflation.
• AIZ is trading at a nearly 5-year low forward price-to-earnings ratio of 10.3.
• When the current headwinds subside, AIZ will have great upside potential.

About three months ago, I recommended buying Assurant ( AIZ ) for its attractive valuation. Since then, the stock has declined 14%, primarily due to its disappointing business performance, which was caused by a strong dollar, slightly higher insurance claims and deceleration in the segment of Global Lifestyle. However, these business headwinds are likely to subside in the upcoming years. As a result, Assurant, which is currently trading at a nearly 5-year low forward price-to-earnings ratio of 10.3 , has become a great bargain for investors with a long-term horizon.

Business overview

Assurant is a well-managed insurance company, with presence in North America, Latin America, Europe, and Asia Pacific. During the last decade, the company has consistently grown its operating earnings per share, at a 5.7% average annual rate. The insurer operates in two segments: Global Lifestyle and Global Housing. The former includes insurance products for the owners of vehicles, mobile phones, consumer electronics and appliances while the latter includes insurance products for homeowners.

In the second quarter, Assurant grew its revenue only 2% over the prior year’s quarter and posted a 1% decline in its earnings per share, mostly due to the impact of high inflation on the Global Housing segment. Until that point, the Global Lifestyle segment had remained essentially unaffected by 40-year high inflation.

In the third quarter, the performance of Assurant slightly deteriorated. Global Lifestyle decelerated while both segments were adversely affected by a strong dollar and somewhat higher insurance claims. As a result, the company posted an 11% decrease in its adjusted EBITDA and an 8% decrease in its operating earnings per share over the prior year’s quarter. Assurant exceeded the analysts’ estimates by $0.01 but that was not a great surprise, as the company has beaten the analysts’ estimates in 18 of the last 22 quarters.

In the first nine months of 2022, excluding catastrophe losses, Assurant grew its adjusted earnings per share by 7%. This performance is worse than the expectations six months ago, primarily due to a strong dollar and the impact of sky-high inflation on the demand for Global Housing. However, the insurer is still expected to report 13% growth of earnings per share in 2022, from $9.36 to a new all-time high of $10.56.

Record earnings per share amid a severe downturn, which has been caused by the surge of inflation to a 40-year high and the rally of the dollar to a 20-year high, certainly reflect resilient business performance. In addition, the current business headwinds are likely to subside in the upcoming years. For instance, it is unreasonable to expect the dollar to keep strengthening indefinitely.

Moreover, central banks have begun to raise interest rates aggressively in order to cool the economy and thus drive inflation back to normal levels. Given their determination, central banks are likely to accomplish their goal sooner or later. When inflation reverts towards its long-term average level, the global demand for house insurance is likely to recover. To cut a long story short, Assurant is facing some strong headwinds in the short run but these headwinds are likely to prove temporary in nature.

Furthermore, while Assurant has no control over the macroeconomic conditions, it is doing its best to improve some factors that are under its control. The insurer recently announced a multi-year extension of its long-term partnership with T-Mobile. The extension of the contract provides Assurant with increased visibility in its U.S. mobile business while it will significantly increase repair volumes through the over 500 cell phone repair locations of the company.

Assurant has also stated that it has increased its efforts on enhancing digital adoption and automating its processes in order to reduce its operating costs and improve customer satisfaction. Thanks to these efforts, the company expects to save approximately $55 million per year from 2024. The insurer expects to achieve more than half of these savings this year. As Assurant has posted operating income of $534 million in the last 12 months, it is evident that its savings initiative will significantly enhance its operating income if it is implemented successfully.

Analysts seem to agree on the promising growth prospects of Assurant. They expect the company to grow its earnings per share by 18% in 2023 and by another 15.5% in 2024, to a new all-time high.

Valuation

High inflation hurts most companies, as it increases their operating costs while it also reduces the real purchasing power of consumers, thus taking its toll on consumer spending. Assurant is somewhat resilient to these effects of inflation, as it has proved capable of passing its increased costs to its customers via higher insurance premiums.

On the other hand, Assurant cannot escape the impact of inflation on the valuation of stocks. Excessive inflation greatly reduces the present value of future cash flows and thus it tends to compress the price-to-earnings ratio of most stocks. This is the primary cause behind the 17% correction of the S&P 500 and the stock of Assurant over the last 12 months.

Assurant is currently trading at a nearly 5-year low forward price-to-earnings ratio of 10.3 , which is much lower than its 10-year historical average of 13.8 . It is also important to realize that the stock is trading at only 8.9 times its expected earnings in 2024. As the company has a great record of beating the analysts' consensus, it is likely to meet or exceed the analysts' estimates in 2023-2024.

Moreover, the Fed has made it clear that it will exhaust its means to restore inflation to its target level of about 2%. To this end, the Fed has been raising interest rates at a record pace in recent months. It is thus reasonable to expect the central bank to achieve its goal sooner or later. Whenever inflation subsides, the valuation of Assurant will probably revert towards its historical average level. This means that Assurant will have great upside potential when inflation subsides merely thanks to the normalization of its valuation level. If the stock meets the analysts’ estimates in 2024 and trades at its historical average price-to-earnings ratio of 13.8 in that year, it will trade at $199 (=14.39*13.8) in that year. This level implies 54% upside potential from the current stock price.

Risk

The main risk for Assurant is the unfavorable scenario of persistently high inflation for years. In such a scenario, the insurer may continue raising its premiums meaningfully and thus it may remain highly profitable. However, high inflation will continue to exert pressure on the valuation of the stock. As a result, great patience will be required until the stock reaches the above mentioned price target. On the bright side, as the Fed has clearly prioritized restoring inflation to a healthy level, inflation is unlikely to remain excessive for years.

Final thoughts

The stock of Assurant is trading at a nearly 5-year low forward price-to-earnings ratio of 10.3 and is offering a nearly 10-year high dividend yield of 2.2% due to some headwinds that are beyond the control of the company, namely a strong dollar and high inflation. However, these headwinds are likely to attenuate sooner or later. When they attenuate, the stock is likely to highly reward those who purchase it around its depressed stock price.

For further details see: