AIZ - Assurant: Overvalued Insurer Gets Hold Rating As Earnings Grow

2023-09-20 09:00:00 ET

Summary

• Assurant gets hold rating, in line with consensus from analysts.
• Positives: dividend growth/stability, earnings YoY growth, company financial health.
• Headwinds: share price expensive, valuation high vs sector.
• Risks of exposure to commercial real estate have been discussed.

Research Summary

Today I'll be rating Assurant ( AIZ ) , in the financials sector, multi-line insurance subsector.

This company had its most recent FY2023 Q2 earnings on Aug. 1st, and I will be using some of that data in today's analysis, as well as information from Seeking Alpha and other sources.

For readers less familiar with this company, here are a few relevant points from their website that I think could be interesting to readers: rating #325 on the Fortune 500, 300MM+ customers worldwide, active in 21 countries, solutions include warranties / protection plans / service contracts. From their website, it appears their target client is businesses rather than consumers directly.

Two key peers of this company, according to Seeking Alpha data, are The Hartford Financial ( HIG ) and Aviva ( OTCPK:AVVIY ).

Rating Methodology

Using a streamlined, structured process, I break down my overall holistic rating of this stock into 5 categories I rank individually and of equal weight: dividends, valuation, share price, earnings growth, company financial health.

If I recommend this stock on at least 3 of 5 categories, it gets a hold rating. 4 of 5 gets a buy, and less than 3 gets a sell rating. Then I compare my rating to the consensus from analysts, Wall Street, and the SA quant system.

Then, I explain any upside or downside risks to my outlook.

Dividends

In this category, I will analyze the dividends of this stock and whether I think they present an opportunity for dividend-income investors. The data comes from official Seeking Alpha dividend info.

As of the writing of this analysis, the forward dividend yield is 2.02% , with a payout of $0.70 per share on a quarterly basis, with a most recent ex-date of Aug. 25th. Since the yield is above 2%, I'd consider it modestly competitive but then again let's see how it compares to the overall sector.

When comparing to its sector average, this dividend yield is 47% below its sector average.

I believe this is a modestly negative point to consider for dividend investors who are comparing multiple stocks in which to invest. In my opinion, my target range is a yield of 2.5% - 5%, to stay within a few points of the sector average. In this case, the yield seems moderately below average, and even got a "D" grade from Seeking Alpha which does not add confidence to my outlook.

Another factor to consider is the growth trend in the dividends over a longer period, in this case 5 years.

In looking at the 5-year dividend growth for this stock, it has shown a positive growth trend. This is, in my opinion, a positive point for dividend investors and a sign of this firm's capacity to return capital back to shareholders.

Additionally, I am looking for stability with dividend payouts, and this stock has shown regular dividend payment history lately without interruption, and also had raised the dividend twice in the period shown in the table, which is a positive point to think about.

So, although the yield is below the sector average, I think this stock makes up for it with dividend stability and growth. I would therefore recommend this company on the category of dividends.

Valuation

In this category, I will analyze the valuation of this stock. The data comes from official valuation info on Seeking Alpha, specifically the forward P/E ratio and forward P/B ratio, the key metrics I look at.

This stock has a forward P/E ratio of 13.16 , which is 36% above its sector average.

I think that a reasonable price to earnings for this stock would be between 8x earnings and 11x earnings, to stay within a reasonable 2-point range of the average. In this case, on this metric the stock appears modestly overvalued vs its overall sector. I understand some stocks will be outliers and deviate from the average, but there should be justification as to why an investor should pay 13x forward earnings.

In the comments section, I welcome your feedback as to whether you think this stock is justified at just over 13x forward earnings? Let's get a productive discussion going!

In terms of the price-to-book value, this stock has a forward P/B ratio of 1.59 , which is 59% above its sector average.

I think that a reasonable price-to-book value for this stock would be between 0.50x book value and 1.5x book value, to stay within a 1/2 point range of the average. In this metric, this stock appears slightly overvalued vs its overall sector.

Based on the examples I gave, because the stock appears overvalued on both metrics studied, I would not recommend this stock on the basis of valuation.

Share Price

Next, I decide if the current share price is a potential buying opportunity based on my portfolio goal of buying at the current price, holding for 1 year until Aug. 2024, and achieving an unrealized gain of +10%. The "1 year" hold period is arbitrary and for example purposes.

The price chart (as of the writing of this article) shows a last closing share price of $140.28, compared to its 200-day simple moving average "SMA" of $127.92 , over the last 1-year period. I chose the 200-day SMA as it is a long-term trend indicator that smooths out the trend nicely.

Next, I plug in the current SMA and share price into the following simulator spreadsheet I created, which simulates unrealized gains & losses if the share price as of Aug. 2024 reaches +10% above the current SMA but also if it drops -10% below the current SMA:

In the above simulation, my goal is to meet or exceed a +10% unrealized gain in 1 year, and I have a maximum loss tolerance of -10% unrealized loss.

Based on the simulation results testing the current buy price, I missed my goal for unrealized capital gains by 9.69%, since I am projecting a gain of just +0.31%. Also, I exceed my loss tolerance by 7.93%, since I am projecting an unrealized loss of -17.93%.

To better illustrate my planned trading "range" that is +/- 10% vs the 200 day SMA, I created the following illustration to help readers understand my outlook. As you can see, the current share price of $140.28 is pretty near the top of this range.

This does not mean the price cannot continue going further up, and it may, but taking the more conservative approach I personally consider it less of a great buying opportunity at the current price.

In this case, considering all the factors mentioned, I would not recommend the current buying price.

Since every investor has different profit goals and risk profiles, consider this simulator just a general framework to help think about this stock in a longer-term sense.

Earnings Growth

In this category, I examine the earnings trends over the last year. To simplify things, I will talk briefly about the top-line and bottom-line YoY results.

From a top line perspective, the core business of earning premiums on insurance did well on a YoY basis, but then the interest-earning assets also did well vs the same quarter a year ago.

I would say the latter is due to the elevated rate environment which has benefitted interest-bearing assets, and unlike a bank this firm does not have interest-bearing customer "deposits" that it has to pay out interest on.

From a bottom-line view, the company also saw YoY growth, which I think is a sign of effective management.

Based on this evidence as whole, I would recommend in this category. From a forward view, since the Fed is not expected to lower rates just yet, I would expect continued tailwind for this firm's interest-bearing assets, and I have seen this in some other insurance firms I recently covered.

Keep in mind that a pause in rate hikes by the Fed still is not a lowering of them, but keeping the current policy rate the same for the time being.

According to today's article in Business Insider , "many economists agree with (Fed Chairman) Powell's sentiment and are expecting a pause in hikes."

Financial Health

In this category, I will briefly discuss a few points indicating the company's overall financial strength as a continuing operation.

From the graphic below, we can see that the firm is cash-rich with $495MM in company cash, but also is committed to returning capital to shareholders via $60MM in stock repurchasing and dividends. I think this is a sign, as I mentioned before, of capital strength.

The following helps me better understand this firm's strategic vision for managing its capital, from a high-level overview, and it certainly drives confidence that this is a serious firm and not yesterday's startup.

Further, I want to call out the cash flow statement from Q2 which shows both levered and unlevered free cash flow being positive, and positive free cash flow per share of $2.53.

In addition, the company balance sheet shows positive equity going back well into 2021, with total assets far exceeding total liabilities. Again, as mentioned earlier, an insurance company cannot be the victim of a so-called "bank run" since it does not hold customer deposits but typically pays out insurance claims only if a valid incident / catastrophe actually occurs.

Based on the data, I recommend in this category, and consider it a firm with solid fundamentals.

Rating Score

Today, this stock was recommended in 3 of my 5 rating categories, earning a hold /neutral rating from me today. This is my initial analysis of this stock, and at a future date it may get another review.

My rating today is in line with the consensus from SA analysts, but less bullish than the consensus from Wall Street and the SA quant system.

Note that a hold rating is not to be considered a "negative" against this stock, or a call to sell it off, but rather a more neutral sentiment about it, based on all the factors combined.

My Rating vs Downside & Upside Risk

My neutral rating can face a both a downside & upside risk related to the firm's asset portfolio.

The downside risk could come from bearish analysts & investors hearing stories in the press such as an article in Reuters this summer about the financial sector's exposure to commercial real estate / office properties in their portfolio, or related exposure such as commercial MBS (mortgage-backed securities).

The upside risk could come from bullish analysts & investors who anticipate a pause in Fed rate hikes and eventual lowering of rates soon after, which means bond values could rise as rates go down, and therefore firms holding a lot of such bonds may see improvement in their bond portfolio values.

However, my counterargument is that a "hold" rating is justified right now because as you can see from the actual asset portfolio this firm holds, exposure to commercial mortgages & related is just 7% of the portfolio (3% in commercial mortgages & 4% in commercial MBS), so I don't think the fear of over-exposure to this segment is justified, and a stock selloff is not justified in this context, as their exposure to that segment is less than 10%.

At the same time, over-bullishness on this stock is not really justified because we don't really know when those rates will actually start being brought down, and there is still a lot of uncertainty as to what the Fed will "actually" do vs what they "might" do.

Therefore, I remain cautious on this stock since it does hold a lot of bonds, in fact as the chart shows it has almost half of its portfolio in corporate bonds. On the earnings side this means continuing interest income which is a positive, but on the asset side the thing to consider is potential unrealized capital losses on bonds that could lose or continue to lose market value.

Analysis Wrap-up

To wrap up today's discussion, here are the key points we went over:

This stock got a hold rating today.

Its positive points are: dividends, earnings YoY growth, company financial health.

The headwinds it faces are: share price, valuation.

Both upside & downside risks have been addressed, related to the firm's asset portfolio.

In closing, I have added this stock to my watchlist of insurance favorites, as that is a subsector I have covered frequently here as of late, since often it does not get adequate coverage in the larger financial press and is not one of the hot tech stocks being pushed, yet is a subsector that often has hidden gems and companies with lots of strong financial fundamentals if you look close enough for needles in the haystack.

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