AIZ - Assurant: Rapid Growth And An Improving Portfolio

2023-10-23 14:11:03 ET

Summary

• Assurant Inc. has shown significant improvement in its financial performance, with net income increasing from $52 million to $156 million.
• The company operates in various specialty niches and has a diverse set of portfolios, which has contributed to its growth.
• Assurant offers a good dividend yield of over 2% and is a good long-term investment opportunity in the insurance industry.

Investment Rundown

Assurant Inc ( AIZ ) has been very proactive in diversifying its revenue streams and operations over the years. The company serves a global market with customers and clients all over the world. The last report showcased a significant improvement in the top and bottom lines of the business as AIZ was able to take advantage of positive market conditions. Net income came in at $156 million, up from $52 million a year prior. If this momentum continues then AIZ looks quite cheap right now to buy into in my view. The estimates suggest that AIZ will continue to drive significant EPS growth of double digits at least over the next few years.

I think that the company is a very good investment opportunity currently as it also offers a good dividend yield of over 2% right now. For investors looking for long-term exposure to the insurance industry, I think AIZ is a good choice currently, issuing a buy rating.

Company Segments

AIZ is a global company specializing in risk management products and services. The company operates across various specialty niches, including property and casualty insurance, as well as insurance related to technological devices and other markets. The company is organized into two key segments: Global Lifestyle and Global Housing. Within the Global Lifestyle segment, AIZ provides a range of solutions for mobile devices, extended service products, and related services. These offerings cater to consumer electronics, and appliances, and also encompass credit and other insurance products.

What I think has been differentiating AIZ in comparison to peers is the diverse set of portfolios and revenue streams that AIZ has gathered up over the years. The EBITDA has had a CAGR of 9% since 2019 which has been fueled by the continued optimization of the portfolio and how the company does its insurances. The company has hedged against major macroeconomic risks and this should yield less volatility in the coming years and decades of operations I think.

Comments From Management

From the last earnings call AIZ CEO Keith Demmings shared some good comments on the company's performance and how the outlook is currently for the business.

"Looking at our business segments. Global Housing adjusted EBITDA increased 49% year-to-date, excluding catastrophes. These results reflect actions taken to transform our Housing business, including focusing on product lines where we have a strong right to win, dramatically reducing noncore areas and our international catastrophe exposure, and aggressively deploying digital solutions to improve the customer experience while driving greater operational efficiencies".

The company has, as visible from Q2 FY2023, been able to hedge against risks and still deliver a solid set of results. The measures the management has taken to offset some of the risks and focus more on improving the product line are paying off very well and I think if they continue down this path the segment will further expand in terms of earnings.

"Now let's turn to our enterprise outlook and capital. Given first half results and anticipated performance for the remainder of the year, we now expect adjusted EBITDA to grow high single digits, excluding cats. This represents an increase from our original expectation of low single-digit growth".

Seeing AIZ raise the guidance for 2023 has been a very positive sign, to say the least. The share price did move up quite quickly since the last report but has come down slightly, following the broader market. I think this has left an even more appealing price point to get in at. If AIZ can sustain the double-digit EPS growth for a prolonged period I think a higher valuation will be the result for the business. Measures like advancing the product line and increasing prospective rates in some segments are driving this growth and not showing any signs that it's affecting the client base.

Valuation & Assumptions

Even if AIZ exhibits a slight premium based on earnings in comparison to the broader financial sector I find that the risk/reward is still very appealing. If double-digit EPS growth can be maintained then AIZ will reach a p/e of 8, in line with the sector in 2025. From there on out I think an EPS CAGR of 7 - 8% is possible if cash flows continue to go towards buying back shares. Together with a dividend of around 2% investors are getting a very good deal right now I think.

Besides, AIZ has one of the better dividend scorecards I have seen. A quite low payout ratio, which isn't risking the dividend being cut or resulting in the company lacking funds to expand its business, as well as an 18-year history of raising it I think is enough to make a buy case here. I think a terminal dividend increase of at least 3.5% is possible if AIZ can maintain the 65% EBITDA FCF conversion rate they anticipate.

Risks

AIZ's balance sheet predominantly consists of fixed-maturity bond securities. While these assets are known for their high credit quality and stability, they may not yield the highest returns, especially in an environment characterized by rising or persistently high interest rates. In such scenarios, AIZ faces the potential challenge of maintaining a strong balance sheet and generating competitive returns. The company must carefully manage its investment portfolio to mitigate the impact of interest rate fluctuations and adapt to changing market conditions.

AIZ's success in the realm of connected living insurance products has significantly contributed to its growth in the past five years. These insurance offerings, such as mobile carrier insurance and device protection, have traditionally relied on consumer demand for electronic devices and services. However, the landscape is evolving as higher interest rates make it more challenging for consumers to finance these products. This shift in the financial landscape could potentially lead to a mid-term slowdown in demand for such insurance products, affecting AIZ business in this sector. The company does offer a lot of shareholder value though, in the form of dividends and buying back shares. The risks that the higher interest rates pose I don't think are justifiable to end a buy case for AIZ. Driving this shareholder value is strong cash flow conversions that have been consistent over the years as well.

Final Words

AIZ has seen quite a volatile during the last 12 months but right now I believe it exhibits a very sound investment opportunity. The company had a strong last quarter as the EPS grew immensely and AIZ continues to deliver a lot of shareholder value through both dividend raises and buybacks. Investors seeking a solid and relatively low-risk insurance play may want to consider AIZ right now. My view on the company is a buy.

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