- AIZ has outperformed the S&P 500 by a wide margin over the last 12 months.
- AIZ expects to grow its operating earnings per share by 16%-20% this year and by more than 12% per year in 2023-2024.
- AIZ is trading at only 10.9 times its expected earnings in 2024.
About a year ago, I stated that Assurant ( AIZ ) was highly attractive, even though it was trading around its all-time highs. Since then, the stock has outperformed the market by a wide margin, as it has rallied 13% whereas the S&P 500 has shed 10%. Even better, the insurer still has promising growth prospects and is cheaply valued. Therefore, it is likely to remain a safe haven in the ongoing bear market.
Business overview
Assurant is a well-managed insurance company, with presence in North America, Latin America, Europe, and Asia Pacific. It operates in two segments: Global Housing and Global Lifestyle. The Global Housing division provides homeowners with manufactured housing and flood insurance. The Global Lifestyle division offers insurance products to the owners of vehicles, mobile phones, consumer electronics and appliances.
Insurance is a tricky business and hence it warrants special attention from investors. During favorable years, in which there are low catastrophic losses, some insurers may look exceptionally attractive, especially those who reduce their insurance premiums and grasp market share from their competitors. However, the reality check comes during adverse years, in which the high catastrophic losses may erase profits generated in many years. Therefore, it is paramount to examine the long-term performance record of an insurance company before purchasing its stock.
Assurant has a solid performance record. During the last nine years, the insurer has grown its earnings per share almost every year, at a 6.7% average annual rate. The company incurred a decrease in its earnings only in two years, 2015 and 2018, which were exceptionally adverse for the entire insurance industry due to their abnormally high catastrophic losses. The consistent performance record of Assurant is a testament to its disciplined underwriting policy and its solid business model.
Moreover, Assurant has divested capital-intensive insurance lines, such as Global Preneed, which used to provide insurance for funeral services. As a result, the company now generates 77% of its EBITDA from capital-light insurance lines and thus its earnings have become more predictable and less volatile. Even in the riskier parts of its business, such as global housing, Assurant has successfully raised its premiums after years with high catastrophic losses.
Furthermore, Assurant enjoys sustained business momentum. Its auto insurance business benefits from strong tailwinds, namely rising car prices and increasing repair costs. These tailwinds enable the insurer to raise its premiums significantly.
The strong business momentum of Assurant is clearly reflected in its latest earnings report . Its Global Housing segment grew its operating income 11% over the prior year’s quarter while its Global Lifestyle segment grew its operating income 13%. As the company also performed meaningful share repurchases and posted remarkably low catastrophic losses, it grew its operating earnings per share 39%.
Even better, there are no signs of fatigue on the horizon. Thanks to sustained tailwinds in both business segments, Assurant expects to grow its adjusted earnings per share (excluding catastrophic losses) by 16%-20% this year and by at least 12% per year in 2023-2024.
Source: Investor Presentation
Analysts seem to agree with the guidance of the company, as they expect it to grow its bottom line by 38% this year, 13% in 2023 and 11% in 2024.
It is also important to note that Assurant has exceeded the analysts’ earnings-per-share estimates in 17 of the last 20 quarters. In the last nine quarters, the insurer has exceeded the analysts’ consensus by a wide margin. Therefore, it is reasonable to expect Assurant to meet or exceed the aforementioned growth estimates of analysts.
Valuation
Assurant is currently trading at a forward price-to-earnings ratio of 13.6 , which is nearly equal to its 10-year historical average of 13.8 . This could lead some investors to believe that the stock is fairly valued right now.
However, it is critical to focus on the promising growth potential of the insurer. If Assurant meets the analysts’ consensus in the next two years, it will be trading at only 10.9 times its earnings in 2024 (at its current stock price). In other words, the stock is currently trading at only 10.9 times its expected earnings in 2024. Given also the aforementioned proven ability of the company to exceed the analysts’ estimates, the stock is certainly attractive right now. Investors should just wait patiently for Assurant to advance in its reliable growth trajectory.
Dividend
Assurant has raised its dividend for 17 consecutive years . During the last decade, the company has grown its dividend at a 14% average annual rate. The multi-year dividend growth streak and the high growth rate of the dividend render Assurant a great candidate for the portfolios of income-oriented investors.
On the other hand, the stock is currently offering just a 1.6% dividend yield , which is insufficient for most income-oriented investors. However, Assurant has a payout ratio of only 25% and hence it has ample room to continue raising its dividend meaningfully for many more years, especially given its promising growth potential. Given also its cheap valuation, Assurant is an attractive candidate for most investors, even for income-oriented investors.
Risk
Due to the nature of its business, Assurant inevitably incurs a material decrease in its earnings in some abnormal years, which are characterized by unusually high catastrophic losses. Only the investors who can endure volatile business performance should consider purchasing Assurant.
It is also important to note that Assurant invests a significant portion of its earnings in the stock market. This is a standard practice for most insurers, who try to utilize their float and boost their investment income. Due to its exposure to the stock market, the stock of Assurant is usually vulnerable during bear markets or market sell-offs. Therefore, only the investors who can ignore short-term pressure and remain focused on the long-term prospects of Assurant should consider purchasing this high-quality insurer.
Final thoughts
Due to its mundane business model, Assurant passes under the radar of the vast majority of investors. However, this is a shame. This high-quality insurer has a strong performance record, has solid growth prospects and is cheaply valued right now. As a result, it is likely to continue to outperform the broad market during the ongoing bear market.
For further details see:
Assurant Likely To Remain A Safe Haven In The Ongoing Bear Market