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Assurant (AIZ) Down 4.7% Since Last Earnings Report: Can It Rebound?

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It has been about a month since the last earnings report for Assurant (AIZ - Free Report) . Shares have lost about 4.7% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Assurant due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Assurant Q2 Earnings & Revenues Beat, Improve Y/Y

Assurant, Inc. reported second-quarter 2018 net operating income of $2.11 per share, beating the Zacks Consensus Estimate by 11.6%. Also, the bottom line improved 29.4% from the year-ago period’s level. Lower effective tax rate owing to the tax cut and a solid performance at Global Lifestyle and Global Housing segments, drove this improvement.

Total revenues grew 16.9% year over year to $1.8 billion, mainly attributable to higher premiums earned, fees and other income as well as net investment income. Moreover, the top line surpassed the Zacks Consensus Estimate by nearly 3%.

Net investment income improved nearly 11.4% year over year to $135.6 million.

Total benefits, loss and expenses increased 23.3% to $1.8 billion, mainly due to a substantial increase in policyholder benefits, selling, underwriting, general and administrative expenses plus interest expense.

Segmental Performance

Net earned premiums, fees and others at Global Housing slid about 1.4% year over year to $542.5 million, primarily due to expected lower placement rates as well as real-estate owned volume in lender placed insurance plus reduction in client demand for originations and field services in mortgage solutions. However, sustained growth in multi-family housing and higher contributions from international and other housing products partially offset this downside.

The company reported net operating income of $72.6 million, which increased 29.2% from the year-ago quarter’s figure. This improvement was mainly attributable to the impact of the reduced effective tax rate.

Net earned premiums, fees and others at Global Lifestyle surged 31.8% year over year to $1.1 billion. This benefit was primarily driven by the contribution of Warranty Group’s $202.6 million of revenues, growth in new and existing mobile protection programs as well as Global Automotive business. However, a decline in average selling prices for the trade-in of mobile devices partially offset this upside.

Net operating income of $68.1 million soared 69.4% year over year. This upside was backed by the impact of the reduced effective tax rate.

Net earned premiums, fees and others at Global Preneed inched up 1.3% year over year to $46.9 million, primarily owing to growth in the United States including prior-period sales of the Final Need product. However, a year-over-year production decline in Canada, partially offset this upside.

Net operating income improved 14.8% year over year to $14.7 million, mainly on the back of the impact from reduced effective tax rate.

Net operating loss at Corporate & Other was $17.5 million, substantially wider than the year-ago quarter’s net operating loss of $10.6 million. Increases in employee-related and technology costs along with adverse impact of the lower effective tax rate were responsible for this downside.

Financial Position

Assurant’s financial position remains strong with around $497 million in corporate capital as of Jun 30, 2018. Total assets surged 33% to $42.4 billion as of Jun 30, 2018 from $31.8 billion at year-end 2017.

Share Repurchase and Dividend Update

The company did not buy back any shares in the quarter under review. From Jul 1, 2018 onward, through Aug 3, 2018, the company repurchased additional 0.3 million shares worth $34 million. It now has $259 million remaining under its current share buyback authorization.

The company’s total dividends amounted to $36 million in the second quarter.  

2018 Outlook

On May 31, 2018, Assurant completed the acquisition of The Warranty Group from TPG Capital for a total amount of $2.5 billion. From Jun 1, 2018, Warranty Group results, the buyout financing and estimated expense synergies will be reflected in Assurant’s operating results as well as its 2018 outlook.

Warranty Group’s operations will be included in Global Lifestyle with certain expenses being allocated to Corporate & Other. Results for the mortgage solutions business, sold on Aug 1, 2018, are included in the outlook for periods prior to sale.
On the basis of current market conditions, the company now expects:

Assurant estimates net operating income (excluding reportable catastrophe loss) to grow between 20% and 25% from the reported results of $413 million in 2017. This earnings growth is likely to reflect a lower effective tax rate apart from Warranty Group’s contributions as well as decent organic growth. The company is expected to realize about $10 million after tax of operating synergies from the Warranty Group buyout through the year-end.

Notably, with the sanction of the U.S. Tax Cuts and Jobs Act (TCJA), Assurant’s consolidated effective tax rate is anticipated to decrease to 22-24% from 33% with nearly one-third of the savings to be reinvested during the second half of 2018 to support future growth.

Assurant projects operating earnings per share (excluding catastrophe loss) to grow, reflecting earnings growth and capital management albeit at a slower rate than the net operating income owing to the effect of Warranty Group’s share issuance without a full run-rate contribution of its income.

The company expects Global Housing to witness a year-over-year improvement in its net operating income excluding reportable catastrophe loss after taking into consideration the lower tax rate of about 20-21% with a portion of the tax savings to be reinvested for future growth during the second half of 2018. On the flip side, net operating income is estimated to decline before considering the benefit of a lower tax rate. Further, the company expects to witness a decline in the ongoing lender-placed insurance normalization and mortgage solutions. However, continued growth in multi-family housing is likely to partially offset this downside. Additional savings from expense management efforts are to be realized toward the end of 2018 and further into 2019. Revenues are projected to contract from 2017-levels due to decrease in lender-placed and mortgage solutions through July 2018.

Global Lifestyle’s net operating income is likely to increase after taking into consideration contributions from Warranty Group (including operating synergies), lower tax rate of about 22-24% and organic growth. A portion of the tax savings to be reinvested for future growth is anticipated to boost results, mainly in the second half of 2018. Profitable growth is likely to be fueled by newly introduced mobile programs as well as Global Automotive expansion and expense efficiencies. The ongoing declines in Financial Services will partially offset this probable upside. Moreover, the company projects revenues to improve from growth in Connected Living and Global Automotive, globally.

Global Preneed is projected to experience a rise in revenues and earnings, mainly on the back of the company’s alignment with market leaders before taking into account the recently enacted tax reform. Lower effective tax rate of about 22% with a portion of the tax savings to be reinvested for future growth, is estimated to enhance results during the second half of 2018.

Assurant expects full-year net operating loss between $80 and $85 million after considering the negative impact of the lower tax rate of about 20%, higher investments for growth and additional expenses in relation to legacy Warranty Group corporate functions at Corporate & Other. Continued expense management efforts will partially offset the loss.

Dividends from the units, namely Global Housing, Global Lifestyle and Global Preneed are predicted to be higher than the segment net operating income (including catastrophe loss) owing to the impact of TCJA and Warranty Group’s 2018 dividend contributions.

The company plans to deploy capital mainly to fund the financing and integration of Warranty Group and other continuing capital needs of the business. The company will invest excess capital to finance other investments and return capital to shareholders via share buyback and dividends.

 

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates flatlined during the past month.

VGM Scores

Currently, Assurant has a nice Growth Score of B, a grade with the same score on the momentum front. Following the exact same course, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Assurant has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.


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