We are reiterating our Neutral recommendation on Assurant Inc. (AIZ - Analyst Report). Although we are optimistic about the company’s long-term performance, the micro as well as macro economic headwinds faced by its various business lines at present are the matters of concern.
While the Health Business is subject to intense market competition and changing market environment led by the Health Care Law, its Employee Benefits business is suffering from high unemployment. The Specialty line of business is likely to suffer from declining outstanding mortgage loans.
Nevertheless, we expect the Solutions Business to record marginal growth. The top line at Assurant Solutions, has been performing well over the past several quarters. Although results in UK have been disappointing for the last few quarters, the company has taken several steps to transform its international business.
Though Assurant Health has been underperforming for some time, the company is preparing its health business to showcase impressive results. In response to the challenging marketplace, the company entered into a network agreement with AETNA Signature Administrators and a marketing agreement with American Family. It also focused on the distribution of individual health policies to its customers, which may lead to an improvement in the segment’s contribution.
Assurant Specialty Property, which derives most of its premium from creditor-placed homeowners insurance, is witnessing a decline in outstanding mortgage loans. This trend is expected to continue until the mortgage market rebounds.
The Employee Benefits segment has been pressed by persistent economic challenges in the small group sector, resulting in higher lapse rates and lower premium growth on in-force policies. Management expects a modest sequential improvement in the segment’s dental business, owing to a growth in voluntary products. However, strong and broad-based growth is unlikely to happen until the economy recovers fully.
In the absence of substantial organic growth, Assurant has maintained its bottom-line earnings via an active capital management strategy. From 2004 to 2010, Assurant utilized 48% of its free cash flow for repurchasing shares.
The company also raised its annual dividend by 17% in May 2012, marking the ninth straight year of dividend hike. It had returned $295 million in share repurchases and dividend in 2012 to the investors. A low debt-to-capital ratio and no debt maturing until 2014 also reflect a solid capital position.
Assurant is conservatively placed with respect to its investment portfolio. It has below-average investment allocations in risky assets, such as commercial real estate, European sovereign debt, BBB bonds and subprime /Alt-A securities. We believe this conservative portfolio to cushion earnings if the macro conditions deteriorate.
Based in New York’s financial district, Assurant competes with Principal Financial Group Inc. (PFG - Analyst Report), Loews Corp. (L) and Conesco Inc. (CNO - Analyst Report). The stock currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.