A month has gone by since the last earnings report for Assurant (AIZ - Free Report) . Shares have lost about 6.8% 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 Q3 Earnings Beat Estimates, Revenues Improve
Assurant, Inc. delivered third-quarter 2018 net operating income of $1.06 per share, beating the Zacks Consensus Estimate by 6%. Further, the bottom line reversed the year-ago quarter’s net operating loss of $1.40 per share. Lower effective tax rate due to the tax cut and a solid performance at Global Lifestyle, Global Preneed and Global Housing segments drove this improvement.
Total revenues surged 45.6% year over year to $2.3 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 11.5%.
Net investment income improved nearly 14.5% year over year to $151.8 million.
Total benefits, loss and expenses increased 29.5% to $2.2 billion, mainly due to a noticeable increase in selling, underwriting, general and administrative expenses plus interest expense.
Net earned premiums, fees and others at Global Housing dipped 1.6% year over year to $521.6 million, primarily due to the sale of mortgage solutions. However, decline in real-estate owned volume and anticipated lower placement rates in lender-placed insurance partially offset this downside.
The company reported net operating income of $19.4 million, against the year-ago quarter’s net operating loss of $110.3 million. This improvement can be attributed to lower catastrophe losses.
Net earned premiums, fees and others at Global Lifestyle soared 83.1% year over year to $1.5 billion. This upside was primarily driven by the contribution of Warranty Group’s $625.9 million of revenues.
Net operating income of $75.9 million soared 78.2% year over year. The benefit obtained from Warranty Group buyout and organic growth in Connected Living drove improvement.
Net earned premiums, fees and others at Global Preneed grew 7.8% year over year to $48.1 million, primarily due to growth in pre-funded funeral policies in the United States and Canada along with prior-period sales of the Final Need product.
Net operating income improved 36.6% year over year to $16.8 million, mainly on the back of the impact from lower effective tax rate.
Net operating loss at Corporate & Other was $19 million, wider than the year-ago quarter’s net operating loss of $13 million. Increase in employee-related and technology costs along with adverse impact of the lower effective tax rate was responsible for this downside.
Assurant’s financial position remains strong with around $473 million in corporate capital as of Sep 30, 2018.
Total assets surged 34.1% to $43.4 billion as of Sep 30, 2018 from $32.4 billion from the year-ago quarter.
Total shareholders’ equity came in at $5.2 billion, up 26.1% year over year.
Book value per share of $78.92 grew 4.4% from the prior-year quarter.
Share Repurchase and Dividend Update
In the third quarter, the company bought back 0.8 million shares worth $83 million. From Oct 1, 2018 onward, through Nov 2, 2018, the company repurchased additional 0.3 million shares worth $34 million. It now has $776 million remaining under its current share buyback authorization, which includes the recently approved $600 million authorization.
The company’s total dividends amounted to $40 million in the third quarter.
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 and 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. Meanwhile, 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. However, continued growth in multi-family housing is likely to partially mitigate 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.
Fourth-quarter 2018 results will take into account losses stemming from Hurricane Michael. During this time, the claims process continues and the company projects pre-tax loss estimate to range between $75 million and $105 million. This is below the 2018 catastrophe reinsurance program per event retention of $120 million pre-tax.
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, primarily 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% and higher investments for growth in the fourth quarter 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 have trended downward during the past month. The consensus estimate has shifted -18.08% due to these changes.
Currently, Assurant has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a D. However, the stock was allocated a grade of B on the value side, putting it in the second quintile 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.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Assurant has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.