Assurant: Poised For A Reversion With Compelling Niche Growth

Summary

• Over the past year, Assurant (-36.13%) has performed significantly worse than the broad market (-8.43%) and TradingView's all-insurance index (-5.68%).
• This price action likely reflects a high-level of margin compression moving from FY21 to FY22, from a 4.37% profit margin to 2.71%.
• While the market has factored in these effects of macro headwinds, I believe they have neglected the operational advantages Assurant has created.
• The company's unique 'B2B2C' model promotes superior partnerships and a secure moat across all verticals.
• Thus, due to the company's operational strength, chronic undervaluation, and balanced capital management lead me to rate the company a 'buy'.

xijian

Assurant (NYSE:AIZ) is a global provider of risk management and insurance products and services. Based in New York City, the Fortune 500 company has recorded $10.19bn in 2022 revenues alongside a $462.50mn operating income.

The company has stylized itself as one which covers oft-overlooked sectors; its two primary segments consist of Global Housing- encompassing lender-placed insurance, mortgages, and multi-family housing- and Global Lifestyle, offering mobile device protection, service contracts for electronics and appliances, and a plethora of other insurance products.

Introduction

Breaking down the company's revenue by segment, 'Connected Living' accounts for $4.3bn, auto insurance- with Assurant covering dealers and OEMs principally- accounted for $3.8bn, Renters and Other accounted for $0.5bn, and Homeowners insurance- covering banks, P&C insurers, etc.- accounted for $1.4bn.

To further understand how each segment contributes to the company's actual margins, this is how segment-adjusted EBITDA breaks down:

Assurant Q4 2022 Presentation

Valuation & Financials

General Overview

As previously discussed, Assurant has experienced poor YoY growth, relative to both broad markets and the insurance industry itself.

Assurant (Dark Blue) vs Market and Industry (TradingView)

Though this may serve to reflect material declines in the efficacy of Assurant's businesses, I believe it is more so an overreaction to temporary economic turbulence.

Comparable Companies

Due to the niche nature of Assurant and its operations, they do not necessarily sustain any direct competition. However, examining multi-line insurers, Assurant can count the following among its competitors; Aviva (OTCPK:AVVIY), a major British multi-line insurer; Hartford Financial Services (HIG), which focuses on banking and credit insurance; and the smaller Radian Group (RDN) maintains a presence across niches such as title insurance.

barchart.com

As the comparison chart demonstrates, Assurant has experienced abysmal price performance- they have the worst 6 and 12-month performance of all peers.

Though this is nothing more than a reflection of the aforementioned macro conditions, Assurant's long-term historical data refutes the market's evaluation of the stock; the company has experienced both the greatest revenue growth and earnings growth over the past 5 years, with margin expansion a core theme.

Additionally, a relatively lower profit margin is indicative of room to grow and greater flexibility.

Valuation

My discounted cash flow model proposes a 28% upside to the company's current price, with its fair value at ~$165.25. Walking through my model, I assume a discount rate of 10%- at par with market benchmarks and reflective of the company's debt-heavy cap structure.

AlphaSpread

AlphaSpread's multiples-based relative valuation tool further supports my thesis of undervaluation; Assurant's fair value, according to the model, is $194.37, up 39% from today.

With a means-based approach, Assurant's fair value is thus $179.81, up 33.5% from its current price.

B2B2C Niche Model Promotes Secular Growth

Instead of focusing on traditional and more-secure businesses such as life, property, or retail auto insurance, Assurant aims to carve its own niche, which both supports an inherent moat and wider consumer retention. Moreover, the company can position itself to leverage multiple avenues of secular growth- for instance, the IoT market is growing at a CAGR of 26.1%, and as one of the largest providers of connectivity insurance, Assurant is poised to take advantage.

Assurant Q4 2022 Presentation

Beyond that, it promotes long-term resilience and side-steps the retail consumers' behavioural factors; the insurer generally works with companies with a direct relationship with consumers, which can take advantage of consumer capital flow with the buffer of business partnership.

Assurant Capital Deployment (Assurant Q4 2022 Presentation)

More so than its operational actions, Assurant actively works to better its capital management strategy, focusing cash flow from these businesses towards debt management- targeting a leverage ratio <30%, ensuring investment-grade fixed assets, and robust, data-driven risk management and compliance strategies.

Wall Street Consensus

Analysts echo my positive opinion of Assurant, estimating an average 1Y price increase of 32.68%.

TradingView

Even when projecting their minimum price, analysts predict a 9.02% increase in the company's stock price, reinforcing my bullish thesis and the idea that the company is fundamentally undervalued.

Risks

Continued Margin Weakness

As demonstrated throughout this analysis, a glaring weakness in Assurant's financial position is its low margins, both in absolute terms and relative to peers. And this margin has been further compressed by the macroeconomic pressures of the past year. Given further rate increases or banking crises, Assurant could face existential risk to their profitability.

Sustained Competitive Pressure

While Assurant operates in a highly specialized niche, they are both spread across multiple niches and have no obvious superiority in the arenas in which they operate. As such, even more highly specialized firms, Hartford Financial in lender-placed insurance, for example, may actually sustain operational advantages. Elsewise, larger insurance companies moving into any areas Assurant operates in may lead to price competition, further threatening profitability.

Need for Inorganic Growth

Though Assurant does not necessarily rely on acquisitions- even espousing an affinity for organic growth on their 10K- integration or divestiture from particular segments often require suitable M&A candidates at attractive prices. This dynamic continues to be threatened by rate rises among other events. More broadly, a lack of inorganic, integrative growth may require greater capex and in-house investment to compete with rivals.

Conclusion

In the short term, I expect a reversion to the mean and relative valuations for Assurant.

In the long term, I project that the market will price in Assurant's unique business model and its ability to operate in highly-specialized areas.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.