Investment Thesis
Assurant, Inc. (NYSE:AIZ) reported impressive earnings growth in the first quarter of 2024, showing adjusted EBITDA growing 53% YoY and GAAP net income increasing 108%. These staggering numbers show the impressive growth the company is experiencing that, in my opinion, should continue throughout 2024. Thus, the stock trades at a cheap valuation of 10x FWD earnings with extremely good growth prospects stemming from its unique and different approach to underwriting in my view.
Company Overview
Assurant, Inc. is an insurance company that specializes in property, casualty, renters, and specialty insurance. Their website explains they are a “leading global provider of comprehensive risk management solutions for the auto, lifestyle, and housing protection sectors”. Like most insurers, they underwrite policies and price them effectively so that, on average, the risks they pool turns an underwriting profit.
The company operates in two segments: Global Lifestyle and Global Housing. Lifestyle refers to “mobile device solutions, extended service contracts and related services for consumer electronics and appliances, and credit and other insurance products” according to the annual report. Housing refers to “lender-placed homeowners, manufactured housing and flood insurance, as well as voluntary manufactured housing, condominium and homeowners insurance”.
Unlike other insurance companies, I noticed that Assurant has a very unique business focus that explains its impressive growth in their industry. In my view, one of its main competitive strengths is its focus on insuring everyday consumer products such as mobile phones, electronics, appliances, through their partnerships with mobile service providers. Many of these everyday household goods are seen as necessities by the public and so to me, it’s an easy sell to get people buy insurance for their everyday household needs.
Furthermore, their focus on homeowners insurance is attractive to me because mortgagors often require proof of insurance before someone can take out a mortgage. So, I believe management is very smart about looking for the most profitable segments of the insurance to underwrite, intelligent reinsurance risk management, and focusing on building long-term relationships with mobile service providers that distribute their products.
My conclusion is that Assurant is an unusually profitable, well-managed, and focused insurance company. They still have opportunities to expand internationally as most of their revenues still come from the United States. Given attractive tailwinds in homeowners and mobile phone insurance, I think 10x FWD earnings is very cheap compared to the growth this company can potentially give investors.
Global Housing Earnings Are On Fire
Assurant reported first quarter earnings on May 7, 2024, with the following results:
- GAAP net income increased 108 percent to $236.4 million, compared to the prior year period, while net income per diluted share increased 111 percent to $4.47 versus the prior year period.
- Adjusted EBITDA, excluding reportable catastrophes, increased 31 percent to $383.7 million, or 32 percent on a constant currency basis.
- Adjusted earnings, excluding reportable catastrophes, per diluted share, increased 42 percent to $4.97.
Most notably to me is the Global Housing segment adjusted EBITDA increasing 181% YoY, which is extraordinary. Management explains this outperformance stemming from the unique partnerships they have with “the largest U.S. banks and mortgage servicers including our new client Bank of America which we began to onboard in the first quarter” according to the earnings transcript.
It also helps that homeowners insurance has had a strong market over the past year as rates across the board have increased dramatically. Reports indicate increased climate change, inflation, and overall spike in claims have made homeowners’ insurance super expensive for many policyholders across America. While many homeowners may complain, there’s not much they can do as many mortgagors require homeowners’ insurance before lending money.
Assurant is a major beneficiary of this trend as the premiums on homeowners insurance has rewarded shareholders tremendously. In this recent earnings report, global housing is the major driver of the strong performance and I expect this to continue as insurance premiums continue to be very high for homeowners. Management explains in the earnings call,
Based on our strong first quarter performance within Global Housing, which included $22 million of favorable prior period reserve development, our 2024 results are trending toward the higher end of the mid-single-digit outlook. We now anticipate global housing will lead our enterprise growth.
I am surprised that the market is not more optimistic about these quarterly earnings results. Since they came out, the stock has gone down slightly from $180 per share. I view this as a mispricing and expect future quarterly results to correctly price shares much higher. The market is not optimistic enough about the fiery earnings result brought to investors by a strong homeowners insurance market, and thus reaffirms my bull thesis.
Global Lifestyle Reduces Volatility
While many investors may worry about storms, hurricanes, and catastrophe losses, I believe the balance sheet and liquidity Assurant has protects investors from this risk. Assurant states in their first quarter earnings they have “company liquidity totaled $622 million as of March 31, 2024, or $397 million above the company’s targeted minimum level of $225 million”.
Furthermore, I like how the Global Lifestyle balances out the volatility experienced in the Global Housing segment. In my view, the two segments act in a Ying-Yang dynamic, where one’s stability balances out the other’s volatility. Investors may know the P&C insurance market can be volatile due to a spike in claims, cat losses, and inflationary pressures. However, the Global Lifestyle segment is pretty stable as mobile phones, electronics, and appliances don’t usually see a spike in claims out of nowhere in my view.
For instance, the last quarter shows adjusted EBITDA for Lifestyle increased 4% YoY, which signals some stability in this earnings stream. My analysis of the Lifestyle segment is that it is less volatile due to the low-dollar amount these claims tend to be. The most it takes to replace somebody’s iPhone is probably around $1000, and the predictability of these claims seems easier because it is less prone to random events like cat losses and extreme weather.
What this means for investors is the earnings stream going forward may actually be pretty consistent, as the company is well-diversified and has liquidity to weather a potential storm coming. Their reinsurance program also has “nearly $1.5 billion in loss coverage in excess of our retention” for the U.S as stated in the earnings call, which significantly reduces the risk for shareholders. All in all, I like how Assurant has set itself up for the future and expect a smooth ride due to the consistent performance from the Global Lifestyle segment.
Valuation – $210 Fair Value
Assuming revenues grow at 5% annually, which is equal to the 5Y average growth rate, I think sales will hit $12 billion by 2026. If we apply an EBITDA margin of 13%, which is slightly higher than its current margin of 11.32% according to Seeking Alpha gets me $1.56 billion of EBITDA.
I believe my 5% annual sales growth forecast is reasonable based on management’s guidance of a “mid-single digit growth” in their 2024 outlook. The EBITDA margins should expand a bit because of the extraordinary growth we are witnessing in the global housing segment. Apply a conservative 8x EV/EBITDA multiple (which is below the sector median of 10x) to $1.56 billion in EBITDA gets me around $12 billion in EV, rounded down.
Subtract net debt of $800 million gets me a market cap of $11.2 billion. Divide by shares outstanding of 53 million gets me a fair value per share of $210, rounded down. I believe the stock trades cheap and does not properly value the impressive growth the company has given investors. Management shows to be prudent in capital allocation by repurchasing $77 million in the first quarter 2024. These buybacks are being executed at the right price in my opinion and further demonstrates a potential signal the stock is undervalued.
The next few quarters should continue to beat market expectations at this price and I expect future EPS and revenue beats to be the major catalyst for the share price to move up. A cheap valuation, immense growth potential, and a strong balance sheet are the cornerstones of what makes this stock a good buy in my view.
Risks
Given the Global Lifestyle segment is so dependent on partnerships with mobile service providers, future problems with these partners could pose a risk to shareholders. If Assurant’s partners decide to find another insurer, revenues for Assurant could plummet dramatically. Competition could come in to the mobile device and consumer appliances segment and put significant pricing pressure against Assurant’s policies.
Catastrophe losses are always risky for insurers like Assurant as they may have to pay out a large amount of claims all at once. From my experiences and observations, it always seems to be that bad things happen all at once to insurance companies, never staggered out conveniently. So, a large amount of claims could put reserves, liquidity, and the balance sheet at risk for Assurant.
A softening in the home insurance market could slow growth in Assurant’s Global Housing segment, so investors may see earnings slow down. Furthermore, Assurant’s saturation in the U.S. market could be a risk if storms and other natural disasters hit the United States, as Assurant lacks diversification outside the USA.
Buy Assurant
I see a fast-growing insurance company that is cheaply priced in relation to its growth potential. Management has shown to be prudent in running a tight ship with careful reinsurance programs and a unique focus on protecting people’s everyday household items, helping it earn significant profits. I think the market is missing the overall story here and continue to expect earnings and revenues to trounce market expectations, leading to rate Assurant as a buy.
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