We are maintaining our Neutral recommendation on shares of Assurant Inc. (AIZ), following the release of fourth quarter and fiscal 2010 results.
Assurant’s fourth quarter 2010 earnings were fairly ahead of the Zacks Consensus Estimate, led by improved performances at the Health and Employee Benefit segments, partially offset by lower operating income from Solutions and Specialty Property.
The top line at Assurant Solutions, which constitutes the largest percentage of total revenues, grew throughout 2009. The segment has maintained the same trend in 2010 by growing premiums. Though results in the U.K. have been disappointing for some quarters, the company has taken several steps for a turnaround in the international arena. These actions led to a year-over-year improvement of 480 basis points in combined ratio and we expect this trend to continue.
Looking ahead, the international credit insurance service contracts worldwide, including wireless and pre-funded funeral products, will likely drive growth for Solutions. The company’s solid sales pipelines in each of these areas will compensate for the run-off from Circuit City and domestic credit products. Moreover, foreign production will be driven by Assurant’s increasing penetration in existing markets (Canada, Argentina, Brazil) as well as its entry into new countries (Mexico, Germany, Spain). Assurant also added new wireless clients to its international business.
Over the longer time horizon, the international business should continue growing at a steady pace, and the domestic business should rebound as the economy improves and consumer electronics spending recovers (late 2011 or early 2012), leading to overall revenue growth.
However, Assurant faces fundamentals headwinds in its Specialty Property, Employee Benefits and Health business. 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. As a result of the fallout of the housing crisis, the company is suffering from lender consolidation, less mortgage originations and fewer new home sales, all of which culminate in fewer loans tracked by the company. Moreover, a growing government participation in home mortgages is restraining the company’s market share. However, new clients added during 2010 will help offset the pressure.
The Employee Benefits segment has been pressured by persistent economic challenges in the small group sector, leading to higher lapse rates and lower premium growth in policies in force. Since there have been few new employee additions and a modest wage growth, premium income from the segment will remain under pressure in the near term. Moreover, the continued low interest rate environment will pressure investment income from employee benefits in 2011
Assurant Health has traditionally been underperforming as it has faced a challenging environment. Total membership dropped 4.6% sequentially during the reported quarter, marking the fourteenth consecutive quarterly decline. As such, the company has concentrated on this business by enhancing its product offering as well as changing its pricing and plan designs. We are uncertain about the impact these initiatives (particularly pricing increases) will have on improving margins as the health insurance market remains very competitive. We also remain concerned about the reduction in earnings related to the minimum loss ratio mandate of the Health care reform.
However, Assurant remains focused on its capital management through share repurchase and by paying dividend to share holders. From 2004 to 2010, Assurant utilized 48% of its free cash flow for repurchasing shares. For the full year 2010, the company repurchased $533 million of shares. As of January 31, 2011, $772 million of company stock remains under authorization in order to be repurchased. Given $630 million of deployable capital at December 31, 2010 and no debt maturing until 2014, we expect a high level of buyback in the near term, which would in turn add to the earnings per share. Assurant also raised its annual dividend by 7% during May 2010, marking it the sixth straight year of increase in quarterly dividend. A low debt to capital ratio of 17.9% at December 31, 2010 and overall asset leverage of 2.8x reflect a solid capital position.
Assurant is conservatively placed with respect to its investment portfolio. It has below-average investment allocations to riskier assets, such as commercial real estate, European sovereign debt, BBB bonds and subprime /Alt-A securities. We believe this conservative portfolio will cushion earnings if the macro conditions deteriorate.
Currently, Assurant retains a Zacks Rank # 3, which translates into a Hold rating over the near term (1–3 months).
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