Description
Summary Description:
Assurant (“AIZ”) is the former U.S operations of Fortis (the European bank and insurance concern). Fortis still owns a bit over 1/3 of AIZ post the Feb 4, 2004 IPO and has plans to fully divest. AIZ operates in diverse specialty markets (earnings derived from Solutions 39%, Health 35%, Benefits 18% and Preneed 8%). Basically, it is a blend of p&c, life and health all of which results in less earnings volatility than comparable stand-alones. It is truly multi-line. Furthermore, for many of its offerings it is the U.S. market leader: creditor-placed homeowners insurance, credit insurance and funeral insurance.
Thesis:
Attractively valued insurance concern with market leading shares and ROE improvement potential. Given that AIZ has been built as a result of acquisitions the reported B/S results in muted ROE relative to returns on newly written business. With a slow down in acquisitions, ROE should slowly improve on a reported basis. Furthermore, given that Fortis is no longer in control, AIZ, on a stand-alone basis, will likely be more disciplined in profitable growth.
Businesses: (I will not go into much detail, you can view the S-1 for that)
Solutions: Sells (i) extended service contracts (45% of segment rev) on electronics, vehicles and white goods; (ii) credit insurance/debt protection (30% of segment rev); (iii) manufactured housing insurance (10% of segment rev); (iv) creditor-placed homeowners (10% of segment rev). This is a policy put in place to protect lender when homeowners underlying insurance lapses/cancelled. AIZ keeps track nearly 22 million loans for lenders. Given the expense of monitoring and fact that it cannot underwrite the risk AIZ chares nearly 3x what underlying policy would cost; and (v) other specialty property coverage. AIZ has exclusive contracts with distribution to place their product offerings including many of the top mortgage lenders, manufactured housing builders, credit card issuers and consumer electronic retailers.
Health: About 2/3rds of lives covered are individual policies (rare among public companies). The balance is small groups (5 employees on average). State Farm distributes between 15-20%. Broker channels make-up about 2/3rds.
Employee Benefits:Dental, disability and life.
Preneed: Insurance to fund funeral expenses. AIZ has exclusive relationship with Service Corp, largest U.S. funeral home operator. Marker leader with 1/3 share.
Valuation: Pro forma for the IPO AIZ has stated BV of approximately $3350mm on 145mm S/O, approx $23/sh. Ex–FAS 115 BV of $21/sh. Further adjustments are made to account for previous acquisitions/divestitures which brings tangible BV to approx $17/sh. (Remove $825mm in goodwill and convert the deferred gain liability to equity. The corresponding I/S entry is to remove from revenue the amort. of the deferred gain.). Using estimates of $2.60/sh results in approximately 15% ROE. Not too bad at all. An appropriate multiple of 1.6x on ending 2004 BV of $19.6 would be about $31/sh.
Risks:
(1) Fortis overhang
(2) Historically acquisitive with mixed results (i.e. purchasing American Bankers and a full 2.5x BV, the results of which required $1.2bn in goodwill write-down). However, part of that was likely driven by Fortis and management has divested more commodity business (sales of Fortis Financial in 2001)
(3) Distributor reliance
Catalyst
Catalysts:
(1) IPO quiet period ended. Coverage initiated by Street
(2) Improving ROE