We reiterate our Neutral recommendation on the shares of Assurant Inc. (AIZ) prior to its fourth quarter earnings release on February 1, 2012. We remain concerned about the company’s top-line growth given cyclical and secular headwinds faced by its different business units. Earnings from Assurant Health are expected to remain uncertain owing to the implications of the Health Reform Act.
A weak economic scenario is expected to drag the earnings from Employee Benefits and Solutions business. Moreover, mortgage weakness continues to drain out Specialty Property revenues. However, we expect that the company’s strong capital position will help it to address the challenging macro conditions. Bottom-line growth in the near term is expected to come from share repurchases.
The Zacks Consensus EPS estimate for the quarter stands at $1.35, generating expected earnings growth of 9.5% year over year.
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.
The Employee Benefits segment has been under pressure from persistent economic challenges in the small group sector leading to higher lapse rates and lower premium growth on in-force policies. Since there have been a few new employee additions and a modest wage growth, premium income from the segment will remain under pressure in the near term.
Assurant Health has traditionally been underperforming in the face of a challenging environment. It has concentrated on this business by enhancing its product offerings and changing its pricing and plan designs.
Management expects the changes to improve the segment’s performance and has thus raised its 2011 net operating income guidance to the range of $10–$15 million from the break-even level expected earlier. However, we are uncertain about the impact these initiatives (particularly pricing increases) will have on improving margins as the health insurance market remains very competitive.
Despite the fundamental headwinds faced by the company, a strong capital position will help it to sail through the tough operating environment. For the past several years, the company has been utilizing a vast amount of cash flow for share buybacks. Given enough deployable capital, with no debt maturing near term, we expect a high level of buyback in the near term will aid bottom-line earnings.
The company competes with Unum Group (UNM) and Reinsurance Group of America Inc. (RGA). Assurant currently retains a Zacks #4 Rank, which translates into a short-term ‘Sell’ rating.
ASSURANT INC (AIZ): Free Stock Analysis Report
REINSURANCE GRP (RGA): Free Stock Analysis Report
UNUM GROUP (UNM): Free Stock Analysis Report
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