I went through the recent 10-Q of Assurant (NYSE: AIZ) and little has changed from my original investment assessment, mainly that the company’s equity should be trading higher than current market pricing.
There continues to be some risk on their lender-placed insurance business (which is a fancy way of describing mortgage providers putting home insurance on delinquent housing owners) as AIZ was forced to take a 30% rate haircut in California starting at the beginning of 2013. There will likely be price concessions in other states which will cut into the company’s profitability, but as the housing market in the USA starts to improve and the number of underwater mortgages continues to decrease, this revenue stream was likely to slow down regardless. The specialty property segment produced a combined ratio of 76.5% for the first 9 months of 2012 and this ratio is very likely to increase in 2013.
Their health insurance unit is at 97.2%, while employee benefits is at 106.4%.
Even with the premium haircut from their specialty insurance business, they are very likely to continue generating cash at a rate where they can continue repurchasing their undervalued shares at a significant discount. At the current share price, buybacks become extremely accretive. Since the company’s book value is about $54.05/share when excluding intangibles, each dollar of shares purchased (at the current market value of $38) is the equivalent of receiving $1.42 of value, plus the organic earning capacity of the company, which is very high relative to price.
The company is trading at the rate it is because of continued fears that regulators will continue to encroach in the profitability of the business in addition to industry-wide concerns (e.g. earnings yields from their investment portfolios) but there is a lot of margin of error for this one. When considering that the amount of raw income the company produces in the first 9 months of 2012 was nearly the same as the net income of the entire 2005 fiscal year (when the stock prices were trading at relatively the same price), coupled with the fact that average shares outstanding went from 136 million to 86 million, gives some hints as to what I believe the market value of this firm should be.