Assurant Stock Has Become Undervalued (NYSE:AIZ)

About three months ago, I stated that Assurant, Inc. (NYSE:AIZ) was likely to remain a safe haven in the ongoing bear market. Until July, the stock had proved immune to the bear market, as it had outperformed the S&P 500 by 23% over the preceding 12 months. However, since my article, the stock has declined 14%, primarily due to the impact of 40-year high inflation on the Global Housing segment, which was somewhat unexpected. Nevertheless, as the insurer is taking drastic measures to mitigate the effect of inflation on Global Housing and its other segment, Global Lifestyle, continues to run at full throttle, Assurant stock has become attractive.

Business overview

Assurant is a high-quality insurer, with operations in North America, Latin America, Europe, and Asia Pacific. The company operates in two divisions: Global Lifestyle and Global Housing. The former offers insurance products to the owners of vehicles, mobile phones, consumer electronics and appliances while the latter offers insurance to homeowners.

In the latest earnings report of Assurant, it became evident that its Global Housing segment has been negatively affected by high inflation, which resulted in higher claim severities and reinsurance costs. This headwind offset the strong performance in the other segment and thus total revenues grew only 2% over the prior year’s quarter and operating earnings per share dipped 1%, from $2.99 to $2.95, and missed the analysts’ consensus by $0.25.

An earnings miss for other companies would not be significant news, but Assurant has a great record of exceeding the analysts’ estimates. To be sure, the company had beaten the analysts’ earnings-per-share estimates in 17 of the last 20 quarters before the recent miss. It is thus natural that the disappointing performance in the second quarter caused a 10% plunge of the stock on the day of the earnings release.

However, Assurant is taking drastic measures to offset the effect of inflation on its Global Housing segment. Just before the end of the second quarter, management implemented a double-digit rate hike on policy renewals while the same rate hike will be implemented to all the renewals over the next 12 months. As a result, the performance of this segment is likely to greatly improve in the upcoming quarters.

In addition, Global Lifestyle has not been affected by inflation so far, with management expecting the strong performance to remain in place in the second half of the year, especially in the auto insurance business. The latter is well protected from inflation, as fast-rising car prices and increasing repair expenses enable Assurant to raise its insurance premiums at a fast pace. Overall, Assurant expects Global Lifestyle to achieve 15%-20% growth of EBITDA in the full year while it also expects its adjusted earnings per share to grow 14%-18% in the full year. Management also reaffirmed its guidance for at least 12% annual growth of earnings per share in 2023 and 2024.

Investors should rely on the guidance of Assurant, as the company has exhibited a consistent performance record. During the last nine years, Assurant has grown its earnings per share almost every year, by 6.7% per year on average. The insurer posted a decrease in its earnings only in two years, 2015 and 2018, which were adverse for the entire insurance industry due to their excessive catastrophic losses. The consistent growth record of Assurant is a testament to its prudent underwriting policy and its reliable business model. This helps explain why analysts agree with the aforementioned guidance of management and expect the company to grow its earnings per share by 14% in 2023 and by 12% in 2024.

Valuation

As mentioned above, Assurant is fairly resilient in the highly inflationary business environment prevailing right now thanks to the material premium raises it can implement in most of its products. This is a significant advantage compared to other companies (in other sectors), which have been severely hurt by the impact of cost inflation on their profit margins.

Unfortunately, there is no stock that is immune to inflation due to the impact of the latter on the valuation of stocks. High inflation reduces the present value of future cash flows, and hence, it reduces the price-to-earnings ratio of stocks. This is especially true for growth stocks, whose future cash flows are much higher than the present ones. To cut a long story short, the whole stock market has incurred a sharp correction in its price-to-earnings ratio this year, mostly due to the surge of inflation to a 40-year-high. Assurant is not immune to this effect of inflation.

Assurant is currently trading at a price-to-earnings ratio of 12.0, which is lower than its 10-year historical average of 13.8. It is also remarkable that the stock is trading at only 10.5 times its expected earnings in 2023 and only 9.4 times its expected earnings in 2024. As the insurer has a great record of exceeding the analysts’ consensus, it is likely to meet or exceed the analysts’ estimates in 2023-2024.

It is also important to note that the Fed has prioritized restoring inflation to its long-term target of 2%, even at the expense of economic growth. To this end, the Fed is raising interest rates aggressively. Given its determination, the central bank will almost certainly achieve its goal in the upcoming years. As soon as inflation begins to subside, the valuation of Assurant is likely to begin to revert towards its normal levels. Therefore, as long as the Fed achieves its goal, Assurant will have significant upside potential in the upcoming years.

Risks

The primary risk for Assurant is the adverse scenario of persistently high inflation for years. In such a case, the company is likely to continue to perform well thanks to its ability to raise its premiums, but the valuation of the stock will probably remain under pressure for a prolonged period. Fortunately, as the Fed is determined to restore inflation to healthy levels, this scenario is unlikely.

The other risk factor is the fact that the investment portfolio of Assurant includes stocks. As a result, the earnings of the company are somewhat sensitive to the fluctuations of the broad stock market. If the S&P 500 remains in a bear market for years, it will probably exert a drag on the results of Assurant. However, the average duration of bear markets has been approximately 10 months while the ongoing bear market has already entered its tenth month. No one can predict how long the ongoing bear market will last, but it is unlikely to last for many years. Even the bear market in the worst financial crisis of the last 90 years, in 2007-2009, lasted for 17 months. As soon as the current bear market comes to an end, Assurant is likely to enjoy a strong recovery in its investment portfolio.

Final thoughts

Bear markets are painful for most investors, but they offer ideal opportunities to purchase high-quality stocks at bargain prices. This certainly applies to Assurant. As soon as inflation begins to subside, Assurant is likely to highly reward those who purchase it around its 52-week lows.