There can be a lot of money in targeting specialized insurance markets, as there's often less competition and substantial rewards for building up expertise in underwriting. It's a strategy that has served companies like Berkshire Hathaway (NYSE:BRK.A, BRK.B) and W.R. Berkley (NYSE:WRB) pretty well. In the case of Assurant (NYSE:AIZ), though, analysts are taking a generally dim view of this company's ability to continue growing premiums and maintaining a profitable combined ratio. While the stock is not especially interesting if the bearish predictions are in fact accurate, financial outperformance could power a strong recovery in these shares.

Discount Brokers Comparison: Your one-stop shop for finding the perfect broker for your investments.

Regulators May Tighten the Screws on a Profitable Business
One of Assurant's largest businesses is in lender-placed insurance; essentially a type of homeowners insurance that protects the mortgage holder (a bank, investor or GSE most commonly) if the homeowner's coverage lapses. More than 20% of the company's premiums come from this business, where Assurant and QBE together hold more than 90% of the market.

Unfortunately, this business is under pressure not only from foreclosures and lower housing purchase activity, but also from regulators. Consumer advocates have complained that rates are just too high and these companies are making too much money. Although it's true that recent years have been profitable, that overlooks the fact that Florida (more than one-third of the market for LPI) hasn't had a major hurricane in going on seven years. The risk, then, is that regulators put the screws to Assurant on premium growth and leave the company vulnerable to future underwriting losses (to say nothing of diminished profitability even in the absence of catastrophes).

Can the Company Work Around Health Insurance Reform?
The arrival of Obamacare is going to significantly change health insurance for companies like Unitedhealth (NYSE:UNH) and WellPoint (NYSE:WLP), and Assurant is no different. In the case of Assurant, the mandate to force minimum medical loss ratios is leading the company to shift its business towards access and supplemental programs that fall outside the MLR controls. This has worked well recently, but I do worry a bit that companies like Chubb (NYSE:CB), Unitedhealth and so on may also look to these same markets to supplement their own profits.

SEE: Intro To Insurance: Health Insurance

The Economy Is a Threat
Although insurance companies are not widely seen as economically sensitive, matters are a little different for Assurant. Products like extended warranties/service contracts and pre-need life insurance (in essence, prepaying for funeral expenses) don't sell as well in tougher times, and the decisions of potential wireless clients like Apple (Nasdaq:AAPL) to self-insure doesn't help matters.

Likewise, the company's credit and employee benefits products also come under pressure in tougher times. When people struggle to pay their bills, credit insurance products tend to rack up bigger losses, and likewise employee benefits programs don't sell as well when companies aren't hiring new workers.

The Bottom Line
Analysts are pretty down on Assurant right now. Although the company has shown some annual premium growth since 2004 and has generally posted double-digit returns on equity, analysts are now looking for annual premium contraction of about 2% over the next five years, with returns on equity falling into the 7 to 8% range. Buybacks should help boost EPS growth into the green over that span and it looks as though the company should be able to fund higher dividends, but overall growth prospects seem sluggish by these numbers.

SEE: 5 Must-Have Metrics For Value Investors

With that sort of expectation in place, it's not so surprising that Assurant stock trades at about three-quarters of its tangible book value and a mid-single digit trailing P/E. With an excess returns model, those dismal assumptions likewise don't fuel an attractive target price. If Assurant can maintain 10% returns on equity, though, and continue with just a bit of premium growth, these shares could be poised to outperform. There are a lot of risks to that more positive scenario, though, so this is a stock that only really makes sense for aggressive investors willing to roll up their sleeves and do some pretty thorough due diligence.

At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  2. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  3. Mutual Funds & ETFs

    ETF Analysis: iShares Morningstar Small-Cap Value

    Find out about the Shares Morningstar Small-Cap Value ETF, and learn detailed information about this exchange-traded fund that focuses on small-cap equities.
  4. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  7. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  8. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  9. Mutual Funds & ETFs

    ETF Analysis: WisdomTree SmallCap Earnings

    Discover the WisdomTree Small Cap Earnings ETF, a fund with a special focus on small-cap and micro-cap stocks with positive earnings.
  10. Mutual Funds & ETFs

    ETF Analysis: iShares US Regional Banks

    Obtain information and analysis of the iShares US Regional Banks ETF for investors seeking particular exposure to regional bank stocks.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Profit Margin

    A category of ratios measuring profitability calculated as net ...
  3. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis ...
  4. Debt Ratio

    A financial ratio that measures the extent of a company’s or ...
  5. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing ...
  6. Net Present Value - NPV

    The difference between the present values of cash inflows and ...
RELATED FAQS
  1. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>
  4. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  5. What is the difference between the return on total assets and an interest rate?

    Return on total assets (ROTA) represents one of the profitability metrics. It is calculated by taking a company's earnings ... Read Full Answer >>
  6. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!