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Tickers in this Article: AIZ, L, CNO, PFG
We are reiterating our Neutral recommendation on Assurant Inc. (AIZ) as we remain concerned about the micro as well as macro economic headwinds faced by its various business lines. While the Health Business is subject to uncertainty related to the Health Care Reform, its Employee Benefits business is suffering from high unemployment. The Specialty line of business is likely to suffer from declining outstanding mortgage loans. We, however, expect the Solutions Business to record marginal growth. Given the limited scope for top-line growth, it is evident that earnings growth will depend on capital management, primarily share buybacks, in the upcoming quarters. The Zacks Consensus Estimate for second quarter earnings is currently pegged at $1.41 per share, reflecting a growth of 86% year over year. The company is scheduled to release its second quarter results on July 25, 2012 after the market closes.

The top line at Assurant Solutions, which constitutes approximately 35% of total revenues, has been performing well over the past several quarters. Though results in UK have been disappointing for some quarters, the company has taken several steps for a turnaround in its international business.

Looking ahead, it is expected that international credit insurance service contracts worldwide, including wireless and pre-funded funeral products, will drive growth for Solutions. The company has a solid sales pipeline in each of these areas. Management expects overall premium growth for the segment to be modest in 2012, with continued improvements expected in the later years.

Though Assurant Health has been underperforming for some time, its profitability in the first quarter of 2012 showed a sharp improvement. In response to the challenging marketplace, the company entered into a network agreement with AETNA Signature Administrators and a marketing agreement with American Family. It also focused on the distribution of individual health policies to its customers.

Management is quite optimistic about its specialty strategy, which in its view is immune to Supreme Court ruling on the Health Care Reform case. Meanwhile, the company is reducing overhead expenses and trying to introduce more products to suit customer choice.  

However, 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.

Moreover, increasing government participation in home mortgages is limiting the company's market share. In order to provide additional product service to customers in this segment, the company acquired SureDeposit in June, the market leader in rental security deposit alternatives. The acquisition is expected to be accretive to earnings right from the beginning.

The Employee Benefits segment has been pressed by persistent economic challenges in the small group sector, resulting in higher lapse rates and lower premium growth on in-force policies. A low rate of recruitment and modest wage growth in the segment imply that premium income from the segment will remain under pressure in the near term.

The segment saw an increased sale of voluntary products providing dental benefits. Management expects a modest sequential improvement in the segment's dental business, owing to a growth in voluntary products. However, strong and broad-based growth is unlikely until the economy recovers fully.

In the absence of substantial organic growth, Assurant has maintained its bottom-line earnings via an active capital management strategy. From 2004 to 2010, Assurant utilized 48% of its free cash flow for repurchasing shares.

The company also raised its annual dividend by 13% in May 2011, marking the eighth straight year of increase. The company also returned $600 million in share repurchases and dividend in 2011. A low debt-to-capital ratio also reflects a solid capital position.

Assurant is conservatively placed with respect to its investment portfolio. It has below-average investment allocations in risky assets, such as commercial real estate, European sovereign debt, BBB bonds and subprime/Alt-A securities. We believe this conservative portfolio will cushion earnings if the macro conditions deteriorate.

Based in New York's financial district, Assurant competes with Principal Financial Group Inc. (PFG), Loews Corp. L) and Conesco Inc. (CNO) among others. The stock currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.

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