Mike & Mark: Assurant (AIZ) De-risked & Ready for a Repricing

by Mike Khouw January 13, 2017 3:53 pm • Trade Ideas

Boring Can Be is Beautiful & Profitable: Assurant Inc. (AIZ) De-risked & Ready for a Repricing

Assurant, Inc. (AIZ) is a niche property-casualty & risk-management insurance company that competes worldwide. One of the interesting products the company offers is mobile devise protection. Every time some buys a tablet or mobile phone, etc., AIZ has a potential customer. Since the retailer offers this coverage, it is a cost efficient sale for the company. The company also offers vehicle protection and pre-funded funeral insurance. The company is also in a number of other steady, repeatable businesses associated with the real estate market. They provide credit insurance, renters insurance, lender-sold homeowners insurance, mortgage valuation and field services, and manufactured housing insurance. It also provides title and valuation services for home equity lenders…

We think AIZ represents a boring yet intriguing investment opportunity for a couple of reasons. (1) They have a strong position in a repeatable business insuring items that virtually everyone owns. The cost of insuring these products is predictable and diversifiable, allowing the company to convert revenues to profits in a very steady manor. (1) The company wisely exited the Health Insurance market, this is a business is full of negative surprises due to the escalating cost of heath care. They also exited the Employee Benefits business that is a low-margin, high-volume business that like the health insurance business requires economies of scale to compete. (2) The company was formerly part of the Fortis Inc. family of insurance companies. It was spun off in February 2004 and has never seemed to capture the imagination of investors causing it to trade at a discount to the median stock in the S&P500.
The technical picture is in a well-contained bullish trend. The share price is moving from the lower left to the upper right, with a few minor pull backs along the way. On a short-term basis, the share price is trading above the 40 week (200 day) moving average. The MACD is signaling positive momentum and the RSI tells us the shares have more room to run before they become overbought. Even though the share price is trading towards the loser end of the tend channel, the technicals suggests the bullish long-term price trend is intact.

Valuation is more than supportive of the bullish case. Over the last 4 quarters, the company earned $9.38 a share, so the company’s shares trade at a PE multiple of about 10 based on the prior 12 months earnings, which is less than half the multiple of the median stock in the S&P500. Analysts are expecting revenue and profits to fall in the next 12 months, which we believe is too negative. The company sells it’s insurance products when consumers make a purchase. With the economy moving along, we think sales will hold steady or rise at the margin. In addition, enterprise value as a multiple of operating cash flow (EV/EBITD) is a very low 4.6 as the company is a strong cash flow generator. The company repurchased $1.6 billion in stock over the last 4 quarters, and we expect them to continue to do so.

If you agree with this thesis, investors might consider taking a long position in this stock if it fits into their portfolio from a diversification standpoint and longer-term strategy. An alternative strategy to consider after the big run up in stocks since the election is that if you think a pullback is due, you might want to get paid for providing another investor with stop loss at $92.50 say, by selling cash covered puts. With the stock trading at $94.83, the trade would take on the following structure:

To initiate this trade, the investor will need to put up $89.75 in cash per share in addition to the premium collected on the short put (as the risk is similar to being long stock below the put strike). The breakeven level is $89.75, which is 5% below the current price. There is not a lot of options volume in the name and the bid/ask spread is wide so patience is important in looking for a fill at your price.

The efficient market hypothesis suggests there is a 70% chance of success on this trade, which is consistent with our thesis. If indeed the investor gets hit with the stock, this would be a good thing. That investor will be picking up shares at a discount to the current price and at a single digit PE. If the share price rises, stays flat or falls marginally, the investor make a few bucks.