Assurant not limited to just one specialty

7/28/2008


  Recent Price
$65
  Dividend
$0.56
  Yield
0.8%
  P/E Ratio
11
  Shares (millions)
119
  Long-Term Debt as % of Capital
19%
  52-Week Price Range
$71.31 - $45.27

Falling home prices have been bad for homeowners, bad for the economy, and bad for mortgage lenders, but a boon for Assurant ($65; NYSE: AIZ). The company’s specialty-property division, which provides insurance to mortgage lenders when homeowners fail to maintain insurance themselves, grew earnings 57% in 2007.

Assurant shares are down 2% this year, versus a 26% decline for the S&P 1500 Insurance Group Index. Such divergence from the insurance index is not unusual for Assurant, which focuses on complex but highly profitable niche insurance businesses. Assurant is a Focus List Buy.

Business niches
The specialty-property division (23% of earned premiums in 2007) has been a chief growth driver in recent years and offers the best potential for near-term profit gains. Many homeowners pay their mortgage, taxes, and insurance in one payment to the mortgage lender. Thus, if a borrower fails to make a payment, the lender assumes the premium has not been paid and takes out insurance on the home at the borrower’s expense.

Assurant controls more than two-thirds of this market, and the business is strongly correlated to delinquency rates. Foreclosures have increased in each of the last 29 months, contributing to the specialty-property unit’s strong results. In June, foreclosures rose 53% over year-earlier levels, according to RealtyTrac.

The solutions division (34% of premiums), encompassing several smaller businesses, could develop into Assurant’s next multiyear growth driver. The division provides credit- and debt-protection services, warranties, and extended-service contracts, as well as insurance to cover funeral expenses. Assurant has targeted expansion in six countries (China, Denmark, Mexico, Italy, Spain, and Germany) where it sees an underdeveloped market for its services. China and Germany combine for about $141 billion in warrantable goods, such as cell phones or laptop computers, with market penetration about one-tenth of that in the U.S.

Assurant’s health division (28% of premiums) provides health insurance for individuals. While competition is growing, so is the size of the market. Between 2005 and 2010, the number of individuals seeking insurance is expected to grow 37% to 26 million. With fewer small businesses offering health insurance, demand is growing. In today’s job market, many uninsured workers are young and healthy, historically a profitable demographic group for insurers.

The employee-benefits division (16% of premiums) provides dental, disability, and life insurance for businesses employing fewer than 500 people. By targeting small groups, Assurant can charge higher premiums and enjoy the benefits of a stable customer base and lower claims rates.

Conclusion
Consensus estimates project a 19% increase in June-quarter per-share earnings, with results due July 31. Though profits are expected to decline in the September quarter, Wall Street expects per-share-earnings growth of 15% this year and 9% next year. Assurant, with a Quadrix® Overall score of 87, sells for just 10 times estimated 2008 earnings. An annual report for Assurant Inc. is available from 1 Chase Manhattan Plaza, 41st Floor, New York, NY, 10005; (212) 859-7000; www.assurant.com.


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