Is Assurant Stock A Good Buy?

Assurant, Inc. (NYSE:AIZ) is a global risk management insurance provider and the leading provider of collateral protection insurance (CPI) in the U.S.. Founded in 1892 and based in New York City, the company reached a historic high market capitalization before world trade skidded to a virtual standstill.

Unlike many other companies, AIZ quickly rebounded, leading some investors to ask: is Assurant stock a good buy?

The company is in the right place at the right time. Its main product CPI is also known as lender-placed insurance (LPI) and force-placed insurance (FPI), depending on whom you ask.

We’ll dive further into the mechanics in a moment, but at its core, it insures the lender’s interest in houses, cars, RVs, and other collateral-backed loans.

Although no one knows how big it could be yet, there is most likely a wave of defaults heading down the pipeline in 2021. The government stimulus rules included a moratorium on foreclosures and evictions that expired on December 31, 2020.

We’re going to spend the first six months of the year learning just how many collateral loans are in default as we monitor court adjudications.

And according to force-placed insurance whistleblower Brian Penny and the editorial staff of Bloomberg, CPI/LPI/FPI is one of the leading causes of foreclosure/repossession.

Why is this controversial product is so profitable and what it could mean for investors?

Assurant Is A Specialty Insurer, But What’s That?

While you likely heard of popular consumer insurance companies like State Farm and USAA, there are multiple layers of insurance and reinsurance. This is true in mortgages, healthcare, life insurance, automobiles, and renters, among others.

Assurant (AIZ) deals with a broad range of specialty insurance and risk management products, but its focuses are insurance plans for many consumer electronics and appliances and force-placed insurance on mortgages and car loans.

The company acts as a third-party loan tracker for auto and mortgage loan servicers. Its portfolio includes 36 million mortgages around the world, and it is expanding its geographic footprint as far and wide as it can.

Mortgage contracts include insurance minimum requirements, and if you don’t carry the proper insurance, the lender will place its own. FPI is up to 10x more expensive than traditional insurance and can be backdated retroactively. It also includes real-estate owned (REO) insurance placed on foreclosed properties.

Because Assurant both tracks the loans and underwrites the policies through its subsidiaries, the company is a vertically integrated company that can control its own profitability.

And it is profitable, which is why some investors are bullish on the stock.

Is Assurant Stock A Good Buy?

Based on a discounted cash flow forecast analysis, Assurant has an intrinsic value of $152. AIZ share prices that exceed that level would signify the company valuation is too high.

The company reported a net loss of $34.9 million in the third quarter of 2020, compared to a net loss of $59.5 million in the same quarter of 2019.

In spite of that, it had net operating income of $84.8 million and grew its global lifestyle revenue to $106.6 million. That’s up year-over-year from $102.1 million.

Third quarter results are often bad, as the company insures against catastrophes, and that’s when hurricanes and tornados hit.

Its profits are based on loss ratios, which are calculated by dividing the money it receives in premiums by money it pays in losses. Many states and countries have mandatory loss ratio levels, and the company has a good track record.

With one exception during the 2007 subprime mortgage crisis.

Things To Be Cautious Of Buying Assurant Stock

The biggest risk Assurant has is its exposure to the mortgage and automobile force-placed insurance industries. This is also going to be its biggest profit generator over the next five years, as the real estate market stabilizes.

Assurant has received several fines by state insurance regulators for price gouging on its force-placed insurance.

Each of these fines was a relative slap on the wrist and totaled less than $20 million over the course of a decade. It pales in comparison to profits, but major client Wells Fargo (WFC) paid $1 billion for auto and mortgage LPI abuses.

The company will profit for a few years from foreclosures and other issues about to hit the economy. But it could easily find itself again in the crosshairs of regulators over it. And maybe the third time will be a knockout.

Regulators aside, Assurant also has to compete in a cutthroat industry.

Assurant Leads But Rivals Are Chasing

Assurant isn’t alone in providing many of its products, but it is the market leader in most.

National General Lender Services (formerly GMAC) controls about a third of the domestic force-placed insurance market versus Assurant’s 70 percent.

The business model outlined above means whichever company gains the loan tracking contracts will gain the force-placed insurance premiums on those loan portfolios. This makes either company a great play for investors seeking controlled profit growth limited only by massive fines and class action lawsuits.

Of course, the only way for Assurant to lose traction is to be hit with market conditions that will affect its competition too. It simply needs to be more resilient.

Is Assurant Stock A Good Buy? 

Assurant is a specialty insurance and risk management company that is well placed for the unstable 2021 economy. Most of its insured assets are consumer electronics (like smartphones) and force-placed insurance that protects collateral lenders.

Some of its products are controversial, but they’re also highly profitable. As we approach the end of foreclosure protections, it is going to become apparent who paid their bills this year. Those who didn’t may find themselves with an expensive proprietary policy placed on their loan by Assurant.

If you’re ok profiting from that, there’s plenty of room to grow. Just be wary of fines coming down the pipelines as a primary risk factor to any AIZ investment thesis.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.