Assurant, Inc.

Moat: 2/5

Understandability: 4/5

Balance Sheet Health: 3/5

Assurant, Inc. is a global provider of risk management solutions, mainly in the housing and lifestyle markets, offering insurance and related services with operations spanning North America, Latin America, Europe, and Asia.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Assurant is a complex company with operations spanning multiple sectors, creating a complex business to analyse. It is also not a simple company and most of their operations are not easily understandable by most people.

Business Overview

Assurant’s primary business segments are Global Lifestyle and Global Housing.

Global Lifestyle: This segment offers protection products and services for mobile devices, extended service contracts for consumer electronics and appliances, and vehicle protection services and insurance. These offerings are sold primarily through its partners’ distribution networks.
Global Housing: This segment provides lender-placed and specialty insurance policies and services, such as homeowners insurance and flood insurance. These policies are typically required by mortgage lenders and bundled with loans or other financial products.

Revenue Distribution:

Premiums: The largest source of revenue, consisting of fees paid by customers for their insurance policies.
Net investment income: Earnings from Assurant’s investment portfolio.
Fees, other income and service revenue: Revenue from other activities such as distribution fees.

Assurant is essentially a B2B company, selling insurance products through other distribution channels, including banks and other financial institutions, rather than directly to the customers.

Industry Trends:

Increased focus on technology solutions: The rise of Insurtech and consumer preferences for digital experiences. As well, the move towards using data and AI to get an edge.
Volatility in interest rates: Assurant’s investments, interest rate risk management and pricing power are affected by this.
Consolidation of financial services: Insurance is a fragmented sector, with constant mergers and acquisitions.
Evolving regulatory landscape: Increased scrutiny and complexity of regulations, especially regarding data privacy and cybersecurity.
Growing demand for risk management solutions in the housing market: As the global population increases and demand for housing rises, there is an increased demand for insurance and protection plans for these.

Competitive Landscape:

Competition is pretty tough for Assurant. There are many larger insurance companies such as State Farm and Allstate, and in its niche it competes with other insurers like AON and Lockton.
Competition also comes from brokers and investment managers offering similar solutions and services.
Competitive pressures are often focused on price, coverage breadth, and quality. Companies seek to increase their returns on capital and improve profitability.

What Makes Assurant Different:

Diversified Revenue Streams: While primarily an insurance company, Assurant’s revenues come from insurance premiums, investment income, and other services. This reduces reliance on one revenue source.
Strong Partnerships: As mentioned above, the use of partners to distribute its products are extremely important to the revenue of the company.
Global Presence: It has a large international presence, but it is still heavily dependent on the U.S. and Europe.

Financials

As of September 30, 2022, the company had total assets of $51.3 billion, down from $53.9 billion at the end of 2021. Total liabilities were $32.3 billion.

Financial Performance

Revenues: It has consistently generated significant revenue with an increase in operating revenues in 2022 (but a decrease in the past quarter). In the last year, they generated around $9-10 Billion in revenue.
Profitability: While the net income had increased a lot from 2020 to 2021, it has since declined in 2022, and this decline has continued for the last 3 reported quarters. Profits have been significantly affected by increased interest rates, inflation, and less favorable insurance market conditions.
Return on Equity (ROE): Is good at roughly 18% which could be a signal of a company with a competitive advantage. However, their financial leverage of 4.5x could also inflate those numbers.

The company has been reporting weaker income, because they have been severely affected by negative effects of higher interest rates, inflation, and less favorable insurance market.

Balance Sheet Health:

The company has approximately $32 billion in liabilities and $20 Billion in shareholder equity. As per usual, in insurance, the company is highly leveraged with liabilities roughly twice the equity. For now, we have rated this as medium health but will watch closely to see if it changes.

Debt: A significant portion of the assets are funded by long-term debt ($20.4 Billion) that will need to be paid back over time.
Liquidity: Excess cash and marketable securities are around 1 billion.

Moat Analysis

Moat Rating: 2/5 (Narrow Moat)

Moats are structural characteristics inherent to a business that make them more resilient and can maintain above-average profits.

Assurant demonstrates some characteristics of a narrow moat, but not a wide one. A wide moat indicates a long-term sustainable competitive advantage. Here is the assessment:

Switching Costs (Moderate): For their embedded protection businesses, like devices, credit cards, loans, etc., it is hard for their customers to switch due to tight integrations, however, their larger direct insurance customers usually have low switching costs. Therefore, this area has a mixed moat.
Intangible Assets (Moderate): While it does have established partnerships with banks, phone companies, and retailers, these are not truly proprietary. It is possible for other companies to make similar partnerships with enough time and capital. There is a degree of brand recognition in some sectors, such as lender-placed insurance, but that alone is insufficient to grant a wide-moat.
Network Effects (Low): A network effect occurs when a service becomes more valuable as more customers use it. While Assurant does operate in multiple countries, there is limited interaction and therefore no network effect.

Moats can quickly disappear. A company should always be monitored to see if competitive dynamics or technological changes are hurting it.

Threats to the Moat and Business Resilience

The most significant risks are threats to the business itself. Therefore, it is imperative to analyze the threats to Assurant and what management can do to deal with them.

Technological Disruption: New technologies could make Assurant’s current solutions obsolete. The company could become irrelevant quickly if the industry transforms. For instance, if people completely stop using phones and only use other means of communication.
Loss of Key Partnerships: This is a big part of the company’s revenue generation. Any loss of these partnerships can have adverse effects on financials. This could occur if a partner company goes bankrupt or the partners switch to other competitors.
Changes in Regulatory Landscape: The company is regulated in several countries. The constantly changing regulatory requirements for insurers could make operations more expensive and hard for Assurant. This risk might be especially felt in the healthcare industry.
Economic Downturn: Any downturn in the economy will lead to less people using the services of the company, especially when they are tied to mortgages and high-value products. Also, less investment income is generated when interest rates are lower.
Industry Consolidation: The insurance industry is currently going through a period of consolidation with larger players buying smaller ones. If one of the competitors gets bigger and consolidates its operations, it can give it a significant competitive advantage over Assurant.
Cybersecurity threats: Because the company is involved in sensitive financial information, they might be vulnerable to cyberattacks. A large data breach of important personal or financial data can cause a big loss of goodwill.
Mismanagement: As mentioned earlier, management decisions have limited influence in a wide-moat company. However, in this case of a narrow-moat company, management decisions have more influence over the profitability. Poor management can lead to losses of market share and profits.

The main thing to focus here, is that the company is not a super high-quality wide-moat business. It has a narrow moat and the potential to be eroded by industry changes.

Understandability

Understandability Rating: 4/5

The financial operations of Assurant are relatively complicated with a lot of moving parts. The company has a wide range of products, and services which can be confusing for people to understand. The company is not particularly easy to understand from the outside, since it mainly operates with other companies to sell its products, and not directly with customers.

Complex Business Lines: Having both the housing and lifestyle segments requires analyzing each segment individually.
Varied Revenue Streams: Revenue comes from a variety of sources, which may require an understanding of several complex and specific business operations.
Financial complexity: The company’s revenue comes from many sources, requiring a good understanding of financial instruments to understand what they do, including a mix of insurance premiums, income from investments, and fees from other services.
Regulatory Landscape: Understanding the implications of changes in the regulatory environment, which includes different countries as well as various industries, is not simple.

Recent Developments and Concerns

Recent reports and earnings calls from the company have indicated that they have taken a hit on profits. Here is the analysis of the issues and what the management has done about it:

Focus on long term value creation and return on capital: In the last earnings call, management emphasized that they were focused on achieving these goals. They have a program underway called “global process and efficiency” which is aimed at streamlining and automating operations, in order to reduce expenses.
Price increases and managing expenses: They have been trying to reduce costs, but they are also managing to increase prices. They have also tried to increase their revenue generation by expanding into new geographies.
Diversifying portfolio: The company aims to increase its business with “connected” products. These include products that are connected to the internet (smart devices), which might be an avenue to move away from its old legacy business.
Inflationary pressures: They recognize that inflation and interest rate risk is affecting them, but are trying to limit those impacts through financial engineering.
New business with limited losses: They continue to pursue growth in their Global Housing segment, including through their new build insurance line with limited losses and good ROICs.
Share repurchases: Management says that the company does buyback stock when it feels that the stock is undervalued and they have more cash than they know what to do with, instead of issuing dividends. They had repurchased around 10% of total outstanding stock in 2022 and 2023, and may continue to do so.

A very important point that is stressed from Management is to not focus on quarterly profits but the long-term business model. While this is good for long term value creation, it might not be great for an investor looking for quick, short term results.

Summary

In conclusion, while Assurant has shown some evidence of a competitive advantage and an excellent growth trajectory, its business model is complex and faces several challenges and risks. The management seems focused on building out new business ventures as well as becoming efficient with their existing ones, but there is no telling if this will translate to the numbers, and future profits. The company has a narrow moat, which means investors must be careful in their valuation. While it is not as bad as a company without a moat, it is not a business that has a strong long term competitive advantage.