The digitization of the global economy is here, and the COVID-19 pandemic has only accelerated the trend. One insurer is looking to capitalize by offering "lifestyle products" for the connected world, focusing on different coverage options such as mobile device extended warranties, vehicle service contracts, credit protection, and other niche products.
Even if you don't recognize Assurant's (AIZ +0.18%) name, you've probably seen its offerings when buying an iPhone or other electronic device. That's because the company has formed partnerships with several big names across different industries. It's probably most known for its partnerships and mobile care plans with companies like Comcast's Xfinity, Charter Communications' Spectrum, Apple, and Samsung.
The insurer has seen modest growth in recent years, but may very well be on the cutting edge of a larger trend. The company recently sold off one of its less profitable businesses so it could direct its focus to the connected world -- specialty insurance for everyday digital products. Analysts have taken note, saying its stock could rise 25% or more from recent prices (after gaining 55% over the past year). Are they right?
A specialty insurer providing "lifestyle products" for the connected world
Assurant generates most of its revenue in two segments: global lifestyle and global housing.
In 2020, global lifestyle accounted for $7.5 billion in revenue, or 74.6% of its total sales during the year. This segment is where Assurant reports its mobile device solutions, extended service contracts, vehicle protection, credit protection, and other insurance products, which are provided through partnerships with mobile device carriers and retailers across the world.
Image source: Getty Images.
These coverage options appeal to customers who want to protect their electronics in the event they are damaged or lost. Assurant appeals to sustainable investment trends too, because the company repurposes old electronic devices. In fact, it recently passed a milestone of repurposing over 100 million devices, which helps prevent additional e-waste while supporting sustainability goals.
In this segment the company also underwrites vehicle service contracts -- covering the cost of vehicle repairs -- as well as credit protection services. For this, Assurant has partnered with American Express, providing customers with coverage that will pay off credit card balances up to $20,000 in the event of death, disability, or loss of income.
Assurant's global housing segment accounted for $2.05 billion in revenue, or 20.3% of its total last year. This segment contains Assurant's homeowners insurance, manufactured housing insurance, and flood insurance.
This type of insurance coverage is for lenders, mortgage servicers, and investors in mortgage property, and it covers damages due to flood, fire, and dwelling hazard insurance. It also provides insurance for vacation rentals and other products targeted to the sharing economy.
Slow revenue growth, with improvements to the bottom line
Assurant's net earned premiums were up 1.9% to $2.1 billion in the first quarter. However, total revenue dropped 0.7% to $2.4 billion, which is due largely to a reduction in fees and other related income, which decreased 35% from last year due to a change in how the company accounts for trade-ins.
On a positive note, expenses declined in the quarter, with underwriting and other general expenses falling the most, down 17.6% to $735 million in the quarter. As a result, net income actually increased 4.5% on the year to $163 million.
Going forward, analysts covering Assurant project revenue for the year of around $9.85 billion, with a projected earnings per share (EPS) of $10.68. If these estimates hold, it would represent a decline in revenue of 2.4% and growth of EPS by 23.8%. The growth in the bottom line is one reason analysts have price targets ranging from $180 to $207 for the company, which represents a 25% gain from Wednesday morning's prices at the midpoint and as much as 33% at the high end.
Directing its attention to what it does well -- lifestyle products for the connected economy
Assurant has done a good job of managing its expenses. One way its improving profitability is with the sale of its global preneed business. In this segment of its business, Assurant provided pre-funded funeral insurance, final need insurance, and other related services. While its preneed business saw revenue increase 5% since 2018, the segment struggled to grow net income alongside it, which actually fell nearly 17%. Management decided it was time to sell the segment and focus its attention on what it sees as the future -- connected lifestyle products.
In March, the company announced it would sell its preneed business to CUNA Mutual Group for $1.3 billion. In a press release, CEO Alan Colberg said, "The sale of global preneed is another important milestone in our transformation of Assurant, sharpening our focus on our market-leading lifestyle and housing businesses, and better positioning our company to capitalize on future growth opportunities emerging around the connected consumer."
The company has a venture capital arm as well, called Assurant Ventures, which recently surpassed $100 million invested. Assurant seeks out companies that provide strong returns and also fit in with its connected world businesses. One example of this is Cazoo, a fully digital U.K. car sales company and also a smart rent, smart home automation provider.
Solid strategic moves, but more progress must be made
Assurant has positioned itself well as a provider of solutions for the connected world. The company has hopped on the digitization of the economy and sees its unique solutions as a driver of future growth.
However, Assurant's growth rate over the past five years has left a lot to be desired for investors. From 2015 to 2020, the company has seen top-line revenue show nearly no growth, with lackluster financial results dragging the company down in 2016 and 2017.
The company has done a good job positioning itself, and it could be a solid play from an ESG (environmental, social, and governance) perspective. However, as an investor, I want to see continued progress from the company in terms of growth on both the top and bottom lines before considering Assurant as a long-term investment.
