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Credit improving as Assurant dials back growth strategy

| March 19, 2021

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.

Assurant (AIZ) presents a gradually improving credit profile after experiencing a period of rapid expansion culminating at the end of 2018. Total assets increased from $30 billion in 2016 to $45 billion as of the fourth quarter of 2020. Management’s growth appetite appears to have cooled, and they now appear more committed to a balanced approach to capital. AIZ recently announced the sale of its global preneed business unit for $1.3 billion in an all-cash transaction and provided an update on the company’s intended use of capital going forward. Risk compensation on the AIZ 30s appears attractive relative to peers, particularly given the additional protection provided by the coupon step language in the bond indenture.

Exhibit 1: AIZ ‘30s vs P&C Comps

Source: Amherst Pierpont, Bloomberg/TRACE Indications

Bond recommendation

AIZ 3.70% 2/22/30 @ +103/10-year; G+118.5; 2.775%; $107.09

BBB property & casualty /reinsurance comparables:

Baa2/A-               CAN       2.05 8/30          95/90   G:102/97
Baa2/BBB           MKL      3.35 9/29          82/77   G:103/98
Baa2/BBB           THG      2.50 9/30          100/95 G:106/101
Baa1/BBB+          Y            3.625 5/30         95/90   G:108/103

Issuer: Assurant Inc (AIZ)

CUSIP: 04621XAM0
Amount outstanding: $350 million
Rating: Baa3/BBB
Global Issue

Coupon Step-Up Language:
Ba1/BB+  +25 bp per Rating Agency
Ba2/BB +50 bp per Rating Agency
Ba3/BB- +75 bp per Rating Agency
B1 or < +100 bp per Rating Agency

  • AIZ experienced a period of relatively rapid period of expansion culminating at the end of 2018 with the close of its $2.5 billion acquisition of The Warranty Group (TWG); but now presents a gradually improving credit profile as management reduces leverage. Total assets increased from $30 billion in 2016 to $45 billion as of the fourth quarter of 2020. The TWG deal added to the Company’s operating diversity by bolstering its market share in vehicle protection services, but left AIZ with a stretched financial profile from the debt incurred in the deal (resulting in downgrades from the rating agencies at the time). Total leverage closed 2018 at a heightened level of 39% up from a more traditional run rate of 25% in the prior year. Leverage improved to 34% in the most recent quarter.
  • Management’s growth appetite appears to have cooled, and they now appear more committed to a balanced approach to capital going forward. AIZ completed four small acquisitions in 2020, following three small deals in 2019. The largest purchase over that stretch was a strategic bolt-on deal for $325 million (HYLA Mobile Inc.), which it partially funded with a subordinated debt launch in late 2020.
  • AIZ recently announced the sale of its global preneed business unit for $1.3 billion in an all-cash transaction. Management will use 75% of the proceeds for share repurchases and outlined the company’s intended use of capital going forward. AIZ will return $470 million to shareholders in 2021, as part of its existing three-year $1.35 billion capital return plan. This is in-line with the prior year, as total share repurchases and dividends were $473 million in fiscal year 2020. This appears a manageable approach to equity compensation within the context of AIZ’s plans to gradually reduce leverage and maintain solidly investment grade financial metrics.
  • Notwithstanding expansion efforts in previous years, the bulk of AIZ’s business remains concentrated in their mobile device protection services within the global lifestyle segment, which still makes up the vast majority of revenue. Lifestyle also houses vehicle protection services, which increased markedly with the TWG deal and will make up a greater portion of earnings going forward. The remainder of business is within global preneed (sold) and global housing (homeowners, renters, etc.); the latter of which represents a smaller portion of earnings, but a sizable component of catastrophe risk to AIZ.
  • AIZ has sufficient sources of liquidity from the standpoint of long-term debtholders. Cash on the balance sheet impressively increased to $2.2 billion as of year-end 2020 from $1.9 billion at the prior year-end. The Company has $446 million in available on its credit facility through 2022, which can be increased to $575 million at their discretion. The company already redeemed the $338 million in maturities due in 2021 (not including $288 million in preferred), with its next maturity of $650 million due in 2023.
  • AIZ maintains solid capital adequacy and a conservative investment portfolio for their current ratings. The vast bulk of investment holdings remain in investment grade fixed income, primarily in corporate and government securities. Only a small portion is retained in equity and non-investment grade fixed income holdings.

Capital structure: The front-end and intermediate notes (23s, 28s and 30s) all contain step-up language, providing incentive for management to maintain investment grade ratings (+200 bp in event both agencies go to single B ratings). There is a small difference in bond indenture language between the 2030s and 2028s. The 2028s are dictated by the “2013 Indenture” while the 2030s revert to an older “2004 Indenture” that includes a limitation on indebtedness that is not included in the 2013 version. Specifically, it is a limitation on secured debt issuance; however, the existence of the limitation on liens in the 2030s serves to benefit the 2028s as well since management is beholden to those covenants on all issues using the 2004 language. AIZ’s last senior public debt offering was in 2019 when the company issued $350 million in 10-year notes to help fund a $100 million tender offer for its AIZ 6.75% 2034s. That issue had previously been tendered for at the end of 2016, with the full $100 million being redeemed. The most recent action makes the issue non-Index eligible. Meanwhile, the surplus notes issued in 2018 (AIZ 7% ’48) are deferrable in the unlikely event that AIZ faces a capital shortfall, providing cushion to the outstanding senior notes.

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