The Long and Short
Assurant offers relative value in P&C
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. This material does not constitute research.
Assurant’s (AIZ: Baa2/BBB/BBB) intermediate term bonds trade at attractive spreads relative to its property & casualty peer group. While the name is subject to earnings uncertainty during periods of high catastrophe losses, the company has a solid operating track record over time, bolstered by its strong position in niche coverage lines. In the US, odds are that at some point you have owned a cellular device covered by an AIZ insurance plan. Investors seeking a relative value opportunity in this segment should target AIZ.
AIZ bonds trade at a discount to other BBB P&C and reinsurance issuers with similar risk profiles that are equally if not more impacted by periods of heightened catastrophe losses, such as Fairfax Financial (FFHCN:Baa2/BBB+/BBB), Liberty Mutual (LIBMUT: Baa2/BBB) and Hartford Financial (HIG: Baa1/BBB+) (Exhibit 1). Meanwhile, lower growth aspirations and a light maturity schedule appear to make the company an unlikely issuer of bonds in the primary market for the near-term.
Exhibit 1. AIZ vs P&C peer comps (BBB or higher) – intermediate credit curve
Source: Santander US Capital Markets LLC, Bloomberg/TRACE G-spread indications only, excludes several outliers
Much of AIZ’s business reside within their mobile device protection services, extended service contracts, and vehicle service contracts within the Global Lifestyle segment, which made up roughly 80% of revenue in the prior year period. These niche business lines benefit from extremely strong distribution channels through distributors, cell providers, retailers and equipment manufacturers. Vehicle protection services increased markedly with the TWG deal in 2018 (see below). The remainder of business is Global Housing—homeowners, flood, renters and so on—that represents a smaller portion of earnings, but a sizable component of catastrophe risk to AIZ. The company divested its global preneed (funeral insurance) operations back in 2021.
Management’s growth appetite appears to have cooled over the past several years, limiting merger activity to mostly smaller, strategic bolt-on acquisitions that have not materially impacted AIZ’s credit metrics. The company has remained committed to a balanced approach to capital since a period of expansion in the prior decade. The most significant addition in recent years was the 2022 purchase of American Lease Insurance Agency to expand commercial P&C lines, although that purchase was only for $60 million.
AIZ experienced a period of relatively rapid expansion back in 2017 through 2018 concluding with the close of its $2.5 billion acquisition of The Warranty Group (TWG). 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 ($596 million in repayment of TWG debt). Total leverage closed 2018 at a heightened level of 39% but has remained in a more traditional run rate of in the high-20% to low-30% range. Both Moody’s and S&P instituted downgrades at the time of the TWG acquisition reflecting the additional leverage. Since then, AIZ has mostly been an improving credit story. The company demonstrated restraint in maintaining a manageable plan for equity compensation over the interim, while gradually reduce the additional leverage from the TWG purchase and maintaining solidly investment grade financial metrics.
AIZ has not tapped the public debt markets since 2021 and does not have a near-term public debt maturity until 2026. The company has previously issued debt in order to tender for its AIZ 6.75% 2034s on multiple occasions but appears unlikely to do so again as the rate environment has shifted meaningfully since its last attempt to do so. Most of the company’s outstanding notes contain coupon step-up language, providing incentive to management to maintain investment grade ratings (200 bp in event both agencies go to single ‘B’ ratings). 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.
AIZ has sufficient sources of liquidity from the standpoint of intermediate and long-term debtholders. As of second quarter of this year the company had $1.7 billion in cash on the balance sheet, with a reported $622 million in liquid assets previously reported at the holding company level. Additionally, AIZ maintains the entirety of its nearly $500 revolving credit facility through 2026, which can be increased to $700 million. That compares with just $175 million near-term maturities in 2026, plus an additional $300 million in 2028. AIZ has generated $1.5 billion in free-cash-flow over the last 12 months.
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.
This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.
Important Disclaimers
Copyright © 2024 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.
In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.
The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.
In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.
Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.
Important disclaimers for clients in the EU and UK
This publication has been prepared by Trading Desk Strategists within the Sales and Trading functions of Santander US Capital Markets LLC (“SanCap”), the US registered broker-dealer of Santander Corporate & Investment Banking. This communication is distributed in the EEA by Banco Santander S.A., a credit institution registered in Spain and authorised and regulated by the Bank of Spain and the CNMV. Any EEA recipient of this communication that would like to affect any transaction in any security or issuer discussed herein should do so with Banco Santander S.A. or any of its affiliates (together “Santander”). This communication has been distributed in the UK by Banco Santander, S.A.’s London branch, authorised by the Bank of Spain and subject to regulatory oversight on certain matters by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA).
The publication is intended for exclusive use for Professional Clients and Eligible Counterparties as defined by MiFID II and is not intended for use by retail customers or for any persons or entities in any jurisdictions or country where such distribution or use would be contrary to local law or regulation.
This material is not a product of Santander´s Research Team and does not constitute independent investment research. This is a marketing communication and may contain ¨investment recommendations¨ as defined by the Market Abuse Regulation 596/2014 ("MAR"). This publication has not been prepared in accordance with legal requirements designed to promote the independence of research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. The author, date and time of the production of this publication are as indicated herein.
This publication does not constitute investment advice and may not be relied upon to form an investment decision, nor should it be construed as any offer to sell or issue or invitation to purchase, acquire or subscribe for any instruments referred herein. The publication has been prepared in good faith and based on information Santander considers reliable as of the date of publication, but Santander does not guarantee or represent, express or implied, that such information is accurate or complete. All estimates, forecasts and opinions are current as at the date of this publication and are subject to change without notice. Unless otherwise indicated, Santander does not intend to update this publication. The views and commentary in this publication may not be objective or independent of the interests of the Trading and Sales functions of Santander, who may be active participants in the markets, investments or strategies referred to herein and/or may receive compensation from investment banking and non-investment banking services from entities mentioned herein. Santander may trade as principal, make a market or hold positions in instruments (or related derivatives) and/or hold financial interest in entities discussed herein. Santander may provide market commentary or trading strategies to other clients or engage in transactions which may differ from views expressed herein. Santander may have acted upon the contents of this publication prior to you having received it.
This publication is intended for the exclusive use of the recipient and must not be reproduced, redistributed or transmitted, in whole or in part, without Santander’s consent. The recipient agrees to keep confidential at all times information contained herein.
