Is Assurant Inc (NYSE:AIZ) Expensive For A Reason? A Look At The Intrinsic Value
Pricing AIZ, a financial stock, can be difficult since these insurance businesses have cash flows that are affected by regulations that are not imposed upon other sectors. For example, insurance companies are required to hold more capital to reduce the risk to shareholders. Emphasizing factors such as book values, with the return and cost of equity, may be appropriate for evaluating AIZ’s intrinsic value. Below I will show you how to value AIZ in a reasonably useful and straightforward way.
Check out our latest analysis for Assurant
What Is The Excess Return Model?
Financial firms differ to other sector firms primarily because of the kind of regulation they face and their asset composition. Financial firms operating in United States face strict financial regulation. Furthermore, insurance companies generally don’t have substantial portions of physical assets on their books. The Excess Returns model overcomes the required capital kept on hand and lack of tangibles by focusing on forecasting stable earnings, rather than less relevant factors such as depreciation and capex, which more traditional models focus on.
How Does It Work?
The main belief for this model is, the value of the company is how much money it can generate from its current level of equity capital, in excess of the cost of that capital. The returns above the cost of equity is known as excess returns:
Excess Return Per Share = (Stable Return On Equity – Cost Of Equity) (Book Value Of Equity Per Share)
= (0.099% – 9.8%) x $89.99 = $0.037
We use this value to calculate the terminal value of the company, which is how much we expect the company to continue to earn every year, forever. This is a common component of discounted cash flow models:
Terminal Value Per Share = Excess Return Per Share / (Cost of Equity – Expected Growth Rate)
= $0.037 / (9.8% – 2.9%) = $0.53
Combining these components gives us AIZ’s intrinsic value per share:
Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share
= $89.99 + $0.53 = $90.52
This results in an intrinsic value of $90.52. Relative to today’s price of US$107, AIZ is , at this time, priced in-line with its intrinsic value. This means AIZ isn’t an attractive buy right now. Pricing is one part of the analysis of your potential investment in AIZ. There are other important factors to keep in mind when assessing whether AIZ is the right investment in your portfolio.
Next Steps:
For insurance companies, there are three key aspects you should look at:
Financial health: Does it have a healthy balance sheet? Take a look at our free bank analysis with six simple checks on things like leverage and risk.
Future earnings: What does the market think of AIZ going forward? Our analyst growth expectation chart helps visualize AIZ’s growth potential over the upcoming years.
Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether AIZ is a dividend Rockstar with our historical and future dividend analysis.
For more details and sources, take a look at our full calculation on AIZ here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
