Sterne Agee analyst John Nadel takes a close look at Assurant, Inc. (NYSE:AIZ) in the lead-up to the company’s Investor Day tomorrow.

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On Assurant, Inc. (NYSE:AIZ)’s 4Q13 conference call, mgmt indicated it was possible the company would lose a block of mortgages to another carrier. We naturally expected the competitor would be QBE (QBE-ASX, $12.72, N/R) given its status as the #2 player in the market. But it doesn’t appear QBE Insurance Group Ltd (ASX:QBE) will be the recipient leaving open the possibility of a new entrant to the market. We hope tomorrow’s Investor Day will shed light on this issue.

Assurant a Winner in Servicing Consolidation

Since YE’11, Assurant, Inc. (NYSE:AIZ) has increased its tracked loan count from 28.4m to 34.7m, an increase of 6.3m loans, or 22%. Most of this appears to have come at the expense of QBE, reflecting former Bank of America Corp (NYSE:BAC) (BAC, $17.33, Neutral – Hagerman) servicing rights that were sold or otherwise transferred to special servicers whose relationships are with Assurant, Inc. (NYSE:AIZ). As a result of these wins, we believe AIZ now controls over 70% of the LPI market.

But Assurant Expects to Lose Some Loans

On Assurant, Inc. (NYSE:AIZ)’s 4Q13 conference call mgmt indicated it expected it could lose a block of loans to another insurance carrier, though no sizing, timing or other details were provided. We had expected QBE Insurance Group Ltd (ASX:QBE) would be the natural “winner” of this block of loans under the assumption that new mgmt running the QBE North American business would look to “recover” some of the lost market share moving forward. However, it appears QBE will not be the recipient. Mgmt was specifically asked if QBE would be the beneficiary on its YE’13 conference call about two weeks ago and CEO John Neal answered “not to my knowledge.” It’s possible the CEO simply wasn’t aware and QBE is in fact the likely recipient of the block of loans. But the CEO’s response also leaves the door open to the possibility that a new entrant into the LPI market will emerge.

A Possible New Entrant?

As we mentioned above, it’s possible if QBE Insurance Group Ltd (ASX:QBE) isn’t the recipient of the block of loans from Assurant, Inc. (NYSE:AIZ) that a new entrant to the market will emerge. While we recognize the technology platform and other administrative capabilities required to accurately track loans and administer LPI policies is significant and highly specialized, we nonetheless also recognize the return potential from this business has historically been very high relative to voluntary homeowners insurance. Moreover, with most/all of the regulatory overhangs for the LPI players now lifted (CA, FL & NY rate actions taken, FHFA requirements now defined, etc.), the ability to price the business for targeted returns is clearer than it was over the last 2-3 years.

Focus on the Placement Rate

As a result of: 1) new loan onboarding; 2) foreclosure moratoriums; 3) judicial process in several key states that has delayed foreclosures, Assurant, Inc. (NYSE:AIZ)’s placement rate has remained elevated far longer than expected (2.75% in 2011, 2.82% in 2012, 2.81% in 2013 – all relative to 1.00-1.50% long-term average). We expect particularly with foreclosure activity increasing and the housing market clearing that mgmt will outline an expectation that the placement rate will begin to normalize over the next few years. On a normalized basis, we estimate Specialty Property earnings around $200-225m, or roughly 20-30% below our 2015 estimate.