Q2 for Q2 2022 Financial Earnings Transcript 2022 (opens in new window)

Assurant 2Q 2022 Earnings Transcript

PARTICIPANTS

Corporate Participants

Keith Demmings - President & Chief Executive Officer, Assurant, Inc.

Richard Dziadzio - Executive Vice President, Chief Financial Officer, Assurant, Inc.

Suzanne Shepherd - Senior Vice President, Investor Relations and Sustainability, Assurant, Inc.

Other Participants

Michael Phillips - Analyst, Morgan Stanley & Co.

Jeff Schmitt - Analyst, William Blair

Thomas McJoynt-Griffith - Analyst, Keefe, Bruyette & Woods

Mark Hughes - Analyst, Truist Securities

John Barnidge - Analyst, Piper Sandler

Brian Meredith - Analyst, UBS

Grace Carter, Analyst, BofA Securities

MANAGEMENT DISCUSSION SECTION

Operator: Welcome to Assurant's Second Quarter 2022 Conference Call and Webcast. At this time, all participants have been placed in a listen-only mode, and the floor will be opened for your questions following management's prepared remarks. [Operator Instructions]

It is now my pleasure to tuthe floor over to Suzanne Sheppard, Senior Vice President of Investor Relations and Sustainability. You may begin.

Suzanne Shepherd, Senior Vice President, Investor Relations and Sustainability, Assurant, Inc.

Thank you, operator and good morning, everyone. We look forward to discussing our second quarter 2022 results with you today. Joining me for Assurant's conference call are Keith Demmings, our President and Chief Executive Officer, and Richard Dziadzio, our Chief Financial Officer.

Yesterday, after the market closed, we issued a news release announcing our results for the second quarter 2022. The release and corresponding financial supplement are available on assurant.com. We'll start today's call with remarks from Keith and Richard, before moving into a Q&A session.

Some of the statements made today are forward looking. Forward-looking statements are based upon our historical performance and current expectations, and subject to risks, uncertainties and other factors that may cause actual results to differ materially from those contemplated by these statements. Additional

information regarding these factors can be found in yesterday's earnings release, as well as in our SEC reports.

During today's call, we will refer to non-GAAP financial measures, which we believe are important in evaluating the company's performance. For more details on these measures, the most comparable GAAP measures, and a reconciliation of the two, please refer to yesterday's news release and financial supplement that can be found on our website.

We have revised all quarterly and annual results for full-year 2020 through first quarter 2022 periods to reflect a change in the Adjusted EBITDA calculation to exclude certain businesses that we now expect to exit fully, including our sharing economy and small commercial businesses in Global Housing, as well as certain legacy long-duration insurance policies within Global Lifestyle. Results also have been revised for the correction of an error related to reinsurance of claims and benefits payable within the Global Lifestyle segment that occurred in late 2018 through first quarter 2022; as well as other immaterial corrections.

The impact of these changes, individually or in the aggregate, is not material to results for any prior period. A full reconciliation of certain reported and revised key measures of performance and metrics is provided in our second quarter financial supplement posted on Assurant.com.

I will now tuthe call over to Keith.

Keith Demmings, President & Chief Executive Officer, Assurant, Inc.

Thanks Suzanne, and good morning, everyone. As we outlined during our recent Investor Day in March, we aspire to be the leading global business services company supporting the advancement of the connected world. And so far in 2022, we have made solid progress in delivering on that vision for the benefit of our clients and their customers, our employees and importantly, our shareholders.

We delivered Adjusted EPS of $7 dollars and 22 cents, up 13 percent from the first half of last year, and Adjusted EBITDA was $592 million dollars - both excluding reportable catastrophe losses.

We're very pleased that Global Lifestyle had such a strong first half of the year with momentum expected to continue, led by both mobile and auto. Our capital light and fee income-based businesses represented 82 percent of our Adjusted EBITDA x CAT so far this year and continued to add to the value of our franchise. While results in Global Housing were below expectations - largely driven by broader inflationary pressures seen across our industry - we have a clear path and several actions underway to address near- term macro challenges.

Longer-term, we continue to believe that our combined Housing and Lifestyle portfolio of businesses is positioned to deliver attractive earnings growth and strong cash flow generation relative to the broader market, while also providing a compelling counter-cyclical hedge in what remains a volatile economic landscape. As we look at our Global Lifestyle segment…

Our business services-oriented offerings generated Adjusted EBITDA growth of 12 percent year-over-year, and 14 percent year-to-date. Our market-leading franchise helped us expand our partnership with several world-class brands in the Lifestyle market.

In the U.S., we recently signed a multiyear renewal with a large cable operator within our mobile business. This includes comprehensive device protection, trade-in services and premium technical support. With the renewal, we will be including new capabilities - demonstrating our ability to grow relationships with value- added services that ultimately lead to a better customer experience. We have now renewed two major U.S. cable operators in our mobile business within the last year - while also broadening our product offerings to support their growing mobile subscriber bases.

We are pleased with the continued growth momentum in Global Lifestyle, which we expect will continue into the second half of 2022. As a result, we believe the segment will deliver mid-to-high teens growth in Adjusted EBITDA, mainly from strong mobile results including device protection and trade-in, as well from the continued strength of our Auto business.

Turning to Global Housing, similar to others in the industry, we were impacted by significant inflationary pressure - which resulted in higher claim severities and reinsurance costs in the quarter, most notably in lender-placed. These higher costs are expected to be mitigated through rate adjustments over time. In addition to regular rate filings in key states, our lender-placed product includes an inflation guard feature designed to address changes in material and labor costs.

We recently implemented a double-digit rate increase on policy renewals. This rate increase will be applied to all renewals over the next twelve months. As a result, there is a timing lag that is magnifying the higher non-CAT loss experience in the quarter and ultimately pressuring results through 2022. We believe this will normalize as incremental premiums eaover time.

As we look at the Housing portfolio, we also are taking other actions to improve profitability through ongoing expense efficiencies and driving even greater focus on the Housing businesses where we see a path to market-leading positions that can deliver attractive financial returns. Most recently we decided to exit the sharing economy business. The strategic and financial objectives for this business did not develop as we originally anticipated, and we want to focus on opportunities that more closely align to our long-term vision and where we have market advantages with a clear right to win.

Stepping back and looking at Assurant overall, we believe we have an attractive portfolio of market-leading businesses which are poised for long-term success. Given the current macro environment, we believe we can deliver Adjusted EBITDA growth of 3 percent to 6 percent. This takes into account higher expected losses in Housing but also stronger results and momentum in Global Lifestyle.

Adjusted earnings per share, excluding reportable catastrophes, is now expected to grow 14 to 18 percent for the full year, reflecting this view of Adjusted EBITDA. EPS growth will of course also be supported by share repurchases - including the retuof $900 million dollars in Preneed sale proceeds, which was completed in the second quarter.

As we have shown historically through various market cycles, we believe we are well positioned to deliver our strategic objectives over the long-term. We expect this period of macroeconomic challenges to be no different. Over time, we believe the strength and resiliency of our business model will endure, enabling us to execute on the 2023 and 2024 objectives we outlined at Investor Day. Looking forward, we expect Adjusted EBITDA acceleration starting next year.

While the earnings path may not be linear, we remain confident that in the long term, our combined Lifestyle and Housing business portfolio will continue to deliver attractive growth, strong cash flow generation and superior shareholder returns relative to the broader market.

I will now tuthe call over to Richard to review the second quarter results and our revised 2022 outlook in greater detail. Richard?

Richard Dziadzio, Executive Vice President, Chief Financial Officer, Assurant, Inc.

Thank you, Keith, and good morning, everyone. Adjusted EBITDA, excluding catastrophes, totaled $277 million dollars, down 8 percent from the second quarter of 2021. As Keith mentioned, performance reflected the strong growth across Global Lifestyle and weaker results in Global Housing.

For the quarter, we reported Adjusted earnings per share, excluding reportable catastrophes, of $3 dollars and 25 cents, flat from the prior-year period. The 2021 baseline for Lifestyle and Housing Adjusted EBITDA has been updated to remove non-core operations and reflect the accounting corrections Suzanne noted to our prior period results.

Now let's move to segment results starting with Global Lifestyle. The segment reported Adjusted EBITDA of $207 million dollars in the second quarter, a year-over-year increase of 12 percent, driven by growth across both Connected Living and Global Automotive. Connected Living earnings increased by $12 million dollars, or 11 percent year-over-year. The increase was primarily driven by continued mobile expansion in North America device protection programs from cable operator and carrier clients, including subscriber growth and more favorable loss experience. This was partially offset by unfavorable foreign exchange.

In Global Automotive, earnings increased $10 million dollars or 15 percent, primarily from higher investment income, including higher real estate gains and yields. Favorable loss experience in select ancillary products also contributed to results.

As we look at revenue, Lifestyle revenue was up by $48 million dollars, or 3 percent, driven by continued growth in Global Automotive. Global Automotive revenue increased 7 percent, reflecting strong prior- period sales of vehicle service contracts. Despite the overall U.S. auto market showing signs of slowing, our net written premiums remained strong even against a record second quarter of 2021, as additional dealerships and strong attachment rates are offsetting the market headwinds. Within Connected Living, revenue was down slightly due to lower revenue in mobile, mainly from premium declines from runoff programs and unfavorable foreign exchange. This was partially offset by growth in subscribers in North America and higher mobile fee income driven by global mobile devices serviced.

In the second quarter, the number of global mobile devices serviced increased by 1.1 million, or approximately 18 percent, to 7.2 million. This was due to higher trade-in volumes supported by new phone introductions and carrier promotions from the growing adoption of 5G devices. In terms of mobile subscribers, growth in North America was partially offset by declines in runoff mobile programs previously mentioned, which also impacted mobile devices protected, sequentially.

For full year 2022, we now expect Lifestyle Adjusted EBITDA growth to be mid-to-high teens compared to the 2021 baseline of $702 million dollars. Mobile is expected to be the key driver of Adjusted EBITDA growth, through global expansion in existing and new clients across device protection and trade-in and upgrade programs. This will be partially offset by unfavorable impacts from foreign exchange and strategic investments to support new business opportunities and client implementations.

Auto Adjusted EBITDA is expected to grow for the full year, but earnings in the second half are expected to be lower than the first half, mainly due to the absence of $14 million dollars of real estate gains. Growth for the year will be partially offset by higher investment income and more favorable loss experience in select ancillary products.

Moving to Global Housing, Adjusted EBITDA was $75 million dollars, which included $20 million dollars of reportable catastrophes for the second quarter. Excluding catastrophe losses, earnings decreased $40 million dollars, driven primarily by $25 million dollars in higher non-CAT loss experience, largely in lender- placed, and to a lesser extent, multifamily housing. This included $12 million dollars in year-over-year reserve strengthening and higher fire losses in the quarter. The balance of the earnings reduction was driven mainly from $17 million dollars in higher catastrophe reinsurance costs. The cost of our reinsurance program reflected both the higher exposures and increased pricing within the reinsurance market.

With the completion of our 2022 catastrophe reinsurance program in June, we believe we fared relatively well in the market given our strong relationships with our more than 40 reinsurance partners. We maintained an $80 million per event retention, including second and third events. We also continue to benefit from the placement of multi-year coverage - covering 45 percent of our program; and a cascading feature that provides multi-event protection.

In Multifamily Housing, growth in our PMC channel was offset by increased non-CAT losses and expenses from ongoing investments to expand our capabilities and further strengthen our customer experience.

Global Housing revenue was flat year-over-year, as higher catastrophe reinsurance costs were offset by higher average insured values in lender-placed.

For the full-year, we now expect Global Housing Adjusted EBITDA, excluding cats, to decline by low-to-mid teens from the 2021 baseline of $512 million dollars. In addition to the higher claims costs, REO volumes have continued to be muted and placement rate trends we are seeing are softer than originally expected. At the same time, we continue to realize expense efficiencies from new system enhancements and strengthened digital capabilities. While the duration and magnitude of inflationary trends remains fluid, rate filings and inflation guards are expected to start to flow through premiums as we exit the year.