Q2 for Q2 2023 Financial Earnings Transcript 2023

Assurant 2Q 2023 Earnings Transcript

PARTICIPANTS

Corporate Participants

Suzanne Shepherd - Senior Vice President, Investor Relations and Sustainability, Assurant, Inc. Keith Demmings - President & Chief Executive Officer, Assurant, Inc.

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

Other Participants

Jeff Schmitt - Analyst, William Blair

Brian Meredith - Analyst, UBS Securities LLC

Mark Hughes - Analyst, Truist Securities

ThomasMcJoynt-Griffith - Analyst, Keefe, Bruyette & Woods

John Barnidge - Analyst, Piper Sandler

Grace Carter - Analyst, BofA Securities

MANAGEMENT DISCUSSION SECTION

Operator: Welcome to Assurant's second quarter 2023 conference call and webcast. At this time, all participants have been placed in a listen-only mode and the floor will be open for your questions following management's prepared remarks. [Operator Instructions]

It is now my pleasure to tuthe floor over to Suzanne Shepherd, 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 2023 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 2023. 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 and financial supplement, 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.

I will now tuthe call over to Keith.

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

Thanks, Suzanne, and good morning, everyone. Our results in the second quarter were strong and well ahead of our expectations, with Adjusted EBITDA, excluding reportable catastrophes, growing 21 percent year-over-year, or a total of 6 percent on a year-to-date basis. Results were largely driven by continued momentum in Global Housing, primarily from higher top-line growth and more favorable loss experience from prior-period development on claims.

Our performance is a testament to the resilience of our global business model, our compelling client offerings and steadfast focus on operational excellence. Looking at our business segments, Global Housing Adjusted EBITDA increased 49 percent year-to-date, excluding catastrophes. These results reflect actions taken to transform our Housing business, including: focusing on product lines where we have a strong right to win; dramatically reducing non-core areas and our international catastrophe exposure; and aggressively deploying digital solutions to improve customer experience while driving greater operational efficiencies. This underscores our ability to quickly respond to ever-evolving market dynamics, driving continuous improvement and better performance over time.

During the first-half of 2023, top-line performance in our Homeowners' business increased 18 percent year- over-year. This reflects higher average insured values and state-approved rate increases to account for higher claims severities from inflationary factors in lender-placed.

Policy counts increased double-digits this year from expanded loan portfolios of new and existing clients. While policy growth has been a contributor so far this year, we expect it to level off from the first half of the year. In our Renters business, our property management company distribution channel has shown strong policy growth year-to-date, increasing 14 percent. This has been driven by the ongoing roll out of our Cover360 solution - one of the many long-term investments we have made in Renters that has

consistently added value to our PMC partners and customers over the last several years. Our strong growth within the PMC channel has helped to diversify profit pools to partially offset lower contributions from our affinity partners along with higher non-CAT losses which have returned to more normalized levels. In summary, we are very pleased with Global Housing's performance year-to-date and expect strong year- over-year earnings growth to continue into the second half of 2023.

Turning to Global Lifestyle, underlying segment results were solid, and demonstrated steady improvement from the second half of last year. Lifestyle earnings for the first six months of the year have increased $34 million dollars, or 9 percent over the second half of last year, from improved Connected Living results.

Within Connected Living, we continue to invest in our technology platforms as we deepen our focus on product innovation and evolving our service delivery capabilities to improve customer experience. Our focus on innovation and global trade-in capabilities has continued to drive a significant level of interest from existing and prospective mobile partners. As we continue to realize ongoing efficiencies, we've implemented expense actions to mitigate macroeconomic headwinds throughout our global operations.

In Europe, these actions have had a positive impact, ultimately helping to stabilize earnings and allowing us to remain focused on growing the top-line. Within extended service contracts, we have made significant progress with our partners in executing large-scale protection and administration programs. In addition, after several quarters of elevated claims severity, we have seen an improvement in the second quarter loss ratio due to rate increases with several clients.

In our Global Auto business, consistent across the industry -- our repair costs have continued to increase from inflation. We have taken decisive actions to improve performance. For example, we have implemented prospective rate increases with several key clients and we are also partnering with our clients to identify cost savings on claims to improve loss experience for programs where we hold the risk. It is difficult to predict the timing of an earnings inflection point, but we expect to see continued improvements as new business earns through - although improvement may take several quarters to materialize.

Overall, Global Lifestyle earnings were in-line with our expectations for the first half of 2023. And, while we work to create new vectors of growth for Lifestyle, we now anticipate Global Lifestyle's Adjusted EBITDA will be down modestly for the full year. This is mainly due to the headwinds in Global Auto we just discussed and lower international contributions, primarily from Japan.

Reflecting on the first half of 2023, our results have demonstrated the attractiveness of our compelling business model with clear competitive advantages, including: Alignment with global market leaders across lines of business; Leadership positions with scale advantages in attractive and growing Lifestyle & Housing

markets; Demonstrated ability to innovate and differentiate through specialized solutions; and a strong track record of taking decisive actions to overcome market challenges and drive performance. Combined, Global Lifestyle and Global Housing should continue to generate strong returns and cash flow - highlighting the strength and resiliency of Assurant.

Prior to moving to our enterprise outlook and results, I want to take a moment to discuss the progress we have made through our sustainability efforts - a key differentiator for Assurant. In June, we published our 2023 Sustainability Report, reaffirming our long-term priorities around talent, products and climate. The report highlights our progress in reinforcing our company culture and leveraging ongoing employee listening and feedback to help support our global diverse workforce. The report reaffirms our 2020 - 2025 ESG strategic focus areas of talent, products and climate to build a more sustainable future together with our clients, customers, employees and suppliers. We continue to view our commitment to sustainability as a competitive advantage that delivers short and long-term business value. Of note: we achieved our 2025 supplier diversity target two years ahead of schedule; we increased our global gender diversity overall; we expanded coverage for our electric vehicle protection products; and we repurposed 22 million mobile devices, globally.

Now, let's tuto our enterprise outlook and capital. Given first-half results and anticipated performance for the remainder of the year, we now expect Adjusted EBITDA to grow high single-digits, excluding catastrophes. This represents an increase from our original expectation of low single-digit growth. Adjusted EPS growth is now expected to approximate Adjusted EBITDA growth, each excluding catastrophes -- an improvement over our previous expectations for EPS growth to trail our EBITDA growth. The increase is mainly due to our higher-than-expected Adjusted EBITDA growth, which is now outpacing the increases to depreciation and tax expenses.

From a capital perspective, we up-streamed $180 million dollars of segment dividends during the quarter and $292 million dollars year-to-date - nearly half of segment Adjusted EBITDA, including catastrophes. We ended the quarter with $495 million dollars of holding company liquidity - a significantly higher level than at the end of the first quarter. As expected, we resumed share repurchases during the second quarter, repurchasing $20 million dollars of common stock as well as an additional $10 million dollars throughout July.

For the remainder of the year, we would expect to gradually accelerate our level of buybacks with the majority weighted toward the fourth quarter - keeping in mind third quarter is hurricane season, and we will look to preserve our capital flexibility. For 2023, we don't currently expect to exceed the 2022 underlying buyback activity of $200 million dollars.

Overall, it has been a strong first-half of the year and we are well-positioned for the full-year. In both Housing and Lifestyle, it will be critical for us to continue to execute through innovation and enhanced customer experience for our clients and their end consumers - which is what differentiates Assurant and supports long-term growth.

I will now tuthe call over to Richard to review the second quarter results and our 2023 outlook in greater detail. Richard?

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

Thank you, Keith, and good morning, everyone. For the second quarter of 2023, adjusted EBITDA, excluding reportable catastrophes, totaled $337 million dollars, up $59 million dollars, or 21 percent year-over-year. And Adjusted earnings per share, excluding reportable catastrophes, totaled $4 dollars and 9 cents for the quarter, up 26 percent year-over-year.

Let's start with Global Lifestyle for our segment results. The segment reported adjusted EBITDA of $197 million dollars in the second quarter, an 11 percent decline year-over-year. However, prior-period results included a real estate joint venture gain of $13 million dollars, mainly impacting Global Automotive. If we exclude this prior-period gain, Adjusted EBITDA declined only 5 percent or $11 million dollars - in-line with our expectations. This decrease was primarily driven by lower results in Global Auto as continued inflationary impacts on labor and parts increased average claim severities. We also incurred increased claims costs on ancillary products as these costs revert to more normalized levels following their post COVID-lows.

The Auto earnings decline was partially offset by higher investment income from higher yields and growth in the U.S. across distribution channels. In terms of Connected Living, excluding the prior-period real estate gain and $3 million dollars of unfavorable foreign exchange, earnings were roughly flat. In mobile, earnings were down from softer results in Japan and Europe as expected. As a reminder, headwinds in international earnings did not materialize until the second half of 2022.

In Japan, we continue to experience subscriber declines as our four-year protection product continues to runoff. And in Europe, while we are benefiting from previous expense actions taken in the latter part of 2022 and beginning of '23, lower volumes have impacted year-over-year results.

U.S. mobile earnings were flat year-over-year, as growth in North American device protection programs from carrier and cable operator clients was offset by lower mobile trade-in results. Trade-in results were