Q3 for Q3 2023 Financial Earnings Transcript 2023

Assurant 3Q 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 third 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 third 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 third 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. We're very pleased with the exceptionally strong results we achieved in the third quarter, with Adjusted EBITDA excluding catastrophes growing nearly 50% year-over- year or 19% on a year-to-date basis, both ahead of our expectations. Our results were largely driven by continued momentum in Global Housing, and our steadfast focus on executing our strategy, including driving innovation, creating efficiencies and strengthening our global partnerships. These efforts have positioned us to exceed our previous expectations of high single-digit Adjusted EBITDA growth, excluding catastrophes. We now expect Adjusted EBITDA growth of mid-to-high teens.

Our year-to-date performance highlights Assurant's competitive differentiators, including our advantaged Global Housing and Global Lifestyle businesses that have proven leadership positions with scale and significant cash generation. Combined, these businesses are extending Assurant's track record of strong financial performance, thanks in part to the swift actions we've taken across our global operations to improve results and strengthen the business given broader macroeconomic headwinds.

We continue to realize benefits from the actions we announced in 2022 to simplify our business and corporate real estate and realign our organizational structure, allowing us to reinvest throughout the enterprise. We extended our 2022 restructuring plan to include additional actions across the enterprise as we believe further enhancing Assurant's operational efficiency will support our long-term profitable growth and value creation. We now expect total restructuring costs associated with our extended plan to be between $90 million to $95 million pre-tax, above our previously announced expectations of $60 million to $65 million.

Looking at our business segments, in Global Housing, I want to thank all of our employees who supported policyholders impacted by Hurricane Idalia and the Hawaii wildfires, as well as several other significant

weather events during the quarter. Assurant plays a critical role in safeguarding our policyholders and supporting the U.S. mortgage industry.

Our Global Housing Adjusted EBITDA, excluding cats, more than doubled year-over-year and increased 72% year-to-date, led by significant growth in our Homeowners business through topline growth and improving loss experience. Our ability to quickly execute changes, particularly in our lender-placed business, has helped us gain earnings momentum from higher in-force policies, average insured values and state- approved rate increases following inflation impacts in 2022.

Our performance so far this year highlights Global Housing's compelling and uniquely positioned portfolio. Year-to-date, including $89 million of reportable catastrophes, our combined ratio is 82% and our annualized ROE is 29%, demonstrating strong returns and cash generation.

In our Renters business, we saw continued strength in our property management channel, where policies in-force have grown double digits this year. We continue to win new clients, grow existing partnerships and release new capabilities, including our upgraded leasing agent portal and digital insurance tracking enhancements.

We're very pleased with Global Housing's strong performance year-to-date, which reflects our focused execution around streamlined product lines where we have a clear competitive advantage and scale.

Turning to Global Lifestyle, third quarter earnings increased 7% year-over-year, or 14% excluding a onetime client benefit within Connected Living last year. Year-to-date, Adjusted EBITDA, down 6% versus the same period in 2022, has continued to improve throughout the year and is tracking in line with our expectations of a modest decline for the full year.

Within Connected Living, we continue to support long-term growth through the development of innovative offerings, for our partners. U.S. Connected Living is poised for another year of solid growth, particularly within our mobile protection business, a testament to our breadth of innovative offerings, customer experience expertise, and deep relationships with mobile carriers and cable operators.

As macroeconomic headwinds have persisted, including impacts from inflation, we've taken decisive action across our global operations to mitigate these impacts. In Europe, expense actions have allowed us to stabilize earnings as we focus on critical opportunities to grow our topline.

We also continue to invest to advance product innovation and anticipate our clients' needs as well as improve customer experience through expanded service delivery capabilities. For example, as part of the

extension of our 2022 plan to realize benefits and simplify our business and corporate real estate, we're consolidating our mobile device care centers into two sites in the U.S. We'll move the services currently offered in York, Pennsylvania, to our existing facility in Texas. Over time, we'll be investing in a new site, in Nashville, where we can leverage a strong talent market and greater logistics efficiencies as we evolve with emerging clients.

Turning to our Global Auto business, we're beginning to see initial signs of claims improvement as a result of the decisive actions taken over the last year to improve performance. These actions included implementing rate increases on new policies across impacted clients and advancing opportunities to improve loss experience for programs where we hold the risk. We continue to monitor claims costs closely and expect improvement will be gradual over time given the way the Auto business earns.

In Auto, we launched Assurant Vehicle Care at over 500 dealers. Building on decades of proprietary data on cost of claims, Assurant Vehicle Care is a comprehensive new suite of vehicle protection products. It was developed to help our dealer partners optimize product design, pricing, training and sales to ultimately enhance attachment and economics. For the consumer, Assurant Vehicle Care provides a digital experience with more vehicle coverage, flexibility and transparency.

Now let's tuto our enterprise outlook and capital. Given our year-to-date results and our business outlook for the remainder of 2023, we now expect Adjusted EBITDA to grow mid-to-high teens, excluding catastrophes. Adjusted EPS growth is now expected to exceed Adjusted EBITDA growth, each excluding catastrophes. This is primarily due to higher earnings growth that now more than offsets the increase in depreciation expense.

From a capital perspective, we upstreamed $202 million of segment dividends during the third quarter and $493 million year-to-date. We ended the third quarter with $491 million of holding company liquidity consistent with the end of the second quarter. In terms of share repurchases, during the third quarter, repurchases totaled $50 million. This brings our total repurchases to approximately $100 million for the year, including an additional $30 million of shares purchased through the end of October. Based on our strong year-to-date results, we expect fourth quarter buybacks to accelerate from third quarter levels and to be approximately $200 million for the year, consistent with our underlying repurchase activity in 2022. We're pleased with our strong capital position, which affords us more long-term flexibility over time.

Looking to 2024, we expect a more modest level of earnings growth in Global Housing, excluding catastrophes, building on strong 2023 financial results, which included $40 million of favorable prior-year reserve development. In Global Lifestyle, we expect earnings growth to be led by Connected Living, particularly in the U.S., from the expansion of current programs, as we work to gradually improve the Auto

business, which we will continue to manage closely. From a capital perspective, we're committed to maintaining flexibility for our strong balance sheet and deploying capital for share repurchases and opportunistic acquisitions to support our growth objectives.

We will share our 2024 outlook in February factoring in our fourth quarter earnings, business trends, as well as the latest forecasts of the macro environment for the year. In the near-term, we're focused on achieving our 2023 objectives, and setting a path for continued growth and value creation in 2024 and beyond. As we look ahead, we remain committed to execution, innovation and enhancing the customer experience for our clients and their end consumers, particularly as we look to capitalize on growth opportunities, while supporting continued momentum.

Before I tuthe call over to Richard, to review the third quarter results and our 2023 outlook in greater detail, I want to once again thank our employees for their hard work and dedication to deliver for our clients. Our company was recently recognized as one of TIME's Best Companies in the World, highlighting Assurant's strong employee satisfaction, revenue growth and sustainability efforts. Assurant was also recognized by Newsweek as one of America's Greenest Companies, demonstrating our commitment to and progress in operating more sustainably. The recognition was timely as we recently introduced Carbon IQ by Assurant. This offering enables clients to see the carbon impact of each device, including new and refurbished devices, and provides them with estimated CO2 emissions throughout the supply chain and lifecycle to identify opportunities for reduction. We're honored to be recognized for our outstanding culture, products and sustainability, all of which help us better-serve our clients.

And now, over to Richard.

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

Thank you, Keith. And good morning, everyone. For the third quarter of 2023, Adjusted EBITDA, excluding reportable catastrophes, totaled $357 million, up $118 million, or nearly 50% year-over-year. Adjusted earnings per share, excluding reportable catastrophes, totaled $4.68 for the quarter, delivering year-over- year growth of 67%.

To review results in greater detail, let's start with Global Lifestyle. The segment reported Adjusted EBITDA of $192 million in the third quarter, an increase of $12 million or 7% year-over-year. As a reminder, prior period results included a one-time client benefit of $11 million within Connected Living. Excluding the prior period gain, Global Lifestyle's Adjusted EBITDA increased 14% or $24 million. This increase was primarily driven by higher contributions from investment income and mobile growth. Connected Living earnings increased $30 million or 32%, excluding the one-time client benefit, demonstrating strong mobile growth

from North American device protection programs, from carrier and cable operator clients and better trade- in performance. Financial services also contributed to the growth.

Trade-in results benefited from improved margins related to higher sales prices for used devices, partially offset by lower volumes impacted by the timing and structure of carrier promotions. In Europe, we stabilized performance through expense actions, mitigating the impact of headwinds that began in the second half of 2022. In Japan, results were impacted by subscriber decline, which is expected to continue into 2024.

Global Auto Adjusted EBITDA declined $6 million or 8%. Results continue to be impacted by inflation of labor and parts leading to higher average claims costs. As expected, claims experience for Auto ancillary products has also contributed to higher incurred claims costs in the quarter. The Auto earnings decline was partially offset by an increase in investment income from higher yields and asset values.

Turning to net earned premiums, fees and other income. Lifestyle was up by $83 million or 4%. This growth was primarily driven by Global Automotive, reflecting an increase of 6% from prior period sales of vehicle service contracts. Connected Living's net earned premiums, fees and other income increased 3%. Growth was muted by the previously disclosed mobile program contract changes of approximately $55 million with no corresponding impacts to profitability. Excluding the impact of these contract changes, Connected Living's net earned premiums, fees and other income grew by 8%. The quarter benefited from higher prices on used mobile devices and modest growth in North America mobile subscribers excluding ongoing client runoff.

Turning to the full year 2023, we continue to expect Lifestyle's Adjusted EBITDA to decline modestly. Global Auto will be down for the full year from unfavorable loss experience, including the impacts from continued normalization for select ancillary products previously mentioned. We've taken decisive actions this year in response to higher claims experience in our Auto book, including prospective rate increases and repair cost reduction. While we've seen some improvement, the improvement is expected to take place over a longer period of time given the earnings patteof the business. In Connected Living, we expect our U.S. business to grow for the full year.

Overall, we are pleased with Lifestyle's strong third quarter performance, especially in light of ongoing challenges in Auto claims. For the fourth quarter, we expect higher trade-in volumes in mobile, but we also expect ongoing topline challenges in Japan and Europe and investments to support business growth. In terms of full year net earned premiums, fees and other income, Lifestyle is expected to grow consistent with year-to-date trends.

Moving to Global Housing, Adjusted EBITDA was $165 million, which included $26 million in reportable catastrophes, primarily from Hurricane Idalia and Hawaii wildfires. Excluding reportable catastrophes, Adjusted EBITDA more than doubled to $191 million, with an increase of $106 million.

Housing performance was mainly led by three main items. First, continued topline growth in Homeowners from higher premium rates and average insured values in lender-placed, as well as an increase in the number of in-force policies. Second, favorable non-cat loss experience across the segment, including a year-over-year positive impact of $39 million related to prior period reserve development. This was comprised of $15 million of reserve reductions in the current quarter compared to reserve strengthening of $24 million in the prior period. And lastly, additional scale within our Homeowners expense base ultimately driving stronger operating leverage. Higher investment income also contributed to earnings growth for Homeowners. For Renters and others, earnings grew modestly from favorable prior period reserve development. Growth within the property management channel was offset by softer affinity channel volumes.

For the full year 2023, we expect Global Housing Adjusted EBITDA excluding reportable cats, to grow significantly due to the strong Homeowners performance driven by topline expansion lender-placed and favorable non-cat loss experience. In the fourth quarter, we expect higher expenses to support business growth. In addition, the third quarter included $15 million of favorable prior period development.

Moving to Corporate. The third quarter Adjusted EBITDA loss was $26 million, representing a modest year- over-year increase, mainly related to higher employee expenses. For the full year 2023, we continue to expect the Corporate Adjusted EBITDA loss to approximate $105 million.

Turning to holding company liquidity, we ended the quarter with $491 million, and dividends from our operating segments totaled $202 million. In addition to cash used for corporate and interest expenses, third quarter cash outflows included three items, $50 million of share repurchases, $37 million for common stock dividends, and $50 million to complete the repayment of our September 2023 Notes.

As Keith mentioned, given our year-to-date performance and outlook for the year as well as the strength of Assurant's balance sheet, we expect to achieve full year share repurchases of approximately $200 million. For the full year, we continue to expect our businesses to generate meaningful cash flows approximating 65% of segment Adjusted EBITDA, including reportable catastrophes. Cash flow expectations assume a continuation of the current economic environment and are subject to the growth of the businesses, investment portfolio performance and rating agency and regulatory requirements.

In closing, through the resilience of our unique business model, the decisive management actions taken and our intense client focus, we are confident in our ability to achieve the higher full year objectives we have outlined today.

And with that, Operator, please open the call for questions.

QUESTION AND ANSWER SECTION

Operator: The floor is now open for questions. [Operator Instructions] Thank you. Your first question is coming from the line of Mark Hughes of Truist. Your line is open.

: Good morning, Mark. : Yes. Thank you. Good morning, Keith, Richard, I really like this Housing business, and I'm glad you didn't listen to those people that said you should divest it - little jokes there. On the Housing business, increased policy count, how much of that is coming from, say, voluntary versus some uptick perhaps in the delinquencies or foreclosures or REO? : Yes, I'd say, first of all, yes, we're pretty excited about the results in Housing and a tremendous amount of work by the team in the last year. And it's really showing through here. The last few quarters and we're building a lot of momentum. I would say very little of the policy growth relates to the underlying economy or REO at all. We're really seeing no change in placement rate based on economic conditions, maybe a little bit of increase in policy count. In a state like California, I'd say very modest, but a bit of a harder market. So, we're seeing a little bit of growth there. Florida basically flat year-to-date. So most of the growth is clients and client loan related mix and nothing yet in terms of the broader economy. : What's your sense of the opportunity for a sustained momentum, say, in higher values or higher rate? Has that activity peaked perhaps, or is there still some way to go on both those fronts? : Yes. I mean, obviously, we work on rates related to that product line consistently, state by state. We also have, as you know, the average insured value adjustment that we do in the summer every year. And obviously, last summer, we put a meaningful double-digit increase into average insured values. This year, it was just over 3%, 3.1% that went in in July. And then, state by state, based on historical performance and expected costs, we continue to work with states. I feel like we still have momentum running through the portfolio. We haven't -

certainly haven't topped out in terms of the impact from the rate adjustments. But we do see it tapering and slowing certainly as we think about Q4 as we head into to 2024. But year-to-date, feel good with where our loss ratio sit. In Housing, we're 42% non-cat loss ratio, if you adjust for prior period development, very consistent with where we were last year. So we feel like the rates that we have are certainly appropriate. And as we see impacts on cost of claims we'll modify as we go forward.

: Then the one final one. Your fee income was up in Lifestyle, your devices serviced were down 20% plus. I think you mentioned higher value per device. Anything else contributing to that? Just the divergence between the fee income and the devices serviced.

: Yes. So, I think if we think about that year-over-year, certainly volumes are down. We saw softer promotional activity in the third quarter, not out of alignment with what we expected. We did see a pickup in the back half of September, obviously after new product introduced - introduction by Apple. So hopefully that sets us up with what we'd expect in the fourth quarter to be an improvement there.

And as I look at that business, we've done a really nice job, in driving operational efficiency in automation to continue to improve the efficiency with which we operate. And then, as you said, we've gotten higher sale prices when we're selling devices. And obviously, we derive revenue based on how well we sell devices in the secondary market. But I'd say there's not much else to report. Profitability a little bit stronger. But if you'll remember, third quarter last year, we had a bit of a mismatch between expenses and revenue. So, Q3 trade-in results were a little bit depressed last year.

: Okay. Appreciate it. Thank you.

: Great. Thanks. Operator: Your next question comes from the line of Jeff Schmitt of William Blair. Your line is open : Hi, Jeff. : Hi. Good morning. : Good morning. : Back to growth in Global Housing. So PFO growth was 23% in the quarter. And I'm just trying to think through the components. You had mentioned inflation guard was 3%, I

think in June or July, but I guess 12% last year. So maybe kind of a mix there earning through. What's rate at? How much was the rate component? And how much was the unit growth component? I'm just trying to think of the different parts there.

: Yes. So maybe I can start and then certainly Richard can jump in. Obviously, when you look at Housing's revenue year-over-year, it's up meaningfully, $100 million, $103 million year-over-year. All of that is from growth in Homeowners, which is up 31% year-over-year, in terms of revenue.

If we think about what's driving the performance, from an underlying EBITDA perspective, and Richard obviously talked about the prior period development, if you adjust the development, $15 million this year against an adverse development last year of $24 million, we still see a $67 million increase in our underlying EBITDA. And I would say two-thirds of that is really driven by rates, average insured values, which obviously play together and then, relatively stable losses related to higher levels of premium rolling through. And then the balance, maybe a third is split between policy growth, which is up 3.5% year-over- year, and then investment income, which is obviously helping with cash yields and more assets being held.

But Richard, happy to have you add any other detail.

: Yes, sure. Yes, that's exact. And I guess I would add and - by the way, good morning, Jeff. What I would add is that if you just look at the premium component that Keith just talked about, think about it generally as being a third for each of the components that we've just discussed. It's the increase in rates, average insured values, and inflation guard. That's sort of the way to look at it.

And the other thing, too, that I would mention is, you see, I mean, you heard Keith talk about how much drops to the bottom line. I think that's also a credit to the expense discipline that we've had and the leverage we're getting. And you can see that coming out in the expense ratios that the growth in the premiums and the leverage that we have in the business is really allowing us to increase the bottom line.

: Got it. Very helpful. And then in Global Lifestyle, just looking at that benefit ratio, kind of continues to move up despite rate increases. It was 23% in the quarter, mainly driven by Auto, it sounds like. Could you maybe just discuss the pricing strategy there? Like, when did that began, what level of pricing can you get in this market? Really, any detail on that would be helpful.

: Yes, I can certainly start, Richard. So, if I think about the Auto business, actually pleased with the work done by our team, so we started making adjustments to rate late