Q1 2020 Earnings Call

Welcome to Assurants first quarter 2020 earnings conference call in web cast at this time, all participants have been placed in listen only mode and the four will be open for your questions. Following management's prepared remarks, if you would like to ask a question about time. Please press star one on your Touchtone phone.

If at any point. Your question has been answered you may remove yourself from the Q repressing the pounds key we ask that you. Please pick up your handset to allow optimal sound quality lastly, if you should require operator assistance. Please press star zero.

It's now my pleasure to turn the floor over just Suzanne Shepherd Senior Vice President of Investor Relations you may begin.

Thank you operator, and good morning, everyone. We look forward to discussing our first quarter 2020 results with you today.

Joining me for a shrinks conference call or Alan Cole, both our President and Chief Executive Officer, and Richard Jones, Our Chief Financial Officer.

Yesterday after market close.

Issued a news release announcing the results for the first quarter 2020, it relief and corresponding financial supplements are available on Assurant Dot com.

We'll start today's call with free so most from LNG, Richard before moving into acumen <unk> session.

Some of these statements made today are forward looking.

Forward looking statements are subject to risks uncertainties and other factors that may cause actual results could differ materially from those contemplated by the state.

Additional information regarding these factors can be found in yesterdays earnings release as well as in our FCC report.

During today's call people 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 Q. Please refer to yesterday's news release and financial supplement.

I'll now turn the call over the Alan.

Thanks, Suzanne good morning, everyone.

Overview Arnaud results through the quarter I wanted to share a few comments regarding the cobot 19 pandemic and our ongoing response.

On the beginning assurance leadership team acted swiftly and deliberately led by our guiding principles to safeguard all employees and their families to maintain operations and service level for our customers and to support our local communities.

Well, we end this crisis, we implemented a global ban on business travel and transition the vast majority of our workforce to work from home helps them to spread the virus in our communities and to protect our employees.

Well those employees, who need to work small offices or repair sites due to the essential nature of their roles, we've implemented strong safety and hygiene protocols.

These measures include social dispensing and the use of personal protective equipment, along with regular cleaning and disinfecting of our locations based on the guidelines from the centers for disease control.

We are committed to doing what we can't to protect our employees through this period of uncertainty always pretty none with respect and providing appropriate support given the challenges were all dealing with at this time.

To allay job security concerns as well as they continue to deliver for our customers. We've made commitments to our employees to not eliminate any rolls through to covert 19 in the short term.

We've also offered financial support where it's most needed.

As part of our Assurant cares employ support for Ace is fun, we watch the special Cobot 19, emergency where we program to support eligible employees, we're experiencing severe financial hardship caused by the pandemic.

We've already raised more than $1 million through the support of our foundation and personal donations from our mansion Kennedy the Assurant board of directors and the generosity of hundreds of employees.

Since its inception in late March the special Ace is fun has helped more than 800 families managed through these turbulent times.

More Archer and foundation is honoring all of its 2020 trouble commitments and its plus an additional $250000. The eight core charitable partners that are providing food and emergency support in the communities where we operate.

I'm exceptionally proud of how our employees is supported not only each other and our communities, but also our customers.

We've been able to maintain continuous service for our clients and provide a central support for our customers like ensuring that their homes remain protected and helping them stay connected through their mobile devices at a time when we're all socially distancing.

I want to thank our more than 14000 employees for supporting each other or customers and our communities throughout this extraordinary time.

Truly made us assurant proud.

Now, let's move to our first quarter results, which were strong and largely unaffected by cobot 19.

We benefited from continued growth in global lifestyle as well as improved results in global housing.

For sure overall, we reported net operating earnings per share excluding catastrophes of $2, an 84 cents an increase of 22% from the same period last year.

Net operating income, excluding catastrophes was up 18% to $176 million.

In the quarter, we incurred about $2 million of incremental expenses directly related to cover 90, which were reflected in net income.

These expenses include among other things cost for the standardization of our facilities and the purchase of personal protective equipment and technology to enable work from home.

Ralph this period, our balance sheet remains strong.

At the end of March we had $433 million, a holding company liquidity after returning $95 million to shareholders through dividends and buybacks during the quarter.

Provide us with an additional buffer during this crisis, we drew down $200 million from our revolving credit facility in late March solely as a precautionary measure we do not expect use these funds.

We're pleased with our first quarter results, which reflects strong momentum across our business pre crisis.

How do we recognize that they may not be indicative of our performance in the coming quarters as the world continues to grapple with the impact to cope with 19.

We are buying multiple scenarios, what he has the potential duration and severity of this crisis better understand how our business might perform and to ensure we have the agility to react appropriately.

Although we believe the long term fundamentals and resiliency of our business remains strong we're spending or 2020 financial outlook until we gain additional clarity on cobot nineteens duration and its impact on the broader economy and our business.

We believe this is a prudent and sensible action given the current uncertainty.

Relative to capital deployment, we want to retain maximum flexibility over.

Over the next few months, we will exercise caution in light of market volatility and as we enter hurricane season.

This will include an ongoing evaluation of share buybacks with an expectation that we will slow down or pause until we have greater visibility.

Supplies to new M&A evaluations as well.

We plan to provide an update on her 2020 view and our long term targets. Once we have more clarity of the economic landscape we're facing.

Over the long term. However, we still believe that we can continue to deliver shareholder value through above market growth and discipline capital management.

This confidence is grounded in the strength of our business portfolio.

Our installed customer base across connected living global automotive multifamily housing and pre need and our counter cyclical lender placed business position us well to whether a prolonged crisis.

Near term however, we expect a greater impact to our business as a result of the ongoing market volatility and containment measures and how those could further impact consumer behavior.

As an example in late March and throughout April we saw a reduction in new sales across multifamily housing auto and pre need.

Within mobile, we experienced lower trading activity and slower sales growth.

We are taking actions to mitigate potential impacts.

For instance, we deferred some discretionary spending and delayed staffing of certain opened goals and our support areas.

Well, we're deferring some investments that's super cautionary measure we have continued to make progress against key strategic initiatives to support our clients and their customers during this crisis and beyond.

These have included among other things continued enhancement of our self service capabilities and our dynamic claims fulfillment to facilitate faster claims resolution as well as our ongoing I T transformation.

Before turning to Richard let me provide additional highlights from the quarter for each of our business segments.

Within global lifestyle, we were pleased to see earnings increased by 20% year over year.

Our growth has been driven by continued additions of new mobile subscribers up 15% year over year.

We believe the our ability to offer a bundled value added services to our installed base of more than 54 million subscribers provides a recurring revenue screen, even during an extended period of financial uncertainty.

Well, we may add fewer new subscribers. During this crisis, we still expect our count to grow.

This should help mitigate impacts from expected lower trading volumes.

Another driver of our success within global lifestyle, it's been our ability to expand partnerships with market leaders and new entrance.

For example, this quarter, we enhanced our existing relationship with Rocky Sam mobile by launching a new trade in program in Japan.

In addition to offering device protection for their mobile networks. The program provides a completely digital trading experience.

Turning to global automotive, we believe the business is relatively well insulated from near term economic shock given its significant level of embedded earnings.

At the end of the first quarter, we had approximately $8.2 billion of unearned premium related to this business, which earned over the next three to seven years.

Furthermore, approximately 50% of our business comes from a service contracts on used car sales, we tend to be less impact as a result, economic downturns as we saw during the last recession.

As such we remain positive on auto and have continued to look for select opportunities to further scaled the business.

Last week, we closed on the acquisition of our longtime partner American financial and automotive services for a F.A.S. for $158 million.

This represents an attractive valuation relative to recent transactions in the space and complements our 2018 acquisition of the warranty group.

Hey, if he asked as a provider of insurance products and services, including vehicle service contracts and other ancillary offerings with nearly a 40 year history.

I have to ask products and services are sold directly through a network of nearly 600 franchise dealerships with a deep footprint in Texas and the southwest.

For 2020, we don't expect the acquisition to be a significant contributor to our results. However in 2021 and beyond we expect it to further enhance our market position and add scale with the expectation to deliver additional profitable growth overtime.

Moving to global housing our lender placed franchise continues to be an integral part of our specialty risk offerings.

During the quarter, we renewed another one of our largest lender placed clients for an additional four years.

Since the beginning of last year, we've now renewed 17 clients representing more than 80% of our track loans.

Superior customer platform has been a differentiator and will serve us well through economic cycles to support our clients and policyholders.

In multifamily housing, we now sport almost 2.3 million ranchers across all 50 states.

Well the business tends to be more resilient during economic downturns as consumers prefer to rent versus five beginning in mid March we saw a decline in new policies as renters are delaying their moving plans due to the pandemic.

During the last few weeks, we've seen some tentative signs of stabilization, especially in our affinity channel as tenants may be regaining comfort with moving.

We remain cautious however, as we enter the summer when we typically see greater activity and sales growth.

We will continue to monitor sales persistency and claim trends will also doing what we can to support current policy holders who are experiencing financial hardship during this challenging time.

This includes deferring premium where appropriate.

Moving to global Preneed results in the first quarter were largely in line with our expectations.

This business benefits from lower metallic less than traditional life insurance products and access more of a spread business.

In light of the current low interest rate environment, we've worked with our partners to make changes to the product as well as help our clients complete the sales process virtually.

We will continue to evaluate other actions as appropriate.

With regards to mortality experience has been largely consistent with our experienced last year.

We attribute this to our policy footprint, including the fact that we do not right in New York.

In summary, despite this uncertainty we believe our businesses resilient and that is sure whether this period and emerge strong.

I'll now turn the call over to Richard to review first quarter results in recent trends in detail Richard.

Thank you Alan and good morning, everyone.

Let's start with global lifestyle.

The segment reported earnings of $121 million in the first quarter.

Excluding 6.7 million dollar client recoverable in connected living earnings grew 14%.

Primarily from continued mobile growth in both new and existing programs.

Global automotive was also a contributor largely due to $5 million of one time income.

It's a client recontracting, along with modest growth from prior period sales.

Global lifestyle results were partially offset by lower margins for mobile trading activity, including some impacts related to cope with 19 from the shutdown of Asian markets earlier in the quarter.

Unfavorable foreign exchange also impacted results.

Looking at total revenue net earned premiums and fees were up $265 million were 16%.

The increase was driven primarily by higher fee income for mobile trading volumes and subscriber growth across North America and Asia Pacific.

Expansion within extended service contracts also contributed to growth in the quarter.

Within global automotive revenue grew 9%, primarily reflecting prior period sales a vehicle service contracts across all distribution channels.

Looking ahead as Alan mentioned, we're continuing to monitor trends and the impact of cobot 19 across the segment.

Well, we believe mobile is well positioned given our large enforce subscriber base trading volumes did decline significantly in the first few weeks of April reflecting store closures and lower consumer demand for new devices.

We expect volumes to rebound when stores reopen in carriers are able to resume in store promotional activity, although timing of such widespread recovery remains unclear.

Looking at our underwriting experience, we have seen the decline in mobile claims as a result, the customers thing and doors.

In most cases, good stable experience will not benefit our bottom line due to profit sharing or reinsurance agreements.

And global automotive near term earnings should be relatively well protected from a slowdown due to how the business earns.

However, we still have exposure related to reductions in vehicle service contract sales, which in April were down by roughly 40% year over year due to a decrease in vehicle sales.

In general New car sales typically earn a majority of income three to five years after being sold.

Following the expiration of the manufacturers warranties, thereby delaying the revenue impact however in the event of the prolonged downturn, we would expect to see uptick in used car sales, which are more quickly.

The persistently low interest rate environment also creates some headwind.

While global automotive does have a longer duration portfolio of three to seven years, we do expect investment income to be pressured from lower investment yields coming from new business.

Trial Global lifestyle. We also expect continued pressure from foreign exchange volatility, especially in Latin America, who did the economic environment.

So while we expect global lifestyle to be impacted in 2020. This segment should be more resilient during an economic downturn relative to other consumer type businesses.

Moving to global housing net operating income for the quarter totaled $74 million.

Up slightly year over year, despite higher reportable catastrophes from the Puerto Rico earthquakes.

Excluding catastrophe losses earnings increased $6 million. This was driven by favorable non catastrophe loss experience and improved results.

Property offerings largely related to the absence of losses within small commercial as it continues to run off.

Lender placed income increased reflecting higher premium rigs, partially offset by reduction of policies in force.

Including the loss of loans from the financially insolvent client we previously disclosed.

That portfolio has now completely de boarding.

During the revenue global housing net earned premiums and fees were flat as growth in our special property and multifamily businesses was offset by the reduction in policies referenced earlier.

The insolvent client portfolio also contributed to a seven basis point year over year decline in the placement rate.

As we continue to operate in this environment, they're tracking a few trends in global housing.

In multifamily housing, we see decline in new sales starting in mid March.

We continue to monitor sales policy cancellations as well as the impact from premium deferrals.

Which today, our primary related to policyholders requesting premium leniency.

Well, we initially saw a different claims we are seeing activity normalize, reflecting the fact that policyholders art home.

Within lender place, we will continue to monitor the state of the overall housing market, including the potential impact of the current mortgage moratorium, which would delay placement of new policies.

But at the same time reduce lapsation.

This business provides critical coverage to both homeowners and their lenders.

Provides downside protection should the economy deteriorate significantly.

However, we would not anticipate any benefit to our placement rate this year.

Lastly, our small commercial business continues to run off as expected, we don't <unk>, 8% of the original block of policies remaining.

Got to potential exposure on business interruption coverage associated with this business. We currently believe our risk is low given virus exclusions included in our policies.

We'll continue to be track state actions and their applications.

In summary, well, we remain cautious on multifamily housing in light of the current uncertainty created by Cobot 19, we continue to believe that global housing is well positioned to weather a prolonged economic downturn.

Now, let's move to global Preening.

Segment reported $12 million of net operating income up slightly year over year, driven by continued growth within the business.

Revenue for pre need was up 9% driven by U.S. growth, including final need sales.

As we look ahead, we expect some pressure from lower yields on new sales through the current interest rate environment.

However, given the 10 year average duration of our investment portfolio, our existing block of business should not be significantly impacted for some years to come.

As Alan mentioned, so far we haven't seen any significant spikes in mortality due to covert 19 as a reminder, a large portion of our policies are concentrated in California, Texas, South Carolina and Tennessee.

So far these states have experienced lower mortality from covert 19 compared to stage in the northeast.

At corporate the net operating loss was $20 million versus $19 million in the prior year period. This was due to lower investment income in the corporate segment, partially offset by lower employee related expenses, including travel.

We will continue to evaluate additional expense actions as necessary.

In light of market volatility I also wanted to provide an overview of our investment portfolio in strategy.

In the first quarter, we recorded a $76 million mark to market loss in our investment portfolio.

This reflects the decline in valuations of our equity securities and RC yellows, each contributing to about half of the total loss.

Despite these losses, we believed that our 13.6 billion dollar investment portfolio is well diversified and high quality.

Approximately 86% of our investments are comprised of fixed maturities and 95% of these securities are investment grade rated.

While interest rates are expected to remain relatively low for the foreseeable future. We believe we are well positioned to navigate this environment given the duration of our existing investment portfolio, along with our conservative go asset turnover approach.

Our overall exposure to these sectors.

That have been hit the hardest by the current market turbulence is not significant.

Summits in travel and leisure represent less than a half a percent of our investment portfolio.

Energy makes up only 4% of our portfolio and our investment tend to be in larger and more diversified energy companies.

Retail represents 2% of our portfolio is comprised of mostly large diversified household names are auto and airline exposures are each 1% or less of our portfolio.

I would finish on the investment portfolio by saying, we will continue to apply consistent investment approach. While we recognize every crisis is different. This is the same strategy. It served us well during the financial crisis over a decade ago.

Finally, I'd like to mentioned that in April we completed the outsourcing of the management of our core investment portfolio to Goldman Sachs asset management, and Voya investment management, we believe that their investment expertise in skilled platforms, coupled with ongoing oversight of our in house team should serve us well.

Well going forward.

Turning to the holding company liquidity, we ended March with $433 million or $208 million above our current minimum target level.

These figures do not include the 200 million dollar draw from our 450 million dollar revolving credit facility.

The proceeds of which are also held at the holding company.

In the first quarter dividends from our operating segments totaled $127 million.

In addition to our quarterly corporate and interest expenses key outflows in the first quarter included $57 million in share repurchases and $43 million in common and preferred stock dividends.

As Alan mentioned relative to capital deployment, we will exercise, even greater caution in light of market volatility.

And as we enter hurricane season.

We have a robust risk management program, including stress testing, our capital cash flows and liquidity under a variety of scenarios considering this uncertain environment.

Before wrapping up I wanted to address two additional points.

First as you saw in our release, we booked a onetime tax benefit can net income amounting to $79 million. This was related to be enactment of the federal cares Act in March the benefit is associated with the carry back of losses in 2018 to five years prior.

This allowed us to accelerate deferred tax assets, which would have been recognized over the next three years at a lower tax rate.

Second we still expect to closing the sale of VK in the second quarter as plant, which will result in an expected net cash outflow of approximately $54 million.

Plus seller financing of up to $40 million.

Both the UK and A.S.A.S. transactions.

We'll be reflected in second quarter holding company capital.

In conclusion.

I Echo Allen's gratitude to our employees and now they have responded during this unprecedented crisis. We are confident that we will emerge in a position of strength from this period.

In the months ahead, we will continue to closely monitored trends and take appropriate steps to sustain our financial strength for the long term.

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

The floor is now open for questions. At this time, if you have a question or comment. Please press star one on your Touchtone phone if at any point. Your question is answered neighborhoods yourself from the Q by pressing the pound key again, we do asset while you pose your question you pick up your handset to provide.

Right optimal sound quality.

Thank you. Your first question is coming from Mark Hughes from Suntrust.

Your line Hey, good morning, Thank you very much.

Good morning, and good morning.

Good morning, Thanks for all that the all the detail.

In thinking about the some of these specific impacts.

I note that your fee income growth was actually quite strong in the.

In the first quarter, if we think about the I think you talked about trading volume down significantly in April I think you're seeing some.

Or maybe the anticipation is that will stabilize and things start to open up.

How should we think about that fee category.

Huh.

In lifestyle in the in second quarter, just some rough parameters would be helpful.

Yeah, Mark let me start on that and then Richard is always feel free to add on some comments. If you think about mobile one of the things we've seen over the last few years is the Q1 tends to be a pretty active quarter and we saw that again in Q1 prior to the slowdown began the second half of March so normally Q2 as a.

Slower quarter anyway in terms of buyback and trading activity and that often moles into Q3 is a slower quarter. Just as people are waiting to see what the new phones might be so yeah. I think certainly in the second and third quarters, we'll have less activity anyway, even if we start to see a recovery and what we're on mobile maybe just a couple of other.

Thoughts about what we're seeing in that imports from line of business.

You heard us in the prepared remarks talk about we've seen new sales slowed down as stores are closed largely across the U.S. and in other markets around the world.

Even with that we do expect subscriber growth you know as we've talked about previously we have these programs that had been launched in the last year or two that are going to continue to ramp so even even in a slower sales environment. We expect some growth in new subscribers that'll help offset the slowdown that we see in buyback and trade in.

And then longer term once we're through this crisis it really whether we have a big bounced back and buyback trade in or whether it's just a return to normal it's going to depend a lot on what new phones come to market what carriers elect to do.

So again, we feel well positioned to mobile even as we go through this crisis, but Richard what would you add.

I think you covered it well I guess, the only thing I would add that might be helpful. Mark is when you look at the line fees in other income obviously, there's mix of business various clients et cetera, but I would say rule of thumb, probably about 40% to 60% of that feet fee income is made.

It up have you know the trade and upgrade volumes that we have.

So maybe that helps a little bit.

Yes, so thank you.

The renters insurance I think you so.

Some drop off but then it's stabilized how much of that influenced by new sales I know you've been really growing at a pretty steady range in the mid single digits.

Some parameters on Q2 Q3 it'd be helpful.

Yeah, Let me let me start again similar to mobile if you look at multifamily it's a business that.

It is really driven by people doing something right. So in the in the March timeframe second half and into early April we didn't see people moving and so we don't have an ability to make a new sale.

Now again those moves may just be delayed and it could return if we get through the crisis sealing the reasonable time period. The other thing that's unique on multifamily is we are seeing some request for premium deferral and that's either being driven a few states of mandated that others, where voluntarily providing it it's not significant so far to our overall.

Block, but it is something we're watching and we are putting up an appropriate reserve. If you know in the event of the people not being able to pay for their insurance that we're providing.

You know if we look longer term and multifamily I think we're we're pretty optimistic about that business. If we get into any kind of downturn people tend to rent more we saw this in the last downturn, which obviously be positive for that business [noise], but more importantly, we're still early enrolling l. out rolling out our point of lease capability, which helps.

So you know provided better experience in the greater attachment rate. We also see a major opportunity around the connected apartment.

As people, particularly with what's happened now connectivity matters more than ever so in both multifamily and in mobile we're focused on ensuring we're there were delivering for our customers.

We've been able to sustain our service levels were still repairing cellphones and getting the back in a timely basis. We're doing all we can to help out our customers, both mobile and renters and of course across all of our businesses.

Let's go I think it might have asked this last quarter as well, but talk about the potential pressure or investment income from.

Lower yields and how that influences the automotive business.

Are you going through the process of adjusting your pricing to take into account the lower yield so you generate the.

Adequate returns in a business.

Richard why don't you take that one.

Yeah sure well I guess, the first thing I would say as you know the business. That's on the books today as a relatively long duration I guess, you know let's call. It three to five years, so that business is fairly well matched in terms of asset liability matching so really what we're talking about is.

As you know that income will roll through and as we have new sales those new sales will be put out that you know.

The new level of interest rates.

Obviously short term interest rates are very low.

Who knows whether go overtime, but you're exactly right. We we would have the opportunity to work with our clients and as though are there new sales.

To look at what the pricing on the various products.

Would be.

I guess the other thing I would add mark is that a lot of the business that we do in the auto sector is reinsured to captive clients as well so there's a straight.

A strong alignment of interest for us to really provide the custom with the best product competitive product at the right pricing.

And Mark maybe the last thing I'd add in both auto and pre need. These are our two businesses that have more exposure to investment income than our other businesses. We are hard at work on adding in other sources of revenue and fee income. So for example in auto we started rolling out pre crisis our pocket.

Dr. kind of our onboard technology and we're looking at other things like prepaid maintenance, which we're now driving into our programs.

And in pre need we've been rolling out a executor assess product, which is another fee income generator. It allows us to help people at time of need really manage it. So we're working just as we've done in mobile and elsewhere to create some fee income streams. In addition to the traditional product.

Yes.

Thank you.

Our next question is coming from Brian Meredith from UBI, Yes. Your line is open.

Yeah, Hey, Brian Good morning, a couple of.

Morning couple of questions for you all first on the global housing business I'm just curious.

Number one when could you potentially see an increase in placement rates and number two do you have any sensitivity just you've done around maybe macro economic statistics and win or the magnitude of placement rates kind of increasing in a situation with this or something like mortgage delinquencies unemployment that kind of stuff anything that you can kind of give us.

The graph, maybe some sensitivities here.

Yeah, Let me maybe start with kind of the short term and then I'll go to the long term first of all lender placed its an important product for the mortgage industry you were effectively there to support the function of the markets to protect policyholders and lenders, but in the short term, we don't really see a lot changing.

If you look at the mortgage forbearance, that's underway, it's not going to have a big impact on us one way or the other.

And so really if we do get into a downturn our product tends to be placed later in that cycle, so someone needs to move into seriously delinquent and often into foreclosure.

So if you look at the last downturn, which is really the data point, we have which was an extreme housing market downturn.

Today worried about 1.51, 0.6% placement rate in the last downturn, we peaked at about a just under 3%.

So that gives you some sense of at least what happened in the last downturn.

Who knows if we'll have a downturn here and I've certainly hope we don't but if we do our business is strong it's well positioned and we've made significant advancements in the last five years on our compliance are tracking infrastructure and so we feel very well positioned if we do have a downturn, but I wouldn't expect to see anything.

It is material in 2020.

Okay, I guess im we're thinking about mortgage delinquencies I mean, if you talk to some of the mortgage insurance companies are talking about mortgage delinquencies kind of picking up here and I'm not sure if you've got any sensitivities around that.

Yes, it's really early days and we'll have to see how it plays out but even if we are starting to see what's going on with more sequencing delinquencies ticking up it for us it won't affect our placement for six to nine months. So it won't be a driver for 2020.

But if if we do have that downturn it will be significant role for us in 2021 and beyond.

And as I mentioned earlier, we feel very well positioned you because of our kind of industry, leading capabilities and compliance we've been able to renew and in many cases early renew the vast majority of our book of tracked loan. So we're well positioned if it does the Gulf Coast way.

Gotcha, and then just I'm just curious I know, there's a profit sharing component to the auto warranty business.

But is there any impact that we could potentially see from delayed warranty work.

You know for.

Barb.

Lifestyle businesses Kinda auto and mobile.

Majority of our risk as reinsured back to our clients. So we really although they report you know as premium we tend to really operate more as an administrator and weve received fees for doing that effectively.

So.

We're not seeing though for example in auto service remains open across much of the U.S., what's been shutdown as sales, but services viewed in most states has in the central service. So if you look at our activity levels in terms of servicing we don't see a big dip. So it's not something that we're focused on as a risk.

Great. Thank you.

Thank you.

Our next question comes from the line of Michael Philips from Morgan Stanley. Your line is open.

Hey, good morning, Mike.

Hey, good morning, Thanks, guys I want to follow up on an earlier question and get your comments on continued growth in the covered devices and I guess the mix between.

You talked about maybe able to add new subscribers versus the kind of a falloff in trade and.

Maybe first off just a little more detail on those new subscribers, where that comes from and then secondly, what's the typical mix I guess of your growth there between the new subscribers versus the person the trade ins with freight and falling off in the near term. So what's the typical mix there and then just maybe more color on the new subscribers and expect to get.

Yes, so the new subscribers are the biggest driver of that business over the last couple of years and they're really coming from the new clients and program said, we've talked about that had been launched in the last couple of years. So for example, Katie I in Japan.

Comcast in charter in the U.S. et cetera, and those programs once we launch them. It generally takes anywhere between three to four years she'd to go through a phone a handset wrist replacement cycle. So even if there are fewer sales now and the crisis sales are still happening to a degree so that's why they're going to grow buyer.

Back trade and was a big driver of our business back in like 15, and 16, when we really ramped it up over the last few years, it's been more stable. We haven't you know that have this in key markets like the U.S. in Japan, you've seen the ownership of handsets lengthening. So people have gone to owning a handset for three years or in Japan.

For years, that's offset the growth we've had in subscribers. So that business has been more kind of flattish over the last couple of years now if we look forward, we see a significant wave of buyback trading coming it may be delayed a little bit by the current crisis, but if you think about fiveg when that really starts to roll out.

What's going to start to roll out later this year in the U.S., we'll we'll see how widely that really happens that will create a wave of activity for the next year or two and buyback trade in and we're well positioned.

The other important thing in mobile that's really driven our growth.

As we've been adding more services per subscriber. So if you recall when the early days, we have one service now often we have up to six different sources of value with every agreement, where we're providing things like premium tech support our onboard diagnostic technology and paki for doing the buyback trade and increasingly we are doing.

An extended warranty.

For your three in your for a phone ownership. So overall it again I think we're encouraged by our position. We expect to have continued growth to just may not be at the same level. This year as we've seen in past years.

Okay. Thanks.

Thats helpful. I guess it have you seen any signs of on the mobile piece of customers that are dropping their coverage more than usual that happening though.

No we havent seen that really at all.

If you look at what's happened in prior downturns, our products because they protect really essential equipment for consumers, whether that's a car or phone they tend to be very sticky and in downturns the needs tend to be even higher. So we haven't really seen anything it's certainly something we watch, but we're not seeing any trend there.

Okay, Great I guess last one if I could.

On the auto side, if if customers become delinquent our auto loans, what's the implication for you guys there for the warranty business.

I think the short answer is non than say a it's a single premium product. So we're we're collecting our funds at the beginning of the sale. So I don't think it affects us at all.

Perfect. Thank you guys.

Our next question is coming from Gary Ransom from Dowling and partners. Your line is open.

Hey, good morning, Gary Good morning.

You can hear me okay.

Yes, we can hear you.

Yes.

Thank you I felt.

Hey, Bob.

Humor.

Hey.

I know we.

You mentioned, how you're sharing some of the benefits on the mobile side, but are you know you've got them.

Decline in revenues, but is there any places across your businesses, where you're actually seeing a I'm sort of benefit.

You know maybe on the homeowner.

Outside the home so you don't give us any losses there.

Can you comment on that at all.

Well the first thing I'd say is it's really early in this crisis. So consumers had been adapting and adjusting for seven or eight weeks now so it's early to see what really might happen. So.

What we're really focused on his first and foremost being there to service customers have you think about it we have this installed base of 300 million or so customers. They still need our support whether it's for their phone or car or their renters insurance and we've been able to quickly pivot to work from home for our most of our operating goals and we've been able to meet and main.

Team meeting all of our service levels.

Which is really impressive and a huge thank you to our employees across the globe who've done that so that's important where where might we see trends I think it's too early to say what what we've seen is for most things consumers are just being cautious about going out in buying anything at the moment either because the stores are close or they don't feel safe going out.

We saw the lows so far in this crisis, the first week or two of April with activity levels, dropping 40 or 50% across a lot of the the channels we serve.

We're starting to see a little bit of recovery in the second half of April although still well below pre crisis levels. So.

Thank you again, if you look at our businesses I think we're well positioned to whether this crisis.

Quite well, we've got that installed base I mentioned, we have the diversity of portfolio. As you mentioned, we have LPI, which will be a counter cyclical hedge if we get into that kind of downturn. We've got the embedded earnings on the balance sheet and auto and pre need we do have things like if we do end up with an economic downturn out of this crisis auto for example.

Generally you have more used car sales in that environment and if we sell on used car we start to earn much sooner than we do on a new car and we've got that strong balance sheet and conservative investment philosophy that Richard talked about so at the end of the day, we're going to continue to monitor all these trends, but we feel well positioned to be there to support our customer.

Listen to whether this crisis well.

Yes.

Thank you I I also wanted to go back to something you said in your prepared remarks about business interruption.

Can you elaborate on where that exposure was arising from.

Richard you want to take out maybe I'll take.

Sure.

Yeah. If you remember last year, we had talked about the small commercial.

Businesses that we were we were underwriting.

So really comes from there.

On the other hand, what I would say is as you heard in the prepared remarks, there's only about 8% of the portfolio remaining it spend in wind down in runoff for for quite some time. So it's a small amount and also the product the products that we sold have specific exclusion site in them.

So yeah, that's where that that comes from scared.

Okay. Thank you.

Yeah, you're welcome that I also wanted to ask about the.

Caution on.

Finances.

On the one hand, you're cautious on the other here.

You did buy back a little bit of stock you made an acquisition, there's a lot of things that are still.

Moving forward.

Maybe this is a lay up question, but can you comment on the things that haven't changed I mean, what is what what continues to go forward to fight.

Cobot 19.

Yeah.

They were approaching this and we are you know as we mentioned.

Fortunate to have a installed base and well positioned to manage through this crisis. So we're trying to strike an appropriate balance between the short term and being cautious in the long term, where we when we come through the other side of business. If you look at where we'd been we had above market profitable growth, we have a long history of very strong.

On capital return and not we don't see that changing when we come out the other side of this we're going to be as strong with.

Same kind of track record in front of US as we've had in the last few years as a company.

So what we're trying to do is we're being prudent so things like deferring expenses are holding off on some hiring being cautious on preserving capital just because you never know, but we are making strategic investments I. For example, the investment Fs that is one of the industry leading franchises in auto it really.

Fills and for us the geography, particularly in Texas in southwest. It also brings capabilities that we can enroll across and it's a very low relative execution risk for an M&A deal because we know the company well and we know that business well. So we went ahead and made the decision and that dialogue has been ongoing come for quite a.

While so we felt it was appropriate we're also investing one of the interesting trends that was already happening, but we'll be accelerated by covert 19 is the shift to digital.

Both on sales and service and we've been investing against that for years, but in this crisis.

The acceleration of that is move forward dramatically, we've been able to be there and support our clients with that so we're fortunate we've made that investment, but we're going to continue to invest to move more things to digital so we're making investments like that that are against the long term trends and our car kind of strong market positions and then we're just.

Being cautious because what we don't know and nobody knows is the duration of how long this might go on and whether we'll have multiple ways of this going on so we're trying to strike that balance, but we feel really good about where our company is going to be at the other side of this crisis.

Alright, Thats very helpful. Thank you.

Thank you.

Once again, if you do have a question you May press star one on your Touchtone phone at this time I.

Our next question is coming from Mark Hughes from Suntrust.

Your line is open.

Hey, good morning, Mark.

Yeah. Good morning, you mentioned that down to the Asian markets is perhaps influencing your trading activity.

Did you.

Measure or any specific numbers, you can share, but how much of an impact that loads.

So what you're referring to as you know in the early days of the crisis. Some of the phones that we end up preparing and not using back in insurance claims are sold around the world.

The Asian markets are one of the big marks for that and that was a.

Really shutdown kind of the February March type timeframe, you could we haven't size that you can see some of the pressure in Q1 lifestyle margins.

We are really on that she was the fact, we had to find alternative channels on short notice to be able to get rid of those phones now the positive as those markets are back open.

We just don't have the same activity level that we would have had a in a pre crisis environment.

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How does the lender placed insurance or work with the forbearance plans that people are.

Under forbearance and it goes through six months.

How does a lender placed insurance interact with the.

Yeah, I think the important thing to remember first is that the majority of mortgage loans aren't in forbearance I think I haven't seen the statistics. This week, but you know, it's under 10% there and forbearance so for 90% plus of our business. It's just as normal if someone ends up being seriously delinquent or out of the home you know it's the same process with.

Always had for mortgage forbearance, obviously, nothing happens right. So as long as a mortgages in that state, it's not going to move into serious delinquencies. So for that small sliver of the market. We will still be tracking along we just won't be doing anything well to mortgages and forbearance.

And then who is actually covering the.

Providing insurance on the property.

If it's in core Barents.

If the homeowners I'm sure.

As a I'm not sure how long they are going to provide the grace period to the consumer or the borrower.

But at some 0.1 would assume they're going to drop off so.

It does the bank to assume the insurance coverage out of that were.

No I mean.

No. It's it's a good question on market you know it's early days for now I think the majority of voluntary carriers are still providing that insurance and there's not a rush by the voluntary players to cancel people's insurance at the moment. If they were canceled we would then trigger a letter cycle likely.

Our normal process that the end of the day that service. We provide is critical for the mortgage industry and we would we would step in but for now we're not seeing anything really happy with the forbearance mortgages that are in the market.

Right, but if they were in forbearance, but the underlying homeowners insurance dropped off then you are letter cycle with the would kick in.

Right absolutely in our primary focus though across all these businesses is continuing to be there and what I'm most proud of.

Many things I'm proud of how our employees who responded here is we really have been able to sustain so far all of our service levels and continue to be there for example in lender place we do a lot of the.

Processing and what are called lost straps and supporting consumers, who are repairing their homes were functioning as normal even even in this environment. There. So I'm very proud of that.

Thank you.

All right I think that's the end of questions I want to thank everyone for participating in today's call. We will update you on our progress on our second quarter earnings call in early August in the meantime, please reach out to either Suzanne Shepherd or Sean Mosher with any follow up questions. You have thanks, everyone.

Thank you. This does conclude today's teleconference. Please disconnect your lines at this time and have a wonderful day.

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