Q1 2021 Assurant Inc Earnings Call
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 turn the call over to Alan.
Thanks, Suzanne good morning, everyone. We're very pleased with our results for the first quarter.
We delivered double digit earnings growth driven by favorable non catastrophe loss experience, including improved underwriting in global housing as well as continued profitable growth in our global automotive multifamily housing in connected living businesses.
Once again results demonstrated the attractiveness of our market, leading specialty P&C and lifestyle offerings distributed across multiple channels.
This is in addition to the compelling growth opportunities emerging across mobile auto and renters. Together. These businesses represent what we refer to as the connected world.
From 2020 are connected world offerings represented two thirds of our net operating income excluding catastrophes and in combination with our specialty P&C businesses will enable us to continue to expand our innovative offerings and deliver a superior and seamless customer experience.
Generating over $1 billion of adjusted EBITDA in 2020.
Our business portfolio is well positioned to sustain above market growth and strong cash flows over time.
As we look ahead, we are continuously investing to bring innovation to market to build a more sustainable future for all of our stakeholders.
To that end, we recently published our 2021, social responsibility report highlighting the many ways. We are delivering on our commitment has a purpose driven company.
We are continuing to advance our ESG efforts, specifically within our strategic focus areas of talent products and climate.
Further integrating ESG within our business operations will be critical as we look for creating even more diverse equitable and inclusive culture that promotes innovation enhances sustainability and minimize our carbon footprint for the benefit of all stakeholders.
Recent notable examples include where.
We are increasing all U S hourly wages to at least $15 per hour by July.
Which supports the financial well being of our employees.
We've launched an assessment of our carbon footprint, including our investment portfolio on supply chain is a critical step to setting our future long term carbon emissions reduction goal.
And we further integrated sustainability into our offerings, such as rolling out electric vehicle products globally, and extending the mobile device lifecycle through trading services.
With high loss, we recently passed a significant milestone repurposing, our $100 million device.
<unk> extended the life of devices put billions of dollars back into consumers' hands and prevented additional E waste from ending up on our landfills supporting global sustainability.
We are pleased with our progress and are proud of the recognitions, we have received including our inclusion in the Bloomberg gender equality index and America's best employers for diversity by Forbes as well as being awarded the best place to work in several of the key markets we operate.
Sustainability and innovation go hand in hand.
Recently, we surpassed $100 million investment to Assurant ventures, our venture capital arm.
This quarter several high quality investments on our portfolio announced spec transactions, including kazoo.
Fully digital UK car sales company and smart rent, a smart home automation provider.
Given current attractive valuations. These investments have the potential to generate strong returns, while also providing strategic insight, which support our connected world businesses, creating value added partnerships and piloting new innovations.
Now, let me share some first quarter highlights for each of our operating segments.
Continued to see strong growth in global lifestyle, increasing earnings by 7% year over year.
Over the years, we've continuously investing in mobile capabilities, such as same day local repair or come to you to repair from mobile devices, which provide another opportunity to drive value for our clients and the end consumer.
Most recently in connected living we further strengthened our product capabilities and customer experience through the acquisition of triangle in Japan.
<unk> develops and operates on mobile phone app that allows consumers to manage the lifecycle of their devices and centrally organized as digital product manuals for all connected products.
Collectively all of our investments have helped lead to 15, new client program launches in 2015.
This includes partnerships with several U S cable providers, including Xfinity and spectrum as well as large mobile carriers in Japan, like K, DDI and Rocky Chan.
Recently, we've expanded our global partnership with Samsung through the launch of Samsung care plus on a smartphone protection program in Brazil and Mexico.
We expect to further extend this partnership globally.
We will continue to build on the strong momentum we have with our global multi product and multi channel strategy bolstered by the additional investments we are making.
As an example, Highland mobile added scale and technology capabilities to our global trade and upgrade business and it's been performing even better than our initial expectations.
We're now providing over 30 trading programs around the world.
Acquisition positions us to benefit from favorable tailwind from the global mobile market, including the upcoming <unk> smartphone upgrade cycle and new client relationships.
In global automotive, we continue to benefit from our scale and expertise as we now cover over 15 million vehicles.
Already this year, we've seen a significant increase in auto production versus pre pandemic first quarter levels.
In the year since acquiring <unk> us we've combined our award winning training programs to create the automotive training Academy by Assurant.
These expanded in person and virtual programs will allow us to scale faster and adapt to the changing needs of dealers and automotive professionals.
Within global financial services, we have added a number of embedded card benefit clients recently, including the previously announced partnership with American Express.
We look forward to enhancing these partnerships and building on our existing suite of products.
Moving to global housing.
Net operating income excluding reportable catastrophes grew 17% as.
As we benefited from favorable non cat loss experience, including improved underwriting results.
Within our lender placed business, we continue to play a vital role in supporting the mortgage industry as we track over 31 million loans.
The business remains well positioned and we expect to benefit from investments in our superior customer platform over the long term.
Multifamily housing increased policies by 9% year over year to almost $2 5 million as we continue to growth through our affinity partnerships in PMC channel, including seven of the top 10 largest PMC is in the U S.
We've also continued to grow our sharing economy offerings, which include car sharing on demand delivery and vacation rental.
Over the last two years through our partnership with market leaders and on demand delivery, we tripled the number of deliveries, we protect over $1 billion deliveries.
While it is too early to gauge whether the pandemic has fundamentally changed consumer demand for these services. We are encouraged by our momentum and the potential for future products and services in the gig economy.
Now, let's move to our first quarter results and our 2021 outlook.
Net operating income excluding cats grew by 13% to $182 million and earnings per share increased 16% to $3 <unk>.
Demonstrating improved results in global housing and continued momentum in global lifestyle.
Given our strong performance in the first quarter and current business trends, we are increasing our full year outlook for 2021.
We now expect 10% to 14% growth in operating earnings per share, excluding catastrophes versus our initial expectation of 9% EPS growth.
EPS expansion from the $9 88 in 2020 will be driven by high single digit earnings growth, mainly from global lifestyle and the lower corporate loss.
Results will also benefit from share repurchases, including the completion of our three year $135 billion objective and the initial return on net proceeds from the global Preneed sales.
Our increased outlook largely reflects global housing's favorable non catastrophe loss experienced in the first quarter.
As such Housing's earnings are expected to be down only modestly year over year from what was a strong 2020.
Looking at adjusted EBITDA, excluding catastrophes, the first quarter generated $302 million, an increase of 15% year over year.
We expect adjusted EBITDA will grow at a modestly higher rate than net operating income in 2021.
Turning to capital we ended March with $332 million of holding company liquidity after returning $80 million to shareholders through common stock dividends and buybacks during the quarter.
And we expect to deliver on all of our commitments sustaining our strong track record of capital return.
In addition throughout the year, we will continue to make strategic investments in our portfolio to position us well for sustained long term growth.
I'll now turn the call over to Richard to review first quarter results on our 2021 outlook Richard.
Thank you Alan and good morning, everyone.
As Alan noted we are pleased with our first quarter performance as our results across global lifestyle on global housing remains strong.
Before getting into our first quarter performance I want to provide a quick update on the sale of our premium business.
In March we announced our plan to sell the business for $1 3 billion for chemo mutual growth.
Signing we have completed the necessary regulatory filings and we remain on track to close the transaction by the end of the third quarter.
Now, let's move to segment results for global lifestyle.
The segment reported net operating income of $129 million in the first quarter.
An increase of 7% driven by global automotive and connected living.
In global automotive earnings increased $7 million or 18%.
<unk> included a $4 million onetime benefit as well as a gain on investment income related to a specialty asset class from our TWC acquisition.
Which we don't expect to recur.
Year over year underlying performance was driven by another quarter of global organic growth from U S PPA and international Oems as well as some favorable loss experience.
Connected living grew earnings by 3%. However, this was muted by a $7 million favorable client recoverable within extended service contracts in the prior year period.
Underlying performance was driven by mobile subscriber growth in Asia Pacific and North America.
Higher trading results from increased seasonal volume on contributions from our highly acquisition.
For the.
<unk> lifestyle, adjusted EBITDA increased 11% to $193 million.
Four points above net operating income growth.
This reflects the segments increased amortization related to higher deal related intangibles from more recent acquisitions and global automotive and connected living.
Depreciation expense also interest.
<unk> from higher investment.
Lifestyle revenue decreased by $85 million.
This was driven mainly by a $98 million reduction in mobile trading revenue.
Primarily due to the contract change we disclosed last year.
Excluding this change revenues for this segment was flat.
For the full year, we continue to expect lifestyle revenues to be in line with last year at approximately seven $3 billion.
As expected overall trading volumes, which flow through the income increased year over year and sequentially.
This was driven by four elements.
Phone introductions last year, greater device availability carrier promotions and contributions from hydro.
While the first quarter did benefit from strong mobile trade in volumes, we do expect it to be a high watermark for the year given historical seasonal patterns.
Since year end, we've increased covered mobile devices by 600000 subs driven by continued growth in North America and Asia Pacific.
This year, we continue to expect covered mobile devices to grow mid single digits.
Compared to 2020.
As we grow subscribers in key geographies like the U S and Japan.
As a reminder, we expect the growth rate of earnings to exceed the growth rate of covered mobile devices over time.
We benefit from offering additional products and services to our clients and their end consumers.
For 2021, we still expect global lifestyle net operating income to grow in the high single digits compared to the $437 million reported in 2020.
Growth will come from all lines of business, particularly connected living.
Adjusted EBITDA for this segment is expected to grow double digits year over year.
Moving now to global housing net operating income for the first quarter total $67 million.
Compared to $74 million in the first quarter of 2020.
The decrease was largely due to $22 million of higher reportable catastrophes, mainly related to the extreme winter weather, particularly from areas like Texas.
Excluding catastrophe losses earnings increased $50 million or 17%.
More than two thirds of the increase was from favorable non cat loss experience, mainly in our specialty offerings, including.
Including sharing economy products.
We estimate that approximately half of the favorable loss experienced in the first quarter was from underwriting improvements.
With the remainder of the benefit driven by favorable loss experience, which we don't expect to recur.
In addition, we saw continued growth in multifamily housing.
Lender placed results were up modestly higher premium rates and favorable non cat loss experience were mostly offset by decline in Oreo volumes from ongoing foreclosure moratoriums looking at the placement rate from.
Modest sequential increase to one 6% was attributable to a shift in business mix and is not an indication of a broader macro housing market share.
Revenue decreased 2% related to a reduction in our specialty product offerings, which included the impact from the exit of small commercial as well as lower RVO volume.
This decrease was partially offset by growth in multifamily housing, which grew 8% year over year.
Driven mainly by our affinity partners.
We now expect global housing net operating income, excluding cats to be down modestly compared to 2020.
This reflects our stronger first quarter and the assumption of a modest increase in our expected non-GAAP loss ratio to more normalized levels for the remainder of the year.
We're also monitoring our REO foreclosure moratoriums and any additional extensions that may be announced.
As we position for the future we will continue the investments in the business to sustain and enhance our competitive position.
At corporate the net operating loss was $22 million, which was flat year over year.
For the full year, we continue to expect the corporate net operating loss to improve to approximately $90 million as we eliminate enterprise support costs associated with global preneed.
As we think about the remainder of the year for all of the Assurant. We are beginning to plan for a phased reentry of our workforce post COVID-19 and.
And we are evaluating our real estate footprint to align with new business and employee needs as we adapt to the future of work.
This may result in additional expenses throughout the year.
I also wanted to provide a quick comment on our investment portfolio.
With preneed moving to discontinued operations, our investment portfolio is now approximately $7 9 billion, excluding cash and cash equivalents.
Given premiums relatively longer average duration of around 10 years.
Sir to the rest of our business.
Following the sale of preneed, our Gulfport duration will drop to between four five to five years.
As a result, our interest rate sensitivity will be reduced by approximately two thirds.
Turning to holding company liquidity, we ended the first quarter with $332 million, which is $107 million above our current minimum target level.
In the first quarter.
Dividends from our operating segments totaled $183 million.
In addition to our quarterly corporate and interest expenses.
Also had outflows from three main items.
$42 million of share repurchases $43 million in common and preferred stock dividends and $10 million, mainly related to the acquisition of <unk> and Assurant venture investments.
Also in January we redeemed the remaining $50 million of our March 2021 notes.
And our mandatory convertible shares converted to approximately $2 7 million common shares during the quarter.
For the year overall, we continue to expect dividends to approximate segment earnings subject to the growth of the businesses and rating agency and regulatory capital considerations.
We've now completed over 70% of our $135 billion capital return objective from 2019 to 2021 and remain confident that we will meet this objective by the end of this year.
In addition, we expect to begin incremental buybacks prior to closing the premium transaction in the third quarter.
Buybacks associated with the net proceeds from the sales are expected to be returned within one year of the transaction close.
In the second quarter through April 30, we repurchased an additional 95000 shares for $14 million.
In summary, our first quarter results demonstrate the strength of our business and our capital and liquidity position.
We remain focused on completing the sale of global preneed and delivering on our 2021 financial objectives.
And with that operator, please open the call for questions.
Thank you.
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 you may remove yourself from the queue by pressing the balance sheet.
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Thank you. Our first question is coming from Bose George of K VW. Your line is open.
Hey, good morning Bose.
Yes.
Hey, Good morning, guys. This is actually Jon on for Dave Thanks for taking the question.
Yes, so the first question.
It was really just kind of about sizing up the rebound in contribution of the trade in volumes I know, there's a lot of moving pieces with the contract change to highlight contribution and it sounds like <unk> was a high watermark.
Cash flow those kind of frame, how we should think about the contribution there.
Trading volume is going forward.
Maybe I'll start and then Richard certainly add on if you think about our trade in and buyback business. We're now in a very strong player or after the acquisition of Highland. We mentioned in the prepared remarks, we have 30 plus programs that we operate around the world.
Youre right Q1 tends to be the seasonal high for trade in.
Really driven by the launch of new balance late in the prior year.
We expect activity to moderate through the balance of the year, but again that business well positioned growing strongly.
And we have a lot of opportunity as the <unk> wave develops which is still very early.
We expect that to develop later this year on into 'twenty, two really is the driver, but Richard making you out on that.
Yes, I think I mean overall on a really good place and as Alan said Q.
Q1, we're looking at it as a high watermark, but on the.
Other hand, we have 30 plus trade in programs.
So we are encouraged by the momentum of the business and also what highlight is adding to the mix of.
The lifestyle business as well.
Okay and can you just kind of thinking about the balance of the year, we may see easy comps, obviously with volumes having been depleted.
Starting on <unk> 'twenty.
As we kind of think of the fees and other income line within global lifestyle is it reasonable to think of it being somewhat flat year over year, even after considering the contract change which will hit in the next two quarters.
And I don't think we've given a total or total revenue outlook for four lifestyle, but we have said that when we look at lifestyle. This year, we will be looking at net operating income.
Being in the high single digits, so hopefully that should.
That should help you.
Yes, no. Thanks, and then just the second question.
Could you just talk about the growth in subscribers and engine.
How much contribution is coming from T mobile on sprint versus some of the other kind of providers, including that cable providers, which would seem to be gaining share on subscriber count.
Yeah, and again just to frame that for everyone. So what we've said for this year is we expect subscriber growth in mobile to be mid single digits, and that's really being driven by growth in North America, which is coming from many different programs, including the ones you mentioned as well on this growth in Asia Pacific, We are seeing a bit of a drag.
<unk> and <unk>.
Europe. That's been ongoing is Europe has been more severely impacted by the COVID-19 Lockdowns also in Q2, we're going to lose a small program in Europe, we're having a banking program on mobile thats going to transition to another provider that's going to be a reduction of about 750000 subs, but we will have no impact on our bottom line.
So we factored that into that outlook as well as mid single digit growth for the year.
Okay. That's helpful. Thanks, guys.
Our next question comes from Brian Meredith of UBS. Your line is open.
Hey, good morning, Brian Good morning.
I Wonder if you could talk a little bit about getting closer to the mid year reinsurance renewal, what that looks like and specifically.
Any additional thoughts with respect to trying to convert the lender placed insurance business more to an MGA modeling and maybe specifically you can kind of get into what are the challenges in impediments and actually going to that type of a model.
Yes.
To talk about that I think it's important when we talk about housing noticed start with its a really good business. That's performing well you saw the very strong 2020, good start to this year over the last five or six years, we really fine tune the lender placed business. We're now in a good position. If there is housing market weakness, so I think thats an important.
Backdrop.
Now we have been taking many actions over the last few years to reduce volatility. So one of those was premium retention down to $80 million per event.
That has now made if we do have a severe cat season, it's not a business risk to the company at all it's just a onetime kind of earnings impact.
Done things like moving to a multiyear tower I think as of January we're up to 52% of the towers now multi year that also smoothed out the volatility and then we've been trimming exposure in areas, where we don't feel like the risk return tradeoff is attractive for true risk businesses like our extra the small.
<unk>.
And with that backdrop that we've been on a journey to become more credit light. It's something we look at it every year, we look at all of our businesses every year the challenge with it.
It's harder to see how the economics work with reinsurance given where we are already buying down too. So you need to come up with other structures those require a lot of earnings give up and so it's not straightforward how you would actually do that and make sure that it was a good outcome for our shareholders on the.
The other way we have been addressing that is just growing the rest of our company.
And so if you look at today are non cat exposed businesses are now something like 75% of our earnings and growing much faster and.
So over time, that's a dramatic shift in our exposure to whatever might happen with cat. So suddenly you continue to work on it but we feel like we've made great progress on it and we're not going to do anything that isn't really positive for our shareholders.
Great. Thanks, and then second question I'm, just curious on the auto warranty business what are your thoughts here as we progress through 2000.
On 'twenty, one on that business, obviously, some pretty solid growth given what we've seen with respect to used car sales.
Yes.
We're well positioned first of all on auto after the warranty group acquisition and then the addition of Asis.
Clear significant leader in that business, we're now up to over 50 million covered autos.
We've seen production for our business recover fully and then some from pre COVID-19. We've mentioned I think Q1, 'twenty one better than Q1 19 minutes significant way. So we feel good about that and what we're trying to also do on.
Today, it's not a compensation metric our primary compensation metrics are things like total shareholder return operating EPS things like that.
But it is a complement and net operating income and in particular, as we think about M&A and growing in fee income businesses. It allows us to help the market better understand the real growth that we are setting up for the future, which is a bit obscured when you look at the accounting.
Of an acquisition of a company, but those businesses we've been acquiring like we mentioned CPR on fixed earlier on an EBITDA basis, it really sets up and helps the market and understand better the growth that we expect in the future.
But Richard what would you add.
Yes, I think I think as Alan mentioned first devaluation issue on the market being able to compare on an apples and apples in terms of on.
Other companies EBITDA NR. So that's the first part.
I also look at it is from an operating point of view.
It's a better operating points.
Better operating metric in my perspective, then NOI, because we add back purchased intangibles. So those are purchases that are made they are running out it's a noncash issue so adding things like that back on taxes back gives us internally just a better view on the on.
Operations of the business from period to period.
Particularly in the lifestyle business.
Yes to your question, we're going to assess over time, how best to link it to things like compensation and we don't know yet if we will or won't but we do think it provides a better view of the underlying profit and momentum of our business, particularly as we're now largely shifted away from traditional risk businesses to be driven by the connected.
World businesses.
Okay. That's helpful.
I also wanted to ask about the.
The macro reopening of the economy.
And are there areas where.
They might have been depressed last year, where there's perhaps pent up demand that might come through as part of the growth or anything that you're seeing I know you've talked a little bit about automotive, but are there other areas that where there might be some pent up demand that would come through as we reopen economies this year.
I know I think broadly you saw last year, how resilient our business was even in a very disruptive environment with COVID-19, but there are a few areas where pent up demand is still really true one is travel.
Do some of the card benefits for example on a linked to travel and so with travel being very depressed that obviously, it's an area that rebounds, we will have some link for us some benefit for us.
In store traffic has been lower.
But we pushed very hard on digital even pre COVID-19, which I think help mitigate that we mentioned earlier, we are seeing still some depressed activity in Europe.
So thats an opportunity, but I think I wouldn't look at.
We were that impacted by COVID-19 in terms of what was happening.
So therefore, our growth from the economies, obviously positive people buy things that gives us new chances to attach on sale.
As I mentioned earlier.
We're still confident whatever happens in the external environment, we're going to grow and outperform.
Alright, Thank you and one of the other things I noticed that.
As an insurance analyst day like to look at book value and I know you.
I see the equity book value per share calculation was gone.
Can you.
Comment on on that change.
Yes, I think Alan.
I'll jump in here.
Yes, I think from me when we look at the company and we look at the evolution of the company really more toward a.
Our capital light type business fee based service based business.
Look at it and book value is much less important than it used to be in terms of an overall indicator of the company. I mean, you can get there from math, we give the balance sheets in the equity and the share. So it's still it's still of accounts out there value.
But things like EBITDA.
<unk> ex GAAP net net operating income ex cats, those are more meaningful to us in terms of the profitability and the ongoing profitability and the growth over time of the business. So they are a better value indicators in our minds.
Okay.
Thank you very much alright.
Alright, thank you.
Our last question comes from Mark Hughes of Truest. Your line is open.
Hey, Marc Thank you.
A couple of things Richard you mentioned.
Some incremental real estate costs.
Maybe size those and are those going to be broken out separately not included in adjusted earnings.
Yes. Thanks for the question Mark in terms of facilities. It's very early days, what we did want to signal.
To the market today is we are looking at our facilities footprint.
Geographically across the world globally, and we think as we go back to the workplace, we can be thoughtful about the future at work and how our staff can work and how we can work more productivity productivity over over time, so very early days with that we have the cash known.
Numbers to it.
As of yet we just wanted to signal that we'll be looking for and it's one of the reasons why.
When we look at the first quarter and we look at how strong the first quarter is and we'd give outlook for rest of the year, we don't want to surprise the market by coming into the facility expense in terms of.
Where it will be when we when we do if and when we do incur it we'll obviously call it out to the market.
Haven't decided yet depending on what it is and where we go geographically where it would go it really would be a part of operating income or it would be something a little bit.
Different than that and more of a one time nonrecurring thing so two to come on in the future.
And Mark what I would add is broadly with COVID-19 and then the changes that are going to happen. We're trying to think through what is the best way to set up our business and our employees to be successful in the future as we work to attract talent.
Had a head start that we had about 30% of employees virtual before COVID-19 and there had been a path that we've been working on anyway.
On the world's changing and we just want to be really thoughtful about how do we create advantage through the way we structure. So that we create the best possible future workplace environment.
As you saw in Q4, we had a little bit of that last year with some leases that were that were about to expire. So again as Richard said, we don't know exactly what it's going to be but we know we will have some changes.
At some point this year likely.
And then on the multifamily you mentioned that your digital capabilities there.
There are very good in the market.
Are you doing any indirect consumer does that create channel conflict.
Is that even from the you're interested in and just a refresher on there.
Yes, the way to think about that as today, we are almost entirely b to b to C. So we've worked through our partners we embedded on our partners, what we're particularly focused on as we think about innovation in the future is how do we combine some of our capabilities to create even a better offering. So for example on multifamily working through.
Our PMC partners on our affinity partners can we include mobile into the bundle can we add capabilities from mobile so.
We don't have any real plans to go to direct to consumer.
Always looking for alternative channels and what I mean by that is our strategy has been to support the consumer wherever the consumer wants to go to get products that we sell.
So we're always looking at alternative channels, but our primary focus is that b to b to C and how we leverage our capabilities, which are pretty differentiated across auto mobile on rental to create kind of new opportunities for growth.
Thank you.
Alright. Thanks, everyone. We appreciate your time today and for participating in today's call. We had a very strong first quarter and we continue to look forward to closing on the sale of global Preneed later this year and the <unk>.
Meantime, please reach out to Suzanne Shepherd, and Sean Mosher with any follow up questions. Thanks, everyone.
Thank you.
This concludes today's teleconference. Please disconnect your lines at this time and have a wonderful day.
Okay.
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