Q2 2022 Assurant Inc Earnings Call

Welcome to assurance second quarter, 2022 conference call and webcast at this time all participants have been placed in a listen only mode and the floor will be opened for your questions. Following management's prepared remarks.

If you would like to ask a question at that time simply press star on your Touchtone phone.

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It is now my pleasure to turn the floor over to Suzanne Shepherd Senior Vice President of Investor Relations and sustainability.

May begin thank.

Thank you operator, and good morning, everyone. We look forward to discussing our second quarter 2022 results with you today.

Joining me for Assurance conference call are Keith Jennings, our President and Chief Executive Officer, and Richard <unk>, Our Chief Financial Officer.

Yesterday after the market closed we issued a news release announcing our results for the second quarter 2022.

The release and corresponding financial supplement are available on Assurant Dot com.

We will start today's call with remarks from Keith and Richard before moving into a Q&A session. Some of the statements made today are forward looking forward looking statements are based upon our historical performance and current expectations and subject to risks uncertainties and other factors that may cause actual results to differ materially from those contemplated by these statements.

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

During today's call, we will refer to non-GAAP financial measures, which we believe are important in evaluating the company's performance for.

For more details on these measures the most comparable GAAP measures and a reconciliation of the two please refer to yesterday's news release and financial supplement that can be found on our website.

We have revised all quarterly and annual results for full year 2020 through first quarter 2022 periods to reflect the change in the adjusted EBITDA calculation to exclude certain businesses that we now expect to exit fully including our sharing economy and small commercial businesses in global housing as well as certain legacy long.

<unk> insurance policy within global lifestyle.

<unk> had been besides for the correction of any error related to reinsurance our claims and benefits payable within global lifestyle segment that occurred in late 2018 to first quarter of 2022 as well as other immaterial corrections.

The impact of these changes individually or in the aggregate is not material to results for any prior period are.

A full reconciliation of certain reported and revised key measures of performance and metrics is provided in our second quarter financial supplement posted on Assurant Dot com.

I will now turn the call over to Keith.

Thanks, Suzanne and good morning, everyone.

As we outlined during our recent Investor day in March we aspire to be the leading global business services company supporting the advancement of the connected world.

So far in 2022, we've made solid progress delivering on that vision for the benefit of our clients and their customers our employees and importantly, our shareholders.

We delivered adjusted EPS of $7 22.

Up 13% in the first half of last year, and adjusted EBITDA was $592 million, both excluding reportable catastrophe losses.

We're very pleased that global lifestyle had such a strong first half of the year with momentum expected to continue led by both mobile and auto are capital light and fee income base businesses represented 82% of our adjusted EBIT ex cat. So far this year and continue to add to the value of our franchise while.

Results in global housing were below expectations, largely driven by broader inflationary pressures seen across our industry. We have a clear path and several key actions underway to address near term macro challenges longer term. We continue to believe that our combined housing and lifestyle portfolio of businesses is positioned to deliver attractive.

Earnings growth and strong cash flow generation relative to the broader market, while also providing a compelling countercyclical hedge in what remains a volatile economic landscape.

As we look at our global lifestyle segment.

Our business services oriented offerings generated adjusted EBITDA growth of 12% year over year and 14% year to date.

Our market, leading franchise helped us expand our partnership with several world class brands in the lifestyle market.

In the U S. We recently signed a multi year renewal with a large cable operator within our mobile business.

This includes comprehensive device protection trading and premium technical support.

With the renewal will be including new capabilities, demonstrating our ability to grow relationships with value added services that ultimately lead to a better customer experience.

We've now renewed two major U S cable operators in our mobile business within the last year, while also broadening our product offerings to support their growing mobile subscriber basis.

We're pleased with the continued growth momentum in global lifestyle, which we expect will continue into the second half of 2022.

As a result, we believe this segment will deliver mid to high teens growth in adjusted EBITDA, mainly from strong mobile results, including device protection and trading as well as from the continued strength of our auto business.

Turning to global housing.

Similar to others in the industry, we were impacted by significant inflationary pressure, which resulted in higher claim severities and reinsurance costs in the quarter, most notably in lender placed.

These higher costs are expected to be mitigated through rate adjustments over time. In addition to regular rate filings in key states. Our lender placed product included inflation guard feature designed to address changes in material and labor costs.

We recently implemented a double digit rate increase on policy renewals.

This rate increase will be applied to all renewals over the next 12 months.

As a result, there was a timing lag that is magnifying the higher non cat loss experience in the quarter and ultimately pressuring results through 2022.

We believe this will normalize as incremental premiums earned over time.

As we look at the housing portfolio. We're also taking other actions to improve profitability through ongoing expense efficiencies and driving even greater focus on the housing businesses, where we see a path to market leading positions that can deliver attractive financial returns.

Most recently, we decided to exit the sharing economy business the.

The strategic and financial objectives for this business did not develop as we originally anticipated and we want to focus on opportunities that more closely aligned to our long term vision and where we have market advantages with a clear right to win.

Stepping back and looking at Assurant overall, we believe we have an attractive portfolio of market, leading businesses, which are poised for long term success.

Given the current macro environment, we believe we can deliver adjusted EBITDA growth of 3% to 6%.

This takes into account higher expected losses in housing, but also stronger results and momentum within global lifestyle.

Adjusted earnings per share excluding reportable cat is now expected to grow 14% to 18% for the full year, reflecting this view of adjusted EBITDA.

EPS growth will of course also be supported by share repurchases, including the return of $900 million in preneed sale proceeds which was completed in the second quarter.

As we've shown historically through various market cycles. We believe we are well positioned to deliver our strategic objectives over the long term.

We expect this period of macroeconomic challenges to be no different.

Over time, we believe the strength and resiliency of our business model will endure enabling us to execute on the 2023 and 2024 objectives, we outlined at Investor day.

Looking forward, we expect adjusted EBIT acceleration starting next year.

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

I'll now turn the call over to Richard to review, the second quarter results and our revised 2022 outlook in greater detail. Thank you Keith and good morning, everyone.

Adjusted EBITDA, excluding catastrophes totaled $277 million down.

Down 8% from the second quarter of 2021.

You mentioned performance reflected the strong growth across global lifestyle and weaker results in global housing.

The quarter, we reported adjusted earnings per share, excluding reportable catastrophes of $3 25.

Flat from the prior year period.

For 2021 baseline for lifestyle and housing adjusted EBITDA has been updated to remove noncore operations and reflect the accounting correction Suzanne noted to our prior period results.

Now, let's move to segment results, starting with global lifestyle the.

The segment reported adjusted EBITDA of $207 million in the second quarter, a year over year increase of 12% driven by growth across both connected living and global automotive.

Connected living earnings increased by $12 million or 11% year over year the.

The increase was primarily driven by continued mobile expansion in North America device protection programs from cable, operator, and carrier clients, including subscriber growth and more favorable loss experience.

This was partially offset by unfavorable foreign exchange and.

In global automotive earnings increased $10 million or 15%, primarily from higher investment income, including higher real estate gains and yields favorable loss experience and selecting silly products also contributed to the results.

As we look at revenue lifestyle revenue was up by $48 million or 3% driven.

Driven by continued growth in global automotive.

Global automotive revenue increased 7%, reflecting strong prior period sales of vehicle service contracts.

Despite the overall U S auto market showing signs of slowing our net written premiums remained strong even against a record second quarter of 2021 as additional dealerships and strong attachment rates are offsetting the market headwinds.

Within connected living revenue was down slightly due to lower revenue in mobile mainly from premium declines from run off programs and unfavorable foreign exchange.

This was partially offset by growth in subscribers in North America, and higher mobile fee income driven by global mobile devices serviced.

The second quarter, the number of global mobile devices service increased by $1 1 million for approximately 18% to $7 2 million.

This was due to higher trading volumes supported by new phone introductions and carrier promotions from the growing adoption of <unk> devices.

In terms of mobile subscribers growth in North America was partially offset by declines in runoff mobile programs previously mentioned, which also impacted mobile devices protected sequentially.

For full year 2022, we now expect lifestyle adjusted EBITDA growth to be mid to high teens compared to 2021 baseline of $702 million.

Mobile is expected to be the key driver of adjusted EBITDA growth.

Global expansion in existing and new clients across device protection and trade in and upgrade programs.

This will be partially offset by unfavorable impacts from foreign exchange and strategic investments to support new business opportunities and client implementations.

Although adjusted EBITDA is expected to grow for the full year, but earnings in the second half, we expect it to be lower than the first half.

Mainly due to the absence of $14 million of real estate gains.

Growth for the year will be partially offset by higher investment income and more favorable loss experience and selecting certain products.

Moving to global housing adjusted EBITDA with $75 million, which included $20 million of reportable catastrophes for the second quarter.

Excluding catastrophe losses earnings decreased $40 million, primarily driven by $25 million.

And higher non cat loss experience largely in lender placed and to a lesser extent multifamily housing.

This included $12 million in year over year reserve strengthening in higher fire losses in the quarter.

The balance of the earnings reduction was driven mainly from $17 million and higher catastrophe reinsurance costs.

The cost of our reinsurance program reflected both the higher exposures and increased pricing within the reinsurance market.

And with the completion of our 2022 catastrophe reinsurance program in June we believe we fared relatively well in the market given our strong relationships with our more than 40 reinsurance partners.

We maintained.

And $80 million per event retention, including second and third events. We also continued to benefit from the placement of multiyear coverage covering 45% of our program and the cascading feature that provides multi event protection.

In multifamily housing growth in our PMC channels was offset by increased non cat losses and expenses from ongoing investments to expand our capabilities and further strengthen our client experience global housing revenue was flat year over year as higher catastrophe reinsurance costs were offset by higher average in <unk>.

<unk> values of lender placed.

The full year, we now expect global housing adjusted EBITDA, excluding cats to decline by low to mid teens from the 2021 baseline of $512 million.

In addition to the higher claims costs Oreo volumes have continued to be muted and placement rate trends. We are seeing are softer than originally expected.

At the same time, we continue to realize expense efficiencies from new system enhancements and strength in digital capabilities.

While the duration and magnitude of inflationary trends remains fluid rate filings and inflation guards are expected to start to flow through premiums as we exit the year.

At corporate adjusted EBITDA loss was $25 million abate million dollars compared to the unusually low second quarter of 2021.

This was mainly driven by higher employee related and technology expenses.

For full year 2022, we expect the corporate adjusted EBITDA loss to be approximately $105 million.

Turning to holding company liquidity, we ended the second quarter with $595 million.

$370 million above our current minimum target level in.

In the second quarter dividends from our operating segments totaled $189 million.

In addition to our quarterly corporate and interest expenses. We also had outflows from three main items.

$232 million of share repurchases $75 million from the repayment of our 2023 notes and $39 million in common stock dividends.

For the full year.

Outlook assumes $365 million of shares repurchased from the remaining premium sale proceeds plus an additional $2 million to $300 million.

Through July we bought back $504 million worth of our stock.

Given changes in investment portfolio values reserve strengthening for noncore operations and accounting adjustments, we expect segment dividends to be moderately below our target of roughly three quarters of segment adjusted EBITDA, including catastrophes.

Lower we still expect capital generation to be strong given our business model and product mix.

As always segment dividends are subject to the growth of the businesses rating agency and regulatory capital requirements and investment portfolio performance.

In conclusion, we believe assurance well positioned for long term growth and strong capital generation underscored by the attractive portfolio of global lifestyle and global housing businesses.

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.

At any point. Your question is answered you may remove yourself from the queue, but again pressing star one.

Again, we do ask that while you pose your question to pick.

Pickup handset to provide optimal sound quality. Thank you. Your first question comes from the line of Michael Phillips from Morgan Stanley . Your line is open.

Good morning, Mike Thanks, Doug Good morning, guys. Thanks, good morning.

I guess I want to talk on the inflationary pressures that youre seeing on the lender placed but can we switch that over to the.

<unk>.

The lifestyle side and anything that youre, seeing there and when either auto or mobile.

Maybe you could talk about how much risk you retained on that side, it's clearly not 100%.

But anything that youre seeing there that might cause pressure from inflationary pressures there.

And if so kind of your ability to combat that.

Terrific, Yeah, so I think the lifestyle businesses.

Obviously performed very well this year, we've raised the outlook for the full year. So we're confident in the momentum I would say in terms of the the resiliency we've been dealing with.

Couple of things certainly inflationary pressures, but also supply chain constraints as you think about the last couple of years of the pandemic, particularly around parts.

On the connected living in the auto side. So I think the nature of our deal structures is quite favorable two thirds of the time, we're not holding the risk relative to the services. We perform in the programs that we manage so that's been very helpful. I'd say, we've got a stronger orientation to fee income.

Even in deals where we retain risk we're targeting fees. We've got typically allow the loss ratios ability to reprice you will see timing issues occur in terms of sometimes losses are a little higher we may recover that overtime with client deal structures, but it hasnt been an issue that's emerged over the course of last several.

Quarters feel really good about it certainly never fully insulated, but a very different operating model and then if you think about inflation on the housing side, we've got rate filings inflation guard in a number of factors that are being put in place to combat that so lifestyle has been quite resilient from that perspective.

Okay. Okay. Thank you.

You mentioned Keith on the opening comments about.

On the lender placed side there.

And inflation Guard and then you also mentioned a double digit on renewals was that the same double digit was that the inflation guard does that on top of inflation guard.

So the so if you think about inflation guard, we put a double digit rate increase in July so that is going to flow through the book as it renews. We've also got a regular course rate filings, we've been accelerating rate filings with states. Obviously is severities have been higher and losses have been higher.

<unk>, we've actually gotten 30.

Date rate filings approved this year, not all of which have been fully implemented but theyre all of Ploop approved and will be implemented by the end of the next year or by the end of this year, sorry, and then we've got an additional set of discussions ongoing with states. So.

That additional rate layers on top of the double digit increase that we talked about relative to inflation guard.

Is there any difference in there can you maybe just talk about the difference that you have in those other rate filings by state that you are alluding to different than a traditional homeowners insurance company.

The clients are individuals like many of your clients in order to place are a little different so does that.

Give any differences in the ability of the speed at which or the ability to take higher rates and the speed that you can take them and then maybe a traditional insurance company.

Yes, I think probably a couple of things first of all the.

These are short tail policies their annual policy. So as we do get rate. It flows through over a 12 month period number one I think the fact that we've got inflation guard built into the product. We don't have to get approval. That's already approved and we just apply an inflationary factor every year that drives aav's up and correspond.

Increases to rate so that I would call that normal course, obviously inflation is elevated.

Industry data supports a higher inflation factor driving more IV in terms of the rate I think as we work with states. We're really looking at the historical experience to justify the increases that we're getting and I would say that that happens like very consistently with what other insurers would be doing.

But we've been more aggressive as others have just in terms of the the heightened severities that we're seeing in the marketplace. So good opportunity to get right. We're looking to make fair returns on the business I would say it doesn't have a huge impact on volumes, we've got exceptional relationships with our clients.

Obviously this is a lender placed policy and we expect to see consistent policy counts as we move forward even in this higher inflationary environment with more rate flowing through.

Okay. Thank you congrats.

Best of luck in future. Thank you so much thank.

Thank you.

Our next question comes from the line of Jeff Schmidt from William Blair. Your line is open.

Hi, good morning, Hi.

What is your view on where the placement rate in the lender placed business could go next year, if we move into a recession, whether we're in one now or not let's say sort of a deeper recession, if interest rates continue to move up.

That move above 2% pretty quickly or where do you think that could go.

Yes, I think it depends on.

A range of factors I would say that as you see the placement rates are relatively stable and have been so for several quarters and thats just the strength of the housing market. The fact that there's so much positive equity.

And I also think about placement rate really tracking closely to delinquency and you've got a prevalence of servicers working on loan modifications a lot of loss mitigation efforts that is really limiting delinquency, it's limiting foreclosure activity.

Obviously, if that starts to shift and that starts to change.

<unk> see rates arise at any level significantly that would have a corresponding impact on our placement rate. Obviously, if there are more foreclosures that would drive up.

Our Oreo volumes, which are really probably a third of pre pandemic levels. So there is certainly upside over time in placement rate. The real question is when does that emerge in the economy, just because of the strength of the housing market. You've also got rising interest rate pressure certainly.

Hardening voluntary insurance market higher inflationary pressure, so I think we need to see how the economy responds and how consumers respond to get a better feel we're not counting on a big.

Increase in placement rates as we think about our longer term expectations and obviously, if that does happen and thats, where we talk about it being a countercyclical hedge from a housing perspective.

Right, Okay that makes sense.

And then the expense ratio in global housing continues to run above 46% I think in the past you've guided to sort of 44% to 46%.

Is there some kind of inflation driving that higher when do you think it could move below that 46% level.

Okay.

Yes, and maybe <unk>.

Richard do you want to talk about expenses.

Yes, yes it is.

A great question it is up a little bit over the last quarter to 46%. So I think youre right its a little bit higher than we'd like to see it. We are we've talked about in previous calls we are investing.

Digitalization and projects like that create more efficiencies as Keith said in his opening remarks. So we would see that I would say over time as these projects in these efforts come through also.

Yes.

The first question on placement rates as the volumes of the business grow obviously, the things that we have in place and our operations are very leverage able so that would also bring down the expense ratio.

Overtime.

Okay. Thank you for the answers.

I appreciate it.

Your next question comes from the line of Tom Amy joined from <unk>. Your line is open.

Good morning, Tommy.

Hey, good morning, guys. Thanks for taking my question.

Yes, so what are the expectations for the noncore operations lost contribution going forward is that meant to be more of a breakeven I know, it's excluded from the guidance and the general time horizon for that wind down.

Sure maybe I can start and then Richard can add on so.

<unk> made the decision this quarter as we talked about to exit.

All of our long tail liability business and driven by the decision around sharing economy. So as we talked about just wasn't strategically aligned with.

The direction that we're headed as a company.

And it was highly specialized niche business with inherent risk in volatility we didn't see a path to leadership.

Didn't think we could get to generate the financial returns, but it wasn't strategically aligned with the direction of the company. So that's.

As part of that all of the clients have already been notified all of the contracts will be non renewed I would say by first quarter of 'twenty. Three net earned premium will be immaterial and by this time next year it'll it'll be gone completely really just at that point managing the runoff as you saw we've put up.

Our reserves so as we exited a very comprehensive top to bottom review of the performance of the business did a lot of scenario analysis.

To try to think about how this could emerge over time put up a full reserve to adequately cover the run off which we think is appropriate and look to put this behind us.

Okay.

Okay, and I guess as you kind of explored what to do with that those businesses. There is no way to sort of monetize what you've built there.

I guess just you guys.

You have typically been kind of sellers and ways to monetize things that just wouldn't be any kind of takers for those businesses.

Yes, I think potentially.

Have looked at that as a path, we didn't see it viable and.

And really it could have become a distraction.

Focusing on driving growth through the rest of the organization. We will certainly consider alternatives now that we've put in runoff to see if theres a way to structure something around.

Sharing the risk with a third party, that's certainly possible and we will look to consider that but.

The value for monetization I would say it was lower than the distraction factor of trying to work through that process quite candidly.

Okay that makes sense okay.

Thank you.

Your next question comes from the line of Mark Hughes from <unk> Securities. Your line is open.

Hey, Mark Thanks, Good morning.

Hey, good morning.

Multifamily business kind of the floor.

Matt in terms of top line this quarter.

But what's happening there.

Yes so.

A couple of things first of all I would say, we feel like we're really well positioned in the retro business.

Got two 6 million customers, so, it's giving us a great opportunity in terms of market leadership scale, we've been investing in the customer experience deepening our expertise. So we do expect long term growth, it's a very attractive part of the market.

I would say in terms of the results being flat, we do have strength in growth within the property management company channel. So that continues to grow.

Exceptionally well and we're gaining share we're driving attach rates and we're having a lot of success with our cover 360 product really just more integrated into the bi flow, we've talked about better digital tools collecting.

The insurance is part of the rent and just leveraging our full capabilities. So that's going extremely well.

Have an affinity portion of our business, which the growth has slowed where we partner with insurance companies.

I think as insurance companies have been focusing on getting rate and dealing with inflationary pressures little less marketing generally with some of our partners. So I think that normalizes over time as the economy.

Finds more stability in the future, but we are seeing growth and we do think long term growth will emerge as we continue to focus on this part of our business.

Richard the investment.

Portfolio, what do you anticipate in terms of the progression and the yield the new money yield what kind of turnover is there in the portfolio little bit on that would be helpful.

Yes, sure Mark Thank you and good morning.

Yes first of all I would say that rising interest rates overall are good for the business and we've been seeing that.

In this quarter is while we've had some real estate gains as we mentioned in our remarks, but we also have fixed income and yields on fixed income raising.

We have a five year duration, so think about 20% of the portfolio rolling over every year. So we won't have any quantum step in terms of long term rates.

In long term yields, but it will gradually increase over time, which is which is a good thing and I think you probably saw the yield for this this quarter over three 5%, which is which is quite good.

What's interesting about it is if we look at our book of business. If we go back a year from now.

Assets that were coming to maturity of the fixed income coming to maturity, we are rolling over at lower levels.

And then we're maturing it now they are rolling over for the most part at higher levels, so that bodes well for the future and short term rates, yes, we have some of our some of our money in cash obviously.

And we're getting an immediate impact on that obviously smaller dollars getting a smaller level of cash that we have relative to the fixed income portfolio.

And then Keith you had I think.

<unk> do you expect adjusted EBITDA to accelerate next year.

Did I hear that properly.

Any other metrics you want to carve outs for next year, maybe EPS growth.

Yes, I think.

As we look at the year.

At 3% to 6% in terms of.

Our EBIT growth, we certainly expect that to be increasing as we move into 2023 and I'd say largely we do expect the lender placed business and housing overall to continue to improve as we get more rate and then we do have great momentum in lifestyle. So.

We haven't set a specific target for 2023 and 2020 for what we have said is on average we want to deliver north of 10% EBITDA growth, we're still committed to our long term objectives from Investor day, which I think is really important.

We're going to do everything we can to deliver those results it would be accountable.

To delivering our financial commitments.

And then just one final one the timing of the rate increase when you get the inflation guard for the lender placed because that only kick in their renewal cycle around that or.

So I would not kick in immediately.

Yes, so the policies are annual.

And they renew it each year. So if you think about let's take July for example, we put in place double digit rate increases for the cohort.

Of annual policies that renewed in July so think about that rate going in 112 at a time over 12 months and then think about it earning $1 12 months at a time after its in place. So the whole cycle. It takes 24 months, but it builds momentum month by month by month.

And then we've also got as I said.

State state related rate increases that go into different periods in the year. That's also contributing and I mentioned 30.

Approved rates really affecting about 75% of our premium overall and then a number of additional filings that are ongoing. So we do feel like we've got a great opportunity with rate. It's a terrific mechanism and designed to deal with inflationary pressures and we expect it to work and we.

To get the housing business, where it needs to be from a total return perspective. The one thing Thats interesting. If you think about housing and it's a tough quarter right. We're not pleased with the results in the quarter.

The first half housing combined ratio was 86% the first half annualized ROE at 26% that will normalize as we get through the rest of the year, but we still think it'll be quite strong overall, given where underperforming our own expectation. So I do want to highlight that as the backdrop. It is a strong business it generates.

Tremendous cash flow, we've got great market, leading advantages and the financial performance is still strong it's just not where we want it to be to deliver on our total commitments.

Thank you.

You bet.

Your next question comes from the line of John Barnidge from Piper Sandler Your line is open.

Good morning, John Thank you very much good morning. Thank you very much for taking my question you talked about signing a multiyear renewal with a cable operator last quarter. You also talked about the expanded relationship.

Can you talk about maybe what the renewal calendar looks like and how you think about potential hit rates for expanded relationships as you come up on renewables.

Yes, we've had a pretty good track record of maintaining our clients and this is true across the board we actually renewed.

Two of our larger lender placed clients on the housing side this quarter I Didnt mentioned in the prepared remarks, but our team did a fantastic job on those client renewals and I'd say that we've got a track record of renewing clients average tenure of clients is extremely long. So we're proud of that and it's all based on delivering and execute.

<unk> for the clients, but ultimately for end consumers in terms of the cable space.

We've become a market leader with cable operators, who are who have entered the mobile space, they're growing rapidly they are evolving their products and services meaningfully every year and we're really proud of the work that our teams have done there and I think thats built a lot of momentum. So we're we're strong with carriers were strong with new market entrants.

And we've been <unk>.

That's been quite nimble in how we've approached the market hopefully that also sets us up to grow new relationships with new clients.

As we move forward and we think we're extremely well positioned in connected living and we've invested significantly over many many years to get to this position and we have great fantastic momentum.

And then as it relates to expanded relationship similar to what you announced today and then in the first quarter. How do you think about the potential to leverage what you've done so far.

Yes, I think.

When I look at the growth opportunity in connected living I still think that we have more growth opportunity there than in any business that we operate.

And it is growing the fastest and it's the largest contributor to financial results. So that's a pretty strong place to be when your biggest most successful business still has more white space. Both in terms of the core of what we do but also in terms of expanding our scope of services and then winning new clients we've talked about.

Trade in and the <unk>.

That we do trade in services with multiple brands now around the world that creates opportunity for us to build deeper partnerships, where we can add additional value over time.

As we think about the evolution, we've talked a lot about leveraging our network for in store repair those are additional capabilities. We operate 500 CPR stores that is something that we want to continue to leverage to create value for our partners.

As I think about the work that we've done with <unk>.

With T mobile that's another Great example, in terms of service and repair.

It wasn't designed to be a significant financial contributor overall it was designed around how do we give consumers choice and better options to get their repairs done at their convenience.

About that part of the business volumes have been a little lower than expected, but customer feedback and net promoter scores have been exceptional and I would say higher than we would have otherwise anticipated. We actively work to optimize that program to modify the program and expect over time changes to be.

Beneficial for both parties. So a lot of interesting momentum in this part of the business.

Great and then if I could ask one more question on the expense initiatives that you talked about which should help to offset inflation is there a way to size or dimension.

How we should be thinking about the scale economies.

Yeah, So probably a couple thoughts and then Richard can certainly add in we have seen progress.

In a lot of the great efforts by our team, particularly in housing on.

On digital first we're really transforming our operations and driving more efficiency and better experience that's building quarter over quarter over quarter. So we do see momentum in the second half and further acceleration as we get into 2023, even at the current level of placement rates in the current scale. We're also look.

To continue to simplify the business optimize support structures, how do we focus our energy where we can move the needle. The most so that work is ongoing as well and then to Richard's earlier point, if we do get an increase in volume through placement rate over time, we have natural economies of scale that will benefit the P&L over.

Todd.

Yeah.

Okay.

Thank you.

Your next question comes from the line of Brian Meredith from UBS. Your line is open.

Yes, Thanks, a couple of here.

Could you remind us.

What the potential impact here or is it from a consumer led recession on mobile subs as well as just growth as well as like average revenue per subscriber will you see that decline if you've got a kind of consumer led recession.

Yes, I think from a mobile perspective, I would say that.

First of all.

There still seems to be very strong demand for high end smartphones in key markets, even as we see pressure in the economy. The high end smartphone market is up year over year, and it's up in our core markets.

That's a really good thing, we see clients continuing to push for growth today to take advantage of their investments in <unk> and the relevance of the mobile device today, it's increasingly important for consumers. So that's that's helpful backdrop, I would say that the majority of our total economics and mobile are driven.

By our device protection subscribers, we've got $63 5 million global subs.

Whether a customer buys a new device or retained their old device. It doesn't move that number a significant amount obviously, if our clients are growing or shrinking in terms of net adds that can have an impact over time, but fairly moderated in base based on the nature of the subscription service, where I would see more pressure would.

Potentially less trading activity, if there were less mobile phone sales, which we certainly havent seen mobile phone sales are strong trade ins are very strong, but that would be the leading indicator if if trade and starts to slowdown.

That's not a big driver of total economics, the counterpoint would be used devices will become more valuable more attractive and there may be other ways for us to monetize it. So I think mobile is.

Relatively protected from any kind of short term shocks from a recessionary environment.

Okay.

But I'm just curious also because I know you've all talked about selling additional services per sub rate and thats been a big.

Does that slow down, whereas somebody would not take that optional applecare or whatever it is product.

No I don't think so I think we've seen really steady attach really steady churn I think consumers are inclined to protect high end devices generally and certainly if theyre more strapped for cash having protection in place is probably a good thing, but we havent seen through economic cycles really material changes.

In terms of the attach of the churn over time. So we don't expect that would be a big driver.

Got you and then I guess my next question just curious we've talked about lender placed but in the multifamily business, what's the impact of inflation. There I would imagine you get some pressure there as well potentially.

Yes.

<unk> there is some incremental increases in the non cat loss ratio.

A little bit of that as inflation, but I would say broadly it's more getting to in line with pre pandemic. So we saw more favorability in loss ratios as people were home more during the pandemic I think we've seen that normalize and obviously, we get rate adjustments on that product line to as needed and as justified.

<unk>.

Don't see a huge inflationary impact it's more just lining up with historical.

So it's more from a frequency perspective things are picking up rather than severity.

Correct and then just quickly last question Richard just curious.

Underlying loss ratio for global housing and it was a 47% when we adjust out some of the current year development and in prior year development and kind of what's the baseline kind of run rate loss ratio and that this is noncash benefit ratio.

Yes, when we back out the.

The reserving that we did the strengthening of the reserves that we get we're getting closer to the low <unk>.

I would say.

On the other hand call it 43.

The other hand.

I would say is keep our Keith articulated earlier, we do have inflation coming through there will be a lag in terms of when the rates and inflation guards come through so I wouldn't see that rate coming down faster than that asset <unk> 43, or lower than 43 anytime kind of in the next quarter I think over time, we're going to see.

That improve.

Probably probably go closer to 40 as we go through the end of the year into next year, so hard to predict because obviously, it's hard to predict what inflation is going to do for the rest of the year, but essentially as we're looking forward at our forecasting that's what we're looking at.

Thank you thank.

Thank you.

And your final question comes from the line of Grace Carter from Bank of America. Your line is open.

Okay great.

Hi, everyone.

So I just had kind of a quick clarification question, let's start from one of the prior questions.

So I guess thinking about the original.

Adjusted EBITDA growth targets for 2023, and 2024, I think average of 10%.

Just thinking about like the lower base I guess expected for 2022 I mean.

Should we just assume that the 2024 adjusted EBITDA levels.

Come out a little bit lower than maybe the original growth expectations implied or I guess, what is the likelihood that.

EBITDA growth over the next couple of years could accelerate sufficiently to get the kind of back in that original range.

Yes. It is.

Great question, and I would say that my commitment and the goal that we have in terms of financial performance is to deliver the original Investor day.

Look for 2024, so what that implies is we've got to accelerate growth beyond the original 10% in 'twenty two 'twenty three 'twenty four to make up for the shortfall in 2022, which is exactly your point. So that's certainly how we're thinking about at Grace, obviously, theres a lot of moving parts and there is a.

Lot of unknowns as we think about the economy and inflation. The good news is I think the Miss as we look at 2022 is entirely driven by housing loss ratio from inflation in particular from severity and because of the features within the product and the ability to get rate that naturally resolves itself.

Over time without a degradation in volume so.

Provided that that rolls through as we expect and hope that it will provided an inflation calms down. So our current thinking is inflation stays elevated through the end of the year begins moderating.

And moderates consistently through 'twenty, three and then sort of normalizes into 'twenty four if that happens we do feel good about our 2024 long term commitment and part of it is the strength of global lifestyle and in particular investment income in auto has been strong the business has been generating significant growth and then connected live.

<unk> and mobile in particular has been on quite a roll of the last handful of years.

Thank you and then I guess I just wanted to affirm that.

Kind of target combined ratio range that you had mentioned before and I think 84% to 89% in the housing book still holds even with the exit of.

Certain businesses and I guess, just kind of how should we think about the ability to stay within that range over the next few quarters.

Just given the pressure from inflation.

Still kind of waiting for the rate increases earned through.

Yes, I would say that we're going to.

Finished the year at least if we think about our forecast.

Today, and what's implied in that forecast when you unpack housing it may be a little a little above our range on the combined ratio ratio basis, probably at the low end in terms of ROE So pretty strong financial performance still overall based on those metrics, but let's say a little bit.

Worse than the range, we definitely think that 84% to 89% range over time is the is the right target for this business and the exit of a sharing economy I'd say it wasn't a huge business not a big driver and it doesn't significantly change the way, we think about combined targets.

Thank you.

You're welcome.

Well. Thank you very much everybody I appreciate all the questions and the interest in the company. We had a solid first half of the year led by the strength of the global lifestyle segment. We believe our business model remains well positioned as we've talked about even in a challenging macro environment.

In the meantime, please reach out to Suzanne Shepherd and Sean Moshier with any follow up questions. Thanks, everybody have a great day.

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

[music].

Sure.

Yes.