Q3 2022 Assurant Inc Earnings Call
Results with you today.
Joining me for Assurance conference call are Keith <unk>, 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 third 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.
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 <unk>.
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 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.
I will now turn the call over to Keith.
Thanks, Suzanne and good morning, everyone.
As we previewed last week, our third quarter 2022 results came in below our expectations. This reflected a more challenging macroeconomic environment and lower contributions from global lifestyle.
Following a very strong first half of the year, where we grew lifestyle adjusted EBITDA by 14% year over year. This quarter had more significant headwinds internationally, including unfavorable foreign exchange.
A modest uptick in claims and lower connected living program volumes.
While disappointing our results don't change our view of the inherent growth momentum in the lifestyle business.
We believe the actions we're taking to drive additional expense savings will also better mitigate potential further deterioration in macro conditions.
Looking at global housing the segment's performance was in line with our expectations for the quarter.
We're pleased with the progress we've made in not only increasing revenues through higher average insured values and rates, but also the transformation actions, we've taken to simplify the business and drive future growth.
Looking at the year to date performance through the first nine months of 2022 assurance reported adjusted EPS of $10 five.
<unk> is up 7% for last year, and adjusted EBITDA of $832 million is down 4%, both excluding reportable catastrophes.
As we evaluate our progress this year, we continue to believe we have a compelling strategy strong fundamentals and momentum with clients as we continue to align with leading global brands and maintain market leading positions across our key lines of business.
For example, we announced a further multiyear extension of our long standing partnership with T mobile.
This important contract extension provides us with increased long term visibility and our U S mobile business.
At the same time, it gives us greater opportunity to increase repair volumes through our over 500 cell phone repair locations with the ability to leverage this capability with other U S clients.
We've also made investments to support our product development around the connected home and we continue to engage and encouraging dialogue with key clients, creating a long term opportunity for growth there.
This also included supporting our largest U S retail client with the expanded relationship we announced earlier this year.
While macroeconomic conditions in Europe are challenging we continue to win new opportunities and recently expanded our global partnership with Samsung to launch Samsung care plus smartphone protection in six major European markets.
We now offer this solution across three continents.
This momentum combined with our partnerships with well positioned global market leaders should help us outperform through an economic downturn.
Turning to global housing, we've already begun a comprehensive transformational effort to position the business for long term success and we're pleased with our progress.
Consistent with our practice of actively managing our portfolio of businesses and reviewing it for strategic fit in addition to exiting commercial liability, we're eliminating our international housing catastrophe exposure.
You don't see these businesses as core to our strategy or our path to leadership positions.
As we execute these changes were designing a new organizational structure for global housing to better manage our risk businesses from our capital light oriented businesses as part of our transformational agenda and also to realize greater efficiencies.
We're finalizing our plans for implementation in 2023.
As we reflect on insurance overall results to date and current market conditions. We now expect 2022 adjusted EPS, excluding catastrophes to grow high single digits from $12 28 last year, driven by share repurchases and global lifestyle growth.
For the full year, we expect adjusted EBITDA, excluding catastrophes will be down modestly to flat with 2021.
This will be driven by high single digit adjusted EBITDA growth for lifestyle, even with additional macro headwinds and.
In fact on a constant currency basis, we expect global lifestyle to finish 2020 to align with our original lifestyle expectations of low double digit growth.
In global automotive, we still expect to outperform our initial expectations driven by tailwind from investment income and underlying growth in the business as we expand share with clients and add to our $54 million protected vehicles.
For 2022, we continue to believe global housing will decrease by low to mid teens, but we're pleased to see the initial improvements in our underlying results.
From a capital perspective, we remain good stewards.
Year to date, we have returned a total of $667 million of capital to shareholders, including proceeds from the sale of preneed and by year end, we expect to close two small acquisitions for a total of approximately $80 million.
These deals will strengthen our position in commercial equipment with attractively priced assets and minimal integration effort.
Yeah.
Looking ahead, given macroeconomic volatility we will exercise prudence in the near term relative to capital deployment. So that we can maintain maximum flexibility to continue to support our organic growth.
This doesn't change our conviction of the strong cash flow generation of our businesses.
Our view of the attractiveness of our stock, but rather as a reflection of the uncertain macro environment.
As the broader environment begins to stabilize and visibility improves we'll evaluate capital deployment to maximize shareholder value.
Looking to 2023, we're confident in the growth of our businesses.
We expect both our global housing and global lifestyle, adjusted EBITDA ex cats to increase year over year.
To that end, we're taking decisive actions to mitigate headwinds, while we maintain our relentless focus on growth.
The global housing business is poised to grow in 2023, and we started to see evidence of that in the third quarter as rate increases flowed through the book.
In the long term the business should provide downside protection, if we see a further deterioration in the U S economy.
We believe global lifestyle is positioned to grow in 2023. This.
This is based on expectations of continued strong underlying growth momentum, even while factoring in lower international business volumes and increasing claims costs.
We have also started several initiatives across the enterprise to drive greater operational efficiencies and leverage our economies of scale.
We're not pushing even harder to realize incremental expense savings given the increasingly volatile market.
We expect to finalize plans in the months ahead, so that we can implement in 2023 and beyond.
This includes optimizing our organizational structure and best aligning our talent.
Leveraging our global footprint to reduce labor costs, where possible.
<unk> to review, our real estate strategy, recognizing we have an increasingly more hybrid workforce and accelerating our adoption of digital solutions.
Our digital first strategies are yielding positive results in 2022, both in terms of delivering better customer experiences and meaningful savings.
As part of our 2023 planning, we're taking steps to accelerate digital adoption and automate processes, which will further reduce cost and improve the customer experience.
We're also applying the same principles to drive greater automation and self service throughout our functional areas.
With this in mind and considering how the overall business environment has changed we are reevaluating our long term financial objectives shared at Investor day.
In February we expect to share our 2023 outlook also factoring in the most recent business trends and macro environment.
This in no way changes our view on our business advantages.
Leadership aspirations or long term growth potential.
We continue to be well positioned with industry, leading clients as we focus on key products and capabilities, where we have market leading advantages.
We believe we have a compelling portfolio of businesses poised to outperform as we deliver on our vision to be the leading global business services provider supporting the advancement of the connected world.
I'll now turn the call over to Richard to review, the third quarter results and our revised 2022 outlook in greater detail.
Richard.
Thank you Keith and good morning, everyone adjusted.
Adjusted EBITDA, excluding catastrophes totaled $240 million down 11% from the third quarter of 2021.
Our performance reflected weaker results in both global housing and global lifestyle.
For the quarter, we reported adjusted earnings per share, excluding reportable catastrophes of $2 81.
Down 8% from the prior year period.
Now, let's move to segment results, starting with global lifestyle.
The segment reported adjusted EBITDA of $166 million in the third quarter, our year over year decrease of 6% driven primarily by connected living.
Excluding an $11 million, one time client contract benefit in connected living lifestyle earnings decreased by $22 million.
The connected living declined $18 million, which primarily from four factors first $7 million of unfavorable foreign exchange, mainly from the weakening of the Japanese yen.
Second lower margins in our device trading business from lower volumes. However, this is expected to improve starting in the fourth quarter, which we have already seen in October .
Third our extended service contract business was impacted by higher claims cost from wage and materials and we did make some additional investments in connected home.
And lastly, softer international volumes for mobile, particularly in Japan and Europe .
The decline was partially offset by continued mobile subscriber growth in North America device protection programs from carrier and cable operator clients.
In global automotive earnings decreased $4 million or 6%, primarily from lower investment income and higher losses in Europe .
Turning to revenue year over year lifestyle revenue was up by $29 million or 1% driven by continued growth in global automotive.
Global automotive revenue increased 9%, reflecting strong prior period sales of vehicle service contracts.
On a year to date basis, our net written premiums in auto were down 2% demonstrating the resilience of the business relative to the broader U S auto market, which contracted at a faster pace.
Within connected living revenue was down 4% year over year 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.
In the third quarter, we serve is $7 1 million global mobile devices supported by new phone introductions and carrier promotions from the growing adoption of <unk> devices.
For the full year 2022, we now expect lifestyle adjusted EBITDA to grow high single digits compared to 2021 led by double digit mobile expansion and global automotive growth.
Earnings in the fourth quarter should grow year over year, mainly from growth in connected living.
Moving to global housing.
Just the EBIT loss was $25 million, which included $124 million of reportable catastrophes.
As a retention level of event.
Hurricane and was the primary driver of reportable catastrophes in the quarter, along with the associated with restatement premiums.
Excluding catastrophe losses, adjusted EBITDA was $99 million.
Down $18 million or 15%.
The decrease was driven primarily by approximately $38 million and higher non cat loss experience across all major products, including approximately $24 million of prior period reserve strengthening.
Lender placed earnings were flat as elevated loss experience from $13 million of higher catastrophe reinsurance costs were largely offset by higher average insured values and premium rates.
The placement rate increased nine basis points sequentially, mainly from client portfolio additions, having a higher average placement rate.
The increase is not a reflection of the exploration in the U S mortgage landscape.
Multifamily housing increased non cat losses, including some reserve strengthening and an increase in expenses from ongoing investments to expand our capabilities and strengthen our customer experience, resulting in lower profitability.
Global housing revenue increased 3% from growth within several specialty offerings as well as higher average insured values of premium rates in lender placed.
This was partially offset by higher catastrophe reinsurance cost noted earlier from hurricane Ian.
For the full year, we expect global housing adjusted EBITDA, excluding cash to decline by low to mid teens from 2021.
With an increasing benefit in the fourth quarter from higher <unk> rate.
We're also evaluating our catastrophe reinsurance program as we approach the January purchases to ensure we optimize risk and return.
This may include increasing our retention level, reflecting the growth of the book of business stemming from inflation.
In the meantime, we believed the implemented rate adjustments will result in higher premiums that can help to mitigate the increase in cat reinsurance costs.
At corporate the adjusted EBIT loss was $25 million.
$2 million driven by lower investment income.
For the full year, we continue to expect corporate adjusted EBITDA loss to be approximately $105 million.
Turning now to holding company liquidity, we ended the third quarter with $529 million.
$304 million above our current minimum target level.
In the third quarter dividends from our operating segments totaled $143 million.
In addition to our quarterly corporate and interest expenses. We also had outflows from three main items.
$80 million of share repurchases $37 million common stock dividends and $6 million, mainly related to assurant venture investments.
For the full year. In addition to the $365 million of Preneed proceeds we expect incremental share repurchases beyond the lower end of our targeted range of $2 million to $300 million.
As always segment dividends are subject to the growth of the business is investment.
Portfolio performance and rating agency and regulatory capital requirements.
Turning to future capital deployment, our objective continues to be to maintain our strong financial position, while continuing to invest in our future organic growth.
However, given the interest rate volatility and uncertain global macro environment, we plan to be prudent relative to capital deployment in the near future.
In conclusion, while our third quarter results were disappointing we are confident that our fourth quarter results will improve.
And with the additional actions were taking to grow the top line and leverage our expense base, we are positioning ourselves for growth into 2023.
And with that operator, please open the call for questions.
Yes.
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 again pressing the star one.
Again, we do ASUR, while you pose your question that you pick up your handset to provide optimal sound quality. Thank you and your first question comes from the line of Mike Phillips from Morgan Stanley . Your line is open.
Good morning, Mike.
Hey, good morning, everybody. Thanks.
I just wanted to touch on the comments on 2023.
And you expect growth in most segments.
As I compare the two.
The stuff you gave in February where you were pretty specific with our financial objectives.
You gave some numbers by segment.
EBITDA growth here.
Here you were I believe you said you want to reevaluate.
<unk> and it sounds like you're also expecting a lifestyle continue to hire claim pulse so kind of wanted to kind of marry those and make sure. We're not reading too much into your wording of reevaluate in 2023 growth.
As compared to your objectives before.
Okay, Yes, maybe I can try to tackle that a couple of ways. So if you think about.
The outlook for 2022, if we just start with that obviously were below what we expected originally from Investor day.
Largely driven by the decline in the housing business as it relates to inflation, which we talked a lot about last quarter.
We had also expected lifestyle to even outperform our original expectations, when we think back to where.
Where we started the year and kind of what we signaled last quarter, obviously, we saw a softer Q3 and lifestyle.
We still expect lifestyle to generate strong growth as we think about 2022, so we talked about high single digit growth.
In lifestyle, but thats overcoming relatively significant foreign exchange rates. If you think about constant currency basis, we expect to be in the low double digit range, which was underpinning our lifestyle investor day commentary I would say that because housing is behind and lifestyle is sort of in line but.
Outperforming as significantly as we had hoped last quarter and we can talk about the third quarter.
We've said, it's prudent for us to.
<unk> closed the year evaluate how we finished look at the trends as we think about 'twenty three and 'twenty four there is a tremendous amount of turmoil in the global economy and the macro environment.
Trying to make sure we take all of that into account set our outlook for 2023 that will also be based on the expense actions, which were taking in the fourth quarter. We do expect international softness to continue I think foreign exchange will be a pressure claims costs are rising not a huge part of the lifestyle story, but still important we're trying to.
Take expense actions to offset that pressure and I think prudent for us to revisit and think about those longer term commitments to make sure that we're being as transparent as we can with the market.
Okay, Yes. Thank you that I think that makes sense.
I guess when you when you look to.
In this quarter.
One of the segments and the lifestyle with the normal margins.
Talk about how thats not going to continue.
Got it.
Yes, you mean in fourth quarter can you talk about why that is.
Yes, so there's a couple of things so if I think about.
The third quarter for lifestyle.
We certainly expected results in the third car to be lower than what we saw in the first half so that wasn't surprising, but obviously they came in even lower than we were expecting.
Maybe I'll unpack why we would've thought that would've been lower to start with and then what happened in the quarter. So I would say as we thought about Q3, we knew there'd be more losses in mobile from seasonality, we tend to see higher claims in the summer months, particularly for the clients, where we're on risk so that certainly happened and we saw.
An elevated level of claims beyond what we were expecting in the third quarter. If you think about the first half of the year, we saw tremendous favorability around mobile losses. So frequency of claims is lower than historic levels. We've done a really good job managing severity a lot of efficiency in our supply chain, but also less.
Aging walk in repair as well to drive down severity of claims and we thought that that positive trend line would continue in third quarter Theres, a little bit of a reversal mainly around the cost of acquiring devices. When we had to do replacement devices and just the sort of the mix of inventory that we had we expect to see that normalize more in into the fourth.
<unk> and beyond when I think about mobile losses year to date pretty in line with what we would've expected at the beginning of the year very much in line with what we saw in 2021, so choppiness between really strong favorability in the first half and then some softness in the third quarter.
We also saw accelerated investments around the connected home in Q3, which we knew would would continue.
And we had some favorability in the first half with investment income in order, which we knew wouldn't continue so we certainly expected Q3 to be down but.
In terms of the Miss to our expectations I would say 50% of that Miss is broadly international.
The combination of FX and softer volumes in a softer economy, particularly in Europe , and Japan, and then about half of it was domestic trading margins, which was probably more of a timing point in terms of devices being delayed.
To be received in our depots and that will reverse itself in the fourth quarter.
Talked about the mobile losses being another driver and then we saw a little bit of loss pressure on the ESC portfolio not a huge number but certainly there is inflation in the system and that's flowing through.
Okay. Thank you for all the color I appreciate it.
You bet.
Our next question comes from the line of Tommy joined from K B W. Your line is open.
Hey, good morning, guys, Thanks, and good morning.
So just.
Maybe stepping back a little bit and thinking from a high level just thinking about the step down I guess in this year's guidance from perhaps I guess six months ago back in May we've seen two sequential steps down. So can you just kind of frame how much of that step down has come from is expected loss cost the claims inflation side versus perhaps to.
<unk>.
Lower demand for your products and services I guess over in Europe in that a little bit domestically. So if you were just kind of bucket into those two categories. The step down in guidance over the year, how would you how would you do that.
Yes, I think when we sat here at the end of the second quarter. We certainly saw pressure in the housing business. No question that was the driver of the.
The step down last quarter offset by really really strong first half we think about lifestyle.
Record year in 2021, and then an incredibly robust first half we projected that trend line would continue in that favorability would continue I would say the adjustment that we're talking about now is entirely sort of backing out that favorability for the full year from lifestyle. So lifestyle like I said, it's going to come.
In very much in line with our original expectations from Investor day from the beginning of the year and the real impact is FX.
If I think about lifestyle overall, I would say domestic connected living we will finish the year very much in line with what we had expected. So a really strong year really robust growth global auto will be ahead of what we originally expected mainly driven by investment income, which we've talked about being a nice tailwind for the auto business.
<unk> that.
That favorability in auto I would say offset by softness in underlying international business results, mainly in Europe , a little bit of pressure in Japan.
And then we've got FX layered on top of that but again, ignoring FX pretty much in line and I would say auto outperforming in offsetting softness internationally and then housing is very much in line with expectations. If we think about what we expected in the third quarter.
<unk> came in very much in line, we've made tremendous progress to transform housing we've reacted with urgency I'm really proud of the way. The team has come together we've simplified the focus you saw the exit of sharing economy. We've signaled the exit of international housing related cat business where employ.
Renting a new org design to delineate between our housing risk and capital light to increase our focus drive even more efficiency and then just a tremendous amount of work on offsetting inflation, not just with expense discipline and prudence, but the work with <unk> that has started to take hold a little bit this quarter.
A lot of progress on rate 31 approved rates with states that are implemented in 'twenty to several more for early 'twenty. Three so just a lot of progress there and I'd say housing pretty much in line as we think about what we said last quarter.
Okay.
Thanks and to follow up on that what gives you guys confidence that some of the weaker pressures over in Europe , and Japan might not spillover into the North American side.
Yes.
We certainly expect the pressure.
In Europe and in Japan to continue I would say, obviously, they're both profitable markets for US Japan has been an incredible success story and I think even though there is some softness in the economy, we're very well positioned in the market and there is tremendous long term opportunity for growth and our team is doing an incredible job so I feel.
A really good long term about our position there Europe , even more challenged obviously with the economy and with FX and.
In that marketplace. So that we're seeing some softness I think that persists and continues we're taking actions to make sure. We're simplifying our focus rationalizing our expense base.
But nothing that we're going to do is going to destroy long term value disrupt what we do with clients or customers and then in North America, we've actually seen really robust results.
Our subscriber counts on mobile in North America postpaid are up sequentially. They were up year over year, obviously with the.
T mobile acquisition of sprint, but good momentum our clients are growing if you think about our device protection clients in the U S on the postpaid side.
They're gaining a lot of net adds I think 70% of the net adds are coming through our client the client partnerships that we have so that bodes well for device protection and then trade and continues to be strong as there is a lot of competition in the broader market, particularly domestically.
Got it thanks, and then just last one from me in housing you recorded the prior period development of $24 million, but full year guidance for housing didn't change so is that pre.
Your peer development already anticipated in the guidance.
So I think.
We certainly expected higher claims costs in the quarter.
That came through in prior period development versus current accident quarter development, and maybe Richard can share some highlights on that but I would say that.
The offset to the prior period development was the significance that we saw both in terms of rate.
AAV is a little bit, but mainly from all the rate adjustments that we've made over the course of the last year and then policy growth. We've got 26000 incremental LTI policies that came through in the quarter as well, which we can talk about but maybe Richard talk a little bit about the prior period.
Yes, exactly I think I think you nailed it in terms of the prior period development, obviously, when we closed Q2, we put.
We put some prior period development in the best number and our best estimate on the other hand, when we were looking at our outlook. We said inflation is high let's just assume inflation is going to stay at a very high level.
So we kind of I would say hedged our bets in terms of where the total loss ratio could go at the end of this year.
Call it not really prior period development, but just all in loss cost so.
That came through in a decent place there and that was able to absorb some of the prior period development.
All of the prior period development I would say 2014 was this year. So it is truly just a movement within the calendar year at $10 10 for the <unk>.
Prior years, and then as Keith said, our premiums were a little bit better. We are seeing the <unk>. We are seeing some new business come on and so that helped to offset.
Any other any other variance with the.
The prior period development that came in.
Got it thanks.
Okay.
Our next question comes from the line of Mark Hughes from Suntrust. Your line is open.
Good morning, Mark.
Yes. Thank you good morning.
The delay on the trading activity I got some questions on that.
Logistical cause.
<unk>.
Yes at a high level relatively simple so a client we expected a client too.
Send additional devices to us towards the end of the third quarter and that was delayed for a variety of reasons.
Still to be received in Q4, so it's really just a shift between three and four and it wasn't so much the the lack of volume from a margin perspective. It was the fact that we had staffed labor accordingly to be able to process and receive those devices. So there's a bit of a mismatch between the labor that we had in place in anticipation of the volume.
And then the volume being delayed.
For some logistical reasons in terms of appliance getting us those devices, so something that we expect to.
Right the shift in the fourth quarter.
On the reinsurance.
<unk> mentioned that you were looking at taking up your retention could.
Could you refresh me the timing of the.
Your renewals I think renewals that renews at a couple of different points through the year.
How do you anticipate what your early thoughts are.
The cost of that program for 2023 versus 2022.
Okay.
I already asked about the timing timing cost retention, if you could address those sure and maybe Richard you can start in terms of the timing and then I can add some color at the end.
Yeah, great. Thank you and good morning Martin.
So so when we when we think about our reinsurance program full year. This year will probably be about a $190 million in total cost in it and how are we looking at the reinsurance program.
Really we need to look at it in terms of total housing prices start with the total housing prices and housing prices have gone up in.
Inflation has been then boosting them other factors have been boosting them. So if you think about the insurance that we put on the properties, we're putting more insurance on.
And then that obviously needs we need that obviously results in us needing to purchase more insurance so really by it.
Just a function of the the overall book of business growing will be placing more insurance reinsurance on that premium will grow.
Think about it having a bigger book of business in more premiums means we do have exposure more exposure at the lower levels and a higher probability that those lower levels will be will be touched so as we look at it it's more of a proportional position that we would take and say, okay, well, what's the right new level for our retention. That's why we wanted to signal that.
Lower labor layer will probably go up it's just kind of.
The logical conclusion in terms of what's what's been happening in the market I would say as we've said a number of times. We are getting rate increases we are getting increases in average insured values. So we are getting premium increases the rise in the reinsurance cost and we are expecting some increase in reinsurance costs given the state of the reinsurance market.
That will be an offset to some of the premium increases that that we are getting so.
I would say sort of logical in that sense in terms of timing.
Typically purchase about two thirds of our reinsurance at the beginning of the year and then the rest of it at the at mid year, we always look at that that proportion could change as we get into the market and see see the dynamics of it.
Yeah, and maybe just one other comment I think at the highest level. We certainly expect the reinsurance cost increase to be more than offset by additional rate.
Both from the rate increases, but also from inflation guard the average insured value increases so even with a harder reinsurance market. We've got really strong relationships across a wide range of reinsurers, we partnered with over 40 different reinsurers.
<unk> performing business long term, we continue to simplify the portfolio, which I think helps helps us as we move forward and then definitely rising costs, but we anticipate that our rate will be more than sufficient to offset that.
Okay.
It sounds like what Youre seeing on the rate and your judgment at this point were more than offset both the underlying inflation and the higher reinsurance costs right.
That's correct, yeah, and if I think about.
Housing even if we just look at the third quarter revenues are up 3% year over year, if you back out the reinstatement premium.
From the premium line, we'd be up 8% year over year. So we had $35 million in reinstatement premium this year and $8 million in Q3 last year. So that's pretty meaningful up 8% I would say that's half from rate very little of that is from this year's AAV. So we put the AAV increase in July we talked about double digit.
Right as a result of AAV.
At three months.
I have in effect right. So it's really a 24 month cycle, we renew policies over 12 months and they take 12 months to earn we're three months into that 24 month cycle. So very little of the improvement is from AAV. Most of it's from all of the rate action. We've taken at the individual state level and then from the policy growth that we saw in the third quarter. So that will just continue to be.
Build and accelerate as as the full effect of AAV rate come through the program.
Your SG&A.
SG&A in lifestyle was up a point sequentially.
That number has been a little bit volatile.
Any change in the economics of the.
Agreements that you've got with the auto dealers or your carrier partners. I know you just renewed with T. Mobile is there maybe a little more sharing youre, having to do with those partners.
<unk>.
No so.
In terms of T. Mobile you are correct, we did do.
Our multiyear contract extension on top of the multi year extension that we got a year ago.
<unk> structure has changed as we pivoted from the in store repair to leveraging our 500 CPR stores, but in terms of the broad economics, I would I would say quite simply we protected the financial integrity.
The original deal that we had so we've restructured the way it operates but no impact to our EBITDA expectations for that business and then we further extended the agreement to protect that relationship over time, which is really significant in terms of giving us long term visibility into the U S mobile market. So no.
Nothing there that would create any economic.
<unk> to us in terms of the balance of clients I'd say.
Tremendous momentum still commercially with our clients.
Lots of focus on driving driving growth driving innovation, but no fundamental changes in deal structures and services provided so.
So we think about the softness in the third quarter and lifestyle.
Other than pointing to the broader economy and some of the impacts that I discussed earlier and nothing related to client deal related changes and then Richard I mean, everyone.
Yes.
Yes. Thanks, Thanks, Keith Yes, exactly exactly minor changes to client contracts, but I would say the increase in the overall SG&A is reflecting some increases in the business growth in the business.
Particularly in the auto business, obviously, theres distribution costs with regard to that and we have been.
The business over the last year. So there's some commissions and Theyre also in our prepared remarks, you heard us talk about some additional investments in our home solutions.
Yes.
Junk of that obviously is expense in the quarter. So those would be the two main drivers market.
Okay.
Thank you very much.
Your next question comes from the line of Gary Ransom from Dowling <unk> Partners. Your line is open good morning.
Gary.
Good morning, Larry.
I was wondering if you could add a little color on the exit from the international housing.
How long will that take and what.
Size, the magnitude of what's being reduced and that it's not clear to me whether that includes.
Caribbean exposure as well, but could you talk about that a little bit sure and it does include the Caribbean exposure and.
And really anything that we write internationally that is cat exposed homeowners related business.
Made the decision strategically to exit.
I would say it will be done writing policies.
Most of it will be done this year, there's a little bit that will finish at the end of the first quarter, but we wont be writing new policies as of Q2 'twenty three and then depending on how some of the final discussions unwind maximum we'd have a 12 month run off on those policies in some cases shorter so.
That's to be finalized and determined but in terms of the scale of it I would think about maybe $50 million and net earned premium.
And in a year as being kind of typical.
It probably takes 10% of our tower. So if you think about the tower that Richard talked about our reinsurance tower, 10% of that goes to protect the international exposures.
And strategically it is.
Been a challenging market.
Hard to get right.
Theres been rising costs as we know of claims we expect rising cost of reinsurance.
A lot of complexity to not only manage the business, but negotiate the reinsurance that backs it and ultimately with modeled LLS.
Fairly limited effect all in EBITDA, certainly EBIT ex cat, but all in EBITDA with cat.
Not hitting our target levels of return risk adjusted so we're making the decision to further simplify and.
And focus and places, where we think we have clear competitive advantages and where we're differentiated where not just the risk taker, we're providing deeply integrated more differentiated services that wasn't the case with this business and we werent able to get the returns we wanted.
Some of this business coming through the OPI business as well.
No no.
No okay.
It's all just separate.
Homeowners business basically, yes separate homeowners some of it where our reinsurers that were a direct writer.
But none of it connects to what we do in LTI and LTI is really unique.
Incredibly advantaged business in terms of how we operate how we're integrated and we create much more value than just being a risk taker and we're able to get rate and we're able to drive the right level of profitability over time in that business. So it's quite a different.
Business to manage versus what we've been working with in the international property side.
Great. Thank you very much and I also wanted to ask about the two acquisitions I know you had the.
<unk> acquisition maybe.
Maybe it's a couple of years ago now.
But.
Do those all fit together.
Is that is there some consolidation potential in just I wonder if is that a market size that.
So it will be additive to the growth your.
Youre thinking about over the long run.
I think thats exactly right.
If we think about the <unk> acquisition and then the acquisition that we're that we're talking about now is really to build on the strength that we've got in that market around commercial equipment leasing and finance equipment.
We've had good results and strong growth and we operate this business both in our housing side and the lifestyle side. So we're going to evaluate how to drive more synergies through the organization as we move forward, but absolutely it's capital light fee income we're talking about.
Small tuck in acquisitions of existing clients that are high performing we're already underwriting the business and it's really just buying the administrative capability and the scale to drive that forward. So we definitely see growth in this line of business and we think it can accelerate as we as we make some what are really quite small acquisitions, but can add a lot of value to our franchise.
Okay.
Sure.
Yes, you said that some of it's in housing and some of it is in lifestyle, I guess I sort of thought of it as <unk>.
Sort of similar to the auto business, but I was wrong on that.
Very much I think we right two different product lines, when we think about heavy equipment and commercial equipment. Some of it is service contracts some of it is physical damage.
Operates very consistently really predictable strong profitability.
And thats been the legacy of how we've been set up as an organization. So one of the things that we're focused on now is as I talked about some of the housing realignment between risk based homeowners business and fee income capital light is just thinking about how do we create maximum efficiency and effectiveness organizationally, how do we create clarity.
In terms of where we want to focus to drive growth what is the mindset, we need leading various different products and then make sure that we've got.
The least amount of friction and how we're organized as possible. So more changes to come as we think about our go to market strategy longer term.
Okay.
Thank you very much.
Actually just one more maybe a bigger picture question when Youre thinking about all of these macro impacts of inflation foreign exchange and.
And then putting that into context of how you were thinking about 23 and 'twenty four before.
I'm not even really asking whether you what you think about hitting.
24, or not but just what just how youre thinking might have changed and what.
We've had these couple of disappointments in the second and third quarter.
What does that do for your thinking.
Thinking about the outlook as we go into 'twenty, four and maybe even longer.
Yes, I think it probably.
We step back and reflect on just how uncertain and complicated the environment is that's true for assuring it's true for most companies today right. So there's a lot of market volatility market uncertainty interest rates are moving quickly. The economy. Obviously is going to is going to shift over the course of the coming quarters, and we'll see how that.
Land. So there's just a recognition of the complexity and then like I talked about earlier, we new housing was going to be weaker this year, we thought the outperformance in lifestyle would.
Would make up that gap as we thought about 2024.
We certainly expect to continue to see the housing growth, it's no doubt going to grow as we think forward over the next couple of years, but the question Mark is around can can lifestyle outperform at the level that we would have needed to in order to offset that housing softness in housing is probably more of a delay than a pivot in terms of what our.
Or it's really just that we're a year behind where we thought we would be but we are seeing evidence of significant improvement and I think right now given the uncertainty is particularly in the international markets just taking a step back like I said finish 2000 and finished the fourth quarter.
Deliver on a really strong plan in terms of what we expect to accomplish in 'twenty three relative to expenses as well as driving the right outcomes with our clients and then stepping back and revisiting what's possible as we think about the longer term and then provide some color on a more informed basis in February .
Okay.
Terrific. Thank you very much.
You're welcome.
Your next question comes from the line of John Barnidge from Piper Sandler Your line is open.
Good morning, John .
Good morning. Thank you very much you've had an expanded partnerships in the lifestyle business announced this year.
Had a couple of questions on that in light of inflationary pressures. One can you talk about how you manage that inflationary volatility and then can you contrast that with <unk>.
Is that pressure actually lead to more partners looking to outsource more of their service management and refurbishment of mobile devices.
Yes, it's interesting if I start with.
The second 0.1st just on outsourcing.
And this ebbs and flows over time, but.
I think.
As we think about a more challenging economy going forward. If we think about a recessionary environment oftentimes will see clients focusing on core and the same for US right. How do we focus on the things where we can generate the greatest amount of return how do we prioritize whats critically important to the company.
I think clients do the same thing so as clients re prioritize their focus there may be opportunities for them to say hey is there someone else in the market that is better equipped to help me with something because it's just not the burning priority of the moment. So we will see how that evolves that sort of happens over over time, but it's certainly reasonable to expect.
As we continue to build scale and as we have better and better capabilities that are efficiently operated we can provide.
A great source of value to our partners over time, so I think that hopefully that trend continues.
In terms of the.
The volatility in lifestyle.
From a macro environment I think if you step back and look at the totality of the year.
We've signaled some puts and takes around kind of the inflationary environment and lifestyle, we see.
Strong investment income certainly blowing through the auto business, which is the.
The biggest source of our portfolio. So that's a positive we've seen mobile losses as I talked about earlier performing quite well.
Not because of inflation, but because frequency of claims is reduced a little bit and then how we're doing with controlling severity through locking repair et cetera, and then we've had favorability in GAAP losses on the auto side, which we've talked about and then two thirds of the time, we're not on the risk.
And we're sharing that risk back with our partners. So that leaves us with a third of the deals where we're more let's call it more exposed to those pressures.
And we are seeing losses on the risk side escalating it's not a huge part of the portfolio. It's not a big part of our narrative this quarter, but certainly on the ESC side cost of parts and labor a little bit on the auto side as well and then there's labor inflation and we try to offset labor inflation with digital.
Digital initiatives and investments in.
Optimizing our operational transformation efforts, so those would be the big highlights on balance not a huge driver for the year, but certainly <unk>.
Facts and softness internationally, which which is we're feeling more of that as a pressure. We expect as we go forward and I do think continued elevation.
Claims and then our job will be to.
Make sure that we've got the right pricing in place with clients that were restructuring deals and we're trying to drive more stability over time.
Thank you that's helpful and then following up on that.
I wanted to go back to the pre announcement you talked about simplifying the business portfolio, you talked about exiting commercial liability and international housing catastrophe.
Have you completed that simplification of the business portfolio or could there be additional niche lines you look to exit in the near to intermediate term.
Yeah, Great question I would say.
I think we've had a very successful track record of managing the portfolio and you've seen us do that consistently over many years.
There is certainly more things that we'll evaluate in terms of smaller product lines and making sure that we're investing in places where we have clear competitive advantages I think about.
A strong right to win and the size of the price needs to be meaningful.
And there are probably other pockets, where we could where we could continue to refine the portfolio over time and I think that will continue permanently right. That's always going to be a part of our DNA is to look to optimize and create more focus on things that can more significantly move the needle and try to limit the distraction for the company.
<unk> focusing energy on products that are smaller don't contribute significantly to the profitability of the company if that effort can be better placed elsewhere to drive more meaningful growth those are the choices and trade offs that our management team is making on a regular basis.
Thank you very much and my last question you talked about $12 million of buybacks in October does that seem like a reasonable run rate for the fourth quarter.
Given the M&A transactions.
Yes, maybe I'll offer a couple of thoughts and then certainly Richard can can jump in I think when we step back and think about capital management at the highest level, we've talked about our focus on continuing to be very disciplined in terms of how we think about our capital.
We've indicated interest in being balanced between share buybacks and M&A. If you think about where we sit year to date, we've done $567 million in share repurchases and then $80 million, we signaled in M&A. So repurchases has been a big part of the story this year nearly 90%.
Of the capital that we've deployed in that respect. So I think we feel good about meeting our commitment on the preneed return we feel good about meeting our commitment to in a normal year do $2 million to $300 million of share repurchases.
But we also recognize the market is really challenging there is a lot of interest rate volatility and we want to be more prudent in terms of capital management and it's really just about maintaining flexibility protecting our financial strength and then looking for the market to stabilize and for visibility to improve.
And then as we look towards the future we see our stock price is extremely attractive right. So as we think about future M&A will have to have a very high hurdle rate in terms of the M&A relative to what a share buyback looks like today, but Richard is anything else you would add.
Yes, I guess I guess that just to add onto what you said I mean, we in terms of share repurchases. This year were.
Already through October .
Little over $550 million in addition to that $113 million.
Dividends.
That brings us to about say $670 million. So we had targets at the beginning of the year. We wanted to make sure we hit them for the year and I would say we have hit them, which is why we signaled.
Would be at the lower end of that two to 300, we had talked about earlier in terms of.
Repurchases outside of the premium.
So any proceeds that we repurchased as Keith said, it's uncertain market conditions, and we want to make sure. We continue to invest in ourselves and we continue to.
Do the right things and remain disciplined with capital So no change in our philosophy, our capital philosophy. The discipline, we have keeping the balance sheet very very very strong as Keith said and we've always said, we always look at deployment of capital between share repurchases and M&A and in these markets with the share price where it is.
The share price, obviously from our perspective is extremely attractive today, so that creates a higher bar for M&A.
Okay.
Thank you very much for your answers.
Great. Thank you.
And your next question comes from the line of Jeff Schmidt from William Blair. Your line is open.
Hi, Good morning, everyone. Good morning, good morning, Jeff.
In global lifestyle, I understand the inflation impact being low on the claim side, just because you don't retain a ton of the risk.
What about for SG&A, how much of that is employee count.
What level of wage inflation are you seeing there kind of relative to last year.
I think we're I think we're generally doing a pretty good job.
Offsetting wage inflation with automation and our digital efforts so.
Certainly paying our employees more as important in the war on talent make sure that we're staying competitive but I think we're doing a really good job offsetting that with our efforts on driving automation through our operations.
Okay.
In global housing I'm, just trying to understand the numbers.
I adjust for add back that reinstatement premium brings.
He brings that attritional loss ratio down to I think 38%.
And then if there was.
If you back out the unfavorable development it brings it down quite a bit more of $33, 34%. So I'm trying to understand you are talking about the pressures that youre seeing there I think you are pushing for double digit rate increases I guess.
Where does that pressure being filed or I guess why is that.
You said if loss pick is lower the days.
Yes, maybe Richard just talk I think we don't we don't see it at that level, but maybe Richard just talk about our view on kind of the normalized loss ratio in the quarter.
Yes.
And I would start it's a great question, Jeff I think.
I would first start by when we go in for rate increases we are looking at it kind of bottom line.
So you have to take in Youre looking at the non cat loss ratio I think you have to look at all in if you look at our combined ratio for the quarter with Hurricane Ian.
It's over 100% obviously.
So that will be taken into account when when we go in and go through rate increases and essentially what we ended up doing that with our non cat loss ratio. There are a couple of different moving parts. If you think about it from.
Our net earned premium part, we we have cats that.
The reinstatement premium we have to add that back but also from the incurred claims we have we have to take out the prior year development when we add back the caps.
To get to kind of like from 68% that you see in the supplement to about a 45% and then we take out the $24 million.
Prior period development, we get to about 40%.
A little bit lighter, so theres, maybe a numerator denominator.
But I think the point your point is a good one you would say, 40% that was slow, but it's really the all in cost, including cat, including the expenses the tracking et cetera that are taken into account when we when we go for rates.
It's a bigger number on an all in basis.
Right got it okay. Thank you.
Thank you.
And your final question comes from the line of Grace Carter from Bank of America. Your line is open.
Good morning, everyone.
I was wondering in the lifestyle book, just given how much of.
That risk that you all don't retain I mean, it seems like the inflationary pressures and a bit more persistent than maybe a lot of people originally hoped.
I know that you had mentioned in the past that you hadn't really been seeing too much pushback from your clients regarding your profit sharing and reinsurance arrangement I was just wondering if given the persistency of inflationary pressures in that that actually starting to show a little bit in the results in the quarter.
Those conversations have evolved any in the past few months.
No I would say the clients that are that are currently in profit share and reinsurance structures. That's the preferred approach for those clients. Those are programs are quite typically quite large very sophisticated clients understand the.
The program economics, and Theres, a tremendous amount of transparency in those deals and there is sufficient profitability and those structures that can absorb the inflationary pressures. So from a client perspective, no interest in moving away from those structures and then clients, where we're we're more on the risks and over time, we'll certainly see.
Discussions evolve and emerge as clients become more sophisticated and interested in and taking on more of the risks that may evolve over time, but generally speaking, it's been pretty steady and I wouldn't say, it's a huge source of discussion with our teams.
Perfect. Thank you and I guess, just kind of thinking of how the lifestyle book has evolved over time.
Moving from the sort of more of the protection and towards more fee based services and then there's the <unk>.
Recent emphasis on.
Growing fee based services like <unk> upgrades whatnot.
The level of macro sensitivity today versus maybe what we've seen in downturns in the past or do you consider it to be pretty even.
I think it's pretty stable I would say when you think about fee based services, even what we do for clients that are reinsured that doesn't show up in fee income. So if you think about administrative fees and underwriting fees, where we're not sitting on the risk it still flows through.
Outside of the fee income line, but it behaves a lot more like fee income right. We get stated fees for providing insurance and related services. So that's still a significant driver of our overall economics and that doesn't show up in the fee income line and then I think the thing. We're excited about is the balance that we have today, we do.
A lot more work with partners across the value chain. So trade in related services are important to our clients and increasingly important and it gives us another way to add value for our customers. It's more defensible competitively and then we can create other unique ways to drive value longer term, because we're playing in a broader set of.
<unk> services across the ecosystem. So from that perspective, I think its really favorable and it does create more balance but the.
The bulk of the economics on the on the parts, where we don't take the risk are also quite predictable and that's evolved over time as well.
Thank you.
Wonderful well thanks, everybody.
Just a couple of closing comments from me. We believe we performed well in what is a really challenging macroeconomic environment and remain differentiated in terms of our business model with compelling long term earnings growth potential and cash flow generation capability. We look forward to closing the year strong and we will talk to everybody on our.
<unk> fourth quarter call in February in the meantime, as usual please reach out to Suzanne Sean with any follow up questions and 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.
Okay.
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