Assurant, Inc.

Welcome to Assurance First Quarter 2019 Earnings Conference Call and Webcast. At this time, all participants have been placed in a listen-only mode and the floor will be open for your questions following management's prepared remarks. If you would like to ask a question at that time, please press star 1 on your touchtone phone. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. We ask that you please pick up your handset to allow optimal sound quality. Lastly, If you should require operator assistance, please press star zero. It is now my pleasure to turn the floor over to Suzanne Shepard, Senior Vice President of Investor Relations. You may begin.

Thank you, Christina, and good morning, everyone. We look forward to discussing our first quarter 2019 results with you today. Joining me for assurance conference call are Alan Kohlberg, our President and Chief Executive Officer, and Richard Jajo, our Chief Financial Officer. Yesterday, after the market closed, we issued a news release announcing our results for the first quarter of 2019. The release and corresponding financial supplement are available on Assurant.com. As noted in both documents, we updated our key financial metrics for the enterprise and our operating segments to align with the company's strategic focus and the financial objectives shared at our recent investor day. We believe these metrics will be a better indicator of performance going forward. We'll start today's call with brief remarks from Alan and Richard before moving into a Q&A session. Some of the statements made today may be forward-looking. Forward-looking statements are 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 report. During today's call, we will refer to non-GAAP financial measures, which we believe are important in evaluating the company's performance. For more details on these measures, the most comparable GAAP measures, and a reconciliation of the two, please refer to yesterday's news release and financial supplement. I will now turn the call over to Alan.

Thanks, Suzanne. Good morning, everyone. Overall, we are pleased with our results for the first quarter. Performance across our three operating segments was strong, especially mobile and global lifestyle. Our results reaffirm our belief that we are well positioned to sustain our performance long term. Our leadership positions and innovative offerings should continue to support double digit earnings growth with a more diversified and higher quality mix of business. During the quarter, we continue to execute on our strategy. In global housing, we repositioned the segment for growth. First, by beginning to stabilize underplaced, and second, by continuing to drive profitable growth within multifamily housing and our other specialty property offerings. In multifamily housing, we grew revenue 7% from both our affinity and property management partners, now protecting 2.1 million renters across the U.S., Our focus remains on investing in our key capabilities to deliver even more value for our clients and their renters. To that end, we continue to roll out our new point of lease tracking capability to seamlessly integrate our products and services and gradually increase attachment rates. With our vertically integrated capabilities, broad product suite, and emphasis on the customer experience, we built a leading position in the PMC channel. We continue to expect strong top and bottom line growth going forward. We've also further strengthened our leading lender place franchise by renewing three key partnerships in the quarter. And over the past five months, the renewals completed represent nearly one-third of our loans tracked. This bodes well for the future as lender place earnings have started to stabilize after years of market declines. Over the next three years, we believe we will generate a 17% to 20% operating ROE, including an average expected catalog. In global lifestyle, we are aligned with leading brands to bring innovative products and services to market. In connected living, this includes services like our premium tech support, which creates greater value for the end consumer and adds new and important profit pools. We now protect more than 47 million covered mobile devices, up 26% year over year. As we highlighted at our Investor Day, our new partnerships with companies like Verizon, Comcast, Charter, KDDI, and the renewal and expansion of our T-Mobile relationship to include Metro by T-Mobile demonstrate that our vertically integrated capabilities continue to drive value for our customers and serve as a significant differentiator for Assurant. We made additional progress integrating the warranty group acquisition, realizing operating synergies as planned, and finding ways to unlock additional value from our stronger, more scalable global automotive business. For example, this quarter we introduced Pocket Drive, our new technology platform that will expand our offerings beyond service contracts. We expect to launch pilot testing in the second quarter with select dealer partners. We are pleased by the continued strong revenue growth and innovation in this business for the 48 million vehicles we protect worldwide. This all supports our long-term view that we can continue to grow a global lifestyle net operating income at least 10% annually on average over the next three years. Turning to global pre-need, we produce solid, consistent earnings and cash flows in the quarter, supported by our growth from pre-funded funeral policies and favorable mortality trends. Base sales were also strong with a 7% year-over-year increase from new distribution partners within our final need product. Over the next three years, we believe we can achieve a sustainable operating ROE of 13% in global pre-need. In addition to setting these long-term segment targets at our investor day, we also provided several key enterprise financial objectives. Over the course of 2020 and 2021, we expect to grow earnings per share on average by 12%, with double digit expansion of net operating income. In addition, starting in 2019, we intend to return $1.35 billion to shareholders over the next three years in the form of share repurchases and common stock dividends, illustrating the confidence we have in our future cash flows. We recognize that executing against our plans for 2019 will be an important step in delivering on these long-term targets. For this year, we continue to expect to grow operating earnings per share, excluding catastrophe losses, by 6% to 10% from the $8.65 we reported in 2018. This will be driven by double-digit earnings growth and disciplined capital deployment. Looking at results for the first quarter of 2019, we reported net operating earnings per share, excluding catastrophes, of $2.33, an increase of 9% from $2.14 in the prior year period. This was driven by earnings growth, partially offset by shares issued last year related to our TWG acquisition. Net operating income, also excluding catastrophes for the quarter, was up 30% to $149 million due to TWG contributions and organic business growth. At the end of March, holding company liquidity totaled $354 million after returning $51 million in share repurchases and $37 million in common stock dividends. Overall, we're pleased with our performance in the first quarter. We're confident in our ability to continue to expand earnings and cash flow. This will allow us to continue to invest in our business and sustain our track record of returning excess capital to shareholders over the long term. I'll now turn the caller to Richard to review segment results in our 2019 outlook in greater detail. Richard?

Thank you, Al, and good morning, everyone. Let's begin with global housing. That operating income for the quarter totaled $73 million, an increase of $2 million from the first quarter of 2018. Excluding mortgage solutions in the prior year period, earnings declined as growth in multifamily housing was offset by higher catastrophe costs and decreased profitability in our specialty property offerings. Lower earnings in our special property offerings were mainly the result of higher non-CAT loss experience in our small commercial property products. For the segment, reportable catastrophes in the quarter totaled $9 million, level with last year. Global housing revenue was down, reflecting the sale of mortgage solutions. Excluding mortgage solutions, revenue was up 5% due to growth in small commercial products, multifamily housing, in our sharing economy offerings. Lender place revenue decreased due to lower placement rates, partially offset by higher premium rates. During the quarter, the placement rate declined 13 basis points year over year, and only two basis points from year end 2018, in line with our expectations. As noted earlier, we have revised our financial supplement disclosure following investor day. Specifically for housing, we've aligned our key financial metrics to report the loss, expense, and combined ratios for the entire segment. For the first quarter, the combined ratio for global housing was unchanged from the prior year period at 86.7%. This falls within our longer-term range of 86 to 90%, including an average expected capital gain. For full year 2019, we continue to expect global housing to realize modest earnings growth, excluding cat losses. This will be driven by continued expansion of our specialty offerings, most notably multifamily housing. As we look to the second quarter, we expect higher non-cat loss ratios, reflecting typical weather patterns, and we will monitor the elevated loss experience in the small commercial products. Slender placed earnings will reflect the additional reinsurance coverage we secured earlier this year, but underlying profitability is expected to remain stable. We also continue the process of migrating clients to our new operating platform, as this will lower expenses, longer term, and more importantly, further enhance the customer experience. Moving to global lifestyle. The segment reported earnings of $101 million for the first quarter, a $45 million increase year over year. This reflects $30 million after tax from TWG, including $10 million of realized synergies and $2.8 million of intangible amortization. We also benefited from strong organic growth in the business, led by Connected Living, which grew earnings by 54% in the quarter. This was mainly due to mobile subscriber growth from programs launched over the past two years. In addition, we realized higher trade-in volumes from carrier promotions and strong margins in repair and logistics. Segment earnings were also supported by more favorable global automotive results for Legacy Assurance compared to the prior period, which was marked by some higher one-time expenses. Looking at total revenue for this segment, net earned premiums and fees were up $763 million, mainly from the $651 million TWG contribution. Excluding TWG, revenue was up $112 million, or 12%. Organic revenue growth was driven primarily by mobile programs launched during the past two years, mainly in Asia Pacific and North America. This growth was across various distribution channels and from multiple profit pools, including device protection, premium tech support, as well as repair and logistics. Auto revenue, excluding TWG, was up 20%, benefiting from strong prior period sales in our TPA distribution. Foreign exchange volatility, primarily from unfavorable currency movements in Argentina and Brazil, partially offset growth in the quarter. Looking at the full year, we continue to expect strong earnings growth due to full year TWG contributions, including $25 to $30 million of incremental expense synergies, mainly in global automotive. In addition, mobile should remain a significant contributor, driven by organic growth from new and existing programs. It's important to note that the first quarter was particularly strong compared to last year, reflecting the timing of new phone introductions and carrier promotions. To the balance of the year, We expect typical mobile seasonality and some additional pressure from anticipated declines in our legacy credit business within financial services. Investments to enhance and strengthen our capabilities, particularly in mobile and auto, will also be important as we look to stay on the forefront of innovation for the future. Now let's move to global premiums. The segment recorded $12 million of net operating income, a $2 million year-over-year increase. Higher investment income and lower mortality compared to the prior year period were the key drivers. Revenue and pre-need was up 6%, mainly driven by growth in U.S., including sales of our final need product. Global pre-needs outlook for the year remains unchanged, with earnings roughly flat with 2018. We will continue to manage expenses closely as we implement the segment's long-term growth strategy drive more sales to our funeral home distribution, work with new partners, and expand our portfolio of products. At corporate, the net operating loss was $19 million, relatively flat with the prior year period. For full year 2019, we expect the net operating loss to be similar to 2018, creating additional leverage with our expense structure as we grow. During the capital, We ended March with $354 million in holding company liquidity, or about $129 million above our current minimum target level of $225 million. Dividends in the quarter from our operating segments totaled $78 million, lower than segment earnings as we typically wait until later in the year for greater visibility. In addition to our poorly corporate and interest expenses, key outflows included $51 million in share repurchases, $42 million in common and preferred dividends, and $8 million of investments, including strengthening our repair and logistic capabilities in Canada. In the second quarter, through May 3rd, we purchased an additional 224,000 shares for $21 million. For full year 2019, we expect dividends from our operating segments to approximate segment operating earnings. These dividends should provide flexibility to invest in our businesses and return capital to shareholders subject to market conditions. While our 2019 capital deployment plans take into account our potential purchase of IK Asistencia, in light of our investment in TWG, we are evaluating how IK fits into our expanded Latin American operations. We are exploring strategic options for IK and have delayed the put call option until February of 2020 to complete our review. In summary, we're very pleased with our strong performance in the first quarter and remain focused on delivering on our commitments for the full year. And with that, operator, please open the call for questions.

The floor is now opened for questions. At this time, if you have a question or comment, please press star 1 on your touchtone phone. If at any point your question is answered, you may remove yourself from the queue by pressing the pound key. Again, we do ask that while you pose your question, that you pick up your handset to provide optimal sound quality. Thank you. Our first question is coming from John Nadell from UBS.

Hey, good morning, John. Good morning. I have a couple of questions, and then I'll get back in the queue. One question. that I'm curious about. The number of renters policies, you know, that's growing really solid double-digit year over year. I think the growth rate this quarter was 13%, 13.5%. But your actual net earned premium is growing high single. Is there just a lag effect there that I'm missing, or is there some pricing competition going on?

Hey, John.

Good morning.

It's Richard. You know, I think there's probably the two parts of it. I think, first of all, we're expanding in the property management channel. I mean, we have really good growth and strong growth. You know, as we've said and Alan said in his remarks, we're investing in the channel to stay at the forefront of innovation and allowing renters to come in and, you know, onboard more quickly. You know, so there's some expense there. think there's probably twofold. I mean, we're being very competitive in the market, but also there is a lack effect between, you know, when we bring on, you know, we write the premium when the premium rolls through. But I would say no big changes in margins that we've seen.

Okay, that's helpful. And then just one housekeeping item. So your outlook for 2019, I'm just curious, you know, we've seen that Property reinsurance costs, particularly in the state of Florida, are up pretty significantly. I just wonder whether you already knew that, had that baked in to your outlook, or if that was more of an estimate, and is there any impact we should expect as it relates to your outlook for reinsurance costs impacting your overall outlook for 19 years?

Yeah, hi, John. Yeah, thanks for the question. Yeah, and actually we did. I think the market had some visibility in terms of, you know, the cat cost in Florida, the cost of the hurricane, Florida hurricane cap bond. So we had a, you know, I'd say a large part of that into it. As we come into the year, it might be a tiny bit higher, but nothing that would impact our outlook whatsoever.

John, the other thing I would add, we talked about it yesterday. We really expanded the multi-year component of our reinsurance, which really stabilizes costs for us over time.

Gotcha. That's helpful. Thank you. And then the last one, I'm just thinking, overall, how did 1Q earnings compare with your own sort of internal expectations? It sounds to me like you're signaling that, in particular, Connected Living had a pretty solid, maybe favorable quarter. How should we think about, you know, you talk about seasonality, you talk about a little bit higher loss ratios. as we move from 1Q into 2Q for that particular business, can you help us by sizing maybe in a dollar amount or a range how we should think about the earnings path for connected living from 1Q to 2Q?

Yeah, so certainly if we look at the quarter, we're pleased by the results, and mobile was stronger than we had expected, really driven by trade-in volumes. The late introduction in Q4, some of the smartphones pushed volume into Q1 more than we had expected. So as we head into Q2, we will have seasonality in connected living, both the normal summer where we just have a greater loss experience, and then trade-in volumes usually people are anticipating, you know, the next smartphone introductions.

And how do, is any chance we can talk about how to think about that in terms of dollar amount of earnings? Typical seasonality, is it like a 5% quarter over quarter decline?

You know, it's hard for us to predict that. What I would say is we remain very confident in our long-term outlook that we've given for lifestyle, which is that 10% plus average annual earnings growth that we it's harder to predict.

Gotcha. Okay, thank you.

Once again, if you do have a question, you may press star 1 on your touchtone phone at this time. Our next question comes from Christopher Campbell from KBW. Your line is open.

Yes, hi. Good morning. Congrats on the quarter. Thank you. Yeah, first question is just on the higher than expected losses in housing. I guess, how much of the year-over-year increase was due to the higher commercial losses?

Was due to, I'm sorry?

The higher attritional, like specialty property losses?

Yeah, I mean, there was a part in there due to that. I mean, that was, you know, I would say the primary part that kicked up the loss ratio year-over-year, as we've sort of pointed out. That's within, just for everyone, that's sort of within the specialty property component of housing, which was about $120 to $500 million. That specialty commercial property part is about 20%, 25% of that. So it's a small component. And we didn't have great experience. We got an increase in severity, you know, in that book of business. And as we've said, we are monitoring it as we go forward.

Got it. And is that more attritional or was it just large losses this quarter?

Really an increase in severity, I would say, you know, in the book. So no, you know, few, several big things, but an increase in severity overall.

Okay. And then question on repurchases. I mean, is $50 million a good quarterly run rate to think about going forward?

I think the way I think about that, Chris, is we've said that we expect over the next three years to return $1.35 billion to shareholders via common stock, dividends, and repurchases. That translates into roughly $300 million a year over the three years in repurchases. But you have to remember, we buy via 10b-5-1, and so we can't go in and out of the market that easily.

Okay.

That makes sense.

And then just in mobile, I mean, any new clients or, you know, relationship extensions that you guys are looking at? I mean, how does the sales pipeline look relative to last year?

Well, I think we're very pleased with our progress in mobile. You know, you heard in my prepared remarks, I rattled off the four or five major new clients that we've started relationships with in the last 18 to 24 months. And as I mentioned at Investor Day, we will be ramping up later this year with Metro by T-Mobile. which has the potential for about 3 million subs to be added over time to our portfolio. So we're very focused on executing on that. But the pipeline remains strong. Our innovative offerings have really differentiated us and given us a lot of traction in the market.

Okay, great. And then I know you guys have talked about 5G being a possible tailwind further out. I guess just any additional clarity that you have on the development of 5G and then the potential impact on your business?

Got it. In 5G, what we've talked about is ultimately when that gains real consumer traction, there will be a handset replacement cycle that will occur. I think it's still quite a ways in the future if you look at the timing of the rollout of 5G, but that is a long-term tailwind that will help the business at some point.

Okay, great. Well, thanks for all the answers. Best of luck in the second quarter.

All right. Thanks, Chris. Thanks, Chris.

Once again, if you do have a question, you may press star 1 on your touchtone phone at this time. Our last question is coming from John Nadell from UBS. Your line is open.

Hey, John. Hey, good morning. It seems everybody is tied up on AIG this morning. Sorry, guys. But I care.

We appreciate that. Thank you, John.

I'm curious your commentary and I appreciate your commentary around the delay of the put call option on EK into early 2020. I guess I'm more curious about how you talked about evaluating how that business fits in. Given the acquisition of TWG and the integration you've got going on, can you expand on those thoughts a little bit? I know you don't want to get ahead of things here, but I'm just curious what that means.

Yeah, so John, let me provide a little context. So when we originally signed the agreement, which was in late 2013, it was really all about creating more scale for our business in Latin America, which we, in key markets like Mexico, that's a priority. With the warranty group acquisition, we added dramatically more scale in the key markets like Mexico and Argentina and Brazil. And given that, it causes us to step back and say, how do we think about this business? has performed well it's actually slightly ahead of the expectations we had when we made the original investment but we have scale now about america so it's a good chance for us to step back and think about what's best for our shareholders got it understood okay and um and then you know alan one of the i guess one of the critiques that i hear you know uh from time to time and

And based on the, you know, disclosures that we get from you guys, I think it's not so easy to counter this critique. It's an overarching belief that, you know, your position, and I'm talking about lifestyle here, your position, assurance position in the value chain is one that suffers maybe from, you know, lower economics. relative to maybe a service provider like a Verizon or another, and that growth as you grow, your incremental margin may actually be lower. Is that a fair critique, or is there some way that you can provide some data that counters that? I think that's one thing that weighs a little bit Your growth rate is – the top-line growth rate looks terrific, right? I mean, in particular, these last couple of quarters. I'm just trying to – I'm trying to see if there's a way to counter that overarching belief or perception.

I don't think that's at all the way we think about the business. So we're aligned with the market leaders. We are expanding our role in providing services to them. We've talked about the addition of major new services in the last 18 months like premium tech support. And if you look at the long term, we have grown earnings in that business 10% plus over the last six years with an outlook that we're going to continue to be able to do that. So it's a very good business where we are critically important to our partners in delivering the consumer experience that they want. And so we don't tend to think about the margin of each service because some of them are fee income, some are not. What we look at is can we continue to grow profitably and expand and deepen our relationships with our key clients, which we've done very well.

And if we think about lifestyle discreetly, Can you remind us what your return target is for that particular segment?

We don't have one because what we've said matters in lifestyle is it's not a traditional insurance business. So thinking about returns is not the way to think about it. What we've said is we can grow earnings and we to do it. Now, we've said overall for the enterprise, we'll be disciplined in that growth with overall enterprise ROE gradually rising over the next three years. But for lifestyle specifically, it's about profitable earnings growth.

Gotcha. And the last one I have for you, you talked about this some time ago. I don't remember if at Investor Day there was any real commentary around this, but I'm thinking about global auto and the potential growth that there may be some opportunity to drive down repair costs, given your better size and scale and maybe some ability to renegotiate some contracts with repair facilities and dealerships. I'm just wondering if there's any update on that front. I know it's not something that – into your synergies. I'm just wondering if you can give us an update on any progress.

John, I appreciate the question. Let me maybe start just a little more broadly on the TWG synergies, and then I'll come to that one specifically. If you recall, when we did the deal, we announced that we had a hard-cost energy target of $60 million run rate pre-tax by the end of 2019. We are on track, and we expect we'll deliver that by the end of this year. With that said, then, we really turned a lot of our focus to other sources of synergy, ranging from revenue synergies. You know, one of the things we recently rolled out in Japan is a partnership with KGDI around their connected home. We're leveraging our relationship with the legacy warranty group capabilities to deliver in the home in Japan. So that's an example of a revenue synergy that we're going hard after. And then on the claims costs, absolutely. We now have an extraordinarily strong position in the market, leveraging our knowledge of cars, the repairs, the things that go wrong. And so we're looking to how do we leverage that. Now, a lot of that benefit will flow to our clients. Many of our programs are reinsured or quota shared with our clients. But that strengthens our relationships with those clients, and we'll get some benefits. So we're early days on those. It takes time to implement that. But it's another significant source of synergy that, as you said, is not reflected when we talked about the expectations for the DWG deal.

Got it. And since you still have plenty of time, I may as well throw one more in. If I think about the migration on the lender place side, the migration to a single operating platform, I know you haven't really quantified what expense saves you think can be generated from that over time. I'm wondering if you could give us a sense. It doesn't sound like it's that big of a contributor. in 2019. I'm wondering, 2020 and beyond, if you think that could be a material impact to the earnings for global housing.

John, hi. It's Richard. I'll take that one. We're starting to onboard clients. We're getting some good reaction from the clients. I mean, first and foremost, our investment in the program is to position us where a great customer experience going forward. And, you know, the investment we've made is, you know, being well-received. So I think that's probably the biggest point on that. It's a multi-year project. And I think as we look forward, I don't think there will be a threshold moment where in 2020 we would see a big impact of expenses, but it would be over time and over, I would say, over the next years. On the other hand, I think as you look at the overall expense ratio for the housing area, we are really managing expenses tightly, both in the housing area, but overall as a company, as you've seen also in our overall corporate loss and stability there.

John, the important thing on lender placed, I think for everyone to remember, is we've now said that we've got that business more stable with significant upside if we get into an accounting downside. Specifically on our single source platform for 2019, it's a modest amount. It's really more about as rich as the longer term and the consumer experience.

And that expense ratio for that segment, should we see that coming down over the next couple of years? And is this maybe part of that driver?

I mean, it's hard to predict now where the expense margin is going to go. I think when we We look at the overall expense ratio in the first quarter, also taking into account the variety of businesses within it, whether it be lender-placed, multifamily, whatever. We have brought it down, managing it well. Would I expect it to go down in the future as we get through the single source platform? I would expect it to go down, but it's hard today to kind of predict what would happen in 2020 exactly.

Okay, maybe it's just the redefinition or redefining the segment loss ratio, expense ratio, combined ratio, but I thought you guys used, you know, previously we're talking about two to four points over time of expense ratio reduction. Is that no longer the case or is it just been, I guess, muted or hidden, if you will, by the aggregation of that expense ratio for the total segment?

I think, John, what I would say is we still feel very good about the long-term impact of that, and we've reaffirmed that 86% to 90% combined ratio over time for this segment.

Okay.

That's helpful.

Thank you so much.

Thanks, John. All right. Well, thanks, everyone, for participating in today's call. We're pleased with our first quarter performance and believe we are off to a strong start for the year. We look forward to updating you on our progress on our second quarter earnings call in August. In the meantime, please reach out to Suzanne Shepard or Sean Mosher with any follow-up questions. Thank you.

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