Assurant, Inc.

Welcome to Assurance third 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'd like to ask a question at that time, please press star 1 on your telephone keypad. If at any point your question has been answered and you wish to remove yourself from the queue, please press 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, Jack, and good morning, everyone. We look forward to discussing our third 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 third quarter 2019. The release and corresponding financial supplement are available on Assurant.com. We'll start today's call with brief remarks from Alan and Richard before moving on to 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 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. I will now turn the call over to Alan.

Thanks, Suzanne. Good morning, everyone. Our third quarter results were strong, driven by continued momentum in our global lifestyle business, where earnings increased 35% year over year. Growth was mainly driven by mobile, which benefited from new and existing clients. We now support 52 million mobile subscribers, an increase of 18% year over year. At the same time, we invested in our business to support the launch of new offerings and client programs. while expanding our infrastructure to support future growth. These investments, which will continue into the fourth quarter, will help sustain double-digit earnings expansion and strong cash flows long term. In the third quarter within Global Lifestyle, we launched a new partnership in Japan with Rakuten, a large e-commerce retailer. We are now providing mobile device protection for their existing and expanding mobile networks. Given our shared commitment to provide a superior customer experience, our offering also includes a fully digital claims experience and a rapid four-hour mobile delivery service. In the US, we renewed our 13-year partnership with DISH Network to continue to provide extended service contract protection for satellite receivers and set-top boxes. These partnerships are a testament to our differentiated capabilities lessons we've made to drive more value to our partners and better experiences for their customers. Our market success with new and long-term clients positions us well to play a key role in the connected living ecosystem, supporting mobile carriers, OEMs, and cable and satellite operators. As we look to further enhance the customer experience, last week we announced our acquisition of CPR, a leading provider of local device repair services. With more than 700 franchise stores globally, this investment broadens our fulfillment options, providing customers increased choice through same-day repair options. Longer term, we believe we can drive incremental revenue growth and operational efficiencies as we cross-sell protection programs and other services. In global automotive, we remain focused on identifying opportunities to leverage our leadership position to scale in key global markets. In China, We recently refocused our operations to capitalize on the sizable auto opportunity, including the growing electric vehicle market. This includes a new partnership with the leading Chinese OEM focused solely on electric vehicles. This supports the expansion of our auto business globally while also gaining further insights into the evolving electric vehicle market. Overall, our offerings and new partnerships support our Investor Day objectives for Global Lifestyle. We believe that we can grow net operating income in the segment by at least 10% on average from 2019 to 2021 and continue to produce strong cash flows. Moving to global housing, I'd like to start by thanking all of our employees who supported our policyholders during Hurricane Dorian and Tropical Storm Imelda. As we pre-announced, we incurred $36 million of after-tax losses, mainly related to those events. Our relentless focus on customer service remains a competitive differentiator. This quarter within our lender place business, we renewed another three client partnerships accounting for 3 million track loans. Looking at the past year, we've now renewed client relationships representing more than half of our track loans, further solidifying the strength of our franchise. Overall for the segment, we are focused on continuing to deliver strong cash flows and better than market return on equity. targeting between 17% to 20% return on equity with an average CAT load. This will be supported by the expansion of our specialty property offerings, including multifamily housing. Turning to global pre-need, we produce strong earnings, excluding a one-time adjustment, which Richard will detail later. Pre-need assets are up 4% year over year, reflecting growth in phased sales. Additionally, we have seen a shift to a multi-pay mix of business, which will further strengthen our ability to sustain solid returns and cash flows. We remain confident that we can deliver above-market operating return on equity of 13% long-term. Looking at our key financial metrics of the first nine months of 2019, net operating income, excluding catastrophes, was up 17% to $435 million, mainly from TWG contributions, including realized synergies, as well as significant organic growth. We also reported net operating earnings per share, excluding catastrophes, of $6.96, an increase of 9% year over year. This was driven by strong earnings growth, partially offset by the impact of shares issued last year for the TWG acquisition. At the end of September, holding company liquidity totaled $385 million after returning $103 million to shareholders in the quarter. Through the end of the third quarter, we returned a total of $279 million to shareholders. Year to date, we're pleased with our progress against our 2019 commitments. For the full year, we still expect earnings per share growth between 6% to 10% compared to 2018. We remain confident in our ability to deliver on our Investor Day objectives, to expand earnings by double digits, drive strong cash flow, and return $1.35 billion to shareholders through 2021. To best ensure that we deliver on these commitments, we're focused on a few critical multi-year priorities, our people, customer experience, and innovation. Our people are and always will be central to our success, and we will stay focused on finding ways to attract, retain, and further develop our top talent and strengthen our culture around the world. Customer experience remains a key competitive differentiator for our organization. Our focus will be on finding new ways, whether through technology, new offerings, or other means, to raise the bar on the experience we create and deliver to end consumers. Doing so will also result in deeper relationships with our key clients, particularly in global mobile, auto, and multifamily housing. And lastly, innovation. We will put even greater emphasis on driving how we will innovate across our business to support the ever-connected lifestyle of consumers globally. I'll now turn the call over to Richard to review segment results in our 2019 outlook in greater detail. Richard?

Thank you, Alan, and good morning, everyone. Let's begin with global lifestyle. Segment reported earnings of $102 million for the third quarter, up $26 million year-over-year. As Alan noted, performance was driven by strong results in mobile, which reflected continued subscriber growth from carriers in Asia Pacific and North America, including the launch of Metro by T-Mobile in July. In the U.S., trading volumes also increased year-over-year, and Europe benefited from better operating performance. In global automotive, earnings were up $4 million, reflecting organic growth, particularly in the U.S. Total revenue for this segment was up $208 million, or 13%. The increase was driven by connected living growth, primarily mobile expansion across our suite of offerings for carriers, OEMs, and cable operators. To a lesser extent, we also saw growth with extended service contracts. Auto revenue fell 4% relative to a strong quarter last year. Growth reflected prior period sales in our national dealer and TPA channels. As we had previously highlighted, we expect to accelerate investments to support growth, particularly mobile, in the fourth quarter, mainly reflecting initial program startup expenses for new clients and our strong pipeline. This should result in modestly lower earnings for lifestyle in the second half of 2019 compared to the first half, but in line with our original expectations. Looking ahead to 2020, earnings expansion will moderate as we will grow up a much higher base in 2019, which benefited from a full year of TWG contributions. While growth may not be linear, we still expect earnings to increase at an average annual growth rate of 10% over the period 19 to 2021. Moving to global housing, net operating income for the quarter totaled $42 million compared to $19 million in the third quarter of 2018. The increase was primarily due to $31 million of lower reportable catastrophes. Excluding reportable caps, earnings declined $9 million. This reflected lower income from lender placed, driven by year-over-year decline in placement rates, and policies in force, as well as a less favorable non-cap loss ratio. Losses from our small commercial products improved from the first half of this year. In the quarter, we strengthened our reserves to account for recent loss trends and will continue to monitor claims experience closely. Turning to revenue, global housing net earned premiums and fees declined, reflecting the sale of mortgage solutions in August 2018. Excluding mortgage solutions, revenue grew modestly, driven by our multifamily housing and specialty property businesses, partially offset by declines in lender placed. Looking at lender placed in greater detail, the placement rate declined six basis points year-over-year and remained unchanged sequentially, consistent with the anticipated portfolio changes. Looking ahead, due to the insolvency of one of our clients, we expect our tract loan count to decline by approximately 600,000 over the next few quarters. This block of business represents approximately $70 million of annualized revenue and is expected to transition starting in the fourth quarter. For global housing overall, we continue to expect net operating income for 2019 to be down modestly. excluding CAT losses through the elevated small commercial losses incurred this year. Lender-placed earnings, excluding the higher CAT reinsurance costs, will likely be down slightly compared to 2018, rather than flat, once we take into account higher non-CAT losses and the reduction in loans referenced earlier. We expect sustained growth in multifamily housing and expense management to partially mitigate the declines. Now let's move to global pre-need. The segment reported $7 million of net operating income, a $9 million year-over-year decrease. The decrease was driven by an error in the calculation of our deferred acquisition costs over a 10-year period. The charge was immaterial to any period, but aggregated to $10 million in the third quarter. Excluding the charge, earnings were $17 million, up modestly from the prior period. driven by both higher income from real estate joint venture partnerships and increased assets. Revenue in pre-need was up 6%, driven by continued growth in the US, including strong sales of our final need product. We now expect global pre-needs earnings to decline due to the one-time accounting adjustment. Excluding the adjustment, results would have trended in line with our original expectations for the year. At corporate, the net operating loss was $21 million, up $2 million compared to the prior year period. This was a result of the lower tax rate due to the net loss in the quarter. The net loss was primarily driven by our investment in EK Assistencia. For the full year 2019, we still expect to approximate 2018 levels, or roughly $85 million. As we announced in May, we began a process to explore strategic options for EK. In the quarter, we recorded a $125 million charge to net income, reflecting our intent to sell the asset. The charge is based on the current estimated value of our 40% ownership interest, the value of our put call option, and the cumulative foreign currency losses. However, as the process is ongoing, there can be no guarantees that we will ultimately conclude a sale. Turning to the holding company liquidity, we ended September with $385 million, or about $160 million above our current minimum target level of $225 million. Dividends in the quarter from our operating segments totaled $217 million. In addition to our quarterly corporate and interest expenses, key outflows included $65 million in share with purchases, $42 million in common and preferred dividends, and $28 million mainly related to a contingent payment for a block of flood policies acquired in 2016. In the quarter, we also had cash outflows of $39 million related to expenses from refinancing debt at a lower interest rate. We are pleased we were able to secure new 10-year senior notes and attractive coupon lowering our overall interest cost to approximately $80 million after tax on an annualized basis while lengthening the maturity of our borrowings. For the full year 2019, we expect dividends from our operating segments to approximate segment operating earnings. We brought up nearly 90% of segment net operating earnings as dividends to the holding company through the first nine months of the year. Overall, these dividends should provide flexibility to invest in our businesses and return capital to shareholders market conditions. In summary, we've demonstrated strong performance in the quarter. We remain focused on delivering profitable growth and meeting our financial commitments for 2019 to serve as a stronger foundation for 2020 and beyond. 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 1 on your touchtone phone. If at any point your question is answered or you wish to remove yourself from the queue, please press 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 comes from the line of Mark Hughes with SunTrust. Your line is open. Hey, good morning, Mark.

Good morning. Morning, Alan. Morning, Richard. Richard, you had talked about the guidance, both of you did the 10% annual growth between 2019 and 2021. Did you make a commentary about 2020 in the course of that?

Yeah, Mark, you know, so as we will always do and have done in our fourth quarter earnings call in February, we'll provide a lot more granularity on how we think about 2020. But we're still very confident in the view that we provided back at Investor Day of, on average, annual growth of 10% plus for lifestyle, 12% plus for EPS. You know, the challenge in 2020 for lifestyle is we've had such a strong growth in 2019 that we have a much higher base, and we had a full year of the TWG synergies. That's going to make it just harder to sustain that level of growth in 2020. But the business is well positioned, and we feel our franchise is strong.

Your point is that it will be hard to sustain this level of growth, but you still feel confident in the guidance that you provided. Is that it?

Yeah. Yeah, Mark, that's correct.

Okay. And then from a TWG perspective, I think your outlook for cost, you said that there are cost efficiencies you set at the higher end of the range of $1 billion. Anything more, any other opportunities you see on a go-forward basis, either from a standpoint of cost efficiencies, you know, the efficiency of your repair network that we might anticipate?

Yeah, I think, you know, if we step back, we feel very good about the TWG acquisition and the integration. As we said earlier this year, we've achieved our synergy commitment publicly ahead of plan. With that said, we continue to look for growth opportunities. The thing I mentioned on the call about our new partnership in China this quarter on electric vehicles, we would never have achieved that without the warranty group. And so over time, we're going to look for other opportunities like that that will enable us to grow revenue, not just improve the profitability. So I think we're well positioned. And, you know, at this point, we're a global market leader in auto, and we're trying to leverage that scale everywhere we can.

Then last question on the lender place business. You've held steady in terms of placement rates the last couple of quarters. I think there's been some mix that's influenced that. When you talk about on an underlying basis, it seems like some of the data, at least on early delinquencies, is suggesting an uptick. And I wonder whether... you're seeing any impact of that or what's the normal timing where you would see an impact on your rates if early stage delinquencies are starting to move up?

Yeah, I think it's fair to say we're not really seeing anything in our business at the moment. The reality is in that business, it is a big counter cyclical hedge. We don't tend to place until it's later in the cycle. The loan has moved into serious delinquency, foreclosure, So if there is any slowdown starting to happen, you know, that will benefit us later. Thank you. Thanks, Mark.

John Nadell with UBS, your line is open. Hey, good morning, John. Good morning, John.

Thanks. Good morning, Alan. Good morning, Richard. So I think this is the first quarter, right? that the year-over-year comparison within lifestyle is fully inclusive in both periods of the warranty group, correct? So the revenue growth was, I think, X currency, 14, 14.5% year-over-year. Is that, Ellen, as you think about 2020, is that the piece of the growth rate where you say, you know, probably a little bit more challenging to sustain that? on a year-over-year basis, and therefore, you know, that growth rate maybe slows down, and that's the reason why earnings growth slows down? Or is it really just the fact that you've got such a faster pace of earnings growth in 2019 owing to things that you mentioned like the expense synergies?

Yeah, John, appreciate the question. So the challenge with revenue is, as we've talked about in prior quarters, if we change the contract structure, which happens often with our clients, our revenue could go down or go up. but it has really no effect on our earnings. So we tend to focus much more on the NOI in that business. And as I mentioned, we've had such strong growth this year. We have a full year of the Warrant Group synergies. It's hard to build off of that at the same level that we've grown in 2019. We also mentioned several new clients on this call. We have others we didn't mention on the call. We're continuing to invest, and our pipeline remains very robust for global lifestyle overall.

Okay, that's helpful. And then I just want to think in terms of order of magnitude. Last quarter, you know, you guys appropriately sort of gave us some help on unexpecting that lifestyle earnings in the back half of 19 would be, you know, down modestly from the front half of 19. As you look at the third quarter of lifestyle, was there anything that was sort of in with your expectation there was that in line because i mean that's a pretty modest i mean that is definitely a modest year-over-year decline we should you i guess i i know you don't want to give guidance for you know any single quarter but is that the kind of pace of decline that's you know in you know that we should expect and you know as we look forward to the fourth quarter uh yeah i'll take that hey john um

I think, you know, as we looked at it, we came into the first half of the year, we basically are looking at half years together. So we were looking first half, second half, and signaled that we thought the second half would be lower than the first half. I think as we sit here at the end of the third quarter and are looking at the second half, it really is coming in line with our expectations. I think we've seen some of the trade-in volumes go down as we had anticipated given the strong first half of the year we had. At the same time, we've seen strong growth you know, in Asia Pacific, the U.S., improved profitability in Europe, which we had been planning on, too. So overall, we're in line with our expectations, as Alan said in his opening statements.

Okay. And then I just had one more, and it just escaped me, so I will re-cue. All right.

Thanks, John.

Thanks, John. Thanks.

Michael Phillips with Morgan Stanley. Your line is open.

Hey, good morning. Good morning, everybody. Good morning. I guess another crack at the prior question with 4Q, if we look at your guidance for this year, you're kind of a little bit above the midpoint right now. And I guess if we couple that with your, you know, the last comment, two half being a little bit less than one half, is, you know, you don't give, I guess I don't see the extra incremental expenses that you're putting into mobile services. on a quarterly basis of what you did this quarter. But should we expect the amount of investment expense in the fourth quarter to be accelerated from third quarter from what you did or in line with the third quarter? And I ask that to think about kind of how we're thinking about that range of six to ten given where you already are today and what the extra expense might be in the fourth quarter.

I think it's fair to say in the fourth quarter, we're going to have accelerated investment. We are very encouraged by the new clients that we're ramping in the pipeline, and we're investing to deliver future growth and profitability. So, yes.

Just to clarify, when you say accelerated, you mean on top of not just first half, but on top of third quarter as well, correct? Correct.

Yes.

And I just, in addition to that, when you say the six to 10%, you're really talking about Assurant, you know, overall EPS. I am, that's correct, yeah. Yeah, and we've talked about, you know, small commercial being out there, some continued declines in financial services. So there are, you know, a couple headwinds that we're taking into account when we're giving that range to you.

Okay. Okay, thank you. I guess just two kind of smaller ones real quickly. You mentioned the mobile growth specifically in Europe. was strong, and can you talk about maybe what's kind of driving that?

Yeah, so mobile growth has been strong in all regions. In Asia Pacific, especially Japan, it's really new clients and new programs. In Europe, it's really been a couple things. We've leveraged our global supply chain capability out of the U.S. to really strengthen our supply chain in Europe, and that's been a big driver. We've also been very disciplined with expenses, which has helped NOI growth. But we're encouraged. We're seeing strong growth in effectively all regions of the world in mobile.

Okay. And just lastly, and this one doesn't get a lot of attention, but in lifestyle, the global financial products, I mean, decline there was kind of more than expected, at least expected for me. Any anomalies in the quarter there? And then kind of the margins continue to slip a little bit there. So any kind of cut on that segment? Yeah.

I think, you know, what we said before, Mike, is that, you know, the segment, that line of business isn't run off domestically. There's probably a little bit of effects going on in there as well. So, yeah, it was down in the quarter.

Okay, so we kind of, yep, sure. All right, thank you.

All right, thanks.

Christopher Campbell with KBW, your line is open.

Hi, good morning.

Good morning.

I guess first question on the global housing, the guidance decline there. I think last quarter you guys had said that it was, you thought like the loans track would be like, I guess, relatively like, I guess, kind of what changed the guidance this time?

Yeah, well, yeah, thanks, Chris. I guess, you know, one of the things that, you know, we pointed out in the opening remarks, I think, is, you know, part of the need for the change, which is the insolvency of one of our clients, and we see those loans transitioning away in the fourth quarter. that will have an impact on us. And we've also seen year over year a small increase, but an increase in the non-CAT loss ratio. So we're taking those two factors into account to kind of change the outlook and say before we had said that it would be flat, now we're saying it would be down a bit.

Okay, got it. So what we're seeing this quarter is not related to the loans that the competitor picked up, but these are like additional loans that were a client insolvency. Is that the way to think of it?

Yeah, that's right.

That's right, Chris. Okay. Okay, great. And then, you know, CPR, I mean, it sounds like it's small. Is there going to be any revenue or EBITDA impact from that that we should be modeling in?

The way to think about CPR is, you know, we're in the business of delivering superior customer experiences. And the way it's evolving is our traditional depot model, you know, the big facilities works really well for buyback and trade-in, and that's going to continue to be a very important driver. But increasingly, consumers are asking for same-day, same-store type repair. CPR gives us that capability. So over time, it'll be potentially a significant growth driver for us, but it's going to take us time to integrate it, build it into our offerings, get our clients to offer it. But we're excited. It gives us the capability to deliver yet another really superior customer experience.

Got it. And should we be thinking about incremental investment costs as you try to kind of unlock the synergies for that that could impact lifestyle segments?

Nothing more than we've already talked about. We expect to accelerate investments in Q4, but that alone is not going to be a big driver of it.

Okay. Great. And then, you know, you reviewed the EK stake this time and took the charge. I mean, are there any other underperforming areas that you're kind of looking at across the portfolio of products that, you know, you're looking to prune to improve results?

So, you know, we go through a regular process with our board, looking at everything we're doing and discussing whether we feel like it's still strategic or not. You know, EK, interesting company. When we made that investment six years ago now, It was really about growing to scale in Latin America with additional fee-based offerings. Over the last six years, our strong growth in LATAM and then the warranty group acquisition, we now have a much stronger franchise in Latin America, which is what led us to take the opportunity to reevaluate. It doesn't fit as well as it did six years ago. So we'll continue to look for things, but I think we feel very good about our portfolio at this point. You've also seen us be over the years very disciplined stewards of the capital of our shareholders, and we'll continue that as we go forward.

Got it. And then just kind of unpacking the charge, a bunch of it was FX and, you know, part of it was derivatives. So I guess, you know, was there like an underlying, I mean, was the marks like all attributable to that or has the value of the EK franchise been materially impaired over the last few years?

Yeah, I think that, you know, we can break the charge down into a couple of things, you know, total charge being 125 million. The first thing is, as you pointed out, Chris, was, you know, $41 million is really related to the cumulative change in FX or the FX loss, I would say, the weakening of the peso since our acquisition some five years ago. So that's 41 million. The other 84, four of it was a deferred tax asset that we took down. And then the other 80 million is really the difference between, you know, what we have up on our books for our 40% interest and the 60% interest obligation we have to buy the rest of the 60% and the market value, you know, should we sell the company? And again, as I said in my opening comments, you know, we are in the process, we have advanced in a process, but we can't say today that we will conclude a process. So, you know, still a ways to go there and we'll keep everyone up to date as we always do.

Okay, wonderful. Thanks for all the answers. Best of luck in the fourth quarter.

Okay. All right. Thanks, Chris. Gary Ransom with Dowling & Partners. Your line is open. Hey, good morning, Gary. Good morning, Gary.

Hi. Good morning. I wanted to follow up on the EK charge, too. When I look back at five years ago, you put in $110, and probably a lot of things happened in between, and now there's a $125 charge. I assume there was some Marking up along the way. And I just wondered if you could help me rationalize the beginning and end of the two pieces.

Sure. Sure. I think, you know, first of all, when just to level set everyone, we talk about $110 million. That was for the 40% interest that we had during the course of time. We haven't marked up the asset. We've kept it on the books. Obviously, through time, we've gotten income from the asset. There have been dividends out from the asset. So that's changed the book value significantly. And really what we're coming to now is after five years and during that five-year period, there actually has been a pretty good weakening of the Mexican peso to the U.S. dollar, $40 million. So that's a third of the charge. The other two-thirds are really, you know, one part is based on the 40% interest we have and the book value we have today and our expectations of, you know, sale price for that. And then the other is on the 60%, we actually have a call put that we've talked about in the past, and that's out of formula. So we're looking at the market value that we could have in a sale versus what that formula gives us, and that's the other part of the markdown.

And, Gary, the only thing I would add is when you look at the EK franchise, it remains strong, and that's why we've had a process ongoing that we'll see where we end up. But it is a good company. Just for us, as we think about where best to deploy our capital, it's not 100% certain that's the best thing we should do.

Okay, so in other words, part of the charge really relates to the 60% you didn't actually buy yet that's feeding through this put call option.

Yeah, that's exactly right. I mean, obviously we have that, you know, we call it an option, it's a put call option, right? So, you know, more or less an obligation to purchase it. So as we've gone on and said, okay, now we're in the sales process, that's given us visibility in terms of potential pricing. So, you know, we take into account you know, what that is versus what we would sell it for. And that difference we've put up in the book. So, you know, putting it at our best estimate today.

And that's been mark to market every year along the way. I mean, maybe not as thoroughly thinking about it and intent to sell, I realized, but that's had a value in there.

Well, you just hit the nail on the head, Gary. I mean, it really, we've been holding it until the third quarter as an operating entity with the operations. As Alan said, it's performed fairly well during our, our period of ownership. It's really in this third quarter that we've said we've advanced in a process. Now we have an intent to sell. What's the sales price? And obviously, we're talking about in Mexico, in today, and the environment and climate, et cetera. So we take all of that into account in the current estimate.

And just one thing to make clear, this has no effect on your buyback and capital return, correct?

Well, I would say, if anything, it could potentially be a net positive because it could give us excess capital if we sell it. Because remember, we've taken into account in our investor day that we would hold it. So it would give us excess cash, and then we would see what we would do with that excess. Capital as we go forward, either return or hold it.

Yeah. And Gary, the 1 thing I would add is we remain committed to our expectation of returning 1.35Billion dollars to shareholders in 2021. You know, as Richard said, if we do end up ultimately with excess capital, you've seen our track record of returning it. But at this point, it's too early to say anything other than we are still committed to our 1.35Billion through 2021.

All right, thank you. That's very helpful. I think I've got it now. I wanted to go to one other topic on mobile. Okay. And just as you talk about all of the flow of business, the pipeline, and I think we all know there's a delay in how you invest and you launch the program and then you start customers starting to pay and it builds up over time. I'm just trying to think of the timing. If you have things in the pipeline, is some of this actually – going beyond our 19 to 21 window? Are we actually setting up? I know we keep talking about out through 21, but when I think about the timing, it feels like today's pipeline is actually partly beyond 2021. Is that true? Can you give us a feel of that, of the timing of all those things?

No, Gary, that's absolutely correct when you think about it. So if you think about a new client that we're launching this quarter, we start generally with no customers. We have to invest to integrate into their systems, to develop the marketing materials, to train people, et cetera. And generally within a year or so, we start to turn profitable. It generally takes three to four years for those programs to kind of reach maturity. So a program we're launching today probably doesn't reach maturity until 2022, 2023. And then a pipeline client, we may close on next year or the year after, but we're making investments to proceed, you know, to set that up for the future. CPR is another example of something that will benefit us beyond the 21 period. You know, the last thing I'd say is if you look at the eventual 5G wave that's going to come, we didn't reflect that anywhere in the 20 or 21 outlook because we think it's going to take a little while. But there's a whole wave of 5G activity coming in the out years for mobile.

Okay. Well, that's helpful. Thank you very much, then.

Thank you.

Thanks, Gary.

As a reminder, if you'd like to ask a question, please press star one on your telephone keypad. John Adele with UBS, your line is open. Hey, John.

Hey, I think I'm recovering from my senior moments. So kind of along the same lines as Gary's question, and I'll be a bit more specific, and I think you already gave a little bit of color, but maybe you can give a little bit more. So if you isolated on a single new client, I guess particularly with connected living. How do we think about the sort of order of magnitude size of the upfront investment spending versus the later, you know, in time ramp up in revenue and then, you know, break even period versus the sort of, you know, achieving targeted margin, if you will? Is there a way to break that down for us and give us a decent sense?

You know, it's hard to generalize because as we've talked about in Investor Bay and since then, our programs could have anywhere between one and seven products and services. And so the amount of investment will vary based on that. But all of those are priced to, over a period of time, generate a very attractive IRR for our shareholders. So I think we feel good about these new programs that we're launching and ramping. You can see the benefit and the growth in mobile over time. that's resulted from the prior programs that we've launched.

Yeah, no question. And I think you mentioned in response to Gary, you talked about a roughly one-year time frame, you know, to the point where you actually start to turn profitable on a new client. Is that a reasonable way for us to think about it?

I think it's fair. I mean, I generalize it with some risk to it because every program is different. But it is fair that it takes a period of time. And where the economics really start to flow through is when you get out into year two and three and the programs begin to get closer to maturity.

Is a good example of that right now, KDDI?

Yes. Yeah, we launched that originally in late 2017. We're now heading into year three of that program.

All right, terrific. And then, Richard, just a housekeeping item. On a year-to-date basis through the end of September, what's your after-tax loss? from the small commercial business? And also, are you on track to effectively non-renew the vast majority of that business by the end of the year? So very little, if any, contribution into 2020?

Yeah, I'll start by the second part. The answer is yes. As we've talked about before, John, we're kind of unwinding, unplugging that business. So every quarter now, the net earned premium, obviously what we've written in the past and what's earning out today is is decreasing quite substantially. To answer the first part of your question, we said in a previous call, first two quarters of the year, we lost about $6 million each quarter. This quarter, the portfolio performed better. Think about a couple of million dollars lost with that in this last quarter.

And do you think fourth quarter would be similar? do you think fourth quarter would be more similar to the first half of the year or more similar to third? Any sense there?

Well, the business is, you know, the portfolio is getting smaller, right? So one would hope that the, you know, the experience would mimic that. On the other hand, you know, who knows? There's some property, some liability, what we could have some higher losses within that. So, you know, to be seen, but we are winding it down and it's winding down very quickly.

So probably fair to estimate that for the full year 19, somewhere between a 15 and 20, probably closer to the 15, loss contribution, that almost all of that or maybe all of that would not recur in 2020.

John, what I would say is we are winding that business down quickly. We're cautiously optimistic that most of the losses are behind us. I wouldn't give a number for the year. But as I look at 2020, we obviously feel good about that, that this business will largely be behind us. We'll have a benefit in 2020 because this will largely be behind us. We'll have some offset in housing in 2020 from that transition of loans away from the insolvent client. But in terms of the small commercial, hopefully it's largely behind us at this point.

Yeah, understood. Thank you so much.

Okay. Thanks, John. Your last question comes from a line of Mark Hughes with SunTrust. Your line is open. Hey, Mark.

Hi, Mark. Yeah, the taxes in the lifestyle business, if I'm looking at this properly, have been occurring about a point per quarter, 24%, 23%, 22%. Is it a good go-forward tax rate for the global lifestyle business?

It's in that range. I think we've said it's around. 22% to 24% overall. And it really is just reflecting the profitability of our business geographically and the tax rates in those various geographies.

Okay. And then the placement rate on the 600,000 loans that you are going to be losing from the insolvent client, did you give some indication of whether those are above average, below average?

But in terms of the loans, you know, we talked about $600,000 and really revenues, you know, a placement rate, but really the revenue is about $70 million in annualized NEP coming out of that business.

Okay. And then, Alan, you mentioned the 5G wave, and you anticipate that coming in the future. Could you just give us, as you look at the opportunity for Assurance, how do you kind of frame that up in your mind? who knows exactly when or the pace of it, but what should it mean for your business?

If you think about 5G from a consumer point of view, when it ultimately rolls out, it dramatically improves latency, which creates all sorts of new applications, including autonomous vehicles really being driven by that, which is one of the reasons we made the investment in auto. The timing, nobody really knows, but what it will cause is over a period of a couple of years, you'll see probably a big spike in handset activity which would benefit us. So, you know, again, I don't think this is in the 2021 type timeframe, but longer term, we are trying to set up the business to be well positioned for that wave.

Thank you.

All right, thanks. Thanks, everyone, for participating in today's call. We're pleased with our year-to-date performance and believe we're well positioned to meet our financial objectives for the year. We look forward to updating you on our progress on our fourth quarter earnings call in February. In the meantime, please reach out to Suzanne Shepard and 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.