Assurant, Inc.

Welcome to Assurance third quarter 2022 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 one on your touchtone phone. If at any point your question has been answered, you may remove yourself from the queue by again pressing the star one. 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 Shepherd, Senior Vice President of Investor Relations and Sustainability.

You may begin.

Thank you, operator, and good morning, everyone. We look forward to discussing our third quarter 2022 results with you today. Joining me for assurance conference call are Keith Demings, 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 of 2022. The release and corresponding financial supplement are available on Assurant.com. We'll start today's call with remarks from Keith and Richard before moving into a Q&A session. Some of the statements made today are forward-looking. Forward-looking statements are based upon our historical performance and current expectations and subject to risk 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 the 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 but 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 to the first nine months of 2022, Assurance reported adjusted EPS of $10.05 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 multi-year extension of our longstanding partnership with T-Mobile. This important contract extension provides us with increased long-term visibility in 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 in encouraging dialogue with key clients, creating a long-term opportunity for growth. This also included supporting our largest US 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. We don't see these businesses as core to our strategy or a path to leadership positions. As we execute these changes, we're 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 Assurance 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. In fact, on a constant currency basis, we expect global lifestyle to finish 2022 aligned with our original lifestyle expectations of low double-digit growth. In global automotive, we still expect to outperform our initial expectations, driven by tailwinds 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've remained good stewards. Year to date, we have returned a total of $667 million of capital to shareholders, including proceeds from the sale of pre-need. 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. 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, nor our view of the attractiveness of our stock, but rather is 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 are confident in the growth of our businesses. We expect both our global housing and global lifestyle adjusted EBITDA, XCATS, 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 is based on expectations of continued strong underlying growth momentum, even while factoring in lower international business volumes and increasing claims costs. We've also started several initiatives across the enterprise to drive greater operational efficiencies and leverage our economies of scale. We're now pushing even harder to realize incremental expense savings given the increasingly volatile market. We expect to finalize plans in the months ahead so 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, continuing 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 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. This segment reported adjusted EBITDA of $166 million in the third quarter, a 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 decline of $18 million was 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 trade and 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 contracts business was impacted by higher claims costs 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 runoff programs and unfavorable foreign exchange. This was partially offset by growth in subscribers in North America. In the third quarter, we service 7.1 million global mobile devices, supported by new phone introductions and carrier promotions from the growing adoption of 5G 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 and connected living. Moving to global housing, the adjusted EBITDA loss was $25 million, which included $124 million of reportable catastrophes. As a retention-level event, Hurricane Ian was the primary driver of reportable catastrophes in the quarter, along with the associated reinstatement premiums. Excluding catastrophe losses, adjusted EBITDA was $99 million, down $18 million, or 15%. The decrease was driven primarily by approximately $38 million in 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 and $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 a deterioration in the U.S. mortgage landscape. In 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 resulted in lower profitability. Global housing revenue increased 3%. from growth within several specialty offerings, as well as higher average insured values and premium rates and lender place. This was partially offset by higher catastrophe reinsurance costs noted earlier from Hurricane Ian. For the full year, we expect global housing adjusted EBITDA excluding caps to decline by low to mid-teens from 2021, with an increasing benefit in the fourth quarter from higher AIVs and rates. We're also evaluating our catastrophe reinsurance program as we approach the January 1st purchase 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 believe the implemented rate adjustments will result in higher premiums that can help to mitigate the increase in CAAT reinsurance costs. At corporate, the adjusted EBITDA loss was $25 million, up $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 of common stock dividends, and $6 million mainly related to assurant venture investments. For the full year, in addition to the $365 million of pre-need proceeds, we expect incremental share repurchases to be on the lower end of our targeted range of $200 million to $300 million. As always, segment dividends are subject to the growth of the businesses, 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 we are 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.

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, you may remove yourself from the queue by again pressing the star 1. Again, we do ask that while you pose your question that you pick up your handset to provide optimal sound quality. Thank you. And your first question comes from a line of Mike Phillips from Morgan Stanley. Your line is open.

Morning, Mike. Thank you, Mike. Hey, good morning, everybody. Good morning. Thanks. I guess I want to touch on the comments on 2023 that you mentioned. You know, you expect growth in those segments. As I compare that to, you know, the stuff you gave in February, where you were pretty specific with the financial objectives of, you know, you gave certain numbers by segment of, you know, of EBITDA growth. Here you were, I believe you said, you know, you want to reevaluate that. And it sounds like you're also expecting a lifestyle continuing to higher claim costs. So kind of want to kind of marry those and make sure we're not reading too much into your wording of reevaluating 2023 growth as compared to your objectives before.

Okay. Yeah. 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 we're 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 we started the year and kind of what we signaled last quarter. Obviously, we saw a softer Q3 in lifestyle. You know, we still expect lifestyle to generate strong growth as we think about 2022. So we talked about high single digit growth in lifestyle, but that's 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 not 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 close the year, evaluate how we finish, look at the trends as we think about 23 and 24. There's a tremendous amount of turmoil in the global economy and the macro environment. So 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 we're 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 markets.

Okay. Thank you. I think that makes sense. I guess when you looked at in this quarter, one of the segments in the lifestyle was the mobile margins, and you talked about how that's not going to continue and can revert. I guess you mean in fourth quarter. Can you talk about why that is?

Yeah. So there's a couple of things. If I think about the third quarter for lifestyle week, We certainly expected results in the third quarter 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 have thought they would have 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 you know, 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 leveraging walk-in repair as well to drive down severity of claims. And we thought that that positive trend line would continue in third quarter. There's a little bit of a reversal, mainly around the cost of acquiring devices when we had to do replacement devices and just sort of the mix of inventory that we had. We expect to see that normalized more into the fourth quarter and beyond. When I think about mobile losses year to date, pretty in line with what we would have 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. You know, we also saw accelerated investments around the connected home in Q3, which we knew would continue. And we had some favorability in the first half with investment income in auto, 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. combination of FX and softer volumes in a softer economy, particularly in Europe and Japan. And then about half of it was domestic. Trade-in 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. I 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's inflation in the system, and that's flowing through.

Okay, Keith, thank you for all the color. You bet.

Your next question comes from the line of Tommy McJoy from KBW. Your line is open.

Hey, good morning, guys.

Good morning. So just maybe stepping back a little bit and thinking from a high level, just thinking about the The step down, I guess, in this year's guidance from perhaps, I guess, six months ago back in May, we've seen kind of two sequential steps down. So can you just kind of frame how much of that step down has come from its expected, you know, lost cost, the claims inflation side versus perhaps just, you know, a lower demand for your products and services, I guess, over in Europe and then a little bit domestically. So if you were just going to bucket into those two categories, the step down and guidance over the year, how would you do that?

Yeah, I think, you know, 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 step down last quarter, offset by really, really strong first half. We think about lifestyle, you know, record year in 2021 and then an incredibly robust first half. We projected that trend line would continue and that favorability would continue. I'd 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 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. 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'd say auto-outperforming and offsetting softness internationally. And then housing is very much in line with expectations. If we think about what we expected in the third quarter, housing 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. We're implementing 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 AIVs that, you know, 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 22, several more for early 23. 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.

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 spill over into the North American side?

Yeah, 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's some softness in the economy, we're very well positioned in the market, and there's tremendous long-term opportunity for growth, and our team is doing an incredible job. So I feel really good long-term about our position there. Europe's even more challenged, obviously, with the economy and with FX in that marketplace. So 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're 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 US on the postpaid side, they're gaining a lot of net ads. I think 70% of the net ads are coming through our client, the client partnerships that we have. So that bodes well for device protection. And then trade-in continues to be strong as there's a lot of competition in the broader market, particularly domestically.

Got it. Thanks. And then this last one for me. In housing, you recorded the prior period development of $24 million, but the full-year guidance for housing didn't change. So was that prior period development already anticipated in the guidance?

So I think we certainly expected higher claims cost in the quarter. And 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 from AIVs 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 26,000 incremental LPI 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.

Yeah, exactly. I think you nailed it. In terms of the prior period development, obviously, when we closed Q2, we put some prior period development in and 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. You know, call it not really prior period development, but just all in loss cost. So, you know, that came through and we're, you know, a decent place there. And that was able to absorb some of the, you know, the prior period development. You know, of the prior period development, I would say 14 was this year. So it's really just a movement within the calendar year and 10 for the prior years. And then as Keith said, our premiums were a little bit better. We are seeing the AIVs. We are seeing some new business come on. And so that helped offset any other variance with the prior period development that came in.

Got it. Thanks. Your next question comes from the line of Mark Hughes from Truist.

Your line is open.

Morning, Mark. Yeah, thank you. Good morning. The delay on the trading activity, I got some questions on that. What was the logistical cause of the delay?

Yeah, at a high level, relatively simple. So we expected a client to 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 Q3 and Q4. And it wasn't so much 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 clients getting us those devices. So something that we expect to right the ship in the fourth quarter.

on the uh reinsurance i think you had mentioned that you were looking at taking up your retention could you refresh me the timing of the uh your renewals i think it renewals it renews it a couple different times through the year um how you anticipate what your early thoughts are about the cost of that program for 2023 versus 2022 and then uh Yeah, I guess I already asked on the timing. So just 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, Mark. So when we think about our reinsurance program, full year this year will probably be about $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. You know, start with the total housing prices, and housing prices have gone up. Inflation has been boosting them. You know, 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 results in us needing to purchase more insurance. So really by, you know, kind of just a function of the the overall book of business growing, we'll be placing more insurance on, the premium will grow. If you think about it, having a bigger book of business and more premiums means we do have more exposure at the lower levels and a higher probability that those lower levels 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 that lower layer will probably go up. It's just, you know, kind of a logical conclusion in terms of what's been happening in the market. I would say, you know, as we 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 costs, and we are expecting some increase in reinsurance costs given, you know, the state of the reinsurance market. That would be an offset to some of the premium increases that we are getting. So, you know, I would say sort of logical in that sense. In terms of timing, We typically purchase about two-thirds of our reinsurance at the beginning of the year and then the rest of it at mid-year. We always look at that. That proportion could change as we get into the market and 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 partner with over 40 different reinsurers, a strong performing business long-term. We continue to simplify the portfolio, which I think 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.

So it sounds like what you're seeing on rate, in your judgment at this point, will more than offset both the underlying inflation and the higher reinsurance costs. Is that 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 AIV. So we put the AIV increase in July. We talked about double-digit rate as a result of AIV. That's had three months to have an 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 AIV. 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 build and accelerate as the full effect of AIV rate comes through the program.

Now, your SG&A in lifestyle was up a point sequentially. That number has been a little bit volatile. But 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 you're having to do with those partners these days?

No. So, you know, in terms of T-Mobile, you're correct. We did do a multi-year contract extension on top of the multi-year extension that we got a year ago. The deal 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 say quite simply we protected the financial integrity of of the original deal that we had. So we 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 US mobile market. So nothing there that would create any economic change to us. In terms of the balance of clients, I'd say, you know, Tremendous momentum still commercially with our clients. Lots of focus on driving growth, driving innovation, but no fundamental changes in deal structures and services provided. So if we think about the softness in the quarter and lifestyle, you know, other than pointing to the broader economy and some of the impacts that I discussed earlier, nothing related to client deal-related changes.

And then, Richard, I don't know if you want to add anything on the sequential expenses.

yeah thanks thanks keith yeah exactly exactly no changes to client contracts but i would say the increase in the overall sgna is is is reflecting you know some increases in the business growth in the business you know particularly in the auto business obviously there's there's distribution costs with regard to that and we have been you know growing the business over the last year so there's there's some commissions in there also in our prepared remarks you heard us talk about some additional investments in our home solutions and you know, a chunk of that obviously is expensed in the quarter.

So those would be the two main drivers. Thank you very much.

Your next question comes from a line of Gary Ransom from Dowling and Partners. Your line is open.

Morning, Gary. Good morning. I was wondering if you could add a little color on the exit from international housing. How long will that take and what... you know, size the magnitude of what's being reduced. It's not clear to me whether that includes the Caribbean exposure as well, but could you talk about that a little bit?

Sure, and it does include the Caribbean exposure and, you know, and really anything that we write internationally that is cat-exposed homeowners-related business. We've made the decision strategically to exit. I would say we'll be done writing policies Most of it will be done this year. There's a little bit that we'll finish at the end of the first quarter, but we won't be writing new policies as of Q2 23. And then depending on how some of the final discussions unwind, you know, maximum we'd have a 12-month runoff on those policies, in some cases shorter. So that's to be finalized and determined. But in terms of the scale of it, I'd think about, you know, maybe $50 million in net earned premiums. in a year as being kind of typical. It probably takes 10% of our tower. So if we think about the tower that Richard talked about, our reinsurance tower, 10% of that goes to protect the international exposures. You know, and strategically, it's been a challenging market. Hard to get rate. There's been rising costs, as we know, of claims. We expect rising costs of reinsurance. adds a lot of complexity to not only manage the business, but negotiate the reinsurance that backs it. And ultimately, with modeled ALLs, you know, fairly limited effect to all in EBITDA, certainly EBITDA XCAT, 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 focus in places where we think we have clear competitive advantages and where we're differentiated. We're not just a risk taker. We're providing deeply integrated, more differentiated services. That wasn't the case with this business, and we weren't able to get the returns we wanted.

Is some of this business coming through the LPI business as well? No.

No. Okay.

It's all just separate homeowners business, basically.

Yeah, separate homeowners. Some of it, we're a reinsurer. Some of it, we're a direct writer, but none of it connects to what we do in LPI. An LPI is really unique. It's a 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 EPG acquisition, maybe it's a couple years ago now. But do those all fit together? I mean, is there some consolidation potential? And just I wondered if, you know, is that a market size that will be additive to the growth you're thinking about over the long run?

Yeah, I think that's exactly right. You know, if we think about the EPG acquisition and then the acquisition that we're talking about now. It's really to build on the strength that we've got in that market around commercial equipment, leased and financed 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 make some really quite small acquisitions, but can add a lot of value to our franchise.

Yeah, 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 sort of similar to the auto business, but maybe I was wrong on that.

Very much. I think we write 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 that's 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 that we need leading various different products? and then make sure that we've got the least amount of friction in 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 you're thinking about all these macro impacts and inflation for exchange and then putting that in the context of how you were thinking about 23 and 24 before – I'm not even really asking what you think about hitting 24 or not, but just how your thinking might have changed. We've had these couple of disappointments in the second and third quarter. What did that do for your thinking about the outlook as we go into 24 and maybe even longer?

Yeah, I think it probably, you know, we step back and reflect on just how uncertain and complicated the environment is. That's true for Assurant, 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 shift over the course of the coming quarters and we'll see how that lands. So there's just a recognition of the complexity. And then, like I talked about earlier, we knew housing was going to be weaker this year. We thought the outperformance in lifestyle 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 lifestyle outperform at the level that we would have needed to in order to offset that housing softness? And housing is probably more of a delay than a pivot in terms of what our expectations are. 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, particularly in the international markets, just taking a step back, like I said, finish the fourth quarter, deliver on a really strong plan in terms of what we expect to accomplish in 23 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 providing some color, you know, on a more informed basis in February.

Terrific. Thank you very much. You're welcome.

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

Morning, John. Good morning. Thank you very much. You've had an expanded partnerships in the lifestyle business announced this year. Had a couple 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, could that pressure actually lead to more partners looking to outsource more of their service management and refurbishment of mobile devices?

Yeah, it's interesting. If I start with a The second point, first, 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 we'll 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 what's critically important to the company? I think clients do the same thing. So as clients reprioritize their focus, there may be opportunities for them to say, hey, is there someone else in the market that's better equipped to help me with something? Because it's just not the burning priority of the moment. So we'll see how that evolves. That sort of happens 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 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. In lifestyle, we see You know, it's strong investment income, certainly blowing through the auto business, which is 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 lock and repair, et cetera. And then we've had favorability and gap 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 you know with digital you know, digital initiatives and investments in optimizing our operational transformation efforts. So those would be the big highlights on balance, you know, not a huge driver for the year, but certainly FX and softness internationally, which is, you know, we're feeling more of that is a pressure we expect as we go forward. And I do think continued elevation of claims and then our job will be to you know, make sure that we've got the right pricing in place with clients, that we're 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, you know, 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 simplifications niche lines you look to exit in the near to intermediate term?

Yeah, great question. I would say, you know, 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. You know, there are 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, you know, we need a strong right to win. And the size of the prize needs to be meaningful. And there are probably other pockets 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. 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. My last question, you talked about $12 million in buybacks in October. Does that seem like a reasonable run rate for the fourth quarter given the M&A transactions?

Yeah, maybe I'll offer a couple thoughts and then certainly Richard 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 an 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've signaled in M&A. 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 pre-need return. We feel good about meeting our commitment to, in a normal year, do two to 300 million of share repurchases. But we also recognize the market is really challenging. There's 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 toward the future, we see our stock prices extremely attractive, right? So as we think about future M&A, we'll 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 there anything else you would add?

Yeah, I guess just to add on to what you said, I mean, in terms of share repurchases this year, we're already through October at a little over $550 million. In addition to that, $113 million in dividends. So 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 we would be at the lower end of that 200 to 300 we had talked about earlier in terms of repurchases outside of the pre-need proceeds that we repurchased. And 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, 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, you know, the share price obviously from our perspective is extremely attractive today. So that creates a higher bar for M&A.

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.

Good morning, everyone. Good morning. 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. But what about for SG&A? How much of that is employee comp? And what level of wage inflation are you seeing there 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 is 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. And then in global housing, I'm just trying to understand the numbers you know, when I adjust for or add back that reinstatement premium, you know, it brings that attritional loss ratio down to, I think, 38%. And then if there was, you know, if you back out the unfavorable development, it brings it down quite a bit more, 33%, 34%. So I'm trying to understand, you know, you're talking about the pressures that you're seeing there. I think you're pushing for double-digit rate increases. I guess – Where is that pressure being felt, or I guess why is that the sort of loss pick as low as it is?

Yeah, maybe Richard, just talk. I think 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.

Yeah, you know, and I would start. It's a great question, Jeff. I think You know, I'd first start by, you know, when we go in for rate increases, you know, we are looking at it kind of bottom line. So you have to take in, you know, you're 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, you know, it's over 100% obviously. So that will be taken into account when we go into and go for rate increases. You know, and essentially what we end up doing with our non-CAT loss ratio, there are a couple of different moving parts. If you think about it from, you know, a net earned premium part, we have CATs that are the reinstatement premium. We have to add that back. But also from the incurred claims, we have to take out the prior year development. When we add back the CATs and we get to kind of like from a 68% that you'll see in the supplement to about a 45%, and then we take out the $24 million of prior period development, we get to about 40%. You know, you're a little bit lighter, so there's maybe a numerator, denominator thing. But I think the point, your point is a good one. You'd say 40%, that looks low, but it's really the all-in cost, including CAT, including the expenses, the tracking, et cetera, that are taken into account when we go for rates. So, you know, 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.

Morning, Grace. 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 inflationary pressures have been a bit more persistent than maybe a lot of people originally hoped. I know that you all mentioned in the past that you hadn't really been seeing too much pushback from your clients regarding your profit sharing and reinsurance arrangements. I was just wondering if given the persistency of inflationary pressures and that that actually started to show a little bit in the results in the quarter, if those conversations had 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 programs are typically quite large, very sophisticated. The clients understand the program economics, and there's a tremendous amount of transparency in those deals, and there's sufficient profitability in those structures that can absorb the inflationary pressure. So from a client perspective, no interest in moving away from those structures. And then clients where we're more on the risk, you know, over time, we'll certainly see discussions evolve and emerge as clients become more sophisticated and interested in taking on more of the risk. 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 and moving from sort of more of the protection and towards more fee-based services. I mean, does the recent emphasis on growing fee-based services like trade-ins, upgrades, whatnot, change 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, you know, 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 wrist, 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 services across the ecosystem. So from that perspective, I think it's really favorable and it does create more balance, but the, The bulk of the economics 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've 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'll talk to everybody on our fourth quarter call in February. In the meantime, as usual, please reach out to Suzanne or 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.