Assurant : Q3 for Q3 2022 Financial Earnings Transcript 2022

Assurant 3Q 2022 Earnings Transcript

PARTICIPANTS

Corporate Participants

Suzanne Shepherd - Senior Vice President, Investor Relations and Sustainability, Assurant, Inc. Keith Demmings - President & Chief Executive Officer, Assurant, Inc.

Richard Dziadzio - Executive Vice President, Chief Financial Officer, Assurant, Inc.

Other Participants

Michael Phillips - Analyst, Morgan Stanley & Co.

Thomas McJoynt-Griffith - Analyst, Keefe, Bruyette & Woods

Mark Hughes - Analyst, Truist Securities

Gary Ransom - Analyst, Dowling & Partners

John Barnidge - Analyst, Piper Sandler

Jeff Schmitt - Analyst, William Blair

Grace Carter, Analyst, BofA Securities

MANAGEMENT DISCUSSION SECTION

Operator: Welcome to Assurant's 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 opened for your questions following management's prepared remarks. [Operator Instructions]

It is now my pleasure to turn the floor over to Suzanne Sheppard, Senior Vice President of Investor Relations and Sustainability. You may begin.

Suzanne Shepherd, Senior Vice President, Investor Relations and Sustainability, Assurant, Inc.

Thank you, operator and good morning, everyone. We look forward to discussing our third quarter 2022 results with you today. Joining me for Assurant's conference call are Keith Demmings, our President and Chief Executive Officer, and Richard Dziadzio, our Chief Financial Officer.

Yesterday, after the market closed, we issued a news release announcing our results for the third quarter 2022. The release and corresponding financial supplement are available on assurant.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 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 that can be found on our website.

I will now turn the call over to Keith.

Keith Demmings, President & Chief Executive Officer, Assurant, Inc.

Thanks Suzanne, and good morning, everyone. As we previewed last week, our third quarter 2022 results came in below our expectations. They 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 percent 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 are taking to drive additional expense savings will also better mitigate potential further deterioration in macro conditions.

Looking at Global Housing, the segment's performance was in-line with our expectations for the quarter. We're pleased with the progress we've made in not only increasing revenues through higher average insured values and rates but also the transformational actions we're taking to simplify the business and drive future growth.

Looking at year-to-date performance, through the first nine months of 2022, Assurant reported Adjusted EPS of $10 dollars and 5 cents, up 7 percent from last year, and Adjusted EBITDA of $832 million dollars - down 4 percent, both excluding reportable catastrophes.

As we evaluate our progress this year, we continue to believe we have a compelling strategy, strong fundamentals and momentum with clients as we continue to align with leading global brands and maintain market leading positions across our key lines of business.

For example, we announced a further multiyear extension of our long-standing partnership with T-Mobile. This important contract extension provides us with increased long-term visibility in our U.S. mobile business. At the same time, it gives us a 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 also made investments to support our product development around the Connected Home. We continue to engage in encouraging dialogue with key clients - creating a long-term opportunity for growth. This also

included supporting our largest U.S. retail client with the expanded relationship we announced earlier this year.

While macroeconomic conditions in Europe are challenging, we continue to win new opportunities and recently expanded our global partnership with Samsung to launch Samsung Care+ smartphone protection in 6 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 for strategic fit, in addition to exiting commercial liability, we are 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 are designing a new organizational structure for Global Housing to better manage our risk businesses from our capital-light oriented businesses as part of our transformation agenda and also realize greater efficiencies. We are finalizing our plans for implementation in 2023.

As we reflect on Assurant's overall results to date and current market conditions, we now expect 2022 Adjusted EPS, excluding catastrophes, to grow high single-digits from $12 dollars and 28 cents last year - driven by share repurchases and Global Lifestyle growth.

For the full year, we believe 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 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 are pleased to see initial improvement in underlying results.

Turning to capital, we believe we have remained good stewards. Year-to-date, we have returned a total of $667 million dollars of capital to shareholders including proceeds from the sale of Preneed, and by year end, we expect to close two small acquisitions for a total of approximately $80 million dollars. 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 business nor our view

of the attractiveness of the stock - but rather is a reflection of the uncertain macro environment. As the broader environment begins to stabilize and visibility improves, we will 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, ex. catastrophes, to increase year-over-year. To that end, we are 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 our 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 have also started several initiatives across the enterprise to drive greater operational efficiencies and leverage our economies of scale. We are now pushing even harder to realize incremental expense savings given the increasingly volatile market.

We expect to finalize plans in the months ahead so that we can implement in 2023 and beyond. This includes: optimizing our organizational structure and best aligning talent; leveraging our global footprint to reduce labor costs where possible; continuing to review our real estate strategy, recognizing we are 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 are taking steps to accelerate digital adoption and automate processes which will further reduce cost and improve the customer experience. We are 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 re-evaluating 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 the business advantages, leadership aspirations and 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 will now turn the call over to Richard to review the third quarter results and our revised 2022 outlook in greater detail. Richard?

Richard Dziadzio, Executive Vice President, Chief Financial Officer, Assurant, Inc.

Thank you, Keith, and good morning, everyone. Adjusted EBITDA, excluding catastrophes, totaled $240 million dollars, down 11 percent 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 dollars and 81 cents, down 8 percent from the prior-year period.

Now let's move to segment results, starting with Global Lifestyle. The segment reported Adjusted EBITDA of $166 million dollars in the third quarter, a year-over-year decrease of 6 percent, driven primarily by Connected Living. Excluding an $11 million dollar one-time client contract benefit in Connected Living, Lifestyle earnings decreased by $22 million dollars. The Connected Living decline of $18 million dollars was primarily from four factors: first, $7 million dollars of unfavorable foreign exchange, mainly from the weakening of the Japanese Yen; second, lower margins in our device trade-in business from lower volumes. 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 have some additional investments in Connected Home. Lastly, softer international volumes from 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 dollars or 6 percent, primarily from lower investment income and higher losses in Europe. Turning to revenue, year-over-year Lifestyle revenue was up by $29 million dollars, or 1 percent, driven by continued growth in Global Automotive. Global Automotive revenue increased 9 percent, reflecting strong prior-period sales of vehicle service contracts. On year-to-date basis, our net written premiums in Auto were down 2 percent, 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 percent 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 serviced 7.1 million global mobile devices supported by new phone introductions and carrier promotions from the growing adoption of 5G devices.

For 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 for the fourth quarter are expected to grow year-over-year mainly due to growth in Connected Living.

Moving to Global Housing, Adjusted EBITDA loss was $25 million dollars, which included $124 million dollars 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 dollars, down $18 million dollars or 15 percent. The decrease was driven primarily by approximately $38 million dollars in higher non-CAT loss experience across all major products, including approximately $24 million dollars of prior-period reserve strengthening.