Assurant Inc (AIZ) — Q3 2019 Earnings Call Transcript

Thank you, Jack, and good morning, everyone. We look forward to discussing our third quarter 2019 results with you today. Joining me for Assurant's conference call are Alan Colberg, 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 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 into a Q&A session. Some of the statements made today may be forward-looking. Forward-looking statements are subject to risks, uncertainties and other factors that may cause actual results to differ materially from those contemplated by these statements. Additional information regarding these factors can be found in yesterday's earnings release as well as in our SEC 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're now providing mobile device protection for their existing and expanding mobile networks. Given our shared commitment to providing a superior customer experience, our offering also includes a fully digital claims experience and a rapid four-hour mobile delivery service. In the U.S., 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 since we've made strides to deliver 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 partnership 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 would like to start by thanking all of our employees who supported our policyholders during Hurricane Dorian and Tropical Storm Imelda. As we preannounced, 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-placed business, we renewed another three client partnerships accounting for 3 million tracked loans. Looking at the past year, we’ve now renewed client relationships representing more than half of our tracked loans, further solidifying the strength of our franchise. Overall for the segment, we're 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 Preneed, we produced strong earnings excluding a one-time adjustment, which Richard will detail later. Preneed assets were up 4% year-over-year, reflecting growth in face sales. Additionally, we've seen a shift due to a multi-payer 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 in 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’ve returned a total of $279 million to shareholders. Year-to-date, we are 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. The best is yet to come as we continue to achieve these commitments and focus on a few critical multi-year priorities: our people, customer experience, and innovation. Our people are and always will be central to our success. 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. Lastly, innovation is something 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 will now turn the call over to Richard to review segment results and our 2019 outlook in greater detail.

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. Total revenue for the segment was up $208 million or 13%. The increase was driven by connected living growth, primarily in mobile expansion across our suite of offerings for carriers, OEMs, and cable operators. To a lesser extent, we also saw growth through extended service contracts. Looking at the past year, we have renewed client relationships representing more than half of our tracked loans, further solidifying the strength of our franchise. Overall for 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 cats, earnings declined $9 million. This reflected lower income for lender-placed business, driven by a year-over-year decline in placement rates and policies in force, as well as a less favorable non-cat loss ratio. 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 ahead, due to the insolvency of one of our clients, we expect our tracked loan account to decline by approximately $600,000 over the next few quarters. We expect sustained growth in multifamily housing and expense management to partially mitigate the declines. Now let's move to Global Preneed. The segment reported $7 million in 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 Preneed was up 6%, driven by continued growth in the U.S including strong sales of our Final Need product. At corporate, the net operating loss was $21 million, up $2 million compared to the prior year period, primarily driven by investment in Iké Asistencia. 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. In the quarter, we also had cash outflows of $39 million related to expenses from refinancing debt at a lower interest rate. For the full-year 2019, we still expect dividends from our operating segments to approximate segment operating earnings.

Hey. Good morning, Mark.

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

Yes, Mark. So as we will always do and have done in our fourth quarter earnings call in February, we will provide much 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 annual growth of 10% plus for lifestyle. The challenge in 2020 for lifestyle is we’ve had strong growth in 2019, leading to a much higher base, combined with 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 franchises are 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 fair?

Yes. Yes, Mark, that’s correct.

Okay. And then from a TWG perspective, I think your outlook for costs you said that the cost efficiencies at the higher end of the range. Any other opportunities you see on a go-forward basis either from cost efficiencies or the efficiency of your repair network that we might anticipate?

Yes, I think 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. I think 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 are going to look for other opportunities like that that will enable us to grow revenue, not just improve profitability. So I think we are well positioned and at this point, we're a global market leader in auto and we are trying to leverage that scale everywhere we can.

And then, last question on the lender-placed business. You held steady in terms of placement rate. The placement rates in the last couple of quarters I think there has been some mix that influenced that. Can you talk about on an underlying basis, it seems like some of the data at least on early delinquencies is suggesting an uptick. I wonder whether you are 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?

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

Thanks. Good morning, Alan. Good morning, Richard. So I think this is the first quarter that the year-over-year comparison within lifestyle is fully inclusive in both periods of the warranty group, correct? So the revenue growth, I think ex-currency the 14%, 14.5% year-over-year. Is that Alan, is you think about 2020? Is that the piece of the growth rate where you say, probably a little bit more challenging to sustain that on a year-over-year basis, and therefore 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?

Yes, John, I appreciate the question. So the challenge with revenue 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. As I mentioned, we’ve had such strong growth this year, we have a full-year of the warranty 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 guys appropriately sort of gave us some help unexpecting that Lifestyle earnings in the back half of '19 would be down modestly from the front half of '19. As we look at the third quarter, was that in line with your expectations there? Was there anything in the quarter that was different from your expectations?

Yes, I will take that. Hey, John. I think as we looked at it, we came into the first half of the year, looking at half years together. We’re looking at the first half compared to the second half and signaling 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 look at the second half, it really is coming in line with our expectations. I think we've seen some trade-ins; some of the trade-in volumes go down as we anticipated given the strong first half of the year we had. At the same time, we’ve seen strong growth in Asia/Pacific, the U.S., and improved profitability in Europe, which we had been planning on. So, overall, we are in line with our expectations as Alan said in his opening statements.

Okay. And then I just had one more, and it just escapes me so I will re-queue.

Thank you. Good morning, everyone. To revisit the earlier question regarding the fourth quarter, it appears that your guidance for this year is slightly above the midpoint. Coupled with your earlier comment that the second half is expected to be less than half, should we anticipate an increase in the investment expenses for mobile in the fourth quarter compared to the third quarter? I'm asking this to better understand how we should be viewing the range of 6% to 10% given your current position and potential expenses in the fourth quarter.

I think it's fair to say in the fourth quarter we are going to have accelerated investment. We are very encouraged by the new clients that we're ramping up 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?

Yes. And in addition to that, when you say the 6% to 10%, you’re really talking about Assurant overall EPS.

Yes, and we've talked about small commercial challenges, some continued declines in financial services. So there are a couple of headwinds that we are taking into account when we're given that range to you.

Thank you. I have a couple of quick follow-up questions. You've mentioned that mobile growth, particularly in Europe, was strong. Can you explain what factors are contributing to that growth?

Yes. So, mobile growth has been strong in all regions, and particularly in Asia/Pacific, especially Japan, it's really due to new clients and new programs. In Europe, we've leveraged our global supply chain capability out of the U.S to strengthen our supply chain in Europe, which has 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 fact with all regions of the world in mobile.

Okay. And then just lastly, 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 from my expectation. Any numbers in the quarter there and then kind of the margins continue to slip a little bit there. So any kind of color on that segment?

I think what we’ve said before, Mike is that that segment is in runoff domestically. There's probably a little bit more competition going on in there as well. So, yes, it was down in the quarter. You’re right. All right. Thanks.

I have a question about the Global Housing segment. The guidance has decreased. Last quarter, you mentioned that you expected the loans tracked to remain relatively similar. What caused the change in guidance this time?

Yes, thanks, Chris. One of the points we made in the opening remarks is the need for change due to the insolvency of one of our clients, and we expect those loans to transition away in the fourth quarter, which will impact us. Overall, we still expect net operating income for 2019 to decline modestly, excluding catastrophic losses, because of increased small commercial losses incurred this year.

Okay, great. And then 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 we’re in the business of delivering superior customer experiences, and the way it's evolving is our traditional people model, the big facilities that work 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 repair. CPR gives us that capability. So over time, it could be a significant growth driver for us, but it's going to take time to integrate it, build it into our offerings, and get our clients to offer it. We're excited; it gives us the capability to deliver yet another 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 segment?

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

So, we go through a regular process with our Board, looking at everything we are doing and discussing whether we feel like it's still strategic or not. Ike is an interesting company. When we made that investment six years ago, it was about growing to scale in Latin America with additional fee-based offerings. Over the last six years, our strong growth in LACTAM and then the warranty group acquisition, we now have a much stronger franchise in Latin America, which has led us to take the opportunity to reevaluate. I think 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 very disciplined stewards of the capital of our shareholders and we will continue that going forward.

Got it. Unpacking the charge, a significant portion was related to foreign exchange and part was due to derivatives. So, was the entire mark related to that, or has the value of the Ike franchise significantly decreased over the past few years?

I think that we can break the charge down into a couple of things, total charge being $125 million. The first thing is, as you pointed out, Chris, $41 million is related to the cumulative change in FX or the FX loss, which is largely due to the weakening of the peso since our acquisition some five years ago, that's $41 million. The other $84 million is really the difference between what we have on our books for our 40% interest and that 60% interest obligation we have to buy the rest of the 60% and the market value should we sell the company? Overall, we are in a process, we are moving forward, but at this point, it’s ongoing, and we will keep everyone updated as we proceed.

Hi. Good morning. I wanted to follow-up on the Ike charge too. Just when I look back at five years ago, you put in $110 million and probably a lot of things happened in between and now there's a $125 million 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. First of all, when we talk about $110 million that was for the 40% interest that we had during that time. We haven’t marked up the asset. We’ve kept it on the books, and obviously, through time, we've gotten income from the assets. There have been dividends out from the assets, which has changed the book value. What we're coming to now is after five years, there has been a weakening of the peso to the U.S. dollar, which was about $40 million, and that’s a third of the charge. The other two-thirds really consists of one part, which is based on the 40% we have and our expectations of that value.

And Gary, the only thing I would add is when you look at the Ike franchise, it remains strong. That's why we've had a process ongoing that we'll see where we end up. But it is a good company for us as we think about where best to deploy our capital. It's not a 100% fit right now, and that's a driving factor in what we've chosen to 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?

Yes, that's exactly right. More or less an obligation to purchase it. We're now in the sales process, giving us visibility in terms of potential pricing. So we take into account what that is versus what we would sell it for, hence the adjustment.

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

I would say if anything it could potentially be a net positive because it could give us excess capital if we sell it. It might allow us to return or hold it, depending on investment opportunities.

Yes, Gary, the one thing I would add is, we remain committed to our expectation of returning $1.35 billion to shareholders in 2021. 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 $1.35 billion through 2021.

Thank you. That’s very helpful. I think I understand now. I wanted to discuss another topic regarding mobile. As you mention the business flow, it relates to the pipeline. We all recognize there’s a delay between making investments and launching programs, and then customers begin to pay gradually over time. I’m curious about the timing if you have items in the pipeline that might extend beyond our 2019 to 2021 timeframe. We consistently discuss plans through 2021, but considering the current pipeline, it seems like some aspects might actually extend past 2021. Is that accurate? Can you provide some insight on the timing of these elements?

Gary, that’s absolutely correct when you think about it. So if you think about a new client that we are launching this quarter, we start generally with no customers. We have to invest, integrate into their systems to develop the marketing materials, train people, etc. Generally within a year or so, we start to turn profitable. It takes about 3 to 4 years for those programs to reach maturity. So a program we are launching today probably doesn't reach maturity until 2022 or 2023. And then the pipeline client we may close on next year or the year after, but we’re making investments to set that up for the future. CPR is another example of something that will benefit us beyond the '21 period. The last thing I would say is if you look at the eventual 5G wave that's going to come, we didn't reflect that 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.

Okay.

Thank you.

Hey, Mark.

Hi, Mark.

Yes. The taxes in the lifestyle business, if I’m looking at it probably have been bringing about a point per quarter, 24%, 23%, 22%, is a good 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 reflecting the profitability of our business geographically and the tax rates in those various geographies.

Okay. Can you provide some insight into the placement rate for the 600,000 loans that you will be losing from the insolvent client? Are those rates above average or below average?

In terms of the loans, we talked about 600,000 and really revenues pegged at a placement rate, but really the revenue is about $70 million in annualized NEP coming out of this.

Okay. Alan, you mentioned the 5G wave and you anticipate that coming in the future. Can you share how you envision the opportunity for Assurant in relation to that? While it's uncertain exactly when or how quickly it will happen, what implications do you foresee 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 since 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 will see probably a big spike in handset activity, which would benefit us. So, again, I don’t think this is in the 2021 type time frame, but longer-term we are trying to set up the business to be well-positioned for that wave.

Thank you.

Thanks. Thanks everyone for participating in today's call. We are 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 Shepherd and Sean Mosher with any follow-up questions. Thank you.