Assurant Inc (AIZ) — Q1 2022 Earnings Call Transcript

Thank you, operator, and good morning, everyone. We look forward to discussing our first 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 first quarter 2022. The release and corresponding financial supplement are available on assurant.com. We will 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 are subject to risks, uncertainties and other factors that may cause actual results to differ materially from those contemplated. 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 supplements as well as the Investor Day presentation materials that can be found on our website. I will now turn the call over to Keith.

Thanks, Suzanne, and good morning, everyone. We're pleased with our performance for the first quarter, which demonstrates the resiliency and strength of our business during a period of macroeconomic and geopolitical uncertainty. Within Global Lifestyle, stronger-than-expected performance in our capital-light Connected Living and Global Automotive businesses offset softer-than-expected results within Global Housing, mainly from our specialty offerings. The ongoing growth of our fee-based, capital-light offerings across Global Lifestyle and Global Housing accounted for nearly 80% of segment earnings in 2021. This differentiates Assurant as both a service-oriented partner to our clients and a compelling investment given our scaled customer base in markets with strong tailwinds. Our continued alignment with world-class partners and our ability to provide best-in-class products, services, and customer experiences has positioned us well for expected profitable growth this year and over the long term. As we outlined at Investor Day in March, we have a clear vision for the future, to be the leading global business services company supporting the advancement of the connected world. We aren't settling for the status quo. While we currently have scale leadership positions in attractive and growing markets, we have our sights set on being the leader in all of the businesses in which we operate. With that said, we believe the financial objectives we outlined for Assurant over the next three years are attractive and will be supported by our focus on market-leading innovation, business simplification, operational optimization, and the benefits of scale. We believe this will lead to continued strong cash flow generation, earnings growth, and financial outperformance. In Global Lifestyle, we remain focused on supporting our more than 250 million customers through our broad set of products and services across insurance, operations, mobile trading and repair, and comprehensive administrative services throughout Connected Living and Global Automotive. For this segment, we continue to expect adjusted EBITDA growth in the low double digits for 2022 with average annual growth of 10% in 2023 and 2024. We anticipate Connected Living will lead our growth for the Lifestyle segment, driven by our multidimensional strategy. Over the next three years, Connected Living should benefit from increased mobile and retail client expansion and increase in fee-based trading and repair, as well as contributions from strategic M&A. We continue to be excited about opportunities to drive growth in our retail business as we think about longer-term opportunities to serve the connected home. As of May 1, we're pleased to announce that we have expanded our relationship with one of our largest U.S. retail partners. We moved beyond program underwriting and have expanded our services to provide for the end-to-end administration of the business, including call center support, claims management, and oversight of service delivery. Not only does this allow us to deepen our relationship with a critical client, but it also allows us to continue to grow our retail business while dramatically increasing our scale to support claims and customer service further, improving our relevance with the third-party repair network that supports this business. We now support a significantly larger number of appliance repairs, which we believe is strategically important to our ambitions to provide protection services to the evolving connected home. This partnership will also support additional investments in digital tools and technology platforms that are key to our long-term vision. Global Automotive is expected to benefit from our increased scale and strong national dealer, third-party administrator and international OEM partnerships. We will continue to invest in technology, integrating our systems and processes following several years of successful acquisitions. Throughout Lifestyle, we'll also continue to invest to expand our market-leading positions. We anticipate incremental spending related to the development of new products, such as our connected home offerings and increased investments for new client implementations. In Global Housing, the business is expected to grow mid- to high single digits in 2023 and 2024. For 2022, we now expect mid-single-digit growth, given the sharing economy performance in the first quarter. Growth in housing is expected to be led by our lender-placed business, an important provider of property protection in the U.S. housing market. This will be driven by efficiencies across our operating model that will position us to benefit from the modest increase in placement rates and REO volume recovery that we expect later this year. Together, these trends will create scale benefits with our large portfolio of over 30 million loans, which will drive lower expenses across the business. Multifamily Housing remains an attractive long-term growth story, although 2022 will be pressured as we continue to make investments in our customer experience and technology. These investments should ultimately support growth of our 2.6 million renters policies and further penetrate the approximately 20 million U.S. renters market. Lastly, our specialty offerings are still expected to grow over the long term despite recent elevated losses in sharing economy from policies previously written under less favorable contract terms, including those from one-off clients. As we consider potential impacts from macro factors like inflation or supply chain disruptions throughout Lifestyle and Housing, we have not experienced a material impact to Assurant overall. In our mobile business, where the availability of parts fluctuates, we're working proactively with large suppliers to keep higher levels of inventory on hand to ensure timely and cost-effective repairs for customers. We'll continue to monitor developments and any corresponding impact on our business as is necessary. Our ability to meet our business goals is supported by the successful execution of our ESG efforts. We recently published our 2022 sustainability report, highlighting our commitment to building a more sustainable future for all stakeholders through our ESG initiative. We are continuing to advance our efforts, specifically within our strategic focus areas of talent, products, and climate. Our sustainability report showcases recent actions and recognitions while also providing insight into the impact of Assurant's sustainability efforts utilizing key ESG reporting frameworks, such as SASB and TCFD. In addition to setting long-term targets for Lifestyle and Housing at our Investor Day, we also provided three key enterprise financial objectives; adjusted EBITDA, adjusted earnings per share, and cash generation. For this year, we continue to expect to grow adjusted earnings per share, excluding catastrophe losses, by 16% to 20% from the $12.12 we reported in 2021. This will be driven by 8% to 10% adjusted EBITDA growth from the $1.1 billion in 2021 as well as disciplined capital deployment through share repurchases, including using the remaining net proceeds from last year's sale of Global Preneed. For 2023 and 2024, we expect to grow average adjusted earnings per share by 12% or more with double-digit average adjusted EBITDA expansion, both excluding reportable catastrophes. Through the first quarter, we returned approximately 85% of the $900 million of Preneed proceeds, and we expect to return the balance by the end of the second quarter. At the end of March, holding company liquidity totaled $738 million after returning $280 million in share repurchases and common stock dividends. Over the next three years, as the business continues to grow, we expect to generate approximately $2.9 billion of cash from our business segments, providing us with around $2.2 billion of deployable capital. We'll continue to be disciplined about capital deployment with the objective of maximizing long-term returns, taking a balanced approach between investments in growth and returning capital to shareholders. Our goal is to maintain greater capital flexibility as we see attractive opportunities for growth. We might hold higher levels of cash, depending on the opportunities we have in front of us, but we won't accumulate cash without line of sight to value-creating opportunities. We'll continue to return excess capital through share buybacks. Overall, we're pleased with our performance in the first quarter. We're confident in our ability to continue to expand earnings and cash flows. This will also allow us to continue to invest in our businesses and sustain our track record of returning excess capital to shareholders over the long term. I'll now turn the call over to Richard to review the first quarter results and our 2022 outlook.

Thank you, Keith, and good morning, everyone. Adjusted EBITDA, excluding catastrophes, totaled $302 million, equal to the first quarter of 2021. Performance was driven by strong growth across Global Lifestyle, which was offset by higher non-cat loss experience in Global Housing, primarily from our specialty offerings. For the quarter, we reported adjusted earnings per share, excluding reportable catastrophes, of $3.80, up 17% from the prior year period, driven by buybacks and a $9 million nonrecurring tax benefit from one of our international businesses. Now let's move to segment results, starting with Global Lifestyle. This segment reported adjusted EBITDA of $217 million in the first quarter, a year-over-year increase of 13%, driven by continued earnings expansion in both Connected Living and Global Automotive. Connected Living earnings increased by $16 million, or 13% year-over-year. The increase was primarily driven by continued mobile expansion in North America device protection programs from cable operator and carrier clients, including more favorable loss experience and subscriber growth as well as an increase in global mobile devices service, including higher trade-in volumes from continued carrier promotions. In Global Automotive, earnings increased $9 million or 12% from three items: higher investment income, favorable loss experience in select ancillary products, and continued growth in our U.S. national dealer and third-party administrator channels, including growth of 5% in global vehicles protected. As we look at revenues, Lifestyle revenues increased by $99 million or 5%, aligning with our expectation that revenue would increase mid-single digits year-over-year. This was driven by continued growth in Global Automotive and Connected Living. In Global Automotive, revenue increased 9%, reflecting strong prior period sales of vehicle service contracts. Even with the decline in U.S. auto sales year-over-year, net written premiums increased 4% as we continued to benefit from higher attachment rates on used vehicles. Within Connected Living, revenue increased 2% from higher mobile fee income driven by our global mobile devices service. Devices service encompasses the devices we touch in our trade-in, repair, and dynamic fulfillment ecosystem. In the first quarter, the number of global mobile devices service increased by $800,000, or approximately 13% to $6.8 million. This was led by higher trading volumes, supported by new phone introductions and carrier promotions from the introduction of 5G devices as well as initial service and repair volumes. In terms of mobile subscribers, growth in North America subscribers was partially offset by declines in runoff mobile programs, previously mentioned, which also impacted mobile devices protected sequentially. For full year 2022, we continue to expect Lifestyle adjusted EBITDA growth to be low double digits compared to the $740 million in 2021. Connected Living is expected to be the key driver of adjusted EBITDA growth, driven by global expansion in existing and new clients across device protection and trade-in and upgrade programs. This will be partially offset by strategic investments to support new business opportunities and client implementations as well as unfavorable impacts from foreign exchange in Asia Pacific and Europe. Auto adjusted EBITDA is expected to increase due to higher investment income and business performance throughout the year, which will be partially offset by higher expenses. Moving to Global Housing, adjusted EBITDA was $104 million for the first quarter compared to $94 million in the first quarter of 2021, driven by lower reportable catastrophes. Excluding catastrophe losses, earnings decreased $30 million, primarily due to higher non-cat losses in our specialty and lender-placed businesses. Nearly two-thirds of the earnings decrease was from an unfavorable non-cat loss experience in our specialty offerings, including a $14 million increase within sharing economy, primarily related to a reserve adjustment and adverse development from policies previously written under less favorable contract terms. Taking a closer look at sharing economy, the product where we are seeing higher claims relates to on-demand delivery. It's a short-term liability policy covering the period when a driver may be using their vehicle for commercial purposes, which is not covered by a traditional auto insurance policy. We started writing this business in 2017, and it is a relatively small portion of our Global Housing business, representing roughly 12% of specialists' annualized net earned premium. We have taken several actions over the years, including modifying contract terms with some of our partners and discontinuing less profitable business to improve performance. However, based on the recent higher claims frequency and severity, we are taking a closer look at the business and expect to take appropriate steps to improve performance as we look to deliver on our financial objectives. Turning to lender-placed, this business comprised the majority of the balance of the increase in our non-cat loss experience within the segment. This was mainly related to elevated frequency and claim severities from fire claims, ultimately leading to lower earnings year-over-year. I did want to note that while fire claims tend to ebb and flow throughout the year, we continue to see higher costs of claims throughout our book due to inflationary factors, including labor and materials. These impacts continue to be largely offset by higher average insured values. In Multifamily Housing, underlying growth in our PMC and affinity channels was offset by more normalized losses compared to an abnormally low first quarter of 2021, as well as increased expenses from ongoing investments to further strengthen the customer experience. Global Housing revenue was up slightly year-over-year, mainly from higher average insured values and lender-placed and growth in Multifamily Housing. This was partially offset by lower specialty revenues from client runoff. Overall, we announced that Global Housing adjusted EBITDA, excluding catastrophes, to grow mid-single digits from the $486 million in 2021. Lender-placed is expected to be a key driver for the following four items: first, expense efficiencies across the business, including system enhancements and new digital capabilities. We expect these to create additional scale as the volume of our business grows; second, higher average insured values; third, a modest lift from expected placement rate increases; and last, REO recovery later in the year, noting that volumes were significantly reduced from foreclosure moratoriums during the pandemic. Additionally, we are monitoring higher claims costs as well as reinsurance costs, which are aligned with the increase in average insured values. Overall, for Housing, we would expect the combined ratio, including catastrophes, of 84% to 89%. At Corporate, adjusted EBITDA was a loss of $22 million, an improvement of $6 million compared to the first quarter of 2021. This was mainly driven by two items: first, lower employee-related expenses; and second, higher investment income from higher asset balances following the sale of premium. For the full year 2022, we expect the Corporate adjusted EBITDA loss to be approximately $105 million. This reflects lower investment income compared to 2021. In addition, the first half of the year historically experiences lower expenses as investments ramp throughout the year. Turning to holding company liquidity. We ended the first quarter with $738 million, $513 million above our current minimum target level. In the first quarter, dividends from our operating segments totaled $129 million. In addition to our quarterly Corporate and interest expenses, we also had outflows from two main items: $242 million of share repurchases and $37 million in common stock dividends. As Keith mentioned, we expect to return the remaining portion of the $900 million of Preneed proceeds, or approximately $125 million, in the second quarter. Our outlook assumes returning an additional $200 million to $300 million throughout the year. For the year overall, we continue to expect segment dividends to be roughly three-quarters of segment adjusted EBITDA, including catastrophes. As always, segment dividends are subject to the growth of the businesses, rating agency and regulatory capital requirements, and investment portfolio performance. In summary, we're confident in our ability to achieve our financial objectives for 2022 and over the long term, as we discussed at Investor Day. Our earnings growth, strong capital generation, product and service offerings, as well as our business resiliency, continue to differentiate Assurant as a strong partner and a compelling investment. And with that, operator, please open the call for questions.

First question is about the comments you made regarding the expanded partnership with retail. Can you quantify that and explain how it might affect the outlook for 2022?

Yes. Certainly, it's considered in the full year outlook. I would say not a material driver. There'll be some investments that we're making. We've been making already to this point in the year. That will continue as we kind of ramp the full scale of services. We'll also see volume and revenue start coming in as well. So that will typically be fairly well aligned in this case. So I would say fairly neutral this year. And then obviously, as we kind of build scale and ramp, it will become more meaningful as we look to '23 and beyond, and it's really exciting opportunity for us. If you think about the retail landscape in the United States, if you think about the opportunity to broadly serve the connected consumer in the future with bundled solutions around the connected home, this does give us a pretty material step change in terms of the scale of our services, particularly around the appliance side of the business. It's a disproportionate increase in our volume. And I think it will definitely bear fruit longer term, and we're really excited. And it's an important client. Certainly, it helps us protect the client, but really expanding our services and then making investments in our platforms that I think will support further growth longer term is what gets me most excited.

Congratulations on that. My second question is about the outlook, specifically regarding the drivers behind it. Can you provide insight into the outlook for mobile sales in the Lifestyle mobile business for the year and how that influences your overall outlook?

Yes. I mean, I think we're seeing really strong results in the mobile business. If you look back over many years, it doesn't always show up in the subscriber count number. Now we've started to give devices services where you're seeing a fairly significant ramp in our trade-in volume, which has been true over the last several quarters. I think we are seeing underlying growth in our most mature markets. That's masked a little bit. So in North America, we're definitely seeing increases in our subscriber counts. That's true with our mobile partners in terms of mobile operators, but it's also true with the cable operators that we do business with for device protection. They're growing. They're achieving net adds every quarter in terms of postpaid customers. So we're definitely seeing growth there. Those are the most mature markets. And then that's kind of masked by a little bit more softness in some of our international markets and then some client runoff that's got a fairly limited economic impact overall. We're still seeing strong demand in the market for mobile devices. We're seeing a lot of carrier competition, carrier promotions. I think we're extremely well positioned with clients, both in terms of device protection and then the breadth of clients we serve with respect to trade-in, which has only grown over the last couple of years. So I feel like we're really well positioned, and there's still a tremendous amount of consumer demand. We'll see as the year progresses if that changes. But certainly, at this point, we feel really good about how we're positioned.

Okay. Last one for now. On the specialty business and the charge there. Actually, Richard, you alluded to some steps you're taking to improve the performance there. Can you kind of talk about what are the things you're doing there to make sure that doesn't happen in future results?

Yes. Thanks, Mike. Go ahead, Keith.

I was going to say, why don't you talk a little bit about some of the work that we're doing, Richard, and I'll talk more strategically.

Okay. Okay. Great. And first to start out in the specialty area, we talked about sharing economy and the charge we took of $14 million. Really, most of that charge is linked to past business, past contracts we had in place. So call it runoff, I think about it as runoff in my mind that there are old contracts, clients that we canceled over time and we're getting those charges come through right now. So we have done, I would say, as Keith said in his remarks, we have done some actions. We're going to continue to do more actions. I think we're deep diving into the types of contracts we have. We're understanding the volatility about those contracts. We're understanding the quality of the clients we have behind those contracts. So our goal is to make sure that we're hitting our financial objectives, as we said in our remarks. And so we're not happy with taking the charge, and we're going to work on that very hard. Keith?

Yes. The only thing I would add, I think the business that we're writing today, to Richard's point, the team has done a really good job modifying pricing, terminating certain partnerships that we didn't think were going to pay off long term and changing deal structures, changing the terms and conditions around the products. There's been a lot of good work done. The charges that you're seeing flow through for the most part relate to business that's since been modified through a lot of those actions that we've taken. I'd say the underlying profitability on the business we write today, new business that we're putting on the books is significantly better than the historical. So that's definitely a good thing. But the team is not happy overall with how this business is performing at the moment. So we're definitely looking at it very closely. One of the strategic I guess in terms of the thesis with this business was not just giving us access to the gig economy, a really fast-growing kind of emerging marketplace that we thought was really interesting, but also a place where we could innovate and develop some new distribution opportunities. We also thought there would be opportunities to provide additional coverages, like mobile protection and vehicle service contracts. Those are pretty important types of coverages for a gig economy worker, and that hasn't materialized to this point. That was part of the strategic rationale and the thesis behind entering this marketplace. So obviously, we're evaluating whether those opportunities can exist for us in the future. So more work to be done. To Richard's point, we're not happy with the results. We're definitely going to be making sure this business is built to deliver the economics that we would expect based on the risk-reward trade in the marketplace.

I had a couple of questions about the new items presented in the earnings. One is regarding the EBITDA margin. In the past, you've mentioned that different contracts have varying revenues and margin levels depending on their structure. Should I interpret the 11% margin reported in Lifestyle differently, or how are you approaching that?

And maybe I can...

Go ahead, Richard.

Yes. No, I think the EBITDA margin, to a certain extent, it's a reflection of the mix of business that we have, Gary. I think that as we go, when we become more fee-based as we've talked about, you're going to get naturally, as opposed to putting it over premiums or gross premiums. You're going to have that margin naturally improve. Keith talked earlier about kind of the mix of products and the fact that we do have clients with more fee-based services. So that definitely is a positive for us. And also, I guess the bottom line too is Lifestyle had a very good quarter overall in terms of profitability. And that obviously then translates into the margin as well, which helps.

I wanted to ask about the mobile devices service, which you mentioned has seen strong year-over-year growth. However, there appears to be some seasonality reflected in the sequential decline. Can you clarify how we should consider the seasonal trends for that metric?

Sure. You're right; there is a notable seasonality in our business. We typically see a significant performance in the fourth quarter related to device services, along with a strong first quarter. During the second half of the year, iconic devices are launched, which leads to increased activity as customers trade in their old devices in the fourth quarter to acquire the new models being actively promoted. This trend often carries over into the first quarter as well. The promotional activities of carriers in the market play a crucial role in this. Many of our global partners provide trade-in programs, and when these offers become more aggressive, they encourage consumers to upgrade to the latest technology, especially with the current emphasis on 5G. This promotional drive is what ultimately influences the seasonality we observe. As a result, we experienced strong activity in the first quarter, and I anticipate we will continue to see this strength throughout the year. However, it’s important to note that we usually observe a very robust first and fourth quarter while we need to monitor how promotions evolve and the impact of consumer demand and other factors that our partners are managing as the year progresses.

Question on the Global Automotive business and vehicle business. Given the current state of the auto market and sales, should we expect growth in the number of vehicles covered or anticipate a more stable approach?

I'm really pleased with the overall performance of the auto business, and we had a particularly strong first quarter. This is evident not only in the profitability, as reflected in our EBITDA growth, but also in our net written premium, which saw a 4% increase, while revenue was up 9%, despite a 12% decline in Q1 auto sales compared to last year. Our team is outperforming the auto industry's trends in car sales, which is very encouraging. This reflects the strength of our client partnerships and our well-diversified distribution channels, helping our partners succeed in the market and gain market share. We are also expanding our own market share due to the breadth of our offerings. I feel very positive about the automotive sector overall. Although the number of covered vehicles is relatively flat right now, we're observing growth in net written premium, which is a good sign. I expect that as pent-up demand for new vehicles is addressed and availability improves, we'll see benefits in the new vehicle market. This should also ease some of the pricing pressures in the used car market, which is currently very high and is likely to normalize. Overall, I see potential for growth in this business over time, especially given the favorable interest rates we experienced this quarter alongside our business's positive performance and growth, presenting opportunities as we move forward.

Maybe a similar question on Multifamily. I think your renters, the count was up 5%, 6%. The revenue was up low single digits, which is a little bit below the recent trend. What do you think is the prospect there?

Yes. First of all, we really like the renters business. We have a strong market position covering 2.6 million renters, which gives us a significant market share that has been historically growing. The renters market has also been expanding, particularly due to improved attach rates over time. I really appreciate our current position. You are correct that we experienced slightly slower growth this quarter, with some of our affinity partners contributing to this. However, we saw strong growth within the PMC channel. We have discussed our success with Cover360 and our property management partners, where we offer a much more integrated solution in the buy flow with improved digital access. Premiums for renters are collected alongside the rent, increasing our potential for growth in this market as we scale our solution and more clients adopt it. I expect this business to contribute to long-term growth. It's a key focus for us, and we are continuously looking for ways to differentiate our solutions and expand distribution, which will remain a priority for our team as we progress through the year.

Richard, regarding investment income, do you think this represents a good run rate at this time? With the current yields on new money, will we see an increase in investment income as we progress through this year and into next year?

Thank you for the question, Mark. The rise in interest rates is definitely beneficial for us, both in the long and short term. We are seeing advantages from this, and we expect to continue receiving benefits as our portfolio matures. It's very positive news for us. Regarding your inquiry about the run rate, I wouldn't consider this to be a reliable run rate since this quarter shows an increase of about $8 million compared to the same quarter last year. This increase is partly due to some real estate gains, as well as investment income from our fixed income portfolio. We also had a few million dollars in real estate gains, just under $5 million. I would categorize some of that as somewhat of an outlier. However, the rest of it is encouraging and hopefully indicates positive trends as interest rates remain elevated and may even increase, as we've observed in recent months.

So it sounds like just kind of going back to the sharing economy and on delivery products that further reserve strengthening this quarter. So while it's a growing kind of exciting piece of the economy, to the extent that you do deem that it's unlikely to meet your return hurdles? Or if you think that cross-selling to those gig economy workers just looks too challenging. Can you talk about what a wind down of that business would look like? I know in the past, you've exited things like small commercial that didn't meet your return hurdles. So just kind of how material is that business? And is it a profitable business right now? Or is it a drag? Just kind of any more kind of numbers you can put around that?

Yes, maybe I'll offer a couple of thoughts, and then Richard, feel free to chip in. But we've talked about it being 12% of the specialty line. I'd say $50 million to $60 million a year in net earned premium in terms of the size and scale of that business today operates across multiple clients, primarily in food delivery. If I look at the P&L over the lifetime of the business, I'd say it's relatively neutral. It's not been a big drag in terms of losing money. We look at the inception-to-date profitability of the business. Forget about quarter-to-quarter and year-over-year changes, is this business making money. So pretty marginal at this point overall. But as we talked about, that's absorbing the learnings, the investment to scale the business, early losses as we sort of had to learn the market as the market was being created. So not a terrible result, and it's something that we built and incubated. And I think our team has done a really good job. It's a really well-diversified mix of business. There's a lot more protections in how that product and how the programs are structured today. We've built a lot of expertise around managing the claims and integrating with our partners. And then obviously, there's a lot of complexity in this business. So I think from that perspective, it's worked in terms of what can this mean for us going forward? How large can it be? Can we get the strategic value to your point? That's something that we've got to continue to work on and making sure we can define that. But it's not a big drain in terms of the actual P&L effect that we're feeling. It's just not hitting the hurdle rates that we'd expect at this point, five years into learning this part of the market. And Richard, feel free to add anything else.

No. I think your last comment is the one I would underscore for Tommy, which is it was a business that we started five years ago as an incubator to innovate and see if there was a part to get into the gig economy that way and see that. Over time, with five years, the overall profitability, I would say, has been fairly neutral for us. The new contracts that we have in place are profitable. And so that's what we're going to dive into is to say, okay, well, do we have something here that we can build upon? Or is this a business that we need to change drastically? So that's what we're deep diving, as Keith said, to do and really to understand it. So overall, for this year, given the results of the first quarter, I wouldn't think it would be a positive or a negative to the rest of the year, right, in terms of the outlook that we have out there. So some work to do there, Tommy.

That's great. Thanks for all those numbers that you guys gave there. And then just my other question, could you guys talk about what could be some of the drivers for the favorable loss experience in Lifestyle that you guys referenced, when there's really widespread reports of higher severity via higher cost in parts and labor in most industries out there.

Yes, I’d like to share a few thoughts. There are several factors to consider, but the main point is that for most of our business, we are either risk-sharing, reinsuring, or profit-sharing with our partners. This means we are not bearing the majority of the risk, as we've mentioned before. For the areas where we do hold some risk, there are some notable trends. In the auto sector, we offer gap insurance, and with used car values at record highs, the GAAP losses have been significantly lower since the depreciated values are much higher than usual. This trend is beneficial, although it will likely normalize as the used car market stabilizes, and it’s difficult to predict when that will happen due to ongoing supply chain challenges. On the mobile side, we experienced some elevated losses compared to Q1 of 2021, largely due to pressure on parts availability. However, our teams have excelled in managing inventory effectively to handle claims. Additionally, as new devices are introduced, their quality has improved, which contributes positively. We've also noticed strength in our ability to manage loss costs within the mobile space, and we are increasingly doing repairs. There are many factors in play, but overall, the arrangements we have favor our partners, while we are satisfied with our team’s performance where we hold risk.

The cost for the T-Mobile in-store repair rollout peaked in the fourth quarter of last year, and you mentioned it should continue in the first half of the year. Can you provide an estimate of the costs for the quarter? Also, while there wasn't year-over-year margin expansion, should we expect that next quarter, or is that more likely to occur in the second half of the year? Any details you can share would be appreciated.

Yes, we're very pleased with our progress with T-Mobile over the past several months. The transition of Sprint customers went extremely well, and we take pride in our achievements there. The implementation of same unit repair in T-Mobile stores also saw significant developments in Q4. This involved recruiting technicians, training them, and enhancing our technology interfaces and inventory management solutions, all of which were primarily completed by the end of 2021. Looking at Q1, the overall impact on P&L has been relatively neutral. We're making continued investments, focusing less on expanding new stores and more on refining processes, platforms, and underlying technology to enhance how we deliver value to consumers alongside T-Mobile. This commitment to improvement will always be a priority for us. We're seeing remarkable Net Promoter Scores, with a very high NPS even before the introduction of same unit repair, which has further elevated customer satisfaction. It's thrilling to observe the positive feedback from customers, which also reflects well on T-Mobile and their brand. While the quarter remained neutral, we anticipate improvements as the year progresses and we reach a more stable state with our solution. I'm immensely proud of the team's work and the results being delivered to customers.

Okay. Great. The covered mobile devices saw a slight decrease sequentially. Could you discuss the underlying growth there, excluding the legacy Sprint customers? What was the effect of the clients leaving, and what is your outlook for that underlying growth? If you look back to the second quarter before Sprint joined, you mentioned it might be in the mid-single digits. What is your outlook for that?

Sure. When comparing year-over-year, there is a significant change due to our relationship with Sprint, which we've highlighted as important. However, in terms of subscriber growth, we're seeing growth in the U.S. market, though this is somewhat obscured in our global total numbers. We anticipate this growth to continue as we progress from quarter to quarter. Additionally, both our mobile operators and cable partners are successfully offering our services to consumers, which will also persist. We are experiencing some slight softness in certain international markets that are still recovering from COVID, but this is not a major economic concern. It is reflected in our account numbers, but the overall economic impact is minimal. We also had a client that we mentioned last year which experienced some reduction, but again, this is not economically significant. I am not worried about our mobile devices segment. What matters is that we are developing deeper relationships with strong global partners. As these relationships strengthen, we can offer more services, innovate, and deliver value, which excites us. There is substantial momentum in the market, and our teams are highly integrated. We are committed to serving our clients, solving problems, and delivering for consumers, which is the long-term goal we are working towards.

That new partnership that you talked about the end-to-end sounds very exciting. Are there opportunities to expand that for other similar relationships? Or do you need to get past the ramp-up phase to really create the leverage to expand with others?

Yes, I definitely think there are opportunities to expand. I think scale, and I've talked about this previously, scale is important, right? And I think this relationship will give us a tremendous increase to our scale. It's quite material in terms of what it means for our ability to deliver customer service to manage a third-party repair network and then to make the underlying investments I think that will happen quickly. And I think we will have opportunities to drive growth, both in new and interesting ways with this partner, who is significant and always trying to innovate around the customer, but also as we think about the capabilities and the foundation that we continue to build, how do we then leverage that foundation. And I would say that foundation will get built and scaled fairly quickly. It won't be 3 or 4 years from now we'll finally have a solution that then is really relevant in the market. That relevance will emerge fairly quickly.

Okay. And then a follow-up question. What does the international growth opportunity look like given increased FX volatility?

Yes. So no doubt, as we look at Q1, we saw some effects from FX. We expect that to continue as we look towards the rest of the year. Luckily, as Richard has talked about, we're pretty resilient. There are a number of pluses and minuses as we look at more broadly inflation, macroeconomic factors, interest rates. So we feel like we're well positioned. But there's definitely we'll see some effect from FX. Think about Europe and Japan, as good examples, where we'll expect to see that. I do think we've got great momentum around the world. I mean our international footprint has continued to mature over the last many years. We haven't expanded into new countries. We've really focused on how do we gain relevance and scale within the key markets that we want to be in. And I think our teams are doing a great job. Our services, our solutions, we continue to deploy them on a global basis. So as we build services like you think about it an easy example like same unit repair or premium technical support or trade-in, those services are relevant everywhere in the world. They may be more relevant in a certain market today and two years from now, that trend catches up in another part of the world. So I think that's one of the powers of operating as a global business. It's allowed us to build things once, build them in a standard way, build kind of global platforms that we can scale and then deploy those internationally. And we've got some incredible clients around the world. I'm so proud of what our international team has done, and I think there's lots and lots of opportunities. And today, it's mobile. Connected Living is the biggest part of international. We've got through the acquisition of TWG, much more automotive going on in various parts of the world. And as we continue to find the other relevant parts of Assurant to export to take advantage of our biggest markets, I think that will create longer-term tailwinds for us. But certainly, in the short term, FX is a challenge.

I was wondering if you all could talk about, I guess, the percent of the LPI book that's historically been in REO and just how that compares today versus historical and I guess, just kind of the evolution of that over the course of the year?

Yes. I would say, in simple terms, our REO volume is down significantly. It's probably one-third of what it would have been pre-pandemic roughly in that order of magnitude. I'd say we've seen it stabilize in terms of volume in the first quarter. I would expect that to slowly increase over time as properties enter foreclosure later in the year. So I definitely see that growing over time. Obviously, there's a ton of strength in the housing market. Our partners are working closely with customers in terms of loss mitigation activity. There's a lot of equity still in the homes for customers. There's a lot of opportunity for mortgage servicers to work with customers. So that will take some time to normalize. But certainly, it's dramatically lower than pre-pandemic, and we'd expect things to normalize over a reasonable period of time over the next couple of years, I would say.

And sticking with the housing book, if there's any more color you could offer on the cost efficiencies that you referenced, just kind of thinking if that should ramp over the year or there should be kind of a more even impact starting next quarter? And just any sort of directional guidance on maybe the magnitude of the impact?

Yes, I think we're investing heavily in terms of digital investments automation. We've got a large operation that we run within the housing business. It's fairly intensive, labor-intensive in terms of the services that we provide. We've talked about how deeply integrated we are with our partners. And really, it's just operational transformation initiatives around digital and finding simpler ways to serve customers more quickly in partnership with our clients. And I would expect it to ramp naturally over the year as we continue to deploy digital tools, digital solutions, and that will allow us to drive that efficiency going forward. But Richard, what else might you want to add?

Yes, I think that's exactly right. I don't think there will be a threshold moment per se. A lot of the leverage that we're getting today is based on projects that have already been launched, that we already are doing. So we're going to continuously, as Keith said, get leverage out of it. And where I see some good leverage coming out is coming back to your previous question, Grace, on REO, as we get more revenues out of that as revenues grow overall in lender-placed, we should hopefully get some leverage out of the expenses as well. Knowing, of course, that over time, it's more of a revenue and top line issue as opposed to just pure expenses because, obviously, we have rate filings to do. And over the longer term, that will balance itself out. But we do see over the short term that expenses and the leverage we're creating will really be helpful to us.

All right. Well, thank you again, everyone. And I would just like to close by saying we're really pleased with our first quarter performance. I certainly look forward to updating everyone on our second quarter results in August. And then in the meantime, please reach out to Suzanne Shepherd and Sean Moshier with any follow-up questions. But thank you very much, and have a great day.