Assurant, Inc. (AIZ) on Q1 2021 Results - Earnings Call Transcript
Operator: Welcome to Assurant's First Quarter 2021 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. It is now my pleasure to turn the floor over to Suzanne Shepherd, Senior Vice President of Investor Relations. You may begin.
Suzanne Shepherd: Thank you, operator, and good morning, everyone. We look forward to discussing our first quarter 2021 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.
Alan Colberg: Thanks, Suzanne. Good morning, everyone. We're very pleased with our results for the first quarter. We delivered double-digit earnings growth, driven by favorable non-catastrophe loss experience, including improved underwriting in Global Housing as well as continued profitable growth in our Global Automotive, Multifamily Housing and Connected Living businesses. Once again results demonstrated the attractiveness of our market leading Specialty P&C and Lifestyle offerings distributed across multiple channels. This is in addition to the compelling growth opportunities emerging across mobile, auto and renters. Together, these businesses represent what we refer to as the connected world. In 2020, our Connected World offerings represented 2/3rds of our net operating income excluding catastrophes and in combination with our Specialty P&C businesses will enable us to continue to expand our innovative offerings and deliver a superior and seamless customer experience. Generating over $1 billion of adjusted EBITDA in 2020, our business portfolio is well positioned to sustain above market growth and strong cash flows over time. And as we look ahead, we are continuously investing to bring innovation to market to build a more sustainable future for all of our stakeholders.
Richard Dziadzio: Thank you, Alan, and good morning, everyone. As Alan noted, we are pleased with our first quarter performance as our results across Global Lifestyle and Global Housing remains strong. Before getting into our first quarter performance, I want to provide a quick update on the sale of our Preneed business. In March, we announced our plan to sell the business for $1.3 billion to CUNA Mutual Group. Since signing, we have completed the necessary regulatory filings and we remain on track to close the transaction by the end of the third quarter. Now let's move to segment results for Global Lifestyle. This segment reported net operating income of $129 million in the first quarter, an increase of 7% driven by Global Automotive and Connected Living. In Global Automotive, earnings increased $7 million or 18%, results included a $4 million one-time benefit as well as a gain on investment income related to a specialty asset class from our TWG acquisition which we don't expect to recur. Year-over-year, underlying performance was driven by another quarter of global organic growth from U.S. CPA and international OEMs as well as some favorable loss experience. Connected Living grew earnings by 3%. However, this was muted by a $7 million favorable client recoverable with an extended service contracts in the prior year period. Underlying performance was driven by mobile subscriber growth in Asia Pacific and North America. Higher trading results from increases in volume and contributions from our HYLA acquisition. For the quarter Lifestyle's adjusted EBITDA increased 11% to $193 million, 4 points above net operating income growth. This reflects this segment increased amortization related to higher deal-related intangibles for more recent acquisitions in Global Automotive and Connected Living. IT depreciation expense also increased, stemming from higher investments. Lifestyle revenue decreased by $85 million, this was driven mainly by a $98 million reduction in mobile trade-in revenue, primarily due to the contract change we disclosed last year. Excluding this change, revenue for this segment was flat. For the full year, we continue to expect Lifestyle revenues to be in line with last year at approximately $7.3 billion. As expected overall trade-in volumes, which flow through fee income increased year-over-year and sequentially. This was driven by four elements. New phone introductions last year, greater device availability, carrier promotions and contributions from HYLA. While the first quarter did benefit from strong mobile trade-in volumes, we do expect it to be a high watermark for the year, given historical seasonal patterns.
Operator: Thank you. The floor is now open for questions. Our first question is coming from Bose George of KBW.
Tom Michaud: Hey, good morning, guys. This is actually Tom Michaud on for Bose. Thanks for taking our questions. Yes, the first question is really just kind of about sizing up the rebound in contribution of the trade-in volumes. I know there's kind of a lot of moving pieces with the contract change, the HYLA contribution and it sounds like 1Q was a high watermark. So if you guys help us kind of frame how we should think about the contribution for the trade-in volumes going forward?
Alan Colberg: Yes. Maybe I'll start and then Richard certainly add-on. If you think about our trade-in and buyback business, we're now very a strong player after the acquisition of HYLA, we mentioned in the prepared remarks, we have 30 plus programs that we operate around the world. You're right, Q1 tends to be the seasonal high for trade-in really driven by the launch of new phones late in the prior year. We expect activity to moderate through the balance of the year, but again that business is well positioned growing strongly and we have a lot of duty as the 5G wave develops, which is still very early and we expect that to develop later this year and into '22 really as the driver, but Richard anything you'd add on that.
Richard Dziadzio: Yes. I think, I mean overall we're in a really good place and as Alan said, Q1 we're looking at it as a high-watermark, but on the other hand, we have 30-plus trade-in programs. So we are encouraged by the momentum of the business and also what HYLA is adding to the mix of the Lifestyle business as well.
Tom Michaud: Okay. And so just kind of thinking about the balance of the year there is some easy comps, obviously with volumes have been depleted kind of and starting in 2Q ‘20. And so as we kind of think of the fees and other income line within Global Lifestyle. Is it reasonable to think of it being somewhat flat year-over-year, even after considering the contract change, which will hit the next two quarters?
Richard Dziadzio: And I don't think we've given a total revenue outlook for Lifestyle, but we have said that when we look at Lifestyle this year we will be looking at net operating income being in the high single-digits. So hopefully that should help you.
Tom Michaud: Okay. Yes, that will. Thanks. And then, just a second question, could you just talk about the growth in subscribers in terms of how much contribution is coming from T-Mobile and Sprint versus some of the other kind of providers including our cable providers which would seem to have been gaining share in subscriber account?
Alan Colberg: Yes. And again just to frame that for everyone. So what we've said for this year is, we expect subscriber growth in mobile to be mid single-digits and that's really being driven by growth in North America, which is coming from many different programs, including the ones you mentioned as well as growth in Asia Pacific, we are seeing a bit of a drag in Europe that's been ongoing as Europe has been more severely impacted by the COVID lockdowns. Also in Q2, we're going to lose a small program in Europe. We're having a banking program in mobile that's going to transition to another provider that's going to be a reduction of about 750,000 subs, but will have no impact on our bottom-line. So we factored that into that outlook as well as mid single-digit growth for the year.
Operator: Our next question comes from Brian Meredith of UBS.
Brian Meredith: Alan, I wonder if you could talk a little bit about, we're getting closer to the mid-year reinsurance renewal what that looks like and specifically any additional thoughts with respect to trying to convert the lender-placed insurance business more to an MGA model and maybe specifically you can kind of get into what are the challenges and impediments in actually going to that type of a model?
Alan Colberg: Yes. Happy to talk about that. I think it's important when we talk about Housing though to start with. It's a really good business that's performing well. You saw the very strong 2020, good start to this year, over the last five or six years, we've really fine-tune the lender-placed business, we're now in a good position if there is housing market weakness. So I think that's an important backdrop. Now we have been taking many actions over the last few years to reduce volatility. So one of those was bringing retention down to 80 million per event that is now made, if we do have a severe cat season. It's not a business risk to the company at all, it's just a one-time kind of earnings impact. We've also done things like moving to a multi-year tower. I think as of January, we were up to 52% of the towers now multiyear that also smooths out the volatility. And then, we've been trimming exposure in areas where we don't feel like the risk return trade-off is attractive for true risk businesses like our exit of small commercial. And with that backdrop, we've been on a journey to become more credit light, it's something we look at every year. We look at all of our businesses every year. The challenge with it, it's harder to see how the economics work with reinsurance, given where we are already buying down to, so you need to come up with other structures those require a lot of earnings give up. And so it's not straightforward how you would actually do that and make sure that it was a good outcome for our shareholders. The other way we've been addressing it is just growing the rest of our company. And so, if you look at today our non-cat exposed businesses are now something like 75% of our earnings and growing much faster. And so over time, that's a dramatic shift in our exposure to what might happen with cat. So we certainly continue to work on it, but we feel like we've made great progress on it and we're not going to do anything that isn't really positive for our shareholders.
Brian Meredith: Great, thanks. And then, the second question, just curious on the other warranty business, what are your thoughts here as we progress through in 2021 on that business, obviously some pretty solid growth given what we've seen with respect to used car sales?
Alan Colberg: Yes. We're well positioned first of all in auto. After the Warranty Group acquisition and then the addition of AFAS, we're a clear significant leader in that business, we're now up to 50 million covered autos. We've seen production for our business recover fully and then some through pre-COVID. We mentioned I think Q1 '21 better than Q1 '19 in a significant way. So we feel good about that and what we're trying to also do in addition to just consolidated gaining share through our differentiated offerings. We mention the training academy for example in the call. That's another way that we can gain share over time. So we're seeing good results already strong underlying growth. Most of the benefit of that will be in future years as we realize the new cars converting out of warranty to our product, but well positioned, good momentum. And one of the other things we're looking at it, how do we bring some of our other differentiating capabilities like in what we do with premium tech support as cars become increasingly connected. We have real opportunity to innovate and bring really differentiated solutions in the market.
Operator: Our next question comes from Mark Hughes with Truist.
Mark Hughes: On the multifamily real strong acceleration in growth this quarter, could you talk about what drove that?
Alan Colberg: There are really two things, maybe three things going on there. One, we have a series of strong affinity partnerships that we've built over the years and we're continuing to gain share with those affinity partners. So that's one driver. Second in our Property Management Company channel, we're still early in the rollout of Cover360, which is our new capability to make it much easier to attach our product. And then, third, we've been investing heavily the last few years in digital and CX and our experience now we believe it's as good or better for the consumer to anyone in the market. All those factors, the 9% growth in policies year-on-year were still gaining share and we're up to I think almost 2.5 million policies now. So we've invested there, we're going to continue to invest, we see enormous convergence coming between some of our mobile capabilities around the connected apartment and connected home, early days for that, but we see strong growth just in what we're already doing and then a significant opportunity to innovate and drive growth in the future.
Mark Hughes: In the mobile business, you talked about Europe being a drag, any signs of life there? And I think also South America or Central America has been laggard for you, any signs of movement?
Alan Colberg: Yes, I think, Europe is still struggling with the COVID and the lockdowns of COVID has been more challenging than certainly the U.S. market for sure. Latin America, we're starting to see some rebound, but it's still measured in nowhere near back to kind of what we've seen in Latin America pre-COVID. So I think again what's really been driving our mobile growth in the last year or so has been our strength and position in our very diverse set of clients in North America and Asia-Pacific, but at some point Europe you would assume will begin to recover and that will be a tailwind at some point, but we're not seeing the same kind of strengthening in Europe yet that we've seen elsewhere and that we're starting to see in Latin America.
Mark Hughes: And then, on the embedded card agreements, you talked about American Express. How do the economics on those sort of agreements versus your other relationships, you mentioned the Samsung Care and other programs. How does the economics look?
Alan Colberg: Yes. I know, let me maybe backup just a little bit provide some broader context there. So when we acquired The Warranty Group, they had recently established a new relationship in the embedded card space with one of the big U.S. card issuers. So that got us into that business. And then, we leveraged our capabilities as Assurant with that entree to begin to reposition some of our legacy debt deferment and credit capabilities into this business. So that's what allowed us to go out and win new clients like American Express. Broadly the way to think about that portion of our business, which rolls out through financial services is their fee income, more effectively administered programs for our partners. We're playing a role in adjudicating claims, but the risk, there is no risk for us, so it's fee income, not significant to our earnings yet, but certainly an opportunity over time to grow and then leverage these relationships to drive some of our other products into those companies and their customers. So we're excited about the early progress there a repositioning, but a long way to go to have that be a meaningful contributor to our company.
Mark Hughes: Suzanne said that I have to tell you the story that I went to Verizon to had my phone fixed and then with no help whatsoever and they appointed me to a little place down the street, which I went to and it turned out to be CPR, had a very good experience and actually realized I've forgotten that it was through your business, but it was a godsend when my phone didn't blink out, so anyway wanted to let you know. Thank you.
Alan Colberg: Oh, Mark, I appreciate that. Maybe just a quick comment on that. One of the opportunities we see over time is to support what's called same unit repair, which is either in the store like you just saw there we acquired CPR about a year, a little over a year ago. The other place we see an opportunity over time to really deliver a superior customer experience is to do repair at your home or office, and we acquired Fixt last year, which gives us that platform. So again these are early, but I think about creating growth opportunities for the future. That really differentiate the customer experience, the example you just gave was CPR is exactly what we're trying to do.
Operator: Our next question comes from Michael Phillips with Morgan Stanley.
Michael Phillips: Listen, my question is wanted to get every quarter or talk about every quarter, but just curious what really changes consumer's attitude towards a trade-in. Is it, I paid off my phone at the time to get the new fancy one or is it really hit its 5G out there now. I wanted to get that fastest thing. So does this conversion to 5G release or any kind of incremental speed up in trade-ins and otherwise happens in the course of a year? And I ask that, I've been called a dinosaur, 4G seems good enough for me. So I'm not resetting the door to go get 5G, but can you just confirm trying to source or ask you something else, but does it really spur what is it that really kind of makes a catalyst for people to come trade-in the fronts?
Alan Colberg: Yes, I think, from a consumer perspective, we're still very early in the 5G cycle. The average consumer doesn't yet see a compelling use case or benefit. There are strong benefits of 5G like speed and latency improvement, which really will create new businesses, but what really has happened so far it's not consumers broadly saying I have to have 5G yet. The carriers have been aggressively promoting the new phones more than they've done in recent years and that's linked off into an upgrade. So what we've seen so far is more I think market driven activity. Not the consumers yet saying I have to have 5G. If I was to speculate I think we believe 5G is very disruptive, longer term, but it's going to take time for use cases to come to map where you really need that new phone as opposed to being fine on 4G.
Michael Phillips: Okay, thanks, Alan. So more higher level here, I guess, can you talk about any impacts to any of your businesses or just the up tick in inflation rates?
Alan Colberg: Couple of thoughts and then Richard you should certainly comment on the investment portfolio. Although, as you mentioned in your prepared remarks that's much smaller than it used to be with the sale of Global Preneed. Our business is going to perform well in a matter of what the macro environment is. So if we get into slowdown in the economy caused by whatever and inflation could cause a slowdown. We have businesses that are countercyclical and will grow. We also just have embedded growth if you think about our mobile programs and the 15 new programs that we've launched in the last three years or so, most of those are not mature. We also have embedded growth in our auto business and with all those policies sold on new cars that haven't started to earn yet. So I don't think from our business, we're going to see a significant impact, just given how we're set out to perform whatever happens, but Richard, what would you say on the investment portfolio or other effects.
Richard Dziadzio: Yes. I think, it obviously be a positive impact on the overall investment portfolio and as Alan referred to the earlier comments with the sale of Preneed, our overall interest sensitivities going down about two-thirds. So our overall duration is going to be for 4.5 years to 5 years. Having said that, that today our overall yield on the historic portfolio, if I can put it that way is above current interest rates. So to the extent that current interest rates rise and the books rolling over the next five years, higher interest rates will actually be beneficial to us and from that respect.
Michael Phillips: Okay, thank you. That's very helpful, guys. Last one Richard real quickly, any impact you guys on any from the chip shortages that have been impacting other parts of the economy?
Alan Colberg: You know not really is the answer. If you think about our auto business where that's been one of the areas, so you see a lot of press on the chip shortages. We are well positioned on car sales. If there are fewer new car sales, which isn't what we're seeing by the way, but if there are fewer new car sales, used car sales will pick up and we benefit from that mix shift in the short-term. In terms of repairs and maybe an increased cost of repairs, for most of our auto business we're administering the repairs for our clients and the clients realize the benefit or the challenges of part shortages. So, at the end of the day, not really material to us and as we mentioned earlier, we're seeing pretty strong momentum in the underlying growth of auto at the moment.
Operator: Our next question comes from Gary Ransom of Dowling & Partners.
Gary Ransom: I wanted to ask about the EBITDA. Thank you for giving us those numbers. How are you using that internally? Is that a way that you're managing the business? Is it a compensation metric? I wonder if you could just remind us how that's -- how -- what you use it for?
Alan Colberg: Yes, let me start and then Richard you can certainly comment more on EBITDA. Today, it's not a compensation metric. Our primary compensation metrics are things like total shareholder return, operating EPS things like that, but it is a complement and net operating income and in particular as we think about M&A and growing in fee income businesses. It allows us to help the market better understand the real growth that we're setting up for the future, which it's a bit obscured when you look at the accounting of an acquisition of a fee company. But those businesses, we've been acquiring like we mentioned CPR and Fixt earlier on an EBITDA basis, it really sets up and helps the market understand better the growth that we expect in the future. But Richard what would you add?
Richard Dziadzio: Yes. I think, as Alan mentioned first is the valuation issue of it, the market being able to compare apples and apples in terms of other company's EBITDA and ours. So that's the first part. I also look at it as from an operating point of view. It's a better operating point -- a better operating metric in my perspective been NOI, because we add back purchased intangibles. So those are purchases that are made they're running out, it's a non-cash issue. So adding things like that back or taxes back gives us internally just a better view on the operations of the business from period-to-period particularly in the Lifestyle business.
Alan Colberg: Yes. And to your question, we're going to assess over time how best to link it the things like compensation. We don't know yet if we will or won't, but we do think it provides a better view of the underlying profit and momentum of our business, particularly as we're now largely shifted away from traditional risk businesses to being driven by the Connected World businesses.
Gary Ransom: Okay, that's helpful. I also wanted to ask about the macro reopening of the economy and are there areas where they might have been depressed last year where there is perhaps pent-up demand that might come through as part of the growth or anything you're seeing? I know you've talked a little bit about automotive, but are there other areas that where there might be some pent-up demand that would come through as we reopen economies this year?
Alan Colberg: Yes, I know I think broadly you saw last year how resilient our business was even in a very disruptive environment with COVID, but there are a few areas where pent-up demand is still really true. One is travel. We do some of the card benefits for example are linked to travel. And so with travel being very depressed that obviously is an area that is a rebound, so we'll have some link for us and benefit for us. The in-store traffic has been lower but we push very hard on digital even pre-COVID which I think help mitigate that. We mentioned earlier, we are seeing still some depressed activity in Europe. So that's an opportunity. But I think, I wouldn't look at, we were that impacted by COVID in terms of what was happening and so therefore growth in the economy is obviously positive, people buy things that gives us new chances to attach and sale. But as I mentioned earlier, we feel confident whatever happens in the external environment, we're going to grow and outperform.
Gary Ransom: All right. Thank you. And one of the other things I noticed that you know as an insurance analyst I'd like to look at book value and I know you, I see the equity, the book value per share calculation was gone. Can you comment on that change?
Richard Dziadzio: Yes, I think, Alan maybe I'll jump in here. Yes, I think when we look at the company and we look at the evolution of the company going more toward a capital-light type business, fee-based, service-based business. We look at it and book value is much less important than it used to be in terms of an overall indicator of the company. I mean, you can get there from math we give the balance sheets and the equity and the shares. So it's still a calc out there for you. But things like EBITDA, NOI, ex-cat, net operating income, ex-cats, those are more meaningful to us in terms of the profitability and the ongoing profitability and the growth over time of the business. So there are better value indicators in our minds.
Operator: Our last question comes from Mark Hughes of Truist.
Mark Hughes: Just a couple of things. Richard you mentioned maybe some incremental real estate costs. Could you maybe size those and are those going to be broken out separately not included in adjusted earnings?
Richard Dziadzio: Yes, thanks for the question, Mark. In terms of the facilities, it's very early days. What we did want to signal to the market today is, we are looking at our facilities footprint geographically across the world globally. And we think as we go back to the workplace, we can be thoughtful about the future at work and how our staff can work and how we can work more productively over time. So very early days with that, we have attached no numbers to it as of yet. We just wanted to signal that we'll be looking for. And it's one of the reasons why when we look at the first quarter and we look at how strong the first quarter is and we give outlook for rest of the year, we don't want to surprise the market by coming in with a facility expense. In terms of where it will be when we do, if and when we do incur it. We'll obviously call it out to the market. We haven't decided yet depending on what it is and where we go geographically where we go if it really would be a part of operating income or would be something a little bit different than that more of a one-time non-recurring thing, so to come in the future.
Alan Colberg: And Mark what I would add is, broadly with COVID and then the changes that are going to happen. We're trying to think through what is the best way to set up our business and our employees to be as successful in the future and as we work to attract talent. We had a head start that we had about 30% of employees virtual before COVID and there have been a path that we've been working on anyway. But the world is changing and we just want to be really thoughtful about how do we create advantage through the way we structure, so that we create the best possible future workplace environment. And as you saw in Q4, we had a little bit of that last year with some leases that were about to expire. So again as Richard said, we don't know exactly what is going to be, but we know we will have some changes at some point this year likely.
Mark Hughes: And then, in the Multifamily you've mentioned that your digital capabilities you think there are very good in the market. Are you doing any direct-to-consumer? Did that create channel conflict? Is that even something you're interested in just a refresher on that?
Alan Colberg: Yes. The way to think about that is today we are almost entirely B2B2C. So we work through our partners, we embedded in our partners. What we're particularly focused on as we think about innovation in the future is how do we combine some of our capabilities to create even a better offering. So for example in multifamily working through our PMC partners or our affinity partners, can we include mobile into the bundle. Can we add capabilities from mobile? So we don't have any real plans to go to direct-to-consumer. We are always looking for alternative channels and what I mean by that is our strategy has been to support the consumer wherever the consumer wants to go to get products that we sell. And so we're always looking at alternative channels, but our primary focus is that B2B2C and how we leverage our capabilities, which are pretty differentiated across auto, mobile and rental to create kind of new opportunities for growth.
Alan Colberg: All right. Thanks, everyone. We appreciate your time today and for participating in today's call. We had a very strong first quarter and we continue to look forward to closing on the sale of Global Preneed later this year. In the meantime, please reach out to Suzanne Shepherd and Sean Moshier with any follow-up questions. Thanks, everyone.
Operator: Thank you. This does conclude today's teleconference. Please disconnect your lines at this time and have a wonderful day.
