Assurant, Inc. (NYSE:AIZ) Q3 2023 Earnings Call Transcript
Assurant, Inc. (NYSE:AIZ) Q3 2023 Earnings Call Transcript November 1, 2023
Operator: Welcome to Assurant's Third Quarter 2023 Conference Call and Webcast. [Operator Instructions]. It is now my pleasure to turn the floor over to Suzanne Shepherd, Senior Vice President of Investor Relations and Sustainability. You may begin.
Suzanne Shepherd: Thank you, operator, and good morning, everyone. We look forward to discussing our third quarter 2023 results with you today. Joining me for Assurant's conference call are Keith Demmings, our President and Chief Executive Officer; and Richard Dziadzio, our Chief Financial Officer. Yesterday, after the market closed, we issued a news release announcing our results for the third quarter of 2023. The release and corresponding financial supplements are available on assurant.com. We'll start today's call with remarks from Keith and Richard before moving into a Q&A session. Some of the statements made today are forward-looking. Forward-looking statements are based upon our historical performance and current expectations and subject to risks, uncertainties and other factors that may cause actual results to differ materially from those contemplated by these statements.
Additional information regarding these factors can be found in yesterday's earnings release and financial supplement as well as in our SEC reports. During today's call, we will refer to our 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. It is now my pleasure to turn the call over to Keith.
Keith Demmings: Thanks, Suzanne, and good morning, everyone. We're very pleased with the exceptionally strong results we achieved in the third quarter with adjusted EBITDA, excluding catastrophes, growing nearly 50% year-over-year or 19% on a year-to-date basis, both ahead of our expectations. Our results were largely driven by continued momentum in Global Housing and our steadfast focus on executing our strategy, including driving innovation, creating efficiencies and strengthening our global partnerships. These efforts have positioned us to exceed our previous expectations of high single-digit adjusted EBITDA growth, excluding catastrophes. We now expect adjusted EBITDA growth of mid- to high-teens. Our year-to-date performance highlights Assurant's competitive differentiators, including our advantaged Global Housing and Global Lifestyle businesses that have proven leadership positions with scale and significant cash generation.
Combined, these businesses are extending Assurant's track record of strong financial performance, thanks in part to the swift actions we've taken across our global operations to improve results and strengthen the business given broader macroeconomic headwinds. We continue to realize benefits from the actions we announced in 2022 to simplify our business and corporate real estate and realign our organizational structure, allowing us to reinvest throughout the enterprise. We extended our 2022 restructuring plan to include additional actions across the enterprise as we believe further enhancing Assurant's operational efficiency will support our long-term profitable growth and value creation. We now expect total restructuring costs associated with our extended plan to be between $90 million and $95 million pretax, above our previously announced expectations of $60 million to $65 million.
Looking at our business segments. In Global Housing, I want to thank all of our employees who supported policyholders impacted by Hurricane Idalia and the Hawaii wildfires, as well as several other significant weather events during the quarter. Assurant plays a critical role in safeguarding our policyholders and supporting the U.S. mortgage industry. Our Global Housing adjusted EBITDA, excluding cats, more than doubled year-over-year and increased 72% year-to-date, led by significant growth in our homeowners business through top line growth and improving loss experience. Our ability to quickly execute changes, particularly in our lender-placed business, has helped us gain earnings momentum from higher in-force policies, average insured values and state-approved rate increases following inflation impacts in 2022.
Our performance so far this year highlights Global Housing's compelling and uniquely positioned portfolio. Year-to-date, including $89 million of reportable catastrophes, our combined ratio is 82% and our annualized ROE is 29%, demonstrating strong returns and cash generation. In our Renters business, we saw continued strength in our property management channel, where policies in-force have grown double digits this year. We continue to win new clients, grow existing partnerships and release new capabilities, including our upgraded leasing agent portal and digital insurance tracking enhancements. We're very pleased with Global Housing's strong performance year-to-date, which reflects our focused execution around streamlined product lines where we have a clear competitive advantage and scale.
Turning to Global Lifestyle. Third quarter earnings increased 7% year-over-year or 14% excluding a onetime client benefit within Connected Living last year. Year-to-date adjusted EBITDA down 6% versus the same period in '22 has continued to improve throughout the year and is tracking in line with our expectations of a modest decline for the full year. Within Connected Living, we continue to support long-term growth through the development of innovative offerings for our partners. U.S. Connected Living is poised for another year of solid growth, particularly within our mobile protection business, a testament to our breadth of innovative offerings, customer experience expertise and deep relationships with mobile carriers and cable operators. As macroeconomic headwinds have persisted, including impacts from inflation, we've taken decisive action across our global operations to mitigate these impacts.
In Europe, expense actions have allowed us to stabilize earnings as we focus on critical opportunities to grow our top line. We also continue to invest to advance product innovation and anticipate our clients' needs as well as improve customer experience through expanded service delivery capabilities. For example, as part of the extension of our '22 plan to realize benefits and simplify our business in corporate real estate, we're consolidating our mobile device care centers into 2 sites in the U.S. We'll move the services currently offered in York, Pennsylvania to our existing facility in Texas. Over time, we'll be investing in a new site in Nashville, where we can leverage a strong talent market and greater logistics efficiencies as we evolve with emerging clients.
Turning to our Global Auto business. We're beginning to see initial signs of claims improvement, as a result of the decisive actions taken over the last year to improve performance. These actions included implementing rate increases on new policies across impacted clients and advancing opportunities to improve loss experience for programs where we hold the risk. We continue to monitor claims costs closely and expect improvement will be gradual over time given the way the auto business earns. In auto, we launched Assurant Vehicle Care at over 500 dealers. Building on decades of proprietary data on cost of claims, Assurant Vehicle Care is a comprehensive new suite of vehicle protection products. It was developed to help our dealer partners optimize product design, pricing, training and sales to ultimately enhance attachment and economics.
For the consumer, Assurant Vehicle Care provides a digital experience with more vehicle coverage, flexibility and transparency. Now let's turn to our enterprise outlook and capital. Given our year-to-date results and our business outlook for the remainder of 2023, we now expect adjusted EBITDA to grow mid- to high-teens, excluding catastrophes. Adjusted EPS growth is now expected to exceed adjusted EBITDA growth, each excluding catastrophes. This is primarily due to higher earnings growth that now more than offsets the increase in depreciation expense. From a capital perspective, we upstreamed $202 million of segment dividends during the third quarter and $493 million year-to-date. We ended the third quarter with $491 million of holding company liquidity consistent with the end of the second quarter.
In terms of share repurchases, during the third quarter, repurchases totaled $50 million. This brings our total repurchases to approximately $100 million for the year, including an additional $30 million of shares purchased through the end of October. Based on our strong year-to-date results, we expect fourth quarter buybacks to accelerate from third quarter levels and to be approximately $200 million for the year, consistent with our underlying repurchase activity in 2022. We're pleased with our strong capital position, which affords us more long-term flexibility over time. Looking to 2024, we expect a more modest level of earnings growth in Global Housing, excluding catastrophes, building on strong 2023 financial results, which included $40 million of favorable prior year reserve development.
In Global Lifestyle, we expect earnings growth to be led by Connected Living, particularly in the U.S. from the expansion of current programs, as we work to gradually improve the auto business, which we will continue to manage closely. From a capital perspective, we're committed to maintaining flexibility for our strong balance sheet and deploying capital for share repurchases and opportunistic acquisitions to support our growth objectives. We will share our 2024 outlook in February, factoring in our fourth quarter earnings, business trends as well as the latest forecast of the macro environment for the year. In the near term, we're focused on achieving our 2023 objectives and setting a path for continued growth and value creation in 2024 and beyond.
As we look ahead, we remain committed to execution, innovation and enhancing the customer experience for our clients and their end consumers, particularly as we look to capitalize on growth opportunities while supporting continued momentum. Before I turn the call over to Richard to review the third quarter results and our 2023 outlook in greater detail. I want to once again thank our employees for their hard work and dedication to deliver for our clients. Our company was recently recognized as one of TIME's best companies in the world, highlighting Assurant's strong employee satisfaction, revenue growth and sustainability efforts. Assurant was also recognized by Newsweek as one of America's greatest companies. Demonstrating our commitment to and progress in operating more sustainably.
The recognition was timely as we recently introduced Carbon IQ by Assurant. This offering enables clients to see the carbon impact of each device, including new and refurbished devices and provides them with estimated CO2 emissions throughout the supply chain and life cycle to identify opportunities for reduction. We're honored to be recognized for our outstanding culture, products and sustainability all of which help us better serve our clients. And now over to Richard.
Richard Dziadzio: Thank you, Keith, and good morning, everyone. For the third quarter of 2023, adjusted EBITDA, excluding reportable catastrophes, totaled $357 million, up $118 million or nearly 50% year-over-year. Adjusted earnings per share, excluding reportable catastrophes, totaled $4.68 for the quarter, delivering year-over-year growth of 67%. To review results in greater detail, let's start with Global Lifestyle. The segment reported adjusted EBITDA of $192 million in the third quarter, an increase of $12 million or 7% year-over-year. As a reminder, prior period results included a onetime client benefit of $11 million within Connected Living. Excluding the prior period gain, Global Lifestyle's adjusted EBITDA increased 14% or $24 million.
This increase was primarily driven by higher contributions from investment income and mobile growth. Connected Living earnings increased $30 million or 32% excluding the onetime client benefit, demonstrating strong mobile growth from North American device protection programs from carrier and cable operator clients and better trade-in performance. Financial Services also contributed to the growth. Trading results benefited from improved margins related to higher sales prices for used devices, partially offset by lower volumes, impacted by the timing and structure of carrier promotions. In Europe, we stabilized performance through expense actions, mitigating the impact of headwinds that began in the second half of 2022. In Japan, results were impacted by subscriber decline which is expected to continue into 2024.
Global Auto adjusted EBITDA declined $6 million or 8%. Results continue to be impacted by inflation of labor and parts leading to higher average claims costs. As expected, claims experience for auto ancillary products has also contributed to higher incurred claims costs in the quarter. The auto earnings decline was partially offset by an increase in investment income from higher yields and asset values. Turning to net earned premiums, fees and other income. Lifestyle was up by $83 million or 4%. This growth was primarily driven by Global Automotive, reflecting an increase of 6% from prior period sales of vehicle service contracts. Connected Living's net earned premiums, fees and other income increased 3%. Growth was muted by the previously disclosed mobile program contract changes of approximately $55 million with no corresponding impact to profitability.
Excluding the impact of these contract changes, Connected Living's net earned premiums, fees and other income grew by 8%. The quarter benefited from higher prices on used mobile devices and modest growth in North America mobile subscribers, excluding ongoing client runoff. Turning to the full year 2023. We continue to expect Lifestyle's adjusted EBITDA to decline modestly. Global Auto will be down for the full year from unfavorable loss experience, including the impacts from continued normalization for select ancillary products previously mentioned. We've taken decisive actions this year in response to higher claims experience in our auto book, including prospective rate increases and repair cost reduction. While we've seen some improvement, the improvement is expected to take place over a longer period of time given the earnings pattern of the business.
In Connected Living, we expect our U.S. business to grow for the full year. Overall, we are pleased with Lifestyle's strong third quarter performance, especially in light of ongoing challenges in auto claims. For the fourth quarter, we expect higher trade-in volumes in mobile, but we also expect ongoing top line challenges in Japan and Europe and investments to support business growth. In terms of full year net earned premiums, fees and other income, Lifestyle is expected to grow consistent with year-to-date trends. Moving to Global Housing. Adjusted EBITDA was $165 million, which included $26 million in reportable catastrophes, primarily from Hurricane Idalia and Hawaii wildfires. Excluding reportable catastrophes, adjusted EBITDA more than doubled to $191 million, with an increase of $106 million.
Housing performance was mainly led by 3 main items: First, continued top line growth in homeowners from higher premium rates and average insured values in lender-placed as well as an increase in the number of in-force policies. Second, favorable non-cat loss experience across the segment, including a year-over-year positive impact of $39 million related to prior period reserve development. This was comprised of $15 million of reserve reductions in the current quarter compared to reserve strengthening of $24 million in the prior period. And lastly, additional scale within our homeowners expense base ultimately driving stronger operating leverage. Higher investment income also contributed to earnings growth for homeowners. For Renters and Others, earnings grew modestly from favorable prior period reserve development.
Growth within the property management channel was offset by softer affinity channel volumes. For the full year 2023, we expect Global Housing adjusted EBITDA, excluding reportable cats, to grow significantly due to the strong homeowners performance, driven by top line expansion in lender-placed and favorable non-cat loss experience. In the fourth quarter, we expect higher expenses to support business growth. In addition, the third quarter included $15 million of favorable prior period development. Moving to corporate. The third quarter adjusted EBITDA loss was $26 million, representing a modest year-over-year increase, mainly related to higher employee expenses. For the full year 2023, we continue to expect the corporate adjusted EBITDA loss to approximate $105 million.
Turning to holding company liquidity. We ended the quarter with $491 million and dividends from our operating segments totaled $202 million. In addition to cash used for corporate and interest expenses, third quarter cash outflows included 3 items, $50 million of share repurchases, $37 million for common stock dividends and $50 million to complete the repayment of our September 2023 notes. As Keith mentioned, given our year-to-date performance and outlook for the year as well as the strength of Assurant's balance sheet, we expect to achieve full year share repurchases of approximately $200 million. For the full year, we continue to expect our businesses to generate meaningful cash flows, approximating 65% of segment adjusted EBITDA, including reportable catastrophes.
Cash flow expectations assume a continuation of the current economic environment and are subject to the growth of the businesses, investment portfolio performance and rating agency and regulatory requirements. In closing, through the resilience of our unique business model, the decisive management actions taken and our intense client focus, we are confident in our ability to achieve the higher full year objectives we have outlined today. And with that, operator, please open the call for questions.
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