Assurant, Inc. (NYSE:AIZ) Q4 2023 Earnings Call Transcript
Assurant, Inc. (NYSE:AIZ) Q4 2023 Earnings Call Transcript February 7, 2024
Assurant, Inc. isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Welcome to Assurant's Fourth Quarter and Full-Year 2023 Conference Call and Webcast. At this time, all participants have been placed in a listen-only mode and the floor will be opened for your questions following management's prepared remarks. [Operator Instructions]. It is now my pleasure to turn the floor over to Sean Moshier, Vice President of Investor Relations. You may begin.
Sean Moshier: Thank you, operator. And good morning, everyone. We look forward to discussing our fourth quarter and full-year 2023 results with you today. Joining me for Assurant's conference call are Keith Demmings, our President and Chief Executive Officer, and Keith Meier, our Chief Financial Officer. Yesterday, after the market closed, we issued a news release announcing our results for the fourth quarter and full-year 2023. The release and corresponding financial supplements are available on assurant.com. Also on our website is a slide presentation that we introduced this quarter for our webcast participants. 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, presentation and financial supplement on our website 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 the news release and supporting materials. We'll start today's call with remarks before moving in to Q&A. I will now turn the call over to Keith Demmings. Keith?
Keith Demmings: Thanks, Sean. And good morning, everyone. 2023 was an extraordinary year for Assurant, our seventh consecutive year of profitable growth. We drove shareholder value by delivering financial outperformance, maintaining a strong capital position and generating significant momentum throughout our businesses. Adjusted EBITDA grew 21% to nearly $1.4 billion and adjusted EPS increased by 26%, both excluding reportable catastrophes. Our results were driven by the strength of our homeowners business within Global Housing, which delivered adjusted EBITDA growth of nearly 65% excluding cats. In addition, our connected living business continued to grow, supported by our strong US partnerships with mobile carriers and cable operators, and our ability to innovate and execute for our clients.
Together, Lifestyle and Housing generated nearly $775 million in dividends. This allowed us to return over $350 million to shareholders, including $200 million of share repurchases. 2023 was a testament to the power and attractive financial profile of our unique and differentiated lifestyle and housing businesses. Assurant would not have been able to achieve this level of success without our talented people, including our newly refreshed management committee, further strengthening our leadership team. As we celebrate our 20th year as a public company, I am proud of the world class culture we've created, exemplified by the many recognitions Assurant has received throughout 2023. Earlier this week, JUST 100 included Assurant as part of its 2024 rankings of America's most just companies, recognizing our commitment to serving our employees, customers, communities, the environment, and our shareholders.
In addition, we received recognition from Fortune as one of America's most innovative companies, and Newsweek recognized the progress we've made to incorporate sustainability into our strategy by placing us on its list of America's most responsible companies. The dedication from our employees and leadership team, who strive to achieve our vision every day, makes it possible to innovate, to better serve our clients and create value for our shareholders. We begin 2024 in a position of strength and with great momentum. Over the past two years, we've focused on further strengthening our business portfolio and driving operational excellence, while accelerating innovation. By investing in businesses where we have leadership positions, we believe we're well positioned for future success.
For instance, within Global Lifestyle, we've grown our presence in specialized markets, including in the commercial equipment space, where acquisitions have contributed to new client partnerships. We've strengthened our company through active portfolio management, making decisions to exit businesses that are not core to our long term strategy. This included exiting our sharing economy offerings and international cat exposed businesses in housing, further simplifying our portfolio. We've made significant progress in driving operational excellence across Assurant with a streamline organizational structure and real estate footprint. We've implemented digital first initiatives across our operations to support our businesses and drive value for end consumers.
Finally, we've accelerated innovation in a variety of ways to drive our business growth. Moving forward, technology innovation will continue to be an important driver of growth and value creation for Assurant. Our approach has driven success within our financial results, and is evident in our track record of winning new business and renewing client partnerships. This expansion of our client base is an integral part of our strategy, and creates important tailwinds as we look toward the future. Now, turning to highlights across our business segments. For 2023, Global Lifestyle earnings were relatively flat on a constant currency basis. In connected living, 2023 represented another year of growth for the business with a 3% increase in earnings.
Within our US business, we drove high single-digit EBITDA growth as we continue to innovate and execute for our growing carrier and cable operator clients through our device protection programs. We strengthened critical partnerships, including Spectrum Mobile, where we provide mobile protection, trade-in and other value-added services. In addition, we expanded our trade-in programs with major OEMs by adding a large new partner, as well as renewing AT&T, where we're deploying robotics in our mobile device facilities throughout the US. We continue to make progress internationally. In Europe, we stabilized earnings by driving expense efficiencies while continuing to address ongoing macroeconomic challenges. Throughout Asia-Pacific, we're excited by our market position and our long term outlook.
We're very pleased to announce a new partnership with Telstra, Australia's largest mobile operator. Our new multi-year deal will allow us to provide comprehensive products to support the end-to-end device lifecycle for Telstra's broad base of customers, including their core mobile protection program, as well as trade-in and repair capabilities. This partnership is significant as we continue to build our presence in Asia-Pacific. Turning to auto, year-over-year declines were driven by inflationary impacts on claims costs. Beginning in 2022, we took decisive action to address significant inflation that impacted the auto repair industry. For the handful of deals structures where we've been negatively impacted by underwriting results, we successfully partnered with our clients to implement meaningful rate increases, while making important changes to strengthen and enhance our claims adjudication process.
Given the longer average duration of our auto service contracts, we'll earn through the full benefit of these actions over time, with improvement expected to begin in 2024. Based on the actions taken in auto and the continued growth of connected living, we feel well positioned to deliver Global Lifestyle growth in 2024. Let's move on to Global Housing. In 2023, the segment grew significantly, driving our overall enterprise performance. Growth was led by our homeowners business, which was supported by higher premiums and in-force policy growth. The business rebounded from inflation impacts on claims experienced in 2022 and also benefited from favorable prior-year reserve development. In addition to highlighting the significant earnings power of the business, our 2023 housing results demonstrated differentiated returns and strong cash flow.
Excluding favorable prior-year development, our 2023 combined ratio was 83%, including $111 million of reportable cats, which was below our assumed annual cat load of $140 million. We are also very pleased to announce a new partnership in our lender-placed business. Beginning in the first quarter of 2024, we'll provide lender-placed insurance services to Bank of America's 1.8 million loan portfolio, further enhancing our market position and validating the competitive strength of our offerings. In renters and other, we increased earnings modestly in 2023 as our property management channel continued to expand. Written premiums in the property management channel grew nearly 20% in 2023. Along with adding new clients, we also achieved double-digit growth across 8 of our top 10 PMC clients, creating significant business momentum.
Growth was supported by the continued expansion of Cover360 where we now track over 1 million residents, a nearly 45% increase over the prior year. Technology innovation also enhanced our digital customer experience, including a new digital agent leasing portal and expanded claims processing powered by machine learning. Let's turn to our 2024 enterprise outlook. We expect continued profitable growth in 2024, driven by our business momentum. While growth is expected to be lower than the significant outperformance we delivered in 2023, we expect our 2024 results will demonstrate the combined earnings power of our advantage portfolio. Adjusted EBITDA excluding cats is expected to grow mid-single-digits, with Global Lifestyle and Global Housing delivering similar growth rates for the year.
Adjusted EPS growth is expected to modestly trail adjusted EBITDA growth, primarily reflecting higher annual depreciation expenses related to technology investments critical in executing our strategy. Before concluding, I'd like to introduce our recently appointed CFO, Keith Meier. Keith has been with Assurant for over 25 years and has served in leadership positions, managing P&Ls across many of Assurant's businesses. In his most recent role as Chief Operating Officer, Keith led the transformation of our technology and drove significant operational efforts to support the end customer experience. I have no doubt that Keith as our CFO will be an enabler of driving profitable growth, while allocating capital strategically. Now over to Keith to review our quarterly results and 2024 outlook in further detail.
Keith Meier: Thanks, Keith. And good morning, everyone. Before reviewing the quarterly results, I'd like to share my perspectives as I'm about to wrap up my first 90 days as Assurant CFO. During my time at Assurant, I've been fortunate to have led several businesses, as well as take on a variety of other roles across the organization, including most recently leading our technology and operational teams. These experiences have provided me with deep insights into our global clients, and the understanding of what is needed to deliver a high level of business performance, always backed by strong financial expertise and discipline. As CFO, driving growth and financial performance will continue to be my priorities. I'm focused on ensuring our capital position remains strong as we create additional shareholder value and drive profitable growth through further innovation and differentiation within our product portfolio.
As I look toward the future, I'm also focused on continued expense efficiencies by utilizing digital and AI technology, which also enables us to deliver better customer experiences. Lastly, I've appreciated the opportunity to meet with many of our investors, employees and clients over the last several months, and their willingness to share observations about Assurant as I began my tenure as CFO. Our discussions have enabled me to better shape my views and the path going forward. Now, let's talk about our fourth quarter financial results, which reinforced the strength of our businesses and the performance that we've seen throughout the year. For the quarter, adjusted EBITDA grew 29% to $382 million and adjusted EPS increased by 38% to $4.90, both excluding reportable catastrophes.
Adjusted earnings and EPS growth were driven by year-over-year growth in both Housing and Lifestyle. Our capital position remains strong, generating $280 million of segment dividends in the fourth quarter, and ending the year with $606 million of holding company liquidity. This allowed us to return $169 million to shareholders in the quarter, including $130 million of share repurchases. Let's review the businesses, beginning with Global Lifestyle. For the quarter, adjusted EBITDA grew 12% to $205 million, led by strong earnings growth of 23% within connected living, as our US mobile protection programs continued to grow. Higher yields on invested assets also contributed to the improved fourth quarter results. Globally, our trade-in programs represent a critical component of our device lifecycle value proposition, as well as a fee-based income driver supporting the growth of our mobile business.
Throughout 2023, we serviced over 25 million devices, including 7.5 million in the fourth quarter, which represented a high watermark for the year. While trade-in results were down modestly year-over-year, we saw fee income growth from higher sale prices for used devices and contributions from new US trade-in programs. Internationally, we continue to be impacted by subscriber declines in Japan, but have stabilized performance in a challenging macroeconomic backdrop. In global auto, fourth quarter adjusted EBITDA was relatively flat, as higher claims costs from inflation were offset by higher investment income. Claims were also elevated from the expected normalization of auto ancillary products and from international clients. During the latter part of the year, we saw positive signs in US loss trends, as we began to benefit from prospective rate increases that were implemented.
Turning to net earned premiums, fees and other income, Lifestyle grew by $268 million or 13%. Growth from global automotive, which increased 14%, was due to $85 million of non-run rate premium adjustments with no corresponding earnings impact, as well as prior periods sales of vehicle service contracts. Connected living's net earned premiums, fees and other income increased 12%, benefiting from contributions from new trade-in programs, higher prices on used mobile devices and modest growth in North American mobile subscribers. Looking ahead to 2024, we expect Global Lifestyle's adjusted EBITDA to grow, driven by both connected living and global automotive. We expect growth in connected living to be led by the continued expansion of our US business.
We expect Japan and Europe to remain generally stable throughout the year. In global auto, we expect rate actions taken over the past 18 months to drive improvement over time, beginning in 2024. Investments related to new client implementations will temper growth in 2024 for Lifestyle, but are critical levers to expand our portfolio and strengthen our business over the long term. We continue to monitor foreign exchange impacts, broader macroeconomic conditions and interest rates, which may impact the pace and timing of growth. In terms of full year net earned premiums, fees and other income, lifestyle is expected to grow mainly from our connected living business. Moving to Global Housing, 2023 was truly a strong year. We drove growth from the actions taken over the past few years to ensure rate adequacy and drive expense leverage, while benefiting from the streamlining that we undertook to simplify our portfolio.
Fourth quarter adjusted EBITDA was $186 million, which included $22 million of reportable cats. Excluding reportable cats, adjusted EBITDA increased by nearly 50% or $68 million to $208 million. Two-thirds of the increase was driven by favorable non-cat loss experience and homeowners, including a favorable year-over-year impact of $35 million related to prior-period reserve development. This was comprised of $40 million of reserve reductions in the current quarter compared to a $5 million reduction in the fourth quarter of 2022. The remainder of the adjusted EBITDA increase was from continued top line growth in homeowners from higher premiums and an increase in the number of in-force policies. Higher investment income also contributed to earnings growth.
Growth was partially offset by incremental expenses to support new business and an increase to our catastrophe reinsurance premium. For renters and other, earnings were flat as growth in our property management channel was offset by softer affinity channel volumes. For the full-year 2024, we expect Global Housing adjusted EBITDA excluding reportable cats to grow, driven by continued top line momentum in homeowners. In 2023, we benefited from $54 million of favorable prior-year reserve development. Our expectation is to deliver growth in housing in 2024, overcoming the $54 million of favorable prior-year reserve development, demonstrating the strength of the housing business. As Keith discussed, we will begin onboarding 1.8 million loans from Bank of America in the first quarter.
When fully onboarded, we expect the placement rate of the book to be below Assurant's current portfolio average of 1.8%, which may impact overall placement rate trends. Due to implementation expenses, we do not expect these loans to contribute significantly to adjusted EBITDA in 2024. In terms of our cat reinsurance program, we have transitioned to a single April 1 placement date beginning this year. This greatly simplifies our placement process while maintaining comprehensive coverage in the market. As this is a transition year, we placed virtually all of our 2024 program in January, with some smaller components remaining for the April placement. For our 2024 program, our program retention will increase to $150 million, aligning with a one in five year probable maximum loss or PML as we continue to optimize risk and return.
This is consistent with our 2023 program. We've expanded our risk protection to align with exposure by increasing our top end limit to protect against a 1 in 265 PML event. Over the past two years, we've continued to increase our capital protection, increasing the top end of our program from a 1 in 174 PML in 2022 to a 1 in 225 PML in 2023 and now a 1 in 265 PML in 2024. Reflecting on these expected changes, we now estimate the appropriate cat load to be $155 million for 2024. Given the exit of our international property business and the better market pricing as we leverage our strong reinsurer relationships, we expect modest overall cost savings in 2024. We will provide further updates on the reinsurance program in May. Moving to corporate.
The fourth quarter adjusted EBITDA loss was $30 million, a $3 million year-over-year increase, mainly due to higher employee-related expenses. For 2024, we expect the corporate adjusted EBITDA loss to approximate $105 million. Turning to capital management. As we look forward to 2024, we expect to continue to generate significant capital and focus on maintaining balance and flexibility to support business growth. For the full year, we expect our businesses to generate meaningful cash flows, approximating two thirds of segment adjusted EBITDA, including reportable cats. Cash flow expectations assume a continuation of the current macroeconomic environment and are subject to the growth of the businesses, investment portfolio performance and rating agency and regulatory requirements.
We repurchased $200 million of common stock in 2023 and currently expect share repurchases to be in the range of $200 million to $300 million for 2024, which will depend on strategic M&A opportunities, market conditions, and cat activity. As you can see, we are well positioned to deliver another year of growth in 2024 through the power of the Assurant franchise. I'll now turn the call back to Keith Demmings to share his views on performance, as supported by our differentiated business model. Keith?
Keith Demmings : I'd like to take a few minutes to discuss why we believe that Assurant is so attractively valued today. Assurant is a powerful differentiated business with unique advantages that have outperformed over time. Our B2B2C business model throughout lifestyle and housing is different from other insurers and service-oriented companies. Not only do we operate in unique, highly specialized and attractive markets, but we hold strong market positions and benefit from our scale. At our core, we provide specialty insurance solutions and fee-based services that are often deeply integrated with our large clients as we play an important role delivering services to their end customers. Our alignment with industry leaders and market disruptors has helped us generate significant scale within our businesses.
Our competitive advantages are further strengthened by our broad set of capabilities that allow us to innovate and execute for our partners and customers, enabling us to be flexible and agile. We have compelling and unique aspects of our business model that we believe create advantages. Our low capital intensity businesses allow us to grow efficiently, while generating additional capital for deployment. This is evident through our capital efficiency and strong cash generation of $3.5 billion over the last five years. Our risk profile is attractive. Earnings volatility is lowered by the risk sharing structures within our business models, reducing the impacts of macroeconomic volatility. For example, throughout connected living and global auto, approximately two-thirds of total risk is reinsured or profit shared to our partners.
Within housing, our portfolio simplification efforts have focused on exiting more capital intensive businesses, which has enhanced our risk profile. In addition, our robust catastrophe program substantially limits retained risk due to the low per occurrence retention level and high limit at the top end of the tower. Lastly, we're well positioned to adjust pricing to enable our targeted rates of return. Lender-placed is a prime example where a product has a built-in annual inflation guard feature to ensure policy pricing accounts for higher labor and materials cost, as we've seen over the last two years. In auto, most of our client deals structures share in the risk through reinsurance or profit shares. This creates close alignment between Assurant's underlying economics and our client's financial results.
Given this dynamic, we have the ability to adjust rates together with our clients to account for inflation impacts in the broader market. Over the past 18 months, we've successfully worked with our clients to put through prospective rate increases on new vehicle service contracts. Financial performance is paramount for Assurant. While growth may not always be linear, we've delivered average annual earnings and EPS growth of double digits since 2019, which has generated significant cash flow. Our 2024 outlook adds to this historical growth that we've delivered. To demonstrate the strength of our business model, we thought it would be useful to show how we perform versus a broad group of insurers on an adjusted earnings basis given the available data.
Please keep in mind this example is not to suggest a new peer group. We've selected the S&P 1500 P&C index to highlight our performance against a credible and broad index that includes members we're often compared to, including specialty and P&C insurers. Over the past five years, we've grown double digits and outperform the index. Our average annual adjusted earnings growth rate excluding cats of 12% is almost double the index growth rate of 7% over the same time period. Including reportable cats, we've also outpaced the market, driving 10% average annual growth versus the index growth rate of 6%. We believe that our consistent ability to demonstrate strong, profitable growth in returns with lower volatility and required capital makes Assurant attractively valued.
I'm confident that we'll continue to drive long term profitable growth and create shareholder value. And with that, operator, please open the call for questions.
Operator: [Operator Instructions]. Our first question is coming from Mark Hughes with Truist Securities.
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