Assurant : Q4 for Q4 2020 Financial Earnings Transcript 2020

Assurant 4Q 2020 Earnings Transcript

PARTICIPANTS

Corporate Participants

Suzanne Shepherd - Senior Vice President, Investor Relations, Assurant, Inc. Alan Colberg - President, Chief Executive Officer & Director, Assurant, Inc. Richard Dziadzio - Executive Vice President, Chief Financial Officer, Assurant, Inc.

Other Participants

Bose George - Analyst, Keefe, Bruyette & Woods, Inc. Brian Meredith - Analyst, UBS Securities

Mark Hughes - Analyst, Truist Securities Michael Phillips - Analyst, Morgan Stanley & Co. Gary Ransom - Analyst, Dowling & Partners Securities

MANAGEMENT DISCUSSION SECTION

Operator: Welcome to Assurant's Fourth Quarter 2020 Earnings 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 question following management's prepared remarks. [Operator Instructions]

It is now my pleasure to turn the floor over to Suzanne Shepherd, Senior Vice President of Investor Relations. You may begin.

Suzanne Shepherd, Senior Vice President, Investor Relations, Assurant, Inc.

Thank you, operator. And good morning, everyone. We look forward to discussing our fourth quarter and full year 2020 results with you today. Joining me for Assurant's conference call are Alan Colberg, our President and Chief Executive Officer; and Richard Dziadzio, our Chief Financial Officer.

Yesterday, after the market closed, we issued a news release announcing our results for the fourth quarter and full year 2020. The release and corresponding financial supplement are available on assurant.com. We'll start today's call with brief remarks from Alan and Richard before moving into a Q&A session.

Some of the statements made today are forward-looking. Forward-looking statements are subject to risks, uncertainties, and other factors that may cause actual results to differ materially from those contemplated by these statements. Additional information regarding these factors can be found in yesterday's earnings release as well as in our SEC report.

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 the reconciliation of the two, please refer to yesterday's news release and financial supplement.

I will now turn the call over to Alan.

Alan Colberg, President, Chief Executive Officer & Director, Assurant, Inc.

Thanks, Suzanne. Good morning, everyone. We're pleased with our performance for 2020. Driven by our market-leading specialty P&C and Connected Living offerings, 2020 represented the fourth consecutive year of strong profitable operating earnings growth for Assurant. This was a significant achievement demonstrating both the strength and resiliency of our business model and the dedication of our employees. Guided by Assurant's core values, our over 14,000 employees demonstrated an extraordinary commitment throughout this pandemic to each other, our partners, and the hundreds of millions of customers we serve around the world.

During this most challenging of years, I'm equally as proud of the steps we took to further advance our longstanding commitment as a responsible employer, including additional actions to foster a more diverse, equitable, and inclusive environment within our communities. Some examples include sustaining enterprise forums to openly discuss challenges still faced by many as we collectively combat racism and bigotry, expanding our supplier diversity and inclusion program to provide additional opportunities to increase the diversity of our vendor relationships, and reaffirming our commitment to fair and equitable pay as we continue to review our policies and practices.

Already in 2021, we've launched several additional initiatives, including more comprehensive enterprise-wide diversity training and the mandatory adoption of diverse candidate slates and interview teams to ensure we hire the best candidates. We also expect to launch enterprise employee resource groups to support a more diverse workforce. We believe these diversity initiatives will help us better connect to each other and the consumers we serve.

Now let's move to our full-year results. Net operating income, excluding reportable catastrophes, grew by 16% to $664 million and earnings per share increased 17% to $10.80. These results were in line with the outlook we provided in November and far exceeded the initial expectations of 10% to 14% operating earnings per share growth we outlined at the beginning of 2020. This performance was driven by strong results in Global Housing and continued growth in Global Lifestyle, particularly Connected Living.

Throughout the year, our balance sheet remained strong. Combined, our three operating segments contributed a total of $821 million in dividends to the holding company. During 2020, we increased our common stock dividend for the 16th consecutive year and returned $455 million in share repurchases and common stock dividends. Our 2019 Investor Day objective of returning $1.35 billion by the end of 2021 is now 65% complete and we expect to return the balance over the course of this year.

As we build a stronger Assurant for the future, we continue to make investments in enhancing key capabilities and the rollout of new and expanded offerings to support our growing global customer base. Our superior customer experience remains a key differentiator. This was critically important during the pandemic and will remain vital as we emerge from this period. Specifically, our digital capabilities have contributed to new business opportunities and the longevity of our most important client partnerships across Assurant. At the end of 2020, our top clients had an average tenure of almost 17 years.

We continue to believe there are significant future growth opportunities within our mobile, auto and renters businesses, also taking into account, the convergence of connected devices, cars and homes, which we refer to as the connected world. These opportunities also drove our decision to explore strategic

alternatives for Global Preneed so that we can deepen our focus on our lifestyle and housing businesses and the connected consumer.

Excluding Global Preneed and catastrophe losses, these connected businesses represented 66% of our 2020 segment net operating income, roughly double that of 2015. Together, they are expected to generate strong above market growth with offerings that have embedded earnings, complementing our specialty PNC offerings.

Given our compelling business model and expanded fee for service offerings as the key source to drive growth, we continue to believe our stock remains attractively priced. We currently trade at a discount to more relevant peers including those in the home services market. However, we believe our consistent earnings growth, cash flow generation and competitive position are in many ways stronger and more sustainable.

Now, let me share some 2020 highlights for each of our operating segments. Within Global Lifestyle, we increased earnings 7% to $437 million. This was driven by Connected Living where earnings grew by 14% as we increased our mobile subscriber base to 54 million through new and expanded partnerships. Across Asia Pacific and North America, we added almost 2.7 million subscribers last year. A portion of this year-over-year growth can be attributed to our alignment with new market entrants like US cable providers and a new wireless carrier in Asia Pacific.

We also processed 7 million devices through our share and trading facilities in 2020 and closed on the acquisition of HYLA Mobile. As a leading provider of smartphone software in trading and upgrade, HYLA will further increase our scale, strengthen, our capabilities and expand our client roster as we look to capitalize on the 5G upgrade cycle over the next several years.

In our extended service contract business, we expanded our 10-plus year relationship with Lowe's Home Improvement with the introduction of Lowe's TechConnect, a white label version of our new Pocket Geek Home product providing tech support for smart home devices.

In Global Automotive, we've increased the number of vehicles we protect by nearly 13% to over 49 million since acquiring The Warranty Group adding to the significant level of embedded earnings within the business. More recently, we've added scale and value to our OEM, TPA and national dealer clients through two acquisitions in key global automotive markets.

With American Financial and Automotive Services or AFAS, we added scale in our direct-to-dealer channel and are already leveraging their best-in-class talent and dealer training programs. In the fourth quarter, we acquired EPG, a leading provider of service contracts and insurance sold through heavy equipment dealers and manufacturers including Volvo and Daimler. Like AFAS, we believe this is a natural extension of our extended service contract business in a niche market we know well which has attractive long-term growth opportunities. Given our focus on the customer experience, we also continued to improve the claims process for vehicle owners through digital enhancements of our virtual claims inspection process, reducing inspection times and minimizing the amount of time without the vehicle.

Within Global Financial Services, we're excited to announce a new partnership with a large US credit card issuer where we're providing administration services for certain embedded card benefits that leverage our enhanced omni-channel customer experience capabilities. We're excited about the businesses' attractive growth prospects for the future.

Moving to Global Housing, we delivered net operating income, excluding cats, of $371 million, up $71 million from 2019. And our returns remained strong, as our operating ROE, including cats, was 15% for the

year. Within our lender-placed business, we had another strong year of client renewals and we remain proud of our critical role in the mortgage lending process. We attribute the strength and longevity of our client relationships to our focus on customer experience, as well as compliance and risk management. These will only get stronger as we continue to make progress on our proprietary single source processing platform, increasing productivity and improving customer experience over the long-term. In multifamily housing, we increased policies 8% since 2019 and now protect over 2.4 million renters nationwide.

We continue to invest in future growth, particularly through digital enhancements and innovations. As the ongoing rollout of our property management solution, Cover360, continues to progress, we recently introduced a newly designed resident portal that makes renters' insurance compliance for residents simple and fully digital, which will ultimately increase attachment rates over the long term.

In Global Preneed, earnings were down year-over-year in light of the COVID-19 global pandemic and continued low interest rate environment. But overall, Global Preneed performed well in 2020 and has continued to produce strong cash flows with a high-quality $6 billion asset base.

To summarize, 2020 was a strong year for Assurant despite a challenging global environment. We took additional transformative steps to continue to build a stronger Assurant for the future and capitalize on the convergence of the connected world.

As we look at 2021, we expect to provide our annual outlook once we complete our evaluation of strategic alternatives for Preneed. We have made progress exploring the potential sale of the business. To-date, interest has been strong, and we expect to provide an update on our progress before our next earnings call in May.

With that said, as we look at Assurant today including Preneed, we are on track to deliver against the financial objective shared at our 2019 Investor Day including 12% average annual operating EPS growth excluding catastrophes for 2020 and 2021. As expected, this implies slower EPS growth in 2021 as we continue to invest for the future and build off of a stronger base in 2020 and also assumes a more normalized level of non-cat losses in global housing.

In 2021, we will continue to prioritize investments in product innovation, further enhancing the customer experience, and strengthening our social responsibility efforts including actions to promote sustainability. I'll now turn the call over Richard to review fourth quarter results and our high level view of 2021. Richard?

Richard Dziadzio, Executive Vice President, Chief Financial Officer, Assurant, Inc.

Thank you, Alan, and good morning, everyone. As Alan noted, we are pleased with our performance for 2020 particularly amidst the pandemic. I'm now going to review our fourth quarter 2020 results and underlying business trends for the year.

For the fourth quarter 2020, net operating income excluding catastrophes declined by $3 million to $136 million, mainly due to a $28 million reduction in net investment income across all operating segments, partially offset by more favorable non-cat loss experience in housing. This drop in investment income reflects both the lower interest rate environment and includes a $12 million decline in income from sales of real estate joint venture partnerships.

In the quarter, we also incurred $11 million of severance and real estate charges as we continue to manage expenses and evolve Assurant's workplace environment.