Assurant : Q4 for Q4 2021 Financial Earnings Transcript 2021 (opens in new window)

Assurant 4Q 2021 Earnings Transcript

PARTICIPANTS

Corporate Participants

Suzanne Shepherd - Senior Vice President, Investor Relations and Sustainability, Assurant, Inc. Keith Demmings - President & Chief Executive Officer, Assurant, Inc.

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

Other Participants

Thomas McJoynt-Griffith - Analyst, Keefe, Bruyette & Woods

Michael Phillips - Analyst, Morgan Stanley & Co.

Tom Shimp - Analyst, Piper Sandler

Mark Hughes - Analyst, Truist Securities

Brian Meredith - Analyst, UBS Securities

Grace Carter, Analyst, BofA Securities

MANAGEMENT DISCUSSION SECTION

Operator: Welcome to Assurant's Fourth Quarter and Full-Year 2021 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 Suzanne Sheppard, Senior Vice President of Investor Relations and Sustainability. You may begin your conference.

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

Thank you, operator and good morning, everyone. We look forward to discussing our fourth quarter and full year 2021 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 fourth quarter and full-year 2021. The release and corresponding financial supplement 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 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 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 supplement.

I will now turn the call over to Keith.

Keith Demmings, President & Chief Executive Officer, Assurant, Inc.

Thank you, Suzanne, and good morning, everyone. As I begin my tenure as CEO, I am extremely proud of the opportunity to lead our nearly 16,000 employees across the world as we support consumers' ever- connected lifestyles. As I reflect on Assurant's transformation over the past several years, not only have we evolved our business model, but also significantly expanded the breadth of our offerings and our customer base.

Today, Assurant represents a cohesive group of higher-growth,service-oriented businesses serving more than 300 million consumers globally. Collectively, our connected consumer and Specialty P&C businesses have generated and are expected to drive continued profitable growth and strong returns. As we position Assurant for 2022 and beyond, we see compelling opportunities to sustain growth, particularly with the convergence of the connected consumer in the global markets and geographies in which we operate.

Continued success will require us to deliver on our vision for the future - to empower leading brands to connect, protect and support their customers' connected lifestyles. Ongoing investments in our people and capabilities will enable us to meet our customers how, where and when they want to be met - differentiating our offerings through a superior customer experience. Continuously adapting to the changing needs of the connected consumer will be critical to achieving long-term growth.

To continue to capture new opportunities, I believe success will require - more than ever - our focus on five priorities: first, attracting, retaining and developing the best talent to unlock future potential; second, delivering a superior, digital-first customer experience; third, deepening our strong partnerships with major clients and prospects worldwide while also developing offerings and capabilities that continue to differentiate Assurant; fourth, accelerating the pace of innovation and prioritizing the necessary investments across our operations and technology; and finally, continuing to further embed and support sustainability and inclusivity for the benefit of all stakeholders and the communities in which we operate.

And already this year, we've made progress in our continued objective to build a more sustainable Assurant. I am proud of our recent recognition by CDP on our environmental impact and commitment, and our continued inclusion in the Corporate Equality and Bloomberg Gender Equality indices.

I want to take a moment to highlight our Lifestyle and Housing businesses and how we successfully executed our strategy throughout 2021.

Within Connected Living, our mobile device lifecycle management solution has enhanced our ability to introduce value-added services and capabilities to monthly device protection plans and trade-in and upgrade programs. This has helped expand our market share and further differentiate our offerings. We now cover almost 63 million mobile devices - a figure that has doubled since 2015 and increased 18 percent in 2021 alone.

At year end, we launched a partnership with Deutsche Telekom in Germany to provide an innovative mobile phone device protection and trade-in program. Assurant has already been recognized by Deutsche Telekom for our commitment to sustainability with a #GreenMagenta label - highlighting how our products and services make a positive climate contribution and reflect a responsible use of resources. This is another example of further integrating ESG into Assurant's business operations and offerings worldwide to drive more value for our partners and our consumers.

Throughout the year, critical investments continued to drive growth and differentiate the customer experience. Our trade-in and upgrade business -- now inclusive of HYLA Mobile - drove exceptional performance, processing over 25 million devices, supported by the rollout of 5G as well as our repair, asset

disposition and technology capabilities. We recently expanded our long-standing partnership with Telefonica to provide a comprehensive device trade-in program across several key countries in Europe and Latin America where Telefonica is a market leader. The program will enable Telefonica to access our leading trade-in technology. We also continued to integrate mobile service delivery options into our offerings through CPR's local same-day capability and the come-to-you repair capability through our acquisition of Fixt.

Demonstrating our commitment to improving the customer experience, CPR by Assurant ranked first in the 2022 Entrepreneur Franchise 500 for electronics repair. This is a testament to the success of our CPR franchisees, and our commitment to provide customers with exceptional experiences, services and support.

And we successfully executed on the major rollout of the in-store repair capability to nearly 500 T-Mobile store locations nationwide - showcasing our ability to adapt to rapidly changing consumer preferences. Over a period of 5 months, we recruited, trained and deployed nearly 2,000 technicians to deliver a seamless experience to T-Mobile customers in-store, while also converting approximately 10 million Sprint subscribers to Assurant. The in-store repair rollout will continue into 2022 as we further enhance the overall experience for T-Mobile customers.

Turning to our Global Automotive business, where we also have a strong track record of growth and innovation -- we've continued to capture market share and see significant opportunity ahead. In 2021, we grew global protected vehicles by 10 percent to nearly 54 million and increased net operating income by 21 percent. The Auto business is critical to the long-term success of Assurant and we should continue to benefit in the future from increased scale through our alignment with industry leaders, and our ability to support customers through digital channels.

Turning to renters, the business grew policies and revenue by 7 percent in 2021 - a testament to strong affinity and property management company channel relationships. We also secured multiyear renewals with two top 10 PMCs. Technology and innovation are critical components to our success in this business and we will continue to invest in our technology over the next several years to further enhance the customer experience for our 2.6 million policyholders. Investments in 2021 included the continued rollout of Cover360, launching new customer-facing sales portals and expanding self-service capabilities that leverage machine learning to enable automation of claims payments. Ultimately, our investments should increase policy attachment rates, which have not yet hit mature levels throughout the industry.

Additionally, in our attractive P&C offerings, including lender-placed insurance, we have maintained our market-leading position with large U.S. servicers and banks, tracking over 30 million loans. Last year alone, we renewed 10 clients and partnered with 2 new clients. As we look to 2022, we will continue investments in operations such as our customer-centric,single-source processing platform -- differentiating our tracking capabilities and improving efficiency.

Overall, I am pleased that our businesses delivered on our commitments for 2021 - as we delivered value for our clients and customers. We also further demonstrated the resiliency of our unique business model as we navigated the pandemic and managed inflationary pressures. Excluding reportable catastrophes, we generated 14 percent earnings per share growth - on the high-end of our expectations. Net operating income, also excluding CATs, grew by 11 percent to $672 million dollars - making 2021 our fifth consecutive year of profitable growth.

Our balance sheet remained strong. Combined, our businesses contributed a total of $729 million dollars in dividends to the holding company - representing approximately 100 percent of segment earnings. This allowed us to return a total of $1 billion dollars in share repurchases and common stock dividends and complete our 3-year, $1.35 billion-dollar capital return objective. In addition, we completed 60 percent of

the $900 million dollars we committed to return through share repurchases, as part of the sale of our Preneed business. We anticipate returning the remainder by the end of the second quarter.

Next, I'd like to review some initial thoughts for 2022. As we look ahead to sharing our long-term vision, strategy and financial objectives at Investor Day in March, we can make an even more compelling case for the future. Given our ongoing shift to more service-oriented,fee-based businesses, we believe Adjusted EBITDA, rather than net operating income, is a better representation of how to evaluate our operating performance for the enterprise and segments.

In 2021, Adjusted EBITDA, excluding CATs, increased 9 percent to $1.1 billion dollars driven by strong results in Global Lifestyle, particularly in Global Automotive and Connected Living, as well as a lower Corporate loss. In 2022, we expect growth in Adjusted EBITDA, ex. CATs, of 8 to 10 percent - a reflection of the strength of our business portfolio. Within Global Lifestyle, we expect Adjusted EBITDA to increase by low double-digits but likely not exceed the 12 percent growth we had in 2021. Segment growth will be driven by Connected Living -- particularly mobile - even as we make strategic investments to support new business, including continued investments in our in-store mobile repair capabilities.

Within Global Housing, Adjusted EBITDA, excluding CATs, is expected to grow mid- to high-single-digits, driven primarily by lender-placed from higher average insured values, operating efficiencies and improved results in Specialty offerings. Our Corporate segment is expected to generate a loss of approximately $105 million dollars of Adjusted EBITDA, which is in-line with our historical levels.

Cash flow generation is also expected to remain strong - and is a core component of Assurant's financial profile, allowing us to continue to invest in and transform this company. As we look at our capital management priorities going forward, we will continue to be strong stewards of capital. Our goal is to continue to maximize long-term value creation through disciplined capital deployment, while also maintaining our investment grade and financial strength ratings.

Given the attractive business opportunities we see ahead, we expect a more balanced capital deployment mix - targeting compelling investments to drive long-term growth - whether organic or through M&A - as well as ongoing return of capital to shareholders. We believe this combination will enable us to sustain above market profitable growth and generate significant value for our shareholders.

We recognize that for periods of time, this may result in higher-than-average levels of holding company liquidity to ensure we have the flexibility to make investments that generate compelling returns while also returning capital, mainly through buybacks, given the attractiveness of our stock.

Lastly, I wanted to acknowledge and thank all who have supported my transition to CEO over the last several quarters - your feedback and ongoing dialogue has been incredibly valuable as we collectively look to build upon the success of Assurant for the future. And I want to thank our employees around the world for their extraordinary efforts in 2021, a year in which they again outperformed, despite the challenges of the pandemic.

I will turn the call over to Richard to review the fourth quarter results, our 2022 outlook and business trends. Richard?

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

Thank you, Keith, and good morning, everyone. As Keith noted, we are pleased with our performance in 2021 which continued to reinforce the strength of earnings and cash flow generation of our business portfolio. Before we begin, I wanted to note that although we will transition to using Adjusted EBITDA for

2022, I will report fourth quarter 2021 results based on net operating income - consistent with our outlook communications during 2021. For the fourth quarter, we reported net operating income per share, excluding reportable catastrophes, of $2 dollars and 49 cents, up 21 percent from the prior-year period. Excluding CATs, net operating income for the quarter totaled $144 million dollars, and Adjusted EBITDA amounted to $245 million dollars, a year-over-year increase of 16 percent and 8 percent, respectively.

Now let's move to segment results starting with Global Lifestyle. The segment reported net operating income of $108 million dollars in the fourth quarter, a year-over-year increase of 23 percent. Growth was driven by strong performance in Global Automotive and Connected Living. In Global Automotive, earnings increased $12 million dollars or 29 percent from fourth quarter 2020. The increase is based on three main items, including: first, continued organic growth across distribution channels, mainly in the U.S., including AFAS contributions; second, better loss experience from select ancillary products; and third, higher investment income.

Connected Living earnings increased by $9 million dollars or 21 percent year-over-year, more than offsetting the implementation costs associated with the initial deployment of in-store device repair services with T-Mobile. These costs are primarily related to technician hiring and parts sourcing and will further impact Connected Living's earnings in 2022 as we continue investing in our in-store capability. The fourth quarter increase in Connected Living was primarily driven by 3 items; higher trade-in volumes, including a full quarter of contributions from HYLA and carrier promotions; higher international earnings, including improved performance in Europe and Asia Pacific; and continued mobile subscriber growth in North America, including growth from our cable operator partners. This quarter, Connected Living and Global Automotive results also included a modest tax benefit that improved earnings.

For the quarter, Lifestyle's Adjusted EBITDA increased 16 percent to $159 million dollars. Adjusted EBITDA eliminates the segment's increased IT depreciation from higher investments as well as amortization resulting from higher deal-related intangibles from more recent transactions in mobile and Global Automotive.

As we look at revenues, Lifestyle revenues increased by $168 million dollars, or 9 percent. This was driven mainly by continued growth in Global Automotive and Connected Living. In Global Automotive, revenue increased 12 percent, reflecting strong prior-period sales of vehicle service contracts across all distribution channels. In the US, we saw continued expansion from our national-dealer network and third-party administrators, while we benefited internationally from higher volumes with OEMs. As expected, our net written premiums - a key sales metric - continued to normalize compared to the third quarter but remained elevated. We expect continued normalization into 2022.

Within Connected Living, revenue increased 7 percent, primarily due to mobile fee income that was driven by strong trade-in volumes, including contributions from HYLA. Trade-in volumes continued to be elevated in the fourth quarter, supported by new phone introductions and carrier promotions from the introduction of 5G devices. Higher revenue from growth in domestic mobile subscribers was offset by declines in runoff mobile programs previously mentioned. For the year, mobile subscribers grew 18 percent to nearly 63 million, driven by growth in North America, including the transition of legacy Sprint subscribers. Excluding the Sprint transition, our North America device count continued to grow at a healthy pace and was up 8 percent, offsetting declines in other regions.

Looking ahead to 2022, we expect Global Lifestyle Adjusted EBITDA to increase by low double-digits. Growth will be mainly driven by Connected Living - and particularly mobile - from continued global expansion in existing and new clients across device protection and trade-in and upgrade programs. Given the strategic investments we are making across Lifestyle to support new business opportunities, including