Assurant - Earnings Call - Q2 2020

Transcript

Speaker 0

Welcome to Assurant's Second Quarter twenty twenty Earnings 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. It is now my pleasure to turn the floor over to Suzanne Sheffard, Senior Vice President, Investor Relations. You may begin.

Speaker 1

Thank you, operator, and good morning, everyone. We look forward to discussing our second quarter twenty twenty results with you today. Joining me for Assurant's conference call are Alan Kolberg, our President and Chief Executive Officer and Richard Giazzo, our Chief Financial Officer. Yesterday, after the market closed, we issued a news release announcing our results for the second quarter of twenty twenty. 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 and 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 a reconciliation of the two, please refer to yesterday's news release and financial supplement. I will now turn the call over to Alan.

Speaker 2

Thanks, Suzanne. Good morning, everyone. We're pleased with our second quarter performance. We reported operating earnings per share excluding catastrophe losses of $2.9 up 27% from the prior year period. Net operating income for the quarter also excluding catastrophe losses was $179,000,000 an increase of 24% from last year, demonstrating the continued strength and resiliency of our business.

Results were above our expectations, reflecting the stability of our large installed customer base, significant client partnerships and embedded growth in global lifestyle. We also benefited from improved results in global housing. Declines in investment income and foreign exchange were more than offset by lower claims activity and expense management efforts. The initial negative impacts from COVID-nineteen in April gradually improved in May and June, resulting in a modest net positive to overall net operating income in the quarter. Year to date, net operating earnings per share, excluding catastrophe losses, grew 24% and net operating income increased 21%.

Even after adjusting for $16,000,000 of onetime items during the first half of the year, our results came in at the high end of our model pandemic scenarios. Given our strong performance in the first half and improved visibility for the remainder of the year, we have decided to reinstate and increase our outlook for full year 2020. We now expect 12% to 16% growth in operating earnings per share, excluding catastrophe losses, an increase from our initial outlook of 10% to 14%. This reflects continued growth in Connected Living, expansion within multifamily housing and improved profitability in our specialty business. Our outlook assumes a continuation of current business trends and therefore does not take into account a material increase in infection rates from COVID-nineteen, which could lead to a significant change in consumer behavior, access to distribution channels or impact to financial markets.

While we expect earnings growth in the second half on a year over year basis, our outlook for the full year assumes a decline in earnings from the first six months of this year as we anticipate more normalized claims activity across most of our businesses and make incremental investments in our digital and customer experience capabilities. The second half of the year will also reflect lower investment income and foreign exchange headwinds, the absence of $16,000,000 of onetime benefits as well as typical mobile seasonality. Looking at our balance sheet, our liquidity position remains strong. In July, we repaid the $200,000,000 credit facility draw from late March, which was done as a precautionary measure. Given the attractiveness of our stock and strong capital position, we expect to resume share repurchases in the third quarter and we continue to expect to reach our objective of returning $1,350,000,000 of capital to shareholders between 2019 and 2021.

As always, this is subject to a variety of factors including no significant deterioration of economic or market conditions. Recent market transactions across our space further reinforce our view that our stock remains attractively priced. Earnings momentum in Global Lifestyle continues to be strong, driven in particular by Connected Living. This business had a compound annual earnings growth rate of 38% between 2015 and 2019 led by mobile. Our installed base of customers, which represent a significant monthly recurring revenue stream continues to expand.

We are now at over 53,000,000 mobile subscribers, up 70% since 2015. We've continued to provide value to consumers through services like trade in, upgrade, and technology support as part of our fee based offerings, resulting in a better ownership experience and multiple profit pools beyond device protection. At the same time, we've continued to deepen our partnerships with market leaders to drive long term profitable growth. We are pleased to announce that as Sprint becomes part of T Mobile, we'll offer device protection to those new T Mobile customers. We believe this is another example to support the long term growth of our Connected Living business, and we are proud of our long standing partnership with T Mobile.

In August, we also strengthened our mobile device trading capabilities in Asia Pacific through the purchase of Allegri, a leading operator in the pre owned mobile device market. After a small initial investment in 2018, we acquired the remaining equity for $12,000,000 Turning to global automotive, our installed base now includes over 48,000,000 vehicles. We continue to strengthen our client partnerships by working with them to enhance the digital customer experience, offering live online dealer training and sales webinars. We

Speaker 3

will continue

Speaker 2

to use our scale and diverse distribution channels to grow the business over the long term, especially as we look at future opportunities with the Connected Car. Moving to Global Housing, our lender placed insurance and renters businesses both continue to contribute to our attractive above market returns. Our lender placed business plays a unique and vital role within the housing market, protecting both lenders and homeowners. We track over 32,000,000 loans, including for eight of the top 10 largest US mortgage servicers. Since the beginning of 2019, we have renewed relationships with clients that represent nearly 80% of our loans tracked, solidifying our position as market leader.

We've been investing in a new technology platform to improve the customer experience. In addition, we've made progress with our efforts to streamline and reduce our operational cost. In our renters business, we've built a leadership position over the last fifteen years. We now cover over 2,300,000 renters and generate over $400,000,000 in annual revenue. Since 2015, we've grown earnings at an 18% compound annual growth rate with multifamily now representing roughly one third of Global Housing's 19 net operating income, excluding catastrophes, illustrating the franchise strength.

We will continue to invest to enhance the customer experience as this remains an important growth business for the company, especially as we think ahead of supporting consumers within the connected world. And in Global Preneed, we have more than 2,000,000 policies and growing. This business over time gives us strong distributable cash flows with statutory earnings greater than GAAP earnings. Overall, the level of mortality risk remains lower relative to other life insurance type products, ultimately contributing to above market returns. More recently, we've introduced new fee for service offerings to support the growing senior lifestyle market such as Executor Assist.

We believe our overall portfolio represents a compelling mix of above market growth and countercyclical businesses with leading positions and a track record of innovation. These businesses generate significant cash flow to reinvest and return capital to shareholders. These are key characteristics which we believe set us apart as a long term outperformer and enable us to create value for our shareholders even against the backdrop of uncertainty in the global macro environment. Before I turn it over to Richard, I want to take a moment to thank our employees for their unwavering focus in supporting each other and our customers during this time. In the past few months, we've taken additional steps to support our employees through an array of actions.

These have included one time relief payments for work from home employees, incentive bonuses for on-site staff, providing additional floating holidays, and a number of well-being and mental health support services. The cost for these programs and other incremental expenses directly related to COVID nineteen are reflected in net income, similar to last quarter. I'm proud and grateful for the exceptional service our employees have and continue to provide on behalf of our clients and our 300,000,000 customers worldwide. Well, in the midst of grappling with COVID nineteen, we've also recognized the need to continue to advance diversity and inclusion at Assurant and within the communities we serve, particularly in light of the tragic murder of George Floyd and many others. For us, diversity and inclusion is not only about common decency and common sense, but it's also a strategic and business imperative.

Building on past initiatives, we've hosted candid enterprise wide conversations with our employees on race to ensure that we recognize these issues in our society and within the workplace. We're evaluating additional actions to support in a more diverse, equitable, and inclusive community. All of this has continued to reinforce the criticality of supporting the evolving needs of all of our key stakeholders with purpose and commitment. In July, we announced several organizational changes to enable us to deliver on those objectives more effectively. Under the leadership of Francesca Luthi and a newly created role as chief administrative officer, we have realigned human resources, facilities and procurement along with marketing, communications, investor relations, and corporate social responsibility.

A move I believe is critical to ensure we bring a holistic view to integrated stakeholder management while at the same time elevating the employee experience to attract and retain the best and most diverse talent for the future. We also promoted Jay Rosenblum to Chief Legal Officer. He had been serving in that role in an interim capacity since February after joining us last year to lead our government relations and regulatory affairs team. Jay's diverse experience spans twenty five years in various legal and HR roles, and I'm pleased to have him lead our global legal function. Overall, I'm exceptionally proud of our leaders and our 14,000 employees and how they have and will continue to live our values.

I'll now turn the call over to Richard to review second quarter results, recent trends and our updated 2020 outlook in more detail. Richard?

Speaker 3

Thank you, Alan, and good morning, everyone. Let's start with Global Lifestyle. This segment reported earnings of $122,000,000 up 11% compared to the prior year period. This increase was primarily driven by continued mobile growth, mainly from programs added in the last several years in North America and Asia Pacific. Lower claims activity outside of The US in connected living and auto also drove improved results.

Our mobile trade in business benefited from higher average selling prices due to scarce supply for used devices. This was partially offset by lower overall volumes due to COVID nineteen. Global automotive reflected a $4,000,000 discrete client benefit in addition to reduced claims activity, mainly from our OEM clients outside of The US as a result of COVID-nineteen stay at home orders. Overall earnings growth was partially offset by a decline in Global Financial Services from weaker results in Canada and anticipated declines in legacy credit insurance. Unfavorable foreign exchange also pressured results in the quarter.

Looking at total revenue for lifestyle, net earned premiums and fees were down $40,000,000 or 2%. The decrease was driven primarily by lower mobile trade in volumes due to store closures from COVID-nineteen and foreign exchange movements. This was partially offset by increased enrollment and new mobile programs, especially as carrier stores began to reopen in the latter part Within Global Automotive, revenue grew 3%, primarily reflecting prior period sales of vehicle service contracts. Sales in auto have rebounded since April and are nearly back to pre COVID levels year over year.

We will continue to monitor trends as sales levels today will impact future earnings for the business. Looking forward to full year 2020, we expect growth in Lifestyle's net operating income compared to full year 2019. However, we also expect that earnings in the second half of the year will be lower compared to the strong first half results. This is due to five key factors. First, we recognized $16,000,000 of onetime benefits in the first six months of the year, dollars 4,000,000 of which was incurred in the second quarter.

We do not expect these items to reoccur in the second half of the year. Second, we expect claims activity in Connected Living and Auto to normalize at higher levels in the coming quarters as the global economy continues to reopen. Third, similar to previous years, the timing and availability for new phone introductions will impact trade in activity in the second half of the year. We are not though assuming any material increases in volumes before year end. Fourth, we're ramping up our investments in digital and customer experience capabilities to further increase our competitive differentiation.

And finally, we expect both foreign exchange and lower investment income to remain headwinds into the second half of the year. I will also note that effective July 1, following the change in contract terms, we're transitioning our revenue accounting treatment from a gross sales basis per device to a flat fee per device for one of our mobile trade in and upgrade programs. This will reduce our fees and other income by approximately $275,000,000 on an annualized basis. Lower cost of goods sold embedded in LifeStyle's SG and A will substantially offset this decrease. We are pleased with this change as it will remove some of the revenue and expense variability we have historically seen in our financial results.

It will also mitigate supply and demand pricing risk in the future. Moving now to Global Housing, net operating income for the second quarter totaled $85,000,000 an increase of $14,000,000 or 19% year over year despite higher reportable catastrophes. Excluding catastrophe losses, earnings of $96,000,000 represented an increase of $27,000,000 or 39% year over year. Just over half of the increase was due to favorable non cat loss experience across all major products, reflecting lower overall claims frequency and improvements in underwriting, including the benefits from artificial intelligence and claims processing initiatives. Also, the absence of losses from small commercial along with growth in certain other specialty products contributed to the increase.

Lender placed results increased year over year. Higher premium rates and favorable loss experience were partially offset by a reduction of policies in force. This reduction was mainly related to the previously disclosed financially insolvent client and lower REO volumes due to the current foreclosure moratoriums. The modest sequential increase in the placement rate to 1.56% was attributable to a shift in business mix. It is not an indication of broader macro housing market shifts.

Multifamily housing earnings were up slightly due to favorable non catastrophe loss experience and modest growth from affinity partners. Turning to global housing revenues, net earned premiums and fees decreased 4% mainly from three items, insolvent client, lower REO volumes, and the exit of small commercial. This decrease was partially offset by growth in our specialty property and multifamily housing businesses. Moving to multifamily housing, revenue increased 4% year over year driven mainly by growth from our affinity partners. The impact of COVID nineteen has been minimal year to date, although we continue to monitor state actions related to premium deferrals.

At the June, we completed our 2020 catastrophe reinsurance program, maintaining our $80,000,000 per event retention and increasing our multiyear coverage to nearly 50% of our US power. We also reduced our overall risk exposure, primarily through the exit of small commercial. Overall, we were able to leverage strong relationships with our reinsurance partners to keep rate increases on the lower end of the overall market, but we also recognize those higher costs may persist into the future. Looking forward to the full year 2020, we expect Global Housing net operating income excluding cats to increase over full year 2019 earnings driven by improved results in our specialty businesses and growth in multifamily housing. We also believe the results for the second half of the year will be lower than the first half for Global Housing.

This is due to four key factors. First, we expect a more normalized level of claims frequency as previously mentioned. Second, we expect REO volumes to continue to be reduced throughout the remainder of the year. Third, the absence of income from the financial insolvent client and lender placed. And finally, the segment will also continue to be impacted by lower investment income due to the lower yields available in the current interest rate environment.

While Lender Place should grow due to the countercyclical nature of the business if economic conditions worsen, today's mortgage industry and economic environment differ significantly from the housing crisis over ten years ago. For example, mortgage loan underwriting standards have tightened with the number of subprime and adjustable rate mortgages down over 60%, and homeowners today have higher rates of home equity compared to that period. Now let's move to Global Preneed. The segment reported $14,000,000 of net operating income, a $3,000,000 decrease compared to the second quarter of twenty nineteen. This was driven by a combination of lower investment yields and a modest increase in mortality due to COVID-nineteen.

We continue to monitor mortality trends, especially in California, Texas, and South Carolina given our policy concentration in those areas. So far, we have not experienced significant increases. Revenue for pre need was up slightly, supported by sales in The US. And while face sales have begun to rebound recently, given funeral home reopenings and increased online sales since April, July year over year face sales were still down approximately 15%. We would expect new sales to continue to fluctuate.

Overall, for Global Preni, we believe 2020 earnings will increase modestly compared to 2019 reported results. The second half of the year, we expect earnings to be up slightly versus the first half of the year due to more favorable mortality trends. We'll continue to monitor these trends as our current outlook does not assume a significant worsening in COVID nineteen cases. We expect the reduction in mortality to be partially offset by investment income declines. At corporate, the net operating loss was $27,000,000 versus $24,000,000 in the second quarter of twenty nineteen.

This was due to a lower tax rate from the consolidating tax rate adjustment and less investment income from lower yields on cash assets. For the full year, we expect the corporate net operating loss to be in the range of $86,000,000 to $90,000,000 as the result of lower investment income and one time transition costs associated with the outsourcing of our investment management function. Across Assurant, our ongoing expense management efforts are contributing to our results. In addition, this year, we benefited from lower travel expenses due to COVID nineteen restrictions as well as a reduction in discretionary spending, including deferring hiring for some positions. We are though filling all critical roles, particularly those needed to meet our client customer expectations.

As we look to sustain profitable growth, we expect to continue to invest in our core capabilities in the upcoming quarters, while closely managing discretionary spends given the continued uncertainty from COVID-nineteen. Next, I want to provide a brief update on our investment portfolio. Overall, our $12,600,000,000 portfolio of fixed maturities is of high quality, well diversified and managed for its income yield with low turnover. And as previously mentioned, we have minimal exposure to harder hit sectors like energy, hospitality, retail stores and airlines. Investment yields on our total investment portfolio dropped by 55 basis points year over year to 3.62%.

This was largely driven by a decline in short term cash yields. While we continue to manage the portfolio to preserve yield, our expectation is that our investment income will remain under pressure for some time as we do expect interest rates will remain relatively low for the foreseeable future. However, we believe our consistent investment approach will continue to serve us well as it has in the past. In conjunction with our decision to outsource the management of our core investment portfolio, we sold our CLO platform for a modest gain in July. The sale will be recorded in the third quarter.

While we will still have a small amount of investments in CLOs, our exposure to the asset class has been significantly reduced. Turning to holding company liquidity, we ended June with $357,000,000 or $132,000,000 above our current minimum target level. This excludes the 200,000,000 credit facility draw, which was reimbursed in July. In the second quarter, dividends from our operating segments totaled $157,000,000 or 71% of segment earnings. In addition to our quarterly corporate and interest expenses, we also bought back 26,000,000 of stock.

As we have indicated, we slowed and then ultimately paused share repurchases in the second quarter. We paid $44,000,000 in common and preferred stock and dividends. We acquired AFAS for $158,000,000 and we sold EK, which resulted in a cash outflow of $51,000,000 from the holding company. In late July, we also received the onetime tax cash benefit related to the acceleration of our net operating losses included in the CARES Act passed in March. As a result, liquidity at the holding company will increase by $84,000,000 in the third quarter.

For the full year, we expect segment dividend to approximate segment earnings. This is subject to the growth of the businesses, rating agency and regulatory capital requirements and the performance of the investment portfolio. As Alan mentioned, we expect to resume buybacks in the third quarter and we'll continue to manage our capital prudently. Our approach to buybacks will be measured as we continue to monitor business performance as well as the broader macroeconomic and credit market environments. In summary, we demonstrated strong first half performance while navigating the challenges of COVID-nineteen.

As we focus on continuing to deliver on our financial commitments for 2020, we will continue to invest in our growth businesses for the future while monitoring global market trends. And with that, operator, please open the call for questions.

Speaker 0

Thank you. The floor is now open for questions. While you pose your question that you pick up your handset to provide optimal sound quality. Thank you. Our first question comes from Mark Hughes of Truist Securities.

Your line is open.

Speaker 2

Hey, good morning, Mark. Good morning, Mark.

Speaker 4

Good morning. Thank you. Could you talk about T Mobile announcement? It sounds like you're going to be providing mobile contract services to new customers. Is there could you give a little detail?

Is this gonna include the back book as well? Is it just new customers? What's the timing, potential financial impact, all of that?

Speaker 2

Yes. No, Mark. Thank you for the question. You know, I'd start by saying we're very proud to be T Mobile's partner for the past decade and assisting them in their journey to be the Un carrier. You know, as they migrate the stores over, the legacy Sprint stores, which they started last weekend, we will be offering our device protection program to all of the legacy Sprint customers as they come into a store.

So that's very positive. It is only go forward though, which is typical in our market. So we're starting with Xero's former Sprint customers. It'll take time to grow that book of business, although obviously it's a very positive long term thing. And we're going to be investing as the, you know, the program starts ramping over the next month or two or quarters or so.

But again, very positive, and we're really proud of the partnership we've built with T Mobile.

Speaker 4

And then, I assume this is publicly available, but the pace of new Sprint, customers, any, sense on that you can share?

Speaker 2

Yeah. I think it would just be what we normally see, which is over a cycle, call it somewhere around three to four years, is when people come into the store to turn in their handset, get a new handset, or purchase a new one. So we would it's similar to the other programs we've launched in the last couple of years. We would expect it to grow and build over the next three plus years.

Speaker 4

That's great. Can you talk about the mobile contract overall? You had mentioned in the auto business that you were pretty close to where you were pre COVID. How about on the mobile service contracts, your kind of sales trajectory as you sit here today versus pre COVID?

Speaker 2

Yes. If I step back a little farther and talk about broadly the impacts from COVID on mobile, what we've seen over the last quarter or so is lower trade in volumes, really as stores were closed and there was disruption in the marketplace. We were fortunate that that was offset by higher margins as we went through the quarter. But we definitely have seen lower trading volumes, although that's now recovered as we head into June and July. Things have really returned more back to pre COVID.

If you look at our subscriber count, we feel great about where we are. Our installed base is 53,000,000. We continue to grow in The US and Japan, which are our critical markets. We did see pressure in Latin America, which is really the most disrupted region, globally in terms of new sales. But overall, it's really a large recurring revenue base that really sets us up well for the future.

Speaker 4

The losses in housing, the underlying losses, I think you've mentioned you got some benefit from favorable weather, which frankly seems to run countered to many or most other carriers. But then you got some benefit from better underwriting and claims processing, I think you mentioned use of the AI. Could you talk about that? How much does that mean for your losses if this persists?

Speaker 2

Yes. Maybe I'll start and Richard, feel free to add on to this stuff. When we look at kind of the non cat loss ratio, it was a little bit below what we normally see, really driven by a couple of things. With people at home, there was less loss than that. There was less water damage.

We've mentioned a little bit less weather just in the quarter. Equally importantly, we've been investing over the last few years in our AI and underwriting initiatives, and we're starting to see the real benefits of that and dramatically better customer experience with much quicker payment of claims, much faster processing. But, Richard, what would you add?

Speaker 3

Yeah. Thank you. Just just a few things, Mark. Good question. I think part of it, obviously, people are staying home.

And so COVID, I think, in in in some respect helped us during this period as, you know, they're watching their houses a little more closely. As Alan said, you know, really the AI initiatives, the claims initiatives that we have really help us, you know, with efficiency and, you know, just staying on top of of claims, you know, much better in processing them better. I'd also say that the underwriting has improved. You know, last year,

Speaker 2

we talked about small commercial

Speaker 3

and some losses we had there. We got out of that business. So that's a plus for us. That won't come back. And also within our specialty, area, You know, we've we've looked at we talked about a single contract with a client that, we changed significantly.

So all of these things will will bode well for us in the future.

Speaker 4

Then just a final one. The 275,000,000 you mentioned in the trade in, you're going to fee rather than gross. That'll all show up in the the fee line. And is is that neutral to earnings?

Speaker 3

Sean, do want to take that?

Speaker 2

Yeah. Please, Richard.

Speaker 3

Yeah. So, yeah, the $275,000,000, you know, that's the contract change that we had in lifestyle that you're referring to. That's an annualized impact that will have. And if you think about it before, we were actually buying in the units and then selling them out. So we had kind of the gross amount going through, you know, the fee income, net amounts going through cost of goods sold.

Now we're more administrating that business. So you'll see those two lines, you know, go down, you know, the income line, but also cost of goods sold, you know, the s g and a line that we show in the supplement, will go down as well. And then, you know, I guess the other thing that we pointed out in our prepared remarks is we think it's a really good move for us. It provides more stability in terms of that trade in business. It takes some of the pricing risk out from us.

So all in all, we're really pleased with it. But we did wanna set up to the to to the market that, you know, revenues will go down, but we're not expecting a a a material bottom line impact on that.

Speaker 4

Thank you very much.

Speaker 2

All right. Our Thanks,

Speaker 0

next question comes from Brian Meredith of UBS. Your line is open.

Speaker 3

Hey, good morning, Yes. Thanks.

Speaker 5

Good morning. Good morning, Brian. A couple of questions here for you. First one, just back on the whole T Mobile transaction, is it possible to frame kind of what the potential revenue opportunity is from picking up the additional Sprint customers?

Speaker 2

You know, what I look at is you can see publicly how many subscribers Sprint has, and you can assume over the next three years, we'll pick up those subscribers. So that that's how I think about it. But other than that, we generally don't talk about client specifics, but it is a very positive development for our mobile franchise.

Speaker 5

Just curious, as I think about it, historically, when you pick up a large customer like that, it's kind of a drag on earnings maybe for a year or so. Should we still expect that?

Speaker 2

Yes, that's typically the case as we have the upfront cost for things like integrating technology, for regulatory filings, for marketing, for training. So we're in the middle of starting to invest those costs right now. So it certainly is a bit of a drag in the short term, but a very positive long term.

Speaker 5

Sure. No, absolutely. And then I'm assuming it's in your guidance for the year, so you're expecting that to

Speaker 3

kind of kick up in the second half?

Speaker 2

Yes, the investments, right? Because we start again, as I mentioned earlier, we start with no subscribers from legacy Sprint, but it will build over time as we go through the next few years.

Speaker 5

Terrific. And then a quick question here on the LPI business. I understand that better quality mortgages today, foreclosures are probably delaying some of the activity there, penetration. But have you got any statistics or do you take a look at what mortgage delinquencies and how they track relative to your, LPI penetration?

Speaker 2

Yeah. So, a couple of thoughts on that. So we wanna be clear. We don't expect a benefit in LPI this year. If you look at what's going on with mortgage forbearance, we're actually, it's a bit of a COVID-nineteen headwind.

We're seeing a lower REO volumes and that's impacting twenty twenty's outlook. But if you look broadly at the housing market, we are starting to see delinquencies begin to creep up. And obviously, our product is an important product that protects both the consumer and the banks. And we're well positioned if the housing market does weaken for a growth there in 2021 and beyond.

Speaker 5

Yes. I mean, I figured looking more at 2021, I didn't know if you've got any kind of correlation statistics. Mortgage delinquency trends are good standing for you, they're running around 7%. Does that equate to a certain amount of penetration that you typically see?

Speaker 2

Yeah. What I would say is we're monitoring what's happening there. There is always a lag in our placement, but we're well positioned. And it's just hard to predict whether those delinquencies will translate into our product in place or not, just given what's going on currently in the market. But we do feel well positioned, and we do, you know, anticipate there'll be upside in 2021 beyond if the economy weakens.

Speaker 5

Gotcha. And then last question here. I'm just curious. Any thoughts on the Bank of America renewal? Obviously, NetGen is getting, you purchased by Allstate.

Any thoughts around that when that could potentially happen?

Speaker 2

Yes. So as it's been talked about previously, it's common knowledge that that RFP is in the market, which is the first time that we've ever had a chance in the last decade to participate in that business. And we'll see what happens over time, but we do believe we have the industry leading capability in the market. We've been investing heavily in our technology. We offer a superior client and consumer experience.

So we'll see what happens, but we feel well positioned for any piece of business that comes into the market.

Speaker 5

Great. Thank you.

Speaker 2

Thank you, Brian.

Speaker 0

Your next question comes from Michael Phillips of Morgan Stanley. Your line is open.

Speaker 2

Morning, Hey, good morning, guys. Thanks. So first off, just high level on the revised outlook. I guess how do we think about your we've seen some reversal in reopenings and some uptick in cases across the country and more concerns there. So how do we match that with your uptick in your outlook with your comment that it doesn't contemplate any uptick in COVID infection rates?

Yes. So I think the starting point is our business is really driven by our installed base. And that large installed base of nearly 300,000,000 customers, over 300,000,000 customers is there. We have a very resilient business. And what we've seen even in July, for example, if you go through the various sectors, auto new sales of our product in July were back at or above pre COVID levels, even as there's disruption in The U.

S. Marketplace. If you look at mobile, we mentioned that trade in activity in July was back what we expected earlier in the year. Multifamily, we were impacted early by COVID, clearly. But as we've gotten into July, we've again seen the new sales rebound and be back to what we expected to see.

So pretty much across the board, the exception is probably pre need. Pre need new sales are still lagging 10% to 15% below where they were same year pre COVID. But our business is strong and really driven by that installed base. And so the other important point I'd make is, as we talked about in the prepared remarks, we still expect to grow 2019 sorry, 2020 versus 2019 despite some of the uncertainty and headwinds from COVID-nineteen. So we'll certainly continue to monitor it, but we feel good about the business trends we're seeing in our portfolio.

Okay. Thanks, Alan. That's helpful. Just a couple of little nuances here. One more question.

You've talked previously about some places that were overseas where things were shut down, I think Hong Kong, some trade in places in Hong Kong. Any impact this quarter on things like that? And are places up and running again? Or should we expect kind of the future impact from those going forward? Yeah.

So just to clarify on that comment, you know, what we were referring to there is in the first quarter, we had some disruption in our ability to sell phones into Hong Kong and This goes back to January and February. That normalized, in February. And, you know, as the virus migrated from East to West, we've not seen any further disruptions in Asia Pacific. If you look around the world, the market that's been most disrupted broadly is Latin America, and we've seen a greater impact on new sales in that geography than anywhere else in the world. We are seeing a little bit lower claims than expected in places like Europe, again, probably a reflection of the shutdown.

But we're starting to see that normalize as we head into Q3. So at this point, we see things trending kind of back to normal, both on new sales as well as on claims. Okay. Thanks. And then multifamily housing, typically, you you get a bit of a a bump there because of some time.

I assume there's a little bit of an impact in there. Can you talk about that? And maybe any impact on, I guess, or any impacts on the rental business because of the recession? Yes. We were clearly impacted back in the March and April as people just didn't move, but that has rebounded.

And our sales are pretty much back to what we expect as we're in July. So we were off track, but pretty much back on track now. And if I really step back on our multifamily business, we're really proud of the franchise we've built. We now have 2,300,000 policyholders. We're profitable.

We've been growing that franchise rapidly. Over the last few years, we've outgrown the market even as different competitors have entered. And it's really driven by our strong diverse distribution with both property management companies as well as our affinity partners. It's driven by our ongoing investments in digital and CX, which helps us sustain a really competitive attractive product for consumers. And then we've got a lot of potential over time with our point of lease product, which has gone slowly this year just as landlords have been disrupted with COVID-nineteen.

But over time, we expect penetration to grow as we roll out our point of lease, which really provides a seamless kind of consumer experience as they move into a property. Okay, great. Thank you, Alan. Appreciate it. All right.

Thank you.

Speaker 0

Our next question comes from Gary Ransom of Dowling and Partners. Your line is open.

Speaker 3

Yes. Morning, Gary.

Speaker 6

Good I wanted to see if I could tie the new guidance at least a little bit into the original Investor Day guidance of the 12% going into 2021. It sounds like you're ahead of what you originally were talking about at this point. And I just can you add any commentary on what your new guidance might mean for that old guidance?

Speaker 2

No, Gary, it's a very fair question. We do always look at a multiyear period because over time, short term fluctuations might impact any given year. But if you look at net operating earnings growth, so this is ex cat, not EPS, but earnings, we grew earnings 11% last year. If you look at the midpoint of our new outlook, we're looking at at least 12% earnings growth this year. So we're ahead both in 2019 and 2020 versus our long term.

So as we think about 2021, I would say a few things. We have a strong track record of profitable growth. I think we've demonstrated that we have a resilient business model that's been proven to be able to navigate the pandemic. We have strong cash flow generation and we still expect to grow in 2021. It's obviously very early, so we haven't completed all of our planning and modeling for next year.

But we are ahead, and so we may grow a little slower next year than we might have originally thought just because we've grown more rapidly in 2019 and 2020. But we remain confident that we will continue to grow earnings over time and next year, really driven off of our installed base of customers, some of the new programs that we've just won and we just announced, for example, the Sprint T Mobile. And just we continue to expand our offerings. The purchase of Allegri in Australia is another example, which really allows us to strengthen our repair and logistics capability, not only in Australia but in Asia Pacific. So we'll provide an update later, but we feel good about the long term profitable growth of our company.

Speaker 6

Thank you for that. That's helpful. A slightly related question. Is this dip in revenues that you saw, and maybe this is mostly about auto, but was it a big enough dip that it will actually affect what we see in the earned premium and and and fees as it gets earned out in the future somewhere? Will there be an echo of this?

Or is that am I kind of making too much out of that?

Speaker 3

Alan, do you want me to take that?

Speaker 2

Yeah. Please. Yeah. Please, Richard.

Speaker 3

Yeah. It's it's it's a good question. I mean, what we're really seeing is a quarter, you know, a dip and and and primarily from March and April when the dealerships closed down. And as you know, you know, the the unearned premium actually earns out over a number of years, you know, call think about three to five years in the future. So the way I think about it, it's it's it's a small thing.

I think you used the word echo, baby. But it dealerships, as Alan said, are now opening our our volumes are back. So I wouldn't think that, going long term, we would see much of an impact, if anything, from just this blip in the last couple of months there, March, April. That's fair.

Speaker 5

Yes, Richard.

Speaker 2

Yes, what I'd also add is, if you look at car sales, car sales are still down a little bit, but our volumes have more than recovered, which is what we normally see in economic downturns. Dealers work harder to place our products when they're having fewer car sales, and we're definitely seeing that in June and July.

Speaker 6

And one more over on the renter's product. We had a public company or an IPO of lemonade with a new technology. And I wondered if how you think about that, if that's a threat at all or just if you have any comments about it.

Speaker 2

Yes. We spend a lot of time looking at our markets and potential new entrants and changes in the marketplace. And what I would say is over the last couple of years, even as new entrants have come in, we have continued to outgrow the market and gain market share. And it's really a function of our strength of distribution as well as the investments we've made and continue to make in digital ZX. So we feel good about our position and we expect continued growth in multifamily regardless of who's entering the market.

Speaker 6

All right. Thank you very much.

Speaker 2

All right. Thank you.

Speaker 3

Thank you.

Speaker 0

Our final question comes from Mark Hughes of Truist Securities. Your line is open.

Speaker 2

Hey, good morning again, Mark.

Speaker 4

Yes, thank you. The typical penetration when we think about the Sprint customer base, are you able to share what their current penetration is in terms of service contracts? Or just broadly speaking, what might one expect if we look at their overall subscriber count, presumably some portion of that are actually going to be service contract customers, the right ratio to think?

Speaker 2

Yes. Without commenting on a specific client, because we normally don't do that, if you look at The U. S, the average penetration now for our product is, call it, roughly high 40s, high 40s percent. So you could assume something like that over time, for for new clients as well.

Speaker 4

And then, NatGen, the acquisition by Allstate, do you expect Allstate to do anything here in the lender placed market?

Speaker 2

You know, I couldn't really speculate on what Allstate might do. What I would say is we are in a very good position, right? So we mentioned on the prepared remarks that over the last year or so, we've renewed 80% plus of our tracked loans. That was in part as we're rolling out our new technology, which is a real differentiator. We wanted to work with our clients to make sure our business was solid and in place.

I think our track record speaks for itself. And, you know, we feel like we have a strong and compelling proposition no matter who we're competing against.

Speaker 4

Understood. Thank you.

Speaker 2

All right. I think that's it for questions. So I want to thank everyone for participating in today's call. In summary, we had a strong second quarter and a strong first half of the year. We will continue to monitor trends in the global market related to COVID-nineteen, but we believe we are well positioned to deliver on our strategy and financial objectives both in 2020 and beyond.

We'll update you on our progress on our third quarter earnings call in November. In the meantime, please reach out to either Suzanne Shepherd or Sean Mosier with any follow-up questions. Thanks, everyone.

Speaker 0

Please disconnect your lines at this time, and have a wonderful day. You.