Assurant - Earnings Call - Q4 2020
February 10, 2021
Transcript
Speaker 0
Welcome to Assurant's Fourth 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 open for your question following management's prepared remarks. If you would like to ask a question during this time, please press 1 on your touch tone phone. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. We ask that you please pick up your handset to allow optimal sound quality.
Lastly, if you should require operator assistance, please press 0. It is now my pleasure to turn the floor over to to Suzanne Shepherd, Senior Vice President of Investor Relations. You may begin.
Speaker 1
Thank you, operator, and good morning, everyone. We look forward to discussing our fourth quarter and full year 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 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 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 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 Alan.
Speaker 2
Thanks, Suzanne. Good morning, everyone. We're pleased with our performance for 2020. Driven by our market leading specialty P and 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 long standing commitment as a responsible employer, including additional actions to foster a more diverse, equitable, and inclusive environment within our communities. Some examples included 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 $664,000,000 and earnings per share increased 17% to $10.8 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 twenty twenty. 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 remains strong.
Combined, our three operating segments contributed a total of $821,000,000 in dividends to the holding company. During 2020, we increased our common stock dividend for the sixteenth consecutive year and returned $455,000,000 in share repurchases and common stock dividends. Our twenty nineteen Investor Day objective of returning $1,350,000,000 by the 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've continued 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
Speaker 3
the end
Speaker 2
of twenty twenty, our top clients had an average tenure of almost seventeen 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 pre need so that we can deepen our focus on our lifestyle and housing businesses and the connected consumer. Excluding global premium catastrophe losses, these connected businesses represented 66% of our 2020 segment net operating income, roughly double that of 2015. Together, they're expected to generate strong above market growth with offerings that have embedded earnings, complementing our specialty P and C 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 twenty twenty highlights for each of our operating segments. Within Global Lifestyle, we increased earnings 7% to $437,000,000 This was driven by Connected Living, where earnings grew by 14% as we increased our mobile subscriber base to 54,000,000 through new and expanded partnerships.
Across Asia Pacific and North America, we added almost 2,700,000 subscribers last year. Portion of this year over year growth can be attributed to our alignment with new market entrants like U. S. Cable providers and the new wireless carrier in Asia Pacific. We also processed 7,000,000 devices through our Assurant trading facilities in 2020 and closed on the acquisition of Haila Mobile.
As a leading provider of smartphone software and trade in and upgrade, Haila will further increase our scale, strengthen our capabilities, and expand our client roster as we look to capitalize on the five gs upgrade cycle over the next several years. In our extended service contract business, we expanded our ten 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% over 49,000,000 since acquiring The Warrior 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 continue 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 U. S.
Credit card issuer where we're providing administrative services for certain embedded card benefits that leverage our enhanced omnichannel customer experience capabilities. We're excited about the business' attractive growth prospects for the future. Moving to global housing, we delivered net operating income excluding cats of $371,000,000 up $71,000,000 from 2019. And our returns remain 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 2,400,000 renters nationwide. We've continued to invest in future growth, particularly through digital enhancements and innovations. As the ongoing rollout of our property management solution, Cover three sixty, 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 pre need, earnings were down year over year in light of the COVID-nineteen global pandemic and continued low interest rate environment. But overall, global premium performed well in 2020 and has continued to produce strong cash flows with a high quality $6,000,000,000 asset base. To summarize, 2020 was a strong year for Assurance 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 preemie.
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 Preevy, we are on track to deliver against the financial objectives shared at our twenty nineteen 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 to Richard to review fourth quarter results and our high level view of 2021. Richard?
Speaker 4
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 twenty twenty results and underlying business trends for the year. For the fourth quarter twenty twenty, net operating income excluding catastrophes declined by $3,000,000 to $136,000,000 mainly due to a $28,000,000 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 $12,000,000 decline in income from sales of real estate joint venture partnerships.
In the quarter, we also incurred $11,000,000 of severance and real estate charges as we continue to manage expenses and evolve Assurant's workplace environment. Now let's move to segment results for Global Lifestyle. The segment reported earnings of $88,000,000 in the fourth quarter, down $9,000,000 The year over year decrease was primarily due to a $16,000,000 decrease in net investment income spread across the businesses, half of which came from sales of real estate joint venture partnerships. Excluding the decline in investment income, segment earnings increased modestly. Underlying earnings growth was driven primarily by organic growth in Global Auto, while Connected Living earnings were flat compared to the prior year.
As well as contributions from the acquisition of Hyla in December. This was largely offset by lower mobile results in Europe, mainly from $5,000,000 of non run rate items. In addition, the segment had $4,000,000 of severance and real estate charges in the quarter that we don't expect going forward. Looking at total revenues, net earned premiums and fees decreased by $37,000,000 This was driven mainly by a $78,000,000 reduction in mobile trade in revenue, primarily due to the contract change we disclosed in the second quarter. Excluding this change, lifestyle revenues were up $41,000,000 or 2% driven by an 8% revenue increase in global auto from prior period sales of vehicle service contracts.
Overall, trading activity, flows through fee income, was down year over year. However, as was the case in the last few years, we saw an uptick in December. This was driven by new phone introductions, greater device availability and contributions from Hyla during its first month with Assurant. Given the continued strong trade in activity in January, we expect to see a sequential and year over year increase in volumes in the first quarter. For the full year of 2021, we expect to see continued growth in Global Lifestyle's net operating income with the growth more heavily weighted toward the second half of the year.
Overall, earnings expansion will be led by mobile and will mainly come from new and expanded programs as well as contributions from recent acquisitions. We also anticipate improved profitability in Financial Services, which is positioned to steadily improve following the lower volumes and unfavorable loss experience seen in 2020. We are cautiously optimistic, particularly as it relates to some of our travel related programs, which were negatively impacted by the pandemic. We expect global auto earnings to be down modestly, reflecting the pressure from the low interest rate environment. Continued investments in our capabilities, product offerings, and customer experience are also anticipated during the course of the year.
Moving now to Global Housing. Net operating income for the fourth quarter totaled $61,000,000 compared to $73,000,000 in the fourth quarter of twenty nineteen. The decrease was largely due to $28,000,000 of higher reportable catastrophes. Over half of the losses were from Hurricane Zeta, with the balance primarily related to claims from Hurricane Delta. Excluding catastrophe losses, earnings increased $16,000,000 or 23% despite lower investment income of $8,000,000 The increase was driven by favorable non cat loss experience across all lines of business.
We saw reduced claims frequency and drove improved profitability in our sharing economy portfolio. Lender placed results also reflected higher premium rates, mostly offset by declining REO volumes from ongoing for closure moratoriums. Turning to revenue, Global Housing net earned premiums and fees decreased 3%. Similar to previous quarters, this was driven mainly by three items, the exit of small commercial, the insolvent lender placed client and lower REO volumes. The decrease was partially offset by growth in both our specialty property and multifamily housing businesses.
We expect Global Housing's net operating income, excluding cats, to be lower in 2021 compared to 2020. An overall increase in our non cat loss ratio to more normalized levels and higher cat reinsurance costs will be the primary drivers. We expect both impacts to begin in the first quarter. Regarding our cat reinsurance costs, in January, we completed approximately two thirds of our 2021 catastrophe reinsurance program placement. As part of the placement, we secured additional multiyear coverage resulting in approximately 52% of our U.
S. Program now benefiting from this feature. As expected, we saw an increase in the overall pricing of reinsurance in our purchases to date, which our multiyear layers help to offset. As we finalize the remaining portion of the program in July, we will continue to evaluate the risks and rewards of purchasing additional reinsurance and alternatives that could reduce our risk. We are not however currently assuming any increased coverage.
We expect some increase in REO volumes in the second half of the year. However, we do not anticipate volumes reverting to pre COVID levels immediately and volumes will be influenced by the timing of the foreclosure moratoriums. Now let's move to Global Preneed. The segment reported net operating income of $9,000,000 a decrease of $7,000,000 year over year. In addition to lower investment income, we had nearly $4,000,000 of nonrecurring items related to a system conversion and updated assumptions for the earnings pattern of new policies.
While the GAAP impact of these items was $4,000,000 the statutory impact was immaterial. In addition, we experienced an increase in mortality trends as we exited the quarter. We continue to monitor trends and expect the increase in claims to continue into the first half of twenty twenty one. Revenue for preneed was up 5% primarily due to growth in U. S.
Sales and face sales have increased significantly since the second quarter of twenty twenty, so they remain below pre COVID levels. For 2021, Global Prenade will remain in our operating results until we conclude our evaluation of strategic alternatives. Overall, we expect 2021 preneed earnings will be up slightly compared to 2020 reported results, illustrating the strength of the business despite the ongoing challenge of the global pandemic. At Corporate, the net operating loss was $23,000,000 compared to $22,000,000 in the fourth quarter of twenty nineteen. This was primarily due to lower investment income and expense actions in the quarter.
For the full year 2021, we expect the corporate net operating loss to improve from 2020. I also wanted to provide a quick update on our investment portfolio. The portfolio continued to perform well during the quarter. While investment income levels are low due to the lower short and longer term yields available in the market and lower joint venture real estate income in the quarter, the strength of the portfolio can be seen through three items, the absence of defaults, the low level of credit downgrades and the increase in the value of those assets mark to market. Turning to holding company liquidity, we ended the year with $4.00 $7,000,000 which is $182,000,000 above our current minimum target level.
In the fourth quarter, dividends from our operating segments totaled $292,000,000 In addition to our quarterly corporate and interest expenses, we also had outflows from three main items, dollars 147,000,000 of share repurchases, dollars 44,000,000 in common and preferred stock dividends and $368,000,000 related to the acquisitions of Hyla and EPG. As a reminder, we partially financed Hyla through the issuance of subordinated debt in the fourth quarter. As we enter 2021, our capital and liquidity positions remain strong, supported by the robust cash flows generated by Global Lifestyle and Global Housing. For the year overall, we expect dividends to approximate segment earnings, subject to the growth of the businesses and rating agency and regulatory capital requirements. We have now returned approximately $880,000,000 in the last two years, and we expect to complete our three year $1,350,000,000 capital return objectives to shareholders in 2021.
Similar to prior years, the pace of buybacks is expected to be somewhat weighted toward the second half of the year. In the first quarter through February 5, we repurchased an additional 120,000 shares for $16,000,000 We have $770,000,000 remaining in our share repurchase authorization, which includes the additional authorization recently approved by our Board of Directors. Additionally, in January, we redeemed the remaining $50,000,000 of our March 2021 notes. Before closing, I also wanted to provide a reminder that our mandatory convertible shares will convert to common shares on March 15. The number of common shares issued will depend on our share price leading up to the conversion date.
At Assurant's current share price, we would expect conversion would result in the minimum issuance of shares. In summary, despite a year of uncertainty, we took action to safeguard our employees to provide our clients with superior service and to maintain our strong financial footing. As we turn the page to 2021, we're focused on continuing to deliver profitable growth, enhancing our products and services and meeting our commitments to all stakeholders. We look forward to the year ahead as we continue to drive Assurant to a strong future. And with that, operator, please open the call for questions.
Speaker 0
The floor is now open for questions. At this time, if you have a question or comment, please press one on your touch tone phone. If at any point, your question is answered and you you may remove yourself from the queue Thank you. Our first question comes from Bose George with KBW. Your line is open.
Speaker 2
Hey, good morning, Bose.
Speaker 3
Hey, morning. Hey, Bose. Hey, good morning. I wanted to ask just about the potential sale of the preneed business. There have been a lot of life insurance and annuity transactions recently.
And just broadly, do you consider those to be good comps? Should we focus on the sales price being based on the multiple of book value as opposed to an earnings multiple?
Speaker 2
So first of all, it's important to reflect on our preneed business. We have a unique and strong business. We have, important distribution partners that are in a long term contract. We have a block of business that's continued to perform well even through COVID-nineteen. And, you know, what I would say on the process is we're encouraged.
There is strong interest and robust interest in our company and in pre need. And, you know, we're hopeful that we'll be able to announce something, you know, in advance of our Q1 earnings call. You know, in terms of valuation, I think it's not really appropriate to speculate on that as we're in the middle of the process. But I do think we're on track to deliver a good and strong outcome for our shareholders at the end of the day and further reposition the balance of Assurant to focus on our growth engines around the connected world and our strong specialty P and C offerings.
Speaker 3
Okay. No. That's helpful. Thanks. And just actually switching over to the extended warranty business.
You know, there have been a couple of headlines about competitors. That was the Home Depot Allstate partnership. Can you just talk about competition in that state and just remind us what the your targeted growth, in returns in that business are?
Speaker 2
So, extended service contracts are part of our connected living business, given the kind of convergence and overlap we see between mobile and service contracts. You know, we mentioned on the call today that we've extended and deepened our relationship with Lowe's, which is an important service contract partner. And we talked in the prepared remarks about the inclusion of what we call Pocket Geek Home, which we're excited about as kind of a next generation innovation. It's really around providing all the services to keep you connected for every connected device that you own. And so that's exciting.
But broadly, if you
Speaker 3
look at Connected Living, it
Speaker 2
was another year of strong growth that includes in our service contract business. And, we continue to believe and you see it with our success that, you know, we've been able to expand and grow and deepen. I think we've announced now more than a dozen or so new partnerships in the last three or four years, really driven by our innovation and our strength in key global markets around the world like Japan and Europe. So I think we feel good about the momentum and we're going to continue to invest to differentiate. We, for example, in 2020, we substantially increased our investment in digital mid year.
Just not that we aren't already strong in digital, but we see the impact of COVID and we wanted to make sure we're doing everything possible to drive a complete digital omnichannel experience for our customers.
Speaker 3
Okay, great. Thanks.
Speaker 0
Our next question comes from the line of Brian Meredith with UBS. Your line is open.
Speaker 2
Hey, good morning, Good
Speaker 5
morning. Hey, first question, I guess, can we take a little bit more into kind of cover devices and mobile and kind of what's happening there? Growth continues to slow. I know you mentioned a little bit how you expect some pickup in the beginning of the year, but just how do you think this plays out, particularly also related to Sprint, T Mobile? How does that kind of play out through the year?
When do we expect to see some kind of meaningful impact from that, at least from a growth perspective and top line?
Speaker 2
Yes. If I reflect on the subscriber count, certainly 2020 was still a positive year. We grew the subscriber count despite COVID and despite the numerous disruptions and store closures that happened throughout the year. You know, we had challenges in Latin America, the region that was most disrupted probably by COVID. But as I mentioned in the prepared remarks, we had strong growth in North America and Asia Pacific.
And, you know, with the Sprint business, we are beginning to ramp that and that will grow strongly as we go through 2021 and beyond. So certainly grew a little bit slower than prior years really because of COVID, but the underlying momentum and strength of that business remains strong.
Speaker 5
Great. And then I guess my second question, just back to the preneed. And you just kind of remind us, what are your thoughts as far as use of proceeds on the preneed sale as you kind of think about it today?
Speaker 2
You know, Brian, I think the most important thing on preneed is, you know, we're very hopeful that we'll get to a great outcome for our shareholders as the first most important thing. If you look at our history, we have a strong, track record of disciplined capital management and deploying capital to support and grow our company over time. Normally, we focus first on organic growth and ensuring that we're funding the growth that's happening. We have strong underlying organic growth across our company. And then we look at M and A and return of capital.
With M and A, as a reminder, we have a very high hurdle. We look at cash on cash IRR, and we're really just focused in our key growth engines of the connected world. So that's mobile, auto and renters. That's where the bulk of that would be. And if we have excess capital, our track record of returning it to shareholders over time is strong.
Speaker 5
Got you. And just one last one, I'm curious, renters insurance marketplace. Can you talk a little bit maybe about the competitive environment there? I mean, we hear a lot about some of these InsurTechs, very active in that marketplace. Give a little perspective on what's going on there.
Speaker 2
Yes. If you look at our business, we continue to grow and gain share. Our policies were up 8% last year, so we added net something like 200,000 policies, give or take, to 2,400,000. And we've really invested over the last couple of years. If you do a side by side of our purchase experience digitally, it's as good and easy to use for consumers as any, digital experience that's out there from any company.
And then importantly, in the property management channel, we're rolling out Cover three sixty, which really will drive attachment over time. It makes the whole process of compliance and having the appropriate coverage easy. So we feel good about our momentum. We continue to grow and gain share relative to the market. You know, if you think about multifamily, it was disrupted by COVID more than many of the markets in The U.
S. Just given, you know, the challenges with renters. We had a lot less mobility last year of people moving. And despite that, we grew policies 8%. So it's a good business.
We continue to gain share and we continue to invest to differentiate our offering.
Speaker 5
Great. Thank you.
Speaker 0
Our next question comes from the line of Mark Hughes with Truist. Your line is open.
Speaker 2
Hey, good morning, Mark. Hey, thanks. Good morning, Mark. Good morning.
Speaker 6
In the global auto business, what are the prospects there for growth? I think you talked about the net income being down on interest rates. I'll ask a question I think I've asked before. If interest rates are low, can you adjust your offering, adjust your pricing perhaps to compensate for that? And that question and then kind of the, what should we think about top line in 2021 in Global Auto?
Speaker 2
So Mark, appreciate that. Maybe I'll start and then Richard, you can go deeper on the question around investment income. If you look at that business, since we closed on the Warranty Group, we mentioned this in the prepared remarks, we've added something like 13% to our service contract count. That's over the last couple of years. That bodes very well for the future.
Those are embedded future earnings that are going to come through. And if you look at the underlying growth in the business before considering investment income impacts, this is a longer duration product than others in our portfolio other than pre need. There is strong underlying growth, really driven by expanding share in our key dealer relationships and beginning to drive some of our capabilities from mobile into the business. We've also recently announced partnerships in Europe, and we've announced previously a partnership in China around electric vehicles. That's another source of innovation growth.
I think put aside, you know, the kind of short term what shows up in our earnings, the underlying strength is strong. But Richard, you should comment more on investment income and how we think about that. Sure.
Speaker 4
And and and just to to to add on to that, I mean, only part of the earnings obviously are coming from investment income. And the the overall portfolio, I would say, is more shorter in duration relative to pre need. You think about pre need having a duration maybe of ten years, think about half that or less, for auto. So the current drop in interest rates has had somewhat of a of a headwind, impact on us. Who knows how long that that's going to last.
Right? But in terms of of moving forward, I think,
Speaker 5
you know, for for for a large part,
Speaker 4
you know, we've taken into account the short term interest rate impact this year so far. So that, you know, I don't think short term rates are gonna go any lower, much lower. So I think that's all settled in, and that's just cash coming in and out of the the enterprise there. And then from a longer term basis, I think your question is a good one. You know, as things move on, if interest rates stay low, it's a competitive environment.
So we'll see with pricing, but that typically would happen in any market, you know, where there's some some sort of interest rate spreads embedded in products. So over time, that should reprice. Obviously, Mark, there's typically a lag in things like that. In terms of 2021, we feel really good, as Alan said. I mean, the business has good momentum.
We've grown the number of protected vehicles that we've had. Our recent acquisition of EPG bodes well for the synergies and integration that we have with that company into ours and future growth. AFAS this summer as well. Good good strong acquisition for us. So, you know, we think we're the strongest player, one the strongest players in the market and and positioned to win as we go forward.
Speaker 2
And Mark, maybe the other thing I'd add on investment income, apologies. If we look at pre need and the process we're in and assuming we get to a good outcome there, pre need is something like 40% or 45% of our total investment portfolio and even more of the volatility just given long duration. One of the other benefits of successful outcome of free need is to even further reduce our exposure to interest rates as a company, which will create more stability in the future.
Speaker 6
On the thank you for that. On the non cat losses in housing, is that an industry phenomenon? Do you think COVID related or just more broadly weather related or perhaps the underwriting phenomenon? How do you view that?
Speaker 4
Yes. Good question. We have had lower non cat loss ratio this year, a lower non cat loss ratio relative to last year. And that comes from a couple of different parts. I think the first part is small commercial.
We exited that business, which was weighing on our overall non cat loss ratio. The second part would be the underwriting we've done and improvements within the Specialty Property and particularly the Sharing Economy part of the business with the growth there that we've had and some nice results there. So those two items, I would say, are very particular to Assurant. So not a phenomenon across the market. And then we've also seen claims come down and frequency of claims this year.
You know, we're not so much thinking it's it's due to COVID as we're thinking it's really due to, you know, kind of weather, more more or less weather and, you know, the wind, the flood, and things like that this year. Looking forward, we think that, as we said, in 2021, the non cat loss ratio will move up, but we don't think it's going to move up that much. There's probably protect you know, potentially a slow conversion towards where we were in the past. But given what we've done in our underwriting, the movements that I discussed a moment ago, we think, you know, we're going to be in a better place, you know, next year than we were historically. So we'll move up a little bit progressively, but but not as much as not not where we were in 2021 is our prediction.
Speaker 2
Yeah. Mark, the the other thing I would add, you know, to summarize kind of what Richard said, more than half of our improvement we believe has been driven by actions we have taken, the ones Richard mentioned. The other thing we've been investing heavily in is AI and automation, which has the benefit of driving better CX as well as improved efficiency. So, you know, there is some effect of what's happening in the industry, but we feel most of this has been driven by us. And, you know, we do expect some step up in 2021 given 2020 was particularly low, but we feel good about actions we've taken to drive improvement here.
Speaker 6
And then, Alan, maybe a little bit of the softball, but you said you, you had mentioned now you feel like Assurant trades at a discount to peers in the home services market. Any elaboration you'd like to give on that?
Speaker 2
Yeah, you know, the things that we look at is if you really step back and look at our company, we, over the last four or five years really evolved to be much more of a fee income service business type company. We have a track record of strong profitable growth. If you look at it, we've delivered now, we mentioned on this call, four years in a row of strong operating earnings growth. We have a cash flow ability, as we've said many times over the years, if we earn a dollar in our segments, we can on average get that to a holding company. And if you look at that, you know, if you look at the competitors that we're evolving into, people in the home services market or others, they all trade on multiples of EBITDA that are in the mid teens.
And we are well below that. And so, you know, we continue to look at how do we help our investors better understand just the quality of our franchise, you know, the seventeen plus year client tenure that we mentioned earlier, the investments we've made to differentiate. And, you know, over time, you know, we continue to believe our stock is attractively priced, and we're going to work on continuing to evolve our metrics and disclosures and how we deploy capital to maximize the value for our shareholders.
Speaker 6
Thank you.
Speaker 0
Our next question comes from the line of Michael Phillips with Morgan Stanley. Your line is open.
Speaker 2
Hey, good morning, Mike. Good morning. Thanks, guys.
Speaker 7
Good morning,
Speaker 8
Hey, good morning. You mentioned Richard, mentioned in your comments the headwind in Europe, a non run rate item of about $5,000,000 Was there anything else in Europe besides that that you would point to that cause a headwind there?
Speaker 4
No. I think the the the the biggest part of the headwind was was really in terms of them, you know, positioning themselves for 2021 and and for growth. I mean, overall, they had a good year despite the pandemic. And we do think that going forward, the profitability is going to increase over Q4 in Europe. So we really do think it was a kind of a onetime thing where there were several small items that we do not expect to recur.
Speaker 8
Okay. Great. And this is kind of a follow on to prior question, on housing. A little bit of a different angle on the frequency benefits that you've seen again. And you mentioned in prior calls recently theft and vandalism has been down.
I guess I'm curious, is that COVID related theft and benefits, theft and vandalism down? Or is that more of what Alan was saying, you know, kind of things that you've done to reunderrate that have helped that piece of the business?
Speaker 6
Well, the the other
Speaker 2
thing I would add on that one, and then Richard, feel free to add on to it, is our book today is very different than five, six, seven years ago. If you think about after the last housing crisis, we had a lot of vacant and foreclosed properties in the portfolio. That's where you tend to see that the most. Today, we're in a strong housing market and, you know, we're really providing a backstop when people aren't able to provide get coverage. So you normally see lower theft and vandalism over time when you're in a stronger housing market anyway.
So I think that's part of what we're seeing. I don't know, Richard, would you add anything else?
Speaker 4
No. That's exactly right, Alan. I think the other thing is we we were seeing a trend coming down even prior to the pandemic. Right. We're not thinking the pandemic.
I mean, could be a small part of that, but that's not something that is a driver.
Speaker 8
Okay, great. Thanks. And then last one for me, on the Global Financial Services, area. You talked a bit about the impact from COVID there from balances being down. I guess, has that turned around any?
And then on the legacy business there, are we in a trough that you talked about, what you expect for this year to be better than last year, but how much of that is a turnaround from COVID and, again, on legacy business or we at a bottom there?
Speaker 2
You know, I think, in that business, I'm really encouraged about, excuse me, the momentum we're starting to see. You know, when we acquired The Warranty Group, they had just signed a significant new client in that space. And then as we announced on the call earlier today, we've just signed another new client. So we've got several potential growth drivers in the future. That makes us pretty optimistic about that.
You know, in terms of the areas that have been disrupted by travel, COVID, that's really travel. And we'll see how that plays out this year. But we expect to see improvement over time. And the new clients and the new offerings over the last couple of years have us in a much better position for this business to grow and contribute in the coming years. Okay.
Thank you, Harren. Appreciate it.
Speaker 0
Our next question comes from Gary Ransom with Zeligand Partners. Your line is open.
Speaker 2
Hey, good morning,
Speaker 4
Good morning, Gary.
Speaker 7
Good morning. I wanted to ask on the severance and real estate change whether that represents any kind of employee business model change? And if so, is there more to come?
Speaker 2
Richard, let me start just briefly. I'll start briefly and you can provide more. You know, at a high level, we're looking at kind of the future of work and what those models are. You know, we've shown we had about 30% of our employees virtual pre COVID and, you know, post COVID, you know, we'll no doubt have a higher percent. So we are looking at that and evaluating it.
But I think the main drivers really are ongoing expense management and just aligning our resources with the growth of the company. But, Richard, what would you add particularly on the real estate?
Speaker 4
Yeah. I think I think that when we think of real estate, you know, I think of the word facilities. So it is linked to our facilities and how we're using our facilities going forward. We had a couple of leases that were coming due early in 2021. We're not going be going back to that space.
We'll be getting new space or working from home in a new work environment. So we just had to take an acceleration of the expense on that leasehold improvements and so forth. So it's really positioning when we get to the fourth quarter, we start to position ourselves okay next year, what's our footprint, where should we be you know, from a headcount point of view, but also from a facilities point of view. So we don't think that, you know, the actions we take in fourth quarter are a harbinger of things to come. It's really just a one time, you know, dollars 11,000,000 total impact, which is why we called it out as such.
Speaker 7
All right. That's helpful. Thank you. Another one on the you mentioned competition in lifestyle. I wonder the competition on global housing in the lender placed business.
Obviously, you said you renewed a lot of contracts, but can you give us a sense of what goes on in those renewals? Are other competitors trying to get in on it? I assume that happens regularly, but I was wondering whether it's any more intense or has changed at all.
Speaker 2
You know, I think the important thing with that business as well of all of ours, you know, it is competitive. That's just the reality of the markets that we all compete in. You know, with that said, we have a really strong position there. We've invested and continue to invest in differentiating our capabilities around compliance, around customer experience. You know, we're early in this rolling out our SSP, our single source platform, which really differentiates our tracking capabilities.
And as we mentioned, we've renewed something like 85% of our relationships over the last two years, many of them early as we prepare to work with our clients on the conversion to our new tracking system. So I don't see the competitive pressure changing a lot. It's always there. But we've shown our ability. If you look at the last decade, we've been able to grow that business dramatically, really driven off of the value that we're creating for our partners and for our customers.
Speaker 7
And in that business, you're going through this process reducing risk and becoming more fee oriented. And pre need, can assume that that's gone, which has some volatility on the investment side. Global housing is the last business with some volatility embedded in it. Is this a strong enough business for you that you're content with handling that volatility? Or is there something else that you might think about in the future?
Speaker 2
Yes, a couple of comments on that. So if we look over the last five, six, seven years, we've significantly reduced our exposure the purchase of reinsurance. You know, if you go back to twenty twelve, twenty thirteen, we were about $240,000,000 of retained, of that exposure. We're down to $80,000,000 We've also morphed our reinsurance tower more than half of it's multiyear now, which also creates a lot of stability. And we've also been pruning non strategic risk.
So a great example of that was our exit of small commercial a year or so ago. So when we look at it, we'll always look at are there other actions that could further share some of that cat exposure away. But if we look at the overlap between our housing business and our lifestyle business, it's strong. You know, if you think about the convergence around the home, the device, the car, we're starting to see opportunities to roll out, you know, what we do in lifestyle into housing. A lot of our mobile capabilities are really relevant in renters and in the connected home.
Also, as you know, we mentioned in the prepared remarks, even in a relatively high cat year, we had a 15% ROE with cats and housing. So it's generating strong earnings, lots of cash to reinvest and continues to be an important part of our strategy and portfolio. With the caveat that we have reduced our cap volatility a lot, and we'll continue to look at ways to reduce that cap volatility.
Speaker 4
And if I could just add to that, I mean, as Alan says, to reduce our cap volatility, we do get the question, and and, we do look at it every year. I mean, this year was a little bit special with the pandemic and with the amount of capital that was in the reinsurance market. We've seen that capital now come back. So we'll keep looking at things like bringing down retention, purchasing aggregates, and doing other things, quota shares or whatever, that could reduce the volatility a little as we go forward. In my prepared remarks, I said we can't plan on anything, and we're not planning on anything to 2021.
But as Alan said, we are keeping our eyes wide open to opportunities there.
Speaker 7
Very helpful. Thank you very much.
Speaker 0
Our last question comes from the line of Mark Hughes with Truist. Your line is open.
Speaker 2
Hey, good morning again, Mark.
Speaker 6
Yes, thank you. Another one of my usual questions, which is when we think about the lender placed placement rate, obviously delinquencies are quite high. You've talked about the REO program. You can certainly understand that being under pressure with the foreclosure moratorium in place. But how about just these higher delinquencies, presumably the escrow funds are getting used up and if people aren't paying their mortgages, a lot of them are not paying insurance.
How do we think about that? It seems like you've had very limited impact so far, but these have been delinquencies that have been in place since early mid last year. It seems like they'd be falling into your bucket pretty soon, but apparently not. I'm just curious, what's going on there.
Speaker 2
Yeah. You know, Mark, I think the the important way to think about lender placed is, you know, whether the housing market weakens or not, we don't know. And, you know, we're not seeing a lot of real evidence that the housing market is weakening. But through the actions over the last, you know, four or five years, we've now gotten lender placed to where it's roughly stable on earnings ex cat, even if the housing market remains strong. And obviously, if the housing market does weaken at some point, you know, we're going to be there to provide the support to the mortgage market that we've historically provided.
So we don't know, what might happen this year. There there is always a lag. You know, it depends a lot on what happens with the government foreclosure moratoriums, but we've certainly called out that, our business has been impacted negatively in 2020 and continuing with just the lack of REO volume given the foreclosure moratoriums that are going on. But the business is well positioned and if the market does weaken, we're going to be there and we will support the mortgage industry through that.
Speaker 6
Now if we continue to see these delinquencies, you know, the ninety day plus delinquencies are up substantially and and maybe they're tapering a bit, but tapering slowly. Yep. Does that have an impact on the business?
Speaker 2
You know, it really as I mentioned, it really depends on what happens with foreclosure moratoriums. If there is weakness in the housing market, eventually, we should see that flow through into our business. We just it's hard to say when given, you know, what's happening in the broader, economy and with our government dealing with COVID.
Speaker 6
So I guess the it's really the the foreclosure numbers that are more relevant for, for your business.
Speaker 2
Well, no. We our our business is driven by many things, but where we've seen the biggest kind of short term negative impact is just the foreclosure moratoriums and therefore, properties aren't moving through the process that you would normally have seen. But, you know, again, we are we're well positioned if the market does weaken and, you know, it's allowed to function like it historically has. You know, we're we're well positioned to benefit and support that.
Speaker 4
Then as I said in my prepared remarks as I said in the prepared remarks, Mark, you know, we're not counting on any sort of big return in REO volumes next year given the forbearance moratoriums and the extension of them. So we we do think that over time, you know, when the market kinda, you know, gets back to a balance, you know, when we get past the pandemic and the the the the moratoriums, it'll start to increase maybe second half of the year a little bit, probably more into 2,022 as we kinda get back to, you I don't know if we'd call it an equilibrium, but more normal times.
Speaker 6
Thank you for that.
Speaker 2
All right. Excellent. And if I just take a moment and reflect more broadly, we're really proud of 2020 and what our employees did to support our customers and clients through COVID. It was a strong growth year for us, both in Connected Living and then broadly in housing. We continue to execute against our long term strategy.
You heard us say that we still expect to deliver on the 2019 Investor Day objectives, including the 12% average annual operating EPS growth in 2020 and 2021. And we continue to gain share, which really augurs well for the future as we invest to differentiate and encourage, you know, our clients to add more of our capabilities into their products. And then finally, you know, we mentioned it, but we're encouraged by the progress on the potential sale of Global Pre E and hope to have, you know, some positive outcome to share shortly. So thank you for participating in today's call. You know, to summarize, we're really pleased with our performance in 2020 and we're going to continue to focus on building a stronger company in 2021.
You know, following the conclusion of our evaluation of strategic alternatives for global free need, we are planning to provide our full year outlook for 2021 at that point. In the meantime, please reach out to Suzanne Shepherd and Sean Mosier with any follow-up questions. Thanks, everyone.
Speaker 0
Thank you. This does conclude today's teleconference. Please disconnect your lines at this time, and have a wonderful day.