Francesca Luthi - Assurant, Inc. Alan B. Colberg - Assurant, Inc. Richard S. Dziadzio - Assurant, Inc..

Seth M. Weiss - Bank of America Merrill Lynch Jamminder Singh Bhullar - JPMorgan Securities LLC John M. Nadel - Credit Suisse Securities (USA) LLC.

Welcome to Assurant's First Quarter 2017 Earnings Conference Call and Webcast. It is now my pleasure to turn the floor over to Francesca Luthi, Chief Communication Officer and Marketing Officer. You may begin..

Thank you, Dan, and good morning, everyone. We look forward to discussing our first quarter 2017 results with you today. Joining me for Assurant's conference call are Alan Colberg, our President and Chief Executive Officer; and Richard Dziadzio, our Chief Financial Officer and Treasurer.

Yesterday, after the market closed, we issued a news release announcing our first quarter 2017 results. The release and corresponding financial supplement are available at assurant.com. As a reminder, beginning in the fourth quarter of 2016, we revised our reportable segments to align with the company's new global operating model.

As a result, our reportable segments now comprise, Global Housing, Global Lifestyle, Global Preneed, and Corporate. Net operating income includes contributions from these four reportable segments, as well as interest expense.

Operating results exclude Health runoff operations, the divested Employee Benefits, and amortization of deferred gains from dispositions, and other items that do not represent the ongoing operations of the company. Related prior-period results in the financial supplement and in the news release have been revised to conform to the new presentation.

On today's call, we will also refer to other non-GAAP financial measures, which we believe are important in evaluating the company's performance. For more details on these measures, the most comparable GAAP measures, and a reconciliation of the two, please refer to the news release and financial supplement available on assurant.com.

We'll begin the call this morning with prepared remarks before moving to Q&A. Some of the statements made today may be forward-looking, and actual results may differ materially from those projected in these statements.

Additional information on factors that could cause actual results to differ from those projected can be found in yesterday's news release, as well as in our SEC reports, including our Form 10-K. I will now turn the call over to Alan..

net operating income, operating earnings per diluted share, and operating return on equity. All metrics exclude reportable catastrophe losses given the inherent volatility of weather.

For the first quarter, net operating income decreased $3 million year-over-year to $106 million, reflecting declines in lender-placed, partially offset by better profitability in extended service contracts, and certain one-time items in Global Lifestyle.

Operating earnings per diluted share increased 13% to $1.88 for the quarter driven by share repurchase activity. And finally, annualized operating ROE excluding AOCI was 10.8%, up from 10.5% at year-end. Continuing to grow fee-based capital-light offerings will be an important driver of ROE expansion by 2020. Our balance sheet also remains strong.

At the end of March, we had $605 million of holding company capital after returning $135 million to shareholders through dividends and buybacks. Our capital position allows us to continue investing in our businesses, organically and through select acquisitions.

We're also meeting our commitment to return $1.5 billion to shareholders by the end of this year. Overall, we're encouraged by the progress we're making in our transformation, as we build an even stronger Assurant for the future. I'll now turn the call over to Richard to review segment results for the quarter in greater detail.

Richard?.

Thank you, Alan, and good morning. Let's start with a look at Global Housing, which produced earnings of $62 million, down $14 million from the same period last year. The change was primarily driven by declines in lender-placed as well as softer results within mortgage solutions.

A combined ratio for Global Housing risk-based businesses increased 220 basis points to 82.9%. Lower placement rates in the lender-placed business as well as higher expenses to onboard new client loans drove the increase. The first quarter of 2017 benefited from more favorable loss experience.

Reportable catastrophes losses totaled $900,000 pre-tax, net of $5.2 million of favorable reserve development related to Hurricane Matthew. The pre-tax margin for our fee-based capital-light businesses decreased 220 basis points to 8.8%.

Weaker performance in mortgage solutions coming from softer market conditions, originations and field services, coupled with lower client volumes, contributed to the decline.

As Alan discussed earlier, we are right-sizing expenses in mortgage solutions, while at the same time implementing technology enhancements to drive additional efficiencies long term.

Meanwhile, our multi-family housing business continue to grow profitably, largely through expansion within our affinity channels, as well as more favorable loss experience. Turning to revenue.

First quarter net earned premiums and fees in Global Housing decreased 8%, primarily due to lower placement and lower premium rates in our lender-placed insurance business. Our placement rate was 1.96% at the end of the first quarter, down from 2% at year-end. This 4 basis point reduction is consistent with trends seen in prior years.

Now, let's move to revenue for our fee-based capital-light businesses. Multi-family housing increased 11% during the quarter. This reflects double-digit growth in renters' policies sold to our affinity channels and property management network.

In mortgage solutions, fee income was down 20%, primarily related to declining volumes in originations and field services discussed earlier. For 2017, we anticipate continued declines in Global Housing net earned premiums and earnings excluding catastrophe losses.

The key variables will be the pace of lender-placed normalization and our progress in driving operating efficiencies near-term. We expect continued profitable growth in our fee-based capital-light businesses overall, with a focus on improving underlying earnings in mortgage solutions. Now, let's move to Global Lifestyle.

This segment's earnings increased by $11 million to $52 million, ahead of our expectations for the quarter. This was largely attributable to $7.5 million after-tax of one-time client recoverables within Connected Living and credit, and is representative of our ongoing efforts to improve client mix and profitability internationally.

Underlying results were solid across most lines of business. We recorded higher profitability and extended service contracts resulting from favorable experience, expense savings, and a broader shift to OEMs and online channels. Vehicle protection also grew due to prior period sales.

Overall earnings growth within Global Lifestyle was partially offset by higher mobile playing costs in Europe, which now have largely been remunerated. Revenue for the segment decreased by 14% entirely due to a $137 million reduction in net earned premiums associated with the change in a client program structure implemented late last year.

As a reminder, this change also extended our relationship with an important Connected Living client, and have no impact on earnings.

Excluding this change and the client recoverables, revenues for Global Lifestyle were essentially flat as ongoing declines in legacy businesses were offset by higher volumes at vehicle service contracts and growth in our Canadian credit business.

Within mobile, growth in covered devices was offset by lower fee income from mobile repair and logistics services. First quarter of 2016 benefited from stronger repair and logistics volumes, driven by the timing of new product launches into the market.

Turing to key performance metrics, the combined ratio for the risk-based businesses, which include vehicle protection and credit insurance, improved by approximately 240 basis points to 92.2%, driven largely by client recoverables. In addition, we saw favorable loss experience in credit.

Going forward, we expect the combined ratio to trend within the long-term range of 96% to 98%. The pre-tax margin for the fee-based business or Connected Living rose to 7.1% from 4.5% last year. Approximately 230 basis points of the increase was driven by client recoverables, and change in the client program structure referenced earlier.

The balance reflected better underlying results in extended service contracts, partially offset by mobile. For the full year 2017, we have not changed our expectations for Global Lifestyle overall.

We expect segment net operating income to increase from Connected Living, driven primarily by mobile, as we implement new offerings and expand share with existing clients. Higher profitability from the vehicle protection business is also expected to be a driver, along with expense management efforts already underway across Global Lifestyle.

All of this is expected to help mitigate declines in legacy businesses. While earnings may fluctuate quarter-to-quarter depending on volumes, loss experience and other factors, we are confident that the segment will continue to deliver long-term earnings growth of 10% or more on an average annual basis. Now, let's turn to Global Preneed.

Earnings increased $4 million to $10 million. But as a reminder, first quarter 2016 results were negatively impacted by $3.9 million coming from an adjustment to reserves and deferred acquisition costs related to an older block of policies.

Excluding this adjustment, underlying earnings increased slightly with additional investment income offsetting higher mortality rates. Total revenue for the quarter was up about 3%, while new sales increased by 2% year-over-year.

In 2017, we continue to expect fee income and earnings to grow in Preneed, driven by increased production across North America and operational efficiencies. Moving to Corporate. The first quarter net operating loss decreased by $4 million to $10 million.

This was due in part to reductions in estimated employee related costs, and additional investment income generated from assets transferred to Corporate after the sale of Employee Benefits.

While still early, we continue to expect the Corporate loss to approximate $70 million, as we redeploy most savings this year to support our multi-year transformation. These investments include the implementation of a centralized procurement function, along with investments in technology and other key capabilities.

Throughout the year, we will update you on our progress, as we are committed to reducing corporate expenses over time. Moving on to capital. We ended the quarter with approximately $355 million in deployable capital. We upstreamed $43 million of capital to the holding company during the quarter.

This included $28 million in dividends from our operating segments, and $15 million in capital from Health. For the full year, we continue to expect operating segment dividends to approximate segment earnings, and in addition to receive approximately $100 million in total from Health and Employee Benefits, as we release residual capital.

During the first quarter, we returned $135 million to shareholders with $105 million returned via share buybacks, and the remaining $30 million through common stock dividends. Also throughout April, we repurchased another $38 million of stock, bringing the total amount returned to shareholders since January 2016 to nearly $1.2 billion.

To summarize, we've continued to make good progress in the first quarter, and have delivered solid results. We remain focused on delivering on our commitments to our shareholders for the full year, and on driving profitable growth in 2018 and beyond. And with that, operator, please open the call for questions..

Thank you. Our first question is coming from Seth Weiss with Bank of America Merrill Lynch. Please go ahead..

Hey. Good morning, Seth..

Hi. Good morning. Thanks for taking the call. My question is one the mobile business. And if we look at the disclosure around mobile covered devices, it appears flat to year-end.

The premium line moves around a little bit because of that program restructure, so I was just curious, if you could guide us about the best way to think about how top line progression in the mobile business, and how we can measure that?.

Yeah. Certainly, Seth. I mean, first of all, in mobile, I think we felt good about the first quarter. It was in line with what we had expected. As we look through the second quarter and beyond, really three things are going on that will continue to drive performance in that business. One is, we are expanding with our existing clients.

In my prepared remarks, I mentioned the rollout with T-Mobile of AppleCare. We're also in the process of launching premium technical support, which is another fee income service with some of our clients.

Also, later in the year, we expect significant increase in trading activity, both with carrier promotions, but importantly, the new products that are expected or is excepted at later of the year. And then, finally, we continue to onboard new clients, some of which will impact 2017, the majority of which are going to impact 2018.

We actually have a backlog as we implement. And then, finally, the mix is shifting. If you think back a few years, traditionally, that business was a premium business, handset protection, now it's heavily also a fee income business. That just shows up differently in the geography of the P&L. We feel good about the progress of mobile..

Okay. So, the – we're not going to see a lot of that progression, I guess, within the P&L and the disclosure, if I'm understanding correctly, since only a piece of that comes from on-boarding new clients.

Is that the right way to think about it?.

What you'll see, we're disclosing a few of the key metrics now between the number of subscribers which is more of the premium-based fees with the business, and then the number of devices that we have processed through our facilities, but the important thing to focus on is profit..

Okay. Great. And then, I'm not sure if you could comment about share buyback, just considering the amount of excess capital that you have in cash on hand. The first quarter, I guess, was just a little bit late from what I expected. I would have expected a little bit more rapid deployment.

So if you could just help us think through sort of the pace of bringing that excess capital back..

Sure. And good morning, Seth. It's Richard. Yeah. Just to maybe back up one step, at the beginning of 2016, we committed to return $1.5 billion to shareholders by the end of this year. As we get through at the end of April, we find ourselves at about having returned $1.2 billion both from share buybacks and dividends.

So we're, I would say, sort of well ahead of the pace that we've put for ourselves. And really to answer your question more specifically, in terms of the first quarter, typically in a first quarter, we would be a little bit lighter in things as we see the year evolve and understand how we get through the summer and cat experience and all of that.

But we are on track for the $1.5 billion and ahead of the pace..

Okay. Great. Thank you..

Our next question comes from the line of Jimmy Bhullar from JPMorgan. Please go ahead..

Hey, good morning, Jimmy..

Hi. Good morning..

Good morning..

Hi. So, first question on just the mortgage solutions business. The results this quarter were weak.

Do you view that as an anomaly or have your expectations for growth in that business changed at all?.

So, let me back up a little context on that business, and how we think about it. So we entered these businesses starting about three to four years ago now, really to leverage our strong client partnerships in the housing space. And our thesis was that we could gain share leveraging our partnerships and that worked very well in 2015 and into 2016.

Really a couple of things happened late last year, early into this year, none of which changed our long-term perspective on the business. One is market demand has gotten softer than anybody had forecasted, really driven by the uncertainty in the economy and uncertainty on interest rate direction.

And then, as we have been implementing our technology upgrades to really bring these businesses together, we've had some short-term client allocation shifts, but they don't fundamentally change how we think about this. So, weaker in the quarter. We are not happy with that, but we took aggressive action as to the leadership of that business.

And we still feel very good about the longer term for mortgage solutions..

Okay. And then on the vehicle service business also, you've seen very strong, generally double-digit growth in that business. This quarter was a little bit of a slowdown.

Any color on what happened there?.

Yeah, no, I think from quarter-to-quarter, there could be small movements, but we did have some, as you mentioned, some very strong top line growth. We're attracting new clients, and the outlook is still intact for VPS to do well for the full year..

Okay. And just lastly, on the share buybacks, I think you have about $540 million remaining in your authorization as of the end of May.

Do you expect to complete that this year, by the end of the year? Because that would put you above your initial targets that you had mentioned for capital deployment?.

So, Jimmy, let's make sure everyone is clear on what we committed to in capital deployment, which was to return $1.5 billion through both dividends and buybacks. So we have more than enough authorization in place to deliver on our commitment of $1.5 billion..

No. That's what I meant. I just was trying to get a sense of if you intend to complete the authorization this year..

Not going to comment on that. What we do intend to commit is that we will hit that $1.5 billion that we've committed to return to shareholders. With authorizations, as appropriate, we'll go back to the board for additional authorizations. But bottom line, we feel very good about the capital position.

We're going to continue to pursue both growth, funding organic growth and selective M&A, while continuing our long track record of returning capital to shareholders..

Okay. Thank you..

Your next question comes from the line of John Nadel with Credit Suisse. Please go ahead..

Hey. Good morning, John..

Hey. Good morning, Alan. Good morning, Richard. Just following up on mortgage solutions first, the revenues there were down 20% year-over-year, but I think if I recall correctly, you actually had an acquisition that should be contributing to that piece of the business, the American Title deal.

So, is my recollection right and did that contribute this quarter? And if it did, what was the contribution and how do we think about the revenues on sort of an organic basis there? Because it looks like it slowed down even worse than the 20..

Yeah. Good morning, John. It's Richard. I'll take that one. Yeah, you're referring to the acquisition of American Title, and you're right. It added about $10 million to the revenue line. So you could back that out. It would bring down the overall revenues by 30%, 33% overall..

Okay. And so, Alan, whether it's 20% or 33%, either one sounds very significant. I get that you're saying that nothing that's happened here has really changed your long-term outlook.

I guess, how do you have that confidence?.

So, a couple of things. First, we're still bigger than we were when we acquired these companies, even with the disruption that's going on in the market in the short term. And it really was largely driven in originations, which has been affected by the uncertainty in the economy..

Okay..

I think the originations were down in that 33%, 34% type range sequentially, but this business is still small, not material to our overall results, and bigger and the thesis has worked out until the last couple of quarters, and we don't see anything that would change that.

And then, as I mentioned in the prepared remarks, we are able to quickly adjust the cost structure in this business. So that any problems can be remediated within a quarter or two..

Okay. I mean, that's helpful. So, we should be thinking about originations as really important driver, a data point for this piece of the business. And....

Certainly important, yes..

Yeah. And then, overall, if I think about the longer term target, right, fee-based capital-light within Global Housing, I think you've indicated at your Investor Day a year-and-a-half ago or so that that's expected to be about 35% to 40% of the segment's earnings by 2020.

This quarter and I guess recently, it looks like it's sort of a mid-teens contribution.

How much in M&A, when you think about the next couple of years and the driver of the growth in the earnings contribution from this piece, how much in M&A is required to get there versus organic growth?.

We don't assume any M&A is required. We believe we'll achieve it through organic growth in both the multi-family housing and the mortgage solutions businesses..

Okay. And then, last one also focusing here in Global Housing, if I do some math on the lender-placed business, it appears, and I know this is imperfect, but it appears that the premium rate on the lender-placed is down year-over-year about 5% to 6%.

Is that about right based on what you guys are seeing in the business? And also as we think about looking forward, how much more pressure should we expect to see on premium rates, before you expect that to stabilize, when you think about that normalization of the business?.

So, a couple of thoughts there, John. I think the primary driver of our results recently has been the placement rate, and that came down 4 basis points, as the housing market continues to recover quarter-on-quarter. What we said on rates I think is still very much true, which is we're now normal course. We settled multi-state, and that's behind us.

We have some states that approve increases based on our experiences, some states that have reductions based on experience. But I wouldn't anticipate any extraordinary trend there..

Okay.

Is the mid-single digit decline at least on a year-over-year basis, is that about right?.

There is a number of things going on in the lender-placed revenues, as Alan said. It's placement rates, which would be the main driver. So it's placement rates, and then obviously, we have some new clients coming in and so forth. So there is offsetting things and there. So I wouldn't put my finger on one number..

Okay. I'll follow up offline. Thank you..

And we have no further questions in the queue at this time. I will turn the call back to the presenters..

All right. Thanks, Dan, and thanks, everyone, for participating in today's call. We look forward to updating you on our progress later this year. Please reach out to Francesca Luthi and Sean Moshier with any follow-up questions. Thanks, everyone..

Thank you. This does conclude today's teleconference. Please disconnect your lines at this time, and have a wonderful day..