Hitting the Targets
Assurant’s CEO explains how the company tries to meet its key financial goals.
- Kate Smith
- December 2018
When Alan Colberg took over as president and chief executive officer of Assurant in late 2014, he launched a multiyear transformation of the company. He wanted to focus on fewer businesses, but go more deeply into them.
Assurant sold its employee benefits business and sold and ran off its health business. It also focused more on its housing and “lifestyle” businesses, which provide protection around the purchase and ownership of significant items, such as homes, automobiles and devices. And in May, it closed on its $2.5 billion acquisition of The Warranty Group.
“So now we're really focused on how to out-execute and out-deliver for the market over time,” Colberg said.
Under Colberg, Assurant has measured its success by three key financial metrics—net operating income, net operating income per diluted share and operating return on equity.
Best's Review talked with Colberg about the financial targets Assurant set and how close it is to achieving them.
You've identified net operating income, earnings per share and operating ROE as key numbers. Why those three?
We laid out three metrics at our 2016 Investor Day that were most important. One was that we could grow earnings. That was significant for us, given we have one business that is heavily counter-cyclical. So our earnings had been declining for a few years.
We achieved that. We grew earnings in 2017 for the first time in a few years. We recently gave guidance that this year the earnings will grow 20%-25%.
The second metric was that we could grow EPS on average 15% a year. We've made good progress. We only grew 1% in 2016, but we grew 22% last year and we're in double digits so far this year. So there's good momentum at growing EPS.
By the way, all the metrics I'm talking about exclude catastrophes. We're looking at the underlying performance independent of whether we had storms or not in our storm-prone businesses.
The third metric we gave out was that we could expand operating ROE to 15% by 2020. Our reported GAAP ROE today is more like 11% at the end of the second quarter. Our statutory ROEs tend to be higher because we have goodwill from previous M&A and other factors that impact that metric due to our mix of insurance and service-related business. As a result, that causes our GAAP ROEs to be different than statutory.
Alan Colberg, Assurant
ROE is an important measure, but it’s becoming less so for our business.
So you focus on the GAAP ROE?
Yes. And ROE is an important measure, but it's becoming less so for our business.
Why is ROE becoming less important?
If you look at our business mix, we talk a lot about the evolution toward more capital-light fee income. Roughly half of our businesses are not capital intensive, so ROE is not the right metric. The right metric is something like pretax margin or EBITDA margin. If you look at our exposures, in our Lifestyle segment for example, we have a Connected Living business line. That's our mobile business primarily. What we always talk about is pretax margin, because the amount of capital required isn't very high, and most of the capital we have is intangible in goodwill-related capital. So ROE isn't a very useful metric.
Is it a useful metric in your housing business?
In our traditional housing business, which is where we have our homeowners products, ROE is very much a relevant metric. There we've told the market we have a long-term ROE target—and this is AFTER catastrophes—of 20% in that business line after catastrophes.
The reason the ROE is high is that our business is a mix of traditional insurance and service. It's not a pure insurance business, so we have a very different cost structure than a typical insurance company.
In that business, for example, we track 35 million mortgage loans. What we do is receive all correspondence on those mortgage loans from other insurance companies. If we get notified that someone no longer has insurance coverage to protect their mortgage, we then write them and call them to get them back into insurance. So we have a massive customer care operation that's part of that business, and that's capital-light fee income.
Part of why we have high ROEs is we're doing these hybrid business models that aren't pure traditional insurance.
Is ROE a driving factor in why you're pursuing these hybrid business models?
The ROE is an outcome, not the driver. If you think about a standard lines product like homeowners insurance, we don't have the scale to be a national competitor. So what we do is come up with unique ways to gather risk. So our unique way to gather risk there is to run this very large, very complicated, service operation to ensure that every consumer we're tracking has insurance to protect their mortgage company. We end up writing homeowners when the house is vacant. We're kind of the insurer of last resort when there's nobody in the house. We also end up writing insurance when the consumer chooses to buy it, after they've searched for a product and can't find one because the voluntary carriers are not in the market.
We aggregate risk in traditional product lines through nontraditional distribution. That's how we end up with higher ROEs, because we do a lot of activities beyond just providing insurance. So it's a very different business model than the typical insurance company.
If you have these fee-based businesses that make ROE less important, why did you select that metric as a key financial indicator?
It's an important discipline to drive how we're making efficient use of capital. At the time we put out that metric we were around 10%, give or take a little bit. It's important to be disciplined in investing, and ROE is a measure of discipline as you're making investments.
We'd have a different hurdle depending on how capital intensive the business was. For a capital intensive business you'd expect to have one kind of ROE. If you're looking at fee income businesses, the ROE is less relevant. But I wanted to send a strong message to ourselves and to our investors that we are deploying their capital in ways that are attractive and increasing the value of the company.
ROE is not a perfect metric for us. It is a very good metric for our risk businesses—our housing businesses, primarily. It's not a very good metric for our Lifestyle businesses. But that message of “We can improve the overall ROE of the company” is still a positive message to the market and to ourselves.
What role does stock repurchase play in achieving that 15% target ROE?
It actually has no role. Over our history as a public company, which is now 14 years, if we make a dollar of earnings in one of our legal entities, we can get that dollar of earnings up to the holding company.
So we have this long-term, 100% conversion of segment earnings to cash available.
What we've done with that cash over 14-plus years is four things. First, we've funded organic growth of the company. Ten years ago we weren't in the mobile cell phone business. Today we're one of the world leaders in doing things around cell phones—from handset protection to repair and logistics to customer care. And we've funded that through the earnings that were developed in the segments and brought up to the holding company.
The second thing we've done with it is M&A. We tend to do smaller deals. We put a very high hurdle rate on M&A given the execution risk involved with M&A. The exception was this year, when we did a very big M&A deal with The Warranty Group. But we did that because we were in the same business as they were in. What they did for us was fill in in markets and geographies, so we understood their business very well. You still have execution risk, but there's less when you're actually in the business and understand the business.
Whatever is left we've returned to our shareholders. We've done that through dividends.
And then we've done buyback. The one big buyback program we did was in early 2016, when we announced we were going to return $1.5 billion to shareholders. That was in the form of dividends and buyback. As we sold employee benefits and sold and put our health business into runoff, we had estimated our proceeds would be $1.5 billion. We elected to give it back to shareholders.
We've bought back relatively consistently. As we have excess capital, we return it. What that helps is EPS growth, but it doesn't meaningfully impact our ROE.
What steps can you take to increase your ROE from its current 11% to the targeted 15%?
Over the last couple of years our ROEs have been below where they'll be on a longer term run rate. We had $1.5 billion in capital come into our company from selling our employee benefits and health businesses, and we've been returning it over that time period. So we've depressed ROE because we've had lots of capital come in and we haven't given it back in one swoop. We've let it back in the market through buyback. So part of our lift will happen from optimizing our capital and working through all of those big changes that we've had in the business mix.
But the bigger factor is growing earnings. We've had this one business—lender-placed homeowners—that for the last five years has been rapidly contracting. This business is counter-cyclical. A lot of what we do in lender-placed homeowners is write insurance when the home is vacant. That's typical when a mortgage is either seriously delinquent or has gone into foreclosure. That business for us grew dramatically during the financial crisis. That's one of the reasons we weathered the financial crisis really well.
We've been dealing with that contracting, and that's hurt our ROEs. But we've now said to the market that that business will be flat in 2019.
What impact will that have?
It's a huge step for us after years of declines. The entire rest of our company has been growing earnings in double digits for years now, and that's been absorbed by lender-placed prior to 2017. So just keeping that flat is a huge step.
So the biggest thing that will grow ROE is to grow earnings, and we're very well set up to grow earnings. Again, our guidance to the market was that earnings would grow 20%-25% this year. We haven't given long-term guidance yet, other than we are well-positioned for sustained earnings growth in 2019 and beyond.
On the equity side of it, we'll fine-tune our capital structure. But that's not nearly as impactful as growing earnings.
Does your acquisition of The Warranty Group change your targets or affect how you'll reach the existing targets?
We've told the market we'll do an Investor Day early next year and we will refresh our targets, given we've really changed the composition of the company with The Warranty Group. Roughly 30% of our revenue now comes out of automotive. We're the market leader in service contracts on vehicles as a result of The Warranty Group. We were relevant before, but now we're the clear market leader. About 30% of our revenue now comes out of Connected Living, which is primarily cell phone related. That's a very different business mix than when we gave out those metrics in 2016.
So we've told the market in March of next year we will reset and refresh what to expect long term from the company. That's coming.
ROE Is a 'Holistic Measure'
The metric reveals both profitability and efficiency.
Return on equity may even be the very measure of success for some public companies, serving as an operational performance benchmark for shareholders to evaluate how those companies utilize the investments they have made.
“It's a key component of operating performance, which is a building block of the ratings,” said Thomas Rosendale, director, A.M. Best.
And among life insurers, Primerica has consistently delivered high ROE.
In 2017, its ROE increased to 27.4%, although that reflected the transition effect of the Tax Cuts and Jobs Act. In the second quarter of 2018, it achieved an ROE of 24.5%.
Primerica provides financial services to North American middle-income households. It underwrites term life insurance and offers mutual funds, variable annuities and other financial products, which it distributes on behalf of third parties.
In a Q&A, Primerica CEO Glenn J. Williams explains what ROE means as a metric and why his company has succeeded in achieving high returns.
How important is return on equity as a metric for your company?
We consider many financial and nonfinancial factors when making business decisions including margins, internal rate of return, operational efficiency and brand perception. ROE is one of the most holistic measures in determining how well a business is performing, because it factors in both earnings performance as well as the effective management of excess capital in business investments and returns to shareholders.
Is there a direct correlation between your lines of business and your healthy ROE?
Our unique business model enables us to achieve an industry-leading ROE. With over 130,000 life insurance-licensed representatives, we are well-positioned to provide financial services to the vast and underserved middle-income market. We only underwrite term life insurance, and it is less capital intensive than other life insurance products. Our fee-based investment and savings products segment, which accounted for 35% of revenues in the first half of 2018, has a very low capital requirement and generates a high ROE. Solid earnings growth in our diverse businesses coupled with prudent capital deployment has driven our top tier ROE.
How do you manage to ROE? And what do you trade off to manage ROE effectively?
We use ROE as a metric to compare how alternative uses of capital will be accretive in order to help determine the most prudent uses of free cash flow.
Although our primary focus is on successfully executing our strategic plan, knowing that if we do that consistently, we should generate growth, achieve ROE expansion and continue to enhance value for all of our stakeholders.