Going to move right along, and I'm thrilled to have Peter Zaffino, CEO of AIG. He's gonna make some opening comments, and then the regular Q&A, plus audience participation from there on.
Thanks, Meyer.
Thank you.
Yeah, thanks, everybody, for being here today. I thought I'd give, you know, three or four minutes of opening remarks. It's great to be at the KBW Insurance Conference, and I really appreciate the opportunity to speak about AIG and the broader insurance industry. I just wanna spend a few minutes of so much that always goes on with AIG, and maybe highlight some of the things that I think are relevant. We've successfully repositioned our portfolio, you know, we've redefined the strategy, completed revamping underwriting standards, resetting risk appetite. We've done that over multiple years. In addition, we've built very strong operational capabilities.
I don't want to talk about that much, but it's made us a much stronger company and actually enables us to compete, you know, better in, you know, the current environment, solving complex risk issues for clients globally. We'll get into AI, but I think it's given us a really good platform. Over the last twelve months, I mean, you know, I always got to start with Corebridge 'cause it's such a big, you know, accomplishment that we've had, but we try to provide, you know, a ton of detail on our earnings call, so we have the opportunity to talk about it here, but we continue to sell down an ownership position, and we completed the financial deconsolidation of Corebridge. Since 2020, we've taken very deliberate steps and strategic actions as part of this journey.
The ones I'd highlight would be, you know, the initial sale of Blackstone of 9.9%, and most recently, the agreement that we ventured with Nippon Life to purchase 20% ownership stake in Corebridge from AIG. Second, we further simplified the General Insurance business through dispositions of Validus Re, Crop Risk Services, most recently with the announced sale of our global personal travel business. Throughout this time, you know, we've been relentless in strengthening our underwriting culture, and I think that's become evident through our core financial performance and results. At the beginning of 2024, we formally launched AIG Next to accelerate the realization of operational efficiencies, weave the company together to operate seamlessly as one cohesive General Insurance organization, which is different than the past and we have the talent and capabilities to compete in the future.
The program is expected, I've mentioned this many times, but to reduce expenses by $500 million. We expect our full year 2025 calendar year combined ratio to be the same or lower than the full year 2023 metric on a comparable basis. I talked about this at earnings, but we originally provided guidance that we'd reach this combined ratio as we exited 2025, but we pulled it forward, and we will achieve it in the 2025 calendar year, so don't need the exit run rate. You'll see with AIG, all the operational programs we've done have been aspirational. They've also been significant, they've also been achieved ahead of time, and executed usually, not only with a schedule that's ambitious, but also, you know, the targets are usually, you know, achieved or overachieved.
Transition to capital management, we significantly strengthened our balance sheet over the past few years, and that's provided a lot of financial flexibility. We're on track with our $10 billion share repurchase plan for 2024 and 2025. This will bring us within our target share count range of 550-600 million shares, subject to market conditions. In the recent past, AIG had one of the highest debt to total capital leverage ratios among our peer group at almost 30%, but post-Corebridge deconsolidation, we've achieved a debt to total capital leverage ratio of 18%, making us among the best in our peer group and reflecting the substantial progress we made. We ended the second quarter with very strong parent liquidity, $5.3 billion.
We've increased the shareholder dividend by more than 10% each of the last two years. I do wanna say, following the exhaustion of the current share repurchase authorization, we would anticipate transitioning to a more sustainable share repurchase levels in the mid to long term. The combination of disciplined capital management, substantial underwriting improvements, rigorous focus on expense management, we're well positioned to deliver on our 10% ROE target that we provided. You know, a challenge we have today is we have more capital than we need to support our current, you know, core General Insurance business. However, that's gonna naturally unwind with our ongoing capital management strategy and the realization of our anticipated growth potential. We continue to prioritize prudent risk selection, limit management, appropriate terms and conditions. We'll talk about it, I'm sure, in the session with Meyer.
We believe in having a comprehensive reinsurance program for all of our lines of business. We've shifted our focus towards growth. I mean, that's been happening over the past year, and we're capitalizing on market opportunities that exist while maintaining the discipline that's led us to the current underwriting strength. One element of the combined ratio I think is incredibly important to continue to talk about is catastrophes. You know, we enter this historical peak period for North American Atlantic hurricanes, and I can't remember a year, perhaps we can talk about it, you know, where the cost of property insurance and maybe even reinsurance would be highly dependent on what happens this year. Because it's still a very fragile market, and there's plenty of capacity. There's a little bit of a different dynamic that's going on in the current environment.
And when you look at that, you really need to reflect on 2022, when the reinsurance market and reinsurers changed quite a bit. Attachment points went up significantly on average. Risk-adjusted, you know, rates were up 50%, and terms and conditions tightened significantly. That's not the story for AIG. We believe our story is meaningfully different, and that it's different than the broader market. Our cat ratio was 16% when I arrived in 2017. It's 4.7% last year in 2023, and through the first half of 2024, it's 3.8%. Always hard when you're in the middle of cat season. We're heading to Monte Carlo next week. Every prediction's usually wrong, so it's hard. The leading forecasters have modeled above average hurricane activity for the 2024 season.
We'll see what happens, but there's, you know, the next 60 days are gonna be, you know, very telling for, you know, 2025, and we believe when you're looking at our own catastrophe losses, I think about $1.1 billion is a good proxy for our full year 2024, and as you know, the third quarter is going to represent the largest percentage of the total, so those are the only comments I want to make. I just, you know, as always, you know, two hours' worth of information in every hour of AIG, so I thought I would just get that out of the way.
Nope, I appreciate it, and we're gonna continue that sort of over concentration. I do talk quickly, so that should help. Can we drill in on a number of areas, AIG Next. So there's an expense component, and I think on the flip side, an efficiency improvement associated with that. Can you walk us through the expense categories that will be declining, and what the upside is? Again, from our perspective, what we'll see with the efficiency improvements.
AIG was set up as a conglomerate, to manage multiple business, including what's Corebridge today. So other operations had a significant amount of expenses, so it's really gonna go into one of four categories, in terms of how you should think about the expenses. Either stays at a retained parent, you know, for AIG, which we gave guidance around $325million -$350 million. Corebridge's you know, similar, you know, expenses go with Corebridge. And then it's either going to find its way into the General Insurance business and be absorbed within the combined ratio, or it'll be eliminated.
Right.
There's been a lot of overlap, a lot of redundancy, particularly in the functions. And so we're getting this end-to-end process and much more efficient, you know, throughout all of AIG. There's things such as easy stuff like procurement, sourcing, real estate, that just hasn't been as efficient as it can be in the future, and so we're really targeting areas where, you know, there's real opportunities. Of course, we've been digitizing workflow, less manual process, and those, so that's gonna present opportunities as well.
Should we expect that to flow into growth? In other words, if you can process business faster and you've communicated a growth appetite, that running the business more efficiently helps?
It absolutely will, and if we get into generative AI, I can explain where I think that's gonna be as a multiple effect in terms of our ability to grow and process business faster.
Okay. As you can all see, my next question is on AI.
Oh, nice.
I have to ask this from the perspective of having just such a primitive understanding of it, but what are the investment priorities? And again, where do we, on the outside, see that in the financial results?
A lot of companies in the financial services, in particular, are talking about the number of instances, whether it's in shared services, contact centers, processes, claims, all very important, and we're doing that, but how we think about what we're gonna do with generative AI, and we're already doing it, and so that's why I introduced it on the last quarter call because the way in which we're gonna introduce it will come fast because we've already run, you know, significant pilots within the organization. Data comes from brokers, very unstructured. It comes in different forms. You're not gonna get brokers to change, you know, behaviors, so you have to be able to look at that structured and unstructured data and get it through a digital workflow, you know, fast, and so you think about an end-to-end process.
What we've been doing is getting more insight into the data, defining what a perfect underwriter would want in underwriting selection, and then, you know, we've built parallel processes to test this, as to in data ingestion. But also, where do you get the data to be able to fill, you know, sort of the underwriter's demands for making perfect underwriter decisions? And what we have found is that building large language models, once data is ingested, our focus has been on the growth side, which is: How can you make yourself significantly more efficient? So everything in AIG is two times, five times, that's kind of the way we, you know, talk about, and very disciplined in terms of how we run these pilots. And they've been unbelievably successful.
We've exceeded five times in terms of getting full underwriting information once it's submitted to the underwriter in a format that they can underwrite more effectively. Now, there's two things that have come from that that are significant. One is a very inefficient and manual process has gone, in some cases, from weeks to hours. So that's one big issue. Another one that was a little bit of a surprise is that I don't wanna say if you give infinite time, but if you give significant time to underwriters to get information, either through brokers or, you know, other available sources, they were able to get less data than how we built the large language models, and so we had a lot more data at the point of underwriting than we did through a manual process. So it's quicker.
And there's so much submission activity in parts of our business that we don't get to everything. That doesn't mean we don't triage it right. We have industry groups, you know, we have different classes of business. We have specific, you know, details in terms of how you build an algorithm to get it to the underwriter's desk, but there's so many different qualitative aspects that don't allow you to do that, and so we believe there's a tremendous opportunity for growth. Yes, we will eliminate. If you don't have the manual process, you know, the manual input, then you don't need people doing it. So there's definitely going to be huge benefits on growth, huge benefits on underwriting efficiency and expense, benefits through, you know, workflow.
No, fantastic.
And then there's the compute part, which is, you know, being able to analyze allocation of capital much faster as well.
So internally, that last part?
Yes.
No, fantastic. I hadn't even thought about that, but that makes a lot of sense. AIG, under, I guess, Brian Duperreault and, and yourself, have really restructured the reinsurance purchasing program. But over the time period since you've gotten there, results have gotten much better and much more predictable. There's much less volatility. How does that latter issue impact your reinsurance demand?
Reinsurance is a strategy and a philosophy. So when we began this, AIG's reinsurance purchasing, in my opinion, when I first arrived, was they felt they had excess capital, and, you know, when you don't want to, you know, buy reinsurance in the market, you keep a lot in debt. I mean, that works if you don't have losses, I mean, but otherwise, it doesn't work. And so the book wasn't profitable. And so we needed to start with a philosophy and a strategy as to how we felt about, you know, we had no earnings, so there was no earnings protection. But like, certainly, how do you preserve capital and how you preserve earnings over time?
And then the book evolves, and the way in which you develop reinsurance should evolve with the quality of the portfolio or the size of the portfolio. That has, you know, significantly improved over time, but I don't think the strategy and philosophy has changed much, and I don't think it'll change much going forward. That doesn't mean you always have to buy the same programs. It doesn't mean you have to buy the same structures, but the gross portfolio's changed a lot, and you know, the profitability of the casualty portfolio or the property portfolio has dramatically improved, and so you restructure it that way. I feel we've been unfairly penalized for volatility.
When I look at our percentage of CATs and net earned premium to anybody of our peer group, it's a fraction, sometimes a third through the first six months was last year. And so making sure that we're containing that volatility is really important to our company, and the predictability of that will remain a core, you know, strategy and principle. I think we're backed by reinsurers better than any organization because of that consistency, the balance of the portfolio, and of course, you know, your investors and other stakeholders are incredibly important because they validate and they buy your stock. But having reinsurers want to reinsure you, and I can give you, you know, many examples where I think we have the best programs, you know, in the industry. It's because the reinsurers think the, the portfolio is the best.
And so I think, you know, finding ways to balance that, there's always changes. I think we go on one with, you know, almost fifty treaties, and believe that, you know, we'll continue to make those, you know, refined changes. But I don't believe in just taking more net because you don't want to pay the freight, which is what's happened in the industry now. When you see every quarter massive net losses, it's 'cause insurance companies have chosen not to buy reinsurance, and they underfund the cost. Like, I don't know why reinsurance costs would be that much more than how you would fund, like, frequency of CAT.
Like, it's the cost, the clearing price, it's cost capital, and so not buying it just means you underfund it, and then you breeze through it on earnings and say, "Well, our core book's great, but, you know, we've lost a lot of money on CAT." I don't want to do that. Like, I want. That's, you know, why the guidance I've given includes CAT, and, and we want to manage that as well. And by the way, last thing, sorry, there's always one other additional fact, but-
Don't apologize. It's great.
The property portfolio, when I arrived, I think ran north of 130 combined, and that was... If I was going to pick, is it over or under? I'd go over, and it's running in the low 80s now. So I think you buy too much reinsurance. I'm like, "Well, why?" Like, I mean, it's embedded in the pricing, it's embedded as a full cost. I know the volatility, the standard deviation is tighter, the predictability is better, and it's way more profitable. And we've got, like, six or seven points of entry across the world to deploy capital for the best risk-adjusted returns. Like, I think it's a smart strategy.
Yeah, and it's hard to argue with low eighties.
Correct.
So the most recent divestiture, besides Corebridge, going this travel business.
Yeah.
So something you can just take us through the thought process, and if you want to answer this, what other elements of AIG are similarly non-core? That's my phrasing.
Right. So I'll answer that. Like, I think we're largely done. I mean, I don't like to use the words never or always, but we're largely done. I think with travel, it's no different than crop. Those businesses need scale. They are not from a combined ratio standpoint. They're highly dependent on expense, digital, and scale. And you know, the travel business is low premium, high policy count, and you can't be in between. And I think we learned with COVID that there is a tail with travel, and you know, with a premium dollar, unlike on property and casualty, you don't have as much for the lost dollar in travel as you do in other parts of the business. And so for us, like, we're not really big in that business.
I don't want to sit in front of this audience and tell you I just bought more travel when there's other things I think could be more additive, you know, to AIG. The Personal Insurance business for AIG needs to improve, and so that was running in a combined ratio that we could not get dramatically different unless it had more scale. Wasn't terribly profitable for us. I think with Zurich, they do have scale, and so the combination of that business for them will be a better return, but it was just as simple as that. I mean, I take a look at, like, our commercial businesses and even our personal businesses, is that at the point-of-sale, AIG matters. I'm not sure it did for our travel business.
We have really good clients, really good capabilities, but it needed more investment, and I think the combination with Zurich is gonna make it a better business.
Okay. Yeah, that makes perfect sense, I think. I want to think of the right way to phrase this question because a lot of the effort that you've done since you came to AIG has been internally focused, and obviously, you have to pay attention to what's going on externally.
Yeah.
But some of the issues were, again, unique to AIG, needed to be addressed. As you look forward and say, "Okay, now that AIG is, I'll say, proactive," the problems have been solved, knock on glass. And you're going forward there. The environment that you're operating in seems a little bit different. We're in the fifth year of rising rates, which I don't think has ever happened before. So maybe this is a better disciplined industry, better informed, better analytics than it used to be. How does that factor into your thinking as you start making positive long-term – I shouldn't say start, 'cause it's been going on for a while, but as you plan for the longer term?
I think we're a huge catalyst in that discipline in the market. I mean, there's other companies that, you know, you heard from today that are very disciplined underwriting companies. But AIG, taking a position in underwriting and building an underwriting culture, you'd have to ask reinsurers, but the top reinsurers in the world consider us one of the best underwriting companies today in the industry. And so that would, you know, five, six years ago, I wouldn't have dared to think that. I mean, it just, it's so hard to change a portfolio in our business. We did it. We created an underwriting culture. Now, the growth, you know, we get labeled with that, "You don't have a growth mentality." It's not true.
I mean, we just had to shed a lot of business, and so, you know, when you look at our peers, they weren't rehabilitating a portfolio, they weren't taking risk out, they weren't reducing overall aggregate, they were pruning, and I think that's where we are today, different than we were in prior years, so we actually had a really good new business funnel. We had a very good, you know, strong retention, we've had good rate, and we've had a real balanced business. I just think you're starting to see that become more evident, because we're not in the rehabilitation phase of any of our portfolio anymore.
They're very focused. I think we're starting to see this, this year, where there's growth opportunities, strong risk-adjusted returns, and we're gonna deploy capital that way, but we want to see more submission activity. I think we've been more disciplined with distribution. And that just means making certain that we are prioritizing risk appetite to submission activity, and I think we're getting a better yield for that. You just heard from, you know, Pat and Tim, you know, the E&S market's been unbelievable for us. The E&S broker distribution from wholesale is unbelievably powerful, and I'm sure they'll. They said it, I'll say it, is that they're driving growth beyond, just what is a market dynamic.
It's a more of a shift that is gonna be much more permanent, and there's gonna be more scale in that, and there is not the same marketing effort that it would be on retail, and so really strong excess and surplus lines capabilities within the United States is gonna generate, you know, very unique opportunities to to continue to grow. Because you always look at the fundamentals of retention, which again, historically, for E&S is in the low 60s%, and it's been in the, you know, low to mid-70s%, so you're retaining more business. There's a lot more new business activity. If that was starting to slow down, you look at properties had maybe a little bit of headwinds on rate for the first half of the year.
Submission activity is not slowing down on property, so, and it's improving in just about every portion of our business that we do with E&S. So I think having that balance, and I always say, like, I'm not trying to talk it up because we have an E&S insurance company, we also have a lot of admitted capabilities, it'll go where it goes. I just see that that's a shift in dynamics that, you know, companies that are prepared to trade in that environment are gonna be winners.
What are the internal and external efforts required to let everyone know that you're interested in growth? I don't know. I'm gonna leave this to you to answer, but culturally, do you have to tell people, "Okay, this is, you know, subject to your judgment as an underwriter, this is a good time to grow," and letting brokers know that you've got an appetite for growth because internally, the results are solid?
There's a shift, it's not a major shift. It sounds like it would be, but is really talking about maintaining underwriting discipline, underwriting profitability, but where there's opportunities for our leadership to grow, we should be deploying more capital, and we have, you know, significant capital to deploy. There's actually a lot of demand from clients.
Mm-hmm.
They like the expertise. We have very strong technical underwriters, point-of-sale matters. We end up setting, you know, lead terms, terms and conditions, pricing. Markets follow us, and certainly the brokers are so important to us, but that's become service. As I said, brokers always want as much as they can possibly get, but the number one thing they need is consistency and risk appetite, so if you say you're going to do something, you gotta be able to deliver, and so that took a little bit of time to build the trust, but like the, again, the submission activity has been tremendous, the support from the brokerage community has been outstanding globally, and we just need to continue to perform and execute.
I don't think it's a big message, Meyer, like, because they know what AIG is today, and know what opportunities present themselves when they advocate for us with their clients.
Okay, great. I want to move on to capital deployment, and again, we are, I think, intentionally moving quickly because there's a lot of, I'll say, good news to cover. So the capital deployment strategy, as you laid it out, and I'm gonna paraphrase what you said, is that you've got a target for capital return in 2024, 2025, after which it's probably a more normalized capital return, earnings minus dividends, and what you need for growth. You know, again, that's me paraphrasing. What led to that sort of prioritization, and then how should we think about an M&A appetite in 2026 or beyond, if that's the right timeframe?
I think we've given a lot of guidance. Sabra, who's sitting in the front row here, and I have provided a lot, and, you know, the first thing you want to make sure is that you have, you know, ample capacity and capital within your insurance company subsidiaries to drive growth because there's great opportunities for us. And we have, I said in my prepared remarks, excess, you know, capital that we can grow into, so that's, that's terrific. We wanted to get the leverage, you know, was the target 18%? No.
But as we started to, you know, create more liquidity from Corebridge proceeds, other proceeds, and earnings, we decided to take an aggressive position on, on leverage, and get it to a place where we felt very comfortable, but also one that gave us a lot of financial flexibility, too. We could take it up if something presented itself or an acquisition. That's not the design, that's not the plan, but we can. Again, giving us financial flexibility. Being a good dividend payer, that's been a while since AIG increased its dividends, so not only increasing it, you know, north of 10%, two consecutive years, but being a consistent dividend payer and increasing our dividend each year is, you know, our, you know, short to medium-term plan. And then the proceeds are coming from Corebridge are substantial.
And, you know, we've outlined a, you know, capital return strategy of $10 billion in, you know, 2024 and 2025 in the form of share repurchases. And I think that's a lot of guidance, right? And so, like, when I think about 2026, I'm not suggesting we wouldn't do share repurchases, but we want to drive earnings power. There's opportunities to do M&A. That'll have to be compelling, it'll have to be disciplined, it'll have to be additive. But you talk to investment bankers in the insurance sector today, they've never been busier. There's so much churn, there's so many things that are being considered, that there may be opportunities, you know, for us, you know, whenever they present themselves.
But as we look to 2026, you can't time these things perfectly, but should an opportunity present itself, should it be additive, either geographically, to enhance AIG, or in products that are, you know, additive or more scale matters-
Mm-hmm.
-we wanna be able to do that. And so we've put ourselves at least in a position to do that, and to be able to drive growth. And then, so I think we're in a really good position, to take advantage of all the hard work and the discipline that we've had on capital management.
Okay, fantastic. When we look at North America Personal, I guess two questions come to mind. One, how should we think about the growth opportunity? And I'm saying North America Personal, but there is an international personal component. The growth opportunity in high net worth, ultra high net worth, personal lines. And second, maybe talking us through why an MGU strategy or MGA strategy is the right way to access capital for this particular line of business.
Okay, so the U.S., North America Personal is basically now the high net worth business and warranty. That's kind of it.
Right.
And the high net worth business is really gonna drive the results. And what happened with our high net worth business over time was the same thing that happened in the commercial business. Too much aggregate, too dense, and it's harder in the Personal Insurance business and personal lines to recalibrate that book than it is on the commercial side, so it just takes longer. And so, you know, we're on that journey and began the profitability improvement, which it needed because the book got to a false positive leading up to 2017, because there was no CATs, wildfire. So all of a sudden, we have to re-underwrite the portfolio, but also there's a lot of shifting dynamics externally. COVID, and the density that already existed in areas where there's aggregation, you know, skyrocketed.
You know, people buying homes used to be fives or tens, putting up 25s everywhere, so all of a sudden, Florida, California, the Northeast becomes a bigger issue. Wildfire wasn't modeled right, secondary perils, and all secondary perils are is that they don't have enough credibility to actually have the right loss costs in terms of all the return periods and model. It's no more complicated than that. So all of a sudden, like, that's underbaked, and then there's reinsurance, which has more costs associated with it, and the state regulators don't really want to push those costs to the original insured, and so we had to pull back, and then, so, like, doing that takes a little bit of time, and why the MGU?
Because the long-term strategy, for us, and we're executing on it, is that the barrier to entry in that business is significant. You gotta have unbelievable claims, capabilities, loss control, policy, knowing the wordings, and you have to have an intimacy with your clients. I mean, like, you know, our clients really like AIG. We have enormous stickiness. And, you know, despite, you know, the rhetoric that things are moving to other carriers, is the only thing that's moving to other carriers, stuff we know and renew. We have a book that our infrastructure can support a bigger portfolio. We just announced with Pat and Tim that we're doing, you know, a E&S platform with Ryan Specialty because we want it more organized.
I believe that the wholesale on the personal lines for high net worth has been more of an adverse selection play. It doesn't need to be that way. It gives us more flexibility to put out limits in areas where we may not feel comfortable deploying them on an admitted, because a $30 million home is a $30 million replacement cost, plus, you know, supply chain and other inflation, but you can put out a $10 million in non-admitted. So you can actually start to solve client problems. And then the portfolio that we have is going to be selective in terms of our underwriting risk appetite, but I would expect over the coming 6 to 12 months, that other insurance companies will come on the platform for the MGU because the infrastructure is built to be bigger.
And so it just gives a lot more flexibility for other risk appetite in an admitted and non-admitted basis that is gonna allow us to grow and for AIG to be very selective in our, you know, underwriting risk appetite. So I would expect to see continued improvement in results on the expense side, as well as on the loss ratio side, and us being able to control volatility on CAP.
Okay, fantastic. One maybe unique element of the commercial industry has been the softness that we've seen in some professional liability products, and it's hard for us to know on the outside how your book of business has evolved through what is now, I guess, second, third year of rate decreases for public company, D&O, EPLI.
Yep.
Can you talk us through the changes that you've seen in your book?
... Yeah, don't forget, like, it's like kind of 50/50 international to North America, and the dynamics we've been seeing have largely been North America, and it's pressure on excess, which is commoditized, and usually price wins. And so there's been some new entrants, been some current carriers that are not necessarily in lead layers, and it's pushed, you know, price down. We've shed a lot of that business. Look, the cumulative rate increases have been substantial in Financial Lines over time. But at some point, if we don't think the margins are there, we start to move away from it. So, like, the way the U.S. book works is that you want to be more in lead.
And then, look, there's multiple excess layers, and then the next, you know, couple of excess layers, and the more commoditized ones have been under price pressure, and that's where we've pulled back in Financial Lines. International works differently. I think some of the excess holds up better, and so it's been a little bit more balanced in its stratification.
Mm-hmm.
So it's not like you don't have to be lead, and the excess gets the pressure. It's been, again, more balanced, but we're seeing rate decreases in international, but it's basically trailed the U.S. by six to eight quarters. Still a very good portfolio. We still have size and scale. And again, we're not going to sacrifice underwriting results or discipline, and we will shrink it if the economic returns aren't there.
Right.
But I think it's been more driven by excess. I think it's starting to, you know, stabilize a bit, and international lags way behind the U.S.
Okay, and international, I think the general assumption is that the social inflationary potential isn't as bad-
Correct
... as it is in the U.S.
And the other thing, too, is when you have international, like, when people say international, what do they mean? I mean, our international business is international versus international writing U.S. D&O-
Right.
... where people end up picking up a lot, which a lot of portfolios in international are picking up a lot of U.S. exposure, which we're very disciplined not to be doing.
And so it's not just Lloyd's business where-
Correct
... it's making a round trip. Okay, I want to talk a little bit about reserving philosophy, and I'm not really looking for a number in terms of casualty loss trends that you book, but what's the approach when you look for, I guess it would be Sabra and the actual team to say, "Okay, this is how we want reserves established." What's the philosophy? What is it that you're looking for them to provide?
Well, I mean, Sabra, she conveniently doesn't have a microphone, so I'll answer the question. She said-- No, I think we look at, we do our DVRs quarterly. We're very transparent what we're looking at, but there's always, you know, it's not like you bury your head in the sand on the other lines of business that are not being, you know, done on a detailed basis each particular quarter. We watch industry trends, we go into things very deep, bad news first, good news, watch it emerge. Really, the good news, watching it emerge just means the portfolio's changed so much.
Mm-hmm.
And that looking at, you know, sort of aged ultimate factors or looking at historical triangles, we just have to be very thoughtful. That's not the same book. Things have changed a lot, so as we see things emerge, we want to be, you know, very cautious and careful about that emergence. But I think there's a lot of positive signs that we see in how the portfolio has been performing. But, you know, the areas in which we've recognized over the course since I've been here have been the ones where we know the pain points. It was, you know, years ago, casualty, and, you know, we looked at Financial Lines. And we continue to, you know, go through everything in a very detailed basis.
And I think give as much transparency as we possibly can in terms of the philosophy and how we analyze it.
Okay, that's helpful. And I'm going to infer, and I'll ask this maybe more explicitly, that you don't see any flashing signs saying that, "Hey, maybe we missed something for more recent years?
You're talking about casualty?
I'm talking about casualty, yes.
It's, like, the popular. I mean, go to Schedule P. I mean, like, again, I say this, I don't always pick the right words, but we had a different problem ahead of the industry, which was large limits, a portfolio that had the right terms and conditions. It was in balance, it had too much net. And so we got after it five years ago, like, you know, whether we were ahead of everything and, you know, saw everything coming, you can determine that. But we already started to take limits down, tighten terms and conditions, move away, you know, from some of the, you know, lower attachment points, and move them up, and that's been a process, that's been in play for quite some time.
And again, if you look at the average of where, you know, the industry is, we're above average in terms of having a higher pegged ultimate loss ratio, and so I think we've recognized it. Watch it very carefully, watch the sort of vertical exposures, jury verdicts, things that are emerging. And we're very cautious, but we watch it all the time, and we have substantial reinsurance. That's not to supplement underwriting, but it is there to mitigate, you know, volatility.
Mm-hmm.
I mean, the AIG I entered could take a $100 million net loss. I think in the U.S., the most you could have now is $13 million, if you had a $100 million gross loss, so we don't have the same volatility, we have enormous vertical protection. We bought quota shares just because we want to make sure we have much more predictable results, and maybe that didn't carry a lot of weight when we first came because it was just a couple of years, but it's like, you know, been year seven now, and so we've got a much more comprehensive structure in place, and we watch casualty like everybody else does, but I think we're a little bit ahead of it.
Okay. No, that's, that's tremendously helpful. And, for those of you that haven't seen the reports we've done on AIG's reserves, that's clearly our conclusion as well. So a little self plug there, I guess.
I love it.
Can we talk a little bit about cyber insurance, just where you are now and how you see the line of business?
It's challenging. We have a very good portfolio. I'm not going to lead to everything's reinsurance, but, you know, the philosophy there, when you're pricing and deploying capital in any line of business that has systemic risk, and the probabilistic outputs are highly unpredictable, you gotta be careful, right? So like if think about cyber terrorism, they just don't have the same predictability. So how do you manage that? You balance industry, you balance geography, and you take gross limits down. So our average gross limit is, you know, $4 million-$5 million, was substantially higher than that over time. So yeah, if there's a couple of losses, they're not gonna really impact the portfolio. And making sure that we're getting the right pricing, put a little bit of competition, in that space.
I'm not sure the entire industry sort of views it the way we view it. But we have tremendous reinsurance protecting us. We've a quota share that pays very good ceding commission by the best reinsurers in the world, and we have aggregate protection on our net. So, you know, that's another systemic risk issue that if you end up having that, that you protect not only for severity, but for frequency, and it's again, another part of the balance is a lot of it's international. You know, so more of the SME and international.
Mm-hmm.
Very careful in the U.S. in terms of corporates. And if the market opportunity presents itself to grow, great, if it doesn't, we'll maintain our position. But you can look at property, and you could argue other lines of business on reinsurance 'cause companies have significant capacity to deploy. So yes, maybe they'll give their preferred, you know, insurance companies great capacity, but they can spread it across the market 'cause they have a lot, they have their own retro. But in cyber, they've got to be really careful 'cause they can't aggregate themselves, and they've chosen us. I mean, you have to ask them, but, you know, when we get the reinsurance structure, they're betting on AIG as the number one carrier, because they see we're doing on the underwriting side, and they want to back us.
Okay. No, that's very helpful. Results have improved dramatically since you've gotten there. This is not a secret. We've talked about it a lot, and I'm wondering, does that-
Is that, is that another plug?
For you, I haven't done anything.
I'm just kidding. Thank you.
You know-
I see you there.
... I just sit in the outside and throw stones. But I was hoping you talk about how being a consistently profitable insurance company, how does that impact investment allocation? Can you be more aggressive? Do you not need to be more aggressive?
You mean, on the asset investment side?
On the asset investment side.
Again, Sabra doesn't have her microphone, but,
I can give you mine.
We set a very conservative philosophy. I mean, it's, you know, it's gotta be liquid, fixed income. We at AIG had the remnants of the investment strategy of a life company, basically. I mean, so that was what happened. So too much hedge funds, too much alternatives, duration a little bit different, where we might have taken a little bit of the imbalance because they want to go longer on, you know, some of the life insurance investments, and so we pulled that back. We're more conservative. Yes, there's, you know, reinvestment yields have been very good, but we've outsourced to BlackRock, you know, a lot of the fixed income.
And, you know, Sabra and her team are working, you know, very closely with other stakeholders in terms of how we structure the alternatives, and, you know, we think we will be, you know, right with the rest of the industry. But, I don't believe in this environment, we want to be more aggressive with going into more alternatives to get more yield.
Okay, that's helpful. And this is really my last question. You've talked for a while about 10% ROE. We have, I think, a very clear operating book value per share number to work from, and that should rise over time. What's the timeline for developing a timeline? You can say, "Okay, 10% ROE by X.
I mean, some of it's driven by this is not the caveats, but some of it is driven by the proceeds that we get, you know, from Nippon.
Mm-hmm.
You know, when that closes, when we do other marketed deals, and how we deploy capital, we have a path to 10% ROE, for sure, and, and again, everyone's gonna want guidance after that, which we're prepared to do. But for now, focusing on the, on the 10% driving earnings. Look, we have more capital. The E is big relative to what we are today, so that will get balanced out. And feel very confident that we will, you know, meet and exceed that. I mean, so, like, the timeline's gonna be dependent on other capital actions, but, you know, in 2025, we expect to be much more normalized. And, again, but it so much depends on some of the closings and some of the marketed deals, you know, that, that we do. But feel like we have the earnings power.
Can I ask myself a question? The one that everyone's like, "The 91.6, can I..." Like, that's like, "Why'd you do that?" Like, so,
Sure.
Okay. You, you're too polite. But look, the question came, and it was a good question because there's so many moving pieces, you know, from AIG, and it's like, what's the baseline? And it was pretty simple math. It's like, you know, we had a combined ratio of 90.6%. We don't have Validus anymore. And Validus Re, no surprise when you move rates up 50%, there's no CATs. There were some earnings there in the prior second quarter. So we adjusted it, looked at. You know, when we look at other operations, we have a $1 billion or so expense. Goes to Corebridge, we eliminate a lot, goes into the business. We have a parent expense of $325 million-$350 million. The companies that absorb that and the combined ratio is not gonna go up in the 2025 calendar year.
But that was the answer. Like, that, like, what's the baseline? The baseline is 91.6. Like, is that where I think we're gonna be? I hope to be better. I mean, I didn't mention calendar year, we didn't mention conservative projections on earned premium. We didn't, you know, mention other expense initiatives, didn't mention how we're gonna structure reinsurance. So, there's other opportunities, and by the way, it's saying it's giving guidance in a, in the future of how we're gonna manage cat, which is like totally very difficult. A lot of other companies are not going to give you a projection that, "Yeah, here's our combined ratio off this baseline, and by the way, we'll absorb cat within that." You know, so it's just a level set.
You know, models right or wrong, I don't really know, but like, that's where we are. I think we've shown that we meet or exceed every expectation and guidance that we've given. That's the baseline, and we're all going to work very hard to, you know, overachieve. I just wanted to just say that, because everyone was like: "Why'd you say it?" It's like, well, it's a pretty simple answer. I mean, it was, "What's the baseline?" That's it.
I mean, I have no problem with that. I think, you know, you telling us what you think is really, you know, what we're looking for. And my last question, and this is only half tongue in cheek, but how bored are you going to be just running a normal, good insurance company?
I have to be quiet for another minute.
Just drink.
There's like-
Be really bold.
... we have huge ambitions with AIG. Thoughtful, but there's a lot in this world that can shift. You know, whether it's all the things geopolitically, but I think giving us a lot of financial flexibility, you know, we're builders of organizations. I'm really excited about what we're doing on Gen AI. And again, I could spend a lot of time on the computing side of it. You know, is there new market entrants? Can we do more in different parts of the world? You know, will there be bolt-on acquisitions? Can we get more efficient? Can we continue to give ourselves tons of strategic and financial flexibility? I think we have a great team that works with me that is built for transformation.
I've never been part of a company that can transform at quality and at speed like the one we have at AIG, and so it just gives us a lot of, a lot of option value. So I think that shift in focus of how we build, how we drive value, our reputation in the global insurance industry is at the top. And so we want to make sure that we maintain those standards and play for the future.
Okay, that is very helpful, and thank you for taking that seriously. With that, please join us in thanking Peter. We have cocktails on the roof in the penthouse, and we'd love to see you there. Thank you so much.