Good afternoon, everybody. This is Brian Meredith. I'm the North American insurance analyst here at UBS, welcome to our next Fireside Chat here with AIG. Quick introduction here of who we have with us. First, we've got Christopher Schaper, who is the CEO of AIG Re. He's going to give us some updates on the reinsurance market and how AIG is responding. Ask him some questions about that. We've also got Mark Lyons, Chief Financial Officer, Sabra Purtill, the Deputy CFO, and Shelley Singh, Investor Relations. We'll focus on some other questions with them as well a little bit later. To begin, though, I know Mark and Chris have some introductory comments that they want to convey to everybody. With that, I'm going to turn it over to Mark.
Great. Thank you, Brian, it's great to be here again. I don't think it was that long ago, maybe August or something.
Yeah
So great. Thanks for the invite to you and your team, asking us here and setting everything up for that. A few introductory comments. First off, I think it's clear in October we had a few announcements that came out besides normal earnings. We had some management changes that we discussed, but I think perhaps the primary announcement of interest to most was centered on our intention to separate our Life & Retirement businesses. I think as we noted on the call, that we, in conjunction with a set of advisors, thought that that was in the best long-term interest of value creation and are going in that route. Quite frankly, none of that would be possible without a strong general insurance operation. I think we've talked at length about the material changes that have occurred over the last few years to enable that.
I just want to kind of put that out there. Firstly, the momentum in general insurance, I think is palpable. I'm sure, Brian, you and your constituents will have a few questions in that regard, we're happy to go there. With that as just a very brief introduction, let me turn that over to Chris for him to make a few comments as well.
Great. Okay, yeah. Thanks, Mark. It is great to be here as well. Good afternoon, everyone. I am Chris Schaper, I am the CEO of AIG Re. I thought I would give you a little background on AIG Re for those that are not very familiar with the company or the organization itself. First off, we started in mid 2019, the company itself is comprised of companies that were within the Validus Group. To give a little bit of background on Validus had both insurance and reinsurance operations as part of it. The reinsurance businesses were segmented off and are now part of AIG Re. In particular, they encompass three enterprises. Validus Re is one of the entities in AIG Re. Validus Re itself is a traditional reinsurer and deploys capital through its balance sheet, as a traditional reinsurer would.
Talbot Treaty is another enterprise that is part of AIG Re. It was part of Validus Re when the acquisition occurred as well. Talbot Treaty is part of Talbot Syndicate. Talbot Syndicate, in essence, deploys capital through a Lloyd's syndicate approach. There is Alpha Cat, and Alpha Cat is an asset manager that operates in the reinsurance space, and it has roughly about $4 billion of assets under management. Those three enterprises were part of the Validus Group initially and are now what make up AIG Re. Certainly been a very busy year for the team. COVID-19 has continued to impact the reinsurance market quite substantially. In particular, beyond that, it has also been a very active storm season for 2020.
From a frequency point of view, as you know, we got into the Greek alphabet for the varying storms that took place in 2020. Prior to that, certainly the last few years were very active as well from a storm point of view. Between COVID and the active storm season and other issues associated within the reinsurance market, it has become a very dynamic environment. What we are seeing in the market right now is that positive pricing is certainly taking place in almost every line. Still early on firm order terms and signings, but those are being worked through as we speak. There has also been very active capital flow in the reinsurance space. You may have seen significant new scale-ups or new startups for both traditional reinsurance as well as for alternative capital entities.
Overall, it makes for an interesting time for those of us in the reinsurance space in and of itself. That being said, just a few other comments, that this is not 2002 or 2006, where at that point, existing markets were frankly scrambling to engage. This is very different. This is an incumbents market. Existing entities with strong balance sheets, with strong client broker relationships, with strong bench strength, with strong operations, et cetera, are definitely there to take on this particular market, which again, is different from where things were previously. Those enterprises, frankly, are the ones that have a very strong position for success. Our clients right now prefer certainly markets that are very active, that seek to offer quotes out to the market, that seek to deploy their capital effectively, and seek to properly engage kind of across the board within the spectrum of reinsurance.
It's a very active time period right now, again, those enterprises that have all of those underlying components that I just mentioned are in very good shape to actually execute. I'm sure we'll talk about the reinsurance market overall, but those are just a few opening comments, and I'll turn that back over to you, Brian.
Thanks, Chris. Yeah. Why don't we just follow onto that and get a little more detail here and just thoughts here. Obviously, January 1st renewals coming up here. One of the markets everybody loves to focus on is property CAT, which was clearly, Validus was one of the leaders, and probably still is one of the leaders in property CAT reinsurance. Maybe you can talk a little bit about what you see happening in the North American property CAT market for property CAT reinsurance and then maybe also the property retro market and kind of the interplay there and what you're seeing happening.
Sure. Okay, yeah. North American reinsurance. First off, North America represents about 50% of the business that we have, just generally in the overall insurance space. Very important market in and of itself. In that market, need to separate business out between loss-based treaties, if you will, versus non-loss-based treaties. Those that have not been loss based, we're certainly seeing rate increases really kind of across the board, I think is the first comment that I'll make. Where we are seeing treaties that have had losses that have come in, whether those are through property circumstances or other circumstances, we're definitely seeing further rate improvement that's happening there beyond what we would see in the normal market where there were no losses. Pretty much kind of across the board, as I said, we're seeing very strong rate movement in that respective area.
That being said, the incumbent markets are really the markets that are really leading this entire area. We may have seen some additional firms that are trying to come into being here. Those companies are really not that, I would just say, influential at all in this particular market. It's really the incumbents. Those are the ones that are focusing on the rates and the quotes and getting all of that sorted for the respective markets. From a retro point of view, yes, for sure. We're seeing rate movement in the retro space. Those rates can be certainly significant double-digit rate increases that are taking place in the retro space. That being said, there's additional capital that's come in, that actually perhaps creates greater competition in that overall field.
We are seeing enhanced competition that's taking place in the retro market year-over-year from what we saw last year. While the rates are up, competition is up as well.
Interesting. I'm just curious on that topic, Chris, and we'll get more into market conditions here in a second. Just remembering back with Validus was a very active user of retrocessional reinsurance as well to manage the exposure and take advantage of market conditions and stuff. Has that changed at all in the new AIG construct? Is there still a relationship, and how do you manage that?
Yeah. Validus certainly is active on both spectrums of that. That in and of itself has not specifically changed relative to Validus pre-AIG and Validus post-AIG. They were active prior, they're active currently. A focus on us prior and certainly current is on properly underwriting risk across the board. That tenet is absolutely part of the perspective that we bring to the table as an organization. The issue of further protecting the organization through different risk management means such as retrocessional protections, et cetera, has been a mainstay of the organization and continues to be to this day. As we think about that, we do think about varying structures. We can have structural changes that may be integrated year-over-year.
In general, in terms of the use of retrocessional protection and how we think about it is definitely part of the risk management program that we have.
Got you. Perfect. Thank you. We talked about property CAT, property retro sounds good. What about some of the other areas of the property market, maybe non-CAT property, as well as quota share risk programs? How's that market shaping up right now?
Yeah. On the quota shares, the value proposition there is you're getting the underwriting rate movement that's happening in the primary lines of business. Those lines are on the move. From a quota share point of view, we think that it's an intriguing area for us to engage in. I would view that we'll continue to move down that path with certain markets. We don't really just spread ourselves across everywhere. We're particularly selective on how we think through the insurers that we're engaging with. There are companies that actually have greater influence in terms of how they try to engage with the market, and with those companies are the companies that we're seeking to do more business with, if you will. From a quota share point of view, yeah, we think that there's an interesting aspect of the business happening there.
Again, primarily due to the rate movement that's happening in the underlying business. That would be intriguing for us. When you think beyond the pure property space, the casualty markets are definitely moving. They're moving, and for real reason. When you think about what's existing in the financial environment, and also think about social inflation and different issues such as that, there's a real need for those areas to accelerate in rate. Again, it's about being with the right companies that are tackling those issues on a regular basis. We think there's some opportunities there, too.
That's terrific. Maybe going across the pond over to Europe. What do you see going on in Europe right now?
Yeah. We do see rate movement there, too. I think there's certain areas that are important that you look at across the board. The U.S. tends to move depending on the circumstances, more specifically than what you would see in the European markets, but we are seeing European markets move as well. We think there's value proposition there, too. That's a different portion of the world, and they have different exposures that they take on. Hurricane risk is not one of those, but they do have wind-based risk.
Right
et cetera. There are differences. We are seeing movement that's happening there in those markets in themselves. Yeah, we think there's some interesting opportunities there as well.
Interesting. You haven't heard that comment as far as movement in European reinsurance pricing for a while, at least in the upside.
Yeah, it's true. We've seen it in some other markets, too, outside of that you hadn't seen that movement happen previously. That's why we're saying, generally, you see rate movements that are happening. We'd say that that's definitely a difference what we've seen in the 2021 renewal than what we had seen prior.
Got you. This is back onto the comment with respect to capital. I appreciate what you're saying, that it's the incumbents that are kind of driving this marketplace right now. We have seen a lot of new capital get raised this year and some new startups that have happened. You've got a lot of trapped capital sitting in the alternative market right now that is clearly kind of tied up. Do you think the market changes as we go throughout 2021? Maybe that capital is more of an influence on mid-year renewals, something like that happens. What happens is trapped capital kind of releases.
Yeah. Let me just make sure I'm clear on your question. Is the question whether I view that the alternative capital coming into the space-
Yeah
is going to have an influence?
Yeah. I guess what I'm trying to do is, what I get questions a lot of times, people say is, like, "Okay, great. 1/1s fine, do you think it gets better or worse during the course of 2021?" Some companies will say, "I'm going to hold back on some of my capital because I think it gets better here going forward." That may be conditioned upon what happens with some of this new capital that's in the marketplace, or perhaps the, I've heard $15 billion-$20 billion of trapped capital with the alternative players. Does that start to free up as COVID losses become more known?
Yeah, it'll take a little time for that. I mean, Brian, I would say your numbers are probably about accurate in terms of how we're seeing it. Yeah, I mean, it's going to take a little time for things to play out fully in terms of what COVID may or may not mean for the overall industry itself. As that does get known, though, for sure, there's an opportunity for that money to be released and then kind of considered to be deployed, right? It doesn't necessarily have to be deployed, but it'd be considered to be deployed. There's an opportunity, possibly, for that to be coming back into the market, but it's going to take a little time for those circumstances to be known. In the meantime, that's not something that's going to happen altogether quickly in 2021.
I think that's going to take definitely some time through that year, if not beyond that, for sure.
Got you. It makes sense. Then, let's put them around a little bit here. As we look throughout 2021, any thoughts on kind of what Florida could potentially look like or the Japanese renewals?
Yeah. I think similarly from what we've seen in 1/1, I think we would see those progressing as well in terms of rates. I would imagine that that would be taking place. There certainly have been storms that have happened in Japan over the past few years, that needs to be considered.
There has also been certainly frequency that's taken place relative to wind events, obviously in 2020. The frequency issue is important. Obviously, severity going along with frequency is even that much more important. I would just say that all those particular items need to be effectively thought through if you are deploying capital. I would envision that you'll see continual movement in those respective territories as we progress through the renewal cycle.
Great. Thanks. Let's pivot over to AlphaCat. We've talked a little bit about alternative capital. What are you seeing in AlphaCat with respect to funds managed? Is there increasing investor demand for this asset class? How are the investors, are they more diligent in kind of when they look to make these investments given what we've seen historically?
Yeah. There's certainly an interest in the insurance or reinsurance space. There's no doubt with that. Every year that happens, I would say investors get more and more intelligent, which is important to us. We want to make sure that you have any investor coming into the space, that they're very knowledgeable. I would say year-over-year, we're certainly seeing that. There are good conversations that happen as a result. I think what you ultimately see here is alternative capital thinking through insurance or reinsurance more considerably than they had previously, particularly when they look at their own environments relative to investment opportunities that they might have. A combination between knowledge of the space that is enhanced year-over-year, along with capital available, has certainly shown to actually increase the interest in our space. I would anticipate that that'll continue.
Yes, there's definitely an interest in AlphaCat, and I would just say overall in the alternative capital space within reinsurance business.
Great, thanks. Pivot a little bit more specifically, COVID kind of related losses. I know you mentioned on the last call that part of the COVID-related charge was Validus Re. Where does the losses typically come from in Validus when you see a COVID-related loss? Should we expect COVID-related losses, you think, in, let's say, not necessarily for Validus, but just the industry in general to continue to see some more COVID-related losses as we go into 2021, just because some of the lag that you get with the reinsurers as well as attachment points are probably going to start to get hit on some of these programs.
I think you'll probably still see some COVID coming in 2021. I do view that. As the programs get renewed, the insureds are trying to give you a fresh or refreshed view of their loss scenarios, which you need to understand the risk that you're taking on. I would imagine that as we continue to move through 2021, that we'll continue to get additional information relative to that from respective insureds. If you think about when the renewal cycle tends to be, you've got the April renewal cycle, the June, the July, and then kind of the October in terms of kind of key time periods. I would expect that we're going to see that. We tend to see the losses coming through on the BI side, so on the property and the BI side. That for sure is a key area.
We also would see it in the event and credit side of the house as well. Everything's manageable for sure. It's a matter of just understanding the perspective of your insured in terms of how they're thinking about COVID and how they're thinking about the loss scenario. Some insureds are at X point and some are at Y, and they all have different perspectives as to how they see COVID playing out a bit, but those would be the primary areas where we see it.
Are there still disputes between what the cedents think that are COVID-related losses and the reinsurers are? I know that early on, there was a lot of questions about whether CAT reinsurance contracts actually pick up some of this COVID-related losses.
Yeah.
Has that kind of been settled?
Yeah. I wouldn't want to say disputes. There may be a difference of opinion.
That's a better word.
I think whenever there's wording out there, you're always working through it with your respective market and the brokers as well. I think mostly level-headed parties come to the table and just try to kind of vet out what everyone's thinking about. There's wording that can be a little bit more broad than others or can be interpreted more broadly or less. I would say that there'll be continual conversations happening. I think in the greater scheme of things, I would just say that a lot of the perspectives have been already kind of brought to the table. I don't know if you're really going to see anything that is headline news in terms of here's a new wording that no one ever thought about. I think in many ways, there's an understanding as to how wording should be considered.
How it ultimately plays out will still be kind of a TBD. Again, I think for the most part, the parties have a sense for what is likely coverage and what was likely not yet covered. It's still going to play out a bit further.
Got you. I think you kind of alluded to what my next question is, that was what kind of notable changes are you seeing in terms and conditions going into this renewal season, right? COVID exclusion or I guess it wouldn't be COVID exclusion, but communicable disease exclusions, those types of things. Are there any other interesting ones that are kind of popping up?
Yeah. Certainly communicable disease, as you said. I would also say that cyber has certainly been an avenue that has been very significantly discussed. As people think about potential loss activity that could occur, obviously that area is one that is pretty paramount for everybody to think through, to consider. That's been one area that we've had a decent amount of conversation, there have been some term and condition changes associated with that on our contracts as a result. There certainly has been rate movement there too. Without a doubt, there's been rate movement on the cyber business. I would say that that's probably, if we're looking at key areas where there have been discussions, that's probably the most significant outside of the communicable disease arena.
Got you. Is the cyber side. Yeah. It sounds like there's been some reasonable amount of loss activity in the cyber business this year. Is that true?
There's been some. Yeah. It's up, but that's not, I would say, in my opinion, that's not really the issue. Obviously, losses are always an area of conversation for all parties. I would say, frankly, the more significant issue is the fact that cyber can be a very extreme circumstance if running through multiple policyholders, one particular circumstance, one particular event, right? It can have a very significant ripple effect throughout not just one or two or three policyholders, but millions of policyholders, and that can have an effect overall on the insurer and ultimately to the reinsurer. It's much more of an endemic issue. It's much more of a kind of a very specific issue within the coverage itself as opposed to just losses that may be starting to show up now. It's a deeper discussion.
It's a deeper issue than just purely a loss issue in terms of what we're seeing today.
Gotcha. Makes sense. Another one that I've been trying to ask most companies is what are your thoughts on the current CAT models out there? Obviously, alternative markets used to use them fairly heavily, AIR, RMS. Do they adequately reflect the frequency and severity of hurricanes and other types of catastrophe losses out there right now? How do you use them? How do you think about them in your business? What's your thought on, are we seeing an increase in frequency and severity?
I think we can point to an increase in frequency that's happened. I think this year is an example of that. Obviously, 2005 is another example of that. We've seen that, but obviously, everyone's got to be cautious about jumping on the frequency bandwagon. You've got to take a very specific viewpoint on that and just try to put it into context. The models, we think of models as certainly a strong tool for us to use. We've always been a very significantly focused model shop here, and we think it's extremely important for us to consider that. We have an entire research business that's part of our overall reinsurance team, with greater than 50 people or so that are part of our research operation within reinsurance. Just specifically for research. It has everything from PhDs to modelers to people with different quantitative skills, et cetera.
It's a very important aspect of how we think about risk. With the models, we use some models for certain types of risks and exposures, and we use other models for other types of risks and exposures. What's most important is that you focus on validating and addressing each model. That's what's really important. You need to look at each model in terms of what it's trying to offer you and assess whether you think there's significant value or not so much, and then try to think, is there a need to augment that further? When we look at models, as I said, you've mentioned a couple names. Obviously, those would be important names for us. There are other modeling firms that are out there that we think bring value to the table as well.
We do look at models as an integral part of what we do. As far as thinking through the frequency and severity issues, I think what is important, and we're doing it independent of the models, is looking at climate change and really trying to understand what that might mean. Then trying to think through should the models be augmented to try to consider that. I think there's a couple other things that are important to consider here, and that is, on the one hand, you need to think about the short-term perspective that you want to bring to the table, make sure you understand that. I'm not saying that within the models, you have short-term and long-term effects if you want to think through how to augment models.
You can think that's what I said, but that's not what I'm trying to get to. What I'm trying to get to here is that it's important that we think through a short- and medium-term perspective and also think through a long-term perspective because we're trying to make sure that we're able to effectively execute for our insurance. We also need to make sure that when we execute, that we're executing safely and effectively for AIG. Then we also need to be thinking through what that means to regulatory bodies, et cetera, making sure that we're really thinking through the spectrum of all respective parties as we consider models integrating into our business. There's a lot to actually do, which is also why personally, I think it's terrific that we have the research team the way that we do.
They're their own business in and of themselves. They help us quite substantially in trying to think through these varying issues as we're trying to consider risk on a regular basis.
Makes a lot of sense. One more here just on the reinsurance side. Two more actually. One, you kind of talked about it, but just kind of dig a little more. I'll let you answer that one. One question I try to ask everybody, as we look into 2021 in the reinsurance markets, what do you think the surprises could be? Is there a surprise? What do you think could potentially happen that'd be like, wow, that's a surprise. I didn't expect that to happen.
I'm in Bermuda here, right? The other day, someone mentioned to me that there was a snowstorm coming in the Northeast, and they said, I don't have anything to worry about. I said, it's a COVID year. I think it could possibly snow in Bermuda as well, given everything that's happened during this year. I've never counted anything out for sure. I think there are always surprises. I do. I think one surprise that people would have right now is the fact that this market has not translated into a market that many had thought. Just a few months ago, everyone was thinking that capital is gone. You've got to bring in new capital. The new capital's got to come in, try to figure out how to deploy itself, et cetera.
Yeah.
It has not played out that way. It's been very different. Very, very different from, I would say, just a few months ago in terms of how people were thinking about this. I mentioned in some opening remarks just about the incumbents, and this is an incumbency market right now. This is not what everybody was anticipating to the degree that it is. You have very strong companies that are executing very well. They're looking for additional writings across the board. I think that the surprise might be how any of these new firms ultimately try to get engaged in this particular market and how they may be thinking about things. That's not to take anything away from what they're trying to do. I'm not trying to do that. What I am saying is that I think you've asked me about an area of surprise.
I think that might be one that's kind of on our forefront right now. We look beyond that, I think that it really will come down to more kind of events, how things are playing out, how the economic environment will ultimately play out as well. I think as we come through this whole COVID circumstance, what does it ultimately mean for us collectively, not just as a society, but certainly from a business-to-business point of view, and how do we want to think about that? I think there's one unknown that's out there, and I think within that, we actually may have some surprises about how we think about business models, how we think about engaging our existing business as well as our existing capital, and what's the best way forward relative to that. There's a few perspectives I would suggest.
Interesting. Sounds good. Let's pivot a little bit here and get Mark involved a little bit here. Chris, you can absolutely comment, too. Ceded reinsurance.
Hey, Brian?
Yeah.
Would you mind, make a couple notes that you're going through with Chris.
Yeah.
He's a provider as opposed to us as a purchaser on the insurance side.
Yes.
There's a little bit perhaps I could offer on that in various things as I kind of made notes. One is, Validus in particular with a proprietary approach to modeling, and taking little bits and pieces but augmenting it dramatically, is probably more the exception than the rule. I'll overgeneralize on purpose, but I think it's probably fair to say that AIR is used more by reinsurers and RMS more by primary carriers. That's a very generalized statement. The tail is a lot thicker on AIR, depending upon the geography and the peril, of course. But if it helps you with the excess pricing, that's what you're going to use, right? More times than not. I would offer that.
I'd say secondly, if you were asking about other areas in the future, 4/1, 6/1s and various areas from an AIG purchasing perspective, we're not really concerned about availability, let's say, of Japan capacity in 4/1. That's a big 4/1 effective date market, because we handle all of that on our 1/1s. We won't have that risk. We won't have any of that issue on a go-forward basis.
Yep.
On the topic of some of the retro, the terms and conditions aspect, you both were talking about the exclusions. Whether it's communicable disease or what have you, or terrorism, I think it's also maybe more in the retro market, more clear of what they're including. These are named peril approaches.
Right.
You don't have this blanket that it sneaked through with lousy wording or not. If it's named perils, they're explicitly denoted. That's kind of a shift and a change as well. Back to your surprise question. The terms and conditions of a tight retro market are going to affect the terms and conditions of the reinsurance market, which is going to affect the terms and conditions of the primary market, because nobody wants to be left holding the bag on those things. Will new capacity come in and relax, not on price, but on broadening terms and conditions and not being named peril, things like that? Don't know. Too early to tell on that.
My last comment would be, This is an AIG holding company perspective. PMLs have been dropped dramatically by AIG over the years, as Peter has talked about, this really allows opportunity from an AIG Inc. perspective that if Validus really sees risk reward opportunities, all good for them. That could be some expansion there. While in the overall AIG context, we're still reducing PMLs in the aggregate. Validus has a business plan, AIG has the balance sheet management plan as to not overexposure and the right trade-offs. Anyway, I just wanted to offer those as a segue.
Yeah. That was kind of an add-on to my question. I mean, just changes to your ceded reinsurance program. You talked about how changes to those ceded reinsurance program will actually benefit your underlying combined ratio. I'm assuming that you'll reduce your ceded purchases, right? Maybe you can explain a little bit how it affects your underlying. Does that mean that we may see rising PMLs and increasing kind of volatility on the margin here going forward?
Yeah, good question. I'd say there's a couple ways it helps achieving the combined ratio goals. The most obvious is the bigger premium you're keeping net. It's a smaller spend. I got a bigger denominator, basically, of my expense ratio, right? It's helpful for that as a componentry. I think more importantly, it changes the mix of business, depending upon whether it's quota share or excess of loss that we change. To the extent that we keep more in a hardening, more profitable market on a quota share basis, it alters your net mix of business and more rate is sticks to the ribs net as opposed to ceding improved rate performance. It helps with that. To the extent that we have different proportions of per risk XOLs CATs, you don't get ceding commissions on those, right?
As that mixture changes, it helps your acquisition ratio because you have a smaller proportion giving you a zero C, effectively. It's the changes in the mix of business that it provides, the optics on the expense ratio, both through a bigger net written premium and through the changes in the form of the reinsurance that you're purchasing.
Got you. Okay. Not necessarily increased volatility.
Yeah. We haven't seen that at all, Brian.
Okay.
In terms of the purchases, one of the lenses you look through is not just net underwriting gain, it's the distribution of it, right? You're looking at your return periods to make sure you're not exposing your balance sheet in any untoward way.
Got you. I know a hot topic. Can we pivot maybe to the separation of life business? One of the questions that I get questions about is on the separation of life insurance business. Why don't you consider selling all pieces of the life insurance operations, right? Wouldn't that create potentially more value, particularly there's an active market right now for buying that stuff, a pretty competitive market right now for buying annuity blocks, et cetera. Is there something maybe that we're not considering when people ask that question and say, "Well, why don't they do it?
Well, there's a lot of synergies that may be the iceberg under the water that isn't as obvious. It's not like every legal entity or every business is doing its own product design, or it has a different view of mortality or longevity, or have a hedge program that's unique to that. All of that is done horizontally across the board, and distribution is leveraged a lot more, and it opens the door to PRPs and things of that nature. You never say never, Brian. If something super creative and accretive came in, we wouldn't necessarily shut the door, but that's not the main goal. The main goal is to leverage the platform, leverage the long-term viability of it, and we think that's best done keeping it together than separated.
I would just add in that regard is to remind people that we've said that the goal is separation, full separation, and the first step of that is the sale of a minority stake probably through an IPO. That doesn't mean at other stages that Life and Retirement couldn't look at blocks of business and all the rest. From AIG's objective, what we want is a full legal entity separation. To do that, like I said, you've got to take the steps from a legal organization perspective to effect separation.
Got you. Okay. That makes sense. It doesn't rule out transactions. It's just your ultimate goal is to separate the whole thing. If an attractive deal came up to sell a block of life or annuity block or whatever it was, okay. That's good. That's helpful.
What we've said to people and our employees and our brokers and our staff is our goal is separation. We're moving down that path. It's not our intention to break things up into pieces and sell them as pieces. We will sell a 19.9% stake in the entire entity as the first step.
Right. Of that $19.9, I guess, maybe just remind us, what do you anticipate the use of proceeds are going to be? How much do you need to pay down debt with the proceeds from that?
Yeah. That's a good question. Even before this, Brian, we had debt pre-COVID-19. We had debt as a priority in the capital management strategy. That's clearly still the case. Doesn't preclude other uses, of course, but we've described the fact that currently, with the $4.1 billion raise that we did, some of that was pre-funding maturing debt that we expect at the end of the first quarter to be down with reasonable earnings expectations, as well as the maturing debt rolling off that was pre-funded to be back closer to where we were pre-COVID-19 at an AIG Inc. standpoint. In order to separate, we've given some general guidance that there'll be increased debt in a structural sense, in order to provide the vehicle to pay off AIG's debt.
There's a real mechanism in place and therefore a goal to continue to have debt reduction as the primary motivator.
Yeah. Just to remind people too, since this is a public forum. There's two pots of proceeds, so to speak, from separation. The first would be the initial debt capitalization of the Life and Retirement holding company. I think you can look at precedent transactions that have been done, like Equitable, where the holding company will borrow money and then use that for pre-IPO dividend to the holding company. That first chunk of proceeds, Mark has been very clear about, would be used to reduce AIG debt. Then the second amount of proceeds would be the proceeds from the equity stake. For that will depend on whether or not we've achieved the debt targets that we've laid out through the use of the first bunch of proceeds.
We're obviously having conversations with the rating agencies around initial capitalization because it is our goal to maintain the insurance financial strength ratings of the legal entities today. The debt ratings will just be an outcome of the leverage calculations and those conversations. Our goal would be that we would, upon full separation, you'd have two separately capitalized holding companies, and that AIG's goal would be to have a lower debt ratio as a fully separated entity than we have today. During the first part of separation, just remember that we would still be consolidating Life & Retirement because we would own 80.1% of it.
Right.
Part of that overall goal, Brian, is maintain the ratings, maintain strong RBC, maintain a debt structure, a debt part of the capital structure that's competitive and not out of line on either side, on Life & Retirement or on the GI remain co piece. They're primary goals. As Sabra said, that's what we're in in-depth discussions with the rating agencies about.
Get that done. Okay. Then another one, just curious your thoughts. One of the pushbacks that I get from investors on the separation is they said, "We've been there, done that with MetLife and AXA," right? Wasn't really any value creation when MetLife spun Brighthouse Financial out to MetLife shareholders as well as ditto for AXA shareholders with Equitable. What do you think is different about your separation of your life insurance business versus those two?
First off, we're a clear composite. Some of those may have been a spin-off of a like kind of subsidiary. I think the transparency at AIG has been, maybe that's an oxymoron, right, on some of those areas. The insight into Life & Retirement and GI, I think will become so much more clear. The strategies become so much more clear, and the investors can be targeted to that. Brian, you know this as well as anyone. If you look back at our stock performance, then pick your period of time, we tend to trade at the lesser of either. A lot of that is due to you can't really see what the underpinnings are, number one. Number two is it's been Life & Retirement that's really been the salvation of the cash flows to parent since before GI was losing money.
Now you have two strong independent platforms, each of which, in my view, are undervalued. That value will emerge on its own and to really leverage that structure and the platform that they each have. Back to that, it's clarity of strategy, clarity of earnings potential, and I think that's some of the main differences.
Got you. That makes a lot of sense. Just one last question, I got to touch on the commercial lines business, primary business once. Just your thoughts, pricing, excessive trends, still a really good market for margin expansion as we look into 2021?
Yeah, it is. As we said on the call, we focused on the commercial lines business, and that's where most of the action is, right, at the end of the day.
Yep.
Peter goes into a lot of detail on that. We see it in strength in the U.S. We see it with strength internationally. Kind of echoing what Chris really said earlier as well. It's another distinguishing feature on this cycle. It's not one line of business driven. It's not one geography driven. It's really everywhere. Where I want to caution is that, yes, there's margin expansion. Let me be clear on that. Yes, there's margin expansion. The degree of margin expansion, given that in rough numbers, half of our book is personal lines, is a dampening effect. Let's take Peter's numbers in the last quarter, like of 17%, roughly. What you're going to have is that's worldwide commercial. If you look at personal lines, you get a few points. Let's make the math easy, three points, right?
If it's roughly split 50/50, that's a 10% average rate increase. Great. Happy to have it, but it's not the level of margin expansion that you would glean from talking about North American commercial lines only. Definite margin expansion. I'm just trying to manage expectation.
No, I get it. I completely get it. That was focused more on the 17% commercial lines, thinking about the margins in that business. I get the personal lines has got its own pressures and own dynamics with travel and a bunch of other things. That makes sense. Good. All right, I think we've hit the 45-minute mark. I want to thank you all very much. Chris, thank you for your insightful comments with respect to the reinsurance markets and everything. I really, really appreciate it. Mark Sabra, Shelley, thank you for your time today. Really appreciate it.
Thank you.
Thank you.