Morning, everybody. Thanks for joining us today. With us this morning, we have a distinguished team. We have AIG's President and CEO, Brian Duperreault. We have Global CEO and CEO of General Insurance, Peter Zaffino, and CFO, Mark Lyons, who don't need any further introduction, I think. We're coming off of a year in which the company's turnaround efforts are taking hold. I look forward to spending the next 35 minutes or so hearing more about the next steps and the company's positioning in markets in which it participates next year. With this, maybe I'll turn it over to Brian for a few opening remarks.
Yeah. We'll kick it off after that.
Thank you. A year ago we were here, and Mark Lyons was our CFO, I think for 12 hours when we were up here the last time. Certainly a different year, and what a difference a year makes. In 2018, we were on the cusp, and we're explaining how we thought you would start to see the fruits of a lot of labor that would start to come into fruition. I'm very pleased with what's happened in 2019. I think we've made great progress with our ROE targets, great progress with profitability, particularly in GI. In GI, we I think have done a very good job of improving the mix of business that we have, our pricing and selection. All that goes into being a good underwriter. Great limits management.
Couple that with, I think, an excellent reinsurance program, remember when we arrived, there really was almost no reinsurance purchase. Now, I think we've got a normalized reinsurance program. That and the limits management have combined to do a great job of basically volatility management. We tend to take a large risk. It's been our bread and butter as a company, but that comes with volatility, managing that volatility requires a couple of things, and those two in particular were instrumental in getting our volatility at a reasonable level. Today, I'd say that we feel very confident that we will make our 2019 goal of an underwriting profit, of course, with an appropriate average adjustment for CAT. We're very confident that we'll get that done.
In Life & Retirement, that we've had actually a good year from an ROE point of view, mostly due to the better investment income situation. That was more front-end loaded in this year, so it's normalizing now, coming back, reverting to the mean. You'd have to say L&R has had a pretty good year. We've got low interest rates, credit spread problems, there's a lot of headwind there now. The other last thing I'll mention, or maybe the second last thing, is very pleased to announce that we've sold a majority stake in Fortitude Re. We have announced the sale closes in 2020. That is a very important milestone for us in our process of getting this company in the right position. I think we're very poised to go into 2020.
I know last year, I stood up and went through a long list of things helping you understand where we thought we would be. I'm not going to do that today, when we do our earnings call in February, we'll go through a number of those items and including what we think the AIG 200 economics will look like. We'll do that in February, so I don't want to stand up and just do it partially. We'll do it in total. With that, Aaron, I think those are just kind of the highlights I wanted to make, and should we get into it?
Sure. Yeah, I appreciate it. I thought maybe we'd start off with higher-level company-wide issues and then maybe dive into P&C. Clearly, 2019 was quite a turnaround year. You mentioned several of the items that were improved over the course of the year. What are the most pressing orders of business going into 2020?
Well, we have to continue the momentum. I think if you see the market, the market momentum is positive, there's a good reason for that. We want to continue that momentum into 2020 and continue to work on the fundamentals of underwriting. I mentioned AIG 200. That's another big issue for us, actually beginning the process of implementation of that. That's a multi-year program, but it begins. We want it to have a very good start, so that's a big deal. We want to close the Fortitude transaction, so we want to actually make sure that closes well. I'd say those are probably the big three for us.
Okay. I know one piece of guidance you've offered and reiterated in the past is double-digit ROE, DTA adjusted, AOCI adjusted by 2021. First of all, is that an exit rate number, or is that a full-year 2021 target? Secondly, maybe you can help us understand how you bridge the gap from where we are today to that double-digit.
Sure. Okay. Well, it kind of reminds me of when I said we'd make an underwriting profit entering 2019. Is that like, I don't know, is it the first day of 2019?
Right.
Actually, it turned out to be the first quarter. I'd say sometime in 2020. If you look at capital and return, we would expect at some point to cross over and get into the double-digit. I don't know if that's going to be mid-year or late, but sometime in 2020. Assume it's exit for sure.
2021.
2021. Thank you, Peter.
Yeah.
2021. Oh my God, I'm knocking stuff over. Yeah, 2021, assume it's exit and while it isn't, people say, "Well, you sold Fortitude. Is that the reason?" That it helps, it's a marginal benefit. The big benefit is the continuous improvement, particularly in GI, and maintenance of our profitability in Life and Retirement, and the investment income associated with all of it. Remember, GI is an interesting structure, we have a pretty good leverage of, say, assets to capital and that leverage in our yields, and a good return on our GI from a combined ratio point of view, profitability basically sets us up. If you continuously improve the GI, you get the double-digit.
Okay. I realize we're not going to spend too much time on AIG 200 here, given the February call. One conceptual question I have around AIG 200 is when we see large-scale initiatives, often you see some disruption that comes along with that.
That often affects top-line.
momentum.
How are you going about trying to minimize that disruption?
Well, it's a risk. There's no question about it, and we're concerned about that, and we will take the appropriate steps. That is really to make sure that those assigned to the work are doing that in a way that isn't affecting the rest of the business. We've taken people out of their current responsibilities, and they've been given responsibility for that because we recognize that it's a full-time effort. Remember the work that when I talk about all the great things that have been happening in GI and with Peter's leadership, I should have mentioned expense management as well. That expense management's been occurring continuously. The idea of being able to manage expense and keep the momentum is a variation or theme here. In this case, there's be more investment in technology.
It's a risk worth taking, and we understand it, and we will manage it like we've been managing everything else in this company.
Got it. Turning maybe to net investment income. I think guidance for this year was $13.2 billion-$13.3 billion, predicated, I think, on a yield of about 425 for the fixed income portfolio. How should we be thinking about next year, considering that the rate environment has come in, considering that Fortitude Re is now being sold off?
Yeah.
How should we think about NII?
I'm going to let Mark answer the question. What I said was, we're really going to give all what we think 2020 looks like in February. I think Mark, just kind of maybe give a general answer.
Thank you, Brian. Brad, let me do this. Let me give you the kind of things or the balls in the air that you can kind of picture as to why we'll do it in February. As Brian already mentioned that for the full year, if there's a sale of Fortitude Re that goes through, you can really, I think, for thinking purposes, have two quarters of uninterrupted, pretty much. It is then second quarter with changes that'll affect operating income a bit. That'll affect industrial assets to that extent. At the same time, you have increasing spread compression on the L&R side of the spread-oriented business. We gave commentary already that one to three basis points per quarter is likely if things don't really rebound in that regard.
On the continuing efforts really that Peter's leading on GOE reduction is also going to have an impact on net cash flow. The GI, and Peter can certainly speak to it in more detail than me, but at a high level, the continued view of doing the right things on the underwriting side on the gross underwriting can have some ongoing cash flow implications, but we're still in the planning phase, and same with the reinsurance outgo. There's quite a few variables at work. The investment portfolio itself, the turnover historically really in fixed income has really not been that big. There's some pretty thick yielding securities out there that are still on the books.
Okay.
All those things are in the air as well.
Got it. That's helpful. Can we talk a little bit more about the Fortitude Re sale? The strategic rationale, I think, is understood, but maybe we can touch on that a little bit. What does Legacy look like post sale?
Yeah. Legacy dwindles to a de minimis amount, real question will wonder if we even need a legacy segment at that point, we'll make that decision shortly, but more than likely, we'll probably just discontinue the legacy segment. The fact that Fortitude is legacy, it's certainly that strategic. It ties up capital supporting basically runoff reserves. We're not in the legacy business. Carlyle wants to, with its group, get into the legacy business. We thought this is a perfect marriage where we can still maintain a small percentage as an investment, but they can take this company and take it forward as a legacy player. We free up the capital to go do the business that we like. Legacy's not strategic, it's as simple as that.
Okay. With this capital being freed up and the balance sheet streamlined, does it change the priorities of capital deployment for the company?
I think the capital deployment's always the same, that is we want to deleverage. We've talked about de-levering. Past that, my preference, my bias is to support the business, reinvest in the business, whether that's AIG 200 or it's the opportunities that are emerging in the GI business in particular, where we would look to deploy capital. If not, we would use other capital management tools. That doesn't change.
When you look at the opportunities out there, whether organic or inorganic growth or AIG 200, is there a certain hurdle that this capital needs to cross that would make you prefer some avenue other than buybacks?
Well, the hurdle's got to be a long-term hurdle. To me, it is long-term shareholder value creation. That may mean short term, it may not be as accretive as, let's say, if you're alternating between stock buyback and let's say an investment in a new company or a new venture. There's short and long term, so we will look at it on a long-term basis.
Okay. I thought maybe we'd switch over to a few questions on General Insurance and the P&C market.
Peter can't wait.
Yeah, I have to get you into the conversation here. Maybe we can start off with just a few general comments on how you see the state of the P&C market heading into 2020.
I would say, if I was to describe it, I would say it's going to continue to be disciplined. You really have to look at it across the world and put it in its geographic components and then segment it. If I look at the area where I think is going to have probably the most impact, it'll be North America. Japan hasn't been defined yet because the catastrophes for the typhoons hasn't fully developed in the quarter, so we'll see how that all plays out. The implications are, if I go to product lines, as property, you have three years in a row of CAT activity. You have the first time we've seen where alternative capital, stated capital is going to go down. I would add to that there'll be more of that stated capital that will be trapped in one-one.
That has dynamics on the retro market, it has dynamics on the property reinsurance market, so we'll see how that all plays out January 1, April 1 for Japan, and June 1 for Florida. I would expect that there's going to be more discipline. They blinked a little bit last year. I don't think you'll see that as much this year. We talk about it on the quarter calls. Mark and I, Brian, spend time on some of the areas where we've seen more meaningful rate improvement, and that's in financial lines, casualty lines, motor, and property. I mean, property excluding CAT, even on attritional, you start to see more movement. I would expect that to continue. For us, it's been risk selection, limit deployment on a gross basis, terms and conditions, deductibles, and then price becomes the outcome.
If you look at the cumulative effect of that throughout 2019, it started in the first quarter where we started to see some movement. Second quarter gained, and third quarter gained as well. I don't have a prediction on the fourth quarter, but I'd have to talk myself out of it, not into it, that that's the market we're in for the foreseeable future.
Got it. I guess one thing that I struggle with a little bit, and not with AIG, with the industry as a whole, is you're seeing the rate firming. You hear a lot of talk of emerging fear, and I'm talking more about casualty lines than property. Yet the loss picks haven't seemed to really move up all that much and seem to still be pretty favorable here. I think the overall expectation is that the industry still prints a profit this year on the underwriting side. With that, why is the rate momentum sustainable?
Well, let me start, and then I think Mark can add on some of the loss picks and what we're seeing in terms of loss cost inflation and how we're approaching it. There's several dynamics. I think that the overall market is more disciplined just in terms of what they're seeing emerging in underlying trends. We talk about them on our quarterly calls. I think that there's, again, I'll start with AIG, where we have been shedding billions, tens of billions of dollars of limit that go into the market, and the market has to absorb that. With that, do I think there's a supply issue? No, I don't. Do I think that there's more discipline with the amount of limit going into the market that you need to get the right risk-adjusted returns? Yes, I do.
When I look at what we're doing, we are managing gross limits, making sure, as I said, that we're getting the right terms, right structures, and then making sure that we're getting paid appropriately for those limits. I think that the market has been absorbing that. I think that they've been waiting for it, and believe that that level of discipline and leadership in the market is what is needed now.
I think you alluded to the fact that, or you stated that AIG has been pulling back from some markets and shrinking limits. With a lot of the heavy lifting now done as we enter 2020 or beyond, and you don't have such a large player still looking to shrink limits, does that change the dynamic for the industry?
I don't think so. I mean, first of all, we talk about shrinking, and as Brian said last year, it's like we're shedding a lot of aggregate, but we still like put out big limits. I mean, it's just that we're not throwing out $2.5 billion on property or $150 million on casualty, but we still have very meaningful limits that are leadership characteristics in the marketplace. I'm not stating that we're done shedding aggregate. I think we have a lot to do still in the property in the first half of the year. I think absent that, when I talk about the dynamics of what's happening in the reinsurance market, I think reinsurers are very careful in terms of where they're deploying capital, not only on property but also on casualty. Who are they going to back?
They're going to back the better underwriters and where they think the trajectory is going to be positive in the future. I don't think they're going to make a lot of bets. I think that if you look at the market dynamics, not just on supply, but how it's been evolving over 2019, there's nothing to suggest that 2020 there's entrance into the market or there's a different view on underlying business. I think it's just going to be a more disciplined market where when you have leadership characteristics, a global footprint, and excellent underwriting characteristics on broad lines of business, you're able to solve problems for your clients.
Okay.
Happy to add to that. As Peter mentioned, let me pivot a little bit from the industry to AIG in particular, because I think there's a little different dynamics going on. I think I've commented on the last earnings call that in some of our third-party lines, which will be most subject to that kind of inflationary impact, that it's been, I'd say a lot of those lines, we're in higher trend factors, I think, than a lot of our competitors. Here's the dynamic that you're going to conceptually get, but the measurement's a little more difficult, is a lot of the high severity trends that we've seen in AIG is partially caused by the adverse selection in the book prior. You take that, you try to make some adjustments, you project it forward.
Where that now on a go-forward basis, because of all the work Peter's doing and the change in distribution and the broader spectrum of risk quality coming in the door, that adverse selection is either massively reduced or not there anymore. There's potential for benefit associated with that. I think that's one. I think secondly is when you look about economic versus social inflation, there's recent evidence of the medical component of the CPI moving up, which would hit a lot of lines of business at the same time, hospital services, physician services, things like that. Social inflation is, there's really not a lot of paid experience on that. There's views, there's venue shopping, things like that. You got litigation funding things that are pushing things up. It's a trend that can, again, conceptually happen, but there's not a ton of numbers supporting it.
Lastly, from AIG's book of business perspective, all the work that Peter and his team are doing is really changing the primary excess mix of the business more towards excess relative to prior years. That has to have a beneficial impact of insulating you more from any compound growth in economic or social inflation because you're further away from risk. I think all those things are beneficial.
Got it. Not to put words in your mouth. I just want to make sure I understand this correctly. Ultimately, these changes and the new portfolio mix is one that does insulate you a bit more from social inflation and should allow maybe the continued momentum of margin improvement even in the face of social inflation?
The combination of all of those things are, think of it as like a ceiling on the impact of what it could be to us, and some of the rate changes that Peter quoted on the last earnings call, in my view, are clearly in excess of that.
One thing I would add, one variable to add to that is reinsurance. Our casualty book, as Brian said, we didn't buy a lot of reinsurance before. When we'd be talking about the sort of underlying fundamentals, in 2017 and early in 2018, we could be taking $100 million net on casualty. When you look at that, you have to trend that out. Our net today is $12.5 million. When you look at all the components of taking out some of the top end of limits, being very thoughtful on loss cost, making sure we're getting margin on pricing, getting the book structured the right way, and then adding in reinsurance to make sure that we have less volatility, I think that has a different dynamic.
Got it. That actually leads me to another question. Between the retrenchment and the increased use of reinsurance, we've seen a lot of volatility and change in the premium base of the company. With a lot of this now done, should we expect more stability going forward in the premium base and maybe a return to growth?
Shall I answer that? Do you want me to answer that, Peter?
Yeah. Well, I think over time, yes, I think you will. Peter mentioned that there's still some work to do on limits management in property in particular. I'd say we're still in this point of shedding limits. That's going to have some effect. The earned effect of these things flow through. You're going to see maybe a difference between net written and net earned over time. We should start to stabilize in 2020 and begin to grow over some period of time next year.
Okay
What I would add is, look, we have a casualty quota share, which was a very strategic placement that we did in 2019. That still needs to earn its way through. I mean, are we looking at materially different reinsurance structures? They will evolve to reflect the current book that we have. We're not playing as much catch up as we were in 2017 and 2018. We'll look at things strategically.
Right.
We don't see anything that's material today that's needed.
Yeah, we haven't quite stabilized the portfolio.
Okay.
It'll begin in 2020.
If I could, just one thing to also to add to that on the front end is, Peter mentioned the net premium. On the gross premium side, primary businesses.
The premium and the rate changes are a lot more correlated. When you get into excess business, I don't care what your line of business is, it's not necessarily premium additive. You can get a, I'll make the numbers up, you can get a 15% rate increase, and because of where you're playing on the tower and you're moving up, the relative risk reward trade-off still makes sense to do, and you might have a 7% premium reduction, but it's a 15% rate increase. As the book starts to shift, at least proportionally, a little more excess in totality, that could possibly dampen some GWP. Let's be clear, both are loss ratio accretive.
Yeah. Okay.
Profit is everything.
As you move into excess layers, I'm assuming we're talking about higher excess layers because the low excess layers seem like they're more in the burn layer these days. Is that a fair assumption or not necessarily?
If inflation continues, obviously it's going to move up exposures into those layers and they'll get more claim laden. Yeah. Sure, it's natural.
Okay.
I'll give you a tangible example. If you look at our historic excess casualty portfolio, you really want to ventilate and make sure you have mid excess and high excess, in addition to lead. This is the point Mark's getting at, which is we led on 90% and had small ventilation where we're trying to get to more of a 40%-50% lead, and then ventilate in the mid excess and high excess. While we keep the premium relatively flat, our risk adjusted repositioning of the portfolio is much stronger.
Got it. I think you touched on this a bit earlier, maybe looking for additional reposition or additional use of reinsurance on the property side. Can you talk just any more color on what you're looking to do on property or even more broadly about the reinsurance program?
Yeah. I think with property, what we strategically tried to do last year is make sure we dealt with frequency through an aggregate and severity through occurrence. I think we did a really good job of putting a structure together knowing that 2019 was going to be an aggressive year of re-underwriting. We've shed a significant amount of aggregate, particularly in our commercial book in North America. I think you'll see similar themes as we go into 2020, but our book has improved, and we don't have as much aggregate, you're able to tailor the reinsurance a little bit more specific to the portfolio that we have. Again, we have a very good business in Japan, and one that we think is positioned well in the marketplace and has opportunities for margin expansion.
We want to make sure that we have a specific reinsurance structure there, and that the North America and rest of world treaty and per risk reflects the book that we have today. You'll see some modifications, but it'll be the same theme in terms of making sure we're protecting in frequency and severity.
Got it. It's been a month, I think, since your earnings call, about a month. Any updates on Hagibis? I think you pegged the loss to AIG very narrowly, but I think the Validus portion was still pretty wide at that point. Any update you could offer there?
It's a very complicated typhoon. I don't have any updates on numbers. Here's what I can tell you. The claims count is coming in lower than we expected at this stage, and we'll have an update at the end of fourth quarter call. Quite frankly, the overall distribution of wind and flood was going to be, I think, a little bit more balanced, and that's coming in with a little bit more wind to date. It's just a very slow emerging claim that I think is going to take a little bit of time before we actually can get our arms around the aggregate. It's not looking worse than what we had said in the fourth quarter. It's within the range, and we're just going to need a little bit more time to determine how this one's going to play out.
Got it. Do you have a sense on a gross basis how that compares to Jebi?
I do, but I'd prefer to wait till the fourth quarter call, if I may.
Fair enough. Fair enough.
Just one other thing that Peter alluded to, there's a difference between estimating things on the primary insurance basis versus doing it on a reinsurance assume basis. You got to wait for your ceding companies and so forth, and it might be more market share driven as opposed to the granular aspects that Peter was describing. With the acquisition of Validus, AIG has both components-
Right
that have different visibilities.
Right. I think a couple of the reinsurers have come out with Hagibis estimates.
We'll wait.
I personally think that's very hard to do at this stage.
Okay.
Just because of what we're seeing, I think, is going to be consistent with what other ceding companies, and there's no conclusion yet. Having a reinsurance point of view today is premature.
Okay. Given that we've now seen three very large events in Japan in 18 months or so, and more events beyond that, does that make you rethink exposure to Japan on the property side?
No. We think Japan is a very good market. Yes, it's got a spate of CATs, the market has always been one that rebounds and has produced underwriting profits over as long as I can remember. This market will adjust too to these events. We think it's a great market, and we're very happy to be in it.
If I could add something, we do think like in terms of the loss ratio, there's enough margin to price for CAT. Japan for us is more of an expense issue, that's going to be a key part of AIG 200 of modernizing our operating technology platforms, straight-through processing, and digitizing user experience, things of that nature which will be highly strategic, will have a outcome for us to make us more competitive in that marketplace. There's enough margin.
Yeah, that's a good point.
to price for the CAT, and we have a terrific business there.
Okay. Maybe it's like a one or two on Life before I'll open it up to the audience. We are in an extended low-rate environment. I think we've also seen a bit of a net outflow situation, not necessarily unique to AIG. With that dynamic, should one expect maybe slow but continued deterioration or compression of ROE in the business?
Well, I think certainly the rate environment spread compression puts pressure on it. I think we've been quoting kind of a range and yeah, it probably gravitates a little bit to the lower end.
all things being equal. I mean, the good thing about our portfolio is it is a very well-balanced portfolio in terms of the annuity products that we put out. We can adjust to that which is producing better economics and relatively speaking, and is also of interest to our buyer, right? We have the ability to adjust, and I think that helps us here.
Got it. Want to give the audience an opportunity to ask a question as well. If there's anything, go ahead. We'll wait for the microphone.
Capital management priorities you spoke to, can we think of that as sort of a 2020 event, or is that more of a multi-year? I don't know if you've put out targets as to how much flexibility you want around your leverage calculation or things like that as you think about maybe doing more M&A down the road.
Yeah. If it's just the leverage M&A question, I think the priority is to address leverage now in 2020. Past that, I'm not sure that we have a pressing need to keep going down and down and down, we don't have a lot of flexibility right now in our leverage, we want to get that. M&A is a question of whether there is an asset out there that actually helps us, makes us better. Those sometimes pop up, sometimes they don't. More likely not. You always have to keep your eye open on it, about it. I mean, we have a great portfolio of businesses on a global scale. We have enough capabilities and enough opportunities out there to keep us very busy for the next several years.
There's still some white space in the company that if we can fill in that white space, we would do it. You just can't ever predict M&A because if you're disciplined about it, these things come along every once in a while.
Let me just amplify one other quick thing on that, if I could. On the debt aspect, we put that out as a priority, as Brian just mentioned. It doesn't mean it's the only priority, but it is a priority. The way you get that down is a function of numerator and denominator, right? We could print good, solid earnings. That's helpful. Your opportunities to really do it, something other than marginally do something is a function of when your debt matures. Some of that debt maturing to get us where we want to be will go into 2021.
Thank you.
I think we'll probably wrap it up here. We're all out of time. Thank you very much.
Thank you.
Thank you.