Good morning, everyone. Thanks again for joining us. I'm Jay Gelb. I lead the insurance equity research effort here for the North American Insurance stocks. Before we get started, I would just like to have folks join me in a moment of silence to recognize and remember those whose lives were lost on September 11th, 2001. Thank you. I'm very pleased to have with us AIG CEO, Brian Duperreault. AIG is among the world's largest property casualty insurers and also has a substantial U.S. life insurance and retirement savings business. Brian joined AIG in 2017 following an already phenomenal career, including CEO of Marsh & McLennan, where he led that company's turnaround, and also as CEO of ACE, which is the predecessor company to today's Chubb. In that role, he transformed ACE from a small niche insurer into one of the few global multi-line property casualty insurance and reinsurance organizations.
Interestingly, Brian began his insurance career at AIG and rose to executive leadership positions during his initial 20-year career at the company. Since becoming AIG's CEO, Brian has brought in top industry talent, improved the underwriting results of AIG's property casualty business, and acquired Validus, which is regarded as a leading property-focused insurer and reinsurer. I'm excited to hear what Brian has planned next for the company. Brian, thank you for joining us today. I'll turn it over to you for some opening remarks.
Thanks, Jay, and thanks for just recognizing 9/11. I do a lot of town halls, and I'm always asked, "What are your proudest moments?" That time after 9/11, when we were all hurting. Lost friends and that. We went back to work as insurance companies in a time where risks seemed to be completely out of control, and we stepped in and did our job. I've never been prouder of the industry than that time. Thanks for bringing that up, and it's always good to remember. Let me just make a couple of comments. I know you want to get into a lot of questions. Some of the comments I might make, we'll touch on them, I'm sure you're going to follow up. Well, first of all, we're in September of 2019.
We haven't finished our third quarter, I'm pleased with the progress we've made to date with all the work that we've been doing and the targets that we set. We're getting there. I'm confident that we will make those targets in the GI in particular, where we said we would have an underwriting profit for the year with appropriate charges for cat on the side. Through two quarters so far, we have done that. I'm very proud of the team. I think if you look at GI in particular, the work that we've done to define the risk appetite that we have, appropriate risk appetite, sizing properly the limits that we're willing to take. The selection process has improved. We've really improved our talent in GI. I'd say we have the best team, and there were good people at AIG.
There were good people there, but the bench was very thin. We had to add to it. We've coupled the great talent that was already there with great talent that's come in. That DNA mix that we just created, I think, is now really starting to pay off because it takes a little while for a team to gel. I think we really now have a strong team with great leadership. I think that's probably one of the most important aspects of what's going on is the leadership that's now in place in GI. Of course, it doesn't hurt that we have lots of tailwind with the pricing environment considerably improved from this time last year. Well, I'm sure you want to talk more about that. We just have a better reinsurance program structure than we've had in the past.
That risk management where you take the volatility out, I think just gives you more confidence in the results as they're being published. Just jumping to L&R for a second.
Life & Retirement?
Life & Retirement, sorry. I probably should call it Retirement & Life since it's more a retirement unit than a life unit, but we do some life. Of course, the headlines are lower interest rates, which certainly will put pressure on us over time. We're confident that the ROEs that we set low to mid-teens and the investment income guidance that we gave, we will meet this year. We can talk a little bit more, I'm sure, about the Life & Retirement business, but it is a great ballast, great complement to the GI. I think the only other thing that I just want to talk a little bit about, the balance sheet is strong.
Certainly stronger than when I came into the company, and it's supplemented by good cat reinsurance, where you have to recognize the balance sheet is good, but if you have a very large cat, you take a big hole out of that balance sheet. I think our cat reinsurance program is much more solid than it was, certainly in 2017, and even the improved one in 2018 needed more work, and we've done that. We've added a better per risk down at $750 in the U.S. We've got an aggregate program. We've improved the international component of it. We bought some other specific covers. We've really done, I think, a very good job, and my hat's off to those guys. Reinsurance in general has been much, much better. This time, a week or so ago, Hurricane Dorian would've been a bigger topic.
I think it's a significant storm, but it's nothing like we thought. It'll take a while for us to get adjusters into the Bahamas. I think generally speaking, we've managed our cat exposure both ways. We've taken our gross exposures down, and we've supplemented that with reinsurance, and that's certainly true in the Bahamas where both of those have occurred. We'll see where it goes, but nothing like we thought it would be a week or so ago. Last thing I thought, just looking forward, I said we would reach a double-digit ROE by the end of 2021, and I believe we're well on track to do that. There's an aspect of that goal which is encapsulated and incorporated in what we call AIG 200. Just a brief comment on AIG 200. I mentioned it in the earnings call.
Peter followed up, and so did Kevin, because it's an AIG-wide effort. I'd simply put it this way. We can get into it a lot. I'm sure you want to get into it, Jay, but AIG has always been known for, on the GI side, underwriting excellence. We lost our way for a while, but if you look at the long history of AIG, underwriting excellence has been our hallmark. It's made us what we are, a great company. On the Life & Retirement, I think they're known for their product diversity, construction, management of investment risk. I don't think anybody would have ever considered us operationally excellent.
If we're going to be a great company, then we need to have both the excellence that we're known for coupled with operational excellence, meaning we attend to the details of the business, whether it's how we go about the underwriting in an efficient way, or it's the customer experience, or the use of shared services and purchasing, all the things that go into making a company truly operationally great. That's what we're after now. If you look at it's not an expense effort. It's an effort to make us a better company, more efficient, more capable, but it will produce improvements in our expense levels. It's a natural consequence of doing the right thing. Now, everybody wants to know, okay, quantify it for me.
As we develop the plans, we certainly will begin to quantify what that means in terms of what the investment is, what the returns would be, et cetera. To me, it's essential for AIG to achieve this last piece, something we've never been known for before that will truly make us great. Just to wrap, we're feeling good about the progress we've made in GI, confident about this year in terms of our underwriting, and we believe our trajectory is very achievable for our 2021 goal.
Fantastic. Thanks for that lead-in, Brian. It's really helpful, and I think it's been pretty amazing the progress AIG has already made.
Thank you
with you at the helm and also with that of your team. You provided an overview of a lot of the important topics that AIG is tackling and looking ahead on. The company has faced a number of challenges that were already in place when you joined, and as I mentioned, results have clearly begun to improve.
especially based on the results of the past two quarters. Are there any other major actions you've taken so far that you feel are leading to these foundational improvements? Essentially, why in the first half of 2019 is it becoming so evident where that may have not been the case
Yeah
prior to that?
Well, we had using agriculture, maybe it was a process of planting and then actually getting the results, the fruits of your labor. In the first year or so, we had to do some fundamental restructuring. We had to change the way we organized the company. We had to change partly the leadership in the company. We had to bring in talent. We had to change our approach to risk. Our risk appetite had to be refined. We had to get that across to our intermediary partners and to our clients, what we're trying to achieve. We had a reinsurance program that was ineffective. That takes time, to properly create a reinsurance program. That's effective. We get a lot of questions about, "Well, you're buying a lot of reinsurance." Well, no, we didn't buy any reinsurance as it were.
We're buying an appropriate amount of reinsurance, the delta, yeah, it goes up. It just brings us to a position we should've been in all along. Getting that reinsurance program, getting your reinsurance partners to accept the changes takes some time, and I'm really proud of the way we have gone about that work. We had to change how we were pricing the product, particularly how we were making decisions around selection. All that takes time. When you write a policy, it takes a year for it to earn out. We had premiums earning in during the period of time we were making a change, they were really reflective of past activities. We had to buy lots of reinsurance to protect the very high limits that were being put in.
Even if you get rid of them today, you still had exposures from the past that you had to recognize. In some ways, we had to buy a lot of reinsurance for limits that were underpriced. That's a negative delta as well. Once we've cleared through, for the most part, the excessive limits that we're putting up, we don't need to buy that kind of reinsurance. There were a lot of different things. Each one had to come into play, and it takes a while. Of course, you have a couple of difficult years from a cat point of view, et cetera, to add to it. It's just the nature of the beast. It takes a while for our ability to turn this massive ship. We're turning it now, and now all of a sudden, okay.
Now it becomes-
Finally
right.
Now we're very confident where we're going because I just love the structure of the team and the approach.
Your stated strategy is to reposition AIG as the leading insurance company in the world. What do you envision AIG eventually looking like, and how far along are you in that process?
Well, I mentioned earlier about underwriting excellence. We're far along there. The operational excellence needs to come. I would say those two actually, one a little further ahead. We're much further ahead, of course, getting back to where we were as an underwriting group or a product development group on the L&R. This operational excellence will take two or three years. Within five years, I think you would say who has the best operational capabilities? I want AIG to be on that list. Who's the best at what they do for a living, which is taking risk? AIG, I want to be at the top of that list.
Right. Five years from when you joined? Five years from now.
Well, I got two years, that means three years from now?
Right.
Maybe three is a little tight, somewhere between three and five years from now, that certainly would be the case.
Okay. I won't hold you to that.
That was good. That was good.
Thank you. How do you plan to achieve your goal of long-term sustainable and profitable growth for AIG? Does that refer to both top and bottom-line growth?
Yeah. Well, long term, there has to be a top-line movement for long-term sustainable growth. We'll get to that in a second. In the short-term period, which is the one we're in now, we had to pare back our volume to get it to an appropriate profitability. If you're putting out lots of limits and you're not getting paid for it, that's bad premium. That's not good premium, right? If you get rid of that, it actually improves your results. Buying reinsurance, it can be a defensive positioning, or it can be an offensive positioning, and certainly in the beginning, it was defensive. Some of the reinsurance programs we've put into place recently would be more of an offensive movement. I think you had to set a base. We talked about that first. That base setting required us to cut volume, change risk.
That process actually produced much more profit, right? Because we've had an underwriting loss as far as the eye can see, at least 10 years of underwriting losses. Cutting that down obviously improves your bottom line. Once we get the base, then we're in a position to take advantage of opportunities to grow, whether organically or inorganically.
That's helpful. You've also set an expectation for AIG to achieve a double-digit return on common equity by 2021, which you mentioned and you affirmed today. On an adjusted basis, that metric was already 11% in the first half of 2019, which did of course include some favorable contribution from investment returns. Does that mean your target is now too conservative?
You can't win. No, I would say it makes it realistic, right? It makes it realistic, and when I first said it was like, "Huh? What? How are you going to do that? How are you going to get to 10?" Now it's like, "Are you sure 10's enough? You're not getting more." I take that as a great compliment. I think you can see the component parts of why that is a possibility, right? Yeah, take the investment income out. It's not double digit if you put a kind of a smoothing on the ups and downs of our investment income in the last 12 months. I think you can see the component parts, how L&R will be steady. The GI, with continued improvement in the underwriting, starts to get up into that range too.
Net, it gets to be double digit.
Okay. confidence in that.
Oh, absolutely. Yeah. It's interesting thing about the GI, we have an interesting ratio. In the old days, in a few of my former lives, you'd have an invested assets to net worth surplus, whatever you want to say. Let's say surplus in this case. Might be 3 to 1, right? Your returns on your investment portfolio were five-ish. Right away, you had 15
Right
ROE. Well, that three for the industry has gone down. Two, maybe below two. Five's gone down. I can't do much about the five, but actually if you look at the GI piece, our invested assets to surplus, north of two, it's close to three. You just do the arithmetic and with a reasonable return on equity and appropriate levels of underwriting, the GI should produce that number without being heroic on the underwriting.
Interesting. Okay. That's a good way to think about it. You did already provide some insight on the AIG 200 transformation program.
That'll focus on opportunities to improve core processes and the infrastructure. At what point do you feel we'll get some more insight on that in terms of objectives around targets and cost to achieve?
Yeah. Well, I think we'll see whether we have something for the third quarter, fourth quarter range reporting makes sense. These plans are in the throes of development. You have the analysis around them, commitments to capital, what the returns might be. I don't want to rush that.
Okay.
Yeah. I did want to signal to you and all who follow the company that this is a big project, and there'll be a lot of internal communications on the subject, and I'd rather bring it out up front right away rather than having, So, what is this 200 thing all about?
Right. I think you provide a bit of insight on the second quarter call around that.
Yeah. Right
in terms of perhaps some numerical component to that. Maybe you can just remind
I wasn't quite I got questioned about it though already anyway, so it's going to have an impact on our expense levels. There's no question about it. It will over time improve those. If you look at our expense levels relative to the industry peers, et cetera, we're high. We're high, I believe because of this inefficiency. In order to really make this thing work, it has to be sustainable. Anybody can cut a bunch of costs out, and then you have this immediate improvement in your bottom line, but it's not sustainable. The difference here is this is a long-term project to ensure that it is sustainable. That requires true investment, creating efficiencies in processes. Sometimes it's technology, sometimes it isn't. It's really going back to basics and doing it from the ground up in a broad-based way.
That's the difference in this versus some of the previous activities around cost reduction. This is not a cost reduction effort, but it should produce very good cost improvement.
Of course. Okay. I often get the question. Excuse me.
You want some water?
I'm all right now. I'm all right. Thank you.
I get choked up about that.
Right. Well, this one's on capital management, it's very near and dear.
I'll start choking.
I do often get the question from investors about AIG's capital management plans. Can you discuss the potential for share buybacks, especially considering AIG's current attractive valuation?
Yeah. Thank you for that wonderful question. Yeah. Look, capital management is always top of mind. Capital is what we use to do our job. It's the basis of being able to take risk. It's one of the fundamental inputs. Recognizing that, you want to put it to work to do what you do for a living, right? To the extent that I can deploy it in the business and have it work so that we're a better company, I'm going to do that. My bias has always been to effectively reinvest. That might be investments in this 200 effort, or it might be investments around an acquisition, or simply taking more risk because I've got more capital, broader based. That's the bias. You have to weigh what is the return expectation of your alternatives, and stock buybacks being one of those.
We're in a market now where I think the opportunities are quite high. We said on the call that I want to take some leverage out as well, because I want some flexibility on the leverage side. We don't have it right now.
Financial leverage.
Financial leverage, yeah, our debt levels. That's a priority. Other than that, I think there's opportunities out there, and I just want to make sure and emphasize that this capital is what we use. It doesn't sit there and go to waste. I can deploy it. I'm going to deploy it into the business. That's my bias.
That makes sense. Does that mean the Street essentially shouldn't be expecting any buybacks for-
I can't predict that. I'm going to make decisions on a quarterly basis. I'm just giving you my bias.
Right. Okay. You did mention the potential for acquisitions. What's your perspective on the topic of future potential deals, both in property casualty and Life & Retirement-
Yeah
as well as domestically and outside the U.S.?
Well, I've been saying this since I got here. I think that Well, certainly if you look at AIG, it is a behemoth. It's a global company scale. It's in 80-plus countries, and does business in even more than those through our partnerships. There is what I would call a lot of white space. L&R, Life & Retirement. It is fundamentally a U.S. operation with some relatively modest activities internationally. Demographics globally are the same, if not worse, than what they are in the U.S. in terms of people's needs for lifetime retirement, and we have the tools and the capabilities to do that. If I can find a way to project the company into other parts of the world, I will do it. In Life & Retirement, it's more likely to acquire.
The greenfields in that business just take a very long time to produce results. The bias again would be maybe acquisition. That's one area, if I could find it, don't know, that I constantly look at.
Right. That was a crown jewel for AIG at one point.
Well, yeah.
Or am I-
The Life & Retirement operations. Well, when I first started out, the Life & Retirement operations were growing, but they hadn't reached the levels that they reached after I had left. You could see the trajectory was there. They eventually became massive in terms of capabilities and profitability, but they're all gone now. Be nice if they hadn't gone, but they've gone, but the opportunities for international Life & Retirement remain.
The question is, can we find ways to do that? If you look at the GI side, we're in many countries. We're not necessarily that large in a large number of them, with some exceptions, but a lot of the countries that we're in, we're relatively small in terms of capabilities. I would love to find ways of filling that out if I could. If there are a country or two that we're not in that we should get in, I continue to look at that, particularly Latin America. There are many places that could be great acquisitions. Over time, acquisitions are funny things. You can have all the plans in the world, but the circumstances just aren't there to do it. You constantly look, and you constantly look, and then one day, wow, how did that happen?
Right.
You just have this opportunity, strange confluence of forces gives you an opportunity, and if you're not ready to seize it, you miss it. We look and we look, but right now our eyes are on the prize, which is getting the fundamentals of the GI where it really needs to be, and there's still more work to be done there.
I see. Okay. Let's turn to more specifics on the property casualty insurance business. There has been a persistent decline in AIG's P&C premium volume resulting from a number of the actions the company's taken. When might we see P&C premium volume stabilize?
Well, I think this year is a year of transitions, so it may be lower or higher than it. Let's say within reason, it's probably stable to slightly down. This year, the base is formed. Most of the actions have been taken. There's still some long-term contracts coming off, but that should pretty well work its way through the system through 2020. Then we're in a stable position, then we can start to take advantage of market opportunities.
Right. That sounds
To grow
more like 2021 as opposed to 2020.
Well, I don't know. I can't say that. I'm just saying 2019 is a year where we may be slightly down.
Right.
I'm not saying 2020 will be down again. I'm not sure it'll be up much, There's a turning point. I've never been a top-line guy in that sense. In other words, in our business, you've got to be very careful about your top-line growth. You can take advantage of a market to the point where the next risk you put on starts to deteriorate your portfolio. You've got a premium growth and a beginning of a decline in your profitability. That you wish you hadn't done that one. If you keep going, you're diminishing the portfolio's power, right? It's got to be is the market the kind of market that you want to take more risk in, or is it the market that you want to take less risk in? That drives your organic growth, right?
If it's a market where there's less organic growth opportunities, there's usually inorganic growth opportunities. That's the way I've managed the businesses since I left AIG many years ago.
That makes a lot of sense. Commercial P&C pricing trends are clearly on the upswing. How persistent do you feel these gains are, and do you see them accelerating?
Well, I guess there's plenty of people out there saying it's accelerating into the third quarter. What's going on, and everybody wants to know is it going to end tomorrow? I made a mention of this on the call, and I've been through a number of hard markets. Nobody wants to call this a hard market. It's certainly an improving market. It doesn't have some of the characteristics of a hard market, meaning there's this crescendo, this kind of almost irrational behavior that occurs, right? Emotion takes over. This one is more rational. It seems to be much more based on fact. Let's say the pricing models are indicating that this is not a good risk. The risk isn't taken. There's discipline around the decision-making on an industry-wide basis.
I'd say that's very good news because it then says that the decisions about risk will be based on the kinds of return characteristics. We know in many lines of business, the price declines have been excessive for a very long time. Terms and conditions have been broadened in the face of changing tort climate and other inflationary factors. Putting that all together, there's more rehabilitation required for the industry's portfolio. That's why I think the reason why it's sustaining itself is that it's needed, and it's being looked at on a rational basis. Kind of interesting. We'll see if that holds, but I'm encouraged by it.
Right. It feels like it has momentum.
It does. Everywhere you look. It's broad-based, it's the interesting thing. It isn't just one line of business in one country, which has been more or less the kind of market turns we've seen, that they haven't been broad-based, they haven't been geographically spread. This one is much broader in many aspects. Again, I think based on the industry's recognition of what it's dealing with in terms of risk.
Of course. Right. Okay. Sounds like a favorable environment on P&C. How about on the claims trends side? We've heard at least one company this week talk about adverse trends in liability claims that might cause them to true up reserves a bit in the third quarter. There's a number of large-scale liability issues out there in the marketplace.
What are you seeing on the claims front, and what does that mean in terms of AIG's reserve adequacy?
Well, we've been talking about this for some time. Whether it's inflationary trends or the trends within the tort system, we've been talking about that for some time, and we've been recognizing that as we price the product and certainly as we post the claims. We have to recognize if that continues to move, then you've got to continue to move your pricing accordingly, right? That's some of the reason why we have this price movement. It's our job to put into place all of the component parts when we determine our reserves, and we didn't just discover that today.
Right. Okay. All right. It sounds like AIG's on top of that. In terms of Hurricane Dorian, you had some commentary on that at the outset.
It looks like it'll be a much more severe event for the Bahamas.
Yeah
as opposed to the mainland U.S.
Yeah.
Does AIG have particular exposure in the Bahamas we should be thinking about?
Well, of course, we're everywhere in many ways, right? We've reduced our exposure in the Bahamas considerably, just as we have in our general cat management. That's all I can tell you. Our exposures are down there. It'll take a while for us to get the adjusters in to understand, and these things can get quite complicated, but I'm very comfortable.
Okay. That doesn't seem like it would be something notable from a loss standpoint, given the size of the industry.
Well, when you give the size of it totally and how we've managed our exposures, I'm saying I'm very comfortable.
Okay. That's great. Appreciate that. Okay. On the Life & Retirement savings business, how well is AIG's L&R business positioned for an eventual economic downturn in terms of the investment portfolio and other risk management factors?
Yeah. The L&R business has been working through issues like that well before I arrived Looking at the investment portfolio and ensuring that it's appropriately matched asset liability, that the interest rates are recognized, hedging programs are in place. Very professionally done. I think from the investment side, I think we have very good processes in place to weather those kinds of movements, those storms. If you take the product development side, we are the largest annuity writer, but we're not the largest in any one category. We have a broad base, a product base, and then annuities, as an example. There, one annuity is appropriate at one kind of economic condition and another one at a different time. If you only write one kind of annuity, then you're kind of stuck.
When it's not the product to sell, you've got a problem because you got nothing else to do. I think our broad-based product offering gives us the ability to handle the differences in economic climates because it's really keying to what the customer needs.
Right.
Right. You need this at this time, we have it. If you need something else at another time, we have that as well.
Exactly. I see. Okay. Final question, maybe we'll have a minute or two leftover for the audience. AIG has a sizable legacy portfolio that's been a drag on return on equity. What actions could the company take to reduce the size of that legacy business?
First of all, we consolidated it in a company in Bermuda so that we can manage it as a single entity. We can properly deal with the capital required for it. That was the first step. In short order, Carlyle came, and we were able to sell just under 20% of the company to a third party. Over time, that remains a possibility that we could sell it down or just continue to manage it as is. You could always take pieces of the portfolio and sell them off over time as well. I think having it in one place, having it managed as a single entity gives us lots of flexibility in terms of what we do with it going forward.
That's helpful. Okay. Time for one question. We have one from the audience. Any questions? Well, since we have just a couple of seconds left, the outlook for investment income this year, I think there's been some questions around that, is very strong in the first half. I understand that was in part driven by the decline in rates and the benefit of mark to market plus alternative investment returns, partnerships, things like that. The outlook that was provided, do you feel there might be some conservatism built into that given rates have again dropped in 3Q and equity markets have been doing okay?
Well, if you'd asked me this question last year, we had a completely different situation in the next three months. You tell me. I don't know. I think when we looked at it, analyzed it in its component parts, we feel very comfortable with the guidance.
Okay.
I think it's an appropriate level of guidance given our understanding of our own portfolio.
Right. Okay. I think we'll end there. Please join me in thanking Brian Duperreault from AIG.