Right. I'm Mike Nici. I'm the Property and Casualty Insurance Analyst here at Goldman Sachs. We're pleased to have AIG joining us here today. AIG has approximately $66 billion in market capitalization, among the world's largest property and casualty insurers, with a large life insurance operation as well. Joining us today from AIG is Sid Sankaran. Sid is AIG's Executive Vice President and CFO. Prior to being appointed CFO in 2015, Sid served as the company's Chief Risk Officer and was responsible for overseeing the company's approach to both pricing and macroeconomic risk factors. Today, as CFO, one of his primary responsibilities is overseeing the company's strategic plan, including its $25 billion capital return through 2017, a core pillar of this strategy laid out at the beginning of the year, and one that has been a central focus of investors.
With that, I'll turn it over to Sid for his opening comments, then we'll sit down for some Q&A. Thanks. Thanks, Sid.
Great. Thank you, Mike. I just point you to our forward-looking cautionary statements to read at your leisure. Really today, what I wanted to cover were our progress on our financial targets, specifically our return on equity of both our operating and legacy portfolio, our general operating expense or efficiency program, capital management, book value per share growth, and our accident year loss ratio improvement. Before I dive into the detail, I thought it'd be helpful for this audience if we just step back a little bit and provided some broader context for our strategic plan. I always like to point people back to Peter Hancock's initial shareholder letter when he became CEO in early 2015. In that letter, I think Peter really highlighted three themes. The first was a priority to simplify the organization and focus on our core operating margins.
Secondly, a need to invest, particularly in data, science, and technology. Thirdly, a commitment to sculpt the company and create a leaner, more focused AIG. As we provided an update on our strategic plan, really in January of this year, I think the market context at that time is also of note. First, really, we saw a challenging interest rate outlook ahead of us. More importantly, we saw a lot of excess capital in the commercial insurance space. Our plan really focused on aligning three things, revenues, where we were targeting shrinking; expenses, where we were accelerating our expense reduction plan; finally, capital, where we were committed to returning excess capital to shareholders. When you think of our strategy, you need to think of those three elements, revenue, expenses, and capital as really aligned.
As we sit here today, really three quarters into what I see as an eight-quarter plan, I think we're very pleased with the progress against our strategic objectives and also against our goals, and we remain confident in hitting our 2017 targets. I'm going to turn the page. As we've said before, we really feel AIG is best valued and assessed in three parts. First, in blue, the operating portfolio. This is about three-quarters of the company's capital and is our core business. Here, we're targeting a 10% return on equity and growth in strategic segments. Secondly, in green, the legacy portfolio. This is about a quarter of the company's capital. Here, our objective is different. Here, we're focused on return of capital and free cash flow while minimizing the impact to book value per share.
Finally, in yellow, what is very important to us is our deferred tax asset. For those of you who haven't followed AIG that closely, the deferred tax asset for us is a very valuable source of free cash flow. While there's been a lot of dialogue around changes in tax policy, and it's still very preliminary. At our investor day, we did highlight some preliminary analysis. I think the key message is that we feel a reduction in the statutory tax rate is a positive for intrinsic value, and I'll walk through why. First, for us, we still believe that we'll utilize in full all our foreign tax credits. Those will shield a higher amount of taxable income, which is very important.
Secondly, as you reduce the statutory tax rate, if there were an immediate reduction to 25%, that would be approximately a 90 basis points increase in our return on equity. If it were to be an immediate reduction to 20%, that would be an increase in our normalized return on equity of about 150 basis points. We feel given where we are on the tax basis, that that would close our gap on an ROE sense to peers. Finally, clearly, if we were to reduce the overall statutory tax rate as a function of tax policy, we did highlight that that would result in a remeasurement of our DTA. An immediate reduction to 25% would result in a $4 billion remeasurement of our deferred tax asset associated with our NOLs, and our timing differences.
A reduction to 20% would be about $6 billion with respect to a remeasurement of those NOLs and the timing difference DTA. That is, in punchline, a summary of how we think about valuing the company. If I turn the page and focus on the operating portfolio, here I'd leave you with a couple of messages. We have been extremely focused on improving the overall return on equity of the operating portfolio and feel we've improved it by about 150 basis points year on year. This has largely been a function of three things: improving our risk margins, our operating efficiency, and capital management.
As we look to 2017, our projection is for approximately a 10% return on the operating portfolio, and this will be a function of two drivers, continued efficiency gains, which we'll talk about, as well as continued underwriting improvements, particularly on the loss ratio side. For a moment, spending a little bit of time on general operating expenses or what we think of as our efficiency program. We expect, as we announced on Investor Day, to exceed our two-year target on expenses and efficiency. As we've said and disclosed in our last earnings call, we've taken out about $800 million of operating expense, general operating expense as normalized on an operating basis year to date. That is roughly 57% of the target we announced.
Based on actions we've taken already with respect to compensation and benefits, and in particular professional fees, we're anticipating approximately an additional 36% reduction of $500 million in the forward-looking run rate. We feel we're about 93% of the way there, and this has really been based on our principles of simplification, modularity, and automation. At the same time we've been taking down expenses, we have done that while continuing to invest in strategic programs, particularly technology. Again, the main message here is we expect to exceed our two-year targets on this dimension. Capital return. Obviously, as Mike alluded to, this is a favorite topic of our investors and our analysts. We feel we are very confident in meeting our capital return targets of at least $25 billion of return of capital to shareholders.
This slide has a few items that I'd call your attention to. First, as of the Investor Day of a couple of weeks ago, we've completed about $11.6 billion of capital return. We have remaining authorization as of that date of approximately $3.6 billion. That leaves $9.8 billion remaining to our capital return target. As we've highlighted in the green bar here, we see about $12 billion-$17 billion of funding sources available to meet that $9.8 billion. What are those sources? First, we have $5 billion-$7 billion of dividends and tax-sharing payments. That would be net of our overhead and interest expense. Secondly, we spent a fair bit of time at our Investor Day walking through the divestitures that we've announced to sculpt the portfolio. There we see $4 billion-$5 billion roughly of free cash flow in our projections.
Thirdly, we previously announced a set of life reinsurance transactions, having executed one of those transactions in the third quarter. We have about $3 billion-$4 billion of funding from the life reinsurance transactions. As we announced previously, our new CIO, Doug Dachille, has announced a set of asset management and portfolio changes, and in particular focusing on hedge funds and third-party managers. There's still about roughly up to $1 billion of additional dividend flows coming from that reallocation. Again, the real punchline here is we remain comfortable with our targets and confident that we're going to hit them given our track record. What I would say I'm most proud of is that we've continued to do that without sacrificing the strength of our balance sheet. As you see on this slide, we continue to maintain very healthy capital ratios in our subsidiaries.
In addition, I think we have industry-leading free cash flow and holding company liquidity that really indicates for us a very strong strength of balance sheet. Legacy. I alluded to the legacy portfolio in our initial comments at our Investor Day did highlight a set of additional disclosures. I think Charlie Shamieh and the focused Legacy team we have are doing a terrific job. A couple of key points here. First, that Legacy through 9 months year to date has continued to act as a drag on our overall ROE. It's about -2%. We think as we're looking forward on a normalized basis, the ROE will be in a range of 3%-5%. Again, the objective here for Legacy has been return of capital and free cash flow.
As you can see from the chart, we think roughly through 3 quarters of the year, we've managed to take Legacy down from that roughly 25%-16%. Our liquidity to parent here, the free cash flow, has been about $6.3 billion from the fourth quarter to now. Charlie and the team are focused, they're executing, and you should expect to continue to see us update you with new transactions each quarter. This is a perfect time, I think, for me to shift a little bit to talk about our business. With respect to both Commercial and Consumer, I'd encourage each of you who didn't get a chance to listen in on our Investor Day to pay attention to the remarks from Rob Schimek, our Head of Commercial, and Kevin Hogan, our Head of Consumer.
I think they frankly did a fabulous job in explaining why AIG has such great market leadership and unique franchises. They gave great detail, I think, in why we have market leadership with our clients, why we have market leadership with our distribution partners, and how we're continuing to innovate. It was a great opportunity to hear from them in a little more detail than you might have heard on a normal earnings call. With respect to our Commercial portfolio, which is the area where obviously we spend the most time in our discussions, we provided detail, which really highlights, and this chart is an important one because it highlights based on the internal amount of capital we've allocated, our mix of business and where we're heading.
Where we're heading is in line with our goal of maximizing intrinsic value, of course, meeting client objectives, but also driving ROE improvement. You see on this slide, it's a little hard for me to see in small font, that we have a lot of levers that we can move. This slide is important because first you see the growth levers, primary casualty international, M&A, cyber in the property space, in particular, large limit, where we have a very unique capability, as well as energy and engineered risk, where I would say the same, as well as credit lines. At the same time, we're reducing participation in many segments of the overall portfolio, most clearly in excess casualty in the U.S.
Also you see that in different pockets of environmental, E&S and property, where we've been actively reducing the portfolio and pricing has been challenged, as well as programs and pockets of the aerospace business. We're also going to continue to be very opportunistic. You saw a little bit of that, where we're managing with intrinsic value and ROE enhancement as a top priority, where we announced in the third quarter the sale of both NSM and Ascot. We're going to be opportunistic. You can also expect in allocating capital based on market conditions. We think that capital allocation, along with a lot of what we're doing, and I'll speak to in a second on the account level side, are really going to drive that ROE improvement that we talked about. Accident year combined ratio as adjusted.
The trend since year-end 2015 through nine months of the year, we think, has been very strong, with three points of improvements in the accident year combined ratio as adjusted. We've announced a target of about six points over two years, from 2015 to 2017 on an exit run rate basis around the accident year loss ratio as adjusted. We've got two points of that, which I'll speak to in a little bit more detail. Equally important in what we're doing based on the shift in mix of business is actively managing the expense ratio, where you see a point of improvement, as well as managing the mix of cat-exposed businesses. We shared at our Investor Day our AAL.
Clearly here, as I alluded to before, integrating revenue, expense, and managing capital for this portfolio business is key because you've got to get the cost and the fixed expense out while you're remixing that portfolio and bringing it down to improve the underwriting margin. With a quick shift, I'm going to talk now about what's driving the loss ratio improvement. If you look at this slide, obviously our starting point is a 66% roughly accident year loss ratio as adjusted for full year 2015. We think year to date, we've got about two points of that. That's been driven largely by business mix as well as improvements in casualty. Just a reminder on the casualty side, we think we've got solid rate improvement now for the past four quarters.
That improvement has been offset a little by the programs adjustment in the loss pick that we talked about in the third quarter. That's the two points that we've gotten so far year to date. The biggest driver of the forward-looking improvement, as Rob has talked about, has been the difference between written and earned. Based on the actions we've taken with the book and what we've underwritten over the next year or five quarters, we expect that to earn into the P&L. That'll be about two points of improvement. We did call out, and we have gotten some questions around the UGC quota share.
One comment that I might make that hopefully could be helpful in clarifying the UGC quota share for you is when we announced our targets in January of this year, around six points, we did not include any of the subsequent divestitures that we announced. We did not include in that projection the sale of Ascot, NSM, and Fairfax. Each of those you can think of as negative to us with respect to our loss ratio improvement plans, but positive to us when you're thinking about combined ratio ROE and intrinsic value. That loss ratio impact was offset by the positive from UGC. It's net flat, and we did that just to be pretty transparent to folks so they could understand where the loss ratio improvements are coming from.
In addition to those steps, what we see as there are coming benefits from exits, which are exits that we've announced that are coming up for renewal, which will earn their way in. Growth, I talked about key growth lines just a second ago. Finally, risk selection, because ultimately the big driver for us here is around ensuring rate adequacy on our book. There we have a real discipline around what we call AQI or account quality index that's driving the risk selection. The sum of that is what's driving our loss ratio improvement. As we sit here today, we remain confident in that target and are looking forward to updating you a little bit more when we get to year-end. Flipping very quickly to consumer. Again, here we've pictured how we're allocating our capital.
Again, this is a picture to scale on capital. Each of our businesses, the key message I'd leave you with are at scale. Individual retirement is really variable annuity, index annuity, and fixed annuity. In this space, we're not number one in any of those segments, but we're top five in each of them and number one in aggregate. Here what really drives sustainable returns above our cost of capital is being agile on how we deploy that capital when we look at the market and opportunities between those products. We do not have fixed distribution that we need to feed. Risk management is a key here in our competitive differentiation. When you look at group retirement, VALIC has a very strong franchise.
Again, if you look at assets under management, I believe Kevin highlighted this at Investor Day, we're number two in the K-12 sector. I believe we're number three in higher education, number four in healthcare. Very strong franchise here and solid profitability. Life, obviously, this is a smaller segment of our capital allocated, and with some of the reinsurance transactions, we've been focused on ROE enhancement and managing risk and capital here. This is largely a U.S. life book. For the first time, we're back in the top five in the U.S. with respect to term sales, which is where we want to be, given the investment interest rate environment at this point in time. Finally, personal insurance. Personal insurance, again, we've spent a lot more time talking about of late, but we've had strong margin expansion here.
In particular, we have segments of the market that we think we have a prominent franchise and are growing. With respect to consumer insurance and base yields and spreads, this is going to be a key driver of earnings. We continue to maintain our discipline here on both pricing and asset liability management. We previously disclosed that we think net spreads are going to decline about 2 to 4 basis points a quarter. That obviously was in the second quarter when interest rates were lower. We're going to continually reevaluate our forecast and update that. Obviously, the interest rate environment has turned a little bit more positively of late. My final slide is on personal insurance, which as you can see here, we've got very good margin expansion in personal insurance. We have sustainable loss ratios through time.
We have been improving that expense ratio and feel pleased with where it is, but it still has more to come. It is really got some elements in this business that are tremendous franchise. Our AIG Private Client Group has been growing and benefiting from industry consolidation. We recently announced a very innovative multinational ultra-high net worth homeowners policy, which we think is unique in the market. This business with its cash flow, its risk, its diversification characteristics, is a great contributor to the portfolio. We're pleased with how it's been improving, but we still have a little bit more to do, and we're confident in the team that's working on it. With that, Mike, I've tried to blow through a lot of information for you to leave it open for some Q&A. Maybe I'll grab a seat.
Great. Thanks so much. I went on a couple of the questions from the audience. Feel free to raise your hand. We'll get a mic over to you. I guess the one thing you mentioned at your Investor Day, you talked and you alluded to it in your presentation here as well, is that you're running ahead of your deployment targets or at least the capital generation targets that you had outlined at the beginning of this year, but didn't update the deployment part. I guess one question is, how should we be thinking about that additional, you talked about that sort of $12 billion-$17 billion versus the $9.8 billion to complete the $25 billion. Is there a scenario where you would expect that capital to remain in the company, or is it just a matter of timing in terms of how you're thinking about that?
We've broken out the sources for you, right? We've given you the dividends and tax sharing contribution of divestitures, as well as a life reinsurance transaction and hedge funds. You have a good sense of what's driving our funding sources for the remaining $9.8 billion. I think what I'd say is we remain confident in that $25 billion and returning at least $25 billion of capital, as we've said. Clearly, each of those funding sources are going to come in over time. I think to me, the punchline is when you look at this company extending in 2017 and beyond, it has an extremely strong balance sheet, great free cash flow, tremendous capital generation. We're constantly going to evaluate our alternatives for capital deployment between organic growth, capital return to shareholders, inorganic growth, and we're always evaluating that.
We just came out, I think the Investor Day, you guys all heard, we're reiterating that at least $25 billion target.
Great. Thanks for that. You talked a bit about margins on the commercial side. Clearly, that's another area that's been a focus. I think in the third quarter, the year-over-year improvement slowed. You reiterated your view on margin improvement for 2017 and 2018. Can you sort of help to reconcile third quarter versus the continued confidence in your view that you can generate the margin expansion that you expected at the beginning of the year?
I think first of all, nothing ever works perfectly in a straight line, as I always say. I think you had very solid performance in the first quarter and the second quarter. The third quarter had a couple items to note. The most important is programs. In programs, we did catch up the loss pick in the third quarter. You need to keep in mind that previously disclosed adjustment to the loss pick for programs was rolled into the third quarter.
I understand.
I think most importantly, obviously, is looking forward. As we look forward, we have a clear line of sight. I think Rob and the team have done a terrific job in remixing the portfolio business. When you look at the bar that we shared with you on what is yet to earn into the P&L, that is a function of actions that we've already taken. It's not dependent on the pricing market. It's changes in the mix of business. There was a chart Rob had that particularly showed in products at BB and B, which is the poorer performing portions of the portfolio, that segment coming down by about, I think, $2.6 billion. But it was roughly, I think a third, if I remember in that slide from the Investor Day, which I point people to.
That obviously is a key driver of the forward-looking P&L.
Got it. I guess, we're looking ahead now. We've sort of talked about these different factors in addition to the non-renewal of business, clearly the reinsurance program that you undertook earlier this year has had an impact on the top line. How are you looking at when that contract comes up for renewal, what happens to the premiums that you ceded? You probably have some view on how that book is performing.
How should we be thinking about that coming to fruition? Is it we're going to re-up that reinsurance program or maybe some business comes back to AIG, or is there another option out there that you're thinking about?
Well, I think the most important thing, I think about that reinsurance transaction to note is that, obviously, we're re-underwriting that entire portfolio. It's a quota share transaction. The whole portfolio, it has not been disruptive to our clients. It's reinsured. When we think of some of the larger transactions, which is what I think you're alluding to.
Yep
On those quota share transactions, they're obviously reinsured back to a third-party provider, third-party reinsurer. We're continuing to re-underwrite that book. That book is being subject to the same standards on Account Quality Index, rate increases that the rest of the portfolio is. While we actively remediate it, when we get to a point where we have to make that decision, we do think there are plenty of alternatives open to us. Obviously, potentially, you alluded to re-upping that transaction, restructuring the nature of that transaction with one or more insurers, retaining that business back on our books if we feel it's meeting our cost of capital. It's something where I think, the team has been very thoughtful about how they approach it, and we're comfortable with how that'll evolve on a forward-looking basis.
Okay. Today, obviously, we're stepping outside of insurance. A lot has happened in the last several weeks. Views on regulation, taxation, which you allude to in your presentation, interest rates. Talk to me about how you are thinking about those changes and how they impact the main tenets of your strategic plan that you outlined at the beginning of this year. If interest rates were a lot higher six months or a year from now, are there things that you might consider doing differently?
Yeah, I think, it's a broad question, Mike.
Sure
I'll try and break it.
I can make it broader.
Yeah. I'll try and break it into pieces. I think we can put tax aside.
Sure
actually my prepared remarks covered that. Maybe I'll focus on interest rates and regulation.
We always plan for multiple scenarios and multiple potential outcomes. With respect to rates, in the second quarter, we highlighted some disclosure, and how we think about the impact on interest rates obviously is with respect to both new business and with respect to the in-force. You can break it a little bit between commercial and consumer and then we can speak about 2018 and beyond. When you look at the in-force business for the consumer business, we announced that we had certain long-tail liabilities that were impacted by falling rates. Obviously, rising rates are a positive for us with respect to that in-force book. In the second quarter, we said that we thought our estimate of intrinsic value given changes in interest rates in the market was down about 5% from the beginning of the year. Obviously, the change in rates has rallied that, right?
That's positive. When we look at the commercial in-force, obviously the sensitivity interest rates were relatively well matched. It's less a question of interest rates and more a question of the underlying drivers of reserves. There, financial inflation is probably less of a driver than medical cost inflation or AQI as we've disclosed. Obviously, inflation is something that we watch carefully in line with rates. On the new business side, clearly for commercial, higher rates potentially means both higher volumes and higher margins in terms of value of new business. With respect to the commercial business where our long-tail lines are most impacted, higher rates as long as loss cost trends are eclipsed by pricing, right? You always have to be careful of what people think are rates of growth versus inflation. Again, inflation is important, loss cost inflation.
Again, we probably see that as a positive both with respect to volume and potentially with respect to our kind of value of new business. Broadly, the trend on the rate side we view as a positive. We carefully manage and watch inflation. Still, I think there's a lot of uncertainty geopolitically. We rarely ever bank one rate scenario. I didn't get too down on the prior rate environment that people thought was in place two months ago, and not overly throwing a party over higher rates. I think you got to manage it carefully. That's how we think about it. We're very disciplined on the ALM side.
I guess, in looking at life insurance stocks and the reaction to higher interest rates, as you think about the different businesses, whether it's P&C life or maybe different businesses within those larger segments, Does a change in the environment change the way that you've thought about either retaining or disposing or divesting of assets?
No, very simply. I think we can, and I'll explain why, we obviously actively look at the portfolio and are evaluating the pieces on an intrinsic value basis, on a sum of the parts basis. For us, a key driver with respect to the life business and retirement business that you allude to are 2 things. 1, the foreign tax credit. These are all interlinked to some of the issues you highlighted.
Yep.
On the foreign tax credit side, we continue to have plans in place to utilize that foreign tax credit, and that's a very valuable foreign tax credit. That's approximately $5 billion. That's a function of keeping the life and property casualty entities together. Secondly, you continue to see capital diversification benefits. While I think there may have been some skepticism around the capital diversification benefits when we mentioned them about a year ago around this time, I think we've seen with how external parties, rating agencies look at breakups and other scenarios, there are real capital implications for RemainCo and SpinCo and all the like. We are focused on those 2 elements and those 2 contributors to our intrinsic value still hold.
Great. Thanks for that. Any questions from the audience? I'll keep on going here. Again, if you have 1, please feel free to raise your hand. When you think about clearly lots of expense cuts, you've been very focused on taking the expense ratio down and which has come down or remained flat despite the reduction in premium levels. As you're thinking about that, how much has that impacted your franchise and your ability to serve customers or your constituents or broker intermediaries or work with reinsurance companies in terms of just from an infrastructure perspective? Does that put more stress on the remainder, or is that something you've been able to kind of just really trim excess capacity?
Yeah, I think it's a great question, Mike. I think first and in our business, 1 of the biggest implications I think of any kind of expense transformation is people, right? People are a big contributor to our costs. Particularly on the business side, it's a continuity issue. Brokers or clients who dealt with somebody on our end have had somebody new facing off against them. What I would tell you is 2 things. 1, I think there was probably more noise on that at the beginning of the year, but I think Rob Schimek and his team, I've got a couple of our folks in our commercial business sitting out there in the audience, have done an absolutely terrific job on working with brokers and clients.
In attending some of our recent client councils, some of the feedback we get is actually the changes, while we've had great people and they contributed to our success historically, is while there's always noise in the initial change, some of the new people we're getting feedback from the clients coming back to us and saying, "Hey, our new person is better than the person I had before. This person's terrific." I think it's obviously got some disruptive elements because of the human component, but I think that Rob and the team have done a very nice job in that regard.
Great.
I have a question.
You have a question? Yep. Right here.
You had painted the go-forward picture of the commercial insurance business as kind of one of the big drivers of the improved combined being better risk selection. How much of that is actually, do you think, better underwriting practices or just kind of a hardening of rates overall, and you think that the market's going to get a little better?
Well, I can tell you in our projections, we don't have a lot of hardening of rates. If you look at our strategy, our strategy hasn't been a growth strategy, right? It has been shrinking deliberately both from two levels. First, I would say a portfolio level. You saw the capital allocation slide, what parts of the business we're actively growing and shrinking. The second is around what we call account quality index. We rate each of our accounts as you might expect, A, B, C, and D as if they were grades in school. Each of them have a different hurdle to hit rate adequacy when we look at our overall return targets and meeting our cost of equity. The primary driver at this point is we've obviously had some dramatic shifts in business mix, as I alluded to.
We think, in particular, the AQI, which has been a big contributor, will continue to be a contributor in the window. I would say the driver for us is more the business mix shift and AQI. It's not really a more optimistic view of rates.
Great. I guess you touched a little bit on the consumer business and sort of what's been happening there. I think at Investor Day, Kevin had mentioned that you were trimming some geographies that were underperforming because of lack of scale, whereas you continue to have good performance in those scale markets. He also sort of touched a little bit on Japan. Just trying to get an idea of once you sort of get rid of some of those subscale markets, how much of a tailwind should we expect that to be to your performance in consumer? Post the integration in Japan, just maybe an update on timing there and how should we be thinking about that from just an order of magnitude perspective on profitability?
Yeah, I think the most important metric that I think I would call your attention to on the personal insurance business is what we refer to as a medium-term target of 92%-94%. The reason that there's not a firm date on it, just as you've alluded to it, Mike, is the dependency on our work on integration in Japan. We haven't provided any update on timing, but I think, as Kevin has said, once we go through the merger approval process and we have something that we could disclose, we will obviously disclose that, and that can give you more certainty on the timing side. I think that, again, when you look at this business, you see very sustainable loss ratios. Much of the challenge that we have are around implementing the strategies on efficiency as well as on growth.
On the underliers, as we've highlighted with US PCG, we see double-digit growth there, and we're very pleased about that. As you look at the work that we've done on exiting or running off specific companies, as we sit here in December, we feel good about that effort as well. I think, when you look at that business, I think setting that medium-term combined ratio target out there and looking at the business mix and the premium, you can see that this can be a strong contributor with respect to earnings and franchise.
Got it. Have you quantified, though, just timing aside, how much you're spending or excess spending is coming into the sort of integration effort in Japan and what that might look like whenever that is done, when it's done?
I think the previous number that I think we've disclosed is roughly a $125 million-$150 million one-time cost that's in the run rate.
Okay.
Obviously, there are other offsets against that as we have also announced that we're taking out certain costs.
Okay
associated at the same time with the integration of what we're permitted to do from a regulatory standpoint. We are absolutely 110% focused on meeting the regulatory requirements and the needs of the regulators in Japan. Obviously, when we look at that investment, we're looking at on an economic basis, and we're saying, given the alternatives out there that we are exposed to, do we think that the one-time cost is accretive? The answer is we do. We think it has a good payback period, particularly, post-merger, very quick.
Great. Any other?
Kyle.
Let's go to Kyle.
You mentioned in your presentation a bunch of targets that management set between capital return, expenses, ROE, and then the commercial P&C loss ratio. I realize they're all important, but is there any way you could rank order them as far as importance to management or, I guess, key focus areas?
Yeah. Peter highlighted a pyramid that really in the investor day, there was a slide which had a pyramid, which really at the top was intrinsic value. Intrinsic value is not disclosed, but we think of it very much in the context of the value, you'll hear us say, the value of the in-force, kind of the embedded value of the balance sheet, and what drives franchise value, future value of new business, kind of profits and margins with respect to our clients. That is really at the top of our pyramid. Beneath that, we had ROE and book value per share growth. We think ROE obviously gives you a good sense on return of capital and our ability to meet our cost of capital. Obviously, in the long term, sustainable book value per share growth is obviously a very strong indicator of intrinsic value growth.
Beneath that, there are a lot of different subsidiary value variables, and we always have to make trade-offs between them, whether it's loss ratio, expense ratio, and growth, all those inputs. We really created that pyramid to try and give people a sense of the hierarchy of metrics that we're managing to. It's not perfect. When you look at some of the actions we've taken, I look at Ascot as a great one. That's one where obviously, the new owner of Ascot is a very advantaged owner of Ascot. We looked at that from a sense of it may be damaging to the loss ratio. When we think about our intrinsic value, ROE, book value per share in a long-term sustainable way, we felt it was a value-accretive transaction.
Peter. Yep, there you go. Thanks. Yep.
Just the $25 billion total capital return. If you lose the SIFI designation, what does that 25 go to?
I think we've been pretty consistent that we, first of all, again, start with what we think the right thing to do is and look at our overall balance sheet strength and what we need to look like to maintain the trust of our clients and regulators. We've said that one of our primary constraints has been the rating agencies. That's where we focus. We continue to target at least $25 billion of capital return.
We got one more here in the corner.
Can you hear me?
There we go.
Can you hear me?
Yeah.
Yes. You mentioned obviously the DTA and what would happen to that, the domestic part of it in the case of a corporate tax reduction. Is there a way to accelerate the usage of that, whether it be through M&A or something strategic if you felt like the tax rate was coming down for sure?
What I would say is as part of our normal business planning and risk management, we evaluate a test, a range of strategies to ensure that that valuable DTA gets utilized. I would just say we consider and test all alternatives. It's not something that you can think of as being on autopilot.
Is there some reason why you would not be able to accelerate some of the usage if you felt like if someone told you 100% for sure, tax rate's coming down 2018, you have one year to do something to use it before you have to impair some. Is there some reason why you could not do that, at least to some extent in the U.S.?
Well, just a reminder, going back to our presentation earlier in the year, our foreign tax credits, there is a cap on foreign-sourced income. There's a maximum amount that you can utilize in a given year. We do feel we have the right risk management capital and business planning strategies, as we said, to utilize about $2 billion-$2.5 billion over the next two years. No, you do have that. That is a limitation on your ability on the foreign tax credits. With respect to the NOLs, that's obviously a function of taxable income. Again, we evaluate everything as we, again, go through our business planning strategies.
Okay. I think we're about done. Thank you so much, Sid. Thanks for your time. Thanks everyone for being here. All right.