Great. We'll get started with the next presentation here. I'm Brian Meredith. I am the Senior Property Casualty Insurance Analyst here for UBS, and we are incredibly pleased to have David Herzog, AIG's Executive Vice President, Chief Financial Officer, with us today. David's been AIG CFO since October of 2008 and has been instrumental in leading the company through the transformation it's gone through from the depths of the financial crisis in 2008. David's going to give us a presentation, then we're going to open it up to questions and answers. With that, I'm going to turn it over to David.
Thank you, Brian. Good afternoon, everyone, welcome. Brian, thank you to you and your colleagues for inviting AIG to participate in your program. It's a pleasure to be here. I'm going to start with just a quick overview of our core businesses. We're going to talk a little bit about the core businesses and then some of the important levers that we're focused on to help drive shareholder value for AIG. This slide really summarizes our core business, property casualty, life and retirement, and our mortgage guarantee business. What we've set out here are some of the core strategies that we've been undertaking. I've got a couple of slides later on that drill down into a couple of the core strategies inside of property casualty, where we are looking to grow the high-value lines.
We're looking to continue the business mix shift, both from some of the less than profitable lines of business, growing our international consumer lines, and spending a lot of time and energy and focus on building out some of the technical underwriting capabilities and the claims management systems. I'll talk a little bit more about that in a minute. Our life and retirement business is a very stable and steady business. It's been quite profitable. It's been a steady producer of operating earnings and, most importantly, a very strong contributor in terms of cash flow to the holding company, I'll talk a little bit about that as a core tenet of how we think about capital management. Finally, our mortgage guarantee business, United Guaranty, is a business that has been remade, both the front end and the back end.
On the back end, the claims management capabilities and discipline have been completely remade since the 2008 era. As a matter of fact, the team that accomplished that is now the team that's in charge of the property casualty global claims management. They did a fantastic job at United Guaranty, both back end and front end, and I'll talk a little bit about that as well. This is a business that is really focused on maintaining its discipline around underwriting and around risk selection and having competitive product, but it really is about getting the right risk for the right price. We really start with building from a position of strength. Maybe a little context around our $103 billion worth of shareholders' equity. 2008 and prior, we had $1 trillion in assets and $100 billion in equity.
Today, AIG, after the restructuring, has about $550 billion in assets and $100 billion in equity. As we start down this journey of building and growing, we're building from a position of strength, of capital strength. Another core tenet of our capital and how we think about capital is about fungibility and about capital flows inside the company. It's one thing to have adequate capital and sufficient capital, but it's even more important to have it in the right place at the right time and in the right currency. The combination of generating capital, building fungibility into how you manage it, those things are the bedrock or the cornerstone to then taking action. Here's a selection of some of the actions we've taken of recent times with the dividend. We put a dividend on the stock in the third quarter of 2013.
We raised that modestly in February. We've gotten two different authorizations, billion-dollar authorizations, and we've deployed a good piece of those through the first quarter. One of the ways I think about capital management is to really think about it in terms of a steady, orderly cadence that we talk a little bit about more that in the Q&A, but to be measured in how we go about this, because this really is a marathon, not a sprint, and we want to be thoughtful in how we execute against capital management. Our capital and ratings are, again, in a strong position. Our capital structure is really pretty straightforward. We have equity and we have debt. Some of the hybrid securities that at one time may have gotten some equity credit somewhere along the line from an agency or the like, they're really just a function of debt.
Our capital is very strong and straightforward. Our leverage, as you can see, is really pretty low. With the financial debt and hybrids under 17% and the financial debt, just straight up financial debt is under 13%, so very low. We remain focused on coverage ratio. You'd say, well, those two things may not make a lot of sense. The point is, about 40% of the debt that's on the books today comes from 2007 and 2008. It was issued in that era, and some of that is pretty expensive. Therefore, it provides an opportunity for us to think opportunistically about how to manage the cost of our debt capital to a more sensible level. The recent events of the sale of ILFC to AerCap, no doubt will be credit ratings positive. Just how positive, we'll have to see how that all plays out.
Clearly, getting $25-plus billion of liabilities off the books is an important step for our company. Again, our book value continues to grow nicely, about 10% year-over-year. That's a function of earnings and certainly of capital management. With respect to the ROE levers, we remain committed to sustainable ROE improvements. It's a clear focus of our management team, and we certainly aim to meet or exceed our cost of capital, and that's embedded in our value metrics that we pursue inside the company. These are just a couple of the levers that I'll talk a little bit more about. This really is then the how do you do this? How do you continue to drive ROE? Certainly in our property casualty business, the focus is on improving the underlying profitability. That manifests itself in the accident year loss ratio.
I've got a slide on that in a minute, that really is driven by a combination of some of the key strategic levers, whether it's business mix shift, whether it's standardizing our claims practices, whether it's making ourselves more operationally efficient by taking out redundancies and the like, or streamlining the legal entities. It's a combination of all of those. We are undertaking a project in our Japan business. We have three very large businesses there. We have scale, but now it's about harnessing scale economies, that work will take some time to do, but the payback will be well worth it. Of course, we took a severance charge in the fourth quarter, and we're going to continue to rationalize the expense base in the firm. With respect to capital management, we've done about $20 billion of capital management since 2011.
That's some equity share buyback, some debt buyback. This excludes anything we've done with the direct investment book. I'll talk about that in a minute, really some of the cash-funded debt that we've retired early. That's an important step. We've got more to do, there's more out in front of us, I'll talk a little bit about the opportunity there. Again, the key to me is continuing to generate deployable capital and then finding the most optimal way to in fact deploy it. Some of the sources of how we generate deployable capital obviously is in some of the future liquidity that we've set forth here, the monetization of our deferred tax asset, and I've got a slide on that in a minute.
Keeping in mind, the earnings that we report, our after-tax operating earnings, we impute a statutory tax rate on those earnings. Even though we do that, we impute a tax, we don't actually, not yet, while we have the NOLs, we're not yet paying tax to the U.S. government. We monetize the DTA through tax sharing agreements that run from the holding company down to the operating company or companies. We charge the operating companies tax, they pay the tax up to the holding company, then the holding company, when we file a consolidated tax return, doesn't pay that tax on to the U.S. government because we're utilizing the NOL. That's just simply how it works. That's the tax law. That's not anything unusual or special. It's just the way it works. It's an important source of cash flow to the holding company.
Finally, with respect to the direct investment book, as it continues to wind down in a very orderly way, I've got a slide on that in a minute, what that'll do is it frees up the $7.9 billion worth of net equity that we have dedicated or allocated to that book. With respect to property casualty, again, some of the strategic focus that we have. Again, we do business with about 97% of the Fortune 500, a little over 90% of the Fortune Global 500. There is no single lever, there's no easy path to improving the performance of a business that is this large and global. It's a lot of very detailed execution, blocking and tackling, if you will.
these are the core tenets of the strategy that Peter Hancock and our P&C team have been pursuing with business mix shift, again, focusing on the higher return, more RAP positive. RAP stands for risk-adjusted profitability, focusing on the higher profitable lines. In terms of underwriting excellence, we have an enormous amount of data that we have at our fingertips, and the key is to be able to leverage that data and turn that data into more informed decisions, be it underwriting decisions, pricing decisions, to help guide what markets we pursue, what business no longer meets our return characteristics. It gives us the courage to walk away from business that we might not once have done. It really is about focusing on the profitability of the underlying business.
With respect to claim servicing, again, as I mentioned earlier, we've asked the team that was instrumental in rebuilding the United Guaranty team and that business to run the global claims for our property casualty. We pay something in the order of five and a half million claims a year, and we now have about half of the claim costs running through a common platform, our OneClaim system. The team's done a remarkable job in rolling that out. There's more to do. There are more benefits to be had, the team's well on its way. I think bringing all of these strategic initiatives together really is built on or bound together by that risk-adjusted profitability framework and that cascades down throughout the organization.
Instead of talking about premium volumes, which premiums are important, growth is important, it doesn't mean it's not, it's the right growth is what the team is targeting. Of looking through a lens of risk-adjusted profitability, where we take the underwriting profit and we attribute an amount of capital, and then we ascribe a cost of capital to that. We look then at the underlying profitability of the business, plus an allocation of investment income, and then compare it to the cost of capital. If you're positive, that's fine. If you're negative, it's okay, now what do you do about it? Which levers do you pull? It really changed the whole dialogue and the whole focus inside the company to focus on profitability.
Importantly, where we weren't meeting return requirements, what do you do about it, and what action do you take? The metric that I look to assess whether or not we're continuing to make progress is in the commercial space, in particular, the accident year loss ratio. This really, to me, is the hardest of the measures to sustainably improve over time because again, it's a large book. As I mentioned earlier, the business is complex, and some of it is longer tail. What we've done, and we've said, this is not going to be a straight line down, Peter Hancock and John Doyle, who runs the commercial business, have by executing on those strategic initiatives, continues to believe this ratio will continue to drop by 200 to 300 basis points a year over time for the near term.
That's what you're seeing here. It's the benefit of having, in some cases, elevated expenses that are needed to fix the claims. Sometimes it's around building out underwriting expertise and data management, et cetera. Over time, we still expect to see this ratio continue to fall. Sometimes in our business, we do have what we have disclosed as severe losses, and those are going to happen from time to time, and particularly in the property space. Again, we haven't seen any underlying trends that would cause us some concern either in the underwriting or the pricing. We continue to pursue the strategies that I've laid out. Finally, with respect to the property casualty reserves, I think the important point here is that over 50% of the reserves are now from business that's been largely re-underwritten since 2011.
We have continued to enhance our processes over time. We make extensive use of third-party experts, not just actuarial firms, but experts as it relates to the underlying drivers of a particular class of business or product line. We look at 100% of what I would call the longer tail, more complex lines, which represents about $45 billion or so of the $65 billion of reserves that we have. We've further enhanced our internal checks and balances. There's a great deal of transparency and review and the consultation that goes on as we set the reserves, which represent our best estimate each quarter. Turning now to the Life and Retirement, our second major segment of the business. This business is really very well positioned. It's top five across the fixed and variable annuity markets as well as the 403(b) business.
Again, these businesses have generated very stable earnings and, importantly, very stable dividend flows to the holding company. The product portfolios are in very good shape. The distribution is under common leadership. What we had done a couple of years ago was bring the distribution organization together under one leader, separating manufacturing from distribution. The distribution team now focuses on bringing multiple products through the various distribution channels. That strategy, and more importantly, the execution of that under the very able leadership of Jay Wintrob and our distribution team, the execution of that's worked exceedingly well. The focus here also is on a value-based measure. We look at value of new business where, again, the focus is on meeting or exceeding your cost of capital as it relates to a particular product line.
One of the opportunities for us really is in the individual variable annuity business. This really is a unique opportunity for us because we've stayed the course. You can see by the graph on the right, we've de-risked a very substantial portion of those liabilities. By de-risking, meaning we index the fees to the VIX. We have volatility control fund requirements, and we have mandatory levels that have to be put in asset allocation or fixed income accounts. Again, it's a very stable product line for us. We've stayed the course, and we've re-energized distribution around this, and as a result, we've actually been able to grow that business exceedingly well. Again, it's the right growth. It's profitable growth. It's meeting or exceeding its cost of capital.
Another important measure we look at, obviously in the retirement savings business, that investment spread is a major source of earnings. We track very closely our base yield cost of funds for a net spread. We've been very disciplined about the asset allocation, opportunistic about adding some higher-yielding assets at appropriate risk-adjusted return levels, again, very disciplined around ALM. Jay and the team have been very disciplined around crediting rate management. We've got about 72% of the book on the fixed annuities, I believe, now down around the guaranteed minimums. Those guaranteed minimums are at a level that give us some headroom in the event of a rising interest rate. That part of the book is in very good shape. Again, the team's been very consistent in how we've managed the crediting rate.
The net result of that then are very stable or even improving spreads. Again, that's the key to continued stable, profitable earnings in that business. Now I'm going to turn to a couple of the non-core activities or the non-core parts of our business. With respect to the direct investment book, this was a book of term debt and structured assets that in part was in the old rundown or runoff of the financial products group, the AIG FP, and the managed investment program that was done at the holding company. 100% of liabilities of AIG FP were guaranteed by the parent company. Essentially, those two things were the same. We put them together, common leadership, common management team, common disciplines around how to manage the wind down of this activity.
As you can see, this wind down is on pace to occur between now and 2018. About 80% of those liabilities will be matured by then. Again, there's essentially no optionality in these liabilities there. This is the runoff pattern. This is the maturity pattern of that book. Then as these liabilities run off, then that frees up the $7.9 billion worth of net equity that we have allocated to this book. While it's not an exact pattern of how that's going to occur, essentially between now and 2018, about 90% of that $7.9 will be released out of the direct investment book and over to the parent. Again, some of that may be cash, some of it may be structured securities, some of it may be other kinds of securities.
Again, the key is to get it out of the direct investment book and up to the holding company for maximum fungibility. We did complete the sale recently of ILFC to AerCap, and we ended up getting $3 billion in cash net. After we net out the intercompanies, it netted to $2.4 billion in cash. Again, that cash sits at the holding company and it's unencumbered. In other words, it's not pledged to anything. It's just sitting at the holding company unencumbered. We also got about $4.6 billion worth of AerCap stock. That was the $4.6 of the value that we will record it at in the second quarter.
We'll end up recording about a little over $2 billion gain on the closing of the sale because we had marked ILFC to about $5.4 billion when we announced the AerCap transaction, and I think the math, you can kind of understand that for yourselves. The 46% of the stock will, again, that too, will sit at the holding company unencumbered, and we will elect the equity method of accounting for that so that you won't see the mark-to-market volatility of that stock in our balance sheet. We'll record our 46% share of the newly combined company's earnings, and you'll see that in our operating results going forward. I think very important was the deconsolidation of about $26 billion worth of liabilities that I think it goes without saying that investment-grade companies don't let their subsidiaries fail or don't let their subsidiaries default on obligations.
We stood behind the company and the like. It's an important credit event for AIG. It lowers the operating leverage on our platform. The last of the non-core activities or the non-core assets I'll talk about is really our deferred tax asset. This schedule is, we use this schedule from the investor deck in our financial supplement, and this just lays out the sources of what we call the U.S. tax attributes, DTA. Even after this DTA gets monetized, the $17.8 billion, even after that gets monetized, we'll likely always have some DTA, DTL, just given the timing differences. This really is what I focus on in terms of monetization to the holding company.
What I've said publicly already is that asset will monetize over the course between here and 2021, $750 million to $1 billion this year, $750 million to $1 billion this year, $2 billion in 2015, roughly. These aren't precise calculations or estimates, but it gives you a sense of the monetization pattern. At $2 billion to $3 billion a year between here and 2020 or 2021. I would expect by that point, 2020-2021, that we will be a taxpayer again. That gives you, again, gives you a sense of a source of capital flows. The way we have defined in our capital planning and capital policies that are under construction, as we think about typical payout rates. We look at after-tax operating earnings, and there's a percentage that we'll look to consider deployable. And then plus the monetization of the DTA.
Again, if we're working off of an after-tax number, then it's appropriate to, since we're not paying tax, since we have this tax shield, to consider that also for deployment. In addition to that, the monetization of non-core assets a la ILFC or the AerCap stock over some period of time, and we haven't decided yet what, when, et cetera, how we're going to think about that investment. We're quite pleased to be a 46% shareholder of a terrific company. Again, it's the monetization of those, again, non-core, including the direct investment book. As that $7.9 billion frees up, that'll be up for consideration of capital management. You can see there's a tremendous amount of capital generation to the holding company, and we've, again, spent a lot of time focusing on fungibility because that's important.
In summary, focusing on improving our profitability in our property casualty company, continuing to focus on generating deployable capital to then be able to generate and support capital management that is prudent and is balanced, has a sensible cadence to it that keeps all the various stakeholders that we deal with in favor with us. Those are all important aspects to how we think about capital management. With that, Brian, I'll turn it over to you. Open it up for Q&A.
Yeah, thanks, Dave. I'm going to start off with the first question. I'll open it up to the audience here. On the topic of capital management, I guess kind of a two-part question here. With the closing of ILFC, you've got some net cash proceeds coming through that you received. What do you intend to do with that cash proceeds in the near term? Could we see a pickup in share repurchase activity potentially? And then as an addendum to that, how do the pending non-bank SIFI rules play into your decision-making process when you're thinking about capital management?
Yeah, that's a good question. First of all, the non-bank SIFI rules have not yet been written.
Right.
It's hard to comment on them that they haven't been written. We are, as a firm, trying to engage constructively with the policymakers that will actually be writing the rules. We don't have a line. I don't have a line of sight in terms of when we can expect those rules to be written. When they are written, we will obviously plan accordingly. But we do run our own CCAR-like. CCAR is the Fed framework for stress testing. We run ours as though we were subject to those requirements. We run them twice a year. Like others do, using the Fed's assumptions and then looking at our own idiosyncratic or operational risk or insurance related risks and to add on to that. We do run that. That's part of the getting ready for ultimate non-bank SIFI requirements.
With respect to how we're thinking about capital management at this point in time. First step was to actually close the ILFC transaction. That's pivotal because in dealing with how you interact with, in at least my view, how you interact with the Fed and our capital plan is the capital plan is based upon things that have happened. In other words, you don't put capital actions in on contingent funding sources. That is inconsistent with, I believe, how the Fed looks at what is a prudent capital plan. Because then when you stress it, you run the risk of contingent actions being thrown out and your capital position being looked at as though the actions were taken, and that's not an appropriate way to develop a capital plan or capital planning framework. The first thing was get the transaction closed. What could happen now did happen.
Now you're dealing with a fact. We're updating our stress tests, which I mentioned a minute ago. We're running through the normal protocol of going through that now. That's happening literally as we speak. We will update our capital plan now for what did happen. We closed the transaction, we'll have normal process that we'll go through. We have an ongoing dialogue with the rating agencies, before we take any action, we don't like to take an operational risk as it relates to our ratings. While I wouldn't foresee any difficulties, the fact is we respect the process and we respect the rating agencies' point of view, and we'll take that into consideration. We obviously then will bring management's recommendation to our board of directors, that'll be another round of conversation.
Obviously we'll have a conversation with representatives from the Fed so they're fully informed about what we're doing. All of that's in motion in one form or another. Again, we take the high priority for this management team. Capital management is an important value creation lever. We've been planning for this moment, we're now executing according to our plan.
Great. Thanks for the answer. Any questions from the audience? Is there a microphone?
Yeah. On mortgage guarantees, obviously they're very attractive to your dynamics right now for mortgage guarantees. Does the mortgage guarantee business benefit from being part of the AIG family? Do you think it could generate better returns as a standalone business through a spin or potentially a sale, but more likely a spin?
Well, I think the business itself is very sound. United Guaranty has done a terrific job, again, looking at a multivariate front end and risk selection pricing discipline around various markets. I think the size and scale that United Guaranty is able to accomplish clearly of being part of AIG is helpful in terms of the strength to know we're there as part of a larger balance sheet, a larger organization, both from a talent and from a technology and certainly from a capital standpoint. From AIG's standpoint, I think the point is ILC is growing at a very acceptable pace. It's meeting or exceeding its cost of capital on new business. I believe it's somewhere around, Liz, around 60%, I think, of the earned premium today has been written since 2009. Under the new model, under the new underwriting model with the multivariate pricing.
Again, it continues to grow, and the new business continues to be an even more significant part of the earnings. It's growing, producing earnings, and importantly, producing deployable capital. It's paid its first dividend since 2010. I believe over time, that business will continue to grow. I think the other insight that it gives us is what's really happening in the U.S. housing market. We've been able to undertake a program, albeit slow at first, but we're taking from time to time, we'll buy the actual mortgages that we are underwriting. We do that through a program we've put in place, going at a very appropriate pace, but it's another way to leverage the strategic capabilities of that very good business. I think it's got a very welcome place at the table.
It's earning growth, it's dividend capabilities, and the insight that gives us to a very important asset class in the U.S.
Okay.
Back here.
Hi. Over here.
Yes.
Two questions. Number one, as part of the capital management story, have you is there an option, or have you considered this as an option, where you exchange your AerCap stock for AIG stock in some type of an exchange or tender? That's my first question.
Okay. The short answer is that the stock is under a lockup for the next 15 months. I think it's a bit of an academic question at this point, but an appropriate one, but we're subject to a lockup, I think is the way I'd answer that.
I recognize that, it's something you could do down the road.
There are lots of
Okay
alternatives that we would think about. Again, we haven't made any decisions about the timing or the scale or the pace. Again, the stock is a terrific combination. I think the markets did the evaluation themselves.
The second question is, the bear case on your capital returns story would be that you have this regulator, the Fed, that would be an impediment to that. To hit an ROE target that would equal cost of capital, a lot of people talked about you would need to have to buy back a lot of your shares. If we weren't able to overcome or buy back as much stock as you thought about, is there a plan B where you guys do you see enough potential to reinvest that capital in your existing businesses, perhaps in the mortgage business or in the life business, to where that capital could be put to work, to where you could get a return that's greater than the cost of capital?
Well, I think the way we think about the framework and how we that it's a bit of a hypothetical, we will look to meet or exceed our cost of capital. One of the dimensions obviously will be how much capital management, the pace and scale and size that we'll be able to do. We will have to take that into consideration. Again, we continue to reinvest in our business. Listen, I'd always rather invest in our business than buying back stock. Buying back stock today is a very attractive proposition, given that we're trading at a discount to book. That whole dynamic will of course be evaluated over a period of time when the rules are written and when we have a sense of what it means to be a non-bank SIFI.
Great. Well, I think that's all the time we have. David, thank you for the presentation.