It's a pleasure to have John Doyle here. He is the Chief Executive Officer of Chartis' global commercial insurance operation, responsible for all of the commercial property casualty businesses of the company globally. John's been with AIG since 1986, he's been in so many varied critical roles for the company that it's pretty clear that he's a strong, knowledgeable leader. We really look forward to hearing what he has to say. He's also a good guy because I know him from my town.
That's right. I first met Andrew at a Rye High School JV football game. Good morning, everybody. It's great to be here. I appreciate you taking the time, I first want to thank Andrew for the time slot opposite Bob Diamond. I'm sure somebody had to fill this slot. Anyway, I'm glad to be here. I'll make some quick comments about AIG and really focus on Chartis. As Andrew mentioned, I'm responsible for the commercial P&C business at Chartis, I know that's of interest to the investor community and how we plan to improve our current operating performance. A quick couple of comments about AIG. These truly are exciting times for us. As Andrew mentioned, I've been with the company since 1986.
It's been quite a ride, I know I can speak on behalf of my colleagues and say that we're very encouraged by our progress and feel good about where we're headed. As you probably all know, AIG released its first quarter on Thursday of last week. There we go. On Thursday of last week. We had our call on Friday morning, shortly after that call, we went right to work. The U.S. Treasury announced the stock offering, I'm pleased to report that offering went very well. The Treasury sold about $5.8 billion worth of AIG stock, reducing its common equity stake in the company from 92% to roughly 61% after the offering in just less than a year. We feel very good about that. We think we showed some improving results within the core businesses.
I think the buyback participation by AIG bought back $2 billion of the $5.8 billion in stocks sold by the Treasury over the weekend. AIG also participated by buying back $3 billion of shares in the March offering, really shows the strength and the pace of our plan, we're well ahead of plan on the capital management side. We feel very good about that. As you can see up on the screen here is a quick snapshot at who AIG is as we move forward. Really three world-class insurance franchises, our life and retirement services company, the SunAmerica Financial Group, Chartis, our global property casualty franchise, which as I said, will be the focus of my comments this morning, United Guaranty, our mortgage insurance company here in the United States.
What you can see here is a pretty well-balanced portfolio, roughly 50% life, 50% P&C. You can see in 2011, these businesses generated $6.5 billion of pre-tax operating income. In the first quarter, these businesses generated a little bit more than $2.3 billion in pre-tax operating income. Again, we're encouraged by where we're headed, and feel very good about the progress to date. Hopefully you all agree. Let's talk about Chartis and who Chartis is. I'm sure many of you are familiar with us, but I do think there is some misunderstanding about who we are as a business. We are really, in my mind, a very unique global P&C franchise. We're very well known for our very significant share of the commercial line space, particularly in the U.S. Really, it's a far more diversified business than that.
As you can see, we have boots on the ground in 90 countries around the world. More than 50% of our portfolio does come from outside of the U.S. You can see we have leading foreign positions in many developed markets around the world, in Europe, in Japan, in China, some critical markets. Also we have a strong foothold in many emerging markets throughout the world, a strong presence in Latin America, throughout Southeast Asia, and even in Eastern Europe. Really a unique franchise from that point of view. What I think is maybe often the most misunderstood part about our business is the strength and depth of our consumer business within Chartis. Our consumer operations make up roughly 40% of our premium around the world, a little bit more than that at the end of the first quarter.
While we do have some traditional P&C products, it's really a unique consumer operation. The largest line of business being accident and health, a very strong global franchise in business in accident and health and extended warranty business. We also have a very large travel business around the world that generates very strong returns. In the U.S., a high net worth personal lines business. Our Private Client Group, which continues to perform very well, and an opportunity for us to expand that business around the world. As you can see up there, we have over 70 million clients, 44,000 employees around the world. We have a relationship with 97% of the Fortune 1000. The Private Client Group that I mentioned previously is really about a 10-year-old business to us. We insure 38% of the Forbes 400 wealthiest Americans.
This is really a strength and depth to our client relationships around the world. That's really served us well in the last several years as we managed our way through the crisis, and positions us very well for profitable growth as we look forward. Again, I think what's maybe somewhat misunderstood and hopefully of some pleasant surprise, is really how well-balanced our business is within Chartis. A good mix between consumer, between the commercial and consumer segment, but also depth to our distribution between brokerage, agency, direct distribution, direct marketing, an important part of profitable growth within our consumer segment, by geography and by product. We write more than 400 insurance products throughout the world. It creates really a unique opportunity for us to manage through the current challenges. With that, why don't I turn to.
Why don't I turn to our first quarter and talk a little bit about those results, then after that, I'll talk about what our plan is to improve our current accident year operating performance and our current returns. Then I'll be happy to take all of your questions here. As you can see down on the bottom of this chart, we had more than $1 billion in pre-tax operating income in the first quarter. A big improvement over the first quarter of last year. A very different start to the year from a property casualty point of view. Obviously, last year we had the earthquake and tsunami in Japan, a much quieter start to the year from a cat point of view.
We did have some tornado activity, a relatively modest amount of cat losses, as you can see, it was about $80 million in the U.S. during the first quarter, a much quieter start to the year from a cat point of view. Really, last year was unprecedented, really on many levels, the type of event, the geographic breadth of cat losses that the industry saw. A better start to the year from that point of view. More important than that is you can take a look at the loss ratio and combined ratio for the first quarter. You can see an improvement in the current accident year, ex cat losses, ex prior year development, a more than three-point improvement in our accident year loss ratio. We feel very good about that. I'll talk about how we're achieving that in a minute or so.
We did see expense growth in the quarter. Some of that's a bit of noise, it's also a part of our plan. We've been investing in tools and in some people, and in some technology to help us be better informed at risk selection and pricing, that is part of our performance improvement plan. We feel, again, very encouraged, a very large business, a three-point improvement. We did see a little bit of improvement even on the property side, the non-cat property side that contributed to some of that accident year improvement. We are seeing some contribution from the current rate environment as well. Giving you a little bit more color on some of the actions that we took in the first quarter.
You can see what we did at a little bit more depth in what we did in our commercial and our consumer business. As you can see, we reduced our writings in the commercial insurance business by close to 9% in the quarter, with rate improvement, obviously. You can see, we took aggressive action to really improve the position of the portfolio. Most of the movement came within our casualty segment. You can see the dark blue block up in the top graph there, $2.7 billion-$2.3 billion. We've been going through a one-year cycle of changing the structure to some of our loss-sensitive products with some of our largest U.S. casualty customers. We're restructuring those programs in a more capital efficient manner. That's roughly $1 billion over the course of the year from the third quarter of last year through.
We still have a little bit of work to do on that in the second quarter and a tiny bit in the third quarter. That's a big part of it. We also continue to take aggressive action in the guaranteed cost workers' comp market in the U.S. While we're seeing good rate improvement there, we don't think it's sufficient, and we've been reducing our exposure to guaranteed cost comp in the U.S. In addition to that, you may or may not be aware, but Continental Europe, January 1st is a very big part of the commercial insurance cycle. A lot of our portfolio and the industry's portfolio renews on that. While we did get slightly higher than expected rate on our renewals, we took action in some casualty classes throughout Europe that weren't generating the returns that we like.
Pretty significant movement for us in reshaping our portfolio in the first quarter. We also had a little bit of noise. We had a non-recurring piece of business, a multi-year deal in our financial lines segment. Our focus is really within commercial insurance and reshaping the portfolio around building our financial lines business around the world, continuing to build that business, growing in specialty classes throughout the world, and then optimizing returns really within our property and our liability businesses. You can see on the other side of it, though, we continue to grow in consumer and generate good returns there. Our consumer business grew by 5% in the quarter, and it's part of our overall effort to shift the mix of business a bit to less volatile, less capital intensive lines. We made some good progress there. I'm going to comment briefly on rates.
I mentioned it a little bit. Our rates were up more than 5% in the U.S. in the first quarter, up in really every geography around the world. Although, it's a bit uneven when you get outside the U.S. where you see rate improvement and where you don't. We continue to be encouraged about rate improvement in the market. It's not where we want it to be, but we continue to see quarter-over-quarter improvement from where we were. This slide here is a summary of how we plan to get to what we characterized as our aspirational goals a year ago when we went out on the road in the re-IPO of AIG. You can see the four light blue blocks there are really the primary levers behind our plan.
You can see them as business mix shift, underwriting excellence, best claims practices, and expense discipline. I'll give you a little bit more color on each one of those to give you a sense of what we're doing. I talked a little bit about the mix shift on the other side, you will see us grow more aggressively in the consumer business over the course of the next couple of years. You will see us grow more outside of the U.S. As I mentioned, our business now is roughly 50% in the U.S., 50% outside of the U.S. We saw about 9% growth in emerging economies during the first quarter, and we continue to be encouraged by our opportunities throughout developing economies throughout the world.
We see really growth in the commercial segment, largely outside of the U.S., and Europe will grow modestly over the 2011 and 2015 performance period that we talked about in the re-IPO of AIG. Really growth that's more in line with GDP growth. Tracking really with payroll as opposed to picking up market share and really what our plan within the commercial business is, again, reshaping the portfolio around higher value lines, focused on financial lines, and our specialty classes. We have market leading products and offerings all throughout the world in aviation, in trade credit insurance, political risk insurance, environmental insurance. We have very unique product offerings that we're able to competitively distinguish ourselves in those markets around the world. We continue to be encouraged by returns there.
You'll see us reshape the business in that way over the course of the next several years. Underwriting excellence. What do we mean by underwriting excellence? Well, you may or may not be aware, but a year ago, in advance of the re-IPO of AIG, we reorganized our business. We had historically operated on a geography first view of our business, and that led to inconsistent underwriting practices, inconsistent application of pricing tools and risk selection tools around the world. We realigned our business into a global consumer business and a global commercial operation, and that's enabled us to really drive a best practice approach throughout the world. We've also made significant investments in the tools that we use to select risk and to price our risks around the world. We've made some key hires. We brought in a new Chief Underwriting Officer.
We brought in new senior talent within our property business, also in our global liability business, and we continue to be very encouraged by the early signs that we see out of some of our predictive modeling efforts to help improve our risk selection as we move throughout the course of 2012 and throughout the rest of that 2011 to 2015 performance period. That's what we mean by underwriting excellence. We feel like we're very much on track with the first two blocks there and the third as well. Our global claims initiative is a key part of our overall performance improvement plan. Much like my comments around risk selection and our underwriting tools, we approach claims different in each geography, and you're now seeing us apply a best practice approach to claims management.
A high risk account, for instance, that may have been handled, generated by an insured, a multinational in a country that was handled by a claims examiner in that country. Now it's going to the best person we have on the planet to handle that claim. If you have a German insured that has ADRs traded in the United States and is sued in a D&O U.S. securities claim, a D&O loss, you have the best people in the world handling that U.S. securities claim in the United States, as an example. It also means big investments in technology, a more consistent and better application of how we detect fraud throughout the world, how we conduct our file reviews to manage performance issues in our claim function throughout the world.
It also means a new workflow for many parts of our business around the world and a staffing model that really is moving work from TPAs back in-house as our historical focus on the expense ratio moves again to a bottom line focus. Lots of change to our claim function and we are very excited about the progress we've made there to date. Lastly, the part of the performance improvement that will come towards the tail end of that performance improvement is in claims, or excuse me, is in expenses. We have a meaningful opportunity to improve our GOE over the course of the next several years. As I said, we're making key investments in people and in technology, much needed investments in our infrastructure around the world that will make us a better business over time.
You'll see expenses spike over the next year to 18 months or so, then you'll see us bring the expense ratio down and expenses down towards the tail end of that performance period. Again, a geography view. Consolidating things from a back office point of view, a big opportunity. You can also see down on the bottom, there's a couple of other important levers, but I really wanted to focus what we're doing in the business to drive that performance improvement. We have some opportunities to improve on NII, and you'll also see us become more capital efficient over the next several years. Again, there's a lot to the plan. We feel very good about where we are. We're very much on track to date. We still have a lot of work to do. We know that. Again, we feel good about where we're headed.
Lastly, before I turn it over to questions, we feel very good about how we're positioned competitively. As I said, we are a global franchise, one of the very few global P&C franchises. That's becoming more and more important to our customers, more and more important to the folks who distribute our products, and something that we are absolutely focused on maximizing the value about. Our scale and expertise throughout the world is critical. I mentioned our footprint and where we have strong footholds throughout the world. It also is an important tool for us as we look to optimize returns by managing the mix of business in the portfolio. The enormous breadth of business that we have, the over 400 products and services, another key lever for us and one that's unique relative to others.
We feel like we have the best underwriters and claims folks in the business. What we're doing now is really arming them with better tools. I can tell you, our folks are very encouraged and excited about, and embracing the new tools and technology that we're bringing them throughout the world. We're excited about that. Our balance sheet is strong. AIG is strong and emerging in a way that I think is even surprising many of our customers and our distributors. We continue to be innovative. We introduced more than 170 products and services last year. We're known for that, and that continues to be an important part of our culture. Lastly, service. Really, as Andrew mentioned, again, I've been with the company a long time, and for much of that period of time, I'm not sure service frankly played a major role in differentiating P&C franchises.
We've made very meaningful investments in our claim infrastructure and our policy delivery and our quoting infrastructure over the course of the last decade, and that's really positioned us very well from a service point of view. Something now that we're also able to realize a competitive strength in the current marketplace. Again, we feel good about how we're positioned. We feel good about the progress we're making. We know we still have some work to do, but again, we're very encouraged by where things are headed at AIG. Thank you.
I'll kick it off with a question or two, and then we'll open it up to the audience. John, Chartis, in terms of loss experience, incurred about $4.3 billion in prior year reserve development in 2010, $2.8 billion in 2009. A lot of people don't question the stuff that was underwritten prior to 2008. Can you give us some confidence in what was written in 2008 and subsequently, and if you think that we'll see any issues with prior year loss development?
Underlying that question is, did we underprice the business during the crisis to kind of stay in the game?
That's a good way to say it.
What I can say is that during that time period, it wasn't about price. It was about whether or not our broker and our consumer had confidence in our future. In fact, rates up until the third quarter of 2008, our rate change was down right around 10%. In the fourth quarter of 2008, the rate change improved to minus 4% in the fourth quarter of 2008, and our rates were actually up slightly in the first six months of 2009. Having spent a tremendous amount of time during that time period communicating with our customers and brokers, what I can tell you was that we are, given our position in the market, extraordinarily important to them, to both the broker and the consumer.
They're obviously important to us. We sat down and talked about the strength of the regulated entities and why what you were reading about in the news or saw on the electronic media was something that ought not concern you. We spent a ton of time with our clients and brokers. It wasn't the first time we met. As I said, we've had a long history and a depth to these relationships. Rate change immediately began to improve. I think frankly, many of our competitors made a mistake and didn't manage through it. They expected the business to run to them. I think they underestimated how important we were to our customers. Again, we've had exhaustive reviews externally, internally. We've made major changes to our reserve review process. We feel good about where the reserves stand.
Great. The second question, just in terms of net written premiums, they've come off a bit in the past two or three quarters. You still have that 6% compound annual net written premium growth through 2015. You mentioned some reshaping of the businesses, that puts a little near-term pressure. Do you get there? How do you do that?
Yes. We've had to take some aggressive action, largely in the commercial portfolio. We don't think we have oversized growth objectives on the top line over that performance period. It's really pretty consistent with GDP growth in most of the economies that we operate in. You'll continue to see us reshape the portfolio. The big decline in the commercial side, as I mentioned, a good component of it is related to us restructuring loss-sensitive premium, and some restructuring of the way we had those programs set up previously. We're doing it in a more capital efficient way. Some of that noise begins to go away starting in the third quarter of this year. Our focus is really on value more than volume, Andrew. Right?
We're absolutely focused on improving the return targets. There are lots of moving parts, as you know, over a period of that length. No, we feel like we're on track with our plan, and don't see any reason why to change it at the moment.
Great. Any people in the audience?
I think we all know that the Property Catastrophe business looks pretty good and consequently, property business is looking all right. Can you talk?
The Property Catastrophe business, is that what you said?
Yeah. Property catastrophe business has been hardening for a long time, and property, as a consequence, is also beginning to harden on the front side.
Right.
Casualty as well. I think some of the lines of business are improving. Can you talk a little bit specifically line by line what you see and really what the terms and conditions are doing as well?
Sure. Yeah, I think you're right. We're seeing meaningful price increase in property catastrophe, primarily in the U.S. and then in Southeast Asia. I would say that in Europe and Latin America, we're not seeing the same level of strength in rate change there. In casualty, really the challenge for us is in the United States and in segments of our book in Europe. I would say that I don't think that challenge is limited to us by any stretch. We're seeing pretty meaningful improvements in work comp pricing. We're also seeing pretty significant rate, high single-digit rate, year-over-year now in excess liability in the United States which is encouraging to us. Again, it's a bit different geography to geography. Most of our products, I would say, are improving from quarter to quarter.
Even in areas that are lagging, whether you look at it on a geographic basis. Latin America and Europe, for instance, rate change has improved over where we were in the third and fourth quarter in the first quarter of this year. The financial lines business is lagging kind of relative to overall. We have a well-balanced book of business there globally. We continue to be encouraged by our returns there. We did see a couple of points in rate improvement in our financial lines portfolio in the first quarter. Again, I think each business is kind of moving up slowly. Obviously, we're pressing to accelerate the rate improvement. We continue to see pretty good improvement really in just about every market and just about every line.
That's where we were compared to where we were in the third quarter, where we were in the fourth quarter to where we are now. I would say it's the same kind of steady progress from January to February to March. We can occasionally see a slightly different mix of business, but as I said, it's a pretty big global portfolio, so that can get fairly normalized out. Encouraged by where the market's headed, for sure. We're driving a lot of that change.
Hi, thank you. On loss rates, your loss ratio has improved by 300 basis points in 1Q. Would you attribute this mostly to portfolio reshaping, i.e., the pricing increases that have started to come in in fourth quarter last year and first quarter this year, they will really start impacting positively the loss ratios going forward?
Yeah. The loss ratio in the first quarter did improve by more than three points overall. It was 3.7 points in our commercial insurance operation. It's a combination of a couple of things. One, the mix of business as I mentioned. That didn't start in the first quarter, right? We've been doing that for some time. You're starting to see the impact of that earn its way through the P&L. The mix of business has changed a bit. What we also saw, aside from cat losses in the first quarter, our current accident year non-cat attritional property losses came in better than expected. That contributed a bit to the first quarter improvement as well.
The rate change is earning in at different levels, kind of by product, depending upon our loss cost inflation assumptions, depending on kind of where we are in a geography around the world. We're starting to see some of it in our work comp loss picks in the U.S. As you know, it takes a bit of time to earn some of these things and some of these changes in.
Okay. A follow-up, which is on capital management. You talked about an ROE goal of 10%-12% by 2015. Is there excess capital in Chartis? One of the bullet points cited in that 10%-12% ROE was capital management.
We have capital maintenance agreements with AIG. We are currently in excess of our targeted RBCs. As I mentioned, our focus on reshaping the portfolio and improving the returns overall is in part driven by focusing on less capital-intensive, less volatile lines of business. That is part of the plan to dividend that capital up to at AIG. We also have a number of different legal entity restructuring efforts through Solvency II in Europe and some restructuring of our legal entities in Asia as well. That is part of the capital management plan.
Yeah. You mentioned that there were reputational issue during the financial crisis. You also mentioned that investors misunderstood Chartis. Do you feel that among your clients, your agents and brokers, reputation and misunderstanding is an issue such that you cannot perhaps push through rates as aggressive as you would like?
Do I think that our distributors and clients understand where we are?
Do you feel that the reputational issue is totally behind you, or do you feel that?
No reputational issue whatsoever in our P&C business anywhere. In fact, I would say to you that our international operations are begging us to rebrand as AIG.
Well-
Maybe that's an indication of that question. That's a non-event for us.
Okay. Let me phrase it another way.
Okay.
Your aspirational goals are 10%-12% ROE. Today, are you writing your new business above your cost of capital, or were there issues during the financial crisis that still prevent you from being able to fully implement the rates that you want?
Our primary metric for our folks around the world is a risk-adjusted profitability metric. That is our target. If I understand your question correctly, our ability to exceed or to get a return in excess of our cost of capital is not related to the credit crisis at all. We're facing, obviously, a low interest rate environment, challenging economic conditions, in a not under-capitalized insurance industry at the moment. I would characterize those issues as the bigger challenge as opposed to any AIG or credit crisis related issues. The challenge for us, and what we talk about internally, is risk-adjusted profits in a current year, our RAT metric versus RAP, as Peter Hancock talks about it, which is risk-adjusted profitability projected over a reasonable timeframe.
Our tolerance for substandard returns in a product in a geography is going to vary depending upon the product and what our view is over a longer return period. That's the balance that we're constantly the line we're trying to walk in deciding whether or not to shed guaranteed cost comp business in the United States or not. Those other issues are the challenge. It's not credit crisis related. Question up here. Let's take one in the back first.
Can you talk a bit more about your expenses? You mentioned that you'd have to invest, and perhaps they might remain elevated for another 12-18 months. Would you expect that to be lumpy or just sustain itself at the level we saw last quarter? How should we expect it to shape out?
I would expect the loss ratio improvement to be a bit less lumpy than the expense side. As I said, we're making very meaningful investments in our infrastructure in how we capture data. Frankly, we haven't done the best job we could do in leveraging our scale to better inform our pricing and risk selection tools. That's a huge part of the investment that we're making in capturing data. We have a major finance transformation project that's well underway, a couple of years underway into a roughly five-year investment period. The claim investments that I mentioned are also very significant over that time period. As I said earlier, you'll see our expenses bump up a bit over the next year or two. You'll see us begin to realize some of the benefits of those investments. By the way, they're not just Chartis related investments.
AIG is making very meaningful investments in human resources and other functions that have needed some investment for some period of time.
With the exit of the U.S. government, what kind of opportunities does that create for Chartis?
I don't think the U.S. Treasury stake in our business has any measurable impact on the business today.
Favorable or unfavorable? When you think about the future opportunities, where do you think the best margin or return opportunities exist on the balance between consumer and commercial?
Well, if you look at the current environment, for sure our focus is in growing the consumer business more aggressively than our commercial portfolio. Obviously, a major market change or some other economic event or loss event could lead to a change in that. Right now, we're seeing better returns out of certain segments of our consumer business, and that's why you're seeing a little bit more growth. You'll see more growth there than you will within our commercial segment. Within the commercial segment, it's again, our U.S. casualty, primary casualty segments of our European primary casualty are creating the biggest challenges for us. You're seeing us reshape within our commercial portfolio to more specialty classes, where we're deploying more resources around the world and generating good returns so far.
Last question. Your expectation for the duration of this pricing cycle, you've talked about how you're expecting rate increases and firmer pricing. Should we expect a shorter cyclicality here or more of a secular? What is your view?
This is not a classic hard market by any stretch. In my career, I haven't really seen something like this. I think we're seeing, frankly, more discipline in the market than we've seen historically at this kind of stage in a market cycle. Maybe driven by when the Fed came out and said interest rates are going to remain low for quite a period of time. That may, in fact, be driving the discipline. I think you do see differences from company to company in terms of what lines of business they're willing to shed in the current environment. 5% rate improvement is nice, but we have some work to do to get our business where we want it to be.
John, thanks for an excellent comprehensive presentation.
Sure we're getting the hook here. Okay, thank you all.