American International Group, Inc. (AIG) Earnings Call Transcript & Summary

That was entertaining. I enjoyed that. Probably won't get the same amount of story this time but maybe a little bit more information, so let's move on to the next session. Very pleased to have 2 key members of AIG's management team with us today: President and COO, Peter Zaffino; and Chief Financial Officer, Mark Lyons. Together, they have about 70 years of industry experience, and both have great track records with previous companies' value creation. The pace of change at AIG has always been elevated. I feel like today, it's at supersonic speeds. The company has a great sense of urgency, is taking dramatic action to improve results. Obviously, most of you saw the results this morning. I saw the results. I did not listen to the call because I was up here hosting. So I might ask some questions you guys have addressed publicly, but it might be a good opportunity for you to expand on in any way.

Sure.

Peter, I don't know if you want to start, maybe just some big picture comments to open up.

Thanks for having us, first of all. And we did release earnings this morning. I guess really, the highlights are and that we're really pleased with, we put out guidance about a year ago that we're going to make dramatic improvements within the underwriting portfolio and deliver underwriting profit. While it's a big milestone for us in terms of crossing under 100, I think what we try to impress in the detail of the earnings call is just what's really happening in the underlying portfolio. So we talked about some of the businesses that have reshaped the most dramatically, some of the limits that we've been shedding and still offer quite a bit of limits, we can talk about that, and relevance to brokers and clients. But the portfolio we inherited had way too much outsized risk in it. We talked about reinsurance, which is appropriate at January 1 because so much of the renewals come up. And then we outlined, we've been talking for the last couple of quarters around AIG 200 and what does that transformational change mean, how are we actually going to improve the company, more details, more financial guidance. So I gave some overviews. Mark unpacked it in more detail. And then Mark just talked through reserving and got a little bit deeper on the calendar year results, all of which we were very pleased with, and then provided some high-level guidance for 2020. And I think in a lot of the questions, Jay, we'll probably go into it in more detail.

Yes. But did anything surprise you about 2019? As you executed on this plan, you saw the results. Were there any notable surprises?

Well, when you look at the year, at least from my perspective, is that the first half was a little slower. Not necessarily for AIG but I think the market, and we knew what we needed to do. The brokers, I think, if you asked the large brokers, they haven't been through a market like this in a long time. And so I think it took a little bit of time, probably a quarter or 2, for them to really calibrate to the market we were in. And I think that under no set of circumstances do we think that when we started the year, every quarter would have sequential improvement in rate, and it would be broad-based in terms of product, it'd be broad-based across geographies. It's not what we lead with. I think you heard in the last -- with the last panel is that underwriting is the most important. So how we reposition the portfolio, underwrite terms and conditions, structure and then price. But I think that's probably one surprise this year is how much the price accelerated as we got in the back half of the year.

Yes. Of course, the ending point was kind of where you would hope it would be, right? So...

Well, it exceeded. I don't think we ever forecast we're going to be getting low double-digit across the world. We usually see...

As far as margin goes, though.

In margin, yes. That was -- and when you unpack the margin, it wasn't going to be one component. It was certainly -- it takes a while to earn through on the underwriting side, but we had underwriting improvement. We had expense ratio improvement. We had very successful integration of acquisitions, and we had significant discipline on expenses. We took $0.5 billion out in general insurance during late 2018 and '19, and that's sustained and kept the ratios relatively flat while the premium was decreasing, reflecting the changes we were making in underwriting.

And as Peter has always talked about on the call here 18 months, I guess, you just can't believe the volatility of the book. And so the figuring out, the resculpting, the change in the front end, the reinsurance structures, there was a lot of sweat equity, and now it's bearing fruit.

I guess I was very surprised -- I think, Peter, you had one of your first calls when you talked -- first call, but when you talked about the limits that you had been offering and where you are going to, it was a dramatic drop. So one, I was surprised the limits were that big. But the question I have is, are you done with that process? Is there still more derisking that needs to be done in '20 and '21?

There's still more to do, but I would say the majority of it is largely done. We had to go through a couple of cycles. We inherited some of, particularly in the property portfolio, a lot of long-term arrangements that had multiyear contracts so it just took us a little bit of time to bend the curve, which we will do in 2020. And I cited on the call just this year, we shed $150 billion of property aggregate in North America, which is staggering when you think about it and drove -- again, rates start to pick up in the back half on the portfolio. So the property will have a little bit more, the excess and surplus lines will have a little bit more, some of the casualty and financial lines. But I would say the majority of the reduction in limits is -- has taken place. So that's to earn through in 2020. But on a written basis, I think the predominant amount has been addressed.

On Peter's property example, I could just add for a second, Jay, is -- and he kind of mentioned on the call, we're using Lexington as the call that you will hear, using Lexington as a case study example. So all that shedded limit on the retail side, household name companies and gigantic limits and huge nets. And the transformation to opening up the wholesale channel through E&S, probably 90% of that business needs $25 million or under in limit, they don't need these gargantuan limits. So it changes the whole complexion of the book but so then informs and changes the reinsurance that you have behind it. So it's an ever-evolving thing.

That was my other question. In the ceded reinsurance program, which really changed quite material as well in 2019, do you foresee material changes in '20 and '21? Or is that program where you want it to be?

For the portfolio we have, we like the structure that we have. But with the improvement in limits management and peak zone management, we expect that will continue to get refined as we enter into 2021 and 2022. I mean we have -- part of it is the high net worth business has a lot of peak zone exposure. But when we work with Lloyd's to form Syndicate 2019, bifurcating that will take us this year in terms of when we do on the front end of the written premium but also in terms of the reinsurance structure. We bifurcated the CAT in -- at 1/1, but there's other things that we need to do in order to derisk that. So you start to see that evolve. And then I think the refinement of the core property CAT and property per risk will continue to get refined.

Got it. There's a lot of moving pieces. We've got our earnings model. We're trying to forecast things like premium. North American commercial premium, given all the moving pieces, 2020, up, flat, down? Any sense of that?

That's why I sat Mark in the middle.

Nice. Well, North American commercial is -- let me answer a different question. I tend to answer a different question, which is there's revenue growth then there's underwriting gain growth, right? So we can focus on top or bottom. If I'm a shareholder, I want earnings per share. Earnings per share is under any gain. So as we transition from evolving the book and post cauterization of some parts of the book, and as Brian said on the call today, you're -- you get a book you're really happy with, and then you're focusing on growth. There's so much change with distribution changing as well that tends to not be focused on as much because you don't see that like in the earnings model. But the whole risk selection, the breadth of distribution that we have now and funneling down clearer risk appetite, I think I've said this before, but because of the broader spectrum of risk quality, you keep finding the same proportions. Your average rate adequacy goes up because you got better quality risk that you didn't have before. And that's hard to measure, but we know it's happening.

You mentioned distribution. And you're right, it is hard to model. Anything more you can add to that? What's changing and how it could help the numbers?

In terms of liquid distribution?

Yes.

We have spent a lot of time -- you can imagine what's going through that dramatic change, being able to articulate a strategy in terms of our risk appetite to brokers and do that across the globe, just took a little bit of time. I believe that we are much more aligned with distribution in the back half of 2019 as we enter 2020 with a refined risk appetite. We're executing on where we want to grow, where we want to shrink, opportunities in geographies, in international as well as within the U.S. of real growth opportunities. So I think that I believe we'll grow on a like-for-like basis. As Mark said, we had to turn the book over a lot, but excess and surplus lines. I mean our submission activity is up almost 100% year-over-year. We've seen a lot of growth opportunities and believe that, that market is the market that we're in for a while and believe that there'll be some other discrete opportunities for us to grow in areas where we're probably a little bit more accelerated on some of the stuff that we've done on the turnaround. And the brokers have been tremendous in supporting us, and they've been tremendous in terms of aligning on risk appetite. And I have a lot of very good data analytics that they use to mine their portfolio and allow us just to be more aligned. So I think that there's a lot of momentum there.

Let's talk about pricing outlook. I'm sure it came up on the call, but I'd love to get your view of what you think will happen to commercial pricing in '20 and '21.

It's always hard to predict. Wish we had the crystal ball. But what I would say is the underlying fundamentals that exist in the market today, I have to talk myself out of it versus talk myself into it in terms of its sustainability because I don't believe it's being driven by any one factor, and so there's multiple factors. And if I look at where it's happening, it's multiple lines of business and it's in multiple geographies. And so that -- it's been accelerating in the back half of 2019. Do I think that acceleration will continue in 2020? Hard to tell, but I certainly believe that the rate environment in terms of getting paid better pricing on a risk-adjusted basis will continue in 2020.

The other side of the margin, claims. A lot of talk about social inflation, rising claims. What are the trends you're seeing there?

I can start that. So a little different story in different areas, in different lines of business, of course, and we're pretty diversified. So one good thing is there's a big international component in that -- U.S. has 70% of the world's lawyers. So that's what happened. So the other 30% is scattered all over, so that's more stabilized. The influence limits aren't as big and so forth. And U.S. related, I said this before, we've had pretty high loss assumptions in what we've had. And some of that is probably due to the AIG experience brought forward, which probably had increasing levels of adverse selection. So you really have adverse selection masquerading as severity trends, but that's never the case, it's nevertheless the case, which makes it more art than science with such a radically changing book of business since Peter has driven the change. So the -- you got to look at it. But the importance of the past is now partial because book's no longer homogenous. So it's radically different. So security class action suits are up, but that's just the highlight -- top line. You got to look underneath it. A lot of that state court or merger objection cases, the dismissal rates are huge on those. So it's almost like med mal business, you have a lot of claims, no pay. You have suits dismissals. They'll only give you a little defense cost. So that has to work its way out. I think it's good to see -- and Dave McElroy said he's really gotten there. He's putting this in place that looking currently and backward of the proportion of times that AIG is hit with security class action suits. And is it full coverage? Is it just Side A coverage and so forth and managing that, and that's been a very favorable trend for us. So you got all these things out there that are specters. And we -- social inflation is very hard to measure, litigation being represented by lawyers and outside funders, so there's a lot of dynamics changing it, which makes the trend more uncertain. One thing we're pretty happy about, though, is the kind of rate changes that the peer has been quoting. Pick your loss trend, we're in excess of it.

Yes. Yes. It was interesting when other companies began taking some reserve charges or having some issues over the last couple of years, I would get the question, what about AIG? They have exposure to all of these lines of business. And my view was you have sort of dealt with that. In other words, when you came in as Chief Actuary and now CFO, you had a fresh look at reserves. So my assumption is, and I want you to comment, you would have been addressing some of the issues that other companies now seem to be addressing with their reserve.

Well, interestingly, before we got there, some of the things that you're talking about that could spread back to past accident years, let's say. Probably under the covers, I think I alluded to this on our prior earnings call, there had been an accumulation of mass tort reserves, kind of a rainy day, but they were designated as mass tort kind of bulk, kind of like run down or [ run sale ] the unknown unknowns. So there's a lot more than you think, firstly. Secondly is -- on a net basis. Secondly, because the adverse development cover, there is $8 billion still untapped, and we have 80% of that. So there's $6.4 billion, plus what we have in mass tort. So even if how it went away in the handbasket, I like where we're sitting.

Yes. Yes. And just I did look at the numbers this morning before the conference started, and you did have some adverse development in the financial lines in the quarter, U.S. commercial. What was driving that?

Well, I kind of got into it on the call a little bit. When you really focus in on it, it's private, not-for-profit business, which is overwhelmingly [ primary ]. It was a D&O side more than an EPLI side, which is much more manageable in a frequency base and a corrective set. So I think we're in good shape there. We write a fair amount of -- on mergers and acquisitions, the old rep and warranty businesses, so we put up some provisionals there. There was some severity being seen. But those 2 that I just mentioned are 80% of what drove it. So there's a little spot here and there, a little spot on the cyber, a little spot on miscellaneous, fidelity, stuff like that. So -- but that was the real driver. It wasn't really the public.

Got it. Okay. I want to make sure we get some questions from the audience, it's a big group. So if you do have questions, just raise your hand, and we'll -- just wait for the mic. I guess I'm the only one who missed the call this morning. So one, just a quick question on the quarter. Oh, there is one. Sorry, go ahead, [ Ron ].

So your dramatic underwriting actions have really reverberated across the whole industry, and I expect it's sort of a reasonable expectation that there will be a point at some renewal of -- whether it's a segment or at the account level, but there'll be a point at the renewal where the market will present the opportunity for you to continue to get rate in excess of the acceptable margin and return that you'd like to get on any particular account or book of business, and you'll be sort of presented the opportunity to sort of seek premium at the expense of excess margin. What will the posture be to the underwriting teams at that point in time when -- if this reverberation and sort of amplitude that's resulted from your past and current actions play out?