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

Hello, everyone, and thank you for joining us today. I'm Elyse Greenspan, a senior insurance analyst at Wells Fargo, and it's our pleasure today to have with us AIG. From the company, we have Sabra Purtill, Deputy CFO, Treasurer and Head of Investor Relations, so she definitely wears several hats at the company; and we're also joined by Shelley Singh, who is a Managing Director in the Investor Relations department as well. And so before we kick off the fireside chat with the list of questions that I have, I'm going to turn over the -- turn it over to Sabra for just some introductory remarks that she has. Go ahead, Sabra.

Great. Thank you, Elyse. And first of all, I hope everybody is safe and healthy and not going too stir-crazy in these very unusual times. And we do wish you all the best with your friends and family and that look forward to seeing you all in person again, hopefully, in the near future. Just a general observation before we go into the fireside chat is that AIG entered this period from a position of strength. We have a strong and profitable Life and Retirement book, which is very well balanced on product and distribution and lacks a lot of the aggressive guarantees of living benefits that were sold prior to the financial crisis. We have a commercial General Insurance book that was significantly reunderwritten over the last couple of years, reducing both our limits as well as our exposures across property and casualty lines and driving towards improved profitability, which we achieved last year, although there's still more work to do to get where we need to be. We also have a very strong personal lines book, strong franchise in Japan as well as a world-class Private Client Group, which, while exposed to catastrophe losses due to the typhoons and some California wildfires, is nevertheless a very strong book of business. And then finally, we had reached an agreement to sell Fortitude Re, our legacy portfolio back in late November. And that sale, which is still targeted for midyear, remains on track going through the regulatory approval process. We'd actually put in some hedging programs late last year, which helped protect the Solvency II surplus in that entity, and we're looking forward to concluding that sale. We also had a strong balance sheet as we began this period of turmoil. Year-end operating company capitalization was above 400% RBC for both the L&R and the U.S. pool. In fact, the U.S. P&C pool had the highest RBC levels in -- since about 2014. We also had significantly derisked the investment portfolio over the last couple of years. And last quarter, we provided a significant expansion in the financial supplement of our investments by segment. So you can see how our portfolios compare to their more direct peers as opposed to looking at us on a consolidated basis as we -- as a global composite or multiline insurer, we really have no comparable company to compare us to in the United States or frankly, there's very few globally as well. We had very strong holding company liquidity. As we began the year, we had more than $7 billion of holding company liquidity compared to an annual run rate of normal holding company interest dividend and holding company expenses of about $3 billion a year. And we, in fact, 2 weeks ago, tapped the market for $4.1 billion in senior notes in order to enhance our liquidity. So as I said, we entered this period from a position of strength. Obviously, there's a lot of uncertainty as to the course of the economic recovery. Hopefully, we're on the recovery bend, at least a little bit now. But we feel very confident in our balance sheet and our business portfolio and frankly, pleased that if we were going to go through this sort of environment that we're going through it now as opposed to 3 or 4 years ago when the impact on AIG would have been much more significant. So with that, Elyse, happy to kick off the fireside chat. Although I don't – we do have a gas fireplace in my house. We were joking last night, I should be doing this in front of my fireplace, but I'm not. I'm in my upstairs office.

Okay. Well, yes. And I'm sorry, just for everyone joining us on the line, if anyone has a question, they can also feel free to just e-mail them into me, [email protected]. But I will kick things off on, Sabra, I think a good place to start is just with your General Insurance business. And I think from maybe just as we think about the margin profile of the business and maybe even leaving COVID aside, so it seems like we were at a place where pricing – we’re getting really healthy price increases, seemed to be a good amount above what you guys were seeing with loss trends. So just give us a sense of as we think about the improvement you can see and maybe kind of focus a little bit more on the commercial components of the GI book. Sabra, are you there?

Yes, sorry, I was muting. That's the problem with these days, you constantly have things on mute. Peter Zaffino talked at our calls the last couple of quarters about what we've been seeing in rate. And obviously, there's a significant numbers of data points that we've put out there. So I would refer people to that in terms of the rate. But I think really what's more significant to the AIG portfolio is what we've done from a risk reduction perspective, both with the expansion of our CAT reinsurance as well as our casualty quota shares, our aggregate programs for CAT exposures as well. And then just a significant reduction in limits and exposures, both in accounts that have been nonrenewed and therefore, just eliminating those risks in total are taking a smaller gross and net limits on those books. So I know there's been a kind of back and forth about, oh, if you're getting all these rates, why is your top line not growing as much? And what I would say is AIG is in the tail end of finishing the reunderwriting part of the portfolio. And I would -- the question mark now in terms of where we go in terms of top line growth or margins is frankly going to be, to some extent, a function of what we see in the underlying loss trends in the market in this very unusual period with COVID. Because we see both negative impacts from COVID as well as, I wouldn't call exactly positive impacts, but there's significant change in loss trends when you have 50% of the U.S. or European economy working from home.

Yes. That's helpful. And so I guess, you mentioned that you guys were at the tail end, right, of some of these changes that have gone in place within the book. So is there a right way to think about when -- I know you guys, when you have previously had some financial guidance for this year, was looking for kind of flat premium is the right way to think about like kind of reaching the inflection in 2020. And then 2021 can be when we can start to think about some level of premium growth within the General Insurance business.

I think that's a reasonable expectation for right now, keeping in mind that it's a slightly different story between commercial and personal lines. Our personal lines book includes the travel book, which we write slightly more than $1 billion of travel business on an annual basis. And clearly, this year, not a lot of people are traveling. So as you think about personal lines, that premium line is going to have some pressure this year from travel. And then secondly, as Mark talked about on the earnings call a couple of weeks ago, we did actually fund and form the Syndicate 2019 in Lloyd's, where a significant portion of our $2 billion personal -- our Private Client Group premiums are going to end up ceded into as well, so that's going to have an additional impact on personal lines. But as you look at commercial lines for the year, we do provide on Page 14 of the financial supplement, a breakdown of premiums by line. And what you'll see in that, for instance, is -- even just in the beginning part of the year, and this is on a written basis, right, so written is going to translate into earned for next year. So we just -- even in first quarter, while total written premiums in -- net written premiums in commercial lines were only up a little bit, we had almost a 20% increase in special risks, which includes our Lexington book of business, but we have like a 60% decrease in property. So I would suggest that keep an eye on that Page 14 of the financial supplement as we go through the year because that's going to be your leading indicator for 2021 on an earned basis. And then we would hope that without any changes in our underwriting appetite, we would benefit from the rate increases that we're seeing in 2021 from a top line perspective. Although, there's a lot of ifs in there, right, depending on how this environment that we're in continues, level of economic activity and the rest. Because at the end of the day, property casualty insurance companies, particularly in commercial lines, what we insure is the economy. And as a global insurer, how much the economy has shrunk or has recovered by the end of 2020 will be an important driver of exposure and therefore, premiums.

Okay. That's helpful. And then sticking with GI and maybe from a little bit of a different angle, we're hearing about a good amount of hardening in the property catastrophe and just the reinsurance market in general. Is your just thoughts like how AIG could potentially mitigate the impact of -- that this would have on your premiums just in terms of what you guys foresee as might be some of the rates running through the reinsurance market in 2020 and then also into 2021?

Yes. And as you recall, we bought Validus Re back in 2018, which has both a Bermuda-based reinsurance business as well as Talbot, which was their Lloyd's syndicate. So we participate in the reinsurance markets in really 2 separate areas. What I would tell you is, yes, definitely, there's a hardening of pricing, particularly, as we come into the Japan CAT renewal season, and that's obviously a major primary market for us as well. But I would just point you to the sizing, right? Validus is -- we have a $25 billion total book of GI premiums on a global basis. And while our reinsurance business is certainly much bigger than what we had before the Validus Re acquisition, I don't think you should think of the growth in that business as being able to offset the 90-plus percent of the rest of the commercial lines book. But it is clearly an area where there's more demand and pricing hardening, especially in some of the CAT lines.

Okay. That's helpful. And then can we maybe shift gears a little bit, very topical now, everyone -- all investors seem to want to discuss COVID-19 and just the potential for losses throughout the insurance industry. I know Brian Duperreault, your CEO, right, as well as some others in the industry have said, right, that this will be the largest loss that the industry will ever see. So kind of keeping with that thought, can you -- just maybe looking for a little bit more color on your potential losses as you see them transpiring into Q2 and beyond? And then I know that on your call, you guys had pointed to 1% of commercial policy limit being the amount that's sub-limited in the aggregate. Is there any way to kind of size up what that 1% of commercial limits could potentially be as we think about potential BI exposure as a portion of your loss?

Sure. A lot of questions in there. So let me start by reminding you that this is the reason why we and many in the industry, including Lloyd's, the other day, view this as potentially being the largest insured event. We can talk about whether technically a catastrophe, it's certainly not a natural catastrophe, but it's manmade one, perhaps. It's because of the magnitude of it in terms of the geographic locations as well as the duration of it. This isn't a hurricane or earthquake that hits, and you've got one big storm in a localized geography. The impact of this is across many geographies and in many lines of business, including, like you mentioned, the business interruption. We also clearly see it in our travel and event cancellation businesses, which were obviously a big portion of what we took in the first quarter because those were very known events. And as David McElroy had talked about the other day on our UBS conference, it -- there's still a lot of uncertainties. So yes, we expect that we're going to see additional claims. Example I would give you is, for event cancellation, what we took in the first quarter represents what we know about first quarter events. It doesn't take into account assumptions about what might happen to second quarter or third quarter events that hadn't already been canceled. So again, depending on the length and duration of this, we would expect to be booking more claims in event cancellation. Travel is less probably going forward because people simply aren't traveling. And as Peter talked about on our call, we have a sliding commission scale. So while we booked a fair amount of losses, I think it was $86 million out of the $272 million was for the travel book, we can actually recoup some of that $86 million through lower commissions once we start seeing more travel insurance sales. So that brings us to other lines, and what I would say on our property limits, I mean we haven't disclosed what our total property limits are nor do we expect to. But we have talked at great length about how we have reduced our property limits so much over the course of the last couple of years, more than $200 billion of reduction in property limits. So the 1% of the exposure that we have is completely manageable within the scope of our balance sheet. And based on some known exposures that we have, where there have been claims filed, we did make some provisions for those in the first quarter numbers as we get any additional claims and situations where contagious disease is covered. And I would be clear about that. It's not a business interruption coverage for us so much as a contagious disease cleanup-type coverage, where you have to have an actual known exposure. We would expect that we would have more of those claims in the second or third quarter. But again, it's very manageable. I mean the claims from this event because of the reunderwriting we've done on gross limits combined with the reinsurance, this is an earnings event for AIG, it's not a capital event. But in terms of giving a prediction of what we think the total claims would be, I keep coming back to when does the economy reopen, what's the impact on directors and officers insurance and liability and lawsuits. We think we're pretty well protected on workers' comp because our workers' comp book is an excess book. And most of the COVID claims within essential worker categories would probably be within the working layer of the workers' comp. But we do expect, like I said, we'll see -- we will make assessments about the reserves for the second quarter and the third and hopefully not the fourth, but potentially the fourth based on the claims that we get and the coverage terms for those periods.

Okay. That's helpful. And then sticking with workers' comp, right? We've heard about some states, including California, looking to expand coverage for comp related to COVID. How do we think about, I guess, the potential exposure changing, I guess, both within California and as other states potentially also expand the coverage terms and a delay maybe to think about AIG's exposure to really some of those frontline types of workers within the comp book?

Yes, sure. And again, AIG's book is mostly an excess book. I mean the vast majority of it is an excess book. So to remind you of what that means, we do not provide first dollar guaranteed cost coverage for workers' comp claims. We basically help large corporations who self-insure for the working layer of workers' comp similar to like what most people do on their health insurance plan these days. And we manage the claims for workers' comp and then provide excess coverage, which normally aggregates to a per claim basis. So if an individual worker's injuries and claims result in more than $1 million, like we would be on the hook for the amount of the cost above the $1 million and the first $1 million is -- comes out of the employer's pocket. So what we would say is the COVID, it's -- obviously, it's a horrific disease, and no one wants to catch it. But there's a relatively low high-severity impact for people catching the disease. Obviously, the ultimate is going to be mortality. And under workers' comp, there's a calculation for that. But given that we're not a primary writer, most of the claims that we're seeing right now, whether they're covered or not, would be not for our risk. It would just be us handling the claims. But as you think generally about what's going on with some of these conversations, whether it's what people or legislatures are trying to do to expand coverage for business interruption when there's a virus exclusion or to kind of mandate how claims should -- what claims should be covered for workers' comp for what kind of essential workers and the rest, I think what you just have to keep in mind is those are all reasons why prices are probably going to harden further within those particular lines of business, which for workers' comp would be a good thing since it's been soft the last couple of years. But there will obviously be some losses around people trying to expand coverage terms after the fact. I think it'll be clearer in policies that are renewing going forward, whether or not the insurer should be pricing and underwriting for expanded terms of coverage, if that's, in fact, what the legislators and the regulators want. In terms of our comp book relative to essential workers, I think there's a general understanding that people who work in hospitals that the COVID claims would be covered, just as it was assumed that the Ebola virus would have been covered a couple of years when that was around. There'll probably be some back and forth about what are the other categories of essential workers outside of the health care space, such as firefighters or policemen or grocery store workers. But again, at the end of the day, what I would just say is that for most people who catch the virus since there's no therapeutics, it's really a loss of income/being at home and not working and picking up the workers' comp claim for that. It's only in instances where people need to be hospitalized that you see a significant medical component of the workers' comp claim. Remember that what workers' comp covers is similar to unemployment insurance, it's like a per weekly indemnity based on the state rules for income and then it covers the medical bills.

Okay. That's helpful. And then maybe shifting gears a little bit. AIG is unique from its insurance peers in the fact that it has a pretty large General Insurance and also Life and Retirement business. Obviously, given what's been going on with interest rates, right, the return profile of L&R, right, have been -- for a while, have been a lot stronger than GI. As we think about go forward, just we think about the return dynamics between the 2 businesses, do you kind of see that shifting, as we've spoken about some better pricing within GI as we think about this? What seems to be a lower-for-longer low interest rate environment?

That's a great question, and I think that's one of the things that we all, as students of corporate finance, will need to think about a little bit harder, given that the risk-free rate, whether you're using 10-year treasuries or 5 years, is pretty low right now. So obviously, targeted returns are down. But what do we think about for the risk premium and cost of capital for capital-dependent/relying industries like banking and insurance and the rest. But to go back to your point, what I would say is that L&R had benefited from a pretty strong return profile over the last couple of years because of the strong equity markets and what that meant for their private equity as well as their alternatives portfolio. In addition, as we were in a low rate, tight credit spread environment, they were picking up a fair amount of income from bond tenders and make-wholes. And a couple of quarters ago, we kind of provided more disclosure. So you could see how much that was contributing to their return. In this environment, like lower -- even though we have wider credit spreads and lower rates, I think it's the impact of the alternatives that which will have the more immediate impact on L&R's return profile in terms of their underlying products because we match on an ALM basis, and we've got hedging programs in place for the exposures we have for both credit interest rates and volatility. Kind of the core returns aren't going to be as impacted on the existing book, but we will see. As Kevin has talked about the last couple of quarters, we're going to continue to see pressure on the base interest margins. And remember, base excludes the alternative of somewhere between 8 and 16 points. But because credit spreads have widened out -- I mean, they've tightened since their lows in late March, early April, but credit spreads are still for investment-grade credit are close to like 100 basis points wider for single A, BBB credit than they were back in December. There's actually an offset for L&R right now. But again, given what we would see for private equity and alternatives, the overall level of earnings for life and retirement are going to be lower than what we had for '19. On GI, what I would say is the key driver of our return profile going forward for GI will be continued improvement in underwriting margins as well as the benefit from these wider credit spreads that we're seeing. So we would hope to kind of have to obviously do some normalizing for GI because of their hedge fund portfolio, in particular. But we would consider that GI's improvement in margins is really squarely focused on the combined ratio as opposed to investment returns.

Okay. That's helpful. And then maybe shifting gears towards capital and leverage, which you did kind of address, the holdco liquidity in your introductory comments. So AIG, obviously, the endgame is to -- what Mark Lyons, your CFO, has said is to kind of get back to or get to around the 25% leverage ratio. As we -- you and others have kind of put a pause on just buybacks and capital actions just to have more liquidity in these uncertain markets. Is there a timeframe to think about the -- you guys managing down your leverage? It seems like it's more of a 2021 event at this point.

Yes. I mean in terms of the leverage ratio, remember, there's like 3 components that basically drive that calculation on a quarterly basis. One is net income in excess of your common dividend and that grows the equity part. Second is the dollar amount of debt. And third is because most of the rating agencies include the AOCI impact from the mark-to-market on our bond portfolios, you have the impact of AOCI. So last quarter -- first quarter of this year, we had about a 2-point increase in our leverage ratios that was just due to the change in the mark-to-market on the bond portfolio, even though we had a slight -- we had about 1 point that was because of the increase in debt because of the revolving credit drawn net of the $350 million we paid off, and then we actually had $1.7 billion of net income. As I think about this year, we've raised the liquidity so we can meet our debt maturities that we have in August and December. So you will see our dollars of debt coming down over the course of this year, and we also have another debt maturity in March of 2021. So definitely, we'll see the dollars of debt coming down. We would certainly expect to have earnings. The amount of earnings will depend on what we see for credit impacts and the rest from COVID. But we expect to see earnings, which would improve our debt ratio. And then in terms of the impact of AOCI, we've already recouped just based on where fixed income markets are today, something like 60%, 70% of the reduction in unrealized capital gains on the bond portfolio that we saw since March. But we are in relatively volatile capital period so that could move around. So in the general sense, what I would say is our first goal is to kind of get our leverage ratios back to where they were at the end of last year, which was around 27% and then from there, which I think will, in fact, take probably until the end of 2021. And then from there, it'll depend on what the world looks like with the profitability profile, capital flexibility, economy and all the rest. But the more important point right now, which the rating agencies understand and they understand it across all kinds of industries, is the capital markets have been very volatile and to manage companies through this period of uncertainty, it's important to have very, very strong holding company financial flexibility, which, as I said when I started, we certainly have right now. We have close to a little bit more than $11 billion of holding company cash and short-term investments right now.

Okay. And almost out with time, but maybe just throw one quick one in there. Do you have an update just on the closing of the Fortitude Re sale. I think at some point was the goal to get that -- try to get that deal done at some point this quarter.

Yes. We still expect that it's going to close by midyear, optimistically, hopefully this quarter. It really depends on the regulatory approval process. We have several U.S. regulators who have to prove changes in material in our -- well, the reinsurance documents basically. And then ultimately, we need Bermuda to approve the change in control. And we've made significant progress on that. But from a timing perspective, I would hope that it would close by June 30, but if it doesn't, that's going to be because we're still awaiting one of the regulatory approvals.

Okay. Great. Well, thank you so much, Sabra, and then Shelley for also joining us. I think that does bring this fireside chat to a close. And thank you so much to our investors, who also joined us as well today. Thank you, Sabra and Shelley.

Yes. And thanks for hosting this. Thank you very much.

Thank you.

Bye.