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

So thanks for joining us. I just introduced the conference to the audience. Again, I'm Ryan Tunis property, casualty insurance analyst here, and we're happy to have you. So again, joining us is Chris Schaper, the group CEO of AIG Re, Global Reinsurance business of AIG, which brings together organizations of Validus Re, AlphaCat and Talbot. He's responsible for the implementation and execution of the firm's global assumed reinsurance strategy, including a focus on new capital markets initiatives. He joined AIG in 2019 and has over 30 years of insurance and reinsurance industry experience. And I think he had a couple of prepared remarks. So Chris, you want to leave us off with that, and then I'll start by asking some questions.

Yes. Thanks, Ryan. Yes. So I'm sorry, we're not in video. But I did have some remarks I just wanted to make. So first, happy to be here today at the Autonomous Future of Insurance event. In my remarks, I plan to discuss 2 topics: First, an overview and refresher of what AIG Re is; and second, observations on the current market environment. So let me start. AIG Re formed in mid-2019. It's responsible for AIG's global assumed reinsurance business. It is wholly owned by AIG, and it's comprised of companies that were assumed from the purchase of Validus Holdings in 2018. Now there are 3 operating entities that make up AIG Re, and they include the following. Validus Re, which is a traditional reinsurer, it was a flagship company when Validus Holdings initiated. And Validus Re deploys capital through a balance sheet based approach. And they focus kind of across the board on property, casualty and specialty lines. Talbot Treaty is another one of the operating entities. It is part of Talbot U.K. But it's -- so because it's a reinsurance operation, it sorts itself through Validus Re and then ultimately to AIG Re. Talbot Treaty is also a traditional reinsurer, utilizing Talbot's balance sheet in terms of its deployment of capital. And it, too, focuses on property, casualty and specialty lines. AlphaCat is the third operating entity. And AlphaCat, an asset manager in the reinsurance space. It assumes capital through pension funds, sovereign wealth funds, family offices. Has about 40 to 50 competitors in its space, does focus more so on short-tail lines of business, such as property catastrophe, treaty, reinsurance, and has about $4 billion of assets under management. Now each of the entities were built through a focus on 3 core elements: those being capital, analytics and risk selection, in particular, to manage exposure and volatility. And in terms of their business risk assumption, it's closely aligned with AIG General Insurance, to make sure that the overall portfolio is taken on and properly established. And Validus Re is a global business. It has locations worldwide. It has -- look, it's based in Bermuda. It has ops in North America, in particular, U.S. as well as Canada. It has ops in the U.K. through Talbot, as I mentioned, and also in Europe, in Switzerland and then in Asia and Singapore. And also supports the Latin America market through its Miami office. So that's Validus Re on a global basis. Talbot Treaty, as I mentioned, is based in the U.K. itself. And AlphaCat has ops in Bermuda as well as the United States. I would just say that the teams, for each, are very knowledgeable, certainly very capable and also very disciplined. And that's really important in any environment, whether it's hard or soft market, whatever it might be, it's very important. And so that disciplined approach was an approach that Validus had from its very beginning and continues very significantly to this day. One item that I think is important to note, concerns why did AIG purchase Validus. And first off, Validus was a well-established enterprise, but there are also a number of other aspects that were important to AIG, which include business diversification. The reinsurance business was certainly complementary to AIG. Geographic diversity was important as well. The ILS capabilities and accessing for growth was important. The ability to scale the business up and down based on market conditions. And also, the CAT modeling and research capabilities that were brought to the table is really terrific intellect coming from the group, and also the sharing of best practices across both entities or enterprises. So real reasons and very significant reasons why AIG sought to purchase Validus. Lastly, just in terms of AIG Re, as you've heard on AIG's earnings calls, within AIG a significant amount of work has gone into the turnaround of the organization. The assumed reinsurance business, though, at AIG Re did not need such changes. It was in very good shape when it came over. So not only are we and have we been in good position, we do view that we're in a very good position to enhance our business proposition in the current environment. And what that does, that actually brings me to my second topic, which involves observations on the current environment. Firstly, I would say, clearly, over the past year and notably in recent months, we've seen the challenges arise between the pandemic situation as well as high-profile incidents that have raised the global attention to social injustice issues. These issues plus those associated with climate change and past losses from climate risk, including wildfires and hurricane loss, now lead us to a point where we're in a highly dynamic environment. And so there are certain facts that are emerging, and they include the following. COVID-19 losses are going to be geographically widespread and will affect many lines within the insurance industry. Those losses will transfer into the reinsurance market. Collectively in both insurance and reinsurance, we're going to see rates for longer terms and conditions. They have been and they will strengthen. And that's going to lead us to a hard market on a global basis. Now in this market, there will be firms that will execute well and will achieve terrific outcomes. But there are going to be other firms that need to focus internally and work themselves out of a problematic situation. So it's dynamic in different ways. Now AIG Re, just to bring it back to AIG Re for a moment, is well positioned. We do have a strong capital base. We do -- we have a very strong parent, very strong leadership. We have a clean portfolio. And we have a very well-oiled internal operating structure. And also, as I mentioned, a very sound personnel to execute. So overall, we view there will be a flight to quality. We view that, that will serve us well in this environment. So with that, Ryan, I will shift back to you for Q&A.

Perfect. That's a fantastic overview. So I think we're definitely going to want to hit on some of the market condition stuff. But yes, let's just -- I guess start off by talking a little bit about Validus. So what are some ways to think about how Validus has changed or evolved over the past couple of years since being acquired by AIG?

Okay. Well, let me just level set. Yes, I'll talk about Validus. But I'll focus more so on the reinsurance side. The insurance has been spoken about others in earnings calls or other conferences. But I'll level set it for a bit. Validus Holdings, as I mentioned, included insurance and reinsurance businesses. The insurance component went into the AIG insurance business side, and the reinsurance aspects were aggregated, as I mentioned, and formed AIG Re. Now for both the insurance and reinsurance portions of Validus, the acquisition was a substantial change. And you're talking about enterprises that were part of -- that were core to a stand-alone entity that are now within a Fortune 75 firm. So there's definitely work to be done to integrate the businesses to make sure the benefits of AIG were available. And at the same time, make sure the attributes, including the culture, when combined, were greater in quality than being separate. And so to do that, actually take the depth to hand, it was very important to both Brian Duperreault and Peter Zaffino from the onset of the acquisition that integration was handled well. I would say from an assumed reinsurance basis, we actually haven't made major changes to how the company is engaged in transacting their business. They were each performing well. We felt that the real focus was to determine how to amplify their capabilities and their market reach and how best to create value, utilizing AIG's broad market presence, its capabilities and how we translate that into overall greater value for being owned by AIG versus being independent. So to that end, in essence, we engaged -- kind of across the board, we engaged -- we determined what we wanted to do and then engage brokers in the business to determine how do we enhance our position across the board. And at the same time in doing that, making sure that our tenets of underwriting discipline and technical analysis were very well maintained. So that was paramount as we move through this process. And so we -- again, we engaged brokers, we sought to determine how best to enhance our position. Now what's interesting is that on the other side of that equation, and a lot of times talk about Validus and how things have evolved, et cetera. But Validus also brought to the table, to AIG, some very strong analytic capabilities, very strong research capabilities, very strong modeling capabilities that involve climate as well as property catastrophe risk. So AIG has actually been able to leverage those capabilities as well. So it's been interesting in the sense that it's been a 2-way street. The businesses of AIG brought this technical expertise that enabled AIG, and AIG brought its market presence and broader capabilities to AIG Re as it has sought to execute. So a really terrific blend for both of the enterprises. So that's kind of what's taken place over the last couple of years.

That's helpful. And yes, so I have a question coming in, and I'll try to kind of paraphrase it. But now thinking about AlphaCat, I think one of the ingredients of this potentially hard reinsurance market is this view that you could have some dislocations in the alternative capital space or in the retro space. Yes, I mean, I'm curious, like, what do you -- what's going on, I guess, over at AlphaCat in terms of the availability of capital? I think on top of that, how is that -- when I think about Validus is actually having to buy retro, to what extent is -- might you be getting squeezed on prices in terms of some of those hedges that you've been putting on? In other words, like to what extent is retro pricing up significantly more than what we're seeing in the traditional side?

Yes. Well, I mean, retro pricing -- well, prices are up across the board. At this June 1 time period, we definitely saw rate increases happening in the reinsurance market as well as coming through on the retrocessional market. Retrocessional market started a little bit earlier, for sure. But everything's kind of caught up. So on both sides, I want to say both sides, on the reinsurance side and on the retro side, we definitely are seeing and have seen rate movement that has been substantial, and in some way, similar now relative to the June 1 renewals. Overall for AlphaCat, as a market that deploys capital, obviously their capital is desired without a doubt. And so frankly, AlphaCat has been able to execute quite well through this market cycle. As an enterprise ourselves that we do buy retrocessional protection. To be frank, we were front foot. We were, I would say, ahead of the market in thinking that through, making sure that we were effectively purchasing at the earlier stages of this market. And so we've been able to secure ourselves quite well as a result, similar to where we were last year, to be frank about it. So from our point of view, in terms of buying, we're comfortable where we're at in terms of the protections. And also in terms of the underwriting and the risk that we took on, and also the associated rate improvements that went along with that risk that we took on. It all kind of works well together. On the AlphaCat side, as I mentioned, as far as a distributor for capital into the retro space, that's going quite well for us also. So I would say on both sides, we're okay. I can imagine markets that were not ahead of the game, I think there are a number of things that they had to deal with, to think about shed risk is one of them, for sure. Try to think about raising capital in different ways, which we're kind of seeing to some extent in this market. So I think everyone's taking a different position based on, I think, their actions that they undertook at the earlier stage of this cycle.

Got it. That's helpful. So yes, I mean, I guess, just thinking about market conditions, and also I have some follow-ups. I guess first, just I don't know if you can comment, but if you'd like to comment on, from a rate standpoint, how you'd characterize the June 1 renewal? And then the other piece of this is, I think, over the past few weeks, we've had some pretty strong language from, I think, other reinsurance executives that have described this as the best market for writing reinsurance in almost 20 years, comparing it to post-9/11. My question is just is -- does that feel a little bit out ahead of our skis? Like, if it's something that we know yet? Do you agree with that characterization? So it's kind of a broad question. But yes, I mean, how firm do you think pricing is?

Okay. Yes, I'll talk a little bit about the June renewal cycle first, and then we'll talk about the second part of your question. So yes, first off, I would say that the June renewal, frankly, was as expected from our point of view. But again, it's our point of view. I mean there were significantly higher rates in the reinsurance market, particularly in the property catastrophe business lines and different geographic zones. Generally, what we see when we see rate movement happen, we see it happen first, frankly, in the U.S. markets. And then if there are other geographies that are changing, that might see some movement, but it's usually minimal. I would say that what we are seeing, and if I include all of second quarter, which includes the April 1 renewals from Japan, we were seeing increases really across the board. And we certainly saw them in the U.S. at the June 1 renewals. Japan at April 1 absolutely increased quite substantially. Those numbers are in the press. So you would have seen those numbers in the 35% to 55% range, and then for wind. And then we're also seeing rate increases in the U.K. and the EU, and those are areas that you tend not to see rate increases. Frankly, in many of the prior -- I won't say markets, but in any of the prior time periods where you might think you see some increase in rate, you might see it in the U.S., but again you really wouldn't see it in the U.K. or in EU. And we're seeing those rate movements happen. So it's definitely increasing kind of across the board on a global basis. So that's what we saw at June 1. We are in the midst of the July 1 renewals right now. I can't obviously talk about any of that. But June 1 was definitely moving directionally up quite substantially. As far as your question about 9/11, are we ahead of our skis, is it 9/11, et cetera. I mean 9/11 was definitely different. 9/11 came in, it was a hit, and definitely the world change, without a doubt. This situation, the pandemic is very broad and certainly having implications in multiple lines. I suspect when people say that 9/11 is similar, what they're talking about is you're seeing changes in multiple lines of business in terms of rate movement, in terms of capacity maybe withdrawing a bit. And I would say there are similarities relative to that because there are certainly lines of business are increasing in terms of rate. There is a restriction in capacity. So it's not just property. It's certainly other lines of business and happening on a global scale. So there's a little bit of similarity there. But overall, though, what I would say is that when you look at the catastrophes that have taken place over time. So if you look back to Andrew in '92, if you look at 9/11, if you look at KRW, each one of those time periods did cause a significant spike in price, hard market, that sort of thing. Where we are right now, and those losses are presently viewed as being less than what we're looking at relative to COVID. When you look at where we are today relative to COVID, COVID is even more significant. So each one of them definitely caused movement in rate and price and available capacity. And we're seeing that -- we're certainly seeing that now. I would say one other thing that I think if there's some commonality to 9/11 was that prior to 9/11, the market had gone through its own problematic cycle. I mean combined ratio is very significant, people are underwriting at negative returns for a period of time, and when 9/11 came in, it kind of just switched everybody over to everything has to move up. In this environment, certainly, in the past few years, we've seen catastrophe losses take place over the past 3 years or so. And the market didn't move, but it started to move. And many of these significant events actually are just the added catalyst that's necessary for rates to move up with capacity to restrict. So I think there's some similarity there. Are we ahead of our skis at this point? I do think it's kind of a wait and see. Let's see -- we'll need to see how this year plays out. We haven't actually gone through the wind season yet either. So we'll need to see that. The economies obviously are going to have issues from COVID. So that needs to be played into this also, which is different from what we had seen in some of the other events. So we need to be thinking about this issue more broadly, I would say, than what we were looking at before.

So Chris, this isn't an issue for AIG. Obviously, you have access to organic capital. But are you surprised that at this juncture, right, in June, 1/1 renewals are 6 months off, that we've seen companies do purely opportunistic capital raise based on the setup? Does that surprise you that, that's been something that the markets digested well?

Well, with -- I'll put it this way. There may be a viewpoint that all raises are opportunistic. And I'm not so sure that that's the case because certainly, there's defensive moves that you make that are important as well. And I think people need to keep that in mind. I mean roughly right now, if you put all the numbers together, it's in the neighborhood of $3 billion or so, right, of additional capital that's kind of come in based on what we've kind of seen sort of adding all the kind of component parts together, somewhere in that neighborhood. But the question comes down to, is all that truly for an offensive play?

Right. So I want to get into that...

For either -- yes. And that's a big issue. And that's a big -- that's an important aspect to this.

So let me get to that in a second. It's interesting. I have 2 similar questions from the audience. Thinking about the fact that we have seen capital raises and start-ups. And your view on how much is the longevity of this cycle dependent on us not seeing quite as much as that? In other words, is this the type of cycle where if we keep seeing these start-ups, you're not going to get the same type of hard market? Or is it more that a lot of these price increases are not so much supply/demand, it's more like thinking about the price of risk and all that?

Well, first off, when you look at starting with business, when you get any personnel, you need a whole -- there's a lot there to actually start the business and actually execute well. Ryan, I just want to make sure that I understand your question. Is your question, whether or not -- just give me your question one more time, so I make sure that I'm...

Yes. So let me -- very simplistically, when we see these new capital raises or these new start-ups, whatever, to what extent is that a bad omen for this hard pricing market, I mean, any longevity, I guess, into 2021?

I see. Does it have legs?

Yes.

Does it have legs? Yes. I would say, yes, to answer your question. I mean the new capital raises that are coming through -- we'll have to see, like, what does this fully look like as we get closer to the 1/1 time period? And how did this wind season actually play out? That's an important aspect to it. But I think that the capital itself, you need to measure that against what the real losses that are going to happen from all of this. You also have issues where entities are suffering on both sides of their balance sheet, right? You have asset issues and you also have liability issues, right? And that's a difference also. So from -- when you look at it in its broad context, the money coming in will support the market, but that would not suggest that, that means that the market rates kind of fall flat. Just to add maybe one last comment to it. If you think about what happened at 9/11, I mean, there were a significant number of companies that started up after 9/11. And that market itself remains hard for quite a period of time, so -- as a comparison.

Yes. I mean that makes a lot of sense. So yes. So the one thing I wanted to hit on before, I did want to talk about like some of those defensive things. But are there -- what type of opportunities are you seeing? I guess what we're trying to understand, are there a lot of opportunities for reinsurers to put capital to work at attractive rates between now and 1/1 that you wouldn't normally get, whether it's COVID dynamics? Like one thing we've been trying to figure out is carriers maybe buying more -- decide they want to buy more reinsurance at midyear. But is there an interesting dynamic -- demand dynamic that we're seeing right now in the wind season outside of June? In other words, with just large traditional carriers where you're seeing the opportunity to put on business at really attractive rates.

I think the cycle is as it is. I mean certainly, some companies didn't purchase as much as they would have liked and are kind of doing a wait-and-see. I think they're waiting and seeing to see how problematic the wind season actually becomes. So -- and they're in the market trying to figure out can they pick up some additional capital somewhere, right? But for the most part, we're primarily in a similar renewal cycle in a sense that June and July are the key ones. After June and July, it kind of goes flat for a bit. But I would suspect that if you were looking at an active season, you're going to start seeing buying without a doubt in the midst of all of that. And that's really where you're going to start seeing like significant spikes happening.

So we need...

Beyond where they are today.

So we need some hurricane activity for those type of opportunities to make them significant?

Yes. And I mean, the opportunities are there. They just -- the numbers are so high right now that the markets doesn't certainly want to pay for it. So they're kind of sitting back a bit and trying to protect some of their -- some of their expense figures instead of paying it. And we're trying to be aware of what may be taking place in the environment relative to events. But there -- it's just an expensive purchase. And a lot of them have decided we're just going to scale back a bit and see how things go.

Got it. So I have an interesting question here from the audience, I guess, ignoring some of the technical -- but so how is -- what are you hearing from up top in terms of, I guess, of how AIG is thinking about allocating capital into the reinsurance business as we go into 2021 versus other quarters? I think one interesting dynamic of AIG, it seems like it's reduced a lot of its CAT exposure. I don't -- doesn't sound like that truly impacted dollar as much. But yes -- I mean like, to what extent are you hearing that, internally, are there discussions about getting more capital reinsurance?

Yes. So certainly, from an AIG point of view, it takes a holistic view across the space. And as they're looking at committing capital, they definitely look at where are there benefits and then strong opportunities to do that. There certainly, have and will be, discussions on what is the best way to deploy. Those decisions will be made over time. At this stage, pretty much the businesses have sorted themselves prior to the 1/1 time period, right? And as a result of sorting themselves, they've executed accordingly. Eventually, as you look at the market, AIG will definitely seek to determine where it's best to commit capital, and based on that, may offer different parts of the organization additional PMLs to deploy. But those specific decisions have not been made at this point in time.

Got it. Okay. So I wanted to shift back to the discussion, not necessarily defensive. But I think one question we've been trying to wrap our heads around is it seems like relative to a normal CAT, we think about COVID losses, reinsurance participation doesn't seem like it's going to be quite as high. I mean do you have a view on how would you characterize that? Or like do you have an overall view of -- if I gave you a number, is it -- do you think it's [ 30 or maybe ] half will be footed by reinsurance, more or less?

I'm not -- yes, that's a tough one. I mean I think -- well, first off, obviously, the BI issue is extremely important kind of across the board, right? And so that needs to be well understood. The reality is that everything is on a case-by-case basis when it comes to the reinsurance market. Obviously, we seek to work with our clients and all of that. The contracts have wording in them. And that wording obviously helps you sort through when these particular issues take place. But I would say, it's hard to say. It's all on case-by-case as we move through it. I think that's probably the best way that I can answer that question at this point in time, given the uncertainties that actually exist out in the market. Again, I would say kind of where BI moves to is important. Certainly, if there's a need for -- if there are changes in court system, et cetera, in terms of some of the thought processes there, that's a bigger issue. But either way, again, it will be on a case-by-case basis that everything would be determined.

So I think one thing we're trying to figure out is, yes, I mean, if you had ballooning BI losses, and actually, if you want to stick around, we've got some BI lawyers in here...

I'm sure.

No, I mean, they're good. They're on the defense side. But my question was going to be, when you think about the treaty side of things instead of the quota share side of things, it's still a little bit of a mystery to me what -- how this could materialize when you think about things like hours clauses, the definition of the event. What are the scenarios that could make this -- if you really did on like kind of a Pandora's Box BI thing, and we're thinking about the follow the fortunes, like why would reinsurers not be more protected on the treaty side based on how the policy is worded?

Yes, I think, yes, it's a tough one to answer. I mean again, it's a case-by-case basis, Ryan. I think whether it's BI, whether it's different hours clauses or they're different triggers, the wording differs in the contracts that are agreed to with cedents. I think on both of those issues, it's going to come down to case by case and everyone kind of sorting through it and determining what's the proper way to go. I don't think you're not going to -- I don't think you're going to find the proper answer at this point that you're looking for, except for it's going to be case by case. That's why we're going to have to go through this particular situation.

Okay. Well, I have one question. It sounds like a follow-up to that. It's can you talk about what percentage of your reinsurance business has followed the fortune's language? Also, do you think all retro coverage you have would follow the fortunes? Or is there certain pandemic exclusion language that could help your retro partners potentially avoid losses? So how hedged are you?

Yes, again, case by case. That's going to have to case by case. Yes. I mean those are very particular questions, but that's on a case-by-case basis. I appreciate the question, but it's going to need to be on a case-by-case basis that, that is determined.

So I guess still what I'm trying to think about is it's interesting to me that we've seen a few of these capital raises. Yes, I mean, it's been 1.5 months, 2 months since earnings. And I don't know, I mean, there does seem to be some -- the tail of losses to me, for the reinsurers, does seem a little bit more straightforward, like you had some -- all of the contingency stuff. But I mean, maybe that's not right. What I'm trying to understand is like when the books closed at 1Q, how much more was there really to learn versus was it a lot of first part of the losses, we have a pretty good feel, you set up reserves out to the end of the third quarter? I mean in other words, like how much do you really think we're still learning about what the losses are going [ to be ], not just the BI issue, right? Other types of losses, how much do you think the industry learned 1Q versus -- because I think when you add up the losses, I mean, we've done this. The losses for the industry and reinsurance, in particular, were not actually that big in just the first quarter. So how much of this is, I guess, still on the common in terms of -- in other words, some of these players that are raising capital, are they learning a lot about potentially new losses as they're doing that?

I see. Well, I can't speak to those that are raising capital what they're learning, what they're not learning. But I think the first quarter was first quarter. I mean I do view that we continue to learn in terms of first order and second order losses. So I mean there are losses that can happen as a result of just economic activity changing as opposed to direct losses from COVID itself. And second order losses are still out there and still being vetted and still being verified. So I do think that there is still a learning process going on. We also don't know to the degree what another wave would actually cause the overall environment. It feels -- you've got to be careful, people let their guard down, et cetera, then things kind of spike back up again. And so there's also that, that sits out there as well. So the economy, it's going to be key how the economy either turn around or don't. That's going to have an impact certainly on some of this -- the second order losses that are out there. So to answer your question, yes, I do think we're still learning from it and trying to derive what is the ultimate looking like. It can take a while. I mean because the losses are going to kind of come in over time as well. So I think it's a broader issue than just 1Q without a doubt.

All right. Well, that's perfect. I think we're out of time, but it sounds like you're cautious. I think that's good. Stay cautious. Tell everyone to stay cautious because it's the only way we're going -- hopefully, we can keep this market hard. But yes, I mean, it's been a really good discussion, Chris, and thanks so much for joining us. We value your time and best of luck.

Great. Thank you, Ryan. I appreciate your time as well. Thanks, everybody, for the questions. Okay. Be well. Bye.