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

Great. Good morning, everyone. It's Meyer Shields, KBW's equity research team. And next panel is with AIG's CFO, Mark Lyons; and Deputy CFO and Treasurer, and I think a million other hats, Sabra Purtill. So I want to thank both of you for taking the time to share your insights with us on what I've been describing. And I think this is accurate. It's most interesting in the positive and negative sense, most interesting time in the insurance industry since I started in the early '90s with just so much going on. And getting your thoughts on that, I think, will be tremendously helpful to people. For everyone that is watching, please feel free to submit questions to me. I do have access to those, and we want to make sure that we're getting as many investor questions answered as possible during the time that we have with us. So with that, I'm going to turn it over to Mark for some brief introductory comments. I'll jump in with a few questions of my own, but again, I'll be monitoring that -- the question dashboard the entire time. So please don't hesitate to submit any questions that you have. And with that, Mark, all yours.

Great. Meyer, well, thanks for inviting us today, and it's great to be here. So we're looking forward to the dialogue and the questions and so forth. So I think it goes without saying that 2020 so far this year has been unusual, if that's not an understatement. I think one positive thing, though, is that the foundational work that AIG has done over the last couple of years is a great positioning. I think a lot of carriers can make a similar claim of being positioned, but both on a relative and an absolute sense, I think we're in a much better positioning, especially with this current market environment and the economic environment. So given that as a backdrop, our liquidity position is strong. Our capital position is strong. Our commercial lines book, particularly in North America, has been largely reunderwritten. It's gotten multiple bites of the apple. I'm sure we may get into something like that a little bit more later. A lot -- there's continuing hardening in the market, and it comes in many forms. Price is most obvious, but there's other ways to improve books, and that's continuing. We derisked the cat exposure, and you've heard Peter Zaffino talk about that quite a bit through underwriting and also increasing our aggregate reinsurance coverage. We created Syndicate 2019 to deal with that spike on the personal lines side on the high net worth. And as a result, the gross in net limit profile is radically different than it was before across many lines, including casualty. We've really managed our product offerings and the hedging programs in the Life and Retirement side, mitigating the impact of the low interest rates, the volatile markets and the impact on reserves and capital that's consequent to that. COVID, though, continues to impact industry results. But there's also been a number of events this quarter that's really been, I think, to your earlier point, pretty noisy. Certainly a lot of hurricanes. There's been typhoons. We've had the Beirut explosion, not that, that's a cat, but that's large unexpected risk event. Wildfires that are still ongoing. COVID that's still ongoing. Civil unrest is still ongoing. Even the Iowa derecho, which, I have to confess, is -- I had to go back and look at it as to -- that's not a word I pronounce every day, by the way, so I needed to get up to speed on that. But all of these things aggregate in -- and low interest rate environment that are -- make it more difficult and make things more price-sensitive in a correction type of sense. So -- but I think it's safe to say with all of that, it's still -- we're at September 9. So the quarter is not even over yet. So it's really hard to get a figure for how the quarter would look on cats given that we still have quite a ways to go. And the cat season in the Atlantic Basin doesn't even end until basically Halloween, probably appropriately so. But as a result of that, though, we want to remind you that on the reinsurance side, in addition to our current covers, we have material aggregate protection as well, and we even bought an additional $500 million of that to help with that regard earlier this year before the reinsurance market started to harden. So -- but I think just broadly, we're confident in the team. We're confident in the business profile that we now have and with the balance sheet. So without taking any more time on overall comments, let me turn it back over to you, and let's kick off the chat.

Okay. Fantastic. Certainly, people want to hear more from you than they do from me. I mean that's always true. So let me kick off with one point that you made. Peter spent a lot of time talking about adjusting risk selection and limits management over the past couple of years. And I look at that as a or the primary focus on the P&C side. I was hoping you could update us on where you are in that process and how much of that AIG-specific effort needs to continue. And how does the fact that we're in a changing pricing environment impact that strategy?

Yes. Well, I think you're right. I think Peter spent a fair amount of time on the earnings call going into a lot of detail on that because there was a lot of lift that needed to happen, and it was done in a kind of a compounded way. When you talk to some of the underwriting executive management, you find out that you've got multiple bites at the apple. Some are getting to their second bite. Some are getting their third bite at the apple. Some getting no bites because we identified poor risks and got them out. So I'd say the first round -- let's just put this in context. I'd say the first round dealt more with limits management, in a reported reduction sense, price hardening and really weeding out underperforming areas and accounts. And the second bite probably was a lot more with limit compression in concert with attachments or deductible movement up, not just capacity shrinkage, a lot more T&C, being terms and conditions, being involved and implemented. And for those that are getting a third bite of the apple, you've got not only rate on rate but rate on rate on rate. And so I think we're in a pretty good position. I think we're pretty far along. We're comfortable with the portfolio as a result of all those bites at the apple. And I think one of the last things that we really had to do was the concentration risk associated with PCG high net worth, which we have -- now have a solution for. So we -- the short answer is we're pretty comfortable with the portfolio as it is, I hope. And then the second part of your question was with regard to the hardening, that just allows that to be implemented on a continuing basis.

Okay. Another strategic question. Earlier in the year, which now seems like centuries ago, there was this comment that we saw a hardening primary insurance market and a hardening retro market with not much happening in reinsurance. And my sense is that reinsurance is catching up. I was hoping you could comment on, one, does that match what you're seeing? And two, maybe more broadly, how should investors think about Validus Re in the context of AIG?

Well, first, let me just reiterate the first point, which is the rate increases continuing to occur at an increasing rate. And so on the primary side, that's what we continue to see, and we really haven't seen anything to dissuade that when we look into early 3Q. With Validus, I think Peter may have commented on this as well. But with Validus, they've also -- they grew their volume on nonproperty spaces last quarter pretty significantly. But they continue to have the derisked property view that we had across the board. So I think they reduced their volatility as a result, and they saw areas of growth. And as the reinsurance market hardens that Validus is in a position to really capitalize on, if the trade-off is correct between risk and exposure, then even the property aspect could probably inch up, but they are very well positioned to capitalize on every line of business.

Yes. And just to add on that, Peter had commented on the earnings call that Validus Re net written premiums were up about 39%. And in terms of all lines combined, the rates were up about 16%. So clearly, they are growing in this market opportunity.

Okay. And it's important for us to understand that, again, you've had a lot of success in implementing this volatility reduction structure, and the rate environment may actually now allow that to increase prospectively.

Yes, yes.

And that's one of the things that -- why we pointed to because I think one of the challenges that we have sometimes is when people look at AIG, they look at General Insurance in total. They don't drill down into North American Commercial Lines or just Commercial Lines in total versus Personal Lines. And we got a fair amount of criticism earlier in the year and late last year about how our top line was not growing as much. And as you'll note, in Commercial Lines and North America Commercial Lines last quarter, net written was up about 7% because with the repricing and the reunderwriting that Mark talked about being significantly through the last couple of years, now we're in a market where we feel comfortable growing and obviously are getting rate. You have to look at it drilling down into the 4 different segments we give you because Personal Lines, on the other hand, as you know, is a completely different market rate story than Commercial Lines.

No, absolutely, and that's helpful. I do have one question coming in asking about your thoughts for growth going forward. You grew during one of the challenging economic periods. So I think that's a positive sign. But is there anything you can share in terms of growth expectations in the back half of 2020 looking forward?

Well, I think in a directional sense, I think it's pretty clear that there's margin expansion. And to what -- Sabra's comments, what, I think, is a nice intro into the fact that all rates and margin expansion are not equal, either by line or by geography. So I think it's fair to say that North American Commercial -- in a rank order, North American Commercial should see the best gain, probably followed by International Commercial with Personal Lines underneath that for all the reasons we know, more heavily regulated, tougher to get larger increases, more muted, where, especially with North American Commercial, it's not as retail driven. There's a lot of wholesale non-admitted business as well, and you've got much more freedom of rate and form in that environment. So I think there's quite a few areas which we are, for 2 reasons, pivoting. The book has been repositioned. The market is very supportive. And because the book has been repositioned, we are now less reinsurance-dependent than we may have been in the past. Reinsurance was very valuable by all the partners that came on board with us, and you're always going to need that for catastrophe risk and vertical shock and that kind of thing. But the -- I agree with you the market is hardening on the reinsurance side, and we have Validus to take advantage of that. But from a reinsurance purchasing point of view, it's going to be negotiations that are going to be probably pretty complex. They're in their environment. As you said, they lagged on rate. And so -- but we're in a position now that if reinsurance terms and conditions or pricing, we think, are too stiff, we're much more comfortable taking that.

And I would just add to that, in terms of the book itself, you got to keep in mind the components that drive growth, right? You've got retention on your existing book, which, as we were repricing and reunderwriting, obviously, the retention was lower. Peter commented that retention is up like 4 and 5 points compared to where it had been a year ago. Secondly, there's new business, and Peter also commented on the call that new business volumes are actually kind of light in the second quarter because of this -- just the disruption that we're seeing, right? Sales were low at L&R as well. But now that people have adapted to this new environment, we would hope and expect to see higher volumes of new business as well. And then, of course, as we've all been talking about, there's rate. So from that perspective, we would hope and expect that we're going to continue to maintain strong retention. Rate will go where rate goes. And as a market leader in many areas, we would hope to see stronger new business flow.

Excellent. There was one comment that Mark made on the conference call, got a lot of attention. And frankly, I was surprised on how surprising it was. And that's with regard to loss trend volatility when we go through a, I call it, once-in-a-century event. And I was hoping you could flesh out what you're seeing with loss trends and how comfortable you are that even maybe some of the more pessimistic scenarios are reflected in pricing and in reserving.

Okay. Well, I was a little surprised, too, quite frankly, because I thought some of my statements were pretty consistent with what I've said in the past. I think -- which I'm happy to go over and directly answer your question. I think it may have been because it was in the context of margin expansion as opposed to pure loss trend. And I think I made the comment that if -- because Peter talked about a 16% increase globally and it was 21% North America and lesser internationally. And no one thinks there's 21% loss trend, right? So therefore, there's margin expansion in that sector. So I think maybe that got some of it. But you do have a lot of other forces, some of which I think are really compounded now by COVID. I mean you always had the litigation funding aspects. You got some runaway verdicts and so forth, but they're still few and far. There -- that wasn't a panacea at that point. But with COVID, you've got now dockets and courtrooms that are really backed up. It's difficult to really get those things through. So in some cases, it's going to be, especially on the GL side or GL products side, I think there's a real argument that, that's not a claim reduction. It's a claim deferral. And that will manifest. It's just going to be a longer time of realization perhaps on some of those. Certain lines like comp, it will become more self-evident. But AIG's comp book, it's largely 3-line large deals, so it's large deductible. So it's the insurance money more than it's AIG's money, right, involved, and it's inside a deductible. The one advantage, because you expect to see with people off the streets, that from an auto perspective, it certainly would be a smaller exposure, but AIG has really shrunk its auto book pretty dramatically. And I'm glad to say, in the trucking space -- because with trucking, you pretty much got to take it all in, right? It's -- you can't cherry-pick an exposure here or there. You take it all in, so it depends on the size. Whereas smaller insurers, you got a much different choice on what you're doing. So you've got that. I mean you've got the upcoming elections. I mean that always -- with Supreme Court's and appellate courts' designees and so forth, there's always a change. And the -- I would say even the civil unrest aspects could find itself on Personal and some Commercial Lines, creating different exposures and emergences on it. So it's -- I think my comment was mostly around the increased volatility of the loss trend as opposed to the loss trend itself. But for clarity, is there margin expansion in North American Commercial? Yes.

Okay. And I think that's probably the bottom line of what people are looking for. And it sounds like you're comfortable with that on both the rate and the reserve side.

Yes.

Okay. Another issue that emerged in second quarter was the impact of a much smaller book of travel insurance within North American Personal. And I think that was more just the mix of loss and expense as opposed to anything sort of fundamental with profitability. But I was hoping you can update us on how that market, in terms of demand, and how the market for event cancellation has been evolving over the course of 2020.

Well, we can ask Sabra to start off that one.

Yes, sure. So to start with our travel book in -- which is in Personal Lines in both North America and International, although the bulk of it's North America, it's about $1.3 billion book. And clearly, when COVID emerged and flight restrictions and travel restrictions went into place, people weren't buying plane tickets, so they weren't buying the travel insurance. and as we talked about in the first quarter, we had a -- I think it was about $86 million of our loss picks for the first quarter were related to travel. But we have a commission-sharing arrangement with that, a profit-sharing arrangement. So that as we -- people start traveling in and buying tickets again, we'll actually recoup some of that through lower commission rate. But as you pointed out, the travel book is a relatively low loss ratio, high expense ratio book of business. So lacking the premium in that in the second quarter, combined with the fact that we obviously still have employees in the travel business, first, claims and customer service and finance and the rest, it really kind of made the North American Personal Lines ratios quite strange compared to prior years. And then when you added the Syndicate 2019 on top of it, it was unusual. We continue to be a market leader in that business, and we would expect that as 2021 comes along that we'll be -- again, people will be buying it. And frankly, I think the type of the product that people buy will be a lot different going forward in part because you've had this experience that we've all gone through, right? And so probably, there'll be higher utilization. But by the same token, you do have some airlines -- for instance, United has permanently waived change and cancellation fees. So I think people might be more likely buying in on hotels and car rentals and things like that. The other thing I would just note, and then on the event cancellation, so the event cancellation book is largely written through Talbot in our International portfolio, and it's in Commercial Lines. Obviously, and Mark can comment on this with his actuarial background, that we have taken reserves for those events that we have known cancellations. There are some events that were postponed like the Kentucky Derby, which ran this weekend, or the Olympics, which were pushed to 2021. So we still have exposure to the extent there's additional cancellations. But as far as a product right now, as you can imagine, given the uncertainty, first of all, people just aren't scheduling events. And then secondly, it's kind of hard to price and underwrite in this very unusual environment for the cancellation. But the events cancellation and the travel book, combined with the business interruption where we have, what I would call, affirmative contagious disease coverage, that's about 70% of the reserves that we've taken for COVID.

I wouldn't add much more to that, really. I think it's important to realize that distribution is inventive and innovative. So as airline travel has dropped off, let's say, European travel, they've pivoted towards having Western RV park visits and things like that. So it's not like they're just shifting to a different item. So the indications, of course, is that generally, there was more travel, incrementally more travel in July and August. We're really a derivative product to travel itself. So there's got to be a little uplift on that. But -- and on event cancellation, you also have non-appearance. So you can have a broader event or it's not just an event or a rock group. It could be a series of performers and there could be a non-appearance by one of them, where it goes on, but it's still impactful. But -- so you have that coverage too, but that's not similar, right? People don't want to take the risk of going through all that event creation and being on the hook.

Okay. The next question is both internal and external, and it's with regard to changing work environments. So that has implications, I think, both for potential losses, right? If people aren't shopping, you don't have the slip and falls. You don't have workers' compensation claim frequency. How does a company like AIG anticipate a changing set of exposures in pricing and in underwriting? And then internally, obviously, there's AIG 200 ongoing right now, and I imagine that this has ramifications for that as well. So I was hoping you could talk about those 2 sides of this COVID-induced phenomenon.

Well, let me just start that. I'll start it with the insurance evaluation on it. Clearly, if there's fewer companies that need insurance, that's impactful. And the ones that continue to need it, if their exposures have dropped, that's impactful, meaning negatively impactful. But -- and therefore, the exposure base itself may not necessarily be proportional to the risk anymore. I think the classic example, let's say, pre-COVID is why you can't get quarterly cat covers, right, because it would be too concentrated. The cat is over the course of the year, and you just can't buy a 3Q cat cover as an example, so it's disproportionate. So I think I think from that respect, you get that kind of impact. But -- so what do you got to do? You got to be very careful as to what the exposures are. Have there been divestitures? And that -- does sales and workers' comp, payroll, are they matching up with each other? You could wind up having some of the distribution force trying to help their customers take the low end of the exposures. And therefore, you're setting yourself up for an additional premium on audit and things of that nature. So you don't want to have a disproportionate amount of your book subject to annualized being an audit premium as opposed to the front-end premium. So -- but overall, it's -- insurance side, it's fewer exposure units and perhaps different lower exposures within those exposure units, coupled with the measurement of exposure itself being appropriate on it. So it's really -- there are certain coverages of certain industries that you can tag, hotels, for example, and others you can tag as going to be down for a while. But on the line-by-line, account-by-account basis, they are the things you have to focus on. Now I don't know, Sabra, do you have anything to add before we pivot to, I'll say, the inside as opposed to the outside? So...

The only thing I would add is just a reminder that, obviously, we -- within AIGRM, the AIG Risk Management book of business, a lot of that experience change is going to be in the working layer of the policyholder as opposed to the excess layers, which is where we would attach.