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

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Excellent. Well, it's a pleasure to have senior AIG management with us today. We've got Mark Lyons, Executive Vice President and CFO of the company; and Sabra Purtill, Deputy CFO and Treasurer. The way I'm going to approach it today is I'm going to ask a series of questions. And then toward the end, I'm going to take a number of questions, whatever you may have, via e-mail. So my e-mail is andrew.kligerman@credit-suisse.com. And the last name is K-L-I-G-E-R-M-A-N. So happy to take those e-mail questions if you have them.

So Mark and Sabra, I'll kick off with some general questions that I think people want to get a good feel for, little tricky, but thinking about AIG's intermediate-term adjusted return on equity, how should we think about that with the potential divestiture a year or 2 out of the Life business? General Insurance recorded an ROE of 3.8% in 2020. Of course, that was impacted by elevated CATs and COVID and then 8.8% in 2019. So is there any kind of snapshot or thinking around an intermediate-term adjusted ROE?

Yes. Great question, Andrew. I would say that at this point, we're more comfortable with some of the guidance we've given to date, which -- what I would say is more around the steps for GI to get to the accident year combined ratio that we target, sub-90, which I'm sure we'll get into, the fact that there's premium growth that we plan associated with that and so forth. It's really difficult on the capital markets and the NII side of the house, both in AIG in totality as well as L&R, which is inextricably linked inside of that. So -- and the reason there's more feeling on GI is because that's really principal as opposed to principal and interest if you think of it in terms of what Gartner's set it down to the bottom line. So we have that. But interestingly, because you sparked something when you said the intermediate because -- then you made the L&R reference that -- and with separation down the line and the ongoing discussions with key constituents or rating agencies and so forth, it's a little hard until you anchor and really finalize on structures as to what some of that might be. But back to the intermediate point that you made is everybody is looking at what's the change in accounting principles, right? What LDTI going to do, for example, because that's kind of an intermediate. And we've done some preliminary work, of course. There's more work to go. But given that, that affects FAS 60 more than anything else, which is likely term insurance and whole life and some UL on that. Our initial view on that is, I can get into why, but close to neutral, if not minor favorable. Remember, we are -- retirement dominates life on a relative proportional basis for us. But when you get into term and whole life, we kind of view that really as the net positive. We -- and it comes down to where you think your loss rec margins are and everything else on that. It's the UL side that -- although that's kind of unlocked as you go anyway, it's the change in the amortization that becoming more straight line that will be more front and center and be the offset to some of the gains we might get out of term and whole life. And I know there's been conversations about the difference in the scope, right, where under FAS 60, you had a lot of aggregation, a lot of freedom as to how you could put things together, kind of like a PDR on the property/casualty side, right? So -- but in the case of this, you got to really look at every issue year and everything else. But the interesting aspect is that you don't any longer have the provision for adverse deviation. So you have that, that dropped because it needs to be expected value or best estimate on a go-forward basis. So between the net of the 2, much more favorable associated with a term and whole life with an offset on UL, mostly because of the back amortization. But we still view that as a net neutral or minor net positive. Anyway, you said intermediate so it came to my mind.

Got it. Well, that's -- those are some very good data points, Mark. And maybe one area that's just kind of a top-of-mind issue around AIG in the General Insurance business is that targeted 90% accident year combined ratio. You had about 94 point -- and then that would be by the end of 2022, I assume. And you had 94.1% in 2020. That was a nice improvement over 96% in 2019. Mark, maybe you could give us the construct about what are going to be the key drivers of pushing that down another 4 percentage points over the next 2 years?

Yes, happy to. I think Peter Zaffino touched on it a little bit, but we can certainly get into that as well. So you do have componentry on the expense side through AIG 200, and probably through the course of this discussion, I'll be reaffirming a few things in that regard as well as the favorable environment and AIG's approach to that favorable environment. But so on the expense ratio side first, let's just talk about AIG 200. AIG 200, and we stick by the numbers, was $1.3 billion investment over the 3-year period to have an ending $1 billion exit run rate on that. And we talked about where we would had achieved in this year, which is better than we originally planned. But if you go back to what we originally said that we adhere to, so at the end of year 2, $650 million cumulatively run rate, exit run rate and then at $1 billion at the end of year 3. So if you think about 2022, which is your question, you're going to have the $650 million coming forward. And effectively, you're going to have half of the balance, right? So let's call that a '25 in a calendar year perspective, right? So -- and we still feel that over the long haul, roughly 3/4 of that will accrue to GI, the General Insurance. So you can kind of do that arithmetic and math, right? And then you can pick where you think net written premium might be, but you're probably in the 2.5 points range of that. Again, you've got to make some assumptions, right, along the way. And then the balance -- and the interesting thing, I think, we all need to keep in mind is AIG is not a monolithic entity. And the way we report externally with the segments in North American Commercial and that's subdivided in Personal Lines, Commercial Lines, we tend to focus where the excitement is, right, and which is in Commercial Lines. And it's mostly in North American Commercial Line, secondarily in International Commercial Lines. But Personal Lines is -- because of the regulatory nature of it and so forth and so on, you're not going to get this kind of massive uptick or massive downtick depending where you are in the cycle. So the Personal Lines acts as kind of a ballast on that overall portfolio. So I think it's good to keep that in mind. But I think the loss ratio improvement is going to come out of North American Commercial first, International Commercial second in kind of a rank order. And Personal Line side is I think -- I've kind of addressed that, right? That's -- you're going to get some improvement, but you might see more expense ratio improvement than loss ratio improvement on that side, where we would expect more loss ratio improvement on the commercial side of the house. So I think the combination of the AIG 200 efforts, the ongoing -- that's why I tried to give you that mix answer on the geography and kind of business, is going to drive it. So we're confident that we're going to achieve that.

That math makes a lot of sense, especially with all the strength in pricing we're seeing these days. So one quick side bar, though, on AIG 200, Mark. You mentioned that 3/4 of it will be General Insurance-related and 1/4 to Life and Retirement. With that separation, is there any disruption? Do you have any concerns about the ability to kind of smoothly transition?

Well, a couple things. First off, I view that 3/4 as an end game. In a quarter or a year, it's going to fluctuate a little bit. But at the end of that period, we would expect that to be the case, firstly. Secondly, I really didn't mean to imply that the remaining 25% is L&R. There's going to be what we'll view as corporate today, right, but in a post separation would be combined with GI, right? So there's going to be savings accruing to corporate on that as well. And now with the separation lens, there's further elbow grease associated with a further consolidation of costs and functions, both at corporate and then what does L&R need on their side of the house as a stand-alone public entity.

I see. So no disruptions, maybe even a little bit better, a little smoother, is that the right way to interpret what you said?

Yes. On a composite basis, we would expect them to close to offset each other. I think Peter has kind of mentioned that in the past as well, and that's where we are on it.

That's great. Now another item that's come up quite a bit, and I know you can't apply specific numbers to a valuation, an IPO or a private investor that hasn't happened. But some people have brought up similar or companies with comparable businesses such as Equitable that trade at what we think is an extremely low multiple of 5x estimated '22 earnings. We think the sector is really undervalued. So if we look at AIG's Life and Retirement business, what might be -- what might give you some confidence that you could do better than the life sector as a whole? Or would you be willing, Mark, to accept a multiple that's comparable to some of these other companies like Equitable or Lincoln?

Yes. There's a couple of thoughts that come to mind on that, Andrew. First off is really are in a different position, I think, than many of those. Let me kind of enumerate a few of those, and feel free with -- to dialogue with it. But we're not a one note tune. We have a lot of products at our disposal. We have a lot of distribution also that is diversified that is very, very helpful. We don't have the back book issues anymore. I mean whether it's old business that we've got different comments on, old LTP or anything else, I mean, that's been solved through the whole Fortitude transaction. So we think the diversification provides a lot of good ways to manage off of their cycle and the macro cycle without the fear of back book really coming back and hitting. So I think that's a point of differentiation. And to the extent on whether it's public or private, again, that's idiosyncratic, right? You got to say what's the terms or conditions that someone might come forward with and does it make sense. We'd only want to value that if it was in the best interest of shareholder and we could really see increased value accretion. And it either enables or doesn't hurt the ability to deal with the balance of what we would need to sell post that. So that's probably the best answer I can give you now.

That’s helpful. And Mark, just -- again, I know you can't speak very, very specifically to it. But a lot of questions out there about the rationale for maybe, on the one hand, keeping the whole Life and Retirement business together versus potentially selling blocks of business, notably the annuity blocks or just altogether different subsegments within Life and Retirement. What's that rationale for keeping it together? Or would you indeed consider some -- breaking off some portion of the business? And if so, how? That was a long question, I'm sorry. But...

Yes. No. No. No issue with that. Well, I would say that -- I mean to some extent, I can rely on some of the answer I gave you on the prior ones with the diversification because you do leverage one to the other as well as a common view of longevity, a common view of mortality. The hedging program, quite frankly, is across the board. It's not a legal entity one. It's an aggregate view of hedging program. But when you get to blocks, when I look at the history of those things within the industry, sometimes you could be left with something much less attractive, or at least in the eyes of the outside world. That's all a point of view. So it's the most attractive blocks or subsets go off first, by definition. They don't have to be core books, but they're corer books by not having the cream left in there. And that's always an issue we got to -- you have to really push the pencil on.

So Mark, it feels like AIG is leaning in the direction of kind of keeping this business as a whole as opposed to separate pieces. Is that a fair...

That would be our preference. Yes, that would be our preference.

Preference. Okay. That's a good word to use there. In terms of the separation, could you talk to us about the capital implications? Would AIG be able to free up capital? Will there be more capital constraint? How do you kind of view AIG from a capital standpoint post 19.9% divestiture, whether that be private or IPO?

Well, a couple points of rationale that maybe just to recenter everyone is the 19.9% is the level which -- it's a consolidation line in the sand, right, so whether you consolidate or not consolidate. And because of AIG's long history of the DTA, a piece of that being foreign tax credits, the FTCs, there is a material amount of that expected to be utilized over the next 2 years. There could be some overhang into year 3, but dominantly in the first 2. So that's one consideration for the percentage and the time line associated with that. And a lot more of the work as Peter, I think, alluded to on the call that's been done is that we are increasingly comfortable that no equity capital would need to be invested into the operation. But we still anticipate in order to come out of this with 2 strong entities with 2 strong platforms, the debt leverage of the capital structure makes sense, and it makes sense within a reasonable period of time so that it's comparable and not disadvantaged and still comfortable with rating agencies, a time frame [ x ] that we would go to. So on the equity side, we don't see it. On the debt side, I think we've already alluded to it in the past. And now I'll ask, Sabra, if you have anything else you might want to kick in on that.

I think you hit on all the key points. I know back, I guess, it was 5 or 6 years ago with a different management team, they've talked a lot about the diversification credit that AIG received having both the GI and the Life and Retirement businesses. And while some of that diversification credit does go away, both GI and Life and Retirement on their own are very diversified, as Mark has commented, relative to the risk profile of Life and Retirement. So with the strength of the balance sheet, the GI pool's risk-based capital levels are like the highest they've been in about a decade and improving profitability. We were happy to be able to confirm that the capitalization structure that we're talking about is achievable without having to downstream any capital into subsidiaries.

That’s nice. And I guess, just in general, talking about capital, and I don't know if you’ll answer. But we kind of estimate about $4.8 billion of excess capital in AIG. And are we in the ballpark? And if so, what are your priorities? I know you've announced plans for $500 million in buybacks in the first half of this year. I think you've got a leverage ratio of 31.4% ex AOCI. So where would you like to take your kind of proceeds? Is it delevering? Is it repurchase? Do you have any growth investments? What are the priorities there?

That's actually a mouthful, that question. But I think Sabra and I will Frick and Frack it as we go through. But I guess, starting with your discussion of the AIG level leverage, which on a GAAP basis is 28.4%, and I think you were kind of looking at it as with or without AOCI and so forth. But as we said on the call, we've already dealt with the maturity in the first quarter, right, that we had kind of prefunded for anyway when we did the $4.1 billion debt raise. So that's already taking us down towards -- glide path towards where we wanted to be pre-separation of 25% on a GAAP basis, 25% on a GAAP basis. So that improvement continues. So I think that's the first thing. The second thing, on your $4.8 billion, I'm not totally sure where that may come from. But I think it's easy to -- because we talk about liquidity a fair amount. So it's easy to kind of transpose the 2, I mean, on our invested assets. I could have them all in cash and have inadequate capital but be massively liquid, right? So I think that might be more of a liquidity view, Andrew. I'm not completely sure. But on -- but back to the rest of your question. The debt reduction still is paramount. I think one message we are trying to leave is, although that continues to be a high priority, we see a lot more flexibility now, not only in the $500 million that you noted on share repurchases, but that on the minority sale, we see a portion of that being also additionally, additively as share repurchase potential on that. Other uses, we have the investment, as we've highlighted, the $1.3 billion into AIG 200 at share repurchases, as we mentioned, but is always holding company expenses, so forth and so on. So -- but into absolute excess capital, whether I'm at AIG or Arch, as you know, Andrew, I never go there. But Sabra, anything else on the liquidity side you wanted to bring up?

I would just mention that Peter talked about it in terms of capital management priorities on the call. And just a reminder that March 1 is when he is appointed as CEO. And I think that we'll probably try to be a little bit more systematic in how we talk about our capital management priorities. But as Mark reviewed, we are managing the debt situation and have been for the last couple of years. With the beginning of COVID, we kind of took a side step for a little bit because we raised the money in May of last year to basically pay off all the maturities that we had coming up over the course of the next effectively year. And we've actually done that. So the $4.1 billion that we raised has been used to pay off maturing debt and to repay the revolving credit draw. So from where we sit today, we're, frankly, relieved that COVID did not have as bad of an impact on our balance sheet, as I think we all feared back in March and April. But with the debt maturities that we've had, we'll continue to look for opportunities to get our leverage down. But really, the big event for capital, as Mark has referred to, will be with the separation and the setting up of the Life and Retirement capitalization, paying off debt at AIG, getting the proceeds from the 19.9%. And that will be kind of the next big frame -- time frame for when we'll be able to do significant capital management activities.

And one other thing, Andrew, if I could, just to pen one thing. Sabra and I kind of go back and forth on this anyway. The $4.1 billion clearly was prefunding. It was economically advantageous. We had a weighted average coupon effectively of 3.3% anyway, [ 3 10 or so weight for that ]. So that part was attractive for us. But given the uncertainties back then, we didn't know what the impact would be on the global economy because we're a global organization, not just a national organization, and how the U.S. government and other governments around the world would react to help sustain those economies. And so you wanted to get in and be liquid for all the contingencies we know about, the known and the unknowns that could have happened. So with that maturing debt schedule, we knew how much time we had with excess cash on our hands in case something went south that no one could predict. So it was just as much a risk management move as it was an economical.

Makes sense. And just so you know how we had calculated that $4.8 billion of excess. So we estimate roughly $10.5 billion of holdco liquidity. I guess you've got $1.2 billion tax settlement due in the second quarter of this year, $1.5 billion of debt due in February and another $3 billion of holdco cash needs. So that's kind of how we did it. I don't know if you want to say anything to address that because you don't always address excess capital but...

That's a liquidity approach. Yes, that's a liquidity approach. I would add to that the share repurchase. I would add to that the AIG 200 expenditures and so forth, which kind of narrows that gap.

There is accounting thing. Make sense...