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

Okay. Good afternoon, everyone. It's Meyer Shields of KBW, and we are extremely fortunate to have, for our next session, AIG's CEO, President and most recently, Chairman of the Board-elect, Peter Zaffino. Obviously, anyone remotely familiar with the story, has seen a phenomenal turnaround over the period that Peter has been at AIG. And the format for this session is going to be the same as what we've done for most. I'm going to have Peter make a few opening comments, and then we'll dive right into Q&A. As always, we greatly encourage questions from our clients. So please feel free to submit them. By far, the best format is to add them to the actual chat in the window there. I have very spotty access to my e-mail over the course of the chat. So questions you want me to ask, I think, are best presented there. And with that, I'm going to withdraw to the background and turn the floor over to Peter Zaffino for opening comments.

Good afternoon. Thank you, Meyer. Thank you, KBW, for having me here today. Before we begin, let me provide a few opening comments on the recent progress so we can jump in, Meyer, to like a fireside chat and go through some of the questions that you and/or the audience would have. Like you said, we've made enormous progress. I'm really proud of what AIG has been able to do over the last several years and in particular, over the last 18 months, given the backdrop of the pandemic. At this point, we've talked a lot about the remediation. It's largely behind us. We have the portfolio that we like. You're always going to be pruning and finding ways to improve, but we have now found ways to grow, looking at risk-adjusted returns and how do we demonstrate leadership in the marketplace. We're growing in many parts of our business, and it's happening through the core fundamentals of strong retention, that's client and premium retention, strong new business growth. And of course, what's always topical is growing through some increased rates year-over-year. We've spoken a lot about our reinsurance programs. They continue to get more and more refined each year. They reflect the improved portfolio, and they really responded quite well to how we've designed them. We have more predictable outcomes today, less volatility in the portfolio. That's driven primarily by the underwriting, but also the reinsurance helps in terms of frequency and in the event of severity. One highlight I keep talking about it from the business that's undergone probably the most transformation has been Lexington and our Excess & Surplus Lines business is really performing well. We've totally repositioned not only the portfolio and its risk appetite, but also its distribution. We now look at ways in which we can be very responsive to clients and distribution partners, but the limits are tighter, much more defined risk appetite. This has led to much more consistency in underwriting, and that's been demonstrated throughout the past couple of years. And while we've been in the process of doing the underwriting transformation, which was significant on its own, we've also been driving significant transformational change through the operations, and that is what we call AIG 200. So we're seeing the results of that play through the underlying core fundamentals of the business are really going to benefit from that, and that's much more end-to-end process, digitizing workflow, things of that nature. When we think about the sort of financial start to the year. We feel it's been exceptional in the commercial P&C business through the first 6 months. We've seen net premiums written grow by about 20%, while achieving accident year ex CAT combined ratios of 89.8% in the last quarter. So really strong overall underwriting profitability. The general insurance business delivered double-digit adjusted return on common equity of 10.4%, and Life and Retirement came in at 15.3% in the first half of 2021. The rate environment remains favorable. The market continues to calibrate to that. Rate is still needed in certain areas, particularly as we think about social inflation, loss cost inflation and the overall dynamics of the marketplace. Having said that, we see areas where the risk-adjusted returns are attractive, and we're deploying capital there to grow. We mentioned on the last quarter call, our capital management position. We're in a very strong position from a capital, liquidity and balance sheet perspective. We've updated our capital plan, and we're going to be reducing debt by $2.5 billion and repurchasing at least $2 billion of shares in common stock that we intend to complete before the year-end 2021. We also increased our share repurchase authorization to $6 billion in total. Blackstone -- at the end of the second quarter, we entered into a strategic partnership with Blackstone. We're very excited about it. They purchased 9.9% of our Life and Retirement business for $2.2 billion or 1.1x adjusted book value. They also purchased certain affordable housing assets for us from -- for $5.1 billion. We also entered into an SMA agreement with Blackstone to manage an initial $50 billion of AUM for the Life and Retirement business, and that will grow to $92.5 billion over the period of 6 years. I want to address the recent catastrophic events that have impacted so many in Louisiana, Mississippi, and as the storm continued to be quite strong going through the Northeast with Hurricane Ida. Of course, our thoughts go out to those impacted. It's much too early to give any insight in terms of an accurate update on the recent losses. But it's clear that it's going to be a very sizable event. We've seen the ranges that are quite significant. So the third quarter has been quite active. Claims are coming in slow from Ida, that's an observation. It's hard to get into some of these sites for the industry, working hard to do that with our claims colleagues and working with all of our partners. The tight labor market, material, all of the things that complicate this catastrophe are going to be parts of the estimate. We're seeing a lot more claims frequency for what it's worth on the personal side than we are in commercial, but that could evolve and change as we look to the next several weeks, and we'll report out more details on the third quarter call. The estimates, as I said, are wide-ranging. They seem reasonable. But again, I don't know how much attention is paid to the losses from the European floods, but in -- particularly, in Germany, very sizable, still working through it. I think that will hit the reinsurance market more than Hurricane Ida. But again, that will remain to be seen in terms of how that all plays out. If we look at the loss activity -- we have, and we've talked a lot about this, and we can go into more detail if it's of interest in the Q&A. It's just on our reinsurance programs. We have significant vertical protections in the form of occurrence and we have significant sideways in the form of aggregate protection. So we have ample reinsurance in place for frequency, and we have ample reinsurance in place for tail events and big severity. So we feel very comfortable with our position in the active CAT season. We use reinsurance strategically. We did decide, and I mentioned it on the last quarter call to purchase a little bit more in the second quarter. So we did buy down on some of our Southeast and Gulf attachment points in North America. And I think that that was just prudent relative to where the market was. And again, to try to reduce frequency and be able to respond to that. The overall program improved quite a bit in terms of our attachment points year-over-year. And feel like we're in really good shape as we get to the back half of the year. So I'm going to stop there. I mean I'm incredibly pleased with the progress that we've made to the portfolio, the underwriting culture that we've developed, the leadership aspects of AIG today in the global insurance market. Looking to make sure we're very thoughtful on loss cost and making sure that we're getting rate above loss cost to generate margin. This is the third year in which we've been doing that. And then also not losing sight of any of the volatility and more predictable results that we want the portfolio to respond to. So I'm, overall, really pleased. The group has done a tremendous job, and I still think there's a lot of runway for us. So I think, Meyer, with that, I'm going to turn it back to you to go through some Q&A.

[Operator Instructions] I want to start from some real basics. Peter, you spent a lot of time both today and in the past, talking through the many changes that you've made since your arrival. So let me start with a big picture question, not discussing the changes, but maybe a portrait of what AIG is now. So for example, in general insurance, we've got Personal and Commercial segments in both North America and International. Now those descriptions could cover an awful lot of potential markets. And I was hoping you could explain to us right now what you see as AIG's target markets in each of those 4 segments: North America and International; and Personal and Commercial. What is it that AIG's actually underwriting in those segments?

Thank you for the question. As you can imagine, just the size and scale of our organization being over $25 billion in net premiums written on a 12-month basis. If you look at the last rolling 12 months, I mean it's a sizable portfolio. So I'll cover the highlights. One is, I do want to say that throughout the remediation, we did shed a lot of business, $650 billion of limits, which is -- I keep saying it because I find it to be quite significant and it allowed us to reshape the portfolio, primarily on the Commercial side. The other thing just to note is that we're a bigger International business than we are domestic. It's 56% or thereabouts for International, 44% for North America. And we are a larger Commercial insurance company than we are a Personal Lines, so it's like 70-30. So that's kind of high level, if you were to break it out. So let's just go through the Personal Lines quickly. When you think about North America Private Client Group, which is the high net worth business, travel, warranty, very good, steady performers, and we have Accident & Health. So that's really what the North America Personal Insurance business is made up of. If you look at International, again, and perhaps we'll talk about it later, is we're a very large insurance company in Japan. We're the #1 foreign insurer in Japan, #4 carrier overall, very big business there. And it's focused more on sort of the Personal Insurance side of auto, homeowners, Accident & Health. So that's a very big business. We also have some travel, some warranty that rounds that out. So if you look at the Personal Insurance business, that's how I would break it out at a high level in terms of what the business looks like. Now I find some of those segments like Accident & Health, very attractive for growth, very attractive for investment in terms of digital B2C, B2B2C and digital workflow. So we see a lot of opportunity to grow in our international Accident & Health portfolio. Commercial Lines. I would think of North America as a very specialized specialty business. I'll start with the Lexington, Excess & Surplus Lines, industry leader, has done a tremendous job in terms of not only repositioning the portfolio, but now growing it. We also report AIG Re in our North America Commercial. And then I would say our largest line after that would be Financial Lines. And again, we have a lot of strong specialty businesses that exist within North America. That's how I would just frame out the larger ones. Now of course, we have domestic retail businesses, which is large accounts what we call AIG Risk Management, Excess and Primary Casualty and retail casualty. International, we have a very strong footprint on the Commercial side in London. So we have -- think about Talbot Lloyd's Syndicate, a global specialty business that is managed from London as well as a domestic business. So we have a lot of capabilities. We're a leader in Financial Lines in Europe, and have a lot of very good businesses in Asia Pacific on the Commercial side. So I could probably gobble up the rest of the hour talking about it, but that's kind of the sort of high level of how the businesses are built in the segments.

No, that was tremendously helpful. And I really appreciate your sort of setting the stage. Can we think about adjacencies as potential avenues for growth? So I made a couple of examples. I don't know if these are realistic or if there are better examples. But is there a high net worth homeowners market in Australia? Is there crop insurance? I know that's -- that was one of the businesses that Validus was engaged in. Is there an international crop insurance opportunity that we should think of as natural opportunities for growth? Growth hasn't been a problem. I don't want to sort of misstate the context, but I was hoping you could help us think through maybe what the next phase of growth could be.

There may be high net worth businesses in Australia. They won't be ones that we will be pursuing. I would start as one of those examples. But we do look at adjacencies, and we look at our global footprint to see where are there opportunities for us to expand market share and expand in products that we may have really strong expertise in underwriting that can be scaled in other parts of the world. But I do think our first opportunity and the real opportunity is to grow in segments that we're already in. So I mentioned Accident & Health. We think that that is a huge opportunity for us to grow through investment. We've been investing. It's probably been the single business where we have spent the most time trying to digitize our client experience, product expansion as well as digital workflow. And that will be something that we continue to work through for the foreseeable future. Really like the Excess & Surplus Lines business. I wasn't able to join some of your earlier sessions, but I know you had some of the wholesale leaders, and they are doing a tremendous job. I mean they are growing, they're grabbing market share. Their organic growth is significant. And we feel like we are a preferred insurance company partner that's going to benefit from not only our own recalibration, but the market growth in general. We have very clear defined risk appetites and believe that there's tremendous opportunities for growth. There may be segments within the high net worth that are better suited for Excess & Surplus Lines just because of the freedom of rate form -- and rate and form, but also being more responsive in areas and being more agile. So I could see that being not necessarily an adjacency, but a different way in which we could grow our business in the high net worth. We have talked a lot about our increased attachment points on a lot of lines of business and moving away from risk. But I think there's a great opportunity when you're a lead underwriter to have opportunities to ventilate more in mid-Excess and higher-Excess where it's not as commoditized because you're playing through the whole vertical chain. I believe that that's a great opportunity. We also look at getting even more organized in our Global Specialty business. And the Global Specialty business, we believe, with our global footprint and being very organized the way we are structured, allows us to have geographic expansion on the same product lines and take advantage of the scale we have and expertise. I mean -- so I think those are a few areas that I would cover. I would be remiss if I didn't speak a little bit about the reinsurance business. We had incredible 1/1, very strong retentions, tremendous new business opportunities. And that one can be scaled based on opportunities that exist in the marketplace. I'd like to see us, if we're talking at this conference in 3 years, to have had more AUM in the ILS space. I think that there's opportunities that we see through Validus Re because Validus Re is a part of AIG that will allow us to scale the ILS much faster and believe that, that opportunity will exist for us in the future and very much want to position Chris Schaper and the leadership team for growth in the ILS. So those are ones that I would think about. There's certainly more, but think that where there's opportunities for adjacencies, but we don't want to be dabbling. I mean, we've done too much work to get a core portfolio that we think is going to perform very well and want to make sure that we're maximizing value there, and where those adjacencies will look to the future.

Okay. Fantastic. That was tremendously helpful. You did use the word ventilate there in terms of limits. And that's a term that AIG has used fairly regularly. I was hoping you could clarify exactly what it is that you mean by that. I know I have my impressions, but just in terms of absolute clarity.

It's becoming one of my favorite words, and I do use it often. If you would go back to where, like on lead Excess Casualty, as an example, where we would have been lead underwriters. The balance of that portfolio when we arrived was totally opposite of what we want to do at AIG today. So we may have led in Casualty, where 90% of our deployment of limit was done in premium in the first Excess, and did not really do mid-Excess or high Excess. And there's no balance. So if you have large losses and you have a lead 25, you were going to get a significant loss and a lot of volatility. So we have shrunk our lead capacity in the first Excess layer and have tried to ventilate in the mid-Excess and high Excess. And so we want to be in the 40% to 50% on lead, and 40% to 50% of the ventilation of mid- and high-Excess just to get a better balance of the book and moving a little bit more away from severity, but still having the opportunity to benefit from doing that lead underwriting and getting better balance in the portfolio. That's really what we mean.

Okay. So I'm thinking of it as layers of exposure that have space in between them.

Absolutely right.

Okay. Perfect. I want to spend a little bit of time talking about the Japanese market because, frankly, it hasn't been an area that has needed anywhere near the amount of remediation effort that you've put into the U.S., into North America and into Europe. And my perception, I'm hoping you can either confirm or correct this, is that the Japanese insurance market moves somewhat slowly, relatively slowly compared to North America, compared to Western Europe, and there's more of a focus on relationships. How does that impact the ability to attain adequate underwriting profits and to improve that when that's necessary?

Well, the Japanese market is very unique. You have the 3 largest domestic insurance companies that have about 85% market share. So -- and they are sophisticated companies. They are -- they do a very good job of capital deployment. They perhaps are not as balanced globally, but they do a very good job in the Japanese market. We are the next largest. And I think capital is fairly sophisticated. The insurance market in terms of looking at risk is very good, perhaps distribution is a little bit slower to move. So when you look at the agency or captive agency that exists within the Japanese market, that may be a little bit slower to evolve. But I see it changing. I see opportunities for us that will emerge from a digital strategy. But when we look at sort of opportunities there, the loss ratio in our Japan business, as you pointed out, is actually quite good. I mean it's in the low 50s. And so when you say you're operating a business and you have aspirations to be below 90% in that business, and there's some CAT from typhoons and tsunamis and other things of that nature. I think there's great opportunities for us to focus on digital, in terms of workflow, the infrastructure needs to evolve. And so we're working through that in terms of really just more digital capabilities on the front of the business as well as through workflow. It doesn't sound all that exciting, but it will generate improved combined ratios that actually improve value to our customers because a lot of the distribution in Japan doesn't have the same digital capabilities as other distribution brokers, agents that exist in more mature parts of the world that have sophisticated insurance marketplaces. I mean Japan is the fourth largest in the world behind U.S., China and Germany. So we think that there's a lot of opportunities to scale what we have, improve efficiencies on the expense side and have a digital go-to-market strategy that will allow us to grow organically. And when you think about our overall market share, there's plenty of opportunity for us to grow in a meaningful way over time if we have those capabilities. Sorry for the longer answer, but there's just a lot there.

No, it's -- I would say, really appreciate it because it's an area that, again, hasn't needed the same sort of emphasis and hasn't gotten it. And on a go-forward basis, I think it's important for me and hopefully for our clients to understand what the goals are. So you mentioned again today, $650 billion of limit reduction. That's -- I don't know, I imagine that's a top 20 insurance company itself that's gone away. And you started off saying that in your view, the remediation efforts are largely behind us. So what is the potential -- and maybe we touched on this a little bit, what's the potential for maybe increasing limits going forward now that the structure and the underwriting appetite has been better defined? And I'm going to presume that AIG's ability to underwrite is better than it was before. Your controls are better before. How should we think of limits growth from this point forward?

This is a very good question, and we have focused a lot on the reduction over the past several years because as you said, it's been substantial, it's put a lot of limit back into the marketplace to absorb, and we thought it was important to highlight. We have a lot of dry powder in terms of limit deployment and looking at whether it was a conversation that we just had on ventilation, more opportunities in the Excess & Surplus Lines. More ventilation, I think, even in some of the financial lines on some of the excess layers. There's great opportunities. We have put together a gross limit stratification strategy that we're very comfortable with across the world. The underwriting guidelines that have been put in place and enforced have been dramatic and have been adopted by our underwriting culture and community. And that, coupled with the reinsurance, we've never really changed our philosophy. It wasn't about using reinsurance to reduce limits and then just increase net. It was giving us opportunities where we thought we had a lead position in the marketplace to be able to balance that gross and net. So the combination of shrinking to grow, the combination of being very disciplined on the pricing, terms and conditions, risk selection. And now the pivot to growth, we did over $1 billion of new business in the second quarter. And I looked at the retentions to make sure we're not just winning in the marketplace through new business. And we're retaining -- we had, in International, over 400 basis points of retention improvement. So we're retaining clients through that client experience and offering value. We're finding ways to acquire new business and believe that we have ample capital to deploy in terms of growth, and we have a limit profile that allows us to accordion it up if we like the economic terms, in terms of growing in certain areas of our business where we think the underlying profitability is very strong. So I think we have tons of opportunity. And the underwriters have been getting that message from Dave McElroy, Jon Hancock and where there's opportunities for growth, let's be relevant to our distribution partners and clients.

Okay. Fantastic. Another point that I want to revisit, maybe go one level deeper on, is on the higher layers of exposure in the ventilation strategy. Because one key component, and again, I think there's been tremendous success on this one, has been reducing volatility. As you move into more remote layers, I guess, mathematically, I would assume that that means lower frequency of loss, but maybe more volatility associated with the severity. But this is all being done in the context of a drive towards reduced severity. So I was hoping you could sort of close that circle for me and talk about how you've been able to accomplish both.

Yes. So there's a couple of data points on that. And we have tried to give relevant updates every quarter. Again, not to go back in history and time, but AIG was willing to take $100 million plus net on Casualty when they deployed gross limits. And that was not something that Brian, myself, anyone, was comfortable with when we arrived, and we significantly reduced that. And we got down to a net on a gross limit of $100 million to $12 million or less. And so as we have worked through the gross underwriting strategy, we really haven't increased that net underwriting risk appetite that much. We have the capability and flexibility to do that. But through ventilation, like you said, you end up getting more predictable outcomes just because it's more balanced. Mark Lyons, who we all know loves mathematical statistics, did reference on his last earnings call -- I'll have to repeat it because with Mark sometimes they're like really good and you just need to hear them a couple of times. But when you look at the average attachment point for our national and corporate U.S. accounts, they've increased by 3.5x and 5.5x, respectively, since 2018. So I think the point he was trying to make is not only are we ventilating, not only getting better balance, we're moving away from risk where when we took these lead layers, we attached much lower. So I think the combination, if I could just try to boil it down, is that we don't take as much of the lead layer. We've moved our attachment points up dramatically. We use limit deployment to ventilate in mid- and high-Excess or other Excess layers. And we use reinsurance in the event that there's a big vertical loss that, that is not going to be volatile on the net results. And overall, the execution has been tremendous, and we're really very positive on what we've seen so far in terms of the results.

Yes. That's very helpful. I appreciate it. I do remember hearing Mark make some comments and thinking that I needed a little help actually understanding what he was driving at. So thank you for clarifying that. Moving to a more basic term, maybe basic, I don't know, social inflation. It's clearly a catalyst for higher insurance rates. But it's not that concrete of a term in terms of what it means. So from AIG's perspective, how do you measure social inflation? And what tools are you using? We talked about some of them. What tools you're using within policy terms and conditions, specifically to protect underwriting results when social inflation is running hot?

So as you said, it is an overused, ill-defined and probably too convenient label to put on a category. So some of the key drivers and not all of them, but some of them -- a well-funded plaintiffs' bar. They have access to getting information out in social media and other means. That's a part of it. A shift in public perception of businesses can be part of social inflation. And then significant expansion of third-party litigation funding globally, that certainly has commoditized the litigation process and also has driven some results that we kind of lump into social inflation. How we look at that in terms of how we're going to underwrite it and how we're going to measure it, is we covered some of it in our strategy on casualty, but it's being proactive in lead umbrella, shortening limits, utilizing reinsurance, increasing attachment points, identify the 3.5 and 5.5, but also really a strict adherence to terms and conditions. And those -- while they are described, and we talk a lot about it, from 2019 until the end of last year, almost 50% of our policies renewed had a lot more restrictive terms and conditions. And another 28%, we had more restricted terms than actually the lead when we decided to not participate in a lead. So we're very focused not only on the math, which is we talk about the social inflation, loss cost inflation and getting rate above that. You need to really focus on the underwriting risk selection, limit deployment and the terms and conditions that we have been very successful on bringing back in terms of making sure that we don't have a false positive in terms of how we're actually executing on the underwriting. It's complicated. I think we have a very good feedback loop in AIG today, which is claims, actuarial underwriting, and they work very closely together to share observations and translate that and not make it stale and only looking in the rearview mirror.

Okay. Fantastic. So let's take one aspect of that where, again, we've seen much more benign reserve development than was the case early on, really, I guess, before Brian and you arrived at AIG. Can you take us through the current philosophy that AIG uses for setting reserves? We can clearly see that it works. But I was hoping you could tell us what it looks like on the inside.

Yes. There's 2 things I'd like to point out. I will bring Mark into this discussion as well. I think he's done a terrific job. He's been implementing a reserve philosophy that's a lot more recognizing bad news as soon as we see it and perhaps recognizing good news a little slower to make sure that what's emerging is not a -- again, something that we recognize too early. So we've been very conservative on that basis. I would also say, again, not to go back to go forward. But when I came here, we actually didn't even have a Head of Global Claims, reporting to 3 different places within AIG. So we totally revamped our claims organization, brought in high-level professionals at the senior-most level, and they improved many areas within the sort of core claims practitioners and policies and controls. And so not only do we work closely with actuarial underwriting and claims, I think the process we have today -- there's one head of claims, there's consistency in terms of how we approach all of our lines of business. Obviously, there's geographic differences based on maybe a litigation environment or whatever nuances exist in that local geography. We have a much more consistent approach today that should lead to better analysis and better abilities for the actuaries to come up with their conclusion. So I think it's really those 2 big things, Meyer, in terms of the development that we've seen over the past couple of years and being very disciplined on the underwriting side.

Okay. Excellent. Thank you. Let's spend a little bit of time if we can on the reinsurance strategy. So we look at results so far year-to-date. We're seeing net written premium growth outpacing gross written premium growth. So that tells us that AIG is retaining more of its growth business. Can you talk us through what we should expect in terms of this strategy going forward? In other words, that difference between gross written premium growth and net written premium growth?

The reinsurance -- the AIG of the past didn't really buy the past. I mean when we arrived at AIG, didn't buy a lot of reinsurance, and that just wasn't a philosophy that we shared. So out of the gate, it was going to be a headwind in terms of buying more property, catastrophe, property per risk. Do not feel comfortable taking the big nets they had on casualty. So that was going to be dilutive. We also bought a quota share because we felt that would allow us to accelerate the re-underwriting faster by having a little bit less net in the short run and then not having the volatility that comes with retaining $25 million net each and every on the casualty. So did we over-index it? I don't think so. I mean we had significant limits. You don't have the ability to shed $650 billion of limit and take that net while you're unwinding long-term deals and re-underwriting portfolio. So I think when we talk about the evolution of reinsurance, one of the big cessions we decrease as we didn't feel it necessary to buy a 50% quota share on our casualty tree. That's a big number. I mean our casualty books -- roughly $2 billion or thereabout subject. And so if you're buying a quota share at 50%, that's a fairly large cession. So we decided to do a 25% quota share. That's one data point. We did not need to buy as much property catastrophe because of the way in which we've just improved the gross portfolio. And one would ask, if you're a skeptic it's like, okay, well, does that mean you took larger nets? No, it was actually the opposite. We took lower nets on the occurrence and the aggregate and bought to the same return period. So it wasn't buying less reinsurance because we felt we could take more net, it was just looking at the return periods and seeing where those attachment points belong based on the portfolio that we have. I think that's going to continue to evolve. The growth portfolio continues to improve. There's going to be points of view that we don't need to have maybe that much excess of loss because we don't use those gross limit deployments as much as we used to. And there's going to be views that if we don't get the economic terms that we think we've earned by the incredible improvement in underwriting, that we absolutely have the flexibility to take significantly more net with our capital position and as well as matching our risk appetite. So I think we have tons of flexibility going into 1/1, where most of our treaties renew. Having said that, we haven't changed our philosophy and our strategic intent is to partner with reinsurers and make sure that we have that balance throughout the portfolio. So I think we've done a tremendous job on the reinsurance side and think that the programs continue to get more sophisticated and they, I believe, tend to deal with what we want on frequency and severity.

Okay. Excellent. How do you think about reinsurance relationships? And that's both a broad question and I think there's a particular component of it with regard to maintaining relationships in a reinsurance world that seems to have ILS as a permanent component. So I guess, the overall relationship and is it different in property CAT in the ILS world?

Well, I take those reinsurance relationships very seriously as does AIG. Maybe it's my background, maybe it's my philosophy. But those partnerships are incredibly important. And so having core reinsurance partners that trade across your portfolio for all their lines of business and finding ways to expand those relationships is a key part of what we've been able to do in improving the reinsurance programs for AIG. ILS, I still feel that way as well. I mean, if I look at -- I mean, they're competitors of AlphaCat, but we have always used ILS as a very meaningful placement strategy for our property CAT. That will continue. The continuity through the major ILS players on our property CAT program is significant, and there's a lot of continuity year-to-year. So we very much focus with them on areas where they all have different risk return parameters and where they want to attach and limit deployment. But that's a key part of our strategy, and that will continue. And I do not look at them as commoditized reinsurance capacity. They're equal partners as to reinsurers that can deploy capital on their own balance sheet. They've been very important to us.

Okay. That's very helpful framing. I'm going to provide a little introduction to this question because otherwise, it sounds a little bit too pessimistic. We've seen AIG have significant success in improving its underwriting results over a period of time when market-wide pricing was largely improving. And frankly, the way I look at it, I think AIG is much more a cause of that market pricing improvement than simply a beneficiary of other people's decision-making. So I don't want to, in any way, take away the credit that I think you deserve for this improvement. This is still a cyclical industry. Right now, we're seeing decreasing increases. Probably at some point in time in the future, we will actually be talking about decreases. Again, I don't think it's imminent, but I do think it's an inevitable part of this cycle. How should investors think about AIG's underwriting profitability? You've given, I think, pretty concrete guidance in terms of expectations, but eventually, things will be soft again. How should we think about AIG's underwriting profit over a cycle?

Well, there's a lot in that question. There's the element of -- we're in a market, right? So there's no doubt that there's competitors, brokers are very large, sophisticated, they advocate on behalf of their clients. But the markets that we're in, they're looking to AIG for underwriting expertise. We're not a capacity player that just follows other leads or offers capacity because it's available. We want to shape the direction of terms and conditions. We want to shape the direction of how we're underwriting. And I think that leadership has yielded rate increases, but equally repositioning of the underwriting portfolio. And I think terms and conditions are as significant, if not greater, than the rates we publish in terms of what we've achieved to date. When I look at the rate, I mean, how I look at it is, am I driving more margin or less margin? And so I am very careful as we go into this market, if the rates -- if we call decelerating rates, meaning I'm getting less of an absolute rate increase this year compared to last year, a bad thing, then I want to reshape that because I think it's a good thing because we want to shape the portfolio we want. If you just chase absolute rate in a market that starts to go down, you end up getting a less than desirable portfolio. And so we want to make sure we're retaining clients, we're getting rate above loss cost inflation and social inflation. We're repositioning the book because you're constantly pruning and you're also using those lead underwriting capabilities to drive outcomes. And I think you said it is like we weren't reliant on others to shape the rate environment that we wanted to drive for our portfolio. I would also say, and this is of no disrespect to anyone in the industry, but we're not competing with the market. I mean we compete with large global lead underwriters, which there are not a ton. So it's not as though new capacity is coming in that may want to do Excess & Surplus Lines. We're not competing the Excess & Surplus Lines with new capital. We're not competing with them in our Casualty or Property portfolios. They may be filling capacity. They may be filling in some of the commoditized layers. But I think the market we're in is the market that needs to continue for a while. And we are comfortable that we will continue to lead in driving rate above loss cost driving margin. Now the last part of your question is, how should we think about or investors think about the profitability improvement? Our big driver in the future is going to be through expense. I mean we like our loss ratios. We think that they're going to become world-class. We'll continue to improve those. But when you look at our expense ratio and what we've outlined with AIG 200 separation, those are real tailwinds for us as we continue to execute and improve the overall expense ratio of the company. That's going to improve the combined ratio. And then I do think that on same-store sales, we'll probably need less reinsurance over time, which also, to your question earlier, can drive a little NPW to help some of the ratios, was really not taking on a lot more risk related to the portfolio today. So again, we know insurance is very competitive. You've got to earn your business. You've got to work very hard with your partners. You have to continue to drive relevance for clients, but that's the DNA, that's the underwriting culture we've developed and one that we really want to drive growth and continue to drive profitability.

No, that helps. I think the phrasing of that and, again, people say this all the time, there's not an insurance industry, there are 30 or 50 subindustries and stuff like that. And it's important to know which one we're talking about, but I think that really clarifies things. So in 2017, 2018, and your team comes to AIG, takes some time to assess what's not working, to fix it. And then all of a sudden, the global pandemic comes along and it sort of knocks every one off their game a little bit. When we look back, what changes to underwriting have you made because of this individual -- I'm saying this with a great deal of hope. This remote risk that hopefully only shows up once a century, at most? And second, more broadly, when you're underwriting, how do you incorporate the idea that maybe some other very remote risk is going to materialize. How does that manifest itself in the AIG underwriting process?

Very good question. Certainly, in COVID, we learned a lot about the strength of policy language, which was really important, where coverage was offered, making sure there was strength in supplements. And so it was a really good refresher reminding me, I'm starting to feel like I'm getting older in the industry because it was very much around 9/11, which is going to be 20 years, but we learned a lot about terrorism and how to deal with that. Now the lessons learned can't be the aha moments, they have to be more in looking at deterministic outcomes on a portfolio, meaning that you can't apply probabilities credibly to get the outcome. So whether it's terrorism, I think flood goes into that category, pandemics. We have to focus on underwriting guidelines that restrict limit deployment on areas where there's not credibility and loss cost of modeling, which you can find in property risks from time to time. Now in cyber, again, there's a systemic issue that's very hard to predict. And so what do we do with that? Is that continuing to drive underwriting thresholds and improvement very close to clients in terms of working through risk management, more clarity on data transparency, but also tighter limits. I mean if you are in a segment that you're not certain of the systemic impact because you can't scenario test everything, you need to have smaller gross limits. When we look at our cyber portfolio, the average gross limit is around $4 million. So okay, Is that enough? No, it's not. So we also have found ways in areas like cyber to probably purchase a little bit more reinsurance to make sure we have a better balance in the portfolio. And that comes in the form of quota share in aggregate. And so I think we've looked at it, not only in the pandemic, but said, we've got to look across the portfolio of areas where when we scenario test it, there could be an outcome that looks like you said black swan, but more out on the tail, we need to find ways to mitigate that volatility. The last piece, we spent a lot of time on this overall topic, but the other is a lot of experts that will come on and talk about the credibility of property CAT modeling. And again, we could talk for a long period of time on that, increased frequency. Is there more thickness on the tail. The answer is yes to all of the above, and certainly need to adjust your underwriting but also your pricing and your risk assumptions. So I think there's real strain in terms of the credibility on the low return periods for property CAT, 1 in 10s, 1 in 25s. It's just not credible. And so we've been thinking through that and applying those probabilities lower. And also being -- it's again, it's hard to always mathematically do it right, but this demand surge or supply issues that are going to exist as a result of the pandemic, but that can go into nat CAT. So like if we have a significant loss beyond what just happened with Ida. But if it's something that goes into Florida or the Northeast of what could happen, is there the supply, and is there even the labor to be able to rebuild communities, homes, commercial buildings? And that needs to get priced in as well. And so I think it's a constant sort of challenge. We have a very good risk sort of checks and balance and just looking at the entire portfolio to make sure we understand the systemic nature, but also the challenges with low return periods and there's more on the tail than perhaps is actually modeled because it's just very hard to do.

So false choice here. Is that a tool or is that a problem that can be resolved through technology? Or is that a tool resolved through imagination?

It comes through better data. And I think you have to be a skeptic of model output. Not that the models are not very good. Just look at the probabilistic models or just taking a set of deterministic sets and not necessarily calibrating everything that's changing in the world and then applying probabilities without not really being able to fully assess climate change, the more density, you can just do the simple math of Palm Beach, what used to be a $3 million house is now $6 million, is knocked down from $10 million. In some cases, the exposures have tripled in areas where there was capacity shortages in terms of deployment in peak zone. So I think you just have to really make sure that you're very cautious in modeling output and not managing to absolutes and have to have a healthy skepticism towards your overall aggregation on your balance sheet.

Okay. Understood. I want to move to AIG 200 because you spent a lot of time describing what AIG 200 is. And then, again, I don't know if I'm representative of the sell side, we look at it as, "Oh, it's an expense control program." And it's clearly much more than that. So let's do it in 2 parts if we can. Can we get a brief update on the expense component of AIG 200? And second, when we talk about the other parts, the digitization, the streamlining of processes. How should we, on the outside, expect to see that in the financials? Where will that make a difference?

Well, the financials that we continue to outline are a program cost of $1.3 billion, and an outcome of an expense benefit of $1 billion, when we're done with the program at the end of next year. And we're on track to deliver those benefits. We've realized over half of the run rate benefit already and have a line of sight towards the full $1 billion. So I think in the financials, I would think of it that way. And again, $1 billion of run rate benefit, 3 quarters of it goes to what would be AIG remaining company, meaning you carve out Life. And then roughly 20%, 25% will go to Life, and they've already earned in some of it. So I think it's a good balance, very well run, very disciplined, governed extremely tightly and we're hitting on all the financial milestones and outcomes. But they are outcomes. When we think about -- and again, I could spend hours on this in terms of how we're improving the business. But when we think of -- if you think of back office to front and then front to back, every part of it is getting improved. We've been able to -- and again, the pandemic, we accelerated and compressed the transformation. We didn't slow it down. And so we were working through our shared service operations and we ended up selling them to Accenture. And you say, okay, well, that seems risky because of the service elements and you don't necessarily own it. But the way we were able to design that is all of our employees stay for the minimum 3 years within Accenture. They had 55 digital capabilities that we didn't have and we would not have been able to fund that capital expenditure and gotten those digital capabilities to enable better service from the back office, and we have very tight SLAs. So that's been a great outcome. We were a 20% cloud user, and we are migrating to an 80% or thereabouts cloud user. And that just gives us enormous capabilities and flexibility and sort of cost certainty that we didn't have, running data centers and having unstructured data was not a good way to strategically get insight on your business. And so that was another IT infrastructure. What do we do with that? We had significant amount of applications that existed in the organization that were not governed the way they are today. So when you have a cloud migration, you go through every single application, and we're retiring a lot of the applications that are no longer needed. They're obsolete. We can reinvest with better technology. So all that's going to require work. But those 2 parts of AIG 200 are already being completed. And so we're on our way of execution. On the underwriting side, better data ingestion, more consistency in data architecture, and it allows us to be able to quote business faster and also triage accounts that we may not want and so we get right on it and spend more time on the businesses that we want to grow. But we weren't able to do that in the past. So we do that in North America. And the last one I'll cover, again, because I can speak about this for a great length of time, is in Japan, which I mentioned. I think that's a tremendous opportunity. It's the business where we think all of the digital investment of whether it's front-end in a B2B2C or B2C will allow us to grow organically, but also the efficiencies that will be gained through digital workflow will be substantial for the Japan business as well as our international business. And therefore, AIG. So if you get in each work stream has a real strategic benefit for AIG that will substantially improve its performance on each of the 10 work streams we did within AIG 200. Those -- the outcome is more efficiency. It wasn't a cost-cutting exercise because that's just not going to improve the business, and that's not something that we were willing to do.

Understood. That was very helpful. I want to move to a theoretically soft topic, and that's talent. People have been saying forever that the aggregate insurance industry is short on talent, certainly relative to the number of organizations that exist. And I'm wondering whether in an insurtech era where there's something -- a shinier alternative to insurance, maybe that makes it a little harder. What does AIG do to recruit, to retain and to develop talent in all of the aspects that are necessary?

Well, I think there's still tremendous talent in our industry and one that has continued to evolve, to go beyond just an apprentice model on the underwriting side to having more structured learning as well as learning through an apprentice model. For AIG, I needed to bring in a significant amount of talent on the underwriting side because I didn't think the underwriting culture that existed was going to perform at the level that we aspired to perform. And so we ended up -- I mean, you know the people that we -- Mark Lyons, Dave McElroy, Tom Bolt, Jon Hancock. I could go on and on in terms of the quality of underwriting executives that we have added. And the best predictor of future performance is past performance, and they all have decades and track records of driving significant underwriting consistency and performance in the business. We built a bench that was going to be of the same type of characteristics, maybe not as much experience. So those are 30-, 40-year veterans that I just named, but making sure that we were very thoughtful in how we were going to develop talent across the world. We strengthened our operations capabilities. I mean when we talk about AIG 200, those are not people that existed within AIG. We went out and hired people with -- real process experts that we have built like kind of like a Mark Lyons and a Dave McElroy, Shane Fitzsimons and a team that leads that has a tremendous track record in core operations with GE, Tata and other major organizations. So we're building the talent to complement what was here, but also bring in top-performing talent. A huge issue is diversity, for me and for AIG. Gender, race and thinking through implications from the senior leadership positions all the way through the organization. It's a huge part of AIG's culture. We have over 100 employee resource groups that exist within the organization. We are active recruiters and very talented apprentice models that come out of university. So we had a very strong and committed internship program that leads to an analyst program. And so that is a big part, you're as good as your people. And I'm really proud of the team that we've assembled. You're never done with talent. You're never done on the diversity agenda, and making sure that we can continue to push that very hard. And you'll continue to see us adding talent, developing talent and cultivating talent at the more junior levels as we start to really build the organization of the future.

Okay. I'm...

We're not in segments -- Meyer, the one thing I would say that you asked on the digital, because I didn't answer that part, but is that we're not in segments that are easy to disintermediate. I mean it's not as though we're in small commercial or more commoditized lines of business that are easier to come up with an underwriting algorithm that can disintermediate significant expense. That's not the business we're in. So do I worry about digitization of the business? Sure, I do. But I worry about it in terms of our customer intimacy and making us more effective in making underwriting decisions in the markets that we participate in.

Okay. I'm getting the flag that says we have about 1 minute left. So I'm going to stop my own contributions and say thank you very much and ask you for final comments. What else do you want to take this opportunity to communicate to investors about AIG?

I really appreciate the opportunity to speak to everyone today. The one last thing I would say is just we're really excited about the partnership with Blackstone. They are -- it's their biggest balance sheet investment in their 30-year history. They really like the Life and Retirement business. We hope to close shortly, gives us a lot more capital flexibility. We have a tremendous partner in helping us build the business for the future and think that the opportunities we have at AIG, we're all very optimistic and just greatly appreciate everyone's support and the opportunity to speak with everyone today.

Peter, thank you so much for your time. Thank you so much for the information. And I wish you the continued best of luck and that your successes continue. Thank you.

Thank you. It's great to see you.

You as well.

Bye now.