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

Thanks for joining us. I'm Ryan Tunis, I'm the insurance analyst at Autonomous. I'm happy to have with us Peter Zaffino, Chairman and CEO of AIG. I think AIG is one of the more interesting stories in insurance for sure. We're going to have a conversation but first Peter wanted to leave off with prepared remarks.

Thanks, Ryan. I thought it would be just easier if I got up and maybe spoke behind the podium for a few minutes. One is, I really appreciate the opportunity to be with you today, Ryan and everybody here today. The AIG story is a unique one, and I hope to unpack it a little bit more with some detail. We've done the hard work of repositioning the company in terms of its underwriting standards and underwriting results, and it's been a significant heavy lift. We now are delivering terrific underwriting results, especially when we compare where we started our journey, which was a very unprofitable portfolio. If I switch to today, our top priorities remain Corebridge, Corebridge deconsolidation and continue to sell down AIG shares. We can talk about that in the session. We want to position AIG for the future. There's what we call AIG Next, which is really an expense initiative to start to take a company that was a conglomerate and put it into a single company. So that will save a significant amount of money for us as we get to focus on our ROE and the company for the future. A few statistics on the underwriting, I think are just important. I wrote in the shareholders letter this year that I thought 2023 was our best year yet. And we've had some really good relative years when we started in 2017 and '18. Just to level set. I've said this before, the portfolio from 2008 to 2018 lost $30 billion. That has not been done in our industry and you survived. I mean, so the reason why I say that is not to provide the statistic, but for everyone to have a clear understanding of the portfolio in which we had to remediate was a highly unprofitable portfolio. We also had within that, a ton of volatility. So CAT '17 became a really active year. If you look at the last 6 out of 7 years, it's been over $100 billion of insurable loss. But our CAT ratio in '17 was 16%, and this past year in 2023 is 4.7%. So not only have we improved the underwriting, we've dramatically reduced the volatility and that continues to be evident in our results. We also did in normal companies, we don't have as much to do, AIG 200, which is really what we use to transform the operational capabilities of the company would be a big story and there are so many other things to talk about. But we actually tackle this simultaneously with the underwriting turnaround. It was $1 billion of savings, but what I'd like to leave you with is more importantly is it was really a big improvement in terms of data, data ingestion, workflow, digital workflow, cloud migration and just improving the core foundation for AIG in the future. So that's done but a big accomplishment. From 2018 to '23, the calendar year Commercial Lines combined ratio improved by 2,600 basis points, which is dramatic. The accident year combined ratio, which is just really the results in that year with no effect of catastrophe or prior year reserve development was 1,900 basis points. So that -- again, you can see what we've done, the evidence through the financial results. We also shaped the portfolio with divestitures that were all purposeful. We divested the reinsurance business, which had an inherent amount of volatility. Its size and scale wasn't big enough to sort of drive outcomes in the marketplace to become an index. We did that with RenRe. We did the same thing with Crop Risk Services, which was a crop business and sold that to Great American. So we continue to prune the portfolio. I don't think there's a lot more to do, but getting the core businesses focused on where we want to have differentiation in the market and be able to grow. Corebridge, we continue to work really hard on sort on the final stages of sell-downs. We have done a lot there. We started with Blackstone with an equity investment. We outsourced fixed income to BlackRock, flip to the Aladdin platform. We used the AIG 200 transformational program as a foundation to do Corebridge's operational Corebridge Forward. We did 3 secondary offerings last year that generated $2.9 billion of proceeds. Divested 2 businesses, Laya, U.K. Life, which is $1.2 billion of proceeds for Corebridge. And we just announced a Nippon Life, 20% sale for $3.8 billion. All this has led to our financial flexibility in the capital management. This multiyear repositioning the portfolio has allowed us to significantly strengthen the balance sheet and give us financial flexibility for the future. All of our Tier 1 insurance company subsidiaries are at or above whatever the target levels we've set. So we have more capital in the subsidiaries for the writings we have today so we can grow in to business and to the capital position without additional capital. So that gives us a lot of flexibility to grow. We've significantly reduced our debt, when we deconsolidate, we'll be sub $10 billion. And so that was really $12 billion of retirement since 2001. I mean a lot of it was from what we did in Corebridge, but we've been really disciplined on when we've done some leverage with Corebridge that we took off that with AIG. So our debt-to-capital ratio upon deconsolidation, including AOCI or excluding we'll be doing 15% and 20%. Board support us with a share authorization program of $10 billion. That really reflects the liquidity that we have, plans. Again, of course, it depends on when we deconsolidate and sell down further Corebridge. But I think about that through '24 and '25. We said we should do about $6 billion this year, probably around $4 billion in '25, depends on the timing of the deconsolidation, but gives us a lot of financial flexibility. We increased the dividend again, 10-plus percent second year in a row, returning capital to shareholders. So I think if I leave you with one thing today, I hope I leave you with more, but I'll leave you with one is like this is a different company. There's really no way to look into the past of anything of relevance to today, although we got a great brand. We have good global presence and we have the ability to continue to grow. And I think our position and voice in the marketplace is significant. So we're really proud of what we've accomplished, the growing reputation and delivering high-quality outcomes quarter after quarter to be able to position AIG for the future. So I just want to just open with those comments, and then Ryan, we can go to Q&A.

So yes, thanks for those comments. So yes, it seems like the major theme here is a lot of years, we're fixing the underwriting. That's fixed, and now it's more of a discussion around a pivot to growth. So I guess as you're shifting that focus, how do you ensure that there's still a good level of underwriting discipline.

Underwriting discipline is really driven by the culture and the framework and who you have leading the businesses. And so you'll hear thematically throughout our conversation of all the changes that we made. AIG, again, I don't spend a lot of time. I knew AIG really well. I was at Marsh & McLennan for 17 years, and they were the biggest trading partner. So I knew the company from the outside as well as you can know it. It was known as a growth company, not necessarily a great underwriting company. And when we need to really position the portfolio, we had to have a culture of underwriting excellence, have a cheap underwriting office that was not a tick the box, but actually was setting standards, monitoring growth and also profitability and having underwriting guidelines that we're going to be aligned with how we want to shape the portfolio. Out of 20 -- the 20 top underwriting positions, and I'm talking about from the most senior on down, so our Chief Underwriting Officer, Chris Schaper, leader of international is John Hancock, and our leader in North America is Don Bailey. So those would be 3. And in the top 20 positions, 17 out of the 20 have less tenure at the company than I do. So it means like less than 6 years. And what we were trying to do is drive those leadership positions with underwriting practitioners. They can still manage. They can still lead, but not having general managers overseeing underwriting businesses was really important. They focus on underwriting profitability. That is the primary objective. We are also set up very differently than other companies in terms of how reinsurance is purchased. It's not done by any of the businesses. It's not done by the CFO's office. The head of our reinsurance purchasing Charlie Fry, I think he's the best in the world. He comes directly to me. We set all the underwriting standards in terms of what we buy for reinsurance based on our volatility, appetite and risk appetite for AIG, not-for-profit centers. So that's very different. So the underwriters are focused on gross underwriting. They don't really look at net underwriting as an outcome. It becomes the outcome every time we have a quarterly income statement we had to produce for the Street. But by and large, that culture is very strong. Underwriting expertise is very strong, and we will not sacrifice underwriting profitability for growth.

Got it. So I guess it's interesting because from your standpoint, you've been advocating that this pivot to growth happened a couple of years ago. But I think there's been a bit of a lag from an investor standpoint. I think count us in that camp, we wanted to see just a little bit more -- let's see the underwriting bear out. But I think investors, most people, I think we now share the same mindset, we're on the same page. So now that growth is more of a focus, and you've been doing this for 2 years. And I guess we haven't been paying as careful attention as we should have. Can you talk a little bit about the progress you've made or the challenges you've encountered trying to shift that mindset back to growth?

When we talked about it 2 years ago, not to caveat it, but I think we're really talking about like on a written basis, we feel like we've had a lot of remediation done. So as it earns in, it just takes a little bit of time and repositioning the portfolio to where we thought the best risk-adjusted returns would exist. We have been very focused. There's businesses today. When you're doing turnarounds, you manage them as an indexed because you have to drive profitability for the entire portfolio. We've really been focused on those last 2 years in terms of getting disproportionate amount of the investment into areas of high growth potential and really strong combined ratios, while still remediating always the bottom portion of the portfolio. So I think you've seen evidence in areas where we think we can grow very profitably like Lexington, like the syndicate that we have, Talbot, Global A&H, which has been de minimis, but we've had a little bit of -- we have been exiting China. So that's been a little bit masking some of the growth in A&H. Our global specialties were the biggest global specialty rider and think that there's ample opportunity for growth there and want to continue to make sure that we have a focus on those areas. And they've been performing exceptionally well. When I look at the portfolio, I always start at like what clients do you retain? What's the new business pipeline? Are we able to look at different areas of business in many different geographies. So like, if you think about property, not all properties created equal. There's definitely different risk-adjusted returns depending on where you are in the world, what's happening with CATs and also what's the underlying profitability. But AIG is 6 or 7 points of entry into property so we can scale it back or scale it up depending on those risk-adjusted returns. I think it's very thoughtful, really driven by portfolio work and how we actually drive that through to the underwriter. So I think the growth will be there. I believe like the retentions are very strong now, where in the past, that remediation still affected the current portfolio and new business has been just terrific. So I still think there's a lot of momentum and a lot of opportunities for growth.

Is it -- you guys are obviously different size than you were 10 years ago. Does that pose any challenges in terms of the growth you can do? Or...

No. I mean, again, if you go back in time, when AIG was at its peak, probably $65 billion of top line, it squandered that opportunity. I mean, because it was -- it's not the way it is today because AIG at that point in time was bigger than any broker in terms of what it plays in the market now, Marsh and Aon if you say we're $35 billion gross top line, they place 3 to 4x that in the market today. So I mean what AIG had as an unbelievable advantage at that time, just wasn't taking advantage of. Now the size matters, but I think what matters more is like where you trade? Like I mean, so when you look at the point of sale, which is through the brokers to clients, are you setting the underwriting terms? Are you setting the pricing? Are you the one that has the lead capabilities, which means you have the underwriting expertise. And that's the businesses we trade. So we're not a capacity player that tries to find risks through an open market and best price wins. That's a failed strategy. The businesses that we are in and the global locations, I think, give us tremendous advantages to differentiate ourselves compared to other companies.

Got it. So you mentioned Lexington. That's your wholesale division in a place where you've executed extremely well. But listen, you've kind of been in the camp, you've been a believer that there's sort of a secular shift of market volumes into the E&S market. So I guess just to play the devil's advocate scenario, if E&S turns out to run a little bit more of a classic cycle, it's good in hard markets, tough in soft markets. how much of an impediment would that be for AIG?

It won't be an impediment at all. One is I don't believe it. It's a complicated market. I'll try to explain it is that E&S has grown substantially over the last 20 years. So I'll give you one statistic first is that if you went back to 2003 and '04, the entire E&S market was about $34 billion. Today, it's $114 billion. So it's grabbing market share. There's no doubt about it. Their capabilities are broadening and their ability to actually drive outcomes is substantial because their organic growth versus retail and they have the momentum. The other piece is that they are able to break their models into really 3 categories to oversimplify. One is a pure E&S market, which is maybe hard to place risks, you have to be very focused on going into E&S markets to be able to do that. The other is they become placement engines for independent agents about 40,000 independent agents in the United States. They have access usually to 2 or 3 markets. They're the more traditional and middle markets, they don't have access to middle markets, they have to use a wholesaler to get to those markets. And then the third is what we call delegated authority or MGUs where they underwrite on behalf of insurance company paper or risk assumption, where they're growing and they're putting the most investment in those 3 buckets. So they have broader capabilities. What happened is -- and this is not intuitive, but the old Lexington had a strategy that it would take retail so think about Marsh, Aon, Willis or wholesale business. And that would have been Ryan Specialty, AmWINS or CRC. That is a terrible strategy and one that ends up getting adverse selection everywhere. Retail brokers don't want to go to excess and surplus lines markets. And you don't have to believe what they -- I ran Marsh, and I'm telling you, I didn't want to go to Lexington. It would be the market of last resort in every instance. Wholesale doesn't want to use a market that will use retail. So they give you the adverse selection. So it ended up becoming a giant business of adverse selection, plus why not just like issue the largest limits you can to make sure that the results are even worse. That's where we started. And if I look at the market share under that strategy, it was 3x the size that we are today. So I would argue that we have plenty of room to grow, number one. The other statistic that's very interesting to me, and I'll say the catalyst was AIG, you could ask around and determine if that's right or not. But in 2017, as I said, when I came in, I had this retail wholesale distribution strategy, and we said we're not doing that either, we're going to like run the business off or we're going wholesale only because it's the only way we're going to get like very strong business. From 2017 and '18, once we decided, which means we had to basically nonrenew most of the portfolio and turn it over and go through wholesale. The compound annual growth rate from '17 to '23 is 20% in wholesale. It's never been that large. And we're talking off a bigger bases now. So I don't think it's really driven by this hard market, soft market. I'll age myself out because I've been doing this for a while. I always -- I don't like hard market, soft market. But if I was to define a hard market, I'd say it's a supply issue. Hard markets, [indiscernible], they were driven by no supply, and therefore, pricing becomes a direct correlation to capacity that could be deployed. There's no shortage of capacity in the marketplace. We could write billions of dollars of premium if they have the right risk-adjusted returns as could many of our competitors. This is a choice in terms of going to a market. And by the way, back to what we talked around how much premium goes into the market. I mean, AmWINS is now north of $30 billion. I think Ryan Specialty is very close to that and CRC is not too far behind. So it's going to be a similar dynamic that we saw in retail like Marsh, Aon, Willis for a while were the big 3 and then there was everyone else, but everyone else is caught up. I mean, they're not the same size, they have strong organic growth and they have a lot more relevance. I think you'll see that in wholesale as well. So it's a dynamic shift. There was only 8 wholesale-only markets, maybe 9 when AIG decided to make a change with Lexington, I think today, don't ask me to name them, but I think there's north of 80 today. Some are doing [ funny ]. So that market is -- I don't see it. If you go back to that period of time, when I said it was back to $33 billion, it lost a little bit of market share in the more traditional hard market, soft market. But it's not going to give a lot back this time. So I just -- and my last like this will be a plug, I'm not a wholesale only market. It goes in a minute. I've got plenty of Medicaid bill. I'm not like plugging for it. I just think that's where the market is. And so if it doesn't work, I got like other businesses that can pick up the opportunities. This is not we're wholesale only, and we're betting in the farm. I just think there's plenty of opportunities for Lexington to grow. I think that market is going to grow. And look at submission count when you're talking to brokers and the wholesale brokers are breaking records every quarter, like I can't believe how much submission activity is coming into them after massive growth than what we've seen over the last 2 to 3 years.

Got it. So I -- I get like aside from, I guess, growth re-underwriting, AIG has been an excess capital story, and a lot of that's kind of been tied to the sell-down of the Corebridge stake. I guess we'd argue that even post deconsolidation and deployment of Corebridge proceeds, you guys still look like an excess capital story. I think one of the -- one of the really interesting stat I think is your tangible equity base is actually not that different than Chubb's, and Chubb has about twice the premium. So that looks like a lot of under lever from a premium standpoint, should we think of organic growth as kind of the most likely deployment of that residual excess capital? And I think you mentioned that you have a $35 billion gross book, I want to say $25 billion net, something like that. Should we think about, I guess, the opportunity to deploy that capital coming more from keeping more business net or from just writing more business?

Are you worried I'm going to give a long answer like the Lexington?

No.

Okay. I would think of it as both. We definitely have excess capital to grow into and believe that we have ample opportunities, park reinsurance for a side, is that there's plenty of opportunities for organic growth in the portfolio. And again, it will be market specific, it will be market dependent, but believe that is the first priority in terms of usage to grow into the capital base. The second why I mentioned like reinsurance is that again, you have to go back to why I kind of made some of the opening statements, it's like AIG got unfairly punished, subsequent to -- it's one of the things that really frustrated me was that I brought in a lot of people with tremendous track records of driving profitability through all market cycles, yet we still had to live with the past of what we were doing with AIG's past. And so like I recognize pretty early on, like we can't have the same volatility as some of our peers for now. And so therefore, that needs to be done through the gross portfolio as well as through reinsurance. And when you look at our just use like it's what's in the K and everything else on the 1 in 100 return periods for PMLs, which is probable maximum loss for natural perils. Our PML relative to shareholders' equity is the lowest of any of our peer group by literally like -- I think we're like 1/3 of the next one and then maybe even 1/4 of the next one after that. So I think we'll be able to take more volatility. We may not choose to do that, but we certainly can take a little bit more on CAT because we have very low attachment points and we want them to not have any volatility while we're doing the deconsolidation with Corebridge and preserve capital and earnings for that matter. The dynamics in the reinsurance market. We're the only industry that like declares what the CAT season is going to be like before CAT season starts. So like we have a lot of forecasts with, I don't know, I mean, I'm not a meteorologist, but everyone is saying it's going to be a more active CAT season, meaning in terms of severity as well as frequency, name storms, severe storms, landfall, I have no idea. But people were predicting that it wasn't going to be that, it ended up being a lot worse. So I think this is the new norm. And I'm not prepared to run a business that's going to lose $1 billion a quarter on CAT because I want to take massive net retentions. Having said that, there are things that we can do that will be driven by choices. We saw a little bit of that in the first quarter where we had a lot of proportional reinsurance, which is basically just ground up. So let's just think about we're writing a business. And if you do proportional and you said a 50%, that means 50% of the premium goes to the reinsurer and they pay you an override, usually get anywhere from 300 to 500 basis points of override based on the quality of the book. That consumes a lot of premium. It may not be a great choice going forward. We did that to reduce volatility and re-underwrite the portfolio. But if you flip that to just what we call excess of loss, which attaches above a certain level, that's not going to be driving premium growth. It will result in that, but it will be restructuring how we buy reinsurance based on the maturity of the portfolio and where we think the market is.

Yes, I don't know if there's a way that you benchmark it in your head. But do you think -- would you say at AIG, your business on average is more -- I guess I'm thinking more the quota share of the ground up, is it more heavily reinsured than most competitors or kind of just what you'd expect for the type of business you're writing? I'm just trying to assess if would it be taking disproportionately high risk to write more on that basis? Or would you just be...

No, the answer to the first question is we buy more reinsurance, particularly on property than our peers do. But that's an appetite of volatility than it is anything else. So we don't have to do that. We did 5 years ago, we don't today. And the property portfolio with no reinsurance was massively unprofitable, north of 130 combined in certain parts of the portfolio now is in the [ 70, 80s ] combined with fully loaded reinsurance. So reinsurance shouldn't be looked at as a cost that is going to be detrimental. It's a cost that is a clearing price of that capacity. It needs to be priced into the original risk. I think what happened -- this is my own view, it doesn't need to be right, is that what I would look at for reinsurance, if you ever like trying to figure out like what companies are doing, I couldn't care less what they did from 2023 to 2024. I want to know what they did from 2022 to 2024 because people took massive net positions and change their portfolio. We didn't make any changes. And that's why I think we're a little bit of an outlier because we chose not to increase retentions because pricing, capacity whatever was available that we decided to pass on. So I would think of it that way. The other one we don't talk a lot about is casualty. I mean we had a portfolio that, again, needed to be remediated, was done for different purposes before all the inflation jury awards that have been evident in portfolios across the industry now by reducing sort of our limit capacity. So one example would be when I came in, AIG could have a $100 million net loss on a single account. Today, the most we could add, we put out the same $100 million policy in North America would be like $12 million. And so -- it's just a dramatically different portfolio and I don't believe in certain lines of business like casualty that you take massive vertical risk if you're going to put out gross limits. I just don't think it's prudent.

Makes sense. So I wanted to shift gears to I guess the news from a couple of weeks ago with Corebridge, you guys -- of 20% of your 52% stake in Nippon Life. I guess first question is when should we expect from a timing perspective, the financial deconsolidation of that? Is that a -- how we can expect this quarter as there are things that have to happen from a Board standpoint? And then also how are you thinking about the timing of the remaining sell-down of that corporate stake?

I think those are 3 questions, right? Maybe 4. So first of all, Nippon Life is an outstanding life insurance company. I mean, the most reputable one in Japan, all respected across -- as a 20% owner for Corebridge is going to be very strategic, and I think the benefits will be short, medium and long term, really, really pleased to be able to announce that. And again, another strategic positioning for Corebridge that's going to really benefit a long time. I believe Blackstone was very good. I mentioned BlackRock, what we did with Accenture in terms of getting better end-to-end processing capabilities, Nippon is going to be very important for them long term. So I think that was very strategic and AIG decided based on our relationship with Nippon is it stands at 9.9% 2 years after closing, just to demonstrate partnership and make the transition easier and still be active participants on the board. Until we close that, it does nothing for deconsolidation. So I would think of it -- now I'll answer the second question in a second. For Nippon, nothing happens until we close. So if we close in the first quarter, fourth quarter, that would trigger deconsolidation if we did nothing else in terms of other sell-downs. In terms of guidance I gave, we'll see. I said we would do something in the second quarter. If you go back to what I said in the fourth quarter, that we expect in the second quarter. I don't know Nippon was going to be available at that time. So we were thinking about a marketed deal or a block or something of that nature. But bringing something like Nippon, we want to be patient. We've got to go below 47% to deconsolidate. We're at 53% now. So whatever trade we do, that's the math. I mean, so if we did a 10% block in the next week, then we would deconsolidate irrespective of what happened with Nippon and then we will continue to do consecutive sell-downs after that. Now we've committed with Nippon, we would do up to a max of 15% in this particular calendar year. And then after 1/1/25, we can sell down the rest at 9.9%.

Okay. That's -- they're all helpful. So yes, I guess one observation. So we've seen a number of expense saving plans rolled out and successfully implemented. I guess, under your stewardage, most recently, AIG next actions $500 million of cost saves by the end of 2025. I guess I'm just curious, when you got to AIG, did you know early on there's going to be this type of runway for cost save plans? Or has it been more of a thing that's evolved over time as you've improved things, you've kind of figured out, "Hey, we can -- here's something I wasn't thinking about." Curious how that's...