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

Going to move right along, and I'm thrilled to have Peter Zaffino, CEO of AIG. He is going to make some opening comments. And then the regular Q&A plus audience participation from there on.

Thanks, Meyer. Thanks, everybody, for being here today. I thought I'd give 3 or 4 minutes of opening remarks. It's great to be at the KBW Insurance Conference, and I really appreciate the opportunity to speak about AIG and the broader insurance industry. I just want to spend a few minutes. There's so much that always goes on with AIG and maybe highlight some of the things that I think are relevant. We've successfully repositioned our portfolio. We've redefined the strategy, completed revamping underwriting standards, we're setting risk appetite. We've done it over multiple years. In addition, we've built very strong operational capabilities. I don't want to talk about that much, but it's made us a much stronger company and actually enables us to compete better in the current environment, solving complex risk issues for clients globally. We'll get into AI, but I think it's given us a really good platform. Over the last 12 months, I mean, I always got to start with Corebridge because it's such a big accomplishment that we've had. But we try to provide a ton of detail on our earnings call, so we have the opportunity to talk about it here. But we continue to sell down our ownership position. We completed the financial de-consolidation of Corebridge. Since 2020, we've taken very deliberate steps and strategic actions as part of this journey. The ones I'd highlight would be the initial sale of Blackstone of 9.9%. And most recently, the agreement that we've entered with Nippon Life to purchase 20% ownership stake in Corebridge from AIG. Second, we further simplified the general insurance business through dispositions of Validus Re, Crop Risk Services, most recently, with the announced sale of our global personal travel business. Throughout this time, we've been relentless in strengthening our underwriting culture. And I think that's become evident through our core financial performance and results. At the beginning of 2024, we formally launched AIG Next to accelerate the realization of operational efficiencies, weave the company together to operate seamlessly as one cohesive general insurance organization, which is different than the past. And we have the talent and capabilities to compete in the future. The program is expected, I mentioned this many times, but to reduce expenses by $500 million. We expect our full year 2025 calendar year combined ratio to be the same or lower than the full year 2023 metric on a comparable basis. I talked about this in earnings, but we originally provided guidance that would reach this combined ratio as we exited 2025, but we pulled it forward and we will achieve it in the 2025 calendar year. So don't need the exit run rate. You'll see, with AIG, all the operational programs we've done have been aspirational. They've also been significant. They've also been achieved ahead of time and executed usually not only with a schedule that's ambitious. But also, the targets are usually achieved or overachieved. Transitioning to capital management, we significantly strengthened our balance sheet over the past few years, and that's provided a lot of financial flexibility. We're on track with our $10 billion share repurchase plan for '24 and '25. This will bring us within our target share count range of 550 million to 600 million shares, subject to market conditions. The recent past, AIG had one of the highest debt-to-total capital leverage ratios amongst our peer group at almost 30%. But post-Corebridge de-consolidation, we've achieved a debt-to-total capital leverage ratio of 18%, making us among the best in our peer group and reflecting the substantial progress we made. We ended the second quarter with very strong parent liquidity of $5.3 billion. We've increased the shareholder dividend by more than 10% in each of the last 2 years. I do want to say, following the exhaustion of the current share repurchase authorization, we would anticipate transitioning to a more sustainable share repurchase levels in the mid- to long term. The combination of disciplined capital management, substantial underwriting improvements, rigorous focus on expense management, we're well positioned to deliver on our 10% ROE target that we provided. The challenge we have today is we have more capital than we need to support our current core general insurance business. However, that's going to naturally unwind with our ongoing capital management strategy and the realization of our anticipated growth potential. We continue to prioritize prudent risk selection, limit management, appropriate terms and conditions. We'll talk about it, I'm sure, in the session with Meyer. We believe in having a comprehensive reinsurance program for all of our lines of business. We shifted our focus towards growth. I mean that's been happening over the past year, and we're capitalizing on market opportunities that exist while maintaining the discipline that's led us to the current underwriting strength. One element of the combined ratio, I think, that's incredibly important to continue to talk about is catastrophes. We entered this historical peak period for North American Atlantic hurricanes. And I can't remember a year and perhaps we can talk about it, where the cost of property insurance and maybe even reinsurance would be highly dependent on what happens this year because it's still a very fragile market. There's plenty of capacity. There's a little bit of a different dynamic that's going on in the current environment. And when you look at that, you really need to reflect on 2022 on the reinsurance market, and reinsurers changed quite a bit. Attachment points went up significantly on average. Risk-adjusted rates were up 50% in terms of conditions tightened -- were tightened significantly. That's not the story for AIG. We believe our story is meaningfully different, and that is different than the broader market. Our CAT ratio was 16% when I arrived in 2017. It's 4.7% last year in 2023. And through the first half of 2024, it's 3.8%. Always hard when you're in the middle of CAT season. We're heading to Monte Carlo next week. Every prediction is usually wrong, so it's hard. But the leading forecasters have modeled above-average hurricane activity for the 2024 season. We'll see what happens. But there's -- the next 60 days are going to be very telling for 2025. And we believe when you're looking at our own catastrophe losses, I think about $1.1 billion is a good proxy for our full year 2024. And as you know, the third quarter is going to represent the largest percentage of the total. So those are the only comments I want to make. And just as always, 2 hours' worth of information in every hour of AIG. So I thought I would just get that out of the way.

No, I appreciate it. And we're going to continue that sort of overconcentration. I do talk quickly so that should help. Can we -- I want to drill in on a number of areas, AIG Next. So there's an expense component and I think on the flip side, an efficiency improvement associated with that. Can you walk us through the expense categories that will be declining? And what the upside is, again, from our perspective, what we'll see with the efficiency improvements?

AIG was set up as a conglomerate to manage multiple business, including what's Corebridge today. So other operations had a significant amount of expenses, so it's really going to go into one of 4 categories in terms of how you should think about the expenses. Either staying inside of retained parent for AIG, which we gave guidance around $325 million, $350 million. Corebridge is similar. Expenses go with Corebridge. And then it's either going to find its way into the general insurance business and be absorbed within the combined ratio or it will be eliminated. There's been a lot of overlap, a lot of redundancy, particularly in the functions. And so we're getting this end-to-end process and much more efficient throughout all of AIG. There's things such as easy stuff like procurement, sourcing, real estate that just hasn't been as efficient as it can be in the future. And so we're really targeting areas where there's real opportunities. Of course, we've been digitizing workflow, less manual process in those, so that's going to present opportunities as well.

Should we expect that to flow into growth? In other words, if you can process business faster and you've communicated a growth appetite, that running the business more efficiently helps?

It absolutely will. And if we get into generative AI, I can explain where I think that's going to be -- has a multiple effect in terms of our ability to grow and process business faster.

Okay. As you can all see, my next question is on AI. I have to ask this from the perspective of having just such a primitive understanding of it. But what are the investment priorities? And again, where do we on the outside see that in the financial results?

A lot of companies in the financial services, in particular, are talking about the number of instances, whether it's in shared service, contact centers, processes, claims, all very important, and we're doing that. But how we think about what we're going to do with generative AI -- and we're already doing it. And so that's why I introduced it on the last quarter call because the way in which we're going to introduce it will come fast because we've already run significant pilots within the organization. Data comes from brokers very unstructured. It comes in different forms. You're not going to get brokers to change behaviors. So you have to be able to look at that structured, unstructured data and get it through a digital workflow fast. And so you think about an end-to-end process. What we've been doing is getting more insight into the data, defining what a perfect underwriter would want in underwriting selection. And then we've built parallel processes to test this as to data ingestion, but also where do you get the data to be able to fill sort of the underwriters' demands for making perfect underwriting decisions. And what we have found is that building large language models once data is ingested, our focus has been on the growth side, which is how can you make yourself significantly more efficient. So everything in AIG is 2x, 5x, that's kind of the way we talk about and very disciplined in terms of how we run these pilots. And they've been unbelievably successful and have exceeded 5x in terms of getting full underwriting information once it's submitted to the underwriter in a format that they can underwrite more effectively. Now there's two things that have come from that, that are significant. One is a very inefficient and manual process has gone, in some cases, from weeks to hours. So that's one big issue. Another one that was a little bit of a surprise is that, I don't want to say if you give infinite time, but if you give significant time to underwriters to get information either through brokers or other available sources, they were able to get less data than how we built the large language models. And so we had a lot more data at the point of underwriting than we did through a manual process. So it's quicker. And there's so much submission activity in parts of our business that we don't get to everything. That doesn't mean we don't triage it right. We have industry groups. We have different classes of business. We have specific details in terms of how you build an algorithm to get into the underwriter's desk, but there's so many different qualitative aspects that don't allow you to do that. And so we believe there's a tremendous opportunity for growth. Yes, we will eliminate. If you don't have the manual process or you don't have the manual input, then you don't need people doing it. So there's definitely going to be huge benefits on growth, huge benefits on underwriting efficiency and expense benefits through workflow. And then there's the compute part, which is being able to analyze allocation of capital much faster as well.

So internally, that last part?

Yes.

Fantastic. I hadn't even thought about that, but that makes a lot of sense. The AIG under, I guess, Brian Duperreault and yourself have really restructured the reinsurance purchasing program. But over the time period since you've gotten there, results have gotten much better and much more predictable. There's much less volatility. How does that latter issue impact your reinsurance demand?

Reinsurance is a strategy and a philosophy. So when we would have began this -- so AIG's reinsurance purchasing, in my opinion, when I first arrived, was they felt they had excess capital. And when you don't want to buy reinsurance in the market, you can keep a lot net. I mean, that works if you don't have losses, I mean. But otherwise, it doesn't work. And so the book wasn't profitable. And so we needed to start with a philosophy and a strategy as to how we felt about -- we had no earnings, so there was no earnings protection. But like certainly, how do you preserve capital and how you preserve earnings over time. And then the book evolves, and the way in which you develop reinsurance should evolve with the quality of the portfolio or the size of the portfolio. That has significantly improved over time, but I don't think the strategy and philosophy has changed much. And I don't think it will change much going forward. That doesn't mean you always have to buy the same programs. It doesn't mean you have to buy the same structures, but the gross portfolio has changed a lot. And the profitability of the casualty portfolio or the property portfolio has dramatically improved, and so you restructure it that way. We -- I feel we've been unfairly penalized for volatility. When I look at our percentage of CATs and net earned premium to anybody of our peer group, it's a fraction. Sometimes, 1/3 through the first 6 months was last year. And so making sure that we're containing that volatility is really important to our company, and the predictability of that will remain a core strategy and principle. I think we're backed by reinsurers better than any organization because of that consistency, the balance of the portfolio. And of course, your investors and other stakeholders are incredibly important because they validate and they buy your stock. But having reinsurers want to reinsure you, and I can give you many examples where I think we have the best programs in the industry, it's because the reinsurers think the portfolio is the best. And so I think finding ways to balance that, there's always changes. I think we go on 1/1 with almost 50 treaties and believe that we'll continue to make those refined changes. But I don't believe in just taking more net because you don't want to pay the freight, which is what's happened in the industry now. When you see every quarter massive net losses, it's because insurance companies have chosen not to buy reinsurance, and they underfund the cost. Like I don't know why reinsurance costs would be that much more than how you would fund like frequency of CAT, like it's the cost, the clearing price, the cost of capital. And so not buying it just means you underfund it. And then you breeze through it on earnings and say, well, our core book is great, but we've lost a lot of money on CAT. I don't want to do that. Like I want -- that's why the guidance I've given includes CAT, and we want to manage that as well. And by the way, last thing, sorry, there's always one other additional fact, but...

Don't apologize. That's great.

The property portfolio, when I arrived, I think ran north of 130 combined. And that was -- if I was going to pick, is it over or under, I'd go over. And it's running the low 80s now. So I think you buy too much reinsurance, I'm like, well, why? Like I mean it's embedded in the pricing, it's embedded as a full cost. I know the volatility, the standard deviation is tighter, the predictability is better and it's way more profitable. And we've got like 6 or 7 points of entry across the world to deploy capital for the best risk-adjusted returns, like I think it's a smart strategy.

Yes. And it's hard to argue with low 80s.

Correct.

So the most recent divestiture, besides Corebridge ongoing, was the travel business. So I was hoping if you could just take us through the thought process. And if you want to answer this, what other elements of AIG are similarly non-core? That's my phrasing.

Right. So I'll answer that like I think we're largely done. I mean I don't like to use the words never always, but we're largely done. I think with travel, it's no different than Crop. Those businesses need scale. They are not -- from a combined ratio standpoint, they're highly dependent on expense, digital and scale. And the travel business is low premium, high policy count, and you can't be in between. And I think we learned with COVID that there is a tail with travel. And with the premium dollar, unlike on property and casualty, you don't have as much for the lost dollar in travel as you do in other parts of the business. And so for us, like we're not really big in that business. I don't want to sit in front of this audience and tell you I just bought more travel when there's other things I think could be more additive to AIG. And the personal insurance business for AIG needs to improve. And so that was running in a combined ratio that we could not get dramatically different, unless it had more scale. Wasn't terribly profitable for us. I think with Zurich, they do add scale. And so the combination of that business for them will be a better return. But it was just as simple as that. I mean I take a look at like our commercial businesses and even our personal businesses, it's that at the point of sale, AIG matters. I'm not sure it did for our travel business. We have really good clients, really good capabilities, but it needed more investment. And I think the combination with Zurich is going to make it a better business.

Okay. That makes perfect sense, I think. I want to think of the right way to phrase this question because a lot of the effort that you've done since you came to AIG has been internally focused. And obviously, you have to pay attention to what's going on externally. But some of the issues were, again, unique to AIG and needed to be addressed. As you look forward and say, okay, now that AIG is, I'll say, proactive, like the problems have been solved, knock on glass, and you going forward there, the environment that you're operating in seems a little bit different. We're in the fifth year of rising rates, which I don't think has ever happened before. So maybe this is a better disciplined industry, better informed, better analytics than it used to be. How does that factor into your thinking as you start making positive long term -- I shouldn't say start because it's going on for a while, but as you plan for the longer term?

I think we're a huge catalyst in that discipline in the market. I mean there's other companies that you heard from today that are very disciplined underwriting companies. But AIG, taking a position in underwriting and building an underwriting culture, you'd have to ask reinsurers. But the top reinsurers in the world consider us one of the best underwriting companies today in the industry. And so that would -- 5, 6 years ago, I wouldn't have dared to think that. I mean, it just -- it's so hard to change a portfolio in our business. We did it. We created an underwriting culture. Now the growth, we get labeled with that. You don't have a growth mentality. It's not true. I mean we just had to shut a lot of business. And so when you look at our peers, they weren't rehabilitating a portfolio. They weren't taking risk out. They weren't reducing overall aggregate, they're pruning. And I think that's where we are today, different than we were in prior years. So we actually had a really good new business funnel. We had a very good strong retention. We've had a good rate, and we've had a real balanced business. I just think you're starting to see that become more evident because we're not in the rehabilitation phase of any of our portfolio anymore. They're very focused. I think we're starting to see this, this year where there's growth opportunities, strong risk-adjusted returns. And we're going to deploy capital that way, but we want to see more submission activity. I think we've been more disciplined with distribution. And that just means making certain that we are prioritizing risk appetite to submission activity. And I think we're getting a better yield for that. You just heard from [ Pat and Tim ], the E&S market has been unbelievable for us. The E&S broker distribution from wholesale is unbelievably powerful. And I'm sure they said it, I'll say it, is that they're driving growth beyond just what is a market dynamic. It's more of a shift that is going to be much more permanent, and there's going to be more scale in that. And there is not the same marketing effort that it would be on retail. And so really strong excess and surplus lines capabilities within the United States is going to generate very unique opportunities to continue to grow. Because you always look at the fundamentals of retention, which, again, historically for E&S is in the low 60s, and it's been in the low to mid-70s. So you're retaining more business. There's a lot more new business activity. If that was starting to slow down, you look at properties had maybe a little bit of headwinds on rate for the first half of the year. Submission activity is not slowing down on property. So -- and it's improving in just about every portion of our business that we do with E&S. So I think having that balance, and I always say, like, I'm not trying to talk it up because we have a E&S insurance company. We also have a lot of admitted capabilities that will go where it goes. I just see that that's a shift in dynamics that companies that are prepared to trade in that environment are going to be winners.

What are the internal and external efforts required to let everyone know that you're interested in growth? I don't know if -- I'm going to leave this to you to answer. But culturally, do you have to tell people, okay, this is subject to your judgment as an underwriter, this is a good time to grow? And letting brokers know that you've got an appetite for growth because everything internal -- not saying everything. Because internally, the results are solid?

There's a shift. It's not a major shift. It sounds like it would be, but it's really talking about maintaining underwriting discipline, underwriting profitability. But where there's opportunities for our leadership to grow, we should be deploying more capital, and we have significant capital to deploy. There's actually a lot of demand from clients. They like the expertise. We have very strong technical underwriters. Point-of-sale matters. We end up sending lead terms, terms and conditions, pricing, markets follow us. And certainly, the brokers are so important to us, but that's become service. As I said, brokers always want as much as they can possibly get. But the #1 thing they need is consistency and risk appetite. So if you say you're going to do something, you got to be able to deliver. And so that took a little bit of time to build the trust on. But like again, the submission activity has been tremendous. The support from the brokerage community has been outstanding globally. And we just need to continue to perform and execute. I don't think it's a big message, Meyer, like because they know what AIG is today and know what opportunities present themselves when they advocate for us with their clients.

Okay. Great. I want to move on to capital deployment. And again, we are, I think, intentionally moving quickly because there's a lot of, I'll say, good news to cover. So the capital deployment strategy, as you laid it out, and I'm going to paraphrase what you said, is that you've got a target for capital return 2024, 2025. After which, it's probably a more normalized capital return, earnings minus dividends and what you need for growth. Again, that's me paraphrasing. What led to that sort of prioritization? And then how should we think about an M&A appetite in 2026 or beyond if that's the right time frame?

I think we've given a lot of guidance. Sabra, who's sitting in the front row here, and I have provided a lot. And the first thing you want to make sure is that you have ample capacity and capital within your insurance company subsidiaries to drive growth because there's great opportunities for us. And we have, I said in my prepared remarks, excess capital that we can grow into. So that's terrific. We wanted to get the leverage. Was the target 18%? No. But as we started to create more liquidity from Corebridge proceeds, other proceeds and earnings, we decided to take an aggressive position on leverage and get it to a place where we felt very comfortable but also one that gave us a lot of financial flexibility, too. We could take it up if something presents itself through an acquisition. That's not the design, that's not the plan. But we can, again, giving us financial flexibility. Being a good dividend payer, that's been a while since AIG increased its dividend. So not only increasing it north of 10%, 2 consecutive years of being a consistent dividend payer, and increasing our dividend each year is our short to medium-term plan. And then the proceeds that are coming from Corebridge are substantial. And we've outlined a capital return strategy of $10 billion in '24 and '25 in the form of share repurchases. And I think that's a lot of guidance, right? And so like when I think about '26, I'm not suggesting we wouldn't do share repurchases, but we want to drive earnings power. There's opportunities to do M&A. That will have to be compelling. It will have to be disciplined. It will have to be additive. When you talk to investment bankers in the insurance sector today, they've never been busier. There's so much churn. There's so many things that are being considered that there may be opportunities for us whenever they present themselves. But as we look to 2026, you can't time these things perfectly. But should an opportunity present itself, should it be additive either geographically to enhance AIG or in products that are additive or more scale matters, we want to be able to do that. And so we put ourselves at least in a position to do that and to be able to drive growth. And so I think we're in a really good position to take advantage of all the hard work and the discipline that we've had on capital management.

Okay. Fantastic. When we look at North America personal, I guess, two questions come to mind. One, how should we think about the growth opportunity? And I'm saying North America personal, but there is an international personal component. The growth opportunity in high net worth, ultra high net worth personal lines. And second, maybe talking us through why an MGU strategy or MGA strategy is the right way to access capital for this particular line of business?

Okay. So the U.S. North America personal is basically now the high net worth business and warranty. That's kind of it. And the high net worth business is really going to drive the results. And what happened with our high net worth business over time was the same thing that happened in the commercial business. Too much aggregate, too dense, and it's harder in the personal insurance business and personal lines to recalibrate that book that is on the commercial side. So it just takes longer. And so we're on that journey and began the profitability improvement, which you needed because there is -- the book got to a false positive in -- leading up to 2017, there's no CATs, wildfire. So all of a sudden, we have to re-underwrite the portfolio. But also, there's a lot of shifting dynamics externally, COVID. And the density that already existed in areas where there's aggregation skyrocketed, people buying homes, used to be 5s or 10s, putting up 25s everywhere. It's also in Florida, California, the Northeast becomes a bigger issue. Wildfire wasn't modeled right. Secondary perils and all secondary perils are -- is that they don't have enough credibility to actually have the right loss costs in terms of all the return periods about them. It's no more complicated than that. So all of a sudden, like that's underbaked. And then this reinsurance has more costs associated with it. And the state regulators don't really want to push those costs to the original insured, and so we had to pull back. And then so like doing that takes a little bit of time. And why the MGU? Because the long-term strategy for us we're executing on, it is that the barrier to entry in that business is significant. You got to have unbelievable claims capabilities, loss control, policy, knowing the wordings. And you have to have an intimacy with your clients. I mean like our clients really like AIG. We have enormous stickiness. And despite the rhetoric that things are moving to other carriers, it's -- the only thing moving to other carriers is stuff we don't renew. We have a book that an infrastructure can support a bigger portfolio. We just announced with [ Pat and Tim ] that we're doing an E&S platform with Ryan Specialty because we want it more organized. I believe that the wholesale on the personal lines for high net worth has been more of an adverse selection play. It doesn't need to be that way. It gives us more flexibility to put out limits in areas where we may not feel comfortable deploying them on admitted because a $30 million home has a 30 replacement cost plus supply chain and other inflation. But you can put out a tenant on in a minute, so you can actually start to solve client problems. And then the portfolio that we have is going to be selective in terms of our underwriting risk appetite. But I would expect over the coming 6 to 12 months that other insurance companies will come on the platform for the MGU because the infrastructure is built to be bigger. And so it just gives a lot more flexibility for other risk appetite in an admitted and non-admitted basis that is going to allow us to grow and for AIG to be very selective in our underwriting risk appetite. So I would expect to see continued improvement in results on the expense side as well as on the loss ratio side and us being able to control volatility on CAT.

Okay. Fantastic. One maybe unique element of the commercial industry has been the softness that we've seen in some professional liability products. And it's hard for us to know on the outside how your book of business has evolved through what is now, I guess, second, third year of rate decreases for public company D&O, EPLI. Can you talk us through the changes that you've seen in your book?

Yes. Don't forget, like it's kind of 50-50, international to North America. And the dynamics we've been seeing have largely been North America and its pressure on excess, which is commoditized. And usually, price wins. And so there's been some new entrants and some current carriers that are not necessarily in lead layers and it's pushed price down. We've shed a lot of that business. The cumulative rate increases have been substantial in financial lines over time. But at some point, if we don't think the margins are there, we start to move away from it. So like the way the U.S. book works is that you want to be more in lead and then look if there's multiple excess layers. And then the next couple of excess layers and the more commoditized ones have been under price pressure, and that's where we've pulled back in financial lines. International works differently. I think some of the excess holds up better. And so it's been a little bit more balanced in the stratification, so it's not like you don't have to be lead. And the excess gets the pressure. It's been, again, more balanced. But we're seeing rate decreases in international, but it's basically trailed the U.S. by 6 to 8 quarters. Still a very good portfolio. We still have size and scale. And again, we're not going to sacrifice underwriting results or discipline, and we will shrink it if the economics returns aren't there. But I think it's been more driven by excess. I think it's starting to stabilize a bit, and international lags way behind U.S.

Okay. And international, I think the general assumption is that the social inflationary potential isn't as bad as it is in the U.S.

Correct. And the other thing too is when you have international, like when people say international, what do they mean? I mean our international business is international versus international writing U.S. D&O, where people end up picking up a lot, which a lot of portfolios in international are picking up a lot of U.S. exposure, which we're very disciplined not to be doing.

And so it's not just Lloyd's and business players making a round trip. Okay. I want to talk a little bit about reserving philosophy. I'm not really looking for a number in terms of casualty loss trends that you book. But what's the approach when you look for -- I guess, it would be Sabra and the actual team, to say, okay, this is how we want reserves established? What's the philosophy? What is it that you're looking for them to provide?

Well, I mean, Sabra, she conveniently doesn't have a microphone, so I'll answer the question this time. No, I think we look at -- we do our DVRs quarterly. We're very transparent on what we're looking at. But there's always -- it's not like you bury your head in the sand on the other lines of business that are not being done on a detailed basis each particular quarter. We watch industry trends. We go into things very deep, bad news first, good news, watch and emerge. And really, the good news in watch and emerge just means the portfolio has changed so much. And that looking at sort of aged ultimate factors or looking at historical triangles, we just have to be very thoughtful that it's not the same book. Things have changed a lot. So as we see things emerge, we want to be very cautious and careful about that emergence. But I think there's a lot of positive signs that we see in how the portfolio has been performing. But the areas in which we've recognized over the course since I've been here have been the ones where we know the pain points. It was years ago, casualty. And we looked at financial lines, and we continue to go through everything on a very detailed basis and I think give as much transparency as we possibly can in terms of the philosophy and how we analyze it.

Okay. That's helpful. And I'm going to infer and I'll ask this one to be more explicitly that you don't see any flashing sign saying that, hey, maybe we missed something for more recent years.

You talking about casualty?

I'm talking about casualty, yes. It's like the popular...

I mean, go to Schedule P. I mean, again, I say this, I don't always pick the right words. But we had a different problem ahead of the industry, which was large limits. A portfolio under the right terms and conditions, it was imbalanced, had too much net. And so we got out there 5 years ago. Like whether we were ahead of everything and saw everything coming, you can determine that. But we already started to take limits down, tightened terms and conditions, move away from some of the lower attachment points and move them up. And that's been a process that's been in play for quite some time. And again, if you look at the average of where the industry is, we're above average in terms of having a higher PEG ultimate loss ratio. And so I think we've recognized it, watched it very carefully, watched the sort of vertical exposure, jury verdicts, things that are emerging. And we're very cautious, but we watch it all the time. And we have substantial reinsurance. That's not to supplement underwriting, but it is there to mitigate volatility. I mean the AIG I entered could take a $100 million net loss. I think in the U.S., the most you're going to have now is $13 million if you had a $100 million gross loss. So we don't have the same volatility. We have enormous vertical protection. We bought quota shares just because we want to make sure we have much more predictable results. And maybe that didn't carry a lot of weight when we first came because it was just a couple of years, but it's like been year 7 now. And so we've got a much more comprehensive structure in place, and we watch cash like everybody else does, but I think we're a little bit ahead of it.

Okay. No, that's tremendously helpful. And for those of you that haven't seen the reports we've done on AIG's reserves, that's clearly our conclusion as well. So a little self-plug there, I guess.

I love it.

Can we talk a little bit about cyber insurance, just where you are now and how you see the line of business?

It's challenging. We have a very good portfolio. I'm not going to lead to everything's reinsurance. But the philosophy there, when you're pricing and deploying capital in any line of business that has systemic risk and the probabilistic outputs are highly unpredictable, you got to be careful, right? So like if you think about cyber terrorism, they just don't have the same predictability. So how do you manage that? You balance industry, you balance geography, and you take gross limits down. So our average gross limit is $4 million to $5 million, was substantially higher than that over time. So yes, if there's a couple of losses, they're not going to really impact the portfolio. And making sure that we're getting the right pricing but a little bit of competition in that space. I'm not sure the entire industry sort of views it the way we view it. But we have tremendous reinsurance protecting us. We have a quota share that pays a very good ceding commission by the best reinsurers in the world, and we have aggregate protection on our net. So that's another systemic risk issue that if you end up having that, that you protect not only for severity but for frequency. And it's, again, another part of the balance is a lot of it is international. So more of the SME in international, very careful in the U.S. in terms of corporates. And if the market opportunity presents itself to grow, great. If it doesn't, we'll maintain our position. But you can look at property, and you can argue other lines of business on reinsurance because companies have significant capacity to deploy. So yes, maybe they'll give their preferred insurance companies great capacity, but they can spread across the market because they have a lot. They have their own retro. But in cyber, they're going to be really careful because they can't aggregate themselves, and they've chosen us. I mean you have to ask them. But when we get the reinsurance structure, they're betting on AIG as the #1 carrier because they see we're doing on the underwriting side and they want to back us.

Okay. No, that's very helpful. Results have improved dramatically since you've gotten here. This is not a secret. We've talked about it a lot. And I'm wondering, does that...

Is that another plug?

For you. I haven't done anything.

I'm just kidding. Thank you.

I just sit on the outside and throw stones. But I was hoping you can talk about how being a consistently profitable insurance company, how does that impact investment allocation? Can you be more aggressive? Do you not need to be more aggressive?

On the asset investments?

On the asset investment side.

Again, Sabra doesn't have a microphone.

I can give her a mic.

But we set a very conservative philosophy. I mean it's got to be liquid fixed income. We at AIG had the remnants of the investment strategy of a life company basically, I mean. So that was what happened. So too much hedge funds, too much alternatives, duration a little bit different where we might have taken a little bit of the imbalance because they want to go longer on some of the life insurance investments. And so we pulled that back. We're more conservative. Yes, there's -- reinvestment yields have been very good. But we've outsourced to BlackRock a lot of the fixed income. And Sabra and her team are working very closely with other stakeholders in terms of how we structure the alternatives. And we think we will be right with the rest of the industry. But I don't believe, in this environment, we want to be more aggressive with going into more alternatives to get more yield.

Okay. That's helpful. This is really my last question. We've talked for a while about 10% ROE. We have, I think, a very clear operating book value per share number to work from and that should rise over time. What's the time line for developing a time line? You can say, okay, 10% ROE by X?

I mean some of it is driven by -- this is not the caveats, but some of it is driven by the proceeds that we get from Nippon, when that closes, when we do other marketed deals, and how we deploy capital. We have a path to 10% ROE for sure. And again, everyone's going to want guidance after that, which we prepared to do. But for now, focusing on the 10%, driving earnings. Look, we have more capital. The E is big relative to what we are today. So that will get balanced out and feel very confident that we will meet and exceed that. I mean -- so like the time line is going to be dependent on other capital actions. But in '25, we expect to be much more normalized. And again, but it so much depends on some of the closings and some of the marketed deals that we do. I feel like we have the earnings power. Can I ask myself a question? The one that everyone is like, the 91.6%, can I like -- that's like, why did you do that? Like so...

Sure.

You're too polite. But look, the question came, and it was a good question because there's so many moving pieces from AIG. And it's like, what's the baseline? And it was pretty simple math. It's like we had a combined ratio of 90.6%. We don't have Validus anymore. In Validus Re, no surprise, when you move rates up 50%, there's no CATs. There were some earnings there in the prior second quarter. So we adjusted it, looked at -- when we look at other operations, we have $1 billion or so expense goes to Corebridge. We eliminate a lot, goes into the business. We have a parent expense of $325 million, $350 million. The companies absorb that, and the combined ratio is not going to go up in the 2025 calendar year. But that was the answer. Like what's the baseline? The baseline is 91.6%. Like is that where I think we're going to be? I hope to be better. We didn't mention calendar year. We didn't mention conservative projections on earned premium. We didn't mention other expense initiatives. Didn't mention how we're going to structure reinsurance. So there's other opportunities. And by the way, it's saying -- it's giving guidance in the future of how we're going to manage CAT, which is like totally very difficult. A lot of other companies are not going to give you a projection that, yes, here's our combined ratio off this baseline. And by the way, we'll absorb CAT within that. So it's just a level set. Model's right or wrong, I don't really know, but like that's where we are. And I think we've shown that we meet or exceed every expectation and guidance that we've given. That's the baseline, and we're all going to work very hard to overachieve. So that -- I just wanted to just say that. Why do you say it? It's like that was a pretty simple answer. I mean, it was what's the baseline? That's it.

I mean, I have no problem with that. I think you telling us what you think is really what we're looking for. And my last question, and this is only half tongue-in-cheek, but how bored are you going to be just running a normal good insurance company?

I have to be quiet for another minute.

Just for 3.

Well, it's like we have huge ambitions with AIG. Thoughtful, but there's a lot in this world that can shift, with all the things geopolitically, but I think giving us a lot of financial flexibility. We're builders of organizations. I'm really excited about what we're doing on gen AI. And again, I could spend a lot of time on the computing side of it. Is there new market entrants? Can we do more in different parts of the world? Will there be bolt-on acquisitions? Can we get more efficient? Can we continue to give ourselves tons of strategic and financial flexibility? I think we have a great team that works with me, that is built for transformation. I've never been part of a company that can transform at quality and at speed like the one we have at AIG. And so it just gives us a lot of option value. So I think that shift in focus of how we build, how we drive value, our reputation in the global insurance industry is at the top. And so we want to make sure that we maintain those standards and play for the future.

Okay. That is very helpful. And thank you for taking that seriously. With that please, thank you for joining, Peter. We have cocktails on the roof in the penthouse, and we'd love to see you there. Thank you so much.