American International Group, Inc.
Q3 2020 Earnings Call Transcript

Published: 6 Nov 2020

[Operator:]

Good day, and welcome to AIG's Third Quarter 2020 Financial Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Sabra Purtill, Head of Investor Relations. Please go ahead, ma'am.

[Sabra Purtill:]

Thank you. Good morning, and thank you all for joining us. Today's call will cover AIG's third quarter 2020 financial results announced yesterday afternoon. The news release, financial results presentation and financial supplement are posted on our website at www.aig.com. And the 10-Q will be filed later today after the call.

[Brian Duperreault:]

Good morning, and thank you for joining us today. Given the announcements we made last week, we will handle today's call differently with the objective to leave as much time as possible for your questions. I will focus most of my remarks on our leadership changes and the separation of Life and Retirement. Peter will expand on what the separation process will entail. He will provide an overview of our third quarter results for General Insurance and Life and Retirement and give an update on AIG 200. Lastly, Mark will provide additional color on our financial results for the quarter. Kevin Hogan, Dave McElroy and Doug Dachille will be available for the Q&A portion of the call. As you saw in our earnings release, AIG continues to manage through the ongoing global economic uncertainty. We are financially strong and well positioned to capitalize on the opportunities for growth. In the third quarter, we reported adjusted after-tax income of $0.81 per common share, and we saw improvement in both the accident year combined ratio in General Insurance and Life and Retirement's adjusted return on attributed common equity. As we announced last week, the AIG Board unanimously elected Peter to become the next Chief Executive Officer of AIG effective March 1. At that time, I will assume -- I will become Executive Chairman of the AIG Board. This leadership transition demonstrates our continuing momentum and focus on AIG's future. It's an honor to serve as the CEO of AIG, and I want to thank our directors for their ongoing support.

[Peter Zaffino:]

Good morning, everyone. Thank you, Brian. I appreciate your kind words and want to thank the AIG Board for the opportunity to lead this company. As Brian noted, we are living through a sustained period of global economic challenges. At AIG, we are well prepared as our purpose is to partner with our clients, especially during challenging times, to help them solve complex risk issues, capture opportunities in all market cycles and provide a consistent approach to providing insurance solutions in this period of uncertainty. We continually ask ourselves whether the things that worked well yesterday will continue to work tomorrow and into the future. This morning, I will expand on Brian's comments regarding key areas we're focused on. I'll start with additional insight into our plan to separate Life and Retirement from AIG. Then I'll provide an overview of the third quarter results for General Insurance and Life and Retirement. And lastly, I'll briefly outline our progress on AIG 200. With respect to Life and Retirement, as Brian said, we undertook a comprehensive review of our composite structure over the last several months. We concluded that over time, the value of full separation we can create for our shareholders will be significantly greater than maintaining our current structure. Our analysis took into account many factors, including potential impediments and benefits. Among the more significant factors are

[Mark Lyons:]

Thank you, Peter, and good morning, everyone. As Brian and Peter have already commented on the announced separation of the Life and Retirement business from AIG, I will briefly discuss the third quarter results in order to allow sufficient time for Q&A. AIG reported adjusted pretax income, or APTI, of $918 million and adjusted after-tax income of $709 million or $0.81 per diluted share compared to $505 million or $0.56 per share in the third quarter of 2019. The key drivers of this increased earnings were

[Brian Duperreault:]

Thank you, Mark. I guess it is time for the Q&A portion of this. So operator, why don't we start?

[Operator:]

. We can now take our first question from Elyse Greenspan of Wells Fargo.

[Elyse Greenspan:]

My first question, Peter, is going back to your comments on Life and Retirement. You mentioned the option for the separation was either an IPO or a private sale. But then in reference to bold, it sounds like you mentioned 19.9%. So I guess I'm confused on what a private sale, could you go down the route of a private sale of 19.9% of L&R, the subsequent sales after that? If I can just get some clarity on that comment, please.

[Brian Duperreault:]

Peter, go ahead and take that, please?

[Peter Zaffino:]

Yes. Thanks, Elyse. Yes, so the 19.9% was referencing to the IPO. And we said that there could be -- we can't predict the future, but that there could be an approach for a private sale, but it would be for the same percentage, the 19.9% or less, that we would not consider anything that would be above that. So I would think about whether it's the IPO or in the event of something came from a private party that it would be the 19.9% or less as an initial first step.

[Elyse Greenspan:]

Okay. And then so if it was a 19.9% to a private party, I guess, then you'd just be looking for subsequent sales down the road. Is there a time frame if it was a private sale or, I guess, the IPO for the -- as you think of these two, 19.9% option for the full disposition of L&R?

[Peter Zaffino:]

Got you. Okay. Yes. So really, the time line, Elyse, I would think like whether we pursue a minority IPO or sale, we're going to make that decision in the near term, and we'd like to communicate that promptly. I mean the ultimate closing of an IPO or sale will depend on regulatory or other required approvals. And we'd like to think we can close on the first step of separation in 2021. But of course, we'll have to see how the process unfolds.

[Operator:]

We can now take our next question from Josh Shanker of Bank of America.

[Joshua Shanker:]

So the first question was the general guidance around growing premium volumes next year. Is that exclusive of what happens with Travel and accident premiums?

[Brian Duperreault:]

Well, I think that's a Peter's question. Peter?

[Peter Zaffino:]

Yes. No. Thanks, Josh. It was not exclusive. I mean we believe that we can grow the top line for General Insurance, even in those conditions where we would have a prolonged headwind in Travel, but we think that we can grow the top line without caveats.

[Joshua Shanker:]

And for those who look at the third quarter liability, premium numbers down in the low double-digit range, given where pricing is. So it sounds like gives them concerns about your appetite for liability business at this price. You've obviously run a lot of liability business in the last couple of years. How does that reflect on your confidence on the last couple of years of books and the attractiveness of writing liability business on -- in November 2020?

[Brian Duperreault:]

Go ahead, Peter.

[Peter Zaffino:]

Well, we've been doing reunderwriting of the liability lines for a couple of years now. And so we've seen the shift in the portfolio in a very positive way. I think what you'll see on the net premium written is just a lot of reinsurance sessions just because we put in excess of loss and quota share. In this particular year, we had even more sessions on the quota share. But we feel very good about the way in which we are positioning that portfolio. We do think that we can grow that portfolio on the top line. And the rate-on-rate increases that we're getting in the Casualty and liability lines are meaningful, and we believe are above loss cost. So I wouldn't read into it. I would say that it's part of the remediation, it's part of reinsurance and we think that we are in a position to grow it.

[Joshua Shanker:]

Would you care to share the gross premium written growth?

[Peter Zaffino:]

I'm sorry?

[Brian Duperreault:]

Say that again, Josh.

[Joshua Shanker:]

Would you care to share an idea about the gross written premium growth in liability? Whether it was much less than down low double digits?

[Peter Zaffino:]

No, I would -- it's the same comment. I think we can grow the top line on a gross basis as well.

[Operator:]

Our next question comes from Brian Meredith of UBS.

[Brian Meredith:]

Peter, when you -- the guidance with respect to the below 90% underlying combined ratio, and I assume that's kind of run rate as you go out end of '22. How do we kind of think about that expense ratio kind of loss ratio as you kind of think about it? How much is going to be AIG 200 related?

[Peter Zaffino:]

Go ahead, Brian.

[Brian Duperreault:]

Go ahead, Peter.

[Peter Zaffino:]

Yes, it's end of 2022 run rate, and we just thought about as we start to exit 2022. But I think all of the variables will contribute to the improved combined ratio. So I gave you some guidance on -- in my prepared remarks on AIG 200. So we remain committed to the $1 billion and so we'll recognize $300 million of that as an exit run rate this year. So you could think about a couple of hundred basis points contributing to expense improvement during that period of time. We feel very good about the opportunity to grow the top line. And so we will start to see top line growth, which will help the ratios. We think we will have a revised reinsurance program that will reflect the portfolio that we have today. And so the vast reunderwriting to pivot to where we are today, we will have a different reinsurance structure going forward, and we will likely not need quite as much. And then the last piece is just the rate increases above loss cost will start to earn into the portfolio. And so I think all of those 4 variables will contribute to an improved combined ratio below the 90%.

[Operator:]

Our next question comes from Paul Newsome of Piper Sandler.

[Jon Newsome:]

Perhaps you could just talk about the prioritization for use of proceeds if you do get the IPO or sale of Life business? And if that would be different from what you'd expected in the past?

[Brian Duperreault:]

So I think, Paul, the question was use of proceeds from the IPO. I think I got that right. And if that's the case, Mark, would you take that question?

[Mark Lyons:]

Sure. Thanks, Paul, thanks for the question. Well, our primary focus for the proceeds from any initial disposition will be to reduce AIG's debt leverage. But we'll continuously review the best use of our capital, which certainly includes share repurchases and act accordingly based upon those priorities.

[Brian Duperreault:]

Paul, was there another part to the question because you were a little unclear in my audio?

[Jon Newsome:]

No. I mean that was the focus on it, but maybe if you could just further that in terms of the debt leverage procedures? I mean my sense was you've sort of already prefunded all of those debt leverage. So I guess I'm a little bit surprised that there's more to do.

[Brian Duperreault:]

Okay. Mark, can you take that?

[Mark Lyons:]

Sure, sure. So since you talked about that, Paul, so AIG clearly has strong liquidity. That was bolstered by the $4.1 billion debt raise we did in May of this year. That attractively prefunded those forthcoming maturities, right, and provided liquidity from a risk management perspective. But the near-term capital management strategy remains focused though on reducing our debt level to leverage ratios and executing on this separation with Life and Retirement from AIG. But as previously noted, though, we have upcoming obligations associated with that liquidity of roughly $3.5 billion. So we've got the tax settlement that I'd mentioned in my prepared remarks, that could be up to $1.2 billion. And we have maturing debt that we did prefund, which pushed up the leverage ratio knowingly. But we know that's coming due at a $700 million range in fourth quarter and $1.5 billion by March of 2021. So we really have -- those priorities are right in front of us.

[Operator:]

Our next question comes from Tom Gallagher of Evercore.

[Thomas Gallagher:]

Peter, you mentioned that you don't intend to break up the Life Insurance business and sell it off in pieces. I guess my question is, we've seen some recent indications in the market that private values are potentially double that of current public market values of life insurers. Have you taken that into consideration and still concluded your path is the best one for shareholders?

[Brian Duperreault:]

Tom, let me take that one, and Peter can add to it. I think you just have to understand that when we look at our Life business, we believe the ongoing strength of it is the breadth of the platforms. They've unequal product and distribution. We've got leading market positions. And there's a lot of cross-unit synergies. So the integrated platform, we believe, provides the kind of knowledge and expertise and stability and that's more valuable together than in pieces. And so we've cleaned it up. We've done a lot of derisking, but L&R really is a beautiful machine where these things all interact. So we believe that some of the products is definitely greater. I mean the whole is greater than each of the parts, I'll say, the right way. I hope that helps, Tom. Peter, do you want to add anything to that?

[Peter Zaffino:]

So I think between my prepared remarks and your comments, Brian, we did look at many alternatives and just believe that the consistent performance that Life and Retirement has produced as it's structured is going to create the most shareholder value, keeping it together.

[Thomas Gallagher:]

I appreciate that, guys. Just my follow-up is the -- back in 2016, there was an estimate of capital diversification breakage of over $5 billion. It sounds like that's a lot less now. Is there still some dissynergy in capital diversification? And if so, could you quantify it?

[Brian Duperreault:]

Well, I guess, I'm going to throw that one, Tom, to Mark. Mark, can you just take us through that?

[Mark Lyons:]

Sure, sure. So Tom, 2015 is quite a while ago. And as you know, there's been massive changes to the portfolio pretty much across the board. So I mean when you think about it, not only from 2015, but when Brian arrived in 2017, you've got a targeted risk reduction program that really went across the board. We revamped the risk appetite, no matter how you looked at it. So that's been successfully implemented on both sides of the balance sheet, and it's involved the parent and GI and Life and Retirement and investments. And the operating subsidiary, RBC and risk-based capital is strong for both GI and for L&R and the volatility in total and within each of those operations has clearly been markedly reduced. And just as a little bit of a remembrance, so you see exactly the kind of risk reduction, which involves all the things you asked about. So the investment derisking, the Fortitude transaction, which we went into great detail, moving not only $35 billion of reserves, $31 billion of it was on Life and Retirement and $4-plus billion on GI, but it's also what constitutes those reserves. So when you look under the covers and you see a lot of structured settlement reserves and a lot of single premium immediate annuity reserves, those are clearly loaded with interest rate risk. So now that type of volatility and that kind of issue has now been pushed off as well. We have the ADC that we put into place with General Insurance that still has $6.4 billion unused, representing an 80% session. The underwriting change to the book that has been massive, both on the front-end and a proper reinsurance structure to protect it, as Peter always talked about. Consequence, the P&Ls have gone down enormously. The marketplace taking advantage of that with improved earnings by driving compound rate and improved terms and conditions, but trimming the portfolio the right way, not just renewing books of business but getting into classes and things doing it properly. And not only on that, we've got the -- what we kind of referenced earlier, which was the debt rates that we had that allowed us to having risk management, liquidity risk management capability in front of the prefunding of those maturing debt securities. So I think all in, we've got a lot of strength in earnings, a lot of strength in -- of lesser volatility around those earnings, and there is certainly a reduction in all those things combined.

[Operator:]

Our next question comes from Yaron Kinar of Goldman Sachs.

[Yaron Kinar:]

My first question goes to the financial leverage commentary around separation. It sounds like you're comfortable and confident in the leverage that will be achieved by both entities after separation. Today, I think the leverage is still a bit higher than where the Life and P&C Groups are at. So I guess, if I try to connect the dots there, is that why you're talking about a 19.9% sale at first to potentially fund some of that decreased leverage and then you'd consider selling the rest?

[Brian Duperreault:]

Well, look, since you brought up the 19.9% and I would have given this to Mark, but Peter, you might want to comment on 19.9% first, and then maybe Mark can go into the leverage question.

[Peter Zaffino:]

Yes, I think, Yaron, it is largely in my script, which is the 19.9% does preserve the foreign tax credits and that's a meaningful number today, but we will earn out of that. But I think Mark, I don't know if you want to go in a little bit deeper as to the deconsolidation issues?

[Mark Lyons:]

Yes. Well, as Peter said, the 19.9% certainly -- because you still consolidate. So you still continue to reap the benefits as he's noted, which is why it's important, number one. And number two is the shrinkage of that, the consumption of that has really been pretty evident over the older years to where we are now. And with L&R and GI, because think about, Yaron, L&R has really been the big consumer for the DTA, especially on the FTC, that's foreign tax credit side. But now you have 2 strong platforms with a lot of great prospects on a go-forward basis where both can use and both can consume that. So I think that's important. Now getting back to the structure, both -- all the AIG subsidiaries really are strongly capitalized today. And we do anticipate, though, that each of the General Insurance and Life and Retirement businesses will maintain strong RBC levels and will have a leverage ratio that's consistent with the respective peers and ratings. And we'll be working closely with our regulators and rating agencies, as Peter referenced, throughout this process to validate our analysis. And our intention is to remain at or above our target ratings of these operating subsidiaries. So we believe as separate organizations, both will have sufficient financial flexibility to compete effectively and to generate returns above their individual cost of capital. So again, to reiterate, at this time, with all in, we do not anticipate the need for additional equity capital in either business as part of the separation.

[Yaron Kinar:]

Okay. That's helpful. And then my second question, with regards to the guidance for 2022, combined ratio has been below 90%. And I think, Peter, you may have touched on this with your answer to Josh earlier. Did you need for the rate momentum to achieve that?

[Brian Duperreault:]

Well, Peter, what do you think?

[Peter Zaffino:]

In the current rate environment?

[Yaron Kinar:]

Yes. Yes. Does that need to continue?

[Peter Zaffino:]

No, we don't. I mean, again, I would have to -- when I'm looking through the future, I would have to talk myself out of and not into in terms of the underlying fundamentals as to will this continue or not. But we did not predicate getting below 90% combined at the end of 2022 with the rate environment that we're in today.

[Operator:]

Our next question comes from Ryan Tunis of Autonomous Research.

[Ryan Tunis:]

Just a follow-up on Tom's question about, I guess, why the outright separation is the right path forward rather than more of a piecemeal approach? And it sounded like Brian gave sort of the strategic rationale for it. But you guys also mentioned that you looked at capital and tax considerations when you decide on what you're going to do. So what, if any, of the capital and tax considerations that made this a better path than more of a piecemeal process of selling the Life business in parts?

[Brian Duperreault:]

Okay, Ryan, let me start with this. So when you -- when we looked at this question, the question is does Life and Retirement and GI belong together? Or are they better apart? And the kind of conclusion was they were better apart. So let me look at the Life and Retirement and you say, okay, is the Life and Retirement better together or apart? And it's the same kind of process. As I outlined it, if we believe that the Life and Retirement business itself, as I said earlier, really is well integrated, there's a synergy around them that produces greater value than separating them. So that was -- we didn't see that value between Life and Retirement and General Insurance, but we see the value in the Life and Retirement business, where there is a creation of value because they are together. And that was the strategic decision. The question, is it practical to separate and all that? We went through all that. And yes, we have the capital, we believe we can get the -- we have the ability to appropriately stand up L&R, I should say. So -- but it really fell on that very simple process. I hope that helps, Ryan.

[Ryan Tunis:]

Yes, it does. And then, I guess, just for Peter, it's early, but thinking about the dissynergies associated with stranded cost, that type of thing. I mean when you think about the cost base of the company, I just -- I'd like to hear your early thoughts on any complexities there.

[Brian Duperreault:]

Go ahead, Peter.

[Peter Zaffino:]

Yes. Thank you. So I would think about -- if I was -- if we're going to do an IPO with Life and Retirement, there will be additional investment in order to have that company stand up on its own. But how I would think about it is that the benefits of AIG 200 to Life and Retirement will be at or more than what the investment costs were. So there'll be no additional costs in terms of the run rate today. And then I do think that there will be more expense synergies at AIG post separation, and we're working through that and that would be in addition to AIG 200, and we'll just give you some more insight in one of our future quarter calls as we do a little bit more ground up work on it.

[Operator:]

And our final question comes from Meyer Shields of KBW.

[Meyer Shields:]

Great. On the fourth quarter '19 call, I think we got the sense that the underlying accident year loss ratio improvement would be more pronounced in 2021 than in 2020. Is that still the expectation?

[Brian Duperreault:]

Peter?

[Peter Zaffino:]

Well, I mean, Meyer, I just want to make sure I understand the question. Is it really in terms of rate above loss cost? Or like, I just want to make sure I understand what you're asking.

[Meyer Shields:]

I guess, I mean, you talked about how rate above loss cost is helping 2020, but I'm wondering whether that would -- any of that improvement was originally expected more in 2021 and has been pulled forward. Or is it just the absolute better pricing environment?

[Peter Zaffino:]

Mark, do you want to just take that on the -- like what we're getting on the policy year and rate cost increase?

[Mark Lyons:]

Sure. Sure, happy to. Thank you, Meyer. So I think one thing that's been clear from the informations Peter has provided not only this call but at prior calls is we don't see any reduction of the rate of increase. It's -- one, it's global, not just centered in the U.S.; and secondly, we don't see it falling off in virtually all the major areas that we've discussed. I think some others may, but we have not, and I think that's tantamount to the continued professionalism of the underwriting group. So think of it this way. So if you have that kind of strength by policy quarter, effective quarter, and if that continues to build, it's going to flow off increasing rate adequacy into future calendar quarters. So '20, it's going to have a very strong year, and I see nothing in the way stopping 2021 from being marginally better than that.

[Brian Duperreault:]

Meyer, do you have a follow-up?

[Meyer Shields:]

Okay. Just a quick one. Is it possible that the proceeds from the sale or IPO of Life and Retirement can be used -- who can use the DTA?

[Brian Duperreault:]

It could be used to -- I didn't hear that last question -- that last piece of the question.

[Meyer Shields:]

Yes. Is it possible that you can use some of the tax credits you can up and against the proceeds from the partial sale or IPO of Life and Retirement?

[Brian Duperreault:]

Well, Mark, I think that's you.

[Mark Lyons:]

It's actually much more complicated and there's legal structures involved. That's -- there's no short answer to that, but other than to say, not really.

[Brian Duperreault:]

I think that's the best way to leave it, Meyer. So look, I want to once again thank you all for joining us today. I'm very pleased with the progress we've made at AIG, and I think third quarter certainly is another indication of the fact that we are on the right track. And I got to tell, our colleagues really continue to impress me with their dedication and loyalty to our company and all our stakeholders. It's an exciting time at AIG. We continue to manage through unprecedented circumstances across the globe, while elevating our market-leading businesses. And we look forward to 2021. I remain confident that our team will continue to execute on our strategies for growth, and we'll separate the Life and Retirement business from AIG. So we look forward to updating you on future calls. Have a great day. Thank you very much.

[Operator:]

This concludes today's call. Thank you for your participation. You may now disconnect.