American International Group Inc (AIG) Presents at Deutsche Bank Global Financial Services Conference (Transcript)

American International Group Inc (NYSE:AIG) Deutsche Bank Global Financial Services Conference May 27, 2020 7:45 AM ET

Company Participants

Mark Lyons - Executive Vice President and Chief Financial Officer

Sabra Purtill - Deputy Chief Financial Officer and Treasurer

Conference Call Participants

Philip Stefano - Deutsche Bank

Philip Stefano

Great. Thanks, everyone for joining our virtual fireside chat with AIG at the Deutsche Bank Global Financial Conference. I'm Philip Stefano the insurance analyst here at Deutsche Bank and we are very excited to have with us early this morning, the CFO, Mark Lyons and Deputy CFO and treasurer, Sabra Purtill.

At least for the interests of focus investors, our two esteemed guests likely require little introductions, I'm just going to provide a brief intro for both. Mr. Lyons returned to AIG in 2018, after spending the majority of the prior two decades, holding various roles of increasing responsibility of our Arch Capital Group. And Ms. Purtill joined AIG in 2019. Previously, having been with the Hartford Financial Services Group, where she was Treasurer and Head of IR. So again, thank you both for joining us today.

When we start with a Q&A, I will begin with some questions on my own, but we are also going to leave time for questions from the participants. And just quick instructions on that you can ask a question via the web portal, there is a box to the left of the slide that you see, or you can also email me at phil.stefano@db.com, whichever is easier for you. But first mark, I believe that you have a few minutes of prepared remarks. So I will turn it over to you to start us.

Mark Lyons

Great. Thank you, Phil. And I appreciate the invite very much. It is always good to get out in front of our listed investors and this is a great FDE compliance opportunity. So again, thank you. Thank you for that.

So, I guess a few summary comments. I would say first, and we kind of mentioned it on our first quarter call. But, AIG entered this COVID hold situation and environment in very strong financial position. And that continues to be the case. We enhanced our apparent liquidity, as you probably saw in the trade press in May, raising 4.1 billion in the net capital markets and we now have north of 11 billion at parent liquidity.

At this point in time, our subs remain in a very strong position. Mostly Life & Retirement and the general insurance elite RBC ratios were north of 400% at the end of 2019. And they actually improved between them and 1Q, 2020.

I think you guys know that the general insurance story has been one of massive are-underwriting peers you know itemizes a lot of those things on the quarterly calls, RBC did in 2019 and to give people a really a flavor for the kinds of effort that had to be expended. And that work continues of course, but it is more the less, you know it will continue through, I think through 2020.

Like now you have had basically a full renewal of everything, and especially in a harder market environment. So I think it bodes very well. And I think the biggest problem child that general insurance has had has been North American commercial. I think that is where figuratively speaking the most surgery and attention has been made. But there wasn't attention elsewhere, but I would say proportionately more there.

The personalized side of the house is really a pretty strong franchise, especially in Japan. and with a high net worth business it is one of the industry leaders in that marketplace. We recently launched Syndicate 2019 as we commented on, on the call in partnership with Lloyds to really serve that high net worth market and which continues to be a fast growing and profitable segment.

Life & Retirement is a well balanced portfolio. I'm sure we will get into that a bit. It is got a strong breadth of products and distribution channels to really let clients be served I think in the right way. And as markets change and pricing decisions change and so forth. There is an array of options for them.

For the cube rise that we have commented on probably since November of 2018 is still on target to close midyear and it is going through the regulatory approval process as we speak. Our investment portfolio, I think we commented on this probably more fully on the last call, has been really derisked over the last three to four years, really since Doug Fishel got here in late 2015.

And I always like to make the analogy that he was faced with similar challenges that general insurance was faced with a portfolio that needed major rebalancing, major constructive and construction work associated with it and I think that is been evidenced overtime as well. And we broke out a lot of information in our financial supplement for investors and analysts and hopefully that has been a value to everyone on this call.

Now, I think, just kind of closing where I started, is we continue to have a lot of confidence in our balance sheet and the business portfolio. As it spans, we will continue to tinker with it of course. But we feel pretty strong about it. Even with all the uncertainty going on at this time.

We feel we are in a pretty good place to navigate things. And this current environment is just that the current environment, and in three weeks it could mean something different. And there could be different governmental policies coming in and programs and so forth. And it is really hard to determine to what extent it buffets up the economy or what it does for overall liquidity. But we still feel that this is an earnings event for AIG, not a capital event.

And with those intro comments Phil, I'm happy to kick it back to you and begin the chat.

Philip Stefano

Great, thanks Mark and So, one of the questions that we get especially now that the first quarter earnings is behind us. Is trying to parse between the different layers of COVID reserving that people have put out there. So the question that we are going to begin with asking everyone is. To what extent do your COVID first quarter charges represent an ultimate? What is encompassed in them and if you can just talk about the extent to which there may be legal expenses embedded in there. It feels like these are the three kind of primary differences in how people have reported so far?

Mark Lyons

Okay. it is a fair question. So I guess there is a lot of sub parts there. So let me go through it and hit some of them. I think Peter you know kind of marched through it. But what we posted, which was 272 million on a net basis was really composed of travel, exposures, Accident & Health, Contingency, business, it include property, it include credit and worker's comp.

We kind of went through, I think but happy to do it again, some of the rationale for some of that. But the extent that we could measure it still would have contemplated legal expenses and buried in the reserves. The reserves are dominated as you would expect to do IBNR reserves, not case reserves.

Now, as things emerge, could legal expenses be a little different than your originally think? I mean, when you look at the papers, and I'm sure everybody is reading the same thing. You can have different views coming from different states, you have certain areas trying to get multi-district litigation and MDL litigation and so forth.

So depending on where that goes, it is a different legal spend associated with it, but our reserve is contemplated our best guess at the time. So, I think you said this is represented ultimate. So the answer is, yes. I guess, I have to differentiate how an insurer might look at that and what we are responsible for doing and how the question might be phrased.

So, I guess first what is the requirements of any insurer to do at any point in time. So, at any balance sheet date, you are required to put up your management's best estimate of glossary service associated with events that have occurred on or before with the statement date. So, from that perspective these are management's best estimates of the exposure from COVID from claims that occurred 331 or prior.

And therefore it is not an estimate, if you think of it like on an underwriting year basis or underwriting years basis, then how long this last. That will be future loss occurrences. So, if there is a event cancellation in September, that is clearly not reflected because it was either postponed or cancelled at the time of the statement date. So, hopefully that clarified it.

Philip Stefano

Yes. One of the things that I have been trying to think about just given the uniqueness of this event and you have a reserving process that you put in place. To what extent is the reserve reserving process fluid? Do you need to start from ground up every quarter or how should we think about how, what the reserving evolution for COVID could look like as we move forward?

Mark Lyons

Yes it is a good question. I think what you will see because I think we talked about kind of a granular bottom up approach, which involves a lot of different people and functions and then a top down approach, which is more exposure. So, the bottom up teaches you about where the exposures are and the top down is more of a kind of an exposure rating approach, if you will or exposure view. So, those two marry themselves.

As time goes on there is going to be more weight given to the bottom up than the top down. I would make the analogy to a reinsure right on a normal catastrophe, usually the estimates come out as a function of market share very top down and then as the quarters pass that kind of gets kicked to the curb it is the actual emergence that dominates and it will be the same thing here in concept.

And as part of your question Phil was, did we have to start from scratch? I would say it is similar to any other reserve group. So, you leverage what you had last time and you look at how things have changed and depending on what you have, if it is a frequency line or severity line you can apply different methods of protection, that is all a function of what comes through.

Philip Stefano

Understood and we had a question come in on the line about COVID. Given that this is at least it was described in the opening remarks in earnings events scenario. When you look at stressing the various assumptions that you are making, can you help us understand maybe what the macro circumstances are what leads this to be a capital event. How does the evolution of losses change to pivot from being an earnings event we should be comfortable with to a capital event this maybe a bit more of a headwind?

Mark Lyons

Well, as I said our view is that it is with our view of how we have looked at it. It is still an earnings event. I mean I got to back off a bit because, as you know we and others have with through guidance, because there is only limited visibility.

I mean, I know that your crystal ball, but mine is very cloudy on 2020 a little on 2021. And basically it will take on 2021. So, you have got to make assumptions on for example where the tenure is and where that might be overtime, what is going on with spreads, what is going on with equity markets on some other aspects you might have, what is going on with other charges that may come through.

So, what we did on - I mean, you assessing thing with scenario testing versus probabilistic approaches, you really have to pick a set of dynamics and kind of let that run through. So it would have to be far worse than we have assumed in our kind of revised view forward, limited visibility view forward for this to become a capital event for AIG.

Philip Stefano

Got it. And you had mentioned that the guidance was withdrawn, at least for the general insurance, the combined ratio improvement expectation was reiterated. To what extent should we contemplate the potential accident year or attritional losses coming through from COVID and serving as a headwind to that improvement target?

Mark Lyons

I view that as marginal really, at this point. I think there is the possibility of some upward drift in - we are talking actually here ex-CAT, Phil, actually the 2020 ex-CAT. So, yes, there could be some movement, but in AIG's case, because of the kinds of lines affected, it could be driven by our changing mix. I mean, when you have your travel business, I mean, you know Phil how we travel just fell off a cliff. So the travel volume is off tremendously.

That affects loss ratios, it affect acquisition ratios and things of that nature and A&H and other line are off and they will rebuild as a function of how the economy rebuilds and what governmental policy lets travel really starts to occur again.

So I use a travel example, because it is, I think a good extreme example, because many people don't have travel books of how a decrease a radical decrease in the volume of the book can actually wait and change your loss ratio, overall. Even though every line of businesses loss ratio may not have changed appreciably, the waiting may cause some upward pressure.

Philip Stefano

Got it. And when we think about the P&C commercial lines, I think in the past you had talked about, you know using a machete to help sculpt the business and maybe you are down to a scalpel at this point. I mean, can you remind us where in the surgery you are with the changes that you are making?

Mark Lyons

Well, I think if I talk about one that is still a little bigger than a scalpel would have been the Syndicate 2019 on the high net worth business. So it is really a strong performer. One exposure you have about people in the high net worth segment is they all tend to want to live on the cost, or they all want to live near each other. So you wind up having risk aggregation exposures that you really can't get away from.

But the book of business that AIG has, it is not just auto or homeowners, it is watercraft, it is collections, it is access liability, there is a fine art, so there is a full array, collectible cars, things of that nature. So there is a full array of exposures that really do help you overall.

But that is, I think a good recent example of additional portfolio management that welcomes and allows Lloyds with its innovative structures of bringing in third-party capital and arranging it in different ways and it has been complemented with a lot of reinsurance that we have from our normal third-party reinsurance indemnity providers.

So it is a really good spread, it allows the profits to be spread as well, but it should overtime change AIG's profile that being a smaller proportion of total. And also generate fee income, because that will be an MGA structure written through Talbot. So it will still be written, you know PCG brand will continue for example, but it will still be written through AIG through Talbot. So we think it is an elegant spread solution that benefits everyone.

Philip Stefano

Got it. Okay. Switching gears a little bit, we got a couple questions that came into the line about the ceded reinsurance program. Something you could just discuss the program generally I know there have been several enhancements over the years which you had detailed on your earnings calls. As we contemplate the structure of the reinsurance program. How should we think about the potential response, at least it feels like the question is geared towards COVID claims on the property versus the casualty side?

Mark Lyons

Well, we tend to talk about the property more and happy to do that again. But I think the enhancements. First of all, it is complicated I could be here three hours, quite frankly. But I think of the per risk and the CAT, there have been I think substantially beneficial tweaks that makes the covers more relevant.

So, on the per risk side, the attachment points have dropped. And there were some A, B's annularity deductibles and some of those and those have been severely lessened. And because we cut our limits it appears to be talked about, right. So dramatically, we didn't need some of that extra coverage at the top, because our limits nowhere, it didn't have that level of size anymore.

And we had made enormous progress towards eliminating those long-term agreements or for LTA's which a three-year deal carried a lot of that. So you have got that benefit there and in the CAT program, not only has lower attachment points, its better on the aggregate basis. So it will attach sooner, irrespective of whether it is a large vertical or a collection of aggregate losses over the course of the year. And both the per risk and the CAT would have coverage for communicable diseases.

For example, although on a go forward basis, we expected and are already seeing the reinsurance market tighten that and there is generally going to be, I think it is general rule there being communicable diseases inclusion going forward. But all of our reinsurance contracts have strong follow the fortune conditions and/or follow the settlement conditions if their settlement evolve. So, that would be my summary Phil on the property side. Casualty side, sorry.

On the casualty side, there is, again, the gross underwriting changes hove to drive what you do and I think Peter talked about last year. On the casualty side, it was a significant change put in on the growth side by the Chief Operating Officer, Tom Bolt and his team. So in the past, AIG would compete against itself basically, and have different pockets around the world. And the brokers knew that and they knew how to exploit the change in the armor. That is no longer happening.

So it is more centrally controlled, restricted ventilation standards between layers, where we would operate, whereas in the past we may have written 200 million with no ventilation in different pockets of the organization and had a huge net on it. Now, there is no more than 100 million that is out and 75 million on new business.

There is a 75x25. That is 100% of seated, and there is a quota share in the first 25 million. That is roughly 55% ceded. So, let's call that and 11 million net compared if we have written the whole thing up to 200 million, so massively different tail management as number one and number two it changes your net mix of business, which is also favorable. So, that is how I would summarize that Phil.

Philip Stefano

No that is great Mark. And the pricing momentum that we have seen at least on the primary side. It is something that we have been discussing for a while and it feels like the hardness or the firming in reinsurance is bit of a new phenomenon in the industry. Does it feel like the pricing momentum of reinsurance versus primary or then might materially diversion at this point?

Mark Lyons

Well, some of the things that we see, because remember, we Validus now right, so we are writing reinsurance assumed. Not just deal with markets on a ceded basis and it is probably worth noting that the amount that Validus rewrites is more than offset the sessions that we do. So, on a net-net basis and a harder market like this we still come out winners from a price gain point of view.

So, with Japan and Florida, whether it is a loss affected or not there is clear indications of real strength of reinsurance pricing going up. So, AIG’s program you may recall from Peter, we still had a 7% spend reduction compared to the prior year. But the rates have gone up, so the reinsurance market that seems to lag the primary market and the retro market, they were in the middle that seems to have been corrected.

Philip Stefano

Got it, thank you. When we think about I guess looking back to the first quarter earnings call, there was a comment that was made and we had a couple of questions come in about the exposure to property and the affirmation that of coverage for communicable diseases was less than 1% of the total limits on property. I think people were trying to just get a better understanding for the context in which that was provided and the extent to which the limits could be a headwind as we think about forward earnings potential items, maybe if you could just clarify or talk around if you have any more clarity in that comment and how we should be thinking about it.

Mark Lyons

Well, I think the intent of that was - kind of gives some relativities as a combination of how often it is offered I guess is a good way of putting it and the sub-limits which are tiny compared, so it was less than 1% I think what you are referring to Phil, less than 1% of the total gross limits in an aggregate sense would be potentially exposed to business interruption. If everything went up including all the things you asked about coverage, language and legislative efforts and things of that nature.

So, I think Peter in the past has talked about that, depending on whether it is North America or international it amounts to like a 1 million to 1.5 million policy limit growth, maybe in North America and less than a million internationally. So, if you think of any contracts from over the year there was two - astonishing numbers 200 billion in limit reductions, gross limits 200 billion.

So, if you take the 1% that is a 2 billion reduction, assuming they all proportionately had business interruption, so that would be a 2 billion reduction in business interruption limit. So the constant resulting of the portfolio and I think as Sabra has commented on in the past that if AIG had been struck if COVID had happened three-years ago, it would have been a whole different ballgame.

But all those efforts that went forth to derisk and restructure the book allowed us to be in this position. So I would summarize that it is less than 1% of the total limits outstanding, the limits have dropped by 200 billion over the course of a year. And that is what puts us in such a great position now.

Philip Stefano

Understood. And thinking about Fortitude RE, post this sale of Fortitude, are there any parts of AIG that still seem non-core? Or alternatively, is there any area that you see a need to grow inorganically following the sale of Fortitude?

Mark Lyons

Well, Fortitude dominates, but isn't exclusively what legacy is. There is still some pieces that you are probably not worth talking about, but Fortitude still dominated that. So, yes, that is considered non-core and that helps the Life & Retirement be comfortable in saying they don't have legacy exposures, right.

They don't really have the 2,000 vintage variable annuity issues, they don't have LTC issues and things like that to the extent any of that that was there that is over in the Fortitudes book and not a call it a going concern upon sale. So I would really say that is still our view of what is non-core. If I look at L&R, between their group, their individual retirement of Life piece, and institutional markets, which is mostly structures and GICs and pension risk transfer deals and things of that nature.

I would say they are all core. Now, the Life piece when we talk about Life & Retirement, it is dominated by R not L. So the life piece really is compared to others is probably not proportionally as big as some of our competitors. But I would say all of it is still core and then I look at GI, it is more - as Peter would do.

We would sit down and look at the portfolio as to what is performing, what is not, what should we grow, what should we coast on, what should we cut back or what should we drop kick? That is an ongoing, but that is pruning, right. That is not saying core, non-core. So, I think with the exception of legacy, we don't have things that I would really classify as non-core.

Philip Stefano

Got and in when you think about the broader AIG portfolio does it feel like there are things that are missing that that would be easier to solve inorganically than organically?

Mark Lyons

Well, if we didn't have Validus yet right, I would say we need a reinsure, we need a Lloyds presence. And we need business that we don't have like crop. And we got all that associated with it. So, I don't think we are in a hurry to flood into the Far East, for example, that is super competitive at this point.

So there might be some areas. I mean, we used to have a Latin American presence, for example, and that got cut back. So, I think it is a continual look at that landscape Phil. So some economics within a geographic region improve, then we will look in that regard. I mean, back to my old company, one of the wavy line tenets was to have more of a rule of law where you could depend on it.

So whether it is London or England or the U.S. or Australia and some of the others where you had some level of knowledge of how a legal system would work, which is critically important insurance. So it all goes into the mix.

Philip Stefano

Okay. And so switching gears a bit, we have conversations with investors about AIG 200. It feels like there is a common pitfall and contemplate AIG 200 is nearly inexpensive for that initiative. And I was hoping you could just remind us, what are the other goals of this program? How is it helping to divisional AIG for growth and underwriting in the future?

Mark Lyons

Okay. Well, it is a couple things. I think Peter talked about it. I talked about a little bit on the call. And I just want to remind the audience here that, in our earnings call deck, we purposely put a slide out there for everyone to kind of get to the heart of your question in a second Phil. To see what the costs to achieve or what we view the year-by-year capitalization to be and since you can't start advertising that until it gets put into service. We provided some information on that as well.

I think to the tune of the 400 million being capitalized at the end of the three-year period, there is still 350, yet to be amortized. And we gave some views that that would be 50 million per year for, I don't know, four or five years and then tail off from there. So, that is the financial aspect that you asked, but you really asked what other type of views.

I will tell you where I get excited about it is, we wind up being in a position where we are going to have a lot more insight than we have today. The ability to have information commonly defined no matter where you are in the world. You happen to have the same view the same information whether underwriting is looking at it, finances looking at it, actuarial is looking at it, ceded re is looking at it, which you can guess is more important given our increased use of reinsurance.

So having much more information available in a drag and drop sense. So the data strategy is key and a lot of senior people are involved in all of these. So this isn't a measure, it is an IT project, they are business led projects, with clear tollgate, clear milestones that have to be met. And the data strategy piece is very key to it. So there is a lot of kernels involved on these things. It is not kick the corporals to do. When you kick the corporals you get a process driven result. When you have senior people involved. You get a results orientation on what you are trying to achieve.

So I'm really excited about our ability to pivot more quickly in the marketplace. The anticipatory have better information to make the continual pruning that goes on or growth opportunities. And looking at things, not just from an insurer point of view, but from a customer centric point of view, from a producer centric point of view, from a reinsurer point of view. So, to me, that is the kind of value and leverage, we get that is not obvious from the outside and doesn't show up in dollars and cents.

Philip Stefano

Got it, thank you. We have a couple of questions coming in and probably time for one more so I will try to frame this stuff if I can. Social inflation is something that we were beginning to discuss more and more over the past year. This is pre-COVID, social employee inflation was a topic on pressuring attritional loss ratios. As we think about the post-COVID inflection in the broader macroeconomic landscape. Is social inflation going to develop or be disrupted in some way by COVID? How can we think about - how we are going to be talking about the concept of social inflation in the coming quarters, if not years?

Mark Lyons

Yes, good question. Hopefully I have a good answer on that. So, I guess you can cut it a couple ways. First I will reaffirm that yes before COVID there was I think increasing sense and feeling in evidence of that across the industry. I think there was many comments about it.

The interesting thing is that when you begin looking at whether it is work comp or GL, you are seeing a frequency decrease on the non-COVID claims everyone is posting on COVID understandably, but the non-COVID is really reducing the other way, will that completely offset, time will tell on that, but you see that as a potential dampener on social inflation to the extent that have fewer cases to get to majority awarded and some of the counties we could - around the country we could comment on.

So, this possibilities that but since there is more jury awards, if I mean conceivably I'm speculating that jurors read the papers like everyone else. So to the extent that there is like ill feeling because of COVID or something, maybe that could jack things up, it is really hard to know. But we and how we are looking at things and needed rate changes and things like that are continuing to reflect that social inflation will not peter out.

Philip Stefano

Got it. Thanks. I think we only have a minute left and I'm not sure we have time to get into it to another question. So, we have a few in the queue. We will try to get to them in our breakout. But Mark and Sabra, thank you so much for your time again. Hope all is well and continues to be well for you and yours and we look forward to talking to you again shortly.

Mark Lyons

Great. Thank you, Phil again we appreciate the invite and I look forward yes like you said to talk to you again shortly. Thank you.

Question-and-Answer Session

End of Q&A