American International Group Inc (AIG) 2013 Q1 法說會逐字稿

Welcome to the American International Group's first quarter financial results conference call.

Today's conference is being recorded.

At this time, I would like to turn the conference over to Ms Liz Werner, Head of Investor Relations.

Please go ahead, ma'am.

Good morning.

Thank you for joining us, everyone.

Welcome to AIG's discussion of our first quarter 2013 results.

Speaking today will be -- Bob Benmosche, our President and CEO; David Herzog, our Chief Financial Officer; Peter Hancock, CEO of AIG Property Casualty; and Jay Wintrob, CEO of AIG Life and Retirement.

Other members of Senior Management are also in the room and available for the question-and-answer period.

Before we get started this morning, I'd like to remind you that today's presentation may contain certain forward-looking statements, which are based on Management's current expectations and are subject to uncertainty and changes in circumstances.

Any forward-looking statements are not guarantees of future performance or events.

Actual performance and events may differ, possibly materially, from such forward-looking statements.

Factors that could cause this include the factors described in our 2013 first quarter 10-Q and our 2012 Form 10-K under Management's Discussion and Analysis and under risk factors.

AIG is not under any obligation to expressly disclaim or update any forward-looking statements whether as a result of new information, future events or otherwise.

Today's presentation may contain non-GAAP financial measures.

A reconciliation of such measures to the most comparable GAAP figures is included in our financial supplement, which is available on AIG's website at AIG.com.

Now, I'd like to turn the call over to Bob.

Thanks, Liz.

Good morning, everybody.

As I've said since mid-2011, the focus of our Company and all the people of AIG has been fix the foundation and get the fundamentals right.

While we see noise as we dealt with some of our non-core assets and so on, mark-to-markets of ML II, III and so on -- AIA.

We've been focusing on the core.

I think what you see is just in the first quarter is another strong quarter of the fundamentals.

This is a quarter where we had some positives.

Last quarter, we had Sandy, which was a negative.

But if you look at the core and we're going to talk about that this morning, we continued to fundamentally do this -- very well here.

You look at our liquidity at the end of the quarter, we're at $15 billion.

That includes dividends from Life and Retirement and also Liability Management, which included some of the cash from the prior quarter.

Peter is going to talk to you about our Property Casualty business, that we've seen good improvement in the underwriting, good returns from the investment side as well.

But what's most important, if you look at the trend over this period of time from mid-2011, you can see that there's a gradual improvement of the current accident year loss ratio which is now down to 63.2%.

Again, strong improvement.

If you look at the growth of the top-line, we continue to grow that this quarter.

It is growing nicely at about 4%.

If you take out some of the accounting charges and the yen issue that we're dealing with in terms of conversion there.

So strong performance in Property Casualty.

The Mortgage Guaranty business, we've said we seen that business turn about two years ago.

We're working through the legacy book.

Again, a strong quarter for that business.

About half of their premiums are now coming from our new underwriting model, which is much -- performing much better than we had in the past.

Our Life and Retirement business, again, great distribution numbers in a very tough climate.

We're continuing to hold the line on our ability to get the returns we need for that business.

So a success for us as well.

Jay will take you through that, so I don't want to belabor at this point.

I look forward to taking your questions at the end of our comments.

What I'd like to do now is turn it over to David, who will highlight some of the financials for you at this point.

David?

Thank you, Bob.

Good morning, everyone.

As Bob mentioned, our core operations delivered strong operating results this quarter, up 28% over a year ago.

We executed on $2.1 billion in Liability Management actions during the quarter.

We remain committed to our aspirational goals, including $25 billion to $30 billion in Capital Management and a 10% ROE by 2015.

Turning to Slide 4, first quarter operating earnings per share was $1.34.

As you might recall, first quarter of 2012 had over $3 billion in pretax gains related to non-core holdings in AIA and ML III.

So the quarter-over-quarter EPS comparison isn't straightforward.

Operating ROE, which excludes AOCI from equity, was 9.2% for the quarter.

On a basis consistent with our long-term aspirational goals, which excluded the deferred tax asset from equity for purposes of calculating ROE, ROE would have been roughly 200 basis points higher this quarter.

Book value per share excluding AOCI was $59.39, up 12% from a year ago and 3% from year-end.

Operating results begin on Slide 5. Property Casualty delivered an underwriting profit in the quarter, driven by continued improvement in the accident year loss ratio.

Both our Property Casualty and Life and Retirement businesses benefited from stronger alternative investment returns than we expected.

Property Casualty had modest CAT losses of around $40 million less than we expected in the quarter.

We realigned our Life and Retirement segment presentation this quarter to provide product segments consistent with our new Management structure, which Jay will discuss in more detail in his remarks.

The Direct Investment Book and Global Capital Markets benefited from positive marks in the quarter, driven largely by tighter credit spreads.

Operating income from the wind-down legacy multi-sector CDS book, which is reported in Global Capital Markets, improved by roughly $150 million from market appreciation of the underlying covered securities, which then reduces the liability we carry on the related CDS.

The Direct Investment Book also benefited from asset appreciation consistent with our objective to capture the pull to intrinsic over time.

These market movements will vary from period to period and could be negative in a reporting period.

Interest expense increased modestly from prior year and reflected only a partial quarter of interest savings from our Liability Management actions that we completed in March.

Corporate expenses, including the impact of costs incurred during the quarter for continued infrastructure buildout, were in line with our near term expected run rate of about $225 million per quarter.

There is roughly $35 million or so per quarter of corporate expenses related to our data center consolidation, which begins to wind down going into 2014.

The effective operating tax rate came in at almost 30%.

Looking ahead for the rest of the year, we continue to expect an operating tax rate to be roughly in this range.

As you may recall, we will not be paying any US income taxes for some time given our NOLs.

We also had a couple of largely offsetting tax adjustments that are not reported as part of operating income.

We increased our reserve for uncertain tax positions under FIN 48 by approximately $600 million related to some legacy matters as a result of current period developments.

We also determined that recently identified tax planning strategies met the prudent and feasible criteria.

We released through income a little over $750 million of our deferred tax asset valuation allowance related to our capital loss carry-forwards.

Our capital position remains solid.

On Slide 6, you can see our current debt levels reflect the over $2 billion in Parent Company debt that we called and repurchased in cash tender offers this quarter.

In March, we called our $1.1 billion, 7.7% hybrids at par.

We purchased $1 billion in debt in cash tender offers with an average coupon of around 7.8%.

Annualized interest savings on this retired debt is about $165 million.

We also have $750 million in callable hybrids with a coupon of 6.45%.

Exercising that call would further reduce annual interest expense by almost $50 million.

At this time we do not have any plans in place for further 2013 Liability Management outside exercising the hybrid call that is available to us.

If we do exercise that call, then between our maturities, the debt we have already retired proactively, we could pare our annual interest expense run rate by roughly $290 million.

Our year-end RBC ratios are also presented on Slide 6 and were 443% for Property Casualty and 532% for Life and Retirement.

These are higher than the preliminary estimates that we reported last quarter.

Our insurance subsidiaries remain well capitalized well above their CMA thresholds and are positioned to deliver sustained dividends and distributions to the Holding Company.

We received distributions from Life and Retirement of over $1.3 billion during the quarter as shown on Slide 7. Property Casualty is on track to deliver its full-year targeted dividend payments later this year.

We continue to expect $4 billion to $5 billion in total in annual dividends and distributions from our insurance companies.

Parent Company available liquidity is over $15 billion at the end of the quarter, reflecting these distributions and the Liability Management actions that I mentioned earlier.

The Parent liquidity balance includes $5.5 billion related to the Direct Investment Book and Global Capital Markets, which is currently allocated towards future maturities of liabilities and contingent liquidity stress needs.

Nearly 60% of the DIB's debt matures over the next five years.

During the quarter, we initiated an investment program at the Holding Company whereby we invested $2.3 billion of available cash into high quality fixed maturity securities with a duration of just over three years and a yield rate of just over 1%.

We expect this portfolio to grow to around $3 billion this year.

Additionally, the ILFC divestiture continues through the regulatory approval process as expected.

Upon closing, the net proceeds that we receive on that transaction will be unencumbered at the Holding Company.

At this time, I'd like to turn the call over to Peter for greater detail on the Property Casualty results.

Peter?

Thank you, David.

Good morning, everyone.

During the quarter, AIG Property Casualty made good progress towards achieving our goals.

We improved our underwriting results and experienced strong investment performance, while expenses remained largely stable.

Turning to Slide 8. Operating income was nearly $1.6 billion, which included moderate catastrophe losses of $41 million, favorable net prior-year reserve development of $52 million and better than expected net investment income.

Continued enhanced risk selection, technical pricing, shifts in our business mix and advances in claims practices contributed to that profitability.

Our accident year loss ratio, as adjusted, of 63.2% is slightly better than trend, which has been improving at an average 3 points annually.

We expect to continue to see a decline in the accident year loss ratio as a result of our continued underwriting improvements.

This quarter, we began recognizing premiums on excess of loss reinsurance at contract inception rather than ratably over the contract term, which will have no effect on full-year net premiums written or net premiums earned but does impact first quarter comparisons.

Changes in foreign exchange driven by the weakening of the yen and a first quarter catastrophe bond issuance also reduced reported net premiums.

Excluding these effects, top line growth was 4%.

We continue to expect modest net premium growth in 2013, as our underwriting actions take hold and we write profitable new business.

General operating expenses were up slightly on a gross basis and included moderate severance and other personnel charges.

Turning to Slide 9. Commercial's net premium written were up 4% excluding the effect of the immediate recognition of ceded premiums on excessive loss reinsurance and the catastrophe bond issuance that I mentioned earlier.

In addition, last quarter, we entered into a new reinsurance program in US excess casualty that reduced Commercial's first quarter premium by about 1%, but will improve overall profitability.

Maximizing risk-adjusted profitability through optimization of business mix and underwriting excellence remains a focus of AIG Property Casualty.

The results of these initiatives are most evident in Commercial's accident year loss ratio, as adjusted, which improved approximately 5 points compared to the prior year.

An increase in new business and positive rate changes contributed significantly to growth in Property, which improved 20% excluding the items mentioned above and in financial lines.

In the US, we saw pricing continue to climb particularly in Property and Worker's Compensation where rates increased over 8%.

Partially offsetting this was continued pressure in certain lines within specialty and in Europe's Commercial business.

Overall, retentions remain strong in those lines of business we wish to grow.

Turning to Slide 10, Consumer net premiums written increased over 4% excluding foreign exchange and the other items mentioned earlier.

Accident and Health experienced growth outside the US particularly in individual A&H in Asia Pacific.

Personal lines benefited from auto's market share gains in EMEA and expansion in high value non-auto lines.

Consumer's accident year loss ratio was up slightly from the prior year, as 2012 included a $45 million benefit related to changes in actuarial assumptions in Accident and Health.

Acquisition ratios reflected our investment in the profitable direct marketing channel, which grew approximately 8% and accounted for 16% of total Consumer premiums.

Slide 11 illustrates our investment portfolio mix.

First quarter net investment income increased 11%, reflecting strong alternative investment returns, increased mark-to-market gains on structured securities and redeployment of excess cash held at year-end.

Alternative investment income was almost $120 million above our expected return.

The first quarter marked another step on our path to increasing the intrinsic value of AIG Property Casualty.

Our shift to high value business combined with underwriting and claims practice improvements exemplified how our focus on balancing growth, profitability and risk is helping to produce better margins.

We maintain our commitment to capital efficiency and optimizing our risk profile.

In Japan, for example, we recently integrated the majority of our operations under one Holding Company, which will enable greater capital flexibility and create operating efficiencies.

We look forward to contributing our planned full-year dividends to the Holding Company during the remainder of the year.

In closing, I'm satisfied with our positive momentum.

I'm confident that this quarter is only the beginning of a successful year.

Turning to Slide 12, I'd like to comment on Mortgage Guaranty's performance and our outlook for this core insurance holding.

The first quarter was another quarter of improving profitability and growth in new business.

Delinquency counts continued to fall and Mortgage Guaranty continues to see a growing portion of earned premiums, now almost 50% from high quality business written since 2009 and declining losses from legacy run-off exposure.

We expect UGC is very well positioned to take advantage of an expanding mortgage -- private mortgage insurance market.

Profitability is expected to grow over the course of the year.

We'll continue to capitalize on our unique underwriting approach and strong capital position.

Now, I'd like to turn it over to Jay.

Thanks, Peter.

Good morning, everyone.

Starting on Slide 13.

As you can see, this was another strong quarter for AIG's Life and Retirement business, with a 6% increase in operating income from a year ago to $1.4 billion.

The year-ago quarter included a $246 million gain in the final Maiden Lane II distribution.

First quarter operating income growth was driven by the robust equity markets, which contributed to strong investment returns on our portfolios of alternative investments and mark-to-market securities.

Combined with another positive quarter for our investment in PICC common stock, these portfolios contributed approximately $320 million in investment income above our expected returns.

Strong equity markets also contributed to our growth in Assets Under Management, driving increased fee income.

The quarter also benefited from lower mortality costs and our continued active management of crediting rates, which dampened the impact of the low interest rate environment.

In addition to strong earnings, as David mentioned, AIG Life and Retirement provided $1.3 billion of liquidity to the Holding Company through dividends and note repayments from our operating Life companies.

We're on target to deliver on our expected dividends to the Holding Company for 2013.

Total premiums and deposits this quarter were $5.6 billion, roughly flat with the year-ago quarter and 7% higher than the fourth quarter of 2012.

Net out flows, the sum of sales less all surrenders, death claims and other benefit payments related to our retail investment products and group retirement businesses were $244 million, a marked improvement from the previous quarter.

Each of our business lines contributing to this favorable trend.

Variable annuities were the leading driver of in flows, while fixed annuities showed the greatest incremental improvement in net out flows due to improvement in sales and a decline in surrenders.

We continue to see strong variable annuity sales growth and remain comfortable with our product offering, risk management and the overall environment with respect to the VA business.

We also remain disciplined in managing our fixed annuity sales and in force block.

Our cost efficient, flexible annuity platform based here in Amarillo, Texas and deep relationships with banks in particular have allowed us to remain the number one provider of fixed annuities through the bank channel.

The low interest rate environment, however, obviously continues to negatively impact product demand across the industry.

We are now reporting under our new segment presentation and our new segments and the underlying lines of businesses, which we illustrate on Slide 14, with recent organizational changes and how we manage the business and allocate resources.

Our results are now broadly reported in two segments, Retail and Institutional.

We also provide profitability and additional supplemental information for certain key businesses.

The Retail segment includes our individual Life and A&H business, fixed annuities, retirement income solutions, and retail mutual funds and broker dealer services.

Our retirement income solutions business line now includes both variable and indexed annuities, reflecting the fact that (audio difficulty) these products rather than focusing only on asset accumulation are increasingly interested guaranteed income.

Today the vast majority of each of these products now include a guaranteed lifetime withdrawal benefit rider option.

The Institutional segment includes our group retirement business which was previously reported as VALIC, Institutional Markets and AIG Benefit Solutions, our group benefits joint venture with AIG Property Casualty, under which AIG Life and Retirement reports 50% of the results.

Our Institutional Markets business represents opportunistic offerings including stable value wrap contracts, structured settlements and pension buyouts.

Given our opportunistic approach to the Institutional marketplace, the [top] line results will fluctuate from period to period.

Slide 15 highlights the product diversity across our segments.

The contribution of strong alternative investment returns benefited all product lines this quarter.

In addition, active spread management benefited both our Retail and Institutional segments.

Total base portfolio yields shown on Slide 16, remained under pressure due to the continued low interest rate environment.

Total yield or reported yield reflects the strength of alternative investments and the gain on our investment in PICC stock.

We expect that base yields could see pressure for the rest of this year, as we continue to take gains on certain portfolios of securities in order to utilize capital loss carry-forwards that are available to us and due to prevailing low interest rates.

Turning to Slide 17, you can see the trend in base yields and net investment spreads for each of our leading [spread-based businesses], fixed annuities and group retirement.

Fixed annuities have benefited from our active management of crediting rates.

Net investment spreads increased this quarter.

Approximately 73% of our fixed annuity and universal life account values now are at minimum guaranteed crediting rates.

We would expect to continue to actively manage spreads.

Group retirement also benefited from reductions in crediting rates, which offset the impact of shifting into certain lower yielding, higher credit quality invested assets, which we mentioned we began last quarter.

When considering our fixed product flows, it is important to note that close to half of our sales and deposits were into products with guaranteed minimum interest rates of 1%, while the majority of surrenders, death claims and other benefits were paid from products with a guaranteed minimum interest rate of 3% or above.

In sum, we're off to a good start to the year with solid earnings and distributions to Parent.

We plan to continue to execute on our growth strategies by leveraging our strong relationships with distribution partners to increase sales of our broad product portfolio across all channels while continuing to look for opportunities to run our businesses in the most effective and efficient manner possible.

Now, I'll turn it back to Liz to open up the Q&A.

Thank you.

Operator, could we open up the lines now for Q&A?

(Operator Instructions)

Jay Gelb, Barclays.

There's been a significant amount of news around the lift out of the team from AIG Property Casualty to Berkshire Hathaway.

Could you address that and also give us a sense of whether we should anticipate that more of the leadership could part?

Thank you.

Well I guess I could only tell you that of the top 3,300 Executives of AIG, during 2012 of the top 30% performers of that group, we retained 94% of those people.

So I know you want to focus on four people in the Property Casualty business.

It's a very big and successful business.

We're going to lose people to competitors from time to time.

We have an outstanding team that's still here.

You saw how quickly Peter was able to put new Executives in charge.

I think the reaction to the staff has been very positive.

So turnover occurs, but if you can retain 94% of your top 3,300 people running this Company -- by the way, 45% of that group have been with AIG more than 10 years, 15% of that group more than 20 years.

So we have experience.

We have a deep bench.

We have a talented group of people.

Not everybody is going to be happy with the Company as we go forward.

I can see that our competition is struggling a little bit with their flows so they are getting into business they weren't in traditionally.

So I think we're fine.

We're moving on, so I think that's the only way I could answer the question.

Okay, thank you.

Then switching gears, could you provide some insight as to when AIG could reinstate its common shareholder dividend?

Also resume the share buyback?

What we've said is that we're going to focus on our coverage ratio.

We're going to continue to focus on Liability Management.

We are -- also want to make sure that we have completed the sale of ILFC so that non-core asset is now completed in terms of the sale so that we reduce our debt, for example, even though it's not direct but about $25 billion.

That's a key milestone we have to reach.

We're continuing to look at our capital plan and doing our stress testing.

We're meeting with rating agencies to make sure that whatever we do does not cause them any concern.

Then our second priority after Liability Management, we said would be a dividend.

After that, we would still like to do stock buybacks.

But we would do it in a very slow and cautious way to make sure that we do nothing to affect our current ratings and that the rating agencies are satisfied with what we're doing.

Because the most important thing for AIG right now is to maintain and build on the confidence that we can make guarantees for sometimes for peoples lifetimes.

We'll be here to live up to those guarantees.

So that's our highest priority as we go forward.

So as the year progresses, you can see our numbers.

You can see our performance.

When we think it's prudent and everyone else feels it's prudent, we'll make those decisions.

Greg Locraft, Morgan Stanley.

I just wanted to clarify the ROE goal.

It's not inclusive of FAS115 and the DTA; is that correct, from a book value perspective?

That's correct.

Okay.

So just to be clear, you take current stated book value of $67, subtract $20 a share -- so we're really at a $47 book value number.

Then we sort of grow off of that.

We want to earn a $10 ROE against it?

I'm not quite sure I follow your math.

Maybe we could do that offline.

I think that is probably the best way to handle that.

Okay.

It just -- I mean it's just FAS115 and DTA subtracted from current GAAP book value.

But okay.

So the goal is $10 ROE ex FAS115, ex DTA in 2015.

Great.

Then the other is just on the capital deployment side, you mentioned $25 billion to $30 billion.

Can you update us on how much you have left to do to get to that goal?

How much has been completed?

How much more can you do to meet that?

Yes, sure.

This is David.

We did -- through 2012, we did $13 billion of common equity share repurchase.

Thus far this year, we've done a little over $2 billion of debt Capital Management.

Again, I gave you the interest savings on that.

We don't view maturities that are being funded through cash as part of that Capital Management.

That's just part of the ongoing management of the Company.

So the calls though -- the early calls on the hybrids, we do consider that part of our Capital Management goal.

So if you think about it, we, through the end of this year, we'll have done with what we've already done plus the planned call on the hybrid.

We will have done close to $16 billion against that $25 billion to $30 billion.

So that's where we are to date.

Then the Company continues to generate deployable capital.

We said the $4 billion to $5 billion per year of dividends and distributions from our operating companies.

We have interest expense in some Parent Company expenses of roughly $2 billion or so a year.

So therein lies the generation of deployable capital.

As Bob referenced earlier, the unencumbered proceeds from ILFC, which will be available at the Holding Company for consideration.

Perfect, great.

That's very clear, thank you.

Then last is just any update on the non-bank SIFI process?

The timing -- I'm wondering if that's slipping at all?

When we might get clarity?

I know that's a bit unfair.

But just any help there would be great.

Thanks again.

Good quarter.

I think on the SIFI part of it -- remember we are now being regulated by the Federal Reserve.

We've been working through a lot of things with them since they arrived in September.

We have a very good working relationship.

They have dug in to understand a lot about our businesses.

They are now in the process of fully examining the way we stress test this organization.

So the SIFI process is going to be something we'll have to go through.

But I think the biggest issue there probably would be what amounts of additional cushion you may have to have.

But as far as the basics, you've got to make sure that you're running these companies -- insurance companies, the banks and so on in a sound way.

I mean there's a huge public outcry of making sure that these institutions don't need taxpayer money.

Unfortunately, we have not done a very good job as an industry explaining how much has been done in the last four years.

With over $400 billion of additional capital being raised to strengthen these institutions, so it's very difficult for them to fail based upon the stress test that everyone is going through today.

So a lot of progress has been made.

People have still not declared victory unfortunately.

So I think that's the bigger cloud.

But I'm pretty confident that SIFI or not SIFI, at the end, we're going to be able to demonstrate the financial strength of this Company, that our stress tests are very well done, that we understand risk management, that we've dealt with the non-core assets and that AIG has the financial strength to do its Capital Management on a go forward basis in a prudent way.

So that's pretty much where we're at.

When SIFI comes, it comes, but it will be more about the ratios than the quality of our numbers.

Thanks, makes sense.

Nice job on the core operations this quarter.

John Nadel, Sterne, Agee.

I guess either for Bob or for David, you opened the call with commentary about focusing on the core.

My question is, when -- on an internal basis when you strip out some of the noise in the quarter, obviously very favorable overall.

I'm hoping you can help us discern what you'd view as the true core underlying earnings in ROE?

I know David mentioned, the ROE on a reported basis was about 11% on equity excluding the DTA.

But I'm interested in your view as to the core results?

I think I'll let David answer.

We normalize for things that are pluses and minuses.

We've gone through some of that.

You've got to decide -- all of you, I can't give you the answer, John.

You've got to think about how you want to deal with partnerships.

We may want to budget it at 8% or 10%.

You've got to decide if getting to 11% to 12% is still core.

But I would say that if you look at our accident year information, that's a key indicator.

You look at the flows in Jay's business -- net flows and understand that our losses, in terms of surrenders in the fixed annuity block are at minimums.

So, therefore, that's actually improving the spread.

So, all of that's -- I don't know how you would do that, but you have to look at -- I would say just as flows is spread and looking at the Mortgage Guaranty and the new book of business coming in.

I think in Property Casualty the accident year combined ratio is a hell of an indicator.

So those are some of the things I would suggest you want to think about as you examine our ability going forward.

David?

Bob, I think you've laid that out very well.

The items that give rise to variability, things like the alternative investments or the Direct Investment Book that will again, over time, pull to a level of intrinsic value that will ultimately be monetized.

Again, the path from here to there is not a straight line.

So again -- we give you some broad parameters around what's on the balance sheet vis-a-vis the Direct Investment Book in terms of the total assets and total liabilities.

We also in the financial supplement give you some parameters around what the alternative investments are for each of our core businesses that, again, you can make some reasonable assumptions based upon the prior performance and your expectations about what equity markets and the like will do over time.

So what we try to do for you is give you a sense of what those underlying variable items are so you can make your own determination and assessment about them.

Again we're making risk return tradeoffs in terms of maintaining and holding those assets as we did with, for example, the Global Capital Markets and some of the wind-down portfolios in the legacy financial products book.

Again over time, we believe there's intrinsic value that's appropriate for us to hang on to given the risk return.

It will pull through intrinsic again over time.

So there are some pages in the supplement that give you the underlying balance sheets that you can make those assumptions.

I guess maybe suffice to ask it this way.

I assume you believe that the core underlying results are right on track or on track with your overall objective looking out the next couple of years?

I think we remain committed to our long-term aspirational goals.

The results of the Company, the progress that Peter and Jay are making are the basis that give us confidence to remain committed to those goals.

Thank you.

Then just a quick follow-up on Peter's comments.

I may have missed it.

He made a comment about Commercial Property.

I wasn't clear on whether it was a 20 point improvement in the accident year loss ratio.

It seems like too much.

Or maybe it was a comment on pricing.

Could you just clarify that?

John, it's John Doyle.

No, when you normalize for the accounting changes and some of the reinsurance activity in the quarter, it was a 20% increase in net written premium in the quarter.

That's it.

Thank you very much.

Mark Finkelstein, Evercore Partners.

You gave some new disclosures on the cash and committed to the DIB at the Holding Company, which is very helpful.

If you work back from on balance sheet resources, add in the unencumbered fixed income investments, you get to a number of around $6 billion, which obviously excludes the future proceeds from ILFC or the MetLife escrow, et cetera.

But the number is around $6 billion if my math is right.

I'm just curious.

If you put SIFI to the side, what is the right number to hold at the Holding Company in terms of cash and investment resources, knowing you've got CMA's?

The way the whole structure works.

Hi Mark, it's David.

Thank you.

Yes.

Your math is correct, if you look at Page 7 of the call deck.

You get in that zip code, it's $5.9 billion to $6 billion, as of the end of the quarter.

Then again what I said earlier was that, again, at the Holding Company, we have at the end of the -- when we exit 2013, the run rate interest expense will reflect our cash funded maturities and the active or proactive debt Capital Management that we have undertaken this year, so the interest expense will come down accordingly.

But nonetheless, we'll have roughly a $2 billion plus, $2.2 billion, $2 billion something like that in terms of annual expenses at the Holding Company to be funded.

Again from that -- again we've not given a specific amount or an algorithm or a formula or a stated amount to hold.

But that gives you a sense of what prudent financial management would call for.

So in any event, then you can go from there in terms of how we're generating deployable capital for consideration once the SIFI designations are known and we understand the requirements of the stress test, et cetera.

Okay.

Then I think you emphasized the $750 million hybrid as the Liability Management through '13 -- but you emphasized through '13 and you emphasized Liability Management generally in talking about the capital position.

How should we think about Liability Management beyond '13?

Well I think you should think about it as opportunistic.

We will assess the progress that we've made vis-a-vis our coverage ratios that Bob spoke about earlier.

We'll evaluate again all facts and circumstances at the time.

So again, we've made very good progress in 2013 on the goals we set out to improve our coverage ratio.

Again, I think that as we have done in the past, we will look to optimize returns for all the various stakeholders and obviously Capital Management is an important part of that.

Okay.

Then just one quick final question, please?

I don't know if Brian's there -- I assume he is.

But how much is the remaining -- what's the update on the remaining pull to intrinsic in the DIB that you estimate currently?

As we've said in prior quarters, the pull to intrinsic is holding strong.

It's approximately $5 billion consistent with what we talked about last quarter, that will obviously be realized over a longer period of time.

Again you're seeing the results coming through in the earnings.

As David mentioned, the DIB sort of reaches its half life in 2017.

There's another big slug of maturities in '18.

So it would be after that point that we would see a fair amount of that pull to intrinsic as well as at that point some release of the capital in that business.

So, $5 billion from this point?

That is correct.

Okay.

Thank you.

That also includes not just the DIB but also the legacy FP.

Randy Binner, FBR Capital Markets.

So I have a question about the yen.

I think about 20% of the PNC consolidated premiums come in the form of yen premiums.

I don't believe that it's hedged from an earnings perspective.

So I understand the call that you gave on how that affected the top-line production, but it didn't seem like there was much bottom-line impact this quarter.

So I guess one, I wanted to clarify that there was not a lot of impact from the yen?

Then that may be related to the fact that the combined ratio was relatively close to 100%.

But then also to ask if you have plans to potentially hedge that more actively going forward, if you plan to have profitability improvement?

This is Peter.

The issue is that Japan, unlike the US is heavily a Consumer business.

It's our largest Direct Marketing operation, which has substantial up front marketing costs which are expensed in the current period.

So from a GAAP net income point of view you're absolutely right.

The bottom-line in yen is actually quite small.

But the value of new business that we originate if you were to capitalize that acquisition cost over the expected life of the persistency of these policies, which are annual policies but have a very high renewal percentage, makes it a very attractive business from a lifetime customer value perspective.

So from a value point of view, we are hurt by the weaker yen because that value of new business is reduced.

But from a GAAP reported bottom-line, we're pretty indifferent.

So that does present some hedging dilemmas in terms of GAAP reported volatility.

But I think that your way of observing that the top-line impact is where the visible effect of the yen is most notable.

But that the GAAP volatility as a result of yen volatility is negligible.

But from a value point of view, that franchise is valuable, but it will be realized over the life of these customer relationships.

So, I guess, is it correct though that there's not an active hedging program on that value?

Is there anything about what's going on with the movement in the yen that would make you rethink that?

We have currency exposures in all 90 countries we operate in.

We manage our currency exposures in a top down way because we have positives and negatives all over the place.

We do not do micro hedging of each line item.

So that's all I think I'd say about the hedging approach.

Okay.

Just one more if I could on, just on the very good underlying combined ratio on Property Casualty.

Is there more business mix and kind of higher value business or phrases that you've used to describe the result?

I think like John Nadel, I'm just wondering what we can run rate going forward?

Is there more Property business being written here in so it kind of over earns a little bit in a quarter like the first quarter, but it could get hit if there's higher CAT activity as the year goes on?

Is that a major feature of what we saw on an underlying basis in the first quarter?

Well I'll have John elaborate, but I think we made it very clear that we think that the first quarter was a light CAT quarter.

So yes, the CAT quarter needs to be normalized for the normal run rate of CAT.

We have seen a growth in our Property business, especially international Property, especially our large limit Property.

But our aggregate PMLs have been coming down steadily as we manage our aggregations more and more.

So I think that it's an inherently volatile line.

So you need to normalize for CAT activity.

But John, you want to elaborate on that?

I would just add that the exposure growth in Property -- I mentioned to John that the premium growth, net written growth in the quarter was about 20%.

But the exposure growth was less than that.

We saw about 8%, 9% of price improvement in our portfolio -- in our Property portfolio.

As Peter mentioned, our PMLs are on a now modest decline year-over-year.

So the exposure growth has come outside of CAT and really outside of our peak zones in the United States.

Jay Cohen, Bank of America Merrill Lynch.

On the alternatives, I know some of these are reported with a one quarter lag.

Based on the movements in the markets in the first quarter, do you have any visibility into the 2Q reported numbers?

It seems like it's setting up to be a better than expected quarter again.

Can you just talk about that?

Bill Dooley?

Well Jay, you see the same results for the quarter as I do, as far as the general market is concerned (audio difficulty) The one quarter lag is only to do with the private equity portfolio.

The other one is just a one month lag on the hedge funds.

So I don't want to assume where the markets going to go, but I'm not going to agree or disagree with what you just said.

Fair enough.

I guess a follow-up to the last question.

Peter, you mentioned obviously, we need to adjust for catastrophe losses.

Do you have a sense that excluding catastrophe losses, if loss activity in general was in line or lighter than normal?

Jay, it's John.

Our Property losses were in line with what we expect, including shock losses in the quarter.

I would say that the shock losses -- more than $10 million losses in property were in line with what our expectations were, but higher than a year ago and higher than the fourth quarter.

That's great feedback, John.

Thank you.

Josh Shanker, Deutsche Bank.

First, just a numbers question.

I want to know if you could walk through how much of the DTA was used during the quarter?

How much of the valuation allowance came off?

On the valuation allowance, Josh -- we took on the DTA, on the capital loss carry-forwards, took down about $750 million.

That was through income.

There was about another $50 million or so that came off through OCI.

So in total, strategies that produced prudent and feasible transactions were about $800 million or so.

Then on the DTA utilization, Jeff Farber?

Well it's essentially the same thing, right?

So we only do our tax return once a year.

So when we do the tax return, but you could kind of think about the earnings for the quarter as a surrogate for usage.

So we continue to use the NOLs actively.

We continue to use the -- utilize the life capital loss carry-forwards, as we've disclosed in the quarter.

Thank you.

I'm not trying to begrudge Peter or John or James anything.

I'm trying to understand the long-term compensation plan a little bit and some of the specific targets.

When it says in the long-term comp plan, there's specific targets to receive 50% of the bonus, how do those specific targets in the PNC division relate to the aspirational goal of 90% to 95% in 2015?

This is Peter.

The aspirational goals are laid out in different components.

There's a combined number.

There's an ROE number.

The one that if you want to pick any one of them that is sort of the most important one that we focus on is the ROE one.

So we, as you know, gave a range for the combined.

You would want to be at the lower end of that range if interest rates are high and you're getting your results flattened by high investment income.

You'd be -- so I think that what we view as the alignment between the compensation plan is effectively an ROE goal.

So if we are on the ROE walk that delivers the 2015 goal, then people will feel pleased.

So it's, I think, a very strong alignment.

We set fairly broad goals.

We don't breakup the Company into little silos.

That's a big change.

I think culturally, has people working together across boundaries whether it's geographic boundaries or business line boundaries, so that everybody wins if we all win as a team.

I think that's really showing up in the culture of the Company.

Our customers are giving us feedback on that.

So I think we want to align interest with the shareholders, as well as making sure that our units work together across boundaries well, So it is a pool approach of how the Property Casualty business as a whole achieves its ROE goal, which then drives the ROE goal of AIG.

Well Peter, do you think it's feasible -- look, I'd like you to get paid and make a lot of money.

But if you don't hit that 95% or below target, do you think it's feasible that the ROE goal be achieved?

Yes, absolutely.

Absolutely it could.

It's a question of capital intense products.

It's a whole other series of factors that go on here.

What's important is that it's the quality of what we do.

Peter has said numerous times that the combined ratio is a consequence of what we do.

It's not what we manage.

When you get involved in managing that combined ratio, you could do some dumb things.

There are things you could do to reduce your expense ratio, which isn't reducing your expenses.

There are other techniques you could do in financial engineering.

We want people to focus on the fundamentals, focus on accident year loss ratios, run this thing the right way.

In the end, we believe that combined will get into that rage of 90% to 95%.

But most important, is you want to continue to grow the quality of your earnings.

You want to have a better ROE.

If you continue to grow earnings and improve your ROE and shareholder return continues to get better -- total shareholder return plus earnings per share those are the key indicators for us.

If that all moves in the right direction, then I think people should be paid.

They will be paid.

So I think their senses are very aligned to doing what's right for the shareholders.

They're in there with the shareholders because of the stock based compensation part of long-term.

I think that I mentioned earlier in the context of discussing our yen exposure, Direct Marketing hurts our combined ratio, but creates extremely good value.

We've talked many times about the marginal ROE over the lifetime of those customer relationships as being in the 20% based on very reliable actuarial histories.

So we wouldn't want to under spend on Direct Marketing simply to get under the wire on a combined target.

We want to do good valuable business and build long-term customer relationships that make sense.

For the skeptics, we will publish greater and greater detail about those actuarial assumptions.

So that you don't think that we are foolishly wasting money on growth.

Mike Nannizzi, Goldman Sachs.

Jay, you mentioned monetizing some capital gains in the life sub.

Just curious, how much of the $25 billion in gross unrealized gains is there?

How much do you think you can monetize?

I don't know, David, if you can remind us what the timeline for expiration is on those capital losses?

Thanks.

Yes.

Jay, I'll go first.

Then you -- maybe you comment.

Bill, if you want to add to it.

A very substantial portion, Mike, of the capital loss carry-forward DTA expires at the end of 2013.

We have -- there's about $1 billion or so that spills over into '14, but the bulk of the carry-forward expires at the end of this year.

Now the NOLs -- just to be clear, the NOLs go out through 2028 and 2029.

So there's a very ample time there.

Then the foreign tax credits are more in the 2020, 2021, 2022 range.

So that gives you a sense of the expiries.

Right.

Yes, no, this is not -- unrelated to the NOL DTA.

But just be purely the capital gains DTA.

Yes, right.

That's why the focus is on 2013.

So the harvesting et cetera, will -- again, will be more opportunistic beyond 2013 and 2014.

Bill, do you want to comment?

Sure.

When you look at just the capital gains by itself, there's other programs that we look at too, on harvesting gains for tax reasons.

The gain process itself has been going on now last year.

It was restarted in the month of March.

It will continue for the next couple of months.

But we're using the gain mechanism also to readjust and reposition the portfolio.

So the portfolio from a duration standpoint is probably short duration at this time.

We're using this as an opportunity to lengthen the portfolio a little bit and also better balance against some of the products that are in the life companies.

Then another example of this is that we're looking at ways to raise liquidity over the period of time for the life companies and for the other companies of AIG.

One of the strategies we've employed is a moderate modified securities lending program.

That gives liquidity to the underlying insurance companies, but at the same time it generates certain types of tax benefits to us on a simultaneous basis.

There's other transactions and structures that we're using, but the bottom-line of everything is it's repositioning some of these portfolios that really haven't been repositioned in many, many years.

Mike, this Jay.

I guess I'd just add one comment to what's already been said, which is obviously, it's very economically efficient for us to realize capital gains given the tax loss carry-forward position.

But we also very carefully focus on what we can do in terms of reinvestment at any given point in time.

What the friction costs are, including lost investment income, if you're not able to reinvest promptly the proceeds of any sales.

So we've targeted certain assets for potential sale, but it's all subject to what we see in the market in terms of potential purchases.

As a practical matter, how quickly we can make those purchases.

Just to add to that -- thanks, Jay.

The amount that we have actually utilized is actually ahead of what we thought we would do originally when we first set forth our aspirational goals back in early 2011.

So we will have utilized about half of the amount in which exceeded the sort of the 20% to 25% level we were expecting that we could at the time.

So Liz, back to you.

Can I ask one quick follow-up to Peter?

Peter, I guess you guys had mentioned before $1 billion run rate -- or $1 billion savings on expenses in some investments as well.

I'm just trying to understand.

We saw the expense ratio fall in US Commercial.

We saw it rise a bit in International Consumer.

Then Consumer in North America was a bit lower than we had.

I'm just trying to reconcile those movements, in particular the G&A expense ratio in US Commercial -- or in North America Commercial was really low.

Can you help me kind of line those dots up a little bit?

Thanks.

I'll help you out.

I think the basic comment we've made is we have $1 billion of savings for all of AIG.

We have said a good piece of it comes from the fact that we are doing this whole technology improvement, rebuilding our platforms.

We've gone from 28 data centers down to 2. We're moving from 12,500 servers to roughly 2,000 to 3,000.

All moved into high secure locations.

All of that will give us a lot more cost savings and benefit.

We're rolling out a new one claim system for example, throughout the Property Casualty business.

That's a huge investment.

Our financial architecture, where we have almost 6,000 people at AIG today working in various aspects of finance, we're rolling out common ledgers and so on, building new processes around that.

So this is a fundamental change in how we do business.

It's at the highest level.

We keep track of those benefits.

We're well on our way to achieve that $1 billion goal.

So it's not just a focus on Property Casualty.

It's really about the overall of AIG.

At this point, I think we're out of time.

Yes.

Thank you, operator.

Please, if you have any additional questions, don't hesitate to reach out.

We'll be here all day.

Thanks very much for dialing in.

That does conclude today's conference.

Thank you for your participation.