American International Group Inc (AIG) 2013 Q4 法說會逐字稿

Good day and welcome to AIG's fourth-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.

Thank you and good morning.

Before we get started, I would like to remind you that today's presentation may contain forward-looking statements which are based on management's current expectations and are subject to uncertainty and changes in circumstances, any forward-looking statements that 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 AIG's third and second quarter Form 10-Q and our 2012 Form 10-K, under management's discussion and analysis of financial condition and results of operations and under risk factors as well as in the same sections within AIG's 2013 Form 10-K when it is filed with the SEC.

AIG is not under any obligation and expressly disclaims any obligation to 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.

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

At this time I would like to turn over our earnings call to our CEO, Bob Benmosche.

Bob?

Good morning to everybody.

If you turn to page 3, let me start off with capital management which is really important.

As you saw we announced a dividend increase and we have added to our share repurchase another $1 billion so this leaves about $1.4 billion available for share repurchase at this time.

And this reflects the strength not only the fourth quarter but of the entire year and actually the last several years as we look at being able to stress our Company to see what would happen under adverse situations and making sure that we have the capital and liquidity to meet a stress event and continue to maintain our strong ratings and improve those ratings in fact over time.

So this was in line with that.

In addition to that we continue our debt management as you have seen.

And most important in the quarter, we were able to sell ILFC and close up the doubt about that transaction.

So we expect that to close in the second quarter of this year.

That will, as you know, be the last major non-core asset that AIG is selling.

Peter will talk to you about our property casualty business.

The underlying results continue to be very strong in my opinion.

There's been a dramatic turnaround from the Company in how it was designed in the past to where we are today and he will take you through the details.

But a strong top line, accident year loss ratios continue to improve, but remember it is not an end of the year business.

It is a zigzag.

I know that is a technical term for some of you but that means it goes up and down and it doesn't go straight and so you will see that the trends I feel are very strong.

Our mortgage guarantee business continues to do well, a dramatic turnaround from where we were five years ago but that is part of the strong risk selection model that was put in place as well as recovery in the market.

Jay will talk about our Life and Retirement business.

We have had very strong sales.

That business is really doing extremely well and continues to do well across all of the products sets.

So I will let Jay bring you up to date on the details there.

So let me turn it over to David who will give you the highlights of the financials and then we will take you through the other key businesses.

David?

Thank you, Bob.

Good morning, everyone.

As Bob mentioned, we saw strong performance in our insurance operations with operating earnings for the quarter in excess of $2.5 billion.

For the full year, our insurance businesses collectively generated in excess of $10 billion of pretax operating earnings.

Looking ahead to 2014, we would expect continued progress in expanding our risk-adjusted returns through growth and capital efficiency.

The sale of ILFC as Bob mentioned to AerCap is on track for closing in the second quarter.

The transaction was valued at $5.4 billion upon announcement using a $24.93 share price for AerCap and any adjustment in that value on closing will reflect the change in the AerCap share price and will be recorded as a nonoperating gain or loss on sale.

Upon closing, AIG will receive net cash of about $2.4 billion which will be held at the parent company available for general corporate purposes.

Our retained 46% interest in AerCap will be held at the holding company and will be accounted for under the equity method of accounting with the equity earnings from AerCap included in our other segment operating results.

The lock-up expiration on AerCap shares begins to phase out nine months following the closing date.

We will be prudent in maximizing our value as you have seen in our past dispositions of invested assets.

As part of the ongoing focus on capital management, as Bob mentioned, our Board approved the 25% increase in our quarterly dividend to $0.125 a share and authorized the repurchase of additional shares with an aggregate purchase price of up to $1 billion.

This gives us $1.4 billion of capacity.

Turning to our financials on slide 4, net income for the quarter was $2 billion and included several largely offsetting nonoperating items detailed on page 6 of our financial supplement.

One such item footnoted on page 6 of the financial supplement relates to an impairment charge on our investment in life settlements totaling about $832 million before tax.

This charge was prompted by the continued underperformance relative to our mortality assumptions.

Accordingly, we revised our future mortality assumptions and discount rates for valuation purposes.

Overall we expect this $3.6 billion portfolio to have a mid-single digits return.

Our operating ROE for the quarter was 7.3% in line with our full-year of about 7.5%.

Since our earnings are tax effected for purposes here and we are not paying taxes to the US Government given our NOLs, our ROE excluding the DTA is about 190 points higher than that.

Book value per share excluding AOCI at $64.28 grew 11% from year-end 2012.

Our operating results begin on slide 5 and you can see solid growth in our insurance operating income from a year ago and Peter and Jay will speak to their respective businesses.

The direct investment booking and global capital markets earnings collectively were strong at a little over $600 million for the quarter and reflect market pricing due to their mark-to-market accounting treatment that can create some volatility from period to period.

We expect these earnings to moderate over time as the portfolio winds down and the investments approach their expected recovery values.

In addition, we continue to proactively and opportunistically reduce the direct investment books footprint.

During the fourth quarter of 2013, we repurchased about $466 million worth of DIB related debt and during the first quarter of 2014, we reduced the direct investment book debt by a little over $2 billion through both a make- whole call that we announced in December and open market purchased transactions all of this using cash within the direct investment book specifically allocated for this purpose.

At year-end, we had roughly $7.9 billion of net asset value in the direct investment book in global capital markets.

Corporate expenses totaled about $213 million for the quarter, down from a year ago due to lower datacenter restructuring costs and other related expenses on restructuring costs.

We expect corporate expenses would run at about $225 million to $250 million quarterly run rate in 2014.

Other expenses included a severance charge of about $265 million related primarily to the Property Casualty business and relates to our migration toward shared service centers which Peter will speak to in his remarks.

Also reported in other were $170 million of gains related to AIG real estate sales transactions.

Our reported operating effective tax rate for the quarter was about 32%.

Our current outlook for 2014 is an annual operating effective tax rate of somewhere between 31% and 32%.

Slide 6 presents a summary of our DTA which totals a little over $21 billion at year end, up from just shy of $17 billion a year ago.

While our tax attribute related DTAs, i.e., the net operating loss carryforwards and the foreign tax credits have declined by about $1.4 billion through the utilization of the NOL.

Our net other DTLs and DTAs increased by almost $6 billion.

The increase relates to the sale of securities with gains, transactions that resulted in tax basis step up and a reduction in the unrealized appreciation of our AFS securities.

In the fourth quarter, we recognized another $540 million of income related to the release of the valuation allowance from the capital loss carryforwards.

In aggregate, we have utilized roughly 86% of the capital loss carryforwards.

For the ROE calculation that normalizes for the tax attribute DTA, we subtract about $17 billion from stockholders equity.

Turning to slide 7, we can see the impact of our capital management activity in 2013.

During the quarter we issued $1 billion of 10-year notes at a little over 4% interest and we repurchased some debt at the parent company and DIB totaling a little over $1 billion that had an average coupon of about 7.5%.

Including the DIB, when you take into account all of the things we have done in 2013 with respect to our liability management and maturities, we have reduced our leverage by over $7 billion and reduced our annualized interest expense by roughly $350 million.

On the equity side during the quarter, we distributed about $147 million in dividends to our shareholders and deployed just over $400 million towards the repurchase of 8.3 million shares.

While the ILFC transaction impacted how active we were in the market during the quarter we remain focused on continued execution of our repurchase authorization.

We will continue to be opportunistic in the future going forward towards our debt capital management as well.

As you can see on slide 8, our insurance operations remained a source of parental liquidity [as we sent] $4.3 billion in dividends and distributions to the parent in quarter including $90 million of dividends from mortgage guaranty, it's first dividend since 2010.

For the full year, dividends and distributions totaled $8.9 billion, well above our expectation of the $4 billion to $5 billion we talked about in the past.

I would point out that the full-year dividends from Life and Retirement included about $800 million related to litigation settlement proceeds received by Life and Retirement that were remitted up to the parent company.

Additionally, $1.5 billion in the fourth quarter dividends from Property Casualty resulted largely from some restructuring activities that we have been working on for quite some time.

Our expectation for 2014 is to have dividends and distributions from the operating companies somewhere between $5 billion and $6 billion.

In addition to these dividends, we expect tax sharing payments from the insurance companies, the parent of approximately $1 billion in 2014 and roughly $2 billion in 2015 as the local insurance companies statutory NOL DTAs are utilized.

These dividends combined with our capital management activities I mentioned earlier result in parent cash short-term investments and unencumbered securities of just over $13 billion as of the end of the quarter.

Included in parental liquidity is $5.9 billion related to the direct investment book and global capital markets which is allocated for its future debt maturities and contingent liquidity stress needs.

As we have indicated in the past, nearly 80% of the direct investment book's liability will mature between now and the end of 2018.

With that, I would like to turn the call over to Peter for comments on Property Casualty.

Thank you, David, and good morning, everybody.

Today I would like to discuss the highlights of the quarter and the year as well as our outlook for 2014.

Let me begin by saying the year marked significant accomplishments that we believe are indicative of our future direction.

Our balanced approach to growth, risk and profitability drove our business mix shift, our underwriting actions and our capital management achievements.

We are pleased with our progress and look forward to continuing on our path towards increasing returns.

Turning to slide 9, in the fourth quarter, net premiums written grew 6% from a year ago on a normalized basis with growth coming from each of our major business lines.

For the full year, net premiums written were over $34 billion or up 4% on a normalized basis.

In the quarter, Commercial lines delivered net premiums written growth of 7% with improvement in each product line.

This is the first quarter in 2013 with a comparable topline comparison to Casualty as there is no longer an impact from the global excess casualty quota share entered into in 2012.

Specialty delivered the strongest topline improvement on a normalized basis from a year ago with noteworthy growth in the Europe and Asia-Pacific regions.

Property also developed strong growth both in the fourth quarter and full year.

Our Global Property business is benefiting from significant international growth as we leverage our recently expanded in-house engineering capabilities and execute on our global approach to capital allocation.

Looking ahead to 2014, we expect continued growth across our businesses including Casualty where the re-underwriting of our book is largely complete.

We remain focused on retaining our highest quality business and see positive rate increase in the United States.

Pricing continued to be positive and largely exceeded loss cost trends.

Global Commercial rates increased 2.6% in the quarter and the US market continued to lead rate improvements with a 5% increase in the quarter.

US Casualty led with a 6.5% increase followed by US Financial lines which were up 4.2% in US Property at 3.7%.

Continued favorable underwriting trends were offset by increased severe losses in the fourth quarter.

Improved underwriting results over the course of the year were the result of our pricing actions enhanced with selection, technical underwriting and investment in claims handling.

Severe losses in the third and fourth quarter reflected higher frequency and severity and exposure growth following the low level of severe losses in the first half.

Our full-year severe losses were somewhat in excess of our expectations but we accept a modest amount of volatility for the increased returns.

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

Over the last three years, we've continued to manage down our gross exposure to catastrophes and refined our global approach to reinsurance which has led to consolidation of our reinsurance purchases and our reduction in the number of counterparties and contracts.

While we don't disclose all of our reinsurance programs, we would like to provide a few highlights that illustrate the role reinsurance plays in our business strategy.

In our Corporate Cat program, which we renewed in the fourth quarter, the attachment point is $3 billion and provides significant protection after $5.5 billion for individual losses in the US and Canada and up to $4 billion for accumulation of losses worldwide.

In 2013, we also continued our strategy of accessing the capital markets.

During the year as part of our cat program, we entered into two separate multiyear cat bond transactions providing combined reinsurance protection of $525 million.

Our consumer business which is presented on slide 11, underwent a transition in 2013 as we increased rates in Japan A&H and Personal Lines and engaged in further portfolio management in the United States.

We continued selective growth in key markets.

We experienced a higher level of travel and accident losses in the quarter which we don't expect to be a sustained issue given the short-term nature of this business.

Consumer remains on track for modest improvements in both growth and profitability in 2014.

Additionally, the investments we are making in Japan will help provide a more competitive operating platform and a lower cost structure in the long term.

Under Kevin Hogan's new leadership, we look forward to executing on a strategy of targeted growth in markets where we can achieve meaningful scale and applying some of the principles that have worked well in commercial.

We look forward to discussing more details of our consumer strategy over the coming months.

Two items of note in the quarter are the severance charge that was recorded in AIG's other operations and our reserve actions.

The expense savings associated with a $265 million severance charge largely pertained to Property Casualty and will emerge beginning in 2014 and become more significant in 2015.

However for the full-year 2014, investments in the business will result in a relatively flat expense ratio compared to 2013.

We began the final phase of the Fuji integration work in the second half of 2013 which will continue into the second half of 2015.

The cost of this initiative estimated to be approximately $250 million when combined with our purchase price still represents a meaningful discount to the fair value of the underlying assets and liabilities acquired.

We believe the full integration of our Japanese business which currently has an 8% market share will position us well in the second largest nonlife insurance market in the world.

Slide 13 presents prior-year development for the fourth quarter and full year.

We continue to review our reserves quarterly and take timely actions to address changes in development trends.

In the fourth quarter, we added $225 million to our pre-2004 runoff environmental reserves based on our updated review.

Our analysis of pollution products [looked] into individual cases which indicated large increases in the value of certain previously reported cases due to new developments such as the discovery of additional contamination in certain sites, legislative changes, court rulings, expansion of plaintiff damages and increased costs of remediation technologies.

In addition, there was a 1 point adverse impact to our current accident year loss ratio related to these multiyear runoff lines of business.

In the fourth quarter, we obtained approval from our Pennsylvania regulator to better align payout patent and mortality assumptions for our excess workers compensation reserves using our own experience and to utilize a more economic discount rate assumption for our primary workers compensation reserves.

These actions reflect our work with regulators over the course of the year and the significant analysis we completed to better model our runoff excess workers compensation book.

For the quarter, the total net discount benefit was $325 million which included a benefit of $647 million on excess workers compensation reserves and a charge of $322 million on primary workers compensation reserves.

We also expect to record an additional workers compensation loss reserve discount benefit of approximately $100 million in the first quarter of 2014 associated with the merger of internal pooling arrangements effective January 1, 2014.

In the fourth quarter, we made $2.6 billion of cash dividend payments to the parent company and $4.1 billion for the full year.

During 2013, we worked with our regulators to simplify our legal entity structure.

We consolidated our US and Bermuda insurance exposures into one US pool to increase our diversification benefits.

These restructuring transactions resulted in $1.5 billion in the fourth-quarter dividend payments to the parent company and $1.8 billion for the full-year.

Turning to slide 14, mortgage guaranty's operating performance continues to improve with operating income for the quarter of $48 million.

Mortgage guaranty continues to benefit from its proprietary risk selection model and an improving housing market with 59% of earned premiums generated by high-quality business written after 2008.

Mortgage guaranty closed the year with a record level of domestic first-lien new insurance written of $49.4 billion.

The delinquency ratio fell to 5.9% at the end of the quarter representing the lowest level since the fourth quarter of 2007.

UGC continues to be strongly capitalized and holds an investment portfolio that is highly liquid with 81% of the investments rated A or better.

As a leading US mortgage insurer, UGC currently insures 800,000 mortgages across the United States.

Now I would like to return the call over to Jay to discuss Life and Retirement results.

Thanks a lot, Peter, and good morning, everyone.

2013 was a record year for AIG Life and Retirement and we had our best year in topline results generating nearly $29 billion in premiums and deposits and in delivering on the bottom line with $5.1 billion of pretax operating income.

Turning to slide 15, operating income in the fourth quarter was $1.4 billion, up 29% from a year ago due primarily to fee income growth, active spread management throughout the year end higher net investment income.

Returns on alternative investments were approximately $200 million above expectations and 52% higher than the prior year period, driving much of the increase in our net investment income.

These results and our solid capital position enabled AIG Life and Retirement to distribute over $1.3 billion to the holding company this quarter and deliver full-year dividends and loan repayments to AIG of more than $4.4 billion.

Giving effect to these dividends, we still grew shareholders equity ex-AOCI by 11% to nearly $35 billion.

The success of our retail investment product strategy was a key driver of the significant increase in our sales volumes.

Our all products, all channels distribution platform continues to generate outstanding results.

Retail premiums and deposits grew 88% from the year-ago quarter reflecting growth across all of our investment products.

Individual variable annuity sales were $2.3 billion for the quarter and $8.2 billion for the full year.

We remain comfortable with this run rate of sales particularly given the actions we have taken over the years to de-risk this product.

Fixed annuity sales increased over 90% in 2013 and sales in the fourth quarter were nearly 4 times what they were in the year-ago period.

Consumer demand for fixed annuities has improved from the year-ago quarter.

Those sales have moderated somewhat from the third quarter due to interest rates declining from peak levels reached last quarter and our related disciplined pricing actions.

We also saw increased premiums and deposits in our institutional businesses with growth in both group retirement and institutional markets on a year-over-year basis.

As of year-end, our assets under management were $318 billion, up 10% from year-end 2012.

Over the course of the year, we saw improved net flows across all of our retail investment products, higher separate account balances and an increase in institutional assets under management.

Net flows in 2013 were nearly $4.6 billion driven by the substantial sales improvement in our retail product that I just discussed.

We continue to grow our stable value wrap business in the quarter and saw a year-over-year increase of $14 billion in stable value wrap assets under management.

These sources of AUM growth more than offset the impact of rising rates on our invested asset portfolio and for the first time in four quarters, we experienced sequential growth in our general account asset balance.

So overall we are pleased with the growth in assets under management we are seeing across our portfolio of businesses.

Slide 16 highlights the strong operating income results of our businesses.

Retail operating income increased 37% versus the year-ago quarter as a result of enhanced spreads, growth in fee income on separate accounts and higher net investment income.

Institutional operating income increased 19% versus the year-ago period and similarly benefited from crediting rate actions, higher fee income on separate accounts and the higher net investment income.

The increases in net investment income were largely attributable to greater partnership returns and appreciation in hybrid securities, non-agency RMBS and other invested assets accounted for using the fair value method.

We also experienced better than expected mortality in our Life insurance business which contributed to the favorable year-over-year performance in the quarter.

Our retirement income solutions business continued to grow profitably with operating income up over 70% from the year-ago quarter.

We are seeing strong demand for our products which we believe are differentiated in the market based on the income options we offer and our award-winning customer service.

Over the past almost four years, we have redesigned our products to reduce risk to AIG and I think the strategy is paying off.

In our retirement income solutions business, of our $24 billion of variable annuities with guaranteed minimum withdrawal benefits, 71% include benefits with strong de-risking features such as the fixed indexing of our rider phase, volatility control funds, and required minimum allocations to the fixed account.

Given its relative size we view our variable annuity business as an opportunity to generate attractive returns especially as competitors reduce their appetite for additional exposure while consumer demand for income solutions remains robust.

Slide 17 shows our investment portfolio, composition returns and yields.

Net investment income benefited from the strong alternative investment returns in the quarter as I mentioned earlier.

Overall the total portfolio base yield declined 4 basis points from the year ago period as we continued to invest premiums, deposits and cash flow from the portfolio at new money yields below the overall base portfolio yield.

Over the course of 2013, portfolio cash flow included proceeds from asset sales which generated significant tax gains in our fixed investment portfolio designed to utilize our capital loss carryforwards.

Since inception of our gains realization program to utilize those capital loss carryforwards in 2012, our overall portfolio base yield has been negatively impacted by 13 basis points on an annualized basis as a result of the action.

It is worth noting however than our base yield increased 3 basis points sequentially mainly attributable to increased income recorded on residential mortgage-backed securities related to appreciation in the Home Price Index as well as an increase in estimated future cash flows when compared to the prior quarter.

Moving to slide 18, we continue to actively manage crediting rates which is reflected in the declining cost of funds for both our fixed annuities and group retirement businesses on both a year-over-year and sequential basis.

Net spreads expanded for both fixed annuities and group retirement from the year ago period and the prior quarter and at year-end, 73% of our fixed annuity and universal account values were at minimum guaranteed crediting rates.

So in closing, 2013 was a strong year for AIG Life and Retirement with record sales and profits.

This year we remain focused on executing against our strategic initiatives which includes growing our distribution organization and increasing the productivity of our wholesalers, affiliated agents and financial advisors, leveraging our strong relationship with distribution partners to increase penetration of our broad retail product portfolio within the firms, maintaining a leadership position and offering competitive and profitable retirement income solutions, and continuing to look for opportunities to grow our institutional businesses where we can achieve the most attractive risk-adjusted returns.

With that I will turn it back to Liz to open up the Q&A.

Thank you, Jay.

Operator, can we open up the lines for our questions this morning?

(Operator Instructions).

Brian Meredith, UBS.

Good morning, everybody.

A couple of quick questions here first.

Peter, I am just curious with 2.5% or 2.3% rate increases globally, do you think we can continue to see the magnitude of improvement in your accident year loss ratios here going forward?

Yes, we have a fair degree of confidence that the three-year trend of accident year loss ratio improvement will continue.

As you know a lot of the improvement is baked into this year through renewals so we have a high degree of confidence on that.

And is it coming from maybe just mix instead of absolute rate and that is why you are still getting the big improvement?

It is a combination of all of the initiatives we have made to make sure that we have re-underwritten the books that were causing problems so the US Casualty book is being substantially re-underwritten getting rate where we needed rate, investment in much, much tighter claims to reduce claims leakage.

So it is a whole combination of factors which have been underway for two years and are now starting to come through as we actually start to believe in the trends that have been established.

Brian, it is John Doyle.

We expect to see continued good growth in our Commercial business in Latin America in Asia, Japan as well as the Middle East and Africa and that continues to perform quite well from a loss ratio point of view.

We also rolled out some new products around the world that will continue to contribute to and improve mix of business.

So we expect the underwriting results on a normalized basis to continue to improve next year.

Great, thanks.

Then just quickly on capital management for David.

As I look at your common equity this year, it was up a little over $2.5 billion and then if you ex the AOCI, it was up close to $8 billion.

So I'm just kind of curious why aren't we seeing more capital management, more share buyback or is that something we may be able to expect on the horizon at kind of a faster pace than we have seen?

Sure.

Thanks, Brian.

As we said before, we have remained and do remain committed to the $25 billion to $30 billion of overall capital management.

To date we have done about $20 billion.

I don't know $16 billion or so of that is in common equity buybacks.

We have done some debt.

We are increasing the dividend.

I think the overall approach is to be prudent, to be deliberate and orderly about the pace at which we go.

We want to be in the long-term scheme of things do this in an orderly way and so we are balancing the perspectives of many different stakeholders at the table.

So the fact that we are increasing our dividend, increasing or getting an additional share repurchase authorization I think you should take as a sign of our confidence, our Board's confidence in the underlying financial underpinnings of the Company.

And as I said, we remain committed to the $25 billion to $30 billion of capital management between 2011 and 2015.

So we are going at a pace we think is appropriate.

Bob, if you want to add any commentary to that I would welcome that at this time.

David said it exactly right.

Keep in mind that [consumed] where we have been and we had the accrual deduction, we want to make sure we do this in the very thoughtful but keen and prudent way.

Great.

Thanks for the answers.

Mark Finkelstein, Evercore.

Good morning.

Peter, can you elaborate on the A&H losses and private client group losses in consumer, please?

I think I will ask Kevin Hogan to handle that once.

So Kevin, why don't you add your thoughts there?

Sure.

Mark, these are primarily related to some wholesale travel business in the fourth quarter.

We had some severe losses in travel delays.

And then in the private client group also, there were a handful of losses associated with the severe weather.

We have taken appropriate underwriting actions across the portfolio in the US throughout 2013 and we anticipate this to be a short-term impact on the results.

Okay, perfect.

And then I guess also staying there, just thinking about the expense ratio, you kind of had the severance charges but the outlook for the expense ratio in 2014 is relatively flat I think if I heard those comments correctly.

And I know in the past you have talked about kind of the expense ratio staying high through 2014 and into 2015.

What is the current thinking on when we will start to see some of the infrastructure and the IT spend moderate and start to see the actual expense ratio coming down?

Well, the big expenditure in 2014 relates to Japan.

As I mentioned, we are spending about $250 million in fully integrating the Fuji acquisition into our AAIU operation and that is a spend that really started in July of last year and will last through July of 2015 but really peaks this year as we make some very major investments in infrastructure and branch rationalization in Japan.

So that is the big item and then offsetting that is a continuation of the process we started in 2011 of integrating the Property Casualty business into one seamless AIG as opposed to a number of separate profit centers with duplicative infrastructure.

And so this year we will be really streamlining removing excess layers of management in areas where they are duplicative so that we can be as responsive to customers and grow and redeploy people and capital where the opportunity is the greatest.

But I think that the expense ratio has been affected by a combination of these investments as well as the reduced denominator of the shrinkage in the US casualty business or a bit of negative operating leverage occurring which as I mentioned, is really starting to getting topline growth again as we have re-underwritten the casualty book.

So I think that we feel good about the outlook on the expense front but I don't think there is going to be a dramatic change until 2015.

Can I just add to that?

I know we are all focused on the expense ratio but we need to focus on the accident year loss ratio and the growth of this business and (inaudible) as Peter has talked about over the last year or two, is that we have invested heavily in an engineering center which will improve our ability to assess risk, invested huge amounts of money and time so we had better data around our underwriting intuition and do a better job there.

That is adding to the expense ratio.

When you look at monies we are spending to put in a fraud unit, subligation units in our claims area, all of this is adding expense and the beneficiary of that is an improved and reliable and consistent accident year loss ratio.

So you really have to think about the strategic work that he has talked about over the last two years and how you are seeing that benefit across the entire combined ratio.

Also it takes a while to earn into the benefits of what we are talking -- we just mentioned earlier today that the actuaries have to see the trends and it takes a long time for trends to emerge and I think you will see this continue to progress over the next several years.

All very fair points.

Just one very, very quick one if I may, which is the increase in the statutory dividends that you are assuming for 2014 over 2013, is that all from improvement in earnings or is there more capital efficiency improvements at P&C or any other items that are helping to improve that number?

Mark, it is David.

It is a combination of continued strength in earnings so we are continuing to generate deployable capital but there is some amount, I haven't quantified it publicly but there is some amount that is -- we are moving some higher than needed capital in some of the operating companies up to the holding company.

So we are continuing to evaluate the amount of capital that we are holding in the operating companies.

We want to make sure that we've got plenty of capital for our ratings, plenty of capital to maintain our competitive positioning and to fund growth.

But the businesses are continuing to generate very substantial capital and we will migrate some of the capital ratios down a bit over time as we said we would do.

Okay, thank you.

You are welcome.

Jay Cohen, Bank of America Merrill Lynch.

Yes, thank you.

Two questions.

One is, you had mentioned the accident year loss ratio being negatively impacted by some multiple year contracts.

I didn't quite get that.

I think it was 1 point.

And then secondly, with your stock trading below book value, with the capital that you will generate from the ILFC sale, should we assume that share repurchase will be a primary use of that capital?

Jay, I will start on the first point and probably enlist James Bracken's help if I flub the GAAP accounting treatment.

But basically these are contracts, these are policies written pre-2004.

They were multiyear in nature where because they are multiyear and we are receiving premiums still means that as claims get made, they appear in the current accident year.

But discontinued business from pre-2004 that appears in the current accident year is an anomaly.

Just one clarification.

So they are being earned in.

We've received all of the premium and think of them as multiyear claims made (inaudible).

So they cover -- they run for a number of years.

We've still got a bit to earn out and we still see some revenue recorded in the [MP] line of the other segment and they attach some loss activity attaches to them but it relates to run-off business.

Was that 1 point?

1 point for the total Company in the quarter.

Yes, 1 point of accident year loss ratio for the entire company.

Great.

As far as capital management is concerned what we have said all along is that our first priority is our credit ratings because that speaks for our ability to live up to the promises we make.

So we are worried about coverage ratio, debt management and so on.

(inaudible) that we want to have some dividends to flow back to our shareholders but the primary goal after those two have been achieved is share buybacks.

And so when ILFC closes, we will make a determination at that time and we will continue to evaluate our capital management program around our stress testing of the Company which is right now we do one starting in November and we will do another one around May.

And then we take a look at where the Company is, where we think the issues are in the marketplace and then we present to the Board what we think is appropriate capital actions based upon what we see at that time.

So as we get to the point, as David pointed out, the $25 billion to $30 billion, we can see the dividends coming up to the holding company, we can see the DTA beginning to get monetized.

Our priorities continue to maintain a strong Company while at the same time giving what makes sense to the shareholders as quickly as we can.

Got it.

Thank you.

Paul Newsome, Sandler O'Neill.

I want to talk a little bit more about the expense in Property Casualty.

I think maybe I would like to ask it in a big picture perspective.

If you go back to AIG before its problems, this was a Company that had a relatively low expense ratio and a pretty average loss ratio and that was kind of how they made their money by having a lower expense ratio than their peers.

Today we are looking at a loss ratio which is much improved and actually kind of looks a lot like its peers broadly speaking but has an expense ratio that is higher.

Is the goal here to have a business that is heavy on loss control and heavy on back expenses, lower loss ratio over time or ultimately are we talking about a Company that wants to make its competitive advantage once again in expenses?

I think of us as having a very competitive combined ratio, both loss ratio and expense ratio.

I think that is what Peter is working towards.

But you need to look at the loss ratio and look at it on an accident year basis historically.

If I go back to our releases and information we provided you, I don't know that the accident year loss ratio for those prior years looked at from this year would be what you saw.

So I think there is a difference and if you factor in, which is what you need to do, prior-year development and if you look at the prior-year development over the last several years and look at what we have had to do, you can see that the accident years were pretty high.

So what you are going to see is continued improvement in the loss ratio, continued improvement in underwriting and systems around underwriting, continued investment in technology so we have a very strong bulletproof processing capability here at AIG that is state of the art.

And then you'll see our expense ratios start to come down and still see improvements in loss ratio.

But we need to continue to invest in a lot of tools to make sure that that loss ratio five years from now is what we said was in the loss or slightly better.

So we are building this Company not only for the 2014 but the 2018 and 2020.

We really have to have a strong foundation for the future and that is what we are building here.

So to try to interpret your comments, it sounds to me like your competitive advantage if you achieve your goals will ultimately be a very competitive -- a better loss ratio than most and an expense ratio that is maybe in line with your peers.

Is that kind of the idea big picture long-term?

I don't view either of these ratios as a source of competitive advantage.

They are outcomes of what we do for our customers.

So our competitive advantage comes by the expertise that we have and the risk that we take ourselves or help our customers to manage if they choose to retain them.

And so the investments that we are making to become true experts in the risks that we've chosen to specialize in around the world and to use the relationships that we have developed over decades with customers both large, medium and small in the consumer and commercial space, and so as a result of that, we are investing in what it takes to be experts and that will lead to a higher expense ratio than was the case historically.

But those historical expense ratios were also somewhat flattered by reinsurance strategies with large ceding commissions which we don't do on the same scale anymore.

The other thing is and as Bob said, you've got to look at those restated accident year loss ratios in 1998 to 2003 which were way above industry averages and we never want to return to those sorts of underwriting standards.

So we are really sharpening up how we manage our risks so that we have competitive combined ratios, as Bob says, and in a sustainable way through the cycle.

And so the other thing we are really focused on is a better trade-off between profitability growth and risks so we don't feel we are forced to grow topline in a soft market.

So we want to get our fixed costs down.

We are focused on the mix between fixed costs and variable costs so that we have the ability to scale back volume in a soft market so we manage the cycle better in the future.

Terrific.

Thank you for the call and congratulations on the quarter.

Josh Stirling, Sanford Bernstein.

Good morning.

Thank you for taking the call and congratulations on a lot of progress this year.

A question for Peter and John perhaps or one of the two.

When I look at the Commercial business and I do some adjustments for severe losses and I think normalizing for the higher expenses in the quarter from incentives and stuff, I get to something like an underlying accident year ex cat combined in Commercial of maybe as low as a 92, which looks like a very nice improvement from last year and a lot of progress in total.

And I'm kind of curious just where are we going to get to in this number?

And when I look at peers you can sometimes see -- you can often see high 80s ex-cat accident year combined ratio underlying numbers and I think that is what you would need to get to your low 90s all-in calendar year target.

Is that a realistic end goal for this story?

Josh, it is John.

Yes, we expect to continue to see in 2014 accident year loss ratio improvement again normalized.

And Peter talked a bit about the severe losses in the quarter.

They were slightly elevated relative to our expectations for the full-year, a bit better than expected in the first half of the year and higher than expected.

So that contributed to a slightly higher 2013 accident year result than what we expect.

We talked about expenses, we do expect to see an improvement in expense ratio over time as Peter pointed out.

We didn't mention shared service centers.

We had some redundant work going on as we build out our shared service capabilities in different parts of the world in Europe and Asia, in Colombia as well.

So yes, we do expect to continue to see an improvement in the combined ratio results for Commercial.

Great.

If I can ask a different question for Kevin, welcome back to the Company.

We are all happy to have you here.

I want to talk about the consumer business so I know there's a lot of things going on and we've talked about Japan.

But in aggregate, results have been flat in the past couple of quarters have on the loss ratio side I think been a bit of a disappointment.

And I'm wondering if you can just -- you referenced some things you are doing more tactically, re-underwriting, some repricing -- I am wondering if you can give us some color on sort of some specifics and the magnitude of actions you are taking to drive margins over the next year or two?

Thank you.

Thanks, Josh.

The reality is that AIG has done a terrific job in the Commercial underwriting area in the last couple of years and are a little bit ahead of some of the disciplines that we are adopting in the consumer area and the focus is on the large portfolios.

So in Japan, we have -- we do it in taking rate on some of the large auto portfolios as well as the core A&H businesses.

And in the United States as well, we are taking a hard look at the private client group business state by state and have filed a number of rate adjustments in both the homeowners and the automobile businesses there.

We are also in the process of introducing similar tools to what has been used in Commercial in terms of the global raters and focusing on rate adequacies in the various portfolios including those which are the strategic business expansion areas where we are introducing the appropriate technical skills from the get-go in our greenfield operations.

So growth is an important aspect of the consumer business as we try to generate a customer insight driven business but we are doing it with the appropriate underwriting disciplines and that is a very important part of our unique focus.

That is great.

Thanks, Kevin.

If I could just sneak one quick one in.

A couple of times now we have heard from management suggesting the actuaries are lagging in recognizing the underwriting results improvement from underwriting claims.

I'm wondering, Charlie, if you'd give us some color on how you are doing the analysis, and are you using the more faster -- the risk report methods, or are you looking at lagging methods like the (inaudible) Ferguson and expected loss ratio?

And how much more would you characterize of margin improvement has yet to actually work through its income statement?

Thanks.

Josh, I think Peter's comments earlier really relate to a lot of the investments, especially in the claims area.

We have talked about them in workers' compensation.

And so one of the key difficulties the actuaries have is that settlements patents are changing, paids and codes are changing, and they're getting much better case reserve information.

And what Peter is talking about is it is very difficult sometimes to distinguish between that case reserve strengthening and what is really going on in the business.

But we are certainly using a whole wide range of techniques that look forward and try to give appropriate credit for all of the investments that the claims team is making in those initiatives.

And so I think with more track record on the paids and incurreds, the confidence in that increases and really that is what Peter is talking about, the statistical credibility that you give to the one or two years of emergence would be better.

The only other statistic I would give you is that we have reached today an inflection point where the last two years if you consider the re-underwriting of the casualty book, we now have just over 50% of our reserves are coming from the better underwriting that Peter and John talked about earlier.

And so as that increases I think you will also see an actual improvement in future periods as the quality of the underwriting comes through and becomes a higher percentage of overall reserves.

Great.

Thanks, guys.

Keep up the good work.

Jimmy Bhullar, JPMorgan.

Hi, good morning.

First a question for David.

Maybe if you could just talk about where you are on your interest coverage ratio now and what your aspiration is?

And then second for Peter, on the loss, your accident year loss ratio, maybe if you could discuss the reasons for the deterioration in the loss ratio this quarter.

You mentioned the 1 point because of the 2004 and 2003 business but even with that, it would have been worse than previously.

And then I'm not sure if you quantified the benefit of the cost savings plan and the severance plan that you just announced but if you could maybe just talk about how much you expect to save on that once it starts to fully reflect in your results this year or next year?

Jimmy, thanks and appreciate the question.

There are three things I would want to sort of leave you with with respect to our debt capital management as it ties into our focus on coverage ratios.

One is we did achieve the goals we had set out for 2013 vis-a-vis the coverage ratio and interest expense run rate savings.

So again, did it opportunistically and again struck a balance of being able to allocate capital to share buyback, dividends, as well as share repurchase.

So again point one, 2013 goals met.

Secondly with respect to the direct investment book and the liability management that Brian Schreiber and the team are overseeing, we funded that with cash that was allocated in the DIB very specifically for that purpose.

So those proceeds are the funds we used for that had no effect essentially on cash or capital we have available for share buyback or other forms of equity capital management.

And again, we will continue to look to optimize the value of the direct investment book over time.

And as I said, 80% of it is gone at the end of 2018.

If we can accelerate that without sacrificing value, we certainly will.

Thirdly, the point being we continue to generate deployable capital in 5 to 6 plus the tax sharing payments.

I would look for us to continue to very opportunistically focus on debt capital management as it presents itself.

I think I would expect we would continue to make progress on our coverage ratio primarily through earnings improvements but also from time to time we will look at capital management, debt buybacks, etc.

as they present themselves.

As Bob said, we are focused on our ratings and we will strike an appropriate balance.

We haven't set any specific targets for 2014.

I think we are in a pretty solid place based on what we did in 2013.

But it doesn't seem like you are done reducing your debt maybe not as much as before but you still expect to reduce that a little bit?

Yes, I think we will continue to be opportunistic in how we think about it.

So I wouldn't give you any specific targets of what we will do or won't do but again, we will be opportunistic.

We want to focus on continued improvement in the coverage ratio again and I think we can do that primarily through earnings but we will look at other ways to approach that.

I will kick it over to Peter.

Jimmy, thanks for the question.

I will give you a quick answer on the timing of expense saves that are related to the severance which is that we really have not disclosed the precise savings that we expect in the calendar year 2014 because we want to be extremely thoughtful about the way we execute what is effectively around an organizational streamlining to better serve our customers, where we are not approaching this with a finite set of deadlines during the course of the year.

We want to make absolutely sure that we execute this in a way that makes us better serve our customers.

And so we will be quite thoughtful about the execution.

So we have a broad range of ideas that I think it is sufficient to say that we think we will maintain an expense ratio that is fairly stable this year but we are not disclosing precise numbers nor a quarterly schedule of savings.

On the accident year loss ratio, as Bob says, this is a business that zigs and zags and to understand which of those zigs and zags are noise and which are signal, you need to sort of dig a little bit under the surface to normalize severe storms and so on quarter to quarter and I think that is probably best done off-line in a follow-up discussion with James.

Sure.

And maybe if I can just ask one more quick question.

On the AerCap stock obviously it has gone up a lot in value.

Have you thought about hedging your position and are there any limitations on you doing that if you wanted to?

Jimmy, we are not going to talk about ILFC.

Once it closes we will be glad to talk about what the options are but let's get to closing and then we will know what we can talk about.

Okay, thank you.

Operator, I think we can take just one more question and then we will have to call it a day.

Tom Gallagher, Credit Suisse.

Good morning.

Just a quick one for David.

The $5 billion to $6 billion of annual dividends that you are expecting out of the insurance companies now, I guess the run rate had been $4 billion to $5 billion and should we -- so we should expect that for the next two years from a visibility standpoint.

Is that the goal and then you would add on the DTA utilization on top of that?

So if those numbers are correct, the high end of that would be $8 billion by 2015.

Is that the right math?

Yes, I think I will limit my remarks to 2014 and so that is the commentary that I want to share with you and the investment community because that is the line of sight that we want to provide.

As I said before, again as we continue -- we continue to generate deployable capital, we want to maintain I think first and foremost strong capital positions in our operating companies and as they continue to generate capital, we will give you as much insight to that as possible.

Again I think the DTA payments, as I said, is roughly $1 billion in 2014 and $2 billion in 2015 and it will go from there.

So there will be a very substantial cash flow for the holding company.

So again, the $4 billion to $5 billion is what we said back in 2011 when we reintroduced the Company and that is a very sound foundation but again, we see opportunities to redeploy some capital that is above and beyond the levels we need to hold at those operating companies.

And again, that's what we want to do get it up to the holding company so it is most fungible at that level.

Got it.

And then was just a little confused about the $4 billion or so of dividends that were taken up in 4Q from the insurance companies.

Can you just reconcile where the $4 billion went because if I look at holding company cash and investments, they were up by a small fraction of that so where did the full $4 billion go?

Very fair question.

So we had -- one of the things we did was we improved the diversification of the capital in a couple of our operating companies through some internal restructurings we did with the life settlement portfolio.

So we accelerated some cash out of the operating companies, we used that cash to improve the diversification of some of the capital.

The punch line is it had no effect on the level of capital or cash we had available at the holding company for capital management or other general corporate purposes.

So that is really where it went.

So almost $2 billion of it went for that so it was some internal improvements that we made.

Okay, thanks.

One last one for me for Kevin.

Just on the comments on increasing rates in Japan A&H and auto, can you just comment on what is happening there because I just want to know, is this to keep pace with loss cost trends because you obviously had some elevation of -- you had cited travel and accident.

I don't know if that is specifically related to it or should we expect the rate you are getting to actually improve margin?

Well, thanks, Tom.

The actions that we are taking in Japan are really related to an overall portfolio review due to fire and marine relative to the [recent] acquisition.

We have taken an extensive review and this is really a the primary area where we have improved our selection parameters and rate and we have seen improvements in the overall profile of the results as a result.

In terms of the A&H business, it is more of a reflection of responding to some changing trends in the underlying results in the marketplace and I believe that what we will see is an improved underwriting result going forward.

Okay, thanks.

Thank you everyone for joining us this morning and we will certainly be happy to take all your other follow-up questions.

We are all here so please feel free to reach out.

Thank you.

Again, ladies and gentlemen, thank you for your participation.

This will conclude today's conference.