American International Group Inc (AIG) 2014 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'd like to turn the conference over to Liz Werner, head of Investor Relations.

Please go ahead, ma'am.

Good morning, everyone.

Before we get started, 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 first, second and third-quarter 2014 Form 10-Q and our 2013 Form 10-K under Management's Discussion and Analysis of financial conditions and results of operations under Risk Factors.

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 the website, www.AIG.com.

This morning, in the room, we have our CEO, Peter Hancock; David Herzog, our CFO; and the heads of our business segments, John Doyle, head of Commercial and Kevin Hogan, head of Consumer.

So with that, I'd like to turn the call over to Peter Hancock.

Thanks, Liz and thank you for joining us this morning.

I'd like to discuss the quarter's results, our priorities, financial objectives and our view of economic forces impacting our businesses.

As we look back over the full year, the earnings growth of our core insurance business, our DTA utilization and accretive share repurchases resulted in 12% growth in book value per share, excluding AOCI and DTA.

Our fourth quarter and 2014 full-year accomplishments reflect our commitment to value-based management and focus on growth, profitability and risk.

As just one example of executing on value-based metrics, I would like to highlight our execution of debt retirement at spreads exceeding those of our debt issuance.

This strategy resulted in over $0.5 billion of incremental economic value for shareholders despite an approximate $800 million GAAP charge to net income.

This quarter, you will also see that our resegmentation highlights are focused on customers.

Our customers look to us as their lead insurer rather than just another source of capacity and you'll hear more on our commercial and consumer customer focus from John and Kevin.

Our fourth quarter included both accomplishments and challenges.

We saw the early signs of expenses moving in the right direction with the commercial and consumer P&C businesses delivering accident year loss ratio improvement from the same period last year.

We executed on a number of positive capital management actions and yesterday, we announced a new $2.5 billion share repurchase authorization.

Our fourth-quarter results also included evidence of our risk management discipline across the Company.

Specifically, accident years 2005 and later continue to develop favorably.

We continue to accelerate the DIB unwind with a focus on maximizing economic value and we moved excess capital from our life insurance companies to the parent.

We also recognized the challenges that persisted this quarter and we remain focused on them.

Specifically, certain older accident years have resulted in additional reserve strengthening.

We provide details on the older accident years in our earnings presentation, which David will speak to.

Consistent with our practice since 2011, this quarter's actions are based on new information coming from a thorough and independent reserve analysis.

We believe that the stable development of more recent accident years highlights the value of our reserving practices and our underwriting discipline.

Our priority is to deliver sustainable ROE improvements as we look to 2015 and beyond.

For the full-year 2014, ROE, excluding AOCI and excluding DTA, was 8.4%.

Over the course of the year, excess alternative returns and lower-than-expected catastrophe losses added about 1 percentage point to this full-year ROE.

Excluding that 1% gives us a good starting point to discuss ROE expansion going forward.

Over the next three years, we are focused on achieving annual ROE improvement through our commitment to managing growth, profitability and risk.

We seek to deliver a consistent level of expense savings through our technology, process redesign, shared service centers and simplification of our organizational structure.

Turning to page 3 of the earnings deck, we outline our financial objectives for the next three years.

Based on the outlook for our businesses and the current environment, we believe that we can achieve 50 basis points or higher of annual improvement in ROE, ex-AOCI and DTA, through 2017 from a normalized baseline of 7.4% for 2014.

Our ability to be higher will be driven in part by the timing of emerging benefits from our investments and the growth in savings resulting from these investments, as well as catastrophe losses and investment returns that are in line with our expectations.

Our long-term ROE objective remains 10%.

Our view on general operating and other expenses is that we can achieve a 3% to 5% annual decline on a net basis through 2017, which allows for growing our investment in technology and systems.

David will provide further comments on our outlook for general operating expenses.

Finally, we expect book value per share growth, ex-AOCI and DTA, to exceed 10% annually through 2017 as a result of improved profitability, further capital and risk management actions and our DTA utilization, assuming our ability to deploy excess capital continues.

We maintain a disciplined risk appetite for new businesses and acquisitions.

Our acquisitions have not been capital-intensive and have provided unique capabilities, clients and distribution and are not driven by a desire for acquiring assets or short-term earnings.

I'd like to close with a few comments on the impact of external forces on our business and how we react to the changing environment.

The reduction in inflationary expectations is good news for claims trends and underwriting results.

Growth in the US is also encouraging and we will pursue new business with our disciplined approach.

Offsetting these positives is the impact of the sustained low interest rate environment and a decline in property casualty rate increases.

Kevin will speak more about the impact of the current interest rate environment.

While there are positives and negatives to our operating environment, we believe our discipline, commitment to our customers and our ability to meet the wide range of their needs will serve us well in the long run.

Now I would like to turn it over to David.

Thank you, Peter and good morning, everyone.

This morning, I will review the highlights for this quarter's results, our recent capital management actions and balance sheet strength and our outlook for 2015 capital management.

Turning to slide 4, you can see our total insurance operating income was up slightly versus a year ago.

After-tax operating income for the quarter was $1.4 billion, or $0.97 per diluted share.

In the fourth quarter, our operating return on equity adjusted for AOCI and DTA was 6.8% and as Peter mentioned, 8.4% for the full year.

Reported net income was $655 million and included the charge for retirement of debt of $824 million associated with our liability management actions.

Book value per share, excluding AOCI and DTA, grew to just over $58 a share, 12% higher than a year ago.

Again, driven by our earnings, our DTA utilization and accretive share repurchases.

I will highlight a few noteworthy items for the quarter and John and Kevin will provide more details on the commercial and consumer operating results.

Turning to slide 5, we summarize prior-year development in our property-casualty reserves.

Net adverse prior-year development for the quarter was just under $300 million, including premium adjustments of about $50 million and relates primarily to accident years 2004 and prior.

Commercial insurance reported prior-year development of about $197 million, including those premium refunds.

There were four classes of business that contributed almost equally to the adverse emergence and those include primary workers' compensation, healthcare, pollution products and certain financial lines.

Consumer insurance had a modest favorable prior-year development of about $35 million principally from our private client group business.

The runoff segment now reported in corporate reported net adverse prior-year development of about $135 million driven primarily by pollution products within the runoff environmental book and the retained asbestos and assumed reinsurance portfolios.

As we have seen in the last couple of years, the overall adverse development was related to 2004 and prior.

As of this year-end, we have experienced less than a 2% change in our initially recorded year-end ultimates for each of the last eight accident years.

In the third quarter, we disclosed that we expected a $250 million to $350 million negative impact on our worker's compensation discount due to the fall in interest rates as of September 30.

In the fourth quarter, we reduced our worker's compensation discount by a little over $560 million due to the combined impact of this fall in interest rates and faster paydown of our reserves.

In our US life business, we added a little over $100 million to the estimated reserves for incurred but not reported death claims, which reflected continuing efforts to identify deceased insureds and their beneficiaries, primarily related to legacy small face amount policies pursuant to the resolution of a multistate audit.

Turning to slide 6, which represents the corporate and other operations, we saw mark-to-market -- a decline in mark-to-market earnings from our direct investment book and global capital markets this quarter.

We continue to actively wind down the direct investment book and global capital markets and in the fourth quarter, we redeemed about $2.5 billion of debt to bring the full-year total to about $7.5 billion using cash and short-term investments allocated to this book.

We expect ongoing wind-down to result in the release of capital to parent over time.

We expect that the earnings contribution from the direct investment book will also decline as the portfolios continue to wind down.

The parent company investments in AerCap and PICC continue to deliver and resulted in about $250 million of pretax operating income in the quarter.

Total corporate expenses net were $236 million in the quarter, down on a sequential basis largely due to the incentive compensation accruals discussed in the prior quarter.

Our reported operating effective tax rate for the quarter declined to just over 21% driven primarily by tax benefits related to foreign operations.

As Peter mentioned, managing our expenses while investing in our future are key priorities for AIG.

As a baseline, slide 7 shows total general operating expenses for 2014 from our new disclosure in the financial supplement.

Our top investments are included in the reported general operating expenses and totaled a little over $650 million in 2014.

For example, the Japan integration is included both in the general operating expense and is included in our investments as we described them.

We are focused on reducing the business-as-usual expenses, which we define as GOE, less these investments sustainably over time, as well as focusing on the overall expenses and the expense reduction that Peter referenced.

All the while making the necessary investments to fund growth, profitability and enhance risk management.

Our capital management highlights begin on slide 8. During the quarter, we deployed $1.5 billion towards the repurchase of approximately 28 million shares of common stock bringing the full-year repurchases to $4.9 billion.

An additional 3.5 million shares were delivered in January with the full completion of the ASR, which we initiated in December.

In addition, the Board of Directors approved an additional share repurchase authorization of $2.5 billion, which reflects the strong capital flows from our life insurance companies, as well as the reduction in risk in our property-casualty business.

With respect to debt capital management, we continue to manage the cost and maturity profile of our debt.

As a result of the actions we have taken in 2014, we've reduced our run rate interest expense by roughly $250 million and we expect the annual interest expense for 2015 to be just under $1.1 billion.

As shown on slide 9, we ended the quarter with financial leverage ratios, including hybrids, of just over 15%, or a little over 16% when giving effect for the January issuances.

We continue to be opportunistic in our debt capital management and expect that an improving earnings profile will continue to positively affect our coverage ratios going forward.

The year-end RBC ratio for the fleet of US life companies is estimated at around 490% after giving effect for the fourth quarter and January distributions, which is closer to our target operating RBC level.

Cash flow to the holding company remained strong as you can see on slide 10.

We received cash dividends and loan repayments from our insurance subsidiaries of $2.9 billion during the quarter, bringing the year-to-date to just over $8 billion.

We also received $700 million in distributions and fixed maturity securities bringing that total for the year to just over $1 billion.

In addition, in January, our businesses paid $2.8 billion in dividends.

Looking ahead to 2015, we expect $6 billion to $7 billion in potential share repurchases and shareholder dividends.

This total does not include any potential monetization of non-core assets.

This is subject, of course, to Board approval, ongoing discussions with rating agencies and any regulatory approvals that could be required.

As part of the natural evolution, we have moved to a more dynamic approach to the deployment of our capital, which reflects our capital utilization for risk, deployment of capital on our businesses and capital flows.

We expect dividends from our insurance subsidiaries in 2015 of $4 billion to $5 billion in addition to the distributions received thus far in 2015 that I mentioned a moment ago.

Further, we expect tax-sharing payments between $1.5 billion and $2 billion annually over the next several years, which reflects tax-planning strategies and updates to our taxable income projections and also reflects our capital gain recognition that realized all of the capital loss carryforwards.

We continue to expect that our tax attribute DTA will be fully utilized by 2020 or 2021.

We expect our operating effective tax rate for 2015 to be 33% to 34%.

So with that, I'd like to turn the call over to John.

Thank you, David.

This morning, I will discuss our commercial results, which include the operating segments, property-casualty, mortgage guaranty and institutional markets.

You'll see that we've moved our insurance runoff business, which had been part of the PC other, to corporate.

This is consistent with our focus on managing runoff lines to capture the greatest economic value for AIG.

Certain expenses in investment income that were previously reported as part of PC other have been allocated to commercial and consumer to be consistent with how we manage the business.

The total commercial segment pretax operating income was $1.2 billion in the quarter driven by improved property-casualty and favorable mortgage insurance results offset by weaker returns in our institutional markets business.

Beginning on slide 12 with property-casualty results, the quarter benefited from lower CAT and severe losses and improved operating efficiency.

Net premiums written, excluding the effects of foreign exchange and return premiums on loss-sensitive business, declined 1% compared to the prior quarter primarily due to our continued underwriting discipline in US casualty.

This was partially offset by new business growth in financial lines and property.

Financial lines grew in all regions and importantly in targeted growth areas such as multinational, small business and M&A.

Property grew in all regions and segments outside of the US, particularly in middle market property and highly engineered risk.

Our intense focus on enhancing customer service in these lines, for example, engineering and loss control services, is increasingly becoming a differentiator for AIG.

Overall, rate change from the prior-year quarter was essentially flat.

Rate change in US financial lines was just over 2% while in US specialty it was up about 2% as well.

US property rates were down nearly 6% in the quarter.

Outside of the US, overall property-casualty rates decreased slightly.

With respect to the rate environment, our management of business mix, enhanced pricing and risk selection tools and improved claims service gives us confidence in the accident year loss ratio trends and continued growth in risk-adjusted profitability.

For the full year, the accident year loss ratio as adjusted was 65.6%, or roughly flat from last year following a period of positive improvement.

In the quarter, we experienced modest elevated attritional loss activity in our short tail lines.

General operating expenses improved in the quarter primarily due to efficiencies from organizational realignment initiatives partially offset by investments in technology, engineering and analytics.

The structure of our corporate cat placement was consistent with the prior year, but procured at an improved rate.

We also continued our strategy of accessing the capital markets entering into our third cat bond transaction, which totaled $500 million in new issuance.

This new bond offering was met with substantial investor interest.

Collectively, our current cat bonds provide $925 million of indemnity protection.

Net investment income for the quarter declined 7% from the same period last year to $1.1 billion reflecting the impact of lower new money yields, lower invested assets and reduced contribution from alternative investments.

Net investment income for the quarter included approximately $100 million of income from a rights offering in AIG's strategic investment in PICC.

Turning to slide 13, mortgage guaranty reported another strong quarter of operating performance with operating income of $171 million.

Mortgage guaranty benefited from decreased first lien losses, an increase in first lien premiums earned and a second lien litigation settlement.

The improvement in the loss ratio also includes $30 million of favorable prior-year reserve development.

Mortgage guaranty remains an important part of our operations given its strong returns and its strategic insights into the residential mortgage market.

Turning to slide 14, institutional markets pretax operating income declined to $118 million for the quarter primarily due to lower investment returns on alternative investments.

The decrease in net investment income was partially exit by higher fee income driven by growth in assets under management primarily from the stable value RAP business.

Premiums and deposits in the quarter grew from the same period last year.

Now with regard to 2015, we expect modest growth in the aggregate as we continue to optimize our business mix.

We also anticipate an additional 1 to 2-point improvement in the property-casualty accident year loss ratio in 2015 from ongoing execution of value-based initiatives, progress in underwriting and claims excellence and expectations for improved short tail losses.

Although I would caution that results can vary from quarter to quarter due to the nature of the short tail business.

We also expect to achieve improved operating efficiency while making investments in technology, engineering and analytics.

And as David mentioned, we see this quarter's decline in net investment income as a trend that will likely continue into 2015 as our loss reserves decline and we continue to invest in this interest rate environment.

To sum it up, the commercial team continues to advance its strategic initiatives and to build on the momentum to become our customers' most valued insurer.

Now I'd like to turn the call over to Kevin to discuss the consumer results.

Thank you, John and good morning, everyone.

As you can see from our revised financial presentation, our consumer results now bring together all of AIG's insurance products and services for consumers, whether individual or group-based contracts that were previously reported in the life and retirement and property-casualty segments.

We have created this global consumer platform with a broad distribution reach under a common leadership team and remain focused on executing against our strategic priorities, including our targeted growth strategy.

In the fourth quarter, we closed on the acquisition of Ageas Protect Limited, a leading provider of life protection products in the UK and entered into an agreement to acquire Laya Healthcare, an Ireland-based healthcare company, which we expect to close in the second quarter of 2015.

These acquisitions will help drive continued expansion of our consumer portfolio of insurance solutions designed to meet consumer needs for financial, health and retirement security.

We believe Ageas will help strengthen our capability in the UK where we already offer personal accident, health and travel insurance coverage to consumers, as well as customized insurance solutions for high net worth individuals through AIG Private Client Group.

Laya Healthcare serves more than 23% of the Irish private health market offering life, dental and travel insurance, as well as health and wellness coverage, which nicely rounds out our available products in Ireland and provides a platform for expansion into health insurance in select additional markets around the globe.

Combined, our consumer businesses delivered $923 million of operating earnings during the quarter.

I will cover highlights for each of our three operating segments and share some views on 2015.

Before discussing results for the quarter for our retirement businesses, which begins on slide 16, I wanted to remind you that as part of our resegmentation, we revised our presentation of retirement results to reclassify a portion of policy fees along with the related portion of [DAC] amortization from operating income to non-operating income.

This reclassification of policy fees, which relates primarily to guaranteed minimum withdrawal benefit embedded derivatives in our variable annuity products, offsets the fees from these embedded derivatives with the associated change in fair value of such derivative liabilities.

This reclassification reduced pretax operating income for the full year of 2014 by a total of $215 million, or roughly $50 million per quarter, but had no effect on GAAP net income.

We believe this treatment is in line with current industry practice.

Operating income for retirement was $722 million for the quarter and reflected growth in fee income resulting from higher assets under management and a decline in net investment income.

Policy fees rose from the prior-year quarter on growth in assets under management driven principally by strong net flows in variable annuities and retirement income solutions and market appreciation.

The decline in net investment income was driven primarily by lower returns on alternative investments, as well as decline in base yields as reinvestment rates are below the weighted average yield of the overall portfolio.

At current levels, we would expect a 4 to 6 basis point quarterly decline in base yields.

We also expect net investment income to be lower in 2015 by approximately $200 million due to the significant distributions of excess capital to parent in 2014.

Turning to slide 17, the quarter benefited from effective spread management achieved through disciplined new business pricing and active management of crediting rates.

The outflow of older policies, which carry higher credits and rates than current rates offered, has also contributed to reducing our cost of funds, which we have reduced in both fixed annuities and group retirement over the last 12 months.

Assets under management ended the year at $224 billion, 3% higher than a year ago, driven by the strong variable annuity net flows and overall separate account investment performance partially offset by net outflows and fixed annuities and group retirement.

Net flows for fixed annuities have been affected by the low interest rate environment.

We expect that sales of fixed annuities, although up on a sequential basis, will remain challenged in the current low interest rate environment as we continue to maintain new business pricing discipline.

We also experienced two large group surrenders in our group retirement business related to retirement plan consolidations, which we believe are part of the normal competitive pressures in this business.

In addition, recent market results suggest pressure on new sales of variable annuities, although our index annuity sales continued to gain momentum and macro trends continue to support growing customer need for quality income solutions.

Slide 18 presents results for our global life business, which now includes Fuji Life in Japan.

Life pretax operating income of $80 million decreased compared to the prior-year quarter primarily due to a charge of $104 million in the fourth quarter to increase reserves for incurred but not reported death claims that David mentioned earlier.

This reserve reflects continuing efforts related to a previously disclosed multistate audit and market conduct examination from 2011.

The decrease in pretax operating income also reflected a decline in net investment income compared to the fourth quarter of 2013 primarily from lower alternative investment returns, as well as a decline in base yields.

With respect to life sales, Japan delivered good growth with a 4% increase in sales from the fourth quarter last year and a 7% increase in premiums.

For the full year, Japan represented almost half of the new business sales for our global life business.

Life insurance in force reached over $1 trillion at the end of the year, more than 9% higher than prior year on both organic growth and the acquisition of Ageas Protect.

Turning to slide 19, personal insurance reported operating income of $121 million, which reflects improved underwriting income from the year ago, partially offset by lower net investment income.

Net premiums written grew 2% from the same quarter a year ago, excluding the effects of foreign exchange.

We saw growth in the automobile and personal property lines of business, partially offset by declines in certain classes of accident and health business as a result of our focus on maintaining underwriting discipline in pricing and terms and conditions.

The personal insurance accident year loss ratio as adjusted was 52.1 for the quarter and 6.1 points lower than the same quarter a year ago reflecting improvements across all lines of business.

Improvement in the accident year loss ratio for our US warranty programs business was offset by an increase in related profit-sharing arrangements, which increased the acquisition ratio.

We continue to experience lower-than-expected losses in Japan automobile, which benefited from reduced frequency and across the portfolio, both catastrophe and severe loss experience were better than our expectations.

Looking ahead to 2015, we believe that the full-year 2014 accident year loss ratio, excluding the impact of cats and severe losses, is more indicative of our expectations for personal insurance than the current quarter ratio.

The general operating expense ratio declined 1.7 points from a year ago primarily due to efficiencies from organizational realignment initiatives partially offset by increased technology-related expenses.

While we are pleased that we've begun to see benefits from our initiatives thus far, as David mentioned, we are focusing on delivering on further operational efficiencies as we move forward.

Our Japan integration initiative is an important part of this story given the size and scale of our Japanese operations.

We currently estimate that Japan integration costs will amount to $150 million in 2015, consistent with previous disclosure.

However, as the final date of merger is subject to approval by the relevant authorities, specific timing of benefits to emerge remains uncertain.

We are carefully managing every aspect of this complex initiative and remain on track to deliver an internal rate of return on this investment that will exceed AIG's hurdle rates and achieve a return in the low double digits.

We have already begun to see certain benefits arising out of these investments such as the recent launch of a new agency front-end system that is now available to over 1500 agents and will be expanded across our distribution network in the coming months.

To close, for our consumer businesses, we remain focused on managing growth, profitability and risk by executing on our strategies, maintaining a prudent risk profile and emphasizing capital-efficient growth opportunities.

Now I'd like to turn it back to Liz to open up to Q&A.

Thank you.

Operator, could we open the lines for questions, please?

(Operator Instructions).

Michael Nannizzi, Goldman Sachs.

So Kevin, just following up on something you just said now, on the consumer loss ratio, the full year being more indicative than the fourth quarter, the expense ratio was higher in the fourth quarter than the full year.

So if you juxtapose those two, that would imply that, in personal lines, you would be running over 100.

Is that where you expect to be running that business, or is there something on the expense side that we should be considering where 4Q may not be a good starting point?

Thanks.

No, we are not anticipating running this business over 100.

We anticipate overall continuing improvement in the expenses and personal insurance associated with the efficiencies that we have gained.

And in terms of the loss ratio, there was a better-than-expected experience this year, particularly with respect to Japan automobile and so it's that particular anomaly that we don't anticipate to repeat in 2015.

I got it, thanks.

And then maybe, Peter, the $650 million, maybe David, $650 million that you -- or so that you talked about in investment in 2014, could we get an idea of what that was in the prior year and what have been the returns that you have seen, so the expense saves that you have generated from the investment so far, just to get an idea of how that process is tracking?

Sure, we didn't discuss 2013 because it's a bit of -- the comparison is not really one for one because there were many projects and initiatives that we were doing in 2014 that were not in existence in 2013, so it's a bit of apples and oranges so to speak.

So the returns that are coming out, again, they are in varying stages.

So for example, the biggest items in there are, for example, our movement to shared services, the Japan initiative and certainly the shared services and some of the finance functions.

Those are the biggest ticket items.

So we are beginning to see payback in each one of those at various stages.

Again, some come sooner than others.

The finance centers have more immediate payback.

It's closer to a near -- within one year of the spend, you are seeing the initiative.

So we haven't quantified the exact benefit yet, but again it is going to vary by each one of those projects.

I think the important theme is that we have set expense targets that we just disclosed on a net basis, so effectively we are maintaining and increasing the level of investments while reducing the net number by 3% to 5%.

So the business-as-usual expense is declining faster than 3% to 5% as we step up the level of investment on projects where we feel comfortable that we have I think a good expected return above our hurdle rate.

So we are not sacrificing long-term growth and efficiency in order to get this net expense reduction.

Great.

And then just connecting, David, your comments on deployment this year, the $6 billion to $7 billion.

Just trying to square that to the buyback authorization of $2.5 billion.

So is the expectation that you put the buyback authorization out, you exhaust it at some point this year and then continue increasing or putting up new authorizations as you go through?

Well, as I said, the expectation for the full year is $6 billion to $7 billion both in total for share repurchase and shareholder dividends.

And again, I've made reference to the more dynamic approach, so we wanted to reflect the very robust distributions to the holding company and importantly the reduction in risk in our P&C business and so we increased the amount of authorization or asked for authorization -- the amount of authorization we asked for -- to the first quarter.

So we will deploy that as appropriate and then again, based on facts and circumstances, seek additional approvals throughout the year.

Great, thanks.

And just last quick one, any impact from energy-related investments on either private equity returns, book value that we should think about just given the three-month lag in private equity?

Nothing material.

Thank you.

Jay Cohen, Bank of America Merrill Lynch.

A couple questions.

One is, in the US consumer business, and I know the acquisition expense ratio is up because of these profit-sharing commissions, but the loss ratio relative to the past couple of quarters actually didn't get better and so is there some sort of catchup in that number?

What kind of acquisition ratio should we expect going forward?

It was a bit different than what you had been running?

Yes, Jay, thanks.

The sequence of loss ratio improvement is not substantive, but year-over-year it is substantive and the profit share is across a lookback mechanism.

And so I think where we are right now, we have restructured the underlying programs in the US warranty business, essentially instituting a deductible and other risk management arrangements, which will change the profile of the loss ratio and acquisition ratio over time.

Got it.

And then secondly, the comment about a 1 to 2-point accident year loss ratio improvement I guess on the commercial side for 2015 -- and I guess it was John that said that -- can you discuss the drivers of that improvement?

Sure, Jay.

It's mix of business really being the primary lever.

It's also increased confidence in some of the risk selection and pricing tools we've implemented over the course of the last several years.

It's from improved claim service primarily outside of the United States.

We've made big investments in our claims team and claim technology to improve how we run off the results outside of the US.

And then, lastly, we expect the short tail losses, which, as I mentioned, were slightly elevated this year.

The attritional short tail losses to move back to a more normal state.

So it's a combination of those things, but, as I also noted, given the amount of short tail business we have, it can be lumpy from quarter to quarter.

Got it.

Thank you.

Jay Gelb, Barclays.

First, for David, the lockup of the AerCap shares begins to expire this month and I heard that you've made a mention of that $6 billion to $7 billion of share repurchase and dividend in 2015 didn't include monetization of non-core assets.

So I was hoping you can update us on your view in terms of when or if you can start to sell down that AerCap stake of $4 billion?

Thanks.

Sure.

The if part is pretty easy.

It's for the contractual lockups, which the first one-third expire actually next week.

That's the if, or that's the how we could.

We haven't commented on the monetization of this non-core asset.

I will maybe ask Peter to share his views and perspective on it.

As we have done before -- as we have said before -- it doesn't change our view of this as a non-core asset, but we want to -- we will be very thoughtful as we think about maximizing value for our shareholders.

So Peter, anything you want to add to that?

I think that we have had a good track record over the last five years of making very thoughtful disposal decisions in the light of the value that we could realize and a patient approach to disposing of this non-core asset is what we think makes sense.

It is quite accretive to our coverage ratio from a ratings perspective and in our stress tests while as an equity -- a concentrated equity position -- on the face of it, it would seem like a hot potato, I would not describe it that way because we have extremely comfortable capital accretions from a stress-testing perspective, so I think we have time on our side.

But we recognize it's a non-core asset and if we receive a favorable offer for it, of course, we will dispose of it and then redeploy that capital to our core operations.

All right, that makes sense.

Then on the ROE expectation, if I think about 50 basis points of improvement starting at a 7.4% level for this year, normalized, I am just trying to get a qualitative perspective of why, Peter, you and the Board feel that that is adequate, to potentially not get to 9% before even 2017.

Well, we have a long-term goal of getting north of 10%, as I stated.

And most importantly getting it above our cost of capital and so we look at the interaction of what we are doing to reduce our cost of capital, in particular derisking the Company and focusing the quality of earnings on really repeatable sources.

So sure, we could get to the target quicker, but it would probably be at the expense of sustainability of earnings, quality of earnings and we have judged that this is an appropriate pace that continues to demonstrate our commitment to improving returns while doing so in a sustainable way.

And so we have made careful trade-offs to improve the returns and to be very transparent about that process.

All right.

And then last one, on the life risk-based capital ratio currently at 490%, when we hear from other large life insurers like Met and Prudential, they are targeting more in the 400% to 450% range.

So I'm wondering if you still might have more room to bring down that RBC in the life business.

Thank you, Jay.

As we have said I think in the past, our range, target range is somewhere in that business between 425% and 475%.

That's a range.

So we are at 490%.

We have taken very substantial amounts of capital out of those companies.

So the short answer is yes, we still have more room to reduce that, but, again, we are pretty clear and we are clear with all our stakeholders what that range is and we're going to be very methodical and measured about how we do that.

But we have made clear what our range is.

We've obviously taken very substantial steps to get close to that.

Remember, last year, we were north of 560% or 568% a year ago, so we have taken meaningful steps.

So I think those actions should give you some sense of how we are thinking about it.

Thank you.

Adam Klauber, William Blair.

The retirement and life generally -- it was a weaker quarter, our income was lower than it has been really over the last five or seven.

Should we think about this as more of a typical quarter, or should we think about it, look at the context of those segments more on an annual basis versus the fourth quarter?

Thanks, Adam.

Look, I think part of the difference in the income came from the performance in the alternatives and partnerships, which I think is kind of a normal course of business.

We have seen a little bit of deal compression, but nothing unusual.

In this quarter, we did have the IBNR reserve, the ongoing activities from 2011 associated with the identification of policyholders and beneficiaries, which is a process involving a third-party vendor that provides us information.

We have to engage in the matches and as that process comes to near a conclusion, we have to respond to the matches that are occurring and the identification of those policyholders.

A lot of these are very small face amount policies.

A lot of them go back a number of years and matching is not an automated process.

Those are some of the anomalies.

As I mentioned, at the current rate environment, and by that assuming a 10 year T around 180, this is where we expect a drift of 4 to 6 basis points per quarter in the base yields.

That's a trend that will depend upon what the future rate environment is.

Okay.

And then in group retirement, you mentioned a couple large accounts left or were consolidated.

Do you think there will be more of those or are they one-off and did that have any impact on the quarterly financials?

So we don't -- first of all, I think it's important to note we don't anticipate a substantial impact on earnings from these larger cases and with respect to the larger cases, they don't always come up for revisitation.

We see nothing on the horizon at this juncture.

Of course, we can't anticipate where consolidations may occur and as you know, there are consolidations in a number of industries, especially healthcare, associated with the recent developments in those industries.

So we do see them as part of a normal aspect of the environment and they are essentially one-off items.

Okay.

And then in the commercial insurance, on the P&C side, we saw good progress on the expense ratio.

You mentioned you are going to continue to work towards that, but in investments.

So again, is this year -- is the progress we have seen this year better than we can expect going forward, or is it possible to see that type of progress going forward on the expense ratio?

As I mentioned in my opening comments, Adam, we will see some GOE improvement next year.

I don't anticipate that it will be at the same dollar amount that we improved during 2014 and of course, the ratio will depend on other factors, but we do expect to continue to get more efficient.

Okay.

Thanks a lot.

Josh Stirling, Sanford Bernstein.

So Peter, thank you -- I think we all appreciate the clarity in your goals.

I wanted to spend just a minute or two talking about them.

Like Jay, I guess I am kind of surprised about the pace of recovery that is implied by the bridge to 10% and I wonder -- obviously, first of all, make sure we understand that -- but I also wonder more fundamentally, why is AIG's long-term goal only at 10%?

If I try to put this simply, many of your monoline peers in life and P&C all consistently generate solid mid-teens ROEs.

Why shouldn't something higher be the long-term aspirational target?

Is there something about the business mix or infrastructure challenges or capital requirements that is really going to be a permanent headwind for the Company, or is this something we just need to be patient and we are going to see upside to these goals over time?

Well, I think that given where we are starting from to speculate beyond three years is challenging.

The 10% in an environment, if we have persistent deflationary pressures, low inflation and low investment yields, in our view is actually quite comfortably above what the cost of capital is likely to be at that point.

So our goal, as we say in overall terms, is to have sustainable ROE above our cost of capital, which is also a function of our risk level.

And so if others are running at much higher ROEs, I suspect it is because they choose to run their balance sheets with more leverage and are willing to take more risk.

And we think that we would like to position the Company as a very balanced portfolio of diversified risk so that we can weather swings in the pricing cycles, swings in the economic cycles and be opportunistic in times of crisis where we think that there are tremendous one-off opportunities to add value.

And I think that maximizing ROE inhibits that financial flexibility.

But making sure that the ROE is comfortably above the cost of equity of the Company and from sustainable sources as opposed to short-term risk-taking of any kind.

So we are very committed to improving the quality as well as the quantity of earnings and being transparent about that shift of mix.

Okay.

I'm wondering if we could just briefly, similar sort of concept in a way, thinking about focus on returns and the environment.

I think you guys disclosed pricing was down relatively notably in property.

In commercial business I think overall you guys were flattish.

How do we think about you guys maintaining your pricing discipline in the context of everything else you are trying to do when you are also still trying to grow?

How do we know that you are going to focus on margins first and sort of long-term health of the franchise second?

Well, I wanted to signal that very much in the $2.5 billion buyback because we talk about -- one of the factors that led us to step up the pace of buyback was the fact that we had reduced risk in the business and in particular in commercial.

And that is because we walked away from certain property renewals where we felt we were not getting adequately rewarded for risk.

And so what we are really saying is that the pricing discipline comes with it a sense that the capital that we have is precious and we will not deploy it if we're not getting an adequate return on it.

So prompt return of capital that is not deployed at adequate ROEs is our way of demonstrating to you and internally that we are not about volume.

We are about value.

That's great.

Thanks for the clear signal.

Josh Shanker, Deutsche Bank.

I just had some questions about the early debt retirement and when it occurred.

Was there some debt that you retired in the quarter that already paid a coupon during the quarter, or more succinctly can we look at the 4Q run rate of interest expense as, at this point, a benchmark for looking into 2015?

As I said in my opening remarks, we expect, based on our full-year expectation, to have interest expense of around or just inside of $1.1 billion, so, again, you can look at the fourth quarter as a reasonable proxy for (multiple speakers).

For 1Q and then go down from there?

So again, that's why I'm trying to give you a level of insight.

I think it's important to note that our leverage ratios are very much inside our target area, our target zone.

And as a matter of fact, on the low side of that, so I think we've got plenty of financial flexibility, but we are obviously focused on balancing leverage and our coverage, so I think those are the critical points you should take away.

Great.

And on the incurred but not reported death claims, there were related charges taken both in 2Q 2011 and 4Q 2011.

What solace should investors take that we are getting close to getting this -- as an issue that is behind them?

Yes, that's true.

This has been an ongoing process of working with a new process for identifying deceased policyholders and their beneficiaries.

We have much more experience now with the vendor and with the matching process and we went through an extensive analysis.

We're getting down to the last I think processes with the vendor and we have some insight into what we believe is going to be coming in the matching process in the future.

So right now, this is our best estimate of what we think will bring us to the conclusion of this process.

But until we get the files from the vendor and engage in a physical matching, we can't provide a 100% guarantee.

And that charge includes the interest on unpaid claims as accrued since that time?

Yes, it does.

In fact, that was an aspect of one of the reserve increases that you noted before and so we do fully incorporate interest in the reserves.

Okay, thank you.

Larry Greenberg, Janney Capital.

I'm wondering if you could just elaborate a little bit more on what is going on at VALIC.

I understand the large cases that were lost, but I guess, in particular, it appears you have been pretty aggressive in managing crediting rates and I'm wondering if maybe that is having an impact on the business, just recognizing the flow of surrender activity and overall flows?

And it also seems like the ROA has been trending down as well, so maybe just an update on the health of that business?

Actually we consider the health of the group retirement business actually quite strong.

We continue to recruit advisors.

We have had, I think, good success with the process of expanding some of the product portfolio that we are able to represent in that business.

And while it is true we are and we continue to be disciplined in our new business pricing, we don't see the loss of these large cases as relevant to that.

We continue to invest in this business.

We invest in our record-keeping capabilities and also our advisory capabilities and we are also introducing kind of a retirement information center to help educate our customers there.

The most important part of the margins in this business are in the smaller and medium-size cases and in the ongoing contributions, so we do not get necessarily distracted by some of the consolidations that occurred in the large case area.

So other than the large case activity, it is pretty much business as usual there?

It's certainly a competitive environment.

And we are monitoring very carefully the developments in that business, but, like I said, we continue to invest in that business and we are comfortable where we are.

Clearly, the yield environment is something that impacts that business as well and we are investing in substantial technology to improve our position.

Great.

And then just finally, on the life RBC ratio, was the decline for the year driven entirely by dividends up to the parent, or were there any adjustments made for low interest rates as well?

The short answer is no.

Substantially all of the decrease in the RBC was related to the dividend flows.

We did provide additional reserves for cash flow testing, but those were insignificant relative to the rest of the decline from distributions.

Great.

Thank you very much.

Operator, I think we only have time for one more question, please.

Tom Gallagher, Credit Suisse.

Peter, I just wanted to ask you a few questions about your 9% ROE goal for 2017.

Should we view that as a -- is that a goal, is that a plan?

What are you contemplating for interest rates?

Does that assume raising interest rates, flat?

Can you just give a little color there?

So first of all, I wouldn't describe it as a goal.

Our goal is -- our broadest goal is to have a sustainable ROE comfortably above our cost of equity and secondly, we have restated our long-term goal of 10%.

The forecast, which is what I provided over the next three years of a 50 basis point improvement per year, is premised on an interest rate environment that reflects the forward curve in the market.

So whether the market is right or wrong, your guess is as good as mine.

We tend to run a fairly carefully matched duration book of the Company, don't speculate on interest rates, but I think the interest rate assumption that we have used in our financial planning is based on the forward curve.

Okay.

This is just an editorial comment by me, but I think one thing being lost here is the fact that you also mentioned you are expecting 10% book value growth.

So I would just comment that 50 basis points of improvement per year with 10% book value growth is actually a pretty solid level of earnings growth implied, for whatever that is worth.

David, just to clarify, if I understood your comments correctly, the $2.5 billion buyback authorization is expected to be the pace in 1Q and then should we then expect a falloff?

I assume that is funded by the de-access that was taken out of the life company and then should we expect a falloff to get to that, I guess, $6 billion to $7 billion of total capital return, including dividends for the balance of the year?

Is that the right pace to think about?

I think that the concept of the buyback being funded is I think combining solvency risk with liquidity risk in a way that I wouldn't.

As you noticed in the last quarter, we issued a substantial amount of very long-term debt at a very effective level.

So we have comfortable liquidity in the holding company and so as we look at this scale of buyback, it is not really constrained by liquidity; it is really driven by risk.

And so as we look at how the risk profile of the Company changes, the RBC levels and dividends up from the subsidiaries is simply one indicator of enterprise risk.

But the more we, the rating agencies and the Fed, look at the Company as one combined enterprise, we start to see that we have substantial capacity to cope with the risk level of the Company because the Company has been substantially derisked over the last five years and we continue to derisk the Company.

And as I mentioned earlier, as we exercise discipline in terms of new business writing, we may find, if the pricing environment in the P&C side is softer, further capacity because of less risk, that may not be reflected in the short term in RBC ratios.

So I just want to make sure that we recognize this is not literally dollar-for-dollar funding; it is separating the liquidity management, which is comfortable, with a view towards managing enterprise risk well within our risk appetite.

Understood, Peter, on the sources and uses comment.

Am I right about the pace though that you all expect?

So I think that the pace you can infer from David's $6 billion to $7 billion for the full year, which would suggest it is a somewhat accelerated pace in the first quarter, but reminding yourself that it excludes any non-core asset disposals or accelerated unwind of the DIB.

Okay, thanks.

And then one last one.

Kevin, one thing that stood out in your businesses was pretty strong improvement in international.

There was a dropoff in revenues, but then margins also picked up.

Can you explain what was happening there?

Well, I think, Tom, an important part of the improvement does come from Japan.

And we have been working on the overall rate adequacy in that environment in addition to enjoying an unusual year with respect to the automobile loss ratio.

There was a feature -- a change in the way non-claim discount bonuses work that has actually driven down frequency for the entire market.

And then the fuel prices, which ironically were high at the time, also reduced the amount of driving and that led to a substantial improvement there.

I think in terms of revenue, there is an underlying improvement in our growth, but it is not as dramatic as the improvement in the loss ratio as we have instituted many of similar underwriting tools as to what commercial has successfully used over the last couple of years.

Okay, and so it is Japan auto driving the improvement.

So do you think this is a good new run rate?

Would you expect continued margin improvement from here?

The Japan auto is unusual in that the prices of fuel were high.

They are not anticipated to stay high, so we do not expect frequency to stay that low.

But, Tom, the improvement in the underwriting actually comes across the board; it is not limited to Japan.

The implementation of the tools that I mentioned are having an impact on rate adequacy and portfolio quality across the board as we actively manage the portfolios.

So don't anticipate the loss ratio as of fourth quarter as a run rate.

There is a number of anomalies.

We had a very benign CAT environment, severe losses below our expectations and also the unusual situation in Japan.

Okay, thanks.

Thank you, everyone and we will be sure to follow up with everybody who is still in queue.

Thank you, everyone.

That will conclude today's conference.

We do thank you for your participation.