American International Group Inc (AIG) 2015 Q4 法說會逐字稿

Good day, everyone, and welcome AIG's fourth-quarter financial results conference call.

Today's call is being recorded.

At this time I would like to turn the conference over to Liz Werner.

Please go ahead.

Thank you, Anthony.

Before we begin I would like to address the format of today's call.

Consistent with our strategy update call, during our Q&A session we ask that you limit yourself to one question and one follow-up.

We would like to take as many questions as possible and ask that you get back in queue to ask additional questions.

You will be limited to 1 minute to ask your question and I apologize in advance if you are cut off.

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 Form 10-Q and our 2014 Form 10-K under Management's Discussion and Analysis of Financial Conditions and Results of Operations and under Risk Factors.

AIG is not under any obligation and expressly disclaims any obligation to update any forward-looking comments and 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.

Nothing in today's presentation or in oral statements made in connection with this presentation is intended to constitute, nor shall it be deemed to constitute, an offer of any securities for sale or the solicitation of an offer to purchase any securities in any jurisdiction.

This morning's prepared remarks will begin with our CEO, Peter Hancock, followed by our incoming CFO, Sid Sankaran; the head of our Commercial business, Rob Schimek; and the head of Consumer, Kevin Hogan.

Our Chief Investment Officer, Doug Dachille, is also joining us this morning in the room.

At this time I would like to turn the call over to Peter Hancock.

Thank you, Liz.

Good morning, everybody; thank you for joining our fourth-quarter call.

In today's call I will highlight unusual items in the quarter and, importantly, I'll provide an update on our progress in executing on our strategic plan, which we presented on January 26.

We and the Board feel that our plan maximizes franchise value for all stakeholders and is based on achievable goals.

This quarter is a further step in providing additional transparency to assess our progress towards our goals.

Before I comment on the quarter, I want to mention yesterday's news that our Board of Directors agreed to expand the size of AIG's Board from 14 to 16 seats.

We believe this resolution is in the best interest of all our stakeholders and, most importantly, allows us to focus on executing our strategic plan.

Our fourth-quarter results were impacted by our actions to strengthen reserves and the lower returns on alternative investments.

As we have previously disclosed, we completed a number of in-depth reserve reviews of our long-tail lines and we responded quickly to new information.

As part of our strategic plan we announced our intentions to reduce and narrow our hedge fund allocation, which we believe will lead to greater risk-adjusted returns and contribute to our $25 billion return of capital through 2017.

During the fourth quarter we took a number of actions towards our goal of being a more streamlined focused insurer.

Importantly, I announced a smaller executive leadership team; a management structure that has already is resulted in increased accountability across our businesses and accelerated our decision-making.

This team is already executing on our strategic plan and today you will hear from some of them directly.

Core to our strategic plan are the organizational changes, strategic actions and operating improvements which we presented on January 26.

On the organizational front the adoption of a modular approach to our business and the creation of our legacy portfolio are important steps to improving transparency into the performance of our operating portfolio.

In the quarter we announced the sale of PICC shares and took additional actions to monetize legacy portfolio assets which Sid will speak to.

We are well on our way to achieving the targeted $9 billion in legacy capital released by 2017.

The fourth-quarter strategic actions are the foundation for the $25 billion of capital return that we expect over the next two years.

For the full year 2015 we returned approximately $12 billion to shareholders and we expect a similar pace to continue.

Yesterday's announced additional 5 billion share repurchase authorization and 14% increase in our dividend is consistent with a path towards returning the $25 billion over two years, or over a third of our market capitalization.

We also announced the sale of our advisor group which we expect to close in the second quarter, and plans for an IPO of a portion of our interest in UGC.

UGC is the market leader and the mortgage insurance industry.

Finally, we are aggressively pursuing operating performance improvements.

And you will see that our progress on operating expense reduction supports our conviction in achieving $1.6 billion in gross operating expense reductions through the end of 2017.

Today we will also provide additional insight into our actions to improve our Commercial Property & Casualty accident year loss ratio.

On slide 4 we reaffirm the targets that we discussed in January and a year ago.

We stand by our plan and look forward to sharing our progress with you on an ongoing basis.

Before Sid begins his remarks on the quarter, I would like to take a moment to recognize that great contribution that David Herzog has made to AIG.

David has devoted the last 16 years to the Company and was essential to our emerging from the financial crisis and positions the Company for its continued future success.

His guidance and his stewardship of our financials continues to be highly valued and he will be missed by many here at the Company.

Sid will now provide you with the financial highlights of the quarter.

Thank you, Peter, and good morning, everyone.

This morning I will speak to our quarterly financial results, progress made on our expense initiatives, our continued active capital management and certain strategic actions impacting 2016 results.

Turning to slide 5, as Peter stated, the fourth-quarter operating loss per share of $1.10 was probably due to the reserve strengthening and weaker alternative returns in both the commercial and consumer segments.

As I stated on the January 26 call, we believe our reserving actions this quarter will help mitigate the risk of future volatility around our best estimate.

The reserve strengthening in accident years 2011 through 2014 was driven by greater actual versus expected loss emergence for primary and excess auto liability, healthcare and financial lines.

The impact of revised tail factors based on emergence in earlier accident years also contributed to the adverse development for excess Casualty and financial lines.

Of note, financial lines remains well above our current profitability targets.

Our reported operating tax rate for the quarter was just shy of 39% due to the pretax operating loss and the impact of other discrete tax items reducing our tax expense.

We expect our operating effective tax rate for 2016 to be approximately 32%.

Turning to slide 6, total general operating expenses declined 6% in the quarter and 3% for the full year on a constant dollar basis, a rate that is expected to accelerate under our current strategic plan.

Included in our 2015 results are approximately $145 million of expenses related to the acquisition of four companies in the calendar year, offset by approximately $125 million representing the nonrecurring portion of the pension curtailment gain.

In addition, we recognized another $222 million in pretax non-operating restructuring charges in the quarter.

$123 million of which relates to the restructuring charge we announced in the third quarter of this year.

The remaining $99 million relates to new actions primarily for additional staff reductions that will result in at least another $200 million reduction in our annual expense run rate.

Taken together the actions announced in the third and fourth quarters of this year will reduce our annual expense run rate by approximately $700 million to $800 million.

We anticipate that we will achieve the majority of these savings by the second half of 2016.

These actions, along with other initiatives we are undertaking, give us confidence we will achieve our $1.4 billion net reduction by 2017.

Slide 7 shows our continued execution against our capital management targets.

During the quarter we deployed over $3.2 billion towards the purchase of approximately 53 million common shares.

This year we have purchased an additional $2.5 billion of common shares the February 11.

This leaves about $800 million unused under the $3 billion authorization that we announced in December plus an additional $5 billion from the new authorization that Peter referenced.

We also announced an increase in our dividend to 14%, which is consistent with a positive view of sustainable profitability.

From the standpoint of total capital return to shareholders our annual dividend payment is approximately $1.5 billion based on our current outstanding shares, and that amount is included in the $25 billion in capital return we discussed in our strategic update.

At year end we had $9.2 billion of parent liquidity, as you can see on slide 8. While we manage our liquidity within a target range of $6 billion to $8 billion, we may be slightly higher or lower from this range from time to time.

Cash inflows from the insurance subsidiaries during the quarter were approximately $400 million reflecting our annual fourth-quarter true up of tax sharing payments.

As we said at the strategy update call, we expect $7 billion to $10 billion in dividends and tax sharing payments over the next two years, which are net of parent and interest expense and the $2.9 billion capital contribution made to the PC subsidiaries in January.

Slide 9 depicts the composition of our legacy portfolio.

As we said in our strategic update call, we are grading a legacy portfolio which contains roughly a quarter of the Company's total equity.

Legacy will consist of actively managed run-off businesses, or non-core assets and liabilities that we are targeting for maximum value.

Our actions as they pertain to the legacy portfolio focus on how quickly we can extract capital by either divestitures, reinsurance or other efficient run-off methods without giving away too much value.

In the fourth quarter we monetized $2.1 billion of legacy portfolio assets, including a portion of our stake in PICC, which we previously disclosed, and certain DIB assets, as well as some internal sales of assets to our insurance businesses.

Legacy portfolio capital declined $5 billion in the quarter to approximately $17 billion, driven by the $3.6 billion of buybacks and dividends in the quarter which were partially funded by the monetization of legacy assets.

The reduction in legacy portfolio capital was also impacted by the additional NOLs created during the quarter, largely as a result of the reserve strengthening we previously announced.

Slide 10 presents the composition of our deferred tax assets.

During the year we utilized about $600 million of foreign tax credits.

NOLs increased by roughly $1 billion, also primarily as a result of the reserve strengthening we mentioned before.

Finally, I would like to cover two of the strategic actions that will impact our earnings in 2016.

The first is our planned life reinsurance transactions, which are intended to address the approximately 40% of redundant reserves in our US life companies that have not already been financed.

We expect these transactions will optimize our capital and generate $4 billion to $5 billion of additional liquidity to the parent through a combination of dividends and tax sharing payments.

This will also result in annual reduction in net investment income of approximately $200 million to $250 million beginning in 2017.

There will be only a modest impact to net investment income in 2016 as transactions are being finalized.

Secondly, we are reallocating roughly 50% of our hedge fund portfolio, as Peter mentioned, primarily into investment grade bonds and commercial mortgage loans, which we believe will free up about $2 billion in additional capital from the allocation to lower capital charge assets.

If you assumed seem a 9% normalized return this would result in an approximately $200 million decline in annual net investment income in 2016 net of our reinvestments.

This would occur over the course of several quarters.

The net investment income reductions from both of these transactions were reflected in the Commercial and Consumer PTOI targets that we provided in our January 26 strategy update presentation.

We look forward to delivering on our strategic plan that we outlined in January and providing you with additional disclosure by 2016 year end.

We remain confident in our plan to deliver $25 billion to shareholders over the next two years in our continued operating improvements.

Now with that I would like to turn the call over to Rob.

Thank you, Sid.

Today I will discuss the Commercial Insurance segment's quarterly results, our strategic priorities and the actions we are taking to improve operating performance.

On slide 12 the fourth-quarter Commercial Property Casualty accident year loss ratio as adjusted was 66.4%, an increase of half a point from the prior year quarter driven by higher severe losses in Property.

Increased loss PICCs in the US, including in E&S trucking and other segments of commercial auto, also contributed to the higher adjusted accident year loss ratio.

The fourth-quarter expense ratio of 28.6% reflected an increase in commission rates in Property partially offset by improvements in general operating expenses.

Net premiums written grew 1.5% after adjusting for foreign exchange.

We continue to improve our portfolio mix and grow in areas that need our targeted ROE.

In the quarter large limit and middle market properties and segments of our program business continue to grow.

We also benefited from fee income from NSM, a leading US managing general agent acquired by AIG in April 2015.

Overall rate change declined by nearly 1 point in the quarter driven by continued pressure in Property, particularly in the US E&S business.

US Casualty rates increased by 3% reflecting margin improvement in line subject to remediation.

Rates were essentially flat in Specialty and Financial lines.

We see profitable growth opportunities in multinational, financial lines, Property upper middle market and major account segments that utilize our risk engineering capabilities, international Casualty and areas of emerging risks such as cyber and M&A insurance.

We are also excited about providing clients with best-in-class claims expertise, risk services and analytic capabilities that will strengthen our relationships.

These include expanded teams of engineers to analyze and mitigate risk, innovations from our partnership with Clemson University and investments in companies like Human Condition Safety, whose wearable devices can help workers avoid serious injury.

The breadth of the AIG franchise and the strength of our client relationships position us well to capitalize on new opportunities and current market disruption from some of our competitors.

With respect to UGC, our CEO, Donna DaMaio and her team delivered another quarter of increasing profitability.

The strength of UGC's business is evident in a default rate that was last seen in 2006.

For the full year UGC had a record first lien new insurance written of over $50 billion and pretax operating income of $644 million.

The private mortgage insurance eligibility rules asset test came into effect in December 2015 and I'm pleased to report that UGC will exceed the requirement by approximately 20%.

During our January 26 strategy update call, we announced specific actions to improve Commercial performance that will reduce the accident year loss ratio as adjusted by 6 points.

On slide 13 the green line shows an accident year loss ratio improvement of almost 11 points since 2011, including the effect of prior-year development for all of those accident years.

Following significant progress between 2011 and 2013 our trend rate slowed in 2014 and 2015, but during that time we made some important advancements in our underwriting tools and analytics.

The bars in the chart highlight the change in business mix as we reduced writings in poorer performing areas of US Casualty from 39% of our portfolio in 2011 to 27% in 2015.

In 2016 and 2017 we will continue to focus on improving the portfolio mix and we will accelerate the use of underwriting tools and analytics capabilities developed over the past few years.

One of the benefits of AIG's recent organizational changes will be to increase agility and speed the adoption of these tools.

Slide 14 shows the dispersion of the adjusted accident year loss ratio excluding catastrophes of each sub segment that comprises our $20 billion of net premiums earned in 2015.

The loss ratios range from as low as 30% to above 100% for a handful of sub segments.

This illustrates a very important point, we do not need to improve each and every sub segment of our $20 billion portfolio by 6 points in order to achieve our targets.

Rather focusing on our best and worst performing areas will significantly contribute to improved performance.

We intend to grow the 15% of the commercial portfolio included within Product Set 1. It includes the lowest loss ratio of businesses which ran at an average of approximately 41%.

We will focus our resources on expanding our presence in the many products and geographies within this product set where we have strong competitive advantages and offer a compelling value proposition.

We will maintain or improve the business captured in Product Set 2 which represents 70% of total premiums with an average accident year loss ratio of approximately 66%.

This is the product set that will benefit the most from the underwriting tools and data analytics I mentioned earlier.

For the highest loss ratio sub segments, which are predominately in US Casualty, we intend to expand our use of quota share reinsurance.

The effect will be an improved commercial loss ratio, release of statutory capital and a higher return on equity.

We will remediate Product Set 3 where the remaining 15% of the commercial portfolio ran at an average accident year loss ratio of approximately 91%.

This is where we will narrow our focus through strategic exits and remediation.

We already began taking actions on some of these sub segments in the second half of 2015 and expect to be seeing benefits from these actions in the first half of 2016.

Earlier this month we announced and communicated to our distribution partners the exit of four specific high loss ratio areas within US Casualty which include certain sub segments of healthcare and commercial auto that Sid mentioned earlier following our fourth-quarter reserve study.

We expect to see these benefits beginning in the second half of 2016 and extending through 2017.

I would note that the majority of the businesses we are remediating in the US will renew relatively evenly throughout the remainder of the year.

We will of course provide proper notice in compliance with the relevant regulatory rules and communicate with our clients well in advance of these actions.

We believe these levers provide a clear path for achieving the targeted accident year loss ratio by year end 2017.

Our strategy is to be targeted using micro segmentation tools, narrowing our focus to significantly differentiate between products, geographies, clients and distribution channels based on value.

With respect to underperforming one or two product accounts, you can expect to see dramatic reductions as we move forward.

Our goal is to be our clients' most valued insurer and we are focused on clients where we can deliver the most value and grow profitably.

In closing, commercial strategy is clear, focused and on pace.

While there is a lot of work to do, I'm confident in our strategic plan and our ability to execute it.

Finally, the commercial leadership team and I are 100% committed to achieving the plan we have outlined.

Thank you.

Now I would like to turn the call over to Kevin.

Thank you, Rob, and good morning, everyone.

This morning I will discuss our consumer business' operating performance, provide an update on the DOL's proposed regulations and provide an update on Japan.

Beginning with retirement on slide 17, as Sid highlighted earlier, lower alternative investment returns combined with lower base portfolio income contributed to the decline in pretax operating income.

We continue to expect base yields to decline 2 to 4 basis points per quarter on a normalized basis in 2016 based on the current interest rate environment.

Sales growth was strong from a year ago, particularly in index annuities and fixed annuities.

We are seeing index annuity growth through all of our channels, particularly with independent agents and expanded wholesaling in banks, broker-dealers and advisors.

Fixed annuities growth was driven by higher interest rates and credit spreads in the latter portion of 2015.

Retirement net flows improved both sequentially and versus a year ago due largely to continued positive flows for retirement income solutions and a decline in fixed annuity and group retirement surrenders.

Despite a challenging environment, we believe our product and distribution diversity allow for continued positive net flows overall.

I would like to provide an update on the Department of Labor's fiduciary regulations with respect to ERISA plans and IRAs.

The version of the proposed regulations, which was advanced to the Office of Management and Budget at the end of January has not been made public.

The final regulations could be issued as early as March or April.

We remain focused on preparing for its implementation with respect to product development, distribution support, compliance, service and administration.

We are in active discussions with our distribution partners to be in the best position possible to meet the evolving needs of retirement savers.

Through group retirement, fixed annuities, index annuities and variable annuities we will offer a broad product portfolio to meet the growing needs of consumers for guaranteed lifetime income and other saving solutions.

Slide 19 presents results for our global Life business.

In Life our new business is already priced to achieve our targeted returns.

As Sid mentioned, we are executing on plans to finance our remaining redundant reserves with a series of reinsurance transactions that will improve the returns in that portfolio and allow for increased distributions to parent.

We are also executing on a plan for our Life business to narrow our distribution and product focus, including greater specialization, which will result in reduced distribution expenses.

Examples of this enhanced emphasis include a greater focus on independent distribution channels with a significant reduction we made in January to our Life career agency force and a narrowing of our product focus at our group benefits business to profitable lines where we have a competitive advantage.

Turning to slide 20, Personal Insurance delivered strong growth in new business in the private client group in Japan Property and Automobile across all regions.

However, there were a number of items that resulted in an increase in accident year losses.

During the fourth quarter we strengthened reserves for accident and health as a result of our normal annual review.

We saw unsatisfactory performance in some European warranty service programs leading to remedial actions including contract cancellations, and we realized higher auto losses in a number of European countries that are already targeted for exit.

We continue to move forward with our work in Japan and are preparing for the merger of Fuji Fire & Marine and AIU legal entities.

At the same time we have successfully grown our personal auto business which grew year-over-year for the first time in over 10 years.

Our one-time merger related expenses were roughly $100 million this year, largely comparable to last year, and we further expect one-time expenses to peak in 2016 at a slightly higher level as we prepare to enter premerger status.

The subsequent legal merger when approved by the authorities will bring to a close the integration of Fuji Fire and Marine which we acquired in 2011.

I would like to briefly comment as well on our plan to deliver $800 million of pretax operating income improvement by 2017.

We expect that much of this improvement will be achieved through significant expense reductions for each of the consumer businesses which are part of AIG's firm wide GOE targets.

The largest reductions will be in the Personal Insurance business and US distribution.

We expect that these benefits will be partially offset by lower net investment income from hedge fund reallocations as well as from a lower invested asset base resulting from the distributions to the parent Company.

To close, we remain focused on achieving profitable growth across our consumer businesses and effectively managing risk by executing our customer focused strategies, maintaining a prudent risk profile and targeting capital efficient growth opportunities.

Now I would like to turn it back to Liz to open up the Q&A.

Anthony, could we start our Q&A session, please?

(Operator Instructions).

Tom Gallagher, Credit Suisse.

Sid, I just wanted to ask you a question on your comment on the impact from the Life reinsurance deals.

So the $5 billion you are going to free up, you said you would lose $250 million of NII.

If you look at that from an after-tax standpoint you are only giving up a 3% to 4% return on that capital.

Are there any other lost earnings associated with that or is that it?

And is that a third-party reinsurance deal?

Obviously we are reinsuring the Life reserves with external parties, but there also are internal parties and internal reinsurance in the structure.

What I would say is your estimates on the ROE give up are roughly accurate.

And just a reminder is that the additional liquidity to the parent comes both from freed up capital as well as from the acceleration of tax sharing payments from the subsidiaries.

Okay, so it is not full the $5 billion capital release, there are some tax benefits in addition to that?

Yes, that is correct.

And so, the costs on the transaction are economically attractive for us when we look at the additional liquidity.

Larry Greenberg, Janney.

I guess this would be for Rob.

Rob, it just seems very challenging to take 4 points off the loss ratio for 2016, particularly given that probably a third of the earned premiums for the year had already been written last year.

So on the reinsurance piece, which appears that it probably plays a pretty significant role here, you mentioned a quota share for I guess the worst performing part of Product Set 2. Will that -- will reinsurance also be used for Product Set 3?

And then I guess the quota share is mostly designed to just change the mix and get more high loss ratio business out of the portfolio, is that correct?

And then finally --

Hey, Larry, it is Liz.

I think you kind of went over the one question, one follow-up.

So let's just start with your first two and I actually think we will be able to get to the rest of them if you just get back in queue.

All right, Larry, thanks for your question.

The first thing I want to say to you is we are not starting flat-footed on any of our actions here.

So actions were being taken in 2015 which we'll see beginning in the first part of 2016.

The second thing I want to say is regarding use of reinsurance, I know there is a lot of questions about that.

The first thing I want to say is we don't think it is a long-term sustainable strategy to be looking to arbitrage our reinsurers, that is not the strategy here.

We are partners with our reinsurers and we see many opportunities for our reinsurance strategy to benefit AIG as well as the reinsurers.

I think there is three key points I would like to make regarding how this work with the reinsurers.

First, you should know I think the reinsurers have an increasingly favorable view about the quality of the data and the quality of our underwriting.

Second, the reinsurers themselves receive significant diversification benefits in their capital models which make business like our US Casualty business more attractive for them.

And third, the long-tail nature of our US Casualty business, for example, gives the reinsurers a significant deal of flexibility in their investment allocation decisions, which might differ from the way AIG might choose to structure its investment portfolio.

I would say most of our actions will be with the reinsurers in Product Set 2. And it will be on the higher end of the loss ratios in Product Set 2, which is where the US Casualty business sits.

The reinsurance will change of course our mix of business, because if you reduce the amount of business in Product Set 2, that is US Casualty, the range in loss ratios in Product Set 2 is pretty wide.

It ranges from as low as the low 50s to as high as the 80s.

And so therefore you will get a lot of benefit from reinsuring the US Casualty business which is higher loss ratio business in Product Set 2.

Meyer Shields, KBW.

Peter, on the January 26 call you were pretty explicit that the 6 points of accident year improvement were actually for all of 2017.

Can you talk about what has changed from then until now so that it is a run rate at the end of the year?

Well, I just want to be clear, I -- obviously it is our intention to drive all 6 points of the improvement in the accident year loss ratio by the end of 2017.

Right, I understand that.

So what is the goal for the 2017 accident year loss ratio?

Close to 60% on an adjusted basis.

Ex-cat.

Ex-cat, that is what the adjustment is.

Josh Stirling, Sanford Bernstein.

Listen, I want to applaud you for taking shareholders and the Board, I think it is refreshing and it is great to see you guys are so willing to take shareholders' views into consideration.

And appreciate you putting shareholders first.

But everybody here at home today is trying to figure out what the impact actually is likely to be from your expansion of the Board, what the impact on your strategy and performance is likely to prove out.

And I am wondering if you can get this a sense of the conversations you have had on the Board and with your new likely Board members so that we can have a better sense of how you expect this to go.

And at a minimum is it going to be sort of business as usual, which is two new members?

Or ultimately are you going to have a different approach to making decisions?

And could you even go so far as to have a strategic review committee created with some of these independent Board members to pursue a review?

Thank you.

So, as we have said publicly we are pleased that we have reached a solution that averts a very distracting proxy fight.

And that the inclusion of two new Board members will add an extra degree of scrutiny on the way in which we execute our strategic plan.

And so, we would not want to comment on any future dynamics between management and the Board.

But the process to date is that the existing Board of 14 and management have developed the strategy in close collaboration.

And so, we expect a continued close collaboration between management and the Board going forward.

Jay Cohen, Bank of America.

While we would like to see the overhead expense ratios improving, I think in every area within Property Casualty the acquisition expense ratios rose and some of that may be business mix change.

But can you talk more specifically what is going on there?

Maybe that is for Rob.

Jay, I think you are right.

As we continue to work on our mix of business in general what you should think is the higher loss ratio more complex business simply carries a lower acquisition cost.

And the business mix that we have been shifting to will carry a somewhat higher acquisition cost.

The net effect of that we think is a net positive in our overall ROE and a positive in the overall combined ratio.

It is offset to some extent by lower loss ratios then?

That is right.

Significantly offset by lower loss ratios.

Jimmy Bhullar, JPMorgan.

Wondering if you could talk about just pricing trends in the P&C market and how they might have changed in the last two months or so.

And related to that, what your expectations are for premium growth in this environment, especially as you raise prices and pull back from certain lines in the P&C market?

First of all, I always try to remind people we deal in a lot of countries and in a lot of products, so when people ask about the market there is no simple single answer to that.

And so, we experience different results with pricing in different parts of our portfolio.

Maybe the bigger change that we would have seen in the fourth quarter is an improvement in the US Casualty pricing environment, as we have driven a bunch of our remediation activities, as I said earlier, in 2015 which will benefit us more in 2016.

I think our competitors are also seeing many of the same things we are seeing, and so I think there is pretty good discipline with respect to US Casualty at this point.

With that said, the US Property market, in particular, the Excess & Surplus lines Property market, has been and continues to be highly competitive.

It is why you see AIG shifting its strategy to an increase in the level of engineers that we have added onto our team, and seeking to use capabilities and expertise outside of our capital as the primary advantage and the primary thing we offer in the marketplace.

So we do expect it to continue to be a mixed bag, product by product and geography by geography.

But just on premium growth, your expectations over the next two to three years as you are trying to improve your margins, should we assume a dramatic decline in your premium?

Yes, it is fair.

I mentioned on the January 26 call, Jimmy, I believe, we do expect our premium volume to go down in 2016.

It will go down partly because of our remediation effort with respect to exits and remediation in that Product Group 3, partly because of the use of reinsurance.

But it will be offset by the fact that we continue to see opportunities to grow in places where we have a sustainable competitive advantage anywhere in the world and with various products.

Thank you.

Jay Gelb, Barclays.

I had a question on the normalized return on equity target.

I am having a little trouble getting to your ranges, primarily due to the sharp drop-off in partnership income.

So in the first half of 2015 there was $1.4 billion of partnership income and that dropped off to almost 0 in the fourth quarter.

I'm just trying to get a perspective of how much your ROE targets take into account expectations of a normalized maybe high-single-digit return in alternative investments relative to basically zero that we saw in the fourth quarter?

Jay, it is Sid here.

We factored that in entirely in our two-year strategic plan.

And so, we have accounted for the change between a normalized return from the hedge funds and alternatives and the reinvestment strategy that I referred to in my remarks.

Bu, Sid, this is entirely related to essentially zero returns or maybe more of a headwind in the first half of 2016.

What are you assuming in your ROE target for 2016 for alternative returns?

Yes, we normalize for performance not volume.

And so, we are normalizing here.

As I said in my remarks, if you assume 9% that has been the normalized performance that we have assumed.

And obviously as we shift out of the hedge fund portfolio we are shifting to a normalized return on fixed income and commercial mortgage loans.

Michael Nannizzi, Goldman Sachs.

Let's talk a bit about Commercial Insurance here, but in Consumer where we haven't gotten a lot of detail, International has consistently been a problem.

When does that get better and what exactly are we doing here in order to try to fix that business and get it to a better place?

I understand Japan, but I feel like that merger has been sitting in front of us now for some time with the carrot of lower expenses.

Could we get some color on that and any granularity would really be helpful?

First with respect to Japan, the merger is progressing.

We are proceeding right now through the integration and regression testing of about 110 systems.

And there has been a new regulatory requirement for a change in the earthquake property rates.

And if you can imagine, whilst we are trying to do this integration and regression testing to have to stop, open up the systems, introduce those new earthquake rates and then go back to integration and regression testing, that is essentially what has pushed us back six months or so in terms of the expectation of the integration date.

And our strategy is in fact to try to advance as many benefits from the work we have already done in recognition of the fact that we can do so.

And examples of that are our ability to recently change our direct marketing strategy and move that away from American Home legal entity and into Fuji Life and the other companies, which will generate further savings that we can now realize.

And so, outside of Japan what I can say is when we did the strategic update we did mention about the footprint strategy.

And many of our consumer businesses are vestiges from the days when AIG had a multiple financial services presence.

For example, in Poland a number of years ago we had a consumer finance company, we had a life business, we had a credit card company.

And it's a natural extension of those customer bases and distribution channels to build a consumer Property Casualty business.

But as we've divested away from those we now have expense overhangs and we have subscale operations in quite a few territories.

And the reason why we are moving to a focus on our individual business and 15 territories in our group business and our multinational clients and 35 territories going forward is to address that expense overhang.

And that has primarily been the performance issue in much of the non-Japan part of the International portfolio.

We do of course have some other portfolio issues like the European warranty business which we address from time to time.

But our loss ratios are generally sustainable and competitive.

It is the expense ratio and the International Property Casualty business we need to address.

But can you provide some more granularity?

I mean, I appreciate all of that context.

But I mean in the Commercial we are talking about specific targets for profitability improvement.

It sounds like you have got a lot of things that you could ring fence and talk about areas that are subscale, areas that are at scale.

What does the run rate in Japan look like after this?

I mean, it seems like all of those are [estimateable], but we are still here talking very qualitatively about things happening.

When can we get some more granularity there?

This is very much the thinking behind the modular business reporting where Japan will be one of the first of the nine modular business units that will be shown in the financial supplement and will give you a clear transparency around ROE and capital and so on.

So we are very committed to giving you more granular disclosures.

And the team is working hard to be delivering those on a schedule that is consistent with a high quality control over financial disclosures that we obviously want to stick to.

But in terms of prospective ROE, perhaps I should just mention that we have in our risk-adjusted profit framework elevated the hurdle rate for all businesses and all territories to a minimum of 10%, which is a shift from where we were a year ago where territories with low nominal interest rates and with low beta we rewarded with a lower hurdle rate.

And we have, in great discussions with several of our large shareholders, agreed that we should have a minimum hurdle rate of 10% and that applies to Japan as well as elsewhere.

John Nadel, Piper Jaffray.

I have one question on rating agency reactions to your strategic update and the other just wanted to talk about the parent company cash if we will forward here into January or February.

Peter, I think -- I was pretty surprised and I know a number of folks were surprised by the rating agency negative outlooks and maybe even one or two ratings being cut following the strategic update.

And I don't -- I guess I just want to gauge your confidence level that these negative outlooks will not turn into downgrades, all else equal, as a result of the $25 billion return of capital.

And then separately, just with the parent company ending the year at $9.2 billion of liquid assets, if we roll forward here into the first part of the first quarter, you have already used $5.4 billion.

So you have got under $4 billion of cash to report, liquid assets at the parent.

How quickly does that recover?

So let me just sort of start and I will hand it over to Sid to complete.

We have been extremely consistent in saying that we manage the AIG enterprise in a way that factors in all stakeholders.

We use that word very deliberately.

And our policyholders in particular are very mindful of our commitment to maintaining a strong balance sheet and the ability to deliver on large long-term promises.

And to the extent that they look at the rating agencies as a guide, we are very mindful of their reactions to our plans and our specific actions.

And as we developed this two-year strategic plan we worked very closely with all the rating agencies to pressure test different assumptions.

And so, the actions they took were not a surprise.

But I have been saying consistently that the rating agencies were more of a binding constraint than any kind of fed oversight of AIG.

And the guide to our own thinking here is very much our own internal assessment of risk and we are very pleased, especially in the light of recent market volatility, that we have done so much over the last four years to de-risk the balance sheet of the Company, the vulnerability to contingent liquidity.

And so, we are confident that once we execute on the goals in this plan the ratings outlook will become positive again.

But, Sid, maybe you can answer the specific liquidity questions and elaborate, if you like, on the rating agency (multiple speakers).

Yes.

The only elaboration, Peter, I would say is just a reminder, John, we continue to have strong ratings on our core Life and Property Casualty operating companies, most of those with stable outlook.

So we believe our planned operating improvements are going to support maintaining those strong ratings and actually improving them over time.

On liquidity, I would point you to my comments around our target.

You have obviously referenced some of the outflows, but just a quick reminder.

In the first quarter we have an assortment of inflows that are coming from dividends, tax sharing payments as well as further liquidations of asset sales some of which we have already executed.

So again, as I said, we target $6 billion to $8 billion, we may be higher or lower than that from time to time.

But we are very confident in the balance sheet and obviously that was core to this entire strategic plan.

Brian Meredith, UBS.

Rob, I was hoping you'd give us maybe a breakdown of how much of the 400 basis point improvement in the adjusted loss ratio by year end 2016 comes from reinsurance, maybe shifting assets to the legacy portfolio, normalization in the severe loss ratio and then pricing and underwriting actions.

And that lastly also, how are you going to manage not losing good business with the bad business as you go through this process?

All right, Brian, thanks for the questions.

So let me say that I think it is reasonably easy for me to tell you regarding legacy that we have already informed the market of the exits that we have and the only thing moving into legacy is the businesses we have exited.

With respect to the drivers, I would say to you first that each part of our business, Property, Casualty, Specialty and Financial lines plays a part.

Obviously the remediation role for Property and Casualty are the most significant whereas I see the opportunity for growth in strategic areas, particularly for financial lines and for some of our specialty products.

With respect to which actions will drive it, it is reasonably evenly mixed between what I would call reinsurance and business mix, strategic growth in some of the lines I just described where we have opportunities and our loss ratios and our competitive advantages allow us to succeed in the marketplace.

And then a contribution of course from exits that have already been announced and our work on risk selection and client selection.

So I might just say think of it as three basic buckets -- strategic growth, reinsurance and business mix, exits/client and risk selection as being reasonably equal in terms of their relative contributions.

Thank you.

Paul Newsome, Sandler O'Neil.

I would like a general question about the Property Casualty reserves and how core are they to the capital that you expect to pull out of the Company over time?

It seems to me that the rating agency's concerns are primarily focused on whether or not the $3.6 billion was enough.

And so, if you could talk about either how -- first, how do we get comfortable with those reserve levels?

And then how sensitive are the capital amounts you are going to pull out of the Company to issues over reserve development?

Yes, Paul, I would really point you to the comments I made on the January 26 call as well as the information we have released in our 8-K.

We believe after applying enhanced methods and assumptions and strengthening our reserves that we are going to help mitigate the risk of future quarterly reserve volatility around the selected best estimate reserve.

And as a result I think our plans are confident in our level of capital for our PC operating subsidiaries.

And I think as a reminder, remember the $25 billion capital return walk that we disclosed on the 26th, the first bar of that chart includes the injection of holding company cash into the subsidiary to fund the reserve strengthening.

So, it sort of starts off with a fully funded reserve.

But if we -- I guess my question is if we have more unfavorable reserve development does that mean we have to pull more capital into the Property Casualty business which means less to the parent?

I mean, look, Paul, I think obviously capital is going to be sensitive to our future projections.

So as I said, our future projections on reserve mitigate the risk of future quarterly reserve volatility, and we don't comment on hypotheticals.

Charles Sebaski, BMO Capital Markets.

Good morning.

Just wanted to follow first on the commercial P&C accident loss ratio.

On both slides 4 and 13, you added a footnote about year end; that the improvement of 4 points and then 2 points is year end, and I guess that is a change from the January 26 presentation.

And wanted to know what the expectation for those actual full years are versus the year-end run rate.

And then additionally, Sid, on the $9 billion of capital freed from legacy portfolios that is in the presentation, I don't see where that is highlighted in the January 26 bridge to $25 billion.

And I am wondering is that new capital or was that incorporated somewhere in that bridge to $25 billion?

Thank you.

So I'll start just by clarifying.

Again, our view is that the decrease in the Commercial adjusted accident year loss ratio will be approximately 6 points in total by the end of 2017.

And just a reminder, it is not -- and 4 points at the end of 2016.

But it is not a linear process and we can only make the changes as policies come up for renewal with proper notification to our policyholders.

So market conditions, renewal, timing, etc., will impact the way you will see that emerge.

But it is our belief that we have enough levers at our disposal that should enable us to be able to deliver 4 points in 2016 and 2 points additional in 2017.

Charles, it is Sid here.

On your second question, I would point you to slide 5 in the strategic update.

Just a reminder -- the legacy capital is a capital projection.

Page 5 illustrates our funding walk for our share repurchase.

So what you're going to see is that $9 billion that you are referring to on capital is returned to shareholders via various funding sources in this walk.

So I'd point you to page 5 and the footnotes there.

Larry Greenberg, Janney.

I guess back to Rob and reinsurance.

I am curious if you will also utilize some excessive loss structures in the plan?

And you have mentioned lost net investment income from other sources of the plan.

Will there be lost investment income in the future associated with the PC reinsurance?

Yes.

So first of all, regarding excessive loss, yes, we will use all types of reinsurance that are available at our disposal.

And I just wanted to highlight that maybe one of the bigger changes was our use of proportional or excessive loss reinsurance.

But we currently use and will continue to use excessive loss.

With respect to how it flows through in investment results, let me let Sid comment.

Yes, there will be reduction in net investment income from lower premiums and reinsurance and that has been factored into the January 26 strategic update figures for Rob and his PTOI walk.

Can that be quantified?

We are not disclosing that right now.

Obviously as we execute on our strategies we will comment on reinsurance transactions and the impact of associated net investment income.

Michael Nannizzi, Goldman Sachs.

Just a quick follow-up here, Rob, on the actions taken in Commercial, most of the changes are implying a reduction in premium.

You kind of said in your comments that there will be some premium reduction from the actions you are taking, but they will be premium growth from other opportunities.

Can you give us just some context?

I mean what are you thinking about what premiums will be?

Like what is going to happen to that top line on a net basis?

And can you give us the gross reductions just so we can understand what actions are being taken and the magnitude of those actions at higher -- or I should say lower profitability, just to understand what that template looks like?

All right, let me see if I can help you out with this, Michael.

I disclosed again some of this on the January 26 call.

I expect that there will be something like $1 billion of lower premium as it relates to reinsurance transactions.

Now that will depend on actual deals we get done, the timing we get them done, etc.

But that gives you a basic idea of relative size.

With respect to exits and remediation and other actions we will take, you should expect something like about the same amount of reduction in premium which will be about another $1 billion.

You're talking about $2 billion both in the reduction direction.

With that said we have changes in mix of business and very attractive opportunities in more strategic parts of our business that we think currently meet our ROE target hurdles.

And we will grow and that number you should think of as being something in the vicinity of $600 million.

So we think our reduction in net premiums in 2016 is approximately $1.4 billion, $1.5 billion.

Again, it will depend on what happens in the market, market conditions, etc.

But that gives you a basic idea of what we are expecting.

Great, thank you.

Meyer Shields, KBW.

Sid, you mentioned something about additional disclosures by year-end 2016.

And I am not sure what you are referencing.

Well, I think that was just in response to questions about modular business units and the operating ROE versus legacy.

Okay.

Brian Meredith, UBS.

Just quickly, Sid, could you remind us where you need your fixed charge coverage ratio to kind of be to maintain your ratings level and where it is right now?

And what is the best way to track that?

Well, first of all it just depends agency by agency.

So I would point you to their guidance.

And what I would say in all of our operating projections, we meet their expectations and continue to target strong fixed charge coverage.

But it will depend, it differs between S&P, Moody's and others.

Okay, thanks.

Charles Sebaski, BMO Capital Markets.

I guess a question on the consumer business and particularly Japan.

Peter, you talked about the improvement or the higher hurdle rate of a 10% ROE for the Japanese business relative to how you had it before.

What would be the expectation of contraction in that business?

I guess to me a higher hurdle of 10% ROE would mean that some Japanese insurers might be able to be -- suffice with less?

Yes, hi, Charles, I will take that.

First of all, we are already pricing our Life business IRRs that are above the hurdle rate, even Peter's new hurdle rate, and has been some time in the low-double-digits.

And that has been a fast growing business for us.

We made a decision a couple of years ago to consume those GAAP earnings at the rate of growth.

So that has been masking our results and Japan a little bit.

The other thing I think it is important to point out is if we take away the one-time project expenses associated with the merger integration of Fuji Fire and Marine, the underlying business portfolio is generating returns we believe in that low-double-digit area.

And since we have acquired Fuji Fire and Marine we have brought their loss ratio on personal asset business down by 9 full points and on Automobile down by 5 full points.

And as I mentioned in my comments, we actually grew that business for the first time in quite a long time this year.

So, we believe that -- we are hoping that with the modular reporting you will be able to understand better the components of the Japanese results in the context of the hurdles that we have set.

Will the new hurdle have no change in the business planning?

I guess to me a new hurdle would mean that's a change from what is currently going on.

And you are basically saying that you are already at that hurdle so no change is necessary.

Well, I think that -- this is Peter.

I think that at an aggregate level you can see that you are over the hurdle.

But within the subcomponent part the mix changes when you raise the hurdle rate on everything.

So I think that you will see greater selectivity of business so that the very high ROE business subsidizes in a sense the stuff that is sort of 8% to 10%.

And there will be less of the 8% to 10%, so there is a trade off there.

But I believe that our risk-adjusted profit framework, by targeting the spread between ROE and the hurdle rate, which we call a RAP spread, timed the equity employed and maximizing that risk-adjusted profit is a way to make the volume margin trade-off in a value accretive way for shareholders.

That does conclude our question-and-answer session.

At this time I would like to turn the conference back over to Liz Werner for any additional or closing remarks.

Thank you, Anthony.

We appreciate all your questions this morning and looking forward to seeing you in coming days and today.

Thank you.

That does conclude our conference for today.

Thank you for your participation.