American International Group Inc (AIG) 2016 Q4 法說會逐字稿

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

Today's conference is being recorded.

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

Please go ahead, ma'am.

Thank you.

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

Any forward-looking statements 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 Form 10-Q, and our 2015 Form 10-K, and 2016 10-K to be released, under Management's Discussion and Analysis of Financial Condition and Results of Operations, and 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 reconciliations of such measures to the most comparable GAAP measures are included in the slides for today's presentation, and are in our financial supplement, both of which are available on our website.

The format for today's call will follow prior quarters; there will be one question and one follow-up during our Q&A period.

We will extend the Q&A period today so that we can answer as many of your questions as possible.

This morning, you'll get to hear from our leadership team, and in particular we'll lead with our CEO, Peter Hancock; Sid Sankaran, our CFO; Rob Schimek, CEO of Commercial; and Kevin Hogan, CEO of Consumer.

And with that, I would like to turn the call over to Peter.

Thank you, Liz, and good morning, everyone.

Today, I will review our 2016 accomplishments, and provide an updated outlook for 2017.

But first, I'll speak to our recent announcement of an adverse development cover with Berkshire Hathaway and our Q4 reserve strengthening.

Let me begin by providing some historical perspective on the adverse development cover.

We have evaluated ADCs from time to time, and followed our 2015 reserve edition, we felt it was a strategic imperative to radically reduce reserve risk and improve earnings sustainability.

At that time, Doug, Rob, and Sid were new to their roles, and I'd asked them to carefully evaluate our business in force, new business underwriting and sources of alternative capital.

As we've stated, reinsurance is a key component of our strategy, and one outcome of their work was the agreement with Berkshire, which reinsures the vast majority of our US casualty reserves, and more importantly, exposures going back more than 40 years.

While adverse development covers are not new to the industry, an agreement of this scope and scale is redefining.

Berkshire is a knowledgeable partner with investment expertise and balance sheet strength which are well matched with AIG's claims capabilities.

The economics and the reduction in risk associated with this agreement will provide benefits for many years to come, and pivot us towards the future AIG, with lower risk of impairments to book value, higher quality earnings, and ultimately, a lower cost of capital.

In the fourth quarter, we also announced a $5.6 billion prior year reserve addition, as we reacted to emerging severity trends across lines and accident years.

We chose to make more prudent reserve assumptions, which Sid will speak to.

The trends we witnessed and reacted to this quarter were broad, and we believe are materially impacting the overall US casualty market, which we see generally as rate inadequate.

With new information, we gain insights, and for our excess business, claims emergence can take several years to become apparent.

In this case, what we have learned recently confirms our existing strategy to adjust volumes, limits, and increase rate in our US casualty book, while maintaining a focus on our most valued clients, many of whom have been with us for decades.

We're confident that our actions will improve our underwriting consistency and profitability, and Rob will comment further on this in his remarks.

Looking back on 2016, as shown on slide 4, there were significant accomplishments to improve profitability, return capital to shareholders, and further sculpt the Company.

We surpassed our expense reduction target and decreased 2016 expenses by over $1 billion or 10%.

These cost reductions were based on a number of disciplined actions to provide sustainable operating efficiencies.

Capital return remains a commitment of this Management team, and 2016 was no exception to our long track record.

We returned over $13 billion in capital, again exceeding our original target.

We maintain our commitment to the $25 billion capital return target, and are focused on doing so in a manner that ensures the continued confidence of our clients in our claims paying ability.

We recognize the great efforts and engagement of our rating agencies and regulators, who have been so critical to the successful transformation of AIG, and will continue to work closely with them to serve all our stakeholders.

Our capital flexibility has been driven by our divestitures and legacy asset sales, and the strength of our diverse insurance subsidiaries.

Divesting businesses that are not part of our core insurance operations and selling legacy assets is consistent with our strategy to increase focus.

Over the course of the year, we completed or announced 10 transactions that are expected to result in over $10 billion of liquidity.

Most importantly, I'd like to highlight the 2016 accomplishments of our consumer and commercial businesses.

Consumer profitability grew, and pre-tax operating earnings increased over 30% to over $3.8 billion.

Profitability was driven by stable individual and group retirement earnings, and strong growth in personal insurance.

The personal insurance geographic strategy and underwriting margin expansion should continue to benefit future earnings, which Kevin will expand upon.

In our commercial businesses, you've heard from Rob this year that we've increased our focus on our most profitable product lines and clients.

At the same time, we've maintained our leadership position in financial lines, and expanded our multi-national capabilities.

As you consider our future progress, we would refer you to our new business modules, which are an important lens through which to view our future business strategies.

Our modules provide greater transparency into how we measure our Business, assign greater control and accountability to our managers, and improve efficiency and profitability.

We recognize that we have provided a significant amount of information this quarter, and we will be providing greater insight into our module strategies in the near future.

The trends in our module ROEs as they stabilize will become a key measure for our Business's performance internally and externally.

Turning to slide 5, our actions this quarter increased the visibility in reaching our 2017 goal of a 9.5% core insurance normalized ROE.

While we have lowered our normalized ROE target by 50 basis points due to lost investment income, I believe this reduction is exceeded by the decline in our cost of capital, resulting from the ADC, legacy dispositions, a reduction in US housing market exposure through our UGC sale, reduced cat volatility, and lower fixed costs.

Beyond 2017, we would expect to see further ROE improvements.

We expect to reach or exceed our expectations for expense reduction and capital return, subject to regulatory and rating agency considerations.

You will continue to see improvements in our core businesses, and further investments in people and technology.

We believe the actions we took this quarter, and the continuing steps to execute our strategy, best position AIG for more stable and profitable long-term results.

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

Thank you, Peter, and good morning, everyone.

This morning, I'll provide further details on our adverse development cover, the fourth-quarter reserve strengthening, our quarterly financial results, and our outlook for 2017.

As we discussed with you at our Investor Day, our objective has been to be vigilant about managing reserve risk.

As Peter mentioned, in Q2 of 2016 we initiated a process to evaluate an adverse development cover, utilizing a third-party reinsurance broker, and evaluating multiple markets and structures.

Slide 6 illustrates how we've transformed our reserve risk profile as a result of the ADC.

Under the agreement, AIG will pay the first $25 billion of liabilities, and then split the next $25 billion of payments, 80/20, up to a $50 billion limit.

At the end of 2016, we held $16 billion of nominal reserves above the $25 billion attachment point, including the 4Q reserve addition.

80% of these reserves, or $12.8 billion, are ceded.

The difference between the $12.8 billion of ceded reserves and the consideration paid, including interest, will result in an estimated $2.6 billion pre-tax deferred gain before discount in Q1 2017.

This gain will be amortized over the estimated reinsurance recovery period.

In terms of our GAAP results, we are required to recognize 100% of any future favorable or adverse reserve development on the covered liabilities in our GAAP net income.

The deferred gain on the ADC will be then adjusted for 80% of the impact, as well as the amortization of this gain.

Only 20% of any future potential reserve development will impact our operating income.

Turning to page 7, you'll see that the agreement covers US casualty and financial lines, which accounts for 80% of the adverse development we've realized over the past two years.

Excluded from the cover is our international commercial business, certain retrospectively rated loss-sensitive policies, short-tail commercial lines, personal lines, and legacy reserves, which contributed approximately $700 million to the fourth-quarter reserve addition.

We expect this transaction will dramatically reduce operating earnings volatility and improve ROE in the long term.

As you know, we also review our reserves over the course of the fourth quarter.

On page 8, the fourth-quarter actions we took were based on emerging trends and new claims data supporting a more cautious view in our assumptions.

The adverse reserve development on covered reserves was $4.9 billion, the vast majority of which is US casualty.

Of this amount, $2.5 billion was related to incurred loss development methodology and tail factor strengthening for the lines subject to the ADC.

The bottom chart illustrates the accident years impacted by the reserve strengthening.

While we did see some large claims activity in financial lines, our performance in this business well exceeds our hurdle rates, even after factoring in this development, so I'll focus my comments on the US casualty business.

Turning to slide 9, there were three things we learned during the course of our reviews.

First, in general for US casualty, we saw an increase in frequency and severity of claims, which became more material in the third quarter and accelerated in the fourth quarter, that caused us to increase our trend in loss development factors across those lines.

Second, in excess casualty, we saw an increase in both paid and incurred claims for recent accident years, particularly 2015.

And while recent accident years remained very green, we felt it prudent to strengthen reserves for this new claims data.

Third, in certain lines where we've taken dramatic actions to reduce writings, such as commercial auto and healthcare, loss costs continued to worsen, and we decided to book reserves higher than the range of estimated losses.

In summary, we believe in light of the observed data we've appropriately revised our assumptions to weight more recent trend in setting a best estimate reserve.

Another important point is the setting of our loss picks, in light of the recent trends.

For the year, we added approximately $700 million to the 2016 accident year, and included an additional $500 million in our outlook for the 2017 accident year, almost entirely in US casualty.

We revised our methodology and philosophy to include a margin for the reasonable uncertainty around casualty loss trends, a shift from our historical approach.

This refinement was further validated by Berkshire Hathaway's pricing of the ADC.

Rob will speak to the underwriting actions the commercial team has implemented in his remarks.

The ADC transaction, reserve strengthening, adjustments to loss picks, and underwriting actions are important steps to position AIG for future profitability, and improve earnings quality.

Going forward, you can expect our future earnings to better reflect the profitability of new business underwritten.

Moving on to the quarter, we reported an operating loss per share of $2.72, which was largely driven by the prior year adverse development charge of $3.56 per share.

As you will hear later today, consumer had a strong fourth quarter, and delivered nearly $1 billion in pre-tax profits.

Commercial results included not only the reserve development, but my previously referenced increase in our 2016 loss picks.

We also recorded $233 million in catastrophe losses from Hurricane Matthew, which was in line with our expectations.

Turning to page 11, you can see our progress versus our 2016 targets.

While we exceeded our expense reduction targets for the year and our planned pace on capital return, the reserve strengthening charge and increased loss picks set us back against our accident year loss ratio, book value growth, and ROE targets.

As we look forward, we have a higher degree of confidence in achieving sustainable improvement in each of these metrics, and expect less volatility going forward.

Turning to slide 12, as Peter stated, we reduced operating expenses by over $1 billion or 10% for the year.

Including our actions taken to date, our annual run rate savings totaled $1.3 billion.

Thus, we have effectively reached our two-year targeted expense reduction a year ahead of plan, and we expect further reductions that will improve our ROE going forward.

Our balance sheet and free cash flow remains very strong.

And as you can see on slide 13, parent liquidity at quarter end was $8.4 billion.

We are ahead of plan, and our projections continue to support our target to return $25 billion of capital to shareholders.

We will continue to return capital to shareholders prudently, and with appropriate quarterly consultation with rating agencies and regulators.

During the quarter, we continued to execute against our capital return target, and returned $3.3 billion of capital to shareholders, bringing the year-to-date total to $13.1 billion.

Since quarter end, and through February 14, we repurchased an additional $1.2 billion of common shares, leaving about $1.2 billion unused under the remaining authorization, prior to yesterday's additional $3.5 billion authorization.

Notable items in the quarter include the $2.2 billion of cash proceeds received on closing the UGC sale, as well as a pre-closing dividend of $250 million received from UGC.

We also received $1.1 billion of newly issued Arch convertible non-voting common equivalent preferred shares.

Importantly, we completed the second of our planned life reinsurance transactions associated with XXX/AXXX in the fourth quarter.

This is expected to result in additional parent liquidity, principally in the form of tax sharing payments of $2.3 billion expected in 2017.

With respect to the plan to reduce hedge funds by about half by the end of 2017, our hedge fund reductions totaled $3.2 billion in 2016.

This has freed up capital of approximately $1.1 billion in 2016, and an additional $500 million in 2017, which result in additional dividend payments to the holding company.

Finally, we expect the ADC transaction will receive approval from regulators to be recognized in our year-end 2016 statutory financials, providing favorable risk-based capital treatment.

Turning to legacy on slide 14, we are very pleased with the progress we made in shrinking legacy this quarter and improving intrinsic value, while carefully managing the impact to book value.

In particular, the fourth quarter included the sale of our Korea IFC Real Estate complex, and a portion of our life settlements portfolio.

Turning to slide 15, at year end we had tax attribute DTAs totaling approximately $14.8 billion, of which approximately one-quarter related to foreign tax credits, and three-quarters related to net operating loss carryforwards.

In addition, we had a net DTA for temporary differences in the amount of $5.9 billion.

We are pleased with the progress we've made with respect to utilizing our foreign tax credits.

Slide 16 shows the changes in book value year over year.

The chart illustrates that book value growth, including dividend growth, was 3% for the year.

However, book value growth in core for the year was 7%, even after the impact of the reserve strengthening charge.

We continue to expect strong book value growth and a more stable book value due to the ADC, as we move forward.

But as I've said before, we are making tradeoffs with respect to legacy in terms of recognizing immediate book value charges for future ROE improvements.

Slide 17 details our core normalized ROE for the year, and our target for 2017.

When you evaluate our new modules, you'll see our view of return on economic capital.

Some of our modules are meeting their cost of capital, while others have more work to do, and Rob and Kevin will comment on that further in their remarks.

I also wanted to highlight that as part of our recasted modular results, we moved to a simpler method of normalizing our annual average loss expectation, also known as our AAL, for cats.

We had historically incorporated a seasonality adjustment to estimate the quarterly allocations, but now are allocating the AAL evenly across the four quarters.

All of the historical periods reflect this change.

Note that with the actions we have announced this quarter, including the ADC, we would expect the future impact of normalisations to be moderated going forward.

Moving to 2017, we show the impact of the quarter's actions on our ROE target.

Our 2017 target for core normalized ROE of 9.5% is driven by the lost investment income associated with our adverse development cover.

Considering the net impact of the adverse development cover, and the fourth-quarter reserve strengthening, we would expect to free up approximately $2 billion of capital over time, subject to rating agency and regulatory considerations.

We have not reflected this benefit in our current projections for 2017, as we do not anticipate revising our PC dividend forecast upward at this point in time.

We expect to achieve a 10% normalized ROE in the not too distant future, as we deliver on underwriting improvements, capital return, and expense management.

To sum up, I'm confident that our actions taken put us on a path to better quality earnings, growth in earnings, as we move forward.

Our strong balance sheet, liquidity position, and a free cash flow profile like no other in our industry leaves us very well positioned for the future.

Now with that, I'd like to turn the call over to Rob.

Thank you, Sid, and good morning, everyone.

Beginning on slide 19, the fourth quarter marked the culmination of a truly transformational year for commercial, with the completion of an extraordinary amount of change as part of the strategy we outlined at the beginning of 2016.

Today, I'll discuss three topics: the actions we've taken to significantly reduce future volatility, progress of our strategy to improve underwriting performance, and the outlook for commercial's business modules.

The adverse development cover is a comprehensive transaction that was one of several strategic reinsurance agreements we entered into over the past year.

A key part of the agreement is that we retain full claims authority to honor our commitments with consistency of decision-making and service that our clients expect of AIG.

As Sid mentioned, during 2016 we also increased current accident year loss estimates by approximately $700 million, in response to the emerging trends reflected in our prior-year reserve strengthenings, bringing total loss picks for the 2016 accident year to a more conservative level that includes a margin of error reflecting the long-tail nature of the US casualty business.

Looking toward the future, we're confident that the steps we took in 2016 to prioritize value creation, and utilize more rigorous data and pricing tools, will significantly enhance the quality of our portfolio.

Turning to slide 20, the top line shows commercial's adjusted accident year loss ratio, including the effect of prior-year development for each accident year.

The bottom line shows the adjusted accident year loss ratio at the end of 2015, before reflecting the results of the 2016 reserve studies.

You can see that our fourth-quarter 2016 reserve strengthening positions us at a 2015 starting point that is 6.1 points higher than we reported this time last year.

On that basis, we achieved 4.1 points of improvement in the adjusted accident year loss ratio in 2016, as a result of the changes in our mix of business, and increasing improvements in our underwriting tools.

We are targeting a 62% adjusted accident year loss ratio on a fourth-quarter 2017 exit run rate basis, representing an 8.8 point improvement over the two-year period.

Today, US casualty represents just 21% of the commercial business, down from 40% of the portfolio in 2011.

We drove the most significant amount of that change in 2016, reducing US casualty's net premiums written by 39% compared to the prior year, with a corresponding improvement in US casualty's adjusted accident year loss ratio of 5.5 points.

As a result of our actions, commercial's full-year 2016 adjusted accident year loss ratio for all business excluding US casualty was strong, at 60.2%.

As Sid mentioned, we continue to experience significantly higher severity trends in commercial auto, medical malpractice, and excess casualty in the United States.

These businesses are parts of the lines we've been remediating and improving, and we've been shrinking our position in these underperforming areas for several years.

While we acknowledge we have more work to do, we've managed the portfolio thoughtfully and with pace over the past year, while balancing the need for improved rate, and our objective of preserving our valued client relationships.

Moving to slide 21, we've illustrated the significant improvement in our mix of business, a key driver of the 4.1 point adjusted accident year loss ratio decline.

We reduced the remediate and improve business by 34%, while also realizing a significant improvement in the adjusted accident year loss ratio in those subsegments.

93% of the fourth-quarter commercial reserve strengthening was attributable to products in the remediate or improve product lines, making us confident that our underwriters are armed with better tools, and taking actions in the right parts of the portfolio.

The attractive grow and maintain business increased from 50% of the portfolio in 2015 to 60% of the business at the end of 2016, and we continue to see strong performance in our focus growth segments and multi-national businesses.

We are pleased that full-year retention of our major clients, which represent our largest multi-line relationships, remained relatively consistent with the prior year at 94%.

The chart at the bottom of the page demonstrates the interconnected nature of our commercial business, as the vast majority of our large clients purchase multiple products that vary in profitability.

We've been carefully resculpting the portfolio to make holistic decisions that prioritize our most valuable client relationships.

In 2017, we'll continue to focus on growing these profitable relationships that create intrinsic value for AIG.

Turning to slide 22, commercial's 2016 normalized ROE of 6% includes the increase in current accident year loss picks.

We're targeting a normalized ROE of approximately 9% in 2017, reflecting lower capital due to the adverse development cover, an improved business mix in underwriting results, partly offset by lower net investment income.

Commercial's full-year adjusted accident year combined ratio of 95.8% was a 5 point improvement over 2015, which includes an increase of 3.9 points in the current accident year loss picks.

The expense ratio declined 0.9 points, demonstrating that we continue to manage expenses, despite a lower premium base.

Turning to slide 23, notwithstanding the increase in current accident year loss picks, the 2016 normalized ROE for liability and financial lines was 8.8%, reflecting profitability in financial lines, and the positive contribution net investment income has on long-tail business.

The liabilities and financial lines full-year adjusted accident year combined ratio of 99.7 increased 0.8 points over 2015, driven by a 5.7 point increase in current accident year loss picks, partially offset by a 2.3 point improvement in the expense ratio.

The expense ratio benefited from improvements in general operating expenses, and higher ceding commissions from reinsurers.

Fourth-quarter net premiums written declined 22%, excluding FX, with approximately 9 points driven by reinsurance, and the remainder by risk selection.

In the US, casualty rates are inadequate, and we've continued to stand firm in the competitive environment.

Fourth-quarter rates increased over 5.5 points, representing the fifth consecutive quarter with rate increases in excess of 3 points.

For the full year, we reduced liabilities and financial lines net premiums written by $3.2 billion, as part of our portfolio optimization efforts.

The bar charts at the bottom left-hand side of the page clearly reflect our shift from US casualty toward the more valuable financial lines in international casualty businesses.

We continue to view financial lines in particular as highly attractive, and remain focused on building upon our strength as a market leader.

With that said, we've demonstrated a healthy discipline to balance our growth ambitions in certain poor performing subsegments of financial lines business, where the rates are challenged.

Turning to slide 24, as we noted during our Investor Day in November, we faced profitability challenges in property and specialty risks.

The 2016 normalized ROE of negative 0.2% was the result of four primary drivers we discussed throughout the year: continued price erosion in parts of the property market, poorer-than-expected performance in programs, elevated attritional losses in Europe, and the size of our average annual loss expectation for natural catastrophes.

We've taken a number of actions that will lead to ROE improvements in 2017.

First, we've been more rigorous in our risk selection beginning in the second quarter of 2016, and extending through the January 1 renewal season, which is particularly important in Europe.

We'll continue to shift to highly engineered large-limit and middle-market risks, while we aggressively reduce exposures in commoditized excess and surplus lines, where we simply don't agree with market behavior.

Second, we've substantially completed our remediation of our programs business, which we discussed during last quarter's call.

Third, we completed the sale of our stake in ASCOT, a business that generated approximately $500 million in premiums, but earned a normalized ROE in 2016 on an AIG economic capital basis -- a normalized ROE of 0% in 2016 on an AIG economic capital basis.

Finally, we've significantly reduced cat risk.

While 2016 was a relatively active cat year, our experience was still better than our average annual loss expectation.

We've continued to aggressively manage our cat exposures, and expanded our cat reinsurance programs effective January 1, 2017, to further reduce our average annual loss expectation.

Turning to the top line, fourth-quarter net premiums written declined 15%, excluding FX, reflecting the improved risk selection and property rate declines of over 5 points, driven primarily by the US excess and surplus lines business.

We have the conviction to continue to opportunistically manage our property book, as market conditions warrant.

The final observation I'd like to make is that as you can see on the bottom-right side of the page, we've experienced a more stabilized level of severe losses, with severe losses improving from 8.9 points in 2015 to 5.4 points in 2016.

We continue to expect reduced loss volatility, as a result of our engineering capabilities, risk selection efforts, and reinsurance purchased during the second quarter of 2016.

While we acknowledge we have work to do, we expect meaningful ROE improvements as a result of our plan in 2017.

In closing, our actions to reduce commercial's volatility, increased use of data and tools, and improvements in our business mix will result in a stronger, more valuable portfolio.

We're focused on execution, and I'm confident that we'll achieve our goals following a truly transformational 2016.

With that, I'll turn the call over to Kevin.

Thank you, Rob, and good morning, everyone.

Consumer produced strong results for the quarter and for the year.

For the year, we expanded normalized ROE by 190 basis points to 10.3%.

We expect to maintain or exceed this level of normalized ROE in 2017.

During 2016, we took actions in each of our modules and key geographic areas to create value.

In addition, I am delighted to report that in Japan, the intensive preparation for our legal entity merger is progressing well.

Early this week, we announced adoption of FSA-approved pre-merger status as of April 1 this year and our target merger date of January 1, 2018.

This is a major milestone in our transformation effort.

Slide 26 summarizes our progress in 2016.

In individual retirement, we were proactive in taking pricing and product feature actions to navigate the low interest rate environment.

We focused on value over volume, and we are not dependent on any one product line.

Due to our broad product portfolio and deep distribution relationships, we achieved top-five sales rankings across annuity lines, fixed, indexed, and variable, a position we believe is unique in the industry.

Individual retirement's earnings for the year were strong, with PTOI increasing by over 25%.

For our group retirement business, VALIC, our investments to transform the plan sponsor and participant experience began to pay off.

We significantly improved our results in winning new group plans, and in retaining existing plans.

Our net flows improved substantially, and we achieved the highest level of premiums and deposits since AIG's acquisition of VALIC.

Our life insurance business continued to make progress, executing on our plan to enhance ROE.

During the year, we completed the introduction of our new state-of-the-art administrative platform and new digital capabilities, revamped our product suite, and substantially exited our US life career distribution and service agent channels, and group benefits business.

Despite these exits, we maintained our sales levels by focusing on independent distribution in our direct-to-consumer platform.

We achieved a top-five ranking in term life sales, the first time we have held this position since 2007, and now lead the industry in term life sales in the direct channel.

Our growth in term life sales, strong underwriting discipline, and increased focus on products without long duration interest rate guarantees created value in the low interest rate environment.

Additionally, working with Charlie Shamieh and the legacy team, we closed two large reinsurance transactions during the year to address significant redundant reserves, and are on track to meet our targets for the remaining transactions.

Our greatest improvement for the year was in our personal insurance business.

Our focused strategy, which includes our geographic footprint reduction, has resulted in significant expense savings, an improved combined ratio, and an increase in PTOI of over $600 million.

As we've reduced our footprint, we've increased our investments in markets and customer segments where we have a competitive advantage and favorable future prospects.

This includes our high net worth business, the private client group in the US, where we've had healthy growth in new business for the last few years, and have recently expanded our offerings overseas.

We also made investments to deliver a digital experience to our customers in a number of our fastest growing markets, including Korea, China for outbound travel business, and South Africa where we have introduced innovative offerings in partnership with The Virgin Group.

We believe the actions we took in 2016 will position our personal insurance business for future growth in our select markets and customer segments.

We also continued to make progress transforming our business in Japan, while producing solid operating results for the year.

Japan's overall underwriting results were strong, and its normalized ROE for the year, based on our internal capital lens, was 10.8%.

We continued to take actions during the year to streamline processes, focus marketing, increase productivity, and reduce headcount and expenses.

As I mentioned earlier, we secured crucial regulatory approval of a targeted merger date of January 1, 2018.

We also announced in November that we had entered into an agreement to sell Fuji Life, allowing us to focus on our strong P&C position.

We have taken actions across our balanced portfolio of consumer businesses to create value and position us as industry leaders in our target markets.

Now I will briefly discuss the results of the quarter.

Turning to individual retirement on slide 27, in the quarter we saw lower sales and net flows from a year ago.

This reflected the ongoing industry-wide slowdown in variable annuity sales from the uncertainty caused by the DoL fiduciary rule, and lower fixed annuity sales due to the sustained low interest rate environment.

In the face of these challenges, we continued our disciplined approach with respect to product pricing, product features, and asset quality.

We maintained our net investment spread for fixed annuities, as well as for variable and index annuities.

Turning to group retirement on page 28, deposits increased in the quarter, but were offset by higher surrenders that resulted in overall declining net flows.

Despite disciplined rate management, base net investment spread for group retirement declined, primarily due to low reinvestment rates.

Further, as we mentioned on the third-quarter call, we did expect to see higher planned conversions in the fourth quarter, including large case group surrenders, as is standard for the defined contribution market at year end.

Before moving to our life insurance business, I'll speak briefly as to recent developments with respect to the DoL fiduciary rule.

On February 3, President Trump issued a memo requiring the DoL to review the rule and determine whether it will adversely impact the ability of retirement savers to access information and financial advice.

Accordingly, the DoL announced that it would consider legal options for postponing the applicability date of the rule, while it considers the issues raised in the memo.

We are closely following further developments.

For our individual retirement business, we remain actively engaged with our distribution partners to ensure that we will continue to meet their needs as they respond to the evolving status of implementation.

Let's now move to life insurance on slide 29.

Premiums and deposits grew, primarily driven by our international business.

In our US business, overall sales remained largely in line with the prior-year period, despite our narrowed distribution focus.

Life insurance PTOI was negatively impacted in the quarter -- our reserve increases in our individual group and international business lines, totaling approximately $45 million, over half of which was driven by administration system conversions in the US.

Turning to slide 30, personal insurance reported another strong quarter of operating performance.

The operating improvement reflected our strategic actions to reduce expenses and focus marketing activities, as well as continued operating benefits from investments in Japan and other select markets.

Results reflect a favorable prior-year loss reserve development, and lower-than-expected attritional losses in key markets, partially offset by higher catastrophe losses.

We believe we have additional opportunities to improve underwriting results, although we do not expect progress to be linear quarter to quarter.

To close, I'm pleased with the progress we are making against our strategic priorities across all of our modules, and we remain focused on continuing to execute on our plan.

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

Thank you.

Operator, we would like to open it up to Q&A.

(Caller Instructions)

(Operator Instructions)

We'll take our first question from Ryan Tunis with Credit Suisse.

I had one question, and John Nadel had a follow-up.

But just trying to understand why the 60% is untenable in 2017, if 93% of the premium, 93% of the charges on premium that you already planned to improve or remediate, why is it that we can't just push a little bit harder on that premium in 2017, and get to the 60%, if that was always a pretty important part of getting there?

Thanks.

Ryan, it's Rob Schimek.

So I'll point a couple things.

First of all, I want to point you to page 20, and just remind you that the 66.7% that you're seeing on that page includes 3.9 points of higher accident year loss ratio that we booked, particularly relating to the long tail lines.

So as I said in my comments and Sid said in his comments, there is a margin for error that we booked into the long tail commercial lines, that we had not previously recorded.

The second observation I would make for you is that as I show on slide 21, the nature of our business is a very interconnected nature, when we think about it from a perspective of a client.

So I've shown you a table at the bottom of page 21 that shows that 90% of our major clients, major account clients, are clients that have revenues of over $500 million.

They are long-term clients, 18-year relationships, but that our relationships cross across not just one line of business but multiple lines of business with varying degrees of profitability.

And our main objective is to protect the valued client relationships, and make sure that we can think of them holistically, not as an individual product, but instead as an individual client.

And then the third point I'd make for you is don't lose track of the fact that in our improvement that we've committed to, we did not make any expectation for you on expense ratio, other than we would be able to maintain it flat.

And in 2016 you can see we did improve the overall commercial expense ratio by almost a point.

So the 66.7 that you're seeing as loss ratio only, if you thought about it in the context of combined ratio, it's about a 5 point improvement over the prior year, and it includes about 4 points of higher accident year loss ratio.

If you drilled that down and put it into the US casualty business, that actually translates to about an 11 point increase in our accident year loss ratio for US casualty business, and what we're really doing there is recognizing that we don't to leave you three years from now seeing us book an increase in prior-year development for the actions we took in 2016.

This is John Nadel, with a follow-up.

My question is for Peter, and I'm focused on slide 17.

It looks like the impact of the reserve charge is driving nearly a 100 basis point increase from the ROE, all else equal.

And that appears to be simply because you've taken the equity down.

If I look at the ROE impacts, excluding that, you're dropping your ROE target by about 150 basis points.

Is that how you and the Board and your incentive plans will capture the impact?

Meaning the gross 150 basis point reduction in ROE will be the more prevalent measure?

And then secondly, around that, are there areas within the total portfolio of businesses, where you can find incremental earnings to help offset that pressure, whether it's via incremental expense saves, capital return, or is it just a function of investors need to believe in and discount a lower cost of capital?

So I think that the 90 basis points that you see on page 17 is just the mechanical effect of the impact on GAAP equity.

But from a point of view, how we steer the ship, and how the Board thinks about value creation, we look at the much bigger reduction in required economic capital that comes from the ADC.

So the ADC reduces the reserve uncertainty so much more than the book equity reflects, that there's actually a bigger than 90% improvement in the return on economic equity.

But that will take time to come through, because we need to work closely with our regulators, before we dividend up from the subsidiaries.

So I think that there's no doubt in my mind that this transaction, and the net of the ADC and the reserve charge, is accretive to value, but I think that the timing of how it comes through GAAP ROE is another matter, that takes a little bit longer.

So you've obviously got a component of it that reflects the reduced investment income, that's another piece that needs to be understood.

But I think that taken as a whole, between the two actions of the prior year development and the ADC, it's significantly accretive to value, and I think if you work your way through the capital framework that we used, in the new modular disclosures, you'll see with much greater transparency how we manage the difference between economic capital and statutory capital.

The so-called differences, the frictional capital, you can see how this will work its way through, especially if you try and forecast ROE in 2018, by which many of these timing mismatches will come out in the wash.

We will take our next question from Kai Pan.

First question on the reserve charge.

I just wonder how much the increase of the accident year loss reserve paid is coming from the so-called emerging trend in third quarter and fourth quarter, versus you're adding in other layers for margin of safety.

Because you mentioned the trend actually impacting overall US casualty market, but we haven't seen large reserve charges at the industry level.

Just wondering if this is the AIG specific issue or is it more industry concern?

Well, it's Sid.

I'll open it, and then I'll hand it over to Rob.

First of all, I'd say we don't explicitly break it out that way, and it differs dramatically by line of business when you look at US casualty.

I will say the general effect of our reserve strengthening is to more, as I said in my remarks, more heavily weight the trend towards recent accident years, and in lines like commercial auto, where you're seeing dramatically higher trend for the industry, we would be strengthening both reserves and loss picks to reflect that new data.

Rob, maybe you want to comment a little bit about how you want to think about the overall portfolio and loss picks in general?

Kai, let me suggest to you this way of thinking about it.

I want to make sure I get this point across for everyone anyway.

Success for the management of our commercial portfolio begins with getting the proper segment selection.

We've got to get the right mix of business here, and the mix of business is going to drive our view of overall profitability for the commercial portfolio.

We've identified the US excess and surplus lines of property business as well as the US casualty business, as the segments of our portfolio that are the most challenged, and we were absolutely correct in that assessment.

86% of our fourth-quarter reserve charge was attributable, in fact, to US casualty.

Today, US casualty is 21% of the commercial portfolio, and we feel confident about the remaining 79% of the portfolio, which is running at an adjusted accident year loss ratio of 60.2%.

So to give you a better sense of the situation we face is I want to take you back to 2004 where effectively, we were a commercial casualty portfolio that wrote some other business and what I mean by that is, we wrote $15 billion of US casualty business, representing 58% of our total portfolio.

In 2016, we wrote $3.3 billion of net written premiums, representing just 21% of our commercial portfolio.

And by the way in 2017, we anticipate writing about $2.5 billion of net written premium in commercial casualties.

But I think we've accomplished four really important things, I'll bring this back to that margin question here in a moment, but four important things in 2016: First, we reduced the US casualty book by 39% in a single year compared to our annual decline of about 8% per year from 2004 through 2015.

Second, we achieved more rate in US casualty than any other part of the portfolio, about 5.5% in the fourth quarter as I said in my prepared remarks.

And third, in January we began working with Swiss Re as part of the reinsurance agreement that we announced, who not only share in the risks but work with us as a partner to bring data, tools and additional expertise to design a long term path for sustainable progress in US casualty.

So we're absolutely committed to serving our valued clients with a US casualty solution, but its got to create value for them and for us, at the same time.

But finally, I'd say and very importantly, the increase in the loss picks for the remaining book that we've talked about here for US casualty is about 11 points, and it's about 11 points on the US casualty portfolio.

So we describe it as 3.9 points across our overall portfolio.

So walking into the year, we were booking US casualty at a level that was about 11 points less.

Now some of that increase is really just responding to what it is we learned in our reserve studies that we conducted, that increased the 2015, 2014 loss picks.

Another piece of what we've recorded recognizes the fact that we just don't want to repeat having prior-year development come out of 2016, when we look back at this year several years into the future.

So I don't have a precise break out for you of how to think about the additional $700 million in terms of how much of it is margin for error, but I will tell you, we've captured everything we've learned for 2015 and prior, and established what we think is a prudent margin for error, given the long tail nature of the US casualty risks.

Thanks for that.

My follow-up question on the capital management front, you affirmed your $25 billion capital management goal.

If you remember it in your investors day, in November, you pointed to you have potentially $2 billion to $7 billion additional funding sources above this capital management goal.

So I just wonder, given the reserve charge and some rating agency or regulatory considerations, is the $25 billion more of a floor or ceiling now?

I'll give you an initial answer, and then I'll hand it over to Sid.

The adverse development cover, as I said earlier, dramatically reduces the amount of economic capital at risk.

The timing of regulatory capital relief is not immediate, and so while we continue to reaffirm our confidence around the $25 billion, we want to work very closely with both regulators and rating agencies on any further capital actions, and make sure a demonstrated track record of repeatable earnings before we would consider adding to that in 2018.

So I think that we still feel very confident about the free cash flow of the Company, and the ability to free up capital through divestitures on the legacy side, as well as improved operating earnings.

But the most important thing to remember is the net of the adverse development cover and the prior-year development is accretive to capital, both on an economic capital basis today, and what we think ultimately will be true of statutory capital from 2018.

So I think that we feel very good about the long-term capital position of the Company.

And Kai, I'd just add what gives us confidence in our 2017 projections as we highlighted at Investor Day, and you have heard in many of my remarks today, when you sum up the accomplishments we've had in terms of non-core legacy asset sales, life reinsurance transactions, our asset allocation shift, and then of course operating subsidiary dividends and tax sharing payments, the aggregate of those have us squarely on track with regards to funding our capital return.

Thank you.

We'll take our next question from Jay Gelb with Barclays.

The biggest topic on the mind of investors that I've received is what will AM Best's reaction be to the 4Q set of announcements?

The AM Best rating for AIG is currently at A, with a negative outlook.

What's your sense on timing, in terms of when we'll hear from AM Best in terms of whether they affirm at A, or downgrade to A-minus?

I will take that, I have tried to be very clear for several years that our concern about claims paying ability is paramount to the trust that our clients have in us, and so the rating agencies, including AM Best are important arbiters of that.

We have revealed to you and them a lot of new information in the space of the last few days, and so we expect it to take some time to digest this, and see the balancing ins and outs in terms of radical reduction in reserve risk, while amendments to current profitability levels, to see how that nets out in terms of impact on rating.

But we've made it very clear to all the rating agencies that with the extremely strong holding company liquidity position, we put the financial strength of the subsidiaries at the top of the hierarchy of goals in the immediate term, to maintain utter confidence in our claims paying ability.

So I'm very hopeful that we'll achieve a good outcome with all of the rating agencies, including AM Best.

But they should probably comment on timing, as opposed to us.

I appreciate that.

My follow-up question is regarding Street estimates for 2017 and 2018.

The Street's at $5.34 for 2017, and $6.45 for 2018.

I appreciate your perspective on core ROE, but my own perspective is that Street estimates are just way too high for the next two years.

Do you have any perspective on that?

Can we help level set this a little?

I don't want to comment on Street estimates.

They are often based on different methodologies.

What I do think is that we've given the Street a lot more granularity of modular information to do a bottom-up analysis of earnings quality, and review those estimates in the light of all of the new information that we've disclosed.

So I think probably best to defer that after the Street has had a chance to digest the significant additional information that they have received.

We'll take our next question from Randy Binner with FBR Capital Markets.

I had a question about the $10.2 billion consideration to National Indemnity.

How is that funded, and what is the timing for funding that consideration to National Indemnity?

I'm not sure that we want to comment on that, but it's funded by divestitures of general account assets.

We have a very liquid general account asset base, and that's just part of our normal course asset liability management.

This is something which is accomplished, but I think the important thing from point of view of forward earnings estimates is that we have given you I think a clear indication of how much foregone net investment income will occur in 2017, as a result of the sale of those assets, and the transfer of those funds.

So Sid, if you want to comment on that, that's fine.

The only other thing I'd add is, we expect to finish that financing very shortly, so that's all I'd add, Peter.

So the assets go, and the investment income goes with it, and then the follow-up I'll have just on this topic is on the page 6 description of the arrangement with NICO, the $12.8 billion ceded.

Is that actually ceded now or is that continually ceded when losses come through?

Now.

Sorry Randy, do you want to clarify your question there, just to make sure we understand?

So the $12.8 billion of ceded nominal reserves, I just wanted to make sure I'm understanding this correctly, you're actually ceding those assets and liabilities now, and that's where we should think about the consideration, part of the consideration coming from?

I'll just point you back to my prepared remarks, Randy.

Remember I noted that we have $41 billion of nominal reserves at year-end, so that's where you get the ceded amount.

You take the 41 billion, you subtract the $25 billion, which is $16 million and then you apply the 80% to get the ceded reserve number.

Obviously as you know from our filing of the contract, that obviously ultimately gets paid out via Berkshire Hathaway on a paid basis, but yes, they are ceded immediately.

We'll take our next question from Josh Shanker with Deutsche Bank.

I'm wondering if you can help walk us through the line items that change the disclosure.

At the end of last year you said that you closed out 2015 with a 66.2% loss ratio accident year, and that's been revised down to a 64.7%.

I'm wondering on an apples to apples basis what the 2016 numbers are?

Ad can you define the difference between the exit run rate loss ratio you're closing out 2016 with, but versus the reported number?

Rob, why don't you go through that?

Yes.

So Josh, let me begin just following on page 20 to think about the green line, that's what you're asking me about, and we're going to focus on the line that says 2015 64.7%.

So when you saw that line item in 2015, it was 66.2%.

The primary adjustments that have been made to that line item are first, we, as you know, we sold UGC.

We have a reinsurance agreement that now works with UGC, and that benefits the commercial business moving forward.

But in order to not make me look good on a year-over-year basis, we've pushed that back to all periods, so that we've actually adjusted down what was the 2015 loss ratio, reflecting the benefit of UGC into 2015.

We've shown that on page 20 in footnote number 2, and you can actually see that the benefit is 0.4 points in 2016.

In 2015, it was actually, just for comparison purposes, it's 0.8 points in 2016.

So apples-to-apples basis, we get a 0.8 point in benefit in 2016 and we didn't want 0.8 point benefit to compare against the old 66.2%, so we brought the old 66.2% down by 0.4 points, which is what the effect would have been in the prior year.

The second big item is that, as you know, we exited some businesses in 2016.

I announced those exits in February.

That included primarily our buffer trucking business and our pollution legal liability business in the United States and Canada.

Those businesses were exited in 2016, and they have now been transferred over to legacy.

Many people worry that I would actually flatter my current loss ratio by simply moving things over to legacy.

In the spirit of very transparent presentation here to you, we've actually also restated 2015 to remove the losses that were in 2015 associated with those same lines that have been exited.

So actually, I get no benefit in the comparison year over year, 2016 versus 2015, for the fact that I exited businesses that have now been transferred over to legacy and to Charlie Shamieh's team.

So overall the 66.4% pulls out the losses associated with businesses that I exited in 2016 that we didn't want to leave in 2015, so that I would look flatter, and then the second thing it pulls out is the benefit of UGC which should be shown on an apples-to-apples basis.

I think those two things actually show you that overall, we are trying to make sure I don't flatter myself at all in the year-over-year comparison, because net-net, even though the exits should have benefited me in 2016 in the comparison, we basically pulled it out of both periods.

Does that make sense?

So year-over-year, it benefits you on an absolute number but not on a year-over-year comparison?

Exactly, Josh.

So we did the right thing, and we don't worry about looking good on a year-over-year basis by flattering ourselves, by leaving the old loss ratio high, and bringing the current loss ratio down.

Sid can comment further.

Josh, I think it's page 33 of the financial supplement, we've actually split out specifically the UGC impacts, and that there's very clear transparency.

I did see that, thank you.

And then on the difference between an exit run rate and an accident year close out number, are we going to close out 2017 at 65% but say the exit run rate is 62%?

And the answer would be well what are we in 2016, the difference between the exit run rate and the close out number?

Yes, so Josh, what I'm saying to you there is the fourth quarter we believe will be a 62%.

Obviously, for the full year 2016 we were at a 66.7% so you can imagine that I'm not going to be able to bring Q1 down to the 62%, and in order to have a full year of 62%, it's going to be the average of the four quarters.

So just recognizing that the fourth quarter we expect to be at 62%, and we expect that move to 62% to occur throughout the course of 2017.

We'll take our next question from Thomas Gallagher with Evercore ISI.

Rob, just following up on that conversation, so if the exit run rate on the commercial loss ratio is really around 67%,, and the goal is to get to 62%, that's 5 points of improvement from an exit rate standpoint.

I think from what you were guiding previously, the 2016 to 2017 delta was more like 2 points.

How are you going to get that extra 3 points?

Is there, can you reconcile that?

So Tom, the first thing I want to point people to is that what I committed we would deliver in 2016, in general there were a lot of doubters about.

They'd say actually you won't be able to deliver 4 points, you're starting flat footed.

We delivered 4.1 points of improvement in the loss ratio, and for good measure, another 9/10 of a point in the expense ratio, for 5 points of underwriting improvement.

Coming into 2017, we've got a lot of momentum.

So the Swiss Re reinsurance deal is already in place.

That will benefit 2017.

We made a lot of changes from a underwriting perspective in 2016, which have not yet been recognized as earned premium until 2017.

In one of the research reports that I read from last night, there was a good comment about that.

If you look at our reduction in net written premium, you could actually see that we significantly reduced our net written premium in the remediate, and in the improve parts of our portfolio, but that doesn't yet reflect in earned premiums until largely 2017.

So I've got a lot of momentum moving from 2016 into 2017 from those two items, and the remainder of the actions that we've got planned for the year, we feel confident will deliver the 62% loss ratio.

I think overall, what people would have doubted we could have achieved with a 6 point improvement in the loss ratio between 2015 and 2017, I'd say I want you to have confidence.

We've already delivered 4 points of it, and we believe we're geared up to deliver well over 4 points of it again in 2017, from the actions we've already taken.

So I think we'll over deliver on a relative basis, apples-to-apples basis.

Okay and then if I could shift to the capital return.

The caveat of subject to future profit improvement, in terms of getting to your $25 billion two-year plan, can you comment, can you provide some perspective on what this means?

Are we talking about no significant adverse development in P&C?

Would that constitute as future profit improvement, or are we talking about do you actually need to show accident year loss ratio improvement in P&C, to be able to achieve your capital return plan?

Anyway that's my question there.

I think that it's fair to say that if you look at the underwriting actions that Rob's team has executed in 2016, it's a radical reshaping of the mix of business, that makes projections more challenging.

And I'm quite empathetic to all of you, but also to the rating agencies, that they try and project our 2017, 2018, 2019 earnings.

But I am confident that once they analyze the additional disclosures we've met, if we meet the expectations that we have just laid out, then that will more than satisfy all stakeholders that we have a very solid earnings base, very solid liquidity position, and very solid capital ratios, both at a subsidiary level and at a Holding Company level, that more than supports the current rating.

But we don't want to jump the gun on that, and we think it's really important to pace ourselves and bring all stakeholders a long on that journey of understanding the underlying earnings power of this Company as we've reshaped the earnings mix.

We'll take our next question from Elyse Greenspan with Wells Fargo.

I just have a follow-up question on getting to that 62% target in 2017.

As we think about a higher inflation level just overall in the industry, can you just express confidence that the picks that you're now using for 2017 play out that scenario?

And that if inflation levels do increase, that you can get to this 62% level by the end of the year?

Yes, I'll just say again, if you think about the 4 points of increased loss picks we have recorded in 2016, I'm referring to the 3.9 points of increase, if you take that to the lines that are likely to have the inflation you're referring to, it will be the long tail US casualty risks in particular.

Those lines actually we increased the loss pick.

If you drill down through modularity, it's 3.9 points to total commercial, it's 5.7 points to liabilities and financial lines, but it's 11 points, if you drill all the way down to US casualty.

So the US casualty increase in loss picks of 11 points higher is intending to reflect the lessons learned from 2015 and prior, the reserve studies and any of the expectations we would have regarding inflation, and that's really the message I've been trying to deliver.

To the point that I was just talking about achieving the improvement between 2016 and 2017, I pointed out two really important items.

We've got the Swiss Re deal that's already in place, and you've got the underwriting improvements that we already took last year.

But just I'll make one last observation.

Because we so significantly increased the loss picks in US casualty, to the extent that in our mix of business, we further reduce our concentration in US casualty, the benefit that we get between 2016's loss reserves or 2016's loss pick and 2017's, because of a lower level of concentration of these very high loss pick businesses, we benefit even more significantly.

Those are the three primary drivers.

They get you from the 66.7% to the 62% that you see on page 20 of our presentation.

Thank you.

And then in terms of the capital return plan, the contract with Berkshire was retroactive, so you did, you are transferring over some reserves that were already sitting on your balance sheet in excess of $7 billion.

How do you think about the amount of capital freed up there, and how does that, it seems liked today you reaffirmed the $25 billion plan, but could something like that potentially be additive to the $25 billion?

Yes, Elyse, it's Sid here.

I'll point you to my earlier remarks.

We've estimated that we have improved our overall capital position by approximately $2 billion when you combine the ADC netting with our reserve strengthening this quarter.

But we anticipate that capital will be deployed over time, as I said.

And so again, it just reaffirms that we have strong confidence in our capital and liquidity positions, as Peter mentioned, as we execute on our target.

We'll take our next question from Paul Newsome with Sandler O'Neill.

Focusing on the commercial business, it looks like I'm looking at page 20 like most people are3, that something happened from a business perspective in probably around 2013, that got you off on your projections, as well as what your business.

Could you talk about what was happening there from a business perspective, and how that's different today?

Who was in charge back then?

That kind of thing.

So there's been a fair amount of change frankly, in terms of who was in charge of the businesses that have reflected this.

And as you can imagine, given the longstanding client relationships and longstanding presence in lines of business that were affected, you have a lot of inertia.

So I think that, as Rob mentioned earlier on, we had a $15 billion casualty book, which was at the beginning of the period, and that's now down prospectively in 2017 to about $2.5 billion.

So that reduction didn't happen overnight, and so during this period of time we were shrinking a book of business which frankly looks a lot better with high interest rates, where you can live with a higher combined ratio, if you got decent net investment income.

And in that 2013 period, if you'll remember, you've got two things: Continued quantitative easing, and therefore very low interest rates, making that a much less attractive business; and a recovery in the economy, so you start to have a lot more miles driven, and a lot more economic activity, and therefore an uptick in frequency and severity of losses.

So you've got a cyclical element hurting you on the loss cost trends, and a continued challenge on the net investment income.

So I think that there's an inflection point there, which confirmed our initial instincts that the reduction in the casualty lines was the right strategy, but the sense of urgency around that picked up as the continued low interest rate environment persisted in the subsequent years, and as the loss cost trends accelerated even more with higher jury awards and so on, in the most recent accident year.

So I think that we've made a lot of change in terms of individuals and process, but we've also tried to learn what is external to AIG that we need to adapt to, lower interest rates, higher loss cost trends, and what is internal in terms of lessons learned, in terms of improved linkage between claims, underwriting, and actuarial, and getting the right alignment of those functions.

And so, we believe that the team that we have today is the right one to continue to reshape the mix of business around our most profitable clients, and I think that's probably the most important change in mindset, is to really start to analyze client profitability, not just business line profitability.

And that is something we should have much better tools, better governance and better understanding of today.

So just want to make sure I understand the answer properly.

It sounds like what you're saying is that you correctly identified the claims inflection and other issues at that time, but simply did not shrink the book fast enough, as you would have liked, in hindsight.

Is that right?

I think that hindsight is something which I'd say you need more time to look back on this the right way.

What we've done is retained over 92% of our best clients.

If we had tried to shrink it faster, that number might have been a whole lot lower, and that might have cost us a lot more in terms of profitable financial lines and other lines of business.

So we were shrinking the commercial business at an annualized rate of about -- the casualty business at about an 11% annualized rate, and then we accelerated that to over 30% in the last 12 months.

I don't think if we had done it that aggressively back then, we would have done it as elegantly, and I do think that we've got much better tools, much better governance around managing those client relationships.

And of course of you remember back then the recent history of AIG's challenges in the financial crisis were still fresh in people's minds.

So I think abrupt changes in our underwriting appetite would have had more disruption then, than it does today.

We'll take our next question from Jimmy Bhullar with JPMorgan.

So first, just a comment.

You did change the disclosure and I think it makes it very difficult to compare results, so I hope, especially when you aren't really posting the updated results in advance, so if you are changing the disclosure in the future, I think you should actually at least provide the historical numbers a few days or a week or two weeks in advance, and then obviously it would reduce confusion a lot.

In terms of my question, I'm just trying to understand your comments on the Berkshire Hathaway contract, which seemed pretty positive, on it reducing your cost of equity.

Obviously it does reduce volatility in GAAP results, but that's only because you're paying $10 billion up front for about $20 billion of coverage, and you're doing it several years in advance of any contribution from Berkshire Hathaway.

So also, you're still on the hook for the tail, so if you can quantify how much the deal is releasing in terms of, or if it is releasing any GAAP or stat capital, whether you see any impact from this on your tax asset, and also what the duration is of the claims payment period on this book?

So I think that the most important thing to see is that as of today's reserve number, you've got about $9 billion of additional risk capacity that is for Berkshire's account, which has an economic risk reduction to us that will make sure that any subsequent adverse development is shared 80/20 between us and them.

So there's substantial risk transfer to them.

There is, quite beyond any accounting impact.

If anything, the accounting is quite adverse compared to the economics, because of the deferred nature of the recognizing of the gain on the ADC, versus the immediate recognition of any subsequent PYD on the books.

So I think this is anything but an accounting driven exercise.

This as we always do, prioritizes improvement in intrinsic value, and reduction in economic risk.

And you rightly point out that there is of course a tail risk, as there is in all of our businesses, and I think that we need to evaluate that carefully, and we have the benefit of our own judgment, as well as those of third parties, to estimate the full range of outcomes for future claims.

But I think that we feel that this is a very substantial reduction in the reserve risk, which should give people more confidence around the book value of the firm, and the earnings trajectory but I don't know, whether did you want to elaborate?

Yes, first of all, we're sympathetic that this is obviously a complex transaction, and Liz and the team will be available to walk you through this in more detail.

But on an economic basis, the way you need to think about this is, think of us Jimmy, as transferring the assets.

We receive a reinsurance recoverable, right?

That has a very sizeable present value.

We release capital up until the limit, right?

And that are the economics of the transaction.

Separate from that of course, when I talk about netting this and freeing up capital, you have the prior year development, and you have to tax effect that prior year development, of course.

So those are the ins and outs of both the reserve and the economics of the transaction.

So don't think of the $10 billion without thinking of the reinsurance recoverable, and on a nominal basis, right, that $10 billion is granted, and there's ceded nominal reserves of $12.8 billion, plus the capital freed up.

That's how you do it.

No, I understand, and I actually think the transaction is relatively simple in terms of how it works.

I'm trying to see if you can quantify some of these numbers.

But what's the claims duration of the book?

What's your best estimate of that?

We aren't going to provide an overall duration in terms of the detailed cash flows, but my rough approximation I'd give you, is about 10 years, since you have some cash flows that are going to be several years out, and some that are going to be way out in the tail of course.

So that's how we think about it when we do the PV, but rough math, I would use 10 years.

We'll take our next question from Gary Ransom with Dowling & Partners.

I had a question on reserves.

At the Investor Day, Peter, you expressed some animosity toward the idea of a reserve cookie jar, and now we're talking about a margin of error.

And I would just observe that one actuary's margin of error is another actuary's cookie jar.

Am I to understand that adding this margin of error is a change in your reserve philosophy?

I would say that when you have an ADC of the scale and scope that we have, which we did not have on Investor Day, we have downsized the strategic significance of reserve risk by 80%.

So the subjectivity that is inevitable in any kind of reserve estimation, that would leave you to judge where you are on that spectrum of conservatism, just has a dramatically lower effect, both on historical reserves.

And then given the dramatic reduction in new business written that Rob has explained, over 30% year on year, it just is not a big issue going forward, and so I'd rather just leave it at that.

I mean Sid, you'd like to elaborate.

First comment I'd like to make Gary is, we've obviously commented before around some of that terminology, and we have the highest standards around our financial reporting process and our reserving process, so I'd leave that for you, number one.

Secondly, the way that I would ask you to think about this in totality is, first, we understand some of the frustrations people have had around historical reserve strengthening, and secondly, we have not been happy with our historical reserve risk outcomes either.

And the way to think about this is the combination of the adverse development cover, our reserve strengthening, the adjustment to our loss picks, and the dramatic shift in the underwriting that Rob referred to, in terms of the business mix.

The total of that does more to change the reserve risk profile and eliminate that historical trend, than anything from a risk perspective could, and that was how we thought about this when we think about reserve risk.

Just one other thing on the timing of the recognition of the adverse trends in the third and fourth quarter.

Are we also to think that you did not see anything along those lines, in say late 2015 or early 2016?

I would point out that, while we have been considering an adverse development cover for some time, and we initiated our exploration of this at the beginning of the year, it was only once we concluded our reserve studies after Christmas that it became clear to us that this was a transaction that made excellent economic sense.

So we do have a back-ended reserving process, and so it was really after Christmas that it became very clear that was the right thing to do.

And I think we made a lot of changes that positively improved our ability to identify trends in the resegmentation of our reserving.

We went to a smaller number of more coherent modular reserving segments, that gave us a higher signal to noise ratio, that gave us more confidence in our decisions.

Gary, it's Sid.

I'd only add a couple points.

First, in the areas where we did see adverse actual versus expected trends, as we talked about at Investor Day which is particularly programs, we think we acted rapidly and transparently, and you saw us strengthen reserves in programs when we saw those actual versus expected trends.

For similar lines that we discussed, we obviously saw trends accelerate into the fourth quarter, and some of those on very green lines.

Like I said in particular, excess casualty in 2015 is a green line, and you need a full year of seasoning.

We are comfortable with that, with the amount of work we did, as Peter alluded to in the segmentation of our analysis, the granularity and the effort we put in, particularly given the work we initiated around an ADC in second quarter, and continuing through the year, that we've done a more thorough analysis of the reserve portfolio at this point in time, and we are very comfortable with where we are.

We'll take our next question from Amit Kumar with Macquarie.

Just two quick follow-ups to prior questions.

Number one, going back to the ratings agency discussion and I'm still not clear.

All else being equal, would a change by AM Best alter your plans to return to $25 billion, or will it not?

I think that first and foremost, I'd say that we have every hope and expectation there will not be a change, and we will do everything we can to prevent a change, because we see that as a critical element to our strategy.

Secondly, they would make their change based on, I'm sure, a multitude of criteria that would maybe include capital planning, but also the geography of that capital, where is it between the holding company and the operating subsidiaries, and it's the rating of the operating subsidiary we care about most, because that's what affects our claims paying ability to our clients, and that's the stakeholder base that we care about most.

So I think we would look at all actions, including amendments to the capital, to make sure that rating is defended.

But we have a lot of capital flexibility, as we pointed out, that would allow us to continue to serve all our stakeholders in a way that's balanced and sustainable.

Okay, the second and final question is, Peter this goes back probably to 2015, when there was a lot of discussion around too big to succeed, et cetera, and at that time we had a SIFI lens to this discussion.

It's 2017, if you think about the tone and the content of conference calls, we rarely talk about the consumer insurance business, if at all.

I was wondering, how does the Board of Directors and you feel about revisiting the separation of business entity discussion, keeping the SIFI discussion apart?

It seems we talk about the same issues on every call, and many other pieces of the business are not getting their sort of fair share of discussion or airtime.

So how do you feel about revisiting the discussion to separate P&C from other pieces?

Thanks.

I think that we've been very clear that there are strong tax reasons, but also very strong diversification reasons why the current mix of business makes all of the sense in the world.

And this quarter, above all quarters, would remind people of the value of diversification.

As we look back at the 2016's excellent results from the consumer business, and the fact that the personal insurance has had a major swing to profitability.

So I think that my hope is our dialogue with you becomes much more balanced, as we reduce the uncertainties, and in particular around reserving, that has plagued the discussion, and allows us the skew to be so heavily focused around the US casualty business, and to be a more balanced discussion about what I think is a mix of business across consumer and commercial, that is focused on our most profitable segments, geographies, and client segments, that create sustainable earnings.

So I think we are in a process of reshaping this Company, we have done a lot to make it less complex.

And so in direction, we are all in favor of resculpting this Company and making it smaller and more focused.

We did not think a three-way split to avoid SIFI regulation was the optimal way to unlock value for shareholders.

So I think we feel very strongly that was the right decision, but we continue to resculpt this Company to be more focused, easier to manage, and easier to explain.

And I do think that this ADC cover is a pivotal moment in taking one of the biggest question marks around the valuation and the risk profile of the Company off the table, so we can focus on the operating earnings engine of the core portfolio, and how that's emerging as a leading franchise.

We'll take our next and final question from Larry Greenberg with Janney Montgomery Scott.

Peter, I think in the past you've given a ROE target for the operating segments and then the total Company and I know here you've given a 9.55 for the core operating.

And maybe I missed it, but is there an ROE target, I know you gave what your freed up capital expectation is from legacy, but is there an ROE target for legacy?

No, the target for legacy is all around the release of capital.

So they are trying to reduce capital and shrink as effectively as possible with a view to how much they impair book value and enhance intrinsic value.

So their gating factor is the speed at which they can release capital, at a price that is accretive to intrinsic.

And I'm delighted to point out how much they've done this last year to do that.

And most recently in the last quarter, the life settlement was a major illiquid asset in the legacy book, which was sold at a level that was accretive to intrinsic value in our view, and they will continue to do that.

But I think that holding them accountable to ROE is the wrong metric, because it really doesn't get at what's really going on here which is shrinking that, so that we can redeploy that capital in our core businesses to grow them, and return any excess to shareholders.

So that's the way we measure it.

And if you think about the hierarchy of goals I talked about it at Investor Day, it helps you to map it into that to see how it all drives growth of intrinsic.

Thanks, and then just a follow-up for Rob, and I'm looking at page 21.

The first category, the grow category saw a 10 point deterioration in the accident year loss ratio, and I'm just wondering if you could give us a little bit of color on that degree of deterioration?

So Larry, the first thing is that, while we present this in a way to try to keep it simple, I want you to really understand that Peter marches out this team to the tune of intrinsic value.

So we are here trying to look even beyond loss ratio, and even beyond expense ratio but we're looking at risk-adjusted profitability in the context of the way we really run the day-to-day decisions inside of the commercial business.

So while this is a simplistic presentation of what happens to loss ratio, I'd say within the attractive parts of the business, what I want you to know is that we're making tradeoffs every day, recognizing that while the loss ratio might look attractive, the ROE, or the intrinsic value might not.

So a classic example of that would be that one of the primary drivers behind why our grow part of this portfolio on slide 21 declined in size, it's largely attributable to property business.

And while the loss ratio, without natural catastrophes, so the adjusted accident year loss ratio for property may look attractive, when we add on the acquisition costs, and we add on the average annual loss expectation, and then we think about the capital consumptions, so I have to do all of the rest of this math behind the scenes, we believe that we are making tradeoffs that are even more sophisticated than what you see here on the simple view of page 21.

And so, I absolutely believe that we've made the right decisions in every element of these product sets that are shown on this page, and that to the extent that we shrunk, or that the accident year loss ratio deteriorated, recognize that tends to be attributable to shifts in business, and generally, with things where we are making behind the scenes decisions on intrinsic value.

That concludes today's question-and-answer session.

Mr. Peter Hancock, at this time, I will return the conference back to you for any additional or closing remarks.

Well I would like to thank everybody for their patience and good questions.

We've had a lot of information to digest, and we take the feedback that we wish we have gotten this to you earlier to digest quicker.

But I think that I'd like to end this with a comment about the team, the management team.

If you look back at the last 12 months, I think you'll see that this team has been extremely active in reshaping this Company and making it a more focused and more sustainable source of earnings, as well as serving our clients better.

And I couldn't be prouder of how the team has worked together, under a great deal of pressure to deliver these results.

And so I have a great deal of confidence in their ability to deliver the 2017 prospective results that we've discussed today as well.

And I think that the additional disclosure that we've given you gives you a better sense of the multi-dimensional nature of their roles, as they optimize our mix of business, both geographic by product by customer segment, and I think that as I speak to our shareholders that may be listening, I think that the leadership team that we have assembled is really very well suited to completing this task.

So I want to give them a shout out for the accomplishments they've made.

And so thank you very much for your attention today, and I look forward to following up with you individually in the weeks to come.

This concludes today's call.

Thank you for your participation.

You may now disconnect.