Q4 2019 Earnings Call
Our speakers today include Bryan do borough CEO, Peter Zaffino, President and Chief operating officer of energy.
And CEO of General insurance cabin, Hogan, CEO life, and retirement and Mark Lyons CFO.
Following their prepared remarks, we love time for acuity.
I'd also like to know that Peter and Mark will be hosting the fireside chat at the Bank of America Insurance Conference today at 12, 35 PM Eastern time, the link for the webcast can be found under the Investor Relations section of our website.
Before Brian begins. Please note that today's remarks may contain forward looking statements, including comments relating to company performance strategic priorities business mix and market conditions.
Mr are not guarantees of future performance or events and are based on management's current expectations actual performance any events may differ materially factors that could cause results to differ include the factors described in our first second and third quarter 2019 reports on form 10-Q, or 2018 annual report on form 10-K at or other research.
And filings made with the FCC 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.
Additionally, some remarks today may refer to non-GAAP financial measures the reconciliations of such measures to the most comparable GAAP figures are included in our earnings release financial supplement and presentation all of which are available on our website I'll now turn the call over to Brian. Good morning. Thank you for joining us to review, our fourth quarter and full year 29.
Results for the fourth quarter adjusted after tax income 919 million or dollarsthree per common share.
Full year 29 see an adjusted after tax income was 4.1 billion or 1009 cents per common share and return on common equity in adjusted return on common equity equity were 5.3% and 8.3% respectively.
These results reflect the significant progress we made over the course of 29 seen on the execution of our strategy the position AI jie for long term sustainable and profitable growth.
Focus on fundamentals.
The foundational work we've done since late 2017 is becoming evident on our financial performance.
Our 2019 results, reflecting broad based improvement across all segments.
I'll highlight some of the important milestones we achieved this past year. Most notable because those in general insurance business.
Got it produced a full year 2019, combined ratio 99.6, and an accident year combined ratio as adjusted of 96%. It's hard to it's hard to say given all the issues today RG over the last decade plus.
Honestly can't remember the last time.
She had a four year underwriting process. This inflection point is critical to achieve and reflects the tremendous efforts by our seed and general insurance led by Peter will affect the turnaround on the scale and timeline never be seen never before seen in our industry.
Beginning in late 2017 that you guys seem acting with urgency to design a strategy to improve wonder running fundamentals repositioning our portfolio aggressively reduced limits judiciously deployed capital capacity and it's still expense discipline.
Additionally, the GRC designed and innovative reinsurance strategy to reduce risk and volatility in some sort of capital.
The disciplined execution on the leadership they demonstrated in the global marketplace throughout many 18 in 2019 nominally dramatically reshaped our portfolio stimulated the global market cycle that I believe is improving and sustainable a great Testament.
To this leadership is that throughout the last couple of years, our clients distribution reinsurance partners as well as other stakeholders actively supported our actions in place their trust and confidence in AI Jie as we continue to provide solutions for current and emerging risks. While there is so much more to be done our strategy is clearly work.
And the scene in general insurance will continue to make progress over the coming year.
I was wondering I'd seen we also saw significant improvements in other areas of our business life and retirement delivered consistent solid results in the face of continued headwinds from sustained low low interest rates and tightening credit spreads due to Kevin under seems proactive strategy to develop a diversified portfolio and brought.
And network Eleanor ended the year when that adjusted return on common equity of 13.7% ahead of our guidance.
Full year 2019, net investment income was 14.4 billion versus $12.7 billion in 2018 helped by a strong alternative returns favorable equity markets and tightening spreads and the credit markets. You also makes a significant progress in de risking our legacy portfolio.
Announcement of an agreement to sell our majority interest in order to.
The sale of subject to regulatory approvals and is currently expected to close mid year.
I'm very pleased that with all we accomplished in 2019.
And our progress reflects the hard work and commitment of our workforce across all of the G. We remain committed to achieving a 10% return on adjusted common equity by the end of the 2021.
Mike will provide more detail that much money financial outlook.
As we look at the 2020, we continue to be laser focused on the execution of our strategy the position AI jie as both a leading insurance franchise and a top performing company AI, Jie, 200, which peters, leading and will discuss in more detail. During his remarks will be a significant body of work this year and over the next several.
Years.
Like our approach in general insurance back in 2017, the foundation work radiology to what it started in earnest in 2019 and will accelerate in 2020, we will continue to build out a world class team of professionals with significant transformation experience will drive this work and cost across our global organization.
The team has identified issues and pain points and creating plans that will redefine how we do business and now we create value for our stakeholders.
This is not about band AIDS and temporary fixes that simply cant down the road. This work will address underlying problems and position us for sustainable long term profitability.
They are G 200, and support program with multiple work streams that require intense focus and disciplined execution.
The sustainable improvements G 200 will deliver requires significant investment.
I will ultimately lead to reduce expense base over time.
When you consider the scope and complexity I've not seen the transformation of the scale in my career much like the G. I turn around we will have some surprises and perhaps setbacks one way. We will look we will work through them and then the end, we will be vaseline food and a stronger company.
200, as a marathon not a sprint well results will not be linear we fully transparent as this worked aggressively.
My confidence continues to grow that we're in right that the they atg I'm very proud of what our colleagues have accomplished a hard work dedication and commitment is delivering results.
We are energized by what Twentys money holds for us.
With that I'll turn the call over to Peter Who'll provide more information on fourth quarter and for your financial results and general insurance as well as a G 200.
Thank you Brian a good morning, everyone.
Today I will review 2019 financial performance for General insurance update you on major reinsurance placements completed as part of the January renewal season share observations regarding current market conditions and outline notable business unit accomplishments and general insurance I will also provide an overview of AI Jie 200 as Brian.
I'd mentioned, we're very pleased that in 2019 general insurance achieved an underwriting profit.
This was an important milestone for our team and reflects the significant work that was done in 2018 and 2019 to build a world class leadership team established a new comprehensive underwriting strategy for general insurance clearly outlined are defined risk appetite for our distribution partners in clients and complete critical someday.
Additional work to improve our portfolio, while meeting the reducing volatility through underwriting actions in a comprehensive reinsurance strategy.
Our improved financial results provide clear evidence that our decisive actions are being accepted in the marketplace. We are reestablishing AI jie as a market leader, which could have not happening without the great support strong relationships, we have with our distribution partners and clients.
Turning to our financial results the adjusted accident year combined ratio for the full year of 2019 was 96% of 370 basis point improvement year over year, including a 240 basis point approving the loss ratio and 130 basis point improvement on the expense ratio.
The North America, the adjusted accident year loss ratio of 67.1% of 300 basis points improvement year over year.
The disciplined execution of our strategy resulted in a better quality more profitable portfolio and North America also benefited from Validus Gigawatts.
As noted on the third quarter call 2019 of the challenging year for crop industry while.
In the fourth quarter.
As we did in the third quarter, we increased loss estimates due to crop yield shortfalls, resulting from for growing conditions and increased reserves due to the prevented planting claims from the impact of wet weather conditions.
As a result crop negatively impacted north America's full year 2019, adjusted accident year loss ratio by 100 basis points.
North America personal insurance continued to perform as expected with an 80 basis point improvement in the adjusted accident year loss ratio for the full year.
As business mix improve across the portfolio.
Private client group experienced lower severe at Attritional loss activity and I'm pleased with the progress the new management team is making in that business.
Moving to international be adjusted accident year loss ratio for the full year was 56.4% a 270 basis point improvement year over year.
This improvement was driven by strong results in specialty in Talbot and significant remediation efforts, taking hold and prop.
All of which contributed to lower severe losses.
International personal insurance performance was inline with expectations 70 basis point improvement and the adjusted accident year loss ratio for the full year driven by personal auto.
Particularly in Japan.
From a top line perspective net premiums written net premiums earned continued to reflect our disciplined underwriting and reinsurance decisions total net premiums written for the full year were 25.1 billion, the 4% reduction year over year, excluding foreign exchange net premiums earned in the full year were 26.4 billion.
3% reduction year over year, excluding foreign exchange.
Lastly, during 2019, we instill discipline and focus on expense management across general insurance, reducing total operating expenses by over $500 million.
Full year expense ratio was 34.4%.
Turning to cat activity fourth quarter net cat losses were 411 million compared to 826 million in the prior year quarter.
I don't have us because the single largest driver of losses, and a 233 million of which 155 million was attributable to Validus re net of the aggregate Retrocessional program, which responded inline with expectations.
International personal and commercial insurance AI Jie average market share in Japan is 6% in the regions. Most impacted by 2019 cat events. Our reinsurance program responded as expected and limited net losses from how about 78 million before reinstatement premium.
Remaining cat activity in the fourth quarter, approximately $150 million net losses from events in North America, the largest which were the Texas tornadoes and unrest in Chile.
For the full year 2019, total cat losses were 1.3 billion net of reinsurance recoveries. This compares to cat losses of 2.9 billion net of reinsurance recoveries in 2018 at 4.2 billion net of reinsurance recoveries in 2017.
We continue to refine and enhance our reinsurance purchasing strategy as our underwriting actions take hold.
Overall, we're pleased with the outcome of the January one renewals, while there are signs of firming in the reinsurance market significant relationships you establish over the last half years enabled us to achieve favorable renewals of our major treat inline with our expectations.
We continue to enhance both the aggregate and occurrence structures for our global property Cat program, which provides significant protection against both severity and frequency of event. In addition to providing extreme help protection against events and geographies, where we have lower March.
For the 2020 aggregate protection, we improved the expiring cat program by combining the international and North American deductibles into a single worldwide deductible and reducing the each and every event deductibles to be more tailored by geography and peril.
These enhancements increase the relevance of the aggregate protection, particularly with respect to secondary and lesser model parents. We also purchased two core occurrence towers. One power covers North America commercial property and the other covers all international property, including Japan.
As with our expire in 2019 Global Cat program Global aggregate protection also provides us with significant additional limit losses arising from a single larger terms.
In addition, we purchased a separate occurrence tower for US private client group bifurcated get from North America commercial haven't dedicated towers part of our initiatives Lloyds to establish syndicate 2019, which is focused on our us high net worth business.
This was the only substantial new program, we entered into on January Onest.
With respect to property per risk through a combination of the significant reduction in gross limits deployed and enhance reinsurance purchasing over the last two years, we dramatically reduce our net retention to any one property loans as a result, we renewed our 2020 cover with enhancements that reduced the maximum of catching pulling from 50.
<unk> million of 25 million and we reduced our purchases for higher layers as our strategy to reduce gross limits continues to dramatically improve our risk profile.
In the aggregate, we were able to improve our overall cat reinsurance program, including terms and conditions, while reducing the overall cost by approximately 7% year over year.
We will continue to refine and enhance our reinsurance program as the year progresses and expect to finalize syndicates 2019 in the first half of the year.
Turning to the overall rate environment and market conditions during the fourth quarter, we continued to see meaningful acceleration and rate increases and it was the strongest quarter of rate improvement we've seen over the last decade.
Overall rate improvement for general insurance, excluding validus in black belts within the low double digits in the fourth quarter and high single digits for the year.
I'll give a few examples that provide more color on the rating.
North America commercial rates, increasing the low double digits to mid teens in the fourth quarter and high single to low double digits for the full year.
International commercial rates, increasing the low double digits in the fourth quarter and mid to high single digits for the full year on average across all geographies.
North America admitted excess casualty rate increases trended in the mid 40% range in the fourth quarter and energy rates increased approximately 35%.
International fourth quarter rate improvements were led by the UK, where do you know rate increased approached 40% on marine and energy rates increase in the mid 20% range.
Now I'd like to provide additional insight into the progress you're making in certain lines of business highlights noteworthy accomplishments.
I'll start with lessons, which I've spoken about before and it's a great case study on the disciplined execution of our strategy.
2019 represented the first full year of executing on our decision.
To be disciplined underwriting excess and surplus loans.
We shifted our focus to true BNS business emphasize the wholesale channel and began an effort through risk selection to bring better balanced portfolio.
The response from the market has been a remarkable and our distribution partners have been very supportive of this repositioning.
Casualty and property new business with our wholesale partners more than doubled in 2019.
In Lexington, casualty fourth quarter, and full year, 2019 submission volume increased 86% and 70% respectively.
We've reduced limits on our most volatile accounts by 67% in the fourth quarter and 61% for the full year, while rate increased 28% in the fourth quarter and 21% for the full year.
In Lexington property fourth quarter, and full year 2019 submission volume increased 41% in 48% respect.
We reduced total enforced limit a 19% in the fourth quarter.
And 52% for the full year, while rates increased 32% in the fourth quarter, 17% for the full year. We also increased average deductibles by over 50% in 2019.
We expect to see greater underwriting discipline, and improving rate environment and units market seeable future.
North America retail properties a great example, the bold actions were executing on.
This portfolio is taking more time to reposition because of a number of long term policies that were in force.
In 2019, we reduced total enforced gross limits.
40 billion was 17% in the fourth quarter it over.
And by over $150 billion, 44% for the full year.
We increased average deductibles by 21% in the fourth quarter in 31% for the full year.
Rate increases were in excess of 40% in the fourth quarter, both total portfolio and when excluding the impact of long term agreements for the full year total rate increases were 19% and increases excluding the impact of long term agreements for 25% as you can see we've dramatically change this portfolio and in 2020.
We expect further improvement in de risking as long term agreements roll off.
The North American financial lines commercial do you know racing through nearly 35% in the fourth quarter marketing second consecutive quarter of increases exceeding 30%.
On a full year basis, we achieved rate increases that exceeded 25 person.
This improvement was led by public Dino where rate increases were 38% in the fourth quarter and 29% for the full year.
We continue to manage our exposure to do you know trends introduce primary commercial do you know aggregate limits by 40% in the fourth quarter and over 35% for the full year.
Additionally, we reduced policies with limits greater than 10 million and lead layers by 50% in the fourth quarter and over 40% for the full year.
With respect to international we're very pleased with the performance of our specialty business led by a significant improvement in our energy portfolio.
Movement in full year adjusted acts in your combined ratio was as result of limit reductions changes to underwriting guidelines and deductibles rate actions and select the class things.
Finally, our globally in each business produced a strong underwriting profit in 2019, you plants with celebrate investment in this growth business, while maintaining focus on risk selection and portfolio optimization.
General insurance enter 2020 with great momentum, we will continue to execute on our underwriting a reinsurance strategies to further improve profitability.
Next I'd like to spend time on a adds you 200, which is our global multiyear effort to focus on the long term strategic positioning of AI Jie and a top priority for us in 2020.
As Brian noted this work focuses on transformational change to our infrastructure and underwriting operations as well as developing a new data architecture as we focus on delivering value through scale and simplification.
In 2019, we engage colleagues across hedging the robust diligence exercise that provided important perspective and insight into how we define who we are as a company how we differentiate ourselves in the global insurance marketplace, how we create value for clients policyholders distribution partner colleagues and other stakeholders.
We conducted a careful analysis and evaluation at the output from this initial phase of work guided by the four core objective strategy to wonder.
Achieving underwriting excellence.
Modernizing our operating infrastructure.
Enhancing user and customer experiences.
And becoming a more unified company.
Based on this analysis, we identified 10 core operational programs, we will begin to execute on in 2020.
We expect these programs will require $1.3 billion of investment over the next three years and deliver $1 billion a run rate benefits Geo we by the end of 2022.
We've been carefully planning execution roadmaps for each of these operational programs with a focus on resource and investment prioritization as well as disciplined execution.
Let me provide a brief overview of the 10 operational programs three sit within general insurance building out a standard commercial underwriting platform enhancing digital workflow and our Japanese business and improving capabilities in private client.
The standard commercial underwriting platform will modernize our global underwriting capabilities by simplifying and streamlining processes and tools to create a contemporary data architecture.
This platform will enable improved underwriting analysis and allow us to drive better risk management pricing in portfolio decision, while improving user experience.
With respect to Japan, we will transform this business into a next generation digital insurance company with the ability to offer anywhere anytime any device experience that our customers and agencies spec.
To deliver on the digital first approach will modernize our underlying technology infrastructure.
And our private client group business decision, making will improve primarily through modernizing our legacy technology and moving to digitize workflows.
As a result of this work PCG will be well positioned to offer brokers agents and clients and improved user experience.
The other operational programs will transform shared services I, Ci finance procurement and real estate across biology.
With respect shared services, we will expand our existing capabilities on a global basis to create AI Jie global operations, a multifunctional fully integrated operating model digitally enabled and process and increased scope and scale.
Our goal for AI Jie Global operations is still a strong culture of operational excellence and continuous improvement that also unifies the company and delivers best in class capabilities.
Oh, Gee, where we have to work streams, we will transform the operating model the function itself to build a modern scalable and secure technology foundation to improve operational stability and enable faster business technology deployment.
The key components of this program focused on materially eliminating legacy technology debt.
Simplifying our business application portfolio and strategically moving to cloud services.
In finance, where we also have to work streams, we will transform the operating model of the function itself and modernize our infrastructure through technology solutions, and simplify financing actuarial processes, while materially improving our analytics capabilities.
In procurement.
We are creating a highly efficient global procurement and sourcing organization to leverage our purchasing power maximize value minimize risk and support continuous and sustained profitable growth.
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Lastly, we are optimizing and consolidating AIG is real estate portfolio to ensure it is cost effective resilient and reflective of our global footprint.
Each of these programs is complex and will require disciplined execution.
In the yen this work will materially improve how we do business and strategically position AI jie to become a top performing company.
We will be fully transparent about the execution of a RG 100, and will provide quarterly updates on our progress.
Now I'll turn the call over to Kevin.
Thank you Peter and good morning, everyone.
Today, I will discuss our full year results and outlook for 2020, then briefly comment on our results for the fourth quarter.
Life and retirement recorded adjusted pretax income of 3.46 billion for the full year and delivered adjusted return on attributed common equity at 13.7%.
Adjusted pretax income increased by 268 million from the prior year.
Solid underlying results were further supported by capital markets conditions and their effect on both assets and liabilities.
Impacts from accretive equity market returns increased by 244 million, including higher fee income lower deferred acquisition cost amortization and higher returns and alternative investments short term positive impacts from lower interest rates and credit spreads increased by 154 million incur.
Putting higher returns on fair value options securities and gains on calls.
Our earnings also benefited from higher assets due to new business growth.
He is positive impacts were partially offset by a further impacts on spread compression of approximately $112 million or seven basis points energy and investments to enhance our operating platforms.
As to our topline 2019 was a good example of our strategy to accelerate more moderate business, depending on relative returns with very favorable pricing conditions. During the first quarter, we deployed significant capital in individual retirement and per dose produced robust new business volume at attractive margins.
As rates in spreads declined over the remaining three quarters, we adjusted our pricing and reduced individual annuity sales levels as our view of margins became less attractive.
At the same time, we achieved record year for New group acquisitions and group retirement and continued to grow international sales for our life insurance business and focused on consistent profitable growth and institutional markets.
Looking ahead to full year 2020, we expect adjusted pretax income to be more in line with our 2018 results.
These expectations assume equity market returns of 6.5% and 10 year treasury rates around 1.7%.
To give you an idea of market sensitivity of our adjusted earnings including impact both assets and liabilities a 1% decrease in equity market returns decrease adjusted pretax income by approximately $30 million to $40 million annually and there would be a corresponding increase and earnings from a 1% increase in equity.
Market returns.
10 basis points decrease and tenure treasury rates, but decreased earnings by approximately five to 15 million annually and there would be a corresponding increase and earnings from a 10 basis points increase in treasury rates.
It is important to note that these market sensitivity ranges are not exact more linear since our earnings are also impacted by the timing and degree of interest rate movements as well as credit spreads and other factors.
Based on our interest rate level assumptions, our expectation for full year 2020 is for base investment spreads across the whole portfolio to declined by approximately eight to 16 basis points annually with the middle of the range, resulting in a headwind of approximately $200 million.
Based on our expectations for rates in spreads we expect negative net flows for group retirement and individual retirement for the year with decreased levels of individual annuity sales, particularly in fixed annuities.
Finally statutory perspective, we expect to continue to generate solid earnings and maintain strong capitalization and operating entities.
Now I will briefly discuss our results for the fourth quarter.
Life and retirement recorded adjusted pretax income of 839 million for the quarter.
Adjusted pre tax income increased by 216 million from the prior year quarter.
Impacts from accretive equity market returns increased by 176 million and short term positive impacts from lower interest rates and credit spreads increased by 46 million.
These positive impacts were partially offset by spread compression and previously mentioned investments to enhance our operating platforms.
Individual retirement premiums and deposits decreased primarily due to lower fixed annuity sales, reflecting low rates introducing credit spreads.
Lower sales resulted in decreased net flows for total individual annuities total assets under administration grew driven by strong equity market performance and higher annuity net flows in the first half the year.
For group retirement premiums and deposits increased by 10% from the prior year quarter, driven by strong group acquisition results.
Net flows were below the prior year quarter due to higher spenders.
Despite facing negative net flows for a period of time, we've continued to produce solid earnings for this business as assets under administration have continued to grow.
So our life insurance business total premiums and deposits increased due to higher international sales.
Are you asked life sales declined as we continued to deemphasize guaranteed universal life sales in the current interest rate environment and indexed Universal life sales remained under pressure.
Lastly, our overall mortality returned to trend and was once again favorable making this 10 out of the last 12 quarters, where mortality was either at or favorable to pricing assumptions.
For institutional markets, we have continued to grow our asset base and earnings in the business continues to be well position to capitalize on available growth while remaining focused on achieving targeted returns deposits decreased due to robust pension risk transfer activity in the fourth quarter of last year.
Across our businesses, we are continuing to invest as needed to prepare for the evolving regulatory and accounting landscape and to leverage these ongoing investments to further improve our efficiency and competitive position.
We are pleased with the comprehensive retirement reform provided by the passage of the secure.
In addition to the expected outcome as increasing the availability of income solutions for participants and defined contribution plans. We believe that will ultimately enhance the overall education and awareness of the need for protected lifetime income as part of a comprehensive diversified retirement.
Well our group retirement business, we are evaluating several unique implant lifetime income options.
Other benefits of the secure App include raising the age for required minimum distribution 72, and eliminating the age limit for contributions to iras, all of which present opportunities for both our group retirement and individual retirement businesses.
To close we remain committed to our ongoing strategy to leverage our broad product expertise and distribution footprint to deploy capital to the most attractive opportunities, which we believe positions us well to help meet growing needs for protection retirement savings lifetime income solutions now I will turn it over to Mark.
Thank you Kevin let good morning all.
Hey, guys adjusted after tax earnings per share was one dollar resets to the fourth quarter compared to a negative 63 cents per share in the prior quarter.
He had adjusted pretax income of 1.2 billion, an adjusted after tax income of $919 million for the fourth quarter and for the full year. Adjusted after tax earnings were approximately 4.1 billion for 4059 cents per diluted share representing a $3 a 42 cents per share improvement over 2018.
Adjusted book value per share, which excludes AOCI I in the DTA was 58089 cents an increase of 2.2% from third quarter is 7.2% relative to year end 2018.
Return on adjusted common equity or we see each with an annualized 7.3% for the quarter and 8.3% for the full year driven by general insurance at 9% for the full year likely requirement at 13.7 additional for the full year.
An important driver of earnings at our own see improvement in the fourth quarter with our net investment income or Anya.
Which was 3.5 billion on an adjusted pre tax income basis, almost the same as the third quarter, Tony Nike, reflecting higher alternative investment income as prepayments in Hong Kong.
And I on an adjusted pretax income basis was up 649 million for fourth quarter, 48 game, which has negatively impacted by higher rates lower equity market negative returns on alternative last year.
On a full year basis, 2019, and I was nearly 14.4 billion.
On an adjusted pre tax income basis, well above our original expectations and up $1.7 billion 48 theme due to strong alternative returns impact of lower rate and credit spreads on fair value option bond and equity markets offset in part by the impact of lower reinvestment rates.
Legacy contributed 2.5 billion by 2019.
I want to call your attention to additional invested income information on page 40 say for the financial supplement which provides information on the drivers of la vie for both Gi and.
Liking retirement.
They should help you refine your models, including the impact of continued low rates on margins and Eleanor and elsewhere I'll discuss our 2020 outlook later in my remarks.
Turning to generally carry the segment produced an underwriting profits with a calendar quarter combined ratio, 99.8% and current accident quarter. Excluding had combined ratio of 95.8% calendar quarter underwriting income was $12 million and increase at nearly $1.1 billion for the fourth quarter of 2018.
With North America, North America, contributing 852 million of improvement and international operations contributing 231 million of approval.
Also both commercial and personal lines through their accident quarter underwriting margins in the fourth quarter versus the prior year quarter. Moreover, each reportable segment also call improvement for the full actually are pointing Nike over 2018, both in North America end international commercial lines and personal loans.
The full 20, Nike accident year combined ratio of grew 370 basis points relative to 2018 and as Peter mentioned with a 240 basis point improvement in the loss ratio 140 basis point reduction in the Geo ratio.
Partially offset by a marginal 10 basis point increasing acquisition ratio.
Additionally, theater reference crop results to the year negatively impacted the full global 20, Nike accident year by a half loss ratio for it had a global level.
It's also important to note that this improvement in the loss ratio represents the benefits multi underwriting actions taken to 28 in 2019.
2020, and beyond you begin to see additional improvement as finer point adjusted filter through our financial results.
The net cat ratio for the fourth quarter was 6.5% versus 11.3% fourth quarter 2018, Despite a high level of close cats in both quarters. That's a combination of gross line re underwriting together with the improve reinsurance program continues to reduce the general insurance light cat ratios, both quarters had lost which.
In the wildfires, the Japanese typhoons, but our aggregate reinsurance program reduced our net exposure consistent with our commentary on third quarter call.
Turning to prior year development therapy like eight.
Thats in prior quarters, we'd like to unpack that for you.
The reported 153 million a favorable development includes 58 million of favorable amortization, probably 82 deferred gain or adverse development covered for gain resulting in 95 million a favorable development, excluding that influence which is on a post ITC recoverable base.
On a free 80 basis, we had $118 million a favorable development with.
With 2017 cat rate leases and wildfire separation, producing approximately $290 million a favorable development global specialty provided $70 million favorable development $60 million. They are both development and international personal lines.
<unk> million, a favorable development U.S. primary casualty lines, which include general liability workers' compensation and approximately 13 million from various other units.
Excuse me on the other side.
We had unfavorable creating the development of approximately 320 million stemming from our us financial lines book.
This unfavorable development emanates, primarily from our private not for profit you know book, which represents about $130 million unfavorable and mergers and acquisitions book, which represented roughly 90 million of unfavorable other areas largely represented fine tuning as the deli had 39 million unfavorable.
Public primary and excess CNO, roughly 35 million unfavorable 60 million in fiber and $7 million favorable Wasnt Ella.
This represented roughly a 210 million dollar unfavorable unopposed 80 basis, which indicates that the strengthening is mostly centered in accident years 2016 48.
On a full year create easy basis. The company enjoyed 341 million a favorable development led by workers compensation personal line global specialty and commercial short tailed lines with unfavorable development on the annual basis emanating from financial lines is just discussed and some in excess casualty on it.
Accident year, and post 80 basis and that showed in the financial supplement.
Accident year 2018 increased by one loss ratio point over the year FY 2017 accident year decreased by 0.6 loss ratio point I'd actually your place if he remained flat.
We reviewed the roll forward potential and the impact of that you're pointing Nike.
But it was not the material in some segments somewhat improved and others somewhat worse.
Peter discussed the rate increases being achieved throughout general carrots, and although they bode well for 40 play the uptick in U.S. social inflation together with an increasing proportion litigated claims an increase securities class action file may cause slower recognition of any a written medically implied margin expansion.
The book has undergone massive re underwriting so our should our historical experience is only moderately useful projecting forward.
Given the changes in the external economic and legal climate, coupled with AIG is material underwriting changes, it's prudent and best practice, let the loss experience or merge or any accident year 2020, Jeff alter contemplated.
Turning for the life and retirement segment.
Adjusted pre tax income is nearly 3.5 billion as.
Kevin noted an increase of 260 length of 28 gain for the quarter. Adjusted pretax income was 839 million up 260 million over fourth quarter 2018 helped along in part by higher equity mode.
Instead of deposits decreased 3.6%, a full year basis, as we continue to be prudent on product prices in this environment.
Regarding spread compression individual retirement variable in index annuities combined base net investment spread fill up 28 basis points for 2019 versus last year, whereas individual retirement fixed annuities based investment spreads fell off just nine basis points for 20, Nike and versus 2018 on the group retirement side based net.
Thats much spreads actually increased four basis points versus last year.
Regarding net flows out of full year basis, because there's a retirement across all products combined at negative net flows. Although these were cut in half relative to last year.
Fixed annuities materially reduce their net outflows variable in the at least with similar to last year, whereas index annuities continued to exhibit material Frank with positive net flows of 4.7 billion for the year.
Retail mutual funds had a similar level of net negative outflows as respect surrender rates for the year fixed annuities were 90 basis points, lower and 2018, whereas the composite of variable and fixed annuity rates were effectively flat.
The group retirement side net flows were negative, but marginally better than 2018, and the surrender rate decreased 60 basis points on a full year basis. Additionally, as a measure of future earnings power assets under administration group working and a half percent during 2019 with similar growth experienced by both individual and group retirement.
The light segment grew life insurance in force by nearly 10% during the year aided by the growth in international life.
Institutional markets had 45 million more and adjusted pre tax income with premiums and deposits level in 2019, the pension risk transfer space with guaranteed investment contract down in volume.
As Kevin discussed the combination of reinvestment yield, including low rates and tight spreads and minimum crediting rate put pressure on 2019 earnings which were offset in part by very strong alternative returns, including a large scale in a private equity left as previously discussed.
Turning to legacy adjusted pretax income was 177 million compared with the fourth quarter 2018 law, which had reflected a 105 million charge loss recognition on acted and help cancer in disability block.
Legacy Anya, who your basis with nearly 2.5 billion slightly higher than last year and the annualized recurring right attributed common equity was 5.4% of the year driven by $501 billion adjusted pre tax income.
As a reminder, legacy is largely driven by 42, three and in November we announced the agreements to sell a 76.6% interest imported food, which we expect to mid year subject to regulatory approval.
With respect to attack the final effective tax rate with 22.1% 2019 applicable to adjusted pre tax income and 19.3% for the quarter inclusive of discrete items, which also includes a nine month $14 million catch up adjustment to reflect lower full year tax rate as you know effective.
Tax rates, our update each quarter.
Using actually that they results do any remaining quarters, our forecasted in integrated and there's always the tax rate is heavily influence each quarter by the geographic distribution of income by tax jurisdiction.
We did not repurchased any shares in the fourth quarter. So our board authorization remains at $2 billion moving to leverage as compared to year end 2018, our total debt and preferred the total capital ratio improved 310 basis points to 26.2% at year end 2018.
Adjusted book value per share increased 7.2% from year end 2018, GAAP book value per share increased 15.2% since the year end 2018 benefiting from approximately 6.4 billion of AOCI I gain during the year.
Now I'd like to pivot, providing some information on our outlook for 2020, all on an adjusted pre tax income basis.
However, recall the 29, he had very strong components and profit that aren't expected to recur and 20 point net investment income or that is a key example.
Excess returns of our alternative portfolio together with credit spread compression is not expected to repeat in 2020, together lead fewer because and I had forecast for 2020.
Hi, I is expected to be nearly 13.6 billion another full year basis, which represents an approximate 4.3% yielded investable assets within associated range of plus or minus 25 basis points.
They 2020 Eni by segment of a point estimate perspective is expected to be 3.2 billion for general insurance 8.2 billion for life and retirement 2.2 billion for legacy on the basis that border team stays with AI Jie all year, so it's 100% level.
General insurance is expected to achieve 25 billion for 2020 net written premium virtually flat the play 19th and therefore, a similar to Lucky Friday net earned premium outlook.
However, given what Peter discussed about the evolving structure Syndicate 2019, our forecast for net written premium may decrease as this structure is finalized we will provide an update of 20 Syndicate 20, Nike on our first quarter call.
Moving onto underwriting profitability the accident year combined ratio for truck body expected to be in the range of 93.8% to 94.8% ex cat.
Life and retirement, we expect to have adjusted pre tax income between 3.1, and 3.3 billion for 2020, which is the level comparable to 2018.
Legacy on a full year basis is expected to provide 80 T.I. of roughly 100 120 million.
Other operations.
Beginning with the first quarter 40, funny, we're going to provide more clarity and insight into other operations.
However in total we expect that fee adjusted pre tax income 2020 to be between 60 to 75 million lower than 2019, meaning a bigger negative.
This represents an amalgam of consolidation and elimination entry interest expense on direct they get as well as interest on debt within consolidated investment entity Blackboard and both Geo Lee and other income that in some cases is gross up for internal service charge backs.
We've now given you the aggregate expected financial impact, but that's highlights the need to provide increased visibility into the components and we will do so.
Peter noted with respect to AG 200.
We expect to invest $1.3 billion over the next three years and to realize a 1 billion dollar of run rate Geo we savings as we exit 2022.
We anticipate the impact to adjusted pretax income in Twentytwenty is a 150 million dollar APQE gain with roughly 75%. This the reflected in general insurance with the balance evenly split between life and retirement and other operations.
Run rate savings are expected to date on a cumulative basis 300 million 600 million and 1 billion in 2022.
Through 2023 point 22.
We currently estimate roughly 400 million of the 1.3 billion cost to achieve being capitalized as the assets are put into service.
We anticipate establishing a restructuring charge in the fourth quarter and we'll provide more detail at that time.
Regarding capital management and associated liquidity, our options are primarily directed towards debt reduction unexpected IRS payment of approximately 1.7 billion in the first half its 2020.
AG 201.3 billion of investment beginning in 2020.
And other possibilities to that back into our core business.
As for share repurchases, we continually evaluate that option, but we'll wait until the fortitude sale is closed review more volley.
Lastly, we expect to make additional progress, reducing our yearend debt and for brings the total capital ratio lower than the current 26.2% and with that I'll turn it back over to Brian. Thanks, Mark We had a lot of content. So we'll go to questions. We will stay on fast non account.
As many questions as we've done some stocks and operator.
Thank you. The question answer session will be conducted electronically to ask a question. Please press star one on your telephone keypad, if I used to ask speakerphone. Please make sure immune function is turned off to layer signal to reach the equipment.
Yes that you please limit yourself to one question and one follow up till now everyone an opportunity to ask a question.
Once again press Star one if you have a question.
We'll go first to Meyer Shields KBW.
Great. Thanks, Good morning to really quick question on us.
Good morning site.
In the I think your loss ratio, excluding crop were there any other adjustments to the full year numbers to bill your 2019 numbers.
From a full year aggregate that nothing material.
Okay, perfect and we look forward I'm wondering how the.
Planned reduction in earnings volatility aligns with what we see as much better pricing in local markets in particular.
As far as though that goes we expect more exposure on a year over year, but that's the losses or direct or better.
So it really question around Retros increasing costs.
Thanks, Peter can answer that question I think we've we've gone to our market with our reinsurance program you heard theater describe it so for Twentytwenty I think weve.
Establish what the cost will be for us for Peter you want to so thanks, Myron retro costs have increased and I think it'll be a little bit different than last year, because believe as we enter into the April 1st and June 1st renewal dates for Japan in Fourq, respectively were going to see meaningful rating.
Creases on same structures and so while.
The reinsurance market has seen increase retro costs I believe that the reinsurance costs will be able to.
Bear that cost in terms of how we're going to reinsure different portfolios.
And we are not taking a lot more volatility in the portfolio in other words because of the retro cost we're not looking to take a lot more net.
But consistent with our overall strategy on volatility and with respect to my talk about though the second but in terms of Validus, yes, that's what I was referring more to on April 1st in June 1st if they ought to be able to.
In a position themselves in the marketplace, we're not looking to grow.
Take on more cat exposure on a net basis throughout 2020.
Next question.
Well move next to Jimmy dealer at JP Morgan.
Hi, Good morning, I had one question on guidance and then also on life underground on guidance you gave a lot of detail on expectations for the year on margins and stuff I don't know if you mentioned anything on the tax rate and also on.
Sort of what type of a capital do you expect for New York.
Looking as a normal capital.
Mark Yeah. Thanks. Thanks for the question no we gave guidance out on an adjusted pre tax basis.
At this point I'm always again my point is really affects about so it'll be a few or on the wood was very low in the fourth quarter and relatively low and in 2019 years old.
Yes, actually the guidance around that is pretty similar what we said last year, So 20 to 23.
Okay, and the gap when anything on it.
Oh cat load.
Oh, well cat load.
I'm really glad you asked this question because you may recall that I think in the middle of the year. We said we're going to start looking at this like every other company, which is looking at retard periods and looking at on though he added 80 basis.
Hadn't K that'll be coming out we'll provide that information for you, but a also we're getting away from we don't manage the company that way, we manage it on the return period basis and.
I'll leave it up.
And then on the life and retirement business were spread declined more than I think the guidance you give them or there will be around two to three basis points per quarter and book individual and group retirement.
That's great that's driving this or the bump the person or flexibility to club crediting rates. If you just comment on what's really driving the.
The duration.
Yeah sure Jimmy Thanks, there is a little bit annoyed and the spread movement, a third quarter to fourth quarter and year over year.
And frankly, that's relative to just some of the specifics of the market conditions through the quarters and you know twice a year over year trend is really a you know I think a much more relevance and so based on the environment that we're expecting you know where sort of looking on an annualized basis at an eight to six.
18 basis points.
Compression, which is a little bit of an increase based on what we had before.
But you know on the entire year basis, our compression in 2019 was seven basis points collectively.
So I think that we're seeing a little bit of compression is largely within what we expected certainly market conditions are very challenging a right now there was a little bit of noise third quarter to fourth quarter, but no impact on trend as far as where concerns and maybe most importantly, we are still seeing very attractive spreads available.
Okay. Thanks, Tom or next question I should say.
Well go next to Tom Gallagher at Evercore.
Good morning, I'm, just a first question on on the expense side, the restructuring charge, that's coming in one Q Mark that you referenced.
Is that exact likely to be.
Most of the or a sizable portion of the billion three investment or you're going to take no upfront or is that going to be far more modest how should we think about chart bill charges be below the line.
Oh are included in operating as you record somebody's.
Well yeah good questions.
Some of that we'll be giving you chapter and verse when we go into first quarter calls as we alluded to.
But you have mixtures of whats above and below the line you know you.
And we'll give you all that detail as far as whether it's the major part of the restructuring I love the total cost of investment.
It's not going to be the major but we'll we'll give you the details on that as again in like you.
Okay, and then just a follow up.
Sorry, just a follow up on Kevin for investment spreads I, just wanted to be clear I.
No what the messages here I heard the year over your comment on bond spreads do you expect spreads to be down versus the Fourq you level because he was kind of a sharp drop in for Q would you expect them to be more stable versus for Fourq here, we're still compressed from for Q levels.
But well.
No I think that obviously it does depend on what the specifics of each quarter to quarter movements are.
But we would act we would expect spreads.
You know a comp comparable.
Two.
Largely comparable to where we were at the for acute depending upon ultimately the market conditions. There was a little bit of movement sort of the third acute or the fourth Q.
As a result of certain characteristics of the investments Tom.
Okay next question please.
Well go next year I'm, sorry Goldman Sachs.
Good morning, everybody.
My first question goes to the temper some adjusted the R. C target by the end of 2021, not does that incorporate so the majority stake imported two three and maybe the impact on from diesel.
And if it does maybe you can help us think about the impact from the sale.
Well, let me, let me take it in and Martin.
And so.
Well I gave you that.
Target sometime ago, we had not contemplated for sale.
Fortitude and and so.
We believe that then now we have afforded to sale impending.
Expected it would close mid year that helps.
That number but that number we believe was achievable in either case, but.
I'll, let mark talk about the rest of the stuff Cecil's yeah. Thank you.
Oh, yes, it contemplates both so contemplates the Cecil which will have a shareholders' equity than they are coming into the year for regulations.
We had guided you last quarter that that was about 645 million, we'll see in arcade comes out the actual number without materially differ from that so yes to that as far as fortitude. It's all it. So it's difficult to is that it's two things one we estimate.
No exactly like closing as we sit around long enough that albeit tail those out.
Secondly, interest rate environment will be.
Really materials to the ultimate.
Impact a little due to book equity.
So it's it's fairly hard to predict but yeah, we're anticipating methodology.
Great. Thank you Adam.
My My second question is around the.
The Geo easy.
Some targets in the yoga laid out or those gross or net.
Mark.
What's your definition of that retailers.
Gross or net.
Well I guess on this front have 300 million me yes.
I'm sorry, Okay Jewish so let me just just clarifying so the if I go back to the comments from from 2020 to 2021. It was 300 million 600 million 1 billion pure GE away I put that if you mean tax of course attacks.
Sounds like you would expect that's from portion of that to be reinvested back into this.
Well.
Well, that's part of our conversation backup in first quarter, we lay things out, but but Peter talked about the 1.3 billion of investment and that's going to be reflected there's cash aspects theres, a putting capitalize assets into service on the timing of those when they're ready and the yards appreciate for that time, there's a lot.
Out of moving parts, so I don't need to be vague, but theres a lot of moving parts and we'll give that to you on the first quarter.
Great. Thank today.
Welcome next question. Please well go next to at least Greenspan at Wells Fargo.
Hi, Thanks. Good morning, My first question on anyway sought still seeing your premiums drop in the fourth quarter and sounds like you expect them to be flat in 2020, yet they're getting a real good amount of brain on and it sounds like there wasn't that much much material changes to your reinsurance.
Purchases for 2020, so I'm just trying to understand I'm can you give us a sense of what businesses, you're still shedding and how business mix is.
Offsetting some of the impact of lead and we still look the kind of a flat premiums written in 2020.
[noise] that Northstar theater Fisher and I have a comment, but thankfully I mean, I think it's consistent but just a little bit more tailing off in 2020, when you compare to 2000.
19, which is going to be.
Gross underwriting actions that continue I talked a little bit about long term agreements rolling off it's a big part of our you know re underwriting in the first quarter for property, we're still working through the Lexington, and even though those statistics are daunting for us in terms of the improvement of the portfolio in the repositioning.
Thats still is going to be work, that's going to be done and then also.
The reinsurance think about the casualty quota share, which was something that we felt really.
Mitigated volatility we entered into that in 2019 for that continues in 2020. So some of the discrete reinsurance purchase will have an impact.
On on net premiums written not to the same extend a bit in 19, but certainly will carry over into 2000.
Okay.
Thanks, and then my second question, Yes bargain diesel.
Let me just add something here you know, but when we started this.
A turnaround Joe what do we face we had we had businesses that were.
I had limited weight, we weren't yet.
We had.
Concentrations of risk.
Well you know you just couldn't Kate keep that concentration I don't we're taking it on that.
And we were getting price paid raising so you know you start we you know we've cut.
Totally out of this company by taking the limits down that takes premium out of the but we raise retentions and fix premium out of the pod.
Yes, we've raised rates. We've also bought reinsurance six pretty satisfied so we have not been concentrating on the top line because we add just concentrate on the bottom line. That's so once you get a base.
That you believe is sustainable then you grow it and so we want to grow the business, but we're going to concentrate on making sure. This portfolios rock solid that's number one kinda that's number one priority okay. Okay. So you've got another question.
Yeah. Thanks, and then my second question Mark on in your guidance commentary you pointed to accident year combined ratio 93, 894 eat in general insurance on I recognize the expense that gives you gave our you know exit run rate and get million for 2020, but if I kind of do some rough math.
That seems like.
That improvement that you'll see over the next 12 months about half should come from underlying loss ratio and pass on the expense ratio does that feel about right given on the expense program and the guidance you laid out.
Well I'd say.
[noise], probably skewed more and more to the loss ratio and as we go from 20 to 21 do you see that probably see that slipped.
Up degree of improvement.
Okay next question please.
Well go next to Erik bass and autonomous research.
Hi, Thank you and I appreciate it the additional guidance details just wanted to ask a bigger picture question. If you can help us kind of bridge the gap to the 10% or are we by yearend 21, nordsons relative to 2019 life and retirement chasing a little bit of pressure. So can you help us just thinking about the contribution from GE March next.
Mansion in AG 200 to get there and are there any other major moving pieces to consider.
Hi, Mark.
Well you get it gets a couple of things you guys think about is.
I think as I tried to lay out the 8.3% return in calendar 2019 had some extraordinary gains. So if you normalize for that and things of that nature, it's not quite.
The same I also think in the prior quarter.
I mentioned that get too.
10% is not linear or that we would expect more in the back half the front half of that we have great expansion and G.
On the expected underwriting gain.
And although the the there's a stronger marketplace environment. It's also a radically modified portfolio. So by the time, we're in 2021.
Now, we'll have a little more back of the window view of what 2020.
It looks like is and if we're lucky enough that the environment continues.
Thats a great.
Tailwind to to help us out AG 200 is going to also helped along the lines. We just mentioned so so there should be incrementally better contributions may I teach you had each year through 2021.
And we'd expect to you know how to be stable in this environment. Maybe they are we used to come down a little bit as weak as weve discussed, but we'd expect eleanor to be stable in the real the wheels around the G.I. improvements its loss ratio now the G 200 kicks into the expense ratios.
Coming later.
Got it. Thank you and then just one follow up on life and retirement guidance and I think you talked about 200 million or so drag from spread compression, but based on the sensitivity having that you gave on the equity markets I would think you'd see some of that are much of that offset given the gains we saw last year. So.
There are other pieces to to factor in that would.
Kind of gets you to the lower earnings next year.
Well, a you know Erika as I pointed out I mean, our assumptions are for you know from starting point of the year, 6.5% on the equity markets and that a 10 year would be around one.
1.7.
And the sensitivities that were agave where relative to those assumptions.
Okay.
Next question.
Well, most net Brian Meredith Mds.
Hey, Thanks, you just to two of them here quickly on the Geo. We is some of that connectors on the other energy 200, some of that going to come from loss adjustment expenses and then maybe you can frame it a little bit how much kind of corporate versus you know general insurance.
Peter you want to pick that yeah. So no we did not contemplate.
G 200, the loss adjustment expense, Brian and then in terms of you know the way we framed out the program I think I if I understand your question correctly, Mark put it into his prepared remarks, which is basically.
Three quarters of it will come through general insurance over the program and then the other quarter will come into wife retirement and corporate.
And again in terms of the sequencing of that I think it'd be fairly consistent throughout the three years.
Gotcha helpful. And then my second would just little clarification and started to kind of.
It could go on this one but if if I look it's your are are we in 2022, when we come out here. We know that legacy is going to cause call over 3 billion dollar shit to your equity when we take a look at that return on equity will but if I add back at three and half billion dollar half of equity, where we still have a double digit return on equity and 2020.
Two.
I'll take that one.
I am I to things that are kind of countervailing actually three things otherwise.
First off when we originally said the 10% we had a completely different investment advisors methodology.
So.
I from that point of view.
Having the fortitude sale as the impact on that is very helpful to offset some of the the investment income.
I looked at Francis.
And the other thing is the 3 billion number that's approximately as you.
Talked about that's the impact on the effect some consolidations as opposed to the impact from sale I looked at from sale is a function of whatever the market. This is going to be able to date or closing so a pretty hard to come to stay too hard to predict.
I know, it's complicated hopefully that helps.
The second maybe one more question.
I'll take that question from Sydney come out at Citi.
Thanks, just a follow up on Brian's question on the equity as we think about coming up half to the 10% is there a capital return.
Share buyback expectation, that's built into that guidance I know you talked about de levering, but.
Just wanted to get offensive or what we should think about in terms of getting into that 10%.
Well, we're both look at each of the market I'd say in a week, where you'd expect that.
As we manage our capital we told you what our priorities are for this year, we're going to look at the end once a once we do close a fortitude will we will we were really looking at share buybacks.
It's just timing for the second half for the year, it's still still a management tool we have Oh, we have an authorization.
So if it's certainly possible.
And then my follow up interest on the the first quarter policy you mentioned a couple of times, we're going to get some more detail can you just maybe give us a sense of what you're planning on disclosing in terms of the edge in 200 on the first quarter call just the pieces.
Okay, Mark you want to go back over that.
Secondly, yes, I think we're going to try to do in the first quarter is just give you a little bit more clarity on the sequencing and so while we have 10 initiatives and the largely be launched in the first quarter. There will be sequencing in terms of where we start and giving you a little bit more insight as to how the.
Program progresses, and then I think that will tied to where Mark said before which is what type of expense needs to be deployed with that sequencing to match expenditures and getting after you know this launch in so I think we'll be able to give you little more clarity as to what you should expect.
On each of the programs or what it looks like for the rest of 2020, but I'll just augment Peters comments.
Probably what you're referring to somebody else. It asked a lot more clarity on.
Maybe perhaps the timing of capital being put in service or capital I think being put in service, but clearly above and below the line aspect so that all the laid out.
Okay. Thank you very much let me I appreciate your same on a longer and all the attention I just want to make a point less the comment and that is that you know as I said at the beginning of the call I'm really pleased.
We delivered a 20 are on our 2019 commitments and we ended the year strong with great.
The support we received from the industry partners in their clients and it really optimistic about what the future old strategy, but last and certainly not least I want to thank.
Got you colleagues across the globe the resiliency they've shown in the last couple of years is tremendous and I'm proud we had a group of such talented professionals, who continue to go above and beyond.
To make a bad you had better stronger company. So thank you all have a great them.
And that does conclude today's conference again, thank you for your participation.
Mhm.
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