Q3 2020 American International Group Inc Earnings Call
[music].
Good day and welcome to <unk> third quarter Twentytwenty Financial results Conference call. Today's conference is being recorded at this time I'd like to turn the conference over to Mr. favorite Pergo head of Investor Relations. Please go ahead ma'am.
Thank you good morning, and thank you all for joining US today's call will cover AI Jie <unk> third quarter 2020 financial results announced yesterday afternoon.
The news release financial results presentation, and financial supplement are posted on our website at www Dot AI Jie dotcom.
And the 10-Q will be filed later today after the call.
Today's remarks may contain forward looking statements, including comments relating to company performance strategic priorities, including the announced planned separation of our life and retirement business business mix and market conditions, including the effects of cope at 19 on T.I.G. These statements are not guarantees of future performance or events and our base.
So on management's current expectations actual performance and events may materially differ.
Factors that could cause results to differ include the factors described in our second quarter 2020 report and form 10-Q, and our 2019 annual report on form 10-K, and our other recent filings made with the FCC inclusive of the effects of covered Nineteenone, I cheat, which cannot be fully determined at this time.
He is not under any obligation and expressly disclaims any obligation to update any forward looking statement, whether as a result of new information future events or otherwise.
Additionally, some remarks may refer to non-GAAP financial measures. The reconciliation of such measures to the most comparable GAAP figures is included in our earnings release financial supplement and earnings presentation, all of which are available on our website.
Now I'll turn the call over to Brian.
Oh, good morning, and thank you for joining us today, given the announcements we made last week, we went out on todays call differently with the objective to leave as much time as possible for your questions I will focus most of my remarks on our leadership changes and the separation of life for retirement.
Peter will expand on what the separation process will entail.
We will provide an overview of our third quarter results with them on trends and life and retirement and give an update on A. I drew 200.
Lastly, Mark will provide additional color on our financial results for the quarter.
Given the Oregon, They mcelroy about the she'll will be available for the Q and a portion of the call.
As you saw in our earnings release say I do continues to manage through the ongoing global economic uncertainty.
We are financially strong and well positioned to capitalize on the opportunities for growth in the.
Third quarter, we reported adjusted after tax income of 81 cents per common share.
We saw improvement in both the accident year combined ratio in general insurance.
Unlike other retirements adjusted return on attributed common equity.
As we announced last week the I two board unanimously elected theater to become the next Chief Executive Officer of GI effective March Onest.
At that time I would assume.
I will become executive chairman of the Energy Board. This leadership transition demonstrates our continued momentum.
And focus on energy future.
It's an honor to serve as a CEO they are GE and I want to thank our directors for their ongoing support.
I also want to congratulate theater.
Worked with Peter several capacities for many years.
I'm extremely proud of him and the legacy he is building in our industry.
Since joining me today are G. and 27 team he designed and executed on the turnaround in our general insurance business.
Which by any measure has been a stark.
I greatly admire Peter strength of character leadership abilities.
And willingness to take decisive action.
He has a proven track record of building great teams and.
Successfully leading them in times of significant change in growth.
Peter exemplifies the rare executive who is both a hard working operational leader and.
And a strategic visionary.
I know that he will be an excellent CEO, Fred Gi and the company will be in great hands.
Turning to our second Big announcement last week as I stated before we are continually examine the composite structure. They actually had over the last several months.
With the assistance assistance from a independent financial and legal advisors. We conducted a very comprehensive review to determine if a change would be in the best interest of our shareholders and other stakeholders.
This review included examining strategic operational capital and tax implications.
And the output of this review was very clear that is a simpler structure would benefit both G.I. and Eleanor.
This is largely due to the significant foundational work our team has done across a G to strengthen our businesses and position them as market leaders.
In addition, impediments to the separation that existed back in 2017 have greatly diminished.
Example, the tax benefits are they actually use current composite structure have decreased over time and.
And with the strong recapitalization of our core business.
Capital diversification benefit has become less significant.
We can be bought businesses will be more resilient as a separate companies with more appropriate and sustainable valuations and each will continue to be market leaders in their respective sectors.
Strong balance sheets.
Capital structures.
The earnings and cash flows.
We also believe both will have sufficient financial flexibility to compete effectively we.
We do not anticipate that either will will require.
Additional capital equity capital in connection with the separation and neither will be overleveraged, especially when compared to their respective peers.
We've evaluated various structural alternatives for the separation and Peter will provide details on our initial conclusions.
Well the separation process will be complex.
I will of course require regulatory approvals, we are confident that we will execute it in a way that provides the best long term value for shareholders and other stakeholders.
We are committed to transparency and providing you with updates as the process moves forward.
Now I'll turn it over to Peter.
Good morning, everyone. Thank you Brian I appreciate your kind words I want to thank the A.O.G. board for the opportunity to lead this company as Brian noted we are living through a sustained period of global economic challenges.
Gee, we are well prepared as our purpose is to partner with our clients, especially during challenging times to helping to solve complex risk issues capture opportunities in all market cycles and provide a consistent approach to providing insurance solutions in this period of uncertainty.
We continually ask ourselves one of the things that worked well yesterday, we'll continue to work tomorrow and into the future the.
This morning, I will expand on Brian's comments regarding key areas we're focused on.
I'll start with additional insight into our plan to separate life <unk> retirement from NRG.
Then I'll provide an overview of the third quarter results for general insurance and life for retirement, and lastly, I'll briefly outline our progress on the G 200.
With respect to wife retirement, as Brian said, we undertook a comprehensive review of our composite structure over the last several months.
We concluded that overtime the values both separation can create for our shareholders will be significantly greater than maintaining our current structure.
Our analysis took into account many factors, including potential impediments and benefits.
One of the more significant factors are one the progress we've made since late 2017 to strengthen the foundation of general insurance.
Surely reduce risk and volatility in our portfolio and position general insurance as a market leader poised for sustainable profitable growth.
Operation of life retirement for me I'd she did.
I would not be possible without a strong general insurance business that can support itself and drive on a standalone basis too. We believe that we can effectively manage any loss of diversification benefits in our capital model as a result of separation. Our current expectation is that no additional equity capital.
It will be required given the improvements in our subsidiary capital positions over the last three years. This is especially true in general insurance, where the capital base is stronger than its been in many years three the separation process will require us to implement a standalone capital structure for life and retirement.
This will involve raising new debt at life retirement and restructuring debt at AIG parent.
India and both companies will have independent capital structures in line with peers and appropriate financial leverage for their respective ratings. Both companies will also had strong financial flexibility to execute on their strategic priorities for hey, I'd She's deferred tax asset is no longer enough.
The gold as it was in the past the DTA is made up of net operating loss carry forwards and foreign tax credits.
With respect to the now net operating losses, we expect AI jie.
Taxable income post separation that is sufficient to utilize the remaining 6.6 billion before they expire.
Foreign tax credit carry forwards had been significantly utilized in recent years and we expect to utilize the vast majority of the remaining $1.5 billion before we deconsolidate like retirement, leaving only a small portion potentially at risk and five there is a limited number of legal entity restructuring is required.
Wire to achieve a separation as well as limited expense dis synergies in fact, we will leverage the important work, we're doing as part of a G 200 to facilitate operational separation.
While the precise form a separation will be subject you Archie board and regulatory approvals rating agency considerations and market conditions. We currently contemplate either an IPO or private sale of up to 19.9% of life and retirement, followed by one or more dispositions of all remaining ownership interest.
Overtime.
We're proceeding with a sense of urgency to determine the initial step of a separation and we will continue to engage with regulators and rating agencies throughout the process.
Finally, we do not intend to break up life and retirement and sell it in pieces as a significant strength of the business is the breadth of its platform and diversified product portfolio and distribution network.
Throughout the separation process, we will remain laser focused on continuing to position our businesses to deliver superior value to our clients distribution partners shareholders and other stakeholders.
Turning to our third quarter in general insurance, we achieved another quarter of positive results in our core business with continued improvement in our underwriting margins the accident year combined ratio, excluding catastrophe improved by 260 basis points to 93.3% compared to 95.9%.
And a year ago, and by 610 basis points compared to 99.4% in the third quarter of 2018.
The improvement was driven by our commercial business, which improved by approximately 560 basis points year over year as a result of lower accident year loss ratio, excluding cat and a lower expense ratio.
The lower commercial accident year loss ratio ex cat reflects a higher quality book of business, driven by a better mix and portfolio management actions.
In personal insurance not surprisingly our portfolio mix continues to be impacted by COVID-19, which has reduced premium volumes by more than 80% in our travel business alone.
The mix of business was further impacted North America personal insurance due to the reinsurance session related to syndicate 2019.
With respect to catch the third quarter was very active with low to moderate severity per event in both North America, and Japan was in upper industry range of $45 billion globally.
As we disclosed last week, our third quarter Cat loss estimates net of reinsurance totaled 790 million for the quarter income.
Included in this cat numbers 185 million of COVID-19 loss estimates.
With respect to covert 19th the loss estimates primarily related to travel contingency and Validus re.
Our year to date Cobra related net loss estimates are slightly over $900 million.
Our reinsurance program continues to perform as expected with recoveries in our international per occurrence private client group or occurrence and other discrete reinsurance programs limiting volatility.
Regardless of frequency and severity of natural cats in additional coal with 19 related losses, we expect overall cat losses for the remainder of the year to be limited due to berry's protections, we have in place under our aggregate cat covers.
Turning to rate in the third quarter, our underwriting discipline and continued as our team has pivoted to pursue premium growth will not losing our focus on account level decisions risk adjusted rage and margin expansion.
In commercial there's continued momentum in our portfolio optimization strategy and we're seeing sustained rate on rate improvement across most lines of business.
For the third quarter, our commercial business had rate increases of approximately 17%.
North America commercial rate increases were 20% in the third quarter compared to 12% in the prior year.
Rate increases in admitted property were over 30%.
Financial lines. They were over 25% led by do you know in excess and surplus lines. They were over 20% and an excess casualty there were over 30%.
International commercial rate increases were 14% in the third quarter compared to 8% in the prior year driven by financial lines and specialty rate increases in commercial property were 12% and financial lines. They were older 20% led by Dino and in UK specialty they were over 25% led by energy aviation.
Trade credit.
It's important to know that the rates were achieving or on a policy year basis. It will take time to earn into our accident year results. Additionally, we're confident that the rate increases we are achieving our outpacing loss cost increases in our portfolio.
Turning to Validus re and upcoming one one renewals our team continues to be disciplined in deploying capacity and focused on acceptable terms and conditions as well as appropriate risk adjusted rate changes double digit rate increases are being quoted in most lines with tighter terms and conditions.
Retro business is very active with meaningful double digit rate increases being quoted what terms altering some model perils only with occurrence covers being preferred over aggregate covers before.
Before turning to wipe retirement I want to provide context for how we view the rate environment the PC market.
Insurance carriers have faced challenging business conditions for more than a decade.
Soft market conditions have grip the industry since 2007 and have been coupled with historically low interest rates and an increase in frequency and severity of natural catastrophes.
As an example, we're looking at property expected Agri industry natural cat losses for 2017 through the third quarter of 2020 are estimated to exceed $400 billion median annual losses over the last 15 years had been approximately 65 billion.
These amounts are nearly double the amount of expected loss for natural catastrophes pricing has adjusted in light of these new norms and keep in mind. None of these numbers include catastrophe losses can COVID-19.
With these challenges and the increasingly complex environment. Our clients are looking to us to help them manage the work. We do is becoming more complex. We believe our retention rates demonstrate the strength of our relationships with clients and distribution partners and confirmed that a flight to quality has in fact come to fruition, particularly due to cope.
The momentum we have generated in general insurance is significant and we believe that we will achieve topline growth in 2021 and by the end of 2022 will achieve an accident year combined ratio excluding cats below 90%. This will represent a 1000 basis point improvement since 2018.
Turning to like retirement I've spent the last couple of months working with Kevin and his team to analyze this business. It is a franchise that is extremely well positioned in the market. It has a track record of delivering consistent performance third quarter adjusted pre tax income was $975 million and adjusted <unk>.
Turn on attributed common equity was 14.5%.
Third quarter results reflected strong performance in all lines of business driven by recovery sales and strong equity market levels, resulting in favorable impacts to deferred acquisition costs and variable annuity reserves as well as higher private equity returns. Additionally, lower interest rates and tighter.
Credit spreads drove higher calling tender income, which is a short term benefit that will be offset in the long term in the form of additional base spread compression. So.
The sensitivities, Kevin previously discussed generally held up recognizing the limits of sensitivities, especially in times of macroeconomic distressed and high levels of volatility.
As we noted in the second quarter reported base investment spread compression has been impacted by substantially lower returns on our tactical cash and short term investment position.
Excluding this impact based investment spreads would continue to be in the eight to 16 basis points range of annual spread compression.
Excluding estimated COVID-19 related deaths mortality experience was favorable and consistent with pre pandemic trends risk management efforts and disciplined in life or retirement have continued to serve this business well the.
The hedge program has performed as expected and our balance sheet remains strong. Additionally, we view our lack of large legacy blocks, such as long term care as a risk differentiator.
As expected retail annuity sales rebounded significantly from the historically low second quarter levels as our distribution partners became more custom to a new working environment. We also grew sales in group retirement and institutional markets, where we successfully issued three large guaranteed investment contracts during the third quarter.
Our total premiums and deposits decreased from second quarter levels, and we remain well positioned and confident to deploy capitals attractive opportunities arise across our business.
Now let me provide a brief update on AG 200 since.
Since we announced the G 202019, we have been focused on investing in our core processes and infrastructure in order to be a more competitive in the marketplace and making real transformational change in AI jie.
A few key points I'd like to highlight.
We are on track to deliver and will likely exceed our original guidance of $300 million exit run rate savings this year.
We also expect to come in below the $350 million cost to achieve that we initially communicated for 2020 and important milestone. We recently achieved was entering into a partnership with Accenture, whereby accenture will acquire our existing shared services footprint.
Working with the AI Jie global operations team Accenture will help us to create a modern digital shared services platform with true end to end processes that will improve the user experience. This agreement is subject to regulatory approvals and March the first phase of our overall relationship with Accenture, which we expect will expand over time.
Our overall targets for AI Jie 200 remain unchanged, we still expect to deliver $1 billion of run rate savings by the end of 2022 against a $1.3 billion total investment.
Lastly, we do not anticipate any delays or significant changes due to the planned separation of life and retirement.
Before I turn it over to Mark I'd like to end my remarks, where I started and thank Brian for his leadership over the last three years since.
Since I joined Brian in mid 2017, we have navigated truly unprecedented conditions throughout Brian has remained steadfast in his commitment to build a world leading insurance franchise with no shortcuts or quick fixes.
I'm incredibly proud of what we achieved so far in our journey our colleagues have demonstrated unmatched resilience and a commitment to excellence and all that they do despite the significant disruption we've all experienced both personally and professionally due to COVID-19 I.
I know I speak on behalf of all AI Jie colleagues when I say that we look forward to continuing to work with Brian as we close out 2020, and look ahead to a very bright future for our company now I will turn it over to Mark.
Thank you Peter and good morning, everyone.
As Brian and Peter have already commented on the announced separation of the life and retirement business from A.J. I will briefly discuss the third quarter results in order to allow sufficient time for acuity.
GE reported adjusted pre tax income of our or a BTI 918 million and adjusted after tax income of 709 million or 81 cents per diluted share compared to 505 million or 56 cents per share in the third quarter of 2018. The key drivers of this increase earnings were one agendas.
Insurance underwriting gain exclusive of the impact of catastrophes and prior year development, which improved $135 million compared the third quarter of 19 second a very strong life and retirement results inclusive of the impact of the annual actuarial assumption update.
Third solid net investment income results up 271 million after adjusting the third quarter of 2019 for fortitude, reflecting higher private equity and hedge fund income in addition to fixed maturity securities.
Fourth reduced total a ICICI general operating expenses by approximately $200 million.
Turning to general insurance third quarter, adjusted pre tax income was $416 million down $91 million from the third quarter of 2019, due primarily to the previously announced catastrophe losses of 790 million pretax partially offset by higher net investment income stemming from alternatives as respects prior year development.
16.1 billion of reserves were carried over shoot they were reviewed this quarter, bringing the year to date total overview to more than 60% of carried reserves. The net result was unfavorable development of 13 million, which reflects $53 million of favorable development from amortization of the agency the hurricane.
So the unfavorable development was $66 million gross of this amortization impact the Aries reviewed where primary workers compensation environmental program businesses Western World Cyber personalized property casualty, Canada, and UK, Europe, and Asia Pacific as their financial lives as.
Well as European short tailed lines next quarter spoke this will be a U.S. financial lives and some casualty areas. This.
This quarter's P.Y.D. showed favorable development in North America, driven mostly by primary workers compensation, a California, 2017, wildfire separately and short tail lines and unfavorable development internationally, driven mostly by financial lines large losses, and UK and Europe casualty mostly in prior.
The accident years.
As Peter mentioned, the general insurance business has continued to improve with an accident year combined ratio as adjusted of 93.3% in the quarter at 260 basis point improvement from last year, North America was 96% 250 basis points better than last year, while North American commercial lines with 600.
30 basis points better than the prior year 560 basis points at which emanated from an improved loss ratio.
International improved the asking your combined ratio as adjusted by 240 basis points to 91% with international commercial lines better by 410 basis points with a 170 basis points of that emanating from an improved loss ratio.
The global expense ratio was 180 basis points lower quarter over quarter, driven by improved acquisition ratio, but general insurance also reduce their geo lead by $76 million the margin momentum in commercial lines reflects the hard work of the past several years with the added Tailwinds have achieved rate in 2012.
I'd above our initial expectations, both will drive margin improvement for 2021.
I would also note that on a global basis personal insurance results are not really compare comparable to last year due to the significant drop in travel business. The correlation does tend to get 2019 for North American PCG business discussed last quarter and higher North American catastrophes, including the cobot impact other trial.
We'll book Internet.
International personal insurance actually your combined ratio as adjusted improved by 80 basis points with favorable frequency in Japanese auto at a lower expense ratio North American personal lines accident year combined ratio as adjusted was significantly higher to 118.6% due to the approximate 60.
Percent drop in net earned premiums for the segment led by travel nearly 80% reduction as well as the noise associated with the changes to P.C.G. that was discussed on the prior call we.
Warranty personal eight H and Canadian personal lines, all continue to perform well.
With the commercial lines re underwriting largely behind US, we're now pivoting to growth, which will become evident in early 2021 at near term top line results are still impacted by personal insurance global.
Global gross premiums written were 8.3 billion in the quarter down approximately 4% before the impact of currency and net premiums written and earned were both down approximately 11% principally due to personal insurance as well as the impact of reinsurance and portfolio management on the North American commercial lines book.
In North America commercial net premiums written decreased by approximately 5%, reflecting the impact of reinsurance as stated portfolio management actions encoded but retention and new business levels have improved this specific area for instance, our Lexington property business grew by 20% year over year as a result of increased flow.
Continued rate increases and new business momentum.
International Commercial's net premiums written increased by approximately 5%, reflecting significant rate momentum and growth in financial lines specialty in Talbot.
North America personal insurance net premiums written was impacted by business mix shift due to the lower travel profit and the changes the PC Jay as we enter 2021, we will retain approximately 25% of the PCG business and the syndicate structure will reduce the volatility of the overall personal lines book.
As was the case this quarter.
International personal insurance net premiums written were down 10% on a constant dollar basis, principally because of the reduction in travel putting it aside from travel most of the international personal insurance is in Japan, which had a slight decrease in premiums due to lower new business also with all the scope.
Now turning to life and retirement adjusted pre tax income was 975 million for the quarter up over 50% compared to the prior year with strong performance in most businesses third quarter. Adjusted return on attributed common equity was 14.5% as Peter noted and 12% on a year to date basis.
Also as Peter mentioned life and retirement retail annuity sales rebounded significantly from historically low second quarter levels sequentially fixed annuities were up 144% to $942 million from the second quarter low of 387 million variable annuities were up 24%.
Et cetera, et 70 million an index annuities were up 38% to 942 million.
Life and retirement also grew sales modestly and group retirement and institutional markets. Several are guaranteed investment contracts or issues during the quarter totaling approximately 1.2 billion.
Total premiums and deposits increase from second quarter levels and net flows although still negative heading a cheerio rebound sequentially of over 612 million for fixed annuities and fixed index annuities below.
The balance sheet remains strong with a solid investment portfolio with limited exposure to large legacy blocks on the liability side, such as long term care pre financial crisis variable annuities or low duration payout annuities.
While low interest rates in the last year will drive additional spread compression that diversity of our product portfolio strength in this environment, our annual actuarial assumption update which lowered our 10 year forward tenure treasury assumption to approximately 2.8% from 3.5% previously was generally benign as we.
Also updated our laps mortality and policyholder behavior assumptions, resulting in an unfavorable impact of 120 million to adjusted pre tax income and net unfavorable impact of $22 million to pre tax net income mostly from revised lapse and policyholder assumptions.
Shifting to investments net investment income on a P.T.I. basis was 3.2 billion or 277 million lower than the third quarter of 2019 as a reminder, due to the sale afforded to the prior year included the full quarter income on the fortitude pool portfolio, whereas it is excluded on ABT.
Hi basis this quarter adjusting the third quarter of last years net investment income Accordingly, this quarter's net investment income and an eight A.P.T.I. basis actually grew $271 million compared to the prior year, reflecting stronger income on both hedge funds and private equity.
Turning to other operations the adjusted pre tax loss. After consolidations of eliminations was 562 million 62 million higher than the third quarter 2019, principally due to additional interest expense from our May 2020 issuance of 4.1 billion of senior notes to pre fund upcoming maturities.
Parrot and service company G., a wheat declined $50 million pretax, reflecting AI geese continued focus on expense reduction.
Our legacy segment, where adjusted pre tax income no longer reflect fortitude at 89 million of ATP I in the quarter slightly down compared to the third quarter 2019, due to lower income as a result of fortitude sale offset by higher gains on fair value option portfolios within the legacy investments legacy.
Legacies results also reflected a favorable impact of $13 million related to the annual actuarial assumption update.
Now turning to the balance sheet at September Thirtyth, 2028 book value per common share was $73.86 down 1% from the prior year end, but up 3% from June 2020.
Adjusted book value per share, which exclude AOCI and DTA and net cumulative unrealized gains on the fortitude funds withheld assets.
56078 cents per share up 2% sequentially from June Thirtyth.
At September Thirtyth Aoki parent had cash in short term liquidity assets of 10.7 billion. After third quarter dividends are holding company expenses as well as the August debt maturity of 638 million.
Looking into next quarter, we expect to pay the balance of the IRS tax settlement on cross border transactions that date back to the 1990 days.
During the second quarter, we had prepaid approximately $548 million related to principal and penalty we.
We recently settled the litigation associated with that case and are awaiting potentially by year end. The final interest calculation from the IRS.
We have requested interest netting which may lower the total amount below our remaining settlement as to which we have accrued at 1.2 billion.
As for debt leverage we reduced that ratio by approximately 100 basis points in the third quarter, driven by maturing debt, which had been prefunded and growth in retained earnings.
Finally, our primary operating subsidiaries remain profitable and well capitalized despite the continuing impact of low rates credit experience in coated for general insurance, we estimate the U.S. pool fleet risk based capital ratio for the third quarter to be between 430, and 440% life and retirement.
It's estimated to be between 410 at 420% both above our target ranges and both providing a good buffer for the uncertainty of the current environment with that I will now turn it back over to Brian.
Thank you Mark I guess, it's time for the Q and a portion of this so.
Brady why don't we start.
Thank you I'd like to ask a question at this time T. signal by pressing star one on your telephone keypad.
Insurance needs function on your time switched off to now you seem to be true.
You can tease press star one to ask a question.
We can now take our first question for me.
Spackle. Please go ahead.
Hi, Thanks, Good morning, Mike.
Question, Peter going back.
Pardon me.
Yeah he definitely.
I'd now I'd now and then in wrapping both it sounds like you mentioned, 99.9%, so I guess I'm.
Hi. This is now if you go down the need of a private sale, 19.9% non.
Now after that.
Already on that comment.
Peter go ahead and take that please.
Yeah. Thanks, Felicia good morning, yes, the 19.9% was referencing.
To the IPO and we said that there could be you know, we can't predict the future, but that there could be.
On a pro shop or a private sale, we would be for the same percentage to 90.9 or less that we would not consider anything that would be above that so I would think about whether it's you know the IPO or in the event of something came from.
From a private party that it would be the 19.9% or less as an initial first step.
Okay.
And then on.
The only thing it was a 19.9% private party I guess, then would you be looking for sales.
Sales down the valley is there a timeframe private.
All right I, just think of between 19.9% option.
On.
In addition of Eleanor.
Correct.
Okay.
Yeah, So really the timeline, we just don't think like whether we pursue a minority IPO or sale you know, we're going to make that decision in the near term and we'd like to communicate that probably I mean, the ultimate closing of an IPO or sale will depend on regulatory or other required approvals and we'd like to think.
We did close on the first step a separation in 2021, but of course, you will have to see how the process unfolds.
Okay. Thank you Louise so should we go to the next question. Please.
We can now take our next question from Josh Shanker with Bank of America. Please go ahead.
Yeah. Thank you very much. So the first question was the general guidance around growing our premium volumes next year, if that exclusive of what happens with travel and accident premiums.
<unk>.
Well I think that's a theater question Peter.
No. Thanks, Josh you do is not exclusive I mean, we believe that we can grow the top line for.
For general insurance, even in those conditions, where we would have a prolonged headwind in travel, but we think that we can grow the top line without caveats.
And for those of us in the third quarter liability premium numbers down in the low double digit range, given where pricing is.
She said that gives some concerns about your appetite for liability of business at this price.
You have out there in a lot of liability, but for the last couple of years or how does that reflect on your confidence on the last couple of years of books and the attractiveness of writing liability business.
In November 2020.
Yes.
Well.
You know we've been doing.
We are underwriting of the liability lines for a couple of years now and so we've seen the shift in the portfolio in a very positive way I think what you'll see on the net premium written is just you know a lot of reinsurance sessions.
Just because you know we put in excess of loss and quota share and this particular year we.
We had even more sessions on the quota share, but we feel very good about the way in which we are positioned in that portfolio. We do think that we can grow that portfolio on the topline.
And the rate on rate increases that we're getting in the casualty and liability lines are meaningful and we believe our above loss cost. So I wouldn't read into it I would say that you know as part of the remediation as part of reinsurance and we think that we are in a position to grow it.
Would you care to satisfy because premium remember.
I'm, sorry, say that again Josh.
Would you care to share an idea about the gross written premium growth from liability weather was much less than down low double digits.
No I wouldn't say, it's the same comment I think we can grow the top line on a gross basis as well.
I'll take it offline. Thank you.
Thanks, Josh next question please.
Our next question comes from Brian Meredith.
Please go ahead.
Yeah. Thanks, Peter when you when you got the guidance with respect to the below 90 underlying combined ratio and I assume that's kind of run rate. It's you go out and.
End of 2022, how do we kind of think about that expense ratio kind of loss ratio as you kind of think about it how much is going to be you know G 200 related.
Right right.
Yes.
This.
And the 2022 run rate and you know we just thought about you know as we start to exit 2022, but.
I think all of the variables will contribute to the improved combined ratio. So I gave you some guidance.
Guidance on in my prepared remarks on.
G 200, so we remain committed to.
Billion dollars until.
So, we'll we'll recognize 300 million of that as an exit run rate. This year. So you can think about a couple hundred basis points contributing to expense.
Improvement during that period of time, we feel.
Very good about the opportunity to grow the top line.
And so we will start to see top line growth, which will help all the ratios. We think we will have a revised reinsurance program that will reflect the portfolio that we have today until the batched, where you underwriting.
To pivot to where we are today, we will have a different reinsurance structure going forward and we will likely not need quite as much and.
And then the last piece is just the you know the rate increases.
Above loss cost will start to earn into the portfolio. When so I think all of those four variables will contribute to improved combined ratio below the 90.
Great. Thank you.
Thank you Brian.
I guess, we go to next question next questioner.
Our next question comes from Paul Newsome.
Hi person. Please go ahead.
Good morning, Thank you.
Perhaps you could just talk.
Talk about claims nation, who use of proceeds.
He is the ideal were so low.
Yeah, we would.
Do you expect.
Yeah.
So I think a part of the question was use of proceeds from the IPO I think I got that right and if.
If that's the case that Mark would you take that question.
Sure Ken by Paul Thanks for the question.
While our primary focus for the proceeds from any initial disposition will be to reduce AI jie that leverage but will continuously review the best use of our capital, which certainly include share repurchases and acting quarterly based upon those priorities.
Colorado was there another part of the question because you were a little unclear in my audio.
No.
Yeah Phil.
Because of that but maybe if you could just proving that in terms of the debt.
Average boosting juice and my sense was you so laurie.
Fundamentals in stepping on each so I guess I'm, a little bit surprised that there's more to do.
Okay, Mark can you take that.
Sure sure so.
Since you talked about that fall. So Angie clearly has strong liquidity that was bolstered by the $4.1 billion at raise we did in may of this year.
Attractively pre funded those forthcoming maturities right provided liquidity and from a risk management perspective, but the near term capital management strategy remains focused though on reducing our debt levels of leverage ratios and executing on this separation, but like retirement from A. J.
So but as previously noted we though we have upcoming obligations associated with that liquidity of roughly three and a half billion dollar. So we've got the tax settlement that I mentioned in my prepared remarks that could be up $2 billion to and we have maturing debt that we did pre fund, which pushed up the leverage ratio would knowingly, but we know that coming.
[noise] do at $700 million range in fourth quarter, and a billion and a half by March of 2021, So we really have those.
Those priorities are written profit.
Okay. Thanks, Good luck thanks, Paul.
I guess, we'll go to the next question operator.
Our next question comes from Tom Gallagher with Evercore. Please go ahead.
Good morning.
Peter You mentioned that you don't intend to break up the life insurance business and sell it often pieces I guess my question is we've seen some recent indications in the market that private values for potentially double that of current public market values of life insurers have you have you taken that into consideration.
And still concluded your path since the best one for shareholders.
Tom Let me take that one and Peter can can add to it and I think you just have to understand that when when we look at our life business. We believe the ongoing strength of it.
Is the breadth of the platforms in revenue.
Equal product and distribution, we we've got leading market positions.
There's a lot of cross unit synergies.
So the the integrated Pratt platform. We believe provides you know the kind of knowledge and expertise.
<unk> ability.
And that's more valuable together than in pieces and so yeah. We've we've.
We've we've cleaned that up we've done a lot of de risking, but but alomar really is a beautiful machine, where you know these things or you know interact. So we believe the sum of the parts is definitely greater I mean, the whole is greater than each of the parts.
Right right.
Yeah.
I hope that helps Peter you want to add anything to that.
So I think between my prepared remarks, and your comments, Brian you know we did look at you know many alternatives is just believed that the consistent performance that life retirement has produced.
Produced added structured is going to create the most shareholder value keeping it together.
No I appreciate that guys state just my follow up is the back in 2016, there was an estimate of capital diversification breakage of over five bill It sounds like that's a lot less now kit is there still some dyssynergy.
Capital diversification and if so could you quantify it.
Oh, well I guess I'm going to throw that one or two to mark Mark can you just take us through that.
Sure. So so I you know.
2015, quite a a while ago and as you know there's been massive changes to the portfolio pretty much across the board. So I mean, when you think about it you know not only for 2015, but one Brian arrived at 27, and you've got a targeted risk reduction program.
That really went across the board it wouldn't work revamped the risk appetite no matter. How you look at it. So that's been successfully implemented on both sides of the balance sheet and involve Perez at G.I. life and retirement investments and.
Operating subsidiary RBC and risk based capital is strong for both G.I. and for Eleanor and the volatility in total and within each of those operations is clearly been markedly reduced.
So and just as a as a little bit of a remembrance, so you'd see exactly the kind of risk reduction, which involve all the things you asked about so the investment de risking afforded to transaction, which we went into great detail moving not only 35 billion of reserves $31 billion, but with a light retirement and or.
Alex on T.I., but also what constitutes those reserves. So when you look under the covers and you see a lot of structured settlement reserves and a lot of single premium immediate annuity reserves those are clearly loaded with interest rate risk.
So now that type of volatility in that kind of issue has now been pushed off as well we have the HBC that we've put into place the general insurance, but still had $6.4 billion unused representing a 8%.
Session the underwriting a change to the book that has been massive both on the front end and at a profit reinsurance structure to protect that that there is always thought about a consequence, the PML I've gone down enormously the marketplace, taking advantage of that with improved earnings by.
Driving compound rate and improved terms and conditions like trimming the portfolio right way not just renewing or.
Book of business.
Getting into classes and things doing it properly and you know we're not reliant on that we've got a.
Are we kind of referenced earlier, which was the the debt raise that we had that allowed us to have a risk management liquidity risk management capability in Florida.
The pre funding of the attorneys that security. So I think I think all in we've got a lot of strength and earning a lot of strength in Oh.
Of lesser volatility around those earnings.
And there's certainly a reduction of all those things combined.
That makes sense thanks, guys.
Thanks, Tom who will go to the next questioner.
Our next question comes from.
Goldman Sachs. Please go ahead.
Thank you good morning, everybody Mike My first question goes to the financial leverage commentary around separation.
Sounds like you're comfortable and confident in the leverage that will get you bye bye.
Emily I after separation.
Today, I I think the leverage it so but higher than where the life and then can sequence or app. So I guess, if I try to connect the dots. There is that why you're talking about a 19.9% sale appfirst.
Potentially fund some of that debt.
Well that's been done you consider selling the rest.
Well look at since you brought up the main thing that I would have given as to where to mark but Peter you might want to comment on like 99 first and then maybe Mark and then go into the leverage question.
Yeah, I think yeah.
Yes, and it was largely a in my script, which is you know the 19.9 does preserve a foreign tax credits and.
That's a meaningful number today, but we will earn out of that but I think you.
No Mark I don't know if you want to go in a little bit deeper as to you know the deconsolidation issues.
Yeah. It wasn't as Peter said, the 19.9, certainly because you still consolidate so you still continue to reap the benefits as he noted which is why it.
You know important number one and number two is the shrinkage of that the consumption of that has really been Ah Ah.
Pretty evident over the older years till to where we are now and with L. at our NGL because it could speak about your an l. that aren't really been big consumer of the DTA, especially on the FTC, but for our tax credit side, but now you have two strong platforms.
With a lot of great prospects on a go forward basis for both can use it both kick in so that.
That so I think that's important I cant getting back to the infrastructure you know both.
All the Aoki subsidiaries really are strongly.
Capitalize today, Oh, we do anticipate though that each of the general insurance and life return businesses will maintain stall RBC levels, and we'll have a leverage ratio that consistent with respect to peers and grades.
We'll be working closely with our regulators and rating agencies as Peter referenced throughout this process to validate and our analysis and our intention is to remain at or above our target range of decent operating subsidiaries. So we believe a separate organizations both will have sufficient financial flexibility.
To compete effectively to generate returns above their individual cost of capital. So again to reiterate at this time with all and do not anticipate the need for additional equity capital in either business as part of the separation.
Okay. Thank them on how that's helpful.
And then my second question with regards to the guidance for 2022 combined ratios below 90% I think up here you may have touched on this with your answer to Josh earlier do.
Do you need for the great momentum that you've done.
Well, Peter what do you think in the current rate environment.
Yeah, Yeah needs does that need a condominium oh.
Well, we don't I mean, you know again I would have to when I'm looking to the future I would have to talk myself out of it not into it in terms of the underlying fundamentals on two will this continue or not but we.
We didn't predicate getting below 90 combined at the end of 2022 with the rate environment that we're in today.
Okay. Thank you.
Thanks, and I guess, we go to the next questioner.
Our next question comes from Ryan Hutchinson Autonomous research team is killing it.
Hey, Thanks, Good morning, I'm, just a follow up on Tom's question about it.
Just widen.
Alright separation is the right path forward, rather than more of a piecemeal approach and it sounds like Brian gave sort of the strategic rationale for you.
Are you guys also mentioned that you looked at capital impacts considerations. When you when you decided on what you're going to do so well what if any of the capital and tax considerations that made this a better path then.
On a more of a piece meal processing no.
Selling logs business in parts.
Okay, Ryan Let me, let me start with it. So you know when you when we looked at.
This question. The question is does life and retirement.
And G. I belong together or are they better apart and that the other kind of conclusion was they were better apart.
So when you look at the life and retirement and you say, Okay is the light from it [laughter].
Heather together.
Or a pride and it's the same kind of process, you know where as I outlined that we believe that the life and retirement business itself.
You know as I said earlier really is is well integrated they you know there's a synergy around them.
That produces you know greater value than than separating them.
So that was we didnt see that value between life and retirement of general insurance, but we see the value in the life and retirement business.
Well there is a creation of value because they are together and that's it and that was the strategic decision.
The question is it practical to separate and all that we went through all that and you know I guess, we have as you know we have the capital. We believe we can get the you know we have the ability to appropriately span each up a standup, Illinois, I should say, so but it really fell on.
That very simple process.
I hope that helps Ryan yeah.
Yeah, I mean, I guess is for Peter.
You know I totally but thinking about the dis synergies associated with dish stranded cost that type of thing I mean, what do you think about the cost base of the company.
I guess I'd like to hear your make your early thoughts on Ah I many complexities there.
Good theater.
Yes. Thank you.
So I would think about it if I wouldn't it.
If we're going to do an IPO with wife retirement, there will be additional.
Investment in order to add that company stand up on its own but how I would think about it is that the benefits of the G. 200 July retirement will be at or more than what the investment cost more so there'll be no additional costs in terms of the run rate today, and then I do think that there will be more expense synergies.
Jeeze post separation and we're working through that and that would be in addition day I teach you want to know what needs to be some more insight in one of our future quarter calls as we do a little bit more ground up work on it.
Okay. Thanks, Ryan I think we're going to go to one last questioner.
And our final question comes from Meyer Shields of KBW. Please go ahead.
Great. Thanks.
On the fourth COVID-19 call I think we got the sense that the underlying accident year loss ratio improvement will be more pronounced in 2021 than in 2020 is that still.
The expectation.
[noise] theater.
Well they might.
I just want to make sure understand the question is it really in terms of.
You know rate above loss cost are like I, just want make sure I understand what you're asking.
I guess, Oh, you're talking about how rate above loss cost is helping 2020, but.
I wonder whether that would any of that improvement with originally expected more in 2021. It has been pulled forward or is it just the absolute better pricing environment.
Mark do you want to just take that on the you know like what were getting on the policy year and ready costs increased sure.
Sure sure happy too thank you.
So I think one thing thats been clear from the Information's Peters provided not only this call but in prior calls is we don't see any.
Reduction in the rate of increase is wonderful not just centered in the U.S. and secondly, we don't see it falling off in virtually all the major areas that that we've discussed I think some others may but we have not I think that.
Adam on to the consumer.
Continued professionalism and right so.
So think of it this way so if you have that kind of strength by policy quarter effect of corridor and as that continues to build its going to take a follow.
Oh, well increasing rate adequacy into future calendar quarters. So 20, it's going to have a very strong year and I see nothing in the way stopping 2021 from being marginally better than that.
Okay. Thanks, Mark that my or do you have a follow up.
Yeah, just a quick one is it possible that the proceeds from the sale or IPO of like over time. It can be used you can use to be good.
It would be used to I didn't hear that last question that last piece the <unk> yeah.
Is it possible that you can use some of the tax credits.
Nothing against the proceeds from a from the parcel sale IPO have led to a permit.
Oh, well Mark I think that for you.
It's actually a much more complicated.
Complicated and there's legal structures.
I'll add that that's there's no short answer to that but other than to say not really [laughter].
[laughter] I'll take that I think that's the best way to leave it buyer. So I look at I want to once again. Thank you all for joining us today.
I'm very pleased with the progress we've made today I G and I think third quarter, certainly as another indication of.
The fact that we are on the right track.
And and I I got it that our colleagues really continues to impress me with their dedication and loyalty.
To our company and all our stakeholders, it's an exciting time at AI Jie, we continue to manage through unprecedented circumstances across the globe.
While elevating our market leading businesses.
And you know we look forward to 2021, I I remain confident that our team will continue to execute on our strategies for growth.
And we will separate the life and retirement business for me I G. So.
So we look forward to updating you on future calls.
Have a great day, thank you very much.
This concludes today's call. Thank you for your participation you may now disconnect.
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