American International Earnings Call NUGGETS: Underwriting Policy, Japanese Consumer Business
Josh Stirling – Sanford C. Bernstein & Co.: So a question for Peter. Could you help us better understand some of the actual operating levers that you guys are pulling on the initiatives to improve underwriting discipline and then separately, the critical initiatives that you’re pursuing in claims? We’ve talked a lot about the mix lever, which I think makes a lot of sense given the (different) range of profitability of your businesses, but I think what’s less clear for investors is exactly what you’re doing and how are you affecting the lives of desk underwriters and claim adjusters as you guys managed through process changes and change your underwriting policy?
A Closer Look: American International Earnings Cheat Sheet>>
Peter D. Hancock – CEO, Chartis: Well, I think starting on the underwriting side, it is the process of really exporting best practices around the world through integration of the best thinking that has grown up in the historically rather separate cultures of the domestic broker group and the Lexington in the U.S. versus AIU internationally. So the global management structure that we have for underwriting and commercial was announced when I took the role, but was really rolled out at the level of the underwriting management structure over the course of last summer. So we’re starting to reap the benefits of those consistent global standards which allocate risk appetite, where we’re getting best rewarded for the risk that we’re taking. So, that’s (indiscernible) how underwriting authorities are delegated, how technical pricing models are used, where underwriter judgment is allowed to alter the results of technical underwriting models. So these are work-in-progress, but I think we made a lot of progress in the last 12 months which is starting to feed through in the lower loss ratio. The business mix shift is both in macro point recognizing the long tail casualty lines, a less attractive in a low interest rate environment than they were in the past. However, as we apply greater and greater understanding using analytical techniques, predictive modeling and other methods, we’re finding attractive areas of business mix at a more micro level that are also coming to fruition. On the claims side, it’s (along) investment that started ’08 in our global claims initiative that is starting to be rolled out around the world and giving us some very encouraging improvements in reduced leakage. So one very tangible example of that in commercial order fleets in the U.K. we’ve seen loss ratios drop by 10% by exporting best practices. So we’re quite encouraged that the return on investment for using systematic claims management techniques all over the world is going to continue to reap benefits. Again, this is an area which lends itself to analytics and predictive modeling especially in the area of fraud control where we have pockets of excellence but a lot of the world has not fully embraced state-of-the-art modern fraud control. So I think that we see some interesting opportunities to further improve that.
Josh Stirling – Sanford C. Bernstein & Co.: David, I very much appreciate the expanded disclosures on global capital markets and the Direct Investment book. I’m wondering if you could just spent a little more time talking about how that the capital balances or at least the excess assets in these businesses, we should think about tying those back to the holding company assets you’ve indicated that you have. I guess the question, you know that ultimately most investors are trying to figure out as if you sort of add up the holding company liquidity with – liquidity that may be available in other buckets, if we look forward, say, 90 days, I mean we imagine a AIA transaction, market is dependent on that. What a reasonable level of liquidity there will be available and truly excess to the Company would be?
David Herzog – EVP and CFO, AIG: Sure. I’ll comment and if my colleague Brian Schreiber wants to add, he’ll do so. I think we were pretty clear about the – our view of the ‘the excess liquidity in cash and financial resources’ that were now available, that were coming out of the Direct Investment book that – which is why we made the disclosure that we did and we’re trying to give people a better sense of the size and magnitude and the – for the financial resources that stand behind the Direct Investment book and our confidence in those future cash flows in the stress testing that we do in conjunction with our enterprise risk management people to assess how much is truly excess at this time and I think that our discourse around that is pretty clear. So, I think again we’re evaluating from time to time based on market conditions and where we are and we’ve not made any decisions, as Bob said, with respect to either ILFC or AIA at this time. So I think it would be premature to comment on that and speculate about what we may or may not do. Brian anything else on the Direct Investment book?
Brian Schreiber – EVP, Treasury and Capital Markets: Yes, I think generally a simple way of thinking about is, as David mentioned earlier, we are still standing by our aspirational goals for capital management. When we did the Re-IPO we explained that the sources of available capital will come from non-core asset dispositions, but also from excess capital being generated in the operating companies, as well as maintaining leverage at the holding company. That said, the DIB will run-off over time. It’s got substantial NAV and a meaningful amount of (pull to) intrinsic in its underlying assets. So over time that NAV and that additional (pull to) intrinsic will ultimately be freed up. Again, that’s how we get to those aspirational goals of $25 billion to $30 billion.
Josh Stirling – Sanford C. Bernstein & Co.: Just a minor clarification, so the Direct Investment book, the excess assets in that are in addition to the $7.3 billion of holding company cash and investments that you guys have disclosed?
Brian Schreiber – EVP, Treasury and Capital Markets: We consolidate, again, the DIB liquidity is part of sort of overall parent liquidity. So in that number, you have the DIB, but keep in mind the number in the Q is as of 6/30 and since then we’ve received the proceeds from ML III. So if you’re doing sort of a pro forma you’ll need to add that to the parental liquidity balance.
David Herzog – EVP and CFO, AIG: Josh, just to be clear though that the NAV is different from cash. So I want to make sure you’re clear on that, okay.
Japanese Consumer Business
Jay Cohen – Bank of America Merrill Lynch: I guess a couple of questions. The first is, in the Q you talk about some pressure in the Japanese consumer business. I am wondering, can you talk about what’s happening there and what you’re doing to address that.
Peter D. Hancock – CEO, Chartis: I’m going to ask Jeff Hayman to answer that.
Jeffrey Hayman – CEO, Global Consumer Insurance Business, Chartis: So I think the Q commented on both auto and accident and health. So let’s address them in that order. The auto severity issue that was highlighted really only is in relation to the Fuji Fire and Marine portfolio. Our legacy, if you will, auto portfolios performed quite well in the quarter. The Fuji Fire and Marine portfolio is reported to us on a quarter lag. So this is actually first quarter month’s reported in the second quarter. It has a much wider geographic spread than our historical businesses and there was a lot of bad weather in Japan in the first quarter, but heavy winter weather, and that affected our physical damage and property damage liability severity. So we look at that as episodic not chronic. On the A&H front, we sell basically two chunks of business. We have an individual supplemental medical type of business and we have a group benefits, combination of that work in 24-hour, largely Accidental Death & Dismemberment business. The AD&D business is basically a large loss business. So a number of the industries where we have good penetration from a group benefits perspective have increased activity as a result of the reconstruction after the Tohoku catastrophe. So we’ve had to play catch-up in terms of rates. We just implemented an 11% rate increase in that portfolio on June 1, renewals are already going out, and we’ve already done some rebalancing, remixing of benefits and some other product changes. There’s also a small amount of individual AD&D business that we really don’t sell much in the way of new business but it’s a historical portfolio that the rates are governed by the rating organization in Japan and they have just promulgated to 15% rate increase that the industry will have to adopt at some point within the next 12 months. So we’re confident that we can get a handle on those portfolios as well.
Jay Cohen – Bank of America Merrill Lynch: Then the second question on the commutation of the insurance/reinsurance treaty, which resulted in the change in the reserve discount. Are there other internal reinsurance treaties that also can be commutated? Is this another source potentially of more reserve discounts to come?
James Bracken – CFO, Chartis: This is James Bracken. We do have internal reinsurance contracts within the organization to enable us to deploy capital effectively. The contracts that we commuted in the current quarter was one of the few that actually ceded U.S. workers’ comp business offshore and so you shouldn’t expect us to see this type of benefit arising from internal commutations on a go-forward basis. This was part of our overall restructuring of internal reinsurance for that organization, so we’ve been working through this for a fairly long time.
Peter D. Hancock – CEO, Chartis: Let me just put that in a broader context of the simplification of our legal entity structures around the world and the conversion of branches to subsidiaries, especially in Asia while in Europe we are converting to a series of branches in Europe of one Central European hub in U.K. and a revision of internal reinsurance and capital maintenance agreements that optimize our capital fungibility around the world.
Robert H. Benmosche – President and CEO, AIG: Let me be more candid we did a lot of auditing to make sure that the reserved development and this action were absolutely independent of each other. It would be (long in the works, in other words.)