American International Group Earnings Call Insights: Property Casual Business and Return on Equity Goal

American International Group (NYSE:AIG) recently reported its first quarter earnings and discussed the following topics in its earnings conference call.

Property Casual Business

Jay Gelb – Barclays Capital: There has been a significant amount of news around the – without the team from AIG Property Casualty to Berkshire Hathaway. Could you address that, and also give us a sense of whether we should anticipate that more of the leadership could depart?

Robert H. Benmosche – President and CEO: I guess I can only tell you that of the top 3,300 executives of AIG during 2012, of the top 30% performers of that Group, we retained 94% of those people. So I know you want to focus on four people in the Property Casualty business, it’s a very big and successful business. We’re going to lose people to competitors from time-to-time. We have an outstanding team that’s still here. You saw how quickly Peter was able to put new executives in charge. I think the reaction to the step has been very positive. So, turnover occurs but if you can retain 94% of your top 3,300 people running this Company and by the way 45% of that Group had been with AIG for more than 10 years, 15% of that Group more than 20 years. So we experience, we have a deep bench, we have a talented group of people. Not everybody is going to be happy with the Company as we go forward, and I can see that our competition is struggling a little bit with their flows and so they are getting businesses they weren’t in traditionally. So I think we are fine and we are moving on. So I think this is the only way I can answer that question.

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Jay Gelb – Barclays Capital: Then switching gears; could you provide some insight as to when AIG could reinstate its common shareholder dividend and also resume the share buyback?

Robert H. Benmosche – President and CEO: What we said is that we’re going to focus on our coverage ratio, we’re going continue to focus on liability management. We also want to make sure that we’ve completed the sale of ILFC, so that that non-core asset is now completed in terms of the sale, so that we reduce our debt, for example, (you know it’s) not direct, but about $25 billion, that’s a key milestone we have to reach. We’re continuing to look at our capital plan and doing our stress testing, and we are meeting with rating agencies to make sure that whatever we do does not cause them any concern. Then, our second priority after liability management we said would be a dividend, and after that we would still like to do stock buybacks, but we’ll do in a very slow and cautious way to make sure that we do nothing to affect our current ratings and that the rating agencies are satisfied with what we are doing, because the most important thing for AIG right now is to maintain and build on the confidence that we can make guarantees sometimes for people’s lifetimes and we’ll be here to live up to those guarantees. So that’s our highest priority as we go forward. So as the year progresses, you can see our number, you can see our performance. When we think it’s prudent and everyone else feels it’s prudent, we’ll make those decisions.

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Return on Equity Goal

Gregory Locraft – Morgan Stanley: Just wanted to clarify the ROE goal. It’s not inclusive of FAS 115 and the DTA. Is that correct from a book value perspective?

David Herzog – EVP & CFO, AIG: That’s correct.

Gregory Locraft – Morgan Stanley: So, just to be clear, you take current stated book value of $67 subtract $20 a share and so we’re really at a $47 book value number and then we sort of grow off of that and we want to earn a 10 ROE against it?

David Herzog – EVP & CFO, AIG: I’m not quite sure I follow your math; maybe we could do that offline. I think that’s probably the best way to handle that.

Gregory Locraft – Morgan Stanley: It’s just FAS 115 and DTA subtracted from current GAAP book value. So the goal is 10 ROE ex-FAS 115, ex DTA in 2015. Then the other is just on the capital deployment side, you mentioned $25 billion to $30 billion. Can you update us on how much you have left to do to get to that goal, like how much is being completed and how much more can you do to meet that?

David Herzog – EVP & CFO, AIG: This is David. We did – through 2012 we did $13 billion of common equity share repurchase and thus far this year we’ve done a little over $2 billion of debt capital management. Again, I gave you the interest savings on that. We don’t view maturities that are being funded through cash as part of that capital management. That’s just part of the ongoing management of the Company. So the calls – the early calls on the hybrids, we do consider that part of our capital management goal. So if you think about it, through the end of this year we’ll have done with what we’ve already done, plus the planned call on the hybrid, we will have done close to $16 billion against that 25 to 30, so that’s how you — that’s where we are to date, and then the Company continues to generate deployable capital. We said $4 billion to $5 billion per year of dividends and distributions from our operating companies. We have interest expense in some parent company expenses of roughly $2 billion or so a year and so therein lies the generation of deployable capital, and as Bob referenced earlier, the unencumbered proceeds from ILFC, which will be available at the holding company for consideration.

Gregory Locraft – Morgan Stanley: Then last is just any update on the non-bank SIFI process, the timing, I’m wondering if that’s slipping at all and when we might get a clarity. I know that’s a bit unfair, but just any help there would be great.

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Robert H. Benmosche – President and CEO: I think on the SIFI part of it, we are working – remember we are now being regulated by the Federal Reserve. We’ve been working through a lot of things with them since they arrived in September. We have a very good working relationship. They have dug into understand a lot about our businesses, they are now in the process of fully examining the way we stress test this organization. So the SIFI process is going to be something we’ll have to go through, but I think the biggest issue there probably be what amounts of additional cushion you may have to have, but as far as the basics, you’ve got to make sure that you’re running these companies, insurance companies, the banks and so on in a sound way. There is a huge public outcry of making sure that these institutions don’t need taxpayer money, and unfortunately we have not done a very good job as an industry, explaining how much has been done in the last four years with over $400 billion of additional capital being raised to strengthen these institutions, so it’s very difficult for them to payout based upon the stress test that everyone is going through today. So a lot of progress has been made, people have still not declared victory unfortunately. So I think that’s the bigger crowd, but I’m pretty confident that SIFI or not SIFI, at the end we are going to be able to demonstrate financial strength of this Company, that our stress tests are very well done, that we understand risk management, that we’ve dealt with the non-core assets, and that AIG has a financial strength to do its capital management on a go forward basis in a prudent way. So that’s pretty much where we are at and when SIFI comes, it comes, but it will be more about the ratios than the quality of our numbers.