Economy Processed transcript of the conference call or presentation on...

Processed transcript of the conference call or presentation on the AIG result 13-Feb-20 14:00 GMT

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NEW YORK, February 14, 2020 (Thomson StreetEvents) – Minutes of the conference call or presentation of the outcome of the American International Group Inc. Thursday, February 13, 2020, 2:00 p.m. (GMT)

American International Group, Inc. – Executive VP and CEO of Life & Retirement

American International Group, Inc. – Executive VP and CFO

American International Group, Inc. – President, Global COO & CEO of General Insurance

American International Group, Inc. – Deputy CFO and Head of Treasury, Investor & Rating Agency Relations & Corporate Development

UBS Investment Bank, Research Division – MD, head of the financial research sector and global insurance strategist

* Suneet Laxman L. Kamath

Hello and welcome to the AIG fourth quarter 2019 financial results conference call. Today’s conference is recorded.

At this point, I would like to hand over the conference to Sabra Purtill, Head of Investor Relations. Please continue.

Sabra Rose Purtill, American International Group, Inc. – Deputy CFO and Head of Treasury, Investor & Rating Agency Relations & Corporate Development [2]

Thank you very much. Good morning and thank you for coming to us. Today’s call relates to AIG’s fourth quarter and year end 2019 financial results, announced this morning. The press release, presentation of financial results and the financial supplement were published on our website at www.aig.com. The 10-K for the year will be submitted next week.

Our speakers today include Brian Duperreault, CEO; Peter Zaffino, President and Chief Operating Officer of AIG and CEO of General Insurance; Kevin Hogan, CEO, Life and Retirement; and Mark Lyons, CFO. After your prepared remarks, we have time for questions and answers.

I would also like to point out that Peter and Mark will host a fireside chat at the Bank of America Insurance Conference today at 12:35 p.m. Easter. You can find the link to the webcast in the Investor Relations section of our website.

Before Brian begins, please note that today’s comments may include forward-looking statements, including comments on corporate performance, strategic priorities, business mix, and market conditions. These statements are not guarantees of future performance or events and are based on management’s current expectations. Actual performance and events may vary significantly. Factors that may cause results to differ include the factors identified in our first, second, and third quarter 2019 reports on Form 10-Q, our 2018 annual report on Form 10-K, and our others recently at SEC filings are described. AIG is not obliged and expressly rejects any obligation to update forward-looking statements based on new information, future events or for other reasons.

In addition, some comments today may relate to non-GAAP financial measures. The reconciliation of such key figures to the most comparable GAAP figures is included in our earnings release, financial supplement and presentation, all of which are available on our website.

I will now transfer the call to Brian.

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Brian Duperreault, CEO, [3]

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Good morning and thank you for joining us to review our fourth quarter and full year 2019 results. In the fourth quarter, adjusted earnings after taxes were $ 919 million, or $ 1.03 per common share. For 2019 as a whole, adjusted earnings after taxes were $ 4.1 billion, or $ 4.59 per common share. The return on equity and the adjusted return on equity were 5.3% and 8.3%, respectively. These results reflect the significant progress that we have made in 2019 in implementing our AIG positioning strategy for long-term, sustainable and profitable growth.

Our focus on fundamentals and the fundamental work that we have done since late 2017 is reflected in our financial performance. Our results for 2019 reflect a broad improvement across all segments.

I will highlight some of the important milestones we have achieved in the past year, particularly those in the general insurance business.

GI achieved a combined ratio of 99.6 for 2019 as a whole and 96% for the adjusted accident year. Given all of AIG’s problems over the past decade, it’s hard to say, but frankly, I don’t remember when AIG’s last underwriting profit was one year. This turning point is critical to achieve and reflect the tremendous effort of our general insurance team led by Peter to bring about a turnaround in scope and timeline that has never been seen in our industry.

From the end of 2017, the GI team developed a strategy with targeted urgency to improve the fundamentals, reposition our portfolio, aggressively reduce limits, use capital or capacity wisely and promote cost discipline.

In addition, the GI team developed an innovative reinsurance strategy to reduce risk and volatility and to preserve capital. The disciplined execution and leadership they demonstrated in the global market in 2018 and 2019 not only dramatically changed our portfolio, but also stimulated the global market cycle, which I believe is improving and sustainable.

A good proof of this leadership role is that our customers, sales and reinsurance partners and other stakeholders have actively supported our actions and put their trust in AIG in recent years, while we continue to offer solutions to current and emerging risks.

While there is still so much to do, our strategy is clearly working and the General Insurance team will make further progress in the coming year.

In 2019, we also saw significant improvements in other areas of our business. Life and Retirement continued to deliver solid results in the face of continued headwinds from persistently low interest rates and tightening credit spreads. Due to the proactive strategy of Kevin and his team to build a diversified portfolio and broad distribution network, L & R ended the year with an adjusted return on equity of 13.7%, ahead of our forecast.

Net investment income for the full year 2019 was $ 14.4 billion, compared to $ 12.7 billion in 2018, which was supported by strong alternative returns, cheap stock markets and tight spreads in the credit markets. With the announcement of an agreement to sell our majority stake in Fortitude, we have also made significant progress in reducing our legacy portfolio. The sale is subject to regulatory approvals, which are expected to close in the middle of the year.

I am delighted that with everything we have achieved in 2019 and our progress, we reflect the hard work and commitment of our people across AIG. We continue to strive to achieve a 10% return on adjusted capital by the end of 2021.

Mark will review our financial outlook for 2020 in more detail.

Looking ahead to 2020, we continue to focus on implementing our strategy to position AIG both as a leading insurance company and as a high performing company, AIG 200, which Peter leads and which we will discuss in more detail over time be a significant work this year and in the coming years.

Like our approach to general insurance in 2017, the foundation work for AIG 200 started seriously in 2019 and will accelerate in 2020. We will continue to build a world-class team of professionals with significant transformation experience who will drive this work forward in our global organization. The team identifies problems and vulnerabilities and creates plans that redefine how we do business and how we create value for our stakeholders.

This is not about pavement or temporary corrections to just step down the can down the street. This work will address the underlying issues and position us for sustainable long-term profitability. AIG 200 is a bold program with multiple workflows that require intense focus and disciplined execution. The sustained improvements that AIG 200 will deliver will require significant investment and will ultimately lead to a reduction in the cost base over time.

If you look at the scope and complexity, I haven’t seen a change of this magnitude in my career, much like the GI turn. We will experience some surprises and maybe setbacks along the way, but we will see – we will work through them and in the end we will be significantly improved and a stronger company.

AIG 200 is a marathon, not a sprint. While the results will not be linear, we will be completely transparent in the course of this work. My confidence continues to grow that we at AIG are on the right track. I am very proud of what our colleagues have achieved. The hard work, dedication and commitment deliver results, and we are excited about what 2020 has in store for us.

With that, I will forward the call to Peter, who will provide more information on fourth quarter and full year financial results in General Insurance and AIG 200.

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Peter Salvatore Zaffino, American International Group, Inc. – President, Global COO & CEO of General Insurance [4]

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Thank you, Brian, and good morning everyone. Today, I’m going to review 2019 General Insurance’s financial performance, keep you updated on key reinsurance placements completed as part of the January renewal season, share observations on current market conditions, and outline remarkable business performance in General Insurance. I will also give an overview of AIG 200.

As Brian mentioned earlier, we are very pleased that general insurance generated an underwriting profit in 2019. This was an important milestone for our team and reflects the significant work that was done in 2018 and 2019 to build a first-class management team, define a new comprehensive underwriting strategy for general insurance, and clearly define a defined risk appetite for our sales partners and clients, and are doing key fundamental work to improve our portfolio while significantly reducing volatility through underwriting and a comprehensive reinsurance strategy.

Our improved financial results clearly show that our key actions in the market are accepted. We are reestablishing AIG as the market leader, which would not have been possible without the great support and close relationships with our sales partners and customers.

Let us turn to our financial results. The adjusted combined annual accident rate for the full year 2019 was 96%, an improvement of 370 basis points compared to the previous year, including an improvement in the loss ratio by 240 basis points and an improvement in the cost ratio by 130 basis points.

In North America, the adjusted accident loss rate was 67.1%, an improvement of 300 basis points over the previous year. The disciplined implementation of our strategy resulted in better quality and a more profitable portfolio, and North America also benefited from Validus and Glatfelter.

As mentioned in the third quarter, 2019 is a challenging year for Crop across the industry. In the fourth quarter, as in the third quarter, we increased loss estimates due to crop failures due to poor growth conditions and higher reserves due to preventive planting claims due to the effects of rainy weather conditions. As a result, Crop negatively impacted the adjusted accident loss rate in North America for 2019 as a whole by 100 basis points.

North America Personal Insurance continued to perform as expected, improving the adjusted accident rate by 80 basis points for the full year as the business mix improved across the portfolio.

The Private Client Group saw less severe wear and I am pleased with the progress the new management team is making in this business.

Moving to international. The adjusted accident rate for the full year was 56.4%, an improvement of 270 basis points compared to the previous year. This improvement was due to strong results at Specialty and Talbot, as well as significant property redevelopment efforts, all of which contributed to lower severe losses.

The performance of international personal insurance met expectations with an improvement in the adjusted accident loss ratio by 70 basis points for the full year, which was borne by Personal Auto, particularly in Japan.

The bottom line was that net premiums written and earned net premiums continued to reflect our disciplined underwriting and reinsurance decisions.

Total net premiums for the full year were $ 25.1 billion, a 4% reduction from a year earlier without currency.

Net premiums for the full year were $ 26.4 billion, a 3% year-over-year reduction without currency.

Finally, in 2019 we introduced discipline and focused on cost management in general insurance, which reduced total cost of ownership by over $ 500 million. The total expense ratio was 34.4%.

Let’s turn to CAT activity. Fourth quarter net CAT losses were $ 411 million compared to $ 826 million in the prior year quarter. Typhoon Hagibis was the largest loss driver at $ 233 million, of which $ 155 million was for Validus Re, minus the full retrocession program that was expected.

In international, personal and commercial insurance, where AIG’s average market share in Japan is 6% in the regions most affected by CAT events in 2019, our reinsurance program responded as expected, limiting Hagibis’ net losses to $ 78 million before reinstatement ,

The remaining CAT activity in the fourth quarter included net losses of approximately $ 150 million due to events in North America, the largest of which were the Texas tornadoes and riots in Chile.

CAT losses totaled $ 1.3 billion less reinsurance reimbursements for 2019 as a whole. This compares to CAT losses of $ 2.9 billion less reinsurance repayments in 2018 and $ 4.2 billion less reinsurance repayments in 2017.

We continue to refine and improve our reinsurance purchasing strategy while our underwriting measures take effect.

Overall, we are satisfied with the result of the renewals on January 1st. While there are signs of consolidation in the reinsurance market and significant relationships that we have built over the past 2.5 years, we were able to extend our key contracts as expected, favorably. We continue to improve both the overall and event structure for our global real estate CAT program, which provides significant protection against the severity and frequency of events, as well as extreme protection against events in regions where we have a lower market share.

For overall protection in 2020, we improved the expiring CAT program by combining the international and North American deductibles into a single global deductible and reducing each individual deductible to make it more geographical and dangerous. These improvements increased the relevance of overall protection, particularly with regard to secondary and lower model risks. We also bought 2 core towers. One tower includes commercial real estate in North America and the other all international real estate, including Japan.

As with our expiring global CAT program for 2019, global aggregate protection also provides us with a significant additional limit for losses resulting from a single major event.

In addition, we purchased a separate deposit tower for our U.S. retail group, which enables North America Commercial to build its own tower as part of our Lloyd’s initiative to create Syndicate 2019, which focuses on our wealthy U.S. business. This was the only major new program that we completed on January 1st.

With regard to real estate per risk, we have drastically reduced our net reluctance to a single loss of real estate by combining the significant reduction in gross limits used and improved reinsurance purchases over the past 2 years. As a result, we’ve renewed our 2020 coverage with improvements that lowered the maximum attachment point from $ 50 million to $ 25 million, and we’ve reduced our purchases for higher shifts as our strategy to reduce gross limits continues to dramatically improve our risk profile ,

Overall, we were able to improve our entire CAT reinsurance program, including terms and conditions, while reducing overall costs by approximately 7% year over year. We will continue to refine and improve our reinsurance program throughout the year and expect the syndicate to close in the first half of 2019.

Let us turn to the general interest rate environment and market conditions. During the fourth quarter, we continued to see a significant acceleration in rate hikes, and it was the strongest quarter of rate improvement we have seen in the past decade. The general rate improvement for general insurance without Validus and Glatfelter was in the low double-digit range in the fourth quarter and in the high single-digit range in the year. I’ll give some examples that provide more color in the rate environment.

Commercial rates in North America rose in the fourth quarter in the low double-digit to mid-teens and throughout the year in the high single-digit, low double-digit range. International trade rates rose in the fourth quarter in the low double-digit range and in the medium to high single-digit range for the whole year on average in all regions.

North America admitted that the tendency for the accident rate to increase in the fourth quarter was in the mid-40% range and energy rates rose by around 35%. International rate improvements in the fourth quarter were led by the UK, where the D&O rate rose nearly 40% and the sea and energy rates rose mid-range by 20%.

Now I want to give additional insight into the progress we are making in certain business areas and highlight remarkable achievements. I’m going to start with Lexington I’ve talked about before, and it’s a great case study on how to discipline our strategy.

2019 was the first full year in which our decision to draw disciplined excess and excess lines was implemented. We shifted our focus to the real E&S business, highlighted the wholesale channel and tried to improve risk selection and better balance the portfolio. The market response has been remarkable and our sales partners have been very supportive of this repositioning.

New business for accident and non-life insurance with our wholesale partners more than doubled in 2019.

At Lexington Casualty, filing volumes increased 86% and 70% in the fourth quarter and full year 2019, respectively. We lowered the limits on our most volatile accounts by 67% in the fourth quarter and 61% for the full year, while interest rates rose 28% in the fourth quarter and 21% for the full year.

Submissions to Lexington Property increased 41% and 48% in the fourth quarter and full year 2019, respectively. We lowered applicable overall limits by 19% in the fourth quarter and 52% for the full year, while rates rose 32% in the fourth quarter and 17% for the full year.

We also increased the average deductible by over 50% in 2019. We expect greater underwriting discipline and a better interest rate environment on the E&S market in the foreseeable future.

North America Retail Property is a great example of the bold actions we take. The repositioning of this portfolio took longer due to a series of long-term guidelines that were in effect.

In 2019, we cut applicable gross limits in the fourth quarter and beyond by $ 40 billion, or 17%, and more than $ 150 billion, or 44%, for the full year.

We increased average deductibles by 21% in the fourth quarter and 31% for the full year.

The rate hikes in the fourth quarter were over 40% for both the overall portfolio and excluding the effects of long-term agreements.

For the full year, the total rate increase was 19% and the increase excluding the effects of long-term agreements was 25%. As you can see, we have changed this portfolio dramatically. And in 2020 we expect derisking to improve further when long-term agreements expire.

In North America’s financial lines, commercial D&O rates improved nearly 35% in the fourth quarter, marking an increase of more than 30% for the second consecutive quarter. We achieved rate increases of over 25% on an annual basis. This improvement was spearheaded by Public D&O, where rate increases were 38% in the fourth quarter and 29% for the full year. We continue to drive our exposure to D&O trends and reduce primary commercial D&O limits by 40% in the fourth quarter and over 35% for the full year.

We also reduced policies with a limit in excess of $ 10 million and lead layers by 50% in the fourth quarter and over 40% throughout the year.

Regarding foreign countries, we are very satisfied with the performance of our specialty business, led by a significant improvement in our energy portfolio. The improvement in the adjusted accident year combined ratio for the full year resulted from limit reductions, changes to the underwriting guidelines and deductibles, interest rate measures and selective class exits.

Finally, our global A&H business posted a strong underwriting profit in 2019. We plan to accelerate investment in this growth business and continue to focus on risk selection and portfolio optimization.

General insurance entered the year 2020 with great dynamism. We will continue to implement our underwriting and reinsurance strategies to further improve profitability.

Next I want to spend time with AIG 200. This is our global multi-year effort to focus on AIG’s long-term strategic positioning and to be our top priority in 2020.

As Brian noted, this work focuses on changing our infrastructure and drawing workflows, as well as developing a new data architecture, as we focus on delivering value through scaling and simplification.

In 2019, we involved AIG colleagues in a solid, careful exercise that provided important perspectives and insights into how we define ourselves as a company. how we differentiate ourselves in the global insurance market; how we create value for customers, policyholders, sales partners, our colleagues and other stakeholders.

We have carefully analyzed and evaluated the results from the initial phase of the work, which are based on the four core objectives of AIG 200: achieving excellent drawing quality; Modernization of our operational infrastructure; Improve user and customer experience; and become a more unified company.

Based on this analysis, we have identified 10 core operational programs that we will begin implementing in 2020. We anticipate that these programs will require $ 1.3 billion in investments over the next three years and that GOE will offer a $ 1 billion run rate benefit by the end of the year 2022.

We have carefully planned the execution plans for each of these operational programs, with a focus on prioritizing resources and investments, and on disciplined execution.

Let me give a brief overview of the 10 operational programs. Three of them are part of general insurance: building a standard platform for commercial underwriting, improving the digital workflow in our Japanese business, and improving skills in the retail customer group.

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 drawing analysis and enable us to achieve better risk management, better price and portfolio decisions while improving the user experience.

In terms of Japan, we will transform this business into a next generation digital insurance company that can offer any device experience anywhere and anytime that our customers and agents expect. To implement this digital-first approach, we will modernize our underlying technology infrastructure.

In our business with private customer groups, decision-making will improve primarily through the modernization of our old technology and the switch to digitized workloads. As a result of this work, PCG will be well positioned to provide brokers, agents and customers with an improved user experience.

The other operational programs will change shared services, IT, finance, procurement and real estate in AIG.

In terms of shared services, we will expand our existing capabilities on a global basis to create global AIG operations, a multifunctional, fully integrated operating model with a digitally activated end-to-end process and expanded scope and scope.

Our goal for AIG Global Operations is to create a strong culture of operational excellence and continuous improvement that unites the company and offers first-class capabilities.

In IT, where we have two workflows, we will transform the operating model to work itself and create a modern, scalable and secure technology foundation to improve operational stability and enable faster delivery of business technologies.

The main components of this program focused on substantially eliminating the old technology debt, simplifying our business application portfolio, and strategically moving to cloud services.

In the finance area, where we also have two workflows, we will transform the operating model of the function itself and modernize our infrastructure through technology solutions and simplified financial and actuarial processes, while significantly improving our analysis functions.

In procurement, we create a highly efficient global procurement and procurement organization to use our purchasing power, maximize value, minimize risk and support continuous and sustainable profitable growth for AIG.

Finally, we optimize and consolidate AIG’s real estate portfolio to ensure that it is affordable, resilient and reflects our global presence.

Each of these programs is complex and requires disciplined execution. Ultimately, this work will significantly improve our business and strategically position AIG to become a best performing company.

We will be fully transparent about the execution of AIG 200 and will report quarterly on our progress.

Now I’m going to transfer the call to Kevin.

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Kevin Timothy Hogan, American International Group, Inc. – Geschäftsführer und CEO von Life & Retirement [5]

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Danke, Peter, und guten Morgen allerseits. Heute werde ich unsere Ergebnisse und Aussichten für das Gesamtjahr 2020 erörtern und dann kurz auf unsere Ergebnisse für das vierte Quartal eingehen.

Life and Retirement verzeichnete für das Gesamtjahr ein bereinigtes Vorsteuerergebnis von 3,46 Mrd. USD und eine bereinigte Rendite auf das zugewiesene Stammkapital von 13,7%. Das bereinigte Vorsteuerergebnis stieg gegenüber dem Vorjahr um 268 Millionen US-Dollar. Solide zugrunde liegende Ergebnisse wurden weiterhin durch die Kapitalmarktbedingungen und deren Auswirkungen auf Vermögenswerte und Schulden gestützt. Die Auswirkungen der steigenden Aktienmarktrenditen nahmen um 244 Mio. USD zu, darunter höhere Gebühreneinnahmen, niedrigere Abschreibungen auf abgegrenzte Anschaffungskosten und höhere Renditen für alternative Anlagen.

Die kurzfristigen positiven Auswirkungen niedrigerer Zinssätze und Kreditspreads nahmen um 154 Mio. USD zu, einschließlich höherer Renditen für Fair Value-Optionspapiere und Gewinne aus Abrufen.

Unser Ergebnis profitierte auch von höheren Vermögenswerten aufgrund des Wachstums des Neugeschäfts. Diese positiven Auswirkungen wurden teilweise durch weitere Auswirkungen der Spread-Komprimierung von ca. 112 Mio. USD oder 7 Basispunkten pro Jahr und Investitionen zur Verbesserung unserer Betriebsplattformen ausgeglichen.

2019 war ein gutes Beispiel für unsere Strategie, das Neugeschäft je nach relativer Rendite zu beschleunigen oder zu moderieren. Mit sehr günstigen Preiskonditionen im ersten Quartal haben wir erhebliches Kapital für die individuelle Altersvorsorge eingesetzt und ein robustes Neugeschäftsvolumen mit attraktiven Margen erzielt.

Da die Zinssätze und Spreads in den verbleibenden drei Quartalen zurückgingen, haben wir unsere Preise angepasst und die einzelnen Rentenverkäufe reduziert, da unsere Sicht auf die Margen weniger attraktiv wurde.

Gleichzeitig erreichten wir ein Rekordjahr für neue Gruppenakquisitionen und den Ruhestand von Gruppen und konnten den internationalen Umsatz für unser Lebensversicherungsgeschäft weiter steigern und uns auf ein konstant profitables Wachstum in den institutionellen Märkten konzentrieren.

Mit Blick auf das Gesamtjahr 2020 erwarten wir, dass das bereinigte Vorsteuerergebnis besser mit unseren Ergebnissen für 2018 übereinstimmt. Diese Erwartungen gehen von einer Aktienmarktrendite von 6,5% und einer 10-Jahres-Treasury-Rate von rund 1,7% aus.

Um Ihnen eine Vorstellung von der Marktsensitivität unserer bereinigten Gewinne zu geben, einschließlich der Auswirkungen sowohl von Vermögenswerten als auch von Verbindlichkeiten, würde ein Rückgang der Aktienmarktrenditen um 1% den bereinigten Vorsteuerertrag um ca. 30 Mio. USD auf 40 Mio. USD pro Jahr verringern, und es würde einen entsprechenden Anstieg geben im Ergebnis aus einer Steigerung der Aktienmarktrenditen um 1%.

Ein Rückgang der 10-Jahres-Zinssätze um 10 Basispunkte würde den Gewinn um etwa 5 Mio. USD auf 15 Mio. USD pro Jahr senken, und ein entsprechender Gewinnanstieg würde sich nach einem Anstieg der Treasury-Sätze um 10 Basispunkte ergeben. Es ist wichtig zu beachten, dass diese Marktsensitivitätsbereiche nicht exakt oder linear sind, da unser Ergebnis auch durch den Zeitpunkt und den Grad der Zinsbewegungen sowie durch Kreditspreads und andere Faktoren beeinflusst wurde.

Basierend auf unseren Annahmen zum Zinsniveau erwarten wir für das Gesamtjahr 2020, dass die Basisinvestitionsspreads im gesamten Portfolio jährlich um ca. 8 bis 16 Basispunkte sinken, wobei die Mitte des Bereichs zu einem Gegenwind von ca. 200 Mio. USD führt.

Basierend auf unseren Erwartungen hinsichtlich Zinssätzen und Spreads erwarten wir für das Jahr negative Nettoflüsse für die Gruppen- und Einzelrente mit einem Rückgang der Einzelrentenverkäufe, insbesondere bei festen Renten.

Schließlich erwarten wir aus gesetzlicher Sicht weiterhin ein solides Ergebnis und eine starke Kapitalausstattung sowie breite operative Einheiten.

Jetzt werde ich kurz auf unsere Ergebnisse für das vierte Quartal eingehen. Life and Retirement meldete für das Quartal ein bereinigtes Vorsteuerergebnis von 839 Mio. USD. Das bereinigte Vorsteuerergebnis stieg gegenüber dem Vorjahresquartal um 216 Mio. USD. Die Auswirkungen der steigenden Aktienmarktrenditen nahmen um 176 Mio. USD zu, und die kurzfristigen positiven Auswirkungen niedrigerer Zinssätze und Kreditspreads nahmen um 46 Mio. USD zu. Diese positiven Auswirkungen wurden teilweise durch Spread-Komprimierung und zuvor erwähnte Investitionen zur Verbesserung unserer Betriebsplattformen ausgeglichen.

Bei der individuellen Altersvorsorge gingen die Prämien und Einlagen hauptsächlich aufgrund geringerer Rentenverkäufe zurück, was auf niedrige Zinssätze und geringere Kreditspreads zurückzuführen war. Niedrigere Umsätze führten zu geringeren Nettoflüssen für die gesamten einzelnen Renten, während das verwaltete Gesamtvermögen aufgrund der starken Aktienmarktperformance und der höheren Renten-Nettoflüsse im ersten Halbjahr zunahm.

Bei der Konzernpension stiegen die Prämien und Einlagen gegenüber dem Vorjahresquartal um 10%, was auf starke Ergebnisse bei der Akquisition neuer Gruppen zurückzuführen ist.

Die Nettozuflüsse lagen aufgrund höherer Konzernübergaben unter dem Vorjahresquartal. Obwohl wir über einen bestimmten Zeitraum hinweg mit negativen Nettozuflüssen konfrontiert waren, haben wir weiterhin solide Gewinne für dieses Geschäft erzielt, da das verwaltete Vermögen weiter gewachsen ist.

For our Life Insurance business, total premiums and deposits increased due to higher international sales.

Our U.S. 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, and the business continues to be well positioned 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 Act. In addition to the expected outcome of increasing the availability of income solutions for participants in defined contribution plans, we believe that it’ll ultimately enhance the overall education and awareness of the need for protected lifetime income as part of a comprehensive, diversified retirement plan.

For our Group Retirement business, we are evaluating several unique lifetime income options. Other benefits of the Secure Act include raising the age for required minimum distributions to 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 and lifetime income solutions.

Now I will turn it over to Mark.

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Mark Donald Lyons, American International Group, Inc. – Executive VP & CFO [6]

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Thank you, Kevin, and good morning all. AIG’s adjusted after-tax earnings per share was $1.03 for the fourth quarter compared to a negative $0.63 per share in the prior quarter.

AIG had adjusted pretax income of $1.2 billion and 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 or $4.59 per diluted share, representing a $3.42 per share improvement over 2018.

Adjusted book value per share, which excludes AOCI and DTA was $58.89, an increase of 2.2% from third quarter and 7.2% relative to year-end 2018. Return on adjusted common equity or ROCE was an annualized 7.3% for the quarter and 8.3% for the full year, driven by General Insurance at 9% for the full year and Life and Retirement at 13.7% for the full year.

An important driver of earnings and ROCE improvement in the fourth quarter was our net investment income or NII, which was $3.5 billion on an adjusted pretax income basis, almost the same as the third quarter of 2019, reflecting higher alternative investment income and prepayments and bond calls.

NII on an adjusted pretax income basis was up $649 million for the fourth quarter 2018, which was negatively impacted by higher rates, lower equity markets and negative returns on alternatives last year.

On a full year basis, 2019 NII was nearly $14.4 billion on an adjusted pretax income basis, well above our original expectations and up $1.7 billion from 2018 due to strong alternative returns, impact of lower rates and credit spreads on fair value option bonds and equity markets, offset in part by the impact of lower reinvestment rates.

Legacy contributed $2.5 billion of NII in 2019.

I want to call your attention to additional investment income information on Page 46 of the financial comparables, which provides information on the drivers of NII for both GI and Life and Retirement. This should help you refine your models, including the impact of continued low rates on margins in L&R and elsewhere.

I’ll discuss our 2020 outlook later in my remarks.

Turning to General Insurance. The segment produced an underwriting profit with the calendar quarter combined ratio of 99.8% and current accident quarter, excluding CAT combined ratio of 95.8%. The calendar quarter underwriting income was $12 million, an increase of nearly $1.1 billion from the fourth quarter of 2018, with North America contributing $852 million of improvement and international operations contributing $231 million of improvement. Also, both commercial and personal lines including their exiting quarter, underwriting margins within the fourth quarter versus the prior year quarter. Moreover, each reportable segment also saw improvement for the full accident year 2019 over 2018, both in North America and international, commercial lines and personal lines.

The full 2019 accident year combined ratio improved 370 basis points relative to 2018. And as Peter mentioned, with a 240 basis point improvement in the loss ratio, a 140 basis point reduction in the GOE ratio, partially offset by a marginal 10 basis point increase in acquisition ratio.

Additionally, as Peter referenced, Crop results for the year negatively impacted the full global 2019 accident year by a half loss ratio for it at a global level.

It’s also important to note that this improvement in the loss ratio represents the benefits from all the underwritten actions taken in 2018 and 2019, and 2020 and beyond should begin to see additional improvements as finer point adjustments filter through our financial results.

The net CAT ratio for the fourth quarter was 6.5% versus 11.3% in fourth quarter 2018, despite a high level of gross CATs in both quarters as the combination of gross line reunderwriting, together with the improved reinsurance program continues to reduce the General Insurance’s net CAT ratio.

Both quarters have losses from California wildfires and Japanese typhoons, but our aggregate reinsurance program reduced our net exposure, consistent with our commentary on the third quarter call.

Turning to prior year development or PYD. As in prior quarters, we’d like to unpack that for you. The reported $153 million of favorable development includes $58 million of favorable amortization from the ADC deferred gains or adverse development coverage deferred gains, resulting in $95 million of favorable development excluding that influence, which is on a post-ADC recoverable basis.

On a pre-ADC basis, we had $118 million of favorable development with 2017 CAT releases and wildfire subrogation producing approximately $290 million of favorable development. Global Specialty providing $70 million of favorable development, $60 million of favorable development in international personal lines, $5 million of favorable development in U.S. primary casualty lines, which include general liability and workers compensation, and approximately $13 million from various other units.

On the other side, we had unfavorable pre-ADC development of approximately $320 million stemming from our U.S. financial lines book. This unfavorable development emanates primarily from our private not-for-profit D&O book, which represents about $130 million unfavorable and the mergers and acquisitions book, which represented roughly $90 million of unfavorable.

Other areas largely represented fine-tuning. Hospitality had $39 million unfavorable; public, primary and excess D&O to roughly $35 million unfavorable; $16 million in cyber; and $7 million unfavorable was in EPLI. This represented roughly a $210 million unfavorable on a post-ADC basis, which indicates that the strengthening was mostly centered in accident years 2016 through 2018.

On a full year pre-ADC basis, the company enjoyed $341 million of favorable development, led by workers’ compensation, personal lines, global specialty and commercial short-tail line with unfavorable development on the annual basis, emanating from financial lines as just discussed and some in excess casualty.

On an accident year and post-ADC basis, and as shown in the financial supplement, accident year 2018 increased by 1 loss ratio point over the year, the 2017 accident year decreased by 0.6 loss ratio points, and accident year 2016 remained flat. We reviewed the roll-forward potential and the impact of accident year 2019 was not deemed material since some segments somewhat improved and others, somewhat worse.

Peter discussed the rate increases being achieved throughout General Insurance. And although they bode well towards 2020, the uptick in U.S. social inflation, together with an increasing proportion of litigated claims and increased securities class action filings, may cause slower recognition of any arithmetically implied margin expansion.

The book has undergone massive reunderwriting so our historical experience is only moderately useful projecting forward. Given the changes in the external economic and legal climate, coupled with AIG’s material underwriting changes, it’s prudent and best practices that let the loss experience emerge before any accident year 2020 adjustments are contemplated.

Turning to the Life and Retirement segment. Adjusted pretax income is nearly $3.5 billion. As Kevin noted, an increase of $268 million from 2018. For the quarter, adjusted pretax income was $839 million, up $260 million over fourth quarter 2018, helped along in part by higher equity market.

Premiums and deposits decreased 3.6% on a full year basis, as we continued to be prudent on product pricing in this environment.

Regarding spread compression, individual retirement, variable and indexed annuities combined, base net investment spreads fell off 28 basis points for 2019 versus last year, whereas individual retirement fixed annuities base investment spreads fell off just 9 basis points for 2019 versus 2018.

On the Group Retirement side, base net investment spreads actually increased 4 basis points versus last year.

Regarding net flows on a full year basis, individual retirement across all products combined had negative net flows, although these were cut in half relative to last year. Fixed annuities materially reduced their net outflow, variable annuities were similar to last year, whereas indexed annuities continue to exhibit material strength with positive net flows of $4.7 billion for the year. And retail mutual funds had a similar level of net negative outlook. As respect to surrender rates for the year, fixed annuities were 90 basis points lower than 2018, whereas the composite of variable and fixed annuity rates were effectively flat.

On 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 grew 14.5% during 2019, with similar growth experienced by both Individual and Group Retirement.

The Life 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 in adjusted pretax income, with premiums and deposits double in 2019 and the pension risk transfer space with guaranteed investment contracts down in volume.

As Kevin discussed, the combination of reinvestment yields, 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 gain on a private equity investment, as previously discussed.

Turning to Legacy. Adjusted pretax income was $177 million compared with the fourth quarter 2018 loss, which has reflected a $105 million charge from loss recognition on accident and health cancer and disability blocks.

Legacy NII on a full year basis with nearly $2.5 billion, slightly higher than last year, and the annualized return on attributed common equity was 5.4% for the year, driven by $501 million of adjusted pretax income.

As a reminder, Legacy is largely driven by Fortitude Re, and in November, we announced the agreement to sell 76.6% interest in Fortitude, which we expect to close mid-year, subject to regulatory approval.

With respect to tax, the final effective tax rate was 22.1% for 2019, applicable to adjusted pretax income and 19.3% for the quarter, inclusive of discrete items, which also includes a 9-month $14 million catch-up adjustment to reflect the lower full year tax rate.

As you know, effective tax rates are updated each quarter using actual year-to-date results and the remaining quarters are forecasted and integrated. And as always, the tax rate is heavily influenced each quarter by the geographic distribution of income by tax jurisdiction.

We did not repurchase 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 to total capital ratio improved 310 basis points to 26.2% at the year-end 2019.

Adjusted book value per share increased 7.2% from year-end 2018 and GAAP book value per share increased 15.2% since the year-end 2018, benefiting from approximately $6.4 billion of AOCI gains during the year.

Now I’d like to pivot providing some information on our outlook for 2020, all on an adjusted pretax income basis.

First, however, recall that 2019 had some very strong components to profit that aren’t expected to recur in 2020. Net investment income or NII is a key example. The excess returns of our alternative portfolio, together with credit spread compression, not expected to repeat in 2020, together lead to where we built NII forecast for 2020. NII is expected to be nearly $13.6 billion on a full year basis, which represents an approximate 4.3% yield on investable assets with an associated range of plus or minus 25 basis points.

The 2020 NII by segment from a point estimate perspective is expected to be $3.2 billion for General Insurance, $8.2 billion for Life and Retirement, and $2.2 billion for Legacy on the basis that Fortitude stays with AIG all year, about the 100% level.

General Insurance is expected to achieve $25 billion for 2020 net written premiums, virtually flat with 2019, and therefore, a similar 2020 net earned premium outlook. However, given what Peter discussed about the evolving structure of Syndicate 2019, our forecast for net written premium may decrease as this structure is finalized. We will provide an update on Syndicate 2019 on our first quarter call.

Moving on to underwriting profitability. The accident year combined ratio for 2020 is expected to be in the range of 93.8% to 94.8% ex-CAT.

Life and Retirement is expected to have adjusted pretax income between $3.1 billion and $3.3 billion for 2020, which is a level comparable to 2018.

Legacy, on a full year basis, is expected to provide APTI of roughly $100 million to $120 million.

Other operations — well, beginning with the first quarter of 2020, we’re going to provide more clarity and insight into other operations. However, in total, we expect that the adjusted pretax income for 2020 to be between $60 million to $75 million lower than 2019, meaning a bigger negative. This represents an amalgam of consolidation and elimination entry — interest expense on direct AIG debt as well as interest on debt within consolidated investment entities, Blackboard, and both GOE and other income that, in some cases, grossed up for internal service charge backs.

We’ve now given you the aggregate expected financial impact, but this highlights the need to provide increased visibility into the components and we will do so.

As Peter noted, with respect to AIG 200, we expect to invest $1.3 billion over the next 3 years and to realize a $1 billion of run rate GOE savings as we exit 2022.

The anticipated impact to adjusted pretax income in 2020 is a $150 million APTI gain with roughly 75% of this to be reflected in General Insurance, with the balance evenly split between Life and Retirement and other operations.

Run rate GOE savings are expected to be on a cumulative basis, $300 million, $600 million and $1 billion in 2022 through — 2020 through 2022. 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 first quarter, and we’ll provide more details at that time.

Regarding capital management and associated liquidity, our options are primarily directed towards debt reduction and expected IRS payment of approximately $1.7 billion in the first half of 2020, AIG 200’s $1.3 billion of investment beginning in 2020 and other possibilities to invest back into our core businesses.

As for share repurchases, we continually evaluate that option, but we’ll wait until the Fortitude sale close to review more fully.

Lastly, we expect to make additional progress, reducing our year-end debt and preferred to total capital ratio lower than the current 26.2%.

And with that, I’ll turn it back over to Brian.

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Brian Duperreault;CEO, [7]

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Thanks, Mark. We had a lot of content. So we’ll go to questions, but we’ll stay on past 9:00 to take as many questions as we can. Can we start then, operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) We’ll go first to Meyer Shields at KBW.

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Meyer Shields, Keefe, Bruyette, & Woods, Inc., Research Division – MD [2]

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Two really quick questions. First, in the accident year loss ratio, excluding profit, are there any other adjustments to the full year numbers — to full year 2019 numbers?

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Mark Donald Lyons, American International Group, Inc. – Executive VP & CFO [3]

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From a full year aggregate, it’s nothing material.

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Meyer Shields, Keefe, Bruyette, & Woods, Inc., Research Division – MD [4]

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Okay. Perfekt. And when we look forward, I’m wondering how the planned reduction in earnings volatility aligns with what we see as much better pricing in international markets, in particular, as far as all this goes, do we expect more exposure on a year-over-year basis to catastrophe losses or to retro cover?

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Brian Duperreault;CEO, [5]

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So it’s really a question around retro’s increasing costs. I guess, Peter can answer that question. I think we’ve gone to our market with our reinsurance program. You heard Peter describe it. So for 2020, I think we’ve established what the cost will be for us. But Peter, do you want to answer that?

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Peter Salvatore Zaffino, American International Group, Inc. – President, Global COO & CEO of General Insurance [6]

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Yes. So thanks, Meyer. Yes, the retro costs have increased, and I think it will be a little bit different than last year because, believe as we enter into the April 1 and June 1 renewal dates for Japan and Tokyo, respectively, we’re going to see meaningful rate increases on same structures. And so while the reinsurance market has seen increased retro cost, I believe that the reinsurance cost will be able to bear that cost in terms of how we are going to reinsure different portfolios. And we are not taking a lot more volatility in the portfolio. In other words, because of the retro costs, we’re now looking to take a lot more net, but consistent with our overall strategy on volatility and risk retention.

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Brian Duperreault;CEO, [7]

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And might talk about Validus hold just a second.

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Peter Salvatore Zaffino, American International Group, Inc. – President, Global COO & CEO of General Insurance [8]

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So in terms of Validus, yes, that’s what I referring more on April 1 and June 1 that they ought to be able to position themselves in the marketplace. But we’re not looking to grow and take on more CAT exposure on a net basis throughout 2020.

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Brian Duperreault;CEO, [9]

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Next question.

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Operator [10]

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I’ll move next to Jimmy Bhullar at JPMorgan.

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Jamminder Singh Bhullar, JP Morgan Chase & Co, Research Division – Senior Analyst [11]

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I had one question on guidance and then also on Life and Retirement. On guidance, you gave a lot of details 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 the year if there is such a thing as a normal CAT load?

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Brian Duperreault;CEO, [12]

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Mark?

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Mark Donald Lyons, American International Group, Inc. – Executive VP & CFO [13]

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Yes, thanks for the question. No, we gave guidance on an adjusted pretax basis at this point. And…

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Jamminder Singh Bhullar, JP Morgan Chase & Co, Research Division – Senior Analyst [14]

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My point is, what do you expect the tax rate to be, if you, overall, because it was very low in the fourth quarter and relatively low in 2019 as a whole?

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Mark Donald Lyons, American International Group, Inc. – Executive VP & CFO [15]

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Yes. Actually, the guidance around that is pretty similar to what we said last year, so 22%, 23%.

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Brian Duperreault;CEO, [16]

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And the CAT question?

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Jamminder Singh Bhullar, JP Morgan Chase & Co, Research Division – Senior Analyst [17]

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Okay. And anything on…

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Brian Duperreault;CEO, [18]

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CAT load?

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Mark Donald Lyons, American International Group, Inc. – Executive VP & CFO [19]

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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 return periods and looking at it on OEP and an AEP basis. 10-K that will be coming out, we’ll provide that information for you. But AALs that 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 with that.

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Jamminder Singh Bhullar, JP Morgan Chase & Co, Research Division – Senior Analyst [20]

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Okay. And then on the Life and Retirement business, your spread declined more than, I think, the guidance you had given earlier this year around 2 to 3 basis points a quarter in both Individual and Group Retirement. So is it this rate that’s driving this or is it competition or flexibility to cut granting rates? Can you just comment on what’s really driving the deterioration in spreads?

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Kevin Timothy Hogan, American International Group, Inc. – Executive VP and CEO of Life & Retirement [21]

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Yes, sure, Jimmy, thanks. There is a little bit of noise in the spread movement third quarter to fourth quarter and year-over-year. And frankly, it’s relative to just some of the specifics of the market conditions through the quarters. And plus, the year-over-year trend is really, I think, much more relevant. And so based on the environment that we’re expecting, we’re sort of looking on an annualized basis at an 8 to 16 basis points compression, which is a little bit of an increase based on what we had before. But on the entire year basis, our compression in 2019 was 7 basis points collectively. So I think that we’re seeing a little bit of compression. It’s largely within what we expected, certainly market conditions are very challenging right now. There was a little bit of noise, third quarter to fourth quarter, but no impact on trend as far as we’re concerned. And maybe most importantly, we are still seeing very attractive spreads available.

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Brian Duperreault;CEO, [22]

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Okay. Thanks. Tom, our next question, I should say.

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Operator [23]

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We’ll go next to Tom Gallagher at Evercore.

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Thomas George Gallagher, Evercore ISI Institutional Equities, Research Division – Senior MD [24]

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Just first question on the expense side. The restructuring charge that’s coming in 1Q, Mark, that you referenced, is that likely to be most of the or a sizable portion of the $1.3 billion investment? Are you going to take that all upfront? Or is that going to be far more modest? And how should we think about charge? Will charges be below the line or included in operating as you record some of these?

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Mark Donald Lyons, American International Group, Inc. – Executive VP & CFO [25]

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Well, yes, good questions. Some of that will be giving you chapter and verse when we go on our first quarter call as we alluded to. But you’re going to have a mixture, so what’s above and below the line. You’ve — then we’ll give you all that detail. And as far as whether it’s the major part of the restructuring of the total cost of investment, it’s not going to be the major, but we’ll give you the details on that, again, in 1Q.

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Thomas George Gallagher, Evercore ISI Institutional Equities, Research Division – Senior MD [26]

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Okay. And then just a follow-up — sorry, just a follow-up on Kevin for investment spreads. I just want to be clear, I know what the message is here. I heard the year-over-year comment on spreads. Do you expect spreads to be down versus the 4Q level because it was kind of a sharp drop in 4Q? Would you expect them to be more stable versus 4Q or still compressed from 4Q levels?

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Kevin Timothy Hogan, American International Group, Inc. – Executive VP and CEO of Life & Retirement [27]

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Well, I think that, obviously, it does depend on what the specifics of each quarter-to-quarter movements are. But we would expect spreads comparable to — largely comparable to where we were at the 4Q, depending upon ultimately the market conditions. There was a little bit of movement sort of the third Q or the fourth Q as a result of certain characteristics of the investments, Tom.

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Brian Duperreault;CEO, [28]

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Okay. Next question, please.

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Operator [29]

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We’ll go next to Yaron Kinar at Goldman Sachs.

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Yaron Joseph Kinar, Goldman Sachs Group Inc., Research Division – Research Analyst [30]

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My first question goes to the 10% adjusted ROCE target by the end of 2021. Does that incorporate sale of the majority stake in Fortitude Re and maybe the impact on from CECL? And if it does, maybe you could help us think about the impact from the sale of Fortitude Re?

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Brian Duperreault;CEO, [31]

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So let me take it and then Mark can go within. So when I gave you that target some time ago, we had not contemplated the sale of Fortitude. And so we believe that then and now we have a Fortitude sale impending, expected it would close midyear 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, CECL and stuff.

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Mark Donald Lyons, American International Group, Inc. – Executive VP & CFO [32]

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Yes, thank you. First off, yes, it contemplates both. So it contemplates the CECL, which will have a shareholder’s equity debt coming into the year for regulations. We had guided you last quarter that, that was about $645 million. You’ll see in our K that comes out the actual number, but it’s not materially different from that. So yes, to that.

And as far as Fortitude, it’s all in. So the difficulty is that it’s 2 things. One, we estimate closing. We don’t know exactly when closing is. And we’ve been around long enough to know we had kept all those down. And secondly, the interest rate environment will be fairly material to the ultimate impact of what it’ll do to book equity. So it’s fairly hard to predict. But yes, we’re anticipating that’s all in.

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Yaron Joseph Kinar, Goldman Sachs Group Inc., Research Division – Research Analyst [33]

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And then my second question is around the GOE kind of cost-saving targets you would lay out. So are those gross or net?

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Brian Duperreault;CEO, [34]

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Mark?

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Mark Donald Lyons, American International Group, Inc. – Executive VP & CFO [35]

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What’s your definition of that gross — gross or net?

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Yaron Joseph Kinar, Goldman Sachs Group Inc., Research Division – Research Analyst [36]

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Well, I guess, do you expect $600 million…

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Mark Donald Lyons, American International Group, Inc. – Executive VP & CFO [37]

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So I guess, you have to reinsure with me?

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Yaron Joseph Kinar, Goldman Sachs Group Inc., Research Division – Research Analyst [38]

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I’m sorry.

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Mark Donald Lyons, American International Group, Inc. – Executive VP & CFO [39]

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Okay. Let me just — so just for clarifying. So the — if I go back to the comments from 2020 to 2021, it was $300 million, $600 million, $1 billion pure GOE. But that — if you mean tax, that’s goes to tax.

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Yaron Joseph Kinar, Goldman Sachs Group Inc., Research Division – Research Analyst [40]

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It sounds like you would expect a certain portion of that to be reinvested back in the business?

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Mark Donald Lyons, American International Group, Inc. – Executive VP & CFO [41]

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Well, that’s part of our conversation back up in first quarter when we laid things out. But Peter talked about the $1.3 billion of investment, and that’s going to be reflected. There’s cash aspects. There’s putting capitalized assets into service and the timing of those when they’re ready and you’ve to appreciate for that type. There’s a lot of moving parts. So I don’t mean to be vague, but there’s a lot of moving parts, and we’ll give that to you in the first quarter.

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Brian Duperreault;CEO, [42]

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Okay. Next question, please.

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Operator [43]

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We’ll go next to Elyse Greenspan at Wells Fargo.

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Elyse Beth Greenspan, Wells Fargo Securities, LLC, Research Division – VP and Senior Analyst [44]

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My first question, you guys saw — still seeing your premiums drop in the fourth quarter, and it sounds like you expect them to be flat in 2020, yet you’re getting a real good amount of rate, and it sounds like there wasn’t that much material changes to your reinsurance purchases for 2020. So I’m just trying to understand, can you give us a sense of what businesses you’re still shedding? And how business mix is offsetting some of the impact of rate as we still look at kind of a flat premiums written in 2020?

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Brian Duperreault;CEO, [45]

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Okay. We’ll start, Peter, and I have a comment.

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Peter Salvatore Zaffino, American International Group, Inc. – President, Global COO & CEO of General Insurance [46]

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Yes. Thanks, Elyse. I mean I think, it’s going to be consistent, but just a little bit more tailing off in 2020 when you compare it to 2019, 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 reunderwriting in the first quarter for Property. We’re still working through the Lexington. And even those statistics are daunting for us in terms of the improvement of the portfolio and the repositioning that 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, but that continues in 2020. So some of the discrete reinsurance purchases will have an impact on net premiums written, not to the same extent it did in ’19, but certainly, we’ll carry over into ’20.

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Brian Duperreault;CEO, [47]

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Okay?

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Elyse Beth Greenspan, Wells Fargo Securities, LLC, Research Division – VP and Senior Analyst [48]

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And then my second question, Mark…

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Brian Duperreault;CEO, [49]

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Let me add — Elyse, let me just add something here. When we started this turnaround, what did we face. We had businesses that were — had limits way too high. We weren’t getting base. We had concentrations of risk where you just couldn’t keep that concentration, and we’re taking it all net and we were getting price paid for anything. So you start — we’ve cut volatility out of this company by taking the limits down that takes premium out of the pipe. We raised retentions that takes premium out of the pipe. Yes, we’ve raised rates, we’ve also bought reinsurance, takes premiums out of pipe. So we have not been concentrating on the top line because we had to 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 portfolio is rock solid. That’s the #1 priority.

Okay. Okay. Elyse, you got another question?

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Elyse Beth Greenspan, Wells Fargo Securities, LLC, Research Division – VP and Senior Analyst [50]

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Yes. And then my second question, Mark, in your guidance commentary, you pointed to an accident year combined ratio of 93.8% to 94.8% in General Insurance. I recognize some of the expense figures you gave are exit run rates of $300 million for 2020, but if I kind of do some rough math, it seems like of that improvement that you’ll see over the next 12 months, about half should come from the underlying loss ratio and half from the expense ratio. Does that feel about right given the expense program and the guidance you laid out?

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Mark Donald Lyons, American International Group, Inc. – Executive VP & CFO [51]

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Well, I’d say, probably skewed more and more to the loss ratio. And as we go from ’20 to ’21, you see — probably see that flip, some degree of improvement.

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Brian Duperreault;CEO, [52]

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Okay. Next question, please.

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Operator [53]

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We’ll go next to Erik Bass of Autonomous Research.

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Erik James Bass, Autonomous Research LLP – Partner of US Life Insurance [54]

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And I appreciate the additional guidance details. Just wanted to ask a bigger picture question. If you could help us kind of bridge the gap to the 10% ROE by year-end ’21 or it seems, relative to 2019, Life and Retirement, facing a little bit of pressure. So can you help us just think about the contribution from GI margin expansion in AIG 200 to get there? And are there any other major moving pieces to consider?

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Brian Duperreault;CEO, [55]

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Go ahead, Mark.

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Mark Donald Lyons, American International Group, Inc. – Executive VP & CFO [56]

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Well, to get — I guess a couple of things you guys to think about is, I think, as I tried to lay out, the 8.3% return in calendar 2019 had some extraordinary gains in it. 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’ve mentioned that get to 10% is not linear, that we would expect more in the back half than the first half of that. We have great expansion in GI on expected underwriting gain. And although there is a stronger marketplace environment, it’s also a radically modified portfolio. So by the time we’re in 2021, we’ll have a little more back of the window view of what 2020 looks like. And if we were lucky enough that the environment continues, that’s a great tailwind to help us out.

AIG 200 is going to also help along the lines we just mentioned. So there should be incrementally better contributions from AIG 200 each year through 2021.

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Brian Duperreault;CEO, [57]

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We expect L&R to be stable in this environment. Maybe the ROEs have come down a little bit as we discussed. But we’d expect L&R to be stable and it wheels around the GI improvements, it’s loss ratio now. With AIG 200 kicks in, it will be expense ratios coming later.

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Erik James Bass, Autonomous Research LLP – Partner of US Life Insurance [58]

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Got it. And then just one follow-up on Life and Retirement guidance. I think you talked about $200 million or so drag from spread compression, but based on the sensitivity, Kevin, that you gave on the equity markets, I would think you would see some of that or much of it offset given the gains we saw last year. So are there other pieces to factor in that would kind of get you to the lower earnings next year?

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Kevin Timothy Hogan, American International Group, Inc. – Executive VP and CEO of Life & Retirement [59]

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Well, Erik, as I pointed out, I mean, our assumptions are for — from the starting point of the year, 6.5% on the equity markets. And that the 10-year will be around 1.7% and the sensitivities that we gave were relative to those assumptions.

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Brian Duperreault;CEO, [60]

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Okay. Next question.

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Operator [61]

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We’ll move next to Brian Meredith at UBS.

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Brian Robert Meredith, UBS Investment Bank, Research Division – MD, Financials Research Sector Head & Global Insurance Strategist [62]

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Yes, just 2 for me here quickly. On the GOE, is some of that — on the AIG 200, is 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 General Insurance?

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Brian Duperreault;CEO, [63]

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Peter, do you want to take that?

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Peter Salvatore Zaffino, American International Group, Inc. – President, Global COO & CEO of General Insurance [64]

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Yes. So no, we do not contemplate an AIG 200, the loss adjustment expense, Brian. And then in terms of the way we framed out the program. I think if I understand your question correctly, Mark put it into his prepared remarks, which is basically 3 quarters of it will come through General Insurance over the program and then the other quarter will come into Life, Retirement and Corporate. And again, in terms of the sequencing of that, I think it will be fairly consistent throughout the 3 years.

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Brian Robert Meredith, UBS Investment Bank, Research Division – MD, Financials Research Sector Head & Global Insurance Strategist [65]

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Got you. It’s helpful. And then my second one, just a little clarification, and sorry to kind of go on this one. But if I look at your ROE in 2022 when we come out here, we know that Legacy is going to cause, call it, over $3 billion hit to your equity. When we take a look at that return on equity, will, if I add back that $3.5 billion FF equity, will we still have a double-digit return on equity in 2022?

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Mark Donald Lyons, American International Group, Inc. – Executive VP & CFO [66]

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I’ll take that one. I have 2 things that are kind of countervailing — actually, 3 things come to mind. First off, when we originally said the 10%, we had a completely different investment environment, investment outlook. So from that point of view, having the Fortitude sale, the impact on that is very helpful to offset some of the investment income outlook differences. And the other thing is the $3 billion number that’s approximately that you talked about, that’s the impact on — the impact from consolidation as opposed to the impact from sale. And impact from sale is subfunction of whatever the market conditions are going to be on the day of closing. So equity part…

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Brian Robert Meredith, UBS Investment Bank, Research Division – MD, Financials Research Sector Head & Global Insurance Strategist [67]

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Come stay too…

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Mark Donald Lyons, American International Group, Inc. – Executive VP & CFO [68]

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Hard to predict. I know it’s complicated. Hopefully, that helps.

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Brian Robert Meredith, UBS Investment Bank, Research Division – MD, Financials Research Sector Head & Global Insurance Strategist [69]

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That’s good.

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Brian Duperreault;CEO, [70]

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Let’s take, maybe, one more question.

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Operator [71]

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I will take that question from Suneet Kamath from Citi.

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Suneet Laxman L. Kamath, Citigroup Inc, Research Division – MD [72]

————————————————– ——————————

Just a follow-up on Brian’s question on the equity. As we think about kind of the half to the 10%, is there a capital return or share buyback expectation that’s built into that guidance? I know you talked about delevering, but just want to get a sense of what we should think about in terms of getting to that 10%?

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Brian Duperreault;CEO, [73]

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Well, we’re both looking at each other. Mark and I. And I’d say, look, we’d expect that as we manage our capital, we told you what our priorities are for this year. We’re going to look at — once we do close the Fortitude, we will relook at share buybacks, which just probably move to second half of the year. It’s still a management tool. We have an authorization. So it’s certainly possible.

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Suneet Laxman L. Kamath, Citigroup Inc, Research Division – MD [74]

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And then my follow-up is just on the first quarter call, 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 AIG 200 on the first quarter call, just the pieces?

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Brian Duperreault;CEO, [75]

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Okay. Mark, you want to go back over that? Back and forth.

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Peter Salvatore Zaffino, American International Group, Inc. – President, Global COO & CEO of General Insurance [76]

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Yes, I think what 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 they’ll 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 that program progresses. And then I think that will tie to, where Mark said before, which is, what type of expense needs to be deployed with that sequencing to match expenditures and getting after this launch. And so I think, we’ll be able to give you a little more clarity as to what you should expect on each of the programs and what it looks like for the rest of 2020.

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Mark Donald Lyons, American International Group, Inc. – Executive VP & CFO [77]

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And I’ll just augment Peter’s comments, to probably what you’re inferring is someone else had asked a lot more clarity on perhaps the timing of capital being put in service, you capitalize things being put in service, but clearly above and below the line aspect. So that all will be laid out.

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Brian Duperreault;CEO, [78]

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Okay. Thank you very much. Let me appreciate your staying on a little longer and all the intention. I just want to make one last comment and that is that — as I said at the beginning of the call, I’m really pleased that we delivered on our 2019 commitments, and we ended the year strong with great for the support we received from the industry partners and our clients. And we’re really optimistic about what the future holds for AIG. But last and certainly not least, I want to thank our AIG colleagues across the globe. The resiliency they’ve shown over the last couple of years is tremendous, and I’m proud to lead a group of such talent professionals who continue to go above and beyond to make AIG a better, stronger company. So thank you all, and have a great day.

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Operator [79]

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And that does conclude today’s conference. Again, thank you for your participation.

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