American International Group (AIG) CEO Bob Benmosche on Q1 2014 Results - Earnings Call Transcript

May. 6.14 | About: American International (AIG)

American International Group Inc. (NYSE:AIG)

Q1 2014 Earnings Conference Call

May 6, 2014 08:00 AM ET

Executives

Liz Werner - Head, IR

Bob Benmosche - President and CEO

David Herzog - EVP and CFO

Peter Hancock - EVP, Property and Casualty Insurance

Jay Wintrob - EVP, Domestic Life and Retirement Services

Kevin Hogan - EVP, Consumer Insurance

Charlie Shamieh - SVP and Corporate Chief Actuary

Analysts

Randy Binner - FBR

Jay Gelb - Barclays

Michael Nannizzi - Goldman Sachs

Larry Greenberg - Janney Capital

Meyer Shields - KBW Management

Brian Meredith - UBS

Josh Stirling - Sanford Bernstein

Operator

Good day and welcome to AIG’s First Quarter Financial Results Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Ms. Liz Werner, Head of Investor Relations. Please go ahead.

Liz Werner

Thank you, and good morning everyone. Before we get started this morning, I’d like to remind you that today’s presentation may contain certain forward-looking statements, which are based on management’s current expectations and are subject to uncertainty and changes in circumstances. Any forward-looking statements are not guarantees of future performance or events.

Actual performance and events may differ, possibly materially from such forward-looking statements. Factors that could cause this include the factors described in our first quarter Form 10-Q and our 2013 Form 10-K, under management’s discussion and analysis of financial condition and results of operations and under risk factors. AIG is not under any obligation and expressly disclaims any obligation to update any forward-looking statements, whether as a result of new information, future events, or otherwise.

Today’s presentation may contain non-GAAP financial measures. The reconciliation of such measures to the most comparable GAAP figures is included in our financial supplement, which is available on our website, www.aig.com.

With that, I’d like to turn the call over to our senior management team and we’ll begin with comments from Bob Benmosche.

Bob Benmosche

Thanks, Liz, and good morning to everybody. I want to start with ILFC, comment on the 8-K we filed yesterday and that is all regulatory approvals have now been received and so we’re very confident that this transaction will in fact close in the second quarter as we’ve talked to you previously. So that’s a good -- for the company going forward. If you look at the quarter, you can see that our capital management continues to proceed and were measured by buyback shares and continuing to reduce our debt which obviously improves our coverage ratio.

Our property casualty had its second best quarter in the last 12 quarters. Unfortunately the best quarter was the first quarter of last year. So we’re comparing the second best quarter to the best quarter. So you see some of it decline. However, if you look at the accident year loss ratios and the other fundamentals, that business is continuing to build a very strong foundations for the future.

Our mortgage guarantee business continues to do well with 62% of its premium now coming from our new underwriting capability which really gives us high degree of confidence that, if the market go soft in the future and I know maybe we’ll never see another soft market in housing but if that day comes we’re confident we have a very strong profile of risks we’ve taken on a book and mortgage guarantee.

And life and retirement continues to show very strong premiums in deposits, $7.1 billion for the quarter, but also very strong in net flow. So it’s not only what’s coming in, it’s what we’re retaining. And so that business really is hitting on all cylinders.

So what I’d like to do is turn it over to David who will take you through the financials.

David Herzog

Thank you Bob, and good morning everyone. As we disclosed yesterday in the 8-K that Bob referenced, we’ve now received all regulatory approvals required with respect to the sale of ILFC to AerCap. We do expect the transaction to close in the second quarter and again, subject to satisfaction of customary posing conditions.

Upon closing, we expect receive approximately $2.4 billion of cash that is net of intercompany settlements plus 97.6 million shares of AerCap stock, all of which will be held at the parent holding company and subject to lock up another transfer provision. In the second quarter, we will update our stress test, our liquidity forecast as well as our annual capital plan and we’ll discuss all of these with the rating agencies, the Federal Reserves and our Board of Directors to access what actions we will take.

Now, turning to our financials on Slide 4. After-tax operating income for the quarter was $1.8 billion with operating earnings per share of a $21. Our operating return on equity was 7.5%, since our earnings, our tax affected we are not paying tax to the U.S. government given our NOLs, our operating ROE excluding the DTA from average equity was about 180 basis points higher or about 9.3%. Book value per share excluding AOCI at the end of the quarter was $65.49, 10% higher than it was in the first quarter of 2013.

Our operating results begin on Slide 5. Peter and Jay will cover their respective businesses following my remarks. The direct investment book for the DIB delivered another solid quarter with over $400 million of operating earnings, reflecting the mark-to-market appreciation. That can create some volatility from period to period. As we had gains also from unwinding certain of our positions, we continue to expect these earnings to moderate overtime as the portfolio winds down and the investments approach their expected recovery values.

In addition, we may from time to time repackage certain of the DIB assets to be held at the parent company or in our operating companies. We continue to proactively and opportunistically reduce the DIB’s footprint. In fact in the first quarter we settled the $2.2 billion of redemptions and repurchases previously announced, as well as initiated the make whole call for the March 2015 maturities, which was completed yesterday. We used cash allocated for the DIB and global capital markets that was set aside exactly for that purpose. At the end of the first quarter we had $7.9 billion of net asset value in the DIB and global capital markets. We expect this capital to be released to the parent over time as the maturities, the liabilities and the underlying assets and derivatives are monetized and settled.

Corporate expenses totaled approximately $243 million in the quarter, in line with our expectation of $225 million, $250 million quarterly run rate for 2014 and they were down from a year ago as expected. Our reported operating effective tax rate for the quarter was 31.7%, also in line with our outlook for 2014. Our strong capital position as of the end of the quarter is set forth on Slide 6.

Our capital structure remains straight forward and our leverage remains low. As I mentioned last quarter we made good progress on our coverage ratios which remains an area of focus for us that we continue to work on through opportunistic debt capital management and improving the earnings profile including the earnings profile of our core businesses.

From this strong capital position we distributed $182 million in dividends to our shareholders and deployed $867 million towards the repurchase of approximately 17.4 million shares of common stock, leaving roughly 537 million remaining in our current share repurchase authorization. We were opportunistic and orderly in our share repurchase activity.

We received dividends and loan repayments from life and retirement of about $1.7 billion during the quarter as shown on Slide 7. Included in this amount is roughly $300 million related to sub-prime. Property casualty is also on track to deliver its full year targeted dividend payments, although none was expected in the first quarter. We continue to expect $5 billion to $6 billion in dividends and distributions from our insurance subsidiaries this year.

In addition to these dividends and distributions we received tax sharing payments of about 300 million in the first quarter. We continue to expect to receive approximately $1 billion of tax sharing payments in 2014 and roughly 2 billion in 2015, as this comes from our insurance companies and they continue to utilize their DTAs. These dividends and tax sharing payments, combined with our capital management activity that I mentioned earlier resulted in parent cash, short-term investments and unencumbered securities of $11.2 billion as of the end of the quarter. Included in parental liquidity is 4.4 billion related to the DIB and global capital markets which is allocated for its future debt maturities and contingent liquidity stress needs. As we’ve indicated in the past, nearly 80% of the DIB’s debt matures by the end of 2018.

So with I’d like to turn the call over to Peter for comments on property casualty.

Peter Hancock

Thank you David and good morning everybody. Property casualty’s first quarter results reflected our continued focus on underwriting discipline and risk selection. While we don’t look at any one quarter as a trend, this was our second highest quarter of pretax operating income over the past three years. Our strategic initiatives and outlook remain unchanged and we continue to focus on driving profitable growth and increasing returns.

Turning to Slide 8; AIG Property Casualty reported first quarter operating income of $1.2 billion. Net premiums written grew 3% from a year ago excluding the effect of foreign exchange. We experienced strong new business growth across the majority of our commercial lines. However casualty written premium volumes declined from a year ago on lower exposures and slower payroll growth at our large accounts. Pricing discipline drove our rate actions and our willingness to walk away from business where appropriate.

Property Casualty’s accident year loss ratio as adjusted was 63.2, flat from a year ago and higher than our long-term trend. Importantly, our view of a decline in the accident year loss ratio in 2014 has not changed. First quarter operating results were also impacted by three large consumer losses and strong alternative investment performance which I’ll address in my remarks.

The quarter included $162 million of net prior year adverse development, primarily related to our international financial lines business, as well as certain specialty lines. We continue to review reserve quarterly and react quickly to any trends. The quarter also included a $105 million benefit from a previously announced change in the discount rate for worker’s compensation. This change was associated with the merger of our internal polling arrangements effective January 1. Our expense ratio was essentially unchanged in the quarter as expected and we continue to progress with our Japan integration. Our investments in Japan and the benefits from the recent severance charges will emerge later in 2015.

Turning to Slide 9, we saw growth across commercial product lines outside of Casualty. Global Property led growth and net premiums written increased 12%, adjusted for changes in our corporate cat program. We saw new business growth in large limit and middle market business globally, particularly in Europe and we continue to leverage our in house engineering capabilities and execute on our global approach to capital allocation. We did see a more competitive market in the U.S. cat this quarter where there is overcapacity and we were disciplined in our renewals.

Commercial insurance pricing remained positive during the quarter and largely exceeded loss cost trends, though rate increases were slightly lower than what we saw in the fourth quarter. Global commercial rates increased 1.9% in the quarter. The U.S. market continued to lead in rate improvement with a 4.4% increase in the quarter. U.S. property, led with a 5.9% increase followed by the U.S. financial wines which was up 4.2%. U.S. Casualty and U.S. Specialty each had 4.1% rate increases.

The accident year loss ratio in commercial improved 0.3 points from the year ago to 65.1, even with the low severe losses of a year ago as a result of our pricing actions, enhanced low-risk selections, technical underwriting, and investments in claim handling. Notable improvement in casualty accident year losses reflected the impact of rate increases and continued improvement in business mix. Casualty had been a leading contributor to declining loss ratio and delivered a positive risk adjusted profit this quarter.

We remain focused on retaining our most profitable business and refining our account quality scoring tools at an increasingly granular level. Severe commercial losses accounted for a 2.9 point impact to commercial’s loss ratio this quarter versus 1.2 points in the year ago quarter and were within a reasonable range of expectations.

Turning to Slide 10, net premiums written for consumer insurance increased 2%, excluding the effects of the yen exchange rate. In consumer we continue to focus on improved underwriting quality and targeted growth in key markets where we can achieve meaningful scale. As Kevin advances his strategy, you will hear more about our plans. Similar to learnings from a commercial transformation, consumer is being led to embrace transformation with an emphasis on value creation. Consumer continues to remain on track for modest improvements in both growth and profitability in 2014.

The consumer accident year loss ratio increased 0.5 point from a year ago to 59.3 including 1.2 points arising from three individual fire losses in North America personal property. These losses were geographically disbursed and were predominantly older policies. Our risk appetite and exposure to North American personal lines has been stable for some time. While large personal property losses are difficult to predict, this was the first time we experienced three personalized losses in excess of $10 million each in a quarter, or even in one year.

In each of the prior two years we experienced just one personalized loss of over $ 10 million. Across the remaining consumer business we saw improved results in automobile, warranty and A&H, driven by underwriting actions and rate increases taken in the current and prior year.

Turning to Slide 11, operating results reflected a modestly lower level of net investment income which resulted primarily from a lower invested asset base cost by the run-off of our reserve base which has fallen from 68 billion in 2010 to 63 billion today. As I mentioned earlier, alternative returns exceeded our expectation by over $100 million. With respect to capital management, as planned, we did not remit a dividend to the holding company during the quarter but we did make tax payments over $ 180 million. We look forward to contributing our planned dividends during the remainder of the year.

Turning to Slide 12, mortgage guarantees operating performance continues to improve with operating income for the quarter of $ 76 million. Mortgage guaranty continues to benefit from its proprietary risk selection model and in improving housing market, with 62% of earned premiums generated by high quality business written after 2008. The delinquency ratio of 5.3% for the quarter continued to fall as the volume of new delinquencies is lower and cure rates improved. The Mortgage insurance market continues to evolve as the highest rated and leading U.S. mortgage insurer, United Guaranty is well positioned to remain a disciplined and competitive market participant. In closing we continued to advance our strategic initiatives, work collaboratively across AIG businesses and further build value for all our stakeholders.

Now I’d like to turn the call over to Jay to discuss and life and retirement results.

Jay Wintrob

Thank you Peter and good morning to everyone. Beginning on Slide 13, the first quarter of 2014 was another record quarter for AIG’s life and retirement business. The segment delivered over $1.4 billion of operating earnings, achieving the highest level of quarterly earnings in our history. Operating income was driven by strong growth in fee income and enhanced spread income. Higher account balances due to strong sales and equity market appreciation generated increased fee income. Interest rate sensitive businesses continued to benefit from disciplined pricing on new business, reduced renewal crediting rates and a run off of older business crediting relatively high interest rates.

Our diversified portfolio of alternative investments, hedge funds and private equity generated very strong returns during the quarter, contributing approximately $260 million of investment income above our targeted 10% annual return. Fair value accounting for investment in PICC Group common stock resulted in a $110 million decline in net investment income year-over-year.

In addition to strong earnings, life and retirement delivered $1.7 billion of dividends to the holding company in the first quarter and we’re on target to meet our dividend plan for 2014. We ended the quarter with shareholders equity ex-AOCI of $34.6 billion, nearly 2 billion higher than a year ago. Our all products all channels distribution platform continued to produce strong results. Retail sales were up 61% from the year ago period reaching nearly 4.4 billion in the quarter. Sales of retirement income solutions products, including individual variable annuities and fixed index annuities reached nearly $2.2 billion in the quarter up 54% from the year ago period.

Our guaranteed income options, effective marketing programs and materials and award winning customer service continue to differentiate our offerings in the marketplace, while innovative and competitive product design has improved the risk profile of these products. We remain comfortable with our level of sales and continue to achieve pricing IRRs in excess of our long-term targets.

Fixed annuity sales more than doubled from the year ago period to $960 million. Our cost efficient flexible annuity administration platform and deep long-term relationships with financial institutions enable us to remain the number one provider of fixed annuities through the bank channel, a position we’ve held for the past 18 years. We saw a slight decline in fixed annuity sales on a sequential basis reflecting our strategy of maintaining disciplined pricing in response to declining interest rates which occurred over the course of the quarter. At the end of the first quarter, assets under management reached $324 billion, up 9% from a year ago, driven by strong retail investment product net flows, higher separate account balances and greater institutional assets.

Net inflows in our retail products and group retirement businesses were $1 billion in the quarter, up substantially from a year ago. This improvement was driven by strong growth in sales and retirement income solutions, retail mutual funds and fixed annuities as just discussed. Our stable value wrap business accounted for $13 billion increase in AUMs from the year ago period, reflecting the deepening and broadening of our client relationships in that business. Overall we’re pleased with the growth in assets under management we’re seeing across the portfolio of businesses.

Slide 14, provides the components of operating income for our retail and institutional businesses. Line of business comparisons to the year ago quarter were adversely effected by the fair value accounting for PICC mentioned earlier. Excluding this impact, retail and institutional operating income each increased by 10% versus the year ago quarter. Retail operating income benefited from growth in fee income from retirement income solutions and enhanced spread income from fixed annuities. Institutional operating results were driven by increased contribution from group retirement from both higher fee income and enhanced spread income in that line of business.

Over the past four years we’ve redesigned our products to reduce risk to AIG. In our retirement income solutions business, approximately three quarters of our $25.3 billion of variable annuities with guaranteed minimum withdrawal benefits include benefits with strong de-risking features, such as the VIX indexing of our writer fees and volatility control funds. In addition we require minimum allocations to the fixed account which also reduces risk. We see competitors increasing their presence in this market, consumer demand for variable annuities remains very strong. We’re also benefiting from growth in index annuities as a result of improved product features, a low interest rate environment and our strong bank distribution presence.

Slide 15 shows our trends in yields and spreads. Base yields in the quarter was 5.32%, up from 5.3% in the prior year quarter and up from 5.29% in the fourth quarter of 2014. The increase primarily reflects the contribution from participation income on a commercial mortgage loan sales and redemption income on our preferred stock holding in the quarter, which more than offset the impact of lower new money reinvestment rates.

We continue to actively manage crediting rates on our in force block and remained disciplined in our new business pricing as demonstrated by the decline in the cost of funds, for both our fixed annuities and group retirement business.

As a result, net spreads expanded for both fixed annuities and group retirement sequentially and from the year-ago period. At the end of the first quarter 72% of our fixed annuity and universal life account values were at minimum guaranteed crediting rates. Slide 16 shows our investment portfolio compensation and returns and reflects the benefit to net investment income of strong alternative investment performance in the quarter as mentioned earlier.

So to sum-up, we’re off to a good start to the year with strong earnings and distributions to AIG. We plan to continue executing on our strategic initiatives which include growing our distribution organization and increasing the productivity of our wholesalers, affiliated agents and financial advisors. We’re successfully leveraging our strong relationships with distribution partners to increase penetration of our broad retail product portfolio, build on our market leading and offer competitive and profitable retirement income solutions.

We also look to continue opportunities to grow our institutional businesses, where we can achieve the most attractive risk adjusted returns. And with that I’ll turn it back to Liz to open for Q&A.

Liz Werner

Thanks John. Operator could we open up the lines?

Question-and-Answer Session

Operator

(Operator Instructions) We’ll take our first question from Randy Binner with FBR.

Randy Binner - FBR

In the commentary Bob said that the buy back in the quarter was measured and so, I was wondering how to think about what we can expect for kind of a run rate there? Should we think of this as something we can run rate or could you let that go more, going forward?

Bob Benmosche

I think the word measured is not necessarily for the quarter, but generally speaking as we go through this period of time, the Federal Reserve coming in and really working with this us on being prepared for an official CCAR down the road, once it’s defined by the FED. But you want to make sure that you do things in a steady and that’s all that was referring to us. So I think as we look through the rest of the year, we have a capital plan, we’ll review that capital plan and update our stress testing as we do it internally.

Again, it’s not the official Federal Reserve stress test but as we update ourselves we will keep an eye on that capital plan once IOFC actually closes and we have the money in hand we will take a second look at it. So it’s just doing things in a very measured way, both for the Federal Reserve and quite frankly for the rating agencies. We want to make sure we satisfy, especially the coverage ratio for them as they are asking us to do. And we’re in constant dialogue with them. So that’s all we’ve meant.

Randy Binner - FBR

And then the follow-up would be, if do you have any kind of updated comments on the process with the FED in particular there’s been recent introduction of bi-partisan legislation in both, excuse me -- the house from the senate looking to clarify the FED’s interpretation of Section 171 of Dodd-Frank. And so wondering if you have any commentary on how that might have affect the process?

Bob Benmosche

No, I think what you see going on is an attempt to rationalize what’s in FED versus insurance company, versus banks. So I think they’re Collins Amendment and such is something that needs to be worked through so that the Federal Reserve can clearly take a look at what we do here at the insurance companies. And look you all understand that our liabilities are very different and the way they behave is very different as we begin to match the assets and liabilities and our focus is really long term solvency so to make we live up with the promises that we make to our client and that’s a big deal. Not say that banks don’t do that as well but it’s a different business and a different structure. So I think that pretty much -- I hope that covers more broadly and I think we’re continuing to work with everybody to make sure that not only in the U.S. but around the work to make sure we’re hearing too and fired up the design of our appropriate regulation.

Operator

We’ll take our next question from Jay Gelb with Barclays.

Jay Gelb - Barclays

For Peter, the 97% underlying combined ratio would view do that as a starting point that property casualty business can improve over the course of the year, I just want to clarify that first?

Peter Hancock

Yes. I do still improvement in the combined ratio during the course of the year based our forecast of normalized trend, yes.

Jay Gelb - Barclays

And then there appears to be a persistent drag on the reserving. I believe we’re in the fourth quarter in a row of persistent reserve strengthening. When do you feel that drag will be over?

Peter Hancock

So we do a quarterly review of separate segment of the reserves that are in particular subject to longer tails and harder to predict loss cost trend and that each quarter is looked at independently over the one before. So the cards fall where they fall based on new information that emerges, and we do it with our internal actuarial team as well as external review. The fact that you’ve had four quarters in a row to meet it is statistically not very significant and the numbers relative to the total reserve of over 60 billion are relatively modest.

The particular prior year development in this quarter was from two principal sources, the international financial lines, which is a very profitable business, we like. And so while there have been a gradual increase in temperature in a number of foreign jurisdictions, that’s something which we gradually adjust our pricing to, but we feel very comfortable with the return on risk of that business and if anything see that as exposing the need for more insurance from the U.S. to other jurisdictions. So it was a sort of some positives there. The other piece relates to a large surety loss that occurred and it really came to us last year. So that’s why it’s prior year. But it’s a transaction that was underwritten about four years ago, that involved a company that went into bankruptcy. So I don’t see it as indicative of the reserve weakness. It’s just a one-off event.

Jay Gelb - Barclays

How big was the surety loss?

Peter Hancock

$89 million.

Jay Gelb - Barclays

$89 million. Okay, Peter, I think it is significant from a comparison standpoint at least. We’re just not seeing this drag from other large P&C companies. For David Herzog, given all the $2.5 billion of cash up front from ILFC, with $5 billion to $6 billion dividend from the P&C business and substantial dividends also coming from the Life Company. I just want get a sense of why AIG wouldn’t accelerate the buyback, even taking into account that were during the course of coming up on a CCAR analysis?

David Herzog

I think, what Bob said - that captures the essence of how we are approaching capital management. With respect to ILFC, as I said in my opening remarks and Bob said, we are now like to go through a process of actually close the transaction. We’re going to update our stress test better that you could look at that as a sort of normal course, that’s what. We will be subject to at some point. Although we’re not today, we will be. So we are following an early process with the Fed. We will update those results. We will review those results with the rating agency, with Fed itself and with our Board of Directors.

And so again -- and then we’ll update or capital plan. I think it’s important to note that it’s not appropriate to put in a capital plan, capital actions that are based upon contingent fund. Others that have tried that did not like the result. So we’ve learned from that, we’ve learned from others. So capital plan will be updated in normal course and then will review that updated capital plan again with those various stakeholders and then take appropriate action. Again I think our approach to capital management has been consistent, steady, orderly and those are dimensions that we believe are balancing the various stakeholders, including the Fed and including rating agencies, including our own management board of directors. So we’re moving at an appropriate place given the environment, given the on boarding of the Fed. Again, you saw what we did in the first quarter, and that is relative to what we did in the fourth quarter. So I think we’re comfortable with the pace we are on.

Jay Gelb - Barclays

Great, I hope at 80% above we view that is a compelling opportunity for buybacks. Thank you.

Operator

We’ll take our next question from Michael Nannizzi with Goldman Sachs.

Michael Nannizzi - Goldman Sachs

Peter, I just wanted to ask a little bit about the North America commercial business. It looks like the year-over-year improvement there slowed a bit in the first quarter. Given the return rate gains in your earnings through and movement towards what I would assume is a lower loss ratio properly book, and even taking into consideration the severity losses that were effectively flat year-over-year; trying to understand what the margin, kind of whether we hit a speed bump or what happened in the first quarter? Was there something I’m missing there?

Peter Hancock

I’m going to give that to John Doyle to answer.

John Doyle

Hey Mike, what I would point out is that we continue to see underwriting improvement in our U.S. casualty business. As Peter mentioned casualty produced suggested profit for us in the first quarter for the first time since we’ve been using that as our primary performance metric and it was more notable than that -- is that our U.S. casualty business was also RAP positive in the quarter. So we feel good about that.

Having said that, we saw some pressure on the top line in the first quarter. The cap property market got considerably more competitive in the quarter. So we sacrificed some volume in the quarter there, in some cases locked some accounts. We also moved up on some programs to retain some relationships on some business that we thought was within an appropriate margin.

And then in casualty there were some pressure on the top line. As Peter mentioned ratable quarters on large accounts but also there was also some pressure from DVA business, it’s just a work comp like cover for U.S. contractors doing business, largely in Iraq and Afghanistan and with the wind down of the lot of the work there we saw some pressure there. We did see decent growth in the other segment and continue to grow outside of cap property in the United States.

Michael Nannizzi - Goldman Sachs

So should we expect some kind of reversion of what we saw in prior quarters in terms of margin expansion there or how should we -- it would just seem that a lot of the really big opportunity to push for excess rate over loss trends -- the low hanging fruit might be behind us? Just trying to understand just given what we’re seeing elsewhere, how should we think about margin expansion in the North America commercial business from here, just given that’s an engine of margin improvement of the company.

Peter Hancock

I’m not sure it ever feels like low hanging fruit to me, because there is lots of competitors out in the market,

Michael Nannizzi - Goldman Sachs

Fair enough.

David Herzog

And I would also mention to you that it’s not just about price. Risk selection is an important driver for our underwriting improvement and we continue to refine more techniques and use a lot of the analytical capabilities that we’ve brought on to the team over the course of the last couple of years to improve. But as Peter mentioned -- I pointed out cat property, but as Peter mentioned in his prepared remarks and mostly other lines of business, rates continued to exceed loss cost trends. And as he also mentioned we do expect continued loss ratio improvement when you normalize for the severe losses and during the course of this year.

Operator

We’ll take our next question from Larry Greenberg with Janney Capital.

Larry Greenberg - Janney Capital

Yes, Peter I think you -- when talking about severe losses in commercial lines, you said the $186 million was within a reasonable range. I’m wondering what the range is that you’re using today? And should we expect that range to be increasing over time as it seems like your continuing to emphasize property over casualty in your growth plans?

John Doyle

This is John, let me -- I’ll jump in on that again. Severe per commercial were $145 million this -- the number you’re referenced includes the three consumer losses that Peter referred to. It’s within a range of reasonable expectations. What I would say it’s slightly higher than what we’d expect but it’s going to be bumpy. Of course we’re not going to see -- it's a quarter-to-quarter predictable number of these losses. One of the losses in fact came in on March 31. So just as an indication but -- and if property continues to grow as a percentage of the book, we’ll see more contribute from that line of business over time.

Peter Hancock

Yes, the most unusual aspect in terms of severe losses as I mentioned is in consumer where we had these three rather unusual fires, but in terms of the last few quarters, I was reassured by the fact that most of the severe losses were from property policies written some time ago. So it’s not as a result of a new exposure. Yes we are growing our property business but there is no evidence that that is the cause of the elevated severe losses that we had in the last three quarters. Over time yes, as the book grows it will become a bit more lumpy, but no I think it’s better diversified today than it’s ever been before, diversifying away from U.S. cat to a more internationally balanced global property portfolio.

Larry Greenberg - Janney Capital

And then also, can you provide us any visibility on the other property casualty segment which no premiums but throws off roughly 40% of your property casualty earnings. And perhaps some sort of breakdown between what the run off piece of that is, maybe the timeline for what that associated tail is. And then how much of it is just purely investment income that doesn’t get allocated to the commercial and personal segments?

Bob Benmosche

Well, the first is, I’ve got to work backwards. Your last comment is a substantial element in that line item, which is the access investment income. We used to transform pricing mechanism between that other segment and the consumer commercial which looks at risk free rates plus the liquidity premium which is roughly 50 basis points. The only investment returns over and above that is shown in our other segment and we’ve been fortunate the asset management group has done an excellent job of getting better returns than that. And so that shows up in that segment. But we also have a number of run-off portfolios, excess workers comp, some environment policies in asbestos in that which is going to be running off over several years, and it ultimately will free up capital to be redeployed either dividends or growth in the rest of the business.

Larry Greenberg - Janney Capital

So when the run-off is complete do you still expect to have in other segment? I mean I know we’re talking years down the road probably?

Bob Benmosche

I think if it is certainly not a bad scale and I think that perhaps another segment might be consolidated for all of AIG because we have a number of run-off assets at the holding company like the DIB and so on. So I think that hopefully at some point the total amount run-off assets in the whole company are a footnote that doesn’t receive as much intention as they do today. But today, between those are the holding company and those that are in PNC, it’s still fair amount of trapped capital which ultimately will get re-deployed productively.

Operator

We’ll take our next question from Meyer Shields with KBW Management.

Meyer Shields - KBW Management

When we look at the international retail segments, I am looking at last year. You had sort of underlying loss ratios in low 50 in the first half of the year and the low 60% range in the back half of the year. Is this some sort of seasonality for the sequential improvement from 4Q due [ph] fourth quarter actually represents something sustainable?

Bob Benmosche

I didn’t hear your question was it -- did you say commercial or consumer at the beginning?

Meyer Shields - KBW Management

I am sorry, international commercial.

David Herzog

The severe loss that John mentioned that came in at the very end of the quarter was an international one and I think that it’s largely severe losses shifting from domestic to international.

Bob Benmosche

And we disclose it in top on Page 17, the severe loss numbers for international commercial and you can see the growth there from the best two quarters of that year being very low to an elevated level as for Q3, Q4 in the first quarter of this year.

Meyer Shields - KBW Management

Okay. So we shouldn’t expect the same sort of seasonality going forward?

Bob Benmosche

No, I think we had very low in the first half of last year and elevated in the last three quarters.

Meyer Shields - KBW Management

Right. Unrelated question how should we think about the process related expenses for regulation? I guess the beginning of AIG unique regulation, the new churn space. Is that likely to increase or decrease from what we’re seeing currently?

Bob Benmosche

I think that you have seen it baked in a bit with our numbers. So we talked about our expenses and when are they coming down. We -- for example may be close to 300 people dedicated full time for working on our stress testing, it could be as much as 1000 people supporting them at various points in time, in a run rate or in the numbers. We’ve already in a process of investing huge technologies. We’ve been able to build a real strategic state of the art system on the investment side, the asset side. We are now putting team together on building the liabilities, employing demand in a very high tech kind of way. So that money is in the run rate, it’s been in the run rate for, I would say at least 2.5 years and we saw a dropping from the fall of (indiscernible) FED year. And we need to start really modernizing it (indiscernible) which has been in the run rate quite a while.

David Herzog

Yes. I think the big investments are sort of quite separate from regulation FED related to merger integration of AIU and Fuji Fire & Marine in Japan. That’s a big spend this year.

Operator

We’ll take our next question from Jay Cohen with Bank of America.

Jay Cohen - Bank of America

Yes. Couple of questions. The first is that the G&A expense within P&C was quite a bit low as it has been running and it was lower in every single segment. Should we be reading into this improvement and this is just --- not the ratio but the aggregate number was down quite a bit from the fourth quarter. Should we read into that?

Bob Benmosche

You could but I don’t think you would be interpreting it right. You got to do the FX adjustment which is very sizable yen expenses so they look lower with a lower translation. But we are making progress on expenses but as I alluded to, we won’t see a full benefit until 2015 as we work our way through the merger integration costs in Japan. I have to say that we had slightly lighter projects than in Japan in the first quarter than I had planned, and we’ll see that come through in the second quarter and third quarter despite the higher pace, but the full year plan for spending in Japan is on track.

Jay Cohen - Bank of America

And what about the drop in the U.S. I assume that -- something to that? Again fourth quarter to first quarter, both in commercial and consumer, that overhead number came down quite a bit.

Bob Benmosche

In the fourth quarter 2013 we had higher comp related expenses within both the U.S. and international businesses and that wasn’t repeated in the first quarter of this year.

Jay Cohen - Bank of America

Got it. And then second question, on IFLC, I fully understand how you’re approaching this from a capital management standpoint. You clearly don’t want to put the cart before the horse. You have said in the past several things on IFLC. One you said that the sale of IFLC would be a credit positive event for the company, that there was transformation to some extent. You also suggest that the capital of that unlock that you have received when you sell IFLC, in your view should be free and clear. It wasn’t supporting any other businesses. Do you still stand by those statements?

David Herzog

It’s David. Yes. The short answer. Listen, getting IFLC has total liabilities of about $25 billion, $26 billion and that number sits today on our balance sheet and liabilities held for sale. There is no question that the rating agencies will see the actual closing of that sale as credit positive, as much as said so. And the capital, whether it’s the shares of AirCap or the cash that we receive, it will sit at the holding company, unencumbered not backing any other business or liability and our judgment process will be as I set forth in terms of how we’re going to go about evaluating what we will do with those proceeds. Bob I don’t know if you want to add anything?

Bob Benmosche

I guess just keep in mind that I think the IFLC management team, over the last four years have done brilliant job of turning the around a business where we had not dealt with legacy aircraft as appropriately as we should, did not have the right financing in terms of duration matching against purchasing of claims and so on. So there is a huge amount of work went on cleaning it up, building a really strong new airplane purchase book. If you look at the planes, the NEO, we were right out in front of that and congratulations to the executives that got that going, the NEO 320. So we have a really strong order book, we have really done a wonderful job of cleaning up our finances and other thing was older aircraft that needed to be sold or parted out and so on.

And we should put the two companies together, we view it as a very strong property and for now we’re getting some cash immediately which is important. We do, as David said have a lock upon it but we also see the future of this over the next several years as being extremely positive. And so we’re going to make the right economic decisions for the company and our shareholders. And over the next two or three years we’ll see what’s there and make the decision based upon how AIG is trading, where we are vis-à-vis book value. We’re expecting improvement in our operating earnings as we go forward, improvement in our ROE as we go forward. So if that all comes together, we’ll have a better view of how we deal with this non-core asset, which we think has a lot of promise over more than one or 1.5 year time frame.

Operator

We’ll take our next question from Brian Meredith with UBS.

Brian Meredith - UBS

Two from me. First just on the property casualty insurance interest in dividend in the quarter, I know you said that part of the reason for the reduction was the lower invested asset balance but it was really a substantial decrease. Was there anything else unusual going in there, FX or something would have impacted the decline from the fourth quarter?

David Herzog

There wasn’t anything substantial. As we said the alternative investments were strongly performed but our overall interest and dividend -- interest receipts were in line with our expectations.

Brian Meredith - UBS

Okay. Because I was just looking, it’s down like $80 million sequentially. Maybe there is an allocation issue, kind of what you’re talking about with the other that went into that.

David Herzog

There is 15 million of PICC mark-to-market and then ultimately of other declines in interest returns -- interest yields.

Brian Meredith - UBS

Great. And then my second question is for Peter, John. I am just curious the severe loss activity that we’re seeing, could any of that be attributed to some of the changes you made in your reinsurance program? And then kind of as an addendum to that, is there any way to kind of get a sense of what the benefit the changes in the reinsurance program have had to your underlying combines in the P&C area?

Peter Hancock

Our international net exposure of non-U.S. net exposure did increase as a result of changes in re-insurance. We continue to back test that decision to take more net and remain confident that it’s been also a right economic decision for us. Last year in the first quarter we saw an unusually low level of severe losses at $60 million in losses and this year was close to a more normal rate. But as I mentioned before, as a percentage of our total portfolio, our high limit property business globally is a bigger part of our commercial insurance operation. So we do expect, at least in the near term those exposures to increase.

Operator

We will take our next question from Josh Stirling with Sanford Bernstein

Josh Stirling - Sanford Bernstein

I’d love to start with a question for Kevin. So we’ve started to see some improving consumer margins. You’ve talked about your initiatives in auto, warranty, and accident health. And I was wondering if you could - you’ve been here for about six months and the Company. Consumer business started to change about 18 months ago. I’m wondering if we can give us a sort of a little bit of a story as to sort of how the focus in consumer is shifting? And maybe some concrete examples of specific changes, and sort of specifically about things like pricing and underwriting, I’m kind of curious, are you pulling these levers hard enough to get your business to down to a target of low 90s combined.

Kevin Hogan

Thanks Josh. As I mentioned last time. We are playing in consumer essentially at similar playbook to what has been very successful in the commercial side, really focusing on underwriting discipline. We’re using similar tools in terms of global writers, regulate portfolio reviews et cetera. And in the big portfolios of Japan and of the U.S. in the last two years, we’ve taken substantial actions not only in terms of rate adequacy but also changing certain terms and conditions in the underwriting aspects of the portfolios and as you mentioned, those few underwriting actions are starting to prove particularly in the automobile and the accident and health areas.

Outside of the two big portfolios in the U.S. and Japan, we’re managing some important growth related initiatives in some of the world’s fastest-growing markets, the SPE portfolios and from those areas, as we are using appropriate technical tools from the start, we’re starting off with a standpoint for the sound technical base. There were a number of challenges in the portfolios that we’re re-underwriting our way through, including the accident and health business in the United States, which is still a bit of a drag on our growth. But we are establishing a sustainable portfolio and so I would say we’re partially through the re-underwriting process, but we have a sound base on which now to focus on growth.

Josh Stirling - Sanford Bernstein

So a question for Peter, or perhaps Charlie, around actuarial and reserving. So you guys have been investing to drive an actuarial transformation along with everything else you’d been doing. I’m wondering if you give us a sense for what more you need to do to bring your actuarial data in processes to be best in class and then if we think about them sort of discreetly, you have given reserves in three buckets, sort of pre ’04 legacy reserves from the financial crisis years and then say the more recent business that you guys have written yourselves since 2010 or ’11. For each of these three buckets, could you give us a sense of your confidence level and sort of where you think the puts and takes and say strength and weaknesses might be in the current pace?

Peter Hancock

Okay, Charlie, I’ll leave that one to you.

Charlie Shamieh

Josh, firstly on technology, I’d say before you get technology, the key thing, as Peter mentioned a bit of it is in relation to the international financial line reserve strengthening. There’s a lot of work that we’re doing to get very granular information with the claims that happened because we do see evidence of earlier settlements of claims on a paid and an incurred basis which is a good thing. We have much richer stake reserve information than we ever had before. And so a lot of the actuarial methodologies are being adopted for that. And we believe our reserves reflect the best estimate for that’s causes a lot of difficulties and looking at historical patterns and the triangles, because Eric’s team is actively affecting those trends. And we think that will be beneficial to us in ultimate loss cost eventually.

In terms of technology, we are -- Bob mentioned it earlier, part of the stress testing work and the capital management work that we’re doing, we are putting the liabilities on to fairly expanded industrial strength platform for income statements and balance sheet projections. And these are industry tools that help us not just look at point estimates, but also uncertainties in those estimates and what drives those uncertainties.

In terms of the confidence in the three buckets that you mentioned, I believe we have confidence in every one of those buckets. We test and derive best estimates regardless of which accident year we’re looking at. If we see emergence now that we had previously not expected, we will react to it in the quarter. One of the drivers in international financial lines was in isolated pockets in Europe, in our personal indemnity. We saw a much longer sale, than we have ever seen before back to 2005, as early as 2005 in some cases and we're reacting to that.

So I wouldn’t give you a differentiated answer. The point that we’re following looks at everything, every quarter in a very detailed dive into the long sale process, we have claims reviews and underwriting. And also ERM involvement in the validation process, at least once annually for the long sale process.

Josh Stirling - Sanford Bernstein

That’s great. So, and then so this quarter with the international financial, it sounds like you must have had some late margins, sort of some latency you didn’t see it didn’t expect and then the surety was basically an individual claim that came through. It sounds like this is much more a case of you guys are responding to the data, as opposed to say changing your approaches and sort of doing a study or something like that?

Bob Benmosche

I think that’s very fair. International financial alliance is really isolated through two pockets. Peter mentioned them earlier, but Australia and New Zealand in the access players and in CRA and CNR specifically. And if I would say the frequency and the severity of this environment Australia in particular was higher than we had basically build into our price. But as Peter said, that remains for us a very profitable portfolio. And then the European BI, we had isolated pockets of individual countries in Europe where we saw much later emergence for a claim financial.

Liz Werner

Thank you. Operator, at this time we'd like to close the call and follow-up with any additional questions when we get back to our desk. Thank you everyone for joining us today and we appreciate your attention.

Operator

That concludes today’s conference. We appreciate your participation.

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