American International Group's CEO Discusses Q1 2013 Results - Earnings Call Transcript
American International Group Inc. (AIG)
Q1 2013 Earnings Call
May 3, 2013 8:00 a.m. ET
Executives
Robert H. Benmosche - President & Chief Executive Officer
David L. Herzog - Chief Financial Officer & Executive Vice President
Peter D. Hancock - Chief Executive Officer, Property and Casualty Insurance
Jay Steven Wintrob - Chief Executive Officer, Domestic Life and Retirement Services
Elizabeth A. Werner - Vice President, Investor Relations
Brian Schreiber - Executive Vice President, Treasury
John Q. Doyle - Chief Executive Officer of Global Commercial Insurance, AIG Property Casualty
William Dooley - Executive Vice President, Investments & Financial Services and CEO, Asset Management
Jeffrey M. Farber - Senior Vice President, Deputy Chief Financial Officer
Analysts
Jay Gelb - Barclays Capital
Gregory Locraft - Morgan Stanley
John Nadel - Sterne, Agee
Mark Finkelstein - Evercore Partners
Randy Binner - FBR Capital Markets
Jay Cohen - Bank of America Merrill Lynch
Joshua Shanker - Deutsche Bank
Michael Nannizzi - Goldman Sachs
Presentation
Operator
Good day and welcome to the American International Group’s First Quarter Financial Results Conference Call. Today’s conference is being recorded. At this time, I would like to turn the call over to Ms. Liz Werner, head of investor relations. Please go ahead, ma’am.
Elizabeth Werner
Good morning and thank you for joining us everyone. Welcome to AIG’s discussion of our first quarter 2013 results. Speaking today will be Bob Benmosche, our President and CEO; David Herzog, our Chief Financial Officer; Peter Hancock, CEO of AIG Property & Casualty; and Jay Wintrob, CEO of AIG Life and Retirement. Other members of senior management are also in the room and available for the question and answer period.
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 2013 First Quarter 10-Q and our 2012 Form 10-K under management’s discussion and analysis 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 AIG’s website, www.aig.com.
Now, I’d like to turn our call over to Bob.
Robert Benmosche
Thanks Liz and good morning everybody. And as I’ve said since mid-2011, the focus of our Company and all the people of AIG has been fix the foundation to get the fundamentals right. And while we’ve seen noises we dealt with some of our non-core assets and so on mark--to-markets of ML II, III and so on AIA. We’ve been focusing on the core and I think what you see is the first quarter is another strong quarter of the fundamentals. This is a quarter we had some positives. Last quarter we had Sandy which was a negative, but if you look at the core and we’re going to talk about that this morning, we continue to fundamentally do very well here.
Now you look at our liquidity at the end of the quarter, we’re at $15 million. That includes dividends from Life and Retirement and also liability management which included some of the cash from the prior quarter. Peter is going to talk to you about our Property Casualty business that we’ve seen good improvement in the underwriting. Good returns from the investment side as well, but what’s most important, if you look at the trend over this period of time from mid-2011, you can see that there’s a gradual improvement of the current action year loss ratio which is now down to 63.2, again a strong improvement.
And if you look at the growth of the topline, we continued to grow that this quarter. It is growing nicely at about 4%. If you take out some of the accounting charges and the Yen issue that we’re dealing with in terms of conversion now. So strong performance in Property Casualty and mortgage guarantee business we’ve said we’ve seen that business turn about two years ago. We’re working through the legacy book. Again a strong quarter for that business and about half of the premiums are now coming from our new underwriting model which is performing much better than we had in the past. And our Life and Retirement business, again great distribution numbers in a very tough climate. We are continuing to hold the line on our ability to get the returns we need for that business. And so success for us, as [Bill] and Jay will take you through that, so I don’t want to belabor at this point. I look forward to taking your questions at the end of our comments. What I would like to do now is turn over to David who will highlight some of the financials for you. David?
David Herzog
Thank you, Bob, and good morning everyone. As Bob mentioned, our core operations delivered strong operating results this quarter. Up 28% over a year ago and we executed on $2.1 billion in liability management actions during the quarter. We remain committed to our aspirational goals including $25 billion to $30 billion in capital management and 10% ROE by 2015.
Turning to Slide 4. First quarter operating earnings per share was $1.34. As you might recall, first quarter of 2012 had over $3 billion pretax gains related to non-core holdings in AIA and ML3. So the quarter-over-quarter EPS comparison isn’t straight forward. Operating ROE which excludes AOCI from equity, was 9.2% for the quarter, on a basis consistent with our long-term aspirational goals which excluded the deferred tax assets from equity for purposes of calculating ROE, ROE would have been roughly 200 basis points higher this quarter.
Book value per share excluding AOCI was $59.39, up 12% from a year ago and 3% from year-end. Operating results began on slide five. Property casualty delivered an underwriting profit in the quarter driven by continued improvement in the accident year loss ratio. Both our property casualty and life and retirement businesses benefitted from stronger alternative investment returns than we expected. Property casualty has modest cat losses of around $40 million less than we expected in the quarter.
We realigned our life and retirement segment presentation this quarter to provide product segments consistent with our new management structure which Jay will discuss in more detail in his remarks. The direct investment book and global capital markets benefitted from positive marks in the quarter, driven by largely by tighter credit spreads. Operating income from the wind down legacy multi-sector CDS book, which is reported in global capital markets, improved by roughly $150 million from market appreciation of the underlying coverage securities which then reduces the liability we carry on the related CDS.
The direct investment book also benefitted from asset appreciation consistent with our objective to capture the pull to intrinsic over time. These market movements will vary from period to period and could be negative in a reporting period. Interest expense increased modestly from prior year and reflected only a partial quarter of interest savings from our liability management actions that we completed in March. Corporate expenses including the impact of cost incurred during the quarter for continued infrastructure build out, were in line with our near term expected run rate of about $225 million per quarter.
There is roughly $35 million or so per quarter of corporate expenses related to our data center consolidation which begins to wind down going into 2014. The effective operating tax rate came in at almost 30%. Looking ahead for the rest of the year, we continue to expect an operating tax rate to be roughly in this range. As you may recall, we will not be paying any U.S. income taxes for some time given our NOL. We also had a couple of largely offsetting tax adjustments that are not reported as part of operating income. We increased our reserve for uncertain tax positions under FIN-48 by approximately $600 million related to some legacy matters as a result of current period developments.
We also determined that recently identified tax planning strategy met the prudent and feasible criteria and we released through income, a little over $750 million of our deferred tax asset valuation allowance related to our capital loss carry-forwards. Our capital decision remains solid and on slide six, you can see our current debt levels reflect over $2 billion in parent company debt that we called and repurchased in cash tender offers this quarter. In March, we called our $1.1 billion 7.7% hybrids at par and we purchased $1 billion in debt in cash tender offers with an average coupon of around 7.8%.
Annualized interest savings on this retired debt is about $165 million. We also have $750 million in callable hybrids with a coupon of 6.45%. Exercising that call would further reduce annual interest expense by almost $50 million. At this time we do not have any plans in place for further 2013 liability management outside exercising the hybrid call that is available to us. If we do exercise that call, then between our maturities, the debt we have already proactively, we could pair our annual interest expense run rate by roughly $290 million.
Our yearend RBC ratios are also presented on Slide 6 and were 443% for Property Casualty and 532% for Life and Retirement. These are higher than the preliminary estimates that we reported last quarter. Our insurance subsidiaries remain capitalized well above their CMA threshold and our position to deliver sustained dividends and distributions to the holding Company. We received distributions from Life and Retirement of over $1.3 billion during the quarter as shown on Slide 7.
Property Casualty is on track to deliver its full year targeted dividend payments later this year. We continue to expect $4 to $5 billion in total in annual dividends and distributions from our insurance companies. Parent Company available liquidity is over $15 billion at the end of the quarter, reflecting these distributions and the liability management actions that I mentioned earlier. The parent liquidity balance includes $5.5 billion related to the direct investment book and global capital markets which is currently allocated towards future maturities of liabilities and contingent liquidity stress needs. Nearly 60% of the DIB’s debt matures over the next five years.
During the quarter we initiated an investment program at the holding Company whereby we invested $2.3 billion of available cash into high quality fixed maturity securities with duration of just over three years and a deals rate of just over 1%. We expect this portfolio to grow to around $3 billion this year. Additionally, the ILFC divestiture continues through the regulatory approval process as expected. Upon closing, the net proceeds that we receive on that transaction will be unencumbered as the holding Company.
And at this time I’d like to turn the call over to Peter for greater detail on the Property Casualty results. Peter?
Peter Hancock
Thank you, David. Good morning everyone. During the quarter, AIG Property Casualty made good progress towards achieving our goals. We improved our underwriting results and experienced strong investment performance while expenses remained largely stable.
Turning to Slide 8. Operating income was nearly $1.6 billion, which included moderate catastrophe losses of $41 million, favorable net prior year reserve development of $52 million and better than expected net investment income. Continued enhanced risk selection, technical pricing, shifts in our business mix and advances in claims practices contributed to that profitability.
Our accident year loss ratio, as adjusted of 63.2%, is slightly better than trend which has been improving at an average 3 points annually. We expect to continue to see a decline in the accident year loss ratio as a result of our continued underwriting improvements.
This quarter we began recognizing premiums on excess of loss reinsurance at contract inception rather than ratably over the contract term, which will have no effect on full year net premiums written or net premiums earned, but does impact first quarter comparisons. Changes in foreign exchange, driven by the weakening of the Yen and a first quarter catastrophe bond issuance also reduced reported net premiums. Excluding these effects, topline growth was 4%. We continue to expect modest net premium growth in 2013 as our underwriting actions take hold and we write profitable new business.
General operating expenses were up slightly on a gross basis and included moderate severance and other personnel charges.
Turning to Slide 9, commercials net premium written were up 4% excluding the effect of the immediate of recognition of ceded premiums on excess of loss reinsurance and the catastrophe bond issuance that I mentioned earlier. In addition, last quarter we entered into a new reinsurance program in U.S. excess casualty that reduced commercials first quarter premium by about 1%. That will improve overall profitability.
Maximizing risk adjusted profitability through optimization of business mix and underwriting excellence remains the focus of AIG property casualty. The results of these initiatives are most evident in commercial's accident year loss ratio as adjusted, which improved approximately 5 points compared to the prior year. An increase in new business and positive rate changes contributed significant to growth in property which improved 20% excluding the items mentioned above and in financial lines.
In the U.S., we saw pricing continue to decline particularly in property and workers compensation, where rates increased over 80%. Partially offsetting this was continued pressures in certain lines within specialty and in Europe, commercial business. Overall, retentions remained strong in those lines of business we wish to grow.
Turning to Slide 10. Consumer net premiums written increased over 4%, excluding foreign exchange and the other items mentioned earlier. Accidents and health experienced growth outside the U.S. particularly in individual A&H in Asia Pacific. Personal lines benefited from auto's market share gain in EMEA and expansion in high-value non-auto line. Consumers accident year loss ratio was up slightly from the prior year as 2012 included a $45 million benefit related to changes in actuarial assumptions in accidents and health.
Acquisition ratios reflected our investment in the profitable direct marketing channel, which grew approximately 8% and accounted for 16% of total consumer premiums. Slide 11 illustrates our investment portfolio mix. First quarter net investment income increased 11%, reflecting strong alternative investment returns, increased mark-to-market gains on structured securities, and redeployment of excess cash held at year-end. Alternative investment income was almost $120 million above our expected return. The first quarter marked another step on our part to increasing the intrinsic value of AIG property casualty. Our shift to high value business combined with underwriting and claims practice improvements, exemplifies how our focus on balancing growth, profitability and risk is helping to produce better margins.
We maintain our commitment to capital efficiency and optimizing our risk profile. In Japan, for example, we recently integrated the majority of our operations under one holding company, which will enable greater capital flexibility and create operating efficiencies. We look forward to contributing our planned full year dividend to the holding company during the remainder of the year. In closing, I am satisfied with our positive momentum. I am confident that this quarter is only the beginning of a successful year.
Turning to slide 12, I would like to comment on mortgage guarantees performance and our outlook for this core insurance holding. The first quarter was another quarter of improving profitability and growth in new business. Delinquency counts continued to fall and mortgage guarantee continues to see a growing portion of earned premiums, now almost 50% from high quality business written since 2009 and declining losses from legacy run-offs exposure. We expect UGC is very well positioned to take advantage of an expanding private mortgage insurance market. Profitability is expected to grow over the course of the year and we will continue to capitalize on our unique underwriting approach and strong capital position.
Now, I would like to turn it over to Jay.
Jay Wintrob
Thanks, Peter and good morning everyone. Starting on Slide 13, as you can see, this was another strong quarter for AIG's Life and Retirement business, with a 6% increase in operating income from a year ago to $1.4 billion. The year ago quarter included $246 million gain in the final Maiden Lane II distribution.
First quarter operating income growth was driven by the robust equity markets, which contributed to strong investment returns on our portfolios of alternative investments and mark-to-market securities.
Combined with another positive quarter for our investment in PITC common stock, these portfolios contributed approximately $320 million in investment income, above our expected returns. Strong equity markets also contributed to our growth in assets under management, driving increased fee income. The quarter also benefited from lower mortality costs and our continued active management of crediting rates, which dampened the impact of the low interest rate environment.
In addition to strong earnings as David mentioned, AIG Life and Retirement provided $1.3 billion of liquidity to the holding Company to dividends and note repayments from our operating life companies. And we’re on target to deliver on our expected dividends to the holding Company for 2013.
Total premiums and deposits this quarter were $5.6 billion, roughly flat with the year ago quarter and 7% higher than the fourth quarter of 2012.
Net outflows, the sum of sales less all surrenders, debt claims and other benefit payments related to our retail investment products and group retirement businesses were $244 million, a marked improvement from the previous -- each of our business lines contributing to this favorable trend.
Variable annuities were the leading driver of inflows, while fixed annuity showed the greatest incremental improvement in net outflows due to improvement in sales and a decline in surrenders. We continue to see strong variable annuity sales growth and remain comfortable with our product offering, risk management and the overall environment with respect to the VA business.
We also remain disciplined at managing our fixed annuity sales and in-force blocks. Our cost efficient, flexible annuity platform based here in Amarillo, Texas and deep relationships with banks in particular, have allowed us to remain the number one provider of fixed annuities through the bank channel. The low interest rate environment, however, obviously continues to negatively impact product demand across the industry.
We are now reporting under our new segment presentation and our new segments and the underlying lines of businesses, which we illustrate on Slide 14, after recent organizational changes and how we manage the business and allocate resources. Our results are now broadly reported in two segments, Retail and Institutional. And we also provide profitability and additional supplemental information for certain key businesses.
The Retail segment includes our individual life and A&H business, fixed annuities, retirement income solutions, and retail mutual funds and broker-dealer services. Our Retirement Income Solutions business line now includes both variable and indexed annuities, reflecting the fact that (inaudible) of these products rather than focusing only on asset accumulation, are increasingly interested in guaranteed income and today the vast majority of each of these products now include a guaranteed lifetime withdrawal benefit rider option.
The Institutional segment includes our Group Retirement business, which was previously reported as VALIC, Institutional markets and AIG Benefit Solutions, our Group Benefits joint venture with AIG Property Casualty, under which AIG Life and Retirement reports 50% of the results.
Our Institutional Markets business represents opportunistic offerings, including stable value wrap contracts, structured settlements and pension buyouts. Given our opportunistic approach to the institutional marketplace, combined results will fluctuate from period to period.
Slide 15 highlights the product diversity across our segments. The contribution of strong alternative investment returns benefited all product lines this quarter. In addition, active spread management benefited both our Retail and Institutional segments.
Total base portfolio yields shown on Slide 16 remain under pressure due to the continued low interest rate environment and total yield or reported yield reflects the strength of alternative investments and a gain on our investment in PICC stock.
We expect the base yields could see pressure for the rest of this year as we continue to take gains on certain portfolios of securities in order to utilize capital loss carry forwards that are available to us and due to prevailing low interest rates.
Turning to slide 17, you can see the trend in base yields and net investment spreads, each of our leadings spread (inaudible) fixed annuities and group retirement. Fixed annuities have benefited from our active management of crediting rates and net investment spreads increased this quarter. Approximately 73% of our fixed annuity and universal life account values now are at minimum guaranteed crediting rates and we would expect to continue to actively manage spreads.
Group retirement also benefitted from reductions in crediting rates, which offset the impact of shifting into certain lower yielding, higher credit quality invested assets which we mentioned, we began last quarter. When considering our fixed product flows, it is important to note that close to half of our sales and deposits were into products that guarantee minimum interest rates of 1%, while the majority of surrenders, debt claims and other benefits, were paid from products with the guaranteed minimum interest rate of 3% or above.
In sum, we are off to a good start to the year with solid earnings and distribution to parent. We plan to continue to execute on our growth strategies by leveraging our strong relationships with distribution partners, to increase sales of our broad product portfolio across all channels, while continuing to look for opportunities to run our businesses in the most effective and efficient manner possible. And now I will turn it back to Liz to open up to Q&A.
Elizabeth Werner
Thank you. Operator, could we open up the lines now for Q&A?
Question-and-Answer Session
Operator
(Operator Instructions) We will take our first quarter from Jay Gelb with Barclays.
Jay Gelb - Barclays Capital
There has been a significant amount of news around the [lift] out of the team from AIG property casualty to Berkshire Hathaway. Could you address that and also give us a sense of whether we should anticipate that more of the leadership could depart? Thank you.
Robert Benmosche
Well, I guess I can only tell you that of the top 3300 executives of AIG, during 2012 of the top 30% performers of that group, we retained 94% of those people. So, I know you want to focus on four people in property casualty business. It's a very big and successful business. We are going to lose people to competitors from time to time. We have an outstanding team that is still here. You saw how quickly Peter was able to put new executives in charge. I think the reaction to this step has been very positive. So turn over occurs, but if you can retain 94% of your top 3300 people running this company -- and by the way, 45% of that group have been with AIG more than ten years, 15% of that group more than 20%. So we have experience. We have a deep bench. We have a talented group of people. Not everybody is going to be happy with the company as we go forward, and I can see that our competition is struggling a little bit with their flows and so they are getting in businesses they weren’t in traditionally. So I think we are fine and we are moving on. So I think this is the only way I can answer the question.
Jay Gelb - Barclays Capital
Okay. Thank you. And then switching gears, could you provide some insight as to when AIG could reinstate its common shareholder dividend and also resume the share buyback.
Robert Benmosche
What we said is that we are going to focus on our coverage ratio. We are going to continue to focus on liability management. We also want to make sure that we have completed the sale of ILFC, so that that non-core asset is now completed in terms of the sale so that we reduce our debt, for example even though it's not direct but about $25 billion. That’s a key milestone we have to reach. We are continuing to look at our capital plan and doing our stress testing. And we are meeting with rating agencies to make sure that whatever we do does not cause them any concern. And then our second priority is for liability management we said will be a dividend. And after that we would still like to do stock buybacks but we will do it in a very slow and cautious way to make sure that we do nothing to affect our current ratings and that the rating agencies are satisfied with what we are doing to [address] the most important thing for AIG right now, it's to maintain and build on the confidence that we can make guarantees, [book] sometimes with people's lifetimes, and we will be here to live up to those guarantees. So that’s our highest priority as we go forward. And so as the year progresses, you can see our numbers, you can see our performance. When we think it's prudent and everyone else feels it's prudent, we will make those decisions.
Operator
We’ll take our next question from Gregory Locraft with Morgan Stanley.
Gregory Locraft - Morgan Stanley
Just wanted to clarify the ROE goal. It's not inclusive of FAS 115 and the DTA. Is that correct from a book value perspective?
David Herzog
That's correct.
Gregory Locraft - Morgan Stanley
So just to be clear, you take current stated book value of $67 subtract $20 a share and so we’re really at a $47 book value number and then we grow off of that and we want to earn a 10 ROE against it?
David Herzog
I'm not quite sure I follow your math. Maybe we could do that offline. I think that's probably the best way to handle that.
Gregory Locraft - Morgan Stanley
Okay. It's just FAS 115 and DTA subtracted from current GAAP book value, but okay. So the goal is 10 ROE ex-FAS 115, ex DTA in 2015. Great. And then the other is just on the capital deployment side. You mentioned $25 billion to $30 billion. Can you update us on how much you have left to do to get to that goal, like how much has been completed and how much more can you do to meet that?
David Herzog
Yeah, sure. This is David. Through 2012 we did $13 billion of common equity share repurchase and thus far this year we've done a little over $2 billion of debt capital management. Again, I gave you the interest savings on that. We don't view maturities that are being funded through cash as part of that capital management. That's just part of the ongoing management of the Company. So the early calls on the hybrids, we do consider that part of our capital management goal. So if you think about it, through the end of this year we’ll have done with what we've already done, plus the planned call on the hybrid, we’ll have done close to $16 billion against that 25 to 30.
So that's how you -- that's where we are to date. And then the Company continues to generate deployable capital. We said $4 billion to $5 billion per year of dividends and distributions from our operating companies. We have interest expense and some parent Company expenses of roughly $2 billion or so a year. And so therein lies the generation of deployable capital. And as Bob referenced earlier, the unencumbered proceeds from ILFC, which will be available at the holding Company for consideration.
Gregory Locraft - Morgan Stanley
Perfect. That’s very clear. Thank you. And then last is just any update on the non-bank SIFI process, the timing. I'm wondering if that's slipping at all and when we might get clarity. And I know that's a bit unfair, but just any help there would be great. Thanks again a good quarter.
Robert Benmosche
I think on the SIFI part of it, we’re working -- remember we are now being regulated by the Federal Reserve. We've been working through a lot of things with them since they arrived in September. We have a very good working relationship. They have dug into understand a lot about our businesses. They are now in the process of fully examining the way we stress test this organization. So the SIFI process is going to be something we'll have to go through. But I think the biggest issue there probably would be what amounts of additional cushion you may have to have. But as far as the basics, you've got to make sure that you're running these companies, insurance companies, the banks and so on in a sound way.
There is a huge public outcry of making sure that these institutions don't eat taxpayer money. And unfortunately we have not done a very good job as an industry explaining how much has been done in the last four years with over $400 billion of additional capital being raised to strengthen these institutions. So it's very difficult for them to payout based upon the stress test that everyone is going through today. So a lot of progress has been made. People have still not declared victory unfortunately. So I think that's the bigger crowd, but I'm pretty confident that SIFI or not SIFI, at the end we are going to be able to demonstrate financial strength of this Company, that our stress tests are very well done, that we understand risk management, that we've dealt with the non-core assets and that AIG has the financial strength to do its capital management on a go forward basis in a prudent way.
So that's pretty much where we are at and when SIFI comes, it comes, but it will be more about the ratios than the quality of our numbers.
Operator
And we will take our next question from John Nadel with Sterne, Agee.
John Nadel - Sterne, Agee
I guess either for Bob or for David, you opened the call with commentary about focusing on the core. And my question is when on an internal basis when you strip out some of the noise in the quarter, obviously very favorable overall, I am hoping you can help us discern what you view as the true core underlying earnings and ROE? I know David mentioned ROE on a reported basis was about 11% on equity excluding the DTA but I am interests in your view as to the core results.
Robert Benmosche
I think I will David answer to it. You know we normalize for things that are pluses and minuses and we have gone through some of that. And you got to decide, all of you, I can't give you the answer, John. You guys think about how you want to deal with partnerships and we may want to budget it at 8% or 10%, you guys decide now it's getting to 11%-12%, still core. But I would say that if you look at our accident year information, that’s a key indicator. You look at the flows in Jay's business, in that flows, and understand that our losses in terms of surrenders in the fixed annuity [bucket] are at minimum. So therefore that’s actually improving the spread. So all of that, I don’t know how you would do that but you have to look at, I would say, just his flows, his spread and looking at the mortgage guarantee in the new book of business coming in. And I think in property casualty, the accident year combined ratio is a hell of an indicator. So those are some of the things I would suggest you want to think about as you examine our ability going forward. David?
David Herzog
Bob, I think you have laid that out very well. The items that give rise to variability. Things like the alternative investments or the direct investment book, that will, again, over time pull to a level of intrinsic value that will ultimately be monetized. Again the path from here to there is not a straight line. So again, we give you some broad parameters around what's on the balance sheet vis-à-vis the direct investment book in terms of the total assets and total liabilities. We also in the financial supplement give you some parameters around what the alternative investments are for each of our core businesses that again you can make some reasonable assumptions based upon the prior performance and your expectations about what the equity markets and the like will do over time. So what we try to do for you is give you a sense of what those underlying variable items are so you can make your own determination and assessment about them again.
We are making risk returns tradeoffs in terms of maintaining and holding those assets as we did with, for example, the global capital markets and some of the wind down portfolios in the legacy financial products book. Again, over time, we believe there is intrinsic value that’s appropriate for us to hang on to, given the risk return and as it will pull through intrinsic, again over time. So there are some pages in the supplement that give you the underlying balance sheets that you can make those assumptions.
John Nadel - Sterne, Agee
I guess, maybe suffice to ask it this way. I assume you believe that the core underlying results are right on track or on track with your overall objective, looking out the next couple of years.
David Herzog
I think we remain committed to our long term aspirational goals and the results of the company, the progress that Peter and Jay are making, are the basis that give us confidence to remain committed to those goals.
John Nadel - Sterne, Agee
Thank you. And just a quick follow up on Peter's comments. I may have missed it, he made a comment about commercial property and I wasn’t clear on whether it was a 20 point improvement in the accident year loss ratio. It seems like too much or maybe it was a comment on pricing. Could you just clarify that?
John Doyle
Hey, John, it's John Doyle. When you normalize for the accounting changes and some of the reinsurance activity in the quarter, it was a 20% increase in net written premiums in the quarter.
Operator
We’ll take our next question from Mark Finkelstein with Evercore Partners.
Mark Finkelstein - Evercore Partners
You gave some new disclosures on the cash and committed to the DIB at the holding Company, which is very helpful. If you work back from on balance sheet resources adding the unencumbered fixed income investments, you get to a number of around $6 billion, which obviously excludes future proceeds from ILFC or the MetLife escrow, et cetera, but the number is around $6 billion if my math is right. I’m just curious, if you put SIFI to the side, what is the right number to hold at the holding company in terms of cash and investment resources knowing you’ve got CMAs and the way the whole structure works?
David Herzog
Hi Mark, it's David. Thank you. Yeah, your math is correct. If you look at Page 7 of the call deck, you get -- in that zip code, its $5.96 billion as of the end of the quarter. Then again what I said earlier was that again at the holding company we have at the end of the – when we exit 2013, the run rate interest expense will reflect our cash funded maturities and the active or proactive debt capital management that we have undertaken this year. So the interest expense will come down accordingly. But nonetheless we’ll have roughly $2 billion plus -- $2.2 billion, $2 billion something like that in terms of annual expenses at the holding company to be funded. Again, from that -- again, we've not given a specific amount or an algorithm, or a formula, or a stated amount to hold, but that gives you a sense of what prudent financial management would call for. So in any event then you can go from there in terms of how we’re generating deployable capital for consideration once the SIFI designations are known and we understand the requirements of the stress test, et cetera.
Mark Finkelstein - Evercore Partners
And then I think you emphasized the $750 million hybrid as the liability management through '13, but you emphasized through '13 and you emphasized liability management generally in talking about the capital position. How should we think about liability management beyond '13?
David Herzog
Well, I think you should think about it as opportunistic, and we will assess the progress that we've made vis-à-vis our coverage ratios that Bob spoke about earlier and we'll evaluate again all facts and circumstances at that time. So again we've made very good progress in 2013 on the goals we set out to improve our coverage ratio. And, again, I think that as we have done in the past, we will look to optimize returns for all the various stakeholders. And obviously capital management is an important part of that.
Mark Finkelstein - Evercore Partners
And then just one quick final question, please. I don’t know if Brian is there. I assume he is, but how much is the remaining -- what's the update on the remaining pull through intrinsic in the DIB that you estimate currently?
Brian Schreiber
As we said in prior quarters, the pull through intrinsic is holding strong. It's approximately $5 billion, consistent with what we had talked about last quarter. That will obviously be realized over a longer period of time. And again, you're seeing the results coming through in the earnings. As David mentioned, the DIB reaches its half-life in 2017 as another big slug of maturities in '18. So it would be after that point that we'd see a fair amount of that pull through intrinsic, as well as at that point some release of the capital in that business.
Mark Finkelstein - Evercore Partners
So $5 billion from this point?
Brian Schreiber
That is correct. That also includes not just DIB, but also the Legacy FP.
Operator
We’ll take our next question from Randy Binner with FBR Capital Markets.
Randy Binner - FBR Capital Markets
So I have a question about the yen. And I think about 20% the P&C consolidated premiums come in the form of yen premiums, and I don’t believe that’s it'd hedged from an earnings perspective. So I understand the [cost] that you gave on, how that effected the top line production, but it didn’t seem like there was much bottom line impact this quarter. And so, one, I wanted to clarify that there was not a lot of impact from the yen, and that maybe related to the fact that the combined ratio is relatively close to 100. But then also to ask if you have plans to potentially hedge that more actively going forward if you plan to have profitability improvement.
Peter Hancock
The issue is that Japan, unlike the U.S. is heavily a consumer business and is our largest direct marketing operation which has substantial upfront marketing costs which are expensed in the current period. So from a GAAP net income point of view, you are absolutely right. The bottom line in yen is actually quite small. But the value of new business that we originate, if you were to capitalize that acquisition cost over the expected life of the, persistency of these policies, which are annual policies but have a very high renewal percentage, makes it a very attractive business from a lifetime customer value perspective. So from a value point of view, we are hurt by the weaker yen because that value of new business is reduced, but from a GAAP reported bottom line, we are pretty indifferent.
So that does present some hedging dilemmas in terms of GAAP reported volatility. But I think your way of observing the top line impact is where the visible effect of the yen is most notable but that the GAAP volatility as a result of yen volatility is negligible. But from a value point of view that franchise is valuable but it will be realized over the life of these customer relationships.
Randy Binner - FBR Capital Markets
I guess, is it correct though that there is not an active hedging program on that value? I guess is there anything about what's going on with the movement in the yen that would make you rethink that?
Peter Hancock
We have currency exposures in all 90 countries we operate in. We manage our currency exposures in a top down way because we have positives and negatives all over the place. We do not do micro-hedging of each line item. So that’s all I think I would say about the hedging approach.
Randy Binner - FBR Capital Markets
Okay. And there is one more if I could. Just on very good underlying combined ratio on property casualty. Is there more, in business mix, kind of higher value business are phrases that you have used to describe the result. And I think, like John Nadel, I am just kind of wondering what we can run rate going forward. Is there more property business being written here, so it kind of over earns a little bit in a quarter like the first quarter but it could get hit if there is higher cat activity as the year goes on. Is that a major feature of what we saw on an underlying basis in the first quarter?
Robert Benmosche
Well, I will have John elaborate, but I think we made it very clear that we think the first quarter was a light cat quarter. So, yes, the cat quarter needs to be normalized for the normal run rate of cat. We have seen a growth in our property business, especially international property, especially our large limit property. But our aggregate PMLs have been coming down steadily as we manage our aggregations more and more. So I think it's an inherently volatile line and so you need to normalize for cat activity. But, John, you want to elaborate on that.
John Doyle
I would just add that the exposure growth in property -- I mentioned John that the premium growth, net written growth in the quarter was about 20%. But the exposure growth was less than that. We saw about 8%, 9% of price improvement in our portfolio, property portfolio. And as Peter mentioned, our P&L are on now a modest decline year-over-year, so the exposure growth will come outside of cat and really outside of our peak zones in the United States.
Operator
And we will take our next question from Jay Cohen with Bank of America Merrill Lynch.
Jay Cohen - Bank of America Merrill Lynch
On the alternatives, I know some of these are reported with a one quarter lag. Based on the movements in the markets in the first quarter, do you have any visibility into the 2Q reported numbers? I mean it seems like it's setting up to be a better-than-expected quarter again. Can you just talk about that?
William Dooley
Bill Dooley. Well, Jay, you see the same results for the quarter as I do as far as the general market is concerned and the one quarter lag is only to do with the private equity portfolio. The other one is just a one-month lag on the hedge funds. So I don't want to assume where the markets is going to go, but I’m not going agree or disagree with what you just said.
Jay Cohen - Bank of America Merrill Lynch
Fair enough. And I guess a follow-up to the last question, Peter you mentioned obviously we need to adjust for catastrophe losses. Do you have sense that excluding catastrophe losses, if loss activity in general was in line or lighter than normal?
John Doyle
Jay, it's John. Our property losses were in line with what we expect, including shock losses in the quarter. I would say that the shock losses are the more than $10 million losses in property were in line with what our expectations were, but higher than a year ago and higher than the fourth quarter.
Operator
We’ll take our next question from Josh Shanker with Deutsche Bank.
Joshua Shanker - Deutsche Bank
First a numbers question. I want to know if you could walk through how much the DT was used during the quarter and how much the valuation allowance came off?
David Herzog
On the valuation allowance, Josh, we took on the DTA -- on the capital loss carry forwards, took down by about $750 million. That was through income and there was about another $50 million or so that came off through OCI. So in total, strategies that produced prudent and feasible transactions were about $800 million or so. And then on the DTA utilization, Jeff Farber.
Jeffrey Farber
Well, it's essentially the same thing, right? We only do our tax return once a year. So when we do the tax return, but you could kind of think about the earnings for the quarter as a surrogate for usage. So we continue to use the NOLs actively and we continue to utilize the life capital as carry forwards as we’ve disclosed in the quarter.
Joshua Shanker - Deutsche Bank
I'm not trying to begrudge, Peter or John, or James, anything. I'm trying to understand the long-term compensation plan a little bit and some of the specific targets. When it says on long-term comp plan, there were specific targets to receive 50% of the bonus, how do those specific targets in the P&C division relate to the aspirational goal of 90% to 95% in 2015?
Peter Hancock
This is Peter. The aspirational goals are laid out in different components. There is a combined number. There is an ROE number. And the one that -- if you want to pick any one of them that is the most important one that we focus on is the ROE one. So we, as you know, gave a range for the combined and if you want to be at the lower end of that range, if interest rates are high and you're getting your results flattened by high investment income and you'd be -- so I think that what we view as the alignment between the compensation plan is effectively an ROE goal. And so if we are on the ROE walk that delivers the 2015 goal, then people will feel pleased. So it's I think a very strong alignment. We set fairly broad goals.
We don't break up the Company into little silos and that's a big change and I think culturally has people working together across boundaries, whether its geographic boundaries or business line boundaries so that everybody wins if we all win as a team. And I think that that's a really showing up in the culture of the Company and our customers are giving us feedback on that. So I think we want to align interest with the shareholders as well as making sure that our units work together across boundary as well. So it is a pool approach of how the property casualty business as a whole achieves its ROE goal, which then drives the ROE goal of AIG.
Joshua Shanker - Deutsche Bank
Peter, did you think it’s feasible -- look, I’d like you to get paid and make a lot of money, but if you don’t hit that 95% or below target, do you think it’s feasible that the ROE goal will be achieved?
Peter Hancock
Yes, absolutely.
Robert Benmosche
Yes, absolutely, you could. It's a question of capital intense products. It's a whole other series of factors that go on here. And what's important is that it's the quality of what we do. Peter has said numerous times that the combined ratio is a consequence of what we do, it's not what we manage. And when you get involved in managing that combined ratio, you could do some dumb things. There are things you can do to reduce your expense ratio, which is reducing your expenses and there are other techniques you could do in financial engineering. We want people to focus on the fundamentals, focus on accident year loss ratios, run this thing in the right way, and in the end we believe the combined will get into that range of 90%, 95%. But most important is you want to continue to grow the quality of the earnings and you want to have a better ROE. And if you continue to grow earnings and improve your ROE and shareholder return continues to get better, and total shareholder return plus earnings per share, those are the key indicators for us, and if that all moves in the right direction then I think people should be paid and they will be paid. So I think their senses are very aligned to doing what's right for the shareholders and they’re in there with the shareholders with the stock-based compensation long-term.
Peter Hancock
I think, I mentioned earlier in the context of discussing yen exposure, direct marketing hurts our combined ratio but creates extremely good value. We've talked many times about the marginal ROE over the lifetime of those customer relationships as being in the 20s, 20%, based on very reliable actuarial histories. And so we wouldn't want to underspend on direct marketing simply to get under the wire on a combined target. We want to do good, valuable business and build long-term customer relationships that make sense. And for the skeptics, we will publish greater and greater detail about those actuarial assumptions so that you don't think that we are foolishly wasting money on growth.
Operator
And our next question comes from Michael Nannizzi with Goldman Sachs.
Michael Nannizzi - Goldman Sachs
Jay, you mentioned monetizing some capital gains in the life sub. Just curious, how much of the $25 billion in gross unrealized gains is there and how much do you think you can monetize? And I don’t know, David, if you can remind us what the timeline for expiration is on those capital losses?
David Herzog
Jay, I will go first, and then maybe you comment, and Bill, if you want to add to it. A very substantial portion, Mike, of the capital loss carryforward DTA expires at the end of 2013. We have, there's about $1 billion or so that spills over into '14 but the bulk of the carryforward expires at the end of this year. Now, the NOLs, just to be clear, the NOLs go out through 2028 and '29. So there's a very ample time there. And then the foreign tax credits are more in the 2020, '21, '22 range. So that gives you a sense of the expiries.
Michael Nannizzi - Goldman Sachs
Right. No, this is unrelated to the NOL, DTA, but just purely the capital gains.
David Herzog
Right. And that's why the focus is on 2013. So the harvesting etcetera will, again, will be more opportunistic beyond 2013 and 2014. Bill, you want to comment?
William Dooley
Sure. When you look at just the capital gains by itself, there is other programs that we look at too on harvesting gains for tax reasons. And the gain process itself has been going on now last year and it was restarted in the month of March and it will continue for the next couple of months. But we're using the gain mechanism also to readjust and reposition the portfolio. So the portfolio from a duration standpoint is probably short duration at this time and we're using this as an opportunity to let in the portfolio a little bit. And also better balance against some of the products that are in the life companies. And then another example of this is that we're looking at ways to raise liquidity over the period of time for the life companies and for the other companies of AIG and one of the strategies we've employed is a modified securities lending program and that gives liquidity to the underlying insurance companies. But at the same time, it generates certain types of tax benefits to us on a simultaneous basis. These other transactions and structures that we're using, but the bottom line of everything is its repositioning some of these portfolios that really haven't been repositioned in many, many years.
Jay Wintrob
Mike, this is Jay. I guess I’d just add one comment to what's already been said which is obviously it's very economically efficient for us to realize capital gains given the tax loss carry forward position, but we also very carefully focus on what we can do in terms of reinvestment at any given point in time and what the friction costs are including lost investment income if you are not able to reinvest promptly the proceeds of any sales. So we’ve targeted certain assets for potential sale, but it’s all subject to what we see in the market in terms of potential purchases and as a practical matter how quickly we can make those purchases.
David Herzog
Just to add to that. Thanks Jay. The amount that we have actually utilized is actually ahead of what we thought we would do originally when we first set forth our aspirational goals back in early 2011. So we will have utilized about half of the amount in which exceeded the 20% to 25% level we were expecting that we could at the time. So, Liz, back to you.
Michael Nannizzi - Goldman Sachs
Can I ask one quick follow-up to Peter? Peter, I guess you guys have mentioned before $1 billion run rate or $1 billion savings on expenses in some investments as well. I'm just trying to understand, we saw the expense ratio fall in U.S. commercial. We saw a rise a bit in international consumer and then consumer in North America was a bit lower than we had. I’m just trying to reconcile those movements. In particular the G&A expense ratio in U.S. commercial or in North American commercial was really low. Can you help me line those dots up a little bit? Thanks.
Peter Hancock
I’ll help you out. I think the basic comment we've made is we have a $1 billion of savings for all of AIG. We have said a good piece of it comes from the fact that we’re doing this whole technology improvement, rebuilding our platform. We’ve gone from 28 data centers down to two. We are moving from 12,500 servers to roughly 2,000 to 3,000, all moved into high secure locations. All of that will give us a lot more cost savings and benefits. We are rolling out a new one claim system for example throughout the Property Casualty business. That’s a huge investment. Our financial architecture, where we have almost 6,000 people at AIG today and working in various aspects of finance. We are rolling our common ledgers and so on, building new processes around that. So this is a fundamental change in how we do business and it's at the highest level. We keep track of those benefits. We're well on our way to achieve that $1 billion goal. So it's not just a focus on Property Casualty. It’s really about the overall of AIG. At this point, I think we’re out of time.
Elizabeth Werner
Thank you, operator. Please, if you have any additional questions, don't hesitate to reach out. We’ll be here all day and thank you very much for dialing in.
Operator
That does conclude today's conference. Thank you for your participation.
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