Elizabeth A. Werner - American International Group, Inc. Peter D. Hancock - American International Group, Inc. Siddhartha Sankaran - American International Group, Inc. Robert S. Schimek - American International Group, Inc. Kevin T. Hogan - American International Group, Inc..

Jay Arman Cohen - Merrill Lynch, Pierce, Fenner & Smith, Inc. Michael Nannizzi - Goldman Sachs & Co. Kai Pan - Morgan Stanley & Co. LLC Josh D. Shanker - Deutsche Bank Securities, Inc. Brian Meredith - UBS Securities LLC Ryan J. Tunis - Credit Suisse Securities (USA) LLC (Broker) Elyse B.

Greenspan - Wells Fargo Securities LLC Larry Greenberg - Janney Montgomery Scott LLC Adam Klauber - William Blair & Co. LLC.

Please stand by. Good day, and welcome to AIG's Third Quarter Financial Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Liz Warner. Please go ahead ma'am..

Thank you, operator, and good morning, everyone. Before we get started, I'd like to remind you that today's presentation may contain 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, second and third quarter Form 10-Q, and our 2015 Form 10-K under Management's Discussion and Analysis of Financial Conditions 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 the slides for Jay's presentation and for – and our financial supplement, which are available on our website.

Nothing in today's presentation or in oral statements made in connection with this presentation is intended to constitute nor shall it be deemed to constitute any offer of any securities up for sale or a solicitation of an offer to purchase any securities in any jurisdiction.

This morning, we will get to hear from our management team and – which would include Peter Hancock, Sid Sankaran, Rob Schimek and Kevin Hogan. And we'll begin this morning's call with Peter..

Thank you, Liz, and good morning, everyone. I'm pleased with our progress this quarter and the continued execution of our strategic plan. We reported third quarter operating EPS of $1 a share, a solid result despite volatility from our review of our longevity assumptions and certain segments of our Commercial business.

I'm pleased that we maintained our strong position in our Life and Retirement segments, and delivered another strong quarter in Personal Insurance. I remain highly focused on the continued improvement of our commercial underwriting, and believe we're taking appropriate actions.

Sid and Rob will speak to the specifics of our reserves and underwriting strategy in their remarks. Since the second quarter, we announced or completed five strategic and complex transactions. These actions are increasing the sustainability of AIG's earnings and are reshaping the company.

During our January strategy update, we discussed our focus on targeting geographies and segments with critical mass and expertise, while improving our multinational capabilities. The Fairfax transaction is the most recent example of executing on this strategy.

The transaction required the extraordinary effort of our employees across two continents, 12 countries, and required the close and timely coordination with over 20 different regulators.

The transaction is expected to consolidate our network partners, and reinforce our commitment to servicing our multinational clients in over 200 countries and jurisdictions without the need for bricks and mortars in every location.

As we committed to you in January, we are narrowing our focus on those countries where we have opportunities to improve our ROE. We're also highly focused on disruption in the market and our future growth opportunities. During the third quarter, we announced the launch of our technology-driven solution to serve the $80 billion U.S.

small-to-middle-market. AIG, Hamilton Insurance and Two Sigma joined together to form Attune. Attune will partner with retail and wholesale intermediaries, and offer small businesses, a broader and more flexible range of products through a technology-enabled platform.

Through the combination of Hamilton's small business expertise, AIG's scale, extensive data and long-standing distribution network, and Two Sigma's technology and data science capabilities, Attune can offer a powerful, disruptive solution to the small business market.

In addition to our actions to simplify AIG, our expense discipline continued this quarter. Through the nine months, we are ahead of our 6% planned reduction with a 10% decline in operating GOE, excluding any foreign exchange effect and the impact of the sale of the AIG Advisor Group.

We expect expense reductions to extend into 2017 and remain ahead of plan as a result of actions taken across the company. The normalized return on equity was 7.1% for the quarter and 8.3% for the nine months. Third quarter normalized return on equity reflects our seasonally high expected third quarter cat losses.

Our operating improvements and return of capital will continue to positively impact ROE, and we're on track to deliver full-year normalized ROE in our targeted range of 8.4% to 8.9%. We will provide greater insight into our confidence in reaching our 2017 financial targets at our upcoming Investor Day.

We continue to shape the company to deliver more sustainable, higher-quality earnings, and remain focused on meeting our two-year strategic objectives.

Our results and the strength of our relationships with customers and partners in the industry are positive indications of our progress and the foundation we're building for the long-term success of AIG. Now, I'd like to turn the call over to Sid..

Thank you, Peter, and good morning, everyone. This morning, I'll speak to our quarterly financial results including noteworthy items, strategic transactions and capital management.

Turning to slide four, our core operating earnings improved from the same period last year as the decline in the Commercial accident year loss ratio has adjusted, expense discipline across AIG and improved alternative investment returns all meaningfully contributed to the improvement in performance.

Looking ahead, while we're only one month into the fourth quarter, our early estimate of losses from Hurricane Matthew is about $250 million, roughly two-thirds of which relates to Commercial and one-third relates to Consumer. Operating results also reflected two adverse impacts of note.

First, we took a loss recognition charge of $622 million related to longevity experience studies, which indicated increased longevity, particularly on disabled lives on a legacy block of structured settlements underwritten pre-2010. This legacy block accounted for over 80% of the $622 million charge.

As we told you on our January 26 strategy update, these assets and liabilities will be reported in the legacy portfolio when we release our fourth quarter recast of results. Shifting to our operating portfolio actuarial updates, we recorded net charges totaling $24 million.

We recorded a benefit of $238 million for our operating Consumer Life and Retirement businesses due largely to lower fixed annuity surrender assumptions, partially offset by an increase in reserves for universal life with secondary guarantees.

Offsetting this, we recorded $262 million of total prior-year adverse reserve development net of premium adjustments, which largely related to our U.S. program business within specialty. Rob will comment further on this review and the underwriting actions that we've taken on our U.S. program book.

During the quarter, we announced the sale of UGC to Arch Capital Group, and have included an overview of the transaction on slide six. AIG will retain the attractive economics associated with our 50% quota share reinsurance agreement on business written by UGC, and are reporting the earnings in Commercial Insurance.

This quota share covers business written during the 2014 to 2016 accident years and we expect the average annual pre-tax earnings from the quota share will be approximately $150 million for 2017 and 2018, and will decline thereafter.

The remaining operating results of UGC, which is held for sale on the balance sheet, are being reported in Corporate and Other up to the closing date. We anticipate closing the transaction in the fourth quarter ideally, or early in the first quarter.

We expect to receive $2.2 billion in cash proceeds at closing, an additional $250 million pre-closing dividend, as well as approximately 9% of Arch's common shares. In addition, as part of the transaction UGC's tax attribute deferred tax assets remain with AIG.

Note, this quarter we also began reporting Institutional Markets' results in Corporate and Other, as the vast majority of this business will be reported in Legacy beginning in the fourth quarter. Slide seven shows recent strategic transactions and their estimated impact on our 2017 results.

While there's a modest earnings impact from these transactions, each transaction is accretive to our overall ROE. Rob and Kevin will speak to the strategic rationale for the Commercial and Consumer transactions.

Consistent with our capital plan, we completed a Life Reinsurance transaction late in the quarter that resulted in the distribution of approximately $1 billion of excess statutory capital from our U.S. life companies to AIG Parent.

This is our first completed Life Reinsurance transaction towards our goal of freeing up $4 billion to $5 billion of capital by the end of 2017. We remain focused and confident on executing on the additional Life Reinsurance transactions.

The earnings impact from this transaction will be reported in next quarter's new legacy module, as it largely related to Legacy Whole Life and universal life business. Turning to slide eight. As Peter stated, we are ahead of plan on expenses and continue to expect to exceed the 6% targeted GOE decline for the full year.

Our expense reduction targets are carefully aligned against our projections of new business volumes to meet our objective of improving operating leverage.

We took additional pre-tax restructuring charges of $210 million during the quarter relating to our ongoing efficiency program, which we expect will generate an additional $400 million of run rate expense savings. We expect to exceed our two-year expense reduction target.

Slide nine details the 120-basis point expansion in normalized ROE for the quarter. This improvement reflected the active return of capital to shareholders as well as continued improvement in normalized operating results and reflects our seasonally high cat loss expectation in the third quarter, which was greater than reported 3Q cat losses.

Our year-to-date normalized ROE is 8.3% and we continue to expect to achieve our full-year normalized ROE target of at least 8.4%. Slide 10 shows the drivers of book value per share ex-AOCI and DTA, and including dividend growth, which grew 1% during the quarter and 5% year-to-date, reflecting operating earnings and accretive share repurchases.

Turning to capital on slide 11. We continue to execute against our capital return target and we are confident we are on track to meet our targets. We've returned $9.8 million of capital to shareholders for the first nine months of the year. During the quarter, we deployed about $2.3 billion towards the repurchase of almost 40 million common shares.

Since quarter end and through November 2, we repurchased an additional $946 million of common shares, leaving about $1.4 billion unused under the current authorization plus an additional $3 billion from the new authorization that we just announced. Our balance sheet and free cash flow remains very strong.

And as you can see on slide 12, Parent liquidity at quarter end was $8.6 billion, above our targeted range of $6 billion to $8 billion, and reflects the timing of insurance company dividends received late in the quarter.

In addition to the Life Reinsurance transaction, we also monetized $900 million of legacy assets during the quarter, or $5.2 billion over the last four quarters. These proceeds have partially funded capital return to shareholders.

And when considering announced but not closed transactions, we expect to well exceed the $5 billion to $7 billion funding target from divestitures that we outlined in our January 26 strategic update.

We also announced that we reduced our hedge fund allocation by about half, which we expect would free up $2 billion of capital towards our capital return target by the end of 2017.

We've reduced our hedge fund portfolio by $2.7 billion for the first nine months of the year, which has freed up approximately $800 million in capital in our life companies, which has come up to the holding company in the form of dividend payments.

As Peter stated, we're focused on the continued execution of our strategic plan and providing you with additional disclosure as we progress at our upcoming Investor Day. Now, with that, I'd like to turn the call over to Rob..

Thank you, Sid, and good morning, everyone. During the third quarter, we remained focused on our strategy to improve underwriting results and create a stronger, more valuable Commercial Insurance business.

Our strategy recognizes the importance of managing both the adjusted accident year loss ratio and expense ratio, and this quarter we saw improvement in both. We will have quarterly variability in each component of the adjusted accident year combined ratio, but we expect the net result will continue to improve. Turning to slide 14.

The adjusted accident year loss ratio declined 1.9 points during the third quarter, reflecting continued improvement in U.S. casualty. The UGC quota share agreement contributed to the improvement over prior year by 0.4 points in the third quarter or 0.3 points year-to-date. Moving to expenses.

The 1.9 point expense ratio improvement exceeded the prior-year quarter despite lower net premiums earned. We expect expenses to continue to decline, but similar to the loss ratio, the expense ratio will fluctuate around a downward trend line. Globally, rates were down less than a point with a marginal increase in the U.S.

and more aggressive competition internationally. In the U.S., casualty rates increased 3.5 points, representing the fourth consecutive quarter with rate increases in excess of three points, and specialty rates increased 2.5 points.

Partially offsetting those increases was continued pressure in property of approximately four points driven primarily by excess and surplus lines.

In certain segments, we're seeing fewer high-quality new business opportunities, and therefore, have maintained our discipline as we deploy our capital where we will meet or exceed our targeted rate of return. We're pleased that we continue to grow in our focus growth segments year-to-date despite competitive market conditions.

In prioritizing our valued multiline client relationships, retention for major clients has remained consistent with prior levels at 94%. As an example, multinational global policies grew 8%, reflecting our multiyear investment to provide world-class solutions for clients across the globe.

As Peter mentioned, an important part of the Fairfax transaction is Fairfax will act as our strategic network partner to serve multinational clients in all 12 countries included in the deal.

This follows a similar transaction completed with Grupo ASSA in Central America last year, and signifies an enhanced strategy to better serve our multinational clients in over 200 countries and jurisdictions through what we consider to be the best combination of owned operations and strong strategic partners in the industry.

Turning to third quarter calendar year results, cat losses were better than our average annual loss expectation but higher than prior-year, and as Sid mentioned, the U.S. programs business resulted in a commercial net reserve strengthening of $306 million. Our U.S.

programs business consists of $1.1 billion of annual net premiums written, spanning across 108 program segments and 41 program administrators. This business is written via managing general agents for predominantly small and medium-sized enterprises, and third-party administrators handle over half of the claims activity.

Prior-year development was driven by higher-than-expected loss emergence in the most recent calendar year from a subset of these programs. We've now completed a detailed segmentation of the entire programs booked as part of a broader, more holistic assessment of the business we transact with managing general agents.

Through the review, we identified the programs we're seeking to grow, improve, remediate or terminate based on our profitability criteria, and we terminated 16 program segments with net premiums written totaling approximately $200 million as a result.

We estimate approximately 80% of the programs business reserve charge relates to programs where we've initiated termination or were in the process of remediating. The purpose of evaluating our managing general agent relationships has been to determine where we wish to focus our resources, reposition relationships and better align incentives.

The sale of our interest in Ascot and MSM, which we announced earlier this quarter, are examples of ROE-accretive repositioning, where we will opportunistically partner with these franchises that bring highly specialized expertise and diversification benefit to create a greater long-term value for AIG. Now turning to slide 15.

The year-to-date adjusted accident year loss ratio of 64.1% improved 2.1 points from the full-year 2015, excluding the UGC quota share benefit. The remainder of my comments will exclude the benefit to provide an apples-to-apples comparison of our performance to the strategic targets we set in January.

While the chart at the top right side of the page demonstrates the quarter-to-quarter variability of losses, I'm pleased with the overall improvement in the adjusted accident year loss ratio trendline.

Our ability to manage expenses, combined with the loss ratio improvement, resulted in an adjusted accident year combined ratio improvement of 3.1 points. This quarter, we experienced more pronounced volatility in our short tail lines, which adversely impacted Commercial's adjusted accident year loss ratio by approximately 2 points.

One point was attributable to increasing the current accident year loss fix, following our view of the U.S. Programs business. And the other point was related to higher property attritional losses.

Although third quarter severe losses were significantly lower than prior year, Property's attritional loss ratio was the second-highest result over the past 12 quarters due to the claims frequency that was greater than the norm.

During the past several years, we've made several significant changes to structurally improve the quality of our Property portfolio, including our shift from excess and surplus lines to highly engineered risks in the expansion of our use of reinsurance. However, as we've said in the past, we do not expect our path to be linear.

We believe accepting a reasonable degree of variability in quarterly results is the right business decision, and we have the ability to course-correct as business and market conditions change.

Given our actions in the first nine months of the year, we're continuing to target a run rate adjusted accident year loss ratio reduction of 4 points, recognizing, as we saw this quarter, with respect to short tail property losses, our results are subject to volatility.

We remain committed to our target of a 6-point run rate reduction in the adjusted accident year loss ratio by the end of 2017. As shown on slide 16, we continue to make significant progress in optimizing our portfolio to reduce the adjusted accident year loss ratio.

Overall, we're pleased with the pace of improvement in our mix of business written through the first nine months of the year, which will earn in over future periods.

In closing, although we faced some headwinds this quarter, I'm proud of the progress our team has made, improving our portfolio, managing expenses and proactively seeking out value-enhancing opportunities. Reflecting on our work over the past 10 months, I am confident in this team's ability to execute our strategy.

With that, I'd like to turn the call over to Kevin..

Thank you, Rob, and good morning, everyone. Despite a challenging economic and regulatory environment, I'm pleased to report that each of our consumer insurance businesses performed well during the quarter, reflecting the benefits of our diversified portfolio of Retirement, Life and Personal Insurance businesses.

Importantly, each of our businesses is executing on our strategic priorities and are focused on value creation, as I will discuss. First, let me make a few introductory comments. In Retirement, I am proud to say that our strong diversification has made AIG the largest provider of annuities in the U.S. in the first half of the year.

While we hold a top five sales ranking in each of variable index and fixed annuities, and we are the only company to hold a top five sales ranking in more than any one of these lines, our focus is on value over volume, and we continue to maintain vigorous pricing discipline facilitated by our lack of dependence on any one product.

In Personal Insurance, we continue to execute on our focused strategy. We are on track to meet our target state of 15 individual and 35 group countries by the end of 2017, and the most recent announcement with Fairfax Financial is a further key step to achieving our goal.

The benefits from these actions are beginning to emerge and will continue to evolve over the coming years. Most importantly, we are preserving our ability to serve our multinational customers and covered individuals through our strategic network partners. In U.S.

Personal Insurance, our private client group is implementing a market-competitive end-to-end platform to build on the double-digit growth that we've been generating, which will further improve the customer and distributor experience, and create operational efficiencies through automation and self-servicing.

In Japan, we remain focused on transforming the business, delivering improved results, executing on our customer value proposition, all while we are preparing for the successful execution of the legal merger. During the quarter, J.D.

Power Auto Consumer Satisfaction survey awarded Fuji Fire and Marine with the number one ranking in shopping satisfaction and AIU with the number one ranking in relationship satisfaction in the market. We also now average over 20,000 independent Japanese agents using our new technology front-end platform on a daily basis.

Now, I will briefly discuss the results for the quarter. Turning to Retirement on slide 18, in the quarter we saw lower Retirement sales from a year ago, reflecting an industry-wide slowdown in variable annuity sales from the uncertainty caused by the DOL fiduciary rule and market volatility.

These challenges validate our strategy of offering a broad portfolio of product solutions to meet our clients' needs. We have been proactive in updating our variable annuity product features and taking pricing actions to maintain our returns in the continuing low interest rate environment.

With respect to the DOL rule, we remain in active discussions with our distribution partners and are confident that we will be prepared to support them under a broad spectrum of chosen paths for implementation.

Fixed Annuity sales and net flows declined, reflecting our ongoing Fixed Annuity pricing discipline in the current investment rate and credit spread environment. Maintaining our Fixed Annuity pricing and asset quality focus remains a priority as we seek value over volume.

Group Retirement benefited from strong deposits and lower surrenders, resulting in improved net flows. While these results reflect the investments we've made in the business, including our client-focused technology platform, competition in this space remains robust.

We do expect to see more planned conversions in the fourth quarter, which is standard for the defined contribution market, including both large plan acquisitions and large case group surrenders. As you can see on slide 19, we continue to maintain our discipline in managing credit (24:48) rates and net spreads.

Trends in the quarterly reported base yields and spreads are impacted by volatility associated with bond accretion and commercial loan prepayment income. Looking forward, absent significant changes in the overall rate environment, we continue to expect our net spreads will decline by approximately 2 to 4 basis points per quarter.

Turning to slide 20, growth in International Life sales drove an increase in premiums and deposits of 10% from the same period last year on a constant-dollar basis. Growth in U.S. Life sales reflects our focus on term life, where we are again a top five term writer and also number one in direct term sales in the first six months of the year.

Change in our product mix demonstrates our commitment to the value of new business as we have increased our focus on products without long-duration interest rate guarantees. Our positive sales trends at Life also reflect the evolution of our distribution strategy and further developments of our independent distribution network.

Operating comparisons for Life benefited from continuing favorable mortality experience, expense management and improved investment returns. We also continue to make progress in the transactions supporting our previously announced plans to reinsure our remaining redundant reserves.

As Sid mentioned, we completed our first Life Reinsurance transaction during the quarter. This was an extremely large and complex transaction, and I would like to thank Charlie Shamieh and the whole legacy team for their discipline and focus throughout the transaction process.

I am confident, that supported by this team, we will continue to meet our targets for the remaining Life Reinsurance transactions. Turning to slide 21, Personal Insurance reported another strong quarter of operating performance.

The operating improvement reflected our strategic actions to reduce expenses, including direct marketing costs as well as early emergence of operating benefits from investments in Japan and other select markets. We did see a higher number of large but not severe losses in the quarter than a year ago.

However, the accident year loss ratio, as adjusted, was only slightly above our expectations. Expenses continued to be a key lever to future margin expansion and Personal Insurance, but as I have said, progress will not be linear quarter-to-quarter due to the nature of our ongoing investments, including in Japan.

To close, I'm pleased with the progress we are making against our strategic priorities across all of our consumer businesses, and we remain focused on continuing to execute on our plan. Now, I would like to turn it back to Liz, to open up to Q&A..

Thank you. And in this morning, we'd like to follow format of one question with one follow-up, please, and then just get back into queue. We would like to open our lines up at this time, operator, for Q&A..

Thank you. And we'll take our first question from Jay Cohen with Bank of America Merrill Lynch..

I just want to ask about the reserve charge in the Program business. You talked about doing sort of a deeper dive into that business this quarter. I guess the assumption that we had was that you had done a pretty deep dive into everything at year-end 2015.

So, my question is, are there still other businesses that you need to dive in a little deeper to?.

Jay, it's Rob. From an underwriting perspective, as you know – so I'll comment on underwriting and let Sid comment about reserves.

But from an underwriting perspective, the way we'll drive our 6-point improvement in the adjusted accident year loss ratio is by digging deeper into all elements of the Commercial portfolio focused on the value of our volume exercises.

So, in 2016, this is one of the areas where we focused, and consistent within actions you've already seen us take this year, the fact that we terminated 16 programs is very consistent with the actions we took with respect to our Environmental Solution Legal Liability business in the U.S.

and Canada earlier this year, and the buffer trucking where, what we believe that a business is not a business that will add value to AIG. We've proved that we're willing to step away from it. I'll let Sid comment about the reserves..

Yeah, Jay, I think as we've said before, we review all of our reserve segments annually so actually in 2015 programs was reviewed midway through the year. We did not observe any significant adverse claim activity, which is important to know.

Now, during the first half of 2016, as Rob noted, and I think the team did an excellent job on a deep dive underwriting review, we noted calendar year loss emergence for the most recent accident years that indicated we need to strengthen the program reserves. So, that's really the backdrop on Programs..

Got it. The other question was on the direct marketing expense which came down quite a bit.

Did you see those reductions have any impact on revenue production?.

Yeah, Jay, our change in strategy in direct marketing primarily focus on Japan, where you may recall we made an announcement about a year ago that we were teasing (30:34) direct marketing in the American Home business and focusing that activity in our Life Insurance platform, Fuji Life, in Japan.

So we have seen a reduction in the production in the supplemental health business in American Home in Japan concomitant with that reduction in direct marketing expenses, and we are focusing on independent distribution channels in terms of new business in Japan..

Got it. Thanks so much..

And the next question is from Michael Nannizzi with Goldman Sachs..

So, with those reserve points addressed, I guess, one question I had is on the underlying combined – as the underlying profitability in your four, sort of, subsegments.

So 70% of your business, International consumer in North America, Commercial did okay this quarter, where the other 30%, which is International Commercial and North America consumer, did really poorly at these versus our estimates. And this isn't the first time those two areas have shown difficulty.

So, what is adequate profitability in those segments? What you doing to get there? And how long is it going to take? And would you consider selling pieces or all of those businesses if parts of them that remain challenged aren't able to remediate?.

Mike, I'll take that. I think that the way you're segmenting the business is not the way we run the business. And so we try to make very clear in our January strategy update our forward-looking segmentation to help you think about valuation and adequate profitability as you put it in two broad segments – Legacy and Operating.

And within the Operating, that helps you estimate what our sustainable ROE will be, and hence, what kind of our multiple on earnings you think we might deserve.

And in the Legacy, I think it's very clear that sizable chunk of equity is – about a quarter of the company's equity at the beginning of this year had a very suboptimal return, about 3% return on equity.

And therefore, as you get to understand the Legacy better, you figure out what kind of discount to the current book value you need as to anchor your valuation from.

So, I'm feeling really good right now about the returns on the aggregate of all of our operating businesses with a forward-looking basis, and I think the big question mark is how quickly and at how big a discount to book value we can divest or reinsure the legacy book? And I think getting into the subsegments as you have, I don't think it's a practical way.

When we're looking at divestitures, it's very focused on the Legacy and focused on the most efficient way to cleanse the earnings picture with those sub-standard returns so that we can focus our energy on a sustainable return on the operating business. So I think that's the way we look at it.

And I don't know if there are any detailed comments on the segments that either Rob or Kevin would like to make..

So, Mike, it's Rob. I'll just make a couple quick thoughts. First of all, as it relates to the adjusted accident year loss ratio in Commercial, I'll just restate I'm absolutely confident that we're making the important changes that we've got to make to deliver on our commitment to improve the loss ratio by 6 points.

And I probably would point to four quick observations. First, we've absolutely demonstrated the willingness to reduce our premium ratings as we retain the business that we think is important for us to remain focused on our valued client segments. But we've been doing this very consistently throughout the year.

You can see that our premium volume in the first nine months of the year is down 16%, including, of course, the effective reinsurance. The second point that I'd make is that, as we show on page 16 of the presentation, the accident year loss ratio dispersion chart shows that we're driving improvements in the mix of business in a very material way.

And to put this in context for you, the Remediate and Improve portions of our portfolio have declined by one-third on a dollar basis, from $7.5 billion of premiums in the first nine months of 2015 to $5.1 billion of premium in the first nine months of 2016, showing that where we're reducing premiums is in the Remediate and Improve portions of the portfolio.

Actually, in the Grow and Maintain portions of the portfolio, Product Set 1 and Product Set 2A, our premium volume is approximately flat. It's down just about 2%. I'm going to turn it to Kevin for anything further..

Yeah, absolutely. Yeah, I think across the board in Personal Insurance, we've actually enjoyed quite strong margin expansion, including in North America.

And in fact, our adjusted combined ratio has improved from 95.9% last year to 92.4% this year, which may be seeming, however, in the loss ratio is that in the third quarter, whilst we have quite a bit of consistency quarter-to-quarter, there is a little bit of volatility.

We did have a number of losses that were large, over 2 million, but not quite at the severe level in the third quarter, whereas in the first two quarters, there were really an absence of those. So year-to-date, frankly, we are pretty much where we had expected to be in terms of the loss ratio.

Consistent with what we've done in the rest of Personal Insurance, in the North American portfolio, we have worked hard on remediating certain areas of the business, including particularly the warranty, which process is now complete. And we're seeing quite a strong growth in our Private Client Group business, which is one of our leading businesses.

So we're quite comfortable with the direction we're going in PI, including the very strong North American franchise..

Okay. And then maybe, Sid, if I could follow up on your capital management comments. You said that we're seeing the disposition dollars are adding up, but you said, or at least the presentation implied, that you have further confidence in the $25 billion. Sort of adding up all the pieces, I would seem to get above that number.

Can you help us reconcile those two points?.

Well, I think if you go back to the funding page that we shared with you back in January, we see ourselves as on track on each of those buckets in the funding page. Clearly, from a divestiture standpoint, you can see what we've done both on legacy sales where I think the team, Charlie and the team, have done a great job.

And then we have a slew of transactions that are in the process of closing. Once we get to our process of closing transactions, we'll redo our capital plan and proceed at that point. But right now, I think the best way we could put it is we remain confident in our targets..

Okay. Thanks..

So we'll take the next question from Kai Pan with Morgan Stanley..

Good morning. Thank you. The first question on the commercial loss ratio reduction on page 16. You see the mix shifting towards the grow and the maintain buckets, but if you'll look at underlying loss ratio for these two buckets you are trying maintain and grow, is actually increasing year over year.

I just wonder what's the dynamics there? I just wonder would that basically will increase that, but the loss ratio increase offset some of the improvement you're making in the other two buckets..

So, Kai, a couple things. First of all, I think the main message on page 16 is that we're driving our improvement by improving the mix of business.

So if you look at products that, 1 and 2, while I would love to retain my loss ratio as low as possible, overall the loss ratio is increased by 3 points overall for products at 1 and 2, from 54% in 2015 to 57% for the first nine months of 2016. So you've got actual market conditions which will be whatever the rate changes are in the market.

So as you might imagine, it will be pretty competitive in that space. And second, whenever we do an update to our reserves, we don't wait to make changes to our loss picks.

And so to the extent that we have updated our reserve reviews, we've already reflected an increase in our loss pick for product set 1 and 2, where those reserve reviews have been completed.

I would note that in product set 2B and 3, where the loss ratio has come down from 79% down to 73% over the first nine months of the year, the main observation I'd drive for you there is that's not because anybody gave me lower loss picks; that's being driven by the fact that we've really fundamentally changed the mix of business and been able to cut out some very poor performing parts of the portfolio..

That's great. My follow-up question is on the divestiture of UGC. Looks like, given the current run rate of earnings for that book, you're probably going to lose more than $500 million pre-tax earnings next year.

And how do you plan to offset that, including maybe increasing buybacks to offset the EPS impact?.

Well, I think we've disclosed for you that one of the important elements of the transaction is in retaining the quota share, which we view as very valuable and has about $150 million of net income to us. So we view that as critical to looking at how we're managing the overall portfolio..

I would just frame this as, we've got the Legacy portfolio with very low ROE businesses, which we are focused on divesting going forward. This was a business with a very high ROE that we felt would be more valuable in somebody else's hands than ours and improved our risk profile, so we're very much focused on value.

The aggregate of the sale price and the reinsurance and the DTA makes this a very attractive net price to us based on any future outlook for that industry, and so the offsetting aspects of earnings dilution through buybacks and redeployment of that capital into other lines of business, is also, in our view, going to improve the quality of earnings to a less cyclical mix.

There are many other ways we can obtain exposure to the U.S. housing market on the left-hand side of our balance sheet, which could more than make up for any kind of risk-adjusted earnings that we give up by the sale of UGC..

Thank you so much..

The next question is from Josh Shanker with Deutsche Bank..

Yeah, thank you for taking my question. I guess this is for David (sic) [Rob] (42:41). In the past commentary you said that you had 1.9% loss ratio improvement..

I'm sorry, Josh, who are you directing the question to?.

A, if you think about all the losses that occurred in 3Q last year, would you have had exposure? And, B, do you feel that there's more of a run rate – that a severe loss exposure of AIG has gone down in this re-underwriting process?.

Josh, thanks for your question. So let me maybe break this into two components for you.

As I think about our longer tail lines, casualty and financial lines, absolutely the 2016 third quarter was better performing than the 2015 third quarter, and even if you remove the fact that we had some increases in the loss picks for healthcare, for example, in the third quarter of last year.

So we are simply improving the underwriting performance of the longer tail lines of business. With respect to the shorter tail lines of business, as you commented, there was a better result in severe losses.

I also want to point you to the fact that we did announced earlier this year that we purchased a reinsurance program designed to limit some of that volatility in severe losses, and had you apply to that treaty, that reinsurance program to 2015, you would have a lower level of severe losses, even in 2015 using the reinsurance program that we put in place this year.

So I think that for sure, there are improvements in the underwriting in the long tail lines. And while there's some volatility in the short tail lines, we had, in fact, made improvements in underwriting, and you have purchased reinsurance in a different way..

So you've never told us what's the budgeted number of severe loss units (44:57) in the new budget would be, but we should assume that going forward AIG's exposure to those severe man-made losses is lower than it was in 2015 or 2014?.

That way it works, Josh, is that the reinsurance that we purchased has an attachment point. So if there were severe losses, a high frequency of severe losses below the attachment to our reinsurance, then yes we could have an elevated level of severe losses.

But generally speaking, our expectation is that our purchase of reinsurance will in fact reduce the level of severe losses moving forward..

Okay. Well, excellent answer. Thank you for it, and good luck..

And the next question is from Brian Meredith with UBS..

Yes. Thanks.

The first question, I'm just curious, Rob, in the adjusted loss ratio for Commercial lines this quarter, how much was current in your development in that loss ratio you said that you adjusted loss picks in the program business?.

Yeah, I gave that answer in my prepared remarks. That was 1 point, Brian..

Sorry. That was 1 point in the loss ratios. Thank you..

That's correct..

And then, second question, Peter, I'm just curious if I look at your financial targets for 2016, as you commented, all of them pretty much getting close to there except for that book value growth. Maybe we can talk a little bit about why you're not achieving.

Is there anything that you kind of learned this year that may make it challenging to meet that type of a target for 2017 as well?.

Well, I mean, I think that this year we had some somewhat unusual accounting asymmetries, which have given us a bit of a headwind in addition to some of the other dynamics, but in particular, one, that was sizable, was the asymmetry or the treatment of the significant change in the sterling exchange rate, which impacted the adjusted book value that we're targeting....

Right..

...but had an equal and offsetting gain in AOCI.

So on a net basis, it's over $1.2 billion, I think, is that right, Sid?.

Yeah, so, Brian, actually we've included an exhibit on page 25 of the conference call presentation which really shows that on the book value per share side we view our growth year-to-date as in the ballpark of 8%, excluding the impact of market volatility. We talked about loss recognition today on legacy structured settlements.

The change in reserve discount, which also impacts it....

Yeah..

...as well as some of the non-operating items that Peter mentioned, like the Brexit FX issues. So we think we're on a solid trajectory on book value per share growth at this point in time..

Great. Thank you..

The next question is from Ryan Tunis with Credit Suisse..

Hey. Thanks. Good morning. I just had a follow-up on the six points of targeted accident year loss ratio improvement out to the end of 2017.

Is that exclusive of the help that the loss ratio is currently getting from the UGC quota share?.

Yes..

Okay. Understood. And then my follow-up was actually on the reserve release and annuities. And I guess intuitively, I would've thought that lower surrenders in an annuities business would be a bad thing just given where interest rates are.

Could you just help us understand why that results in a favorable item?.

Yeah, Ryan, it's Sid. I assume you're asking about the DAC locking on fixed annuities....

Correct. Yeah..

Think about it as lower lapses mean people persist longer, which means there's more absolute dollars of income over time, which then creates the DAC unlocking..

Okay. Thank you. And then I guess my last one just quickly was I noticed you moved some new lines in the runoff. So, I mean, I guess I asked the question on the quota share.

What's the impact of some of the lines that you moved into runoff on the loss ratio this quarter? In other words, how would it have looked if you didn't move some of those lines into the runoff segment?.

Yeah. So, Ryan, it's Rob. We do not – we did not move business into runoff out of Commercial. And to be clear, for example, when we've exited business like Programs, that business that we've exited will continue to run off through my results and not help me until it has been fully earned in the Commercial loss ratio. So that creates a headwind for me.

With that headwind, we still reaffirm the fact that because we've been able to terminate that business, that by the end of 2017, we do expect we'll deliver all six points of the loss ratio. Let me ask Sid to comment further..

Yeah, Ryan, it's Sid. I think the last time we had a move of items into runoff was in Q1, so you can look back to Q1. The only item of note, I believe, in this quarter is if you look in our financial supplement, we split out the UGC quota share that Rob has talked about to be fully transparent..

Okay. Thank you..

The next question is from Elyse Greenspan with Wells Fargo..

Hi. Thank you. Good morning. I just wanted to talk a little bit more about the Commercial line's underlying margin. You did point out about two points from property losses and also from the program adverse development of the current year.

As we – and so that you've – as we think about the casualty and the specialty books, I guess, within Commercial, how did those books do sequentially on an underlying loss ratio basis when we compare to the Q2?.

Yeah, so specialty, excluding programs, had a higher loss ratio in the third quarter of 2016 relative to Q2, and also relative to the third quarter of the prior year. The areas of specialty that would have been higher loss ratios would – the single biggest one for the quarter was actually aerospace and that's a short tail line.

But I'll point to aerospace, and then as it relates to – relative to prior year, of course, it's environmental as we've exited some business that will continue to run off. As it relates to casualty, we've had much better results.

The casualty result is more than three points better in the third quarter of 2016 than it was in the third quarter of 2015, and in part because we've got the reinsurance in place that will continue to earn in with increasing momentum across the course of the year.

The benefit of that is better in Q3 than it was in Q2, and it will be better in Q4 than it was in Q3..

Okay. Great. And then in terms of the capital return plan, we did see a little bit of a sequential slowdown in the Q3, but the – it seems like the liquidity at the holding company did go up in the quarter. So as you think about Q4, I guess we should see a view towards an uptick there given when some of the divestitures and cash came into the company.

And then also if you can comment, Sid, on the expected cash dividend from the operating companies in the Q4, if possible. Thank you..

So, Elyse, I'll start with the first point, which is, yes, you're right, we did slow buybacks in the third quarter because we had two factors in the back of our minds. One, it's tax season and so we wanted to make sure that we were very well prepared for any uncertainty on catastrophes.

And secondly, there were a number of transactions as we – I talked about, over five sizable transactions that – signed in the quarter, and we wanted to make sure that we got them over the finish line before we dialed it up.

In the fourth quarter, I think it's a good assumption to assume that there'll be a higher pace of buybacks, somewhat constrained by daily trading volumes. And as we look forward, while liquidity is one dimension that calibrates the pace of buybacks, it's only one.

We also look at capital, we look at fixed charge coverage ratio, and we are very committed to maintaining an extremely strong balance sheet because that is a core part of our promise to our clients. So I don't know, Sid, if you want to comment further on that..

Yeah, on the final question, Elyse, on dividends and tax share payments, we never comment on specific quarters. But if you go back to my earlier comments, we look very much on track of our window here in terms of the free cash flow generated from our subsidiaries.

We have, I think, one of the strongest track records here in terms of free cash flow generation across our operating subs..

Okay. Thank you very much..

The next question is from Larry Greenberg with Janney..

Good morning and thank you. I just have a general question on service levels and how you maintain those service levels in the property casualty business while taking out so much cost. Competitors, and I think this is self-serving on their part, have talked about this and say they're capitalizing on some of your challenges.

So given how important it is for the long-term sustainability of the franchise, I'm just wondering if you could talk about that topic..

I'll start by my observations when I meet with clients, especially large groups of clients, in our client advisory councils where they give us very candid feedback, many of them have been clients of ours for 20, 30 years. In some cases, they have seen a change in the person who is their account representative.

And I'd say that in the first two quarters of this year, they were pretty grumpy and they would complain about the changes. In the third quarter, a number of notable clients came to me and said that the changes we made have been a net improvement in the service quality.

We have a hungrier, more focused set of leaders that are more empowered to respond to clients' needs, and they are equipped with better technology than they have before to be responsive.

And so I'm very pleased with the overall – obviously, in a company that services 1 million claims a month, there will always be some that go awry and they obviously get more attention than others.

But in overall terms, I'm actually very pleased on this particular point, and that's a core part of our strategy going forward, where we can focus our energy on service levels on the clients that need us most, and so that we can be for them. We can't be all things to all people in all countries, and that's a core part of our strategy..

And I'll just add one quick thing, Larry. It's Rob. I would just say that we are absolutely relentlessly focused on providing the best service possible to our clients. I would look at multinational as a great example of where we're doing things differently, and I think we're doing things dramatically better.

So the feedback that we get from our multinational clients and the key performance indicators that we monitor regarding our speed, the accuracy, the capability that we're bringing to that space are better than they've ever been before. And I credit Carol Barton and her multinational team for some excellent leadership for us in the space..

I think multinational is one of the most complex to service businesses there is, and I believe year-on-year, the numbers were up about 8.5%. So I think that we're pretty pleased with the way our service level is translating into growth of client business..

And I'd just add one more thing. As we are narrowing our focus, particularly in the Consumer business, we really are focused on value over volume.

And we are currently participating in fewer products, fewer distribution channels and fewer geographies, which are allowing us to ensure that the places that we are focusing on, we're well-positioned to win.

And so we're doing business in approximately 19 fewer territories than a few years ago and it's allowing us to focus our energy on those places that are our highest priorities..

Thank you very much..

Operator, I think we....

And the next....

I'm sorry. Operator, I think we only have time for our last question since we're approaching the top of the hour..

All right. The final question is from Adam Klauber with William Blair..

Thanks. A bit of a follow-on to some of the other, but directionally, you've done a lot of heavy lifting in North America P&C.

So when we think about premium growth next year directionally, is it going to be more flattish, up or down?.

Adam, it's Rob. I guess what I would say is put in the transactions that Sid talked about earlier in his comments, so there's a couple of transactions that will impact the Commercial business. They include the Ascot transaction, the MSM transaction and the Fairfax transaction that we described.

And those transactions will reduce our net written premium in the vicinity of $700 million in 2017.

And then I'd say the other thing that would be an environmental factor for us with premium growth is that when we announced our plan last year in the first quarter, on January 26, we were not able to impact the very important January 1 renewals in Europe in particular, and many of the renewals that we would've had in the first quarter here in the U.S., in North America, where we really do our heavy negotiation of that well in advance of the renewal date.

So I would say after we get past the first quarter, I expect our premiums, absent the three transactions that I described, to be relatively flat, maybe modest growth.

But in the first quarter, especially thinking about the January 1 renewals and the fact that we'll continue to make sure we're using our risk selection tools to the best of our ability, we will have some reduction in premium in the first quarter.

I think in total, it's probably accurate to say something like, including the three transactions, about a $1 billion reduction in premium in 2017 is probably about a fair benchmark for you..

Adam, consistent with our commitment to value versus volume, we have been proactive in getting our expenses down and returning excess capital to shareholders so that we are less concerned about that top-line number than perhaps others, because we really want to improve the quality and sustainability of our earnings rather than just the volume.

And I think that the team has done an excellent job of getting ahead of the curve on expenses so that we won't see a retreat on the expense ratio as the top line is impacted by some of these tough decisions to exit either lines of business, locations or customer segments where we don't feel we're getting adequate returns on capital..

Great. That's very helpful. Thank you..

So, I'd like to thank everyone for joining us this morning on our earnings call. I would like to answer all your questions, so if we didn't get to you this morning, please don't hesitate to reach out to us directly and we will be sure to follow up.

Operator?.

And this concludes today's call. Thank you for your participation. You may now disconnect..