American International Group, Inc. (AIG) Q4 2013 Earnings Report, Transcript and Summary

Good day and welcome to AIG’s fourth quarter financial results conference call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Ms. Liz Werner, head of investor relations. Please go ahead, ma’am.

Thank you, and good morning. Before we get started this morning, 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 AIG’s third and second quarter Form 10-Q and our 2012 Form 10-K, under management’s discussion and analysis of financial condition and results of operations and under risk factors, as well as in the same sections within AIG’s 2013 Form 10-K when it is filed with the SEC. 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. At this time, I’d like to turn over our earnings call to our CEO, Bob Benmosche. Bob?

Thank you, Liz, and good morning to everybody. If you turn to page three, let me start off with capital management, which is very important. As you saw, we announced a dividend increase, and we’ve added to our share repurchase another $1 billion, so [unintelligible] we’ve got $1.4 billion available for share repurchase at this time. And this reflects the strength, not of the fourth quarter, but of the entire year, and actually the last 70 years as you look at being able to stress our company to see what would happen under adverse situations and making sure we have to capital and liquidity to meet a stress event and continue to maintain our strong ratings and improve those ratings, in fact, over time. So this was in line with that. In addition, we continue our debt management, as you’ve seen. And most importantly in the quarter, we were able to sell ILFC and close that doubt about that transaction. So we expect that to close in the second quarter of this year. That will, as you know, be the last major noncore asset that AIG is selling. Peter will talk to you about our property and casualty business. The underlying results continue to be very strong, in my opinion. This has been a dramatic turnaround from the company and how it was designed in the past to where we are today, and he’ll take you through the details. But it’s a strong top line, [unintelligible] and loss ratios continue to accrue, but remember, it’s not a year-to-year business, it’s a zig zag. I know that’s a technical term for some of you, but there’s up and down, and it doesn’t go straight. And so we’ve seen that, but the trends, I feel, are very strong. Our mortgage guarantee business continues to do well, a dramatic turnaround from where we were five years ago, but that’s part of the strong risk selection model that was put in place, as well as recovery in the market. And Jay will talk about our life and retirement business. That barely swung sales. That business is really doing extremely well, and continues to do well across all of its product sets. Jay will bring you up to date on the details there. So let me turn it over to David, who will give you the highlights of the financials, and then we’ll take you through the other key businesses. David?

Thank you, Bob, and good morning everyone. As Bob mentioned, we saw strong performance in our insurance operations, with operating earnings for the quarter in excess of $2.5 billion. For the full year, our insurance businesses collectively generated in excess of $10 billion pretax operating earnings. Looking ahead to 2014, we would expect continued progress in expanding our risk-adjusted returns through growth and capital efficiency. The sale of ILFC, as Bob mentioned, to AerCap, is on track for closing in the second quarter. The transaction was valued at $5.4 billion upon announcement, using a $24.93 share price for AerCap and any adjustment in that value on closing will reflect the change in the AerCap share price and will be recorded as a non-operating gain or loss on sale. Upon closing, AIG will receive net cash of about $2.4 billion, which will be held at the parent company available for general corporate purposes. Our retained 46% interest in AerCap will be held at the holding company and will be accounted for under the equity method of accounting, with the equity earnings from AerCap included in our other segment operating results. The lock up expiration on AerCap shares begins to phase out nine months following the closing date. We will be prudent in maximizing our value, as you have seen in our past dispositions of invested assets. As part of the ongoing focus on capital management, as Bob mentioned, our board approved the 25% increase in our quarterly dividend to $0.125 a share, and authorized the repurchase of additional shares with an aggregate purchase price of up to $1 billion. This gives us $1.4 billion of capacity. Turning to our financials on slide four, net income for the quarter was $2 billion and included several largely offsetting nonoperating items detailed on page…

Thank you, David, and good morning everybody. Today I’d like to discuss the highlights for the quarter and the year as well as our outlook for 2014. Let me begin by saying the year marked significant accomplishments that we believe are indicative of future direction. Our balanced approach to growth, risk, and profitability drove our business mix shift, our underwriting actions, and our capital management achievements. We’re pleased with our progress, and look forward to continuing on our path towards increasing returns. Turning to slide nine, in the fourth quarter net premiums written grew 6% from a year ago, on a normalized basis, with growth coming from each of our major business lines. For the full year, net premiums written were over $34 billion, or up 4% on a normalized basis. In the quarter, commercial lines delivered net premiums written growth of 7%, with improvement in each product line. This is the first quarter in 2013 with a comparable top line comparison to casualty as there’s no longer an impact from the global excess casualty quota share entered into in 2012. Specialty delivered the strongest top line improvement on a normalized basis from a year ago, with noteworthy growth in the Europe and Asia Pacific regions. Property also developed strong growth, both in the fourth quarter and full year. Our global property business is benefitting from significant international growth as we leverage our recently expanded in-house engineering capabilities and execute on our global approach to capital allocation. Looking ahead to 2014, we expect continued growth across our businesses, including casualty, where the reunderwriting of our book is largely complete. We remain focused on retaining our highest quality business and see positive rate increase in the United States. Pricing continued to be positive, and largely exceeded loss cost trends. Global commercial…

Thanks a lot, Peter, and good morning everyone. 2013 was a record year for AIG Life and Retirement, and we had our best year in top line results, generating nearly $29 billion in premiums and deposits and in delivering on the bottom line with $5.1 billion of pretax operating income. Turning to slide 15, operating income in the fourth quarter was $1.4 billion, up 29% from a year ago, due primarily to fee income growth, active spread management throughout the year, and higher net investment income. Returns on alternative investments were approximately $200 million above expectations and 52% higher than the prior year period, driving much of the increase in our net investment income. These results and our solid capital position enabled AIG Life and Retirement to distribute over $1.3 billion to the holding company this quarter and deliver full year dividends and loan repayments to AIG of more than $4.4 billion. Giving effect to these dividends, we still grew shareholders’ equity, ex-AOCI, by 11% to nearly $35 billion. The success of our retail investment product strategy was a key driver of the significant increase in our sales volumes. Our all products, all channels distribution platform continues to generate outstanding results. Retail premiums and deposits grew 88% from the year ago quarter, reflecting growth across all of our investment products. Individual variable annuity sales were $2.3 billion for the quarter and $8.2 billion for the full year. We remain comfortable with this run rate of sales, particularly given the actions we’ve taken over the years to derisk this product. Fixed annuity sales increased over 90% in 2013, and sales in the fourth quarter were nearly four times what they were in the year ago period. Consumer demand for fixed annuities has improved from the year ago quarter, though sales have…

Thank you, Jay. Operator, can we open up the line for questions this morning?

[Operator instructions.] We’ll go first to Brian Meredith with UBS.

Peter, I’m just curious, with 2.5% or 2.3% kind of rate increases globally, do you think we can continue to see the magnitude of improvement in your loss ratios going forward?

Yes, we have a fair degree of confidence that the three-year trend of actually loss ratio improvement will continue. As you know, a lot of the improvement is baked into this year through renewals, so we have a high degree of confidence on that.

And is it coming maybe just mix instead of absolute rate, and that’s why you’re still getting the big improvement?

It’s a combination of all the initiatives we’ve made to make sure that we have reunderwritten the books that were causing problems. So the U.S. casualty book has been substantially reunderwritten. Getting rate where we needed rate, investment in much, much tighter claims to reduce claims leakage. So it’s a whole combination of factors which have been underway for two years and are now starting to come through as we actually start to believe in the trends that have been established.

I can add that we expect to see continued good growth in our commercial business in Latin America, in Asia ex-Japan, and as well as the Middle East and Africa. And that business continues to perform quite well from a loss ratio point of view. We’ve also rolled up some new products around the world, that continue to contribute to an improved mix of business. So we expect the underwriting results on a normalized basis to continue to improve next year.

And then just quickly, on capital management, for David, as I look at your common equity this year, it was up a lot of $2.5 billion and then if you ex AOCI, it was up close to $8 billion. So I’m just kind of curious, why aren’t we seeing more capital management, more share buyback? Or is that something we may be able to expect on the horizon [unintelligible] faster pace that we’ve seen?

As we’ve said before, we’ve remained, and do remain, committed to the $25 billion to $30 billion of overall capital management. To date, we’ve done about $20 billion. $16 billion or so of that is in common equity buybacks. We’ve done some debt. We’re increasing the dividend. I think the overall approach is to be prudent, to be deliberate and orderly about the pace at which we go. We want to, in the long term scheme of things, do this in an orderly way. And so we’re balancing the perspectives of many different stakeholders at the table, so the fact that we’re increasing our dividend, increasing or getting an additional share repurchase authorization, I think you should take as a sign of our confidence, our board’s confidence, in the underlying financial underpinning of the company. And as I’ve said, we remain committed to the $25 billion to $30 billion of capital management between 2011 and 2015. So we’re going at a pace we think is appropriate. Bob, if you want to add any commentary to that, I’d welcome that at this time.

No, you said it exactly right. Keep in mind that, considering where we’ve been, and we’ve had the clear direction, we want to make sure we do this in a very thoughtful, routine, and prudent way.

And we’ll go now to Mark Finkelstein with Evercore.

Peter, can you elaborate on the A&H losses and private client group losses in consumer please?

I think I’ll ask Kevin Hogan to handle that one. So Kevin, why don’t you discuss that?

Sure. Mark, these are primarily related to some wholesale travel business in the fourth quarter. There were some severe losses in travel delays. And then in the private client group also, there were a handful of losses associated with the severe weather. We’ve taken appropriate underwriting actions across the portfolio in the U.S., throughout 2013, and we anticipate this to be a short term impact on the results.

And then I guess, also staying there, just thinking about the expense ratio. You’ve kind of had the severance charges, but the outlook for the expense ratio in ’14 is relatively flat, I think, if I heard those comments correctly. And I know in the past you’ve talked about expense ratio staying high through ’14 into ’15. What is the current thinking on when we’ll start to see some of the infrastructure and the IT spend moderate and start to see the actual expense ratio coming down?

Well, the big expenditure in 2014 relates to Japan. As I mentioned, we’re spending about $250 million in fully integrating the Fuji acquisition into our AIU operation. And that’s a spend that really started in July of last year, and will last through July 2015. So it really peaks this year as we make some very major investments in infrastructure and branch rationalization in Japan. So that’s the big item. And then offsetting that is a continuation of a process we started in 2011 of integrating the property casualty business into one seamless AIG as opposed to a number of separate profit centers with duplicative infrastructure. And so this year we will be really streamlining, removing excess layers of management in areas where they’re duplicative so that we can be as responsive to customers and grow and redeploy people and capital where the opportunities are greatest. But I think that the expense ratio has been affected by a combination of these investments, as well as the reduced denominator of the shrinkage in the U.S. casualty business. So a bit of negative operating leverage occurring, which, as I mentioned, we’re getting top line growth again as we have reunderwritten the casualty book. So I think we feel good about the outlook on the expense front, but I don’t think there’s going to be a dramatic change until 2015.

Can I just add to that? I know we’re all focused on the expense ratio, but we need to focus on the accident year loss ratio and the growth of this business. And another thing, as Peter has talked about over the last year or two, is that we’ve invested heavily in an [engineering] center that will improve our ability to assess risk, investing huge amounts of money and time to get better data around underwriting intuition, and doing a better job there. That’s adding to the expense ratio. When you look at money we’re spending to put in the fraud unit, subrogation units, in our claims area, all of this is adding expense and the benefit really of that is an improved and reliable and consistent accident year loss ratio. So you really have to think about the strategic work that he’s talked about over the last two years and how you’re seeing that benefit across the entire combined ratio. And also, it takes a while into earn into the benefits of what we’re targeting. We just mentioned earlier today that the actual rates have to exceed the trends, and it takes a long time for trends to emerge. And I think you’ll see this continuing to progress over the next several years.

All very fair points. And just one very, very quick one, if I may, which is the increase in the statutory dividend that you’re assuming for ’14 over ’13. Is that all from improvement in earnings, or is there more capital efficiency improvements at P&C, or any other items that are helping to improve that number?

It’s a combination of continued strength in earnings, so we’re continuing the generate the deployable capital, but there is some amount - I haven’t quantified it publicly - that we’re moving some higher than needed capital in some of the operating companies up to the holding company. So we’re continuing to evaluate the amount of capital that we’re holding in the operating companies. We want to make sure we’ve got plenty of capital for our ratings, plenty of capital to maintain our competitive positioning and to fund growth, but the businesses are continuing to generate very substantial capital and we will migrate some of the capital ratios down a bit over time as we said we would do.

We’ll go next to Jay Cohen with Bank of America Merrill Lynch.

You mentioned the accident year loss ratio being negatively impacted by some multiple year contracts. I didn’t quite get that. That was one point. And then secondly, with your stock trading below book value, the capital that you’ll generate from the ILFC sale, should we assume that share repurchase will be a primary use of that capital?

I’ll start on the first point and then I’m going to probably enlist James Bracken to help if I flub the GAAP accounting treatment. Basically, these are contracts and policies written pre-2004. They were multiyear in nature, where because they’re multiyear and we’re receiving premiums still, it means that as claims get made, they appear in the current accident year. These are the discontinued business from pre-2004 that appears in the current accident year. It’s an anomaly.

Just one clarification. That being earned, then, would [unintelligible] the premium, and think of them as multiyear claims made [follow through]. So they run for a number of years. We’ve still got a bit through [unintelligible] and we still see some revenue recorded in the [MPE] line of the other segment, and some loss activity attaches to them, but it relates to the runoff business.

And was that one point?

Yeah, one point to the total company [unintelligible].

Yeah, one point of actual year loss ratio, including the entire company.

And as far as capital management is concerned, what we’ve seen all along is that our first priority is our credit ratings, because that speaks to our ability to live up to the promises that we make. So we’re worried about coverage ratio, debt management, and so on. We then said that we want to have some dividends to [unintelligible] back to our shareholders. But the primary goal, after those two have been achieved, is share buybacks. So when ILFC closes, we will make a determination at that time, and we’ll continue to evaluate our capital management program around our stress testing of the company, which is right now we do one starting in November and we do another one around May, and then we take a look at where the company is, where we think the issues are in the marketplace, and then it goes into the board, what we think is appropriate capital actions based on what we see at that time. So as we get to the point, as David point out, the $25 billion to $30 billion, we can see the dividends coming up to the holding company, you can see the DTA beginning to get monetized. Our priority is to continue to maintain a strong company, while at the same time, given what makes sense to the shareholders, as quickly as we can.

We’ll go next to Paul Newsome with Sandler O’Neill. Paul Newsome - Sandler O’Neill: I want to talk a little bit more about the expense in property casualty. I think maybe I’d like to ask it in a big picture perspective. If you go back to AIG before its problems, this was a company that had a relatively low expense ratio and a pretty average loss ratio, and that was kind of how they made their money, by having a lower expense ratio than their peers. Today, we’re looking at a loss ratio which is much improved. It actually kind of looks a lot like peers, broadly speaking. But it’s an expense ratio that’s higher. Is the goal here to have a business that is heavy on loss control and heavy on expenses, lower loss ratio over time? Or ultimately are we talking about a company that wants to make its competitive advantage once again in expenses?

I think you should [unintelligible] us having a very competitive combined ratio, both loss ratio and expense ratio. I think that’s what Peter is working towards. But you need to look at the loss ratio and look at it on an accident year basis, historically. If I go back to our releases, and the information we provided you, I don’t know that the accident year loss ratio for those prior years looked at from this year would be what you saw. So I think there’s a difference. And if you back them in, which is what you need to do, prior year development, and you look at the prior year development over the last several years, and look at what we’ve had to do, you can see that the accident years were pretty high. So what you’re going to see is continued improvement in the loss ratio, continued improvement in underwriting and systems around underwriting, continued investment in technology so we have a very strong, bullet proof processing capability here at AIG that’s state of the art, and then you’ll see your expense ratio start to come down and still see improvements in loss ratio. But we need to continue to invest in a lot of tools to make sure that that loss ratio, five years from now, is what we said was in the [unintelligible] or slightly better. And so we’re building this company not only for 2014, but for 2018 and 2020. We really have to have a strong foundation for the future, and that’s what we’re building here. Paul Newsome - Sandler O’Neill : So to try to interpret, it sounds to me like your competitive advantage, if you achieve your goals, will ultimately be a better loss ratio than most, and an expense ratio that’s maybe in line with your peers. Is that kind of the idea, big picture, long term?

I don’t view either of these ratios as a source of competitive advantage. They are outcomes of what we do for our customers. So our competitive advantage comes by the expertise that we have and the risks that we take ourselves or help our customers to manage if they choose to retain them. And so as a result of that, we’re investing in what it takes to be experts, and that will lead to a higher expense ratio than was the case historically, but those historical expense ratios were also somewhat flattered by reinsurance strategies at large [seating] commissions, which we don’t do on the same scale anymore. The other thing is, as Bob says, when you restated accident year loss ratios, 1980 to 2003, which were way above industry averages, and we never want to return to those sorts of underwriting standards. So we’re really sharpening up how we manage our risks so that we have a competitive combined ratio, as Bob says, and in a sustainable way, through the cycle. And so the other thing we’re really focused on is a better tradeoff between profitability, growth, and risk, and we don’t feel we are forced to grow top line in a soft market. So we want to get our fixed costs down, we’re focused on the mix between fixed costs and variable costs, so that we have the ability to scale back volume in a soft market, so we manage the cycle better in the future.

We’ll go next to Josh Stirling with Sanford Bernstein.

Question I think for Peter and John perhaps, one of the two. When I look at commercial business, and I do some adjustments for severe losses and I think normalizing for the higher expenses in the quarter from incentives and stuff, I get to something like an underlying accident year ex-cat combined in commercial of maybe as low as a 92, which looks like a very nice improvement from last year and a lot of progress in total. And I’m kind of curious, where are we going to get to on this number? When I look at peers, you can often see sort of high 80s ex-cat accident year combined ratio underlying numbers. And I think that’s what you would need to get to your low 90s all in calendar year target. Is that a realistic end goal for this story?

We expect to continue to see, in 2014, accident year loss ratio improvement again normalize. Peter talked a bit about the severe losses in the quarter. They were slightly elevated relative to our expectations for the full year, a bit better than expected in the first half of the year and higher than expected, so that contributed to a slightly higher 2013 accident year result than we expected. We talked about expenses. We do expect to see an improvement in the expense ratio over time, as Peter pointed out. We didn’t mention shared service centers. We have some [unintelligible] work going on as we build out our shared services abilities in different parts of the world and in Europe and Asia and Colombia as well. So yes, we do expect to continue to see an improvement in the combined ratio results for commercial.

If I can ask sort of a different question for Kevin. Welcome back to the company, I think we’re all happy to have you hear. I want to talk about the consumer business. I know there’s a lot of things going on, and we’ve talked about Japan, but in aggregate, results have been flat and the past couple of quarters on the loss ratio side have been a bit of a disappointment. You referenced some things that you’re doing more tactically, reunderwriting some of your pricing. I’m wondering if you could give us some color on some specifics and the magnitude of actions that you’re taking to [drag] margins over the next year or two.

The reality is that AIG has done a terrific job in the commercial underwriting area in the last couple of years and are a little bit ahead of some of the disciplines that we’re adopting in the consumer area, and the focus is on the large portfolios. So in Japan we have been taking rate on some of the large auto portfolios as well as the core A&H businesses. And in the United States as well, we’re taking a hard look at the private [unintelligible] business state by state and have filed a number of rate adjustments in the homeowners and automobile businesses there. We’re also in the process of introducing similar tools [that reps can use in] commercial in terms of the global raters and focusing on rate adequacies in the various portfolios, including those that are the strategic business expansion areas, where we’re introducing the appropriate technical skills from the get go in our [unintelligible] operations. So growth is an important aspect of the consumer business as we try to generate a customer insight driven business, but we are doing it with the appropriate underwriting discipline and that is a very important part of our [unintelligible] focus.

A couple of times now we’ve heard from management suggesting the actuaries are lagging in recognizing the underwriting results improvement from underwriting in claims. I’m wondering, Charlie, if you could give us some color on how you’re doing the analysis, and are you using the faster report methods? Or are you kind of looking at lagging methods like the [unintelligible] and expected loss ratio? How much more would you characterize of margin improvement has yet to actually work through [unintelligible]?

I think Peter’s comments earlier really relate to a lot of the investments, especially in the claims area. And we’ve talked about, in worker’s compensation. So one of the key difficulties that actuaries have is that settlement patterns are changing, paids and incurreds are changing. And we’re getting much better case reserve information. And what Peter’s talking about is it’s very difficult sometimes to distinguish between that case reserve strengthening and what’s really going on in the business. But we’re certainly using a whole wide range of techniques that look forward and try to give appropriate credit for all the investments that the claims team is making in those initiatives. And I think with more track record on the page in incurreds, the confidence in that increases, and really that’s what Peter’s talking about, the statistical credibility that we give. One or two years of emergence would be better. And the only other statistic I’d give you is that we’ve reached today an inflection point where over the last two years, if you consider the reunderwriting of the casualty book, we now have just over 50% of our reserves are coming from the better underwriting that Peter and John talked about earlier. And so as that increases, I think you’ll also see an actual improvement in future periods as the quality of the underwriting comes through and becomes a higher percentage of over reserves.

We’ll go next to Jimmy Bhullar with JPMorgan.

First, a question for David. Maybe if you could just talk about where you are on your interest coverage ratio now, and what your aspiration is? And then second, for Peter, on the accident year loss ratio, maybe if you could discuss the reasons for the deterioration in the loss ratio this quarter. You mentioned 1 point because of the 2004 and pre-04 business, but even with that, it would have been worse than previously. And then I’m not sure if you quantified the benefit of the cost savings plan and the severance plan that you just announced, but if you could maybe just talk about how much you expect to save on that once it starts to fully reflect in your results this year or next year.

There are three things I’d want to sort of leave you with respect to our debt capital management as it ties into our focus on coverage ratios. One is we did achieve the goals we had set out for 2013 vis-à-vis the coverage ratio and interest expense run rate savings. So again, we did it opportunistically and struck a balance of being able to allocate capital to share buyback, dividends, as well as share repurchase. So, again, point one, 2013 goals met. Secondly, with respect to the direct investment book and the liability management that Brian Schreiber and the team are overseeing, we funded that with cash that was allocated in the DIB very specifically for that purpose. So those proceeds, or the funds we used for that, had no effect, essentially, on cash or capital we have available for share buyback or other forms of equity capital management. And again, we’ll continue to look to optimize the value of the direct investment book over time. And as I said, 80% of it’s gone at the end of 2018. If we can accelerate that without sacrificing guidance, we certainly will. And thirdly, then, the point being we continue to generate deployable capital, again 5 to 6, plus the tax sharing payments. I would look for us to continue to, very opportunistically, focus on debt capital management as it presents itself. I think I would expect we would continue to make progress on our coverage ratio, primarily through earnings improvements, but also from time to time we will look at capital management, debt buybacks, etc., as they present themselves. So really, as Bob said, we’re focused on our ratings, and we’ll strike an appropriate balance. We haven’t set any specific targets for 2014. I think, again, we’re in a pretty solid place based on what we did in 2013.

But it doesn’t seem like you’re done reducing your debt, maybe not as much as before, but you still expect to reduce debt a little bit?

I think we’ll continue to be opportunistic in how we think about it. So I wouldn’t give you any specific targets of what we will do or won’t do, but again, we’ll be opportunistic. We want to focus on continued improvement in the coverage ratio. And I think we can do that primarily through earnings, but we’ll look at other ways to approach that.

I will just give you a quick answer on the timing of expense saves related to the severance, which is we really have not disclosed the precise savings that we expect in the calendar year 2014, because we want to be extremely thoughtful about the way we execute what is effectively around an organizational streamlining to better serve our customers, where we’re not approaching this with a finite sort of deadline during the course of the year. We want to make absolutely sure that we execute this in a way that makes us better serve our customers. And so we’re being quite thoughtful about the execution. So we have a broad range of ideas. I think it’s sufficient to say that we think we will maintain an expense ratio that’s fairly stable this year, but we’re not disclosing precise numbers nor quarterly schedule of savings. On the accident year loss ratio, as Bob says, this is a business that zigs and zags, and to understand which of those zigs and zags are noise and which ones are signal, you need to dig a little bit under the surface to normalize severe storms and so one quarter to quarter, and I think that’s probably best done offline in a follow up discussion with James.

Sure. And maybe if I could just ask one more quick question. On the AerCap stock, obviously it’s gone up a lot in value. Have you thought about hedging your position, and are there any limitations on you doing that if you wanted to?

We’re not going to talk about ILFC. Once it closes, we’ll be glad to talk about what the options are, but let’s get to closing, and then we’ll know what we can talk about.

Our last question today will come from Tom Gallagher with Credit Suisse.

Just a quick one for David. The $5 billion to $6 billion of annual dividends that you’re expecting out of the insurance companies now, I guess the run rate had been $4 billion to $5 billion. So we should expect that for the next two years, from a visibility standpoint? Is that the goal? And then you would add on the DTA utilization on top of that? And so if those numbers are correct, the high end of that would be $8 billion by 2015? Is that the right math?

I think I’ll limit my remarks to 2014. That’s the commentary that I want to share with you and the investment community, because that’s the line of sight that we want to provide. As I said before, if we continue to generate deployable capital, we want to maintain first and foremost strong capital positions in our operating companies, and as they continue to generate capital, we’ll give you as much insight into that as possible. Again, I think the DTA payments, as I’ve said, are roughly $1 billion in 2014 and $2 billion in 2015, and it will go from there. And so there will be a very substantial cash flow to the holding company. Again, the $4 billion to $5 billion is what we said back in 2011 when we reintroduced the company, and that’s a very solid foundation, but again, we see opportunities to redeploy some capital that’s above and beyond the levels we need to hold at those operating companies. And that’s what we want to do, get it up to the holding company, so that it’s most fungible at that level.

And I was just a little confused about the $4 billion or so of dividends that were taken up in Q4 from the insurance companies. Can you just reconcile where the $4 billion went? Because if I look at holdco cash and investments, they were up by a small fraction of that. Where did the full $4 billion go?

Very fair question. One of the things we did was we improved the diversification of the capital in a couple of operating companies through some internal restructurings we did with the life settlement portfolio. So we accelerated some cash out of the opcos as we used that cash to improve the diversification of some of the capital. The punch line is it had no effect on the level of capital or cash we had available at the holding company for capital management or other general corporate purposes. So that’s really where it went. So almost $2 billion of it went for that, so it was some internal improvements we made.

And then one last one from me, for Kevin. Just on the comments on increasing rates in Japan A&H and auto, can you just comment on what’s happening there? Because I just want to know, is this keeping pace with loss cost trends, because you obviously had cited travel and accident. I don’t know if that’s specifically related to it, or should we expect the rate you’re getting to actually improve margin?

The actions that we’re taking in Japan are really related to an overall portfolio review [unintelligible] fire and marine, relatively reducing acquisition. We’ve taken an extensive review, and this is really a primary area where we have improved our selection parameters and rate. And we have seen an improvement in the overall profile of the results as a result. In terms of the A&H business, it’s more of a reflection of responding to some changing trends in the underlying results in the marketplace, and I believe what we will see is an improved underwriting result as we go forward.

Thank you, everyone for joining us this morning, and we’ll certainly be happy to take all of your other follow up questions, and we’re all here, so please feel free to reach out. Thank you.