Ladies and gentlemen, good day, and welcome to AIG's First Quarter 2020 Financial Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Sabra Purtill, Head of Investor Relations. Please go ahead, ma'am.

Thank you. Good morning and thank you all for joining us today. Our call today will cover AIG's first quarter 2020 financial results announced yesterday afternoon. The news release, financial results presentation and financial supplement were posted on our website at www.aig.com, and the 10-Q will be filed later today. Our speakers today are Brian Duperreault, CEO; Peter Zaffino; President and COO of AIG and CEO of General Insurance; Kevin Hogan, CEO, Life and Retirement; and Mark Lyons, Chief Financial Officer. We will have time for Q&A after their remarks. Today's call may contain forward-looking statements relating to company performance, strategic priorities, business mix and market conditions, including the effects of COVID-19 on AIG. These statements are not guarantees of future performance or events and are based on management's current expectations. Actual performance and events may differ materially. Factors that could cause results to differ include those described in our 2019 Annual Report on Form 10-K and other recent filings made with the SEC, inclusive of the effects of COVID-19 on AIG, which cannot be fully determined at this time. AIG is not under any obligation and expressly disclaims any obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise. Additionally, some remarks will refer to non-GAAP financial measures. The reconciliation of such measures to the most comparable GAAP figures is provided in our news release and other financial results material, all of which are available on our website. I'll now turn the call over to Brian.

Good morning, everyone. It's been an extraordinary few months since we last spoke. Before we start, I want to say that I hope you and your families are healthy, and that you've been able to adjust to the new normal that COVID-19 is creating for all of us. This crisis has been heartbreaking to witness as it unfolds across the globe. It's a tough time for everyone and the uncertainty about how long it will last and what life will be like afterwards makes this time even harder. I've witnessed a lot in my 40-plus year career in the insurance industry. But this health and humanitarian crisis, which quickly became a threat to the world economy, is like nothing any of us has experienced. We believe COVID-19 will be the single largest CAT loss the industry has ever seen and will continue to have significant global economic ramifications for the foreseeable future.

Thank you, Brian. Good morning, everyone, and thank you for joining us. Today, I plan to review the following topics: a brief overview of the potential near and longer term impact of COVID-19 on the insurance and reinsurance markets generally, how we analyze the impact of COVID-19 on GI through March 31st, first quarter results for General Insurance, excluding COVID-19, including Validus Re, our recently announced launch of Syndicate 2019 and AIG 200 and the progress that we've made since our last earnings call. As Brian said, the near and long-term impact of COVID-19 on the global economy and insurance and reinsurance industries remains unclear. In contrast to other catastrophes like wildfires, hurricanes and earthquakes, this event is not confined to any specific geographic region, and it has already impacted over 200 countries and territories. In addition, this duration is not limited as is typically the case with traditional CATs. While the insurance industry manages risk of all kinds, it's fair to say that the profound impact and global nature of COVID-19 is something we have never encountered. There's no playbook. And as a result, we are called upon to make thoughtful and prudent decisions in a climate of unprecedented uncertainty. Before COVID, the largest catastrophes on record were Hurricane Katrina with $65 billion losses, then the Tohoku earthquake with $35 billion in loss, Hurricane Irma with $30 billion losses, and Superstorm Sandy also with approximately $30 billion in losses. With respect to COVID-19, we're starting to see early industry estimates, but they have significant ranges. While it's too early to gauge the ultimate size of the loss, we believe COVID-19 will result in the largest individual CAT loss, the insurance industry has ever seen. Going forward, COVID-related losses will impact all aspects of underwriting insurance from absolute limits available, limits deployed to certain lines of business, terms and conditions, co-insurance and structure of coverage just to name a few. With respect to the reinsurance main, unlike traditional name parallel catastrophes, COVID was not modeled. And, therefore, it will be a headwind for future capacity. We believe the retro market will contract. And in the ILS market, there will be trapped capital, which will lock up collateral, therefore, restricting capacity on a go-forward basis, and we're already seeing this.

Thank you, Peter, and good morning, everyone. Today, I will discuss overall Life and Retirement results for the first quarter and our current outlook, changes in our operating environment due to COVID-19 and then briefly comments on the results for each of our businesses. Life and Retirement recorded adjusted pre-tax income of $574 million for the quarter and delivered adjusted return on attributed common equity at 8.4%. Adjusted pre-tax income decreased by $350 million year-over-year, primarily due to significant market stress in March compared with the strong market recovery we saw in the first quarter of 2019. The main driver of the decrease was lower equity market returns, which primarily resulted in higher variable annuity reserves of $161 million and higher deferred acquisition cost amortization back of $138 million. Also, widening credit spreads generated lower returns from fair value option bonds of $116 million and the low interest rate environment resulted in continued spread compression across our individual and group retirement product lines. Lastly, I am pleased to report that our hedge program performed as expected in response to the market stress experienced in March, generating gains exceeding the movements in our economic view of the liability and related cash collateral. Recognizing the limits of sensitivity, especially in the context of first quarter's market volatility, our sensitivities provided on our last earnings call generally held up. Based on the environment we see today, we continue to expect base spread compression across the whole portfolio of approximately eight to 16 basis points annually. However, wider risk-adjusted credit spreads should generate opportunities to attract new business as profitable margins and the reinvestment of assets slowing off the portfolio should benefit from higher credit spreads. We have updated our estimates of market sensitivities to reflect our balance sheet as of the end of…

Thank you, Kevin. Before providing summary comments about the first quarter, I'd like to give COVID-19 perspective from where I sit. First, this health crisis, which quickly evolves into an associated financial crisis, is unprecedented in scope, uncertainty and length and depth of economic impact. Additionally, this ongoing event has simultaneously impacted both sides of the balance sheet, thereby nullifying most underlying disruptions that investment assets and insurance liabilities are marginally correlated. As a result, it's extremely difficult to forecast one quarter in advance let alone a full year longer. However, as Brian also noted, I want to reiterate that AIG was strongly financially positioned entering the crisis, both from a parent and subsidiary liquidity and capital perspective and is well positioned today, including our investment portfolio. The evolving situation causes us to view liquidity and capital strength as an imperative. When the crisis suddenly took hold on capital markets in mid-March and not knowing what could come next, we thought it was prudent to augment our already strong current liquidity with a $1.3 billion partial drawdown of our revolving credit facility. We did this solely as a precautionary measure given the significant uncertainty at the time, about the near-term impacts of COVID-19. I will provide an update on our capital management plans and liquidity position later in these remarks after I review our first quarter results. So turning to the first quarter. AIG reported adjusted after-tax operating earnings of $0.11 per diluted share compared to $1.58 per share in the first quarter of 2019. Contained within this result is the continued improvement of General Insurance with a 95.5% accident year 2020 ex-CAT combined ratio as Peter noted. First quarter results reflect direct and indirect impacts related to COVID-19, including the market impact on net investment income and book value,…

Thanks, Mark. Abby, I think we're ready for the Q&A portion. So please get us started and let us move first.

Thank you. And we will take our first question from Elyse Greenspan with Wells Fargo. Wells Fargo.

Thanks. Good morning. My first question, in your prepared remarks, you guys mentioned that a small fraction of your commercial property policies contain coverage for infectious diseases and that those policies do have small sub-units. I'm just trying to get a sense of those policies where you think you could see losses have you set up reserves within your COVID losses in the first quarter?

Okay. Elyse, I think that's a question for Peter. Peter, would you take that, please?

Yeah. Sure, Brian. Hi, Elyse, let me just give you a little bit more detail. Yes, we did go through it very thoroughly in the first quarter, as I outlined our process that we did bottom-up and top-down but when you look at the size and scope of our global portfolio, the nature of our clients in terms of the segmentation, we do have commercial property policy that have some manuscript warnings. As I said in my opening remarks, the overwhelming majority of the standard commercial property policies do contain clear exclusions for viruses, and it's fairly standard in the industry. These policies also require that there's direct physical loss or damage that impact the insurance business operations. As to these policies, COVID is not covered. So that's point one. There are limited instances where we do write affirmative coverage for communicable diseases. But even in those cases, it's only on a supplemented basis, and in pursuant, we have very strict underwriting guidelines that often result in coverage for only specified diseases. And in an event that there's a requirement that there would also be a government closure caused by physical presence of the disease itself. So again, it's fairly clear. And just to give you some context in terms of what I'm talking about is that 100% of our sub-limits aggregate to well less than 1% of our total limits in our commercial property policy. So it's a very small portion of the overall property exposure. And I would just note that I mentioned in my prepared remarks, we have really comprehensive reinsurance, whether it's on a property per risk basis, we have low attachment points on a per occurrence basis that's regional, and we also have global aggregates that attach to reduced volatility on a frequency severity basis. So sorry for the long answer, but I think it's important to get into the detail.

Thank you, Peter. Next question

We will take our next question from Tom Gallagher with Evercore.

Good morning. Mark, you mentioned your plan on running with higher debt for the time being, which I think that makes sense given the current environment. Have you gotten any sense from the rating agencies on their reaction to the higher leverage for now? And then just a follow-up question on the investment portfolio. Appreciate all the disclosure there. The $18 billion of other invested assets, it looks like $6.7 billion of that is in legacy. Would you expect most of that to be transferred with the Fortitude resale? And then sorry for the string here. But then just one related question, the $8.5 billion of real estate alternative investments, should we expect there to be any kind of impairment on that in 2Q, or is there some buffer with historical cost accounting there?

Okay, Tom. Listen, why don't we have Mark, you wanted to talk about the debt. And then I'm going to ask Doug to take over on the investment portfolio question. So Mark, why don't you go first?

Thank you, Brian, and I will do that as well. With regards to debt, yes, we've spoken to the rating agencies. In fact, we were in conversation with them on the revolver drawdown, as a matter of fact, and had very good strong and supportive conversations with them. And in the future, we may contemplate, of course, we be involve in discussions with them as well. With that, I will turn it over to Doug to talk about this to investment questions.

Thank you, Mark and good morning. Well, I would refer you to page 49 of the financial supplement, which basically goes through the legacy segment and the assets that are held in that segment in pretty robust detail. And as you know, in addition, there's approximately $40 billion of assets, which we also disclosed in our financials, which are going to be part of the sale related to Fortitude. The portions that we’ll be retaining, there will be some real estate investments that we'll be retaining that are part of legacy. There will also be some fair value option bonds that will be retained in legacy that were part of the old financial products direct investment book. So those will not be part of the sale transaction. But the material amount of the assets will be, as you know – over $40 billion will be separating as part of the sale of Fortitude. With respect of the real estate, you -- as you know, we only experienced a rapid acceleration in the month of March with respect to the development and emergence of the COVID situation. So we're still in the midst of analyzing the impact. And I think it's very early to determine what the impact will be on our real estate portfolio. But it should be noted that our real estate portfolio is diverse. It includes both domestic and international exposures. So the impact we'll learn more as things go on. I think where we're learning the most about our real estate is obviously on the commercial mortgage loan side. So that's where we're getting some real insight into what's going on in the real estate market. And those teams, the commercial mortgage loan team work very, very closely with the real estate equity team at AIG. And all of those investments are managed directly. So we have great level sight – of line of sight to what's going on in that market, but it's still really early to determine what's going to happen.

Okay, thanks Doug. So, why don’t we get the next question then.

We will take our next question from Yaron Kinar with Goldman Sachs.

Hi, good morning everybody and thanks for the very helpful opening comments. I just want to start with one question on the removal of the 2021 exit rate return guidance. Just want to make sure I understand what it does and what it does not mean? Does it mean from your perspective that you could see the COVID impact linger or continue well into 2021?

Well, let me take that. Who knows? I mean, you don't know whether COVID will reemerge, if it does go down an impact in 2020. It's really a question of how much predictability is there to quarterly earnings. And it's difficult to predict quarters. So if you can't predict the quarter, I don't want to try to predict a year or several years. I think it's important to note, though, that the underlying power of the company remains. We're very, very strong in the GI. GI has continued to show improvement. Good work that has been done over the last 3 years, what Peter and his team have continued on. So the returns that we were talking about, I believe, if you – certainly, if you pick the COVID out for a second, are going to continue to improve. And so that trajectory we're on is, we're still on. Now you have a COVID event, and I think the COVID event certainly would impact L&R on a short-term basis. But again, we think the long-term power of the company is there. So COVID itself, it will be large. I told you that I believe it will be the largest event in the insurance industry, but it is -- it's an inflection point. And that effect that we'll see -- we've already been in a market on the GI side, General Insurance, P&C side that was turning. It was improving. And the rates in terms and conditions were improving for the risk taker. This COVID is going to prove to be an inflection point. So, companies with strong balance sheet, we have one; companies with strong management, we have one; companies that has been well risk managed, and we've done that now, they're going to be on the right side of that. And so we believe we can handle anything that comes with COVID and we feel very strong. But predicting quarter-to-quarter is just impossible. So, I hope that helps.

Yes, it does.

Next question.

So, my follow-up question on that is when you talk about COVID being the largest catastrophe event in the industry's history. Can you maybe talk about what P&C lines in particular you would foresee having very large losses here? And maybe also the proportion of losses that you'd expect coming from L&R, maybe not directly COVID-related, but from capital markets activity?

Well, I'm going to have Peter talk about what we see in the P&C side, and then I'll let Kevin talk about L&R. So, Peter, do you want to talk about that first?

Sure. Thank you, Brian. We mentioned quite a few lines when we were referring to the first quarter, whether it's travel, M&A, A&H, some other lines to think about that could have activity, workers' compensation. We don't know about D&O liability. We have been watching it very carefully and making certain that we're looking at any line that we think could have an impact. But what I can tell you to add to Brian's comments before, is that we have a very thorough process and we'll be consistent all the way through. We know the CAT is still ongoing, which is a very rare. So, as things emerge and develop, we will adapt to that. And we're looking at this across every global geography where we think there's impact and multiple lines of business. But because the CAT is still going, we even have two months left in the quarter. It's hard to see what transpire in the future. But as I said, we have a great process, and we will keep everybody have a great process, and we will keep everybody updated on lines of business as they emerge.

Kevin, on L&R?

Yes. Thanks. So, I'll address it really in 3 pieces, mortalities of the markets and then maybe just a reminder around pricing. So, our reported mortality in the first quarter was below pricing, which continues the trend that we've had for the last two-plus years. But later in the period, what we did notice is that there were some delays in reporting, generally related the issuance of certain documentations. So, we put up the modest IBNR really for just running reporting. As we look ahead, we do expect that there will be additional mortality in the second and the third quarter, depending upon how circumstances and behaviors evolve. So, where does that leave us? We expect some expect some adverse mortality overall for 2020, but we don't expect to see significant impacts to the balance sheet based on what we know, and there could be some offsetting factors. In terms of the market effects, look, there's two things. I mean, when equity markets move, particularly when they go down, that ultimately reduces our future expected fee income, particularly in the annuities portfolio, which we have to reflect immediately and back. The reality is, is that the reduced reserve overall actually emerges as additional profits in the future. It also serves to increase our SOP all 3 1 reserves, and when changes in credit spreads, we see the immediate impact on fair value options. So those two short-term market effects are reversible. And that leads to the third thing, which is pricing and how do we feel about current pricing. And certainly, treasury rates are at all-time lows, but our ability to price product is to pace -- is based not only on where base rates are. But also where credit spreads, what is the shape of the yield curve and where investor expectations and appetites are. And so based on the power environment, we're still able to price the long-term expectations that we have. Certainly, there's disruptions in the sales environment, but it's difficult to anticipate what the future on that is going to be and how it resolves. So those are the three perspectives I have on the long-term earnings potential of the Life and Retirement environment.

And one thing I'd just like to add there, Yaron, Peter's comments about certain lines of business, he mentioned workers' comp. I think it's important to remember that AIG has de-risked that workers' compensation business significantly, probably over the last 7, 8 years. And where AIG finds itself now is mostly in loss sensitive related programs, which have average deductibles north of $1 million. So when you think about debt in the work comp area, that's statutorily determined by state, that's going to be underneath a deductible, standard medical and temporary, all that falls away. It has to be a major permanent parcel to really penetrate it. So I think the book is well positioned given what we're talking about here.

Yes. And just one other piece on the comp, and Peter mentioned this earlier, but, yes, there are COVID claims coming in, but I think you have to recognize that there's been a decline in a number of claims coming in otherwise. So it remains to be seen what the net effect of COVID has on the worker concept. So that's something to keep an eye on. With that, Abby, let’s go to the next question.

We will take our next question from Michael Phillips with Morgan Stanley.

Thank you. Good morning. I want to touch on comments on expected, continued underwriting core profitability in General Insurance and maybe how you think about the near-term impact of exposure drops given your economy and how that might affect the profitability improvement plan for the remainder of this year?

Okay. Michael, well, that's Peter. So Peter, why don't you do that?

Okay. Thank you for the question. We certainly are paying very close attention to lines of business that would be affected by the economic headwinds that are generated from COVID-19. I mentioned some of them in the prior question in areas where we're watching for loss, but I would think that there's going to be a meaningful falloff of travel in the second quarter. M&A could be some fall off in aerospace, marine and energy, and we mentioned workers' compensation. Having said all that is that you got to remember the segmentation and demographic of our portfolio, I mean, over 75% of our businesses on some form of either deductible SIR or funded captive. And so we don't have a direct correlation, even though it is rated off of a payroll, sales, auto is done on an excess basis. And therefore, we do not think we will have as much headwind in terms of premium reduction. There will be some, but it will be more modest because it's not a direct ratable exposure that generates the premium. We have different factors in terms of how we adjust excess premium. So we just don't think it's going to be as pronounced. Brian mentioned on workers' compensation, the decrease in frequency. It's not a trend yet, but it's an observation that, while COVID losses are increasing, we're seeing a commensurate drop in where our clients are retaining losses that those are dropping. So as we look at repositioning our portfolio, where we attach on an excess basis and the commensurate premium as I said, there's going to be some lines of business that will affect. We there's opportunities for other areas of growth. As we have repositioned the portfolio, we like where we are, and think that the leadership position that AIG can demonstrate in the marketplace will give us also some select opportunities for growth.

Thanks. Michael, anything else?

No. That’s it. Thank you, Peter. Appreciate it.

Okay. Thanks, Michael, Abby, next question.

We will take our next question from Paul Newsome with Piper Sandler.

Good morning. Thanks for the call everyone. I'm a little concerned that the loss with the – the big CAT loss that you have from Totalbank seems more of a liability loss than a property loss. Could you talk about how the reinsurance could protect you in liability-type catastrophe versus property. I think we all feel is excess loss properties, but I can't recall liability to cash is simple size. So I don't know with regard to in terms of coverage ?

Okay. So Paul, you want us to talk about in a COVID versus our reinsurance program?

Yes. If COVID was a liability loss instead of a property loss?

Yes. Okay. Well, Peter, I guess, that's you again.

Thanks, Brian and Paul. So I outlined our property program and said that we had reduced volatility significantly. On the liability side, I think we've done actually even more. We used to retain significant limits within AIG and so we've been building a program over time that significantly reduce the net limits that we put out as well as the gross limits. And also we did that on an excess of loss basis and also on a quota share. So on a general liability policy, as an example, we would have less than probably, depending on the limit, we have a 50% plus quota share on our first limit retention that we have 100% reinsurance above $25 million. So we have – if you issue a policy, a significant sized policy, the multi have net is between $10 million and $12 million. So we actually have significant protection on the quota share as well as the excess of loss.

So Paul, let me just jump in. Look, our reinsurance is good and solid, and Peter has done a tremendous job along with his team to put that together. Our first-line of defense is the way we manage our portfolio to start with. And so you can't rely on reinsurance to make a portfolio better than it is. o we've done a tremendous amount of work, risk selection, limits management, attachment points and pricing along all the lines of business property and casualty and that's where we feel very confident about our situation vis-à-vis the impact that COVID will – as those impacts unfold. So I just want to add that. So Paul, did you have another – anything else?

No. That’s it for me. Thanks for the answer and thank you very much.

Okay. You’re welcome, Paul. Thank you. Next question, Abby?

Our next question is from Ryan Tunis with Autonomous Research.

Hey, thanks. Good morning. I just wanted to confirm some of that, I guess, Peter said earlier in the Q&A. Yes. There's affirmative BI coverage for 1% of total property limit. But sounds like that could be somewhat of a big notional number that you might get, roughly?

Well, I said one. Peter, go ahead.

Peter, go ahead.

Sorry, Ryan. What I said was, not that that was a permanent coverage and those sublimits would trigger coverage. What I said is that the limits that we provided on the affirmative, which have, again, a bunch of triggers that I outlined in my previous answer that we have well less than 1% of our total limits when you compare that to our property gross limits. So, again, it's well less than 1%. And I'm not suggesting that we confirm that there is coverage or that we are adjudicating claims on that amount. It's just that, that's what we have for limits, and then it goes case-by-case, insured-by-insured in terms of what the losses.

Yes. Ryan, let me just add something here. And that is, Peter talked about that process of evaluating the losses occurring in the first quarter. I've been in this business a long time, 40-plus years. And I've seen a lot of things come and go. I've seen difficulties in trying to assess loss. I have to tell you the process that they – that we went through, that they went through, we went through, it's as good as anything I've ever seen. They have gone through every bit of the portfolio. They looked at everything where there was a potential and evaluated whether there would be reason to post the reserve, if it was, it was done. So we have posted the reserve that we believe are appropriate, albeit conservative for that, everything that happened in the first quarter. I just want to make sure that everybody understands that, everything that happened there.

Yes, yes. So could you just talk a little bit about how you're seeing business interruption, losses might respond within the Validus book? And also, just the $272 million net loss number, what does that look like on a growth basis of reinsurance? Thanks.

Okay. Well, Peter, that's you again.

Okay. With Validus Re, we've gone seat-by-seat and have taken a look at our gross net exposures and put up what we thought was the best estimate based on, again, the same process that we outlined for the core of AIG in the first quarter. In terms of the net growth, I mean, look, there's some reinsurance. I'm not going to go into great detail in terms of what the net is versus the growth is, still an evolving loss as we outlined with meaningful IBNR. But again, I've outlined what I thought were the reinsurance structures that could apply in the event that the loss were to grow over time.

Okay. Thanks, Ryan. Abby, let’s go to the next question.

We will take our next question from Meyer Shields with KBW.

Thanks. This is soft of a related question, but it seems to be top of mind for a lot of investors. How should we think about commercial property where there is no little bit of coverage, but no virus exclusion, given some apparent court decision saying that non circle damage would qualify?

Well, it's a technical question, Peter, can you do this?

Hey Meyer. It's a really hard question to answer because it's, hypothetical. The only thing I can really do is comment on the policies that we have and where we think, again, I outlined demographics of it and think that the exclusions that we have and where we granted affirmative coverage, it's very specific. And so, it's hard to answer that because I don't think it really applies to our portfolio.

Okay. That's fair, unrelated question. I guess, I would have expected maybe better results in international personal lines, assuming, an international shelter in place order. Am I missing something there?

International personal lines, Peter?

Yeah. What, what happened in international personal lines? It's not an anomaly, but we basically had a runoff program, that impacted we still had earned premium, so it was put into runoff in 2018 that earned premium in 2019 and as you've been doing the re underwriting of the portfolio, again not as much as we did on the commercial. We've just lost a little bit of premium. And so, the ratios, look like they perhaps are not going in the right direction, but the absolute performance is very strong. We like the personal book very much and think that there's some real discrete opportunities for growth, particularly in A&H and an areas across, all of international an accident held them new digital platform we're putting in. So I wouldn't read into that in terms of a trend is just, the impact of a runoff of business. Meyer.

Okay. Thanks.

Thanks Peter. Thanks Meyer. Let's go to the next question. I think

Our next question is from Brian Meredith with UBS.

Yeah, thanks. So, Brian, I'll have this one for you. We're going to Peter on it. Given the impact you've seen of COVID-19 on the general church business as well as the life insurance businesses, I'm wondering if you're at all rethinking the strategic rationale of actually having both the lights in the TMT operation in the same company?

Well, Brian, I guess, you know, my job is to continually always think about, the structure that we have. Does it make sense? Would we be better in a different structure? And so that's, that thinking continues, I think at this point. We're comfortable with where we are, but I -- that's my job is to continue to do that. So we'll continue to keep looking at that. There were reasons why these two belong together and those two are still there. But we, I'll always think about that, but there is nothing that I would talk about. Right now I think we're comfortable with it.

Any other question, Brian?

Yeah, this is just one of the quick one here. I'm just thinking about it. So given us the largest cash loss coverage, each inch industry probably ever, if I kind of think back, AIG with -- had well over $2 billion of losses, are we talking about it potential last year? There's going to be well north of a $1 billion for you guys. Ultimately, at the end of the day, if this is truly the largest cash we lost ever?

Well, I look at it, we're not the company we were Brian. We're not the company then, there's been a complete, change and we look at the risk, the de-risking that we've done, the limits management, the improved reinsurance profiles all lead us -- put us in a position where we are much stronger and able to withstand an event. And so I point out that this is the largest event because I want people to understand that it's creating an inflection point in the industry. But there are going to be some who do well in this process and some that won't. We're in -- we believe we will do well through this event and that we're going to emerge stronger and more in demand than we were before. Q – Brian Meredith: Makes sense. Thank you.

You are welcome. Abby, next question.

We will take our next question from Andrew Kligerman with Credit Suisse.

Hey, good morning. Thank you for taking my question. On the life insurance side, I'm wondering if you could give a bit more of sensitivity in terms of the COVID-19 exposure, what you might expect during the course of the year. And then with regard to variable annuity hedging that was very strong. What was your hedging expensive numbers for the variable annuity? And lastly, just in terms of the press release and what you said on the call, you talked about maintaining the return on equity profile for the life business, what might that profile be? I mean could you kind of drill in where you think a good range for all the Life and Retirement could be?

Okay, Andrew, thanks. So I'm going to have Kevin, obviously, talk about the sensitivity around COVID-19 and the hedging program. And the hedging program, I think, Kevin, why don't you do the piece about the variable annuity, but I would like Doug to jump in on the -- what happened with Fortitude as well. So Kevin, why don't you start?

Yes. Thanks, Brian. Thanks, Andrew. So look, I guess I'll address that from a couple of perspectives. I covered the market impacts, the short-term market impacts. So I'm not sure I need to go back to that. But I mean, clearly, when equity markets move, it impacts the SOP in the DAC and when the fair values move, that impacts the fair value options. Those will never -- I'm sorry, Andrew?

Yes. I apologize. I needed to be clear, I mean quickly the mortality. What would series…

Mortality. So it’s very straightforward that in the first quarter, we saw mortality better than pricing. We believe there are delays in the reporting of those claims. As we look at second quarter and third quarter based on where the current estimates are, this is well within our first level modeled stress scenario. We don't expect any significant impact on the balance sheet. And there's also -- it's difficult to project how people are going to behave, how people are going to respond. So that's about the best that we can do. It's just based on where we believe our market presence and geographical presence are versus the current expected losses. In terms of hedging, what I would say is, first of all, you can only hedge what you have. And so the liability profile that we have is a big part of the success of our hedging program because we have primarily de-risked benefits, sold well after the VA arms race of the mid-2000s. And so that includes our feature of requiring fixed income allocation, volatility control funds, et cetera. We've hedged all hedgeable market risks. We've left an open position relative to credit spread, because we believe that that is a natural hedge against our general account portfolio. Over time, our hedge effectiveness is around 90%, and it's continued to perform almost exactly as we expected in the various market dynamics, resulting in I think the results, the good results were reported for the quarter. But I'm going to pass on to Doug because another feature of our hedging success in the first quarter was also in the Fortitude portfolio.

All right. Thank you, Kevin. So I just wanted to comment on the fact that what you don't really see in the financials is with respect to the legacy segment, you're seeing all the mark-to-market impact particularly of the fair value option securities that are in legacy and to some extent, in Fortitude. What you don't see is the fact that we had established interest rate and credit hedges, which all that P&L and effect goes through realized capital gains and losses. So you don't really see the net effect. But the best way to look at how that – how the entity performed and how those hedges are formed and how effective they were is as Mark made in his prepared remarks, he said that the regulatory capital ratios for the entity were preserved from over a year ago. So that gives you a sense of how effective our hedging strategy was for things that you're not necessarily seeing when you look at the mark-to-market volatility that is reported in our financial statement in the APTI. So, thank you.

Okay. Thanks, Doug. And Abby, I think we're running a little long, but why don't we take one last question?

Yes. Our next question will be from Scott Frost with State Street Global Advisors.

Thank you for taking my question. You said you expect COVID to be the largest single P&C event industry's ever seen. Could you give us some background on what the basis is with this assessment, specifically the length of shutdown you're assuming here? And what are your thoughts on the Willis piece released Friday, and over how many years do you expect claims to develop and be paid? I'm assuming multiyear payment profile, but if I'm wrong, please correct me.

Okay. Well, let me start with that and then Peter can add from it. But in terms -- just in terms of the payments, these particularly business interruption claims are very long in process and payments. So I think we're just I think we just cleaned up the last business interruption from Superstorm Sandy to give you some idea. So anyway, but in terms of the estimate, I mean, we've seen a lot of different estimates, and I think they run the range, but the first thing you have to understand is this is global in nature. This pandemic is affected every corner of the world. It isn't that hard to come up with a reasonable assumption around the effects because we're seeing effects in Europe, we're seeing effects in Japan. We're seeing effects in Latin America, and of course, here in North America. So whether it's the effects of comp that we talked about or it's the business interruption, we've seen travel and event cancellations and on and on and on, it doesn't take much to figure out how this is spread across the globe. The question for us is, what's our position on all those things and we feel very, very comfortable with how we've managed this risk in general and how we're well-positioned for COVID. Peter, do you want to add anything to that?

Not much. The only thing I would just add is what you said. We've seen a lot of very good written documents that have come out. But just because of the ongoing nature of the event and the complexity of the different lines of business, it's the wide range of scale in terms of the low end of the high end is about as wide as you'll see in terms of predicting cash. So, it's very hard to pinpoint anything or the level of accuracy until this evolves over time.

Well then how can we say that it's going to be the largest event we've ever seen when there's a wide range, I mean, again, you're saying that's going to exceed Katrina? So, on the basis of that, what -- I mean, again, what are we saying? I mean, the world supports a length of shutdown is really the determining factor. They're saying a year its $80 billion. When you say it's greater than Katrina, is that the basis of your statement or can it be less than -- I mean, what I'm trying to get at is, how are you getting to that statement?

Peter?

Yes. I mean -- so looking at -- I mean, let's get off the Willis is that we've done a ground-up analysis based on what we think can be an industry loss with a lot of assumptions, again, let's get off the Willis is that we've done a ground-up analysis based on what we think can be an industry loss with a lot of assumptions, again, length of time, severity, geographic spread and have done it across multiple lines of business. And length of time, severity, geographic spread and have done it across multiple lines of business. And again, we're not in the business of putting out ranges as to what is going to happen to the industry because we look at our own portfolio. But when we look at market share of different lines of business, we came up with an estimate that exceeded Katrina. And I think that was the basis of Brian's statement.

Okay. It would be helpful if you told us some of the assumptions behind that, so I'm driving that. Thank you. I appreciate the comments.

Well, thank you very much. Like I said, we've gone past our time. So, I want to wrap this up. And so first of all, I want to thank everyone again for joining us today. And I also want to thank our clients and distribution partners, our shareholders, other stakeholders. We're all in this together and we will get through this challenging time together. Most importantly, finally, I want to thank our colleagues around the world. Guys you've exceeded my expectations and I could not be prouder of what we've accomplished together over the last few months. So, everyone, please be safe and be healthy and thank you again. Goodbye.

Ladies and gentlemen, this concludes today's call and we thank you for your participation. You may now disconnect.