American International Group Q2 2021 Earnings Call Transcript

Quartr
Provided by Quartr
August 6, 2021

There are 11 speakers on the call.

Operator

Ladies and gentlemen, good day and welcome to AIG Second Quarter 2021 Financial Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Quentin McMillan. Please go ahead.

Speaker 1

Thank you, Nora. Today's

Speaker 2

remarks may contain forward looking statements, including comments related to company performance, strategic priorities, including AIG's and are based on management's current expectations. Actual performance and events may differ materially. Factors that could cause results to differ include the factors described in our Q1 2021 report on Form 10Q, our 2020 annual report on Form 10 ks and other recent filings made with the SEC. 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 may refer to non GAAP financial measures.

Speaker 2

The reconciliation of such measures to the most comparable GAAP figures is included in our earnings release, financial supplement and earnings presentation, all of which are available on our website at www.aig.com. With that, I will now turn the call over to Peter Zaffino, President and CEO of AIG.

Speaker 3

Good morning and thank you for joining us. We have a lot of topics to cover this morning as we made significant progress on many initiatives over the last 90 days. I will start today's remarks with an overview of AIG's outstanding consolidated financial results for the Q2. Then I will review results for general insurance and life retirement in more detail. Following that, I will provide an update on the progress we're making on AIG200 and the operational separation of life retirement from AIG.

Speaker 3

Next, I will provide details on the strategic partnership we announced with Blackstone in July which represents a significant milestone for AIG and a major step forward towards the IPO of life retirement. And lastly, I will provide an update on our capital management strategy where our near term priorities remain the same as what I've outlined in the past, Debt reduction, return of capital to shareholders in the form of share repurchases and investment in organic growth. Mark will provide additional details on the quarter and we'll then take questions. Starting with our consolidated results, I'm pleased to report That AIG had an outstanding second quarter. We have sustained the significant momentum we had coming into 2021 through the first half of the year and delivered exceptional performance in general insurance with strong top line growth and significant improvement in our combined ratios.

Speaker 3

Our pivot to growth and focus on demonstrating leadership in the marketplace accelerated through the 2nd quarter As we continue to prioritize underwriting discipline, portfolio optimization, reducing volatility and growing in segments where market conditions are favorable and fall within our risk appetite. We also saw very good results in our life Retirement business primarily driven by improved investment performance. Life and Retirement's adjusted pre tax income increased 26% year over year and the business delivered a return on adjusted segment common equity of 16.4%. We continue to advance AIG 200 with the transformation remaining on track to deliver $1,000,000,000 in run rate savings across the company by the end of 2022 against the cost to achieve of $1,300,000,000 And as you saw in our press release, Our adjusted after tax income in the 2nd quarter was $1.52 per diluted share compared to 60 Turning to our financial results, I'll start with general insurance. Growth in net premiums written was very strong in the 2nd quarter, Accelerating from the Q1 and continuing the trend that began in 2020 as our heaviest remediation efforts We're nearing completion.

Speaker 3

Net premiums written increased 24% year over year to $6,900,000,000 or approximately 20% excluding foreign exchange. Growth was strong across both Global Commercial and Personal. Global commercial net premiums written increased 13% excluding foreign exchange reflecting growth in areas with attractive risk adjusted returns, Improving renewal retentions and more than 25% increase in new business compared to the prior year quarter and overall rate increases of 13%. North America commercial net premiums written increased 15% excluding foreign exchange, Including strong growth in excess casualty, financial lines, retail property, AIG Re and Lexington, New business increased 25% from the prior year quarter led by Financial Lines and Lexington Wholesale and renewal retentions improved 300 basis points over the same period. It's worth noting that Lexington had its strongest quarter of new business Since we fully repositioned its operating model to focus on wholesale distribution and excess and surplus lines, This business has significant momentum which we expect will continue for the foreseeable future.

Speaker 3

Shifting to international commercial, Net premiums written grew 10% excluding foreign exchange, primarily driven by financial lines across the UK, EMEA and Asia Pacific, Global Specialty, particularly marine and energy and Talbot, our Lloyd's syndicate. New business increased 26% from the prior year period led by financial lines, Marine, Energy and Talbot and renewal retentions increased by 500 basis points over the same period. It's important to emphasize that the growth we're achieving across commercial is aligned with our risk appetite that we've been executing against over the past 3 years. We continue to prudently deploy limits, including with respect to new business with an intense focus on risk aggregation. In addition to strong retention, our growth is being driven by exceptional new business, which in global commercial was $1,000,000,000 in the 2nd quarter.

Speaker 3

With respect to personal insurance, as we discussed on last quarter's call, the unusually high growth in net premiums written was largely reflective of the creation of Syndicate 2019 in the Q2 of 2020 and the reinsurance sessions associated with creating that syndicate. Turning to rate, momentum continued with overall global commercial rate increases of 13%. North America commercial rate increases were 13% with the most notable improvements in excess casualty which was up 20%, Lexington Casualty which was up 19% and Lexington Wholesale Property which was up 15%. International commercial rate increases were also 13% driven by financial lines which was up 21%, property which was up 18% and energy which was up 16%. Across the global portfolio, The largest rate increases were in cyber, where rates were up almost 40% with the strongest rate increases in North America.

Speaker 3

We continue to carefully reduce cyber limits and are obtaining tighter terms and conditions to address increasing cyber loss trends, The rising threat associated with ransomware and the systemic nature of cyber risk generally. Underwriting excellence, thoughtful risk selection, tighter terms and conditions and improving rate adequacy have been core areas of focus as we transformed our portfolio. The general insurance accident year combined ratio ex cat improved for the 12th consecutive quarter coming in at 91.1 percent, an improvement of 380 basis points from the Q2 of 2020 and an improvement of 9.90 basis points from the Q2 of 2018. This improvement was comprised of 160 basis point improvement in the accident year loss ratio ex cat and a 220 basis point improvement in expense ratio as AIG200 and the benefits of premium growth continue to contribute to profitability. Global commercial achieved an accident year combined ratio ex cats of 89.3 percent, an improvement of 500 basis points year over year.

Speaker 3

This is the best result commercial has reported in the last 15 years. In personal insurance, The accident year combined ratio ex cats was 95.1 percent, a 70 basis point improvement over the prior year quarter. Now just a quick comment on reinsurance purchased across general insurance where we continue to evolve our reinsurance program to reflect In the second quarter, we were very active in the market with 25 Specific layers on a variety of treaties placed. Notably, in nearly every instance, we were able to enhance our terms and conditions And our placements were at equivalent or improved pricing in a reinsurance market that is experiencing tighter terms and conditions and rate increases. With respect to our property cat program in particular, we took the opportunity in the Q2 to further reduce our per occurrence attaching point in North America through several buy down cat layers for peak zone exposures.

Speaker 3

Lastly, on general insurance, we remain confident that we will achieve a Sub-ninety percent action year combined ratio ex cats by the end of 2022. Based on the progress that I've seen in our underwriting, The ongoing efforts in optimizing our portfolio, the terrific execution of AIG200 and the significant momentum we've developed, I'm optimistic we'll get there sooner. As we move through the second half of the year and get further into AIG200 and separation execution, We will provide further comment on our combined ratio expectations. Now let me turn to AIG Re, which oversees our global assumed reinsurance business. Net premiums written across all lines increased more than 30% in the Q2 compared to the prior year period.

Speaker 3

Writings were balanced across multiple lines of business with risk adjusted returns and underwriting ratios improving across the portfolio. Highlights of AIG Reid's 2nd quarter results include the following. In U. S. Property cat, we saw rate improvements across All U.

Speaker 3

S. Property Business Sectors increases range from mid single digits to upwards of 25% Depending on geography and loss affected accounts. In Florida, Validus Re net limits at June 2021 were reduced by more than 40% in coordination with AlphaCAD. Since AIG's acquisition of Validus Re in 2018, We reduced the overall limit in Florida by more than 65% or approximately $400,000,000 of annual limit demonstrating Validus Re's continued discipline and focus on volatility reduction. Further, Florida specific firms now represent less than 2% of Validus Re's total net premiums written.

Speaker 3

Our focus remains Regional and nationwide firms in the U. S. As well as international diversification. In addition, in 2020 and through the Q2 of 2021, Less than 25 percent of AIG Re's net premiums written came from property lines. Building on our retrocessional purchase On oneone of worldwide aggregate protection, Validus re secured further retrocessional protections in June.

Speaker 3

Specifically, we purchased more peak zone coverage for U. S. Wind, Asia wind and California earthquake for the 2021 season. Overall, we have substantially enhanced our portfolio despite heightened competition. We're very pleased with how AIG Re has evolved.

Speaker 3

We have exceptionally strong intermediary market support as well as strong client relationships, which have resulted in significant renewal retention and signings. In addition, we've upgraded the talent across the board and have broadened the skill sets of our leaders. We believe this business is much more prepared to assess and opportunistically respond to market conditions. Turning to Life Retirement, this business once again delivered very strong results. Life and Retirement's broad leadership position across products and channels enabled us to take advantage of a significant rebound in retail annuity sales With total annuity sales up significantly across our entire annuity offering.

Speaker 3

Our strong sales resulted in positive individual retirement annuity net closed during the quarter. Group retirement deposits were higher compared to Q1 2021 levels and Q2 2021 New plan participant enrollments increased 20% year over year. As demonstrated regularly in recent quarters, our high quality portfolio is well positioned to navigate uncertain environments. Our variable annuity hedging program has continued to perform as expected, providing downside protection during prolonged periods of volatility. Finally, the strategic partnership with Blackstone further positions Life and Retirement to And its distribution relationships, enhance its product offerings and the business will benefit from Blackstone's significant capabilities.

Speaker 3

Now let me turn to AIG200, our global multiyear effort to position AIG for the long term. AIG200 is continuing with a sense of urgency with all 10 operational programs deep into execution mode. We're 18 months into the transformation And we have a clear execution path to $1,000,000,000 in run rate cost savings with $550,000,000 already executed or contracted, 355,000,000 of which has been recognized to date in our income statement. AIG200 continues to build a strong foundation across the company and instill a culture of operational excellence. Turning to the separation of life retirement, we made considerable progress in the second quarter with a focus on speed execution with minimal business disruption.

Speaker 3

Our separation management office has identified day 1 requirements for life Retirement to become a standalone company and multiple work streams are underway. This work includes aligning our investments unit with life of retirement And preparing for the Blackstone partnership to close. The speed with which our colleagues have moved would not have been possible without the foundational work that's been done as part of AIG 200. As I've discussed on prior calls, an IPO of up to 19.9% of life or retirement was our base case since we announced our intention to separate the business from AIG last October. And we continue to believe an IPO will maximize value for our stakeholders and position the business for additional value creation as a public company.

Speaker 3

I also noted on our last call that following our announcement, We received several credible inquiries from parties interested in purchasing a minority stake in Life Retirement as well as our entire investment management group. 1 of those parties was Blackstone. We ultimately decided not to pursue the original Because we determined that selling the entire investment management group was not in the long term interest of life retirement And some of the proposals also contemplated significant reinsurance transactions ahead of an IPO, which we didn't believe would optimize the outcome for Shareholders at this stage in the process. In June, Blackstone reengaged with us to determine if we could find a mutually beneficial way to partner that would further our goals for the separation of life retirement. These discussions led to the announcement of the strategic partnership we entered into in mid July.

Speaker 3

We continue to work with a sense of urgency towards an IPO of the life retirement business. Following the 9 point 9 percent equity investment by Blackstone, the IPO will likely be the Q1 of 2022 event, subject to required regulatory approvals and market conditions. We previously viewed the Q4 of this year as the earliest an IPO would occur, With the Q1 of 2022 as a more likely outcome. So our timeline is essentially unchanged even with the announced Blackstone transaction. Additionally, the gain on sale of affordable housing coupled with other factors provides us with flexibility to sell down beyond 19.9 percent as we now expect to fully utilize our foreign tax credits in 2022.

Speaker 3

This development facilitated our partnership with Blackstone and as a result made it more compelling compared to structures we considered since our separation announcement last October. We believe that we are better positioned to accelerate operational separation and as a result Life Retirement will be more comprehensively established as an independent company when the IPO occurs. Now let me provide additional detail on the Blackstone partnership, which represents a significant milestone for AIG and provides meaningful momentum for the IPO of life and retirement. As I mentioned, this partnership represents the culmination of discussions that took place over the last year on several strategic initiatives and we view it as very beneficial for AIG and Blackstone. Blackstone's leadership has indicated for some time that insurance is a key strategic priority for their firm And the investment Blackstone is making in our life and retirement business is the single largest corporate investment the firm has made in its 35 year history And Life Retirement is now Blackstone's single largest client.

Speaker 3

This substantial commitment by Blackstone highlights the strength of Life Retirement's business. Blackstone's belief in the value of the investment and it's a validation of Life Retirement's market leading position. Furthermore, John Gray, President and COO of Blackstone was directly involved in the negotiations. He has been a great partner throughout and will join the Board of Directors of the IPO entity at the closing of the equity investment which we expect to occur in September. Let me recap some of the terms of the transactions and how we're thinking about future capital structures for AIG and life retirement as standalone businesses.

Speaker 3

Blackstone will acquire a 9.9 percent cornerstone equity stake in the holding company for AIG's Life Retirement Business for $2,200,000,000 in an all cash transaction. The purchase price is equivalent to a multiple of 1.1 times The combined book value of our life retirement business and a majority of our investments unit as well as The financing arrangements to be undertaken and the amounts to be paid from that entity to AIG just prior to the IPO. This entity consistent with its ratings and peer leverage ratios. The new debt will be used to pay down AIG debt Such that the debt stack at AIG and at the IPO entity will both be in line with each company's peers and what we view as the optimal debt to total capital ratio for each company. Life and Retirement will also enter into separately managed Agreements or SMAs with Blackstone whereby Blackstone will manage $50,000,000,000 of specific asset classes with that amount growing to $92,500,000,000 over a 6 year period.

Speaker 3

Lastly, as I alluded to earlier, We sold certain affordable housing assets to Blackstone Real Estate Income Trust for $5,100,000,000 in an all cash transaction which is expected to close by the year end 2021. Turning to capital management, We ended the Q2 with $7,200,000,000 of parent liquidity. The net proceeds from the Blackstone transactions result in additional liquidity of We plan to pay down $2,500,000,000 of AIG debt and buyback at least $2,000,000,000 of common stock. As we announced in our press release, the AIG Board has authorized additional share repurchases, which together with the remaining approximately $1,000,000,000 left On our prior authorization brings our total stock buyback authorization to $6,000,000,000 Together, These capital management actions demonstrate our commitment to delever and return capital to shareholders. In addition, The strength of our overall capital position leaves us with ample capacity to continue to invest in growth, particularly in general insurance where market conditions continue to be extremely favorable.

Speaker 3

Now, I'll turn it over to Mark to provide more detail on the quarter.

Speaker 1

Thank you, Peter, and good morning, everyone. For the Q2 of 2021, AIG reported adjusted pretax income or APTI of $1,700,000,000 and adjusted after tax income of $1,300,000,000 We produced an annualized return on adjusted common equity of 10.5 percent For AIG, 12.3 percent for General Insurance and 16.4% for Life and Retirement. The annualized return on adjusted Tangible common equity was 11.6 percent for the quarter. On a GAAP basis, AIG reported $91,000,000 of net income With the principal difference between GAAP and adjusted after tax income of $1,300,000,000 being the accounting treatment of Fortitude, Net investment income and associated realized gains and losses. Before I move to General Insurance though, I'd like to add to Peter's remarks on the Blackstone SMA.

Speaker 1

This arrangement incorporates specific specialty asset classes comprised mostly of private credit, alternatives and Structured Products, where Blackstone is a world leader in sourcing and origination and has a demonstrated track record of delivering yield uplift and not public fixed income securities. The fee structure is 30 basis points on the initial $50,000,000,000 of AUM, Increasing to 45 basis points for the annual new AUM of $8,500,000,000 starting 4 quarters later as well as for the reinvested runoff AUM. Therefore, fees should rise from 30 basis points initially towards 43 basis points by the end of the initial 6 year contract term for Blackstone's share of the assets. For this part of our portfolio, It's fair to expect that fees will somewhat precede the benefits of the impact of enhanced origination and differentiated asset classes and recognition of related yield uplift. We believe this SMA arrangement is unique in that LNR maintains control over its overall asset allocation, asset liability management, liquidity and credit profile and the nature of individual investment structures.

Speaker 1

In addition, Life and Retirement has the opportunity to enhance overall investment management by focusing on improving efficiencies and asset classes that are not part of the SMA as well as optimizing performance across the whole portfolio. We believe the combination of these efficiencies Together with the Blackstone focus on maximizing the performance of SMA assets and growth opportunities on the overall AUM should drive net yield uplift. Before leaving the Blackstone transaction, I want to note that a GAAP loss on sale is anticipated With a 9.9 percent equity purchase by Blackstone as well as with subsequent IPO sell downs due to the inclusion of OCI and GAAP Given that OCI in future periods is subject to market fluctuations, the impact cannot be fully estimated at this time. As it respects, affordable housing, note that the $5,100,000,000 purchase price translates to an approximate $3,000,000,000 after tax gain on sale, which will benefit book value and provides approximately $4,000,000,000 of cash to parent with a minority portion held back in a regulated life and retirement entity to further strengthen an already historically strong RBC level. This transaction is expected to close by year end 2021.

Speaker 1

Moving to General Insurance. 2nd quarter adjusted Pre tax income was $1,200,000,000 up $1,000,000,000 even year over year, primarily reflecting increased pre tax underwriting income of over $800,000,000 along with $200,000,000 and change of increased pretax net investment income, driven primarily by private equity returns. Catastrophe losses of $118,000,000 were significantly lower this quarter compared to $674,000,000 in the prior year quarter. Prior year development was $51,000,000 favorable this quarter compared to favorable development of $74,000,000 in the prior year quarter. This included $58,000,000 of net favorable development in North America and $7,000,000 of net unfavorable development in international, both of which reflect marginal changes in the underlying operations.

Speaker 1

As usual, there is net favorable amortization from the adverse development cover, which amounted to $49,000,000 this quarter. It's important to put in context though the recent strength of the property and casualty market and how General Insurance has executed within this environment. As Peter mentioned in his remarks, the book has had nearly 3 turns at correction since 2018. Risk appetite and risk selection have been materially sharpened, complementary and properly evolving reinsurance programs have been implemented, Certain lines and segments were exited or massively reduced, clearer and broader distribution has been embraced and Lexington has been stood up as a major E and S platform. All of this was accomplished while simultaneously achieving significant rate in excess of loss cost trends with materially better terms and conditions.

Speaker 1

These actions form the foundation as to why General Insurance has shown material improvement in the underlying accident year ex cat combined ratios in both the historically underperforming North America Commercial segment and the International Commercial segment as well. North American Commercial has shown a 620 basis point improvement in the accident year ex cat combined ratio over the prior year quarter. The International Commercial segment has continued to improve profitability with 370 basis points improvement compared to the prior year quarter. This shows demonstrable margin improvement stemming from the totality of the actions enumerated earlier, And this level of global commercial improvement is noteworthy as global commercial made up 71% of worldwide net premiums written

Speaker 3

for the first

Speaker 1

half of twenty twenty one. Additionally, the global commercial book is increasingly becoming a global specialty book, comprised of low frequency, high severity coverages. As a result, General Insurance Commercial, although large and global in scope, It is not a mere index of the market, but instead an underwriting company, where risk selection and business mix are important factors and achieving profitable growth while mitigating volatility. Turning to Personal Insurance. As we noted on our Q1 earnings call, Our year over year net premium written comparisons for the Q2 would improve given the timing of the initial COVID-nineteen impacts and the distortions from Syndicate 2019 being reflected also during the Q2 of 2020.

Speaker 1

Global personal line net premiums written grew by 45% or 41% on a constant dollar basis aided by the Syndicate 2019 comparison. Elsewhere within the segment, the Q2 of 2021 North America Personal Insurance saw premiums in travel and warranty business increase. This was driven by a rebound in travel activity and increased consumer spending, but not yet back to the pre pandemic levels. Our outlook for net premiums written for the next 6 months in North America Personal Insurance is between $450,000,000 $500,000,000 per quarter. We continue to anticipate earned margin expansion throughout 2021 and into 2022, resulting from AIG's favorable underwriting actions taken and global market conditions involving strong rate increases well above loss trend, improved terms and conditions and a more profitable, less volatile mix.

Speaker 1

Given the specific market dynamics of where we choose to play, We don't foresee any material slowing down in the cheap rate levels throughout the balance of the year. Now I'd like to comment a bit on inflation, which one needs to think about in terms of both economic and social inflation. Based on the Consumer Price Index and the Producer Price Index, headline inflation indicates an annualized rate of about 5.5% to 7.5%, which has accelerated since March. Some components of the indices have become worrisome, such as used cars and trucks being up about 45% And energy commodities being north of 40%, but medical care services, whose impact stretches across most casualty, auto, Workers' compensation and excess placements, although higher, are much more tame than headline inflation would indicate, with physician services up about 4% recently and hospital services up about 2.5%. Costs involving labor, materials, construction and related services are up and will impact property coverages and cat claim costs in the near term.

Speaker 1

These indications demonstrate that the inflationary impact on any given insurer is a direct function of the products and the mix they write and where they play within an insurance program. Social inflation, However, is much more of a U. S.-centric phenomenon, driven by a highly litigious culture. Social inflation also has correlations to social change initiatives, including income inequality and changing sentiments towards business to name a few. Being further away from risk So is a meaningful inflation counter and AIG's General Insurance has taken strong preemptive action in that regard by minimizing lead umbrellas in favor of higher positions within the insurance program.

Speaker 1

For example, our excess casualty average attachment points for national and corporate U. S. Accounts have increased approximately 3.5 times and 5.5 times respectively since 2018. This significantly increased distance from attaching is a key overall portfolio benefit. Taken altogether, a U.

Speaker 1

S. View towards a total inflation rate of 4% to 5% is arguably reasonable for the near to medium term. Our Q2 rate increases together with our view of pricing for the rest of the year provide continued margin in excess of this loss cost trend. Now turning to life and retirement. When compared with the prior year, favorable equity markets drove higher alternative investment returns, Principally higher private equity returns, which reflect the impact of the 1 quarter lag on the period.

Speaker 1

Life insurance continues to reflect a COVID-nineteen Related mortality provision that has dropped relative to the prior quarters. We estimate our exposure to the population is approximately 65000000 to 75000000 per 100000 population deaths. Mortality, however, exclusive of COVID-nineteen, continues to be favorable compared to pricing assumptions. Within individual retirement, excluding the retail mutual fund business, Net flows were positive for the quarter and favorable by over $1,200,000,000 when compared with the Q2 of 2020, led by index annuities Rebounding to be higher by approximately $700,000,000 with variable annuity net flow being about $365,000,000 stronger year over year. Group retirement premiums and deposits were up with net flows being relatively flat, while also experiencing an improved surrender rate sequentially.

Speaker 1

The Life business has seen consistent premiums and lower lapse surrender rates over the last 4 quarters than prior. And for institutional markets, premiums and deposits were up compared to the prior year and sequentially. GIC issuance was also higher both And we executed several large pension risk transfer transactions during the quarter. The pipeline for pension risk transfer opportunities, both direct and through reinsurance remain very strong in both the U. S.

Speaker 1

And in the UK. We continue to actively manage the impacts from the low And our earlier provided range for expected annual spread compression has not changed As our base investment spreads for the Q2 were within our annual 8 to 16 point guidance. Further, new business margins generally remain within our targets at current new money returns due to active product management and a disciplined pricing approach. Lastly, post June 30, we closed on the sale of our retail mutual fund operation. As you are aware, Retail Mutual Funds has contributed negative net flows over the last 2 years and the drag from this will now cease.

Speaker 1

Moving to other operations, adjusted pretax loss was $610,000,000 inclusive of $94,000,000 from consolidation and elimination entries, which principally reflect adjustments offsetting investment returns in the subsidiaries, which are then eliminated at and Other Operations. Before consolidations and eliminations, the adjusted pretax loss was $700,000,000 worse than the Q2 of 2020, but that quarter included 2 months of FortitudeRe results of $96,000,000 In addition, during the Q2 of 2021, we also increased prior year legacy loss reserves by a net $65,000,000 driven mostly by Blackboard exposures. And we increased our incentive program accrual to reflect the strong performance year to date, whereas in 2020, we began adjusting our incentive program accrual in the Q3. After applying these adjustments, The comparison is actually favorable year over year. Shifting to investments, overall net investment income On an APTI basis was $3,200,000,000 virtually flat from the Q2 of 2020, but again Adjusting the Q2 of 2020 for Fortitude net investment income over that 2 month period, this quarter's net investment income was $362,000,000 higher than the prior year, reflecting strong private equity returns at an annualized 27% return rate for the quarter and hedge funds results at a 21 annualized return rate for the quarter, along with stable interest and dividend income.

Speaker 1

Turning to the balance sheet at June 30, book value per common share was $76.73 up 7% from 1 year ago. Adjusted book value per common share was $60.07 per share, up 7.5% from 1 year ago, driven primarily by strong operating performance and adjusted tangible book value per common share was 54 point and $0.24 up 8.1 percent from a year ago. As Peter noted, at quarter end, AIG parent liquidity was 7,200,000,000 During the Q2, we made a $354,000,000 prepayment to the U. S. Treasury in connection with certain tax settlement agreements emanating from the pre 2,007 period as well as completed debt tenders for an aggregate purchase price of 359,000,000 Our debt leverage at June 30 was 27 percent even, down 140 basis points from the end of 2020 and down 360 basis points from June 30, 1 year ago.

Speaker 1

Our primary operating subsidiaries remain profitable and well Capitalized. For General Insurance, we estimate the U. S. Pool fleet risk based capital ratio for the Q2 to be between 4.60% and 4 70% and life and retirement is estimated to be between 440% and 4.50%, both above our target ranges. Lastly, as it respects tax, I want to reiterate that the remaining net operating loss or NOL portion Of AIG's DTA at the time of deconsolidating LNR for tax purposes will still be available to offset future general insurance and or AIG taxable income through their natural expiration.

Speaker 1

As of June 30, that portion of the DTA totaled 6,300,000,000 and is available to offset up to $30,000,000,000 of taxable income. Upon tax deconsolidation, what we'll cease is the ability to utilize up to 35% of life insurance company income against NOLs or any remaining FDC. With that, I will now turn it back over to Peter.

Speaker 3

Thank you, Mark. Operator, we'll go to question and answer.

Operator

Thank We'll take our first question from Elyse Greenspan from Wells Fargo. Your line is open. Please state your question.

Speaker 4

Hi, thanks. Good morning. My first question, Peter, you said you guys Yes, to that $1,090,000,000 margin target within general insurance perhaps sooner than expected. So was hoping you could expand on that just in terms of timeframe. And when you make that comment, are you assuming Stable pricing and inflation kind of remains around 4% to 5% based off of what Mark said into 2022?

Speaker 3

Thanks Elyse. I've talked about in the past that there's many components that are going to drive improved combined ratio. The first is the absolute underwriting performance and we're seeing that come through and what Mark covered in his script in terms of severity, Attritional losses and just less volatility. In addition, we have seen strong top line growth and believe that's In the commercial side, we're in that market now and see that continuing. We need less reinsurance That we once needed because of the makeup of the portfolio.

Speaker 3

So those are all tailwinds. And then in addition to that, you have AIG 200, which I gave some numbers on my prepared remarks that we have real tailwinds there. Not only are we So we don't heavily rely on one component. There's 4 to 5 that drive it. And no, it does not require us to be in the same rate environment.

Speaker 3

I I mean, you have to be in the range on the social inflation and loss cost inflation, but we watch that all the time and believe that We have a lot of momentum and I'll give more guidance specifically in the next couple of quarters. I mean the momentum I've seen and the excellent job that Dave McElroy and the Our leadership team have done in General Insurance is a real differentiator and the momentum they have is tremendous. So it just leaves me with a lot of optimism.

Speaker 4

Great. And then my second question, in terms of life and retirement, now that you did this initial sale with Blackstone and you emphasized using most of the foreign tax credits. So it sounds like tax considerations won't impact the amount of LNR that you guys bring to the public market. Did you have a sense of how much you're going to bring to the public market? And then in terms of the proceeds you guys get there, Since you're paying down $2,500,000,000 of debt now, will the majority of the proceeds from future transactions This be used for buyback and organic growth?

Speaker 3

Yes. Thanks, Elyse. I mean, in terms of the timing, as I We're targeting our Q1 IPO. We're working really hard on the operational separation. We'll close with Black who's going to be a tremendous partner for us, we hope in July.

Speaker 3

And so working over the next 6 months to position Life retirement to have a very successful IPO is the primary focus. 2nd is we have to think about So in my prepared remarks of like the regulatory environment and the market itself. So that will Really dictate in terms of how much we do, and it just gives us a lot of flexibility to accordion it up if there's really favorable market We wouldn't go to an IPO with a 9.9, we'll do something larger than that. But the size, Timing, we'll continue to give you guidance as we get further along in the year with the progress that we're making. I don't know Mark if you want to add anything to The capital management, the debt?

Speaker 1

Just I think that the core point was To emphasize that this removes the constraint. So rather than on the specifics of the sizing, which as Peter said, was very Market sensitive and contingent, but having that ability now to not have such a constraint is the main point we really wanted to push over.

Speaker 3

Thanks. Next question please.

Operator

We'll take our next question from Meyer Shields from KBW Investment Bank. Your line is open. Please go ahead.

Speaker 5

Great. Pardon me, thanks. First question on the Blackstone partnership. Can you give us a sense of what the internal That are comparable to the 30 45 basis points that will constitute the fee?

Speaker 3

Yes, Meyer, thank you for the question. I'll turn it over to Mark in a second. But I think that when we looked at the partnership with Blackstone, There was a variety of factors that went into it, certainly them making a commitment on the equity investment, Making certain that Life Retirement still maintained its authority and ability to shape the investments with Blackstone, so we've contained that. A lot of the assets that we have or will transfer Our classes that they have exceptional track records on and so we're working through that. We do believe that the AUM will grow over time with life retirement and so this will become a smaller percentage and the base case was that not only with the Blackstone partnership that our overall business model will evolve to be more efficient over time.

Speaker 3

But Mark, maybe you could Fill in a couple of the details of that.

Speaker 1

Yes. Well, Meyer, as Peter said, the level of the specialty assets Are usually much more labor intensive and are always on the higher end of the scale, if you think of it in a rate card sense. And so that part is completely within expectations of what we would say. Within with our own internal structures, we would have also increasing costs as you graduate up to the overall asset class Categories that they are experiencing for us. So there's some gap, but some of that cost accounting View is less clear than you think, but we know what the value we're going to be getting out of that is going to be More than worth

Speaker 5

it. Okay, understood. The second question, I guess this is Probably for Mark. I know the expense ratios in North America and Personal have been distorted up till the Q2 because of, I guess the press travel, insurance and the syndicate. Is the 2nd quarter expense ratio run rate, Are those representative of what we should see going forward?

Speaker 1

It's I think that you're going to let me make a general statement first. And that is that, I think Peter tried to position us a bit. We may have said this a little bit in past calls, but You should think of the combined ratio gains on the commercial side of being loss ratio and expense ratio driven. And on the personal line side, more expense ratio driven. We've gotten a lot more stability in the loss ratios on there.

Speaker 1

So you'll continue to see that. But to the extent it's roughly a I would actually say you should anticipate the expense ratio to continue to improve in North America Personal.

Speaker 3

One thing I would add, Marion, in terms of what Mark just noted is that The high net worth space is changing dramatically in peak zones. We expect to see Continued change in the excess and surplus lines as more alternatives. It was basically split In the Q2 between admitted and non admitted new business. So that's just something that we're going to watch. I mean there's no specific trends that are going to be substantially different than the guidance we've given.

Speaker 3

But there is some change in that business that we want to make sure with the market leading position that we Take advantage of solving problems for clients, but also reposition the portfolio to have less volatility. Okay. Next question, please.

Operator

Thank you. We'll take our next question from Erik Bass from Autonomous Research. Your line is open. Please state your question.

Speaker 6

Hi, thank you. I was hoping you could talk a little bit more about the asset management agreement with Blackstone and how you see this affecting life and retirement NII over the next Couple of years. It sounds like you expect some initial dilution, but when should this turn and start being accretive to NII? And also will any of the assets they manage be used to support new business and could this help you be even more competitive in your fixed indexed annuity offerings?

Speaker 3

Yes, Mark, why don't you start and then turn over to Kevin in terms of talking about product?

Speaker 1

Yes. Thank you, Peter. Yes. I think Kevin will have a few things to help you with there as well. So on The asset management, think of it this way, Eric.

Speaker 1

You've got the uplift We'll come more delayed than the fees to your point firstly. And secondly is as the $50,000,000,000 of AUM is worked through, We have been thinking about it mostly, it takes 7 years for that runoff to turn over. As that occurs, It also shifts from 30 to 45 basis points. The $8,500,000 annually that will also come in to take it to the 92.5 We'll be at 45 bps. So you kind of have that curve that I was alluding to in my prepared remarks.

Speaker 1

So as a result of that, you're going to have net Yield uplift coming through is a function of when those investments can be made. So if you think of it, you're really At the end of year 1, you still have 85% of the original AUM, still not turned over, which is why you get the delay Aspect. But it's we expect that to chip away and close A lot sooner than you might think, but that is the important point to remember is that LNR completely has that control. So the takeoff between the liquidity and the rating distributions and the asset distribution and capital trade offs and so forth It's all within the management's discretion of LNR. Kevin?

Speaker 7

Yes. Thank you. So, Eric,

Speaker 1

I think what's important is to

Speaker 7

keep in mind that this is Not a change in our portfolio strategy. This is an enhancement of our portfolio strategy. Blackstone has tremendous We believe that their ability to originate in these asset classes exceeds our current ability. And in addition to that, they have a broader range of assets within the subclasses And the combination of their ability to originate with more capacity and also the breadth of their asset classes, We believe will allow us to create new products, to support transactions, and our intention will be to work together to innovate strategies that will allow us to grow faster. We do not think of the balance sheet as static.

Speaker 7

We think about a growing balance sheet. And so rather than focusing just on the yield of this Part of the portfolio, I think about the overall portfolio strategy. So again, this is not a change in our strategy. This is an enhancement of it And that's how we think about it.

Speaker 6

Thank you. And then can you help us think about the level of new public expenses That life and retirement will have and will these be able to be offset by savings elsewhere? And then how should we think about the level of expenses that are running through other ops It will remain with the parent kind of post separation.

Speaker 3

Well, Eric, let me handle that one. The guidance that I provided in the past and will stay with is that there are meaningful savings for life Retirement within AIG 200 that will be tailwinds to them. We had said around $125,000,000 Life Retirement Achieved some of that, but there's a big number left for us in terms of earning through that over the next 18 months. So think about Roughly $100,000,000 of AIG200 benefits. Then there is allocations and parent service fees that goes over to Live Retirement Today that will either dissipate or we'll still have those services as we transition for So that's in the range of $75,000,000 plus So Kevin has a Decent amount to invest towards building out the public company.

Speaker 3

And we think with other initiatives for expense savings through Operation office that it should largely be neutral to life retirement and we think the synergies that exist within The remaining company AIG that it's neutral to beneficial and we'll give more guidance as we get closer to the end of the year We've done more work in the separation office.

Operator

Thank you. We'll take our next question from Phil Stefano from Deutsche Bank, your line is open. Please go ahead.

Speaker 8

Yes. Thanks. Good morning. Looking at the general insurance book and mostly focused on Commercial. When we look at the GAAP in net written versus net earned, I mean, it's clear that this is a runway just given where the pricing is today for the continued improvement in the underlying loss ratio there.

Speaker 8

How are you thinking about rate adequacy, the need to continue to push for rate versus just Growing and dialing back the rate that you're getting now, like how are you balancing these two dynamics?

Speaker 3

Thank you very much for the question. Mark put a lot of comments in his prepared remarks. We watch Loss cost inflation and margin on everything we do in terms of portfolio optimization, that's really what I refer to when I talk about how do we Position general insurance particularly on the commercial side have an optimized portfolio. We've had several years of rate increases. We're building margin in some Specific lines of business have been getting more rate than others and they're the ones that need it.

Speaker 3

But it's something that Dave McElroy and the entire team spend every day thinking about and believe that there is absolute runway To continue to develop margin. But Dave, do you want to talk a little bit about how you're approaching it and some of the different segments of the business that you're focused on?

Speaker 9

Yes. Thank you, Peter, and thank you, Phil. The rate increase story is 1 you don't you want to make sure it's calibrated off of all the other things you're doing in the So what we've done over the last 3 years is a lot of risk selection in terms of conditions and attachment point And account exposures and managing that. So if you fall in love with a singular rate increase number and you Find your book, you ultimately probably end up adversely selected again. So you actually have to put that in context.

Speaker 9

And I always use examples. It's like I I might have gotten 10% rate increase on a contractor in New York and I'm still chasing New York labor law, I will lose, okay? And for the industry, it's a little bit of like commercial auto. We've been getting rate increases in commercial auto for 8 years and we still haven't solved that problem. So rate increase can be a false positive.

Speaker 9

What we've done with a sort of technical understanding of it, looking at it and Aggressively realizing that we have a large account book, upper middle market book and we need more rate to reflect the more So that's we think that's sustainable going into the latter part of this year, okay? We think We can accommodate what would be expected loss cost inflations. And we're at the same time, and this is what I've observed in the last quarter, There's more pricing to the account, the account characteristics. Is it moderated? Yes, a little bit, okay?

Speaker 9

But it's moderated off of still over loss cost trends. And what I would say when I look at my dispersion charts, We don't have the same outlier plus 30% up, but we have a swell of more of a plus 5 to 10, plus 10 to 20, Plus 20 to 30 type of accounts that are basically aggregating in that in terms of rate reflecting the exposure. The other piece and I we have to be careful with it because we want to reflect our book and our clients, but We do we are in the multiyear phase of a re underwriting and an influence in the market. And When you look at compounding and you look at the compounding that might exist in excess casualty or primary D and O, okay, Or even programs, okay? These are numbers that are plus 93%, plus 86%, Again, plus 70% over a period of time of starting in late 2018 to the first half of twenty twenty one.

Speaker 9

It's not a panacea, Okay. If I was trying to write investment banking E and O and I got 90%, I probably would still lose. But I mean, It's a good baseline for the progress that we've done with the business. The last thing I'd say is that We had a lot of new business this quarter. I think it was cited on a couple of calls.

Speaker 9

And remember, this is also being priced now With an elevated rateprice structure. So the same business 2 years ago or 3 years ago Is now up that 30% to 40% when we can produce it as a piece of new business. And that's very much formed A lot of our success in this quarter was moving from remediation to an offensive point, capturing The quality of what AIG has with multinational claims reputation complexity and actually building off of that for The strongest new business we've had in a while. So that flows off of technical rate increases and our consistent view of that, but It's important to sort of lay that all out, so you understand that we're not we're really looking at this with the lens on all aspects of the business. So with that, I'll defer

Speaker 3

it. Thank you.

Speaker 8

Yes, thanks guys. That's very thorough. Look, maybe a quicker one.

Operator

We'll take our next question from Tracy Banguin from Barclays. Please go ahead, Tracy.

Speaker 10

Thank you. I see that there is an IPO contingency in the Blackstone transaction. Is that just a timing thing? Or is the IPO contingency also considering a pricing floor for minority IPO proceeds or a minimum equity stake size?

Speaker 3

Thanks, Tracy. The 9.9% is predicated on a strategic partnership That starts to accelerate all the things that we want to do to set life retirement up to be a public company. And we're really focused on getting that done within the Q1 and making sure that the organization is Set up to do that. And again, there's regulatory and market considerations that we'll always look at, but those are really the bigger ones Tying really what the cornerstone investor has brought to the table versus the eventual IPO. As Mark mentioned, we have a lot more flexibility because consumption of the foreign tax credits.

Speaker 3

And so 2022 will start to outline what we think will likely happen as we get closer to the end of the year.

Speaker 10

Okay. Yes, I was just referring to some fine print in your 8 ks that if the IPO didn't happen, There were some recourse, so I didn't know if there was something else that I should also be considering. No. Okay, perfect. Look, anyone could trade growth for margin expansion, but you're at a spot where you're doing both.

Operator

Yes. And I guess the

Speaker 10

only place where I don't have visibility is your loss picks. So can you contextualize how your current acne or loss picks have been tracking maybe relative to last year and your 5 year average?

Speaker 3

Mark, you want to cover that?

Speaker 1

Sure. Sure. Hi, Tracy. I guess a couple of things. First off, we are viewing although we're showing substantial margin Improvement on a quarter over quarter, year over year basis.

Speaker 1

We actually think we're being conservative in this. As I said, I think on past calls, There has been a lot of change over the last 3 years, including some of the fundamental channels in which we get business. So we think we've done every one of those correctly. Nobody bats a 1,000. So you wind up having a little bit of risk margin Associated with each of the last several years.

Speaker 1

So we feel good overall and we feel about the trajectory Of the improvement and where it's coming from and that we're not booking and displaying things without having an appropriate risk margin I hope that's helpful.

Speaker 3

Yes. Thanks, Mark. And I want to just thank everyone for joining us today. Before we end the call, I want to thank our colleagues around the world for what they've accomplished over the last 6 months, especially considering the challenges that have been presented in work remote environments. We have a talented hard working colleague base that's executing on multiple complex initiatives simultaneously, Which I think makes us very unique.

Speaker 3

Very proud of the team, remains very focused on ensuring quality and everything that we do and delivering significant value to all of our stakeholders. Have a great day.

Operator

That concludes today's conference call. Thank you everyone for your participation. You may now disconnect.

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Earnings Conference Call
American International Group Q2 2021
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