Peter Zaffino
President & Chief Executive Officer at American International Group
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 second quarter. 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 AIG 200 and the operational separation of Life Retirement from AIG. 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 had outlined in the past. Debt reduction, return of capital to the shareholders in the form of share repurchases, and investment in organic growth. Mark will provide additional details on the quarter and will 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 topline growth and significant improvement in our combined ratios. Our pivot to growth and focus on demonstrating leadership in the marketplace accelerated through the second quarter as we continued to prioritize underwriting discipline and 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 pretax income increased 26% year-over-year and the business delivered a return on adjusted segment common equity of 16.4%.
We continued to advance AIG 200 with the transformation remaining on track to deliver $1 billion of run way savings across the company by the end of 2022 against a cost to achieve a $1.3 billion and as you saw in our press release, our adjusted after-tax income in the second quarter was $.52 per diluted share compared to $0.64 in the prior year quarter.
Turning to our financial results; I'll start with General Insurance. Growth in net premiums written was very strong in the second quarter, accelerating from the first quarter and continuing the trend that began in 2020 as our heaviest remediation efforts were nearing completion. Net premiums written increased 24% year-over-year to $6.9 billion 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 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 it 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.
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 in line with our risk appetite that we've been executing against over the past three 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 billion in the second quarter.
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 second quarter of 2020 and the reinsurance sessions associated with creating that syndicate.
Turning to Re, 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 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. 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, powerful 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%, an improvement of 380 basis points from the second quarter of 2020 and an improvement of 990 basis points from the second quarter of 2018. This improvement was comprised of 160 point improvement in the accident year loss ratio ex-Cat and a 220 basis point improvement in expense ratio as AIG 200 and the benefits of premium growth continue to contribute to profitability. Global Commercial achievement and accident year combined ratio ex-Cats of 89.3% and improvement of 500 basis points year-over-year. 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% 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 our significantly improved underlying portfolio. 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 second quarter to further reduce our per occurrence attachment point in North America through several buy down Cat layers for peak zone exposures. Lastly, on General Insurance, we remain confident that we will achieve a sub 90 accident year combined ratio ex-Cat 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 AIG 200 and the significant momentum we developed, I'm optimistic we'll get there sooner. As we move through the second half of the year and get further into AIG 200 and separation execution, we will provide further comment on our combined ratio expectations.
Now let me turn to AIG Re, which oversees our Global Consumer Reinsurance [Phonetic] business. Net premiums written across all lines increased more than 30% in the second quarter compared to the prior year period. Writings were balanced across multiple lines of business with risk-adjusted returns and underwriting ratios improving across the portfolio. Highlights of AIG Re's second quarter results include the following. In U.S. Property Cat we saw rate improvements across all U.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 [Indecipherable]. Since AIG's acquisition of Validus Re in 2018, we reduced the overall limit in Florida by more than 65% or approximately $400 million 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. Our focus remains on regional and nationwide firms in the U.S. as well as international diversification. In addition, in 2020 and through the second quarter of 2021, less than 25% of AIG Re's net premiums written came from property lines.
Building on our retrocessional purchase on one warrant of worldwide aggregate protection, Validus Re secured further retrocessional protections in June. Specifically, we purchased more peak zone coverage for U.S wind, Asia wind and California earthquakes for the 2021 season. Overall, we have substantially enhanced our portfolio despite hike in competition. We are very pleased with how AIG Re has evolved. 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 the significant rebound and retail annuity sales with total annuity sales up significantly across our entire annuity offering. Our strong sales resulted in positive individual retirement annuity net flows during the quarter.
Group retirement deposits were higher compared to first quarter 2021 levels and second quarter 2021 new plan participant enrollments increased 20% year-over-year. As demonstrated regularly in recent quarters, our high quality investment 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 expand its distribution relationships, enhance its product offerings and the business will benefit from Blackstone's significant capabilities.
Now, let me turn to AIG 200. Our global multiyear effort to position AIG for the long term. AIG 200 is continuing with the sense of urgency, with all ten operational programs deep into execution mode. We're 18 months into the transformation and we have a clear execution path to $1 billion in run rate cost savings, with $550 million already executed or contracted $355 million of which has been recognized to date in our income statement. AIG 200 continues to build strong foundations across the company and instill a culture of operational excellence.
Turning to the separation of Life and Retirement we made considerable progress in the second quarter with a focus on speed execution with minimal business disruption. Our Separation Management Office has identified day one requirements for Life and Retirement to become a standalone company and multiple work streams are underway. This work includes aligning our investments unit with Life and 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 have discussed on prior calls, an IPO of up to 19.9% of Life and Retirement was of our base case since we announced our intention to separate the business from AIG last October. And we continued to believe an IPO will maximize value for our stakeholders and position the business for additional value creation as a public company. I also noted on out last call that following our announcement we received several credible increase from parties interested in purchasing a minority stake in Life Retirement, as well as our entire Investment Management Group. One of those parties was Blackstone. We ultimately decided not to pursue the original proposed transactions 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 and Retirement. These discussions led to the announcement of the strategic partnership we entered into in mid-July. We continued to work with a sense of urgency towards an IPO of the Life Retirement business. Following the 9.9% equity investment by Blackstone, the IPO will likely be the first quarter of 2022 event subject to required regulatory approvals and market conditions. We previously viewed the fourth quarter this year as the earliest an IPO would occur, with the first quarter 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%, as we now expect to fully utilize our foreign tax credits in 2022. 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 a single largest corporate investment the firm has made in its 35-year history and Life and Retirement is now Blackstone single largest client. 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 CEO 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. Blackstone will acquire a 9.9% cornerstone equity stake in the holding company for AIG's Life Retirement business for $2.2 billion in an all cash transaction. The purchase price is equivalent to a multiple of 1.1 times a target pro forma adjusted book value of $20.2 billion. The adjusted book value reflects the combined book value of our Life Retirement business, and a majority of our investments units, 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.
As we look to the permanent structure of the IPO entity, we will be raising debt at this entity, consistent with its ratings and peer leverage ratios. The new debt will be used to pay down AIG debt, such as the debt stack at AIG, and at the IPO entity will both be aligned 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 Account agreements or SMAs with Blackstone, whereby Blackstone will manage $50 billion of specific asset classes with that amount growing to $92.5 billion over a six year period. Lastly, as I alluded to earlier, we sold certain affordable housing assets to Blackstone Real Estate Income Trust for $5.1 billion in an all cash transaction, which is expected to close by the year end 2021.
Turning to Capital Management, we ended the second quarter with $7.2 billion of parent liquidity. The net proceeds from the Blackstone transactions resulted in additional liquidity of $6.2 billion to AIG by year end 2021. Through the remainder of this year, we plan to pay down $2.5 billion of AIG debt and buy back at least $2 billion 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 billion left on our prior authorization brings our total stock buyback authorization to $6 billion. 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.
Now, I'll turn it over to Mark to provide more detail on the quarter.
