Peter Zaffino
President and Chief Executive Officer at American International Group
Good morning and thank you for joining us today to review our third quarter results. I'm pleased to report that AIG had another outstanding quarter as we continue to build momentum and execute on our strategic priorities. We continue to drive underwriting excellence across our portfolio. We're executing on AIG 200 to instill operational excellence in everything we do. We are continuing the work on the separation of Life and Retirement from AIG, and we're demonstrating an ongoing commitment to thoughtful capital management.
I will start my remarks with an overview of our consolidated financial results for the third quarter. I will then review our results for General Insurance, where we continue to demonstrate market leadership in solving risk issues for clients, while delivering improved underwriting profitability and more consistent results. I will also comment on certain market dynamics, particularly in the property market, as well as recent CAT activity and related reinsurance considerations as we approach year end.
Next, I'll review results from our Life and Retirement business, which we continue to prepare to be a stand-alone company. I will also provide an update on the considerable progress we're making on the operational separation of Life and Retirement from AIG and our strong execution of AIG 200. I will then review capital management, where our near-term priorities remain unchanged from those I've outlined in the past: debt reduction, return of capital to shareholders, investment in our business through organic growth, and operational improvements.
Finally, I will conclude with our recently announced senior executive changes that further position AIG for the long term. These appointments were possible due to the strong bench of internal talent and significantly augment the leadership team across our company. I will then turn the call over to Mark, who will provide more detail on our financial results and then we'll take your questions.
Starting with our consolidated results, as I said, AIG had another outstanding quarter, continuing the terrific trends we've experienced throughout 2021. Against the backdrop of a very active CAT season and the persistent and ongoing global pandemic, our global team of colleagues continue to perform at an incredibly high level delivering value to our clients, policyholders, and distribution partners. Adjusted after-tax income in the third quarter was $0.97 per diluted share compared to $0.81 in the prior year quarter. This result was driven by significant improvement in profitability in General Insurance, very good results in Life and Retirement, continued expense discipline and savings from AIG 200, and executing on our capital management strategies.
In General Insurance, Global Commercial drove strong top line growth and we were especially pleased with our adjusted accident year combined ratio which improved 280 basis points year-over-year to 90.5%. These excellent results in General Insurance validate the strategy we've been executing on to vastly improve the quality of our portfolio and build a top performing culture of disciplined underwriting.
One data point that I believe demonstrates the incredible progress we have made is our accident year combined ratio for the first nine months of 2021, which was 97.7%, that's including tax. This represents a 770-basis point improvement year-over-year with 600 of that improvement coming from the loss ratio, and 170 from the expense ratio.
In Life and Retirement, we again had solid results, primarily driven by improved investment performance and increased call and tender income. This business delivered a return on adjusted segment common equity of 12.2% for the third quarter and 14.3% for the first nine months of the year. And we recently achieved an important milestone in the separation process by closing the sale of a 9.9% equity stake in Life and Retirement to Blackstone for $2.2 billion in cash. We continue to prepare the business for an IPO in 2022 and we'll begin moving certain assets under management to Blackstone.
We ended the third quarter was $5.3 billion in parent liquidity, after redeeming $1.5 billion in debt outstanding and completing $1.1 billion in share repurchases. Year to date, we have reduced financial debt outstanding by $3.4 billion and have returned $2.5 billion to shareholders through share repurchases and dividends. We expect to redeem or repurchase an additional $1 billion of debt in the fourth quarter and to repurchase a minimum of $900 million of common stock through year-end to complete the $2 billion of stock repurchase we announced on our last call. Through these actions, we've made clear our continuing commitment to remain active and thoughtful about capital management.
Now let me provide more detail on our business results in the third quarter. I will start with General Insurance where, as I mentioned earlier, gross and net premiums written continue to be very strong and we achieved our 13th consecutive quarter of improvement in the adjusted accident year combined ratio. Adjusting for foreign exchange, net premiums written increased 10% year-over-year to $6.6 billion. This growth was driven by Global Commercial, which increased 15%, with Personal Insurance flat for the quarter.
Growth in Commercial was balanced between North America and international, with North America increasing 18% and international increasing 12%. Growth in North America Commercial was driven by excess casualty, which increased over 50%; Lexington wholesale, which continued to show leadership in the E&S market and grew property and casualty by over 30%; Financial Lines, which increased over 20%; and Crop Risk Services, which grew more than 50% driven by increased commodity prices.
In International Commercial, Financial Lines grew 25%; Talbot had over 15% growth; and Liability had over 10% growth. In addition, gross new business in Global Commercial grew 40% year-over-year to over $1 billion. In North America, new business growth was more than 50% and in international, it was more than 25%. North America new business was the strongest in Lexington, Financial Lines, and Retail Property. International new business came mostly from Financial Lines and our specialty businesses. We also had very strong retention in our in-force portfolio with North America improving retention by 200 basis points and international improving retention by 700 basis points.
Turning to rate, strong momentum continued with overall global commercial rate increases of 12%. In many cases, this is the third year, where we have achieved double-digit rate increases on our portfolio. North America Commercial's overall 11% rate increases were balanced across the portfolio and led by Excess Casualty, which increased over 15%; Financial Lines, which also increased over 15%; and Canada, where rates increased by 17%, representing the 10th consecutive quarter of double-digit rate increases.
International Commercial rate increases were 13%, driven by EMEA, excluding specialty, which increased by 22%; UK, excluding specialty, which increased 21%, Financial Lines, which increased 24% and energy, which was up 14%, it's 11th consecutive quarter of double-digit rate increases.
Turning to global Personal Insurance, we had a solid quarter that reflected a modest rebound in net premiums written and travel and warranty, offset by results in the Private Client Group due to reinsurance cessions related to Syndicate 2019 and non-renewals in peak zones.
Shifting to underwriting profitability, as I noted earlier, General Insurance's accident year combined ratio ex-CAT was 90.5%. The third quarter saw a 150-basis point improvement in the accident year loss ratio ex-CAT, and a 130-basis point improvement in expense ratio, all of which came from the GOE ratio. These results were driven by our improved portfolio mix, achieving rate in excess of loss cost trends, continued expense discipline, and benefits from AIG 200.
Global Commercial achieved an impressive accident year combined ratio ex-CAT of 88.9%, an improvement of 290 basis points year-over-year and the second consecutive quarter with a sub-90% combined ratio results. The accident year combined ratio ex-CAT for North America Commercial and international Commercial were 90.5% and 86.8% respectively, an improvement of 370 basis points and 210 basis points. In global Personal Insurance, the accident year combined ratio ex-CAT was 94.2%, an improvement of 220 basis points year-over-year driven by improvement in the expense ratio.
Given the significant progress we have made to improve our combined ratios, and our view that the momentum we have will continue for the foreseeable future, we now expect to achieve a sub-90% accident year combined ratio ex-CAT for full year 2022. After three years of significant underwriting margin improvement, we believe that the sub-90% accident year combined ratio ex-CAT is something that not only will be achieved for full year 2022, but that there will continue to be runway for further improvement in future years.
Turning to CATs, as I said earlier, the third quarter was very active with current industry estimates ranging between $45 billion and $55 billion globally. We reported approximately $625 million of net global CAT losses with approximately $530 million in Commercial. The largest impacts were from Hurricane Ida item and flooding in Europe, where we saw net CAT losses of approximately $400 million and $190 million, respectively.
We have put significant management focus into our reinsurance program, which continues to perform exceptionally well to reduce volatility, including strategic purchases for wind that we made in the second quarter. Reinsurance recoveries in our international per occurrence, Private Client Group per occurrence, and other discrete reinsurance programs also reduced volatility in the third quarter.
We expect any fourth quarter CAT losses to be limited, given that we are close to attaching on our North America aggregate cover and our aggregate cover for rest of the world, excluding Japan. We have each and every loss deductibles of $75 million for North America wind, $50 million for North America earthquake, and $25 million for all other North America perils and $20 million for international. Our worldwide retention has approximately $175 million remaining, before attaching in the aggregate, which would essentially be for Japan CAT.
Taking a step back for a moment, I want to acknowledge the frequency and severity of natural catastrophes in recent years. Since 2012 and excluding COVID, there have been 10 CATs with losses exceeding $10 billion and 9 of those 10 occurred in 2017 through the third quarter of this year. Average CAT losses over the last five years had been $114 billion, up 30% from the 10-year average, and up 40% from the 15-year average. And through 2021, catastrophe losses exceed $100 billion and we're already at $90 billion through the third quarter, this will be the fourth year in the last five years in which natural catastrophes have exceeded this threshold.
We've never seen consistent CAT losses at this level and, as an industry, need to acknowledge that frequency and severity has changed dramatically as a result of climate change and other factors. I'll make three observations. First, while CAT models tended to the trend acceptable over the last 20 years, that has not been the case over the last five years. Second, over the last five years, on average, models have been 20% to 30% below the expected value at the lower return periods. If you add in wildfire, those numbers dramatically increase. Third, industry losses compared to model losses at the low end of the curve had been deficient, and need rate adjustments to reflect the significant increase in frequency in CATs.
To address these issues at AIG, we have invested heavily in our CAT research team to develop our own view of risk in this new environment. As a result of this work, we made frequency and severity adjustments for wildfire, U.S. wind, storm surge, flood, as well as numerous other perils in international. We will continue to leverage new scientific studies, improvements in vendor model work, and our own claims data to calibrate our views on risk over time to ensure we are appropriately pricing CAT risks. Across our portfolio, our strategy and primary focus has been and will continue to be to deliver risk solutions that meet our clients' needs, while aligning within our risk appetite, which takes into consideration terms and conditions, strategic deployment of limits, and a recognition of increased frequency and severity. The significant focus that we've been applying to the critical work we've been doing is showing through in our financial results as you've seen over the course of 2021 with improving combined ratios, both including and excluding CATs.
Now, turning to Life and Retirement, earnings continue to be strong and in the third quarter were supported by stable equity markets, modestly improving interest rates relative to the second quarter, and significant call and tender income. Adjusted pretax income in the third quarter was approximately $875 million. Individual retirement, excluding Retail Mutual Funds, which we sold in the third quarter, maintained its upward trajectory with 27% growth in sales year-over-year. Our largest retail product, indexed annuity, was up 50% compared to the prior year quarter.
Group Retirement collectively grew deposits 3% with new group acquisitions ahead of prior year, but below a robust second quarter. Kevin and his team continue to actively manage the impacts from a low interest rate and tighter credit spreads environment and their earlier provided range for expected annual spread compression has not changed, as base investment spreads for the third quarter were within the annual 8 to 6 points guidance.
With respect to the operational separation of Life and Retirement, we continue to make considerable progress on a number of fronts. Our goal is to deliver a clean separation with minimal business disruption, and emphasis on speed execution, operational efficiency and thoughtful talent allocation. We have many work streams in execution mode, including designing a target operating model that will position Life and Retirement to be a successful standalone public company, separating IT systems, data centers, software applications, real estate and material vendor contracts and determining where transition services will be required in minimizing their duration with clear exit plans. We continue to expect an IPO to occur in the first quarter of 2022 or potentially in the second quarter subject to regulatory approvals and market conditions.
As I mentioned on our last call, due to the sale of our affordable housing portfolio and the execution of certain tax strategies, we are no longer constrained in terms of how much of Life and Retirement we can sell on an IPO. Having said that, we currently expect to retain a greater than 50% interest immediately following the IPO, and to continue to consolidate Life and Retirement financial statements until such time as we fall below the 50% ownership threshold. As we plan for the full separation of Life and Retirement, the timing of further secondary offerings will be based on market conditions and other relevant factors over time.
With respect to AIG 200, we continue to advance this program and remain on track to deliver $1 billion in run rate savings across the company by the end of 2022 against the cost to achieve of $1.3 billion. $660 million of run rate savings are already executed or contracted with approximately $400 million recognized to date in our income statement. As with the underwriting turnaround, which created a culture of underwriting excellence, AIG 200 is creating a culture of operational excellence that is becoming the way we work across AIG.
Before turning the call over to Mark, I'd like to take a moment to discuss the senior leadership changes we announced last week. Having made significant progress during the first nine months of 2021 across our strategic priorities and in light of the momentum we have heading towards the end of the year, this was an ideal time to make these appointments.
I'll start with Mark, who will step into a newly created role, Global Chief Actuary and Head of Portfolio Management for AIG on January 1. As you all know, over the last three years, Mark has played a critical role in the repositioning of AIG. He originally joined AIG in 2018 as our Chief Actuary and this new role will get him back into the core of our business, driving portfolio improvement, growth and prudent decision making by providing guidance on important performance metrics within our risk appetite and evolving our reinsurance program.
Shane Fitzsimons will take over from Mark as Chief Financial Officer on January 1. Shane joined AIG in 2019 and his strong leadership helped accelerate aspects of AIG 200 and instilled discipline and rigor around our finance transformation, strategic planning, budgeting and forecasting processes. He has a strong financial and accounting background, having worked at GE for over 20 years and many senior finance roles, including as Head of FP&A and Chief Financial Officer of GE's International operations. Shane has already begun working with Mark on a transition plan and we've shifted his AIG 200 and Shared Services' responsibility to other senior leaders.
We also announced that Elias Habayeb has been named Chief Financial Officer of Life and Retirement. Elias has been with AIG for over 15 years and was most recently our Deputy CFO and Principal Accounting Officer for AIG, as well as the CFO for General Insurance. Elias has deep expertise about AIG. And his transition to Life and Retirement will be seamless as he is well known to that management team, the investments team that is now part of Life and Retirement, our regulators, rating agencies, and many other stakeholders. Overall, I'm very pleased with our team, our third quarter results and the tremendous progress we're making on many fronts across AIG.
With that, I'll turn the call over to Mark.
