American International Group Q1 2022 Earnings Call Transcript

Quartr
Provided by Quartr
May 4, 2022

There are 10 speakers on the call.

Operator

Good day, and welcome to AIG's First Quarter 2022 Financial Results Conference Call. This conference is being recorded. Now at this time, I would like to turn the conference over to Quintin McBillin. Please go ahead.

Speaker 1

Thanks very much, Jake. Good morning. Today's remarks may include forward looking statements, which are subject to risks and uncertainties. These statements are not guarantees of future performance or events and are based on management's current expectations. AIG's filings with the SEC, including our annual report on the Form 10 ks and quarterly reports on Form 10 Q provide details on important factors that could cause actual results Except as required by the applicable securities laws, AIG is under no obligation to update any forward looking statement circumstances or management's estimates or opinions should change.

Speaker 1

Additionally, today's remarks may refer to non GAAP financial measures. The reconciliation of such measures 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'd now like to turn the call over to our Chairman and CEO, Peter Zaffino.

Speaker 2

Good morning, and thank you for joining us to review our first Quarter Financial Results. I'm very pleased to report that AIG had an excellent start to 2022. We are successfully executing on several strategic, operational and our team has significant momentum on many fronts, which we believe will continue throughout the year. Following my remarks, Shane will provide more detail on our financial results and then we will take questions. Mark Lyons, David McElroy and Kevin Hogan separation of our life and retirement business, which will be renamed Corbridge Financial.

Speaker 2

2nd, I will review the excellent Q1 performance of General Insurance, where we continue to drive top line growth, particularly in global commercial and saw meaningful improvement in underwriting profitability. 3rd, I will cover Life Retirement's financial performance. This business remains a meaningful contributor to our overall results. And 4th, I'll provide an update on our capital management strategy, particularly as to stock buybacks, which we plan to accelerate over the course of 2022, given our positive view of AIG's future over the near, medium and long term. Before I turn to these topics, I'd like to discuss the situation in Russia and Ukraine.

Speaker 2

It goes without saying that what is happening is heartbreaking. Ukrainian people are experiencing unimaginable pain and suffering, and it's our hope that a peaceful resolution will be achieved. With respect to the insurance industry, we've not seen a situation like this in modern times. It presents a unique set of circumstances that make any exposure or coverage analysis complex. Let me start by commenting on what we saw at AIG in the Q1 and what we did with the few claims that were submitted.

Speaker 2

The claims we received were largely reported under political violence or political risk policies. While the amount of information included in the claims was limited, We did reserve our best estimate of ultimate losses including IBNR. While we know it will take time for the full impact of the Russia Ukraine situation to emerge, Based on the work we did in the Q1 to analyze our exposures and review known claims, we do not believe the impact will be material to AIG. And In the event of losses, we have multiple reinsurance programs available. With respect to the industry more broadly, There has not been much discussion so far in this earnings season regarding what the Russia Ukraine situation means.

Speaker 2

So I thought I'd spend a few minutes on the complexity that it presents. As a starting point, it's important to bear in mind that standard property and energy policies issued To the Type 7 insureds most likely to have suffered losses due to the conflict typically contain broad exclusions for losses arising at a war and other hostile acts. In instances where affirmative coverage has been provided for losses that would typically fall within the scope of these exclusions, the most relevant coverages related to policies such as political violence, political risk and trade credit, aviation and marine. I'd like to spend a few minutes on aviation and will take time before all the relevant facts and resulting coverage implications fully emerge. Let me start with what we know.

Speaker 2

We know that aviation policies can be issued to both airline operators and airline leasing companies and typically provide separate coverage for, On the one hand, losses caused by war perils such as nationalization and confiscation and on the other hand, losses caused by non war perils. We also know that the invasion of Ukraine first occurred on February 24th and there were sanctions issued by the UK and the EU on February 26th, which have since been updated. These sanctions generally required airline lessors to cancel leases with Russian airline operators and gave them a brief period in which to do so. Additionally, we know that there was an aircraft re registration law passed in Russia on March 14, which permitted Russian airline operators to re register aircraft leased from Western lessors on the Russian aircraft registry. What we don't know is much more expansive.

Speaker 2

As an initial matter, we don't know whether or to what extent actual losses have occurred or when they occurred given the uncertainty surrounding the location and condition of aircraft and other equipment as well as the timing of their potential return to lessors. Nor do we know if efforts have been undertaken by lessors to mitigate any damages. As to the question of losses caused by war perils versus non war perils, This is a critical question that will need to be answered as the outcome will determine which policy might apply and the amount of coverage that may be available. With respect to war perils such as government confiscation, this type of loss would typically be included in a whole war policy, but it must be first Even where it is determined that a government confiscation took place, Consideration will also have to be given to the timing of notices and the geographic scope of coverage. The answers to these questions will impact whether there is a covered loss and if so, whether a given whole war policy response.

Speaker 2

With respect to reinsurance, structures likely implicated In a war peril scenario, it includes war, marine and energy and political violence, but it's also possible that other types of reinsurance contracts could be available for recoveries. If a loss is alleged to be due to a non war peril, it could be covered in an all risk policy. As an initial matter, however, A determination would need to be made that a loss in fact has occurred and then if it has that is due to a non war peril. Additionally, as with war perils, you would have to consider if reinsurance is available. The reinsurance that would be typically available in all risk scenario maybe in different structures than in government confiscation or other war peril scenario.

Speaker 2

As to all potentially covered perils, There are many issues requiring analysis, including the potential applicability of any sanctions. Assuming claim payments are made, insurers will also have This is just a high level summary of some of the issues the industry will grapple with, but I thought they were important to highlight and you get the idea that it's a complex situation. Now turning to separation of life retirement. We made significant progress to prepare this business to be a standalone public company. We continue to target an IPO in the 2nd quarter subject to market conditions and required regulatory approvals.

Speaker 2

We also continue to expect that we will retain a greater than 50% interest in this business post IPO. As you can appreciate, given where we are in the process, there are limitations on how much I can say about life and retirement, but let me give you some highlights of what we've accomplished since our last call. In March, we announced several important milestones. The public filing of the S-one, The new name for Life Retirement, which as I mentioned is CoreBridge Financial and the independent directors who currently serve on the CoreBridge Board of Directors and those who will join and strengthen the Board as of the IPO. At the same time, we launched a $6,000,000,000 corporate senior notes offering, which was upsized to $6,500,000,000 based on significant demand.

Speaker 2

Shane will provide more detail on the maturities and coupons. We also made substantial progress on the operational separation of the Life Retirement business from AIG, including identifying $200,000,000 to $300,000,000 Cost savings for this business inclusive of the $125,000,000 in savings already in flight as part of our AIG 200 transformation program. And we continue to execute on establishing a hybrid investment management model that will allow Corbridge to benefit from strategic partnerships with world class firms that offer excellent origination and investment capabilities and that complement our own capabilities and asset classes such as commercial mortgage loans, Global Real Estate and Private Equity. The first step in moving to this hybrid model was our strategic partnership with Blackstone, which we announced in 2021. In March of this year, we announced an arrangement with BlackRock whereby BlackRock will manage up to $90,000,000,000 of Corbridge Liquid Assets.

Speaker 2

In addition, we developed a plan to modernize the mid and back office functionalities of the business and the transition to BlackRock's Aladdin technology platform with respect to Life of Retirement's entire investment portfolio. Aladdin enables us to replace aging and end of life technology infrastructure, provides risk analytics, establishes a single accounting book of record a single and investments book of record as well as reporting, stress testing and other services currently performed across multiple systems at AIG. We expect that the cost for Corbridge to operate this hybrid model, taking into account both Blackstone and BlackRock, Will be approximately the same as the fully loaded costs of our prior investment management operating model where asset management was largely handled in house. Shifting to our Q1 financial results, as you saw in our press release, adjusted after tax income was $1.30 per diluted share, representing an increase of 24% year over year. This result was driven by significant improvement in profitability in General Insurance, Good results in life retirement considering the current environment, continued expense discipline, savings from AIG 200 and strong execution of our capital management strategy.

Speaker 2

In General Insurance, we reported an accident year combined ratio, Excluding cat of 89.5 percent, a 290 basis point improvement year over year and the 15th consecutive quarter of improvement. We were especially pleased with the accident year combined ratio excluding cat and commercial, which was 86%, An improvement of 4.40 basis points year over year. In Life Retirement, 1st quarter results benefited from product diversity despite headwinds in the capital markets. Return on adjusted segment common equity was 10%. AIG ended the 1st quarter with $9,100,000,000 in parent liquidity after returning $1,700,000,000 to shareholders through $1,400,000,000 of common stock repurchases and $265,000,000 of dividends.

Speaker 2

Now let me provide more detail on our Q1 results in General Insurance, where we continue to drive improved financial performance with core fundamentals being key contributors. Gross premiums written increased 10% on an FX adjusted basis to $11,500,000,000 with commercial growing 11% and personal growing 8%. Net premiums written increased 5% on an FX adjusted basis to $6,500,000,000 This growth was led by our commercial business, which grew 8% with personal contracting 1%. Growth in North America Commercial net premiums written was 6% and in International net premiums written growth was 10%, both on an FX adjusted basis. I'd like to unpack certain components of North America Commercial net premiums written as we had a very strong growth in our core business that may not be immediately obvious.

Speaker 2

While there are always movements each quarter in various aspects of our portfolio, both positive and negative, There were 3 items that impacted the Q1 that I'd like to provide more insight on. These items relate to assumed and ceded reinsurance and the timing of purchases, which is not something we have focused on previously, but which I think is worth spending a few minutes on given the impact they had on North America commercial net premiums written. The first item relates to AIG Re, our assumed reinsurance business. Financial results for AIG Re are included in the results for North America Commercial and in the Q1 represented 40% of the segment's total net premiums written. For AIG Re, the Q1 is the largest quarter of the year with over 50% of its annual business written at oneone.

Speaker 2

In the Q1 of 2022, AIG Re's net premiums written were flat year over year. This result was deliberate as we applied a disciplined approach to underwriting and the market environment that persisted leading up to oneone Let us conclude that AIG Re could not achieve appropriate levels of risk adjusted returns in property cat in particular, even with a comprehensive retrocessional program in place. As a result, we reduced gross limits deployed in property cat, primarily in the U. S. By $500,000,000 which was the main reason for AIG Re's net premiums written being flat.

Speaker 2

With respect to the second item, you may recall that in 2021, AIG Re made discrete retrocessional purchases throughout the year to further reduce frequency and volatility, whereas this year retrocessional purchases were consolidated into the Oneonetwenty 22 renewals as the retro market rebalanced. As a result of this decision, AIG Re's ceded premiums were higher in the Q1 2022, which also reduced North America Commercial's net premiums written when compared to the Q1 of 2021. 3rd, a similar dynamic occurred with respect to our core property cat at Reinsurance Program for AIG. In 2021, we purchased reinsurance throughout the year to lower net retentions and reduce volatility, particularly with respect to North America property cat. In 2022, however, those purchases were also consolidated into our core property at placement at 1:1.

Speaker 2

We were able to consolidate these reinsurance purchases because our portfolio is much Commercial net premiums written in the Q1. To summarize, some of these headwinds in the Q1 of 2022 will largely reverse in the Q2. Now turning back to growth. In North America Commercial, we saw a very strong growth in net premiums written, particularly in retail property, which grew more than 20%, Crop Risk Services, which also grew more than 20% Lexington Wholesale, which grew more than 15% led by property, which grew more than 50% and our Canadian Commercial business, which grew more than 15%. In International Commercial, We also saw very strong growth, including in property, which grew 50%, specialty, which grew 34%, driven by Energy and Marine and financial lines which grew 14%.

Speaker 2

In Global Commercial, we also had very strong renewal retention of 86% in our in force portfolio in both North America and international, with North America improving retention by 300 basis points and international retention holding constant year over year. We calculate renewal retention prior to the impact of rate and exposure changes. And across commercial on a global basis, our new business was very strong coming in north of $1,000,000,000 for the 4th consecutive quarter. New business growth in North America and in international were both up 13%. North America new business growth was led by Lexington and Retail Property.

Speaker 2

International Commercial new business growth was led by Financial Lines and Global Specialty. Turning to rate, Strong momentum continued in Global Commercial with overall rate increases of 9% or 10% if you exclude workers' compensation and in the aggregate rate continued to exceed loss cost trends. This continues to be a market in which we are achieving rate on rate in many cases for the 4th consecutive year and where we're successfully driving margin expansion above loss cost trends. North America commercial achieved 8% rate increases overall, 10% excluding workers' compensation with some areas achieving double digit increases led by retail property, which increased 14% Lexington, which increased 13% Financial Lines, which increased 12% including more than 85 rate increases in cyber and Canada, where rate increased 13%, representing the 11th consecutive quarter of double digit rate increases in this region. International commercial rate increases were 10% overall, driven by financial lines, which increased 21%, including more than 60% rate increases in Cyber Property, which increased 14% EMEA, which also increased 14% and Asia Pac, which increased 10%.

Speaker 2

Last quarter, we indicated that our severity trend view North America commercial range from 4% to 5% and that we were migrating towards the upper end of that range. We now believe the upper end is moving towards 5.5% mostly driven by shorter tail lines. Our property rate changes where we continue to achieve Mid teen increases equal or exceed loss cost trends in our own data and in government published inflationary indices. Our liability trend assumptions continue to be in the 7% to 9% range with international indications continuing to be less than those in North America. Turning to Personal Lines.

Speaker 2

In North America Personal, net premiums written grew nearly 40%, albeit off a smaller base, driven by a rebound in travel and A and H, which was offset by a reduction in warranty and increased reinsurance sessions supporting Private Client Group. International Personal saw a 5% reduction in net premiums written on an FX adjusted basis due to a reduction in warranty and Personal Auto in Japan, offset by a rebound in A and H and Travel. Overall, Personal Lines is an area where we continue to invest where there are attractive opportunities for profitable growth. Now let me review Life Retirement's results. This business had a good quarter considering the headwinds created by the capital markets.

Speaker 2

These market dynamics were offset by continued strong alternative investment income and strong growth in premiums and deposits, which increased 13% year over year to $7,300,000,000 Adjusted pretax income in the Q1 was $724,000,000 with return on attributed segment equity of 10%. Adjusted pretax income decreased in the period due to lower call and tender income and continued elevated COVID-nineteen mortality, which is still within our previously established guidance. Blackstone's capabilities in the early days of our partnership resulted in Life and Retirement seeing one of its strongest fixed annuity sales quarters and over a decade with premiums and deposits up nearly 150% year over year to $1,600,000,000 while surrenders and death benefits both improved slightly. Post separation, we continue to expect that Life Retirement, meaning CoreBridge, We'll achieve a return on equity of 12% to 14% and that it will pay an annual dividend of $600,000,000 Overall, I'm pleased with the momentum in life and retirement and in particular the early success of our partnership with Blackstone that was evident in the Q1 results. With respect to capital management, we had a very active first quarter, which ended with $9,100,000,000 in parent liquidity.

Speaker 2

As a result of the actions I outlined earlier in my remarks, AIG received $6,500,000,000 of the $8,300,000,000 promissory note issued Corbridge promissory note during the Q2. Our capital management strategy will continue to be both balanced and disciplined as we maintain appropriate levels of debt while returning capital to shareholders through stock buybacks and dividends while also allowing for And we will now begin to see the balance sheet and cash flow. This will also be true over time as we continue to sell down our stake in Life Retirement. With respect to share buybacks, as I mentioned earlier, we repurchased $1,400,000,000 of common stock in the Q1 and are on track to buy back at least $1,000,000,000 more in the 2nd quarter. This will leave us with approximately $1,500,000,000 remaining under our prior Board authorization.

Speaker 2

And as you saw in our press release, the AIG Board of Directors recently authorized an additional $5,000,000,000 in share repurchases. With respect to growth opportunities, our priorities continue to be focused on allocating capital in General Insurance, where we see opportunities for profitable organic growth and further improvement in our risk adjusted returns. As we move through 2022 and are further along with the separation of life retirement, we will provide updates regarding our capital management strategy. Before I turn the call over to Shane, I want emphasize how pleased I am with how we started the year across AIG and how we are continuing to execute on multiple complex strategic priorities with high quality results that are positioning AIG as a top performing company. Our teams have over performed across the board and our deep bench continues to provide us with opportunities to leverage skill sets and further develop talent across the organization.

Speaker 2

With that, I'll turn the call over to Shane.

Speaker 3

Thank you, Peter, and good morning to all. I am very pleased to be AIG's CFO, and I look forward to working with everyone moving forward. I will provide more detail on our Q1 financial results and unpack a number of our key performance metrics, specifically EPS, liquidity, leverage, Net Investment Income and ROCE. I will begin by going through the financial results of the businesses in the quarter. I will then touch upon the balance sheet, Leverage and liquidity, which benefited from excellent execution on a number of capital transactions.

Speaker 3

I will then supplement Peter's remarks on the separation of Corbridge, including the arrangement we announced with BlackRock and liability management actions we recently completed. I will then spend some time on investment income and will provide insight on the impacts of rising interest rates. And finally, I will talk about the execution path towards our long term 10% ROCE goal for AIG, including income drivers, AIG 200 and other areas of corporate GOE reduction. As Peter mentioned, adjusted EPS attributable to AIG common shareholders grew 24% year over year to $1.30 per diluted common share compared to $1.05 per diluted common share in 1 quarter 2021. Compared to the Q1 2021, improvements in general insurance contributed $0.33 year over year.

Speaker 3

Reduction in share count contributed $0.07 and lower interest expense contributed 0 point 0 $4 offset by life and retirement being 0.19 dollars unfavorable, primarily due to $0.20 unfavorable due to lower net investment income. General Insurance's adjusted pre tax income contribution in the quarter was $1,200,000,000 which reflects strong underwriting profit, Growth in Global Commercial and continued improvement in both the GAAP combined ratio of 5.90 basis points to 92.9 percent and the accident year combined ratio ex cat improving 290 basis points to 89.5%. The combined ratio improvement was due to improved underwriting, premium growth, expense discipline And lower cats, which all contributed to pretax underwriting income being 6 times higher than the Q1 of 2021, increasing to $446,000,000 from $73,000,000 With net investment income down $7,000,000 year over year, The $366,000,000 improvement in adjusted pretax income was driven by underwriting income, of which $223,000,000 Was from improved accident year underwriting income, dollars 146,000,000 due to lower cat and $4,000,000 from improved net PYD. North America Commercial has shown a 580 basis points improvement in the accident year combined ratio ex cat over the prior year quarter, coming in at 88.1%. International Commercial also continued to improve profitability with 330 basis points improvement in the accident year combined ratio ex cat this quarter coming in at 83.5% for the Q1.

Speaker 3

Personal Insurance GAAP combined ratio of 97.2 percent improved by 160 basis points year over year. In the Q1, cat losses were $274,000,000 or 4.5 loss ratio points compared to $422,000,000 or 7.3 loss ratio points in the prior year quarter. The most significant loss events in the quarter Came from flooding in Australia and a Japanese earthquake. The ongoing events with Russia and Ukraine, which Peter discussed, Contributed approximately $85,000,000 of the estimated loss. Prior year development excluding related premium adjustments With $93,000,000 favorable this quarter compared to favorable development of $56,000,000 in the prior year quarter.

Speaker 3

This quarter, the ADC amortization provided $42,000,000 of favorable development and the balance of $51,000,000 favorable arose from old accident years in U. S. Workers' compensation along with short tail lines in North America and in Japan personal lines. Life and Retirement adjusted pretax income of $724,000,000 compared to $941,000,000 in 1Q 2021, a reduction of $217,000,000 mostly attributable to lower net investment income, which was $2,100,000,000 in the quarter compared to 2.4 1,000,000,000 in the prior year quarter, a decrease of $224,000,000 reflecting Lower call and tender activity from rising interest rates. The absence of the affordable housing portfolio, which was sold in Q4 2021 as well as reduced fee income and an increase in deferred acquisition costs and statement of position reserves due to lower separate account asset values.

Speaker 3

Within individual retirement, excluding the retail mutual fund business, which was sold, net flows were positive $874,000,000 this quarter compared to positive net flows of $50,000,000 in the prior year quarter, benefiting from higher fixed annuity sales aided by origination activity through the Blackstone Partnership. Group Retirement grew deposits by 3.9% in the quarter, driven by higher group acquisition and individual deposits, Driving a slight uptick in fee and advisory income due to higher assets under administration. Life insurance adjusted pretax income was a loss $44,000,000 due to continued elevated COVID mortality, while premium and deposits grew 3.4 percent to $1,200,000,000 benefiting from growth of international life sales. Institutional markets grew premiums and deposits as well as reserves due to increased pension risk transfer activity in the period. Turning to other operations, which includes interest expense, Corporate general operating expenses, institutional asset management expense, runoff portfolios and eliminations and was a positive contributor to adjusted pretax income year over year by $109,000,000 These results benefited from lower interest expense of $51,000,000 as we reduced our general borrowings through the course of 2021 by 4,000,000,000 And lower eliminations of $43,000,000 Corporate general and operating expenses excluding increased functional cost Set up CoreBridge as a standalone public company of $6,000,000 were largely flat year over year.

Speaker 3

Moving on to the balance sheet, leverage and liquidity. Our financial flexibility remains strong. We closed the quarter with $9,100,000,000 of parent We saw a large AOCI movement as a result of increase in interest rates. Adjusted AOCI, which Excludes the cumulative unrealized gains and losses related to Fortitude, moved from $3,900,000,000 positive to a $5,900,000,000 negative or a reduction of $9,800,000,000 Although this mark to market impact is a drag on capital, As long as we hold the assets to maturity, we will not realize this unrealized loss. Corporate interest rate movements impact our metrics primarily in 2 places.

Speaker 3

One, we end up with a gain on the Fortitude Re embedded derivative, which impacted GAAP EPS by $3.21 in the quarter. And second, it impacts our GAAP leverage by a little over 300 basis points. And with interest rates up another 55 basis points in April, We expect to see further movement in Q2. We exited the quarter at a GAAP leverage of 27.8%, up from 24.6 percent, the increase of which is attributable to the AOCI movement. The impact is larger in life and retirement than general insurance given the duration of their respective asset portfolios.

Speaker 3

Total adjusted return on common equity was 7.6%, up from 7.4% in the Q1 2021 and total company adjusted tangible return on common equity was 8.3%. General Insurance's adjusted attributable return on common equity was 12.3% in the Q1, while life and retirement was 10%. Adjusted book value per share of $70.72 increased 2.7% sequentially and 20.5% year over year. Adjusted tangible book value per share of $64.65 increased 2.9% sequentially and 22.3% year over year. Our primary operating subsidiaries remain profitable and well capitalized with General Insurance's U.

Speaker 3

S. Pool fleet Risk based capital ratio for the Q1 estimated to be between 4 70% 4 80% And the life and retirement U. S. Fleet is estimated to be between 430% and 440%, both well above our target ranges. Finally, on EPS, during the quarter, we repurchased 23,000,000 shares at an average cost of $60.02 for $1,400,000,000 bringing our ending share count to $800,000,000 with a quarterly average of $826,000,000 compared to 870 $6,000,000 in the prior year quarter, representing a 6% reduction in average share count, which contributed $0.07 of EPS growth in the quarter.

Speaker 3

Turning to Corbridge since the start of the year, we continue to make progress on numerous fronts with respect to the separation. As Peter mentioned, at the end of the Q1, Corbridge entered into a strategic partnership with BlackRock to manage up to $90,000,000,000 of liquid assets. At the same time, AIG also entered into a separate arrangement with BlackRock, whereby BlackRock will manage liquid assets for AIG representing up to $60,000,000,000 Having now signed IMAs, we expect to begin transferring assets to BlackRock over the course of the second quarter. In early April, Corbridge successfully raised $6,500,000,000 of senior notes, which along with the remaining $2,500,000,000 of delayed draw term loan facility and commitments for the $2,500,000,000 of revolving credit facility. This establishes the capital structure for Corbridge Financial.

Speaker 3

AIG proactively hedged treasury rates earlier in the year. And upon unwinding the hedge at quarter end, AIG realized a $223,000,000 gain, which equates to approximately 50 basis points in yield on the notes issued. While the debt issuance closed early in Q2, the $223,000,000 gain was realized as a gain in the Q1. The senior notes offering excluding the hedge was well structured and laddered with a 3.91% weighted average coupon rate. Corbridge used the proceeds from that offering to repay $6,400,000,000 of the $8,300,000,000 promissory note payable to AIG.

Speaker 3

Following the success of Corbridge's senior notes issuance, AIG initiated a debt tender offer. Taking advantage of strong demand, the tender offer was And AIG parent debt was ultimately reduced by $6,800,000,000 An additional €750,000,000 will be redeemed on May 10, bringing the total expected AIG parent debt reduction to $7,600,000,000 The average coupon in the debt that we retired was 3.82 percent and the annualized interest expense savings is approximately $290,000,000 We continue to target debt leverage in the high 20s Excluding AOCI for Corbridge and in the low 20s including AOCI for AIG going forward. Given the significant progress we have made and with $1,900,000,000 of proceeds from the $8,300,000,000 note yet to be received, We have the necessary cash to finalize our planned debt actions without utilizing any of the proceeds from the IPO. With these actions completed, we remain on track for an IPO in the Q2 subject to market conditions and regulatory approval. Net investment income on an adjusted pretax income basis for the quarter was $3,000,000,000 Total cash and investments were 305,000,000,000 excluding Fortitude.

Speaker 3

Net investment income in the Q1 decreased $193,000,000 compared to prior year, primarily reflecting lower call and tender income. The Q1 saw significant increases in benchmark treasury yields with an 80 basis point increase on the tenure. With General Insurance and Life and Retirement's portfolio durations of 4 and 8.4 years, respectfully. The overall rise in interest rate environment will provide a tailwind to our investment portfolio returns. In April, our portfolio crossed the equilibrium point where new money yield is now 50 basis points higher on average And the yield on the assets rolling off the portfolio.

Speaker 3

The new money yield is higher by 20 basis points in general insurance versus assets rolling off and 70 basis points in life and retirement versus the yield on sales and maturities currently. Moving forward, the new money yield is roughly 60 basis points higher than the current portfolio in general insurance and roughly 90 basis points higher in life and retirement. To illustrate the point, holding all other variables constant and assuming a 100 basis points parallel shift in the yield curve, We would anticipate approximately $500,000,000 of benefit to adjusted net investment income over a 1 year period with nearly $200,000,000 in general insurance $300,000,000 in life and retirement. Within general insurance, we have $11,000,000,000 of floating rate Securities, which will begin to see some benefits in the near term, most of which are not tied to longer dated liabilities. Life and Retirement is $25,000,000,000 of floating rate assets, but most of this portfolio is tied to floating rate liabilities that will offset the benefits.

Speaker 3

Turning to investments that have Russian exposure, at December 31, AIG held 359,000,000 dollars of sovereign and other foreign debt of the Russian Federation, of which $79,000,000 were within through proactive sell downs of $129,000,000 which generated a loss of $41,000,000 as well as the establishment of a credit allowance of $127,000,000 The market value of these securities at the end of the Q1 with $86,000,000 of which $18,000,000 is held by Fortitude. Looking ahead, we have 3 priorities beyond Continued progress on underwriting optimization and completing AIG 200. They are the successful separation of the life and retirement business, Continued execution on our capital management priorities and ROC improvement towards 10%. Post deconsolidation of Corbridge, we expect that AIG will earn a 10% ROCE, although there are many moving pieces that will get to this result, including the size and timing of the Corbridge IPO, additional capital management actions and continued progress on reducing expenses. As we've improved expense ratios in General Insurance, one of the key drags on ROCE is corporate expenses, Which we have been reducing through AIG200 and work on the separation, but there remains more work to be done.

Speaker 3

As Peter noted, with respect to AIG200, we continue to achieve significant milestones and in the first quarter reached $890,000,000 of exit run rate savings with $590,000,000 of that realized to date. We currently expect a full line of sight into the $1,000,000,000 of exit run rate savings, either contracted or identified by the end of the Q2, 6 months earlier than originally planned. Of the $1,000,000,000 of parent expenses, we expect that approximately $300,000,000 will move to Corbridge upon deconsolidation. We will continue to provide updates over time, but the components to get to a 10% ROCE, Our continued growth in underwriting profit improved net investment income as we benefit from higher interest rates Continued execution on expense management, particularly at Parent and optimizing capital allocation in terms of leverage and returns to shareholders in the form of Stock buybacks and dividends was making sure that we continue to grow the company. Peter, I will now hand it back to you.

Speaker 2

Thank you, Shane. Operator, we're ready for questions.

Operator

On your telephone keypad. We do ask that you limit yourself to one question and one follow-up question. We will begin with Elyse Greenspan with Wells Fargo.

Speaker 4

Hi, thanks. Good morning. My first question is on the Capital return that you guys laid out. So you guys have just over $9,000,000,000 at the whole time. Peter, I think you said a minimum buybacks of $1,000,000,000 for the Q2, but just given that you have above $9,000,000,000 at the holdco with additional capital coming later this Here, I would think that there's some flexibility to perhaps look of that $1,000,000,000 So can you just kind of walk us through a little bit more how you're thinking about Uses of capital for growth relative to buyback at least in the short term.

Speaker 2

Yes. Thanks Elyse for the question. Good morning. Yes, we said we would do a minimum of $1,000,000,000 of share repurchases in the second quarter. I think Shane and I tried to do as much detail as we could in our prepared remarks in aligning what our priorities are for capital management.

Speaker 2

And certainly, the Board's authorization for an additional 5 Billions says that we will continue to return capital to shareholders in the form of share repurchases. We think the positioning of the business, I mean, I think you see in the results, we see great opportunities for top line growth. We see it across the world. We see it in the commercial businesses, but also what you would have seen in some of the international That's probably massive that accident and health has started to rebound over the last three quarters and we're starting to see top line growth there. So we want to make sure that we are allocating the appropriate capital for growth in driving margin and making the company Look at its opportunities on risk adjusted returns and make sure that we're capitalizing on the market and our discipline.

Speaker 2

I think Really, when we get to the actual IPO and Corbridge is a public company, we'll be able to outline the capital management strategy in more detail, but we wanted to provide as much guidance as we could based on what we know today and we would expect to continue to make the progress that we've demonstrated and the earnings call today.

Speaker 4

Okay, thanks. And then my follow-up, you guys pointed out that you raised some of your severity assumptions within general Insurance on the short tail side. When you guys set out that target for the accident year combined ratio of sub-ninety percent for this year, was that contemplated? And then should how about the cadence? Can you give us a sense, should we think about sequential improvement from the Q1 level as we move through the year?

Speaker 4

Or is there Some seasonality that we should be considering within General Insurance.

Speaker 2

Let me take the first part and then I'll ask Mark to comment on the loss cost observations. We've seen when you think about the quality in the results that we produced this quarter, When we look at our business, what do we look at? We look at client retention, which continues to improve. We look at new business, so we're acquiring a lot of Clients across the world and so that continues to progress and think that there's a lot of momentum there. We look at rate above loss cost trends And so that was favorable and we continue to get rate in areas where we believe it Is required in terms of its risk adjusted returns and again with our leadership in terms of deploying capital.

Speaker 2

Are all the inflation factors considered The sub-ninety percent, well, no, we obviously are adjusting them, but the outperformance that we have been driving wasn't contemplated either. I mean, like we're making more progress on the business at a faster pace, and think that we will continue, to show that we can grow the business Top line and generate the risk adjusted returns and improvement in combined ratios. Mark, do you want to comment on the loss costs?

Speaker 5

Yes. Thank you, Peter, and good morning, Elyse. So I think Peter answered it very well. What I'll do is just reemphasize that, Yes. I mean the context of your question, we gave that original guidance before there was any spike of inflation.

Speaker 5

But Like I think any good company, you don't forecast just a point estimate. You're forecasting a range and those ranges vary by line of business and they all melt together. And even with the changing inflation assumptions, we'd still be inside that range. So we're comfortable with that.

Speaker 4

Thank you.

Speaker 2

Next question please.

Operator

We'll go to Meyer Shields with KBW.

Speaker 6

Thanks. Good morning. I think this might also be a question for Mark as 2 factorial. We're clearly seeing a little bit less Core loss ratio improvement then the simple mathematical application of earned rate increases and loss trend. And I was hoping you could talk about how that's manifesting

Speaker 5

and in prior year reserve reviews.

Speaker 2

Yes, Mark, please take that. I mean, I think it's also important to give some Context of the portfolio shift as well, Mark, when we look at loss ratios?

Speaker 5

Yes, happy to. And thank you, Myra, for the question. So I think on that side first on the reserve side, When you look at our view of inflation and severity trends and so forth, you really got to separate Short tailed lines from longer tailed lines, right? And like in our view, the evidence within our own information as well as looking at External indices, whether it's from the perspective of the purchaser or the seller, it's clearer with in property oriented lines. And it's probably worth noting back to Peter's comment on mix is that less than 10% of our Pre ADC reserves are property.

Speaker 5

So they can't move the needle too much anyway. So I don't really view that as an issue. And In terms of non property, we've gone through looking at various basis point scenarios of lift and for various durations associated with it. And we still feel with that all of that is pretty contained. And don't forget, Especially on longer tail lines, there's still a high proportion of total reserves subject to the ADC on recoverables as well.

Speaker 5

So In terms of the first part of your question with regard to the arithmetic versus what's there, I think we've addressed this before, Meyer, but I'm happy to give some comments again, which is the book has changed so dramatically from policy year 18, 2019, 2021 and it's actually your convergence that you need a Margin of safety associated with it because nobody bats 1,000 on these things, but there's been a radical change And the quality of the risk, the distribution strategy that Dave McElroy has and his team has instituted, getting much better risk, Portfolio, churn purposely done to improve it, all the limit changes that Peter has talked about over time. And as a result, The arithmetic just doesn't pan out, let alone the change in mix that has been purposeful, let alone the change in net mix. So All of those changes simultaneously require in our view a reasonable range of margin of safety and that's what you're seeing.

Speaker 6

Okay. Thanks, Mark. A quick follow-up if I can. I know there are a lot of moving parts, but is there any way of quantifying the impact of the reinsurance purchasing timing On the expense ratio in the quarter?

Speaker 2

Thanks, Meyer. I'll take that. As I said, it's going to be A headwind in the Q1 will be a tailwind in the Q2. Once we there's a couple of moving pieces. We can't really provide The exact numbers, but you can look at like in the second quarter where we purchased down on the North America commercial cat to lower retentions, as well as in AIG Re where we reduced volatility by buying single shot per occurrence retrocessional at the Q2 and both recovered by the way last year.

Speaker 2

So we felt that reducing the net retentions was appropriate and carrying that forward into how we were going to structure the 1one treaty for AIG as well as the retrocessional covers for AIG Re. So we have lower nets than we would have at this time last year. It's not uncommon Purchase sometimes mid term if there's available capacity and you're still trying to evolve a program, But we felt very good about the consolidation of those programs at Oneone and really like the reinsurance that we have in both instances.

Speaker 6

Okay, fantastic. Thank you very much. Thanks.

Operator

And now we'll hear from Ryan Tunis with Autonomous Research.

Speaker 7

Hey, thanks. Good morning. A couple of questions Just following up from the first two question askers. First one, we saw about 3.5 points of sequential loss ratio improvement this quarter in commercial lines in general. I noticed that last year, we also saw like the biggest Sequential move in the Q1.

Speaker 7

So I'm curious if there's something about 1Q, if it's setting a loss pick assumption or something like that, That's leading to that level of sequential jump that's outsized.

Speaker 2

Yes, let me start. Thanks very much for the question. We have there's Mark touched on a little bit and I'll ask if he has any additional comments after I make a few observations on the mix of business. But what we had In the Q1, obviously, is a big AIG REIT, which when you look at if you're changing the composition of the portfolio from Reducing cat to doing more proportional, you're going to have lower loss ratios, higher acquisition costs. And so that will have a Sometimes impact in terms of how it earns into the Q1.

Speaker 2

We also had in terms of the overall general insurance business, The mix changes because on the one hand, we wanted to make sure that we were patient with A and H, which is a great business for us And travel in terms of its rebound after COVID, but not really reducing the overall overhead, but it does have an impact In terms of the mix and acquisition expense and loss ratio, the other thing you have to consider where we started, I mean, the Incredible improvement that we've had in the portfolio has been disciplined. We've always talked about underwriting from a Risk selection standpoint, terms and conditions, attachment, reducing volatility with supplementing reinsurance and then of course price above loss cost. And I think when you do that sequentially and maintain the same level of discipline, we start to see the outcome produced like we had in the Q1. Mark, anything you want to add to that?

Speaker 5

Yes. Thank you, Peter. Yes, I think your point about mix is right on point. And remember, there's 2 mixes. You've got the mix on the front end and then you've got the mix changes that manifest by the reinsurance purchases and how they earn in over time.

Speaker 5

So you got both of those factors. I think secondly, there's also the realization that over time the property and shorter tailed businesses over the last couple of years are a you got to watch the mix of that over time. And therefore, with the mix of medium and longer term lines that have volatility associated with them, That you've got to watch kidding yourself that the quarter by quarter is super predictable. If you get the accident year right, I'm happy. Accident quarter by accident quarter is a little bit more of an academic exercise.

Speaker 5

So I think that maybe some of what you're seeing.

Speaker 7

Got it. My follow-up just on the acquisition cost ratio, when we think about The reinsurance purchasing, the ceding commissions, the change in the mix, can you guys make a directional assessment at this point about Should the acquisition costs in general insurance, should that ratio be higher or lower in 2022 over 2021?

Speaker 2

It's hard to predict. I think your first part of the question is, do ceding commissions as they start to earn in benefit The overall expense ratio, the answer is yes. It wasn't always the case when we were starting the turnaround and But today, we have market terms or better on ceding commissions and that starts to earn in. But I hate to go back to travel and I mean those really dipped during the pandemic and the U. S.

Speaker 2

Rebounded 1st, international starting to rebound and those businesses just by its nature of how they're Set up have lower loss ratios and higher acquisition expenses. So it's hard to predict. I mean, what's the recovery look like? What's our growth What we will focus on all the time is improvement in accident combined ratio. So we're not going to be shifting from one Category of loss ratio into acc, or back.

Speaker 2

I mean, we're going to make sure we're focused on the portfolio optimization and mix of business to improve the overall results.

Speaker 3

Thank you.

Operator

And now we'll hear from Alex Scott with Goldman Sachs.

Speaker 8

Hi, good morning. First question I had is just on the life and retirement side. When I look at the 10 ROE, it held up and how strong they were and whether that can continue. But at the same time, there were probably some other things in there. I think probably DAC true ups And things like that related to the markets would have hurt you.

Speaker 8

Without maybe the details, it's a little hard from the outside to tell sort of What the ROE is running at on a run rate basis at the moment relative to that 12% to 14% that you all have highlighted. Could you talk about that a little bit and how we should think about sort of the level of ROE that you think you can earn right now?

Speaker 2

Thanks, Alex. I mean, as you can appreciate, preparing for the IPO of Life Retirement, we do have constraints in terms of how much detail we can go into. I think if you look at the 1, in terms of how we believe we can drive a 12% to 14% ROE over the long term is something we're very confident about. And if you look at the historical performance of Life Retirement in terms of its ROE and attributed capital, they've done very well. I mean, Kevin, keeping in mind, we've got to be Do you want to provide maybe 1 or 2 items of your observations on the quarter?

Speaker 9

Yes. Thank you, Peter, and thanks, Alex. It really is about the combination of the lower equity markets, which do impact And the second question is from the line of the guidance. The second question is from the line of the guidance. The guidance is now expected to be continuing.

Speaker 9

And then of course, We have the increased SOP reserves, and these are things that will be much less of an impact under LDTI. So it's really the onetime impact of that. And then in terms of interest rates, right, with the increased rates, that does very much affect Call tender income on a real basis, CML prepays and with the direction of the markets, the fair value options. I think we've provided that detail both in the deck for today on Page 11 and also in the Fin sup.

Speaker 2

Thanks, Kevin. Alex, is there another question?

Speaker 8

Yes. Maybe as a follow-up, just going back to The ROE improvement over time, some of those items certainly will take some time and I don't know if you want to Put a specific time frame around it, but I guess the piece of it that's related to corporate cost reductions, I mean for that piece Specifically, over what time period do you think you'd be able to sort of take out, call it,

Speaker 2

We provided a lot of detail in Shane's prepared remarks, And so I don't think it's really worth going back and going through point by point. But the most important thing for us at this stage is to sequence really the strategic Initiatives we have in front of us, the most important being right now the core bridge IPO. So like that's a big Project in itself and making sure that core bridge is set up to be a separate standalone public company and getting the IPO away. Also making sure that all of the things that are done at AIG today that need to be transferred over or worked with Corbridge is the next Highest priority. And we have a our parent expenses, you have to think of it as parent and what is general insurance today Coming together as one company.

Speaker 2

And coming together as one company, we want to be very thoughtful about the business we're in, in the future. What is a target operating model and how do we sequence that in a manner that we are not creating any risk with all the things that we have going on strategically and that we get to the right outcome, in the end. And I think our track record has demonstrated whether it's the underwriting turnaround, AIG200, What we're doing in terms of Corbridge, you should be highly confident we'll do it at a pace that is Certainly, front of mind, but at the same time making sure that we have all the very important pieces of what we're doing in the separation done Very well. And so like that's kind of the timeframe, but it's really not going to be what month, what quarter, it's going to be how do we And then sequence the next priority, which will be how we bring parent and general insurance together. If I may, let me just I just want to thank everybody for our clients, our distribution partners and our colleagues have been tremendous in terms of the work that they've done and the contribution that they've driven to get to these results.

Speaker 2

So everybody have a great day. Thank you for your time.

Operator

And once again, ladies and gentlemen, this does conclude your conference for today. We do thank you for your participation and you may now disconnect.

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Earnings Conference Call
American International Group Q1 2022
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