Peter Zaffino
President & Chief Executive Officer at American International Group
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 financial priorities, 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 will join us for the Q&A portion of today's call.
Today, I will cover 4 topics. First, I will outline the tremendous progress we've made towards the separation of our Life and Retirement business, which will be renamed Corebridge Financial. Second, I will review the excellent first quarter performance of General Insurance, where we continue to drive top line growth, particularly in Global Commercial, and saw meaningful improvement in underwriting profitability. Third, I will cover Life and Retirement's financial performance. This business remains a meaningful contributor to our overall results. And fourth, 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. 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 first quarter and what we did with a few claims that were submitted. 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 first quarter 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's not been much discussion so far in this earnings season regarding what the Russia-Ukraine situation means. 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 types of 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 relate to policies such as political violence, political risk and trade credit, aviation and marine.
Now, I'd like to spend a few minutes on aviation because it's the topic that has received the most attention over the last 30 to 45 days. Aviation is similarly complex and it will take time before all the relevant facts and resulting coverage implications fully emerge.
Let me start with what we know. 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 nonwar perils. We also know that the invasion of Ukraine first occurred on February 24, and there were sanctions issued by the U.K. and the EU on February 26, 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 reregistration law passed in Russia on March 14, which permitted Russian airline operators to reregister aircraft leased from Western lessors on the Russian aircraft registry.
What we don't know is much more expansive. 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 nonwar 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 be determined if there's an actual confiscation. 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.
With respect to reinsurance, structures likely implicated in a war peril scenario include 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 nonwar 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 nonwar peril. Additionally, as with war perils, you would have to consider if reinsurance is available. The reinsurance that would be typically available in an all-risk scenario may be in different structures than in government confiscation or other war peril scenario.
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 to consider their recovery rights through salvage and subrogation and contribution from other available insurance. 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 the separation of Life and Retirement. We made significant progress to prepare this business to be a stand-alone public company. We continue to target an IPO in the second quarter, subject to market conditions and required regulatory approvals. 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-1; the new name for Life and 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 billion Corebridge senior notes offering which was upsized to $6.5 billion based on significant demand. Shane will provide more detail on the maturities and coupons. We also made substantial progress on the operational separation of the Life and Retirement business from AIG, including identifying $200 million to $300 million of cost savings for this business, inclusive of $125 million 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 Corebridge to benefit from strategic partnerships with world-class firms that offer excellent origination and investment capabilities and that complement our own capabilities in 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 billion of Corebridge's liquid assets. 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 and 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 and a single 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 Corebridge 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 first quarter 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 and Retirement considering the current environment, continued expense discipline, savings from AIG 200 and strong execution of our capital management strategy.
In General Insurance, we reported an accident year combined ratio, excluding CAT, of 89.5%, 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 440 basis points year-over-year.
In Life and Retirement, first quarter results benefited from product diversity despite headwinds in the capital markets. Return on adjusted segment common equity was 10%. AIG ended the first quarter with $9.1 billion in parent liquidity after returning $1.7 billion to shareholders through $1.4 billion of common stock repurchases and $265 million of dividends.
Now, let me provide more detail on our first quarter 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 $11.5 billion, with commercial growing 11% and personal growing 8%. Net premiums written increased 5% on an FX-adjusted basis to $6.5 billion. 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 then 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. While there are always movements each quarter in various aspects of our portfolio, both positive and negative, there were 3 items that impacted the first quarter 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 financial results for North America Commercial and, in the first quarter, represented 40% of the segment's total net premiums written. For AIG Re, the first quarter is the largest quarter of the year with over 50% of its annual business written at 1/1. In the first quarter 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 1/1 led us to 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 million, which was the main reason for AIG Re's net premiums written being flat.
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 1/1/2022 renewals as the retro market rebalanced. As a result of this decision, AIG Receded premiums were higher in the first quarter of 2022, which also reduced North America Commercial's net premiums written when compared to the first quarter 2021.
Third, a similar dynamic occurred with respect to our core property CAT 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 CAT placement at 1/1. We were able to consolidate these reinsurance purchases because our portfolio is much improved from last year with significantly reduced exposures. Like the actions we took in AIG Re, however, this reduced North America Commercial net premiums written in the first quarter. To summarize, some of these headwinds in the first quarter of 2022 will largely reverse in the second quarter.
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%. 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 billion for the fourth 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. 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 fourth 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%.
Last quarter, we indicated that our severity trend view in the aggregate in 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. In North America, personal net premiums written grew nearly 40%, albeit off a smaller base, driven by a rebound in Travel and A&H, which was offset by a reduction in Warranty and increased reinsurance cessions 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&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 and Retirement's results. This business had a good quarter considering the headwinds created by the capital markets. 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 $7.3 billion. Adjusted pretax income in the first quarter was $724 million, 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-19 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 in over a decade, with premiums and deposits up nearly 150% year-over-year to $1.6 billion, while surrenders and death benefits both improved slightly. Post separation, we continue to expect that Life and Retirement, meaning Corebridge, will achieve a return on equity of 12% to 14%, and that it will pay an annual dividend of $600 million.
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 first quarter results.
With respect to capital management, we had a very active first quarter, which ended with $9.1 billion in parent liquidity. As a result of the actions I outlined earlier in my remarks, AIG received $6.5 billion of the $8.3 billion promissory note issued to AIG from Corebridge, and those funds were used to repay outstanding AIG debt, resulting in AIG's interest expense being reduced by 23% year-over-year. In addition, AIG will receive the remaining $1.9 billion under the Corebridge promissory note during the second quarter. 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 investment in growth opportunities across our global portfolio. This will also be true over time as we continue to sell down our stake in Life and Retirement.
With respect to share buybacks, as I mentioned earlier, we repurchased $1.4 billion of common stock in the first quarter and are on track to buy back at least $1 billion more in the second quarter. This will leave us with approximately $1.5 billion remaining under our prior Board authorization. And as you saw in our press release, the AIG Board of Directors recently authorized an additional $5 billion 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 and Retirement, we will provide updates regarding our capital management strategy.
Before I turn the call over to Shane, I want to 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 overperformed across the board, and our deep bench continues to provide us with opportunities to leverage skill sets and further develop talent across the organization.
With that, I'll turn the call over to Shane.