Chairman & Chief Executive Officer at American International Group
Good morning and thank you for joining us to review our second quarter results. AIG had an excellent quarter with strong momentum continuing across all of our strategic, financial and operational objectives.
I could not be more pleased with the exceptional results in General Insurance and Life Retirement again delivered good results despite very challenging equity market conditions, significant volatility and other headwinds. As you saw in our press release, adjusted after-tax net income per diluted common share was $1.19.
General Insurance achieved a calendar year combined ratio of 87.4%, the first sub-90 quarter and best result this business has achieved in over 15 years. The accident year combined ratio, excluding cats, was 88.5%, a 260 basis point improvement year-over-year and the 16th consecutive quarter of improvement. And the accident year combined ratio, excluding cats, in Global Commercial was 85.3%, an improvement of 400 basis points year-over-year.
Consistent with our strategy to manage volatility, catastrophe losses were very modest in the quarter, coming in at $121 million or 1.8% of a combined ratio. Life and Retirement has strong fixed annuity sales with over $1.3 billion in deposits for the second straight quarter which benefited from the origination capabilities of Blackstone.
AIG returned nearly $2 billion to shareholders in the second quarter through $1. 7 billion of common stock repurchases and $256 million of dividends. In addition, we are on track to buy back at least $1 billion of common stock in the third quarter. We ended the second quarter with $5.6 billion of parent liquidity which Shane will go through in more detail in his remarks.
On today's call, I will provide more detail on 5 topics. First, I will provide an update on the IPO of our Life and Retirement business which will be known as Corebridge Financial once the company is public and discuss why we chose not to proceed with the IPO in the second quarter. I will also review the significant progress we've continued to make on various aspects of the separation of Corebridge as we prepare this business to be a stand-alone public company.
Second, as a follow-on to the IPO discussion, I will review Life and Retirement results where, as I mentioned, the core business showed continued resilience and solid performance despite headwinds largely driven from a reduction in net investment income. Third, I will review the performance of General Insurance, where underwriting excellence continues to produce outstanding results with strong profitability and top line growth, particularly in our Global Commercial portfolio.
Fourth, I will provide an update on AIG 200, where we achieved critical milestones and delivered on our stated goal of $1 billion in exit run rate savings 6 months ahead of schedule. Lastly, I'll provide an update on capital management, particularly with respect to stock buybacks and debt reduction.
Following my remarks, Shane will provide more detail on the quarter 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.
As you can see, our team has accomplished a lot on many fronts. Before expanding on our financial and operating performance, I want to address the status of the Corebridge IPO. Our base case had always been to complete the IPO in the second quarter, subject to regulatory approvals and market conditions. In deciding whether to launch the initial public offering in May or June, we weighed several variables which were all market-related, some specific to Corebridge and some more macro level. These included equity market conditions and particularly the trading values of companies in the Life and Retirement sector that we consider to be the most comparable to Corebridge.
In the second quarter, equity markets were down 16% with only 3 weeks seeing positive market returns, the VIX which was above 30 resulting in extremely elevated market volatility and feedback we received from advisers, analysts and many potential institutional investors following the public filing of the S-1. While completing the IPO is a significant priority for us and something we are laser-focused on, we believe this is an attractive business and did not want to execute a transaction that would be detrimental to stakeholders in the long run.
Absent something we don't see today, we remain ready to execute on the IPO, subject to regulatory approvals and market conditions and the next window will be in September. In the meantime, throughout the summer, we continue to make significant progress to position the business for long-term success.
I'll highlight 3 areas of focus. One, expanding on our plan to achieve expense savings at Corebridge. Last quarter, we estimated these savings to be in the range of $200 million to $300 million but we now expect to generate closer to $400 million of savings over the next 3 years with the majority of the run rate savings to be achieved in the next 24 months.
Two, progressing the implementation of a new operating model for our investments unit. This includes our strategic partnership with Blackstone announced in July of 2021 and our partnership with BlackRock, where we began moving assets under management in the second quarter of this year pursuant to the arrangement we announced in late March.
And three, planning our transition to BlackRock's Aladdin platform which will replace aging and end-of-life technology infrastructure and provide enhanced risk analytics and reporting. We continue to expect that Corebridge will pay an annual dividend of $600 million post-IPO that will have a payout ratio of 60% to 65% and that it will achieve a return on equity of 12% to 14% over the next 24 months.
Now turning to Life and Retirement's performance in the second quarter. As I mentioned earlier, adjusted pretax income was $563 million, decreasing from the prior year period due to lower NII which was driven by lower alternative investment income, accelerated DAC amortization and an increase in SOP reserves.
Given the pending IPO, we remain somewhat limited in what we can say about the business but let me provide some details from the second quarter. The core business produced strong sales in fixed annuities which were up 48% to $1.4 billion and strong sales in indexed annuities which were flat at $1.5 billion.
In Group Retirement, contributions grew 1%, nonrecurring deposits grew 4% and enrollments were up 11%. Second quarter deposits of $1.8 billion were strong with base net investment spread growing 4 basis points sequentially due to the higher interest rate environment. The Life and Retirement balance sheet and capital position remains strong with an RBC ratio of 415% to 425%, still above our target ranges.
Now let me provide more detail on our second quarter results in General Insurance, where we continue to drive improved financial performance. Gross premiums written increased 5% on an FX-adjusted basis to $9. 6 billion with Global Commercial growing 8% and Global Personal decreasing 3%.
Net premiums written increased 5% on an FX-adjusted basis to $6.9 billion. This growth was led by our Global Commercial business which grew 8% with Global Personal decreasing 4%. Global Commercial net premiums written increased 10%, excluding AIG Re, where we have significantly reduced property cat writings and exposure, particularly in the Southeast region of the U.S.
North America Commercial net premiums written increased 10% or 14% excluding AIG Re. And international net premiums written increased 5% or 8% excluding the impact of nonrenewal and cancellations related to Russia exposure in each case on an FX-adjusted basis.
In North America Commercial, we saw very strong growth in net premiums written, in Lexington which grew 31% led by wholesale property which was up 46%; retail property which grew 17%; and our Canadian commercial business which grew 10%. In International Commercial, on an FX-adjusted basis, we also saw strong growth in net premiums written. In Global Specialty which grew 16% led by energy which was up 20% and marine which was up 10%. North America Specialty which grew 17%; and International Specialty which grew 15%.
In Global Commercial, we also had very strong renewal retention of 85% in our in-force portfolio with North America up 200 basis points to 85% and International holding steady at a very strong 86%. As a reminder, we calculate renewal retention prior to the impact of rate and exposure changes. And across Global Commercial, our new business continues to be very strong, coming in slightly over $1 billion for the fifth consecutive quarter.
North America's new business grew to $542 million led by Lexington. International new business was $466 million, slightly down year-over-year due to intentional actions we took in Talbot and in our Specialty business related to Russia, Ukraine.
Turning to rate. Momentum continued in Global Commercial with overall rate increases of 7%. And in the aggregate, rate continued to exceed loss cost trends. This is the fourth consecutive year in which we're achieving rate above loss cost trends and where we are successfully driving margin expansion.
North America Commercial achieved 7% rate increases with some areas achieving double-digit increases led by Lexington which increased 18% with 17% in Lexington wholesale property; Financial Lines, where professional increased 34% led by cyber which increased 52%; and excess casualty which increased 10%. International commercial rate increases were 7% driven by Financial Lines which increased 11%, including more than 47% rate increases in cyber; property which increased 10%; and EMEA which also increased 10%.
Last quarter, we indicated that our loss cost trend view in the aggregate for North America Commercial had migrated upwards from 4% to 5% mostly driven by shorter tail lines. And as a result, we moved the upper end of the range to 5.5%.
In the second quarter, trends in casualty and other liability lines continue to show no obvious impact in either internal or external data to support a large move on loss cost, whereas property businesses have been more clearly affected. As a result, based on a review of more recent information, we again modified our view on loss cost trend to 6%.
Loss cost trend represents the composite of frequency and severity. However, there is an additional mitigant to inflation built into rate decisions. Exposure trend which we view as a partial offset to loss cost trend, reflects the additional premiums an insurer receives driven by growth in underlying inflation sensitive exposure basis. When taking this exposure mitigant into account, our current North America Commercial loss cost trend net of these inflationary exposure benefits is approximately 4%.
Additionally, our North America Commercial accident year loss ratio ex cat is booked at 63% year-to-date which is consistent with pure actuarial rate over loss cost and exposure trends but is a pure numerical approach and does not reflect our improved risk selection and continued improvement in terms of conditions. Those benefits will emerge over time.
As we discussed on prior calls, since 2018, we have implemented a clear ventilation strategy in our casualty, financial lines and property portfolios that directs our capacity deployment towards higher average attachment points which is a strong defensive measure towards rising inflation. And this strategy continues today. We also implemented the strategy in our AIG risk management loss-sensitive workers' compensation business. And over the last few years, average deductibles have increased 30% to $1.3 million.
Turning to Personal Lines. In North America Personal, net premiums written declined nearly 4% driven by a reduction in warranty which was partially offset by a rebound in travel. In International Personal, net premiums written declined 4% on an FX-adjusted basis also due to a reduction in warranty and partially offset by growth in Accident & Health and travel.
Now I'd like to spend a few minutes on our high net worth business. This is a business we will continue to invest in where there are attractive opportunities for profitability improvement.
Over the last 2 years and through the second quarter, we've already invested $140 million to improve digital workflow, data, a customer interface that will provide enhanced insight and value to distribution partners and policyholders. The actions we are taking are designed to position this business to be more balanced with less density and lower volatility in order to provide more sustainable financial results.
Let me review some of the market dynamics impacting this business that have created significant complexity and the resulting actions we are taking to reposition the portfolio. Currently, the level of reinsurance we purchased and the commensurate model ceded profit is a headwind to net premiums written growth and combined ratio improvement. This has been intentional as we are not willing to take volatility on frequency or tail risk on cat in our high net worth business.
Adding to this, the inability to pass on increased loss and reinsurance costs through rate increases or limit management largely due to regulatory constraints further deteriorates margin in the short run. But we have made a deliberate decision to continue writing this business as we believe the trade-off is appropriate in the near term given the opportunity we see over the long term.
And while each of our cat-exposed businesses has different attributes, I don't see reinsurance costs for the high net worth market generally becoming less expensive for the foreseeable future but instead, seeing it putting pressure on the segment. In fact, for a business that is primarily underwritten in peak zones with high total insured values, reinsurance costs will likely increase and in some cases, materially.
To understand the complexity of reinsurance for peak zones, you need to look no further than what has happened in the retrocessional market over the last few years. While overall small market, retrocession provides approximately $60 billion of available limit across various structures, of which roughly $20 billion is indemnity-based for reinsurers with this capacity primarily supported by alternative capital.
The dynamics in the retrocessional market over the last few years are important to understand because they have materially changed even though overall retrocessional capacity has remained flat since 2017. First, the cost of retrocession has increased significantly more than in the reinsurance industry on a risk-adjusted basis. Second, available capacity has shifted from predominantly aggregate to predominantly occurrence.
Third, first event aggregate and lower attaching occurrence retrocession have been put under significant stress. Fourth, the retrocessional market return period attachment points have increased 50%. And fifth, compounded risk-adjusted rate changes have also increased by over 50% even though retrocessional exposure is reduced compared to prior year.
When you couple these factors with the additional adjustments going forward for inflation, model changes, trapped capital, you have a very complicated and challenging market. Additionally, if you review global insured net cat retrocession losses over the last decade, 9 out of 10 years have had larger contributions from secondary peril aggregate losses than peak peril losses which highlights the complexity of modeling catastrophes.
As a result of these dynamics and challenging circumstances, we concluded that to continue to provide high net worth clients with comprehensive solutions that meet their emerging risk issues, we needed to move property homeowners product to the non-admitted market, particularly in cat-exposed states. In the second quarter, we exited the admitted personal property homeowners market in certain states as we could no longer maintain our level of aggregation especially given the inability to reflect the loss cost increases, inflation and increased reinsurance costs and rates as well as limitations on our ability to make coverage changes in this market.
As part of our go-forward high net worth strategy, we're going to move homeowners and possibly other products in more states to the non-admitted market. And we plan to set up a structure that over time, we expect to be supported by third-party capital providers in addition to AIG. This structure will provide more flexibility to manage aggregation, price, limit, terms and conditions and to innovate to solve evolving client needs.
We will continue to provide coverage to our clients in the U. S. utilizing a hybrid model of non-admitted and admitted products in some states and admitted-only products in other states. We're already seeing the benefits of this strategy in our portfolio as the reduction in key catastrophe perils is apparent in these early stages.
For example, since year-end 2021, gross wildfire PMLs are down approximately 35% to 40% across the entire PML return period curve.
Now I want to review Russia-Ukraine. Last quarter, I addressed the many complexities and uncertainties that this situation presents, particularly those related to aviation policies issued to airline operators and leasing companies, including questions surrounding the occurrence of actual losses, loss mitigation efforts, whether any losses arise from war versus non-war apparels and the potential applicability of sanctions. These complexities and uncertainties very much continue.
The claims we have received continue to be largely reported under political violence or political risk policies. And we continue to reserve our best estimate of ultimate losses, heavily comprised of IBNR despite the fact that the information we have received in connection with these claims remains very limited. Moreover, in the event of losses and the lines of business we have outlined that are subject to a potential loss, we have multiple reinsurance programs available.
Turning to AIG 200. We started this 3-year journey in 2019. AIG 200 was designed to transform our core foundational capabilities across the company and our financial objective was to deliver $1 billion of exit run rate savings with a cost to achieve of $1.3 billion.
At the end of the second quarter, we achieved these goals 6 months earlier than expected. Delivering on these critical operational and financial objectives is a major accomplishment for our team.
AIG 200 was successful because we maintained a tight governance structure and saw exceptional collaboration from colleagues across all major areas of the company. While the original objectives of AIG 200 have been completed, our team will remain focused on continuous improvement in operational excellence.
AIG 200 has put the company in a significantly better place. Specifically, we modernized our IT platform, retiring over 50% of our identified applications and moving 80% of our infrastructure to the public cloud. We now have a global standard commercial underwriting platform that streamlines our processes and allows over 3,000 underwriters to make better risk management decisions in real time.
This platform also includes a new global location management system that allows us to better understand and manage our PML exposure. We made significant investments in key capabilities, including building a consistent underlying data infrastructure, enhancing our digital capabilities through new distribution partner and client portals linked to a single common call center platform and fundamentally streamlined our finance reporting capabilities for faster decision-making. And we streamlined our global operations and shared services capabilities by moving over 10,000 roles to outsourcing partners.
I want to thank all of our colleagues involved in AIG 200 for their outstanding performance. They should take great pride in knowing they established a new infrastructure and foundation for AIG that we will continue to build on and that will drive benefits for our stakeholders now and in the future.
Turning to our capital management strategy. We will continue to be 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.
As I said earlier, we had a very successful second quarter, where we reduced net debt outstanding by $1.4 billion, repurchased $1.7 billion of common stock, paid $256 million in dividends and ended with $5.6 billion in parent liquidity. Looking ahead, with respect to debt repayment, AIG will receive the remaining $1.9 billion under the promissory note from Life and Retirement prior to the IPO. And we expect to use these proceeds to pay down additional AIG debt and for other purposes.
With respect to share buybacks, we have $5. 8 billion remaining on our current share repurchase authorization and expect to repurchase at least $1 billion of common stock in the third quarter. 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 discussed on our last call, we expect that post deconsolidation of the Life and Retirement business, AIG will achieve a return on common equity at or above 10%. Shane will provide more details on ROE and on capital management in his remarks.
Shane, I'll turn the call over to you.