Peter Zaffino
Chairman & Chief Executive Officer at American International Group
Thank you, Quentin. Good morning and thank you for joining us today to review our third quarter financial results, which I'm pleased to report, we're very strong along with the excellent progress we've made on our strategic priorities. Following my remarks, Shane will provide more detail on the third quarter financial results and then we'll take questions. Kevin Hogan, David McElroy, and Mark Lyons will join us for the Q&A portion of today's call.
The third quarter represented an inflection point for AIG with important milestones achieved across the organization. Our team once again demonstrated its ability to execute on significant strategic initiatives that position AIG for a strong future to apply discipline and the successful execution of these initiatives and to achieve high-quality outcomes, even against the backdrop of very complicated capital and insurance markets.
Before I cover the third quarter in more detail, I'd like to comment on the successful Corebridge Financial IPO, which we completed in mid-September, despite very challenging equity capital market conditions. On our second quarter earnings call, we explained the volatility in the capital markets was significantly elevated and that attempting to complete an IPO at that time would not have been in the best interest of AIG, Corebridge or our stakeholders.
As a result, we decided to defer the IPO and revisit timing in the third quarter. We knew that there would be limited open windows and remain committed to completing a transaction as soon as we believe an appropriate opportunity was available. Throughout the summer, our team did a remarkable job and worked diligently on the operational separation of Corebridge from AIG as well as to prepare the business for a successful IPO.
As we noted on our last call, we had already increased the targeted savings program at Corebridge from an initial range of $200 million to $300 million to $400 million within two to three years. With the additional time available pre-IPO, the business accelerated certain actions and is now expected to deliver run rate savings of over $100 million by the end of 2022, ahead of our original schedule.
We were also prepared to secure the capital structure of Corebridge prior to the IPO and accessed the debt markets in late summer during a short window when conditions became more favorable. In August, Corebridge issued $1 billion of hybrid debt securities and in early September drew down on a $1.5 billion bank facility to complete its initial capital structure. Using part of the net proceeds from these debt transactions, Corebridge closed out the remaining $1.9 billion due to AIG under a promissory note.
Throughout this time, we also engage in continuous discussions with our financial and other advisers about equity market conditions, investor sentiment, and our ability to execute the IPO in a complicated market. While equity markets remain uncertain, volatility was not as extreme leading up to Labor Day. We were confident we could complete the IPO within an acceptable valuation range, and we continue to believe it was very important for the future of AIG and Corebridge to establish Corebridge as a public company in 2022.
Throughout the third quarter, we also made significant progress in the implementation of a new investment management model for AIG and Corebridge. As you know, in mid-2021, we finalized a strategic partnership with Blackstone, which includes the transfer of $50 billion of Corebridge AUM to Blackstone, with that number growing to $92.5 billion over six years.
In addition, earlier this year, we announced a partnership with BlackRock, under which we will transfer up to $150 billion of liquid assets from both AIG and Corebridge. To date, we have transferred $100 billion of assets with $37 billion moving from AIG and $63 billion moving from Corebridge. The complexity of operationally separating corporate from AIG as well as implementing our new operating model for investment management cannot be understated. Keep in mind, these businesses have been in a combined structure for over two decades with aspects of each business shifting over time between segments until just a few years ago. And until we announce our intention to separate Corebridge from AIG in late 2020, investments was a stand-alone unit at AIG, servicing all businesses across the organization. Our partnerships with Blackstone and BlackRock enable us to accelerate the reshaping of our investment portfolios.
With respect to the financial commitments Corebridge made as part of the IPO, I'd like to reiterate them as they, too, will create significant value for shareholders over time. We continue to expect Corebridge to pay $600 million in annual dividends with its first quarterly dividend of $148 million declared 15 days after the IPO close and already paid. To have the financial flexibility to repurchase shares or reduce AIG's ownership stake as early as the second quarter of 2023 and to achieve a return on equity of 12% to 14% over the next 24 months.
Completing the Corebridge IPO within a very narrow window was a testament to the careful preparation, hard work and dedication of our teams at AIG and Corebridge and to the quality of the business. This was a major accomplishment for our teams, and we are all very proud of the outcome.
Turning to other highlights in the third quarter. Adjusted after-tax net income per diluted common share was $0.66. General Insurance delivered very strong performance and continued profitability improvement despite significant natural CATs in the quarter. The accident year combined ratio, ex-CATs was 88.4%, a 210 basis point improvement year-over-year and the 17th consecutive quarter of improvement. This result was primarily due to Global Commercial, which had an excellent quarter, with an accident year combined ratio ex-CATs of 83%, a 590 basis point improvement year-over-year, driven by international commercial which had an impressive 80.4% accident year combined ratio ex-CATs.
The accident year combined ratio was 98.2%, a 200 basis point improvement year-over-year. The calendar year combined ratio was 97.3%, a 240 basis point improvement year-over-year.
CAT losses in the third quarter were $600 million, or 9.8 points of the combined ratio. Shane will break this number down for you in his remarks. Our CAT total includes losses from AIG Re related to Hurricane Ian, which came in at $125 million. This result reflects the terrific work the team has done to reduce peak zone exposure in our assumed reinsurance business, particularly in Florida, where we've reduced limits deployed by approximately 60% since 2018 and have minimal exposure to Florida domestic insurers.
Considering Hurricane Ian and other CATs in the third quarter, our CAT losses validate the quality of our underwriting, our reinsurance strategy, and our ability to successfully manage volatility. With respect to PYD, there was a favorable release in the third quarter of $72 million or 90 basis points of the calendar year combined ratio.
In Life and Retirement, the business had another quarter of strong sales with premiums and deposits coming in at approximately $9 billion, up from $7.2 billion in the prior year with positive year-over-year growth in each of its four business segments.
Effective capital management remains a priority for AIG. In the third quarter, we repurchased $1.3 billion of common stock and paid $247 million of dividends. We also announced $1.8 billion of debt repayments, which we commenced in the third quarter and closed last week, further strengthening our balance sheet. And lastly, AIG ended the third quarter with $6.5 billion of parent liquidity.
Now let me provide additional detail on General Insurance and the continued sustained improvement and very good absolute performance in our underwriting. When referring to gross and net premiums written, note that all numbers are on an FX-adjusted basis. Gross premiums written increased 5% to $9.2 billion with global commercial growing 8% and Global Personal decreasing 3%. Net premiums written increased 3% to $6.4 billion. The growth was in our Global Commercial business, which grew 6% with Global Personal decreasing 4%. North America Commercial net premiums written increased 7%, and international commercial net premiums written increased 5% or approximately 8%, excluding the impact of nonrenewal and cancellations related to known Russia exposure.
In North America Commercial, we saw very strong growth in net premiums written in Lexington led by wholesale property, retail property, and Glatfelter. In International Commercial, we also saw strong growth in net premiums written in Global Specialty, led by International Specialty, marine and energy as well as property. In Global Commercial, we also had very strong renewal retention of 85% in our in-force portfolio with North America up 400 basis points year-over-year to 86% and international at 85%. 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 strong. North America new business was $458 million led by Lexington. International new business was $474 million led by specialty.
Turning to rate. Momentum continued in North America Commercial with overall rate increases of 9% in the third quarter, excluding workers' compensation. Areas within North America Commercial achieved double-digit rate increases. These included Lexington, which increased 20%; cyber, which increased 32%; and excess casualty, which increased 12%. International Commercial rate increases were 6% driven by Talbot, EMEA, Asia Pacific, each of which increased 10%.
Our team analyzes loss cost trends every quarter. On our last call, we indicated that our loss cost trend view in the second quarter for North America Commercial lines had migrated upwards to 6%. Due to inflationary and other related factors that have resulted in an increase in property loss costs, we are increasing our aggregate loss cost trend to 6.5%, both in North America and International. Overall, we continue to receive rate above loss cost trends, which contributes to margin expansion on a written basis.
Moving to Global Personal Insurance. We continue our work across the portfolio to prioritize growth in A&H, to reposition our capabilities in Japan Personal and to transform our North America high net worth portfolio. Starting with North America. Personal net premiums written declined 11% driven by warranty as well as our ongoing reshaping of our high net worth business that we've discussed on prior calls.
We continue to make progress in our high net worth business by reducing peak zone aggregation, improving the overall quality of the portfolio, transitioning a portion of the portfolio, where appropriate to excess and surplus lines and enhancing the value we offer to clients. Third quarter results reflect this repositioning with North America's gross and net premiums written declining as we continue to reduce exposures and increase reinsurance sessions to mitigate volatility.
North America Personal Insurance's premium declines were partially offset by continued momentum in individual travel and personal A&H. In International Personal, net premiums written declined 2% due to a reduction in warranty that was partially offset by a rebound in individual travel as well as growth in A&H, which is our largest and most profitable International Personal portfolio.
One item to note in the International Personal Insurance third quarter accident year loss ratio is that it reflects approximately $100 million of losses related to COVID claims in Japan and, to a lesser extent, Taiwan. These losses were primarily due to the Japanese government instituting a policy relating to deemed hospitalizations resulting from COVID, which impacted our A&H book. This government policy was revised in the third quarter, and as a result, we expect the issue to have a de minimis impact in future quarters, starting with the fourth quarter of this year.
Additionally, some of these losses related to cleanup expense benefits offered to small businesses, which AIG no longer provides.
Turning to PYD. We conducted our annual review of approximately 75% of pre-ADC loss reserves in the third quarter. We applied conservative assumptions in this review as we believe it is appropriate to be prudent given current economic conditions. As a result of our review, we recorded $72 million of net favorable development for the third quarter or 90 basis points of the loss ratio. This reflects $42 million of amortization from the ADC combined with $30 million of other favorable development. Our international operations were favorable in every region totaling $328 million, whereas North America was unfavorable by $256 million.
Furthermore, in North America, virtually every line of business was favorable, except for U.S. financial lines, which was unfavorable by $660 million net of the ADC, predominantly in accident years 2018 and 2019 and, to a lesser extent, 2020.
Let me unpack the drivers of unfavorable development in U.S. financial lines a bit more because it's been an area of focus for us for several years, given AIG's history in this line of business. The unfavorable development was primarily driven by excess D&O written out of both the U.S. and our Bermuda business. And while there was some movement on the primary side, the excess book was the most significant driver. D&O prior year emergence continues to be driven by large losses. Many from security class actions and earlier accident years also experienced stacking exposures where primary mid-excess and high-excess policies were all exposed on the same insured.
This issue is similar to what we saw across the portfolio when we first started our remediation strategy. The company had too much vertical limit on a per account basis. As we've discussed on prior calls, our underwriting strategy and ventilation standards were completely overhauled over the last few years, including U.S. financial lines to prevent stacking and overexposure to any one insured. And we've dramatically reduced limits deployed on individual policies obtained tighter terms and conditions and achieved higher attachment points on primary limits. Shane will provide more detail on PYD in his remarks.
Now I'd like to spend a few minutes talking about Hurricane Ian, which was a very tragic event on a human level that also left devastating physical damage. AIG rapidly deployed significant resources to the affected areas, providing immediate support and infrastructure to help individuals, businesses and communities rebuild. Hurricane Ian is projected to be the second largest insured natural CAT loss in U.S. history.
There remain a considerable number of variables contributing to industry ultimate losses. But based on what we know today, total insurable losses are expected to be in the range of $50 billion to $60 billion. For context, Hurricane Katrina and Irma, the first and third largest U.S. natural CAT losses in the last 100 years are estimated at $85 billion and $40 billion of insured losses, respectively, on an inflation-adjusted basis.
While Hurricane Ian will have an impact on the broader insurance, reinsurance and retro markets, we believe AIG is well positioned. Very importantly, we have strong and strategic relationships with our major reinsurers and we are confident in our ability to obtain similar levels of capacity for 2023 as we did in 2022. In addition, we've improved and continued to improve our portfolio, and therefore, the reinsurance we require will reflect this during 2023. And we see significant growth opportunities across the market, especially in the near term and for property specifically, and our significant financial flexibility will allow us to be nimble as we deploy capital at attractive risk-adjusted returns to retail property, wholesale property, Talbot, global specialties and AIG Re.
With respect to the industry and markets more broadly, as we noted on our second quarter call, there are a few things you need to believe about the market prior to Ian in order to understand the impact Ian may have in the future. If you believe, as we do, that the retro market was already contracting from last year's available capacity, which itself was reduced from the prior year and the anticipated capital for 2023 was already going to further contract approximately 10%. The retro market and the property CAT market would have already been challenged even prior to Ian.
In addition to reduced capacity over 2022, prior to Ian, there was also an expectation of increased retentions, more specific apparel coverage as well as rate increases resulting from several factors, including increased frequency and severity of CATs over the last several years. Keeping this context in mind, 2022 will be another year with over $100 billion in natural CAT industry losses. Prior to 2017, on an inflation-adjusted basis, there were only two years, 2005 and 2011, that had greater than $100 billion of global natural CAT losses. And in both of these years, losses were led by primary apparels.
Since 2017, five of the last six years have had greater than $100 billion in global natural CAT losses with the predominant portion of losses in the aggregate coming from secondary apparels. Furthermore, other issues potentially impacting 1/1 capacity prior to Ian were the strengthening of the dollar, euro-denominated capacity likely decreasing due to currency devaluation, asset valuations, inflation and demand surge from the post-pandemic economy, just to name a few.
When considering the impact of Ian and the complexity it adds to already challenging market conditions, there are a few additional factors to consider. In Florida, residential total insured values have increased by more than 50% over the last 10 years. The significance of commercial losses, which will likely exceed 40% of the ultimate losses for Ian compared to the average of prior natural catastrophes, where commercial losses were 30% of the ultimate loss. The prevalence of commercial losses exacerbates the complexity of CAT modeling generally and the resulting deficiencies regarding appropriate CAT load and pricing.
When considering the modeled estimated output for losses related to Ian, for example, commercial losses were deficient by 2.5 times and personal by 1.5 times after adjusting for inflation and other factors. Furthermore, when major CATs occur in Florida, a disproportionate amount of the loss finds its way to the reinsurance market because of the proportional and low attaching excess to loss placements completed by Florida domestic insurers as their capital structures require significant reinsurance. Available reinsurance capacity is forecasted to be the lowest aggregate limit available in over a decade, making conditions in the property CAT reinsurance market even more challenging.
Now turning to Life and Retirement. Adjusted pretax income was $589 million, decreasing from $877 million in the prior year period, mainly due to lower alternative investment income and lower call and tender income. There were no significant reserve adjustments arising out of the third quarter actuarial assumption review. As I mentioned earlier, Life and Retirement had excellent sales with premiums and deposits of approximately $9 billion, up 23% on year-over-year. Sales of annuities over the course of 2022 have benefited from our relationship with Blackstone with $5 billion of assets originated year-to-date in private ABS, direct credit lending, and structured assets.
While our strategic partnership with Blackstone is still in the early days, the quality and the performance of the portfolio relative to what the business could have done on its own are very encouraging. Sequential improvement in fixed income and loan portfolio yields accelerated with a 24 basis point improvement in base investment yields. Year-over-year fixed income and loan portfolio yields also improved 8 basis points, confirming the business has surpassed year-over-year yield compression for the first time in recent memory.
Shane will provide more information on the Life and Retirement segment and Corebridge in his remarks. Shifting to capital management. We continue to be balanced and disciplined as we maintain appropriate levels of capital in our subsidiaries for profitable growth opportunities across our global portfolio as well as reduced levels of debt while returning capital to shareholders through share buybacks and dividends. Looking ahead, with respect to share buybacks, we have $4.3 billion remaining on our current share repurchase authorization and expect to end 2022 with over $5 billion of share repurchases for the full year. And balance sheet actions we've taken put us in a position of strength with significant financial flexibility that AIG has not had in many years.
As we look to 2023, our lockup agreement with the underwriters of the IPO with respect to Corebridge common stock expires in March.
Subject to ordinary course blackout periods, this means that our likely windows for a secondary offering of Corebridge common stock in the first half of 2023 will be in mid to late March as well as mid-May to late June. Our current expectation is that the net proceeds will largely be deployed to share repurchases.
While we remain committed to consistently returning capital through share repurchases for the foreseeable future, we believe there will be attractive organic growth opportunities in General Insurance and AIG Re, given current market dislocations that may prove compelling. Lastly, as we discussed on our second quarter call, we continue to expect that post-deconsolidation of Corebridge, AIG will achieve a return on common equity at or above 10%. Shane will provide more details in his remarks.
As we approach year-end and plan for 2023, our path forward is clear with General Insurance solidifying its position as a global market leader. The deconsolidation and eventual full separation of Corbridge firmly underway and a significantly strengthened balance sheet.
With that, Shane, I'll turn the call over to you.
