American International Group Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 2, 2023

There are 9 speakers on the call.

Operator

Good day, and welcome to AIG's Second Quarter 2023 Financial Results Conference Call. This conference is being recorded. Now at this time, I would like to turn the conference over to Quint McMillan. Please go ahead.

Speaker 1

Thanks very much and 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 provide details on important factors that could cause these actual results or events to differ materially. Except as required by applicable securities laws, AIG is under no obligation to update any forward looking statements if circumstances or management's estimates or opinions should change.

Speaker 1

Today's remarks may also refer to non GAAP financial measures. A reconciliation of such measures to 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 aig.com. Finally note, Today's remarks as they related to net premiums written in general insurance are presented on a constant dollar basis and where applicable are also adjusted for the lag elimination in international and that is described in our earnings release and related documents. Additionally, today's remarks will include results of AIG's Life and Retirement segment and other operations on the same basis as prior quarters, which is how we expect to continue to report until the deconsolidation of Corbridge Financial. AIG's segments and U.

Speaker 1

S. GAAP Financial Results as well as AIG's key financial metrics with respect thereto differ from those reported by Corbridge Financial. Corbridge Financial will host its earnings call on Friday, August 4. 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 Q2 financial results. Following my remarks, Sabra will provide more detail on the quarter and then we will take questions. Kevin Hogan and David McElroy will join us for the Q and A portion of the call. I am very pleased to report that AIG delivered another exceptional quarter with strong financial performance. In addition, We made significant progress on our strategic priorities that are strengthening AIG for the future.

Speaker 2

We again demonstrated our ability to deliver high quality outcomes while executing on multiple complex initiatives during very difficult market conditions. I would like to start with financial highlights from the Q2. Adjusted after tax income was $1,300,000,000 Or $1.75 per diluted common share representing a 26% increase year over year And the best quarterly adjusted EPS result for AIG since 2007. Net premiums written in general insurance grew 11%, Led by our commercial business, which grew 13%. Underwriting income in the quarter was approximately $600,000,000 The adjusted accident year combined ratio ex cats was 88%, a 50 basis point improvement year over year and the best result for AIG since 2007.

Speaker 2

Our cat loss ratio was 3.9% Or $250,000,000 of catastrophe losses, a terrific result against the backdrop of a very challenging cat quarter for the industry. The Life and Retirement business reported very good results in the 2nd quarter. Adjusted pretax income was $991,000,000 Up 33% year over year and premiums and deposits were over $10,000,000,000 a 42% increase year over year supported by record sales of fixed index annuity products. Consolidated net investment income On an APTI basis was $3,300,000,000 in the 2nd quarter, a 31% increase year over year. In General Insurance, net investment income was $725,000,000 a 58% increase.

Speaker 2

AIG returned $822,000,000 to shareholders in the Q2 through $554,000,000 of common stock repurchases And a $268,000,000 of dividends, which reflected a 12.5% increase in our quarterly common stock dividend that we announced on our last call. As you saw in our press release, the AIG Board of Directors approved an increase to our share buyback authorization to $7,500,000,000 which reflects our commitment to returning capital to shareholders, consistent with the capital management strategy we have previously outlined. Lastly, our balance sheet remains very strong and we ended the quarter with $4,300,000,000 in parent liquidity. During the remainder of my remarks this morning, I will provide more information on the following five topics. First, the significant strategic actions we took in the Q2 to reposition AIG.

Speaker 2

During that review, I will provide additional details on the divestitures of Validus Re and Crop Risk Services, the launch of Private Client Select as an MGA Serving the high and ultrahigh net worth markets and the actions we took with respect to Corbridge. 2nd, I will discuss financial results for General Insurance. 3rd, I will give an overview of the results for life and retirement. 4th, I will provide an update on capital management. And lastly, I will reconfirm our guidance With respect to our path to a 10% plus ROCE post deconsolidation of Corbridge.

Speaker 2

Turning to the strategic actions we executed on, I will start with Validus Re. In May, we announced the divestiture of Validus Re And AlphaCat to RenaissanceRe for approximately $2,750,000,000 in cash and $250,000,000 in RenRe common stock. We expect to close this transaction in the Q4 subject to regulatory approval. We're very pleased to have RenRe as the acquirer. RenRe is a very important partner to us, a company with a terrific reputation and we value the strong relationship we have with Kevin and his management team.

Speaker 2

We believe RenRe will be an excellent owner of Validus Re. Now let me provide some highlights on our rationale for the divestiture. We acquired Validus in 2018, which at the time provided AIG with business diversification not limited just to reinsurance, But also attractive specialty businesses including Talbot and Western World, which were not part of the sale to RenRe and will remain with AIG. Since 2018, we transformed Validus Re by re underwriting the portfolio, leading to significant premium growth And improve profitability. In addition, we dramatically changed the business mix of the portfolio to achieve a more attractive balance among property, Casualty and Specialty Businesses improved geographic diversity and decreased peak zone exposures.

Speaker 2

For AIG, this divestiture represents a key milestone on our journey as it further streamlines our business model, Simplifies the structure of our global portfolio, substantially reduces volatility, which I will explain in a moment, Generates additional liquidity and capital efficiencies and accelerates our capital management strategy. Due to the nature of assumed reinsurance and the portfolio mix of Validus Re, this business is capital intensive and disproportionately contributes to AIG's overall volatility and PMLs. As we have discussed over the past few years, The core objectives of the property and casualty turnaround were to substantially improve the overall quality of AIG's global portfolio and underwriting results. Reduced volatility through a massive reduction in growth limits written, Better manage peak zone exposures and geographic balance and strategically use reinsurance across our overall business. A turnaround of this magnitude is made harder when you have a treaty reinsurance business, which by its very nature has volatility.

Speaker 2

We have completed a rigorous enterprise wide modeling exercise using RMS Version 21 to This analysis took into account AIG's exposure, Validus Re's exposure as of February 1, 2023 And the combined output for both companies on an occurrence and aggregate basis. Let me provide a few examples of the modeled output for AIG Post closing of the Validus resale on an occurrence basis. For worldwide all perils, Net PMLs were reduced by 45% at the 1 in 2.50 return period. Worldwide hurricane PMLs will reduce by 60% at the 1 in 50% return period and by 70% at the 1 in 100 return period. North America hurricane PMLs will reduce by 70% at the 1 in a 100 return period North America earthquake PMLs will reduce by 55% at the 1 in 2.50 return period Japan Typhoon PMLs will reduce by 50% at the 1 in a 100 return period.

Speaker 2

Japan Earthquake PMLs will reduce by 50% at 1 in 250 return period and for EMEA, all apparel PMLs will decrease by 85% at the 1 in 250 return period And 75% at the 1 in 100 return period. In addition to the strategic repositioning of our portfolio, There were several additional components that made the sale of Validus Re appealing for AIG. The required tangible that AIG will deliver to RenRe upon closing, which is $2,100,000,000 is substantially below what Validus Re Would have required if the business remained at AIG. We will receive $900,000,000 above the book value of Validus Re, which reflects the improved quality of the portfolio since AIG's purchase of the business in 2018. We also expect to receive Through a pre closing dividend, excess capital in the legal entities being transferred to RenRe, which we estimate will be approximately $200,000,000 In addition, a $1,000,000,000 intercompany loan from Validus Re to AIG will be settled through internal dividends and we expect AIG to benefit from a $400,000,000 reduction in risk based capital requirements following the closing.

Speaker 2

As part of the transaction, AIG will retain 95% of future reserve changes in the portfolio delivered at closing. We will receive the benefit of future reserve releases as the portfolio matures, and we will likely purchase an adverse development cover prior to the closing to minimize potential future reserve exposure. In the Q2, we also announced and closed The sale of Crop Risk Services to American Financial Group were $240,000,000 in cash. Crop Risk Services was part of the Validus acquisition in 2018. Over the remainder of the 2023 crop season, AIG will continue to benefit from earned premium For crop business booked since the start of the year, but as we enter 2024, this business will no longer have an impact on AIG's financial results.

Speaker 2

Next, I want to provide more detail on the formation of Private Client Select as an MGA, which is now referred to as PCS. The MGA has officially launched and we expect to add new capital providers in the coming quarters. We believe the MGA structure is ideal for PCS As it creates flexibility and alternatives for clients, agents and brokers in an environment that's becoming more complex. The high and ultrahigh net worth markets PCS is focused on that have significant foundational challenges include loss cost pressure, Inflation, increased cat exposure through increased total insured values and more concentration in peak zones And primary and secondary apparel modeling has been deficient. AIG will continue to support the MGA And because we will be assuming risk on our balance sheet, we've established the MGA's risk framework, which is designed to improve its financial performance in 2023 as we enter 2024.

Speaker 2

Overall, we are pleased with the progress we've made with StonePoint Capital on this MGA structure and we're well positioned to accelerate the business plan through the remainder of the year. Moving to Corbridge. In June, we completed a secondary offering of Corbridge common stock with gross proceeds to AIG of $1,200,000,000 The offering was well received by the market and the new owners included a strong mix of long term holders, which we believe Results in a more stable and well diversified shareholder base for CoreBridge. Also in June, CoreBridge announced and paid a $400,000,000 special dividend in addition to its $150,000,000 ordinary quarterly dividend and completed the repurchase of $200,000,000 of common stock from AIG and Blackstone. AIG's net proceeds from these actions were approximately $540,000,000

Operator

At the end of

Speaker 2

the second quarter, our ownership stake in CoreBridge was approximately 65%. These actions demonstrate our commitment to deconsolidation and eventually full separation. As we noted on our last call, we continue to explore all options with respect to our remaining ownership of Corbridge that are aligned with the best interest of shareholders. Turning to other strategic actions we are taking in CoreBridge. The previously announced sale process for Leah Healthcare, The Private Medical Insurance business in Ireland that is part of Corbridge is proceeding very well.

Speaker 2

We expect to announce a positive outcome from this Process in the near term and expect that the proceeds from this divestiture will largely be used for special dividend to Corbridge shareholders. Additionally, we recently retained advisors to analyze strategic alternatives for the disposition of the U. K. Life business that is part of Corbridge. The dispositions of Lea and UK Life will streamline the core bridge portfolio and allow its management team to focus on core life and retirement products and solutions in the United States.

Speaker 2

Turning to General Insurance, we had another quarter of strong growth in both gross and net premiums written. Gross premiums written were $10,400,000,000 an increase of 11%. Global commercial, which represents 80% of gross premiums written, grew 15% and global personal decreased 1%. Net premiums written were $7,500,000,000 an increase of 11%. This growth was driven by global commercial, which grew 13%, while global personal grew 5%.

Speaker 2

In North America Commercial, we saw a very strong growth of 18% in net premiums written and excluding Validus Re, net premiums written growth in North America Commercial was 13%. The major drivers were as follows: Retail property, which grew over 50% Validus Re, which grew 32% and Lexington, which grew 18% led by wholesale property and casualty. I would like to provide a few additional details about Lexington's growth given it continues to be an important part of AIG strategy. Property grew 38% year over year driven by very strong retention in new business as well as strong rate increases. Submission activity was up over 30% year over year.

Speaker 2

Casualty grew 41% supported by strong retention in new business and its submission count was up over 90%. In International Commercial, net premiums written grew 6%, Primarily driven by Property, which was up 34%, Talbot, which was up 17% and Global Specialty, which was up mid single digits, which reflected the impact of additional reinsurance purchasing in the 2nd quarter. Global Commercial had very strong renewal retention of 88% in its in force portfolio. International was 200 basis points to 88 percent and North America was up 200 basis points to 87%. As a reminder, We calculate renewal retention prior to the impact of rate and exposure changes.

Speaker 2

And across Global Commercial, we continue to see strong new business, which was approximately $1,100,000,000 in the 2nd quarter. North America commercial excluding Validus Re produced new business of approximately $100,000,000 an increase of 10% year over year. This growth was driven by Lexington Property, which saw excellent new business growth of over 40%. Retail property had over 50% new business growth, $485,000,000 which grew 5%. This growth was led by Talbot new business, which increased over 100% year over year And Property, which grew new business by 40%, offset by financial lines where new business contracted by over 20%.

Speaker 2

As I noted on our last call, we continue to see headwinds in certain aspects of financial lines due to increased competition putting pressure on pricing. Despite these continuing dynamics, we remain disciplined on risk selection, terms and conditions and price, while taking a long term view on this line of business by not Following the market down. Moving to rate, in North America commercial excluding Validus Re, Rate increased 8% in the 2nd quarter or 9% if you exclude workers' compensation and the exposure increase was 2%. Rate increases were driven by Lexington Wholesale, which was up 23% with wholesale property up over 35% And Retail Property, which was up 30%. In International Commercial, Rate increased 9% and the exposure increase was 1%.

Speaker 2

The rate increase was driven by property, which was up 21%, Halbit, which was up 14% and Global Specialty, which was up 11% driven by Global Energy, which was up 21%. Rate plus exposure was 10% in North America, 11% if you exclude workers' compensation and 10 Note that second quarter results in North America Personal reflected the fact that PCG was transitioning to become Private Client Select. North America personal net premiums written increased 17%, primarily driven by lower quota share sessions in PCG, offset by decreases in travel and warranty. Overall, we had strong growth in net premiums written of 17% With PCG net premiums written growing over 60%. With PCS now officially launched as an MGA, There are several components of AIG's business in the high and ultrahigh net worth markets that will result in improved financial performance for AIG over the balance of 2023.

Speaker 2

First, as we outlined in prior calls, over the last few years, we evolved the model for our high and ultrahigh net worth business Such that we expect net premiums written to grow significantly over the remainder of the year, with our current expectations showing net premiums written increasing over 75% in the 3rd and 4th quarters. 2nd, the lag in earned premium growth that we saw in the Q1 of 2023 dissipated And we saw 36% growth in earned premium in the 2nd quarter. And we expect that earned premium growth will continue to accelerate in the 3rd Q4. The additional earned premium will provide operating leverage, which will reduce our GOE ratio in the 3rd Q4. 3rd, AIG has stranded costs from the transition of PCG to an MGA and we expect to eliminate these costs over the next 18 months.

Speaker 2

4th, we expect the accident year loss ratio for high and ultrahigh net worth business will improve with the combination of improved pricing in our admitted business And more business migrating to the non admitted market, which already had a very positive impact on PCG's accident and policy year loss ratios in prior quarters. This should earn in for our high and ultrahigh network business through the second half of twenty twenty three and into 2024. In International Personal, net premiums written increased by 1% year over year. The modest growth was driven by travel And personal property in Japan, overall, our key focus continues to be growing accident and health and our business in Japan. Shifting to combined ratios.

Speaker 2

As I noted earlier, the 2nd quarter accident year combined ratio ex cats was 88%, A 50 basis point improvement year over year. In Global Commercial, the 2nd quarter accident year combined ratio ex cats was 84.4%, A 90 basis point improvement year over year. The North America commercial accident year combined ratio ex cats was 85.1%, A 310 basis point improvement year over year. And the international commercial accident year combined ratio ex 2nd quarter accident year combined ratio ex cats of 98.1%, a 170 basis point increase from the prior year quarter, largely due to a decrease in earned premium. Now I'd like to provide some context around mid year Reinsurance renewals and recent conditions in the reinsurance market before moving to life and retirement.

Speaker 2

We purchased our major reinsurance treaties at January 1. However, approximately 20% of our overall core reinsurance purchasing occurs in the Q2 as we have a number of core midyear renewals, Predominantly in specialty classes and they were all successfully placed. In addition, we to purchase additional retrocessional protection for Validus Re and a low excess of loss reinsurance placement for Private Client Group ahead of the win season. Overall, the market exhibited more orderly behavior during mid year renewals amidst more stable trading conditions compared to January 1. Reinsure appetite for more discrete purchases increased somewhat enabling a number of buyers to make up for shortfalls in coverage experience at January 1.

Speaker 2

Overall, midyear property cap pricing increased 25% to 35% year over year in the U. S. Driven by Florida. This was the 2nd year in a row of substantial rate increases. International renewals driven by Australia and New Zealand Saw price increases of 20% to 50% with higher increases resulting from loss activity in the region.

Speaker 2

In previous calls, I touched on the increase in catastrophe losses from secondary perils. Through the first half of twenty twenty three, the industry has already experienced over $50,000,000,000 of insured losses, the majority of which were due to secondary perils making 2023 already the 4th highest year on an inflation adjusted basis. A majority of insured losses continue to occur in the United States, highlighting the difficulty of managing volatility in the largest insurance market in the world. Against this challenging backdrop In a strengthened reinsurance rating environment, we maintained our conservative risk appetite and continue to have one of the lowest peak parallel net positions in the market, while managing our overall reinsurance spend. Additionally, through each of our renewals, we maintain all of our principal relationships with our key reinsurance partners.

Speaker 2

While we are exiting the assumed reinsurance business through the sale of Validus Re, Our ownership of RenRe common stock that we will receive as part of the purchase price consideration coupled with our ability to invest up to $500,000,000 in RenRe's Capital partner vehicles will allow us to continue to participate and benefit from partnering with a world class reinsurer with less risk and capital requirements. Turning to Life Retirement. As I noted earlier, the business produced very good results in the 2nd quarter. Adjusted pretax income was $991,000,000 and adjusted return on segment equity was 12.2%, representing a 250 basis point improvement year over year. Premiums and deposits grew 42 year over year to $10,000,000,000 driven by record fixed index annuity sales.

Speaker 2

Corbridge ended the quarter with a strong balance sheet with parent liquidity of 1 point $1,000,000,000 and a financial leverage ratio of 28%. Over the Q2, we continue to make good progress against the Corbridge operational separation So that it can eventually be a fully standalone company. A key focus has been executing against IT separation, which we believe will be substantially complete by the end of this year. To date, approximately 55% of the transition service agreements put in place The time of the IPO have already been exited. Now turning to capital management.

Speaker 2

As I noted earlier, In the Q2, we returned approximately $822,000,000 to shareholders through common stock repurchases and dividends. And the additional $400,000,000 of common stock we repurchased in July brings the total amount of capital we've returned to shareholders since the beginning of the 2nd quarter to over $1,200,000,000 In addition, we continue to focus on maintaining well capitalized Subsidiaries to enable profitable growth across our global portfolio and we remain committed to having a leverage ratio in the low 20s and a share count between $600,000,000 to $650,000,000 post deconsolidation of Corbridge. The additional liquidity We will have following the closing of the sale of Validus Re will largely be used for share repurchases, which we expect to accelerate beginning in the Q4 and as we enter 2024. We also plan to use some of the proceeds from the sale of Validus Re to reduce outstanding debt. Lastly, with respect to ROCE, we remain highly committed to delivering a 10% plus ROCE post deconsolidation of Corbridge.

Speaker 2

During the Q2, we continue to make meaningful progress on all four components of our path to deliver on this commitment. As a reminder, these are sustained and improved underwriting profitability executing on a simpler, leaner business model across AIG With lower expenses across the organization, operational separation and deconsolidation of Corbridge and continued balanced capital management, The sequencing of each component has been very important. We are now able to accelerate this work With the GI underwriting turnaround, AIG 200 and the Investment Group restructuring largely behind us and the operational separation of Corbridge further along In addition to divestitures, which I've already outlined, as I stated on our last call, we're moving away from AIG's historical conglomerate structure to being a leading global insurance company with a leaner and better defined parent company. We continue to expect approximately $500,000,000 in cost reductions across AIG with a cost to achieve approximately $400,000,000 with substantially faster earn in of savings than we saw with AIG 200. Sabra will provide more details on our path to a 10% plus ROCE in her remarks.

Speaker 2

Overall, I could not be more pleased with our progress and what we've accomplished the first half of the year. Our strong momentum continues We have a very solid foundation to build on for the future. Now, I'll turn the call over to Sabra.

Speaker 3

Thank you, Peter. This morning, I will provide more detail on 2nd quarter results, including net investment income and underwriting performance, Provide a balance sheet update and review the drivers of our path to a 10% plus adjusted ROCE. Starting with 2nd quarter results, As Peter noted, adjusted after tax income was $1,300,000,000 up 15% from last year for an annualized adjusted ROCE of 9.4%. Adjusted after tax income per diluted share was $1.75 up 26% from last year, reflecting the impact of share repurchases on EPS. 2nd quarter results were consistent with recent trends.

Speaker 3

Strong underwriting margins and higher net investment income in general insurance, Increased base investment yields and spreads and strong sales in life and retirement and continued expense reduction in balanced capital management in corporate and other. Turning to net investment income. On an APTI basis, investment income improved significantly, up 31% from last year and up 7% sequentially on a consolidated basis and also rose in each segment. Reinvestment rates are driving higher yields. The average new money yield was 5.46%, about 210 basis points above the yield on sales and maturities.

Speaker 3

In General Insurance, this increased the yield on the fixed maturities and loan portfolios 93 basis points over last year and 23 basis points sequentially. In life and retirement, the yield improved 75 basis points and 15 basis points respectively. Alternative investment returns also improved this quarter, although they remain below our long term outlook, totaling $147,000,000 for an annualized return of 6 0%. Credit performance has been strong with more upgrades than downgrades in the fixed maturity portfolios and continued derisking of lower rated assets. Commercial property valuations continue to face downward pressure from higher cap rates, which impacts loan to values on commercial mortgage loans and investment returns on real estate equity funds.

Speaker 3

However, debt service coverage ratios are holding up well and are generally strong across the portfolio, including office. Turning to General Insurance, APTI was $1,300,000,000 up $62,000,000 from the prior year. Net investment income rose by $267,000,000 and underwriting income for the current accident year, excluding catastrophe losses, were 73,000,000 Total catastrophe losses were $250,000,000 up $129,000,000 and included $56,000,000 of 1st quarter cats, mostly from U. S. Events, including a tornado that occurred at quarter end.

Speaker 3

This was a very solid result, as Peter noted, given the high level of industry Cat losses were $159,000,000 while international totaled $91,000,000 largely from Typhoon Marwar. During the Q2, we conducted North America casualty DVRs or detailed valuation reviews, which reviewed about 20% of reserves compared to 15% last year. In our DVRs, we focus on changes in frequency and severity trends, including social and other types of inflation as well as changes in claims trends and settlements such as occurred during COVID. As we noted previously, casualty bodily injury and medical workers' comp trends in our book have been and continue to be more favorable than our reserving assumptions. Our approach in these situations is to react quickly to adverse developments, but to be conservative and wait to recognize favorable trends until accident years are more mature.

Speaker 3

We maintain the same approach for the COVID accident years where claims development patterns in many casualty lines slowed. For those years, we have lagged our development factors In addition to the results of the DVRs, prior year development also includes amortization of the ADC gain, changes in prior catastrophe losses and impacts from loss sensitive lines that are not related to DVRs. In this quarter, prior year development, net of reinsurance and prior year premiums was $25,000,000 This was made up of $115,000,000 of favorable loss reserve development, partially offset by $90,000,000 of prior year return premium. The lower favorable development compared to last year is mainly attributable to the excess workers' compensation DVR, which was favorable by about $75,000,000 in Q2 last year, but is being completed in the Q3 of this year. Our favorable loss reserve development included 100 $50,000,000 of favorable development from our AGRAM loss sensitive portfolio and $74,000,000 of favorable development resulting from North America DVRs.

Speaker 3

This was partially offset by $62,000,000 of unfavorable development in international commercial lines, principally from a multiyear Legacy casualty policy that was written with much higher limits than we do today. In the Q3, DVRs will cover nearly 70 And we will now begin the Q1 of 2019 financial lines claims have not returned to the levels we experienced pre COVID, which we believe reflects improved underwriting, better loss selection, continued ventilation of risk, our reinsurance strategy and achieving appropriate levels of rate. With respect to underwriting, AIG's share of U. S. Public company D and O securities class actions where we are the primary insurer With respect to rate, since 2018, the compounded increases in the Financial Lines portfolio for corporate and national accounts are greater than 60% 50%, respectively.

Speaker 3

However, consistent with our conservative approach, in addition to the lag development factors, We are placing more weight on longer term experience and balancing out more favorable recent trends. Turning to life and retirement. As Peter noted, 2nd quarter results were strong with APTI up 33% over 2Q 2022 driven by higher spread in underwriting margins and strong sales in fixed indexed annuities. Both spreads and underwriting margins remain attractive and fee margins improved with more favorable capital market levels compared to last year. Base net investment spreads Continued to widen with 64 basis points improvement year over year and 9 basis points sequentially driven by reinvestment rates.

Speaker 3

Individual Retirement APTI increased $215,000,000 or 58% from 2Q 2022, driven by base spread expansion and growth in general account products. Positive net flows to the general account were about $400,000,000 Group Retirement APTI grew by $21,000,000 or 12%, driven by continued base spread expansion despite negative flows in the general account. Life Insurance APTI decreased $42,000,000 or 35%, primarily due to lower other yield enhancement income, partially offset by improved base portfolio returns and marginally favorable mortality experience. Institutional markets delivered very Strong results with APTI up $50,000,000 or 65%, driven by investment income and reserve growth. 2nd quarter premiums and deposits reached $2,900,000,000 with $1,900,000,000 of pension risk transfer activity and $970,000,000 of GICS transactions.

Speaker 3

Turning to AIG's other operations. 2nd Quarter adjusted pre tax loss improved by $41,000,000 over last year, driven by an $80,000,000 improvement in corporate and other due to the 4Q 2022 sale of legacy investment portfolios that had losses of $119,000,000 in 2Q 2022. Corporate general operating expenses of $242,000,000 included $67,000,000 of core bridge expenses, including separation expenses. Excluding core bridge and separation related expenses, corporate GOE decreased $19,000,000 from the prior year. Moving to the balance sheet.

Speaker 3

We continue to execute on our balanced capital management strategy with share repurchases, an increase in our common stock dividend and repayment of maturing debt. We ended the quarter with AIG parent liquidity of $4,300,000,000 We remain committed to maintaining strong capitalization in our insurance subsidiaries to support risk and growth. The General Insurance U. S. Pool risk based capital ratio is estimated in the 4 70% to the 4 80% range and life and retirement is projected to be above its 400% target.

Speaker 3

We repaid a $388,000,000 debt maturity in the 2nd quarter and continue to target debt leverage in the low 20s post deconsolidation of Corbridge. At June 30, consolidated debt and preferred stock Total capital excluding AOCI was 26.0 percent, including about $9,400,000,000 of corporate debt. Book value per common share was $58.49 on June 30, 2023, up 6% from year end. Adjusted book value per common share was $75.76 per share, flat from year end. Turning to ROCE, we remain intently focused and are making progress on achieving a 10% plus adjusted ROCE post deconsolidation.

Speaker 3

Year to date, annualized adjusted ROCE for AIG was 9.1% on a consolidated basis And 11.8% in General Insurance and 11.4% in Life and Retirement. Capital management and rightsizing our equity base for AIG post deconsolidation are material levers for achieving our adjusted ROCE goal. In the near term, we will accelerate share repurchases in the Q4 and into 2024 with the additional liquidity from Validus proceeds In addition to ordinary course liquidity generated by our business operations through subsidiary dividends and ongoing profitability. We will balance these share repurchases with additional debt reduction consistent with our leverage target. We are committed to achieving a share count between And we will now begin the Q1 of 2019.

Speaker 3

We will now begin the Q1 of 2019. We will now begin the Q1 of 2019. We will now begin the Q1 of 2019. We will now begin the Q1 of 2019. To $7,500,000,000 Based on the size, risk profile and profitability of our general insurance business and holding company needs today, We estimate a pro form a GAAP equity base excluding AOCI of approximately $40,000,000,000 for AIG ex This is inclusive of about $4,000,000,000 in deferred tax asset NOLs that we exclude for adjusted common shareholders' equity calculation.

Speaker 3

Considering this equity level and our plans to simplify AIG's business and operational structure, reduce volatility and drive more predictable and We are confident that we will achieve our adjusted ROCE goal. We look forward to continuing to update you on our progress. With that, I will turn the call back over to Peter.

Speaker 2

Thank you, Sabra. And operator, we're ready for questions.

Operator

Thank you. Our first question comes from Paul Newsome with Piper Sandler. Your line is open.

Speaker 4

Good morning. Congrats on the quarter. I was hoping we could focus in on the general North American Commercial Business A little bit. I'm getting some questions about the growth, if you sort of assume a certain amount of growth that's related to the Price increases, sort of ex Validus and whether or not we saw a fair amount of growth Just sort of if you normalize both for price increases and for Validus. Sorry, I know you A lot of detail there, but maybe if you could kind of simplify it for that would be fantastic.

Speaker 2

Sure. Thanks, Paul. Good morning. As we talked about in our prepared remarks, we are very Pleased with our overall growth across the world, and retention is up, new business was terrific and balanced, And rate, well above loss cost was evident in so many parts of our business. If I unpack it, as you've asked, I mean, Look at North America, we discussed Validus Re was up 32%, but it's not cyclically its largest quarter.

Speaker 2

It was basically 25% of North America. But other businesses Had tremendous quarters. Lexington had 18% growth, but that was also part of us Casualty, which was 40% growth Lexington Property, which was 35% growth. Retail Property was up over 50% in the quarter and Outlined the rate increases were north of 30 for 2 quarters in a row. Our actual retail casualty business was up in the high single digits.

Speaker 2

So it's a very good outcome for net premium written in North America. The headwind was financial lines, Which was down a little bit over 10%, but that is something that is specific to North America, but we have really good balance in growth. I look at I'll just expand a little bit in terms of international. We had really strong growth. I mean with property, our syndicate Talbot was up 17%.

Speaker 2

International Specialty, I drew it out as a mid single digit growth, net premium written in the quarter, but we had some discretionary spends on Treaty Reinsurance on a gross basis, it grew over 40%. And I want to call out Financial Lines is not experiencing the same headwinds As North America and international was flat, and that's our largest business in the Q2 in international. So, that a little bit more of the weight In terms of the overall growth, but thought it was really balanced, really well done and all the fundamentals we're executing on.

Speaker 4

Thank you. And my second question, I wanted to ask about the cat load in Particularly in North America, as we think of it going forward, I mean, clearly from the data you showed us or talked about on the call, The volatility piece or the tail is going to be reduced a lot with Validus Re. But on an ongoing basis, do you also see kind of a reduction

Speaker 2

Yes. Thanks, Paul. Again, I gave probably a little bit more PML information than people may have liked, but it's really the story is 3 components. One is What we did in the re underwriting to reduce gross exposure across AIG, by the way, including Validus Re over the Last several years and we shed over $1,000,000,000,000 limit, most of it property. And so that had an effect on exposure and PMLs at all return periods.

Speaker 2

I think the reinsurance programs that we bought are world class. We keep calling that out, but In a very challenging and difficult environment at oneone, we did not compromise by taking a lot more net Because of reinsurance pricing, it reflected our book. We got great partners. And as a result, we didn't really have more net in terms of Overall low return period PMLs. And so what I drew out in the Validus Re examples, again, it's on occurrence, it was the RMS model.

Speaker 2

We'll work We've got plenty of aggregate as to drive businesses that exist within AIG. But yes, I mean like it's a different company. I mean we're not going to have the tail But also at all return periods, we're going to have less cat. We've managed aggregates across the world. And look at Validus Re is a very good business.

Speaker 2

But as I said, when we want to continue to reduce volatility, we do that through reinsurance. But when you have a treaty reinsurance business that is got a portfolio that has a lot of cat, That's harder to do. So I think the volatility, the cat loads will go down by the very nature we're going to lose a big part of our cat exposure. But we've been conservative on that and increased them this year and are very comfortable with our estimates and our actual results.

Speaker 4

Great. Thank you very much. Appreciate all the help.

Speaker 2

Thanks, Paul.

Operator

Thank you. Our next question comes from Meyer Shields With KBW, your line is open.

Speaker 5

Great. Thanks so much and good morning. Peter, you gave us a lot of detail about Rate and exposure changes, we saw a little bit sequential improvement, but I was wondering if you could talk about changes in the gap Between rate increases and loss trends from the Q1 to the Q2 of this year?

Speaker 2

Sure, Mary. Good morning. We have given guidance. So let me start with the loss cost inflation, which is still At 6.5 and you can imagine in a company like ours, I mean it's an index and so we look at each line of business each quarter, Make minor modifications or as we did in the back half of last year just based on inflation, more meaningful Adjustments. I'm really pleased with the discipline the company is showing on driving rate above Loss costs and we've done that across the world.

Speaker 2

So the rate environment in the second quarter was very strong. I gave you the guidance on the prepared remarks of North America Excluding work comp 9%, international at 9%. The drivers for this retail property, excess and surplus lines in our specialty businesses, The headwind for rate in North America was financial lines. And it's worth noting again that we have a very big I mentioned in the prior question that international is not experiencing the same rate issues. And again, when I look back over the last 14 quarters, each quarter Has been a positive rate increase in financial lines.

Speaker 2

So it's different for our international portfolio versus our domestic. And We continue to look at businesses like properties getting a lot of attention, but you can look at that as a single quarter. I mentioned before cost increases on the loss cost side, inflation, cost of capital, but also the cost of reinsurance for the industry. Ours was a High single digit risk adjusted increase at 1.1, but those reinsurance costs in the industry are going to need to play in over the course of a year or maybe even in like in Europe's case, into the Q1 absent anything happening through cat season. So I think this is the market that we're in.

Speaker 2

It's a disciplined market. The cost of capital is more expensive and we're going to be very prudent in where we deploy capital. But I'm very comfortable that we are driving margin on a written basis and that will continue as we get to the back half of the year.

Speaker 5

Okay. That's very helpful. One thing that you said in your prepared remarks also that surprised me was that you're seeing a huge uptick in Casualty submissions in Lexington, I think we expected the property side. I was hoping you could dig a little bit deeper into what's going on in special casualty.

Speaker 2

Yes. Well Lexington is just a great story. When we look at we had record submission count across Lexington. We drove very strong growth at the top line, but it's one of our most profitable businesses. And Dave McElroy, Lou Levinson, who leads Lexington, this has all been about Driving value for our distribution partners and wholesale brokers.

Speaker 2

And we've been asking for Submission activity on all lines of business. And so when we're going to deploy property, yes, we have aggregate, Yes, the performance has been very good. Yes, the growth opportunities there on its own, but we have been very focused on driving Opportunities across the portfolio and we're asking for the business. And so like the submission activity is substantial. And then I think being one of the largest wholesale Underwriters and respected as one of the top in terms of underwriting excellence, we're getting looks at multiple lines of business And we have staffed up in order to take on that additional volume on the property and casualty side.

Speaker 2

So I was very pleased that the team executed as well as it did And I expect that to continue.

Speaker 5

Great. Thank you so much.

Speaker 2

Thank you.

Operator

Thank you. Our next question comes from Yaron Kinar with Jefferies. Your line is open.

Speaker 6

Thank you. Good morning. First question, I guess going back to Paul's question on Validus. Can you offer us like a pro form a margin profile For North America Commercial, ex the Valadis sale, maybe even ex the Crop business?

Speaker 2

Good morning. It's a very good question, but I have to follow-up the question back to you. Do you want it over a longer period of time? Because I mean looking at our cat business in the second quarter, And again, I'm happy to provide some detail. It was accretive by a little over 100 basis points in the quarter to a combined ratio, but don't forget, its acquisition ratio is higher than our normal business.

Speaker 2

The loss ratio was slightly below Based on dynamics going on in the market today, when I look at our overall business and Ones that I continue to highlight Lexington Specialty, our property, those are more accretive than Validus Re. So I wouldn't have The impression that it's going to be highly dilutive. Obviously, it's done really well in the first half of the year. But if I go back the last 3 to 4 years, last year is the 1st year We were able to publish combined ratio below 100. And so looking at the combined ratios of the business, Overall, it's been a positive contributor in the first half of this year.

Speaker 2

But in terms of the business, we have a lot of businesses perform better. And we have in terms of the index, I don't think it will materially impact us.

Speaker 6

Got it. And maybe just as a clarification, your commentary is that on a reported basis or Underlying.

Speaker 2

Both. But we don't But I mean in terms of looking at it from 2018 to 2022, 2022 was the 1st year on a fully loaded combined ratio, it was below 100%.

Speaker 6

Got it. And then my second question, Given the secondary in Core Ridge and we're starting to see a line of sight to below 50%, can you maybe offer us A precise threshold for deconsolidation?

Speaker 2

No. I can't I'll offer you precise, but I can give you some guidance in terms of what we're thinking, if that's okay? Sure. Yes. So the secondary is our base case And we would expect to do something hopefully for year end subject to market conditions.

Speaker 2

I think what we have proven Over time is that we want to be prepared. And so we prepared for the IPO ended up delaying it just based on market conditions prepared on the secondary. And so we will be prepared to go before year end. I think to go before year end. I think Corbridge is doing very well in its business performance, It's operation as a public company and then we have made enormous progress of getting it ready to be a standalone public company once we deconsolidate.

Speaker 2

They're executing very well on the management plan. Again, Kevin outlined it in detail on Friday, but they're able to on capital management now with share repurchases as well as ordinary dividend. And so we Certainly want to continue the sell downs at a reasonable pace, but it's just going to be subject to market conditions and where the business is.

Speaker 6

Peter, I apologize. I was not really focused on the timing. I was more interested on what the precise percentage would be To see deconsolidation, is it the second we drop below 50?

Speaker 2

Depending on Board structure, but If we modify the board structure, it would be below 50%, but on the current board structure, we'd have to go below 45%. Okay. Thank you. Thank you.

Operator

Thank you. Our next question comes from Alex Scott with Goldman Sachs. Your line is open.

Speaker 7

Hi, good morning. First one I had is on the capital deployment. I mean, I think one of the most challenging things To sort of model and forecast from the outside right now is just how you'll go about deploying the proceeds From a lot of the actions you're taking, including the separation of Corbridge. So I was just interested if there's any updated thoughts. I know in the past you guys Given the share count range, any thoughts you provide or guidance as it relates to where the share count could go from here?

Speaker 2

I think what we've outlined is still the base case. We ended up in the low 700s in terms of our share count. Sabre did a very good job of outlining the liquidity that we have and liquidity that will be coming in. We have focused on the 4 components in a very rigorous way of making sure that we have Capital and subsidiaries to drive the growth in a market that we think is very favorable. We increased our dividend this year and so want to Our leverage in the low 20s and Saeb and I both indicated we'll do some cleanup On debt because the impact of share repurchases, you need to continue to still retire debt.

Speaker 2

And the main focus from liquidity is going to be on share repurchase and that will be highly correlated to when we close on RenRe, We'll be active in the market in the Q3 and I really couldn't give you much more guidance on that other than we're really

Speaker 7

I guess follow-up sort of in the same vein. In terms of organic deployment, I listened to the PML Comments you're making and think about the volatility and how much better it is. And then the fact that you guys, I think, still have below Average underwriting leverage, at least when we sort of look at like premiums to surpluses kind of metrics, Do you have the capacity to be able to fund this greater growth, whether it's in Lexington or some of your other businesses in general insurance, Without using so much of the proceeds from the strategic actions?

Speaker 2

We do and it's been a big focus for us. Sabra, do you want to expand on that a little bit?

Speaker 3

Yes, thanks. I would just note, as I mentioned in my prepared comments The risk based capital ratios in our U. S. Pool are in the range of 4 70% to 4 80%, which is well above our target range $400,000,000 to $420,000,000 So we have ample capacity within the general insurance businesses today to support growth.

Speaker 7

Got it. Thank you.

Speaker 2

Great. Thank you. We'll take one more question.

Operator

Thank you. Our next question comes from Michael Zaremski with BMO, your line is open.

Speaker 8

Great. Good morning. My question is about the existing remaining portfolio post the sale of Validus Pending in the crop business, are there other and what you did on the what you're doing on the personal line side, are there other pieces of portfolio that still Need additional optimization or are we kind of mostly through the major actions?

Speaker 2

I think we're through most of the major actions. We have to focus more on personal insurance and then we have been Certainly, we spent a lot of time on the ultra non net worth business and the actions that we're taking there in terms of Improving it and we'll see that as we go to the back half of twenty twenty three and into twenty twenty four. Japan is a big focus for us, and it's a Terrific business, one that has terrific scale, performs very well, needs more digital investment, And we have such a wide distribution of agents that we can scale more products. So we'll see some investment in Japan on digital work Flow and digital interfacing with customers and we've been working through that over the past 12 to 18 months. So we'd expect to see But that's going to have investment and we would expect to see more growth and more profitability improvement there.

Speaker 2

But I don't it's not Major, it's more of just making strategic investments in order to position the portfolio to be more advantageous. So those will be the areas But after Validus Re, we had a very active quarter and certainly would not expect another one of those. But we are going to continue to try to drive improvement throughout the portfolio.

Speaker 8

Okay, great. And my follow-up is switching gears, thinking about AIG's long term Kind of combined ratio, I guess, inclusive of other expenses. If we're thinking longer term, you've done a great job improving The loss ratio, we're clear that there's still you have guidance on expenses coming down. But when you say longer term, Most of the wood's been chopped in the loss ratio and we should be thinking about overall expenses is kind of getting you to the double digit ROE Land sustainably or is there still loss ratio components such as maybe reserves and whatnot that could continue to improve over time?

Speaker 2

I think you're thinking of it the right way. I mean, we've done an incredible job in terms of getting the portfolio that was in existence In 2017 2018 to where it is today, we know that we're an outlier on the expense ratio. That's a big part of what we're doing in the future operating model. And we'll start to show more and more evidence of that in the coming quarters and as we go into 2024. I did mention not to repeat the first But I do think that there's loss ratio and combined ratio opportunity for improvement in personal insurance and we're heavily focused on that in terms of balance across all of AIG.

Speaker 2

But when we look at the improvement in CE expenses is going to be a big part of it. And as we focus on getting to our future operating model, that scale And discipline around having an expense ratio that's more favorable will be a huge focus of this management team. Thank you. Okay. Thanks.

Speaker 2

I want to thank everybody for joining us today. I hope you have a great day.

Operator

Thank you for participating in today's conference. This does conclude the program and you may now disconnect. Everyone have a great day.

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Earnings Conference Call
American International Group Q2 2023
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