Q2 2020 American International Group Inc Earnings Call
Good day, and welcome to eight Oh, Jeez second quarter I train two trends chief financial results call.
As a reminder, today's conference is being recorded.
This time I'd like to turn the conference over to Mr., Brett particular head of Investor Relations. Please go ahead.
Good morning, and thank you all for joining us today's call will cover.
Second quarter 2020 financial results announced yesterday afternoon. The news release financial results presentation, and financial supplement posted on our website at www Dot Dot com and the 10-Q for the quarter will be filed later today after the call.
Today's remarks may contain forward looking statements, including comments relating to company performance strategic priorities business mix and market conditions, including the effects of Coke 19 on E. G. These statements are not guarantees of future performance oriented and are based on management's current expectations actual performance anyway.
Since may differ materially.
Factors that could cause results to differ include the factors described in our first quarter 2020 report on form 10-Q, and our 2019 annual report on form 10-K, and our other recent filings made with the FCC inclusive of the effects of covered 19 on energy, which cannot be fully determined at this time.
Yeah actually is not under any obligation and expressly disclaims any obligation to update any forward looking statement, whether as a result at new information future events or otherwise.
Additionally, some remarks may refer to non-GAAP financial measures. The reconciliation of such measures to those comparable GAAP figures is included in the earnings release financial supplement in earnings presentation, all of which are available on our website.
I'll now turn the call over to Brian.
Good morning, and thank you for joining us today.
I hope everyone is seeing healthy and safe.
Like last quarter, our team is participating on the call from different locations I'm joined by Peter Cabinet, Mark Douglass Youre, Chief investment officer loss will be available for Q1 day.
Yeah actually continues to show remarkable strikes the resiliency of school with 19 remains a formidable and ongoing catastrophe.
Global workforce as adjusted to working remotely and I'm credits incredibly proud of how that see it must become more unified and focus on supporting each other clients and other stakeholders doing this unprecedented times.
The second quarter, we continue to build on the strong foundation created since late 2017 to instill a culture of underwriting excellence adjusted risk tolerances and implement a best in class reinsurance program.
These actions strengthened and protected our balance sheet and are allowing us to effectively manage through cold like feed on its collateral effects on the global economy.
Mission to natural catastrophes.
Also made progress on strategic initiatives across say Gee, including the early June closing of the sale of a majority stake in fortitude, which significantly de risked our balance sheet and represented the vast majority of our legacy portfolio.
Our focus on de risking is also reflected in how the overall investment portfolio was held up during this extended period of market uncertainty.
As we outlined on our last call our portfolio is diversified by asset class and industry sector and contributes to our strong balance sheet.
Mark will give more details on the accounting implications of the sale of four to two which why we live with what we outlined on prior calls are complex and added significant impact on our GAAP results in the second quarter.
Rather positive developments in the second quarter, such as the launch of Syndicate 2019, which also had some noise or results, but overall I'm very pleased with our underlying performance in this quarter.
We also would have start financial flexibility with parent company liquidity of over $10 billion at June Thirtyth, reflecting the proceeds from the fortitude sale as well as the successful debt offering we completed in May.
With respect to cap.
Second quarter total estimated net that losses were 674 million.
Moving forward and 58 million related to go over night team.
This brings our estimated cobot net losses for the first fair for the year to seven another 30 million.
We continue to view Cove, it as an earnings event not a capital of that.
I agree.
In arriving at our Cobot estimates for the second quarter, we follow the same thoughtful and rigorous process that Peter have lied on our last call.
That's the ramifications of the pandemic continue to unfold different lines of business are being impacted which to date has been in line with what we expect.
Turning to the general insurance, excluding cats, we continued to see improved underwriting profitability with the accident quarter combined ratio coming in at 94.9%.
120 basis point improvement over the prior year quarter.
With respect to raise the current environment is as strong as I've seen a more than 20 years and the increases over the last several quarters accelerating through the covert 19th.
These rate increases are global broad based across multiple lines of business.
Changes, we are starting to drive in terms and conditions, particularly in commercial property a remarkable.
Your underwriting discipline and rigor Peter and that you guys seem as instilled across the business is impressive and they continue to be a market leader in southern rich good risk issues.
For our clients a distribution partners.
With respect to life and retirement financial results improved in the second quarter reversing much of the negative impact of market volatility we saw in the first quarter and our hedging program continued to perform as expected.
Although it is still early days, we are seeing signs that the second quarter will represent a low watermark in sales and mortality rates remain within mid range what pandemic models.
Kevin will provide more details on life and retirement in his remarks.
We also made significant progress and they actually two waters in the second quarter.
We moved into the execution phase of our operational programs and we've already seen demonstrably results from our efforts so far.
You'll hear more about this from Peter.
To summarize where we ought to the second quarter 2020 relative to where we began our journey three years ago.
Well, we've successfully reshaped they are G by substantially changing our operating model the focus on three core business units General insurance life and retirement and investment.
Also vastly improved our underwriting capabilities and business portfolios significantly reduce volatility.
Restore balance sheet and increased financial and capital flexibility.
These achievements are the results of extraordinary were worked like our colleagues across a RG to remediate remediate the commercial and personal portfolios in general insurance.
Strengthen our business in life and retirement.
And reduce risk in our investment portfolio.
And with a sale afforded to.
Essentially eliminated the vast majority of I legacy portfolio and related exposures, the long failed runoff liabilities and interest rate risk.
Well this complex work behind US, we're now able to focus on our core businesses and leverage our financial position to strategically deployed capital towards growth, particularly in the general insurance commercial lives, where we're seeing some of the strongest market conditions in our careers.
I remain confident that actually is well positioned for the future and on the right path to become a top performing company and a leading insurance franchise.
Before I turn the call over to Peter.
I do want to take a moment to address the recent movements for ratio to quality across the United States in other parts of the world.
Gee, our colleagues were deeply upset by the traumatic events.
Expose the depth of inequality that continues to exist the United States and around the world.
So on outpouring of empathy.
Which led to courageous and often difficult conversations throughout the organization.
We're now moving beyond empathy in conversations with formulating near short and longer term actions, we must take.
We know there are no quick fixes.
While we have taken important steps over the last few years to foster a cultural diversity and inclusion we must do more.
Like the other complex issues, we have taken on or they are G. My leadership team is committed and I'm confident that with the support of our global colleagues, we will make lasting change at our company.
As we continue our transformational journey. They are Gee, we remain steadfast in our pursuit of excellence and all that we do which we know can only be achieved with exceptional diverse talent at all levels of the organization.
Peter over to you.
Thank you, Brian and good morning, everyone today I plan to provide more detail on Brian's comments regarding the general insurance second quarter results.
19, the current market environment, and I will finish with an update on a G 200.
This month marks my third anniversary of joining Brian today on Gi and when I look back where we started our journey the progress our team has made his extraordinary.
We discussed on prior calls during our first year to Angie, we determined a G.I. portfolio required to complete overhaul in terms of underwriting culture.
She global standards dramatically altering limits deployed.
And we knew that our business is needed to be reposition in the marketplace to become more competitive and relevant declines.
We also need quickly to design a comprehensive global reinsurance program, which has been evolving portfolio improves this program that reduce volatility in unpredictability in outcomes and was a critical component of our overall strategy, allowing us to be faster in re underwriting a G.I. portfolio.
We think a world class team and strengthen the bench across the world and are completely revamped risk appetite get successfully communicated to accepted by the marketplace.
We also achieved our goal of injuring 2020 with an underwriting profit and since the second quarter of 2018, our adjusted accident year combined ratio, there's going from one or 1% to 94.9% 610 basis point improvement.
Just a result will be outstanding work done by the team and we built considerable momentum that will allow us to continue to improve our financial results.
With respect to our global commercial portfolio. It has been significantly remediated and while there will always be opportunity for improvement.
Portfolio is now positioned for further strengthening more diversification and profitable growth.
Personal insurance as I outlined in our last call, we significantly de risked private client group known as PCG.
Creation of shouldn't get 2019 through our partnership with Lloyds.
In addition in late June we announced an agreement to transition to PCG upper middle market clients to Liberty mutual and heritage insurance. This fall.
P.C.G. the market leader in the you'd made in capital structure, we carefully designed employees.
The disposition of our upper middle market business allows us to now focused on the areas in the high net worth segment, where we bring the most valued clients as well as or brokers and agents.
Our access to new capital and reinsurance partners reduces jeez concentration risk during peak zones and resultant volatility that is inherent in this type of business and removes the constraints, we had on our ability to grow this portfolio.
Give you a bit more insight into the challenges you faced with P.G. prior to the actions we took in the second quarter.
Portfolio contributed between 15% to 20% of our global property Apparels PML at various return periods going forward, we expect at the new capital Light model. We've put in place will allow us to profitably grow the P.G. portfolio in which we maintained a 25% interest.
In addition, we will receive fee income from our capital reinsurance partners for making wonder why decisions, providing other services, including claims administration, which will improve the quality of earnings from this business Mark will provide more detail regarding the impact of these actions in PCG will have over the next few quarters.
Since Archie I journey began the industry's page meaningful and wins, including social inflation lower interest rates significant infrequent natural catastrophes constraints on the retro capacity in property and more recently, the unprecedented and ongoing cold at 19 pandemic and the resulting global economic headwinds.
It has created.
Our global workforce is more connected nimble and agile in the new work environment created by cold It and we're becoming a stronger more unified company, which bodes well for our future.
We believe that companies that adjusted that new abnormal would be the ones that are best able to solve complex risk issues for clients and provide a continuity that is needed in the market.
Turning to general insurance, we saw continued momentum in the second quarter, our focus on underwriting profitability continues to produce positive results.
As I mentioned earlier the accident year combined ratio excluding catastrophes in the second quarter was 94.9% a 120 basis point improvement year over year, Mark will provide more detail on this in his remarks.
Leadership position in the market continues to accelerate across multiple lines of business and we are achieving rate well in excess of loss cost trends.
As Brian mentioned this acceleration of rate improvement has been significant particularly when you consider the improvement in range that we've seen in the 10 consecutive quarters, leading up to cobot 19.
We believe that cold. It has resulted in a flight to quality and we are benefiting from this market dynamic well new business slowed in the second quarter as everyone quickly move to remote work environment in the early challenging due to cold 19 strong foundation, we built allowed us to.
Be responsive to stakeholders needs in our global commercial portfolio. For example, we saw an improvement both clients and revenue retention.
In addition, we are resetting terms and conditions and he many lines such as property and primary and excess casualty and we're continuing to deploy limit with discipline, while pursuing growth in certain lines of business that will further strengthen our portfolio on a risk adjusted basis.
Now turning to catastrophes in the second quarter, we booked 674 million of cat losses net of reinsurance, reflecting 458 million of estimated cobot 19 losses 126 million of civil unrest related losses, and 90 million of natural catastrophe losses. This brings our total estimated cobot 19th.
Great and net losses to 730 million year to date.
Our estimate for cold and through the first half of the year is based on actual experience through the first and second quarter as well as our broad based devaluation of the relevant lines of business and includes I'd be an arm.
As we expected Colbert related claims activity, increasing the second quarter, our first full quarter of coated and impact in a large number of lines of business than in the first quarter, including travel contingency property trade credit Marine.
<unk> workers compensation accident, and health financial lines and validate Street.
The first quarter, we conducted a very thorough estimation process utilizing experts from claims underwriting finance an actuarial we tend to be assumptions, we usually the first quarter and confirmed that day and our estimation process continued to be sound.
As a reminder, on our last call I stated that the overwhelming majority of our commercial property business interruption policies contain exclusions for losses related to viruses and otherwise you require a showing that the virus caused direct physical law or damage that was the cause of the business interruption.
We continue to believe that these exclusion and related terms and conditions will be held where challenge.
I also noted that in the small fraction of commercial property policies, where we have provided affirmative coverage for infectious disease. We've done so under strict underwriting guidelines offering only small supplements with terms and conditions limiting coverage in many instances only just certain specified disease and regardless only.
The work can be shown that the diseases physically present and led to a governmental suspension of the business operations.
Our second quarter estimation process for commercial property.
All of our lines of business potentially impacted my cold and 19.
I think both in terms of actual claims experience in the quarter and the specific terms and conditions under those policies, where we provided affirmative coverage.
She's disease related losses.
Cobot 19 is still an ongoing catastrophe and in many cases is accelerating in geographies across the world.
We haven't additional quarter of experience from which to assess our exposures or second quarter accurate estimate reflects our best view at June Thirtyth.
Turning to our reinsurance program provides meaningful protection against our overall gross losses related to covert across our most impacted launch.
With respect to property losses. In addition to our global property per risk treaty or property catastrophe reinsurance includes separate occurrence towers for North America, and international and we have a substantial global aggregate cover.
Based on our current expectations of cold weather related losses through the second quarter, we expect to recover under our international per occurrence catastrophe Treaty and we have approximately one half of our retention remaining before attaching under the North America per occurrence catastrophe treaty.
Per occurrence towers have a reinstatement limit.
In addition in light of Cold at 19, we anticipated that reinsurance capacity could contract and as a result, we purchased an additional 500 million of aggregate limit early in the second quarter such that we continue to have a substantial protection against exposure to natural catastrophes throughout the remainder of the year and in particular going into peak wind season.
Net premium written was $5.6 billion into second quarter or approximately $1 billion lower than the prior year. The reduction was entirely in North America personal lines, which was down $1.1 billion year over year due to the sessions related to the formation of syndicate 29 team and to a lesser extent.
Reductions in our travel business, resulting from Cowen 19.
The negative net premium written in North America personal lines was partially offset by growth in commercial.
Premium written in commercial grew 6% in North America, and 7% in international commercial year over year, driven by improvement net retentions and strong rate momentum.
While our overall new business is down primarily in our large account risk management business due to covert 19, we did see new business growth in North American lines, such as retail property excess casualty and financial lines excluding M&A.
Similarly, Groping international commercial was driven by financial lines property and Talbot.
Turning to rain momentum in our global commercial portfolio remained strong.
And was up 16% in the second quarter, which translates to 21% growth in North America, and 10% an international.
For example, retail property rates were up over 35% excess casualty was up over 35% public company do you know what to over 50% and eat backlog was up over 30% or UK business in Talbot, both achieved rate increases of around 20% driven primarily by specialty.
And with energy up more than 40% and aviation up more than 20%.
With respect to Validus re the team continued its disciplined underwriting approach, increasing premium volume or rate improvement and terms and conditions were strong while reducing lines were raised in terms and conditions did not meet our risk appetite net premium written was up 39% driven by new business and strong client retention in the non.
Property sectors of agriculture casualty and specialty.
Recent property lines were up approximately 20% and in all lines combined rates were up approximately 16%.
Although there were significant rate increases in property Validus re property exposures continue to be reduced with a focus on lowering volatility.
For the remainder of the year, we expected all reinsurance lines will experience continued positive rate movement, and there will be opportunities to grow our topline with improved risk adjusted returns.
Turning to G 200, our transformation continues to be a top priority, we conducted a rigorous and disciplined operating views on a regular basis and built a strong team of leaders who are driving program execution.
Well, we're still in early stages of executing on a G 200, our colleagues are coalescing around this critical strategic effort that will position a g. for long term sustainable and profitable growth. We remain on track to achieve $300 million, an exit run rate savings for 2020, and our overall targets of achieving.
$1 billion in run rate savings by the end of 2022, where the cost to achieve a 1.3 billion have not changed.
To highlight.
Recent progress we've made on three operational programs.
With respect to PCG. We're currently testing the modeling the modern digital platform, we are moving to clients brokers and agents and incorporating feedback. This operational program will streamline our processes improve decision, making and enhance the user experience or clients distribution partners in our colleagues through a dramatic.
Increased from the use of external data and AI product delivery and risk management services.
Karen.
All these centralized as global function and now have visibility into all categories of spend across AI Jie, we've already achieved significant savings as well as improve supplier and partner performance.
Perspective real estate, we continue to rationalize our global real estate footprint.
A recent announcement regarding the move of AI Jie Global headquarters to Midtown Manhattan, and the consolidation of our remaining offices in the Greater New York Metro area is just one example.
The design of these new offices will incorporate key learnings and successes from our current remote working environment and will be reflected in our global workplace strategy.
New York City has played an important role and jeez history and through our re commitment to the city and surrounding area. We hope to do our part to support these communities during this challenging time.
We entered 2020 with a clear focus on continuing to improve our core underwriting performance strengthening the value we delivered to our clients distribution partners and other stakeholders and modernizing our operations and systems I'm very proud of the meaningful progress or team has made against these priorities.
Gee colleagues have shown tremendous strength and flexibility in the face of challenging circumstances and remain committed to our journey to excellence and all that we do.
Now I'll turn the call over to Kevin.
Thank you Peter and good morning, everyone.
Today, I will discuss overall life and retirement results for the second quarter, our current outlook and the results for each of our business life and retirement recorded adjusted pretax income was 881 million for the quarter and delivered adjusted return on attributed common equity of 13.2%.
With a significant rebounds, an equity markets during the quarter, we saw favorable benefits to both reserves and deferred acquisition costs, which had been impacted by negative equity market returns in the first quarter.
This market recovery is not reflected in our private equity returns for the quarter. Since they are generally reporting on a one quarter lag.
Adjusted pre tax income decreased by 168 million from the very strong second quarter of last year, driven by unfavorable mortality, resulting from cobot 19, lower returns from fair value option bonds to the balls, how credit spreads and expected spread compression.
Our current quarter also benefited from significant yield enhancements for them to low interest rates.
Asked results for the second quarter last year reflected a large IPO Dan from a single private equity Holden.
Recognizing the limits of sensitivities, especially in times of macro economic stress and historic volatility.
Sensitivities, we previously provided agenda, we continued to hold up.
However, our reported based investment spread compression is higher than we would otherwise expect as we have continued to maintain liquidity and has held higher levels of cash on our balance sheet.
Excluding the impact from this larger liquidity position, our based investment spreads with continued in the eight to 60 basis point range and it will spread compression.
Relative to equity markets in total deals we have also updated our sensitivity estimates as of the ended the second quarter.
We would expect the plus or minus 1% change in equity market returns to respectively increase or decrease adjusted pretax income by approximately 40 to 50 million animals, and a modest increase based on higher market levels than the first quarter.
As to reach a plus or minus 10 basis point movement on 10 years reinvestment rates would increase or decrease earnings by approximately five to 15 million annually consistent with prior quarter.
As always it is important to note that these markets sensitivity ranges are not exactly linear since our earnings were also impacted by the timing and degree of movements as well as other factors.
Our risk management, a disciplined are serving us well in this challenging times moving our hedging program has continued to perform as expected and our balance sheet remains strong.
We currently estimate our fleet risk based capital ratio for the second quarter to be between 420, 430%.
Well above our target range of 375% to 400%, providing a good buffer fill the uncertainty at the current environment.
Further as we have repriced and restructured many of our products are new business margins generally remained within our targets currently money returns.
Sales were significantly lower in the quarter, especially in the retail annuity market as our distribution partners responded to their own challenges.
Towards the end of the quarter, we began to see improvements in retail and Liberty activity as our distribution partners responded to the mall environment.
As of today based on early indications, we have seen a strong rebar themselves compared to June.
Retail new business pipeline continues to build suggesting improving volumes from historically, most second quarter levels.
Our blood position across products and channels has been especially advantageous during these times.
For example, as retail annuity sales languished in the second quarter, we expanded our pension risk transfer business, including several significant reinsurance transactions.
We remain well positioned and confident to deploy capital as attractive opportunities arise across our businesses.
Well I will turn to our second quarter results for each of our businesses.
Allergan sales environment for individual retirement that I know that resulted in negative that flows for movies.
The group retirement premiums and deposits decreased due to lower new group acquisitions as well as reduced individual product sets.
Despite lower sales net flows were essentially flat due to lower group and individual surrenders.
For our life insurance business total premiums and deposits increased due to higher international life premiums.
Our estimate for the impact some excess mortality of all causes including Cobot 19 results in a level of mortality net of reinsurance and longevity offsets that is modestly higher than pricing assumptions.
Based on a small and evolving dataset. We currently estimate that around 40% of our cold at 19 related death claims reflects an acceleration of claims we would have otherwise experience in the next five years.
Our recent mortality experience will be factored into our longer term experience studies and our annual review of actuarial assumptions, which will occur in the third quarter.
You know solution, we do not currently expect called at 19 losses to have a large impact on our long term mortality assumptions.
Your institutional markets adjusted pretax income was favorably impacted by the wasn't have start activity I noted earlier.
[laughter] premiums and deposits and continue to develop a trap that new opportunities across the portfolio.
In particular, the pipeline for pension risk transfer opportunities most of that's going to reinsurance is very strong.
To close we remain well positioned to meet the ever growing needs for protection retirement savings and lifetime income solutions now I will turn it over to Mark.
Thank you, Kevin and good morning, all.
Hey, I do produce strong underlying performance this quarter, particularly in the automatic areas at risk reduction liquidity and capital preservation.
Overall, AI Jie reported adjusted pre tax income of 803 million and adjusted after tax income the 571 million or 66 as per diluted share compared to a dollar compared to 1.3 billion or $1.43 per share in the second quarter of 2019, the key drivers of the year over year reduction were higher.
Our catastrophe losses from coated and civil unrest, along with lower net investment income positive contribution stem from continued improvement in general insurances adjusted accident year results stronger likely retirement returns and our ongoing disciplined focus on cost.
As Peter noted that continued focus on general insurance underwriting profitability and expense management drove 120 basis point improvement in the accident year combined ratio ex cats. However, commercial lines was even stronger with a 400 basis point improvement on a global basis made up a 320 basis point improvement.
North America at 500 basis points have been proven and international General insurance, the second quarter, a P.T.I. with 175 million.
Down 805 from the second quarter 2019, due to a 315 million dollar reduction in net investment income driven by the combined impact of alternative investment losses, and the continued impact of lower reinvestment rates on available for sale income at a 500 million dollar increase in catastrophe loss.
Peter discussed second quarter catastrophe losses, but I'd point out that in the aggregate. They represented 11.9 loss ratio point and that the non coal, but non civil unrest cat reserves represent just 1.6 loss ratio points versus 2.6 loss ratio point in the second quarter of 29.
Prior period development was net favorable by 74 million 53 million of which which is it was associated with the amortization of the 80 seat deferred gain.
For North America personal lines, the combined impact of lower travel premium and the send to get 2019 structure sessions close the sharp change and business mix within the segment for the quarter, which impacted both the loss ratio and expense ratio compared to prior year. These impacts which includes some catch up premium.
Gross and net written premiums to be negative for the quarter.
Structure, however, should significantly reduce the future all linked combined ratio volatility of the personal life book, well, allowing us to continue to properly profitably grow this business.
Looking forward the 2021, we anticipate retaining approximately 25% of the P.C.G. premium.
However for the balance of 2020 for the totality of the North America personal insurance segment as reported in our financial supplement.
We estimate roughly 425 million and 325 million net written premium and net earned premium respectively for each of the next two quarters.
Turning to likely retirement, as Kevin mentioned life and retirement achieved a 13.2% annualized return on attributed equity for the quarter.
The 881 million of a P.T. I was aided by lower DAC amortization due to the recovery of the financial market. After the large increase that amortization in the first quarter 2020 related to that quarters market decline. So better measure is the year to date nearly 11% return on attributed equity.
Kevin described the market for his various product sets, but it should also be noted that surrender slashed lap rates were noticeably lower for both individual and group retirement as well as the life you get it up both quarter over quarter and sequential basis.
Shifting to investments net investment income on a P.T.I. basis was 3.2 billion or 537 million lower than the second quarter 2018, and impacted both general insurance and life and retirement APC Guy.
Reduction was primarily driven by a 514 million dollar a year over year negative swing in private equity result.
276 million of losses recorded in this second quarter compared with a particularly high amount in second quarter 2019 Reserve returns, which it has included a one time large IPO game.
Like others in the industry, we generally report private equity on a linked quarter lag due to the timing of valuation information received from the managers. So the second quarters loss reflects March 31st 2020 valuation.
On a sequential basis, however, a P.T.I. net investment income improved by almost 500 million from the first quarter, even though the second quarter only had two month afford it should related and I.
This reflects the impact of the strong capital market recovery in the second quarter on hedge fund as fair value option income and but please note that in future quarters, a P.T.I. and after tax income will not include four to two although the invest to themselves will continue to be included on our GAAP, though and she will get into more of that too.
Turning to other operations the adjusted pre tax loss after consolidations and eliminations is 510 million and improvement of 25 million sequentially and 76 million of improvement from the fourth quarter 2019, reflecting AIG continuous focus on expense reduction corporate.
Interest expense was slightly higher due to our may bond issuance and will increase corporate interest expense for the second half a twentytwenty and into the first half of 2021.
Our legacy segment had 257 million of a P.T.I. in the quarter 96 million of which was from fortitude before the impact of non consolidating interest the remaining $161 million is related to other run off general insurance life and retirement and investment portfolios.
As Brian noted on June 2nd we completed the sale of Fortitude and because it closed during the quarter. The second quarter included earnings for April and May only in <unk>.
The net earnings on the funds withheld assets are excluded from 80 T.I. for the month of June at the economics of those assets were shifted to fortitude upon closing.
Now shifting from adjusted after tax income to gap below the line impacts on net income in Cheryl common shareholders' equity the second quarter included two largely non economic items I'd like to unpack.
The first item, which I focused onto our last call involves the gap recognition of our variable annuity hedging program, which requires a nonperformance adjustment or npis.
In the second quarter, we recorded at approximately 1 billion dollar GAAP pre tax loss, which is shown in discussed on pages Woman's 150 April 160 of the 10-Q, which will be filed later today and this represents a partial reversal of the large gains we recorded in the first quarter 2020 as our hedge.
Program is designed to offset interest rate and equity market changes on annuity reserves.
The second item involves the sale afford it too.
As Brian noted the completion of this majority stake sale represent a significant milestone de risking our balance sheet and improving our asset liability management profile. However, it also created a lot of noise on a GAAP basis. So I will highlight five key impacts that cut through the associated complex.
Accounting, but I will also direct you to the robust disclosures. We've included in our slides financial supplement and 10-Q to help navigate the accounting involved. Additionally, our investor relations staffs now stands ready to help with your understanding.
The five core highlights I'd like to make sure. We communicate are as follows first.
Nearly 35 billion of GAAP reserves are now recoverable from a fully collateralized third party reinsure in which AI jie now retains a 3% to 5% interest.
Second and perhaps most importantly, because the recognition that the GAAP accounting impact is largely non economic as this transaction had no adverse impact on the statutory capital of our insurance company. The assets are marked to fair value. The gap reserving practices don't reflect analogous fair value adjustments.
Liability.
Accordingly had the policyholder benefit reserves, but it's fair valued to reflect current low interest rates their fair value would have been higher and have more closely aligned that GAAP accounting with the true underlying economics.
Third from a GAAP accounting perspective, the impact on common shareholders' equity is a 4.3 billion dollar reduction however, the impact on adjusted common shareholders' equity is a lesser 2.5 billion dollar reduction with the major difference being an adjustment for 4.2 billion of unrealized.
Jason on the supporting plus with health assets, including in our AOCI Guy as you recall AOCI I is one of the items historically removed and AI jie definition of adjusted common shareholders' equity.
Fourth the components of the 6.7 billion dollar GAAP net income loss are comprised of two broad items first there's a loss on deconsolidation.
Of the previously this goes disclose 2.7 billion for prepaid reinsurance assets and deferred acquisition expenses.
The second item is the loss on sale, which totaled $4 billion, which is primarily due to the increase in fortitude gap equity from mark to market need investment portfolio, primarily the funds withheld assets.
Okay.
Hi, GE has updated several non-GAAP financial measures this quarter to remove asymmetrical accounting treatments there will be ongoing below the line volatility at our GAAP results. So to help navigate this are continuing disclosures plus our investor relations team will drive understanding.
This asymmetry and the need for the step initial adjustment.
And lastly on this we will be re segmenting before year end to better aligned with that judgments view of it setting operating performance given the legacy segments now expected de Minimis contributions APC Guy.
Turning to the balance sheet at June Thirtyth 2020 book value per share was 70 $1.64 cents down 2.7% from one year ago, and adjusted book value per share, which excludes AC AC or why the DTA an unrealized gains on the four to two funds withheld assets was down 1.7% from a year ago.
During the quarter tighter credit spreads compared to March 30, Onest reverse the negative mark to market impact, though they have securities that we had at March 31st with a net increase in AOCI I, a 10.2 billion in the second quarter.
We continue to place a high emphasis on maintaining ample liquidity and a strong capital position. This economic environment at June Thirtyth and she had parent liquidity of $10.7 billion. This is in addition to our fully Undrawn 4.5 billion revolving credit facility during the second quarter, we issue.
4.1 billion, a senior debt and received $2.2 billion of proceeds related to the sale afford it too.
Of which 1.3 billion were retained at parent.
We also repaid our precautionary 1.3 billion March 2020 credit facility borrowings insightful and made a 548 million dollar pre payment to the IRS related to principal and penalties or a previously disclosed tax settlement on cross border transactions that date back.
To the 19 nineties.
We will pay the balance of this several that up to 1.2 billion pending receipt of the final interest calculation potentially by the end of this year with the older than them out depending on the potential application of interest net for the crude interest calculation, which he has requested.
We do not plan to repurchase shares in the near term and have 1.3 billion in mature a senior notes in the second half of 2020 as well as 1.5 billion maturing those in the first quarter 2021, all of which will be funded with cash on hand.
Turning to subsidiary capital.
She's insurance fleet capitalization and liquidity levels remain very strong at June Thirtyth RBC fleet ratios for general insurance is your lets pool and for life at her retirement or above prior year levels and above the higher end of our target operating rages, providing solid buffers for absorbing potential cobot 19 losses.
Capital market volatility or credit impacts.
Also our ratings and stable outlook, we're affirmed by S&P following its regular annual review.
We continue to prioritize liquidity strong operating capitalization and financial flexibility as we navigate this ongoing uncertain environment, our balance sheet and liquidity our strong at our investment portfolio is diversified and significantly de risked compared to years past.
We remain focused on continuing improvement of general insurance profitability, managing likely to retirement prudently in a low interest rate environment and executing AG 200 on schedule and land budget. We are convinced that AI Jie will exit. This unusual crisis has a stronger more resilient company and with that I'll now turn the.
Call back over to Brian.
Thank you Mark I think it's a time for to Una. So operator can we start to keep an eye process.
Thank you if he would like to ask this question. Please take note bypassing stab on on your telephone keypad.
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We ask that you paint them yourself to one question I'm one follow up question to allow time for all questions and the King.
Again, that's still want to ask a question.
Well now take off stress question, Tom Michael Phillips from Morgan Stanley. Please go ahead. Your line is now open.
Thank you on gasoline blending everybody.
First question focus on an ultimate coming funds, where your core loss ratio improvement looks pretty decent.
On the surface I guess I'm going to dive into that a little bit.
We've seen some competitors.
I will commence in frequency benefits because of coal that I suspect that's nothing much the keys here, but I want to mature given mirror.
The business, what kind of layers hold limits and hello to corporate accounts.
May not see minutes as soon as much frequency benefit from core within that quarter alteration that the commercial so can you maybe talk about that little bit the.
We'll go through all looks little behind that.
So.
Good.
Well I think that's a Michael that's a good question for Peter on the frequency benefits or lack thereof, Peter can you answer that.
Sure Brian Thank you and good morning, Michael.
You're correct, we did not take the frequency benefits in the quarter. If there was any you no sign of a better frequency relative to expectations. It was in some of our international business in a in auto in Japan.
We've seen that over the last several quarters.
You know when you think about I'm going to go to workers compensation, because I think that's the one that's that stands out the most which is we've had.
Frequency in coated its typically I would say, 70% is industries related to health care, but it is very unique because again, we have high retention is most of that over 90% is related to.
Businesses, where we have a deductibles a million dollars or greater so that frequency really hasn't impacted us and then we have seen a commensurate reduction in a in frequency then noncovered related claims are getting their observation this quarter or get a lot of is on retention business, but we haven't recognized it yet because we want to see how.
It emerges you know one thing back on coal would workers comp, which is very interesting is that over 50% of the claims that we've seen over the last four months.
50% of them already closed so it's it's a very different type of of loss relative to workers compensation.
The ones that we've seen in the liability in auto again, it will be slow to recognize that we've seen reduce frequency and we'll give you an update next quarter. Once you have a little bit more experience.
Okay, great. Thank myself will bump yeah. Thank you.
Question on the B.
Level last year, you guys were one of them for a few companies that did actually have margin improvement and that's because of all you're reiterating some jobs going past couple of years I guess can you talk about where are you in that process.
When we looked at reporting up front you mentioned the rate that was all getting rates are rates, but the loss trends said.
How much of that re underwritten efforts have been done and how much more still to be done.
Okay, and Michael I think again, that's either.
Yeah, Michael So I think we're in a really good place I mean, you know we.
When I said in my opening comments you know what are the areas, where we had headwinds and no new business, which I think the industry had seen when everybody was going to work remotely what drove.
The the growth, but it was driven by better retention. We had you know 400 basis points from improvement in international 500 basis points improvement on retention of our clients within North America. So I think that reflects that we'd like the portfolio and we're trying to be very helpful to our clients and distribution partners by deploy.
All in capital of course, you know when a different dynamic and need to make sure that we're getting the appropriate returns and I think you saw that didn't know rate. So I think the combination of retention of a portfolio, we like and we can grow combined with a positive rate environment I think contributed to the overall growth on the on the NPW commercial.
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Okay, great. Thanks, Michael next question please.
Well now take our next question.
And these screens from Wells Fargo. Please go ahead your line is open.
Hi, Thanks, Good morning, My first question.
So late in the commercial business you guys mentioned some of that prices that you're getting on into the double digit Vietnam and that that that's an excess of trend could you just give us depends on where loss trend. That's in your commercial business and how that supply chain Dawn.
So far this year, just as we think about kind of that spread between price and loss trend on that nothing about money no margin.
Okay. Thanks, I think in terms of trends et cetera, So many markets it better.
On their marketing you answer the question.
Yeah. Thank you Brian I appreciate that Hello late.
So you know in the areas.
Mostly asking about.
Or take like excess businesses that trend a pure loss cost trend is approaching double digits. When you get into auto its little bit less probably in the seven 8% area and the other primary lines are a little less than that.
But you've got.
And your way that altogether with things like.
Yeah with property and other loss sensitive related exposure bases that got it kinda drops at all so.
Barry I'm not going to get into the weighted average and total brought tell you that we look at every single line.
And and reflect that at our thinking I want to give you that the range, where it could be a couple percentage points and some short tail lines up to almost double digits and some more volatile except for it.
Okay. That's helpful. And then my second question on his Amit earned premium I guess on commercial lines in personal lines is impacted by that let me share but within commercial we seen on this in pretty good growth in both North America internationally I'm a great insight.
Earned on they'll be telling me just given you know a lot of your business. Nick actions that you talk on the right way to think about it that you know just given up on it we could see some pressure on that phones within commercial over the balance the here and that could start to see some growth in 2021.
Aren't going to stick them too.
Yeah, I think I think you actually actually grow question you get you get the increasing no impact at the casualty quota share and that's that's really what you're saying.
Okay. Thank you next question please.
Next question.
Brian Meredith and he'd be.
Please go ahead your line is open.
Then Q1 quick numbers question. Another broader question first one Mark I Wonder if you could.
Give us a guidance or on what gives them in nutrition income is going to look like general insurance Big drop off obviously, the second quarter was there anything unusual there is that kind of a run rate given.
Where we are right now its first.
Okay.
Your Mako huh.
Yeah. Thank you, Brian you cut out a little bit Isle me, Brian were you asking about a investment yields and Gee I do you look at both overall, but also the July in particular, you had a big drop off in your best sequentially and it just wondering if there's anything there that will read securities or something else. It was talking to drop so much where that's coming.
True right right, yes, yes actually.
Well, you got to getting bigger half Airbus. It. So if there's two things going on but last quarter. I think was the first quarter. We I will allow the disclosure think even see that so they drop off you see it's somewhat caused by what you just said like it at that or little bit later and one of it. It is just a bit of a correction.
So last quarter's g., a yield but overall I think of it is overstated those at 14 million dollar Canadian security a correction I thought I think it fit Hardy. Your question. So so that would have come down another.
12 basis points something like that.
To the extent of.
On the current quarter with but with a structured securities.
You're right a lot of that's up is floating but you're really required to.
Retrospectively look at it and look at what has happened or what's your view of the future is and what that implies yield is that yield is lower than what you book do you have to do a catch up.
Got it and that's what you're seeing in in the quarter. So you can adjust for for some of those Brian and it looks to me they'd be a nine to 10 basis point drop off sequentially not not as steep as it appears.
Great I never thought that Mike.
Absolutely Brian and this is this is it gets more for you and Peter.
Given how low yields are right now.
I'm wondering what type of underlying combined ratio combined reshoot you need to cheat you believe in your general insurance business now Didnt earn acceptable return on capital and if you had to kind of alter your targets.
Wow, that's a great questions on I guess I'll take that.
I mean double digit returns with a higher interest rate so make sense with these low interest rate for car when it comes down.
I, you know I would say that.
It's an evolving right now it's an evolving process and you know Super Bowl over so I understand what steady state looks like.
But you know my like that would say that you know something in the double digit range is possible, becoming more difficult because of the a low interest rates.
So it's more like a you know what's the we've turned over you know over.
With free rate, so I you know.
Hard to say then I will just driving this thing down you know when you're going into a market like this where where rates are rising sounds like conditions are improving.
You know you're right. We don't have a fixed number that you're going to try to give you know we're going to take advantage of market and Ah.
And have you know how the results that we that we can see with is elevated level of risk perceived in the marketplace I guess, if that sort of put his line.
I wouldn't launch but thanks.
Thank you. Our next question comes from Erik Bass from Autonomous Research. Please go ahead. Your line is open.
Hi, Thank you so you've talked about some of the benefits from syndicate 19 in terms of the volatility and reduction in the fee income you'll generate knows makes sense and should be clear positives overtime that stepping back from a near term perspective do you see this is enhancing or detracting from the normalized earnings at the personal lines segment.
Eric Let me start with US and then I'll, let Peter a theater picked it up so look if you wouldn't it make a change like this is certainly a disruption right now with a with ceded premiums and the other and going out and so there will be some dislocation obviously.
We saw the second quarter bleed into this or overall, though you know one when things normalize says we are focusing on to the where there's something in that benefit to the company than say a.
As Mark said those capital light.
Structure.
And if it basically allows us to grow the business and you know we could not grow it given the concentration of cat exposure with the approach. We've taken now the you know the structure at Lloyds and it's it's capital efficiency and the ability to spread and we can now take the benefits net and actually grow it and have them.
That grow you did you want to add anything for that.
Yes, just a couple of points, Brian as you said I mean, I think de risking repositioned the portfolio for growth as reported that reduce volatility increasing capital flexibility I think the second quarter is gonna be the noisy. It's just because of the catch up on the you know unearned premium and seasonally the second quarter was the largest on the.
Net premium written side, so again, you'll still see some noise.
In the third and fourth but not to the degree you saw in the second and we've just been.
Very focused on accelerating the transition so we can get the 2021 would be on earned.
Largely going away and then reposition shouldn't get 29 team to be very competitive in the market in terms of value. So we're really excited about what this is going to me for the business and for our clients and distribution partners.
You have a follow up there. So yes. Thank you and then secondly, just with the lower level of sales in life and retirement, how does this affect your outlook for capital generation and are you planning to keep any sort of excess capital you generate in the life subs or do you see opportunities to shift to capital to PNC to take advantage of some of the more favor.
Well pricing backdrop.
Well, let me let me have Kevin just talk about the sales because we are seeing a pickup of it.
So it may be premature to talk about of.
Capital, but I'll get back that Kevin you want to start with the sales piece.
Sure.
Last quarter was the lowest and ER in memory, but you know towards he up the latter part of June we saw some some real signs of life during the quarter. The channel that really was disrupted the most was the bank channel, which was down around 60% and if we look at just the month of July.
Over June or the bank channel is that's almost doubled so.
The disruption that impact about channel. The most we've seen starting to turn around for financial advisors broker dealers nine most no. They were down about 40%, but I think that the virtual sales practices that they adopted and no we tended to reprice earlier than many companies and so I think as other companies caught up.
With repricing that leveled the playing field a bit.
And you know what we saw following the month of June looking at July over June.
We saw substantial increase in sales in the pipeline is growing and no ourselves of the motors per day continued to increase so we're we're pretty optimistic that if conditions continue the way. They are Oh, we'll see recovery in July older children in the third quarter over the second.
Some show us continuing to grow despite the disruption we saw about 4% growth in the second quarter and that trend continues, particularly our direct channels performing very well and every time. It services. It's important to note that periodic premiums, which I really the backbone of that business were only down 4% than the second quarter and again.
Our advisor channel is a is back up and focused on their customers and its individual sales generally follow their retail a individual retirement sales so.
When you backed that up with the fact that the pension risk transfer business and pipeline is as strong as we've ever seen it and we've opened up the reinsurance channel.
We feel cautiously optimistic that second quarter will be Lamar watermark, and and holler strategy local down this quarter and beyond recognizing all the uncertainties in the market.
Yeah. Thanks, Kevin I'd, just add they look at the you know the opportunities.
Seem to be much more in G. I vote, yes, it's not as extreme as maybe the sales from the second quarter might have indicated but.
No we will move a we will move our attention where we think the greatest growth and returns are occurring right now to out it looks pretty good.
So we move onto the next question. Please.
Thank you and next question comes from me Yeah, <unk> from Goldman Sachs. Please go ahead.
Thank you very much [noise] couple of questions I in G.I.. So first can you maybe talk about how you're thinking of loss picks here with rates well in excess of loss trend. Upon the one can you also have the cobot driven favorable frequency more short term I got on the other and I asked with some.
The contents of North America, commercial loss ratio, which I guess improved year over year, but actually weekend, but sequentially.
Yeah, Thanks, Yeah, and I think that's a cab that's a mark a question Mark.
Six.
I can certainly a start affecting brought it up well you do have a lot of a forces we were happy to be I think one of the catalyst on this market.
And at that level of of increases Peter talked about it continued to increase at an increasing graphics that first day, but you do have other thing you. We don't know the longer term impacts of on many third party at first party lines of code for example, a social inflation is more of a general upward move.
As opposed to.
A lot of specifics that you you can nail down and so I think there's there's still the thought a buck stuff and the industry that there's potential for creek moving up I think there should be some back to normality between interest rates it affiliation and we're probably heading more into inflation.
Sorry.
You know environment. So I was little cautious on the fact that where we're seeing this great rate increase.
And the there's more variability I.
I flip it from a year ago, where there was more variability around what kind of price increase can we get now we see that the magnitude or the price increases we can get there's more variability about the future look oh loss cost trends.
Okay got you have a follow up.
I do so in that.
Commercial premium, but that has been growing and sounds like you're you're pretty constructive on on those lines up and growth. There can you talk about the potential offsetting factor because exposure. There I think we've heard from some of your peers that it slows or <unk>.
It's coming in that as a quite a headwind.
Yeah, Peter can you talk about exposures.
Sure. Thank here and for the for the question.
I think when you think about us.
Prior to our competitors you remember we don't have as much a you know guaranteed cost business and so therefore, it's not a direct correlation to no effect on payroll sales and that's going to result in a commensurate premium reduction you know as we have reinforced book the we have minimum deposits on our excess.
This is in most cases I think when we look to the future in terms of some of the changes on on frequency and changes on a you know payroll in sales I'm you know could have a modest had one which is what we've talked about in last quarter's call. You know in terms of exposure base for me.
Duals and could have a slight impact on on premium, but I would look to went on you know we're trying to solve issues on excess.
We're deploying capital I mean, those who have led to better risk adjusted returns because.
You know, we're still coming up with similar structures.
And while there maybe a little bit of light headwinds in terms of overall exposure should not have a material impact on our premium as we look to third and fourth quarter based on what we know today.
Thank you we bought a little late maybe we could take a one last question operator.
Thank you. Our next question comes from can't meet feeling that from JP Morgan.
He's got right Carolina.
Hi on the travel insurance book I think you wrote a little bit over a billion dollars opinions last year can you discuss how much that's shrunk and whether you're seeing any sort of signs of a recovery in that book either in the U.S. or in international markets and then also on a b and C.
That did you having restructured your portfolio on reinsurance program are you thinking about any major changes in reinsurance as you're looking at next year, given the hardening market there.
Jimmy the first the first book of business that you referred to was was what I didn't pick the travel the Devil book family I think that okay.
Yeah got it yeah, Yeah billion dollar book in its shrinking I'm, just trying to get an idea on the better okay.
[music].
Thanks, Jim Yeah, Peter I think those are both yours.
Yes on the first one on the travel in the second quarter. A you know you had not only no new sales you also had a cancellation. So I think that that was one that was a.
And when it contributed to the North American personal negative premium written.
As we look at its hard to predict it you know again, we don't know what can happen with coal, but we don't know when travel is going to resumed its less than a billion dollars in North America, and it's fairly evenly spread in terms of you know quarter to quarter.
I I think we would have some modest sales in a in the third quarter, probably about a third as to what our run rate would be but getting very hard to predict you know we think that there isn't dynamic in that business. That's interesting, which is nobody really contemplated I think in terms of clients. The cat and so I think there's going to be a rebase in terms of how we price.
Business, what the economics are going forward and don't want to overreact, Bob you know sort it through to a quarter in terms of travel and think that as it starts to rebalance we think the economics, we'd better but again, we'll give an update as to what it looks like in the third quarter in terms of if there's a rebound or not.
I'm sorry to get the second question Jamie.
It was just on reinsurance for prices going up or you can think about sort of maybe retaining more risk or changing the reinsurance and insurance program in anyway.
Well, we're gonna have to try out our virtual Monte Carlo in September, which is really going to kick off I think we probably would have had 100 meetings scheduled as a g. under.
Normal conditions.
I don't think that we're going to you know we look at the reinsurance structures than any repositioning it will reflect the girls portfolio not trying to.
Say the market conditions are you a much stronger therefore, you know we're going to dump treaties because we've always talked about on the reduction of volatility, making sure. We had more predictable outcomes and we have great partnerships that we trade across every geography and multiple lines of business <unk> reinsurance partners, but we would expect to see changes in our reinsurance programs to reflect the excellent under.
Right and that we've been doing and the gross improvement that we've seen a you know quarter to quarter. So we begin to have those discussions you know what we have in terms of structures I don't think there'll be something that materially changes, but I would expect some refinements to reflect the portfolio as it is today.
Okay.
Jamie Thank you.
Well, let me, let me just to close and thanks, everybody for joining us this morning.
I, particularly want to thank my atg colleagues around the world I mean, these last few months I've really been challenging on many many fronts and I'm so grateful.
Your hard work and dedication the on this journey, we're on and I hope everyone.
Days are safe and healthy.
William masks, okay. Thanks, everybody.
Ladies and gentlemen. This concludes today's call you can't see Apache visitation you may now disconnect.
Oh.
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