Q2 2021 American International Group Inc Earnings Call
[music].
Ladies and gentlemen, and good day and welcome to Aig's second quarter 2021 financial results Conference call. Today's conference is being recorded at this time I would like to turn the conference over to Quentin Mcmillan. Please go ahead.
Thank you Laura.
Today's remarks may contain forward looking statements, including comments related to company performance strategic priorities, including Aig's pursuit of a separation of its life and retirement business business mix and market conditions and the effects of COVID-19 on AIG. These statements are not guarantees of future performance or events and are based on management's current expectations actual.
Performance and events may differ materially.
Factors that could cause results to differ include the factors described in our first quarter 2021 report on form 10-Q, our 2020 annual report on form 10-K, and other recent filings made with the SEC AIG.
AIG is not under any obligation and expressly disclaims any obligation to update any forward looking statement, whether as a result of new information future events or otherwise. Additionally, some remarks may refer to non-GAAP financial measures. The reconciliation of such measures to the most comparable GAAP figures is included in our earnings release financial supplement and earnings presentation all of which.
And you are available on our website at Www Dot AIG dot com with that I will now turn the call over to Peter Zaffino, President and CEO of AIG.
Good morning, and thank you for joining us.
We have a lot of topics to cover this morning, as we made significant progress on many initiatives over the last 90 days I.
And I will start today's remarks with an overview of Aig's outstanding consolidated financial results for the second quarter.
Then I will review results for general insurance and life retirement and more detail following that I'll provide an update on the progress we're making on AIG 200, and the operational separation of life retirement from AIG.
Next I will provide details on the strategic partnership we announced with Blackstone and July which represents a significant milestone for AIG and a major step forward towards the IPO of life retirement, and lastly, I'll provide an update on our capital management strategy, where our near term priorities remain.
The same as what I've outlined in the past debt reduction.
Return of capital to shareholders and the form of share repurchases and investment and organic growth.
Mark will provide additional details on the quarter and we will then take questions.
Starting with our consolidated results I am pleased to report that AIG had an outstanding second quarter.
We have sustained the significant momentum we had coming into 2021 through the first half of the year and delivered exceptional performance and general insurance with strong topline growth and significant improvement and our combined ratios.
Our pivot to growth and focus on demonstrating leadership in the marketplace accelerated through the second quarter as we continue to prioritize underwriting discipline and portfolio optimization, reducing volatility and growing and segments, where market conditions are favorable and fall within our risk appetite.
We also saw very good results and our life retirement business, primarily driven by improved investment performance.
Life and retirement adjusted pre tax income increased 26% year over year and the business delivered a return on adjusted segment common equity of 16, 4%.
We continued to advance AIG 200, with the transformation remaining on track to deliver $1 billion and run rate savings across the company by the end of 2022 against our cost to achieve of $1.3 billion.
And as you saw on our press release, our adjusted after tax income and the second quarter was $1.52 per diluted share compared to <unk> 64.
And the prior year quarter.
Turning to our financial results I'll start with general insurance.
Growth and net premiums written was very strong and the second quarter accelerating from the first quarter and continuing the trend that began in 2020 as our heaviest remediation efforts, we're nearing completion net.
Net premiums written increased 24% year over year to $6.9 billion or approximately 20% excluding foreign exchange.
Growth was strong across both global commercial and personal.
Global commercial net premiums written increased 13%, excluding foreign exchange, reflecting growth in areas with attractive risk adjusted returns and improving renewal retentions and more than 25% increase and new business compared to the prior year quarter and overall rate increases of 13%.
North.
Erika commercial net premiums written increased 15% excluding foreign exchange income.
Including strong growth and excess casualty financial lines retail property, AIG re and Lexington and.
New business increased 25% from the prior year quarter led by financial lines, and Lexington wholesale and renewal retention has improved 300 basis points over the same period.
It's worth noting that Lexington had its strongest quarter of new business since we fully repositioned its operating model to focus on wholesale distribution and excess and surplus lines. This business has significant momentum, which we expect will continue for the foreseeable future.
Shifting to international commercial net premiums written grew 10%, excluding foreign exchange, primarily driven by financial lines across the UK, EMEA and Asia Pacific Global specialty, particularly marine and energy and Talbot, our Lloyd's syndicate.
New business increased 26% from the prior year period led by financial lines, Marine and energy and Talbot and renewal retention and increased by 500 basis points over the same period.
It is important to emphasize that the growth we're achieving across commercial is aligned with our risk appetite that we've been executing against over the past 3 years.
We continue to prudently deploy limits, including with respect to new business with an intense focus on risk aggregation.
In addition to strong retention and our growth is being driven by exceptional new business, which and global commercial was $1 billion and the second quarter.
With respect to personal insurance as we discussed on last quarter's call. The unusually high growth and net premiums written was largely reflective of the creation of syndicate 2019, and the second quarter of 2020, and the reinsurance sessions associated with crude and creating that syndicate.
Turning to rate momentum continued with overall global commercial rate increases of 13%.
North America commercial rate increases were 13% with the most notable improvements and excess casualty, which was up 20% Lexington casualty, which was up 19% and Lexington wholesale property, which was up 15%.
International commercial rate increases were also 13% driven by financial lines, which was up 21% property, which was up 18% and energy which was up 16%.
Across the global portfolio, the largest rate increases were and cyber where rates were up almost 40% with the strongest rate increases and North America.
We continue to carefully reduce cyber limits and are obtaining tighter terms and conditions to address increasing cyber loss trends.
The rising threat associated with ransomware, and the systemic nature of cyber risk generally.
Underwriting excellence thoughtful risk selection and tighter terms and conditions and improving rate adequacy had been core areas of focus as we transformed our portfolio.
The general insurance accident year combined ratio ex cat improved for the 12th consecutive quarter coming in at 91, 1% and improvement of 380 basis points from the second quarter of 2020, and and improvement of 990 basis points from the second quarter on.
2018.
This improvement was comprised of 160 basis point improvement and the accident year loss ratio ex cat and a 220 basis point improvement and the expense ratio as AIG 200, and the benefits of premium growth continued to contribute to profitability.
Global commercial achieve and accident year combined ratio ex cats of 89, 3% and.
And improvement of 500 basis points year over year.
This is the best result, Commercial's reported and the last 15 years.
And personal insurance the accident your combined ratio ex cats was 95, 1%, a 70 basis point improvement over the prior year quarter.
Now just a quick comment on reinsurance purchased across general insurance, where we continue to evolve our reinsurance program to reflect our significantly improved underlying portfolio.
And the second quarter.
We were very active and the market with 25 specific layers on a variety of treaties placed <unk>.
Notably and nearly every instance, we were able to enhance our terms and conditions.
And our placements were at equivalent or improved pricing and a reinsurance market that is experiencing tighter terms and conditions and rate increases.
With respect to our property Cat program in particular, we took the opportunity and the second quarter to further reduce our per occurrence attach and point and North America through several buy-down cat layers for peak zone exposures.
Lastly on general insurance, we remain confident that we will achieve a sub 90 accident year combined ratio ex cash by the end of 2022.
Based on the progress that I've seen and our underwriting the ongoing efforts and optimizing our portfolio, but terrific execution of AIG 200, and the significant momentum we've developed I'm optimistic we'll get there sooner.
As we move through the second half of the year and get further and to AIG 200, and separation execution. We will provide further comments on our combined ratio expectations.
Now, let me turn to AIG re which oversees our global assumed reinsurance business.
Net premiums written across all lines increased more than 30% and the second quarter compared to the prior year period.
Writings were balanced across multiple lines of business with risk adjusted returns and underwriting ratios improving across the portfolio.
Highlights of AIG Reis second quarter results include the following and <unk>.
U S property cat, we saw rate improvements across all U S property business sectors increases range from mid single digits to upwards of 25%, depending on geography and loss affected accounts and Florida Validus re net limits at June 2021 were reduced by more than 40%.
And and coordination with Alphacat.
Since Aig's acquisition of Validus re and 2018, we've reduced the overall limit and Florida by more than 65% or approximately $400 million of annual limit demonstrating validus res continued discipline and focus on volatility reduction.
Further <unk>.
And a specific firms now represent less than 2% about <unk> total net premiums written.
Our focus remains on regional and nationwide firms and the U S as well as international diversification.
In addition in 2020 and through the second quarter of 2021, less and 25% of AIG <unk> net premiums written came from property lines.
Building on a retro sessional purchase on 1.1 and worldwide aggregate protection Validus re secured further retro sessional protections and June specifically, we purchased more peak zone coverage for U S Wind Asia wind and California earthquake for 2021season overall, we have substantially and.
And our portfolio despite heightened competition.
We're very pleased with how AIG re has evolved.
We have exceptionally strong intermediary market support as well as strong client relationships, which have resulted in significant renewal retention and signings.
In addition, we've upgraded the talent across the board and abroad and the skill sets of our leaders. We believe this business is much more prepared to assess and opportunistically respond to market conditions.
Sure.
Turning to life retirement this business once again delivered very strong results.
And retirement as broad leadership position across products and channels enabled us to take advantage of the significant rebound and retail annuity sales with total annuity sales up significantly across our entire annuity offering.
Our strong sales resulted in positive individual retirement annuity net flows during the quarter.
Group retirement deposits were higher compared to first quarter 2021 levels and second quarter 2021, New plan participant enrollments increased 20% year over year.
As demonstrated regularly in recent quarters, our high quality investment portfolio is well positioned to navigate uncertain environments.
Our variable annuity hedging program has continued to perform as expected providing downside protection during prolonged periods of volatility.
Finally, the strategic partnership with Blackstone further positions life and retirement to expand its distribution relationships enhance its product offerings and the business will benefit from Blackstone and significant capabilities.
Now, let me turn to AIG 200, and our global multi year effort to position AIG for the long term.
AIG 200 is continuing with a sense of urgency with all 10 operational programs deep into execution mode.
We're 18 months into the transformation and we have a clear execution path to $1 billion and run rate cost savings with $550 million already executed a contracted $355 million and which has been recognized to date and our income statement.
AIG 200 continues to build a strong foundation across the company and instill a culture of operational excellence.
Turning to the separation of life retirement, we made considerable progress and the second quarter with a focus on speed to execution with minimal business disruption.
Our separation management office has identified day, 1 requirements for life and retirement to become a Standalone company and multiple work streams are underway.
This work includes aligning our investments unit with life and retirement and preparing for the Blackstone partnership to close.
The speed with which our colleagues have move would not have been possible without the foundational work that's been done as part of AIG 200.
As I've discussed on prior calls and IPO of up to 19, 9% of life and retirement was our base case since we announced our intention to separate the business from AIG last October.
And we continue to believe and IPO will maximize value for our stakeholders and position the business for additional value creation as a public company.
I also noted on our last call that following our announcement, we received several credible inquiries from parties interested in purchasing and minority stake and life retirement as well as our entire investment management group.
1 of those parties with Blackstone.
We ultimately decided not to pursue the original proposed transactions because we determined that selling the entire investment management group was not and the long term interest of life retirement and some of the proposals also contemplated significant reinsurance transactions ahead of and IPO, which we didn't believe would optimize the outcome for shareholders.
At this stage and the process.
And June Blackstone Reengage with us to determine if we could find a mutually beneficial way to partner that would further our goals for the separation of life retirement.
These discussions led to the announcement of the strategic partnership we entered into and mid July.
We continue to work with a sense of urgency towards an IPO of the life retirement business.
Following the 9.9% equity investment by Blackstone, the IPO will likely be the first quarter of 2022 event subject to required regulatory approvals and market conditions.
We previously viewed the fourth quarter of this year at the earliest and IPO would occur with the first quarter of 2022 as a more likely outcome. So our timeline is essentially unchanged, even with the announced Blackstone transaction.
Additionally, the gain on sale of affordable housing coupled with other factors provides us with flexibility to sell down beyond 19, 9% as we now expect to fully utilize our foreign tax credits in 2022.
This development facilitated our partnership with Blackstone and as a result made it more compelling compared to structures, we considered since our separation announcement last October.
We believe that we are better positioned to accelerate operational separation and as a result life retirement will be more comprehensively established as an independent company when the IPO occurs.
Now, let me provide additional detail on the Blackstone partnership, which represents a significant milestone for AIG and provides meaningful momentum for the IPO of life and retirement as I mentioned this partnership represents the culmination of discussions that took place over the last year on several strategic initiatives.
<unk> and we view it as very beneficial for AIG and Blackstone <unk>.
Blackstone's leadership is indicated for some time that insurance is a key strategic priority for their firm and the investment Blackstone is making and our life and retirement business is the single largest corporate investment. The firm has made and its 35 year history and life retirement is now Blackstone single largest client.
This substantial commitment by Blackstone highlights the strength of life retirement business Blackstone's belief and the value of the investment and it's a validation of life retirement market leading position.
Furthermore, Jon Gray, President and COO Blackstone was directly involved and the negotiations.
He has been a great partner throughout and will join the board of directors of the IPO entity at the closing of the equity investment, which we expect to occur in September.
Let me recap some of the terms on the transactions and how we're thinking about future capital structures for AIG and life retirement as Standalone businesses.
Blackstone will acquire at 9.9% cornerstone equity stake and the holding company for Aig's life retirement business for $2.2 billion.
And and all cash transaction.
The purchase price is equivalent to a multiple of 1.1 times target pro forma adjusted book value of $20.2 billion.
The adjusted book value reflects the combined book value of our life retirement business.
And a majority of our investments unit as well as the financing arrangements to be undertaken and the amounts to be paid from that entity to AIG just prior to the IPO.
As we look to the permanent structure of the IPO entity, we will be raising debt at this entity consistent with its ratings and peer leverage ratios.
The new debt will be used to pay down AIG debt such that the debt stack at AIG and at the IPO entity will both be in line with each company's peers and what we view as the optimal debt to total capital ratio for each company.
Life and retirement will also enter into separately managed account agreements or SMA.
With Blackstone, whereby Blackstone will manage $50 billion of specific asset classes with that amount growing to $92.5 billion over 6 year period.
Lastly, as I alluded to earlier, we sold certain affordable housing assets to Blackstone Real estate income Trust for $5.1 billion and and all cash transaction, which is expected to close by the year end 2021.
Turning to capital management, we ended the second quarter was $7.2 billion of parent liquidity.
The net proceeds from the Blackstone transactions result in additional liquidity of $6.2 billion to AIG by year end 2021.
Through the remainder of this year.
We plan to pay down $2.5 billion of AIG debt and buy back at least $2 billion of common stock.
As we announced on our press release, the AIG Board has authorized additional share repurchases, which together with the remaining approximately $1 billion left on our prior authorization brings our total stock buyback authorization of $6 billion.
Together these capital management actions demonstrate our commitment to Delever and return capital to shareholders. In addition, the strength of our overall capital position leaves us with ample capacity to continue to invest and growth, particularly in general insurance, where market conditions continued to be extremely favorable.
Now I'll turn it over to Mark to provide more detail on the quarter.
Thank you Peter and good.
Good morning, everyone.
For the second quarter of 2021, AIG reported adjusted pre tax income or <unk> atti of $1.7 billion and adjusted after tax income of $1.3 billion. We produced an annualized return on adjusted common equity of 10, 5% for AIG 12, 3% for general insurance and $16.4 per.
We're set for life and retirement the annualized return on adjusted tangible common equity was 11, 6% for the quarter.
On a GAAP basis, AIG reported 91 million of net income with the principal difference between GAAP and adjusted after tax income of $1.3 billion being the accounting treatment of Fortitude net investment income and associated realized gains and losses.
Before I move to general insurance, though I'd like to add to Peter's remarks on the Blackstone SMA.
This arrangement and incorporate specific specialty asset classes comprised mostly of private credit alternatives and structured products, where Blackstone is a world leader and sourcing and origination and has a demonstrated track record of delivering yield uplift.
And not public fixed income securities.
The fee structure is 30 basis points on the initial $50 billion on.
Increasing to 45 basis points for the annual new AUM of $8.5 billion starting.
4 quarters later as well as for the reinvested runoff.
Therefore, you should rise from 30 basis points initially towards 43 basis points by the end of the initial 6 year contract term for blackstone's share of the assets.
And this part of our portfolio, it's fair to expect that fees will somewhat precede the benefits of the impact of enhanced origination and differentiated asset classes and recognition of related yield uplift.
We believe this SMA arrangement is unique and that LNR maintains control over its overall asset allocation asset liability management liquidity and credit profile and the nature of individuals' investment structures. In addition life and retirement and has the opportunity to enhance overall investment.
But by focusing on improving efficiencies and asset classes that are not part of the SMA as well as optimizing performance across the whole portfolio. We believe the combination of these efficiencies together with the Blackstone and focused on maximizing the performance of SMA assets and growth opportunities on the overall AUM.
And should drive net yield uplift.
Before leaving the Blackstone transaction I want to note that a GAAP loss on sale is anticipated with a 9.9% equity purchase by Blackstone as well as with subsequent IPO sell downs due to the inclusion of OCI and GAAP book value.
Given that OCI and future periods are subject to market fluctuations the impact cannot be fully estimated at this time.
As it respects affordable housing and note that the $5.1 billion purchase price translates to an approximate $3 billion after tax gain on sale, which will benefit book value and provides approximately $4 billion of cash to pair it with a minority portion held back and the regulated life and retirement entity to further.
Strength in already historically strong RBC level.
And this transaction is expected to close by year end 2021.
Moving to general insurance second quarter adjusted pre tax income was $1.2 billion up $1 billion, even year over year, primarily primarily reflecting increased pre tax underwriting income of over 800 million on.
Along with $200 million and change of increased pre tax net investment income driven primarily by private equity returns.
Atrophy losses of 118 million and were significantly lower this quarter compared to $674 million and the prior year quarter.
Prior year development was $51 million and favorable this quarter compared to favorable development of $74 million and the prior year quarter. This included $58 million of net favorable development and North America and.
And $7 million of net unfavorable development and international both of which reflect marginal changes and the underlying operations as usual there is a net favorable amortization from the adverse development cover which amounted to $49 million and this quarter.
It's important to put in context, though the recent strength of the property and casualty market and health General insurance has executed within this environment.
As Peter mentioned in his remarks. The book has had nearly 3 turns at correction since 2018 risk appetite and risk selection and had been materially sharpen complementary and properly evolving reinsurance programs have been implemented certain license segments were exited or massively reduced.
Clear and broader distribution and that's been embraced and Lexington has been stood up as a major E&S platform. All of this was accomplished while simultaneously achieving significant rate and excess of loss cost trends with materially better terms and conditions. These actions form the foundation as to why.
General insurance has shown material improvement and the underlying accident year ex cat combined ratios and both the historically underperforming North American commercial segment, and the international and commercial segment as well.
North American commercial has showed a 620 basis point improvement and the accident year ex cat combined ratio over the prior year quarter.
International commercial segment has continued to improve profitability with 370 basis points improvement compared to the prior year quarter.
This shows demonstrable margin improvement stemming from and that totality of the actions and Numerate. It earlier and this level of global commercial improvement is noteworthy as global commercial and made up 71% of worldwide net premiums written through the first half of 2021.
Additionally, the global commercial book is increasingly becoming a global specialty book comprised of low frequency high severity coverages as.
As a result general insurance commercial on the large and global in scope.
Non EMEA index of the market, but instead and underwriting company, where risk selection and business mix are important factors and achieving profitable growth while mitigating volatility.
Turning to personal insurance as we noted on our first quarter earnings call our year over year net premiums written comparisons for the second quarter would improve given the timing of the initial COVID-19 impacts and the sources from syndicate 2019 being reflected also during the second quarter of 2020.
Global personal lines net premiums written grew by approximately 45% or 41% on a constant dollar basis aided by the syndicate 2019 comparisons.
Elsewhere within the segment the second quarter of 2021, North America personal insurance.
Premiums and travel and warranty business increase this was driven by a rebound and travel activity and increased consumer spending, but not yet back to the pre pandemic levels are.
Our outlook for net premiums written for the next 6 months and North America personal insurance is between 450 and $500 million per quarter.
We continue to anticipate earned margin expansion throughout 2021 and into 2022, resulting from Aig's favorable underwriting actions taken and global market conditions involving strong rate increases well above loss trend improved terms and conditions and a more profitable net.
Yes.
Given the specific market dynamics of where we choose to play we don't foresee any material slowing down and a cheaper rate levels throughout the balance of the year.
Now I'd like to comment a bit on inflation, which 1 needs to think about in terms of both economic and social inflation.
Based on the consumer price index, and the producer price index headline inflation indicates an annualized rate of about 5.5% to 7.5%, which has accelerated since March some components of the indices have become worrisome, such as used cars and trucks being up about 45% and energy commodities being.
North of 40%, but medical care services, whose impact stretches across most casualty auto workers compensation and excess placements, although higher or much more te and headline inflation would indicate with physician services up about 4% recently and hospital services were up about 2.5%.
Cost involving labor and materials construction and related services are up and will impact property coverages and cat claim costs in the near term.
These indications demonstrate that the inflationary impact on any given insure is a direct function of the products and the mix day rate and where they play with it and insurance program.
Social inflation. However, it's much more of a U S centric phenomenon driven by our highly litigious culture, social inflation and also has correlations to social change initiatives, including income inequality and changing sentiments towards business to name a few.
Being further away from risk, though is a meaningful inflation counter and Aig's General insurance has taken strong preemptive action in that regard by minimizing lead umbrella is in favor of higher positions within the insurance program.
For example, our excess casualty average attachment points for national and corporate U S accounts have increased approximately 3.5 times and 5.5 times, respectively. Since 2018.
This significantly increased distance from attaching is a key overall portfolio benefit.
Taken altogether, a U S view towards that total inflation rate of 4% to 5% is arguably reasonable for the near to medium term.
Our second quarter rate increases together with our view of pricing for the rest of the year provide continued margin and excess of loss cost trend.
Now turning to life and retirement when compared with the prior year favorable equity markets drove higher alternative investment returns and principally higher private equity returns, which reflect the impact of the 1 quarter lag on the period.
Life insurance continues to reflect the COVID-19 related mortality provision that has dropped and relative to the prior 2 quarters. We estimate our exposure to the population is approximately $65 million to $75 million per 100000 population deaths.
Mortality, however, exclusive with COVID-19 continues to be favorable compared to pricing assumptions.
Within individual retirement, excluding the retail mutual fund business net flows were positive for the quarter and favorable by over $1.2 billion when compared with the second quarter of 2020 led by index annuities rebounding to be higher by approximately $700 million with variable annuity net flow being about 365.
And stronger year over year.
Group retirement premiums and deposits were up with net flow as being relatively flat, while also experiencing and approved surrender rate sequentially.
The life business has seen consistent premiums and lower lapse surrender rates over the last 4 quarters than prior and.
And for institutional markets premiums and deposits were up compared to the prior year and sequentially get issuance was also higher both sequentially and year over year, and we executed several large pension risk transfer transactions during the quarter the pipeline for pension risk transfer opportunities, both direct and through reinsurance remained very.
Strong and both the U S and and the U K.
We continue to actively manage the impacts from the low interest rate and tighter credit spread environment and our earlier provided range for expected annual spread compression has not changed as our base investment spreads for the second quarter were within our annual 8% to 16 point guidance.
Further new business margins generally remained within our targets at current new money retards due to active product management and a disciplined pricing approach.
Lastly, post June 30, we closed on the sale of our retail mutual fund operation and.
As you are aware retail mutual funds has contributed negative net flows over the last 2 years and the drag from this will now cease.
Moving to other operations adjusted pre tax loss was $610 million inclusive of $94 million from consolidation and elimination entries, which principally reflect adjustments offsetting investment returns and the subsidiaries, which are then eliminated at other operations.
Before consolidations and eliminations the adjusted pretax loss was $516 million 184 million worse than the second quarter of 2020, but that quarter included 2 months of Fortitude re results of $96 million. In addition, during the second quarter of 2021, we also.
<unk> prior year legacy loss reserves by a net $65 million driven mostly by blackboard exposures and we increased our incentive program accrual to reflect the strong performance year to date, whereas in 2020, we began adjusting our incentive program accrual in the third quarter.
After applying these adjustments the comparison is actually favorable year over year.
And shifting to investments overall net investment income on and <unk> basis was $3.2 billion virtually flat from the second quarter of 2020, but again adjusting the second quarter of 2024, 4% to net investment income over that 2 month period. This quarter's net investment income was 3 <unk>.
$62 million higher than the prior year, reflecting strong private equity returns and an annualized 27% return rate for the quarter and hedge fund results at a 21 annualized return rate for the quarter, along with stable interest and dividend income.
Turning to the balance sheet at June 30 book value per common share was <unk> $76.73 up 7% from 1 year ago.
Adjusted book value per common share was $60.7 per share up 7% from 1 year ago, driven primarily by strong operating performance and adjusted tangible book value per common share was $54.24 sets up 8.1% from a year ago.
As Peter noted the quarter and AIG parent liquidity was $7.2 billion during the second quarter, we made a $354 million prepayment to the U S Treasury and connection with certain tax settlement agreements emanating from the pre 2007 period as well as completed debt tenders for an aggregate purchase price of 3 <unk>.
And it's $59 million.
Our debt leverage at June 30 was 27% even down 140 basis points from the end of 2020 and down 360 basis points from June 30.
1 year ago.
Our primary operating subsidiaries remain profitable and well capitalized for general insurance, we estimate the U S coal fleet risk based capital ratio for the second quarter to be between 460 at 470% and life and retirement is estimated to be between 440 and 450%.
Both above our target ranges.
Lastly, as respect tax I want to reiterate that the remaining net operating loss or NOL portion of AIG DTA at the time of deconsolidation LNR for tax purposes, we will still be available to offset future general insurance and or AIG taxable income through their <unk>.
Natural exploration as of June 30 that portion of the DTA totaled $6.3 billion and is available to offset up to $30 billion on taxable income.
Upon tax day deconsolidation.
And we'll see is the ability to utilize up to 35% of life insurance company income against the Nols are any remaining FTC.
With that I will now turn it back over to Peter.
Thank you Marc operator, we'll go to question and answer.
Thank you, Sir ladies and gentlemen, if you would like to ask a question. Please signal by pressing star 1 on your telephone keypad and see all using a speaker phone. Please make sure you're on mute function is turned off to.
Your line is signal to Vishal equipment. Once again, please press star 1 to ask a question.
Pause for just a moment to assemble the queue.
And we'll take our first question from Elyse Greenspan from Wells Fargo. Your line is open. Please state your question.
Hi, Thanks, good morning.
My first question on Peter.
Peter Thank you.
Yes.
9.
Margin target within general insurance, perhaps.
And I was hoping you could expand on that.
Graeme and good morning.
Make sense.
Are you assuming stable pricing and inflation kind of remained around 4% to 5% based off of what Mark said in 2020.2.
Thanks Elyse.
I've talked about in the past that there is many components that are going to drive improved combined ratio.
The first is the absolute underwriting performance and we're seeing that come through and what mark covered in his script and in terms of severity.
Attritional losses, and just less volatility and.
In addition, we have seen strong topline growth and believe that and the commercial side.
We're in that market, now and and see that continuing and we need less reinsurance that we once needed because of the makeup of the portfolio and so those are all tailwind and then and in addition to that you have.
AIG 200, which I gave some numbers on.
On my prepared remarks that we have real tailwind there not only on we're going to continue to have a clear sight and the overall path to $1 billion, but it's starting to earn through.
And the income statement and just our overall expense discipline. So we don't heavily rely on 1 component. There is 4 to 5 that drive it and no. It does not require us to be and the same rate environment.
I have to be in the range on the social inflation and loss cost inflation, but we watch that all the time and believe that we have a lot of momentum and I will give more guidance specifically on the next couple of quarters and the momentum I've seen and the excellent job that Dave Mcelroy and the entire leadership team have done and general insurance.
Real differentiator and the momentum and I have is tremendous so it just leaves me with a lot of optimism.
Great and then my second question and.
On the life and retirement on.
And this initial sale with on block.
And you.
Emphasize these name on.
Most of the foreign tax credit and so it sounds like tax considerations.
The amount and LNR and price points.
And the public markets did you have a sense of how much you're going to bring on.
And to the public markets and then in terms of the debt, there and youre paying down 2 and hassle debt.
Now on well the majority of the policy.
And back.
And let's see.
Buybacks and organic growth.
Yes, Thanks, Elyse I mean in terms of the timing as I said, we're targeting.
First quarter IPO, we're working really hard on the operational separation will close with Blackstone, who is going to be a tremendous partner for us, we hope and July and so and working over the next 6 months to position.
Life retirement to have a very successful IPO is the primary focus second is we have to.
Think about I said on my prepared remarks on the regulatory environment and.
The market itself.
So that will really dictate in terms of how much we do.
And it just gives us a lot of flexibility to accordion and it up if there is really favorable market conditions or just to go in with we wouldn't go to and IPO with a 9.9 will do something larger that map and the size.
Timing will continue to give you.
<unk> as we get further along on the year with the progress that we're making I don't know Mark if you want to add anything to.
The capital management and the debt.
Just just I think that.
Core <unk> was <unk>.
The size that this green.
Move the constraint so.
Rather than on the specifics of the sizing, which as Peter said with very market.
Incentive and contingent, but having that ability now to not have such a constraint is the may flow. If you really wanted to push over.
Thanks next question please.
We'll take our next question from Meyer Shields from K B W. Investment Bank. Your line is open. Please go ahead.
Great.
Pardon me. Thanks for question and on the Blackstone partnership can you give us a sense what the internal audit expenses are that are comparable to the 30 to 45 basis points that will constitute the fee.
Yes Maher. Thank you for the question I'll turn it over to Mark and a second but I think that when we looked at.
The partnership with Blackstone.
A variety of factors that went into it certainly them, making a commitment on the equity investment.
Making certain that life retirement is still maintained its authority and ability to shape the investments with Blackstone and so we contain that a lot of the assets that we have or will transfer.
Our classes that they have exceptional track records on and so we're working through that we do believe that the AUM will grow over time with <unk> retirement, and so this will become a smaller percentage and the base case was that not only with Blackstone.
<unk> that our overall business model will evolve to be more efficient over time, but mark maybe you could.
Phil and a couple of the details of that.
Yes, Meyer as Peter said.
Level of the specialty assets are usually much more labor intensive and are always on the higher end of the scale. If you think of it and at a rate card and sets.
And.
So that part is completely.
Within expectations, and what we would say within with our own net journal structures. We would have also increasing costs as you gratulate up to the IPO.
Overall asset class categories that they are experiencing for us so.
There is some GAAP, but some of that cost accounting.
View is less clear than you think but we.
No with the value, we're going to be getting out of that is going to be.
More than worth it.
Okay understood.
Second question and I guess.
For Mark and I know the.
Expense ratios and North American personal have been distorted up till the second quarter because of I guess the press travel.
Insurance and and the second quarter.
And the expense ratio run rate on those representative of what we should see going forward.
I think that Youre going to let me make a general statement first and then.
Is that.
Peter try and position this event and we May have said this a little bit in past calls, but you should think of the combined ratio gains on the commercial side of being loss ratio and expense ratio driven and on.
On the personal line side more expense ratio driven we've gotten a lot more stability and the.
And the loss ratios on there so you'll continue to see that but to the extent it's roughly at a.
I would actually say you should anticipate the expense ratio to continue to improve and North American personal.
And 1 thing I would add merit and in terms of what Mark just noted is that.
The high net worth space is changing dramatically and peak zones.
We expect to see continued change in the excess and surplus lines as.
More alternatives it was basically split and.
And the second quarter between admitted and non admitted new business. So.
So thats just something that we're going to watch I mean, there is no specific trends that are going to be substantially different than the guidance. We've given but there is some change and that business that we want to make sure with our market leading position that we take advantage of solving problems for clients, but also repositioning the portfolio and have less volatility.
Okay next question please.
And we'll take our next question from Erik Bass from Autonomous Research. Your line is open. Please state your question.
Hi, Thank you I was hoping you could talk a little bit more about the asset management agreement with Blackstone and how you see this affecting life and retirement NII over the next couple of years and it sounds like you expect some initial dilution, but when should this turn and start being accretive to NII and <unk>.
Also will any of the assets they manage to be used to support new business and could this help you be even more competitive and your fixed index annuity offerings.
Yes, Mark why don't you start and then turn it over to Kevin in terms of talking about product.
Yes. Thank you Peter Yeah, and I think I think Kevin and have a few things debt to help you with there as well.
So on the day.
And as you think of it this way Eric.
You've got the.
And the uplift will come more delayed than the fees to your point.
Firstly, and secondly is as the $50 billion of AUR and it's worked through.
Have been thinking about it and mostly it takes 7 years for that run off the turnover.
As that occurs and it also shifts from 30 to 45 basis points, the $8.5 million annually that will also come in and take it to the 92 and.
And a half will be at 45 bps.
Kind of have that curve.
And was alluding to in my prepared remarks.
So as a result of that youre going to have.
Net net.
Yield uplift coming through as a function of windows and investments can be made.
If you think of it you are really at the end of year..1 you still have 85 percentage originally AUM.
Still not turned over which is why you get the delay.
Aspect.
Got it.
We expect that to chip away and close.
A lot sooner than you might think but that is the important point and remember is that LNR completely has that control so that take off between the liquidity and the rating distributions and the asset distributions and capital tradeoffs and so forth is all within the management.
Discretion of LNR.
Got it.
And.
Yes, Thank you Eric.
Eric I think what's important is to keep in mind that this.
This is not.
Not a change and our portfolio strategy. This is and enhancements of our portfolio strategy.
Blackstone has tremendous origination capabilities, we believe that their ability to originate and these asset classes and exceed our current ability.
And in addition to that.
They have a broader range of assets within the sub classes.
And the combination of their ability to originate with more capacity and also the breadth of their asset classes, we believe will allow us.
2.
And to create new products to support transactions and our intention will be to.
And to work together to.
Innovate strategies that will allow us to grow faster.
We do not think of the balance sheet as static we think about a growing balance sheet.
And so rather than focusing just on the yield of this part of the portfolio I think about the overall portfolio strategy.
So so again this is not a change and our strategy. This is and enhancements of it and that's how we think about it.
Thank you and then can you help us think about the level of new public expenses life and retirement, we will have and we will need to be able to be offset by savings elsewhere and then how should we think about the level of expenses that are running through other ops that will remain with the parent.
On a post separation.
Let me handle that 1.
On the guidance that.
And I provided in the past and will stay with us that.
And there are meaningful savings for life and retirement within AIG 200 that will be tailwind to them.
We had said around $125 million life retirement achieved some of that book, but there is a big number left for us in terms of earning through that over the next 18 months So think about.
Roughly $100 million of AIG 200 benefits than there is allocations and parents service fees that goes over to a life retirement today that will either dissipate or we will still have those services as we transition for life and retirement and become a public company. So that's.
And the <unk>.
Range of 75 plus million so Kevin has a.
Decent amount to invest towards building out the public company and.
And we think with other initiatives for expense savings through separation office that it should largely be neutral.
2 life retirement, and we think the synergies that exist within.
On the remaining company AIG that it's.
Neutral to beneficial and we will give more guidance as we get closer to the end of the year when we've done more work and the separation office.
Thank you both to our next question from Phil Stefano from Deutsche Bank. Your line is open. Please go ahead.
Yeah, Thanks, and good morning, and looking at the General insurance book and mostly focused on commercial.
We look at the GAAP and net written versus net earned I mean, it's clear that as a run way just given where the pricing per day for the continued improvement.
The underlying loss ratio.
How are you thinking about adequacy.
Need to continue to push for rate versus sales.
And growing and dialing back.
And Youre getting now and how you're how you're balancing debt to.
And 2 dynamics.
Okay.
Thank you very much for the question.
Mark put a lot of comments and his prepared remarks, we watch.
Loss cost inflation and margin on everything we do in terms of portfolio optimization, and that's really what I referred to and I talked about how do we.
Physician general insurance, particularly on the commercial side to have and optimize portfolio. We've had several years of rate increases we're building margin and some specific lines of business have been getting more rate than others and they're the ones that need it, but it's something that Dave Mcelroy and the entire team spend every day thinking.
And believe that there is absolute runway to continue to develop margin, but Dave do you want to talk a little bit about how you're approaching it and some of the different segments of the business that youre focused on.
Yes, Thank you Peter and thank you Kal day.
And while the rate increase story is 1 you don't you want to you want to make sure. It's calibrated it off all of the other things you're doing and the portfolio. So.
What we've done over the last 3 years is is a lot of risk selection and terms and conditions and attachment point and account exposures and managing that so if you fall in love with a singular rate increase the number and you define your books you ultimate way.
We ended up at Roche adversely selected against so you actually have to put that in context and I.
I always use examples it's Mike.
Might've gotten and 10% rate increase on a contract on New York and I'm still chasing New York Labor Law, I will lose okay and for the industry, it's a little bit of light commercial auto we've been getting rate increases and commercial auto for 8 years, and we still haven't solved that problem. So so rate increase can be a false positive what we've done with a sort of technical.
And understanding of it and looking at it and.
And aggressively.
Realizing that we have a large account book upper middle market book, and we need more rate to reflect the more complexity of that book. So so thats, we think thats sustainable going into the latter part of this year. Okay. We think we can accommodate what would be expected loss cost inflations and.
And at the same time and this is what I've observed and the last quarter is there is more pricing to the account and account characteristics.
Is it moderated yes, a little debt, okay, but but it's moderated off of still over loss cost trends and what I would say when I look at my dispersion and charts. We don't have the same outlier plus 30% up but we have a swell of more of a plus 5 to 10, plus 10 to 20 plus 20.
30 type of accounts that are that are basically aggregating and that in terms of rate, reflecting the exposure there.
Other piece and I.
We have to be careful with it because we want to reflect our book and our clients, but we do we are and the multiyear phase of a re underwriting and and influence and the market and when you look at compounding and you look at debt.
And the compounding that Mike existing excess casualty or primary D&O, okay, or or or even programs. Okay. These are numbers that are plus 93% plus 86% again, plus 70% over a period of time up starting in late 2018 at 2 to the first half of <unk>.
2021 and <unk>.
And on a panacea.
And if your if I was trying to write investment banking and Allen and I got 90% I, probably would still lose but I mean.
It's a good baseline for the progress that we've done.
With the business.
The last thing I'd say is that we had a lot of new business. This quarter I think it was cited on and on a couple of calls and remember. This is also being price now with with an elevated rate slash price structure. So sort of the same the same business 2 years ago or 3 years ago is now up that 30% to 40 <unk>.
And <unk> when we can produce it as a piece of new business and and Thats very much formed a lot of our success and this quarter was moving from remediation 2 and offensive point.
Capturing the the quality of what AIG has with multinational claims reputation complexity and actually building off of that for.
And the strongest new business, we've had and a while so that flows off of technical rate increases and our our consistent view of that but it's important to sort of lay that all out.
And you understand that we're not we're really looking at this with.
And with the lens on all aspects of the business.
With that ill go ahead.
Thank you.
Yes, I think that's very thorough look on it maybe a quicker 1.
Okay.
And we'll take our next question from Tracy <unk> with some back and take 1 last question and then ill.
Yes, Thank you yes.
Please go ahead traci.
Thank you.
And I see that is there and then.
IPL contingency and the Blackstone transaction.
Timing thing.
And the IPL contingency also considering a pricing floor.
Minority IPO proceeds or a minimum equity steep side.
Thanks Tracy.
The $9.9.
Is predicated on a strategic partnership with <unk>.
To accelerate all of the things that we want to do to set life retirement up to be a public company.
And we're really focused on getting that done within the first quarter.
And making sure that the organization is set up to do that and again, there is regulatory and market considerations that we will always look at but those are really the bigger ones then.
Tying really what the cornerstone investor has brought to the table versus the eventual IPO as Mark mentioned, we have a lot more flexibility because of the consumption and the foreign tax credits.
And so 2022, and we'll start to outline what we think will likely happen as we get closer to the end of the year.
Okay, Yes, I was just referring to some fine print and your 8-K.
That is the ATL didn't hop and there were some recourse.
And now with zero or something else and I should also be considering.
No.
Okay perfect.
And on.
Anyone could trade growth for margin expansion, but you're at a spot where youre doing bolt on I guess right.
And I don't have visibility is on law. So can you contextualize how your current accident year loss had been tracking maybe relative to last year and your 5 year average.
Mark do you want to cover that.
Sure sure Hi, Tracy.
And I.
And I guess, a couple of things first off we are viewing although we're showing substantial margin.
Movement on on a quarter over quarter year over year basis, we actually think we're being conservative and this as I said I think on past calls there has been a lot of change over the last 3 years, including some of the fundamental channels and which we get business.
So we think we've got every 1 of those correctly nobody of assets.
So you wind up having a little bit of risk margin associated with each of the last several accident years. So we feel good overall and we feel about the trajectory.
The improvement and where it's coming from and that we're not.
We're not booking and displaying things without having an appropriate risk margin associated with it.
That's helpful.
Yes, Thanks, Mark and.
And I wanted to thank everyone for joining us today.
Before we end the call I want to thank our colleagues around the world for what they've accomplished over the last 6 months, especially considering the challenges that have been presented and work remote environments.
We have a talented hard working colleague base is executing on multiple complex initiatives simultaneously, which I think makes us very unique very proud of the team remains very focused on ensuring quality and everything that we do and delivering significant value to all of our stakeholders have a great day.
That concludes today's conference call. Thank you everyone for your participation you may now disconnect.
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