Q3 2021 American International Group Inc Earnings Call
And ladies and gentlemen, please stand by good day and welcome to the H Aig's third quarter 2021 financial results Conference call. Today's conference is being recorded and now at this time I would like to turn the conference over to Quentin Mcmillan. Please go ahead Sir.
Thank you Jake.
Today's remarks may contain forward looking statements, including comments related to company performance strategic priorities, including AIG is pursuit of 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.
Factors that could cause results to differ include factors described in our third quarter 2021 report on Form 10-Q, our 2020 annual report on Form 10-K, and other recent filings made with the SEC AIG is under no obligation and expressly disclaims any obligation to update any forward looking statements, 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 are available on our website www dot AIG dot com.
With that I would now like to turn the call over to Peter Zaffino, President and CEO of AIG.
Good morning, and thank you for joining us today to review our third quarter results.
I am pleased to report that AIG had another outstanding quarter as we continue to build momentum and execute on our strategic priorities.
We continue to drive underwriting excellence across our portfolio.
Executing on AIG 200 to instill operational excellence in everything we do we are continuing to work on the separation of life retirement from AIG.
And we're demonstrating an ongoing commitment to thoughtful capital management.
I will start my remarks, with an overview of our consolidated financial results for the third quarter.
I'll then review our results for General insurance, where we continue to demonstrate market leadership in solving risk issues for clients, while delivering improved underwriting profitability and more consistent results.
I'll also comment on certain market dynamics, particularly in the property market as well as recent cat activity and related reinsurance considerations as we approach year end next I will review results from our life and retirement business, which we continue to prepare to be a standalone company.
He will also provide an update on the considerable progress we're making on the operational separation of life retirement from AIG and our strong execution of AIG 200.
I will then review capital management, where our near term priorities remain unchanged from those I have outlined in the past debt reduction.
<unk> of capital to shareholders.
Investment in our business through organic growth and operational improvements.
Finally, I will conclude with our recently announced senior executive changes that further position AIG for the long term.
These appointments where possible due to the strong bench of internal talent and significantly augment our leadership team across our company.
I'll, then turn the call over to Mark who will provide more detail on our financial results and then we'll take your questions.
Starting with our consolidated results as I said AIG had another outstanding quarter, continuing the terrific trends we've experienced throughout 2021.
Against the backdrop of a very active cat season, and the persistent and ongoing global pandemic. Our global team of colleagues continue to perform at an incredibly high level delivering value to our clients.
Policyholders and distribution partners.
Adjusted after tax income in the third quarter was 97 per diluted share compared to 81 in the prior year quarter.
This result was driven by significant improvement in profitability in general insurance.
Good results in life retirement.
<unk> expense discipline and savings from AIG 200, and executing on our capital management strategy.
In General insurance Global commercial drove strong top line growth and we were especially pleased with our adjusted accident year combined ratio, which improved 280 basis points year over year to 95%.
These excellent results in general insurance validate the strategy, we've been executing on to vastly improve the quality of our portfolio and build a top performing culture of disciplined underwriting.
One data point that I believe demonstrates the incredible progress. We have made is our accident year combined ratio for the first nine months of 2021, which was 97, 7% that's including Cats. This represents a 770 basis point improvement year over year with 600 of them.
Improvement coming from the loss ratio and 170 from the expense ratio.
And life retirement, we again had solid results, primarily driven by improved investment performance and increased call and tender income.
This business delivered a return on adjusted segment common equity of 12, 2% for the third quarter and 14, 3% for the first nine months of the year and.
And we recently achieved an important milestone in the separation process by closing the sale of a nine 9% equity stake in life or retirement to Blackstone for $2 2 billion in cash.
We continue to prepare the business for an IPO in 2022, and we will begin moving certain assets under management to Blackstone.
We ended the third quarter with $5 3 billion and parent liquidity after redeeming $1 5 billion of debt outstanding and completing $1 1 billion in share repurchases.
Year to date.
We have reduced financial debt outstanding by $3 4 billion and have returned $2 5 billion to shareholders through share repurchases and dividends.
We expect to redeem or repurchase an additional $1 billion of debt in the fourth quarter and to repurchase a minimum of $900 million of common stock through year end to complete the $2 billion of stock repurchase we announced on our last call.
Through these actions we've made clear our continuing commitment to remain active and thoughtful about capital management.
Now, let me provide more detail on our business results in the third quarter I will start with general insurance, where as I mentioned earlier growth in net premiums written continue to be very strong and we achieved our 13th consecutive quarter of improvement in the adjusted accident year combined ratio.
Adjusting for foreign exchange net premiums written increased 10% year over year to $6 6 billion.
This growth was driven by global commercial which increased 15% with personal insurance flat for the quarter.
Growth in commercial was balanced between North America and international.
With North America, increasing 18% and international increasing 12%.
Growth in North America, commercial was driven by excess casualty, which increased over 50% Lexington wholesale which continued to show leadership in the E&S market and grew property and casualty by over 30%.
Financial lines, which increased over 20% and crop risk services, which grew more than 50% driven by increased commodity prices.
And international commercial financial lines grew 25% Talbot had over 15% growth and liability had over 10% growth.
In addition, gross new business in global commercial grew 40% year over year to over $1 billion.
In North America, New business growth was more than 50% and in international it was more than 25%.
North America, New business was strongest in Lexington financial lines and retail property.
International New business came mostly from financial lines in our specialty businesses.
We also had very strong retention in our in force portfolio with North America, improving retention by 200 basis points and international improving retention by 700 basis points.
Turning to rate strong momentum continued with overall global commercial rate increases of 12%.
In many cases this is the third year, where we have achieved double digit rate increases on our portfolio.
North America Commercial's overall, 11% rate increases were balanced across the portfolio and led by excess casualty, which increased over 15%.
Financial lines, which also increased over 15% in Canada, where rates increased by 17%, representing the 10th consecutive quarter of double digit rate increases.
International commercial rate increases were 13% driven by EMEA, excluding specialty which increased by 22% U K, excluding specialty which increased 21%.
All lines, which increased 24% and energy, which was up 14% its 11th consecutive quarter of double digit rate increases.
Turning to global personal insurance, we had a solid quarter that reflected a modest rebound in net premiums written in travel and warranty.
Offset by results in the private client group due to reinsurance sessions related to syndicate 2019, and non renewals in peak zones.
Shifting to underwriting profitability as I noted earlier general insurance's accident year combined ratio ex cat was 95%.
The third quarter saw a 150 basis point improvement in the accident year loss ratio ex cat and a 130 basis point improvement in the expense ratio all of which came from the Geo ratio. These.
These results were driven by our improved portfolio mix achieving rate in excess of loss cost trends continued expense discipline and benefits from AIG 200.
Global commercial achieved an impressive accident year combined ratio ex cats of 88, 9% an improvement of 290 basis points year over year, and the second consecutive quarter with a sub 90% combined ratio results.
The accident year combined ratio ex cats for North America, commercial and international commercial where 95% and 86, 8%, respectively, an improvement of 370 basis points and 210 basis points.
In global personal insurance the accident year combined ratio ex cats was 94, 2% an improvement of 220 basis points year over year, driven by improvement in the expense ratio.
Given the significant progress we have made to improve our combined ratios in our view that the momentum we have will continue for the foreseeable future. We now expect to achieve a sub 90 accident year combined ratio ex cat.
For full year 2022.
After three years of significant underwriting margin improvement, we believe that the sub 90 accident year combined ratio ex cat is something that not only will be achieved for full year 2022, but that there will continue to be runway for further improvement in future years.
Turning to cash as I said earlier, the third quarter was very active with current industry estimates range between $45 $55 billion globally.
We reported approximately $625 million of net global cat losses, with approximately $530 million in commercial.
The largest impact from hurricane item and flooding in Europe, where we saw net cat losses of approximately $400 million and $190 million respectively.
We have put significant management focus into our reinsurance program, which continues to perform exceptionally well to reduce volatility including strategic purchases for win that we've made in the second quarter.
Reinsurance recoveries in our international per occurrence private client group per occurrence and other discrete reinsurance programs also reduce volatility in the third quarter.
We expect any fourth quarter cat losses to be limited.
Given that we are close to attaching on our North America aggregate cover and our aggregate cover for rest of the world Excluding Japan.
We have each and every loss deductible to $75 million for North America wind $50 million for North America earthquake and $25 million for all other North America apparel and $20 million for international.
Our worldwide retention has approximately $175 million remaining.
Before attaching in the aggregate, which would essentially be for Japan cat.
Taking a step back for a moment I want to acknowledge the frequency and severity of natural catastrophes in recent years since 2012, and excluding Covid. There have been 10 attached with losses exceeding $10 billion and nine of those 10 occurred in 2017 through the third quarter of this year.
Average cat losses over the last five years had been $114 billion up 30% from the 10 year average and up 40% from the 15 year average and should 2021 catastrophe losses exceed $100 billion.
And we're already at 90 billion through the third quarter. This will be the fourth year in the last five years in which natural catastrophes of exceeded this threshold.
We've never seen consistent cat losses at this level and as an industry need to acknowledge that frequency and severity has changed dramatically as a result of climate change and other factors I'll make three observations first.
While cat models tended to trend acceptable over the last 20 years that has not been the case over the last five years second over the last five years on average models have been 20% to 30% below the expected value at the lower return periods.
If you add in wildfire those numbers dramatically increase.
Third industry losses compared to model losses at the low end of the curve had been deficient in these rate adjustments to reflect the significant increase in frequency in cats.
To address these issues at AIG, we have invested heavily in our cat research team to develop our own view of risk in this new environment. As a result of this work we've made frequency and severity adjustments for wildfire U S wind storm surge flood as well as numerous other perils of international.
We will continue to leverage new scientific studies improvements in vendor model work and our own claims data to calibrate our views on risk over time to ensure we're appropriately pricing cat risks.
Across our portfolio our strategy and primary focus has been and will continue to be to deliver risk solutions that meet our clients' needs, while aligning within our risk appetite.
Which takes into consideration in terms and conditions strategic deployment of limits and a recognition of increased frequency and severity.
The significant focus that we've been applying to the critical work we've been doing is showing through in our financial results as you've seen over the course of 2021 with improving combined ratios, both including and excluding cats.
Now turning to life retirement.
Earnings continue to be strong and in the third quarter were supported by stable equity markets.
Modestly improving interest rates relative to the second quarter and significantly call and tender income.
Adjusted pre tax income in the third quarter was approximately $875 million individual.
Retirement, excluding retail mutual funds, which we sold in the third quarter maintained its upward trajectory with 27% growth in sales year over year.
Our largest retail products indexed annuity was up 50% compared to the prior year quarter.
Group retirement collectively grew deposits, 3% with new group acquisitions ahead of prior year, but below our robust second quarter.
Kevin and his team continued to actively manage the impacts from our low interest rates and tighter credit spreads environment and their earlier provided range for expected annual spread compression has not changed as base investment spreads for the third quarter were within the annual 8% to six points guidance.
With respect to the operational separation of life retirement, we continue to make considerable progress on a number of fronts.
Our goal is to deliver a clean separation with minimal business disruption and emphasis on speed execution operational efficiency and thoughtful talent allocation.
We have many work streams in execution mode, including designing a target operating model that will position life from retirement to be a successful standalone public company.
Separating our it systems data centers software applications real estate and material vendor contracts.
And determining where transition services will be required and minimizing their duration with clear exit plans.
We continue to expect an IPO to occur in the first quarter of 2022 or potentially in the second quarter subject to regulatory approvals and market conditions.
As I mentioned on our last call due to the sale of our affordable housing portfolio and the execution of certain tax strategies. We are no longer constrained in terms of how much of life retirement, we can sell or an IPO.
Having said that we currently expect to retain a greater than 50% interest immediately following the IPO and to continue to consolidate life retirement financial statements until such time as we fall below the 50% ownership threshold.
As we plan for the full separation of life retirement, the timing of further secondary offerings will be based on market conditions and other relevant factors over time.
With respect to AIG 200, we continued to advance this program and remain on track to deliver $1 billion run rate savings across the company by the end of 2022 against the cost to achieve of $1 3 billion.
660 of run rate savings are already executed a contracted with approximately $400 million recognized to date in our income statement.
As what the underwriting turnaround, which created a culture of underwriting excellence AIG 200 is creating a culture of operational excellence that is becoming the way we work across AIG.
Before turning the call over to Mark I'd like to take a moment to discuss the senior leadership changes, we announced last week.
Having made significant progress during the first nine months of 2021 across our strategic priorities and in light of the momentum we have heading towards the end of the year. This was an ideal time to make these appointments.
With Mark who will step into a newly created role global Chief Actuary and head of portfolio management for AIG on January one.
As you all know over the last three years Mark has played a critical role in the repositioning of AIG.
He originally joined AIG in 2018, as our chief Actuary in this new role will get him back into the core of our business driving portfolio improvement.
<unk> and prudent decision, making by providing guidance on important performance metrics within our risk appetite and evolving our reinsurance program.
Shame Fitz Simons will take over from Mark as Chief Financial Officer on January one.
Shane joined AIG in 2019, and a strong leadership helped accelerate aspects of AIG 200, and instill discipline and rigor around our finance transformation strategic planning budgeting and forecasting processes.
He has a strong financial and accounting background, having worked at GE for over 20 years, and many senior finance roles, including as head of <unk> and Chief financial.
Actual officer of Ge's International operations.
Jane has already begun working with Mark on a transition plan and we've shifted as AIG 200, and shared services responsibility to other senior leaders.
We also announced that Elias <unk> app.
Has been named Chief Financial Officer of life retirement.
Our lives has been with AIG for over 15 years and was most recently, our deputy CFO and principal accounting officer for AIG as well as the CFO for general insurance.
<unk> deep expertise about AIG.
And his transition to life retirement will be seamless as he is well known to that management team. The investments team that is now part of life retirement, our regulators rating agencies and many other stakeholders.
Overall, I am very pleased with our team our third quarter results and the tremendous progress, we're making on many fronts across AIG.
With that I'll turn the call over to Mark.
Thank you Peter and good morning to all IMAX.
I am extremely pleased with the strong adjusted earnings this quarter of 97 per share and our profitable general insurance calendar quarter combined ratio, which includes cats of 99, 7%.
The year over year adjusted EPS improvement was driven by a 750 basis point reduction in the general insurance calendar quarter combined ratio strong growth in net premiums written and earned and it related 280 basis point decrease in the underlying accident year combined ratio ex cat life and retirement also produce.
Strong <unk> of $877 million, along with a healthy adjusted ROE of 12, 2%.
<unk> strong operating earnings and consistent investment performance helped to increase adjusted book value per share by 3% sequentially and nearly 9% compared to one year ago, the strength of our balance sheet and strong liquidity position were highlights in the period as we made continued progress on our leverage goals with the <unk>.
GAAP net leverage reduction of 90 basis points sequentially, and 350 basis points from one year ago today to 26, 1% generated through retained earnings and liability management actions.
Shifting to general insurance.
Due to our achieve profitable growth to date together with demonstrable volatility reduction and smart cycle management makes us even more confident in achieving our stated goal of a sub 90% accident year combined ratio ex cat for a full year 2022, rather than just exiting 2022.
Shifting now to current conditions the markets in which we operate persist in strength and show resiliency.
Aig's global platform continues to see rates strengthening internationally, which adds to our overall uplift. Unlike more U S centric competitors as you recall international commercial rate increases lag those in North America initially, but beginning of 2021 as noted by Peter and his remarks international.
<unk> is now producing rate increases that surpassed those strong rate still being achieved in North America and in some areas meaningfully so.
These rate increases continued to outstrip loss cost trends on a global basis across a broadband and assumptions and are additive towards additional margin expansion.
In fact for a more extensive view within North America over that three year period 2019 through 2021 product lines that achieved cumulative rate increases near or above 100% are found with an excess casualty both admitted and non admitted property lines, both admitted and non admitted and finance.
All lines. We believe these levels of tailwind will continue driving earned margin expansion into the foreseeable future.
In the current inflationary environment, it's important to remember that products with inflation sensitive exposure basis, such as sales receipts and payroll.
As an installation and mitigate and Furthermore, our subject to additional audit premiums as the economy recovers.
Last quarter, we provided commentary about U S portfolio loss cost trends are 4% to 5% and some aspects were viewed as being near term.
We believe that this range still holds but now gravitates towards the upper end given another quarter of data and in fact, our U S loss cost trends range from approximately three 5% to 10% depending on the line of business.
From a pricing perspective, we feel that we are integrating these near term inflationary impact into our rating and portfolio tools and we are not lowering any line of business loss cost trends since lighter claims reporting may be misconstrued as a false positive due to COVID-19 societal impact.
It's also worth noting that all of our North America commercial lines loss cost trends with the exception of workers' compensation are materially lower than the corresponding rate increases we are seeing.
This discussion around compound rate increases and loss cost trends collectively give rise to the related topic of current year loss ratio picks are indications and the resultant bookings the strong market that we now enjoy in conjunction with a significant underwriting transformation that AIG has driven.
Other aspects of the portfolio that affect loss ratios.
In many lines and classes of business that degree that cumulative rate changes have outpaced cumulative loss cost trend is substantial.
And these lead to meaningfully reduce loss ratio indications between 2018 and into 2021 years. Unfortunately, this is where most discussions usually sees with external stakeholders. However in reality that is not the end of the discussion, but nearly the beginning.
Some other aspects that can have material favorable implications towards the profitability of underlying businesses are one terms and conditions, which can rival price and the impact to a much more balanced submission flow across the insured risk quality spectrum.
By improving rate adequacy, and mitigating adverse selection three strategic capacity deployment across various layers of an insured tower, which can produce preferred positioning and ongoing and retention with the customer and for reinsurance that temporary volatility and mitigates net losses occur.
Accordingly, even if modest loss ratio beneficial impacts are assigned to each of these nuances.
Additionally, contribute to further driving down the 2021 indicated loss ratio beyond that signal by rate versus loss trend alone and these are real and these are happening.
So why our product lines booked at this implied level of profitability by any insurer.
There is at least four reasons first insurers assume the heterogeneous risks of others and each year is composed of different exposures rendering so called on level projections to be in perfect.
Most policies are written on an occurrence basis, which means the policy language can be challenged for years, if not decades potentially including novel theories of liability.
Many lines are extremely volatile and even if every insurer has underwritten perfectly even.
Every insurer has underwritten perfectly as for booking an overly optimistic initial loss ratio nearly increases the chance of future unfavorable development. Therefore, these types of issues require prudent and the establishment of initial loss ratio picks for most commercial lines of business.
Shifting now to our third quarter Reserve review approximately $42 billion of reserves were reviewed this quarter, bringing the year to date total to approximately 90% of carried pre ADC reserves.
I'd like to spend a little time, taking you through the results of our quarterly reserve analysis, which resulted in minimal net movement confirming the strength of our overall reserve position.
On a pre ADC basis, the prior year development was $153 million favorable on a post ADC basis, it was $3 million favorable and when reflecting the $47 million ADC amortization on the deferred gain it was 50 million favorable in total this.
This means that our overall reserves continue to be adequate with favorable and unfavorable development balanced across lines of business, resulting in an improved yet neutral alignment of reserves.
There will be forward looking at the quarter on a segment basis I'd like to strip away. Some noise. That's in the quarter. So we don't get overly loss details. One should think of this quarter's reserve analysis is performing all of the scheduled product reviews, and then having to overlay to seemingly unrelated impact caused by the receipt of a large.
Segregation recovery associated with the 2017 and 2018, California wildfires. The first of these two impact is the direct reduction from North America personal insurance reserves of $326 million, resulting from the subrogation recoveries. As a result, we also had to reverse a previously recorded.
<unk> 2018 accident year reinsurance recovery in North America commercial insurance of $206 million since the attachment point was no longer penetrated once the subrogation recoveries were received.
These two impacts from the subrogation recovery resulted in a net $120 million of favorable development. So excluding their impact restates. The total general insurance <unk> eight as being 70 million unfavorable in total rather than the $50 million in favorable development discussed earlier.
This is a better framework that discussed the true underlying reserve movements this quarter.
This $70 million of global on favorable stems from $85 million unfavorable in global cat losses, together with $15 million favorable in global non cat or attritional losses, the $85 million unfavorable a cat is driven by marginal adjustments involving multiple prior year events from <unk>.
2019 in 2014 the.
The $15 million noncash favorable stems from the net of $255 million unfavorable from global commercial and $270 million of favourable development predominantly from short tail personal lines businesses within accident year 2020, mostly in our international book.
<unk> with our overall reserving philosophy, we were cautious towards reacting to this $270 million favorable indication until we allowed the accident year to season.
North America commercial had unfavorable development of $112 million, which was driven by financial lines strengthening of approximately $400 million with favorable development in other lines led by workers compensation with approximately $200 billion emanating, mostly from accident years 2015, and prior and approximately one <unk>.
Billion across various other units.
North America financial lines were negatively impacted by primary public D&O largely in the more complex national accounts arena and within private not for profit DNO unit. In addition to sell excess coverage, mostly in the public DNO space with 90% emanating from accident years 2016 to 2018.
International commercial had unfavorable development of $143 million, which was comprised of financial lines, strengthening and D&O and professional indemnity of approximately $300 million led by the UK and Europe, but the accident year impacts are more spread out.
Favorable development was led by our specialty businesses at roughly $110 million with an additional favorable of approximately $50 million stemming from various lines and regions.
Now as Peter noted the changes we've made to our underwriting culture and risk appetite over the last few years, coupled with strong market conditions are now showing through in our financial results U.
U S financial lines in particular through careful underwriting and risk selection has meaningfully reduced our exposure to securities class actions or SCA lawsuits over the last few years evidence of this underwriting change is best seen through the proportion of Fca's for which the U S. Operation has provided coverage.
In 2017, AIG provided D&O coverage, the 67 million insured involved in FCA, which represents 42% of all U S. Federal security class actions in that year, whereas in 2020 that shrunk suggest 18% and through nine months of 2021 is only 15 insured or <unk>.
14%. This is significant because roughly 60% to 70% of public D&O loss dollars historically emanate from FCA.
The North America private not for profit D&O book has also been significantly transform.
The policy retention rate here between 2018 to 2021, which is a key strategic target is just 15% again. It should also be noted that the corresponding cumulative rate increase over the same period at nearly 130%.
This purposeful change in risk selection criteria away from $1 billion revenue large private companies and nonprofit universities and hospitals to instead, a more balanced middle market book will also drive profitability substantially.
International financial lines has implemented similar underwriting actions with comparable three year cumulative rate increases along with a singular underwriting authority around the world as respects U S listed D&O exposure through close collaboration with the U S Chief underwriting officer.
In summary, our reserving philosophy remains consistent and that we will continue to be prudent and conservative. This is evidenced by our slower recognition of attritional improvements in short tail lines from accident year 2020, and from the sound decision to strengthened financial line reserves, even though there are some interpretive challenges stemming for.
A difficult claims environment changes within our internal claims operations over the last couple of years and potential COVID-19 impacts on client reporting patterns.
All of these underwriting actions we've taken over the last few years makes us even more confidence in our total reserve position across both prior and current accident years.
Moving on to life and retirement the year to date ROE has been a strong 14, 3% compared to 12, 8% in the first nine months of last year.
<unk> during the third quarter saw higher net investment income and higher fee income offset by the unfavorable impact from the annual actuarial assumption update which is $166 million pre tax negatively affected by approximately 250 basis points out of annual basis and <unk>.
By <unk> 15 per share.
The main source of the impact was in the integrated total retirement division associated with fixed annuity spread compression.
Life insurance reflected a slightly elevated COVID-19 related mortality provision in the quarter, but our exposure sensitivity of 65 to 75 million per 100000 population best proved accurate based on the reported third quarter Covid related deaths in the United States mortality exclusive of Covid nine.
<unk> was also slightly elevated in the period.
With an individual retirement, excluding the retail mutual fund business net flows were a positive $250 million this quarter compared to net outflows of $110 million in the prior year quarter, largely due to the recovery from the broad industry wide sales disruption, resulting from COVID-19, which we view as a material rebound indicator.
Prior sensitivities in respect to yield an equity market movements affecting API continue to hold true and new business margins generally remained within our target at current new money returns due to active product management and disciplined pricing approach.
Moving to other operations adjusted pretax loss before consolidations and eliminations was $370 million 2 million higher than the prior quarter of 2020, driven by higher corporate GLA, primarily from increases in performance based employee compensation, partially offset by higher investment income.
Lower corporate interest expense, resulting from year to date debt redemption activity.
Shifting to investments overall net investment income on an <unk> basis was $3 3 billion, an increase of $78 million compared to the prior year quarter.
Collecting mostly higher private equity gains by business life and retirement benefited most due to asset growth higher call and tender income and another strong period of private equity return General Insurance's NII declined approximately 6% year over year due to continued yield compression and underperformance in the head.
Hedge fund position.
So general insurance has a much higher percentage allocation to private equity and hedge funds, which is likely to change moving forward.
As respect share count our average total diluted shares outstanding in the quarter were $864 million and we repurchased approximately 20 million shares the end of period outstanding shares for book value per share purposes was approximately $836 million and anticipated to be approximately $820 million at <unk>.
Year end 2021, depending upon share price performance, given Peter's comments on additional share repurchases.
Lastly, our primary operating subsidiaries remain profitable and well capitalized with general Insurance's U S pool fleet risk based capital ratio for the third quarter estimated to be between 450, and 460% and the life and retirement U S. Fleet is estimated to be between 440 and 400.
50%, both above our target ranges with that I'll now turn it back over to Peter.
Great Mark. Thank you operator, we will take our first question.
And ladies and gentlemen, if you'd like to ask a question. Please signal by pressing star one on your telephone keypad. If you are using a speaker phone. Please make sure. Your mute function is turned off to allow your students to reach our equipment. Please advise that you are allowed to ask one question and one follow up question again. Please press star one to ask a question, we'll pause for <unk>.
In a moment to assemble the queue.
And we will begin with Elyse Greenspan with Wells Fargo.
Hi, Thanks.
Good morning, My first question.
When Peter when you made the comment that you think you'll hit 90 for full year 2022, and then you said that there would be runway for further improvement in future years I'm just trying to when you kind of think 2022 and beyond.
Assuming for both pricing and loss trends as we kind of think out the next year and even beyond that timeframe.
Well, Thanks, Elyse, let me answer the first part of why we're so confident that the momentum that we have and the sub 90 combined ratio is achievable. When you look at this quarter and last quarter just the improvement.
From the core of the businesses continues to improve at an accelerated pace and Dave Mcelroy of the leadership team.
On the underwriting side, Shane who is not a move in the CFO role driving AIG 200, just the execution has been terrific and.
Why we're confident is just again the momentum when we look at the fundamentals of the business.
We're growing top line, we talked Mark and I about.
That we are getting pricing above loss cost developing margin expense ratio all of that goes into our confidence we have higher retentions on our policy count very strong new business and things that a flight to quality, we have more relevance each quarter in the marketplace and.
And so the assumptions are modest it's not that it has to stay in the same pricing environment.
But it is one that we're going to continue to be very disciplined of driving profitability and making sure that where we are deploying capital that on a risk adjusted basis, we're going to be getting margin. So I think that again I don't want to give guidance beyond that.
But feel that next year, we have the momentum.
Executing on all of our strategic imperatives, and we're delivering the results.
Okay. Thanks, and then my follow up.
You guys said that take.
Take place in Q1 will happen in the second quarter of next year, how do we think about capital return I know you guys have laid out a plan for this year, but how should we think about capital return.
Next year.
And the ultimate size.
What do you bring to market with the life and retirement business in the IPO.
Well.
We've been trying to give.
A lot of guidance in terms of what we intend to do in the short run because of the number of moving pieces.
We have strong liquidity, which is what we had talked about in the prepared remarks.
Some of the big moving pieces as we get to the back half of the year will be the affordable housing proceeds.
The closing of Blackstone.
The fact, we're going to continue to execute on debt reduction share repurchases and I think as we get to the fourth quarter call.
And we have a better line of sight in terms of what we think the actual timing will be on the IPO plus liquidity at year end, we will give further guidance as we move forward, but for now I think we're just going to stick with what we've.
Outlined and we continue to execute on that each quarter.
Okay. Thank you.
Elyse.
We will now take the next question from Meyer Shields with <unk>.
Thanks, I guess first question for Peter.
You laid out pretty conservative cadence for the frequency and severity catastrophes.
We think about what Validus re.
Interested in writing in that context.
Thanks Mary.
Our industry.
Since we've acquired them, we have not increased risk appetite and as a matter of fact, they take a very conservative position in terms of of their net and I think that was evidenced in the quarter in terms of our overall cat number that's number one.
I think Chris Schaper, and the team have done a terrific job of diversification on the portfolio. So we've reduced our aggregates in peak zones, such as Florida significantly from the original portfolio that we acquired were getting better balance in the portfolio across the world and Thats with multiple perils in multiple geographies.
So I think that that continuation of that strategy.
Getting balance <unk>.
Diversification and.
And making sure that we're not taking significant that's in the portfolio and making sure that we're driving risk adjusted returns as we look to one one is going to be very important for validus re but we've been executing on that throughout the year.
Okay understood. Thanks, and then as a follow up from Mark is there any way.
Writing.
I mean, you made a very strong case for conservatism in the current accident year loss pick.
And Im wondering how youre thinking about that level of conservatism in recent accident years as of 930.
Go ahead Mark.
Yes. Thank you thanks.
Thanks Bye.
We feel very good about accident year at 2020 while efficiently.
The core of your question and.
I think I made a pretty strong case or the changes that have occurred which I think had been.
Pretty innocuous on it.
Interestingly overall I'm confident not just in the current accident years I am confident where we are now on the reserve position.
And then for financial lines and in total across the book.
You can kind of say well why are you are you confident then there's a lot of reasons for it.
Then Dave macro oriented.
Got in here.
They started making some pretty material change.
Changes are step by step.
And I think it's just endemic upon the analysis of it for not only the past years, but with the current years to focus on exactly what those changes were and then go back with a very tight I to look at it and that's exactly what we did but the transformation of the book as I itemized on private not for <unk>.
And public has been enormous so I feel I feel very strongly about where we are on the on those recent years.
Hi, Martin. Thank you mentioned potential lines, I think maybe Dave Couldnt provide some context as to.
Some of the changes and how he's looking at the portfolio. So Dave maybe you can add to what Mark commented on.
Yes. Thank you Peter Thank you Mark.
I know, it's probably top of mind, but financial lines book has been one that has been stored at AIG.
Most of you know I've been involved with P&L in financial lines for my entire 40 year career. So I've seen I've seen the body's quote bind me I've seen the strategies.
About and just about and we know exactly what we're doing when we came in here.
To look at this portfolio. So today I would say that both North America and international are completely different and fundamentally different books than what we had in the 16 to 18 cohort years.
As a personal to me Thats also Michael price, who is running North America for us, but but we did we did the things that are.
That matter and we don't we've been doing it across all of our lines of business in terms of risk selection limit management portfolio.
Portfolio balance.
The diligence on terms and conditions Mark talked about a little bit on a project and then we're measuring and on claims. So so the this is what this I view this as the story that we needed to complete.
Mark hit our public company book that is by and large the measure of a D&O underwriter and if you are in the public company space Youre talking about your securities class action exposure and a 67% of your annual loss costs are driven by those cases. So when you think about that let's say, it's a math equation of.
200 of these are normally filed out of 5500 total public company. So risk selection matters, what we what we found here was probably chasing premium versus chasing quality accounts. So we might we were over weighted in technology and life science and health care and new <unk>.
Monomer and unicorns trying to go public instead of trying to build a portfolio of what I'd consider be stable less less volatile stocks.
So from a company class industry standpoint, we gave some more definition to our underwriting teams about what they should be looking at and then trying to stay away from what I considered to be the target rich environment of the plaintiffs' bar, which are stock volatility market cap volatility and basically a ready.
Made securities Class action case, so so that's a lot of the re underwriting thats been done.
We knew it was going to take a little bit of time.
Evidence of that is now showing up we've taken out sick.
65 billion of limits.
Heard our story around $650 billion of limit is taken out across the portfolio $65 billion of it is in these products alone.
And more importantly, and Thats sort of Boston, how I'm I'm looking at the businesses is.
We took it down and primary D&O, okay. So so the the natural order of looking at.
A large fortune 500 companies used to be at $25 million. There now at 10, 81% of our portfolio is at $10 million there versus what would have been $25 million four years ago. The same with a what I consider to be NASDAQ mid cap. They were 15, <unk> intense theyre now $5, 66%.
The book is now five so so we've compress limits we've addressed the retention issue. We were trying to we recognize that M&A bump up claims were actually.
<unk> primary underwriters and I think thats been on other calls.
They were protecting primary underwriters more disparate than excess underwriter. So we increased our retention. There. These are all the tools that we're always available to us we just actually push them forward.
And.
We're trying to get in front of it but basically we believe strongly that.
This portfolio today is a very different portfolio from a risk selection standpoint.
From a balanced perspective in terms of excess inside a versus primary versus the limits versus our controlling the aggregate I would also sort of finalize that by saying. This is a claims made book so in many ways, we will actually know within that three to five year window. All the work that's been done.
Our frequency and severity has dropped dramatically in the 2021 years not only in securities class actions, we're running it we're running at less than half, but because of the limit management. We're running at at two thirds lower in terms of limits exposed to class action manager class action suits as well.
Well. So these are the these are tools fashion is coming through very much.
I would probably want to.
Second another question finished and then and then by the way, we we have gotten compounded rate increases.
100%, so I apologize Matt.
Matt.
Good afternoon.
Thank you.
Next question.
Next we'll hear from Michael Phillips with Morgan Stanley.
Thanks, Good morning.
Two quick ones I think mark.
Mark your comments on again.
Thing number two was I think.
Well the current stuff and it's long tailed and that can lead the risk and so we're going to be conservative when it looks like the industry. I think that was your number two can you tell us.
Has there been any kind of shift in your book.
Given everything else you guys have done from occurrence. The claims made in the commercial lines book, So anything noteworthy that would shift away from our current declines right.
Yes.
Great question, Michael So.
I would say.
Theres only a handful that are really claim today it right its management liability professional indemnity that really drive it in a super tough product liability cases Israeli clients made.
It's one thing Thats shifted growth, it's nothing to shift that net right. So.
As we've used different reinsurance is over time that changes the proportions.
<unk>.
We're comfortable with the mix of our currency claims made.
Growth in financial lives as Peter pointed out and there is some growth in excess casualty the nets are somewhat different but we think appropriate.
For what we thought.
Okay perfect. Thanks, and then just a real quick pointed one so on the last question David answers.
And the <unk>.
In the professional lines.
Lots of concerns in the past 18 months or so because of securities class actions in Ipos and specs and would you say given all the Dave's comments. There that you think your exposure to that type of risk is pretty limited.
Well, yes, I think Dave explains it is the way the business actually flows.
This actually works. So the key thing is upfront identifying the right classes and the right risk, which they've really done I think exceptionally well and then the second is what goes through the court systems given that you have <unk>, even though we are massively reduced and the FCA you've got to go through all the motions to dismiss and other another procedure.
Charles.
Take you take you there so thats, what Dave's comment about three plus three to five years has to work its way through the court system.
But given our reduced exposure.
Back to a similar answer with that makes us feel so strongly about the recent accident year.
Okay. Thanks, a lot.
Okay.
Next question, Josh Shanker Bank of America.
At the risk of being labeled a pariah aren't going to go back to.
The D&O questions a little bit.
Can we talk a little about the.
Youre not necessarily for AIG here, though it can be.
Sort of combined ratios were 16, 17, and 18 producing in retrospect, we've seen tremendous pricing come through.
Business broadly for the industry written in those years being written at a substantial underwriting loss.
And the extent to which you took the reserve charges in this quarter a lot of the business I assume was syndicated or the syndicate feeling the same kind of theme that you are in.
Or are you getting ahead of what you think are blockbusters.
Clark why don't you comment on.
On Josh is question on loss ratios and then I think Dave should talk about the pricing.
Well, Josh I know you're a state in this business.
You go back speaking to the industry is a little different I don't want to get out ahead of the industry, but I know your schedule P Guy.
You go back and look at that of course at U S. Only and you can look direct not just net.
And Thats, a combination of management liability and professional right in there, but we know it's dominated by the management liability.
Ability side. So you can go back and look at the annual statements through 2020.
And get an idea.
But.
With regard to syndication and Dave will pick this up better better than I will but.
Generally primaries are 100% written and as you go up the tower there could be some.