Q2 2019 Earnings Call
Ladies and gentlemen, please standby.
Good day and welcome to the E. G <unk> second quarter 2019 financial results Conference call.
This conference is being recorded and at this time I would like to turn the conference over to Mr., Liz Werner head of Investor Relations. Please go ahead.
Thank you Jake and good morning, everyone. Todays remarks may contain forward looking statements, including comments relating to company performance strategic priorities business mix and market conditions.
These statements are not guarantees of future performance or events and are based on managements current expectations.
Actual performance and events may materially differ factors that could cause results to differ include the factors described in our first quarter 2019 Form 10-Q , our 2018 annual report on Form 10-K , and other recent filings made with the FCC.
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 slide presentation, all of which are available on our website www dot A.O.G. dot com.
This morning, you'll hear prepared remarks from our CEO , Peter or brain do Breaux, our COO and she loves General insurance, Peter Zaffino, our CEO of life and retirement, Kevin Hogan and our CFO Mark Lyons.
During the Q in May we ask that you limit your questions to one and with one follow up and at this time I'd like to turn the call over to Brian . Thank you <unk>. Good morning, and thank you for joining us to review our second quarter results.
As we continue to position a g. for long term sustainable and profitable growth.
Disciplined execution of our strategy is reflected in our strong performance in the second quarter.
And first half of 2019.
Adjusted return on common equity for the second quarter was 10.4% and 11% year to date.
Adjusted after tax income was 1.3 billion.
We're down to 43, a share for the second quarter.
And 2.7 billion or $3.01 per share year to date, nearly a dollar per share improvement over the first half of 2018.
Throughout the first half of 2019, we made we remain focused on the foundational work that continues across say Gee, particularly in general insurance, which delivered a second consecutive quarter of profitability with an accident year, I mean, an accident quarter combined ratio, including actual cats.
98.7% were 96.1% as adjusted.
The calendar quarter combined ratio was 97.8%.
The turnaround of general insurance.
Which has been led by Peter Zaffino and his team is impressive.
AIG is taking a leadership position in its approach to disciplined underwriting and innovative reinsurance strategies.
And we have strong momentum heading into the second half of 2019.
I can confirm that we expect to achieve underwriting profitability for the entire year.
Peter will provide more detail in his remarks on the significant progress being made in general insurance.
With respect to premium rate trends I want to follow up on my comments from the first quarter.
Rate increases accelerated in the second quarter in some cases materially.
I've seen a number of market cycles and each one has different characteristics.
I would describe this market is one where there was more underwriting discipline and rigor around the deployment of capacity.
Rather than a major decline in capacity.
That discipline seems to be playing out through the pricing models and underwriting processes.
That are recognizing increase loss cost frequency, the tort environment and other emerging risks.
To me that means the turn is based on facts rather than an emotion.
And is there for more sustainable.
With respect to Gee, we're seeing strong rate improvement across most of our global portfolio.
In addition to industry dynamics rate increases reflect a comprehensive and disciplined strategy to reposition our businesses as market leaders by refining our risk appetite significantly, reducing gross and that limits tightening terms and conditions and reducing capacity in certain areas.
Peter and Mark will provide more details on rate in their comments.
Life and retirement also had a solid quarter.
Posting a 17.3% adjusted return on common equity due to continued discipline and execution of its strategy.
As well as strong private equity returns and favorable market performance.
Equity markets remain highly volatile and unpredictable and as a result, we're not changing our 29 guidance for life and retirement of full year adjusted return on common equity in the low to mid teens.
Kevin will provide more additional information on life and retirement.
Net investment income was 3.7 billion in the second quarter, reflecting strong performance in the equity markets tightening spreads in the credit markets.
As well as a significant gain on private equity investments.
Mark will provide more detail on our overall financial results later in the call.
Since I arrived at AI Jie, we're focused on addressing several critical areas.
Including refining our approach to underwriting reducing our risk profile overhauling, our reinsurance strategy to reduce volatility, making our general insurance business profitable and Remediating challenged legacy businesses.
We have also been working on AIG eastridge strategic positioning in the global insurance marketplace.
And longer term priorities that define who we are as a company and how we create value for our stakeholders.
Given the progress we have made we are now placing greater focus on a multi year enterprise wide program, which we have branded AI Jie 200.
I've asked Peter in his capacity as global Chief operating officer.
To lead this effort across all of AI Jie.
Hey, I G 200 will focus on opportunities to improve core processes and infrastructure.
If we were to become a top performing company, we must make transformative and sustainable improvements.
That will require investment.
This work ultimately will lead to a reduced expense base and an improved experience for our clients.
Policyholders and colleagues.
Like the foundational work that started in late 2017, we're not taking shortcuts with this program.
AG 200 is critical to our long term success and we will report on our progress on future calls.
With respect to capital management.
You will hear from Mark that we did not buy back shares in the second quarter.
Capital plan for the remainder of the year remains focused on reinvesting in our business and reducing our leverage.
With that I'll turn it over to Peter.
Thank you, Brian and good morning, everyone.
Today, I will provide an overview of several highlights from the second quarter.
I will provide detail on the financials.
Once in general insurance highlight late options, which Brian mentioned provide insight into the progress you're making in our businesses and the tangible and.
Yes, and disciplined actions are having to change the composition of our portfolio I'll briefly update you on Validus summarized progress on our reinsurance program and lastly share some observations as we look towards the second half of 2009.
We continued to execute on focused actions across general insurance that will position our businesses to be leaders in their respective markets.
These actions include enhancing the quality of her underwriting desired risk appetite evolving our reinsurance program to reflect our improving book of business and exercising expense discipline in order to provide bandwidth future investor.
We are Operationalizing these actions, Rob general insurance by embedding more disciplined end to end business processes.
I'm very pleased Mashable impact actions are having on our business results evidenced in our financial performance in the second quarter and the first half of the year.
I believe not only sustainable but will improve overtime.
Building on our momentum from the first quarter, we achieved.
Quarter combined ratio moving actual task, 98.7% an improvement of 460 basis points year over year on an accident quarter combined ratio as adjusted 96.1% an improvement of 490 basis points year over year.
The calendar quarter combined ratio was 97.8% an improvement of 350 basis points year over year.
The accident quarter loss ratio, excluding cats for the second quarter was 61.3%, a 410 basis point improvement year over year, and a 50 basis point sequential improvement from the first quarter 2009.
This quarter over quarter improvement was the result of a change in business mix and continued reduction in lines, where we're not achieving our targeted returns.
Improved areas once reduce volatility stemming from our underwriting actions and comprehensive vastly improved property reinsurance program and improved loss experience in certain areas, such as <unk> and personal auto and commercial property.
In the second quarter, we experienced net cat losses of 174 million, which were primarily driven by storms and tornadoes in North America.
Overall, our nation strategy long with reinsurance continue to reduce our gross to net exposures on a worldwide basis.
Net premiums written for the second quarter was 6.6 billion down approximately 3.7% year over year on an FX constant basis.
Our net premiums written excluding Validus and Glatfelter has declined almost 15% year over year, we've reduced our exposure by greater magnitude and the re underwriting of our portfolio improve the quality and rate adequacy of our overall business.
Our focus discipline will continue to improve our combined ratio jobless spend upon later.
The second quarter expense ratio of 34.8% represents an 80 basis point improvement year over year, and a 50 basis point increase from the first quarter of 2009.
This 50 basis point increase is largely due to the second quarter acquisition expense ratio of 22.2%, which reflects an increase of 40 basis points sequentially and 110 basis points higher year over year.
A significant amount of the year over year increase.
Attributable to a one time favorable premium adjustments in the second quarter 2008.
The acquisition ratio in the second quarter of 2019 was impacted by improved performance in the travel and warranty businesses, which have lower loss ratios higher commissions.
The general operating expense ratio was 12.6% from the second quarter in line with our run rate and expectations and a 190 basis point improvement from the prior year.
Excluding the impact of acquisitions general operating expenses on an FX constant basis declined by approximately 18% year over year.
We continue to execute on our strategy to optimize our portfolio by concentrating on a risk framework risk appetite that identify areas for growth.
Asian and leverage.
Unique market.
Moving onto rate in the second quarter as Brian noted, we continue to see meaningful rate increases across our portfolio and excluding thousand black belts are in the high single digits compared to a mid single digit improvement in the first quarter of the year.
In North America, excluding Validus in black belts are and in the UK, we obtain high single digits.
The strong rate increases in the U.S., most desktops commercial property, both retail and wholesale you know energy and excess cash.
In the UK the accelerated rate increases were led by marine energy and financial lines in our reinsurance business. We obtain mid single digit rate improvement on a weighted average basis, which I will provide more detail on that.
Let me share some specific business highlights from the second quarter, where we made material.
Lexington has undergone extensive repositioning with revised risk appetite and distribution strategy that has resulted in baskin from submission flow and tighter limits.
As a result, we achieved strong rate improvement in the mid to high teen property in cash.
Property submissions were up over 35% year over year and in casualty he reaches almost 75% since the second quarter of 2008.
We strategically targeted reductions in most of our Baltimore, resulting in a reduction of property limits of over 55% and of casualty limits of over 50%.
I'm very pleased with our leadership team. These options reflect the extent of the Recalibration to business hasten change and progress and becoming a leader in the DNS Mark.
In financial lines Youre, demonstrating leadership you rest as we execute on our plan to improve the composition of our portfolio reduced our gross limits lead layers prudently deploy our capital in those layers.
Rate continues to be very strong and ahead of rising loss costs, which mark will expand on in his remarks.
For example in primary corporate Dino you saw rate increase of over 30% the policy count retention of approximately 90 days.
In parallel we reduced primary commercial do you know aggregate limits by approximately 30% in primary commercial you know policy limits greater than 10 billion in lead layer over 45%.
In our European financial life portfolio, we've reduced public U.S. limits by over 50%.
Premium increases in the high teens and in the UK, we reduced public U.S. limits by over 20% in the quarter and increased premiums by over 20% from the prior year.
The North American property, we continue to execute on our aggressive actions to improve our overall portfolio.
This entailed reducing total gross limits by over 60%, increasing average deductibles by over 60% and achieving rate increases of over 20% on a written basis core.
As Brian noted theres been industry commentary about the evolving werent environment, the expanding anti social issues and social inflation.
These are not new issues, we've been following legislative in case lot development for some time now, including our late holes and adopt requires patches.
We're in the business I imagine with paying when they add GE, particularly adept at handling sorry.
Our experienced underwriting actuarial and claims professionals working together to understand these developments.
Really it threatens emerging complicated and sensitive list as they mature.
Turning to Validus re.
This business had a very good.
The main areas of focus April 1st and renewals in the June Onest, Florida regions demand was generally flat well capacity tightened due to a combination of factors such as prior hurricane loss development and reduced capacity from the Isle lesson Retrocessional markets, resulting in rating.
The oldest continue to show discipline in shaping the portfolio for example, as I mentioned last quarter next year and renewals at April one the average rate change in the portfolio was 10%.
With rate increases ranging from 15% to 25% loss impacting catheters and 7% for the layers not impacted my cats.
For the Florida renewals, our core portfolio aggregate reduced by 17% year over year, while risk adjusted rates increased by 9%, representing a net 2% premium increase relative to our Ics are important.
A quick update on a reinsurance program reinsurance plays a critical role in our overall strategy to manage volatility and we continue to be very pleased with our ongoing accomplishments and strategic position when combined with the advances were making on underwriting discipline and the composition of our core portfolio, we see strong progress towards delivering a sustainable profitable and less volatile underwritings.
And the second quarter, we purchased two additional property trees that were placed lower cap program to address specific areas of concentration and we purchased an aggregate retro public validus re the more meaningful the two property treaties as a single limit per occurrence cap public from the Caribbean and why you attachment points or 200 million and 100 million are being like specs.
With a single shared limit of 325 million.
We also continue to manage our exposures for large individual property.
In addition to grow.
Purchased facultative automatic reinsurance on some of the higher hazard risk in the portfolio, providing additional volatility.
As we move into the second half of 2019, and it's a cheap hurricane season.
We now have comprehensive occurrence in aggregate production plays continue to further enhance the fine and evolve our reinsurance program as our gross underwriting improvement begins to earn future quarters I look forward to updating you on our next call.
Turning to talent in general insurance, we continue to focus on building and retaining a best in class team, we strengthen our underwriting leadership team in the second quarter added new talent to our reinsurance organization Spaniard our operational capabilities that linked to the rest of the organization and overall continuing to build our bench. Additionally in personal insurance, we added a seasoned veteran to lead our network as we continue to refine our strategy to reformulate that business.
I'm extremely proud of our team globally performance of general insurance in the first half of 2019 reflects the dedication commitment capabilities and extraordinary efforts colleagues across the globe.
Lastly, I want to comment on AG 200, as Brian mentioned in his opening remarks, as we look to the second half of 2019 and beyond it's critical that we focus on our infrastructure businesses across all of <unk> G and best to modernize and digitize, our workflows as well as create a more unified.
As we do with general insurance over the last 18 months, we are filling critical roles and adding a number of seasoned executives in the corporate center a proven track record of achieving excellent results during transformation.
In my capacity as they are global Chief operating officer I look forward to meeting. This next phase of work that will accelerate the progress, we're making towards achieving our long term strategic operational financial goals and enable us to become a top performing.
With that I'll turn the call over to John .
Thank you Peter and good morning, everyone.
Life and retirement recorded adjusted pre tax income of just over $1 billion for the quarter and adjusted return on common equity of 17.3%.
Adjusted pre tax income increased by 87 million from the prior year quarter.
A primary driver of this increase was a onetime gain of 138 million for a private equity holdings following an initial public offering.
Our earnings also benefited from the broader capital markets environment.
Net investment income reflected both higher returns on fair value option securities of 48 million and higher call and tender income of 22 million due to significantly lower interest rates. Additionally.
Favourable mortality drove an increase of 35 million.
These favorable impacts were partially offset by an allowance for reinsurance recoveries and 38 million in our life insurance business and expected spread compression in our retirement businesses.
New money rates are below portfolio yields across our retirement portfolios, resulting in reduced but still attractive spreads and many products. The prior year comparison for adjusted pre tax income also reflects net positive actuarial adjustments of 51 million in the second quarter of 2018, a benefit of $98 million in life insurance and an unfavorable adjustment of 47 million individual retirement.
Our market assumptions for the full year have not changed and recent market volatility as a reminder, that the second half may be much more challenging from a capital markets perspective.
While our first half results provide some palace for the full year outlook declining equity markets would among other things negatively impact fees as well as deferred acquisition cost amortization.
Further with recent large declines in U.S. interest rates. Our current expectation is that base that spreads will decline to the higher end of our approximately zero to two basis points range per quarter.
Finally declining interest rates would typically results in higher returns on fair value option securities. Although the overall impact on net investment income would depend on the timing and degree of interest rate movement.
From a statutory perspective, we expect to continue to generate solid earnings and for our strong year end risk based capital levels to improve over year end 2018.
Separately, we are pleased to pass me appears poised to extend the required date for adoption of the new accounting for long duration contracts until 2022.
Nevertheless, we have a large and growing effort underway to understand and operationalize all the changes which are very broad reaching.
It's too early to comment on impact, but we take comfort in the quality underlying economics and cash flows of our in force and the new business be right.
Our results for the first half of the year reflects strong growth from our ongoing strategy to leverage our broad product portfolio and diversified distribution network to satisfy customer needs.
With strong market demand and favorable pricing conditions. During most of this period, we significantly increased sales and fixed and indexed annuities.
We expect lower levels of sales for certain product lines in the second half due to lower interest rates and the uncertain environment.
We will remain disciplined with respect to product pricing and teachers and continue to leverage our broad capabilities to deploy capital to available attractive new business opportunities.
I will now talk briefly about the results for the quarter each of the businesses for individual retirement premiums and deposits grew by 13%.
We produced strong sales and fixed index annuities during the quarter, although fixed annuity sales decline from first quarter levels.
We do expect lower sales of fixed annuities in the prevailing interest rate environment.
We achieved positive net flows excluding retail mutual funds, which is a comparatively small part of our earnings.
Total assets under management increased driven by strong equity markets performance and growth of annuity deposits during the first half of the year.
For group retirement premiums and deposits were lower than the prior year quarter, primarily due to two large group acquisitions in the second quarter last year.
In plan contributions and individual product sales continued to be strong.
Net flows improved from the prior year quarter due to lower surrender activity, that's still remain negative.
Although the timing of group acquisitions and individual contributions will result in quarter over quarter variances in deposits, we expect surrenders and other withdrawals to continue to drive negative net flows.
It is also important to note that the financial impact of outflows will vary based on product characteristics.
For example, the impact will be lower if the outflows from a higher guaranteed minimum interest rate annuity policy or from a lower margin mutual fund offering.
Despite facing negative flows for a period of time, we've continued to produce solid earnings for this business as assets under administration have continued to grow.
For our life insurance business total premiums and deposits increased for the quarter driven by sales growth in our UK individual protection product line as well as the addition of group protection from the acquisition of units.
Our U.S. life sales declined as we de emphasize guaranteed universal life sales in the current interest rate environment and index Universal life sales remain under pressure.
Overall mortality experience was favorable to pricing expectations and the prior year quarter.
We have been pleased with our mortality results over the last several quarters, while recognizing that there will always be some volatility quarter to quarter.
Adjusted pretax income decreased from the prior year quarter, primarily due to the favorable actuarial adjustments in the second quarter of 2018, and the current quarter reinsurance recoveries allowance that I mentioned earlier.
[noise] institutional markets premiums and deposits were lower than the prior year quarter, primarily due to large get issuance in the second quarter of last year.
We continue our opportunistic strategy in the pension risk transfer business and the market pipeline over the next 12 to 18 months remains robust.
Overall, our institutional markets business continues to be well positioned to capitalize on available growth across its product lines, while remaining focused on achieving targeted returns.
Lastly, I wanted to briefly comment on AG 200, which includes life and retirement.
We plan to focus on investments that will accelerate our efforts to enhance the customer and distributor experienced across our businesses.
Complete the work needed to fully focus our life insurance business on the core portfolio.
Further prepare for the new standards of care in advisory expectations and position our businesses for future product and distribution channel expansion, while improving overall efficiency.
To close we remain committed to our ongoing strategy to leverage our broad product expertise and distribution footprint to deploy capital to the most attractive opportunities, which we believe positions us well to help meet growing needs for protection retirement savings and lifetime income solutions now I will turn it over to Mark.
Right. Thank you, Kevin and good morning all.
And it gets adjusted after tax earnings per share. The dollar 43 for the quarter compared to one dollar five per share in the corresponding quarter of 2018.
In dollar terms AI Jie had nearly 1.7 billion of adjusted pre tax income and $1.3 billion of adjusted after tax income.
Book value per share, which excludes AOCI guy DTA on an adjusted basis increased $1.42 per share nearly 2.6% as compared to the first quarter of 2018 as respects just return on common equity or Aro C, which also excludes AOCI DTA edgy returns an annualized 10.4% for the quarter.
Segments achieved the following return on attributed equity General insurance achieved a 10.3% return as Kevin mentioned life and retirement of 17.3% return and legacy with a 5.2% return.
As mentioned last quarter AI Jie now using the term return on common equity because last quarter, we introduced some preferred stock into our capital structure.
Net investment income or Eni for the second quarter was 3.74 billion on an adjusted pre tax income basis, and 3.75 billion on a GAAP basis compared to 3.7 to 3.8 billion respectively. The sequential first quarter of 2019.
This level of that.
Had the benefit of at approximately 13 cents per share after tax gain associated with an IPO wouldn't in our in our alternative private equity asset class. This $142 million pretax gain is reflected in life and retirement for 138 million 4 million that in our legacy segment.
Strengthening equity markets and tighter credit spreads also helped this quarter's investment results and please recall that effective last quarter.
We implemented to changes in the accounting presentation that now recognize changes in the fair market value of equity securities below the line and that non insurance subsidiary and <unk> that had been reflected within other income is now reflected in the anti line proper.
Turning to general insurance for the second consecutive quarter segment produced both the calendar quarter and the current accident quarter underwriting profit with a calendar quarter combined ratio of 97.8% as Peter mentioned with trip, which of course reflects actual catastrophe losses and prior period development at a 96.1% current accident year or accident quarter combined ratio excluding cats.
The actual cat ratio for the second quarter of 2019 was 2.6% of net premiums earned for the first quarter of 2019 sequentially was 2.7%.
The prior year development ratio or P. like de ratio net of BDC and amortization was a favorable 0.9 loss ratio points for the quarter.
And for the prior quarter was 1%.
For the first quarter of 2018 sequentially what percent.
Furthermore, improved gross underwriting along with reinsurance purchases designed to reduce our risk attachment points and provide horizontal exposure coverage reduce the level of large net property losses.
The North America segment of General insurance produced a 96.8% current accident year, excluding cats combined ratio within North America commercial lines component, producing a 99.2% current accident quarter combined ratio, excluding cats, which represents a 9.3 combined ratio improvement over the second quarter of 2018.
North America personal lines operation produced a 90.1% current accident quarter combined ratio, excluding cats, which represents a 7.8% combined ratio point improvement over the corresponding quarter of 2018.
The International segment of General insurance produced at 95.5% current accident quarter combined ratio, excluding cats versus 98% even comparable ratio in the second quarter 2018.
This improvement was driven by the commercial segment, which saw a 6.5 combined ratio quite reduction over the second quarter of 2018.
It's also informative to comment on general insurance performance on a year to date six months basis versus the first six months of 2018 and on that basis year to date net earned premiums were up 1.1%.
Calendar year combined ratio improved five points, even in the current accident year combined ratio, excluding cats improved 4.2 points. Furthermore, the general operating expense ratio, where geely ratio improved 2.2 points prior to adjusting for the ballot. This acquisition.
Lastly year to date General insurance return on a trip to common equity is 12.1% and 2019 versus 5.3% in the first half of 2018 at 680 basis point improvement.
Turning to prior year development or P.Y. date, this quarter saw a $63 million of net favorable development was 66 million of favorable stemming from general insurance and $3 million of unfavorable emanating from legacy operations.
Although actual versus expected loss emergence was reviewed globally the areas receiving deeper reserve. This quarter were mostly U.S. exposures primary and excess casualty I posted admitted and non admitted basis.
Environmental health care, GL, and med Mal within programs personal lines property and some specialty lines.
The 63 million of net favorable development is mostly driven by the amortization associated with the deferred gain of the adverse development cover or 58 million.
The remaining post 80, C. 5 million of net favorable development was scattered across many lives, but unpacking. This further looking at things on a pre 80 c. basis.
Net favorable development was 132 million split as 129 million favorable in North America, 6 million favorable internationally and pre affirmation or mentioned 3 million unfavorable from the legacy type.
But an equally relevant you have this 135 million a 380 see favorable general insurance people I'd say is that 230 million represents favorable development for accident years 2015, and prior across many lines and is largely subject to the ITC and $95 million of unfavorable development for accident years 2016 to 2018, which is split $55 million from U.S. admitted and excess casualty 10 million from us primary casualty and workers compensation lines combined.
$30 million of unfavorable development emanating, mostly from short tail personal lines and European property and specialty lines.
I am pleased that this quarter's deep dive review, representing 30% of total reserves that also have historically been volatile lines of business resulted in relatively minor movements for example.
On a year to date basis accident year 2000, Seventeens loss ratio has only move 110th of a loss ratio point at accident year 2000, eighteens move it doesn't even register.
Legacy segment incurred $47 million of unfavorable development from accident year 2018 stemming from two environmental cleanup cost cap policies written in 2020 06 each for 30 year terms.
Which is totally distinct from general insurance.
But only 3 million favorable to legacy across all accident years.
Peter commented earlier on general insurance is achieve rate increases for the quarter and hoping to put the pervasiveness of these rate increases in context, nearly 60% of the quarter's gross premium was associated with double digit rate increases, whereas less than 10% associated with rate decreases.
I'd also like to add some color on the related concept of margin expansion, which is defined as the beneficial impact of the effective rate changes over loss cost trends.
In North America commercial weighted average loss cost trend was approximately 3.5%.
But that varies widely by product line line and ranges from a positive 1% trend to plus 9% trend depending on the line.
Given the discussion of rate changes given by Peter earlier on a written basis, one can see that the degree of margin expansion above what was already contemplated with our 29 gene plan loss ratios has been significant in the quarter.
And this expansion has been centered and led by commercial property DNS casualty business and directors and officers liability, although almost all lines had some degree of expansion.
Turning to the life and retirement segment, Kevin has already provided provided a good overview.
I would add that the boost to Eni from the previously referenced IPO at an approximate 230 basis point beneficial impact on the quarters annualized return on common equity.
And therefore their return would have still been approximately 15% without that impact.
All units reported increases in adjusted pre tax income sequentially quarter over quarter, except for the life unit, which is exploring growth along with the associated expense drag on income.
Individual retirement net flows for the quarter were 300 million negative, but improved materially compared to the 1 billion negative in the second quarter of 2018. These net flows have ever were approximately 470 million positive across all annuity type fixed variable and index combined with index annuities, providing $1.1 billion of positive net flows.
As mentioned by Kevin retail mutual fund outflows were the most challenged in the quarter.
On a year to date basis index and variable annuities combined show a flat surrender rate, whereas fixed annuity saw a minor uptick.
Net investment spreads for individual retirement were under pressure during the quarter, whereas group retirement that spreads increased.
Life insurance is seeing growth in international sales favorable mortality experience relative the original pricing assumptions and the comparison with the second quarter of 2018 becomes favorable when controlling for that quarter is $98 million at beneficial actuarial refinements.
Assets under administration grew in both individual and group retirement, primarily due to strong equity market performance individual markets, sorry, institutional markets pre tax income improved quarter over quarter, but deposits. Some premium shrank comparatively due to a large get get can get issuance in 2018 that was not repeated in 2019.
Turning to legacy adjusted pre tax income was up slightly on this quite you'll basis to 119 million and the after tax income due attributed to common shareholders was 93 million in the quarter, which translated to a 5.2% annualized return.
Legacy and I was comparable to the first six months of 2018, but even though the year to date return on common equity is 4.7%. We continue to anticipate in 2% to 3% return for the second half of the total 19 similar to original guidance.
As respects tax the effective tax rate was 22.4% for the year applicable to adjusted pre tax income and 21.8% for the quarter, which is inclusive of the discrete items.
As you know the effective tax rate is updated each quarter using actual results or that supplemented by re forecast for the remaining quarters and as always the tax rate is heavily influenced each quarter by the geographic distribution of income by tax jurisdiction.
It's worth noting that approximately 350 million of the DTA was consumed this quarter utilization of net operating losses and foreign tax credits with both life and retirement and general insurance contributing towards that consumption.
As Brian noted, we did not repurchase any shares in the second quarter. So our board authorization remains at $2 billion.
As compared to the first quarter of 2019, our total debt and hybrids to total capital leverage ratio approved another 120 basis points sequentially this quarter to 26.9%.
We also had a bond issuance mature for 1 billion in mid July that was effectively pre funded by our March 2019 debt raising.
This that overlap at June Thirtyth, when adjusted results in an additional 80 basis point improvement in the total debt hybrids to total capital ratio to 26.1%. When you look at this on a year to date basis. There is a 320 point.
Reduction in this leverage metric.
Adjusted book value per share increased nearly 2.6% in the quarter and GAAP book value per share increased 6.2% sequentially and 13.2% since year end 2018 and is benefiting from AOCI gains.
As respects our rating agency discussions we completed our reviews last month the following results for our various financial strength ratings.
M. best affirmed our a rating and stable outlook S&P affirmed our a plus rating and upgraded our outlook to stable.
Fitch affirmed our a plus rating and their negative outlook on an interim basis until their full review, which takes place later this year.
Moody's reviewed asked as well, but this was considered an internal review within their multi year process.
Lastly, as Kevin alluded to as for the financial accounting landscape AIG is in the process of evaluating and planning for three fundamental accounting change is currently at will be implemented in 2020 through 2022, depending upon the standard.
These are long duration accounting affecting our life and retirement division.
I infer a 17 affecting our general insurance international operations, but mostly in the compliance sense.
And thirdly as fast as the Cecil or current expected credit loss model, which really affects both sides of the balance sheet.
We will provide more details around the impact of the changing accounting standards over the next few quarters and on that exciting note I'll return it back to Brian .
Yeah.
Thank you Jack well, let's go to the you a nice portion of this.
First question please.
Ladies and gentlemen, if youd like to ask a question. Please press star one on your telephone keypad, if you're using a speaker phone. Please make sure that mean functions released to a lot of that signal treaty equipment.
We ask that you. Please limit yourself to one question and one follow up question to allow everyone an opportunity to ask their questions. Once again star one for questions today.
We will begin with elite Greenspan with Wells Fargo.
Hi, Thanks, good morning.
My first question on on General Insurance, you know you.
Again mentioned a lot of the underwriting actions that you've taken within that book.
Combined with obviously now we're getting more of a pricing tailwind. So it does sound like the second half this year on the margin should be better than the first half Brian I know you guys said you have the target for the underwriting profit maintaining that for the full year could you just give us a sense of how the second half that accident year combined ratio as adjusted within general insurance that type of improvement that we should expect from that 96, and one that we saw in the first half the year.
Well at least you know I've.
You know I said, we expect an underwriting profit for the year, it's very hard to predict.
Accident quarter, assuming we're we've been.
You know we've been improving the volatility this book and so I think the results get to be a little bit more predictable, but we still have a.
We still have a relatively ah interesting mix of business. So I, just I don't really want to.
Predicts some you know to the decimal point change we.
We want to continue to sequentially improve but will will that happen in a.
In some kind of straight line I cant tell you, but over time, yes, we continue to.
Targeting improvement in a in the and the general insurance and as I said and get to a sustainable.
Pinpoint return on a.
Adjusted equity a over the next couple of years, but don't don't hold me to what the accident quarter is going to be.
Next question.
Okay.
Excuse me also had a follow up on so Mike.
Please.
My second question just on AG 200 did you guys outlined about the call I just want to get a sense does that ultimately to the channel. How does it mean that you guys are looking for 200 basis point of improvement in your expense ratio just trying to get a sense of where that 200 comes from and if you can just give us a sense of the timeframe there and any investments that we should be thinking about that you're making.
That's interesting it's going to be more than 200 basis points will tell you that.
No. It's it's really a reference to you know we just oh.
In this year celebrating you know the.
But back 100 years and so this is to look forward to the next hundred.
And so maybe I should this call today, well I won't give you a number but anyway yeah.
So.
You know look at.
If we're ever going to be a great company.
And it's our intention to be a great company. If you assess where we are now you know the life and retirement, a great set of products great distribution platform.
At handling handling issues that come along in terms of the the markets to theaters, bringing the.
General insurance to an underwriting excellence position, where it belongs to what we do for a living.
We've got.
The best.
Investment management and the business.
But the one thing Weve never been noted for his operational excellence and this is the one thing that you know we have not invested in we've got legacy processing fees.
Too many manual interventions on and on and on and it you know it it's and it's it is a drag on our performance. If you look at the G.I. expense ratio in particular.
You know pick a number so at least 500 basis points too high in my mind.
And how you ever going to get that down you know says you have to we have to transform the company. We have to we have to do it fundamentally.
It's it's going to take us some time.
But it's the next great step and to me, it's as important as anything we've been doing to date in this company and so it's a very very important effort it's across the whole company.
And it'll it'll provide that a long term benefit and get us to to the position of greatness that we've achieved that we aspire to.
Next question please.
And that question will come from Mike Phillips with Morgan Stanley .
Thank you good morning, Brian I appreciate your comments at the beginning on kind of the comments on the discipline of the market and being more fact based and and how that's driving this cycle I guess you know some of your peers have talked about.
I've described the cycle as.
Reserve driven an income statement, driven and I guess I wanted to hear your thoughts on that description and I kind of get a question kind of goes to.
Not from your book, but just kind of overall for the industry profitability of the current year versus kind of the profitability of prior year still.
Well I think the the market's reacting to the fact that they don't think the current year profitability without these rate changes would have would have matched prior years and I mean, that's logical given.
You know the kind of trends that we referred to whether it's social inflation other kind of toward.
Movements, just frequency of loss and so I think the markets reacting as I said in a.
In a a natural way away that a one would expect a well managed industry to do so I'm I'm encouraged by it.
Well what else would you like to ask Mike Okay. Thanks.
Just a specific one on the towards the legislative changes that we've had a lot of headlines obviously only sexual harassment stuff does that is that the next especially for the industry.
[laughter].
I think as best as has been the next assessments for this industry.
So Jimmy so I don't want to I don't want to I don't want to.
I'm going to be Vadis Supreme you know what I mean.
Well, let's just say it's certainly.
US society wide problem and all this stuff, that's going on and and.
And then it will be reflected in society's reaction to it.
As Peter pointed out the one thing that we have.
Been known for and that you know when I talk about being a great company with this kind of.
Large widespread.
Phenomenon is something we've been.
Handling for a very long time.
But but it is certainly an issue that everybody has at the top of their mine.
Thank you Mike next question please.
Well hear from a year and Konare with Goldman Sachs.
Hi, Good morning, everybody I'm wondering to start with a question on NII. So you had two strong quarters of openings for the year, how should we think of the $13.2 billion to $13.3 billion.
Run rate to that you talked about last quarter with the rate environment being what it is today.
Yeah, Okay well.
I think I'll have.
Mark do this one thank you. Thank you.
I mean, it's reasonable question I mean, what I would.
Just kind of comment on last quarter, you kind of gave a framework, we said roughly 91% of the carrying value of the investable assets is in pretty stable predictable stuff.
I mean, that's still got some variability to it of course, but on a relative basis and then there was another 9%.
It has a lot more volatility to it some because of the inherent asset class itself and some because of the accounting election.
But.
It was put through.
And that mix is still pretty much in fourq is this quarter.
So so there's couple of things what if you if you look back even through our fund so you're going to see in PE and hedge fund composite.
Freddie.
Pretty broad volatility, it's we have a a minus 11% in the fourth quarter that rebounded to 18 16. This quarter. It was I mean, 5% in the latter part a record of 18.
So you can kind of go backwards and pick your own stared air on those kinds of things the other thing that Brian alluded to it and Kevin alluded to it.
If if you go under the assumption that the where the interest rates are now stays.
At this level with natural maturities and natural turnover in fixed income you're going to be reinvesting in lower yielding fixed income securities that could put some downward pressure.
On it in the latter half and into 2016, so all those things taken into account, we still think that the original guidance. We had given covenant Didier was 13 billion and three that framework that I mentioned, you can really get to about 13 and a half in that range and that's it for the reasons. We just mentioned that's pretty much where we still are.
Okay.
Of the question.
Yeah. My next question is going back to the energy 200 [noise] initiative.
Is that something that you expect to complete by the 2021 at the end of 2021. When you are targeting double digit or are we and also with the costs associated with this program would those be.
Included in and not just today.
Operating income or not.
Yeah, well the.
I would say yeah, I I put it as Oh, we have three plus year program.
But once once that period ends.
You know this constant improvements should never end and I and I. So I think there will be.
You know continuous improvement after that but let's say the.
A project name will probably end and in that period of time and yes. We would include.
Yeah, the cost and benefits net net in the.
In our.
Belief that we will get to that double digit position at that point did you want to add anything more I just don't think that the second part of your question was worse, you'll see that the net income, but that kind of restructuring charges generally excluded from operating income.
Got it thank you.
Okay. You're welcome next question please.
Well now take a question from Tom Gallagher with Evercore.
Good morning.
Hey, guys. So mark just a follow up on the Eni question. So if I followed your 13 and a half billion expectation for the year that implies per quarter and I would running around 3 billion or so for the next couple of quarters. If we stay in the current rate environment is that approximately right.
Yeah, I mean, if your linear.
Got it.
Got it and then my follow up is just.
From slide five there's a footnote.
That says about 20% of your fixed maturities are in variable rate securities.
Are those.
I think thats, all I would solve for like 50 billion.
Variable rate securities are those traditional floaters and is that is that the main source of pressure on on Eni from a base spread standpoint.
First off your mix is right.
That 80, 80, 20, and the notional sounds fractionally right as well. So I mean, yes, you have with floating your that's kind of a be a natural.
Impact on it which yeah, but you got it sounds like he just let it go I mean, there is risk management and hedge aspects associated with it but.
Doug you want to.
We will see a run sorry, hi, hi, good morning.
When you look at that that's the holdings of the floating rate assets, but there is a couple of factors you have to think about with respect to the impact to net investment income first of all the reason we hold those flow <unk> those floating rate assets. It provides diversification, but the other reason we hold them as we have a lot of liabilities that repriced frequency frequently during the course of the year. So there's some asset liability management says associated with holding floaters. So we hold floating rate assets against liabilities that have a floating rate repricing characteristic <unk> to the extent there is any excess floaters that we invested in because we thought there was value the extent, there's an asset liability mismatch, we typically swapped those floating rate assets into fixed. So why was telling you what percentage of the portfolio actually has floating rate as a component of the available for sale, that's not necessarily the exact amount of exposure we have to the repricing of the floating rate.
Understood. Thanks.
Okay next question.
[noise].
It was up.
One moment please.
And we'll now take a question from Jay Gelb.
Thanks, and good morning Barclays.
I appreciate the morning job good morning, with a with regard to capital management, you've had some discussion in prepared remarks.
About why the company did not repurchase shares in the first half.
In terms of taking down the leverage ratio at the same time free cash flow seems.
Quite strong and the stock is currently trading at 80% of book value.
Can you talk about what your expectations might be for the second half in terms of buybacks.
I think Mike mentioned in his prepared remarks that you know, we're we're going to and I said the same thing, but we're going to.
Yes, we're going to continue to look at our leverage.
So, let's not forget that but you know my bias is always been to invest in the business and you know in this.
Situation, where we've got the you know we've got a market that's improving.
Ah daily.
And also you know an effort in the company to self improve through the G. 200, I think there'll be plenty of opportunities for us to invest in the a and the company itself and I think that's the long term best use of the funds and that's where we're going Jay.
That sounds good I do have a follow up this ones for Peter I was wondering if you can give us any indications of what you're seeing in terms of the pricing environment. So far through the through the third quarter. If the positive trends are accelerating.
It's too early Jay I'm really to to comment, but I I wouldn't expect a you know just based on you know sort of qualitative commentary that the third quarter.
You know early reactions are similar to what we see in the second quarter.
Thank you.
Good.
Terrific.
Let's let's say, let's take another question.
Well now hear from Josh Shanker with Deutsche Bank.
Oh, Thank you for fitting me in I appreciate it good morning.
Good morning, John always good to hear from you.
Thank you. So you don't you're talking about rate everyone's talking about rate and whatnot, but in some ways AI Jie is writing its own ticket theres an overhaul of the portfolio going on that's on going when you talk about rate is that pricing only or is that joined with an overhaul how AI jie underwrites its PNC business.
Well I'm going to I'm going to start at a market either Ken can finish. So you know where you are these rates that we refer to.
Ah I really you know like same store sales right kind of thing right. So we're matching apples with apples, but as you point out there's another thing going on which is the shedding of business.
That was either poorly selected are underpriced limits that we didn't think we were getting paid for so there's an other underlying improvement taking place in addition to.
This rate comparison, Mark you want to add yeah. Thank you.
Well first off Josh I appreciate that one opening comment you made that in terms of writing your own ticket <unk> well I think clear point of differentiation is and a lot of sector. Eight she is pushing the market. It's not like we're benefiting from the result of other we are pushing it and that's there yep contributory to our view on a lot of different things in terms of the rate changes are Peter quoted before they are effective rate changes taken into account as much as you can see the examples that Brian mentioned, you know, let's see traction and the cash for platelets and so forth, but there is a broader lift that that does not reflect any that's the explicit rate change implicit rate change.
Portfolio quality.
Differentials, so when you non renew or get rid of business of rate adequacy of the x., you're bringing in new business that much stronger than not acts. It has it beneficial a lift as well that will find its way into the ultimate loss ratios, but that in addition to the individual rate changes you're okay. You got anyone want to add that I just want to build on what both of you had commented on which is the most important thing where you know making sure that the underwriters are doing is risk selection, how the recalibrated portfolio, making disciplined decisions around limit deployment understanding.
They are aggregations understanding what's actually happening with loss cost in underlying trends. So we're very pleased with the rate that we've been driving but thats become an outcome of the discipline that we've been driving over the last five or six quarters.
Gosh, we got maybe fine for a follow up no and no other.
Yeah, absolutely follow up right on it.
And so next year as I think about the shape of the portfolio and your purchase of reinsurance over the past 12 months.
Can we imagine that the shaping of the same that you won't have the same reliance on reinsurance for the next 12 months or is that going to change over time.
Well I think that you know, where we have been addressing our reinsurance to the portfolio that we had.
As that portfolio changes right. So we get rid of the large limits strategy you don't have to buy as much.
In terms of protection protecting the company from those very large limits.
Portfolio mix.
But I'd say the basis of ours, our philosophy of that around the reinsurance.
That it is you know it's geared to to addressing exposures that we feel we should share because of accumulations or because of volatility that is going to continue but yes as soon as the portfolio evolves.
We'll we'll adjust our our total program accordingly.
Thank you, thanks, Josh and I I'm going to I'm going to call. This a to an end and thank you and I just want to just thank everybody for joining us today and for your questions and before we end to end the call of course, I do want to acknowledge our colleagues around the world for their tireless efforts and dedication.
To the journey that we're on here at AIG and I I am I am proud of what we are accomplishing and appreciate everybody's hard work.
I also want to thank our business partners shareholders and stakeholders for their support it's meant a lot to me and my leadership team and we remain committed to making energy the leading insurance company in the world have a great day.
And with that ladies and gentlemen, this does conclude your conference for today, we do thank you for your participation and you may now disconnect.
Uh huh.
Oh.
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