Q2 2023 American International Group Inc Earnings Call
We expect to continue to report until the deconsolidation of <unk> financial.
AIG segments and U S GAAP financial results as well as Aig's key financial metrics with respect to their to differ from those reported by corporate financial corporate financial will host its earnings call on Friday August 4th with that I'd now like to turn the call over to our chairman and CEO Peter Zaffino.
Good morning, and thank you for joining us to review, our second quarter financial results.
Following my remarks Sabre will provide more detail on the quarter and then we will take questions, Kevin Hogan and David Mcelroy will join us for the Q&A portion of the call.
I am very pleased to report that AIG delivered another exceptional quarter with strong financial performance. In addition, we made significant progress on our strategic priorities that are strengthening AIG for the future.
We again demonstrated our ability to deliver high quality outcomes, while executing on multiple complex initiatives during very difficult market conditions.
I would like to start with financial highlights from the second quarter.
Adjusted after tax income was $1 3 billion or $1 75 per diluted common share.
Presenting a 26% increase year over year and the best quarterly adjusted EPS result for AIG since 2007.
Net premiums written in general insurance grew 11% led by our commercial business, which grew 13%.
Underwriting income in the quarter was approximately $600 million.
The adjusted accident year combined ratio ex cats was 88% a 50 basis point improvement year over year and the best result for AIG since 2007.
Our cat loss ratio was three 9% or $250 million of catastrophe losses, a terrific result against the backdrop of a very challenging quarter for the industry.
The life and retirement business reported very good results in the second quarter.
Adjusted pretax income was $991 million up 33% year over year.
And premiums and deposits were over $10 billion, a 42% increase year over year supported by record sales of fixed indexed annuity products.
Consolidated net investment income on an H P. Ti basis was $3 $3 billion in the second quarter, a 31% increase year over year.
In General insurance net investment income was $725 million, a 58% increase.
AIG returned $822 million to shareholders in the second quarter through $554 million of common stock repurchases and a $268 million of dividends, which reflected a 12, 5% increase in our quarterly common stock dividend that we announced on our last call.
As you saw in our press release, the AIG Board of directors approved an increase to our share buyback authorization to seven $5 billion.
Which reflects our commitment to returning capital to shareholders consistent with our capital management strategy, we have previously outlined.
Lastly, our balance sheet remains very strong and we ended the quarter with $4 3 billion and parent liquidity.
During the remainder of my remarks. This morning, I will provide more information on the following five topics.
First.
The significant strategic actions, we took in the second quarter to reposition AIG.
During that review I will provide additional details on the divestitures of Validus re and crop risk services. The launch of private clients select as an MGA, serving the high and ultra high net worth markets and the actions we took with respect to coverage.
Second I will discuss financial results for general insurance.
Third I will give an overview of the results for life and retirement.
Fourth I will provide an update on capital management, and lastly, I will reconfirm our guidance with respect to our path to a 10% plus RLC post deconsolidation of corbridge.
Turning to the strategic actions, we executed on I will start with Validus re.
In May we announced the divestiture of Validus re and Alphacat to Renaissance III for approximately $2 $75 billion in cash and $250 million in rent re common stock.
We expect to close this transaction in the fourth quarter subject to regulatory approval.
We're very pleased to have run re as the acquirer.
<unk> is a very important partner to us a company with a terrific reputation and we value the strong relationship we have with Kevin and his management team.
We believe <unk> will be an excellent owner about history.
Now let me provide some highlights on our rationale for the divestiture.
We acquired Validus in 2018, which at the time provided AIG with business diversification not limited just to reinsurance, but also attractive specialty businesses, including Talbot and Western World, which were not part of the sale to run rate and will remain with AIG.
Since 2018, we transformed validus re by re underwriting the portfolio, leading to significant premium growth and improve profitability.
In addition, we dramatically change the business mix of the portfolio to achieve a more attractive balance among property casualty and specialty businesses improved geographic diversity and decreased peak zone exposures.
For AIG. This divestiture represents a key milestone on our journey as it further streamlines our business model.
Simplifies the structure of our global portfolio.
Substantially reduces volatility, which I will explain in a moment.
Generates additional liquidity in capital efficiencies and accelerates our capital management strategy.
Due to the nature of assumed reinsurance and the portfolio mix of Validus re this business is capital intensive and disproportionately contributes to aig's overall volatility and pms.
As we have discussed over the past few years, the core objectives of the property and casualty turnaround work to substantially improve the overall quality of Aig's global portfolio and underwriting results.
Reduce volatility through a massive reduction in gross limits written.
Better manage peak zone exposures and geographic balance.
And strategically use reinsurance across our overall business.
A turnaround of this magnitude is made harder when you have a treaty reinsurance business, which by the very nature that's volatility.
We have completed a rigorous enterprise wide modeling exercise.
Using RMS version in 'twenty, one to approximate the Pms for AIG post closing and all categories will significantly reduce.
This analysis took into account aig's exposure.
The oldest res exposure as of February one 2023.
And the combined output for both companies on an occurrence and aggregate basis.
Let me provide a few examples of the modeled output for AIG post closing of the Validus re sale on our current spaces.
For worldwide, all perils net <unk> were reduced by 45% at the one and $2 50 return period.
Worldwide Hurricane <unk> will reduce by 60% at the one and $2 50 return period and by 70% at the one in 100 return periods.
North America Hurricane <unk> will reduce by 70% at the one in 100 return period.
North America earthquake, <unk> will reduce by 55% at the one and $2 50 return period.
Japan Typhoon <unk> will reduce by 50% at the one in 100 return period, Japan.
Japan earthquake, <unk> will reduce by 50% at the one and 250 return period and.
And for EMEA, all apparel <unk> will decrease by 85% at the one and $2 50 return period and 75% at the one in 100 return period.
In addition to the strategic repositioning of our portfolio. There were several additional components that made the sale of Validus re appealing for AIG.
The required tangible equity that AIG will deliberate to run re upon closing, which is $2 $1 billion is substantially below what validus re what have required if the business remained at AIG.
We will receive $900 million above the book value of about three which reflects the improved quality of the portfolio since aig's purchase of the business in 2018.
We also expect to receive.
Through a pre closing dividend excess capital and the legal entities being transferred to <unk>, which we estimate will be approximately $200 million.
In addition, a 1 billion intercompany loan from Validus re the AIG will be settled through internal dividends.
And we expect AIG to benefit from a $400 million reduction in risk based capital requirements. Following the closing.
As part of the transaction AIG will retain 95% of future reserve changes in the portfolio delivered at closing.
We will receive the benefit of future reserve releases as the portfolio matures and we will likely purchase an adverse development cover prior to the closing to minimize potential future reserve exposure.
In the second quarter, we also announced and closed the sale of crop risk services to American financial group for $240 million in cash.
Crop risk services was part of the Validus acquisition in 2018.
Over the remainder of the 2023 crop season, AIG will continue to benefit from earned premium for crop business booked since the start of the year, but as we enter 2020 for this business will no longer have an impact on Aig's financial results.
Next I want to provide more detail on the formation of private clients select as an MGA, which is now referred to as P. C. S.
The NGA has officially launched and we expect to add new capital providers in the coming quarters.
We believe the MGA structure is ideal for Pcs as it creates flexibility and alternatives for clients agents and brokers in an environment that is becoming more complex.
High and ultra high net worth markets Pcs's focused on have significant foundational challenges include.
Loss cost pressure inflation increased.
Increased cat exposure through increased total insured values and more concentration in peak zones and primary and secondary apparel modeling has been deficient.
AIG will continue to support the MGA.
And because we will be assuming risk on our balance sheet. We've established the mga's risk framework, which is designed to improve its financial performance in 2023 and as we enter 2024.
Overall, we are pleased with the progress we've made with stone point capital on this MGA structure, and we're well positioned to accelerate the business plan through the remainder of the year.
Moving to corbridge.
In June we completed a secondary offering of corbridge common stock with gross proceeds to AIG of $1 2 billion.
The offering was well received by the market and the new owners included a strong mix of long term holders, which we believe results in a more stable and well diversified shareholder base for corbridge.
Also in June Corbridge announced and paid a $400 million special dividend. In addition to its $150 million ordinary quarterly dividend and completed the repurchase of $200 million of common stock from AIG and Blackstone.
Aig's net proceeds from these actions were approximately $540 million.
At the end of the second quarter, our ownership stake in Corbridge was approximately 65%.
These actions demonstrate our commitment to deconsolidation and eventually full separation.
As we noted on our last call. We continue to explore all options with respect to our remaining ownership of corbridge that are aligned with the best interest of shareholders.
Turning to other strategic actions, we are taking incorporates the previously announced sale process for layer health care, the private medical insurance business in Ireland that is part of core bridge is proceeding very well.
We expect to announce a positive outcome from this process in the near term and expect that the proceeds from this divestiture will largely be used for a special dividend to corporate shareholders.
Additionally, we recently retained advisors to analyze strategic alternatives for the disposition of the UK life business that is part of corbridge.
The dispositions of layer and U K life will streamline the corporate portfolio and allow us management team to focus on core life and retirement products and solutions in the United States.
Turning to general insurance, we had another quarter of strong growth in both gross and net premiums written grew.
Gross premiums written were $10 4 billion, an increase of 11% global commercial which represents 80% of gross premiums written grew 15% and global personal decreased 1%.
Net premiums written were $7 5 billion, an increase of 11%.
This growth was driven by global commercial which grew 13% while global personal grew 5%.
In North America commercial we saw very strong growth of 18% and net premiums written and excluding Validus re net premiums written growth in North America commercial was 13%.
The major drivers were as follows retail property, which grew over 50%.
Out of three which grew 32% and Lexington, which grew 18% led by wholesale property and casualty.
I would like to provide a few additional details about Lexington is growth given it continues to be an important part of Aig's strategy.
Property grew 38% year over year, driven by very strong retention and new business as well as strong rate increases submission activity was up over 30% year over year.
Casualty grew 41% supported by strong retention and new business and its submission count was up over 90%.
And international commercial net premiums written grew 6%, primarily driven by property, which was up 34%.
Albert which was up 17% and global specialty which was up mid single digits, which reflected the impact of additional reinsurance purchasing in the second quarter.
Global commercial had very strong renewal retention of 88% and its enforce portfolio inner.
International was up 200 basis points to 88% in North America was up 200 basis points to 87%.
As a reminder, we calculate renewal retention prior to the impact of rate and exposure changes.
And across global commercial we continued to see strong new business, which was approximately $1 1 billion in the second quarter.
North America commercial excluding Validus re produced new business of approximately $600 million, an increase of 10% year over year.
This growth was driven by Lexington property, which saw excellent new business growth of over 40%.
Retail property had over 50% new business growth offset by financial lines, where new business contracted by over 35%.
International commercial new business was $485 million, which grew 5%.
This growth was led by Talbot, new business, which increased over 100% year over year and property, which grew new business by 40% offset by financial lines, where new business contracted by over 20%.
As I noted on our last call, we continue to see headwinds in certain aspects of financial lines due to increased competition, putting pressure on pricing.
Despite these continuing dynamics, we remain disciplined on risk selection and terms and conditions and price while taking a long term view on this line of business by not following the market down.
Moving to rate in North America commercial excluding Validus re rate increased 8% in the second quarter or 9%. If you exclude workers' compensation and the exposure increase was 2%.
Rate increases were driven by Lexington, wholesale, which was up 23% with wholesale property up over 35% and retail property, which was up 30%.
And international commercial rate increased 9% and the exposure increase was 1%.
The rate increase was driven by property, which was up 21% Talbot, which was up 14% and global specialty which was up 11% driven by global energy, which was up 21%.
Right plus exposure was 10% in North America, 11%, if you exclude workers' compensation, and 10% and international which in each case remains above loss cost trend.
Turning to personal insurance.
Note that second quarter results in North America personal reflected the fact that PSEG was transitioning to become private clients select.
North America personal net premiums written increased 17%, primarily driven by lower quota share sessions in <unk> offset by decreases in travel and warranty.
Overall, we had strong growth in net premiums written of 17% with P. C. G net premiums written growing over 60%.
With PCF now officially launches an MGA.
There are several components of Aig's business in the high and Ultra high net worth markets that will result in improved financial performance for AIG over the balance of 2023 first.
As we outlined in prior calls over the last few years, we evolved the model for our high and Ultra high net worth business such that we expect net premiums written to grow significantly over the remainder of the year with our current expectations showing net premiums written increasing over 75% in the third and fourth quarters.
Second the lag in earned premium growth that we saw in the first quarter of 2023 dissipated and we saw 36% growth in earned premium in the second quarter.
And we expect that earned premium growth will continue to accelerate in the third and fourth quarter.
The additional earned premium will provide operating leverage which will reduce our <unk> ratio in the third and fourth quarter third AIG has stranded costs from the transition of PSEG to an MGA and we expect to eliminate these costs over the next 18 months.
Fourth we expect the accident year loss ratio for our high and Ultra high net worth business will improve with the combination of improved pricing in our <unk> business and more business migrating to the non admitted market, which already had a very positive impact on <unk> accident and policy year loss ratios in prior quarters.
This should earn in for our high and Ultra high net worth business through the second half of 2023 and into 2024.
In international personal net premiums written increased by 1% year over year, the modest growth was driven by travel and personal property in Japan.
Overall, our key focus continues to be growing accident and health.
And our business in Japan.
Shifting to combined ratios as I noted earlier, the second quarter accident year combined ratio ex cats was 88%, a 50 basis point improvement year over year and.
In global commercial second quarter accident year combined ratio ex cats was 84, 4%, a 90 basis point improvement year over year.
The North America commercial accident year combined ratio ex cats was 85, 1%, a 310 basis point improvement year over year.
And the international commercial accident year combined ratio ex cats was 83, 1%, which continues to be an outstanding level of profitability.
Global personal reported a second quarter accident year combined ratio ex cats of 98, 1%, a 170 basis point increase from the prior year quarter, largely due to a decrease in earned premium.
Now I'd like to provide some context around mid year reinsurance renewals in recent conditions in the reinsurance market before moving to life and retirement.
We purchase our major reinsurance treaties at January one however, approximately 20% of our overall core reinsurance purchasing occurs in the second quarter as we have a number of core mid year renewals predominantly in specialty classes and they were all successfully placed.
In addition, we decided to purchase additional retrocession protection for Validus re.
And a low excess of loss reinsurance placement for private client group ahead of the wind season.
Overall the.
The market exhibited more orderly behavior during mid year renewals amidst more stable trading conditions compared to January one.
Reinsurer appetite for more discreet purchases increased somewhat enabling a number of buyers to make up for shortfalls and coverage experience at January one.
Overall mid year property cat pricing increased 25% to 35% year over year in the U S driven by Florida. This was the second year in a row of substantial rate increases.
International renewals, driven by Australia, and New Zealand saw price increases of 20% to 50% with higher increases resulting from loss activity in the region.
In previous calls I've.
Ill touch on the increase in catastrophe losses from secondary barrels through the first half of 2023. The industry has already experienced over $50 billion of insured losses. The majority of which were due to secondary perils, making 2023 already the fourth highest year on an inflation adjusted basis.
A majority of insured losses continue to occur in the United States, highlighting the difficulty of managing volatility and the largest insurance market in the world.
Against this challenging backdrop and our strength in reinsurance rating environment, we maintained our conservative risk appetite and continue to have one of the lowest peak peril net positions in the market, while managing our overall reinsurance spend.
Additionally.
Through each of our renewals we maintained all of our principal relationships with our key reinsurance partners.
While we are exiting the assumed reinsurance business through the sale about a three our ownership of <unk> common stock that we will receive as part of the purchase price consideration.
Coupled with our ability to invest up to $500 million in rent <unk> capital partner vehicles will allow us to continue to participate.
And benefit from partnering with a world class reinsurer with less risk and capital requirements.
Turning to life retirement as I noted earlier.
The business produced very good results in the second quarter.
Adjusted pretax income was $991 million and adjusted return on segment added equity was 12, 2%, representing a 250 basis point improvement year over year.
Premiums and deposits grew 42% year over year to $10 billion driven by record fixed indexed annuity sales.
<unk> ended the quarter with a strong balance sheet with parent liquidity of $1 6 billion and a financial leverage ratio of 28%.
Over the second quarter, we continued to make good progress against the corbridge operational separation. So that it can eventually be a fully standalone company. A key focus has been executing against it separation, which we believe will be substantially complete by the end of this year to date.
Approximately 55% of the transition service agreements put in place at the time of the IPO had already been exited.
Now turning to capital management as I noted earlier in the second quarter, we returned approximately $822 million to shareholders through common stock repurchases and dividends and the additional $400 million of common stock we repurchased in July brings the total amount of capital we've returned to shareholders since the beginning of the second.
Ordered over $1 2 billion.
In addition, we continue to focus on maintaining well capitalized subsidiaries to enable profitable growth across our global portfolio and we remain committed to having a leverage ratio in the low twenties and a share count between $600 million to $650 million post deconsolidation of corbridge.
The additional liquidity, we will have following the closing of the sale of Val <unk> three will largely be used for share repurchases.
Which we expect to accelerate beginning in the fourth quarter and as we enter 2024. We also plan to use some of the proceeds from the sale of Val <unk> three to reduce outstanding debt.
Lastly, with respect to <unk>, we remain highly committed to delivering a 10% plus R. O C pulse deconsolidation of corbridge.
During the second quarter, we continued to make meaningful progress on all four components of our path to deliver on this commitment as a reminder, these are sustained and improve underwriting profitability.
Executing on a simpler leaner business model across AIG with lower expenses across the organization.
Operational separation deconsolidation of Corbridge and continued balanced capital management.
The sequencing of each component has been very important.
We are now able to accelerate this work with the Gi underwriting turnaround AIG 200, and the investment group restructuring largely behind us and the operational separation of Corbridge further along in addition to divestitures, which I've already outlined.
As I stated on our last call, we're moving away from Aig's historical conglomerate structure to being a leading global insurance company with a leaner and better define parent company.
We continue to expect approximately $500 million in cost reductions across AIG, where the cost to achieve of approximately $400 million with substantially faster earn in of savings than we saw with AIG 200 say.
Sabre will provide more details on our path to a 10% plus <unk> in her remarks.
Overall, I could not be more pleased with our progress and what we've accomplished the first half of the year. Our strong momentum continues and we have a very solid foundation to build on for the future.
Now I'll turn the call over to Sarah.
Thank you Peter this morning, I will provide more detail on second quarter results, including net investment income and underwriting performance provide a balance sheet update and review the drivers of our path to a 10% plus adjusted R E.
Starting with second quarter results as Peter noted adjusted after tax income was $1 $3 billion up 15% from last year for an annualize adjusted RSA at nine 4% adjusted after tax income per diluted share was $1 75 up 26% from last year, reflecting the impact of share repurchases on EPS.
Second quarter results were consistent with recent trends strong underwriting margins and higher net investment income in general insurance increased based investment yields and spreads and strong sales in life and retirement and continued expense reduction and balanced capital management and corporate and other.
Turning to net investment income on an H P. T I basis investment income improved significantly at 31% from last year and up 7% sequentially on a consolidated basis and also rose in each segment reinvestment.
Reinvestment rates are driving higher yields the average new money yield was 546% about 210 basis points above the yield on sales and maturities.
In general insurance this increase the yield on the fixed maturities and loan portfolio was 93 basis points over last year, and 23 basis points sequentially and life and retirement, the yield improved 75 basis points and 15 basis points respectively.
Alternative investment returns also improved this quarter, although they remain below our long term outlook totaling $147 million for an annualized return of 6.0%.
Credit performance has been strong with more upgrades than downgrades in the fixed maturity portfolio and continued derisking of lower rated assets.
Commercial property valuations continue to face downward pressure from higher cap rates, which impacts loan to values in commercial mortgage loans and investment returns in real estate equity funds. However debt service coverage ratios are holding up well and are generally strong across the portfolio including office.
Turning to general insurance, a P. T I was $1 $3 billion of $62 million from the prior year net investment income rose by $267 million in underwriting income for the current accident year, excluding catastrophe losses were $73 million.
Total catastrophe losses were $250 million up $129 million and included $56 million at first quarter cat, mostly from U S events, including a tornado that occurred at quarter end.
This was a very solid result, as Peter noted given the high level of industry catastrophe losses, particularly in North America, North America Cat losses were $159 million, while international to $91 million largely from Typhoon My arm.
During the second quarter, we conducted North America casualty D D ours, our detailed valuation reviews, which reviewed about 20% of reserves compared to 15% last year.
In our D V R's, we focus on changes in frequency and severity trends, including social and other types of inflation as well as changes in claims trends as settlement such as occurred during COVID-19.
As we noted previously casualty bodily injury and medical workers comp trends in our book have been and continue to be more favorable than our reserving assumptions. Our approach in these situations is to react quickly to adverse development, but to be conservative and wait to recognize favorable trends until accident years are more mature.
We maintain the same approach for the Covid accident years, where claims development patterns in many casualty lines slowed for those years, we have lagged our development factors to allow more time for claims patterns to mature as we are taking a conservative position that industry claims experience will revert to pre COVID-19 patterns.
In addition to the results of the D. D. R's. Prior year development also includes amortization of the ADC gain changes in prior year catastrophe losses and impacts from law sensitive lines that are not related to D. D R's.
And this quarter prior year development net of reinsurance and prior year premiums was $25 million favorable. This was made up of $115 million of favorable loss reserve development, partially offset by $90 million of prior year return premium the lower favorable development compared to last year is mainly attributable to the excess workers.
Sensation, DVR, which was favorable by about $75 million in second quarter last year, but it is being completed in the third quarter of this year.
Our favorable loss reserve development included $167 million from North American commercial lines, including $41 million of ADC amortization $50 million of favorable development from an agrium loss sensitive portfolio and $74 million of favourable development, resulting from North America D V R's.
This was partially offset by $62 million of unfavorable development in international commercial lines, principally from a multiyear legacy casualty policy that was written with much higher limits than we do today.
In the third quarter D V ours will cover nearly 70% of reserves, including financial lines.
Financial lines claims have not returned to the levels, we experienced pre COVID-19, which we believe reflects improved underwriting better loss selection continued ventilation of risk, our reinsurance strategy and achieving appropriate levels of rate.
With respect to underwriting AIG share of U S. Public company D&O Securities Class actions, where we are the primary insurer is down from 42% in 2017 to about 20% at the end of the second quarter of this year with respect to rate since 2018, the compounded increases in the financial lines portfolio for corporate Nash.
All accounts are greater than 60% and 50% respectively. However.
However, consistent with our conservative approach. In addition to the lag development factors, we are placing more weight on longer term experience and balancing out more favorable recent trends.
Turning to life and retirement as Peter noted second quarter results were strong with a P. T. I, a 33% over <unk> 22, driven by higher spread in underwriting margins and strong sales and fixed indexed annuities, both spreads and underwriting margins remain attractive and fee margins improved with more favorable capital market levels.
Compared to last year.
Base net investment spreads in individual and group retirement continued to widen with 64 basis points improvement year over year, and nine basis points sequentially driven by reinvestment rates.
Individual retirement, apta increased $215 million or 58% from <unk> 22, driven by base spread expansion and growth in general account products positive net flows of the general account, we're about $400 million.
Group retirement, apta grew by $21 million or 12% driven by continued base spread expansion. Despite negative flows in the general account.
Life insurance, apta decreased $42 million or 35%, primarily due to lower other yield enhancement income, partially offset by improved base portfolio returned and marginally favorable mortality experience in.
Institutional markets delivered very strong results with a P T I up $50 million or 65% driven by investment income and reserve growth.
Quarter premiums and deposits reached $2 9 billion with $1 $9 billion of pension risk transfer activity and $917 million of gift transactions.
Turning to AIG as other operations second quarter, adjusted pretax loss improved by $41 million over last year, driven by an $80 million improvement in corporate and other due to the <unk> 22 sale of legacy investment portfolios that had losses of $119 million until 'twenty two court.
General operating expenses of $242 million included $67 million of corbridge expenses, including separation expenses.
Excluding corbridge and separation related expenses corporate GLA decreased $19 million from the prior year.
Moving to the balance sheet, we continued to execute on our balanced capital management strategy with share repurchases and increase in our common stock dividend and repayment of maturing debt.
We ended the quarter with AIG parent liquidity of $4 $3 billion.
We remain committed to maintaining strong capitalization in our insurance subsidiaries to support risk and growth.
The general insurance U S pool risk based capital ratio is estimated in the 470% to 480% range and life and retirement is projected to be above its 400% target.
We repaid a $388 million debt maturity in the second quarter and continue to target that leverage in the low twenties post deconsolidation of Corbridge at June 30th consolidated debt and preferred stock to total capital, excluding <unk> was 26.0%, including about $9 $4 billion of corporate debt.
Book value per common share was $58 49 on June 32023 up 6% from year end adjusted book value per common share was $75 76 per share flat from year end.
Turning to our S. E. We remain intently focused and are making progress on achieving a 10% plus adjusted RSC E Post deconsolidation.
Year to date annualized adjusted our Oce for AIG was nine 1% on a consolidated basis and 11, 8% in general insurance, and 11, 4% and life and retirement.
Capital management, and right sizing our equity base for AIG post deconsolidation, our material leavers for achieving our adjusted RSC Eagle.
In the near term, we will accelerate share repurchases in the fourth quarter and into 2024 with the additional liquidity from Validus proceeds. In addition to ordinary course liquidity generated by our business operations through subsidiary dividends and ongoing profitability.
We will balance these share repurchases with additional debt reduction consistent with our leverage target.
We are committed to achieving a share count between 600 650 million shares because deconsolidation, which we will be able to achieve with the increase in our share repurchase program to $7 $5 billion.
Based on the size and risk profile and profitability of our general insurance business and holding company needs today, we estimate a pro forma GAAP equity base, excluding <unk> of approximately $40 billion for AIG ex Corbridge. This is inclusive of about $4 billion in deferred.
Tax asset Nols that we exclude for adjusted common shareholders' equity calculation.
Considering this equity level and our plans to simplify AIG business and operational structure reduce volatility and drive more predictable and sustainable profitability. We are confident that we will achieve our adjusted ROIC equal we look forward to continuing to update you on our progress with that I will turn the call.
Back over to Peter.
Thank you Sabra and operator, we're ready for questions.
Thank you it would be like to ask a question. Please press star one one if your question has been answered and you'd like to remove yourself from the queue. Please press star one again.
Our first question comes from Paul Newsome with Piper Sandler Your line is open.
Good morning, congrats on the quarter.
Hum.
We can focus.
General.
North American Cat.
And commercial business a little bit.
Questions about.
The growth.
If you sort of.
Assume a certain amount of growth is related to the <unk>.
Price increases.
So ex Validus.
Whether or not we saw.
Cool.
Just sort of if you normalize for price increases.
All right.
Sorry, I know you gave a lot of detail there, but maybe.
Maybe if you can kind of simplify it.
Yes.
Sure. Thanks, Paul Good morning.
As we talked about in our prepared remarks.
We were very pleased with our overall growth across the world and Retentions up new business was terrific and balanced.
And rate well above loss cost was evident in so many parts of our business if I unpack that.
Now as you asked I mean look at North America, we discuss Validus re was up 32%, but it's not cyclically its largest quarter. It was basically 25% of North America, but other businesses.
Had tremendous quarters Lexington had 18% growth, but that was also.
Part of US discontinuing a big program that we didn't like the risk adjusted returns that had an impact on our topline.
Topline premium growth and so I would look at Lexington in terms of casualty, which was 40% growth Lexington property, which was 35% growth.
Retail property was up over 50% in the quarter and I outlined the rate increases.
We're north of 30 for two quarters in a row, our actual retail casualty business was up in the high single digits. So it was a very good outcome for net premium written in <unk>.
North America, the headwind was financial lines.
Which was down a little bit over 10%.
But that is something that is specific to North America, but we have really good balancing growth. If I look at I'll, just expand a little bit in terms of international we had really strong growth I mean with property. Our syndicate Talbot was up 17% International specialty I drew it out as a mid single digit growth.
Net premium written in the quarter, we had some discretionary spends on by treaty reinsurance on a gross basis. It grew over 40% and I want to call out financial lines is not experiencing the same headwinds as.
As North American International was flat.
And that's our largest business in the second quarter in international So had a little bit more of the weight in terms of the overall growth, but thought it was really balance really well done and all the fundamentals are we're executing on.
Thank you.
Second question I wanted to ask about the.
Cat load.
Okay.
America.
As we think of it going forward clearly from the data you showed us.
On the call.
The volatility piece or the tail is going to be reduced a lot.
All of this.
But on an ongoing basis.
The reduction.
Good.
And the efforts.
Yes.
Pieces.
It changes.
Yes.
Yeah. Thanks, Paul again, I gave probably.
More P M. L information then.
People may have liked but it's really the story has three components. One is what we did in the re underwriting to reduce gross exposure across AIG.
AIG by the way, including Validus re over the last several years and you know we shut over a trillion of limit most of that property.
So that had an effect on our exposure and N P. M L that all return periods.
The reinsurance programs that we bought are are world class, we keep calling that out but in a very challenging and difficult environment at one one we.
We did not.
Compromise by taking a lot more net because of reinsurance pricing it reflected our book we've got great partners.
And as a result, we didn't really have more net in terms of.
Overall, you know low return peered P M L and so what what I drew out and you know on the Validus. Re example, again is on a current so it was the RMS model will work through it we got plenty of aggregate as to drive businesses that exist within AIG, but yes, I mean like I said different company I mean, we're not gonna have a tail exposure, but also at all.
Return periods.
Gonna have less cat, we manage aggregates across the world.
And you know look at Validus re is a very good business, but as I said, when we want to continue to reduce volatility we do that through reinsurance, but when you have a treaty reinsurance business that is <unk> got a portfolio that has a lot of cat.
That's harder to do so I think the.
Volatility the cat loads will go down by the very nature were going to lose a big part of our cat exposure.
But we've been conservative on that and you know increase them this year and are very comfortable.
With our estimates and our actual results.
Great. Thank you very much appreciate all the help.
Thanks, Paul.
Thank you. Our next question comes from Meyer Shields with <unk>. Your line is open.
Great. Thanks, a lot and good morning, Peter you gave us a lot of detail about right.
Rate and exposure changes.
A little bit sequential improvement, but I was wondering if you could talk about changes in the gap between rate increases and loss trends from the first quarter to the second quarter of this year.
Sure Matt Good morning.
Yeah.
We havent given guidance. So let me start with the loss cost inflation, which is still at six and a half and you can imagine in a company like ours I mean, it's an index and so we look at each line of business each quarter.
Make minor modifications or as we did in the back half of last year, just based on inflation.
More meaningful adjustments.
Adjustments I'm really pleased with the discipline the company is showing on.
Driving rate above.
You know loss costs, and we've done that across the world. So the rate environment. The second quarter was very strong.
I gave you the guidance on the prepared remarks of North America, excluding work comp, 9% international at 9%.
The drivers for this retail property excess and surplus lines in our specialty businesses.
The headwind for rate in North America was financial lines.
And it's worth noting again that we have a very big big footprint and I mentioned in a prior question that.
International is not experiencing the same rate issues and again when I look back over the last 14 quarters. Each quarter has been a positive rate crease in financial lines. So its different for our international portfolio versus our domestic end.
We continue to look at <unk>.
Businesses like property is getting a lot of attention, but you can't look at that as a single quarter I mentioned before cost increases on the loss cost side inflation cost of capital, but also the cost of reinsurance for the industry and ours was a high single digit risk adjusted increase at one one but those re.
Insurance costs in the industry are going to need to play in over the course of a year or maybe even in like in Europe's case.
And so the first quarter absent anything happening through cat season. So.
You know I I.
I think this is the market that we're in it's a disciplined market.
The cost of capital is more expensive and we're going to be very prudent and where we deploy capital, but I'm very comfortable that we are driving margin on a written basis and that will continue as we get to the back half of the year.
Okay. That's very helpful. One thing that you said in your prepared remarks also that surprised me was that youre seeing a huge uptick in casualty submissions in Lexington, I think we expect that the property side.
I was hoping you could dig a little bit deeper into what's going on in specialty casualty.
Yeah, well Lexington, just a great story, when we look at.
We had record submission count across Lexington.
We drove very strong.
Growth at the top line, but it's one of our most profitable businesses.
And you know Dave Mcelroy.
Lou Levinson, who leads Lexington. This has all been about driving value for our distribution partners and wholesale brokers and.
We've been asking for submission activity on all lines of business and so when we were going to deploy property. Yes, we have aggregate yes. The performance has been very good yes, the growth opportunities there on its own but we have been very focused on driving.
Opportunities across the portfolio and we're asking for the business and so like the submission activity is substantial and I think being one of the largest wholesale underwriters and respected as one of the top in terms of underwriting excellence, we're getting looks at multiple lines of business.
And we have staffed up in order to take on that additional volume.
On the property and casualty side. So this is very pleased that the team executed as well then.
And I expect that to continue.
Great. Thank you so much.
Thank you.
Thank you. Our next question comes from Yaron Qunar with Jefferies. Your line is open.
Thank you good morning.
First question I guess going back to Paul's question on Valdez could you offer us like a pro forma margin profile for our North America commercial ask me about all of this sale, maybe even ex the crop business.
Good morning.
It's a very good question, but I'd have to follow up with a question back to you do you want it over a longer period of time, because I mean looking at our cat business in the second quarter.
And I'm happy to provide some detail it was accretive by a little over 100 basis points in the quarter to a combined ratio, but don't forget it's.
The acquisition ratio was higher than our normal business. The loss ratio was slightly below you know based on dynamics going on in the market today when I look at.
Our overall business and.
Ones that I continue to highlight Lexington specialty.
You know our property those are more accretive than validus re so I wouldn't have the impression that it's going to be highly dilutive. Obviously, it's done really well in the first half of the year, but if I go back.
Last three to four years last year is the first year, we were able to publish combined ratio below 100, and so looking at the combined ratios of the business you know overall, it's been a positive contributor in the first half of this year, but in terms of the business. We have a lot of businesses performed better.
And we have you know in terms of the index I don't think it will materially impact us.
Got it and maybe just as a clarification your commentary is that on a reported basis our underlying.
Both of us.
We don't break it out, but I mean in terms of looking at it from 2018 through 2022.
2022 was the first year on a fully loaded combined ratios below 100.
Got it.
And then my second question.
Given the secondary and the core region.
Starting to see a line of sight to below 50% can you maybe office.
Precise thresholds for these consolidation.
No I know I can offer you a precise but I can give you some guidance in terms of what we're thinking that's okay sure.
Sure.
Yeah, so the secondaries our base case.
And you know we would expect to do something hopefully before year end subject to market conditions I think what we have proven over time is that we want to be prepared.
And so we are preparing for the IPO ended up delaying it just based on market conditions prepared on the secondary and so we will be prepared to go.
For year end, I think corbridge is doing very well and its business performance.
Its operation as a public company and then we have made enormous progress of getting it ready to be a standalone public company once we deconsolidation.
They're executing very well on the margin plan.
Again, Kevin will outline in detail on Friday, but they are able to execute on capital management now with share repurchases as well as our ordinary dividend and.
So we certainly want to continue to sell downs.
At a reasonable pace, but.
You know, it's just going to be subject to market conditions and where the businesses.
Peter I apologize I was not really focusing on the timing I was more interested on of what the precise percentage would be to see deconsolidation is it the second we dropped below 50.
Depending on board structure, but you know if we modify the board structure it would be below 50, but in the current board structure, we'd have to go below 45%.
Okay.
Yeah.
Thank you.
Thank you. Our next question comes from Alex Scott with Goldman Sachs. Your line is open.
Hi, good morning.
First one I had is on the capital deployment.
I think one of the most challenging things to to sort of model and forecast from the outside right now it's just.
How you'll go about deploying the proceeds from from a lot of the actions we've taken including the <unk>.
A separation of corbridge.
I was just interested if there's any updated thoughts I know in the past you guys have kind of given the share count range.
Any thoughts you can provide or.
Guidance as it relates to where the share count could go from here.
I think what we've outlined is still.
The base case, we ended up in the low seven hundreds in terms of our share count.
Sabre did a very good job of outlining the liquidity that we have in liquidity that will be coming in.
We have focused on four components.
And a very rigorous way of making sure that we have.
Capital and subsidiaries to to drive the growth in a market that we think is very.
Very favorable we increased our dividend this year and so we want to continue to focus on that.
Our leverage in the low twenty's and save and I. Both indicated we'll do some clean up.
On that because you know the impact of share repurchases you need to continue to still.
Retire debt and the main focus from liquidity is going to be on share repurchase and that will be.
Highly correlated to when you know we closed on run rate will.
We will be active in the market and in the third quarter.
And I really couldn't give you much more guidance on that other than we're really focused on the share repurchase in getting to that 600 to 650 million shares.
Yeah.
Got it.
Makes sense.
I guess follow up sort of in the same vein in terms of organic deployment.
I listened to the PMO comments, you're making and think about the volatility and how much better. It is and then the fact that you guys I think still have below average underwriting leverage.
At least when we sort of look at my premiums to surplus those kind of metrics.
Do you have the capacity to be able to fund. This this greater growth, whether it's in Lexington or some of your other businesses in general insurance.
Without using.
Yes, so much of the proceeds from the strategic actions.
We do and it's been a big focus for us, but do you want to expand on that a little bit.
Yes. Thanks, I would just note as I mentioned in my prepared comments that the risk based capital ratios in our U S pool are in the range of $4, 70% to 408%, which is well above our target range of 400 to 420 <unk>. So we have ample capacity within the general insurance business is today to support growth.
Okay.
Got it thank you.
Great. Thank you, we'll take one more question.
Thank you. Our next question comes from Michael Zaremski with BMO. Your line is open.
Hey, great good morning.
Question is about.
The.
Our remaining portfolio.
The sale about a pending in the crop business are there other.
What you did on the what you're doing on the personal line side are there other pieces of the portfolio that still need additional optimization or are we kind of.
Mostly through the the major actions.
I think we're through.
Most of the major actions, we have to focus more on on personal insurance and we have been.
Certainly the we spent a lot of time on the ultra high net worth business and the actions that we're taking there in terms of improving it and we will see that as we go to the back half of 'twenty three and then into 'twenty for Japan is a big focus for us.
And it's a terrific business.
One that has a terrific scale performs very well needs more.
Digital investment.
And we have such a wide distribution of agents.
That we can scale more products. So we will see some investment in Japan on digital workflow and digital interfacing with customers and we've been working through that over the past 12 to 18 months.
So I would expect to see.
Improved performance there and then also our global accident health business, which performs very well.
Mostly overseas and international but that's going to have investment and we would expect to see more growth and more profitability improvement there, but I don't it's not major it's more of just making strategic.
Investments in order to position the portfolio to be more advantageous. So those will be the areas of focus but after validus re we had a very active quarter in.
It certainly would not expect another one of those but we are going to continue to try to drive improvement throughout the portfolio.
Okay, Great and my follow up is switching gears thinking about.
Aig's long term kind of combined ratio I guess inclusive of other.
Expenses.
We're thinking longer term, you've done a great job improving the loss ratio.
We're clear that Theres still you know you have guidance on unexpected is coming down but would you say longer term you know most of the what's been shopped in the loss ratio and we should be thinking about overall.
Expenses is kind of getting you to the double digit ROE land sustainably or is there still loss ratio components such as maybe.
Reserves and whatnot.
Continue to improve overtime.
No I think youre thinking about the right way I mean, we've done an incredible job in terms of getting the portfolio that was in existence in 17, and 18 to where it is today.
We know that we're an outlier on the expense ratio that's a big part of what we're doing in the future operating model.
And we will start to show more and more evidence of that in the coming quarters and as we go into 2024 I did mentioned not to repeat the first part of the answer but I do think that there is loss ratio and combined ratio opportunity for improvement in personal insurance and we're heavily focused on that in terms of its balanced.
Across all of AIG, but.
When we look at the.
Improvement in <unk> expenses is going to be a big part of it and as we focus on.
Getting to our future operating model that scale.
And discipline around having an expense ratio thats more favorable will be a huge focus of this management team.
Thank you.
Thanks.
I want to thank everybody for joining us today I hope you have a great day.
Thank you for participating in today's conference. This does conclude the program and you may now disconnect everyone have a great day.
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