American International Group Inc (AIG) — Q3 2018 Transcript

Thank you, April. Before we get started this morning, I’d like to remind you that today’s presentation may contain forward-looking statements, which are based on management’s current expectations and are subject to uncertainty and changes in circumstances. Any forward-looking statements are not guarantees of future performance or events. Actual performance and events may differ possibly materially from such forward-looking statements. Factors that could cause this include the factors described in our first, second and third quarter 2018 Form 10-Q and our 2017 Form 10-K under Management’s Discussion and Analysis of Financial Conditions and Results of Operations and under Risk Factors. AIG is not under any obligation and expressly disclaims any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. Today’s presentation may contain non-GAAP financial measures. The reconciliation of such measures to the most comparable GAAP figures is included in the slides for today’s presentation and our financial supplement, both of which are available on our website. As a reminder, for this morning’s call, our Q&A session will have one question with one follow-up. Please get back into queue if you would like to ask additional questions. On this morning’s call, you’ll hear from our senior management team including CEO, Brian Duperreault; CFO, Sid Sankaran; CEO of GI, Peter Zaffino; GI’s Chief Actuary, Mark Lyons; and CEO of L&R, Kevin Hogan. At this time, I’d like to turn the call over to Brian.

Thank you, Liz, and good morning, everyone. Our third quarter results reflected volatility due to 14 global catastrophes, particularly the Japan typhoons. We continue to execute on our reinsurance strategy, one of our key initiatives, which I will cover in more detail and which Peter will also review in his remarks. Other actions we’re taking to improve our underwriting capabilities and profitability are taking hold, and we started to see some of the resulting benefits in our third quarter results. We continue to expect to deliver an underwriting profit including Accident Year Loss for General Insurance as we exit 2018. Over the course of the last year, Peter and his team have made significant progress in executing on our reinsurance strategy. And this work will continue as we approach the January 1 renewal season. So far this year, we’ve lowered our North American CAT cover attachment point from a per occurrence of $1.5 billion to an aggregate of $750 million and added an additional international cover. As you will hear from Peter in his remarks, AIG’s national market share in Japan is 6%, and in the area most impacted, it’s 10% on average. While our Japan reinsurance program was renewed in January 2018 maintaining its historical structure which included two separate towers for the commercial and personal insurance business, we have been working diligently throughout this year to get a single structure in place for 2019 to reduce our net exposure on both a frequency and severity basis. We are pleased with the contributions and balance that Validus brings to our business mix. The disciplined underwriting and risk approach that Validus takes was most evident this quarter in the estimated net CAT loss of approximately $200 million, which was in line with peers. Validus was neutral to our accident year results this quarter and remains on track to contribute approximately 1 point to a combined ratio improvement as we exit 2018. Our recent announcement of the pending acquisition of Glatfelter will provide further balance to General Insurance by improving our position in the programs market with the addition of one of the most respected firms in this space to our portfolio of businesses. The closing of this transaction is expected to occur next week. Turning to reserves, we welcome Mark Lyons to the team this summer, and he has hit the ground running in reviewing our actuarial processes and procedures. Net reserve additions of $170 million in the third quarter reflect the work Mark and his team performed relating to approximately 75% of our book. Year-to-date, net reserves development was flat. Peter will provide additional detail on General Insurance in his prepared remarks. And Mark is joining the call and will give you more color on the work he has done on General Insurance reserves. Life & Retirement delivered another solid quarter, notwithstanding challenging year-over-year comparisons that reflect the impact of annual assumption reviews. Underlying Return on Equity continued in double digits, and in particular our investments in businesses over the last few years are beginning to bear fruit with strong growth in Individual Retirement and life in particular. Sid will discuss the results of the third quarter actuarial review and Kevin will elaborate on the performance of this well-positioned business, which serves some of the world’s most important needs, the need for sources of savings, lifetime income, and protection. Our steps to reduce exposures on our Legacy book and to allocate capital more efficiently underscore our capital management discipline and focus on long-term shareholder value. The sale of 19.9% of Fortitude Re, formerly known as DSA Re, to the Carlyle Group is imminent and will free up capital as well as provide a platform for potential growth. Lastly, we have purchased shares and warrants totaling $1 billion through the third quarter of this year, including $350 million in the third quarter. We have $1.3 billion remaining in our authorization. Share repurchase remains a capital management tool that we will continue to deploy in addition to other uses of capital that will contribute to our goal of making AIG better than it has ever been. In conclusion, we are making progress towards positioning AIG for the long term. We continue to work deliberately and thoughtfully and with a sense of urgency to improve our core underwriting capabilities, reduce volatility, deliver an underwriting profit, including Accident Year Loss for General Insurance as we exit 2018 and position each of our businesses for long-term success. Now, I’ll turn it over to Sid, who’ll provide more detail on our third quarter financial results.

Thank you, Brian, and good morning, everyone. This morning, I’ll comment on our third quarter financial results, our capital and liquidity position, and provide an update on Fortitude Re and Validus. Turning to slide four. We reported an adjusted after tax loss of $0.34 per share. Book value per share, excluding AOCI, was $66.83; and adjusted book value per share, which excludes AOCI and Deferred Tax Asset, was $55.58 at quarter-end. Note that approximately $500 million of the reduction in book value is associated with an increase in the deferred gain on our adverse development cover, which will amortize back into earnings and book value over time. Overall, net investment income from our insurance operations including the Legacy insurance portfolios was $3.4 billion in the quarter or $9.9 billion year-to-date, which is in line with the $13 billion full-year guidance that we provided at the beginning of the year. We continue to make progress on our restructuring initiatives in the third quarter, most notably in General Insurance where general operating expenses declined 5% from the second quarter on an ex-Validus comparable basis. We continue to expect to achieve the full $450 million of annual run rate expense savings I referenced last quarter, as we enter 2019. General Insurance, Life and Retirement, and Legacy results were all impacted by various noteworthy items listed on page five. We report $1.6 billion of pre-tax catastrophe losses driven by multiple events, most significantly, Typhoons Jebi and Trami in Japan. We remain comfortable with our initial pre-tax losses in its for Hurricane Michael, which are between $300 million and $500 million. And this estimate will be included in our fourth quarter 2018 operating results. Given these events place us close to attaching North American catastrophe aggregate program and that our third quarter severe losses attach on our aggregate XOL severe loss cover, this reduces the risk of volatility in the fourth quarter. Peter will speak further about our catastrophe losses and reinsurance program in his remarks. Note that Legacy incurred approximately $57 million of CAT losses associated with runoff property policies in Japan. As a result, Legacy’s Return on Equity was below our long-term 3% to 5% expectations. Life and Retirement had a solid quarter with an adjusted Return on Equity of 11.2% inclusive of a $98 million charge associated with the annual assumptions review. This was largely driven by adjustments in Individual Retirement due to refinements in variable annuity withdrawal assumptions, additional reserves related to older universal life policies, and refinements to interest crediting to the Life Insurance segment. Note, these adjustments did not impact our assessment of profitability on new business written going forward or profitability of the core portfolio. We completed our third quarter detailed valuation reviews, and year-to-date net prior year reserve development was roughly flat while the quarter was adverse by $170 million in adjusted pre-tax operating income. Mark Lyons will comment further with additional insight into this quarter’s reserve review and actions taken. Our third quarter adjusted effective tax rate was roughly 28%, which reflects the beneficial impact of tax discrete items this quarter on the pre-tax loss. We expect our full-year 2018 adjusted effective tax rate to increase slightly to approximately 25%. This increase is primarily related to the impact of the third quarter catastrophic events on our full-year net income projections, combined with our current assumptions around the impact of the U.S. Tax Reform on our operations. Our balance sheet and free cash flow remain strong. As shown on slide six, parent liquidity at quarter-end was $4.5 billion. We continue to view the target level of liquidity at the holding company to be between $3 billion and $4 billion. Cash proceeds in the quarter included $1.6 billion of dividends from our insurance subsidiaries and tax sharing payments of approximately $200 million. Our base case for annual dividends and tax payments from our insurance subs remains approximately $6 billion, although we see potential upside for non-recurring flows. Our capital ratios for our Life and Retirement and Legacy companies are above target levels and our General Insurance companies are comfortably at target levels even after the third quarter catastrophes. Our strong balance sheet should continue to provide us ongoing financial flexibility. During the quarter, we deployed approximately $350 million towards the purchase of common shares at an average price of $53.05, leaving our remaining authorization at approximately $1.3 billion. Slide seven depicts our capital structure and ratings. We redeemed the Validus preferred shares totaling approximately $400 million in October. While our financial leverage ratio increased this quarter to 29.2%, reflecting the inclusion of Validus’ debt and the net loss for the period, we are deeming Validus junior subordinated debt in the fourth quarter through excess capital in the legal entity which will reduce the financial leverage ratio by 0.6 points. We expect to complete the sale of 19.9% of Fortitude Re to the Carlyle Group in the fourth quarter at which time, we will begin to report this minority share in non-controlling interests on the income statement, which will reduce Legacy’s contribution to AIG’s earnings per share. Finally, with respect to Validus, we completed the purchase accounting during the quarter. Of the $3 billion of cash consideration paid in excess of tangible net assets, $2 billion was attributed to goodwill and related intangibles; $440 million was attributed to the value of the distribution network acquired or VODA; $298 million was attributed to the value of business acquired or VOBA with $268 million of other indefinite-lived intangibles. The VOBA, which was established, approximated the amount of Validus’ deferred policy acquisition costs that were written off in purchase accounting. VOBA is being amortized consistent with the existing DAC one-off pattern of approximately two years and is included in adjusted pre-tax operating income and the underwriting ratios of the General Insurance segment. VODA will be amortized over 15 years or roughly $30 million per year and will be reported in our other operations segment as part of adjusted pre-tax operating income. To sum up, we continue to make progress towards delivering long-term profitability, reducing volatility, and maintaining a strong balance sheet and free cash flow profile. Now, I’d like to turn the call over to Peter.

Thank you, Sid, and good morning. Today, I will provide an update on General Insurance’s progress against our key 2018 priorities to improve underwriting performance and position the business for long-term success; the recently announced Glatfelter transaction, third quarter financial results, and our observations of current market conditions. During the quarter, we continued to execute on our initiatives to strengthen General Insurance’s core performance and achieve underwriting profitability. I am pleased with the progress we’re making to implement fundamental changes to our underwriting strategy and guidelines. Under Tom Bolt, we have built a Chief Underwriting Officer structure to support our underwriters across the globe. We’ve recently welcomed Mike Price as Deputy Chief Underwriting Officer and have expanded the role of Lixin Zeng, CEO of AlphaCat, who will work closely with Tom to bring Validus’ best practice in model development to AIG. As we have shared in the past, our underwriting strategy has prioritized the reduction of gross and net limits in property and casualty. We’ve reduced property’s gross limits from $2.5 billion to $750 million and its net limits from $611 million to $143 million. In a similar way, we’ve reduced casualty’s gross limits from $250 million to $100 million. With respect to underwriting governance, we’ve reviewed, validated, and reissued 100% of global underwriting authorities to align with our revised risk appetite and instituted a new underwriter scorecard that measures performance against profitability and other key metrics. As we reposition our portfolio, we are using reinsurance to support sustained profitable growth, while prudently managing gross and net exposures and protecting AIG’s balance sheet. As a clear example, we’ve recently expanded our existing $75 million excess of $25 million international casualty excess of loss treaty into a global program that now includes exposures across U.S. primary and excess casualty lines, which aligns the net retention to our overall risk appetite. We are currently in the marketplace to place a U.S. casualty quota share and preparing to enhance some of our existing covers during the January 1 renewal season, which we expect will yield additional benefits in 2019. Organizationally, we’ve continued to hire some of the industry’s best talent, particularly in leadership positions across the world with the primary focus on strengthening our underwriting capabilities. Since last quarter’s call, David McElroy has joined us as CEO of Lexington, and we’ve named Peter Bilsby of Talbot, as Head of our Global Specialty Business. Both David and Peter have already demonstrated the value they bring to the organization as we focus on improving our underwriting portfolio. I’m pleased to share that our new business leaders and the changes they are implementing have produced very positive feedback from our brokers, clients, and reinsurers, who recognize AIG as a better and more agile partner. We continue to work diligently to reduce general operating expenses and free-up capacity to invest in underwriting, actuarial, and claims. General Insurance’s third quarter general operating expenses declined 5% sequentially excluding Validus, and we remain on track to achieve our plan for 2018. Finally, rounding out our efforts to strategically reposition General Insurance, we look forward to closing on the pending acquisition of Glatfelter Insurance Group next week. Glatfelter has an excellent reputation as a highly selective program manager with world-class underwriting capabilities and in-house technology, a track record of underwriting profitability, as well as a talented leadership team. The addition of Glatfelter to AIG will accelerate the repositioning of our existing U.S. programs business where we have or are currently in the process of non-renewing over 50% of our current programs, in line with our primary objective of improving General Insurance’s core underwriting performance. Turning to General Insurance’s third quarter results. Slide nine details our overall performance and profitability metrics. Third quarter net premiums written declined 2%, excluding both FX and Validus compared to the prior year quarter, largely driven by the execution of revised underwriting strategies in North America Commercial, partially offset by growth in North America Personal Insurance. Validus contributed $440 million in net premiums written to our North America and international top line results. With respect to profitability, the third quarter combined ratio included $1.6 billion in net catastrophe losses. The breakdown of these losses is provided on slide 10. Validus’ net catastrophe losses were approximately $200 million, over half of which were related to Japan, a result that was within our modeled expectation and in line with peers. Our core insurance businesses excluding Validus and Legacy experienced net losses attributable to third quarter events of $748 million in Japan, emanating from five events, and $439 million in North America, emanating from eight events, with the majority of the remaining losses arising from prior quarter catastrophes. To provide further context on our business in Japan, AIG’s national market share is 6%; and in the Kansai region, home to Fuji Fire Marine and the location principally impacted by third quarter catastrophe events, our personal and commercial property market share is approximately 10% on average. As a result, our losses reflect both the unique severity and frequency of one of the worst catastrophe seasons for Japan in 25 years and AIG’s footprint as the largest foreign-based insurer in the country. As Brian noted, AIG’s Japan CAT reinsurance program was structured in two separate towers for our commercial and personal insurance businesses. In late 2017, we began working to improve the program and successfully reduced the attachment points for both towers during the January 1st, 2018 renewal. For the upcoming 2019 renewal, we plan to consolidate the program into a single tower to improve its effectiveness and further reduce our net exposure on a frequency and severity basis. In North America, Hurricane Florence was a sizable industry event, which represented $325 million of our third quarter catastrophe losses, excluding Validus. North America Personal Insurance’s accident year results include increased loss estimates for the California mudslides that occurred in the first quarter of 2018. The impacted territory is recovering from both the 2017 wildfires and the 2018 mudslides. AIG’s global claims teams have done a terrific job working with our insurers, often before the storms have made landfall and began inspecting and paying claims as soon as regional conditions allow. We have responded to clients representing over 84,000 commercial and personal insurance claims, the majority of which are in Japan, given the severe nature of the damages in that region. In the U.S., our claims teams have completed physical inspections for 100% of the sites impacted by Hurricane Florence, where access has been permitted. Shifting to accident year profitability. The adjusted accident year combined ratio was 99.4% and largely in line with our expectations. The adjusted accident year loss ratio of 63.6% reflects underlying portfolio management improvements of 240 basis points and a more moderate level of severe losses compared to the prior year quarter and the second quarter of 2018. The third quarter expense ratio was in line with second quarter results and our shift towards lower loss ratio and higher commission business in the North America Personal Insurance. The General Operating Expenses ratio does not yet reflect the expense reduction actions I mentioned earlier, which will begin to be evident in the fourth quarter and as we enter 2019. Moving to Validus. While the third quarter was challenging in terms of catastrophe losses, the business performed largely in line with our expectations. As a heavy writer of catastrophe exposed business, it is important to assess Validus’ results on a four-quarter basis. Since the closing of the acquisition, our teams have been working closely to drive value and we remain confident in the strong strategic contribution Validus brings to AIG. Slide 11 and 12 provide North America’s and International’s third quarter financial results. North America Commercial showed improvement across most lines, driven by business mix, rate, and risk selection. North America Personal Insurance had a solid quarter with an adjusted accident year loss ratio of 53.2%, and its acquisition ratio reflects the shifts we’re making to grow lower loss ratio business. In International Commercial, lower severe losses were partially offset by attritional loss activity in the UK and European specialty businesses. We expect that the growing momentum of our underwriting strategy will address attritional losses, particularly as we look to the January renewal season. International Personal Insurance continued to demonstrate profitability with an adjusted accident-year combined ratio of 97.2%. Moving to current market conditions, the third quarter rate changes have been relatively in line with our experience over the past few quarters. North America Commercial’s overall rates increased approximately 4%. We experienced admitted property pricing improvement in the mid-single-digit range, while E&S property rates improved in the low-double-digit range. North America casualty rates increased in the low to mid-single digits on average, depending on the line of business, attachment point, loss history, and other factors. Looking at the reinsurance market and the upcoming January 2019 renewals, we expect property CAT and retrocessional rates to be relatively flat on average for non-loss affected accounts. Rates on loss-affected accounts will be determined on a case-by-case basis including in Japan, where the majority of the renewals take place on April 1st. In casualty, we expect to continue to see terms and conditions tighten with rate change in line with loss cost trends. In closing, we continue to expect that the implementation of our underwriting and reinsurance strategies to manage growth in net lines. Actions to reduce expenses and strategic contributions from Validus and Glatfelter will enable us to improve our underwriting performance as we enter 2019. Our deliberate and targeted actions are positioning General Insurance for long-term success as we transform into a high-quality underwriting organization that is committed to delivering on its commitments to all of our stakeholders. And I’m very proud of what we’ve accomplished for the first nine months of the year. With that, I’ll turn the call over to Mark.

Thank you, Peter, and good morning all. I’d like to make some comments this morning, firstly, about some general observations I have since joining AIG earlier this summer; secondly, I’d like to provide more focused comments on loss reserves for the quarter; thirdly, I’d like to provide some clarity around the reserving numbers themselves; and lastly, I’ll get my views about the underwriting portfolio changes that have been implemented so far to date. Over the last four months, I’ve had the opportunity to meet with many AIG executives and P&L owners, understand their strategies, historical results, budgets, competitive positioning, and portfolio composition. I’ve always operated under the assumption that an understanding of the underlying business strategy is critical towards evaluating reserves, profitability, portfolio mix, and the like. Actuaries after all are charged with analyzing mountains of data and associated information to properly accomplish their job. It’s best for them to understand the market conditions that spawn the data being analyzed. I found here a talented group of professionals who are hardworking and care about the company. They’ve employed a host of appropriate actuarial methods that are suitable for the task in hand. This group has helped me review, analyze and conclude on 50% of the General Insurance loss reserves during the third quarter and also helped me review, challenge and understand the analyses done earlier this year. Overall then, I’ve got my fingerprints on approximately 75% of the reserves through third quarter. As for the fourth quarter, when the remaining 25% of reserves will be reviewed, the areas of focus will be U.S. Financial Lines, workers’ compensation buffer access policies, international casualty reserves other than the UK and Europe which were reviewed this quarter, and personal exposures. At this time, on a preliminary basis and before the detailed reviews are completed, I see no material red flags for these fourth quarter lines to give me undue concern. Of course, the work still has to be done, but that’s how I see it at this point. Lastly, I’ve discussed the reviewed lines through the third quarter with our outside independent actuaries as well to gain their insights and their views. Now, moving on to the third quarter area of focus. The only area where I felt material reserve strengthening was necessary was in the excess casualty portfolio. More specifically, the strengthening was predominantly centered on construction defect exposures through practice, project, and wrap policies, as well as through excess casualty division other than those that specifically target construction. The last several years, AIG has experienced the increased frequency of construction defect claims as well as an associated increased severity. Given the late nature of these reporting patterns, it was necessary to understand the historical and recent exposure characteristics of AIG's book. Beginning around 2009, AIG began to simultaneously reduce their construction defect exposure as well as zero away from residential risk in favor of commercial risk. The book also shrunk exposure by approximately 70% as measured by our level of premium between 2009 and 2017 as well as proportionately away from the heaviest construction defect states such as California. We project that most claims as yet unreported will emanate from commercial exposures rather than the residential exposures that make up most of our known recorded claims experience. We anticipate that commercial construction defect claim emergence will be fewer in number but be more complex in nature of a higher average cost per claim. And that higher average will be exacerbated by commercial insurers who, as a matter of course, purchased higher towers of coverage historically. Additionally, since AIG competed with capacity among other aspects, more limits per insured were exposed and this was the case for residential policies. Furthermore, an exhaustive internal analysis, outside claims audit in close collaboration with Anthony Vidovich who runs General Insurance Claims worldwide and his team, provided valuable insight into the claims history and patterns. Taking all these factors into consideration resulted in a $1.26 billion U.S. excess casualty reserve strengthening charge this quarter. This figure is gross of the adverse development cover or ADC with Berkshire Hathaway. There were other reserve adjustments this quarter in other lines of business that resulted in some partially beneficial net favorable development to the ADC, most notably from the Commercial Auto Line. Overall, given these pluses and minuses, the ADC experienced ceded adverse development of $723 million this quarter whereas AIG experienced net adverse development of $170 million, as Brian and Sid have already referenced. Both figures are highlighted on page three of the earnings release and on page 44 of the financial supplement. Now, I want to take a moment and make clear that these reserve charges result from underwriting policies that existed in the past. I do not view these as a carry forward issue into policies being written today under the revised underwriting strategy. For additional clarity, I want to walk you through the progression of some of these reserve changes. As stated, the reserve charge gross of the ADC for excess casualty was $1.26 billion adverse. The total charge across all lines of business for General Insurance, also on a gross of the ADC basis, was $950 million. This can be seen on page 44 of the financial supplement by adding the unfavorable developments and lives covered by ADC of $904 million and the unfavorable development from lives not covered by the ADC of $46 million. The net of ADC adverse development for AIG of $170 million has already been reduced by the quarterly ADC amortization of $57 million. Adding back in this amortization results in a net adverse development charge of $227 million, which implies the $723 million ADC adverse charge we just discussed. So, hopefully, that’s helped you instead of confusing you more. The ADC as of 9/30/2018 has nearly $7.7 billion of remaining at the 100% level; and given the 80% session, there is $6.1 billion of remaining limits still available to AIG. Lastly, from the perspective of the operating units, $170 million of net adverse development this quarter saw $134 million emanate from North America, mostly from personal line development on California Wildfires, another $38 million from international and a minor $2 million of favorable development from the Legacy portfolio. Shifting gears a bit. As part of Peter’s leadership team, I have been involved in the strategies of the various operating units and I have a fairly detailed view of the underwriting changes that have already been implemented. Peter has already commented on the massive reduction in the gross and net limits on the property, energy, and casualty side of the business. And I’ll just editorially add. When I say massive, on just a $468 million reduction in the vertical net on property and $150 million reduction in international casualty and roughly $80 million, those qualify as massive reductions in my view. As respects to other underwriting changes that have been implemented, clear underwriting appetites have been established. Clarity with distribution around these revised appetites is happening as we speak, and this will result in a targeted and higher quality submission as well. Thinner limits and higher attachment points and/or deductibles are being bound, a market proportional shift to smaller accounts has occurred and continues especially in the excess casualty area, a definitive strategy to increase the mid-excess proportion of the excess portfolio has also been implemented, clear ventilation rules exist between AIG entities on the same risk with Chief Underwriting Officer governance. Heightened underwriter accountability now dovetails clearly with revised authority; improved pricing tools and portfolio monitoring have been developed for again excess casualty in particular. Peter referred to the successful binding of the global casualty $75 million excess of $25 million excess of loss treaty, which shows the broad support the reinsurance market towards our significantly altered gross underwriting strategy. Lastly, for those of you who know me, I am generally considered a skeptic and a cynic when it comes to reported benefits of underwriting changes. My 40 years of property and casualty experience however tell me that these changes are substantive and will lead to improved loss ratios in any market. Now, with all this going on, this is really an exciting time to be at AIG. So, now, I’d like to turn the call over to Kevin.

Thank you, Mark, and good morning, everyone. As you can see on slide 15, Life & Retirement delivered solid results for the quarter. Excluding the adjustments from the annual assumption update that Sid discussed, adjusted pre-tax income of $811 million was in line with our expectations, along with an adjusted Return on Equity of approximately 13%. We continue to deploy capital to attractive opportunities, leveraging our broad product portfolio and channel strategy. As market conditions improved, we increased premiums and deposits across our annuity lines: fixed, index and variable. We grew Life Insurance sales, especially in our International Life business and increased premiums and deposits in Group Retirement. Higher general operating expenses reflect this new business growth, as well as our investments to strengthen our platforms and enhance our digital capabilities. If market conditions continue to improve, we are well-positioned to deploy more capital at or above our targeted economic returns, while recognizing we will incur additional expenses associated with new business growth. Now, I will briefly discuss results for each of our businesses. Turning to Individual Retirement on slide 16. Premiums and deposits grew by over 40% with particularly strong growth in fixed and indexed annuities. With these strong sales levels, we achieved positive net flows for the quarter, excluding retail mutual funds. Retail mutual funds, which is a comparatively small basis of our business, continued to face headwinds in the quarter and net flows may continue to be challenged for a period of time. Total assets under management and fee income for Individual Retirement remain strong. We continued our practice of active spread management, but as expected, we saw continued compression from our fixed annuity portfolio due to the roll off of higher yielding assets that are being reinvested at rates below the overall portfolio yields. Base net investment spread for variable and indexed annuities benefited from higher accretion and other investment income. After adjusting for these items, spread decreased for these products in line with our expectations. Turning to Group Retirement on slide 17. We increased premiums and deposits with solid periodic deposits and growth in individual product sales. Our confirmed new group acquisitions for this year are strong, although the timing of some of these planned conversions may shift to early next year. As I have mentioned on previous earnings calls, we will continue to see attrition of some large groups due to plan sponsors reducing the number of providers in their plans, M&A activity in the healthcare market and other competitive factors. Our surrenders were impacted this quarter by the loss of two large plans and the natural attrition of plans may impact surrenders in future quarters. We continue to believe that our differentiated model, which combines high-touch and high-tech service, positions us well as a leader in the growing not-for-profit defined contribution market. Similar to Individual Retirement, assets under management remained strong and we continue to actively manage spreads. Base net investment spread for Group Retirement benefited from accretion and other investment income. Adjusting for these items, spread was in line with the prior year quarter. While we are more optimistic than last quarter, forward rate conditions are still below our portfolio yields and spreads remain under pressure. Also, in a rising rate environment, we will need to maintain market competitiveness on the crediting rates for our in-force business. As we look forward across Individual and Group Retirement, absent significant changes in the overall rate environment, our current expectation is that our base net spreads will decline by approximately zero to 2 basis points per quarter. Let’s now move to Life Insurance on slide 18. We continue to make progress in our life business, and separating our operating models from Fortitude Re will allow us to further focus on our new business platform. Total premiums and deposits increased and we continue to grow sales in the U.S. and the UK with particularly strong new business growth in the UK. Lastly, our overall mortality experience was favorable to pricing assumptions in the prior year quarter. Turning to Institutional Markets on slide 19. We did not execute notable opportunistic transactions during the quarter. The market pipeline for pension risk transfer transactions over the next 12 to 18 months continues to be robust. Overall, our Institutional Markets business continues to be well-positioned to capitalize on available growth while remaining focused on achieving targeted economic returns. To close, our results for the quarter reflect our ongoing strategy to leverage our broad product expertise and our distribution strength to deploy capital to the most attractive opportunities, which we believe continues to position us well. Now, I would like to turn it back to Brian to open up the Q&A.

Thanks, Kevin. Let’s go to Q&A.

Hi. Good morning, everybody. My first question is around the CAT losses. So, I guess, the one thing I’m still struggling with after the preannouncement and in the quarter is, just get a better feel of the Accident Year Loss and maybe why CAT losses were at least year-to-date seem to be tracking well above the Accident Year Loss. And I understand that Japan losses were very significant. But, at the end of the day, I would have thought that these are items or the exposures were known or the market weighting in Japan was known well into this year. So, maybe any additional color you can offer on your thoughts on Accident Year Loss here; is the 4% to 4.5% still a reasonable number to think about?

Yes, sure. Yaron, I think it is. But I think Peter can give you a little bit more color.

Thanks, Brian, and thank you for the question. Let me start with the catastrophe losses. We reported $1.6 billion for the quarter. After excluding Legacy, Validus, and the $150 million in adjustments for mudslides, we arrive at about $1.2 billion. The loss in Japan, which is one of the worst catastrophe years in 25 years, stands at $750 million, with Jebi being the most significant. Based on current return periods, this is actually in line with our expectations. The Accident Year Loss and reinsurance were also as anticipated, although we experienced more frequency this quarter than in previous periods. In North America, we had around $440 million in losses. When you consider these figures together and the frequency observed this quarter, everything falls within our modeled expectations. Mark mentioned our strategy regarding property and gross limits. Over the past ten years, Accident Year Losses have generally been around 100 basis points lower than our actual catastrophe experience, which aligns well. We are reviewing total insured values, considering potential maximum losses, and exploring various reinsurance structures. Brian noted in his comments that we will reassess our approach to Japan. We anticipate reduced frequency and severity as we enter 2019. We are updating our models to reevaluate the Accident Year Losses, but they remain consistent with our long-term expectations.

My first question is about the underwriting profitability target. Brian reaffirmed the goal for the end of the year. As you consider inflation, could you discuss what you have factored in to reach that sub-100 target? Also, just to clarify, since that is a year-end target, do you expect General Insurance to achieve a sub-100 underlying plus Accident Year Loss in the first quarter of 2019?

Well, let me do the last piece first. Yes. That’s what I meant by entering into 2019. So, we expect the first quarter to be an underwriting profit. So, with respect to inflation, we’ve got Mark here. I think, Mark’s probably the best to answer that question.

Thank you, Brian. Hello, Elyse. As Peter mentioned, we have a 4% increase in weighted average pricing, which we see as a positive factor for margin expansion. This varies by line of business; averages can be misleading. Our loss cost trends, reflecting both frequency and severity, range from around zero in some lines to over 8% in others. For example, in the auto segment, we are currently observing rates around 8% which is a significant margin expansion. Most of our other lines, such as casualty, primary, and excess, are also contributing to margin expansion due to the rate changes we're experiencing. However, in some challenge areas like workers' compensation, the performance is more stable, and we might be losing a bit there. Regarding Directors and Officers insurance, we believe it’s close to flat, but some specific areas are improving, while sectors like Employment Practices Liability Insurance show marginal losses.

Can we talk a little bit about $148 million of California Wildfire losses a year later? That’s a lot of houses or a lot of businesses? What’s going on there?

I think Mark wanted to answer this question. This is great.

Hey, Josh. You see similar impacts whether it’s due to wildfires or mudslides, especially those from early 2018. Many high-value locations are difficult to access, with some situated on mountainsides. Regulatory challenges also contribute to delays in inspections. There's a significant demand for contractor services; not only are rates increasing, but the cost of equipment and other expenses are rising too. Overall, this explains a lot of the situation. Additionally, since many affected individuals are high net worth, there tend to be higher living expenses that accumulate, and it seems some individuals are utilizing those funds quite freely.

I would like to add that when we examine the mudslides from the current accident year, the impact was not significantly different, as Mark mentioned; there weren't many insureds involved. The main challenge was physically accessing the site, inspecting, and evaluating all the elements of the loss, along with considering the demand surge. Additionally, there were other factors that could not be evaluated in the first quarter. As the year progressed, we were able to gain a much clearer understanding of the situation.

Yes. I’d say that when I looked at our abilities to understand what the CATs are and price them properly, we’ve got a pretty good track record. I think this is a bit of an anomaly, and I think it’s just a unique situation with regard to this particular loss and the insureds. Next question?

My first question is on capital management. Given the stock is trading at 60% of book value, do you find it just more attractive to buy back your stock versus other deployments of your capital?

Well, I mentioned earlier, we bought $350 million of stock in the previous quarter; price was around 53. So, I’d say, this price is pretty compelling, let’s put it that way.

Can you provide insights on the strengthening of excess casualty reserves for 2016 and 2017? How significant was that amount? What rate do you believe is necessary for this line now? Additionally, can you discuss the impact of the current accident year adjustments in the third quarter? How much did that adversely influence the loss estimate for the third quarter?

Yes. There was a couple of factors on that; one of them relates to the area of focus, which was on construction defect and wraps, because you have to look at that by policy year and the losses that emerge. I mean, the work or the poor work has really already been done. So, we anticipate some of those accidents occurring from those policy years in ‘16, in ‘17, in ‘18. So that’s causative for some of the drift up, more so in ‘16 and ‘17, and more in ‘17 and ‘18, which you’d expect with a shrinking book on that. So, that’s a piece of it. And on the balance, which will also include ‘18, we’ve made some, I’ll call them market cycle adjustments, associated with where we think we are in the underwriting cycle. Excess casualty is a fairly volatile line of business and more extreme on the underwriting cycle. So, we made some adjustments in that respect. And I would say, lastly, and this is one of the key underwriting strategies of moving attachment points materially. There is some auto exposure coming in on a small set of lead umbrella policies that has some auto exposure, and we’re reflecting that. That would have been more ‘16 and ‘17 though.

Yes, I think Mark mentioned earlier that we believe we are actually seeing margin increases in the excess business at this point. Additionally, regarding construction, I believe Peter indicated that we are significantly reducing our appetite in that area.

Yes, basically just a quick follow-up there. Mark, was there any current year development in the underlying loss or the loss pick in the third quarter in the general insurance operations? And then, a follow-up to that, a lot of the discussion has been on changing limits profiles in reinsurance and all such things. I assume we are going to improve your guys' loss ratios going forward. When are we going to see that? Because, Brian, I think a lot of the discussion has been improving the expense ratio going into next year, not so much the loss ratio.

Let me address that first, and then I'll let Mark discuss the loss ratios for the third quarter. When can we expect to see changes? We believe some changes are already happening. Mark mentioned improvements in margins, and I believe we will achieve underwriting profit next year. Much of this will come from managed expenses. As I've stated before and I believe Mark agrees, we may feel changes are underway, but we want to see them reflected in actual numbers before making adjustments. Therefore, we will adopt a cautious approach to lowering loss ratios until we see concrete results. This does not mean we don't recognize that improvements are occurring, but we want to ensure we handle this correctly so that we don't need to increase reserves later due to premature optimism. It's important to understand the timing of these developments. However, we do anticipate seeing improvement, and we expect to achieve an underwriting profit in 2019, though it may not be substantial. From there, we can aim for greater profitability. Mark, would you like to elaborate on the third quarter?

Sure. Thank you. Brian, I think a more direct answer to your question is in the accident year with 90 basis points of loss ratio impact for the General Insurance level in total by all the causative factors I just mentioned, emanating from the one product line. But you have to look at it in two pieces. There was the current accident quarter, if you will, which was 30 basis points; then, there was 60 basis points of catch-up, the true-up the first two accident quarters of the year through the third quarter. So, 60 plus 30; and so, it’s 90 in total.

Yes. Most of my questions were answered. Just one last one. Selling off part of the Legacy business, can you give us some sense of the earnings impact that that will have?

Well, I think we’ve given you an idea that the Return on Equity is around 3% to 5%. And we’re going to take about 20% of that off. Sid, do you want to do more of the arithmetic than that? But, it’s a fairly simple arithmetic question.

Yes. I think, you are going to see for the full-year that we’ve had an ROE in that range. So, think of it as about 20% off the income is obviously the adjustment for the non-controlling interest.

In the third quarter, we had this CAT included, and removing it makes the calculations quite straightforward. Okay, next question?

I had a question for Kevin. You mentioned that the Return on Equity for the Life and Retirement business was in line with your expectations with the level of normalized earnings this quarter was well below where they were in the second quarter and the recent trend, despite benefits from a favorable equity market tailwind and good mortality. So just wondering, were there any other moving pieces to consider in the third quarter, and how should we think about the run rate earnings power for the business?

No. I mean, there were no other unusual moving pieces in the third quarter. I think looking past the actuarial review impact, in the current conditions and especially at the current level of premiums and deposits, which we are enjoying which are higher than we’ve seen for some time, I really consider the third quarter run rate to be within our range of expectations, and the returns in the low to mid double digits is pretty much within the range that we have previously suggested.

I had two questions. The first is what level of Return on Equity do you think AIG is capable of achieving, once you start seeing the improvement in property, casualty coming through, thinking about kind of 2020 and beyond? And then, the second question more near-term is, Sid, based on a 25% overall effective tax rate for 2018, that would seem to imply a fourth quarter 2018 tax rate around 30%. Am I am I right on that?

Let's address that last question. No, that's not correct. I believe Sid will provide you with further details. Regarding Return on Equity, we have a legacy figure that falls within the 3% to 5% range. However, I would say the core figure is likely to be above 9%, and the weighted average might settle around 8%. This ultimately depends on the trajectory of the legacy segment. Assuming it remains within our operations, that would be my expectation. Sid, would you like to discuss the tax rate?

Yes. Thank you, Brian. No. I think the 25%, remember, is simply intended to be as we look at, we’ve previously suggested that for full-year we’re looking at 21% to 22% excluding tax discrete. And so, as there is lower net income forecasted for the year, given the catastrophes, which would be taxed at 21%, we expect a higher expectation for the fourth quarter. And so, we concluded on our catch-up this quarter. So, it would be at that 25% level is our approximate expectation.

Any thoughts on the most recent earnings or the financial market volatility this month in relation to the Life Insurance businesses, both positive and negative?

As we’ve reported previously, our hedge program has performed and continues to perform within expectations. Sid, if you have anything else?

No. I think, as you know, we fully hedge for equity markets. And so, we haven’t seen anything in the recent market expectation around our variable annuity hedging program. Just a reminder that of course on the investment side, there are securities in terms of private equity hedge funds and fair value options that do have equity market sensitivity. But, obviously, we need to see how the full year plays out for the Life Insurance business and the investment side there.

Okay. Listen, I think we’re going to end the Q&A. I really do appreciate all your attention. And we had a lot of content, so we cut the Q&A a little shorter than normal. Thank you for your indulgence on that. Before I end the call, I want to recognize the hard work and tireless support that our employees around the world have provided to our customers and neighbors affected by the numerous global catastrophes. Our hearts go out to all of those who’ve been impacted. So, with that, thank you very much.