American International Group Inc (AIG) — Q2 2021 Transcript

Thank you, Nora. Today's remarks may contain forward-looking statements, including comments related to company performance, strategic priorities, including AIG's pursuit of a separation of its Life and Retirement business, business mix and market conditions, and the effects of COVID-19 on AIG. These statements are not guarantees of future performance or events and are based on management's current expectations. Actual performance and events may differ materially. Factors that could cause results to differ include the factors described in our first quarter 2021 report on Form 10-Q, our 2020 annual report on Form 10-K and other recent filings made with the SEC. AIG is not under any obligation and expressly disclaims any obligation to update any forward-looking statement, whether as a result of new information, future events, or otherwise. Additionally, some remarks may refer to non-GAAP financial measures. The reconciliation of such measures to the most comparable GAAP figures is included in our earnings release, financial supplement, and earnings presentation, all of which are available on our website at www.aig.com. With that, I will now turn the call over to Peter Zaffino, President and CEO of AIG.

Good morning, and thank you for joining us. We have a lot of topics to cover this morning as we made significant progress on many initiatives over the last 90 days. I will start today's remarks with an overview of AIG's outstanding consolidated financial results for the second quarter. Then I will review results for General Insurance and Life and Retirement in more detail. Following that, I will provide an update on the progress we're making on AIG 200 and the operational separation of Life and Retirement from AIG. Next, I will provide details on the strategic partnership we announced with Blackstone in July, which represents a significant milestone for AIG and a major step forward towards the IPO of Life and Retirement. And lastly, I will provide an update on our capital management strategy where our near-term priorities remain the same as what I outlined in the past: debt reduction, return of capital to shareholders in the form of share repurchases, and investment in organic growth. Mark will provide additional details on the quarter and we'll then take questions. Starting with our consolidated results, I'm pleased to report that AIG had an outstanding second quarter. We have sustained the significant momentum we had coming into 2021 through the first half of the year and delivered exceptional performance in General Insurance with strong top line growth and significant improvement in our combined ratios. Our pivot to growth and focus on demonstrating leadership in the marketplace accelerated through the second quarter as we continued to prioritize underwriting discipline, portfolio optimization, reducing volatility, and growing in segments where market conditions are favorable and fall within our risk appetite. We also saw very good results in our Life and Retirement business, primarily driven by improved investment performance. Life and Retirement's adjusted pretax income increased 26% year-over-year, and the business delivered a return on adjusted segment common equity of 16.4%. We continue to advance AIG 200 with the transformation remaining on track to deliver $1 billion in run rate savings across the company by the end of 2022 against a cost to achieve of $1.3 billion. And as you saw in our press release, our adjusted after-tax income in the second quarter was $1.52 per diluted share compared to $0.64 in the prior year quarter. Turning to our financial results. I'll start with General Insurance. Growth in net premiums written was very strong in the second quarter, accelerating from the first quarter and continuing the trend that began in 2020 as our heaviest remediation efforts were nearing completion. Net premiums written increased 24% year-over-year to $6.9 billion or approximately 20%, excluding foreign exchange. Growth was strong across both Global Commercial and Personal. Global Commercial net premiums written increased 13%, excluding foreign exchange, reflecting growth in areas with attractive risk-adjusted returns, improving renewal retentions and more than 25% increase in new business compared to the prior year quarter and overall rate increases of 13%. North America Commercial net premiums written increased 15%, excluding foreign exchange, including strong growth in Excess Casualty, Financial Lines, Retail Property, AIG Re and Lexington. New business increased 25% from the prior year quarter, led by Financial Lines and Lexington wholesale. And renewal retentions improved 300 basis points over the same period. It's worth noting that Lexington had its strongest quarter of new business since we fully repositioned its operating model to focus on wholesale distribution and Excess & Surplus Lines. This business has significant momentum, which we expect will continue for the foreseeable future. Shifting to International Commercial. Net premiums written grew 10%, excluding foreign exchange, primarily driven by Financial Lines across the U.K., EMEA, and Asia Pacific; global specialty, particularly marine and energy; and Talbot, our Lloyd's syndicate. New business increased 26% from the prior year period, led by Financial Lines, marine, energy, and Talbot. And renewal retentions increased by 500 basis points over the same period. It's important to emphasize that the growth we are achieving across Commercial is aligned with our risk appetite that we have been executing against over the past three years. We continue to prudently deploy limits, including with respect to new business, with an intense focus on risk aggregation. In addition to strong retention, our growth is being driven by exceptional new business, which in Global Commercial was $1 billion in the second quarter. With respect to Personal Insurance, as we discussed on last quarter's call, the unusually high growth in net premiums written was largely reflective of the creation of Syndicate 2019 in the second quarter of 2020 and the reinsurance cessions associated with creating that syndicate. Turning to rate. Momentum continued with overall Global Commercial rate increases of 13%. North America Commercial rate increases were 13% with the most notable improvements in Excess Casualty, which was up 20%; Lexington Casualty, which was up 19%; and Lexington wholesale property, which was up 15%. International Commercial rate increases were also 13%, driven by Financial Lines, which was up 21%; property, which was up 18%; and energy, which was up 16%. Across the global portfolio, the largest rate increases were in cyber, where rates were up almost 40% with the strongest rate increases in North America. We continue to carefully reduce cyber limits and are obtaining tighter terms and conditions to address increasing cyber loss trends, the rising threat associated with ransomware, and the systemic nature of cyber risk generally. Underwriting excellence, thoughtful risk selection, tighter terms and conditions, and improving rate adequacy have been core areas of focus as we transformed our portfolio. The General Insurance accident year combined ratio ex CAT improved for the 12th consecutive quarter, coming in at 91.1%, an improvement of 380 basis points from the second quarter of 2020 and an improvement of 990 basis points from the second quarter of 2018. This improvement was comprised of a 160 basis point improvement in the accident year loss ratio ex CAT and a 220 basis point improvement in the expense ratio as AIG 200 and the benefits of premium growth continued to contribute to profitability. Global Commercial achieved an accident year combined ratio ex CAT of 89.3%, an improvement of 500 basis points year-over-year. This is the best result Commercial has reported in the last 15 years. In Personal Insurance, the accident year combined ratio ex CAT was 95.1%, a 70 basis point improvement over the prior year quarter. Now just a quick comment on reinsurance purchased across General Insurance, where we continue to evolve our reinsurance program to reflect our significantly improved underlying portfolio. In the second quarter, we were very active in the market with 25 specific layers on a variety of treaties placed. Notably, in nearly every instance, we were able to enhance our terms and conditions and our placements were at equivalent or improved pricing in a reinsurance market that is experiencing tighter terms and conditions and rate increases. With respect to our property CAT program in particular, we took the opportunity in the second quarter to further reduce our per occurrence attachment point in North America through several buy-down CAT layers for peak zone exposures. Lastly, on General Insurance, we remain confident that we will achieve a sub-90% accident year combined ratio ex CAT by the end of 2022. Based on the progress that I've seen in our underwriting, the ongoing efforts in optimizing our portfolio, the terrific execution of AIG 200 and the significant momentum we've developed, I'm optimistic we'll get there sooner. As we move through the second half of the year and get further into AIG 200 in separation execution, we will provide further comment on our combined ratio expectations. Now let me turn to AIG Re, which oversees our global assumed reinsurance business. Net premiums written across all lines increased more than 30% in the second quarter compared to the prior year period. Writings were balanced across multiple lines of business with risk-adjusted returns and underwriting ratios improving across the portfolio. Highlights of AIG Re's second quarter results include the following. In U.S. property CAT, we saw rate improvements across all U.S. property business sectors. Increases range from mid-single-digits to upwards of 25%, depending on geography and loss-affected accounts. In Florida, Validus Re net limits at June 2021 were reduced by more than 40% in coordination with AlphaCat. Since AIG's acquisition of Validus Re in 2018, we reduced the overall limit in Florida by more than 65% or approximately $400 million of annual limit, demonstrating Validus Re's continued discipline and focus on volatility reduction. Further, Florida-specific firms now represent less than 2% of Validus Re's total net premiums written. Our focus remains on regional and nationwide firms in the U.S. as well as international diversification. In addition, in 2020 and through the second quarter of 2021, less than 25% of AIG Re's net premiums written came from property lines. Building on our retrocessional purchase on January 1st of worldwide aggregate protection, Validus Re secured further retrocessional protections in June. Specifically, we purchased more peak zone coverage for U.S. wind, Asia wind, and California earthquake for the 2021 season. Overall, we have substantially enhanced our portfolio despite heightened competition. We're very pleased with how AIG Re has evolved. We have exceptionally strong intermediary market support as well as strong client relationships, which have resulted in significant renewal retention and signings. In addition, we've upgraded the talent across the board and have broadened the skill sets of our leaders. We believe this business is much more prepared to assess and opportunistically respond to market conditions. Turning to Life and Retirement. This business once again delivered very strong results. Life and Retirement's broad leadership position across products and channels enabled us to take advantage of the significant rebound in retail annuity sales with total annuity sales up significantly across our entire annuity offering. Our strong sales resulted in positive Individual Retirement annuity net flows during the quarter. Group Retirement deposits were higher compared to first quarter 2021 levels. And second quarter 2021 new plan participant enrollments increased 20% year-over-year. As demonstrated regularly in recent quarters, our high-quality investment portfolio is well positioned to navigate uncertain environments. Our variable annuity hedging program has continued to perform as expected, providing downside protection during prolonged periods of volatility. Finally, the strategic partnership with Blackstone further positions Life and Retirement to expand its distribution relationships, enhance its product offerings, and the business will benefit from Blackstone's significant capabilities. Now let me turn to AIG 200, our global multiyear effort to position AIG for the long term. AIG 200 is continuing with a sense of urgency with all 10 operational programs deep into execution mode. We're 18 months into the transformation. And we have a clear execution path to $1 billion in run rate cost savings with $550 million already executed or contracted, $355 million of which has been recognized to date in our income statement. AIG 200 continues to build a strong foundation across the company and instill a culture of operational excellence. Turning to the separation of Life and Retirement. We made considerable progress in the second quarter with a focus on speed execution with minimal business disruption. Our separation management office has identified day one requirements for Life and Retirement to become a stand-alone company and multiple work streams are underway. This work includes aligning our investments unit with Life and Retirement and preparing for the Blackstone partnership to close. The speed with which our colleagues have moved would not have been possible without the foundational work that's been done as part of AIG 200. As I've discussed on prior calls, an IPO of up to 19.9% of Life and Retirement was our base case since we announced our intention to separate the business from AIG last October. And we continue to believe an IPO will maximize value for our stakeholders and position the business for additional value creation as a public company. I also noted on our last call that following our announcement, we received several credible inquiries from parties interested in purchasing a minority stake in Life and Retirement as well as our entire investment management group. One of those parties was Blackstone. We ultimately decided not to pursue the original proposed transactions because we determined that selling the entire investment management group was not in the long-term interest of Life and Retirement. And some of the proposals also contemplated significant reinsurance transactions ahead of an IPO, which we didn't believe would optimize the outcome for shareholders at this stage in the process. In June, Blackstone reengaged with us to determine if we could find a mutually beneficial way to partner that would further our goals for the separation of Life and Retirement. These discussions led to the announcement of the strategic partnership we entered into in mid-July. We continue to work with a sense of urgency towards an IPO of the Life and Retirement business. Following the 9.9% equity investment by Blackstone, the IPO will likely be the first quarter of 2022 event, subject to required regulatory approvals and market conditions. We previously viewed the fourth quarter of this year as the earliest an IPO would occur with the first quarter of 2022 as a more likely outcome. So our timeline is essentially unchanged even with the announced Blackstone transaction. Additionally, the gain on sale of Affordable Housing, coupled with other factors, provides us with the flexibility to sell down beyond 19.9% as we now expect to fully utilize our foreign tax credits in 2022. This development facilitated our partnership with Blackstone and, as a result, made it more compelling compared to structures we considered since our separation announcement last October. We believe that we are better positioned to accelerate operational separation. And as a result, Life and Retirement will be more comprehensively established as an independent company when the IPO occurs. Now let me provide additional detail on the Blackstone partnership, which represents a significant milestone for AIG and provides meaningful momentum for the IPO of Life and Retirement. As I mentioned, this partnership represents the culmination of discussions that took place over the last year on several strategic initiatives, and we view it as very beneficial for AIG and Blackstone. Blackstone's leadership has indicated for some time that insurance is a key strategic priority for their firm. And the investment Blackstone is making in our Life and Retirement business is the single largest corporate investment the firm has made in its 35-year history. And Life and Retirement is now Blackstone's single largest client. This substantial commitment by Blackstone highlights the strength of Life and Retirement's business, Blackstone's belief in the value of the investment, and it's a validation of Life and Retirement's market-leading position. Furthermore, Jon Gray, President and COO of Blackstone, was directly involved in the negotiations. He has been a great partner throughout and will join the Board of Directors of the IPO entity at the closing of the equity investment, which we expect to occur in September. Let me recap some of the terms of the transactions and how we're thinking about future capital structures for AIG and Life and Retirement as stand-alone businesses. Blackstone will acquire a 9.9% cornerstone equity stake in the holding company for AIG's Life and Retirement business for $2.2 billion in an all-cash transaction. The purchase price is equivalent to a multiple of 1.1x the target pro forma adjusted book value of $20.2 billion. The adjusted book value reflects the combined book value of our Life and Retirement business and a majority of our investments unit as well as the financing arrangements to be undertaken and the amounts to be paid from that entity to AIG just prior to the IPO. As we look to the permanent structure of the IPO entity, we will be raising debt at this entity, consistent with its ratings and peer leverage ratios. The new debt will be used to pay down AIG debt such that the debt stack at AIG and at the IPO entity will both be in line with each company's peers and what we view as the optimal debt-to-total capital ratio for each company. Life and Retirement will also enter into separately managed account agreements, or SMAs, with Blackstone, whereby Blackstone will manage $50 billion of specific asset classes with that amount growing to $92.5 billion over a 6-year period. Lastly, as I alluded to earlier, we sold certain Affordable Housing assets to Blackstone Real Estate Income Trust for $5.1 billion in an all-cash transaction, which is expected to close by the year-end 2021. Turning to capital management. We ended the second quarter with $7.2 billion of parent liquidity. The net proceeds from the Blackstone transactions resulted in additional liquidity of $6.2 billion to AIG by year-end 2021. Through the remainder of this year, we plan to pay down $2.5 billion of AIG debt and buy back at least $2 billion of common stock. As we announced in our press release, the AIG Board has authorized additional share repurchases, which, together with the remaining approximately $1 billion left on our prior authorization, brings our total stock buyback authorization to $6 billion. Together, these capital management actions demonstrate our commitment to delever and return capital to shareholders. In addition, the strength of our overall capital position leaves us with ample capacity to continue to invest in growth, particularly in General Insurance, where market conditions continue to be extremely favorable.

Thank you, Peter, and good morning, everyone. For the second quarter of 2021, AIG reported adjusted pretax income, or APTI, of $1.7 billion and adjusted after-tax income of $1.3 billion. We produced an annualized return on adjusted common equity of 10.5% for AIG, 12.3% for General Insurance and 16.4% for Life and Retirement. The annualized return on adjusted tangible common equity was 11.6% for the quarter. On a GAAP basis, AIG reported $91 million of net income with the principal difference between GAAP and adjusted after-tax income of $1.3 billion being the accounting treatment of Fortitude, net investment income and associated realized gains and losses. Before I move to General Insurance though, I'd like to add to Peter's remarks on the Blackstone SMA. This arrangement incorporates specific specialty asset classes comprised mostly of private credit, alternatives, and structured products, where Blackstone is a world leader in sourcing and origination and has a demonstrated track record of delivering yield uplift and not public fixed income securities. The fee structure is 30 basis points on the initial $50 billion of AUM, increasing to 45 basis points for the annual new AUM of $8.5 billion starting 4 quarters later as well as for the reinvested run-off AUM. Therefore, fees should rise from 30 basis points initially towards 43 basis points by the end of the initial 6-year contract term for Blackstone's share of the assets. For this part of our portfolio, it's fair to expect that fees will somewhat precede the benefits of the impact of enhanced origination and differentiated asset classes and recognition of related yield uplift. We believe this SMA arrangement is unique in that L&R maintains control over its overall asset allocation, asset-liability management, liquidity, and credit profile of the nature of individual investment structures. In addition, Life and Retirement has the opportunity to enhance overall investment management by focusing on improving efficiencies and asset classes that are not part of the SMA as well as optimizing performance across the whole portfolio. We believe the combination of these efficiencies, together with the Blackstone focus on maximizing the performance of SMA assets and growth opportunities on the overall AUM, should drive net yield uplift. Before leaving the Blackstone transaction, I want to note that a GAAP loss on sale is anticipated with a 9.9% equity purchase by Blackstone as well as with subsequent IPO sell-downs due to the inclusion of OCI and GAAP book value. Given that OCI in future periods is subject to market fluctuations, the impact cannot be fully estimated at this time. As respects Affordable Housing, note that the $5.1 billion purchase price translates to an approximate $3 billion after-tax gain on sale, which will benefit book value and provides approximately $4 billion of cash to parent with a minority portion held back in a regulated Life and Retirement entity to further strengthen an already historically strong RBC level. This transaction is expected to close by year-end 2021. Moving to General Insurance. Second quarter adjusted pretax income was $1.2 billion, up $1 billion year-over-year, primarily reflecting increased pretax underwriting income of over $800 million, along with $200 million and change of increased pretax net investment income, driven primarily by private equity returns. Catastrophe losses of $118 million were significantly lower this quarter compared to $674 million in the prior year quarter. Prior year development was $51 million favorable this quarter compared to favorable development of $74 million in the prior year quarter. This included $58 million of net favorable development in North America and $7 million of net unfavorable development in International, both of which reflect marginal changes in the underlying operations. As usual, there is net favorable amortization from the adverse development cover, which amounted to $49 million this quarter. It's important to put in context though the recent strength of the property and casualty market and how General Insurance has executed within this environment. As Peter mentioned in his remarks, the book has had nearly 3 turns at correction since 2018. Risk appetite and risk selection have been materially sharpened. Complementary and properly evolving reinsurance programs have been implemented. Certain lines and segments were exited or massively reduced. Clearer and broader distribution has been embraced. And Lexington has been stood up as a major E&S platform. All of this was accomplished while simultaneously achieving significant rate in excess of loss cost trends with materially better terms and conditions. These actions formed the foundation as to why General Insurance has shown material improvement in the underlying accident year ex CAT combined ratios in both the historically underperforming North America Commercial segment and the International Commercial segment as well. North America Commercial has shown a 620 basis point improvement in the accident year ex CAT combined ratio over the prior year quarter. The International Commercial segment has continued to improve profitability with a 370 basis points improvement compared to the prior year quarter. This shows demonstrable margin improvement stemming from the totality of the actions enumerated earlier. And this level of Global Commercial improvement is noteworthy as Global Commercial made up 71% of worldwide net premiums written through the first half of 2021. Additionally, the Global Commercial book is increasingly becoming a global specialty book comprised of below-frequency, high-severity coverages. As a result, General Insurance Commercial, although large and global in scope, is not a mere index of the market, but instead an underwriting company, where risk selection and business mix are important factors in achieving profitable growth while mitigating volatility. Turning to Personal Insurance. As we noted on our first quarter earnings call, our year-over-year net premium written comparison for the second quarter would improve, given the timing of the initial COVID-19 impact and the distortions from Syndicate 2019 being reflected also during the second quarter of 2020. Global Personal Lines net premiums written grew by approximately 45% or 41% on a constant dollar basis, aided by the Syndicate 2019 comparison. Elsewhere within the segment, the second quarter of 2021 North America Personal Insurance saw premiums in travel and warranty business increase. This was driven by a rebound in travel activity and increased consumer spending but not yet back to the pre-pandemic levels. Our outlook for net premiums written for the next 6 months in North America Personal Insurance is between $450 million and $500 million per quarter. We continue to anticipate earned margin expansion throughout 2021 and into 2022, resulting from AIG's favorable underwriting actions taken and global market conditions involving strong rate increases well above loss trend, improved terms and conditions and a more profitable, less volatile mix. Given the specific market dynamics of where we choose to play, we don't foresee any material slowing-down in achieved rate levels throughout the balance of the year. Now I'd like to comment a bit on inflation, which one needs to think about in terms of both economic and social inflation. Based on the Consumer Price Index and the Producer Price Index, headline inflation indicates an annualized rate of about 5.5% to 7.5%, which has accelerated since March. Some components of the indices have become worrisome, such as used cars and trucks being up about 45% and energy commodities being north of 40%. But medical care services, whose impact stretches across most casualty, auto, workers' compensation and excess placements, although higher, are much more tame than headline inflation would indicate with physician services up about 4% recently and hospital services up about 2.5%. Costs involving labor, materials, construction and related services are up and will impact property coverages and CAT claim costs in the near term. These indications demonstrate that the inflationary impact on any given insurer is a direct function of the products and the mix they write and where they play within an insurance program. Social inflation, however, is much more of a U.S.-centric phenomenon, driven by a highly litigious culture. Social inflation also has correlations to social change initiatives, including income inequality and changing sentiments towards business, to name a few. Being further away from risk though is a meaningful inflation counter. And AIG's General Insurance has taken strong preemptive action in that regard by minimizing lead umbrellas in favor of higher positions within insurance programs. For example, our Excess Casualty average attachment points for national and corporate U.S. accounts have increased approximately 3.5x and 5.5x, respectively, since 2018. This significantly increased distance from attaching is a key overall portfolio benefit. Taken all together, a U.S. view towards a total inflation rate of 4% to 5% is arguably reasonable for the near to medium term. Our second quarter rate increases, together with our view of pricing for the rest of the year, provide continued margin in excess of this loss cost trend. Now turning to Life and Retirement. When compared with the prior year, favorable equity markets drove higher alternative investment returns, principally higher private equity returns, which reflect the impact of the 1 quarter lag on the period. Life Insurance continues to reflect the COVID-19-related mortality provision that has dropped relative to the prior quarters. We estimate our exposure to the population is approximately $65 million to $75 million per 100,000 population deaths. Mortality, however, exclusive of COVID-19, continues to be favorable compared to pricing assumptions. Within Individual Retirement, excluding the Retail Mutual Fund business, net flows were positive for the quarter and favorable by over $1.2 billion when compared with the second quarter of 2020, led by Index Annuities rebounding to be higher by approximately $700 million with Variable Annuity net flow being about $365 million stronger year-over-year. Group Retirement premiums and deposits were up with net flows being relatively flat while also experiencing an improved surrender rate sequentially. The Life business has seen consistent premiums and lower lapse surrender rates over the last 4 quarters than prior. And for Institutional Markets, premiums and deposits were up compared to the prior year and sequentially. GIC issuance was also higher both sequentially and year-over-year. And we executed several large pension risk transfer transactions during the quarter. The pipeline for pension risk transfer opportunities, both direct and through reinsurance, remain very strong in both the U.S. and in the U.K. We continue to actively manage the impacts from the low interest rate and tighter credit spread environment. And our earlier provided range for expected annual spread compression has not changed as our base investment spreads for the second quarter were within our annual 8 to 16 point guidance. Further, new business margins generally remain within our targets at current new money returns due to active product management and a disciplined pricing approach. Lastly, post June 30, we closed on the sale of our Retail Mutual Fund operation. As you are aware, Retail Mutual Funds has contributed negative net flows over the last 2 years, and the drag from this will now cease. Moving to Other Operations. The adjusted pretax loss was $610 million, inclusive of $94 million from consolidation and elimination entries, which principally reflect adjustments offsetting investment returns in the subsidiaries, which are then eliminated at Other Operations. Before consolidations and eliminations, the adjusted pretax loss was $516 million, $184 million worse than the second quarter of 2020. But that quarter included 2 months of Fortitude Re results of $96 million. In addition, during the second quarter of 2021, we also increased prior year legacy loss reserves by a net $65 million, driven mostly by Blackboard exposures. And we increased our incentive program accrual to reflect the strong performance year-to-date, whereas in 2020, we began adjusting our incentive program accrual in the third quarter. After applying these adjustments, the comparison is actually favorable year-over-year. Shifting to investments. Overall net investment income on an APTI basis was $3.2 billion, virtually flat from the second quarter of 2020. But again, adjusting the second quarter of 2020 for Fortitude net investment income over that 2-month period, this quarter's net investment income was $362 million higher than the prior year, reflecting strong private equity returns at an annualized 27% return rate for the quarter and hedge fund results at a 21% annualized return rate for the quarter, along with stable interest and dividend income. Turning to the balance sheet. At June 30, book value per common share was $76.73, up 7% from 1 year ago. Adjusted book value per common share was $60.07 per share, up 7.5% from 1 year ago, driven primarily by strong operating performance. And adjusted tangible book value per common share was $54.24, up 8.1% from a year ago. As Peter noted, at quarter end, AIG parent liquidity was $7.2 billion. During the second quarter, we made a $354 million prepayment to the U.S. Treasury in connection with certain tax settlement agreements emanating from the pre-2007 period as well as completed debt tenders for an aggregate purchase price of $359 million. Our debt leverage at June 30 was 27%, even down 140 basis points from the end of 2020 and down 360 basis points from June 30, 1 year ago. Our primary operating subsidiaries remain profitable and well capitalized. For General Insurance, we estimate the U.S. pool fleet risk-based capital ratio for the second quarter to be between 460% and 470% and Life and Retirement is estimated to be between 440% and 450%, both above our target ranges. Lastly, as respects tax, I want to reiterate that the remaining net operating loss or NOL portion of AIG's DTA at the time of deconsolidating L&R for tax purposes will still be available to offset future General Insurance and/or AIG taxable income through their natural expiration. As of June 30, that portion of the DTA totaled $6.3 billion and is available to offset up to $30 billion of taxable income. Upon tax deconsolidation, what will cease is the ability to utilize up to 35% of Life Insurance company income against NOLs or any remaining FTC.

With that, I will now turn it back over to Peter. Thank you, Mark. Operator, we'll go to question and answer.

My first question, Peter, you said you guys could get to that sub-90% margin target within General Insurance perhaps sooner than expected. I was hoping you could expand on that just in terms of time frame. And when you make that comment, are you assuming stable pricing and inflation kind of remains around 4% to 5% based off of what Mark said into 2022?

Thanks, Elyse. I've talked about it in the past that there are many components that are going to drive improved combined ratio. The first is the absolute underwriting performance, and we're seeing that come through in what Mark covered in his script in terms of severity, attritional losses, and just less volatility. In addition, we have seen strong top line growth and believe that's in the Commercial side. We're in that market now and see that continuing. We need less reinsurance that we once needed because of the makeup of the portfolio. So those are all tailwinds. And then in addition to that, you have AIG 200, which I gave some numbers on my prepared remarks that we have real tailwinds there. Not only are we going to continue to have a clear sight in the overall path to $1 billion, but it's starting to earn through in the income statement and just our overall expense discipline. So we don't heavily rely on one component. There are 4 to 5 that drive it. And no, it does not require us to be in the same rate environment. I mean you have to be in the range on the social inflation and loss cost inflation. But we watch that all the time and believe that we have a lot of momentum. And I'll give more guidance specifically in the next couple of quarters. I mean, the momentum I've seen and the excellent job that Dave McElroy and the entire leadership team have done in General Insurance is a real differentiator. And the momentum they have is tremendous. So it just leaves me with a lot of optimism.

Great. And then my second question, in terms of Life and Retirement, now that you did this initial sale with Blackstone and you emphasized using most of the foreign tax credits, so it sounds like tax considerations won't impact the amount of L&R that you guys bring to the public market. Do you have a sense of how much you're going to bring on to the public market? And then in terms of the proceeds, do you guys get there? Since you're paying down $2.5 billion of debt now, will the majority of the proceeds from future transactions just be used for buyback and organic growth?

Thank you, Elyse. Regarding the timing, we are aiming for a first quarter IPO. We are focused on the operational separation and expect to finalize our partnership with Blackstone in July. Over the next six months, our main priority is to prepare Life and Retirement for a successful IPO. Additionally, we need to consider the regulatory landscape and market conditions, as these factors will influence our actions. We have the flexibility to adjust based on market conditions, but we won't proceed with an IPO if it only involves a small percentage; we will aim for a larger offering. We will keep you updated on the size and timing as the year progresses and we make headway. Mark, would you like to add anything about capital management and debt?

The main point we wanted to make is that we have removed the constraint that was previously in place. Instead of focusing on the specifics of the sizing, which is highly dependent on market conditions, it's important to highlight our newfound ability to operate without such limitations.

First question on the Blackstone partnership. Can you give us a sense of what the internal expenses are that are comparable to the 30 and 45 basis points that will constitute the fees?

Yes. Meyer, thank you for the question. I'll turn it over to Mark in a second. But I think that when we looked at the partnership with Blackstone, there were a variety of factors that went into it, certainly them making a commitment on the equity investment, making certain that Life and Retirement still maintained its authority and ability to shape the investments with Blackstone. So we contained that. A lot of the assets that we have or will transfer are classes that they have exceptional track records on, and so we're working through that. We do believe that the AUM will grow over time with Life and Retirement. And so this will become a smaller percentage, and the base case was that not only with the Blackstone partnership that our overall business model will evolve to be more efficient over time. But Mark, maybe you could fill in a couple of the details of that.

Yes. As Peter mentioned, the level of these specialty assets tends to be more labor-intensive and typically falls on the higher end of the scale when considering rates. This aligns with our expectations. Within our internal structures, we also anticipate increasing costs as we move up to the overall asset class categories that they are experiencing. There is some discrepancy, but the cost accounting perspective may not be as clear as it seems. However, we are confident that the value we will derive from this will more than compensate for those costs.

Okay. Understood. Second question, I guess, this is probably for Mark. I know the expense ratios in North American Personal have been distorted up until the second quarter because of, I guess, depressed travel insurance and the syndicate. Is the second quarter expense ratio run rate, are those representative of what we should see going forward?

Let me start with a general statement. I believe Peter has attempted an approach that we may have mentioned in previous calls. You should view the combined ratio improvements in the Commercial segment as being driven by both loss and expense ratios, while for the Personal Line segment, it's primarily influenced by the expense ratio. We have observed increased stability in the loss ratios there, so you can expect that to continue. Overall, I would anticipate that the expense ratio in North America Personal will keep improving.

One thing I want to add, Meyer, regarding what Mark just mentioned is that the high net worth sector is undergoing significant changes in key areas. We anticipate ongoing shifts in the Excess & Surplus Lines as more alternatives emerge. The new business in the second quarter was nearly evenly divided between admitted and non-admitted. This is something we will keep an eye on. While there are no major trends expected to deviate significantly from the guidance we've provided, there are changes in the business that we intend to leverage with our market-leading position. Our goal is to address client needs while also adjusting our portfolio to reduce volatility.

I was hoping you could talk a little bit more about the asset management agreement with Blackstone and how you see this affecting Life and Retirement's NII over the next couple of years. It sounds like you expect some initial dilution. But when should this turn and start being accretive to NII? And also, will any of the assets they manage be used to support new business? And could this help you be even more competitive in your fixed indexed annuity offerings?

Yes. Mark, why don't you start and then turn it over to Kevin in terms of talking about product?

Thank you, Peter. I think Kevin will also provide some insights. Regarding asset management, Erik, the increase will occur later than the fees, as you mentioned. Additionally, considering the $50 billion of assets under management, we are estimating that it takes about seven years for that to roll over. As this happens, we expect the fees to increase from 30 to 45 basis points. The annual contribution of $8.5 million will elevate our total to 92.5% at 45 basis points. This reflects the trajectory I mentioned earlier. Consequently, you will see a net yield increase as investments are made. By the end of the first year, 85% of the original assets will still be in place, which accounts for the delay. However, we anticipate that this will change more quickly than expected. Crucially, L&R has full control over this process, including the management of liquidity, ratings, asset distribution, and capital decisions.

Yes. Thank you. So Erik, I think what's important is to keep in mind that this is not a change in our portfolio strategy. This is an enhancement of our portfolio strategy. Blackstone has tremendous origination capability. And we believe that their ability to originate in these asset classes exceeds our current ability. And in addition to that, they have a broader range of assets within the subclasses. And the combination of their ability to originate with more capacity and also the breadth of their asset classes, we believe, will allow us to create new products to support transactions. Our intention will be to work together to innovate strategies that will allow us to grow faster. We do not think of the balance sheet as static. We think about a growing balance sheet. And so rather than focusing just on the yield of this part of the portfolio, I think about the overall portfolio strategy. So again, this is not a change in our strategy. This is an enhancement of it, and that's how we think about it.

And then can you help us think about the level of new public expenses that Life and Retirement will have? And will these be able to be offset by savings elsewhere? And then how should we think about the level of expenses that are running through other ops that will remain with the parent, kind of post-separation?

Erik, let me handle that one. The guidance that I provided in the past and we'll stay with is that there are meaningful savings for Life and Retirement within AIG 200. That will be tailwinds to them. We had said around $125 million, Life and Retirement achieved some of that. But there's a big number left for us in terms of earning through that over the next 18 months. So think about roughly $100 million of AIG 200 benefits. Then there are allocations and parent service fees that go over to Life and Retirement today that will either dissipate or we'll still have those services as we transition for Life and Retirement to become a public company. So that's in the range of $75-plus million. So Kevin has a decent amount to invest towards building out the public company. And we think with other initiatives for expense savings through separation office that it should largely be neutral to Life and Retirement. And we think the synergies that exist within the remaining company, AIG, that it's neutral to beneficial. And we'll give more guidance as we get closer to the end of the year when we've done more work in the separation office.

Yes. Looking at the General Insurance book and mostly focused on Commercial, when we look at the gap in net written versus net earned, I mean, it's clearly there's a runway, just given where the pricing is today for the continued improvement in the underlying loss ratios there. How are you thinking about rate adequacy, the need to continue to push for rate versus just growing and dialing back the rate that you're getting now? Like how are you balancing these two dynamics?

Thank you very much for the question. Mark put a lot of comments in his prepared remarks. We watch loss cost inflation and margin on everything we do in terms of portfolio optimization. That's really what I refer to when I talk about how do we position General Insurance, particularly on the Commercial side, to have an optimized portfolio. We've had several years of rate increases. We're building margin. And some specific lines of business have been getting more rate than others and they're the ones that need it. But it's something that Dave McElroy and the entire team spend every day thinking about and believe that there is absolute runway to continue to develop margin. But Dave, do you want to talk a little bit about how you're approaching it in some of the different segments of the business that you're focused on?

Thank you, Peter and Phil. It’s important to ensure that rate increases are aligned with everything else we are doing in the portfolio. Over the last three years, we have focused heavily on risk selection, terms and conditions, attachment points, and account exposures. If you fixate on a single rate increase figure to define your book, you might ultimately face adverse selection. It's essential to consider the broader context. For instance, even if I secured a 10% rate increase on a contractor in New York, the complexities of local labor laws might render that increase ineffective. The situation is similar to commercial auto, where we have seen rate increases for eight years without resolving the underlying issues. Thus, a rate increase can sometimes be misleading. We have approached this with a thorough understanding, recognizing that our large upper middle-market account book demands higher rates due to its complexity, which we believe is sustainable as we move into the latter part of the year. We anticipate being able to manage the expected inflation in loss costs, even though there has been some moderation in pricing related to account characteristics. However, this moderation still occurs against the backdrop of rising loss cost trends. In reviewing my dispersion charts, while we don’t see significant outliers exceeding 30%, there’s a noticeable concentration of accounts with increases ranging from 5% to 30%, reflecting the exposure. We are also in a multi-year phase of re-underwriting and influencing the market. If we look at the compounding in Excess Casualty or primary D&O over time, those numbers have increased significantly since late 2018. However, it’s not a complete solution; for example, trying to write investment banking E&O, even with a 90% rate, may still present challenges. Nevertheless, it's a good indicator of the progress we've made. Additionally, we experienced considerable new business this quarter, as noted in previous calls, priced under an elevated rate structure. Business that we could have written two or three years ago is now seeing increases of 30% to 40%, contributing to our recent success as we transition from remediation to a proactive stance. We are capitalizing on AIG's strengths, particularly in multinational claims and complexity, leading to our strongest new business performance in some time. This all ties back to our consistent approach to technical rate increases across the business.

Yes. That's very thorough. Look, maybe a quicker one...

I see that there is an IPO contingency in the Blackstone transaction. Is that just a timing thing? Or is the IPO contingency also considering a pricing floor for minority IPO proceeds or a minimum equity stake size?

Thanks, Tracy. No, the 9.9% is predicated on a strategic partnership that starts to accelerate all the things that we want to do to set Life and Retirement up to be a public company. And we're really focused on getting that done within the first quarter and making sure that the organization is set up to do that. And again, there's regulatory and market considerations that we'll always look at. But those are really the bigger ones than tying really what the cornerstone investor has brought to the table versus the eventual IPO.

Okay. Yes, I was just referring to some fine print in your 8-K that if the IPO didn't happen, there were some recourse. So I didn't know if there was something else that I should also be considering.

No.

Okay. Perfect. Look, anyone could trade growth for margin expansion, but you're at a spot where you're doing both. And I guess, the only place where I don't have visibility is your loss pick. So can you contextualize how your current accident year loss picks have been tracking maybe relative to last year and your 5-year average?

Mark, do you want to cover that?

Sure. I want to highlight a couple of important points. While we are demonstrating significant margin improvement both quarter-over-quarter and year-over-year, we believe we are being conservative in our assessment. As I mentioned in previous calls, there have been many changes over the past three years, including shifts in the fundamental channels through which we generate business. We feel confident that we have accurately addressed these changes. It's important to acknowledge that achieving perfection is unlikely, which adds a little risk margin to each of the recent accident years. Overall, we are optimistic about the improvement trajectory and the sources of that improvement, ensuring we have an appropriate risk margin associated with our bookings. I hope this information is helpful.

Yes. Thanks, Mark. And I want to just thank everyone for joining us today. Before we end the call, I want to thank our colleagues around the world for what they've accomplished over the last six months, especially considering the challenges that have been presented in work remote environments. We have a talented, hardworking colleague base that's executing on multiple complex initiatives simultaneously, which I think makes us very unique, very proud of the team, remains very focused on ensuring quality in everything that we do and delivering significant value to all of our stakeholders. Have a great day.