American International Group Inc (AIG) — Q3 2021 Transcript

Thank you, Jake. Today's remarks may contain forward-looking statements, including comments related to company performance, strategic priorities, including AIG's pursuit of separation of its Life and Retirement business, business mix and market conditions, and the effects of COVID-19 on AIG. These statements are not guarantees of future performance or events and are based on management's current expectations. Actual performance and events may differ materially. Factors that could cause results to differ include factors described in our third quarter 2021 report on Form 10-Q, our 2020 annual report on Form 10-K, and other recent filings made with the SEC. AIG is under no obligation and expressly disclaims any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. Additionally, some remarks may refer to non-GAAP financial measures. The reconciliation of such measures to the most comparable GAAP figures is included in our earnings release, financial supplement, and earnings presentation, all of which are available on our website, www.aig.com. With that, I would now like to turn the call over to Peter Zaffino, President and CEO of AIG.

Good morning, and thank you for joining us today to review our third quarter results. I'm pleased to report that AIG had another outstanding quarter as we continue to build momentum and execute on our strategic priorities. We continue to drive underwriting excellence across our portfolio. We're executing on AIG 200 to instill operational excellence in everything we do. We are continuing to work on the separation of Life and Retirement from AIG. And we're demonstrating an ongoing commitment to thoughtful capital management. I will start my remarks with an overview of our consolidated financial results for the third quarter. I will then review our results for General Insurance, where we continue to demonstrate market leadership in solving risk issues for clients while delivering improved underwriting profitability and more consistent results. I'll also comment on certain market dynamics, particularly in the property market, as well as recent CAT activity and related reinsurance considerations as we approach year-end. Next, I'll review results from our Life and Retirement business, which we continue to prepare to be a stand-alone company. I will also provide an update on the considerable progress we're making on the operational separation of Life and Retirement from AIG and our strong execution of AIG 200. I will then review capital management, where our near-term priorities remain unchanged from those I have outlined in the past: debt reduction, return of capital to shareholders, investment in our business through organic growth and operational improvements. Finally, I will conclude with our recently announced senior executive changes that further position AIG for the long term. These appointments were possible due to the strong bench of internal talent and significantly augment the leadership team across our company. I will then turn the call over to Mark, who will provide more detail on our financial results, and then we'll take your questions. Starting with our consolidated results. As I said, AIG had another outstanding quarter, continuing the terrific trends we've experienced throughout 2021. Against the backdrop of a very active CAT season and the persistent and ongoing global pandemic, our global team of colleagues continue to perform at an incredibly high level, delivering value to our clients, policyholders and distribution partners. Adjusted after-tax income in the third quarter was $0.97 per diluted share compared to $0.81 in the prior year quarter. This result was driven by significant improvement in profitability in General Insurance, very good results in Life and Retirement, continued expense discipline and savings from AIG 200 and executing on our capital management strategy. In General Insurance, Global Commercial drove strong top line growth. And we were especially pleased with our adjusted accident year combined ratio, which improved 280 basis points year-over-year to 90.5%. These excellent results in General Insurance validate the strategy we've been executing on to vastly improve the quality of our portfolio and build a top-performing culture of disciplined underwriting. One data point that I believe demonstrates the incredible progress we have made is our accident year combined ratio for the first 9 months of 2021, which was 97.7%. That's including CATs. This represents a 770 basis point improvement year-over-year, with 600 of that improvement coming from the loss ratio and 170 from the expense ratio. In Life and Retirement, we again had solid results primarily driven by improved investment performance and increased call and tender income. This business delivered a return on adjusted segment common equity of 12.2% for the third quarter and 14.3% for the first 9 months of the year. And we recently achieved an important milestone in the separation process by closing the sale of a 9.9% equity stake in Life and Retirement to Blackstone for $2.2 billion in cash. We continue to prepare the business for an IPO in 2022, and we'll begin moving certain assets under management to Blackstone. We ended the third quarter with $5.3 billion in parent liquidity after redeeming $1.5 billion in debt outstanding and completing $1.1 billion in share repurchases. Year-to-date, we have reduced financial debt outstanding by $3.4 billion and have returned $2.5 billion to shareholders through share repurchases and dividends. We expect to redeem or repurchase an additional $1 billion of debt in the fourth quarter and to repurchase a minimum of $900 million of common stock through year-end to complete the $2 billion of stock repurchase we announced on our last call. Through these actions, we've made clear our continuing commitment to remain active and thoughtful about capital management. Now let me provide more detail on our business results in the third quarter. I will start with General Insurance, where, as I mentioned earlier, growth in net premiums written continued to be very strong, and we achieved our 13th consecutive quarter of improvement in the adjusted accident year combined ratio. Adjusting for foreign exchange, net premiums written increased 10% year-over-year to $6.6 billion. This growth was driven by Global Commercial, which increased 15%, with Personal Insurance flat for the quarter. Growth in Commercial was balanced between North America and International, with North America increasing 18% and International increasing 12%. Growth in North America Commercial was driven by Excess Casualty, which increased over 50%; Lexington Wholesale, which continued to show leadership in the E&S market and grew Property and Casualty by over 30%; Financial Lines, which increased over 20%; and Crop Risk Services, which grew more than 50% driven by increased commodity prices. In International Commercial, Financial Lines grew 25%, Talbot had over 15% growth, and Liability had over 10% growth. In addition, gross new business in Global Commercial grew 40% year-over-year to over $1 billion. In North America, new business growth was more than 50%, and in International, it was more than 25%. North America new business was strongest in Lexington, Financial Lines, and Retail Property. International new business came mostly from Financial Lines and our Specialty businesses. We also had very strong retention in our in-force portfolio, with North America improving retention by 200 basis points and International improving retention by 700 basis points. Turning to rate. Strong momentum continued with overall Global Commercial rate increases of 12%. In many cases, this is the third year where we have achieved double-digit rate increases in our portfolio. North America Commercial's overall 11% rate increases were balanced across the portfolio and led by Excess Casualty, which increased over 15%; Financial Lines, which also increased over 15%; and Canada, where rates increased by 17%, representing the 10th consecutive quarter of double-digit rate increases. International Commercial rate increases were 13% driven by EMEA, excluding Specialty, which increased by 22%; U.K., excluding Specialty, which increased 21%; Financial Lines, which increased 24%; and Energy, which was up 14%, its 11th consecutive quarter of double-digit rate increases. Turning to Global Personal Insurance. We had a solid quarter that reflected a modest rebound in net premiums written in Travel and Warranty, offset by results in the Private Client Group due to reinsurance cessions related to Syndicate 2019 and nonrenewals in peak zones. Shifting to underwriting profitability. As I noted earlier, General Insurance's accident year combined ratio ex CAT was 90.5%. The third quarter saw a 150 basis point improvement in the accident year loss ratio ex CAT and a 130 basis point improvement in the expense ratio, all of which came from the GOE ratio. These results were driven by our improved portfolio mix, achieving rate in excess of loss cost trends, continued expense discipline and benefits from AIG 200. Global Commercial achieved an impressive accident year combined ratio ex CATs of 88.9%, an improvement of 290 basis points year-over-year and the second consecutive quarter with a sub-90% combined ratio result. The accident year combined ratio ex CAT for North America Commercial and International Commercial were 90.5% and 86.8%, respectively, an improvement of 370 basis points and 210 basis points. In Global Personal Insurance, the accident year combined ratio ex CATs was 94.2%, an improvement of 220 basis points year-over-year driven by improvement in the expense ratio. Given the significant progress we have made to improve our combined ratios and our view that the momentum we have will continue for the foreseeable future, we now expect to achieve a sub-90% accident year combined ratio ex CAT for full year 2022. After 3 years of significant underwriting margin improvement, we believe that the sub-90% accident year combined ratio ex CAT is something that not only will be achieved for full year 2022, but that there will continue to be runway for further improvement in future years. Turning to CATs. As I said earlier, the third quarter was very active, with current industry estimates ranging between $45 billion and $55 billion globally. We reported approximately $625 million of net global CAT losses with approximately $530 million in Commercial. The largest impacts were from Hurricane Ida and flooding in Europe, where we saw net CAT losses of approximately $400 million and $190 million, respectively. We have put significant management focus into our reinsurance program, which continues to perform exceptionally well to reduce volatility, including strategic purchases for wind that we made in the second quarter. Reinsurance recoveries in our International per occurrence, Private Client Group per occurrence, and other discrete reinsurance programs also reduced volatility in the third quarter. We expect any fourth quarter CAT losses to be limited given that we are close to attaching on our North America aggregate cover and our aggregate cover for the rest of the world, excluding Japan. We have each and every loss deductibles of $75 million for North America wind, $50 million for North America earthquake and $25 million for all other North America perils and $20 million for international. Our worldwide retention has approximately $175 million remaining before attaching in the aggregate, which would essentially be for Japan CAT. Taking a step back for a moment, I want to acknowledge the frequency and severity of natural catastrophes in recent years. Since 2012 and excluding COVID, there have been 10 CATs with losses exceeding $10 billion. And 9 of those 10 occurred in 2017 through the third quarter of this year. Average CAT losses over the last 5 years have been $114 billion, up 30% from the 10-year average and up 40% from the 15-year average. And through 2021, catastrophe losses exceed $100 billion, and we're already at $90 billion through the third quarter. This will be the fourth year in the last 5 years in which natural catastrophes have exceeded this threshold. We've never seen consistent CAT losses at this level, and as an industry, we need to acknowledge that frequency and severity have changed dramatically as a result of climate change and other factors. I'll make 3 observations. First, while CAT models tended to trend acceptable over the last 20 years, that has not been the case over the last 5 years. Second, over the last 5 years, on average, models have been 20% to 30% below the expected value at the lower return periods. If you add in wildfire, those numbers dramatically increase. Third, industry losses compared to model losses at the low end of the curve have been deficient and need rate adjustments to reflect the significant increase in frequency in CATs. To address these issues, at AIG, we've invested heavily in our CAT research team to develop our own view of risk in this new environment. As a result of this work, we made frequency and severity adjustments for wildfire, U.S. wind, storm surge, flood as well as numerous other perils in international. We will continue to leverage new scientific studies, improvements in vendor model work, and our own claims data to calibrate our views on risk over time to ensure we're appropriately pricing CAT risks. Across our portfolio, our strategy and primary focus has been and will continue to be to deliver risk solutions that meet our clients' needs while aligning within our risk appetite, which takes into consideration terms and conditions, strategic deployment of limits and a recognition of increased frequency and severity. The significant focus that we've been applying to the critical work we've been doing is showing through in our financial results as you've seen over the course of 2021 with improving combined ratios, both including and excluding CATs. Now turning to Life and Retirement. Earnings continue to be strong, and in the third quarter were supported by stable equity markets, modestly improving interest rates relative to the second quarter, and significant call and tender income. Adjusted pretax income in the third quarter was approximately $875 million. Individual Retirement, excluding Retail Mutual Funds, which we sold in the third quarter, maintained its upward trajectory with 27% growth in sales year-over-year. Our largest retail product, Index Annuity, was up 50% compared to the prior year quarter. Group Retirement collectively grew deposits 3% with new group acquisitions ahead of the prior year, but below a robust second quarter. Kevin and his team continued to actively manage the impacts from a low interest rate and tighter credit spreads environment. And their earlier provided range for expected annual spread compression has not changed as base investment spreads for the third quarter were within the annual 8 to 16 basis points guidance. With respect to the operational separation of Life and Retirement, we continue to make considerable progress on a number of fronts. Our goal is to deliver a clean separation with minimal business disruption and emphasis on speed execution, operational efficiency, and thoughtful talent allocation. We have many work streams in execution mode, including designing a target operating model that will position Life and Retirement to be a successful stand-alone public company, separating IT systems, data centers, software applications, real estate, and material vendor contracts, and determining where transition services will be required and minimizing their duration with clear exit plans. We continue to expect an IPO to occur in the first quarter of 2022 or potentially in the second quarter, subject to regulatory approvals and market conditions. As I mentioned on our last call, due to the sale of our affordable housing portfolio and the execution of certain tax strategies, we are no longer constrained in terms of how much of Life and Retirement we can sell on an IPO. Having said that, we currently expect to retain a greater than 50% interest immediately following the IPO and to continue to consolidate Life and Retirement's financial statements until such time as we fall below the 50% ownership threshold. As we plan for the full separation of Life and Retirement, the timing of further secondary offerings will be based on market conditions and other relevant factors over time. With respect to AIG 200, we continue to advance this program and remain 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. $660 million of run rate savings are already executed or contracted, with approximately $400 million recognized to date in our income statement. As with the underwriting turnaround, which created a culture of underwriting excellence, AIG 200 is creating a culture of operational excellence that is becoming the way we work across AIG. Before turning the call over to Mark, I'd like to take a moment to discuss the senior leadership changes we announced last week. Having made significant progress during the first 9 months of 2021 across our strategic priorities and in light of the momentum we have heading towards the end of the year, this was an ideal time to make these appointments. I'll start with Mark, who will step into a newly created role, Global Chief Actuary and Head of Portfolio Management for AIG on January 1. As you all know, over the last 3 years, Mark has played a critical role in the repositioning of AIG. He originally joined AIG in 2018 as our Chief Actuary, and this new role will get him back into the core of our business, driving portfolio improvement, growth, and prudent decision-making by providing guidance on important performance metrics within our risk appetite and evolving our reinsurance program. Shane Fitzsimons will take over for Mark as Chief Financial Officer on January 1. Shane joined AIG in 2019, and his strong leadership helped accelerate aspects of AIG 200 and instill discipline and rigor around our finance transformation, strategic planning, budgeting, and forecasting processes. He has a strong financial and accounting background having worked at GE for over 20 years in many senior finance roles, including as Head of FP&A and Chief Financial Officer of GE's international operations. Shane has already begun working with Mark on a transition plan, and we've shifted his AIG 200 and shared services responsibility to other senior leaders. We also announced that Elias Habayeb has been named Chief Financial Officer of Life and Retirement. Elias has been with AIG for over 15 years and was most recently our Deputy CFO and Principal Accounting Officer for AIG as well as the CFO for General Insurance. Elias has deep expertise about AIG, and his transition to Life and Retirement will be seamless as he is well known to that management team, the investments team that is now part of Life and Retirement, our regulators, rating agencies, and many other stakeholders. Overall, I am very pleased with our team, our third quarter results, and the tremendous progress we're making on many fronts across AIG. With that, I'll turn the call over to Mark.

Thank you, Peter, and good morning to everyone. I am very satisfied with our strong adjusted earnings this quarter of $0.97 per share and our profitable General Insurance combined ratio for the quarter, including catastrophes, at 99.7%. The year-over-year improvement in adjusted earnings per share was driven by a 750 basis point reduction in the combined ratio, robust growth in net premiums written and earned, and a related 280 basis point decrease in the underlying accident year combined ratio excluding catastrophes. Life and Retirement also reported a strong adjusted profit of $877 million, along with a healthy adjusted return on equity of 12.2%. The quarter's strong operating earnings and consistent investment performance led to a 3% sequential increase in adjusted book value per share and nearly a 9% increase compared to last year. Our balance sheet remains strong, and our liquidity position was a highlight during the period as we made continued progress on our leverage goals, achieving a GAAP debt leverage reduction of 90 basis points sequentially and 350 basis points from last year to 26.1%, accomplished through retained earnings and liability management. Turning to General Insurance, our successful growth to date, along with reduced volatility and effective cycle management, boosts our confidence in achieving our goal of a sub-90% accident year combined ratio excluding catastrophes for the full year 2022. Discussing current market conditions, the markets where we operate remain strong and resilient. AIG's global platform continues to experience rate increases internationally, contributing to our overall improvement compared to more U.S.-focused competitors. International Commercial rates initially lagged those in North America, but since 2021, as Peter mentioned, they are now surpassing North American rate increases in several areas. These rate hikes outpace loss cost trends globally, potentially leading to further margin expansion. Specifically, over the 3-year period from 2019 to 2021, several product lines in North America that achieved cumulative rate increases of 100% or more include Excess Casualty, both admitted and non-admitted, Property Lines, and Financial Lines. We expect this momentum to continue supporting earned margin expansion in the near future. In the current inflationary context, it's vital to recognize that products with inflation-sensitive exposure bases, such as sales, receipts, and payroll, function as inflation mitigants and may be subject to additional audit premiums as the economy rebounds. Last quarter, we provided commentary on U.S. portfolio loss cost trends of 4% to 5%, which we still believe to be valid, though it now leans towards the upper end based on recent data. Currently, our U.S. loss cost trends range from approximately 3.5% to 10%, depending on the line of business. From a pricing standpoint, we are incorporating these short-term inflationary impacts into our rating and portfolio strategies without lowering any business line loss cost trends, as lighter claims reporting might mislead us due to COVID-19's societal effects. Moreover, all our North America Commercial Lines loss cost trends, apart from workers' compensation, are significantly lower than the corresponding rate increases we are witnessing. This discussion regarding combined rate increases and loss cost trends leads us to current year loss ratio indicators and resultant bookings. The favorable market environment we are currently benefitting from, along with significant underwriting changes at AIG, has positively impacted other portfolio aspects that influence loss ratios. In numerous lines and business classes, the extent to which cumulative rate changes have exceeded cumulative loss cost trends is considerable, resulting in significantly lowered loss ratio indicators between 2018 and 2021. Unfortunately, most discussions with external stakeholders tend to conclude here. However, this is merely the beginning of the conversation. Other factors that can materially favorably impact the profitability of underlying businesses include: one, terms and conditions which can be as influential as pricing; two, a more balanced submission flow across the quality spectrum of insured risks, enhancing rate adequacy and mitigating adverse selection; three, strategic deployment of capacity across different layers of insurance towers, fostering preferred positioning and ongoing client retention; and four, reinsurance strategies that help mitigate volatility and losses. Even if these nuances lead to modest beneficial impacts on the loss ratio, they will further contribute to driving down the indicated loss ratio for 2021 beyond what is signaled solely by rate versus loss trends. These developments are tangible and occurring. So why do insurers book product lines at this implied level of profitability? There are at least four reasons: first, insurers assume the diverse risks of others, with each year presenting different exposures making on-level projections imperfect; second, most policies are written on an occurrence basis, which means that policy language can be contested for years or decades; third, many lines of business are extremely volatile, rendering perfect underwriting of each insured improbable; and fourth, overestimating an initial loss ratio only increases the risk of future unfavorable developments. Thus, prudence is essential in setting initial loss ratio picks for most commercial lines. Regarding our third-quarter reserve review, we evaluated approximately $42 billion of reserves this quarter, with the year-to-date total nearing 90% of carried pre-ADC reserves. I would like to outline the results of our quarterly reserve analysis, which resulted in minimal net changes, affirming our overall reserve strength. On a pre-ADC basis, prior year development was $153 million favorable, and on a post-ADC basis, it was $3 million favorable. Adjusting for the $47 million ADC amortization on the deferred gain, the total was $50 million favorable. This indicates that our reserves continue to be adequate, with favorable and unfavorable developments balanced across business lines, leading to a neutral alignment of reserves. Before moving to segment-specific results, I want to clarify certain impacts that influenced this quarter's reserve analysis. You should consider this quarter's reserve examination as conducting all scheduled product reviews while adjusting for two unrelated effects from a significant subrogation recovery tied to the 2017 and 2018 California wildfires. The first of these impacts was a direct reduction of $326 million from North America Personal Insurance reserves due to the subrogation recoveries. Consequently, we also had to reverse a previously recorded 2018 accident year reinsurance recovery in North America Commercial Insurance amounting to $206 million, as the attachment point was no longer breached once the subrogation recoveries were acknowledged. These two subrogation recovery impacts resulted in a net $120 million of favorable development. Excluding their effects reclassifies the total General Insurance prior year development to $70 million unfavorable instead of the previously stated $50 million favorable development. This framework offers a clearer picture of the underlying reserve movements this quarter. The $70 million global unfavorable development arises from $85 million unfavorable global CAT losses coupled with $50 million favorable global non-CAT or attritional losses. The $85 million unfavorable in CAT results from minor adjustments concerning several prior year events from 2019 and 2020. The $15 million non-CAT favorable loss stems from $255 million unfavorable in Global Commercial balanced against $270 million of favorable development, mainly from short-tail personal lines for accident year 2020, largely in our International portfolio. Consistent with our reserving approach, we were cautious in responding to this $270 million favorable indication until the accident year had time to stabilize. North America Commercial showed an unfavorable development of $112 million, driven primarily by Financial Lines which saw $400 million of strengthening, while workers' compensation and other lines contributed favorable developments of approximately $200 million and around $100 million, respectively, primarily from accident years prior to 2015. North America Financial Lines experienced challenges due to primary public directors and officers liability, especially in complex national accounts and in the private non-profit sector, the majority of which originated from accident years between 2016 and 2018. International Commercial presented $143 million of unfavorable development, mainly from strengthening in D&O and professional indemnity Financial Lines, largely in the U.K. and Europe, with more varied accident year impacts. Favorable developments in this segment were mainly from our Specialty businesses at around $110 million, along with an additional $50 million of positive outcomes from various lines and regions. As noted by Peter, the changes we made to our underwriting practices and risk appetite in recent years, combined with robust market conditions, are now being reflected in our financial outcomes. U.S. Financial Lines, in particular, have significantly reduced our exposure to securities class actions through careful underwriting and risk selection. This change is starkly illustrated by the percentage of SCAs for which U.S. operations provided coverage. In 2017, we covered 67 insurers linked to SCAs, representing 42% of all U.S. federal securities class actions that year. In contrast, by 2020, this dropped to just 18%, and in the first nine months of 2021, it stood at only 15 insurers or 14%. This is crucial because historically, approximately 60% to 70% of public D&O claims arise from SCAs. The North America private non-profit D&O book has undergone a significant transformation, with a policy retention rate of just 15% from 2018 to 2021, a period marked by nearly a 130% cumulative rate increase. This strategic shift towards more balanced middle market risks instead of billion-dollar revenue large private companies and major non-profit entities will greatly enhance profitability. International Financial Lines has undertaken similar underwriting actions with comparable 3-year cumulative rate increases and has established a unified global underwriting authority regarding U.S.-listed D&O exposures through cooperation with our U.S. Chief Underwriting Office. In conclusion, our reserving philosophy remains consistent; we will continue to be prudent and conservative. This is reflected in our cautious recognition of improvements in attritional losses from shorter-tail lines originating from accident year 2020 and our judicious decision to strengthen Financial Line reserves, despite facing interpretive challenges due to a difficult claims landscape, changes in our internal claims processes, and potential impacts of COVID-19 on claim reporting patterns. All these underwriting measures taken over the past few years enhance our confidence in our reserve position across both historical and current accident years. Moving on to Life and Retirement, the year-to-date return on equity stands at an impressive 14.3%, up from 12.8% in the same period last year. During the third quarter, adjusted profit before tax increased due to higher net investment income and fee income, although it was partially offset by a $166 million pre-tax unfavorable impact from the annual actuarial assumption update, which negatively affected return on equity by about 250 basis points on an annual basis and earnings per share by $0.15. The primary source of this impact was in the Individual Retirement division due to fixed annuity spread compression. Life Insurance also recorded a slight increase in COVID-19-related mortality provisions this quarter, but our sensitivity analysis indicated a potential exposure of $65 million to $75 million per 100,000 COVID-related deaths, aligning well with reported deaths in the U.S. during the third quarter. Mortality rates excluding COVID-19 were also slightly elevated during this period. Within Individual Retirement, excluding the Retail Mutual Fund segment, net flows were a positive $250 million this quarter, a significant recovery from the $110 million in net outflows in the prior year’s quarter, largely reflecting the rebound from the broad industry-wide sales disruptions caused by COVID-19, which we see as a strong recovery sign. Prior sensitivities related to yield and equity market movements impacting adjusted profit continue to hold true, and new business margins generally remain within our targets at current new money returns due to effective product management and disciplined pricing. Regarding other operations, the adjusted pretax loss before consolidations and eliminations was $370 million, slightly higher than the prior quarter, mainly driven by increased corporate expenses due to performance-based employee compensation, though this was partially countered by higher investment income and lower corporate interest expenses resulting from year-to-date debt redemption activities. Turning to our investment performance, overall net investment income on an adjusted profit before tax basis was $3.3 billion, up $78 million from last year, mostly due to higher private equity gains. By business segment, Life and Retirement saw the most benefit from asset growth and strong private equity returns, while General Insurance's net investment income declined approximately 6% year-over-year due to ongoing yield compression and underperformance in hedge fund allocations. Moreover, General Insurance has a significantly higher percentage allocation to private equity and hedge funds, which is likely to be adjusted moving forward. Regarding share count, our average total diluted shares outstanding for the quarter were 864 million, and we repurchased around 20 million shares. The end-of-period share count for book value per share purposes stood at about 836 million and is expected to be around 820 million by year-end 2021, contingent upon share price performance, following Peter's comments on additional share repurchases. Finally, our primary operating subsidiaries are remaining profitable and well-capitalized, with the U.S. pool risk-based capital ratio for General Insurance estimated at between 450% and 460% for the third quarter, and the Life and Retirement U.S. fleet ratio estimated at between 440% and 450%, both exceeding our target ranges. With that, I will now hand the call back to Peter.

Great, Mark, thank you. Operator, we'll take our first question.

My first question is for you, Peter. When you mentioned that you expect to hit below 90% for the full year 2022 and noted that there would be potential for further improvement in the coming years, I'm trying to understand your assumptions regarding both pricing and loss trends as we look ahead to next year and even further into the future.

Thank you, Elyse. I want to address why we are confident about achieving a sub-90% combined ratio. Looking at the last two quarters, we see continuous improvement from our core businesses at an accelerated pace. The leadership team, including Dave McElroy and Shane, who will soon transition into the CFO role, has executed exceptionally well. Our confidence stems from strong fundamentals; we are seeing top-line growth and pricing that exceeds loss costs, which is contributing to margin development and a better expense ratio. We're also achieving higher policy retention and a robust influx of new business, which adds to our relevance in the market each quarter. Our assumptions are conservative, and we don't need to rely on a static pricing environment. However, we will maintain a disciplined approach to profitability and ensure that our capital deployment is aligned with risk-adjusted margins. While I don't want to provide specific guidance, I strongly believe we have the momentum heading into next year, as we are successfully executing our strategic goals and delivering positive results.

Okay. For my follow-up, you mentioned that the Life IPO is expected to occur in the first quarter, possibly in the second quarter of next year. How should we view capital return? I know you have outlined a plan for this year, but what should we expect regarding capital return next year? Is it dependent on the timing and the size of the market launch for the Life and Retirement business and the IPO?

Well, we've been trying to give a lot of guidance in terms of what we intend to do in the short run because of a number of moving pieces. We have strong liquidity, which is what we had talked about in the prepared remarks. Some of the big moving pieces as we get to the back half of the year will be the affordable housing proceeds, the closing of Blackstone, the fact that we're going to continue to execute on debt reduction, share repurchases. And I think as we get to the fourth quarter call and we have a better line of sight in terms of what we think the actual timing will be on the IPO plus liquidity at year-end, we'll give further guidance as we move forward. But for now, I think we're just going to stick with what we've outlined, and we continue to execute on that each quarter.

I guess first question for Peter. You laid out a pretty conservative case for the frequency and severity of catastrophes. How should we think about what Validus Re is interested in writing in that context?

Thanks, Meyer. Well, I mean, Validus Re, since we've acquired them, we have not increased risk appetite. And as a matter of fact, they take a very conservative position in terms of their nets. And I think that was evidenced in the quarter in terms of our overall CAT number. That's number one. I think Chris Schaper and the team have done a terrific job of diversification on the portfolio. So we've reduced our aggregates in peak zones, such as Florida, significantly from the original portfolio that we acquired. We're getting better balance in the portfolio across the world, and that's with multiple perils and multiple geographies. So I think that, that continuation of that strategy of getting balanced diversification and making sure that we're not taking significant nets in the portfolio and making sure that we're driving risk-adjusted returns as we look to 1/1 is going to be very important for Validus Re. But we've been executing on that throughout the year.

Okay. Understood. And then as a follow-up for Mark, is there any way of describing the strong case for conservatism in the current accident year loss picks? I'm wondering how you're thinking about that level of conservatism in recent accident years as of September 30.

Go ahead, Mark.

Yes, thanks. Yes, thank you, Peter. Thanks, Meyer. Actually, we feel very good about accident year '20 and '21, I think the core of your question. And I think I've made a pretty strong case for the changes that have occurred, which I think have been, I think, pretty enormous on it. And interestingly, overall, I'm confident not just in the current accident years. I'm confident where we are now on the reserve position even and for Financial Lines and in total across the book. And you could kind of say, well, why are you confident? And there's a lot of reasons for it. I mean when Dave McElroy and his group got in here, they started making some pretty material underwriting changes step by step. And I think it's just endemic upon the analysis of it for not only the past years but the current year is to focus in on exactly what those changes were and then go back with a very tight eye to look at it. And that's exactly what we did. But the transformation of the book, as I itemized on private not-for-profit and public, has been enormous. So I feel very strongly about where we are on those recent years.

Mark, since you mentioned Financial Lines, I think maybe Dave can provide some context as to some of the changes and how he's looking at the portfolio. So Dave, maybe you can add to what Mark commented on.

Thank you, Peter and Mark. I understand it's a crucial topic, but the Financial Lines portfolio has undergone significant changes at AIG. Throughout my 40-year career, I have been deeply involved with P&L and Financial Lines, witnessing various strategies come and go. When we assessed this portfolio, we were clear about our direction. Today, both North America and International have transformed significantly compared to the years 2016 to 2018, which is personally important to me and also to Michael Price, who oversees North America. We have focused on key areas, including risk selection, limit management, and portfolio balance, as well as diligently reviewing terms and conditions. Mark touched on private lines, and we are also closely monitoring claims. I see this as a necessary narrative we are completing. Mark addressed our public company book, which largely reflects the performance of a D&O underwriter. In the public sector, one must consider the exposure to securities class action lawsuits, which account for 67% of annual loss costs. Statistically, about 200 of these lawsuits are typically filed from a pool of 5,500 public companies, highlighting the importance of risk selection. Initially, we may have prioritized premium over the quality of accounts. We were heavily invested in technology, life sciences, health care, and new economy sectors, focusing on unicorns going public instead of building a portfolio of stable, less volatile stocks. We have provided our underwriting teams with clearer guidelines on what to focus on and advised them to avoid high-risk areas characterized by stock and market cap volatility and potential class action lawsuits. Much of this re-underwriting has already been initiated, and while we expected it to take time, we are starting to see results. We have removed $65 billion in limits from these products specifically, and overall, we have pulled $650 billion in limits from the portfolio. Significantly, $65 billion of this pertains to primary D&O. The traditional approach for large Fortune 500 companies used to involve $25 million limits, which have now been reduced to $10 million, with 81% of our portfolio now at this new limit compared to $25 million four years ago. Likewise, for NASDAQ mid-cap companies, limits have decreased from $15 million and $10 million down to $5 million, with 66% of our book now at this level. We have addressed retention issues, recognizing that M&A bump-up claims have disproportionately impacted primary underwriters compared to excess underwriters, resulting in increased retentions. We have employed all available tools proactively, and we believe this portfolio has substantially improved in terms of risk selection and balance concerning excess versus primary limits and the control of aggregate exposure. It's important to remember that this is a claims-made book, so we will likely see the outcomes of our efforts within a 3- to 5-year timeframe. Our frequency and severity rates have significantly decreased in the years 2020 and 2021, not only concerning securities class actions, which are running at less than half, but due to better limit management, we are also seeing two-thirds less in terms of limits exposed to class action lawsuits.

Dave, your passion is coming through very much. We probably want to take another question.

I have two quick questions. Mark, could you elaborate on your comments regarding the loss pick? Additionally, I'm curious about the current situation being long-tailed, which may introduce some risk. We plan to approach this conservatively, similar to the industry's approach. My second question is whether there has been any shift in your book related to everything you’ve done, particularly regarding the transition from occurrence to claims-made in the Commercial Lines book. Is there anything significant that would indicate a movement from occurrence to claims-made?

Great question, Michael. So I would say there's only a handful that are really claims-made, right? It's management liability, it's professional indemnity that really drive it, and super tough product liability case is really claims-made. It's one thing to shift it gross, it's another thing to shift it net, right? So as we've used different reinsurances over time, that changes the proportions. So we're comfortable with the mix of occurrence and claims-made. There's growth in Financial Lines, as Peter pointed out. And there's some growth in Excess Casualty. The nets are somewhat different but we think appropriate for what we're doing.

Okay. Perfect. And then maybe just a real quick point on one, too, on the last question to Dave's answers in the professional lines. There's clearly lots of concerns in the past 18 months or so because of securities class actions and IPOs and SPACs. Would you say, given all Dave's comments there, that you think your exposure to that type of risk is pretty limited?

I believe Dave explained the business flow accurately. The crucial factor is identifying the right classes and risks upfront, which has been done exceptionally well. Furthermore, we must navigate the court systems. Although we significantly reduced our exposure to SCAs, we still need to follow the processes involved in dismissals and other procedures. This is what Dave meant when he referred to the 3 to 5 years it takes for things to work through the courts. However, given our reduced exposure, we feel strongly about the recent accident years.

At the risk of being labeled a pariah, I'm going to go back to the D&O questions a little bit. Can we talk a little about the accident year picks, not necessarily for AIG, although it can be, what sort of combined ratios were '16, '17, and '18 producing in retrospect? We've seen tremendous pricing come through. Is D&O business broadly for the industry written in those years being written at a substantial underwriting loss? And the extent to which you took the reserve charges in this quarter, a lot of the business, I assume, was syndicated. Are the syndicates feeling the same kind of pain that you are? Or are you getting ahead of what you think are losses to come?

Mark, why don't you comment on Josh's question on loss ratios? And then I think Dave should talk about the pricing.

Josh, I understand you are referring to the business. When looking at the industry, it’s important to approach it differently. I don't want to overshoot industry trends, but I recognize that you focus on schedule fees. If you review the annual statements from 2020, that should provide some perspective. Regarding syndication, Dave will explain this better than I can, but typically, primary placements are fully written. As you move up the tower, there may be some co-participations, but it isn’t syndicated in the same way that you might envision with a large property transaction. Dave, would you like to elaborate on this?

Thank you, Mark and Josh. I want to highlight that we've observed significant variability in scheduling related to portfolios over the years, often resulting in consistent differences of 40 to 50 points. This reflects both risk selection and portfolio management. However, there has been noticeable verticality during these years, particularly evident in 2019 and 2020, as the courts did not close for the motions to dismiss and the securities class action. In fact, if you examine Cornerstone, you'll see that the number of settlements in 2020 during COVID was equal to that in 2019. Verticality remains a factor in this business, along with market cap loss and disclosed damages. There's considerable immaturity in these years that will likely continue to surface since the cases are still developing. Claims typically have a 3 to 5-year timeframe, which ties back to the motion to dismiss, as these are still being contested. Many cases were argued, and once decided in favor of the clients, settlement negotiations began. If the company succeeds, these matters usually resolve, dealing mainly with therapeutic or defense costs. However, there are still uncertainties regarding the cohort from 2016 to 2018 due to verticality of loss for those cases. Several were settled in 2020, and many more are being settled in 2021, with additional settlements expected in 2022.

I'm going to hold it to one question for you guys, and just congratulations on everyone's new role.

I'll give you a broader-based one. Peter, if I look at the return on attributed equity for the General Insurance business right now, you had some corporate costs there. It's still below a double-digit return on equity. I guess my question is, is that your goal to achieve a double-digit ROE in that business? And what does the underlying combined ratio need to be in order to achieve that given the current catastrophe outlook and interest rate environment?

Thanks, Brian. As we've said in the past, and I really have the same answer, which is we're really focused on driving the profitability earnings, reducing volatility. We're making great progress on the combined ratio, looking at the investment portfolio over time to have less volatility on the Property and Casualty side. We're working through the separation. And it's hard to give you an answer in terms of the absolute combined ratio and returns until we know all the math in terms of the numerator and denominator. Meaning we just need a little bit more time over the next couple of quarters to separate Life and Retirement, have the path of the IPO and the capital structure that we'll outline in more detail for you. But we know that, that is an important guidance in terms of when we are in future state, and we'll work towards that. But I think now with the number of moving pieces between the 9.9% in terms of what we're doing to set up the IPO and what we're doing with General Insurance in terms of growth, we see a lot of opportunities to grow with margin and with improved combined ratios over time. And so that's really the primary focus now that giving the ROE guidance once we know the variable is a little bit more fixed, we can do that.

That's fair. And then just one other just quick one. Have you done any work or maybe just some general perspective on what LDTI could mean for your Life Insurance business?

Well, we are in progress of implementing the new standards and working through it. And so we're analyzing the guidance that's been issued today, formulating approach. We know that we have the IPO coming up, so we have an enormous amount of resources on it. But it's really just too early for us to provide the estimates. But it's a key area of focus for the company and one that we'll give guidance as we get in subsequent quarters. Thanks, Brian. I think that's going to wrap it. Look, I really appreciate it. Appreciate the time. I want to thank all of our colleagues for all the great work, and I hope everybody has a great day. Thank you.