American International Group Inc (AIG) — Q3 2022 Transcript

Thanks very much, and good morning. Today's remarks may include forward-looking statements, which are subject to risks and uncertainties. These statements are not guarantees of future performance or events and are based on management's current expectations. AIG's filings with the SEC provide details on important factors that could cause actual results or events to differ materially. Except as required by applicable securities laws, AIG is under no obligation to update any forward-looking statements if circumstances or management's estimates or opinions should change. Additionally, today's remarks may refer to non-GAAP financial measures. A 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. Finally, today's remarks will include a discussion of the financial results of AIG's Life and Retirement segment and Other Operations on the same basis as prior quarters, which is how we expect to continue to report Life and Retirement and Other Operations until the deconsolidation of Corebridge Financial. AIG's segments and U.S. GAAP financial results, as well as AIG's key financial metrics with respect thereto differ from those reported by Corebridge Financial. As such, we will be intentional when referring to AIG's Life and Retirement segment versus Corebridge Financial when commenting on financial results. Corebridge Financial will host its first earnings call post IPO next week on November 9, and its management team will provide additional details on the Corebridge Financial third quarter results. With that, I'd now like to turn the call over to our Chairman and CEO, Peter Zaffino.

Thank you, Quentin. Good morning, and thank you for joining us today to review our third quarter financial results, which I'm pleased to report were very strong, along with the excellent progress we've made on our strategic priorities. Following my remarks, Shane will provide more detail on the third quarter financial results, and then we'll take questions. Kevin Hogan, David McElroy, and Mark Lyons will join us for the Q&A portion of today's call. The third quarter represented an inflection point for AIG, with important milestones achieved across the organization. Our team once again demonstrated its ability to execute on significant strategic initiatives that position AIG for a strong future, apply discipline, and successfully execute these initiatives to achieve high-quality outcomes even against a backdrop of very complicated capital and insurance markets. Before I cover the third quarter in more detail, I'd like to comment on the successful Corebridge Financial IPO, which we completed in mid-September despite very challenging equity capital market conditions. On our second quarter earnings call, we explained that volatility in the capital markets was significantly elevated, and that attempting to complete an IPO at that time would not have been in the best interest of AIG, Corebridge, or our stakeholders. As a result, we decided to defer the IPO and revisit timing in the third quarter. We knew that there would be limited open windows and remained committed to completing a transaction as soon as we believed an appropriate opportunity was available. Throughout the summer, our team did a remarkable job and worked diligently on the operational separation of Corebridge from AIG as well as preparing the business for a successful IPO. As we noted on our last call, we had already increased the targeted savings program at Corebridge from an initial range of $200 million to $300 million to $400 million within 2 to 3 years. With the additional time available pre-IPO, the business accelerated certain actions and is now expected to deliver run rate savings of over $100 million by the end of 2022, ahead of our original schedule. We were also prepared to secure the capital structure of Corebridge prior to the IPO and access the debt markets in late summer during a short window when conditions became more favorable. In August, Corebridge issued $1 billion of hybrid debt securities and in early September drew down on a $1.5 billion bank facility to complete its initial capital structure. Using part of the net proceeds from these debt transactions, Corebridge closed out the remaining $1.9 billion due to AIG under a promissory note. Throughout this time, we also engaged in continuous discussions with our financial and other advisers about equity market conditions, investor sentiment, and our ability to execute the IPO in a complicated market. While equity markets remain uncertain, volatility was not as extreme leading up to Labor Day. We were confident we could complete the IPO within an acceptable valuation range, and we continue to believe it was very important for the future of AIG and Corebridge to establish Corebridge as a public company in 2022. Throughout the third quarter, we also made significant progress in the implementation of a new investment management model for AIG and Corebridge. As you know, in mid-2021, we finalized a strategic partnership with Blackstone, which includes the transfer of $50 billion of Corebridge AUM to Blackstone, with that number growing to $92.5 billion over 6 years. In addition, earlier this year, we announced a partnership with BlackRock, under which we will transfer up to $150 billion of liquid assets from both AIG and Corebridge. To date, we have transferred $100 billion of assets, with $37 billion moving from AIG and $63 billion moving from Corebridge. The complexity of operationally separating Corebridge from AIG as well as implementing our new operating model for investment management cannot be understated. Keep in mind, these businesses have been in a combined structure for over 2 decades, with aspects of each business shifting over time between segments until just a few years ago. And until we announced our intention to separate Corebridge from AIG in late 2020, investments were a stand-alone unit at AIG, servicing all businesses across the organization. Our partnerships with Blackstone and BlackRock enable us to accelerate the reshaping of our investment portfolios. With respect to the financial commitments Corebridge made as part of the IPO, I'd like to reiterate them as they too will create significant value for shareholders over time. We continue to expect Corebridge to pay $600 million in annual dividends, with its first quarterly dividend of $148 million declared 15 days after the IPO close and already paid, to have the financial flexibility to repurchase shares or reduce AIG's ownership stake as early as the second quarter of 2023 and to achieve a return on equity of 12% to 14% over the next 24 months. Completing the Corebridge IPO within a very narrow window was a testament to the careful preparation, hard work, and dedication of our teams at AIG and Corebridge and to the quality of the business. This was a major accomplishment for our teams, and we are all very proud of the outcome. Turning to other highlights in the third quarter. Adjusted after-tax net income per diluted common share was $0.66. General Insurance delivered very strong performance and continued profitability improvement despite significant natural catastrophes in the quarter. The accident year combined ratio, excluding catastrophes, was 88.4%, a 210 basis point improvement year-over-year and the 17th consecutive quarter of improvement. This result was primarily due to Global Commercial, which had an excellent quarter, with an accident year combined ratio, excluding catastrophes, of 83%, a 590 basis point improvement year-over-year, driven by International Commercial, which had an impressive 80.4% accident year combined ratio, excluding catastrophes. The accident year combined ratio was 98.2%, a 200 basis point improvement year-over-year. The calendar year combined ratio was 97.3%, a 240 basis point improvement year-over-year. Catastrophe losses in the third quarter were $600 million, or 9.8 points of the combined ratio. Shane will break this number down for you in his remarks. Our catastrophe total includes losses from AIG Re related to Hurricane Ian, which came in at $125 million. This result reflects the terrific work the team has done to reduce peak zone exposure in our assumed reinsurance business, particularly in Florida, where we've reduced limits deployed by approximately 60% since 2018 and have minimal exposure to Florida domestic insurers. Considering Hurricane Ian and other catastrophes in the third quarter, our catastrophe losses validate the quality of our underwriting, our reinsurance strategy, and our ability to successfully manage volatility. With respect to prior year development, there was a favorable release in the third quarter of $72 million or 90 basis points of the calendar year combined ratio. In Life and Retirement, the business had another quarter of strong sales with premiums and deposits coming in at approximately $9 billion, up from $7.2 billion in the prior year, with positive year-over-year growth in each of its 4 business segments. Effective capital management remains a priority for AIG. In the third quarter, we repurchased $1.3 billion of common stock and paid $247 million of dividends. We also announced $1.8 billion of debt repayments, which we commenced in the third quarter and closed last week, further strengthening our balance sheet. And lastly, AIG ended the third quarter with $6.5 billion of parent liquidity. Now let me provide additional detail on General Insurance and the continued, sustained improvement and very good absolute performance in our underwriting. When referring to gross and net premiums written, note that all numbers are on an FX-adjusted basis. Gross premiums written increased 5% to $9.2 billion, with Global Commercial growing 8% and Global Personal decreasing 3%. Net premiums written increased 3% to $6.4 billion. The growth was in our Global Commercial business, which grew 6%, with Global Personal decreasing 4%. North America Commercial net premiums written increased 7%, and International Commercial net premiums written increased 5% or approximately 8%, excluding the impact of nonrenewal and cancellations related to known Russia exposure. In North America Commercial, we saw very strong growth in net premiums written in Lexington led by wholesale property, retail property, and Glatfelter. In International Commercial, we also saw strong growth in net premiums written in Global Specialty, led by International Specialty, marine and energy as well as property. In Global Commercial, we also had a very strong renewal retention of 85% in our in-force portfolio, with North America up 400 basis points year-over-year to 86% and international at 85%. As a reminder, we calculate renewal retention prior to the impact of rate and exposure changes. And across Global Commercial, our new business continues to be strong. North America new business was $458 million led by Lexington. International new business was $474 million led by Specialty. Turning to rate. Momentum continued in North America Commercial with overall rate increases of 9% in the third quarter, excluding workers' compensation. Areas within North America Commercial achieved double-digit rate increases. These included Lexington, which increased 20%; cyber, which increased 32%; and excess casualty, which increased 12%. International Commercial rate increases were 6%, driven by Talbot, EMEA, Asia Pacific, each of which increased 10%. Our team analyzes loss cost trends every quarter. On our last call, we indicated that our loss cost trend view in the second quarter for North America Commercial lines had migrated upwards to 6%. Due to inflationary and other related factors that have resulted in an increase in property loss costs, we are increasing our aggregate loss cost trend to 6.5%, both in North America and internationally. Overall, we continue to receive rate above loss cost trends, which contributes to margin expansion on a written basis. Moving to Global Personal Insurance, we continue our work across the portfolio to prioritize growth in Accident & Health, to reposition our capabilities in Japan Personal, and to transform our North America high net worth portfolio. Starting with North America, personal net premiums written declined 11%, driven by warranty as well as our ongoing reshaping of our high net worth business that we've discussed on prior calls. We continue to make progress in our high net worth business by reducing peak zone aggregation, improving the overall quality of the portfolio, transitioning a portion of the portfolio where appropriate to excess and surplus lines, and enhancing the value we offer to clients. Third quarter results reflect this repositioning, with North America's gross and net premiums written declining as we continue to reduce exposures and increase reinsurance sessions to mitigate volatility. North America Personal Insurance's premium declines were partially offset by continued momentum in individual travel and Personal Accident & Health. In International Personal, net premiums written declined 2% due to a reduction in warranty that was partially offset by a rebound in individual travel as well as growth in Accident & Health, which is our largest and most profitable International Personal portfolio. One item to note in the International Personal Insurance third quarter accident year loss ratio is that it reflects approximately $100 million of losses related to COVID claims in Japan and, to a lesser extent, Taiwan. These losses were primarily due to the Japanese government instituting a policy relating to deemed hospitalizations resulting from COVID, which impacted our A&H book. This government policy was revised in the third quarter, and as a result, we expect the issue to have a minimal impact in future quarters, starting with the fourth quarter of this year. Additionally, some of these losses related to cleanup expense benefits offered to small businesses, which AIG no longer provides. Turning to prior year development, we conducted our annual review of approximately 75% of pre-ADC loss reserves in the third quarter. We applied conservative assumptions in this review as we believe it is appropriate to be prudent given current economic conditions. As a result of our review, we recorded $72 million of net favorable development for the third quarter or 90 basis points of the loss ratio. This reflects $42 million of amortization from the ADC combined with $30 million of other favorable development. Our international operations were favorable in every region totaling $328 million, whereas North America was unfavorable by $256 million. Furthermore, in North America, virtually every line of business was favorable, except for U.S. financial lines, which was unfavorable by $660 million net of the ADC, predominantly in accident years 2018 and 2019 and, to a lesser extent, 2020. Let me unpack the drivers of unfavorable development in U.S. financial lines a bit more because it's been an area of focus for us for several years given AIG's history in this line of business. The unfavorable development was primarily driven by excess D&O written out of both the U.S. and our Bermuda business. And while there was some movement on the primary side, the excess book was the most significant driver. D&O prior year emergence continues to be driven by large losses, many from securities class actions and earlier accident years also experienced stacking exposures where primary mid-excess and high-excess policies were all exposed on the same insured. This issue is similar to what we saw across the portfolio when we first started our remediation strategy. The company had too much vertical limit on a per account basis. As we've discussed on prior calls, our underwriting strategy and ventilation standards were completely overhauled over the last few years, including U.S. financial lines to prevent stacking and overexposure to any single insured. And we've dramatically reduced limits deployed on individual policies, obtained tighter terms and conditions, and achieved higher attachment points on primary limits. Shane will provide more detail on PYDs in his remarks. Now I'd like to spend a few minutes talking about Hurricane Ian, which was a very tragic event on a human level that also left devastating physical damage. AIG rapidly deployed significant resources to the affected areas, providing immediate support and infrastructure to help individuals, businesses, and communities rebuild. Hurricane Ian is projected to be the second largest insured natural catastrophe loss in U.S. history. There remain a considerable number of variables contributing to industry ultimate losses, but based on what we know today, total insurable losses are expected to be in the range of $50 billion to $60 billion. For context, Hurricane Katrina and Irma, the first and third largest U.S. natural catastrophe losses in the last 100 years, are estimated at $85 billion and $40 billion of insured losses, respectively, on an inflation-adjusted basis. While Hurricane Ian will have an impact on the broader insurance, reinsurance, and retro markets, we believe AIG is well positioned. Very importantly, we have strong and strategic relationships with our major reinsurers, and we are confident in our ability to obtain similar levels of capacity for 2023 as we did in 2022. In addition, we've improved and continued to improve our portfolio, and therefore, the reinsurance we require will reflect this during 2023. And we see significant growth opportunities across the market, especially in the near term and for property specifically, and our significant financial flexibility will allow us to be nimble as we deploy capital at attractive risk-adjusted returns to Retail Property, wholesale property, Talbot, global specialties, and AIG Re. With respect to the industry and markets more broadly, as we noted on our second quarter call, there are a few things you need to believe about the market prior to Ian in order to understand the impact Ian may have in the future. If you believe, as we do, that the retro market was already contracting from last year's available capacity, which itself was reduced from the prior year, and the anticipated capital for 2023 was already going to further contract approximately 10%, the retro market and the property catastrophe market would have already been challenged even prior to Ian. In addition to reduced capacity over 2022, prior to Ian, there was also an expectation of increased retentions, more specific peril coverage as well as rate increases resulting from several factors including increased frequency and severity of catastrophes over the last several years. Keeping this context in mind, 2022 will be another year with over $100 billion in natural catastrophe industry losses. Prior to 2017, on an inflation-adjusted basis, there were only 2 years, 2005 and 2011, that had greater than $100 billion of global natural catastrophe losses. And in both of these years, losses were led by primary perils. Since 2017, 5 of the last 6 years have had greater than $100 billion in global natural catastrophe losses, with the predominant portion of losses in the aggregate coming from secondary perils. Furthermore, other issues potentially impacting 1/1 capacity prior to Ian were the strengthening of the dollar, euro-denominated capacity likely decreasing due to currency devaluation, asset valuations, inflation, and demand surge from the post-pandemic economy, just to name a few. When considering the impact of Ian and the complexity it adds to already challenging market conditions, there are a few additional factors to consider. In Florida, residential total insured values have increased by more than 50% over the last 10 years. The significance of commercial losses, which will likely exceed 40% of the ultimate losses for Ian, compared to the average of prior natural catastrophes, where commercial losses were 30% of the ultimate loss. The prevalence of commercial losses exacerbates the complexity of catastrophe modeling generally and the resulting deficiencies regarding appropriate catastrophe load and pricing. When considering the modeled estimated output for losses related to Ian, for example, commercial losses were deficient by 2.5x and personal by 1.5x after adjusting for inflation and other factors. Furthermore, when major catastrophes occur in Florida, a disproportionate amount of the loss finds its way to the reinsurance market because of the proportional and low-attaching excess to loss placements completed by Florida domestic insurers as their capital structures require significant reinsurance. Available reinsurance capacity is forecasted to be the lowest aggregate limit available in over a decade, making conditions in the property catastrophe reinsurance market even more challenging. Now turning to Life and Retirement. Adjusted pretax income was $589 million, decreasing from $877 million in the prior year period, mainly due to lower alternative investment income and lower call and tender income. There were no significant reserve adjustments arising out of the third quarter actuarial assumption review. As I mentioned earlier, Life and Retirement had excellent sales with premiums and deposits of approximately $9 billion, up 23% year-over-year. Sales of annuities over the course of 2022 have benefited from our relationship with Blackstone with $5 billion of assets originated year-to-date in private ABS, direct credit lending, and structured assets. While our strategic partnership with Blackstone is still in the early days, the quality and the performance of the portfolio relative to what the business could have done on its own are very encouraging. Sequential improvement in fixed income and loan portfolio yields accelerated, with a 24 basis point improvement in base investment yields. Year-over-year fixed income and loan portfolio yields also improved 8 basis points, confirming the business has surpassed year-over-year yield compression for the first time in recent memory. Shane will provide more information on the Life and Retirement segment and Corebridge in his remarks. Shifting to capital management, we continue to be balanced and disciplined as we maintain appropriate levels of capital in our subsidiaries for profitable growth opportunities across our global portfolio as well as reduced levels of debt while returning capital to shareholders through share buybacks and dividends. Looking ahead, with respect to share buybacks, we have $4.3 billion remaining on our current share repurchase authorization and expect to end 2022 with over $5 billion of share repurchases for the full year. And balance sheet actions we've taken put us in a position of strength with significant financial flexibility that AIG has not had in many years. As we look to 2023, our lockup agreement with the underwriters of the IPO with respect to Corebridge common stock expires in March. Subject to ordinary course blackout periods, this means that our likely windows for a secondary offering of Corebridge common stock in the first half of 2023 will be in mid- to late March as well as mid-May to late June. Our current expectation is that the net proceeds will largely be deployed to share repurchases. While we remain committed to consistently returning capital through share repurchases for the foreseeable future, we believe there will be attractive organic growth opportunities in General Insurance and AIG Re given current market dislocations that may prove compelling. Lastly, as we discussed on our second quarter call, we continue to expect that post deconsolidation of Corebridge, AIG will achieve a return on common equity at or above 10%. Shane will provide more details in his remarks. As we approach year-end and plan for 2023, our path forward is clear with General Insurance solidifying its position as a global market leader, the deconsolidation and eventual full separation of Corebridge firmly underway and a significantly strengthened balance sheet. With that, Shane, I'll turn the call over to you.

Thank you, Peter. As Peter noted, I will provide more detail on the third quarter results, specifically EPS, reserve reviews, net investment income, capital management, and the path to achieving an above 10% return on common equity. Adjusted after-tax income was $509 million or $0.66 per share compared to $837 million or $0.97 per share in the prior year quarter. This was driven by a $741 million decline in net investment income, offset by improved underwriting results in General Insurance and solid performance in Life and Retirement as well as improved General Operating Expenses and Other Operations. General Insurance finished the third quarter with adjusted pretax income of $750 million. Underwriting income was up $148 million despite Hurricane Ian, offset by a $209 million decline in net investment income due to alternative investment returns. Life and Retirement contributed adjusted pretax income of $589 million, which is $288 million below the prior year quarter driven by lower alternative investment and call and tender income. Other Operations adjusted pretax loss of $614 million compared to $562 million prior year quarter, mostly due to lower alternative investment income, partially offset by lower interest expense. This quarter, Other Operations included $16 million of additional expenses for setting up Corebridge as a stand-alone company. Excluding such expenses, General Operating Expenses improved by $17 million versus the prior year. As Peter noted, results in General Insurance reflect strong underwriting performance with continued combined ratio improvement of 240 basis points to 97.3%, an accident year combined ratio excluding catastrophes improved 210 basis points to 88.4%. North America Commercial accident year combined ratio excluding catastrophes improved 590 basis points over the prior year quarter to 84.6%. International Commercial accident year combined ratio excluding catastrophes at 80.4% showed 640 basis points of improvement. North America Personal reported an accident year combined ratio excluding catastrophes of 112.8%, primarily reflecting higher reinsurance costs and lower ceding commission for high net worth business. International Personal accident year combined ratio excluding catastrophes was 99.9%, wholly due to increased frequency of Accident & Health claims in Japan and Taiwan. Net catastrophe losses, excluding reinstatement premiums, were $600 million or 9.8 loss ratio points in the third quarter, which included $450 million from Hurricane Ian and $84 million from Japanese typhoons. Additionally, the reinstatement premium impact across all catastrophe events was $55 million. Switching to reserves, nearly $40 billion of reserves were reviewed this quarter, bringing the year-to-date total to approximately 90% of carried pre-ADC reserves. As Peter noted, prior year development, excluding related premium adjustments, was $72 million favorable this quarter compared to favorable development of $50 million in the prior year quarter. Prior year emergence in accident years 2019 and 2020 was largely due to policies written in 2017 and 2018. And accident year 2020 was largely due to policies in private and not-for-profit where gross premiums have been reduced by 54% since 2018, and limits provided have been reduced by 85%. In 2018 and prior, AIG wrote multiyear policies that contributed to accident year 2019 and 2020 losses. So for example, a policy written in 2017 had loss emergence in accident year 2020. We have strategically shifted away from this business, which now makes up less than 1% of policies in those lines. As we've discussed previously, we overhauled the General Insurance underwriting strategy, including U.S. financial lines, resulting in reduced limits deployed on individual policies, tighter terms and conditions on higher attachment points on primary limits, and termination of certain businesses. Since 2018, we have seen the following. Total primary limits exposed in U.S. financial lines have been reduced by $32 billion on a comparative basis, or nearly 80% through the third quarter of this year. Total primary limits in both corporate and national D&O have been reduced by nearly 50% on a comparative basis, and private and not-for-profit primary limits have been reduced by nearly 85%. And in all cases, rates have increased substantially over this time period. Since 2018, we have achieved cumulative rate increases of nearly 85% in both primary corporate and national D&O on a third quarter cumulative basis and over 115% in private and not-for-profit primary business. Overall, we recognize bad news early but wait to recognize good news over time as we monitor developments, which we believe leads to a conservative view on our reserves. Along these lines, we've built in an expectation of higher inflation given the uncertainty over its potential impact on our reserves. Turning to Life and Retirement. Adjusted pretax income was $589 million compared to $877 million in the prior year quarter. The decrease was due to lower alternative investment, call and tender, and fee income, partially offset by higher investment income from fixed maturity and loan portfolios, less adverse mortality, and an improved outcome in the annual actuarial assumption review, which, other than DAC acceleration of $57 million, showed no meaningful net movement in reserves this year. Product margins were attractive and in excess of long-term targets in all businesses, supported by robust new business origination from Blackstone. Corebridge now expects spread compression to convert to expansion beginning in 2023. Strong sales momentum continued in Individual Retirement, with $3.8 billion in sales, a 16% increase year-over-year, led by over 100% growth in fixed annuity sales on a record $1.7 billion in index annuity sales. Group Retirement deposits grew 11%, driven by higher large plan acquisitions in the third quarter. The Life business had solid sales with an improving mix of business in the U.S. and continued underlying growth in the U.K. In Institutional Markets, premiums and deposits of $1.9 billion were up from $1 billion in the prior year quarter, with larger GIC issuances on higher pension risk transfer transactions. Mortality, including COVID losses, was once again below original pricing expectations. COVID losses remain within original sensitivities of $65 million to $75 million for each 100,000 U.S. population deaths. Adjusted pretax net investment income for the third quarter was $2.54 billion, a decline of $741 million or 23% compared to the prior year quarter, with $431 million attributable to Life and Retirement. $665 million of the decline was due to alternative investment income and $150 million was due to reduced call and tender income, offset by an increase in the fixed maturity and loan portfolios of $153 million from yield uplift. Our fixed maturity and loan portfolio saw a lift in yield of 17 basis points in the third quarter, building on top of the 9 basis points from the second quarter, and we expect 10 to 15 basis points additional in the fourth quarter. The new money yields on our fixed maturity and loan portfolio was approximately 120 basis points above the assets rolling off during the third quarter, roughly 60 basis points higher in General Insurance and 130 basis points higher in Life and Retirement. Now turning to the balance sheet and capital management. We began 2022 with $10.7 billion of parent liquidity. And since then, we have paid dividends totaling $768 million, repurchased approximately $4.4 billion or 77 million shares of common stock, bringing our ending count to 747 million shares, a 9% reduction year-to-date. Including recently announced bond make-whole calls of $1.8 billion, we established a Corebridge debt structure of $9.4 billion and reduced $9.8 billion of AIG debt. We completed the Corebridge IPO with its parent liquidity at $1.7 billion. AIG received $1.6 billion of net proceeds from the IPO, and we exited the third quarter with $6.5 billion of AIG parent liquidity, including $1.8 billion to fund the make-whole calls. At third quarter end, our GAAP leverage was 36.5%, a 540 basis points increase quarter-over-quarter. The decrease in AOCI added 320 basis points to the overall leverage ratio, with over 80% of the change relating to Life and Retirement. AIG's debt leverage ratio, excluding AOCI, was 27.5%, up 220 basis points from the second quarter as a result of the issuance of Corebridge debt as planned prior to the IPO. Including the impact of the make-whole calls post quarter end, AIG's leverage is 34.7% or 26%, excluding AOCI. Total adjusted return on common equity was 3.7%, down from 6.5% in 3Q '21. The decrease is mostly caused by a decline in net investment income. Moving to the risk-based capital ratio, our primary operating subsidiaries remain profitable and well capitalized, with General Insurance's U.S. pool fleet and Life and Retirement's U.S. fleet RBC ratios both above our target ranges. We continue to make progress on the 4 priorities to achieve a 10% or greater return on capital employed. They are: underwriting profitability; a leaner operating model; separation of the Life and Retirement business; and capital management. Two points of improvement in combined ratio or $500 million of expense savings or $5 billion in share repurchases approximate to 1 point improvement in ROCE. We expect to achieve expense savings from multiple areas, including: the remaining $350 million of savings yet to be realized from AIG 200; roughly $300 million of corporate GOE, and approximately $400 million of interest expense that will be transferred to Corebridge; additional expense savings as we transition AIG to a leaner operating model. Additionally, we've seen a 26 basis point yield uplift in the fixed maturity and loan portfolios in the past 2 quarters. Over time, we expect the yield uplift from net investment income could add 1 to 2 points to ROCE. We are confident about delivering on our 10% plus ROCE commitment, and we will continue to execute on a prudent capital management strategy, which will reduce the share count to the 600 million to 650 million range while maintaining leverage at the 20% to 25% level post deconsolidation. With that, I will turn the call back over to you, Peter.

Thank you, Shane. And operator, we're ready for questions.

Operator, maybe we'll go to the next one in the queue, and then we'll come back to Elyse.

Do you want to try the next one in the queue, operator, please?

Sorry about the confusion from the folks on the questions. Hopefully, you can hear me. I actually wanted to ask you about sort of a little bit different broad M&A question about the turmoil in the market. I think, obviously, we've seen environments where there's quite a bit of change. And I don't know if you think or you're seeing maybe the sellers getting a little bit more willing to sell given the volatility of the environment, and just your general thoughts on M&A would be fantastic.

Yes. So let me first take a step back, thank you for the question, and talk a little bit about our capital management strategy. And as we've outlined in the past, we're focused on putting additional capital in the subsidiaries for organic growth because we see great opportunities. We worked very hard on reducing leverage. So while we've leveraged up Corebridge, we've been redeeming debt at the AIG level, focused on returning capital to shareholders through share repurchases, and we'll look very hard at the dividend for 2023. And our view on M&A is, where there are compelling opportunities, I think you have seen weakness in this quarter in terms of some of the reporting. But our strategy is much more where it's compelling, where it's strategic. And I think if we use Glatfelter as an example, Glatfelter was a best-in-class program underwriter that had great distribution. We were not performing well in our Programs business. So we were able to reduce our position in programs and bring Glatfelter and Tony Campisi and the leadership team to AIG, and they just have thrived here together, where we've improved combined ratios, we've grown, and we've improved our overall performance. So I think we will look for ways. We don't really have portfolios that need to be rehabilitated like we would have the Programs 3 years ago, but we could find those bolt-ons and things that are additive to AIG, where we are both better from being together. So I think that's how we would think about acquisition in the sort of medium term.

Fantastic. Shifting to a different question, could you share some thoughts on Validus in the context of the reinsurance business and the broader steps taken to reduce catastrophe exposure? There have been significant achievements in reducing catastrophe exposure under AIG. As we move forward, how do you perceive the trade-off given the numerous opportunities in property catastrophe areas, especially within the reinsurance market? You've managed that trade-off quite aggressively in the past.

Yes. I believe the market ahead will favor those who remain disciplined as we approach it. We have been careful about reducing our overall exposure in peak regions and areas susceptible to natural disasters. Over time, we have significantly cut back on our limits during the reunderwriting process. Regarding the AIG reassumed side, we have maintained discipline; we reduced our aggregate by 60% due to unfavorable risk-adjusted returns, as noted in my earlier comments. When looking at premiums on a gross basis, particularly in the catastrophe space, we expect a year-over-year decrease of about 40%, with potentially larger decreases in North America. We will explore opportunities for aggregate coverage in catastrophe, but our focus will remain on identifying the best risk-adjusted opportunities. The positive aspect is that we have various entry points. We have Lexington in the excess and surplus markets, retail property capabilities worldwide, and a strong syndicate in Talbot that can target specialty classes that are primarily first party. Our global specialties division performed exceptionally well this quarter, demonstrating its leadership. Additionally, we have opportunities to deploy capital within the assumed business for AIG Re. We are prepared to take action, as the market conditions appear favorable for expanding our property portfolio. However, we will remain disciplined and observe how the situation evolves over the next 60 to 90 days. Next question, please.

Great. Am I coming through?

Yes, Meyer. Good to talk to you.

Fantastic. Okay. And Peter, just hoping you could talk a little bit about casualty loss trends because you mentioned property as one of the reasons for raising the overall trend to 6.5%. And we obviously saw the financial lines issues that, at least superficially, could lead into other casualty lines. Can you sort of close the loop on that?

Sure. I'll ask Mark to provide more detail. I think what we do in our prepared remarks is say that we're looking at property, casualty, all of our lines and business in great detail. Really, what's been driving the upper end of the ranges up has been more the first-party business because of all the economic factors that are driving them. But Mark spends enormous time with the staff and the underwriting claims, looking at all the casualty trends as well. Mark, do you want to provide more detail, please?

Sure, Peter, thank you. Regarding the follow-up, the trends for excess casualty loss costs are in the double digits, and the primary trends are somewhat lower, in the single digits at the upper end. We believe we have captured this accurately. However, the incremental changes from quarter to quarter, as Peter mentioned, show slight increases on the liability side, primarily influenced by more significant trends in property loss costs, which, on a weighted average basis, drive the overall increase.

Okay. That's very helpful. The second question, I guess, in recent quarters, we've been hearing about increasing competition in, I guess, in excess public D&O, which seems a little bizarre. Are you seeing any other individual product lines where there's incremental softness?

Thanks, Meyer. Dave, why don't you talk a little bit about what we're seeing in D&O. We really are not seeing it in other lines to the extent that what's going on in D&O, but we've been very disciplined, and Dave could provide a little bit more context.

Thank you, Peter and Meyer. Yes, the rates have decreased after four years of cumulative increases over 100% in public D&O. I'm not exactly sure about the reasoning behind that. At the same time, we need to consider the various markets within what is categorized as public D&O, such as primary versus first excess versus high excess versus Side A, along with class and market capitalization differences. All of these factors need to be taken into account. In our portfolio, which leans towards primary, there's less pricing pressure in that area. There is respect for the company that leads the tower, as well as its claims reputation, multinational presence, and underwriting strength with distribution and clients. That’s a unique aspect, Meyer. Excess coverage has been and will continue to be a commodity product in many business lines. We're seeing this with D&O now and it often appears in excess casualty and may also show up in excess property. Right now, it is specifically present in D&O. Once again, the risk and the account matter, and although there may be commoditization, I view that as potentially contradictory to the vertical loss trends we have in the business, which needs to be managed by each individual company. You may have a different portfolio that others might pursue. I would say that responsible markets are likely to have a lower renewal retention in the excess capacity, which will become evident in upcoming quarters. It doesn't seem logical. To be straightforward, the vertical loss trends are very tangible right now, whether in securities class actions or derivative cases. This is simply a matter of supply and demand competition. For our portfolio, we're confident because of our control and the balance we have between primary and Side A, which is connected to primary, along with the financial stability of AIG, ensuring that we can manage long-duration claims effectively. With that, I'll turn it back.

Can you guys hear me?

Yes, Elyse. Yes. Sorry about the glitch.

No worries. So my first question, I know the timing of the deconsolidation depends upon secondary offerings of Corebridge. But when you do ultimately deconsolidate, do you envision at that point that General Insurance as a stand-alone entity will be running at a 10% return on equity?

Yes, we do. I mean, again, like we've said, the timing of deconsolidation is subject to market conditions and the volatility in the market. But if you take that away and look at a normal course as we get through 2023, when we deconsolidate, we expect we'll be, with all the variables that Shane outlined, at that 10% return on equity.

And then my second question is on the financial line adverse development. I know you guys mentioned part of it is the multiyear covers that AIG used to write. But was there an impact on your current accident year picks as a pull forward of the charge? And if there wasn't, is it just because of the changes that you made in the business over the years?

Mark, would you take that one, please?

Sure, Peter. Elyse, it’s great to hear from you. That’s a good question, and an important one. To clarify, Shane mentioned that we set aside $40 billion for reserves this quarter, bringing our year-to-date total to 90%, with only 10% remaining. Our reviews have been thorough, and this quarter was particularly detailed, thanks to improved actuarial methodologies and a rigorous examination of individual cases within the claims department, with a focus on downside risk. This depth gives us a strong financial reserve position. Regarding multiyear policies, they do have an impact, likely more significant than you might expect, primarily concerning excess D&O and private not-for-profit lines, as highlighted by Peter and Shane. However, I don’t foresee this influence extending to more recent accident years. Dave touched on this indirectly, but I want to address it more clearly in terms of risk selection, which is crucial. Back in 2017, 42% of our insurance was associated with a specific security class action lawsuit on a primary insured basis, compared to just 12% now. This demonstrates a clear shift in risk selection. In terms of the capacity allocated to those impacted by the lawsuit, there’s been an 80% reduction. Both of these points emphasize a strong capacity deployment and an improved risk selection moving forward. Additionally, since I know you appreciate statistics, Elyse, here’s some relevant data. When we examine primary not-for-profit lines, the loss ratio for policy year 2021 at 18 months of development is 80% lower than the prior year. Similarly, for excess P&L, which has a longer tail, there’s also an 80% reduction in the loss ratio. All these indicators point towards a significantly stronger book of business, bolstering our confidence that the loss ratios from the most recent accident years remain valid, and we are not observing any changes to those loss ratios.

Great. Thanks, Mark. Thanks, Elyse. Next question, operator.

Can you hear me?

Yes, Brian. Thank you. Nice to talk to you.

Great. Awesome. Yes. Peter, I'm just curious, there's been a lot of debate about how the kind of rehardening here of the property market kind of affected the casualty markets. Just curious, your thoughts there in specifically casualty re and then on the primary side as well.

Thanks, Brian. As we approach January 1, we will better understand the pricing environment, which will primarily be influenced by property. I mentioned in my prepared remarks that capacity issues and the disciplined manner in which reinsurers choose to allocate their capital will play a significant role. I anticipate there will be some impacts on the primary casualty side as well, given the typical economic challenges and capital deployment considerations. It's important to take a comprehensive view; we won't just be increasing rates on property without considering casualty. Dave and I have invested considerable effort into this, and we firmly believe that excess and surplus lines in casualty will experience more growth than admitted lines. On a same-store sale basis, I think the current opportunities will yield more growth in E&S and specialty classes. Rates should reflect the exposures, affecting casualty lines too. However, we will have a clearer picture as we enter 2023.

Great. And then for my second question, I’m curious about your North American Commercial written premium growth. Considering the rate and exposure you are experiencing, I would have expected close to double-digit growth in that area, not just 7%. Is there anything unusual going on?

No. Dave, why don't you add on in terms of what really happened in financial lines with M&A and IPO? But no, Brian, we saw very good growth. We outlined it in my prepared remarks, Lexington property, Glatfelter, Primary Casualty. So we saw real growth across North America and felt it was strong. Had a little bit of a headwind from financial lines just based on M&A and IPO. But Dave, maybe you can just cover that a little bit.

Yes, Brian, when you examine each of our key businesses, whether it's property or casualty or our programs group and Glatfelter, we experienced strong growth. However, financial lines were influenced by fluctuations in the stock market, which has historically been the case. Much of the new business growth is connected to the stock market, particularly last year with the prevalence of SPACs and IPOs that were not recurring in 2022. Additionally, there is runoff business also related to the stock market. What we observed is that the decline in growth was primarily due to financial lines and disciplined underwriting; we did not pursue aggressive growth this quarter. While we have confidence in our overall portfolio, it's important to note that a significant portion of our underlying growth did not materialize in the third quarter for valid reasons. The stock market ultimately dictates the opportunities within financial lines.

Thank you, Brian. I think we have time for one more question.

First one I had for you is on the capital deployment commentary. Getting down to 600 million to 650 million share count, I just wanted to see if you could unpack sort of underlying assumptions that may be included in that. And maybe help us think through when we think about the excess capital you have today, potential Corebridge secondary proceeds. How would you think about debt reduction versus share repurchases and how that sort of triangulates to the 600 million to 650 million, if you could?

Yes. So thanks, Alex. We've talked about our capital management strategy over the past several quarters and focused on capital for growth, debt reduction, share repurchases. And as I said, going into 2023, we're going to focus on the dividend. The primary use of capital will be used for share repurchases and, again, like Corebridge, I think has done very well in a very challenging IPO market. We expect the value to continue to move in a very positive direction based on how strong the business is. And so I'm not going to get into like the P/E today versus the P/E of AIG, but think that the best use of capital over the foreseeable future is going to be to reduce share count to get us to the 600 million to 650 million range. Now if I could spend 2 seconds on outlining what we've done since we've announced Blackstone in July of 2021, so you go back into early third quarter of last year, and we set up Corebridge's financial structure. Not only did we do the IPO of 12.4% but set up the structure of $9.4 billion of debt, $1.7 billion of parent liquidity. During that period, we've reduced ongoing debt at AIG by approximately $12 billion, including the $1.8 billion make-whole in October. We paid common and preferred dividends of $1.3 billion during that period. We've also repurchased over 100 million common shares, which is over $6 billion, and we put around $2 billion of capital in our subsidiaries for growth. So that's a lot of capital deployment. All of it is set up to strengthen the balance sheet, strengthen AIG's strategic positioning, as well as making sure that we can continue to put the capital in the subsidiaries to drive organic growth. So we're really pleased where we are, and we think that the path forward with the secondary offerings will put us even in a stronger position.

Got it. That's helpful. And maybe as a follow-up question, just on reinsurance costs, is there anything you can tell us about your spend on your natural CAT reinsurance program as it stands today? And I appreciate that you probably don't want to provide too much and tip your hand one way or the other in terms of the way you'll work through negotiations on that next year. But any way to help us think through the current cost? And anything we should consider when thinking about the materiality of that headed into a harder reinsurance market?

AIG operates differently from typical market trends, particularly in our reinsurance purchasing strategies due to our size, geographic diversity, and varied products. We have solid relationships with our reinsurers that enable continuity in our program year after year, even with structural changes. We've secured commitments from our major reinsurers for the necessary capital for our property catastrophe needs. Additionally, our portfolio has evolved; as we reduce gross exposures, our structural requirements change. In 2022, we adjusted our approach to include global coverage that complements our existing layers and reduced our aggregate limits. Currently, we are evaluating different structures, but it's clear that the renewal season will be delayed, with retro agreements still being finalized and no firm quotes available for a while. Despite these market conditions, I believe AIG is well-positioned due to our portfolio structure, partnerships, and overall performance. Feedback from reinsurers indicates that we have surpassed expectations on underwriting commitments, particularly in property and casualty, which bodes well for our positioning as we navigate the renewal season further. Okay. Yes. I want to thank everybody today for your time, and I hope everybody has a great day. Thank you.