American International Group, Inc. — 2023 Q2
Transcript
Each turn shows the speaker, their inferred role, the section, and that turn's net sentiment (×1000).
Good day, and welcome to AIG's Second Quarter 2023 Financial Results Conference Call. This conference is being recorded. Now at this time, I would like to turn the conference over to Quentin McMillan. Please go ahead.
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 these 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.
Good morning, and thank you for joining us to review our second quarter financial results. Following my remarks, Sabra will provide more detail on the quarter, and then we will take questions. Kevin Hogan and David McElroy will join us for the Q&A portion of the call.
to substantially improve the overall quality of AIG's global portfolio and underwriting results; reduce volatility through a massive reduction in growth limits written; better manage peak zone exposures and geographic balance; and strategically use reinsurance across our overall business. A turnaround of this magnitude is made harder when you have a treaty reinsurance business, which, by its very nature, has volatility.
Retail Property, which grew over 50%; Validus Re, which grew 32%; and Lexington, which grew 18%, led by wholesale property and casualty.
Thank you, Peter. This morning, I will provide more detail on second quarter results, including net investment income and underwriting performance, provide a balance sheet update and review the drivers of our path to a 10%-plus adjusted ROCE.
strong underwriting margins and higher net investment income in General Insurance; increased base investment yields; and spreads and strong sales in Life and Retirement and continued expense reduction in balanced capital management and Corporate and Other.
Thank you, Sabra. And operator, we're ready for questions.
[Operator Instructions] Our first question comes from Paul Newsome with Piper Sandler.
Congrats on the quarter. I was hoping we could focus in on the general -- the North American Commercial business a little bit. I'm getting some questions about the growth. If you sort of assume a certain amount of growth is related to the price increases sort of ex-Validus and whether or not we saw a fair amount of growth -- just sort of if you normalize [indiscernible] Validus. Sorry, I know you gave a lot of detail there, but maybe if you could kind of simplify it for -- that'd be fantastic.
Sure. Thanks, Paul. As we talked about in our prepared remarks, we are very pleased with our overall growth across the world. And retention is up, new business was terrific and balanced. And rate, well above loss cost, was evident in so many parts of our business.
And my second question, I wanted to ask about the cat load in particular in North America as we think of it going forward. I mean, clearly, from the data you showed us, you talked about on the call the volatility piece or the tail is going to be reduced a lot on Validus Re. On an ongoing basis, do you also see kind of a reduction in the cat load from the efforts that you're making with Validus Re and other pieces and changes that you [indiscernible]?
Yes, thanks, Paul. I gave probably a little bit more PML information than people may have liked, but it's really the story is 3 components. One is what we did in the reunderwriting to reduce gross exposure across AIG. By the way, including Validus Re over the last several years. And we shed over $1 trillion of limit most of it property. And so that had an effect on exposure and PMLs at all return periods.
Our next question comes from Meyer Shields from KBW.
Peter, you gave us a lot of detail about rate and exposure changes. And we saw a little bit of sequential improvement. But I was wondering if you could talk about changes in the gap between rate increases and loss trends from the first quarter to the second quarter of this year.
Sure, Meyer. We have given guidance. So let me start with the loss cost inflation, which is still at 6.5. And you can imagine in a company like ours, I mean, it's an index. And so we look at each line of business each quarter, make minor modifications or as we did in the back half of last year just based on inflation, more meaningful adjustments.
Okay. That's very helpful. One thing that you said in your prepared remarks also that surprised me was that you're seeing a huge uptick in casualty submissions in Lexington. I think we expected the property side. I was hoping if you can dig a little bit deeper into what's going on in specialty casualty.
Yes. Well, Lexington is just a great story. When we look at -- we had record submission count across Lexington. We drove very strong growth at the top line, but it's one of our most profitable businesses. And Dave McElroy, Lou Levinson, who leads Lexington, this has all been about driving value for our distribution partners and wholesale brokers. And we've been asking for submission activity on all lines of business.
Our next question comes from Yaron Kinar with Jefferies.
First question, I guess, going back to Paul's question on Validus. Could you offer us like a pro forma margin profile for North America Commercial ex the Validus sale, maybe even ex the crop business?
It's a very good question, but I have to follow up with a question back to you. Do you want it over a longer period of time? Because I mean, looking at a cat business in the second quarter and again, I'm happy to provide some detail. It was accretive by a little over 100 basis points in the quarter to a combined ratio.
Got it. And maybe just as a clarification. Your commentary, is that on a reported basis or underlying?
Both. But we don't break it out. But I mean, in terms of looking at it from 2018 through 2022, 2022 was the first year on a fully low to combined ratio is below 100.
Got it. And then my second question, given the secondary and Corebridge and we're starting to see a line of sight to below 50%, can you maybe offer us a precise threshold for deconsolidation?
No. I can't offer you precise, but I can give you some guidance in terms of what we're thinking if that's okay.
Sure.
Yes. So the secondary is our base case. And we would expect to do something hopefully before year-end, subject to market conditions. I think what we have proven over time is that we want to be prepared. And so we prepared for the IPO, ended up delaying it just based on market conditions, prepared on the secondary. And so we will be prepared to go before year-end.
Peter, I apologize. I was not really focused on the timing. I was more interested on what the precise percentage would be to see deconsolidation. Is it the second we drop below 50%?
Depending on Board structure. But if we modify the Board structure, it would be below 50%. But on the current Board structure, we'd have to go below 45%.
Our next question comes from Alex Scott with Goldman Sachs.
First one I had is on the capital deployment. I mean, I think one of the most challenging things to sort of model and forecast from the outside right now is just how you'll go about deploying the proceeds from a lot of the actions you're taking, including the separation of Corebridge. So I was just interested if there's any updated thoughts. I know in the past, you guys have kind of given the share count range. Any thoughts you'd provide or guidance as it relates to where the share count could go from here?
I think what we've outlined is still the base case. We ended up in the low 700s in terms of our share count. Sabra did a very good job of outlining the liquidity that we have and liquidity that will be coming in.
Got it. That makes sense. I guess a follow-up sort of in the same vein. In terms of organic deployment, I listen to the PML comments you're making and think about the volatility and how much better it is and then the fact that you guys, I think, still have below-average underwriting leverage, at least when we sort of look at like premiums to surplus, those kind of metrics. Do you have the capacity to be able to fund this greater growth, whether it's in Lexington and some other businesses in General Insurance, without using so much of the proceeds from the strategic actions?
We do, and it's been a big focus for us. Sabra, do you want to expand on that a little bit?
Yes. Thanks. I would just note, as I mentioned in my prepared comments, that the risk-based capital ratios in our U.S. pool are in the range of 470% to 480%, which is well above our target range of 400% to 420%. So we have ample capacity within the General Insurance businesses today to support growth.
Our next question comes from Michael Zaremski with BMO.
My question is about the exist -- remaining portfolio post the sale of Validus pending in the crop business. Are there other and what you did on the -- what you're doing on the personal line side. Are there other pieces of the portfolio that still need additional optimization? Or are we kind of mostly through the major actions?
I think we're through most of the major actions. We have to focus more on Personal Insurance, and then we have been certainly, the -- we spent a lot of time on the ultra and high net worth business and the actions that we're taking there in terms of improving it. And we'll see that as we go to the back half of '23 and into '24.
Okay. Great. And my follow-up is switching gears, thinking about AIG's long-term kind of combined ratio inclusive of other expenses. If we're thinking longer term, you've done a great job improving the loss ratio. We're clear that there's still -- you have guidance on expenses coming down.
No, I think you're thinking of it the right way. I mean, we've done an incredible job in terms of getting the portfolio that was in existence in '17 and '18 to where it is today. We know that we're an outlier on the expense ratio. That's a big part of what we're doing in the future operating model. And we'll start to show more and more evidence of that in the coming quarters and as we go into 2024.
Thank you for participating at today's conference. This does conclude the program, and you may now disconnect. Everyone, have a great day.