American International Group Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 5, 2023

There are 9 speakers on the call.

Operator

Welcome to AIG's First 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.

Speaker 1

Thanks very much, Michelle, 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 provided details on important factors that could cause actual results to CFO or events to differ materially. Except as required by applicable securities laws, AIG is under no obligation to update any forward looking statements the circumstances or management's estimates or opinions should change.

Speaker 1

Additionally, today's remarks may refer to non GAAP financial measures. The reconciliation of such measures to the operator. 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 aig.com. To Finally, today's remarks will include 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 until the deconsolidation of Corbridge Financial. AIG's segments and U.

Speaker 1

S. GAAP Financial results as well as AIG's key financial metrics with respect thereto differ from those reported by Corbridge Financial. Corbridge Financial will host its earnings call on Tuesday, May 9. With that, I'd now like to turn the call over to our Chairman and CEO, Peter Zaffino. Good morning and thank you for joining us

Speaker 2

to review our Q1 financial results. Following my remarks, Sabre will provide more financial detail in the quarter and then we will take questions. Kevin Hogan and David McElroy Will be available for the Q and A portion of the call. As you saw in our press release, we reported an excellent start to the year. To We continue to make meaningful progress across AIG and achieve important milestones even in the face of ongoing complexity in the insurance industry, to volatile market conditions and general economic uncertainty.

Speaker 2

We continue to diligently execute on our strategic and operational priorities, which drove very strong financial results in the Q1 and are positioning AIG for long term value creation. To Here are some highlights from the Q1. Adjusted after tax income was $1,200,000,000 or 1.63 Citi Sense per diluted common share representing a 9% increase year over year. Net investment income on a consolidated basis

Speaker 3

Chris and his team was $3,100,000,000

Speaker 2

In 2022, we began to take proactive steps to improve the credit quality, construction and return characteristics of our investment portfolio as well as to reduce volatility. To We saw the benefits of these actions in the Q1 and expect that to continue throughout the year. Sabra will provide additional detail on net investment income in her remarks. Net premiums written and general insurance grew 10% to On a constant dollar basis and adjusted for the international lag elimination that we discussed on our last call. To This growth was driven by our commercial business.

Speaker 2

Underwriting income was approximately $500,000,000 a 13% increase year over year, which is AIG's strongest first quarter underwriting result. The accident year combined ratio excluding catastrophes was 88.7% an 80 basis point improvement from prior year. Life and Retirement reported very good results with premiums and deposits of $10,400,000,000 to In the Q1, a 44% increase year over year supported by record sales in fixed annuity and fixed index annuity to products. Net flows into the general account from individual retirement were approximately $1,300,000,000 to Corbridge and Blackstone have made substantial progress advancing their strategic partnership, which began in late 2021. To Since that time, Blackstone has invested approximately $11,000,000,000 on behalf of Corbridge to with an average gross yield of 6.5% and an average credit rating of A.

Speaker 2

This partnership has allowed CoreBridge to expand in certain asset classes where we had limited to no access in the past, which has been very beneficial for the business and is helping to support growth, to particularly in fixed annuity products. We returned approximately $840,000,000 to shareholders in the Q1 to $600,000,000 of common stock repurchases and $240,000,000 of dividends. To And we ended the Q1 with strong parent liquidity of $3,900,000,000 Overall, I'm very pleased with what we accomplished in the Q1. The strong momentum we had coming into 2023 continues. As we announced last night, AIG Board approved the 1st meaningful increase to AIG's common stock quarterly dividend in many years.

Speaker 2

Starting in the 2nd quarter, This dividend will be $0.36 per share, an increase of 12.5%. This is another significant milestone for AIG and reflects our commitment to a disciplined, balanced capital management strategy and our confidence in the future earnings power of AIG. CoreBridge is also achieving important milestones. To Since its IPO in September of last year, CoreBridge has paid 3 dividends to public shareholders totaling approximately $450,000,000 to And yesterday, the Corbridge Board authorized a $1,000,000,000 share repurchase program. During the Q1, We were prepared to launch a secondary offering of Corbridge common stock, but chose not to proceed when equity markets became volatile due to issues in the financial sector.

Speaker 2

We continue to be prepared and disciplined in terms of executing a secondary offering, to which remains our base case for selling down our ownership in Corbridge subject to market conditions and regulatory approvals. To We remain committed to reducing our ownership interest in Corbridge and we'll explore other options that are aligned with the best interest of shareholders. To Mr. Chairman. During the remainder of my remarks this morning, I'll provide more information on the following five topics.

Speaker 2

To First, I will review the Q1 results for General Insurance. 2nd, I will give a high level overview of the results for life and retirement and Deborah will provide more detail in her remarks. 3rd, I will provide an update on a few strategic initiatives including the announcement last week relating to Private Client Services, our MGA partnership with StonePoint Capital. To our announcement on Tuesday of the sale of Crop Risk Services and our intent to sell Lea Healthcare, to which is a part of Corbridge and Ireland's 2nd largest health insurance provider. 4th, I will provide more information on capital management actions.

Speaker 2

Lastly, I will review progress on our path to a 10% plus ROCE, including an update on the work we are doing to on the future state business model of AIG. Turning to General Insurance, let me provide more detail on Q1 results Starting with our strong growth in gross and net premiums written. When we refer to gross and net premiums written, all numbers have been adjusted for both foreign exchange

Speaker 3

to

Speaker 2

the impact of the lag elimination. Gross premiums written were $12,000,000,000 an increase of 9% to With global commercial growing 13% and global personnel decreasing 4%. Net premiums written were $7,000,000,000 an increase of 10%. To This growth was primarily driven by Global Commercial, which grew 11%, while Global Personal grew 6%. To In North America Commercial, we saw a very strong growth of 15% in net premiums written due to Validus Re, which had over 40% growth year over year due to the exceptional results we achieved with our January 1 treaty placements, to which I discussed in detail on our last call.

Speaker 2

Lexington, which grew over 25% led by Wholesale Property and Casualty, to double digit growth in Captive Solutions and Glatfelter. Focusing on Lexington for a moment, I would like to highlight a few achievements from the Q1. The business continues to drive excellent performance, impressive growth and has consistently improved its portfolio quarter after quarter over the last couple of years. Lexington's tremendous growth Has been achieved through its relevance in the marketplace and increasing its market share, not from increasing limits deployed. To Strong retention, new business and rate have been the key drivers of Lexington's financial performance.

Speaker 2

To Lexington has now seen double digit rate increases for 16 consecutive quarters and cumulative compounded rate increases totaled over 100% to property primary policy went from $100,000,000 in limits deployed to $5,000,000 This has substantially reduced volatility Lexington's portfolio. Our thoughtful and prudent growth strategy together with our shift in focus to wholesale distribution to continues to serve us well, particularly in the E and S market. I also want to provide more color on Validus Re. To We provided significant detail on the oneone renewal season on our last call and I think it's worth expanding on a few items from the Q1. To Net premiums written were very strong and balanced in Validus Re and we continue to meaningfully improve the quality of the portfolio.

Speaker 2

To Rate improvements were particularly strong in U. S. Property, international property, marine and energy, casualty and specialty lines. To With respect to April 1 renewals across the portfolio, gross and net premiums written increased And within international property, limits deployed were reduced slightly and Japan property cat risk adjusted rates were up approximately 20%. To As we consider our deployment strategy at the June 1 renewal cycle, which focuses on U.

Speaker 2

S. Wind exposure, We will continue to maintain a prudent approach on limits deployed. We do not expect to deploy additional limits beyond our current aggregate allocated to Florida. To Although we do anticipate significant rate increases and improved terms and conditions. Like general insurance, the Validus Re portfolio has been completely reunderwritten with the focus on risk adjusted returns.

Speaker 2

The business had a terrific Q1 and is well positioned for profitable growth to the rest of the year. Shifting back to our 15% net premiums written growth in the Q1, This result was impressive despite the headwinds we continue to see in financial lines, where overall net premiums written contracted 9% to due to increased competition putting pressure on pricing as well as continued slowdown in M and A and other transactional business. To We are one of the very few lead markets in large account public D and O, where primary rates have remained relatively flat year over year. In contrast, HiX's public company D and O saw rate declines greater than 20%. To put this in perspective, This represents a little over 5% of our overall North America Financial Lines business and we will continue to manage this book very prudently.

Speaker 2

We have deep domain knowledge and experience, data, best in class underwriting capabilities and leading claims expertise to customers that allow us to differentiate ourselves in the D and O marketplace. During the past year, we continue to see new competitors with limited experience enter the high access public D and O market. This is driving down pricing in what is traditionally the most commoditized portion of a placement. To Despite these dynamics, we remain disciplined on price and are taking a long term view of this line of business. To We have significant scale and geographic balance on our portfolio and we will not fall the market down.

Speaker 2

To Turning to International Commercial, net premiums written grew 6%, primarily due to property, which was up over 40%, Global Specialty, which was up over 15% and Casualty, which was up over 15%. To Global Commercial had very strong renewal retention of 88% in its in force portfolio. International was up 200 basis points to 88% to And North America was up 100 basis points to 87%. As a reminder, we calculate renewal retention prior to the impact of rate

Speaker 3

Consumer and exposure changes.

Speaker 2

And across Global Commercial, we continue to see strong new business, which was over $1,000,000,000 in the first quarter. To International Commercial new business was over $590,000,000 led by Specialty, which increased its new business by over 50%

Speaker 3

to driven by

Speaker 2

Energy and Marine. North America Commercial excluding Validus Re achieved new business of over $480,000,000 Driven by Lexington, which saw excellent new business growth of over 50%. With respect to rate, In North America commercial, excluding Validus Re, rates increased 7% in the Q1 or 8% if you exclude workers' compensation to And the exposure increase was 2%. In North America commercial, rate was driven by Lexington Wholesale, which was up 26% With wholesale property up 35%. For Lexington Property Wholesale, this was its strongest quarterly rate increase.

Speaker 2

To Rate in retail property was also up significantly at 32%. International commercial rate increases were 8% driven by Talbot Citi at 16%, international property at 11% and specialty at 9%. The exposure increase in the international portfolio to with 2%. Rate plus exposure remains above loss cost trend at 9% in North America, 10% if you exclude workers' compensation Ken and Ten Percent in International. Turning to Personal Insurance, 1st quarter results reflect our continued repositioning of this business, to especially PCG given our announcement of the creation of a managing general agency in partnership with StonePoint Capital.

Speaker 2

To I will provide more information on the MGA later in my remarks. North America personal net premiums written increased 57% to driven by lower quota share sessions in PCG at January 1 as we transition to writing the business to as an MGA along with the recognition of an improved portfolio. The combination of improved pricing in our admitted business to And more business migrating to the non admitted market has a very positive impact on PCG's accident and policy or loss ratios. To This will earn in through the second half of twenty twenty three and into 2024. Entering 2023, to We required less excess of loss reinsurance on the upper end of our reinsurance program due to realized reduction in PCG's PMLs at all return periods as a result of ongoing improvements in risk selection and reductions in aggregate in peak zones.

Speaker 2

To More specifically, all peril and all return periods from 1 in 20 to 1 in 1,000 reduced on average by 40%, to While those same return periods with respect to wildfire reduced on average by 60%. These dynamics further impacted net premiums written in the Q1. Syndicate 2019 continues to act as a mechanism to enable third party capital providers to support PCG's high and ultrahigh net worth business for the 2023 accident year. To In terms of expectations for PCG for the full year, we expect net premiums written growth to be at to or higher than we saw in the Q1, the loss ratio to meaningfully improve and the acquisition ratio and general operating expense to also improve. To Turning to International Personal, net premiums written were largely flat in the Q1.

Speaker 2

To Travel and warranty grew, while personal property declined, all driven by a further refinement of our cat reinsurance cost allocation methodology, to making year over year comparisons difficult. Accident and Health had some timing issues that impacted net premiums written in the Q1. To We expect to see growth in international personal for the remainder of 2023 and believe results will continue to strengthen as we move through the year. To Shifting to combined ratios, as I noted earlier, the Q1 accident year combined ratio Excluding catastrophes was 88.7 percent, an 80 basis point improvement year over year. To In Global Commercial, the 1st quarter accident year combined ratio excluding catastrophes was 84.9%, a 110 basis point improvement year over year and we reported 24% increase in underwriting income.

Speaker 2

To The North America commercial accident year combined ratio excluding catastrophes was 85.7%, to a 240 basis point improvement year over year. The international commercial accident year combined ratio excluding catastrophes to was essentially flat at 83.7%, which is an outstanding result. Global Personal reported a first Q1 accident year combined ratio, excluding catastrophes of 98.6%, a 120 basis point increase from the prior year quarter, to, largely due to a decrease in earned premium from our deliberate reduction in gross exposure in PCG in North America. To Now let me comment on catastrophes. The cat loss ratio in the quarter was 4.2% or $264,000,000 of catastrophe losses.

Speaker 2

To Our largest loss in the period was from 2 storms in New Zealand, which accounted for $126,000,000 of catastrophe losses. To Looking at North America, total losses from catastrophe related activities in the Q1 were $116,000,000 to which includes Validus Re. In international, excluding Japan, we have eroded approximately $75,000,000 of our aggregate retention to and have approximately $75,000,000 net remaining plus the annual aggregate deductible for each cat loss for the rest of the year. To As we described on our last call, the reinsurance program we structured at this year's January 1 renewal provides us with the ability to manage volatility and severity. Looking ahead to the rest of 2023, we expect to see very strong top line growth to General Insurance.

Speaker 2

Turning to Life and Retirement, the business delivered strong performance

Speaker 3

in the

Speaker 2

Q1. Adjusted pre tax income was $886,000,000 for the Q1 and adjusted return on segment equity was 10.7%. To 1st quarter results benefited from continued growth in spread based products and related spread income. To As I mentioned earlier, premiums and deposits grew significantly in the Q1, driven by strong new individual retirement business, which to despite increasing surrenders related to interest rates contributed to growth in the general account. The balance sheet The capital position of CoreBridge remains strong with $1,800,000,000 of parent liquidity.

Speaker 2

Turning to our strategic initiatives. Last week, we executed definitive documentation with StonePoint Capital for the launch of Private Client Services, an MGA to that will serve the high and ultrahigh net worth market. We are excited about the prospects for PCS and are confident of the value this new operating Instructure will deliver for clients, brokers and other stakeholders. We look forward to continuing this journey with the PCS management team and the ongoing support of StonePoint Capital. Subject to regulatory approvals, the MGA is expected to formally launch in the Q3 of this year, to And we expect to bring on additional capital providers through the second half of twenty twenty three.

Speaker 2

As part of our ongoing review process, We regularly assess the composition of our portfolio of businesses to ensure it is aligned with our long term strategy to and best positioned to create value for our shareholders and other stakeholders. As part of this review, As you saw in our announcement on Tuesday, we executed definitive documentation to sell Crop Risk Services or CRS to American Financial Group for $240,000,000 We acquired CRS as part of our broader acquisition of Validus Holdings in 2018. To AIG will continue to write business for the 2023 spring crop season, which ends June 30. To We expect approximately $700,000,000 to $800,000,000 of net premiums written for 2023, 75% of which booked in the Q1. To Starting in the Q3, AIG will act as a fronting partner for American Financial Group during a transitional period.

Speaker 2

To For full year 2023, we expect to retain about $800,000,000 to $900,000,000 of earned premiums, dollars 750,000,000 CRS of which will earn in over the remainder of the year. CRS is a well run and attractive business led by a high quality management team. To In American Financial Group, we have found a high quality partner for CRS and its employees and believe the business will benefit from being part of a larger Combined Platform. We also continually review the product portfolio and geographic footprint of Corbridge as we position this business for the future As a fully standalone company, after a comprehensive review of the health product offering, we decided to evaluate strategic alternatives And a potential sale of Leah Healthcare, the private medical insurance business in Ireland. We believe this will help to streamline the Corbridge portfolio and allow us to focus on life and retirement products and solutions.

Speaker 2

Turning to capital management, the Q1 marked another quarter of continued to the progress and execution of our balanced strategy. In addition to the Q1 share repurchases and dividends that I mentioned earlier, Against the backdrop of an unstable macroeconomic environment, we thought it was prudent to raise $750,000,000 of debt at the end of March. To This provided us with financial flexibility to pay down a near term debt maturity and complete additional share repurchases to Chris on delivering a 10% plus ROCE. Through the Q1, we continue to make meaningful progress on the 4 components of our path to deliver on this commitment. To As a reminder, these components include sustained and improved underwriting profitability, executing on a simpler, leaner business model COO, across AIG, operational separation and deconsolidation of Corbridge and continued balanced capital management.

Speaker 2

To Given the number of strategic initiatives we are executing at once, we are taking a long term view to while measuring progress in 90 day increments. We advanced each component during the Q1 and expect this to continue throughout 2023. To As I discussed earlier, our Q1 financial results were excellent with continued top line growth and improvement in underwriting profitability in general insurance. To Over the last few months, we accelerated our work to establish AIG's future state business model. Sequencing has been very important on our journey and the work that's been accomplished over the last few years.

Speaker 2

On the general insurance turnaround, AIG200, the separation and IPO of Corbridge and restructuring of our Investment Management Group. To This has positioned us to move forward as a more focused and simplified AIG. To evolving our future state business model will result in us moving away from the conglomerate structure AIG operated in for decades. To We will eliminate overlap and significantly reduce decentralized infrastructure across the company, which will lead to a leaner business model, particularly in our operations. In future state, we expect a redefined AIG parent expense structure should be approximately 1% 1.5% of premiums, which today is roughly $250,000,000 to $350,000,000 AIG Parent will have 5 primary roles and objectives, public company matters including finance, legal, compliance and regulatory over Cite as well as corporate governance communications with key stakeholders including the investment community, rating agencies, regulators, policymakers and AIG colleagues, risk management, culture, performance and human capital management to and strategy including business development, M and A and design and execution of key initiatives.

Speaker 2

To As we progress our future state business model, we anticipate achieving approximately $500,000,000 in cost reductions at AIG Parent to and a cost to achieve of around $400,000,000 with substantially quicker earn in of savings than we achieved with AIG 200. To As expense savings begin to earn through, the reductions will largely be seen in other operations, to which is where general operating expenses are currently accounted for. With respect to Corbridge, I took you through our current thinking on separation and timing of the secondary offerings. To Lastly, on capital management, we continue to maintain appropriate levels of capital in our subsidiaries to support profitable growth. To We remain on track to reduce AIG common stock outstanding to be between $600,000,000 $650,000,000 shares to and achieve a debt to capital leverage at the lower end of our 20% to 25% range post deconsolidation of Corbridge.

Speaker 2

To As I noted earlier, we increased our common stock dividend by 12.5% starting in the Q2 of this year. To And in addition to our stock repurchases in the Q1, to date we have repurchased $240,000,000 of AIG common stock in the 2nd quarter. To Apart from the progress we're making on these components of our path to a 10% plus ROCE, we also expect tailwinds from higher reinvestment yields. To We are confident that our continued progress on strategic initiatives and our capital management strategy will allow us to achieve our ROCE targets Sabra and deliver long term profitable growth that benefits all of our stakeholders. I will now turn the call over to Sabra.

Speaker 4

Thank you, Peter. This morning, I will cover 2 accounting changes, provide more details on Q1 results and give an overview of commercial mortgage loans. First, the 1 month lag in financial reporting for the General Insurance International segment was eliminated last quarter. The lag elimination did not impact earnings significantly, to But it did affect premiums written comparisons to 2022. Details on the premium impacts are in the financial supplement on Page 26.

Speaker 4

To 2nd, we adopted the change in accounting standard for certain long duration products commonly called LDTI. Yesterday, 8 ks were filed that provide restated prior year financial results for AIG and Corbridge. The cumulative effect at year end 2022 was an increase of 1 point $5,000,000,000 to adjusted equity and an increase of $1,000,000,000 to total shareholders' equity. This impact is consistent with our previous guidance. To As a reminder, this is a GAAP accounting change only and does not impact statutory results, insurance company cash flows or economic returns.

Speaker 4

To going forward, we expect a modest run rate increase in LNR APTI and less market and mortality driven volatility from the change in accounting standards. To Turning to the quarter, as Peter mentioned, AIG's Q1 adjusted after tax income was $1,200,000,000 CFO for $1.63 per diluted share, up 9% from last year on a restated basis and up 25% from originally reported. To Key trends in the quarter and similar to the last three quarters were higher GI underwriting results and higher income from fixed maturities and loans to lower alternative investment income. Compared to the prior year quarter, there was a higher impact from non controlling interest from the Corbridge IPO in 3Q 2022. Consolidated net investment income on an APTI basis was $3,100,000,000 to Similar to the Q4, income from fixed maturities and loans in both GI and L and R rose sequentially and over the prior year, to while returns on alternative investments were down $593,000,000 compared to very strong annualized returns of 28% last year.

Speaker 4

To Income on fixed maturities and loans rose by $573,000,000 over the prior year, with average new money reinvestment rates of 5.35 percent, to about 220 basis points above sales and maturities. The yield rose to 4.29%, up 78 basis points from 1Q 2022 to Q2 and 23 basis points over 4Q 2022. Part of the increase in fixed maturity yields resulted from our proactive repositioning over the last two quarters CFO in the U. S. GI portfolio.

Speaker 4

We sold and reinvested about $6,000,000,000 in fixed maturities, resulting in a realized loss of $224,000,000 to the company's earnings call. We expect incremental yield pickup from this repositioning in 2Q2023 and also from higher reinvestment rates throughout 2023 based on the current rate and spread environment. Turning to the segments, GI adjusted pretax income or APTI was $1,200,000,000 $37,000,000 higher than 1Q 2022, Chris, principally due to a $56,000,000 increase in underwriting income from both higher earned premiums and a one point improvement in the calendar year combined ratio, which was 91.9%. Peter covered underwriting results in detail, but I want to add that GI reserves had favorable prior year development, net of reinsurance and prior year premiums of $54,000,000 Turning to L and R results for the Q1, APTI was 886,000,000 to down $48,000,000 compared to $934,000,000 in 1Q 2022 as restated. Consistent with GI, LNR had a strong increase in base portfolio investment income, but lower alternative investment income.

Speaker 4

To Mortality experience improved, but fee income was down due to lower capital market levels compared to a year ago. As Peter noted, L and R premiums and deposits were very strong at $10,400,000,000 Notably, individual retirement sales were $4,900,000,000 a 26% increase over the prior year quarter with record levels of fixed and fixed index annuity sales because of higher crediting rates. To group retirement deposits grew 19% with higher out of plan fixed annuity sales and new plan acquisitions. To Strong fixed and fixed index annuity sales net of surrenders resulted in $1,300,000,000 of positive flows to the general account and individual retirement, to our operator, up from $700,000,000 last year. While surrenders are up, they remain below projections.

Speaker 4

To variable annuity net flows, which impact the separate account were negative. To conclude on earnings for the quarter, other operations adjusted pretax loss to Consolidated Investment Entities and Asset Management, which had strong private equity results in 1Q 2022. Corporate GOE decreased $27,000,000 from the prior year and $77,000,000 from 4Q 2022 Citi, despite $29,000,000 of additional expense related to the corporate separation. Turning to AIG's balance sheet. Book value per common share was $58.87 at quarter end, up 7% from year end, principally due to higher valuations unavailable for sale securities due to lower long term interest rates.

Speaker 4

Adjusted book value was $75.87 per share, roughly flat with year end. To At the end of March, we issued $750,000,000 of senior notes, a portion of which was used to pay down an April bond maturity. To our leverage ratio declined to 32.8%, down about 1 point from year end even with the new issuance due to the change in AOCI in the quarter. To Excluding AOCI and the Fortitude embedded derivative, debt leverage was 26.3%. For the Q1 of 20 23, AIG's consolidated adjusted ROCE was 8.7%, comprised of 11.6% in GI and 10.7% in LNR.

Speaker 4

To as Peter discussed, we are laser focused on achieving a 10% plus ROCE post deconsolidation. To Peter provided a lot of detail on the quarter. So I'll use my remaining time to cover investments, particularly commercial mortgage loans, given the recent focus on this asset class. First, I want to emphasize that our investment portfolio is grounded in the liability profile of our 2 insurance businesses. To We strive to achieve strong risk adjusted return, while matching the duration, cash flow and liquidity needs of the liabilities.

Speaker 4

To Over the last several years, we have improved the risk profile of the investment portfolio by reducing capital intensive, less liquid or more volatile assets such as hedge funds. With the onset of COVID and again with rising interest rates last year, we further tightened investment guidelines and moved up in quality, including the GI repositioning mentioned earlier and also sales of LNR non investment grade assets. Turning to our commercial mortgage loan exposures, I'll start by noting that our mortgages are senior secured loans on high quality properties to people that are well diversified by type and geography with strong loan to values or LTVs averaging 59% to EndeT Service coverage ratios averaging 1.9 times. We are the lead lender on more than 80% of our loans, which gives us important control rights. To Excluding Fortitude Funds withheld assets, we had $33,800,000,000 of commercial mortgage loans at the end of March, to of which $30,300,000,000 were at Corbridge and $3,500,000,000 at General Insurance.

Speaker 4

The largest property type is multifamily housing Chris, about 40% of our commercial mortgage loans. Industrial property loans are about 16% of the portfolio. Both multifamily and industrial are performing well. We are however focused on traditional U. S.

Speaker 4

Office, which is $5,400,000,000 to our 2% of AIG's invested assets. Our U. S. Office allocation has been shrinking for several years, particularly when we tightened underwriting standards to further for office, retail and hotels with the onset of COVID. Currently, 94% of the the company's credit cardholders.

Speaker 4

These loans are high quality rated CM1 or CM2 with debt service coverage averaging about 2.1 times Q1 and weighted average LTVs of 64%. Valuations are updated annually by a third party and we continue to monitor valuations given rising cap rates. To We also have a credit or CECL allowance against the portfolio of about $330,000,000 or 3.7 percent to against the office loan portfolio and $584,000,000 for the total commercial mortgage portfolio our 1.7%, which is higher than many peers as we use CMBS default data in our methodology. To Roughly 3 quarters of the building securing the loans are Class A or newer buildings with better amenities. The majority are in the top 5 Collison Areas and Concentrated and Central Business Districts, including in New York City, which historically has been one of the strongest office markets in the country.

Speaker 4

To today, we are intensely focused on office loan maturities in the next 2 years, about $2,000,000,000 or 28 loans. To We are already in discussions with many borrowers about their plans and our requirements for refinancing or extension, including additional equity, revised the financial statements. While valuations are under pressure, cash flows are the primary source of debt service for our loans, and we will continue to monitor the loans carefully. We look forward to updating you on our investment performance in the quarters ahead. To wrap up.

Speaker 4

Our Q1 2023 results demonstrate continued sustained and strong financial results, rising investment portfolio yields, significant progress against strategic initiatives, robust capital and liquidity and continued progress on our path to a 10% plus ROCE. With that, I will turn the call back over to Peter.

Speaker 3

To

Operator

to please press star 1 again. Our first question comes from Meyer Shields with KBW. Your line is open.

Speaker 5

To Thanks. Good morning. Peter, I wanted to address one aspect of growth. I didn't cover it, I think, a ton of detail, which is helpful. But to the net to gross ratio didn't change.

Speaker 5

And I would have thought that based on the current dynamics in the property cat market and much improved to performance on a lot of casualty lines that have been heavily reinsured that we would see AIG retaining more of its gross premium. So I was hoping you could talk through that?

Speaker 3

To

Speaker 1

Hi, Mario. This is Quentin. I think we're having a little audio technical difficulty. So if you can bear with us

Speaker 2

Can you hear me now? To Yes.

Speaker 1

You're coming through loud and clear, Peter.

Speaker 3

Yes. Do you

Speaker 1

want to just repeat your question?

Speaker 6

I heard a question.

Speaker 2

Sorry, I actually had a good answer too. I just was on not a microphone that worked. So, Maher, back to your question is that to We had you have to look at the portfolio composition to be able to answer the question. And Balladust Re obviously had to meaningful growth on gross and net during the quarter. And so therefore, it's hard to look at to the sessions year over year when you're having a retro program that fits the portfolio that you're underwriting.

Speaker 2

We've never had a strategy that we're going to time the market with our reinsurance partners. They've always been strategic. They've always been supportive. They've always deployed the capital in support of AIG. And so we were not going to to do anything other than to try to get the appropriate terms and conditions with them and have not really changed much of our risk appetite in terms of taking that.

Speaker 2

And I think that has to generated a terrific result for us on net premium written, but also on the combined ratios. So I think to I wouldn't look into just one quarter in terms of the sessions. And as I said, we have a lot to In terms of the guidance I've given on PCG, which we will still assume a lot of risk. To And I guess, let's just play it out for the full year. We're not looking to do anything materially different.

Speaker 5

To Okay, perfect. That's helpful. And I don't know if this is even a good question, but does the changing approach to North American Personal Lines have any implications for the International Personal segment?

Speaker 2

To It really doesn't, Maher. I mean, they're really distinct businesses. I mean, certainly, our travel and warranty have to platforms that are global and that give us capabilities across the world. But as to Private Client Group in particular in the U. S.

Speaker 2

Is a unique asset. Again, the guidance I gave in the prepared remarks, it's one that we believe to We will grow the net premium written because we don't believe we need the quota shares anymore after the excellent job the team has done in to repositioning and reunderwriting that portfolio. We have substantially less cat and aggregate that we once did. So I think that's to something that will be a little different in terms of if you look at international. In international, we have a terrific personal insurance business.

Speaker 2

To some of it was affected by COVID. It's growing back between Japan's personal insurance, our global accident and health, which is predominantly international, to as well as our travel and warranty, which are rebounding in terms of growth. So I don't think that there's a lot of correlation between to international and North America, but both we believe in and we're investing in and you'll continue to see improvement. It will just be at a different pace because of the anomaly of the high network business.

Speaker 5

Okay, perfect. Thank you so much.

Speaker 2

Thank you, Maher.

Operator

Thank you. Our next question comes from Paul Newsome with Piper Sandler. Your line is open. To

Speaker 6

Good morning. I also had a couple of questions on the personal lines business, sort of micro and macro. To My understanding and tell me if I'm wrong is that much of the change to the NGA is skill related. And does that mean that we should expect the expense ratio to fall over time as the MGA to King Speed. And maybe just correct me if I'm wrong, does that shift around how we think about So the relationship between expenses and losses in that business over time, not necessarily next quarter, but over time.

Speaker 6

To

Speaker 2

Paul, let me make sure I understand the question. I mean, are you asking in terms of what's going to happen to the expense ratios over time as we start to reposition and grow the business.

Speaker 6

Yes, I am.

Speaker 2

Okay. Thank you. This year, as I said in my prepared remarks, to We are going to see a lot more net premium written. The reason for that is, as we were repositioning the business over the last 2 years, to We bought very low excess of loss catastrophe reinsurance. We bought a substantial quota share.

Speaker 2

We ceded significant amount of Syndicate 2019, which also had retrocession behind that in a variety of forms. And so the net premium written to was not that large as you've seen. And so part of the repositioning with StonePoint and having an MGA, one is that we think there's Tremendous growth opportunities that exist in the business with other capital providers and believe that how we have repositioned the business through to rate increases and disciplined underwriting on the admitted side and then also the non admitted became to an option for us to have flexibility in form and rate. And so that was very positive for us in terms of repositioning the business. As we look to 2023 and beyond, We believe that the business is going to perform much better, much more profitable and we don't need to seed off as much on the quota share.

Speaker 2

So as a result in this particular calendar year, what you'll see is a lot of net premium written growth, improved loss ratios and both the expense ratio on an acquisition basis as well as to The general operating expenses will improve. And so the overall combined ratio will improve dramatically. We're not going to be where we want to be in 2023, I believe by the time we hit 2024, those results will continue to improve.

Speaker 6

That's great. And Maybe a big picture talking about a little bit more of the big picture cat exposures. I mean, it looks like I'm just looking to At the general insurance overall, the cat load has pretty much stabilized, but that's been a huge part of the improvement over time. Do you think we're pretty much done in it? Again, I'm not talking about next quarter, I'm talking about years to come to making this portfolio of businesses have the cat load that you want.

Speaker 6

I mean, is this sort of the run rate we should be thinking about in the long term? To

Speaker 2

The team has done an incredible job of underwriting the property line of business across all of AIG over multiple years. To our ability to reposition that portfolio. We talk a lot about aggregates. We talk a lot about reductions and we talked a lot about where we want to grow. I think we were in a terrific place as we entered 2023 from that hard work.

Speaker 2

And when I look at where we to we constantly talk about where the best risk adjusted returns available in the marketplace, where is our capacity most valued And where are we valued for clients. So when I look at where we've grown, Valdez Re certainly was a big part of that. Lexington has been hitting it out of the park on just about every aspect whether it's top line growth, retention, new business, rate, to like how they actually are more relevant in the marketplace. Working with Dave McElroy and the team, we've taken back some of the retail property, to But then in other parts of the world, we've taken it back up. So like we've repositioned the portfolio and then have coupled that with the reinsurance to reflect the portfolio it is today.

Speaker 2

So if I summarize what happened at oneone is that we saw terrific opportunities for Validus Re to grow. So we took the PMLs up there a little bit. To We dramatically took the PMLs down in the private client group substantially. Again, I gave the return period that every return period from 120 to 1 to in Lexington and Global Specialty, we took those PMLs down as well. So overall, when you look at the increased PMLs in the Q1 of Validus Re And the reductions that we had in the commercial business and the personal business, our overall PMLs are down year over year.

Speaker 2

I think that's a tremendous outcome When you look at where we're growing, how we're driving risk adjusted returns, how we couple that with reinsurance and our overall net PMLs are down at all the critical return periods. So I think all that's been purposeful. The team has done an unbelievable job executing.

Speaker 6

Great. Thanks. We always appreciate the help.

Speaker 2

Thanks, Paul.

Operator

Thank you. Our next question comes from Michael Ward with Citi. Your line is open.

Speaker 7

To Thanks, guys. Good morning. I was hoping you could discuss how you think about your excess capital just given the macro volatility. To you raised some debt, it sounds like for some prudent liquidity and for buybacks. I guess given the share price.

Speaker 7

I guess the buyback could have been a little bit higher. So just wondering from here, should we expect that you'll sort of hold a bit more capital against uncertainty?

Speaker 2

Thank you and good morning. We were very disciplined in terms of the 750,000,000 to DebtRaise. Again, I'm going to let Saver comment a little bit more on liquidity and capital. But when I look at all the different components of to our capital strategy. I think we executed incredibly well in the Q1.

Speaker 2

I mean our primary focus is to make sure that we have to the appropriate capital levels in the insurance company subsidiaries for growth. And so it gave us tremendous opportunities at oneone as it will give us for the entire year, to very focused on our leverage ratios and being at the lower end just to give us financial flexibility. And of course, I've been leading everybody every quarter saying we're looking at the dividend, we're looking at the dividend to And to have a 12.5 percent dividend increase, not only helps complete, some of the capital management strategy we've been talking about, But also shows the confidence that we have on our earnings and how we're managing liquidity. But I'll have Sabra comment a little bit on the parent liquidity and our approach capital and it is proven to be conservative at this time. Sabrina?

Speaker 4

Thank you, Peter. Yes, and I would just comment that first of all, we look at our capitalization both in base and stress scenarios. I mean, this is just what I would call basic risk management procedures that we do. And we're very comfortable with our balance sheet even in the current environment where obviously there's a lot of stress on the system with the debt ceiling and the rest. To from where we sit today, we have very strong robust capital and liquidity.

Speaker 4

And as Peter noted, the Board was comfortable raising the dividend for the first to time in many, many years because of the significant turnaround of GI underwriting results over the past 5 years. To So as we sit here today, yes, we'll continue to evaluate our financial flexibility for additional share repurchases, keeping in mind that our first goal is to maintain a strong balance sheet that can withstand turbulent times.

Speaker 7

Very helpful. Thank you. I guess maybe on the crop deal, I guess I was just wondering are there to If you could maybe point to any other sort of targeted units where you could do sort of similar value unlocking deals there to as you sort of work towards margin improvement and simplification. Thanks.

Speaker 2

Great. Thank you. We're always looking at portfolio and looking at areas where we can add, where we can improve the overall structure of AIG to And looking at the different parts of the world that we compete in, I think crop is a little bit anomalous, just because we really do believe it's a very good business. To But you know how it works, which is driven by commodity prices and yields. And I think that having to Scale is really important.

Speaker 2

And while the top line that we publish on a gross and net basis is significant, That's gone up 40%, 50%, if not more over the past several years based on those components. And we believe that crop Risk Services in order for it to achieve its ultimate potential that being part of a bigger enterprise and one that valued it like Great American to was the prudent approach for us at this time. And so that was something that was specific to that business. It was specific to how we look to strategically position AIG for the future and also making certain that with the Crop Risk the company's services. It had a great opportunity to scale and realize its potential.

Speaker 2

So I feel like we really found a very good partner and that's really what drove the outcome for CRS.

Speaker 7

Thanks very much.

Speaker 2

Yes. Have a good day.

Operator

Thank you. Our next question comes from Alex Scott with Goldman Sachs. Your line is open.

Speaker 8

Hi. First one I have for you is to On the separation at Corbridge, I know you mentioned the base case is still a secondary, but I think you also mentioned that you were considering some alternatives. So I just wanted to see if you could extrapolate on that a bit at all. What kind of alternatives could you look towards? And Yes.

Speaker 8

How could some of those things potentially improve things for shareholders?

Speaker 2

Yes. Thanks, Alex. I'll try to expand a bit on Because as you can imagine, there's not a lot of more detail that I can really share beyond my prepared remarks. We do believe the secondary is the preferred path, to But obviously, it's subject to market conditions as we saw in the Q1, but we're prepared to go in the Q2. Our objective has not changed, which is for AIG to reduce its ownership stake in Corbridge over time.

Speaker 2

And so I think it's prudent looking at to a variety of different options to make sure that we're driving value for shareholders and provide a path that will recognize to the value of Corbridge. Corbridge has done a terrific job since we've announced that we were going to commence upon doing an IPO, getting themselves positioned to be an independent public company, and the stock was trading at a deep discount in the Q1. I mean one of the alternatives, I don't think we're going to go much beyond this was what we announced on Leah Healthcare. To And so making sure we're sticking to the core business of Corbridge and we'll just give you updates as the weeks and over the next month progresses, but we're prepared and are very excited about hopefully getting the secondary done in the 2nd quarter.

Speaker 8

To Got it. Follow-up I had is on corporate expenses. I think it was the first time you guys gave a bit more explicit guidance around to where corporate expenses for RemainCo could shake out at that 1% to 1.5% premiums. And I just wanted to make sure I understood some of the mechanics. I to When I think about that level, I mean, is that what I should expect in sort of corporate GOE, overall corporate Kos.

Speaker 8

I mean, how do I think about that? And then just a technical kind of question, the investment that I think you mentioned leading up to that, to will that go through operating and also be reflected in corporate?

Speaker 2

Yes. So we try to provide as much to detail as we could on the expense savings. Certainly, let me start with AIG200 because we still have more to earn through on AIG200 savings to in 2023 2024. So over 50% of that will be earned in mostly through the second and through Q4 of 2023. We have begun to separate Corbridge and but upon deconsolidation, to approximately $300,000,000 of the AIG corporate expenses will move to life of retirement.

Speaker 2

So that's another variable that you need to consider. We also gave guidance as we're working through our future state business model, dollars 250,000,000 to $350,000,000 of parent expenses. And And then the remaining will be worked through to fit the business model in terms of what we're designing for the future of AIG. We want to make sure that we have a lean model that's not synonymous with expense cutting, but it is how we're going to be in each market, how we face off with our clients and our distribution partners to maximize growth and all the opportunities that present themselves to AIG and making sure that we have a structure to that supports that. Sequencing is important.

Speaker 2

We've been working on a variety of different initiatives that are substantial and we're performing on all of them, Making certain that General Insurance has the capital and support it needs to grow in this market, repositioning some of our businesses, which we covered in my prepared remarks, Making sure we complete AIG 200, the operational separation, preparing to do the secondary, advancing Corbridge Capital structure, to And then making sure that we're working to get this future state business model implemented, but it has to be in that order. And we've given you the guidance. We've done the work. We know that's the savings that we'll achieve. Some of that's going to go into the business and so the business has to get rationalized and leaner to in order to be able to absorb more expenses, but our commitment is the $500,000,000 in addition to the guidance that we've given in the other components, And we're highly confident we'll execute on that at the right time, meaning, we've got to get these other things further along.

Speaker 2

And then when we have clear to line of sight in terms of separation, we'll be able to execute on the target operating model.

Speaker 8

Got it. Thank you.

Operator

To thank you. Our next question comes from Brian Meredith with UBS. Your line is open.

Speaker 3

Hey, thanks. Yes, Peter, you gave us a lot of detail on the growth in the commercial lines. There's obviously very strong growth. I'm trying to just dumb it down a little bit here. If we look at what the growth is ex, let's call it, ballast and crop, what would have looked like?

Speaker 3

And what was the tailwind from ballast and crop just from the commercial lines growth on a year over year basis. And the reason I'm asking is those are obviously very big first quarter premium numbers. So I just want to make sure I'm not extrapolating that for the remainder of the year. To

Speaker 2

Thanks, Brian. Certainly, Ballad has contributed a meaningful amount to the growth. But look, we bought a lot of retro. It's the first quarter. It's not all property.

Speaker 2

So each quarter is a bit different in terms of not being able to straight line it. Crop Risk Services had low single digit growth. So that was not a contributor at all in terms of net premium written. To We had very strong, as I said, growth in our specialty business, in Lexington, in our property, to offset a little bit by financial lines. But I put the guidance in there because I feel very confident That we're going to have strong growth throughout the year.

Speaker 2

Even though the quarters are a little bit different, businesses like Europe is heavy oneone to And we start to have sort of different mix of business over the second, 3rd and 4th. But I feel Seeing the pipeline, looking at how you grow, I mean, the first thing I would look at is what's the client retention? How is the new business? What's happening with rate? And are we growing in the businesses that we want to?

Speaker 2

And I think we are checking all the boxes here and see that those businesses have more opportunity in the future, not less. So I think the growth that you saw in the Q1, obviously, there's a mix of business, but I would expect to see similar growth throughout the rest of the year.

Speaker 3

To Very helpful. And then second question, just curious, some other companies are talking about how the commercial property markets are even further firming up in the Q2, there's more business available. Are you seeing the same kind of dynamics or things actually continuing to prove here in the commercial property markets?

Speaker 2

To Yes. Thanks, Brian. Yes, we are seeing that. I mean, again, it's early in the Q2, but views on April. And as we look to to the rest of the Q2, we're seeing property continue to firm up and getting stronger than it was in the Q1.

Speaker 2

So that's something that we're trying to be to focused on clients, making sure we're driving value, and we have a lot of capital to deploy. So, we expect to be trading actively in the Q2.

Speaker 7

Thank you.

Speaker 2

Okay. Well, thank you everybody. Sorry for the 1 minute hiccup on the microphone, but greatly appreciate you dialing in and I wish everybody a great Thank you.

Operator

Thank you. This does conclude the program. You may now disconnect. Everyone have a great day.

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Earnings Conference Call
American International Group Q1 2023
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