Peter Zaffino
Chairman and Chief Executive Officer at American International Group
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. I am very pleased to report that AIG delivered another exceptional quarter with strong financial performance. In addition, we made significant progress on our strategic priorities that are strengthening AIG for the future. We again demonstrated our ability to deliver high-quality outcomes while executing on multiple complex initiatives during very difficult market conditions. I would like to start with financial highlights from the second quarter. Adjusted after-tax income was $1.3 billion or $1.75 per diluted common share, representing a 26% increase year-over-year and the best quarterly adjusted EPS result for AIG since 2007. Net premiums written in General Insurance grew 11%, led by our Commercial business, which grew 13%. Underwriting income in the quarter was approximately $600 million. The adjusted accident year combined ratio ex cats was 88%, a 50 basis point improvement year-over-year and the best result for AIG since 2007. Our cat loss ratio was 3.9% or $250 million of catastrophe losses, a terrific result against the backdrop of a very challenging cat quarter for the industry. The Life and Retirement business reported very good results in the second quarter.
Adjusted pretax income was $991 million, up 33% year-over-year. And premiums and deposits were over $10 billion, a 42% increase year-over-year, supported by record sales of Fixed Index Annuity products. Consolidated net investment income on an APTI basis was $3.3 billion in the second quarter, a 31% increase year-over-year. In General Insurance, net investment income was $725 million, a 58% increase. AIG returned $822 million to shareholders in the second quarter through $554 million of common stock repurchases and a $268 million of dividends, which reflects a 12.5% increase in our quarterly common stock dividend that we announced on our last call. As you saw in our press release, the AIG Board of Directors approved an increase to our share buyback authorization to $7.5 billion, which reflects our commitment to returning capital to shareholders, consistent with the capital management strategy we have previously outlined. Lastly, our balance sheet remains very strong. And we ended the quarter with $4.3 billion in parent liquidity. During the remainder of my remarks this morning, I will provide more information on the following five topics. First, the significant strategic actions we took in the second quarter to reposition AIG. During that review, I will provide additional details on the divestitures of Validus Re and Crop Risk Services, the launch of Private Client Select as an MGA serving the high and ultra-high net worth markets and the actions we took with respect to Corebridge.
Second, I will discuss financial results for General Insurance. Third, I will give an overview of the results for Life and Retirement. Fourth, I will provide an update on capital management. And lastly, I will reconfirm our guidance with respect to our path to a 10%-plus ROCE post deconsolidation of Corebridge. Turning to the strategic actions we executed on. I will start with Validus Re. In May, we announced the divestiture of Validus Re and AlphaCat to RenaissanceRe for approximately $2.75 billion in cash and $250 million in RenRe common stock. We expect to close this transaction in the fourth quarter, subject to regulatory approval. We're very pleased to have RenRe as the acquirer. RenRe is a very important partner to us, a company with a terrific reputation. And we value the strong relationship we have with Kevin and his management team. We believe RenRe will be an excellent owner of Validus Re. Now let me provide some highlights on our rationale for the divestiture. We acquired Validus in 2018, which at the time provided AIG with business diversification not limited just to reinsurance but also attractive specialty businesses, including Talbot and Western World, which were not part of the sale to RenRe and will remain with AIG. Since 2018, we transformed Validus Re by reunderwriting the portfolio, leading to significant premium growth and improved profitability. In addition, we dramatically changed the business mix of the portfolio to achieve a more attractive balance among property, casualty and specialty businesses, improved geographic diversity and decreased peak zone exposures.
For AIG, this divestiture represents a key milestone on our journey as it further streamlines our business model, simplifies the structure of our global portfolio, substantially reduces volatility, which I will explain in a moment, generate additional liquidity and capital efficiencies and accelerates our capital management strategy. Due to the nature of assumed reinsurance and the portfolio mix of Validus Re, this business is capital-intensive and disproportionately contributes to AIG's overall volatility and PMLs. As we have discussed over the past few years, the core objectives of the property and casualty turnaround were: 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. We have completed a rigorous enterprise-wide modeling exercise using RMS version 21 to approximate the PMLs for AIG post closing, and all categories will significantly reduce. This analysis took into account AIG's exposure, Validus Re's exposure as of February 1, 2023, and combined output for both companies on an occurrence and aggregate basis.
Let me provide a few examples of the model output for AIG post closing of the Validus Re sale on an occurrence basis. For worldwide, all perils, net PMLs were reduced by 45% at the 1-in-250 return period. Worldwide hurricane PMLs will reduce by 60% at the 1-in-250 return period and by 70% at the 1-in-100 return period. North America hurricane PMLs will reduce by 70% at the 1-100 return period. North America earthquake PMLs will reduce by 55% at the 1-250 return period. Japan typhoon PMLs will reduce by 50% at the 1-100 return period. Japan earthquake PMLs will reduce by 50% at the 1-250 return period. And for EMEA, all PMLs will decrease by 85% at the 1-250 return period and 75% at the 1-100 return period. In addition to the strategic repositioning of our portfolio, there were several additional components that made the sale of Validus Re appealing for AIG. The required tangible equity that AIG will deliver to RenRe upon closing, which is $2.1 billion, is substantially below what Validus Re would have required if the business remained at AIG. We will receive $900 million above the book value of Validus Re, which reflects the improved quality of the portfolio since AIG's purchase of the business in 2018. We also expect to receive, through a pre-closing dividend, excess capital in the legal entities being transferred to RenRe, which we estimate will be approximately $200 million.
In addition, a $1 billion intercompany loan from Validus Re to AIG will be settled through internal dividends, and we expect AIG to benefit from a $400 million reduction in risk-based capital requirements following the closing. As part of the transaction, AIG will retain 95% of future reserve changes in the portfolio delivered at closing. We will receive the benefit of future reserve releases as the portfolio matures, and we will likely purchase an adverse development cover prior to the closing to minimize potential future reserve exposure. In the second quarter, we also announced and closed the sale of Crop Risk Services to American Financial Group for $240 million in cash. Crop Risk Services was part of the Validus acquisition in 2018. Over the remainder of the 2023 crop season, AIG will continue to benefit from earned premium for crop business booked since the start of the year. But as we enter 2024, this business will no longer have an impact on AIG's financial results. Next, I want to provide more detail on the formation of Private Client Select as an MGA, which is now referred to as PCS. The MGA has officially launched, and we expect to add new capital providers in the coming quarters. We believe the MGA structure is ideal for PCS as it creates flexibility and alternatives for clients, agents and brokers in an environment that's becoming more complex.
The high and ultra-high net worth markets PCS is focused on have significant foundational challenges include loss cost pressure, inflation, increased cat exposure through increased total insured values and more concentration in peak zones, and primary and secondary peril modeling has been [Indecipherable]. AIG will continue to support the MGA. And because we will be assuming risk on our balance sheet, we've established the MGA's risk framework, which is designed to improve its financial performance in 2023 and as we enter 2024. Overall, we are pleased with the progress we've made with Stone Point Capital on this MGA structure. And we're well positioned to accelerate the business plan through the remainder of the year. Moving to Corebridge. In June, we completed a secondary offering of Corebridge common stock with gross proceeds to AIG of $1.2 billion. The offering was well received by the market. And the new owners included a strong mix of long-term holders, which we believe results in a more stable and well-diversified shareholder base for Corebridge. Also in June, Corebridge announced and paid a $400 million special dividend in addition to its $150 million ordinary quarterly dividend and completed the repurchase of $200 million of common stock from AIG and Blackstone.
AIG's net proceeds from these actions were approximately $540 million. At the end of the second quarter, our ownership stake in Corebridge was approximately 65%. These actions demonstrate our commitment to deconsolidation and eventually full separation. As we noted on our last call, we continue to explore all options with respect to our remaining ownership of Corebridge that are aligned with the best interest of shareholders. Turning to other strategic actions we are taking in Corebridge. The previously announced sale process for Laya Healthcare, the private medical insurance business in Ireland that is part of Corebridge, is proceeding very well. We expect to announce a positive outcome from this process in the near term and expect that the proceeds from this divestiture will largely be used for a special dividend to Corebridge shareholders. Additionally, we recently retained advisers to analyze strategic alternatives for the disposition of the U.K. Life business that is part of Corebridge. The dispositions of Laya and U.K. Life will streamline the Corebridge portfolio and allow its management team to focus on core Life and Retirement products and solutions in the United States. Turning to General Insurance. We had another quarter of strong growth in both gross and net premiums written.
Gross premiums written were $10.4 billion, an increase of 11%. Global Commercial, which represents 80% of gross premiums written, grew 15%. And Global Personal decreased 1%. Net premiums written were $7.5 billion, an increase of 11%. This growth was driven by Global Commercial, which grew 13% while Global Personal grew 5%. In North America Commercial, we saw a very strong growth of 18% in net premiums written. Excluding Validus Re, net premiums written growth in North America Commercial was 13%. The major drivers were as follows: Retail Property, which grew over 50%; Validus Re, which grew 32%; and Lexington, which grew 18%, led by wholesale property and casualty. I would like to provide a few additional details about Lexington's growth, given it continues to be an important part of AIG's strategy. Property grew 38% year-over-year driven by very strong retention in new business as well as strong rate increases. Submission activity was up over 30% year-over-year. Casualty grew 41%, supported by strong retention in new business, and its submission count was up over 90%. In International Commercial, net premiums written grew 6% primarily driven by property, which was up 34%; Talbot, which was up 17%; and Global Specialty, which was up mid-single digits, which reflected the impact of additional reinsurance purchasing in the second quarter. Global Commercial had very strong renewal retention of 88% in its in-force portfolio.
International was up 200 basis points to 88%, and North America was up 200 basis points to 87%. As a reminder, we calculate renewal retention prior to the impact of rate and exposure changes. And across Global Commercial, we continue to see strong new business, which was approximately $1.1 billion in the second quarter. North America Commercial, excluding Validus Re, produced new business of approximately $600 million, an increase of 10% year-over-year. This growth was driven by Lexington property, which saw excellent new business growth of over 40%. Retail Property had over 50% new business growth, offset by Financial Lines, where new business contracted by over 35%. International Commercial new business was $485 million, which grew 5%. This growth was led by Talbot new business, which increased over 100% year-over-year and property, which grew new business by 40%, offset by Financial Lines where new business contracted by over 20%. As I noted on our last call, we continue to see headwinds in certain aspects of Financial Lines due to increased competition putting pressure on pricing. Despite these continuing dynamics, we remain disciplined on risk selection, terms and conditions and price while taking a long-term view on this line of business by not following the market down. Moving to rate.
In North America Commercial, excluding Validus Re, rate increased 8% in the second quarter or 9% if you exclude workers' compensation, and the exposure increase was 2%. Rate increases were driven by Lexington wholesale, which was up 23% with wholesale property up over 35% and Retail Property, which was up 30%. In International Commercial, rate increased 9%, and the exposure increase was 1%. The rate increase was driven by property, which was up 21%; Talbot, which was up 14%; and Global Specialty, which was up 11% driven by global energy, which was up 21%. Rate plus exposure was 10% in North America, 11% if you exclude workers' compensation and 10% in International, which in each case remains above loss cost trend. Turning to Personal Insurance. Note that second quarter results in North America Personal reflected the fact that PCG was transitioning to become Private Client Select. North America Personal net premiums written increased 17% primarily driven by lower quota share sessions in PCG, offset by decreases in travel and warranty. Overall, we had strong growth in net premiums written of 17% with PCG net premiums written growing over 60%. With PCS now officially launched as an MGA, there are several components of AIG's business in the high and ultra-high net worth markets that will result in improved financial performance for AIG over the balance of 2023.
First, as we outlined in prior calls, over the last few years, we evolved the model for our high and ultra-high net worth business such that we expect net premiums written to grow significantly over the remainder of the year with our current expectations showing net premiums written increasing over 75% in the third and fourth quarters. Second, the lag and earned premium growth that we saw in the first quarter of 2023 dissipated. And we saw a 36% growth in earned premium in the second quarter. And we expect that earned premium growth will continue to accelerate in the third and fourth quarter. The additional earned premium will provide operating leverage, which will reduce our GOE ratio in the third and fourth quarter. Third, AIG has [Indecipherable] costs from the transition of PCG to an MGA. And we expect to eliminate these costs over the next 18 months. Fourth, we expect the accident year loss ratio for our high and ultra-high net worth business will improve with the combination of improved pricing in our admitted business and more business migrating to the non-admitted market, which already had a very positive impact on PCG's accident and policy year loss ratios in prior quarters. This should earn in for our high and ultra-high net worth business through the second half of 2023 and into 2024. In International Personal, net premiums written increased 1% year-over-year. The modest growth was driven by travel and personal property in Japan.
Overall, our key focus continues to be growing Accident & Health and our business in Japan. Shifting to combined ratios. As I noted earlier, the second quarter accident year combined ratio ex-CATs was 88%, a 50 basis point improvement year-over-year. In Global Commercial, the second quarter accident year combined ratio ex-CATs was 84.4%, a 90 basis point improvement year-over-year. The North America Commercial accident year combined ratio ex-CATs was 85.1%, a 310 basis point improvement year-over-year. And the International Commercial accident year combined ratio ex-CATs was 83.1%, which continues to be an outstanding level of profitability. Global Personal reported a second quarter accident year combined ratio ex-CATs of 98.1%, a 170 basis point increase from the prior year quarter, largely due to a decrease in earned premium. Now I'd like to provide some context around midyear reinsurance renewals and recent conditions in the reinsurance market before moving to Life and Retirement. We purchased our major reinsurance treaties at January 1. However, approximately 20% of our overall core reinsurance purchasing occurs in the second quarter as we have a number of core midyear renewals, predominantly in specialty classes, and they were all successfully placed.
In addition, we decided to purchase additional retrocessional protection for Validus Re and a low excess of loss reinsurance placement for Private Client Group ahead of the wind season. Overall, the market exhibited more orderly behavior during midyear renewals amidst more stable trading conditions compared to January 1. Reinsure appetite for more discrete purchases increased somewhat, enabling a number of buyers to make up for shortfalls in coverage experienced at January 1. Overall, midyear property cat pricing increased 25% to 35% year-over-year in the U.S. driven by Florida. This was the second year in a row of substantial rate increases. International renewals, driven by Australia and New Zealand, saw price increase 20% to 50% with higher increases resulting from loss activity in the region. In previous calls, I touched on the increase in catastrophe losses from secondary perils. Through the first half of 2023, the industry has already experienced over $50 billion of insured losses, the majority of which were due to secondary perils, making 2023 already the fourth highest year on an inflation-adjusted basis. A majority of insured losses continue to occur in the United States, highlighting the difficulty of managing volatility in the largest insurance market in the world.
Against this challenging backdrop and a strengthened reinsurance rating environment, we maintained our conservative risk appetite and continue to have one of the lowest peak peril net positions in the market while managing our overall reinsurance spend. Additionally, through each of our renewals, we maintain all of our principal relationships with our key reinsurance partners. While we are exiting the assumed reinsurance business through the sale of Validus Re, our ownership of RenRe common stock that we will receive as part of the purchase price consideration, coupled with our ability to invest up to $500 million in RenRe's capital partner vehicles, will allow us to continue to participate and benefit from partnering with a world-class reinsurer with less risk and capital requirements. Turning to Life Retirement. As I noted earlier, the business produced very good results in the second quarter. Adjusted pretax income was $991 million. And adjusted return on segment equity was 12.2%, representing a 250 basis point improvement year-over-year. Premiums and deposits grew 42% year-over-year to $10 billion driven by record Fixed Index Annuity sales. Corebridge ended the quarter with a strong balance sheet with parent liquidity of $1.6 billion and a financial leverage ratio of 28%.
Over the second quarter, we continue to make good progress against the Corebridge operational separation so that it can eventually be a fully standalone company. A key focus has been executing against IT separation, which we believe will be substantially complete by the end of this year. To date, approximately 55% of the transition service agreements put in place at the time of the IPO have already been exited. Now turning to capital management. As I noted earlier, in the second quarter, we returned approximately $822 million to shareholders through common stock repurchases and dividends. And the additional $400 million of common stock we repurchased in July brings a total amount of capital we've returned to shareholders since the beginning of the second quarter to over $1.2 billion. In addition, we continue to focus on maintaining well-capitalized subsidiaries to enable profitable growth across our global portfolio. And we remain committed to having a leverage ratio in the low 20s and a share count between 600 million to 650 million post deconsolidation of Corebridge. The additional liquidity we will have following the closing of the sale of Validus Re will largely be used for share repurchases, which we expect to accelerate beginning in the fourth quarter and as we enter 2024. We also plan to use some of the proceeds from the sale of Validus Re to reduce outstanding debt. Lastly with respect to ROCE. We remain highly committed to delivering a 10%-plus ROCE post deconsolidation of Corebridge.
During the second quarter, we continued to make meaningful progress on all four components of our path to deliver on this commitment. As a reminder, these are sustain and improve underwriting profitability; executing on a simpler, leaner business model across AIG with lower expenses across the organization; operational separation and deconsolidation of Corebridge; and continued balanced capital management. The sequencing of each component has been very important. We are now able to accelerate this work with the GI underwriting turnaround, AIG 200 and the investment group restructuring largely behind us and the operational separation of Corebridge further along, in addition to divestitures, which I've already outlined. As I stated on our last call, we're moving away from AIG's historical conglomerate structure to being a leading global insurance company with a leaner and better defined parent company. We continue to expect approximately $500 million in cost reductions across AIG with a cost to achieve of approximately $400 million with substantially faster earn-in of savings than we saw with AIG 200. Sabra will provide more details on our path to a 10%-plus ROCE in her remarks. Overall, I could not be more pleased with our progress and what we've accomplished in the first half of the year. Our strong momentum continues, and we have a very solid foundation to build on for the future.
Now I'll turn the call over to Sabra.
