Ladies and gentlemen, good day, and welcome to AIG's Second Quarter 2021 Financial Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Quentin McMillan. Please go ahead.

Thank you, Nora. Today's remarks may contain forward-looking statements, including comments related to company performance, strategic priorities, including AIG's pursuit of a separation of its Life and Retirement business, business mix and market conditions and the effects of COVID-19 on AIG. These statements are not guarantees of future performance or events and are based on management's current expectations. Actual performance and events may differ materially. Factors that could cause results to differ include the factors described in our first quarter 2021 report on Form 10-Q, our 2020 annual report on Form 10-K and other recent filings made with the SEC. AIG is not under any obligation and expressly disclaims any obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise. Additionally, some remarks may refer to non-GAAP financial measures. The reconciliation of such measures to the most comparable GAAP figures is included in our earnings release, financial supplement and earnings presentation, all of which are available on our website at www.aig.com. With that, I will now turn the call over to Peter Zaffino, President and CEO of AIG.

Good morning, and thank you for joining us. We have a lot of topics to cover this morning as we made significant progress on many initiatives over the last 90 days. I will start today's remarks with an overview of AIG's outstanding consolidated financial results for the second quarter. Then I will review results for General Insurance and Life and Retirement in more detail. Following that, I will provide an update on the progress we're making on AIG 200 and the operational separation of Life and Retirement from AIG. Next, I will provide details on the strategic partnership we announced with Blackstone in July, which represents a significant milestone for AIG and a major step forward towards the IPO of Life and Retirement. And lastly, I will provide an update on our capital management strategy where our near-term priorities remain the same as what I've outlined in the past: debt reduction, return of capital to shareholders in the form of share repurchases and investment in organic growth. Mark will provide additional details on the quarter and we'll then take questions. Starting with our consolidated results, I'm pleased to report that AIG had an outstanding second quarter. We have sustained the significant momentum we had coming into 2021 through the first half of the year and delivered exceptional performance in General Insurance with strong top line growth and significant improvement in our combined ratios. Our pivot to growth and focus on demonstrating leadership in the marketplace accelerated through the second quarter as we continued to prioritize underwriting discipline, portfolio optimization, reducing volatility and growing in segments where market conditions are favorable and fall within our risk appetite. We also saw very good results in our Life and Retirement business, primarily driven by improved investment performance. Life and Retirement's adjusted pretax income…

Thank you, Peter, and good morning, everyone. For the second quarter of 2021, AIG reported adjusted pretax income, or APTI, of $1.7 billion and adjusted after-tax income of $1.3 billion. We produced an annualized return on adjusted common equity of 10.5% for AIG, 12.3% for General Insurance and 16.4% for Life and Retirement. The annualized return on adjusted tangible common equity was 11.6% for the quarter. On a GAAP basis, AIG reported $91 million of net income with the principal difference between GAAP and adjusted after-tax income of $1.3 billion being the accounting treatment of Fortitude, net investment income and associated realized gains and losses. Before I move to General Insurance though, I'd like to add to Peter's remarks on the Blackstone SMA. This arrangement incorporates specific specialty asset classes comprised mostly of private credit, alternatives and structured products, where Blackstone is a world leader in sourcing and origination and has a demonstrated track record of delivering yield uplift and not public fixed income securities. The fee structure is 30 basis points on the initial $50 billion of AUM, increasing to 45 basis points for the annual new AUM of $8.5 billion starting 4 quarters later as well as for the reinvested run-off AUM. Therefore, fee should rise from 30 basis points initially towards 43 basis points by the end of the initial 6-year contract term for Blackstone's share of the assets. For this part of our portfolio, it's fair to expect that fees will somewhat precede the benefits of the impact of enhanced origination and differentiated asset classes and recognition of related yield uplift. We believe this SMA arrangement is unique in that L&R maintains control over its overall asset allocation, asset-liability management, liquidity and credit profile and the nature of individual investment structures. In addition, Life and Retirement…

Thank you, Mark. Operator, we'll go to question and answer.

[Operator Instructions] We'll take our first question from Elyse Greenspan from Wells Fargo.

My first question, Peter, you said you guys could get to that sub-90% margin target within General Insurance perhaps sooner than expected. I was hoping you could expand on that just in terms of time frame. And when you make that comment, are you assuming stable pricing and inflation kind of remains around 4% to 5% based off of what Mark said into 2022?

Thanks, Elyse. I've talked about it in the past that there's many components that are going to drive improved combined ratio. The first is the absolute underwriting performance, and we're seeing that come through in what Mark covered in his script in terms of severity, attritional losses and just less volatility. In addition, we have seen strong top line growth and believe that's in the Commercial side. We're in that market now and see that continuing. We need less reinsurance that we once needed because of the makeup of the portfolio. So those are all tailwinds. And then in addition to that, you have AIG 200, which I gave some numbers on my prepared remarks that we have real tailwinds there. Not only are we going to continue to have a clear sight in the overall path to $1 billion, but it's starting to earn through in the income statement and just our overall expense discipline. So we don't heavily rely on one component. There's 4 to 5 that drive it. And no, it does not require us to be in the same rate environment. I mean you have to be in the range on the social inflation and loss cost inflation. But we watch that all the time and believe that we have a lot of momentum. And I'll give more guidance specifically in the next couple of quarters. I mean, the momentum I've seen and the excellent job that Dave McElroy and the entire leadership team have done in General Insurance is a real differentiator. And the momentum they have is tremendous. So it just leaves me with a lot of optimism.

Great. And then my second question, in terms of Life and Retirement, now that you did this initial sale with Blackstone and you emphasized using most of the foreign tax credits, so it sounds like tax considerations won't impact the amount of L&R that you guys bring to the public market. Do you have a sense of how much you're going to bring on to the public market? And then in terms of the proceeds, do you guys get there? Since you're paying down $2.5 billion of debt now, will the majority of the proceeds from future transactions just be used for buyback and organic growth?

Yes. Thanks, Elyse. In terms of the timing, as I said, we're targeting a first quarter IPO. We're working really hard on the operational separation. We'll close with Blackstone, who's going to be a tremendous partner for us, we hope, in July. And so working over the next 6 months to position Life and Retirement to have a very successful IPO is the primary focus. Second is we have to think about, I said in my prepared remarks, of like the regulatory environment and the market itself. So that will really dictate in terms of how much we do. And it just gives us a lot of flexibility to accordion it up if there's really favorable market conditions or just to go in with a -- we wouldn't go to an IPO with a 9.9%. We'll do something larger than that. But the size, timing, we'll continue to give you guidance as we get further along in the year with the progress that we're making. I don't know, Mark, if you want to add anything to the capital management, the debt.

Just I think that -- I think the core point was to emphasize that this removes the constraint. So rather than on the specifics of the sizing, which as Peter said, which is very market-sensitive and contingent, but having that ability now to not have such a constraint is the main point we really wanted to push over.

We'll take our next question from Meyer Shields from KBW Investment Bank.

First question on the Blackstone partnership. Can you give us a sense of what the internal expenses are that are comparable to the 30 and 45 basis points that will constitute the fees?

Yes. Meyer, thank you for the question. I'll turn it over to Mark in a second. But I think that when we looked at the partnership with Blackstone, there was a variety of factors that went into it, certainly them making a commitment on the equity investment, making certain that Life and Retirement still maintained its authority and ability to shape the investments with Blackstone. So we contained that. A lot of the assets that we have or will transfer are classes that they have exceptional track records on, and so we're working through that. We do believe that the AUM will grow over time with Life and Retirement. And so this will become a smaller percentage, and the base case was that not only with the Blackstone partnership that our overall business model will evolve to be more efficient over time. But Mark, maybe you could fill in a couple of the details of that.

Yes. Well, Meyer, as Peter said, the level of these specialty assets are usually much more labor-intensive and are always on the higher end of the scale, if you think of it in a rate card sense. And so that part is completely within expectations of what we would say. Within -- with our own internal structures, we would have also increasing costs as you graduate up to the overall asset class categories that they are experiencing for us. So there's some gap, but some of that cost accounting view is less clear than you think. But we know what the value we're going to be getting out of that is going to be more than worth it.

Okay. Understood. Second question, I guess, this is probably for Mark. I know the expense ratios in North American Personal have been distorted up until the second quarter because of, I guess, depressed travel insurance and the syndicate. Is the second quarter expense ratio run rate, are those representative of what we should see going forward?

It's -- what I think that you're going to -- let me make a general statement first. And that is that I think Peter tried a position that's been -- and we may have said this a little bit in past calls. But you should think of the combined ratio gains on the Commercial side of being loss ratio and expense ratio driven and on the Personal Line side, more expense ratio driven. We've gotten a lot more stability in the loss ratios on there, so you'll continue to see that. But to the extent -- it's roughly a -- I would actually say you should anticipate the expense ratio to continue to improve in North America Personal.

And one thing I would add, Meyer, in terms of what Mark just noted is that the high net worth space is changing dramatically in peak zones. We expect to see a continued change in the Excess & Surplus Lines as more alternatives -- it was basically split in the second quarter between admitted and non-admitted new business. So that's just something that we're going to watch. I mean, there's no specific trends that are going to be substantially different than the guidance we've given. But there is some change in that business that we want to make sure with the market-leading position that we take advantage of solving problems for clients but also repositioning the portfolio to have less volatility.

We'll take our next question from Erik Bass from Autonomous Research.

I was hoping you could talk a little bit more about the asset management agreement with Blackstone and how you see this affecting Life and Retirement's NII over the next couple of years. It sounds like you expect some initial dilution. But when should this turn and start being accretive to NII? And also, will any of the assets they manage be used to support new business? And could this help you be even more competitive in your fixed indexed annuity offerings?

Yes. Mark, why don't you start and then turn it over to Kevin in terms of talking about product?

Yes. Thank you, Peter. Yes. And I think Kevin will have a few things to help you with there as well. So on the asset management, think of it this way, Erik. You've got the -- the uplift will come more delayed than the fees, to your point, firstly. And secondly is as the $50 billion of AUM is worked through, we have been thinking about it mostly, it takes 7 years for that runoff to turn over. As that occurs, it also shifts from 30 to 45 basis points. The $8.5 million annually that will also come in to take it to the 92.5% will be at 45 bps. So you kind of have that curve that I was alluding to in my prepared remarks. So as a result of that, you're going to have a net yield uplift coming through as a function of when those investments can be made. So if you think of it, you're really -- at the end of year 1, you still have 85% of the original AUM still not turned over, which is why you get the delay aspect. But it's -- we expect that to chip away and close a lot sooner than you might think. But that -- the important point to remember is that L&R completely has that control. So the takeoff between the liquidity and the rating distributions and the asset distribution and capital trade-offs and so forth is all within the management discretion of L&R. Kevin?

Yes. Thank you. So Erik, I think what's important is to keep in mind that this is not a change in our portfolio strategy. This is an enhancement of our portfolio strategy. Blackstone has tremendous origination capability. And we believe that their ability to originate in these asset classes exceeds our current ability. And in addition to that, they have a broader range of assets within the subclasses. And the combination of their ability to originate with more capacity and also the breadth of their asset classes, we believe, will allow us to create new products to support transactions. And our intention will be to work together to innovate strategies that will allow us to grow faster. We do not think of the balance sheet as static. We think about a growing balance sheet. And so rather than focusing just on the yield of this part of the portfolio, I think about the overall portfolio strategy. So again, this is not a change in our strategy. This is an enhancement of it, and that's how we think about it.

And then can you help us think about the level of new public expenses that Life and Retirement will have? And will these be able to be offset by savings elsewhere? And then how should we think about the level of expenses that are running through other ops that will remain with the parent, kind of post-separation?

Erik, let me handle that one. The guidance that I provided in the past and we'll stay with is that there are meaningful savings for Life and Retirement within AIG 200. That will be tailwinds to them. We had said around $125 million, Life and Retirement achieved some of that. But there's a big number left for us in terms of earning through that over the next 18 months. So think about roughly $100 million of AIG 200 benefits. Then there is allocations and parent service fees that goes over to Life and Retirement today that will either dissipate or we'll still have those services as we transition for Life and Retirement to become a public company. So that's in the range of $75-plus million. So Kevin has a decent amount to invest towards building out the public company. And we think with other initiatives for expense savings through separation office that it should largely be neutral to Life and Retirement. And we think the synergies that exist within the remaining company, AIG, that it's neutral to beneficial. And we'll give more guidance as we get closer to the end of the year when we've done more work in the separation office.

We'll take our next question from Phil Stefano from Deutsche Bank.

Yes. Looking at the General Insurance book and mostly focused on Commercial, when we look at the gap in net written versus net earned, I mean, it's clearly there's a runway, just given where the pricing is today for the continued improvement in the underlying loss ratios there. How are you thinking about rate adequacy, the need to continue to push for rate versus just growing and dialing back the rate that you're getting now? Like how are you balancing these 2 dynamics?

Thank you very much for the question. Mark put a lot of comments in his prepared remarks. We watch loss cost inflation and margin on everything we do in terms of portfolio optimization. That's really what I refer to when I talk about how do we position General Insurance, particularly on the Commercial side, to have an optimized portfolio. We've had several years of rate increases. We're building margin. And some specific lines of business have been getting more rate than others and they're the ones that need it. But it's something that Dave McElroy and the entire team spend every day thinking about and believe that there is absolute runway to continue to develop margin. But Dave, do you want to talk a little bit about how you're approaching it in some of the different segments of the business that you're focused on?

Yes. Thank you, Peter. Thank you, Phil. Phil, the rate increase story is one you don't -- you want to make sure it's calibrated off of all the other things you're doing in the portfolio. So what we've done over the last 3 years is a lot of risk selection and terms and conditions and attachment point and account exposures and managing that. So if you fall in love with a singular rate increase number and you define your book, you ultimately probably end up adversely selected against. So you actually have to put that in context. And I always use examples. It's like I might have gotten a 10% rate increase on a contractor in New York and I'm still chasing New York labor law, I will lose, okay? And for the industry, it's a little bit of like commercial auto. We've been getting rate increases in commercial auto for 8 years and we still haven't solved that problem. So rate increase can be a false positive. What we've done with a sort of technical understanding of it, looking at it and aggressively realizing that we have a large account book, upper middle-market book, and we need more rate to reflect the more complexity of that book. So that's -- we think that's sustainable going into the latter part of this year, okay? We think we can accommodate what would be expected loss cost inflations. And at the same time, and this is what I've observed in the last quarter, is there's more pricing to the account, the account characteristics. Is it moderated? Yes, a little bit, okay? But it's moderated off of still over loss cost trends. And what I would say, when I look at my dispersion charts, we don't have the same outlier plus 30% up,…

Yes. That's very thorough. Look, maybe a quicker one...

We'll take our next question from Tracy Benguigui from Barclays.

I see that there is an IPO contingency in the Blackstone transaction. Is that just a timing thing? Or is the IPO contingency also considering a pricing floor for minority IPO proceeds or a minimum equity stake size?

Thanks, Tracy. No, the 9.9% is predicated on a strategic partnership that starts to accelerate all the things that we want to do to set Life and Retirement up to be a public company. And we're really focused on getting that done within the first quarter and making sure that the organization is set up to do that. And again, there's regulatory and market considerations that we'll always look at. But those are really the bigger ones than tying really what the cornerstone investor has brought to the table versus the eventual IPO. As Mark mentioned, we have a lot more flexibility because of the consumption of the foreign tax credits. And so 2022, we'll start to outline what we think will likely happen as we get closer to the end of the year.

Okay. Yes, I was just referring to some fine print in your 8-K that if the IPO didn't happen, there were some recourse. So I didn't know if there was something else that I should also be considering.

No.

Okay. Perfect. Look, anyone could trade growth for margin expansion, but you're at a spot where you're doing both. And I guess, the only place where I don't have visibility is your loss pick. So can you contextualize how your current accident year loss picks have been tracking maybe relative to last year and your 5-year average?

Mark, do you want to cover that?

Sure. I guess, a couple of things. First off, we are viewing -- although we're showing substantial margin improvement on a quarter-over-quarter or year-over-year basis, we actually think we're being conservative in this. As I said, I think, on past calls, there has been a lot of change over the last 3 years, including some of the fundamental channels in which we get business. So we think we got every one of those correctly. Nobody bats 1,000, so you wind up having a little bit of risk margin associated with each of the last several accident years. So we feel good overall. And we feel about the trajectory of the improvement and where it's coming from and that we're not booking and displaying things without having an appropriate risk margin associated with it. I hope that's helpful.

Yes. Thanks, Mark. And I want to just thank everyone for joining us today. Before we end the call, I want to thank our colleagues around the world for what they've accomplished over the last 6 months, especially considering the challenges that have been presented in work remote environments. We have a talented, hardworking colleague base that's executing on multiple complex initiatives simultaneously, which I think makes us very unique, very proud of the team, remains very focused on ensuring quality in everything that we do and delivering significant value to all of our stakeholders. Have a great day.

That concludes today's conference call. Thank you, everyone, for your participation. You may now disconnect.