Good day, and welcome to AIG's Second Quarter 2023 Financial Results Conference Call. This conference is being recorded. Now at this time, I would like to turn the conference over to Quentin McMillan. Please go ahead.

Thanks very much, and good morning. Today's remarks may include forward-looking statements, which are subject to risks and uncertainties. These statements are not guarantees of future performance or events and are based on management's current expectations. AIG's filings with the SEC provide details on important factors that could cause these actual results or events to differ materially. Except as required by applicable securities laws, AIG is under no obligation to update any forward-looking statements if circumstances or management's estimates or opinions should change. Today's remarks may also refer to non-GAAP financial measures. 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 aig.com. Finally, note today's remarks as they related to net premiums written in General Insurance are presented on a constant dollar basis and where applicable, are also adjusted for the lag elimination in International that is described in our earnings release and related documents. Additionally, 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 Corebridge Financial. AIG segments and U.S. GAAP financial results as well as AIG's key financial metrics with respect thereto differ from those reported by Corebridge Financial. Corebridge Financial will host its earnings call on Friday, August 4. 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 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…

Thank you, Peter. This morning, I will provide more detail on second quarter results, including net investment income and underwriting performance, provide a balance sheet update and review the drivers of our path to a 10%-plus adjusted ROCE. Starting with second quarter results. As Peter noted, adjusted after-tax income was $1.3 billion, up 15% from last year or an annualized adjusted ROCE of 9.4%. Adjusted after-tax income per diluted share was $1.75, up 26% from last year, reflecting the impact of share repurchases on EPS. Second quarter results were consistent with recent trends: strong underwriting margins and higher net investment income in General Insurance; increased base investment yields; and spreads and strong sales in Life and Retirement and continued expense reduction in balanced capital management and Corporate and Other. Turning to net investment income. On an APTI basis, investment income improved significantly, up 31% from last year and up 7% sequentially on a consolidated basis and also rose in each segment. Reinvestment rates are driving higher yields. The average new money yield was 5.46%, about 210 basis points above the yield on sales and maturities. In General Insurance, this increased the yield on the fixed maturities and loan portfolios 93 basis points over last year and 23 basis points sequentially. In Life and Retirement, the yield improved 75 basis points and 15 basis points, respectively. Alternative investment returns also improved this quarter, although they remain below our long-term outlook totaling $147 million for an annualized return of 6.0%. Credit performance has been strong with more upgrades than downgrades in the fixed maturity portfolios and continued derisking of lower-rated assets. Commercial property valuations continue to face downward pressure from higher cap rates, which impacts loan to values on commercial mortgage loans and investment returns on real estate equity funds. However, debt…

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

[Operator Instructions] Our first question comes from Paul Newsome with Piper Sandler.

Congrats on the quarter. I was hoping we could focus in on the general -- the North American Commercial business a little bit. I'm getting some questions about the growth. If you sort of assume a certain amount of growth is related to the price increases sort of ex-Validus and whether or not we saw a fair amount of growth -- just sort of if you normalize [indiscernible] Validus. Sorry, I know you gave a lot of detail there, but maybe if you could kind of simplify it for -- that'd be fantastic.

Sure. Thanks, Paul. As we talked about in our prepared remarks, we are very pleased with our overall growth across the world. And retention is up, new business was terrific and balanced. And rate, well above loss cost, was evident in so many parts of our business. If I unpack it as you asked, I mean, look at North America, we discussed Validus Re, was up 32%, but it's not cyclically its largest quarter. It was basically 25% of North America. But other businesses had tremendous quarters. Lexington had 18% growth. But that was also part of us discontinuing a big program that we didn't like the risk-adjusted returns that had an impact on top line premium growth. And so I would look at Lexington in terms of casualty, which was 40% growth. Lexington property, which was 35% growth. Retail property was up over 50% in the quarter, and I outlined the rate increases were north of 30% for 2 quarters in a row. Our actual retail casualty business was up in the high single digits. So it was a very good outcome for net premium written in North America. The headwind was Financial Lines, which was down a little bit over 10%, but that is something that is specific to North America. But we have a really good balance in growth. If I look at -- I'll just expand a little bit in terms of International. We had really strong growth in property. Our syndicate Talbot was up 17%. International Specialty, I drew it out as a mid-single-digit growth net premium written in the quarter. We had some discretionary spends on treaty reinsurance. On a gross basis, it grew over 40%. And I want to call out, Financial Lines is not experiencing the same headwinds as North America, and International was flat. And that's our largest business in the second quarter in International. So had a little bit more of the weight in terms of the overall growth. But I thought it was really balanced, really well done and all the fundamentals we're executing on.

And my second question, I wanted to ask about the cat load in particular in North America as we think of it going forward. I mean, clearly, from the data you showed us, you talked about on the call the volatility piece or the tail is going to be reduced a lot on Validus Re. On an ongoing basis, do you also see kind of a reduction in the cat load from the efforts that you're making with Validus Re and other pieces and changes that you [indiscernible]?

Yes, thanks, Paul. I gave probably a little bit more PML information than people may have liked, but it's really the story is 3 components. One is what we did in the reunderwriting to reduce gross exposure across AIG. By the way, including Validus Re over the last several years. And we shed over $1 trillion of limit most of it property. And so that had an effect on exposure and PMLs at all return periods. I think the reinsurance programs that we bought are world-class. We keep calling that out, but in a very challenging and difficult environment at 1/1, we did not compromise by taking a lot more net because of reinsurance pricing. It reflected our book. We got great partners. And as a result, we didn't really have more net in terms of overall low-return peered PMLs. And so what I drew out in the Validus Re example, again, is on occurrence. It was the RMS model. We'll work through it. We got plenty of aggregate as to drive businesses that exists within AIG. But yes, I mean, like it's a different company. I mean, we're not going to have the tail exposure. But also at all return periods, we're going to have less cat. We've managed aggregates across the world and look at Validus Re as a very good business. But as I said, when we want to continue to reduce volatility, we do that through reinsurance. But when you have a treaty reinsurance business that is -- got a portfolio that has a lot of cat, that's harder to do. So I think the volatility, the cat loads will go down. By the very nature, we're going to lose a big part of our cat exposure. But we've been conservative on that and increased them this year and are very comfortable with our estimates and our actual results.

Our next question comes from Meyer Shields from KBW.

Peter, you gave us a lot of detail about rate and exposure changes. And we saw a little bit of sequential improvement. But I was wondering if you could talk about changes in the gap between rate increases and loss trends from the first quarter to the second quarter of this year.

Sure, Meyer. We have given guidance. So let me start with the loss cost inflation, which is still at 6.5. And you can imagine in a company like ours, I mean, it's an index. And so we look at each line of business each quarter, make minor modifications or as we did in the back half of last year just based on inflation, more meaningful adjustments. I'm really pleased with the discipline the company is showing on driving rate above loss cost, and we've done that across the world. So the rate environment in the second quarter was very strong. I gave you the guidance on the prepared remarks of North America excluding work comp, 9%; International at 9%. The drivers for this Retail Property, excess and surplus lines and our specialty businesses, the headwind for rate in North America was Financial Lines. And it's worth noting again that we have a very big footprint. And I mentioned in the prior question that International is not experiencing the same rate issues. And again, when I look back over the last 14 quarters, each quarter has been a positive rate increase in Financial Lines. So it's different for our International portfolio versus our domestic. And we continue to look at businesses like properties getting a lot of attention, but you can't look at that as a single quarter. I mentioned before, cost increases on the loss cost side, inflation, cost of capital, but also the cost of reinsurance for the industry, ours was a high single-digit risk-adjusted increase at 1/1. But those reinsurance costs in the industry are going to need to play in over the course of a year or maybe even like in Europe's case, into the first quarter, absent anything happening through cat season. So I think this is the market that we're in. It's a disciplined market. The cost of capital is more expensive, and we're going to be very prudent in where we deploy capital. But I'm very comfortable that we are driving margin on a written basis, and that will continue as we get to the back half of the year.

Okay. That's very helpful. One thing that you said in your prepared remarks also that surprised me was that you're seeing a huge uptick in casualty submissions in Lexington. I think we expected the property side. I was hoping if you can dig a little bit deeper into what's going on in specialty casualty.

Yes. Well, Lexington is just a great story. When we look at -- we had record submission count across Lexington. We drove very strong growth at the top line, but it's one of our most profitable businesses. And Dave McElroy, Lou Levinson, who leads Lexington, this has all been about driving value for our distribution partners and wholesale brokers. And we've been asking for submission activity on all lines of business. And so when we're going to deploy property, yes, we have aggregate. Yes, the performance has been very good. Yes, the growth opportunity is there on its own. But we have been very focused on driving opportunities across the portfolio, and we're asking for the business. And so like the submission activity is substantial. And then I think being one of the largest wholesale underwriters and respected as one of the top in terms of underwriting excellence, we're getting looks at multiple lines of business. And we have staffed up in order to take on that additional volume on the property and casualty side. So I was very pleased that the team executed as well as it did, and I expect that to continue.

Our next question comes from Yaron Kinar with Jefferies.

First question, I guess, going back to Paul's question on Validus. Could you offer us like a pro forma margin profile for North America Commercial ex the Validus sale, maybe even ex the crop business?

It's a very good question, but I have to follow up with a question back to you. Do you want it over a longer period of time? Because I mean, looking at a cat business in the second quarter and again, I'm happy to provide some detail. It was accretive by a little over 100 basis points in the quarter to a combined ratio. But don't forget, its acquisition ratio is higher than our normal business. The loss ratio was slightly below based on dynamics going on in the market today. When I look at our overall business and ones that I continue to highlight, Lexington specialty, our property, a little more accretive than Validus Re. So I wouldn't have the impression that it's going to be highly dilutive. Obviously, it's done really well in the first half of the year. But if I go back the last 3 to 4 years, last year is the first year we were able to publish a combined ratio below 100. And so looking at the combined ratios of the business overall, it's been a positive contributor in the first half of this year. But in terms of the business, we have a lot of business to perform better. And we have -- in terms of the index, I don't think it will materially impact us.

Got it. And maybe just as a clarification. Your commentary, is that on a reported basis or underlying?

Both. But we don't break it out. But I mean, in terms of looking at it from 2018 through 2022, 2022 was the first year on a fully low to combined ratio is below 100.

Got it. And then my second question, given the secondary and Corebridge and we're starting to see a line of sight to below 50%, can you maybe offer us a precise threshold for deconsolidation?

No. I can't offer you precise, but I can give you some guidance in terms of what we're thinking if that's okay.

Sure.

Yes. So the secondary is our base case. And we would expect to do something hopefully before year-end, subject to market conditions. I think what we have proven over time is that we want to be prepared. And so we prepared for the IPO, ended up delaying it just based on market conditions, prepared on the secondary. And so we will be prepared to go before year-end. I think Corebridge is doing very well in its business performance, its operation as a public company. And then we have made enormous progress of getting it ready to be a standalone public company once we deconsolidate. They're executing very well on the management plan. Again, Kevin will outline it in detail on Friday, but they're able to execute on capital management now with share repurchases as well as ordinary dividend. And so we certainly want to continue to sell down at a reasonable pace, but it's just going to be subject to market conditions and where the business is.

Peter, I apologize. I was not really focused on the timing. I was more interested on what the precise percentage would be to see deconsolidation. Is it the second we drop below 50%?

Depending on Board structure. But if we modify the Board structure, it would be below 50%. But on the current Board structure, we'd have to go below 45%.

Our next question comes from Alex Scott with Goldman Sachs.

First one I had is on the capital deployment. I mean, I think one of the most challenging things to sort of model and forecast from the outside right now is just how you'll go about deploying the proceeds from a lot of the actions you're taking, including the separation of Corebridge. So I was just interested if there's any updated thoughts. I know in the past, you guys have kind of given the share count range. Any thoughts you'd provide or guidance as it relates to where the share count could go from here?

I think what we've outlined is still the base case. We ended up in the low 700s in terms of our share count. Sabra did a very good job of outlining the liquidity that we have and liquidity that will be coming in. We have focused on the 4 components in a very rigorous way of making sure that we have capital and subsidiaries to drive the growth in a market that we think is very favorable. We increased our dividend this year, and so we want to continue to focus on that. Our leverage in the low 20s, and Sabra and I both indicated, we'll do some cleanup on debt because the impact of share repurchases, you need to continue to still retire debt. And the main focus from liquidity is going to be on share repurchase, and that will be highly correlated to when we close on RenRe. We'll be active in the market in the third quarter. And I really couldn't give you much more guidance on that other than we're really focused on the share repurchase and getting to that 600 million to 650 million shares.

Got it. That makes sense. I guess a follow-up sort of in the same vein. In terms of organic deployment, I listen to the PML comments you're making and think about the volatility and how much better it is and then the fact that you guys, I think, still have below-average underwriting leverage, at least when we sort of look at like premiums to surplus, those kind of metrics. Do you have the capacity to be able to fund this greater growth, whether it's in Lexington and some other businesses in General Insurance, without using so much of the proceeds from the strategic actions?

We do, and it's been a big focus for us. Sabra, do you want to expand on that a little bit?

Yes. Thanks. I would just note, as I mentioned in my prepared comments, that the risk-based capital ratios in our U.S. pool are in the range of 470% to 480%, which is well above our target range of 400% to 420%. So we have ample capacity within the General Insurance businesses today to support growth.

Our next question comes from Michael Zaremski with BMO.

My question is about the exist -- remaining portfolio post the sale of Validus pending in the crop business. Are there other and what you did on the -- what you're doing on the personal line side. Are there other pieces of the portfolio that still need additional optimization? Or are we kind of mostly through the major actions?

I think we're through most of the major actions. We have to focus more on Personal Insurance, and then we have been certainly, the -- we spent a lot of time on the ultra and high net worth business and the actions that we're taking there in terms of improving it. And we'll see that as we go to the back half of '23 and into '24. Japan is a big focus for us, and it's a terrific business, one that has terrific scale, performs very well, needs more digital investment. And we have such a wide distribution of agents that we can scale more products. So we'll see some investment in Japan on digital workflow and digital interfacing with customers. And we've been working through that over the past 12 to 18 months. So I would expect to see improved performance there. And then also our Global Accident & Health business, which performs very well mostly overseas in International, but that's going to have investment. And we would expect to see more growth and more profitability improvement there. But I don't -- it's not major. It's more of just making strategic investments in order to position the portfolio to be more advantageous. So those will be the areas of focus. But after Validus Re, we had a very active quarter and certainly would not expect another one of those, but we are going to continue to try to drive improvement throughout the portfolio.

Okay. Great. And my follow-up is switching gears, thinking about AIG's long-term kind of combined ratio inclusive of other expenses. If we're thinking longer term, you've done a great job improving the loss ratio. We're clear that there's still -- you have guidance on expenses coming down. But when you say longer term, most of the wood's been chopped in the loss ratio, and we should be thinking about overall expenses is kind of getting you to the double-digit ROE land sustainably? Or is there still loss ratio components such as maybe reserves and whatnot that could continue to improve over time?

No, I think you're thinking of it the right way. I mean, we've done an incredible job in terms of getting the portfolio that was in existence in '17 and '18 to where it is today. We know that we're an outlier on the expense ratio. That's a big part of what we're doing in the future operating model. And we'll start to show more and more evidence of that in the coming quarters and as we go into 2024. I did mention not to repeat the first part of the answer, but I do think that there's loss ratio and combined ratio opportunity for improvement in Personal Insurance. And we're heavily focused on that in terms of its balance across all of AIG. But when we look at the improvement in ROCE, expenses is going to be a big part of it. And as we focus on getting to our future operating model, that scale and discipline around having an expense ratio that's more favorable will be a huge focus of this management team. Okay. Thanks. I want to thank everybody for joining us today. I hope you have a great day.

Thank you for participating at today's conference. This does conclude the program, and you may now disconnect. Everyone, have a great day.