American International Group, Inc.

Jake, you need to mute, David. I know. I'm helping Andy.

Ladies and gentlemen, please stand by. Good day and welcome to AIG's first quarter 2021 financial results conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Ms. Debra Curtill, head of investor relations. Please go ahead.

Thank you. Good morning and thank you all for joining us. Today's call will cover AIG's first quarter 2021 financial results announced yesterday afternoon. The news release, financial supplement, and financial results presentation were posted on our website at www.aig.com, and the 10Q for the quarter will be filed later today after the call. Our speakers today include Peter Zafino, President and CEO, and Mark Lyons, Chief Financial Officer. Following their prepared remarks, we will have time for Q&A. David McElroy, CEO, General Insurance, and Kevin Hogan, CEO, Life and Retirement, will be available for Q&A. Today's remarks may contain forward-looking statements, including comments relating to company performance, strategic priorities, including AIG's intent to pursue 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 materially differ. Factors that could cause results to differ include the factors described in our 2020 Annual Report on Form 10-K and our other recent filings made with the SEC. AIG is not under any obligation and expressly disclaims any obligation to update forward-looking statements, 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. I'll now turn the call over to Peter.

Hello, and thank you for joining us today. This morning, I will start our call with a high-level overview of AIG's consolidated financial results for the first quarter. I will then review results from general insurance and the significant progress we've made with our portfolio, which allowed us to pivot from remediation to growth heading into 2021. Following that, I will review first quarter results for life retirement. I will then provide an update on the work we're doing on the separation of life retirement from AIG. And lastly, I'll provide an AIG 200 update. Mark will give you more details on the financial results, and then we will take questions. AIG had an excellent start to the year, and we have significant momentum across the entire organization. In the first quarter, we delivered outstanding performance in general insurance. We saw continued solid results in life retirement. We made meaningful progress on the separation of life retirement from AIG, and we significantly advanced AIG 200 with the transformation remaining on track to deliver $1 billion in savings by the end of 2022 against a cost to achieve of $1.3 billion. In addition, our balance sheet and financial flexibility remain exceptionally strong, allowing us to focus on profitable growth across our portfolio, prudent investments in modern technology and digital capabilities, separating life retirement from AIG in a manner that maximizes value for our stakeholders and positions both companies for long-term success, and returning capital to our shareholders when appropriate. As you saw in our press release, our adjusted after-tax income in the first quarter was $1.05 per diluted share compared to 12 cents in the prior year quarter. We ended the first quarter with parent liquidity of $7.9 billion. And we repurchased $92 million of common stock in connection with warrant exercises and an additional $270 million against the $500 million buyback plan we mentioned on our last call. We expect to complete the additional $230 million of that buyback plan by the end of the second quarter. Turning to general insurance, net premiums written increase approximately $600 million year over year. or approximately 6% on an FX constant basis, driven by nearly $1 billion, or a 22% year-over-year increase in our global commercial businesses. This 22% increase in global commercial was driven by higher retentions, excellent new business production, particularly in international, strong performance in first quarter portfolio repositioning, and continued rate momentum. North America commercial net premiums written grew by approximately 29%, an outstanding result, due to a variety of factors, including increased 1-1 writings of Validus Re, continued strong submission flow in Lexington, rate improvement, strong retention, and higher new business in segments we have been targeting for growth. In addition, as a result of the improved quality of our North America commercial portfolio and our improved reinsurance program, which now includes lower attachment points in North America, we did not need to purchase as much CAT reinsurance limit in 2021, the benefits of which will come through in future quarters. International commercial had an exceptionally strong first quarter with the year over year growth and net premiums written of approximately 13% on an FX constant basis. Increases were balanced across the portfolio, with the strongest growth in international financial lines, followed by our specialty business. Looking ahead, we expect overall growth and net premiums written for the remainder of 2021 to be higher than the 6% we saw in the first quarter of this year, with more balance and growth across our global commercial and personal portfolios. With respect to rate, momentum continued with overall global commercial rate increases of 15%. North America commercial rate increases were also 15% driven by improvements in Lexington casualty with 36% rate increases, excess casualty with 31% rate increases, and financial lines with rate increases over 24%. International commercial rate increases maintained strong momentum at 14% in the first quarter of 2021, which is typically the largest quarter of the year for our European business. These increases were driven by energy with 26% rate increases, commercial property with 19% rate increases, and financial lines with 20% rate increases. Turning to global personal insurance, net premiums written in the first quarter declined 23% on an FX constant basis due to our travel business continuing to be impacted by the pandemic as well as reinsurance sessions to Syndicate 2019, our partnership with Lloyds. Adjusted for these impacts, global personal insurance net premiums written were down only 1.6% on an FX constant basis. We expect to see strong year-over-year growth for the remainder of the year with a rebound in global personal insurance as the effects of COVID subside, the repositioning and re-underwriting of this portfolio nears completion, and a full year of reinsurance sessions relating to Syndicate 2019 will be complete. We are very pleased with the continued improvement in our combined ratios, including and excluding caps. I don't need to remind everyone where we were when I outlined our turnaround strategy three years ago. In the first quarter of this year, the adjusted action year combined ratio was 92.4%, a 310 basis point improvement year over year. driven by a 440 basis point improvement in our adjusted commercial accident year combined ratio. The adjusted accident year loss ratio improved 160 basis points to 59.2%, driven by a 330 basis point improvement in global commercial. The expense ratio improved 150 basis points, reflecting the impact of AIG 200 savings and continued expense discipline. We expect to continue to improve the expense ratio throughout 2021, particularly as we deliver on our AIG 200 programs. To provide further color on combined ratio improvements, in North America, the adjusted accident year combined ratio improved to 95.6%, a 210 basis point improvement year over year. This reflects a 370 basis point improvement in the North America commercial lines adjusted accident year combined ratio, which came in at 93.9%. In international, the adjusted accident year combined ratio improved to 90.2%, a 340 basis point improvement year over year. This reflects a 490 basis point improvement in the international commercial lines adjusted accident year combined ratio, which came in at 86.8%, a 150 basis point improvement in the international personal lines adjusted accident year combined ratio, which was 94%. With respect to catastrophes, first quarter 2021 was the worst first quarter for the industry in over a decade in terms of weather-related cat losses, largely due to winter storms in Texas. Net CAT losses in general insurance were $422 million, primarily driven by the Texas storms, and do not include any new COVID-related estimated losses for the first quarter. Now let me touch on reinsurance assumed. As I noted, Validus re-saw strong 1-1 renewals across most lines with attractive levels of risk-adjusted rate improvement. The team focused on prudent capital deployment and portfolio construction while improving technical ratios and reducing volatility. With respect to April 1 renewals, within international property, rate adjustments varied from mid-single digits to upwards of 30% on loss-impacted accounts. And our Japanese renewals were very successful with 100% client retention, net limits largely similar year-over-year, and risk-adjusted rate increases, which were in the high single digits. Before moving on, I want to highlight the quality and the strength of our general insurance portfolio. Of course, optimization work will continue, but the magnitude of what was accomplished over the last three years is worth reflecting on because the first quarter of 2021 was an important inflection point for our team. Our focus pivoted from remediation to driving profitable growth. These are a couple of concrete examples of how we have repositioned the global portfolio. Gross limits in global commercial were reduced by over $650 billion. North America excess casually removed over $10 billion in lead limits and increased writings in mid-excess layers in order to achieve a more balanced portfolio. And in Lexington, we repositioned this business to focus on wholesale distribution. The team grew the top line in 2020 for the first time in over a decade. The portfolio is now more balanced, and the submission flow has increased over 100% the last couple of years. The enormity of the turnaround and the complexity of execution that was accomplished cannot be understated. We now have a disciplined culture that is grounded in underwriting fundamentals, a well-defined and articulated risk appetite, We remain laser focused on terms and conditions and obtaining rate above loss cost. And we have an appropriate reinsurance program in place to manage severity and volatility. Our global portfolio is poised for improving profitability and more predictable results. While all this was taking place in general insurance, our colleagues in Life Retirement did an excellent job maintaining a market-leading position in the protection and retirement savings industry and, together with our investment colleagues, consistently delivered solid performance against the backdrop of persistent low interest rates and challenging market conditions. Turning to Life Retirement's first quarter, this business also had strong results. Adjusted pre-tax income in the first quarter was $941 million, and adjusted return on common equity was 14.2%, reflecting our diversified businesses and high-quality investment portfolio. The sensitivities we provided last quarter generally held up with respect to equity markets, 10-year reinvestment rates, and mortality, although first quarter results were towards the higher end of our mortality expectations than of reinsurance and other offsets. We continue to actively manage impacts from the low interest rate and tighter credit spreads environment, and the range we previously provided for expected annual spread compression of 8 to 16 basis points has not changed. Our high-quality investment portfolio is well-positioned to navigate uncertain environments as demonstrated by our steady performance through the macroeconomic stress and high levels of volatility in 2020. And our variable annuity hedging program has continued to perform as expected, providing offsetting protection during periods of volatile capital markets. We believe Life Retirement is positioned to deliver strong, sustainable financial results due to the quality of its balance sheet, diversified product offerings and distribution, effective hedging programs, and disciplined risk management. With respect to the separation of Life Retirement from AIG, we continue to work diligently and with a sense of urgency towards an IPO of up to 19.9% of the business. We made significant progress on several fronts, including preparing standalone audited financials and having an independent party conduct a thorough actuarial review. No concerns have been raised about Life Retirement's portfolio as a result of this work. As I noted on our last earnings call, we did receive a number of credible inquiries from parties interested in purchasing a minority stake in Life Retirement in our investment management group. we conducted a robust evaluation of those opportunities to determine if they offered a better long-term outcome for our stakeholders than an IPO. At this time, we believe an IPO remains the optimal path forward to maximize value for our stakeholders and to position the business for additional value creation as a standalone company. In addition, an IPO allows AIG to retain maximum flexibility regarding the operations of the business as well as the separation process. Overall, I'm pleased with the progress we've made. Turning to AIG 200, all 10 operational programs are deep into execution mode. Our transformation teams continue to perform exceptionally well despite the continued remote work environment. Recent progress on IT modernization has enabled us to reach the halfway point or $500 million of our run rate savings target. $250 million in cumulative run rate savings has been realized in APTI through the first quarter of this year with $75 million of incremental savings achieved within the first quarter income statement. Key highlights on our progress include the successful transition of our shared services operations and over 6,000 colleagues to Accenture at year-end 2020. This partnership is going extremely well with KPIs at or better than pre-transition levels. We also negotiated a multi-year agreement with Amazon Web Services to execute on an accelerated cloud strategy, which is a significant step forward in modernizing our infrastructure. And with a new, highly experienced leader in Japan, we made significant progress during the first quarter on our AIG 200 strategy in Japan and are on track to finalize target outcomes as we modernize this business by developing digital capabilities with agile product innovation. Before turning the call over to Mark, I want to thank our global colleagues for their resilience and excellent support of our clients, policyholders, distribution partners, and other stakeholders. The last year in particular brought unimaginable stress and tragedy across the world. And for our colleagues, it came during a time of significant and foundational change. Yet they never lost sight of our purpose at AIG and continue to be focused and dedicated to the important work we do, each other, and the communities in which we live and work. I could not be prouder of what we've achieved together. We are in great businesses, have global scale, loyal clients, exceptional relationships with distribution and reinsurance partners, world-class experts and industry veterans, and we strive to be a responsible corporate citizen with a diverse and inclusive workforce that delivers value to our shareholders and all other stakeholders. I am confident AIG is on its way to becoming a top-performing company in everything that we do. With that, I'll turn the call over to Mark.

Thank you, Peter, and good morning, everyone. Since Peter has already provided a good overview of the quarter, I'll just add that we posted a 7.4% annualized adjusted return on common equity at the AIG level, an 8.2% adjusted return on tangible common equity at the AIG level, an 8.5% adjusted return on segment common equity for general insurance, and a 14.2% adjusted return on segment common equity for life and retirement. Moving to general insurance, first quarter adjusted pre-tax income was $845 million, up $344 million year-over-year, primarily reflecting increased underwriting income in international, as well as increased global net investment income driven by alternatives. Catastrophe losses totaled $422 million pre-tax, or 7.3 loss ratio points this quarter, compared to 6.9 loss ratio points in the prior year quarter. The CAT losses were mostly comprised of $390 million related to the winter storms, primarily impacting commercial lines, including AIG REIT. The net impact of the winter storms reflects the benefit of our commercial reinsurance program, and changes to our PCG portfolio as a result of Syndicate 2019. Overall, prior year development was 56 million favorable this quarter, which included 58 million of net favorable development in North America, driven by 52 million of favorable development from the ADC amortization, and 2 million of net unfavorable development in international development. It's worthwhile to note that General Insurance still has $6.6 billion remaining of the 80% quota share ADC cover. There was also, embedded within these figures, $33 million of unfavorable development related to COVID-19 claims that relate back to 2020 loss occurrences, or a movement of less than 3%, emanating primarily from Validus Re and Talbot R. Lloyd Syndicates. Our general insurance business continued to materially improve, driven largely by strong accident year 2021 XCAT showings in both North America and international commercial lines. So rather than double up on facts that Peter has shared, the main drivers of the attritional underwriting gain improvements were, for North America commercial, Lexington, financial lines, and excess casualties. And from international commercial, the main drivers of improvement stem from property, Talbot, and financial lines. As Peter noted, on a global commercial lines basis, the accident year combined ratio, excluding CAT, was 90.4%, which represents a 440 basis point improvement over the prior year's quarter, with 75% of that improvement attributable to a lower loss ratio and 25% of the improvement attributable to a lower expense ratio. Turning to personal insurance, starting in the second quarter of this year, meaning next quarter, our year-over-year comparisons will begin to improve given the timing of the initial COVID-19 impacts and the formation of Syndicate 2019 in May of 2020. Although North American Personal Lines had a 74% drop in net premiums written, as Peter highlighted, it's also important to understand that the other units within the segment which represented nearly 50% of the quarter's net earned premium, is comprised mostly of warranty and personal A&H business, had their net premium only fall off marginally. Our international personal lines business, which by size dominates our overall global personal insurance business, continues to perform well with 150 basis points improvement in the accident-year XCAT combined ratio, reflecting an improved loss ratio and expense discipline. Now, to expand on some of Peter's marketplace commentary, various areas continue to accelerate the adequacy of achieved rate beyond that of prior quarters. For example, the level of excess casualty rate increases continues and in many units exceeds prior results, such as CAT excess coverage out of Bermuda, North America corporate and national admitted excess, and the Lexington. The increase achieved in the first quarter of 2020 and compounded in the first quarter of 2021 alone, ignoring prior to 2020 rate increases, exceeded 150% for Bermuda-based capacity business, which makes sense given recent year's price deficiency on these capacity excess layers, and approximately 115% for the other mentioned units. U.S. financial lines on the same compound basis has seen an excess of 80% increases for the staples of DNO and EPLI. Internationally, the 14% first quarter overall rate increase saw continued rate expansion in key markets, such as the UK at plus 23%, global specialty at plus 15%, Europe and the Middle East at 14%, Latin America at 13%, and Asia Pacific also at 13% when excluding the tempering influence of predominantly Japan at 3%. Lastly, cyber achieved our highest rate increase yet at 41% for the quarter. These increases are clearly broad-based by region and line of business all around the world. I'd now like to spend a few minutes on two observations. One, the impact of net rate change versus gross rate change. And two, some examples of new business rate adequacy relative to renewal rate adequacy. So first, our achieved North America commercial rate change for the quarter on a net basis is now estimated to be at least 150 basis points stronger than the corresponding gross rate change, largely due to our increased net positions across selected product lines. Last year, much of the achieved gross rate increase was being ceded to reinsurers, where now there is much less so. The shift to higher net positions results directly from our prior stated strategy of improving the gross book such that we had increased confidence to retain the appropriate amount of net, and because we could not take a higher net position previously because of the legacy imbalance of very large limits written. Now, moving on to relative rate adequacy, we see continuing indications in North America of new business having stronger relative rate adequacy over renewal rate levels in most lines of business. likely doesn't reflect different class mixes, but instead an additional margin for a lesser known exposure. However, this should be expected and is also historically supported, given where we are in the underwriting cycle, as new business is less established with an insurer versus an existing client renewal relationship. A further related item involves renewal retention. As general insurance implemented revised underwriting standards, renewal retentions predictably would have been impacted, especially in the target line. Now, even with superior risk selection, rate and term condition changes that have been achieved, renewal retentions have improved to the mid 80% in the aggregate across all commercial lines in both North America and across internationally. We also see improvement in the Lexington, where E&S has lower industry retentions based on the nature of the business, and this is very positive for the book, and we see it across specialty lines and across most admitted retail books. This is indicative of the re-underwriting action being successful, having settled down, and now with general insurance being comfortable with the underlying insured exposures that meet our risk appetite. Based on current market conditions and our view of the foreseeable future, we continue to anticipate earned margin expansion throughout 2021 and into 2022, resulting from AIG's favorable underrating actions taken, favorable global market conditions, materially improved terms and conditions, and a more profitable, less volatile business mix. As a result, I would like to reconfirm our outlook for a sub-90% action-year combined ratio, excluding CAT, by the end of 2022. Global commercial lines are very nearly at the sub-90% level now, and global personal lines is running at 96% for the first quarter. Given our portfolio composition, the market conditions, and our strategic repositioning of North America personal, we anticipate greater continued margin expansion within commercial lines than personal lines. We are highly confident that we will achieve our sub-90% target and have several paths to help us get there. some via mix, some via reasonable market conditions persisting, and some via expense levers. Now, I'd also like to unpack some of Peter's high-level net written premium growth comments for 2021 with an emphasis here on next quarter, second quarter. North America commercial is expecting to see growth of approximately 10% for the second quarter of 2021, relative to the prior year quarter, driven mostly from Lexington, across a host of product lines, and admitted casualty, both primary and excess. This growth will be two-pronged, as growth on the front end will be coupled with lower reinsurance sessions, especially from those lines subject to the casualty quarter share. North America personal is expected to see significant second quarter 2021 growth, but it is driven by the Syndicate 2019 reinsurance session change that we've been signaling. You will recall North American personal had a negative 150 million net written premium in the second quarter of 2020 due to many Syndicate 2019 treaties becoming effective, including an unearned premium cover for the PCG High Network book. That distortive spike in session, which is not repeatable in the second quarter of 2021, will give the appearance of considerable growth, but instead will provide a PCG net premium that is more stable on an ongoing basis. So, overall, for North America, both personal and commercial combined, we anticipate net written premium growth between 35% to 40% for the second quarter over the second quarter of the prior year. International commercial in the second quarter of 2021 is expected to be roughly plus 7% net written premium growth driven by global specialty, financial lines, and Talbot. And international personal is expected to be approximately flat relative to the prior year quarter. Now turning to life in retirement, adjusted pre-tax income increased by 57% or 340 million compared to the first quarter of 2020, with favorable equity markets driving higher private equity returns, lower deferred acquisition cost amortization, a rebound in most areas of sales, and higher fee income. The increase also reflects favorable short-term impacts from tighter credit spreads, driving higher call and tender income, and higher fair value option bond returns. This increase was partially offset by adverse mortality, as U.S. COVID-related population deaths of approximately 205,000 in the first quarter were higher than earlier anticipated, which was also reflected in our own experience. In terms of premiums and deposits, we continue to see encouraging improvement in retail sales. Individual retirement premium and deposits grew 8% from the prior year quarter, which we consider a pre-COVID quarter as the sales pipeline carried through March of last year with index and variable annuities both exceeding prior year levels. In group retirement, group acquisition deposits increased significantly from prior year, although both periodic and non-periodic deposits declined, leading to a marginal reduction in overall gross group premiums and deposits of 2%. In life insurance, premiums and deposits grew 6% overall, with year-over-year growth in both U.S. and international. Finally, While institutional markets did not conclude any significant pension risk transfer transactions in the quarter, the pipeline of direct and reinsurance transactions going into the second quarter is very strong, particularly with many defined benefit plans nearing fully funded status. Turning to net flows and related activity, our portfolio reflects the dynamic environment quarter by quarter of the last year. Individual retirement net flows improved by approximately $1 billion over the first quarter of 2020, driven by variable annuities and retail mutual funds. And yet, when excluding retail mutual funds, net flows were positive, led by index annuities, rebounding to be plus $1 billion for the quarter, which is virtually identical to one year ago, but with steady progress from a low of $439 million in the second quarter of 2020 to the plus $1 billion this quarter. Surrender rates were up slightly over the last few quarters within individual retirement for fixed and indexed, whereas variable annuity surrender rates have been more comparable, as have for group retirement. Similarly, the life business has seen consistently lower lapse in surrender rates over the last four quarters than prior. Life and retirement continues to actively manage the impacts from the low interest rate and tighter credit spread environment, and the previously provided range for expected annual spread compression has not changed. New business margins generally remain within our target at current new money returns due to active product management, disciplined pricing approaches, and our significant asset origination and structuring capabilities. Moving to other operations, adjusted pre-tax loss was 530 million, which was inclusive of 176 million of losses from the consolidation and eliminations line, which principally reflects adjustments offsetting investment returns in the subsidiaries by being eliminated in other operations. So it wouldn't be double counting. Before consolidation and elimination, adjusted pre-tax loss was $354 million, which was $481 million better than the first quarter of 2020, which included a $317 million adjusted pre-tax loss related to fortitude. and a $30 million one-time cash grant given to employees to help with unanticipated costs when the global pandemic began last March. The first quarter also reflects lower corporate interest expense and lower corporate general expenses, and we expect this to continue throughout 2021. However, one might expect some continued volatility within the consolidations and eliminations line, which can fluctuate based on investment returns. Now, shifting to investment, net investment income on an APTI basis was $3.2 billion, or $492 million higher than the first quarter of 2020. Adjusting first quarter 2020 for Fortitude's investment income to make the comparison apples to apples, this quarter's net investment income on an APTI basis was actually $611 million higher than the prior year, or plus 23%, reflecting strong private equity and real estate returns. as well as bond tender and call premium, which more than offset the lower income on the AFS fixed income portfolio. We continue to have a high-quality investment portfolio that is positioned well under any market condition. Turning to the balance sheet, at March 31st, book value per common share was $72.37, down 5.3% from year-end, reflecting net unrealized mark-to-market losses on the investment portfolios. Adjusted book value per share was $58.69, up nearly 3% from December 31st. At quarter end, AIG parent, as Peter noted, had cashed a short-term liquidity asset of $7.9 billion, and we repaid our March debt maturity of $1.5 billion and repurchased the $362 million of shares, as Peter outlined. Our gap debt leverage at March 31st was 28.4%, flat to year-end given downward fixed income market movements negatively impacting AOCI, despite the repaid debt maturity mentioned earlier. Our primary operating subsidiaries remain profitable and well-capitalized. For general insurance, we estimate the U.S. pool fleet risk-based capital ratio for the first quarter to be between 465% and 475%. And life and retirement's fleet is estimated to be between 435 and 445%, both well above our target range. And with that, I will now turn it back over to Peter.

Thank you, Mark. And Jake, I think we're ready to start Q&A.

Yes, ladies and gentlemen, if you would like to ask a question, you can signal by pressing star 1 on your telephone keypad. Just keep in mind, if you are using your speakerphone, make sure your mute function is released to allow your signal to reach our equipment. Once again, star one for questions, and we will begin with Elise Greenspan with Wells Fargo.

Hi, thanks. Good morning. My first question is on the life and retirement separation. I appreciate the update in terms of working towards the IPO. Is the plan in terms of timing for that to still take place at some point later this year, or do you have a more finer tune around that?

Yeah, thanks, Elise. As I said in my prepared remarks, you know, we're working with a sense of urgency on the IPO. We've made really significant progress working on standalone financial statements, actuarial, have set up, you know, the organization to operationally separate. So we're working very hard on several fronts related to the IPO. I mean, the ultimate timing of completing this step, you know, is going to depend on a number of factors. Some are out of our control, such as regulatory and market conditions. But we're still, you know, working towards the same timeline, which is, you know, by the end of 2021. But, again, depending on those factors, it could always slip into, you know, the first quarter of 2022. But it's, you know, the company's focused, and we're going through all the details and moving forward.

Okay. And then my second question is on the market commentary you guys gave. A lot of helpful color. You know, Mark, you said that you guys expect continued earned margin expansion throughout 2021 and into 2022. So, I guess you're kind of giving us a market view, it sounds like, for the next year. Is the expectation that rates would stabilize and get closer to trend in 2022? I'm just trying to put that together. You're just kind of giving us the outlook that rates should remain strong through 2021. and then we'll see how 2022 transpires with earned versus lost trends.

Let me start with your question on rate and then I'll turn over to Mark to provide a little more context and then talk about the year. You know, I think, look, this is the third year where we're seeing, you know, rate at least at, you know, at AIG above loss cost. And, again, you really have to just, you know, take a look at the overall portfolio because, you know, quarter to quarter it may be a little bit different, meaning, you know, just the seasonality of our business, whether it's Validus Re having a big inception date in the first quarter, crops, specialty, Europe driven more towards the first quarter. So when we look at it, We're looking at, you know, first quarter to first quarter, and there has been no slowdown in terms of the rate environment and believe that we're building margin above loss cost rate on rate. And I think that's kind of where Mark was alluding to. You know, the market environment at least is always hard to predict, but we think the market that we're in is the market we're going to see for the remaining part of the year, and it's very hard to predict, you know, beyond that. Mark, do you want to add any more context?

Just a bit. Thank you, Peter. I think Peter nailed it mostly, at least. I want to reemphasize, though, what Peter said. Every quarter's mix is pretty different. And I know that's a written viewpoint that earns in. But we've already written, you know, business that we can last year that's going to earn into 2021. And we've already written one quarter that's going to go into 2022. So, We're not counting. We believe we're going to have the margin expansion as denoted that doesn't really depend on the existing level of rate levels in the market.

Okay. Thanks for the color.

Thanks, Elise. Next question, please.

Next question will come from Brian Meredith with UBS.

Yes, thanks. So a couple here. Quickly, just Mark, I'm curious. You said you had some COVID development in the quarter. Where did that come from? And are we pretty close to, you think, kind of being done with the COVID-related losses, at least in the general insurance business? I understand there could still be some more in life.

Go ahead, Mark. So, yeah, we can localize a lot of that to contingency business out of Talbot. And on Validus, I think there was really just two contracts involved. So it's not like it was widespread in any way. So that overwhelmingly accounts for it. And I think for your second question, yeah, we didn't put any additional provisions. We're happy where we are associated with it. So I think we're on the down slope, to say the least.

Gotcha. And then my second question, I guess, Peter, for both of y'all. What is your kind of view with respect to, you know, lost trend or kind of tort inflation and lost trend as we kind of the economy reopens here, you know, courts reopen? Kind of how are you thinking about that, you know, from a reserving perspective and maybe also from a pricing perspective?

Yes, I'll have Mark add to my comments. We're watching it very carefully, Brian. It's something that, again, as it emerges throughout the world, the economy starts to reopen. We look at it line of business by line of business, lead versus excess, different trends that we're seeing in the portfolio emerging over the last year and then how we forecast that to look for the future. So I think the balance of the portfolio is being shaped in a way to mitigate that. And we're very focused on making sure that even in the growth that we outlined in the first quarter that we're growing, where we know that we're going to get the risk-adjusted returns in terms of deploying the capital. So I think we're very disciplined. It's circular with underwriting actuarial claims. We're learning a lot and making sure that we're positioning the portfolio accordingly. Mark, do you want to add anything to that?

Yeah, thank you, Peter. I think I may have commented on this before, but I think it's probably worth bearing again. Long term, there's generally been a 200 basis point addition beyond economic inflation for social inflation. Clearly, that's been south of that over the last few years. But that's one way of looking at it by having a range of loss trends and not necessarily just point estimating it. And it really varies by line of business, clearly. I think in the past, I've also commented that our loss trend and excess casualty, for example, is very close to double digits, number one. And so it really varies across the board. And when you get to Peter's comment on portfolio, think of the best way to insulate yourself from unexpected spikes in economic or social inflation, irrespective of which one. is by having the portfolio change. And the mix away from leads and having more mid-access, not just in casualty but other places, aggregately moves that portfolio further away from risk, insulating you more from any compound abuse of that. So I think that's how we look at it, and I think all of that is important when it comes to fair.

Yeah, yeah. Mark, part of my question, though, is also asking this. Do you think about when you make reserve assumptions or pick assumptions, are you making different assumptions with respect to what potential loss trend and when you're pricing the business?

Not materially because you have calendar year views, right? So claims when they're settled or when they're reported don't care what their accident year was.

Gotcha. Okay. Thank you.

Thanks, Brian.

Next question. I'll hear from Paul Newsom with Piper Sandler.

Good morning and congratulations on the quarter. Let's turn to maybe a big picture question about the life insurance business. Is there kind of a path to positive net flows? Obviously, the institutional business is volatile for the quarter, but Maybe you could just give us a sense of, you know, especially as we get closer to thinking about the life IPO, how those net flows might recover to a positive level.

Okay. Thanks, Paul. Kevin?

Yeah, thanks. Thanks, Paul. Look, net flows reflect the trends of premiums and deposits as against the surrender behavior. As Mark pointed out, we haven't really seen much material change in the surrender behavior, a little bit within sort of expected margins, but premiums and deposits is really another story. And we said that the second quarter last year was gonna be the low water market, certainly was. And in fact, the first quarter of this year is one of the largest sales quarters we've had in the individual businesses since we created AIG Financial Distributors. And while the month of January was actually still below last year, and we consider last year's first quarter a pre-COVID quarter. because really the pipelines were full right through March, April. We saw growth from February over January, March over February, a pretty significant growth. So the end of the quarter, we're really back at what we consider to be normal run rates for that business. And as Mark pointed out, both index and variable annuity very strong for us there. And so, you know, the one line of business, fixed annuities, they're a little bit lower than historical levels, but we also saw recovery in fixed annuities towards the end of the quarter. And so we're feeling optimistic about the forward curve for the individual business. And as Mark pointed out across annuities, because we've announced relative to the retail mutual funds, right, we had positive flows. So I'm confident relative to the flows in the individual retirement business. For group retirement, it's a little bit of a different story. The group acquisitions, the new group acquisitions actually were one of our strongest quarters and increased by $150 million over the prior year, whereas periodics were down about $50 million, and I think that reflects furloughs and people leaving the workforce, and then the non-periodics were also down a little bit for a variety of reasons. In the group retirement business, we still see some modest negative flows, but I think that reflects the fact that we're a small, medium-sized plan provider, and in the consolidation that continues to go on in healthcare, we do see some of that large-case consolidation. But the assets under management have continued to grow, obviously supported by equity markets, and that's an important base of earnings for the fee side of the business. So we feel confident. We're being careful about capital deployment. We're seeing conditions improve, and our diverse product range and channel allow us to be careful where we deploy the capital, and we're seeing that start to come through in the first quarter.

Is there a market component or an interest rate component to keeping the ROE stable in the life business in the European Union?

Well, certainly, you know, we provide the sensitivities, and depending upon where equity markets are, where interest rates are, where credit spreads are, and which way they're going, they have kind of a short-term impact on earnings volatility. But we price our products, you know, to make sure that we're making our returns based on, you know, broadly expected market conditions, not necessarily a single deterministic scenario. So we're not relying on market returns. necessarily in the pricing of our products.

Thanks, Paul. Next question.

Next question will come from Ryan Tunis with Autonomous Research.

Hey, thanks. Good morning. I had one for Mark and would even be interested in David's thought if he's on the call, but I guess thinking about classic economic inflation, you know, wage-driven, historically It's been kind of bad for workers' comp, but it's been a long time since we've had it. Are the risks from that type of scenario on that line kind of still the same as they were 20 years ago, or are there mitigating factors? Just how are you thinking about workers' comp if we do have just a normal inflationary economic cycle?

Let me start. You got to remember that, you know, two-thirds of our business is on high retentions. And so, you know, the fluctuation of frequency and, you know, wage inflation and lost cost inflation is largely retained by our clients. I mean, so, you know, we've seen some fluctuation just because of the high attachment points in which we have in the workers' comp book. And so, you know, And Dave's been working really hard on our large account business as well as workers' compensation in terms of the positioning of that. And I think the attachment points, the positioning of the book is really important. Dave, do you want to just talk a little bit about what you're seeing in the marketplace and how we are reacting to it?

Yeah, thank you, Peter. I think workers' comp, I think there was some concern with COVID that there would be presumption That mostly does not affect our book because of the high retentions that our clients have. That's very different than the middle market books and the small commercial books that might exist. I think the more illuminating issue is that workers' comp has been a profitable line, whether it was the state laws that muted it. And often we get lost in our generalization of what is rate-increased workers' comp has had modest to negative rate increase because it's been profitable for the industry. And I think it's very important for everybody to understand that that's a discrete market. And a lot of the different parts of the market that we trade in, that's absorbed by our clients. So if that same client has general liability or financial lines or or even property, that's a different market with different pricing than might be existing in the workers' comp market. So workers' comp market has actually worked, and everybody talks about it in terms of the rate increase, but that's a discrete type market that reflects that, and I think our industry is fairly sophisticated to understand why that happens and then why other businesses need rate or need rate to reflect exposure. So that's the workers' comp market. It's been a winner for this industry because of the reforms that happened at the state level.

Hey, Ryan, I'd like to add just one quick thing, if I could. You really started the question doing the correlation on wage. And given Peter really talking about two-thirds of the book is really loss sensitive over high attachment points, it's actually more of a medical question than a wage indemnity question, because medical trend is what could sneak over, especially on major permanent partials and things of that nature, and permanent totals. So that's why it was actually a We're in a really good position on that because of the analysis that was done about three years ago on that book that's still holding today. So all those past assumptions are absolutely holding.

Understood. And then my follow-up is just thinking about, you know, you're running at a little bit over a 92, so you need about two points to get sub-90. Just, you know, listening to the rate alone – you know, seemingly would be able to get, get you there. Obviously, I think that there are some offsetting headwinds or, you know, just other things that, you know, along the way you got to get past. I'm not sure if that's more new business or what. Could you just remind us of some, you know, offsets to rate in terms of getting down to that 90 over the next couple of years?

Thanks, Ryan. Um, There's multiple factors in terms of driving the sub-90 combined ratio. One is we had a terrific start to the year. You can see we're driving top-line growth, driving margin, improving combined ratio. We like You know, the momentum that we have. I think we're going to focus on continuing on the underwriting side. Certainly the culture we're building out of, you know, risk selection, terms and conditions, making sure that we're getting rate above loss cost is the discipline that Dave is driving through general insurance, and they're doing very well. I think you'll start to see, you know, I talked about in my prepared remarks that The AIG 200, while we announce run rate, we gotta catch up a little bit in terms of some of the implementation. So we know that we have expense tailwinds in terms of what will be coming through with AIG 200. In addition to that, just normal expense management and being very disciplined on reinvestment and making sure that we are a company that's very focused on ways in which we can improve what we're doing and create our own investment capacity. I think you'll start to see the earned premium increasing from growth and strong new business. International had the best quarter new business that they've had since the new teams arrived. So there's a lot of momentum there. And then expect to see new business pick up as we – continue throughout the year and the economy starts to recover. And then what I also mentioned in my prepared remarks is that we are not gonna need as much reinsurance going forward just based on the gross portfolio. And so we needed to probably buy a little bit more CAT, a little bit more on the risk side. Those are all improving and those will be tailwinds over a period of time. So there's four or five components that will drive improved combined ratio in the subsequent quarters and into next year. Next question, please.

We'll hear from Brian Shields with KBW. Brian Shields, go ahead.

Good morning. Can you hear me? Yes, Mark. Okay. Sorry about that. So, Mark, I'm trying to tie together a couple of comments because you're expecting, if I understand correctly, margin improvement into 2020, but we still get below the 90% on the underlying by year end. So, Does that mean that we should expect to be there sooner if you won't need margin improvements later in 2022 to get below 90?

Want me to start that, Peter? Yeah, go ahead, Mark. So I think what we're trying to say in various ways is that looking sequentially is really not the way. You've got to really look at it quarter over quarter for the points that Peter brought out before about the mix being pretty different. The fact that although we reduced volatility dramatically, we still follow the lines. You can still have a pop here or there that may not have really occurred in this quarter or the last quarter that still could at another time. We really need to see a few more accident quarters, if you will, pop in before we can declare victory in that sense. You can't look at each quarter as a totally independent stand-alone on a sports player.

Okay, that makes sense. The second question, I guess you talked about cyber rate increases, and I don't know whether sort of the way we typically think about trend is relevant, but is there any way you can outline how cyber loss expectations are changing? Dave, do you want to take that?

Yeah, thank you. You know, when we looked, you know, sometimes we index off of rate increases, and in fact, you know, a big part of our story here at AIG has actually been risk collection and limit management and retentions and terms and conditions. And cyber, you know, cyber was this year's case study, okay? It had been a profitable business. Ransomware started showing up. And what we've done is we've cauterized that with sublimits and coinsurance to reflect the fact that we're a big primary player and we need to manage ransomware. And that's what we've done. And our renewal retention has come down. Our rate increase, which may be something cited and exciting for others, is up 40. It's 41%. But for us, it's actually managing the risk on the other side. So I look at that rate increase as a factor as opposed to our not only vertical but horizontal risk. It's a tough risk. We have it worldwide. We're leaders. We've been very active in terms of our prophylactic and our involvement in terms of trying to stem the actual loss itself. And we look at that as a viable product that we – have controlled horizontally with reinsurance and vertically with reinsurance and with partnerships. And we look at that not only like every other specialty business that we have in this company. We have a lot of them. We have to attack it and we have to underwrite it with the facts of that business. And that's what we're doing. It should be, it should scare the industry It certainly gives us pause, and that's why we've been underwriting it very aggressively over the last three years.

Thank you, Dave. I think we have time for one last question.

That last question will come from Tom Gallagher with Evercore.

Thanks. Peter, just first a question on the decision to pursue the IPO versus the private sale issue. Was it mainly because we've gotten so much improvement in peer L&R public valuations that the gap narrowed where it wouldn't give you as much of a benefit, but any color you can give us as to what drove that decision?

Thanks, Tom. That is certainly one component. We always said the base case was going to be the IPO of 19.9%. So when we had entertained some of the inbounds from terrific companies that We evaluated the relative merits of the sale compared to the minority IPO. We took into account value creation, execution certainty, regulatory and rating agency implications, the delivery of life retirement's growth strategy over the long term where we're going to be making the right investments to make sure we're getting the value of the 80.1. It's a great business, and so we want to make sure that we are investing in it. And so when we weighed all those merits, ultimately we felt that – you know, an IPO was going to fulfill the value for our stakeholders and decided that that was the appropriate path for us. Okay.

Okay, thanks. And then just a follow-up for Kevin on L&R. Peter, I think I heard you say you're reiterating the 8 to 16 basis point spread compression guide. I guess my question is interest rates – have risen a pretty good amount. Would you change within the 8 to 16 basis point band where you expect to operate? I think you used to say it was toward the high end of that. Kevin, you want to finish?

Yeah, absolutely. Yes, Tom. We have moved from the high end of the 8 to 16 towards the middle to the lower end based on the recent improvement in the yields. You have to monitor, obviously, the combination of where credit spreads are versus where actual base rates are. So it's not all what we saw in the base rates. You have to look at the total reinvestment position.

All right, great. Thanks, everyone, for joining us today, and have a great day.

And with that, ladies and gentlemen, this will conclude your conference for today. Thank you for your participation, and you may now disconnect.