American International Group (AIG) Q2 2021 Earnings Call Transcript

Cavina T Morris

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American International Group (NYSE:AIG)
Q2 2021 Earnings Call
Aug 06, 2021, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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.

Quentin McMillan

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.

Peter ZaffinoPresident and Chief Executive Officer

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 in 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.

And 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 our strategic partnership with — we announced with Blackstone in July, which represents a significant milestone for AIG and a major step forward toward the IPO of Life and Retirement. Lastly, I will provide you 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 the 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 that we delivered exceptional performance in General Insurance with strong top line growth and this significant improvement in our combined ratios. Our pivot to growth and focused on demonstrating our leadership in this marketplace accelerated through the second quarter as we continued to prioritize underwriting discipline, portfolio optimization, reducing volatility and growing in segments where our market conditions are really favorable in fall and 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 pre-tax income increased 26% year over year and the business delivered a return on adjusted segment common equity of 16.4%. We continue to advance the AIG 200 with  transformation remaining on track to deliver $1 billion in run rate savings across our company by the end of 2022 against a cost to achieve of $1.3 billion. And as you saw in our press release, our adjusted after-tax income in the second quarter was $1.52 per diluted share, compared to $0.64 in the prior year quarter. And turning to our financial results, I’ll start with General Insurance.

Growth in net premiums written was strong in the second quarter, accelerating from the first quarter and continuing the trend that began in 2020 as the heaviest remediation efforts we’ve — that’s nearing completion. Net premiums written increased 24% year over year to $6.9 billion or approximately 20%, excluding foreign exchange. Growth was strong across both Global Commercial and Personal. Our Global Commercial net premiums written increased 13%, excluding foreign exchange, reflecting growth in areas with attractive risk-adjusted returns, improving renewal retentions and really more than that 25% increase in the new business compared to the prior-year quarter and overall rate increases of 13%.

North America Commercial net premiums written increased 15%, excluding foreign exchange, including our strong growth in Excess Casualty, Financial Lines, Retail Property, AIG Re and Lexington. New business increased 25% from the prior year quarter, led by Financial Lines and Lexington wholesale. Renewal retentions also improved in 300 basis points over this same period. It’s worth noting that Lexington had its strongest quarter of new business since we fully repositioned its operating model to also focus on the wholesale distribution of Excess & Surplus Lines.

This business has significant momentum, which we expect will continue for the foreseeable future. Shifting to International Commercial. Net premiums written grew 10%, excluding foreign exchange, and primarily driven by Financial Lines across the U.K., EMEA and Asia Pacific, global specialty, particularly marine and energy, and Talbot, our Lloyd’s syndicate. New business increased 26% from the prior year period, led by Financial Lines, marine, energy and Talbot.

And renewal retentions increased by 500 basis points over this same period. It’s important to emphasize that the growth we are achieving across Commercial is also aligned in our risk appetite that we have been executing against over the past three years. We continue to prudently deploy limits, including with respect to the new business with an intense focus on risk aggregation. And in addition to strong retention, growth is being driven by exceptional new business, which in Global Commercial was $1 billion in the second quarter.

With respect to Personal Insurance, as we discuss this on last quarter’s call, the unusually high growth in net premiums written was largely reflective of the creation of the Syndicate 2019 in second-quarter 2020 and the reinsurance cessions associated with creating that syndicate. Turning to rate. Momentum continued with overall Global Commercial rate increases of 13%. North America Commercial rate have increased 13% with the most notable improvements in Excess Casualty, which was up 20%; Lexington Casualty, which was up 19%; and Lexington wholesale property, which was up 15%.

International Commercial rate also increased 13%, driven by Financial Lines, which was up 21%; property, which was up 18%; and energy, which was up 16%. Across the global portfolio, the largest rate increases were in cyber, where rates were up almost 40% and the strongest rate increases in North America. We continue to carefully reduce cyber limits and are obtaining tighter terms and conditions to address increasing cyber loss trends, the rising threat associated with ransomware and the systemic nature of the cyber risk. Generally, underwriting excellence, thoughtful risk selection, tighter terms and conditions and improving rate adequacy have been core areas of focus as we transformed our portfolio.

The General Insurance accident year combined ratio ex CAT improved for the 12th consecutive quarter coming in at 91.1%, an improvement of 380 basis points for the second quarter of 2020 and an improvement of 990 basis points from the second-quarter 2018. This improvement was comprised of 160-basis-point improvement in accident year loss ratio ex CAT and a 220-basis-point improvement in our expense ratio at AIG 200 and the benefits of premium growth continued to contribute to profitability. Global Commercial achieved an accident year combined ratio ex CAT of 89.3%, an improvement of 500 basis points year over year. This is the best result Commercial has reported in the last 15 years.

In Personal Insurance, the accident year combined ratio ex CAT was 95.1%, a 70-basis-point improvement over the prior-year quarter. Now with just a quick comment on reinsurance purchased across General Insurance, we continue to evolve our reinsurance program to reflect our significantly improved underlying portfolio. And in the second quarter, we were very active in the market with 25 specific layers on a variety of treaties placed. Notably, in nearly every instance, we were able to enhance our terms and the conditions of our placements were at equivalent or improved pricing in a reinsurance market that is experiencing tighter terms and conditions and rate increases.

So with respect to property CAT program in particular, we took this opportunity in the second quarter to further reduce the per occurrence attachment point of North America through several buy-down CAT layers for peak zone exposures. Lastly, on General Insurance, we remain confident we will achieve a sub-90% accident year combined ratio ex CAT by the end of 2022. Based on the progress that I’ve now seen in our underwriting, the ongoing efforts in optimizing our portfolio, the terrific execution of AIG 200 and the significant momentum we’ve developed, I’m optimistic we’ll get there sooner. And as we move through second half of the year and get further into AIG 200 in separation execution, we will provide you further comments on our combined ratio expectations.

Now let me turn to AIG Re, which oversees our global assumed reinsurance business. Net premiums written across all lines increased more than 30% of — the second quarter compared to the prior-year period. Writings were balanced across multiple lines of business with risk-adjusted returns and underwriting ratios improving across the portfolio. The highlights of AIG Re’s second-quarter results include the following: in U.S.

property CAT, we saw rate improvements across all U.S. property business sectors; increases range from the mid-single digits to upwards of 25%, and depending on geography and loss-affected accounts; in Florida, Validus Re net limits at June 2021 were reduced by more than 40% in coordination with AlphaCat. Since the acquisition of Validus Re in 2018, we reduced the overall limit in Florida of more than 65% or approximately $400 million of annual limit, demonstrating that Validus Re’s continued discipline and focus on volatility reduction. Further, Florida-specific firms represent less than 2% of Validus Re’s total premiums written.

Our focus remains on regional and nationwide firms in the U.S. as well as international diversification. And in addition to 2020 and through the second quarter of 2021, less than 25% of AIG Re’s net premiums written came from property lines. Building on our retrocessional purchase on 1-1 of worldwide aggregate protection, Validus Re secured further retrocessional protections in June.

Specifically, we purchased more peak zone coverage for U.S. wind, Asia wind and California earthquake for the 2021 season. Overall, we have also substantially enhanced the portfolio despite the heightened competition, and we’re really pleased with how AIG Re has evolved. We have exceptionally strong intermediary market support as well as strong client relationships, which have resulted in the significant renewal retention and signings we have.

In addition, we’ve upgraded talent across the board and have broadened skill sets of our leaders. We believe this business is much more prepared now to assess and opportunistically respond to the market conditions. Turning to Life and Retirement, this business once again delivered very strong results. Life and Retirement’s broad leadership position across products and channels has enabled us to take advantage of significant rebound in retail annuity sales with our — with total annuity sales of significantly across our entire annuity offering.

Our strong sales resulted in positive Individual Retirement annuity net flows during the quarter. Group Retirement deposits were higher compared to the first-quarter 2021 levels. Second-quarter 2021’s new planned participant enrollments also increased 20% year over year, as demonstrated regularly in recent quarters. Our high-quality investment portfolio is well positioned to navigate these uncertain environments.

Our variable annuity hedging program has continued to perform as expected, providing downside protection during prolonged periods of volatility. And finally, this strategic partnership with Blackstone further positions Life and Retirement to expand its distribution relationships, enhance its product offerings, and the business will benefit from Blackstone’s significant capabilities. Now let me turn to AIG 200 in our global multiyear effort to position AIG for the long term. AIG 200 is continuing with a sense of urgency for all 10 of the operational programs deep into execution mode.

We’re 18 months into this transformation and we have a clear execution path to $1 billion in run rate cost savings of $550 million already executed or contracted, $355 million of which has been recognized already to date in the income statement. AIG 200 continues to build a strong foundation across the company and instill a culture of operational excellence. Turning now to the separation of Life and Retirement, we made considerable progress in the second quarter with a focus on speed execution with minimal business disruption. Separation management office has identified day 1 requirements for Life and Retirement to become a stand-alone company and multiple work streams are underway.

This work also includes the alignment our investments unit with Life and Retirement and preparing the Blackstone partnership close. With the speed with which our colleagues have moved — would not have been possible without the foundational work that’s been done as part of AIG 200. And as I’ve discussed on prior calls, our IPO of up to 19.9% of Life and Retirement was our base case since we announced our intention to separate this business from AIG last October. We continue to believe that an IPO will maximize value for our stakeholders and the position of the business for additional value creation as a public company.

I also noted on our last call that following our announcement, we have received several credible inquiries from different parties that are interested in purchasing a minority stake in Life and Retirement as well as our entire investment management group. One of those parties with Blackstone. We’ve decided not to pursue this original proposed transactions because we determined that selling the entire investment management group was not in the long-term interest of Life and Retirement. Some of the proposals also contemplated significant reinsurance transactions ahead of an IPO, which we didn’t believe would optimize this outcome for our shareholders at this stage in the process.

In June, Blackstone reengaged with us to determine if we could find a mutually beneficial way to partner that would further our goals for the separation of Life and Retirement. These discussions have led to the announcement of our strategic partnership with — we entered into in mid-July. We continue to work with a sense of urgency toward an IPO of the Life and Retirement business. Following the 9.9% equity investment by Blackstone, this IPO will likely be the first in the quarter of 2022 event, subject to required regulatory approvals and market conditions.

We previously viewed the fourth quarter of this year as the earliest in IPO would occur within the first quarter of 2022 as our more likely outcome. So our timeline is essentially unchanged even if — with the announcement of the Blackstone transaction. Additionally, the gain on sale of Affordable Housing, coupled with other factors, provides us with great flexibility to sell beyond the 19.9% as we now expect to fully utilize our foreign tax credits in 2022. This development facilitated our partnership with Blackstone and, as a result, made it more compelling compared to structures we considered since our separation announcement last October.

We believe we are better positioned to accelerate with this operational separation. And as a result, Life and Retirement will be more comprehensively established as an independent company when the IPO occurs. Now let me provide additional detail on the Blackstone partnership, which represents this significant milestone for AIG and provides meaningful momentum for the IPO of Life and Retirement. As I mentioned, this partnership represents the culmination of discussions that took place over the last year on several strategic initiatives, which we view it as very beneficial for AIG and Blackstone.

Blackstone’s leadership has indicated this for some time that insurance is a key strategic priority for their firm. The investment Blackstone is making in our Life and Retirement business is the single largest corporate investment the firm has made in its 35-year history. And Life and Retirement is now Blackstone’s single largest client. This substantial commitment by Blackstone highlights the strength of Life and Retirement’s business, Blackstone’s belief in the value of the investment, its validation of Life, and Retirement’s market-leading position.

Furthermore, Jon Gray, President and COO of Blackstone, was directly involved in the negotiations. He has been a great partner throughout and will join the board of directors of the IPO entity at the closing of our equity investment, which we expect to occur in September. Let me recap some of terms of the transactions and how we’re thinking about this future for capital structures for AIG and Life and Retirement as stand-alone businesses. Blackstone will acquire a 9.9% cornerstone equity stake in the holding company for AIG’s Life and Retirement business for $2.2 billion in an all-cash transaction.

The purchase price is equivalent to a multiple of 1.1x target pro forma adjusted book value in $20.2 billion. Our adjusted book value also reflects that the combined book value of our Life and Retirement business and a majority of our investments unit as well as the financing arrangements to be undertaken and the amounts to be paid from that entity to AIG just prior to the IPO. As we look to the structure of the IPO entity, we will raise debt at this entity, consistent with its ratings and peer leverage ratios. The new debt will be used to pay down AIG debt such that debt stack at AIG and the IPO entity will both be in line with each of the companies’ firm and what we view as the optimal debt-to-total capital ratio for each company.

Life and Retirement will also enter into separately managed account agreements, or SMAs, with Blackstone — whereby we at Blackstone will manage $50 billion of specific asset classes with that amount growing to $92.5 billion over a six-year period. Lastly, and as I alluded to earlier, we sold some — certain of Affordable Housing assets to Blackstone Real Estate Income Trust for $5.1 billion in an all-cash transaction, which is expected to close by year-end 2021. Turning to capital management, we ended the second quarter with $7.2 billion of parent liquidity. The net proceeds from the Blackstone transactions resulted in an additional liquidity of $6.2 billion to AIG by year-end 2021.

Through the remainder of this year, we plan to pay down the $2.5 billion AIG debt and buy back about — at least $2 billion of the common stock. And as we’ve announced in our press release, the AIG Board has authorized the additional share repurchases, which, together with the remaining approximately $1 billion left on our prior authorization, brings our total stock buyback authorization to $6 billion. So together, these capital management actions demonstrate our commitment to delever and return capital to shareholders. In addition, the strength of our overall capital position leaves us with ample capacity to continue to invest in growth, and particularly in General Insurance, where our market conditions continue to be extremely favorable.

Now I’ll turn it over to Mark to provide more detail on the quarter.

Mark LyonsExecutive Vice President and Chief Financial Officer

Thank you, Peter, and good morning, everyone. For the second quarter of 2021, AIG reported adjusted pre-tax 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% to the quarter.

On a GAAP basis, AIG reported $91 million of net income with 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 that 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 profit 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 four quarters later as well as for the reinvested run-off AUM. Therefore, fee should rise from 30 basis points initially toward 43 basis points by the end of the initial six-year contractor 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 and 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 has the opportunity to enhance overall investment management, focusing on improving efficiencies and asset classes that are not part of the SMA as well as optimizing performance across our whole portfolio. We believe the combination of these efficiencies, together with the Blackstone focus on maximizing the performance of SMA assets and growth opportunities on the overall AUM, should drive net yield uplift.

Before leaving the Blackstone transaction, I want to note that a GAAP loss on sale is anticipated with a 9.9% equity purchase by Blackstone as well as with subsequent IPO sell-downs due to the inclusion of OCI and GAAP book value. Given that OCI in future periods is also subject to some market fluctuations, the impact cannot be fully estimated at this time. As respects Affordable Housing, note that the $5.1 billion purchase price translates to an approximate $3 billion after-tax gain on sale, which will benefit book value and provides approximately $4 billion of cash to parent with the minority proportion held back in a regulated Life and Retirement entity to further strengthen an already historically strong RBC level. This transaction is expected to close by year-end 2021.

Moving to General Insurance, second-quarter adjusted pre-tax income was $1.2 billion, up $1 billion even year over year, primarily reflecting increased pre-tax underwriting income of over $800 million, along with $200 million and change of increased pre-tax net investment income, driven primarily by equity returns. Catastrophe losses of $118 million were significantly lower this quarter, compared to $674 million in the prior-year quarter. Prior-year development was $51 million favorable this quarter, compared to the favorable development of $74 million in the prior year quarter. This included $58 million of net favorable development in North America and $7 million of net unfavorable development in International, both of which reflect some marginal changes in the underlying operations.

As usual, there is net favorable amortization from the adverse development cover, which amounted to $49 million this quarter. It’s important to note in context, though, the recent strength of the property and casualty market and how General Insurance has executed within this environment. And as Peter mentioned in his remarks, the book has had nearly three turns at correction since 2018. Risk appetite and risk selection have been materially sharpened, complementary and properly evolving reinsurance programs have been implemented.

Certain lines and segments were exited or massively reduced. Clearer and broader distribution has been embraced. Lexington has stood up as a major E&S platform, all of this was accomplished while simultaneously achieving the significant rate in excess of lost cost trends with materially better terms and conditions. These actions formed the foundation as to why General Insurance has shown material improvement in the underlying accident year ex CAT combined ratios in both the historically underperforming North America Commercial segment in the International Commercial segment as well.

North America Commercial has shown a 620-basis-point improvement in the accident year ex CAT combined ratio over the prior-year quarter. The International Commercial segment has continued to improve profitability with 370 basis points improvement compared to the prior-year quarter. This shows demonstrable margin improvement stemming from the totality of the actions enumerated earlier. And this level of Global Commercial improvement is also noteworthy Global Commercial made of 71% of worldwide net premiums written through the first half of 2021.

Additionally, the Global Commercial book is increasingly becoming a global specialty book comprised of below-frequency, high-severity coverages. As a result, General Insurance Commercial, although large and global in scope, it’s not a mere index of the market, but instead an underwriting company, where risk selection and business mix are important factors in achieving profit and growth while mitigating volatility. Turning to Personal Insurance. As we noted on our first quarter earnings call, our year-over-year net premium written comparison for the second quarter would improve, given the timing of the initial COVID-19 impact and distortions from Syndicate 2019 that’s being reflected also during the second quarter of 2020.

Global Personal Lines net premiums written grew by approximately 45% or 41% on a constant dollar basis, aided by the Syndicate 2019 comparison. Elsewhere within this segment, the second quarter of 2021 North America Personal Insurance saw premiums in travel and warranty business increase. This was driven by a rebound in travel activity and increased consumer spending but not yet back to the pre-pandemic levels. Our outlook for net premiums written for the next six months in North America Personal Insurance is between the $450 million and $500 million per quarter.

We continue to anticipate earned margin expansion throughout 2021 and into 2022, resulting from AIG’s favorable underwriting actions we’ve taken in global market conditions involving the strong rate increases well above loss trend, improved terms and conditions and a more profitable, less volatile mix. Given the specific market dynamics of where we choose to play, we don’t foresee any material slowing-down in the cheaper rate levels throughout the balance of the year. And now I’d like to comment a bit on inflation, which one needs to think about in terms of both economic and social inflation. Based on the Consumer Price Index and the Producer Price Index, headline inflation that indicates an annualized runrate of about 5.5% to 7.5%, which has accelerated in March.

Some components of the indices have become worrisome, such as used cars and trucks being up about 45% and energy commodities being north of 40%. But medical care services, whose impact now stretches across most casualty, auto, workers’ compensation and excess placements, although higher, are much more tame than the headline inflation that would indicate with physician services up about 4% recently and hospital services up about 2.5%. Costs involving labor, materials, construction and related services are up and will impact property coverages and CAT claim costs in the near term. These indications demonstrate that the inflationary impact on any given insurer is a direct function of the products and the mix they write and where they play within our insurance program.

Social inflation, however, is much more of a U.S.-centric phenomenon, driven by a highly litigious culture. Some social inflation also has correlations to the social change initiatives that are — including income inequality and changing sentiments toward business, to name a few. Being further away from risk though is a meaningful inflation counter. And AIG’s General Insurance has taken strong pre-emptive action in that regard by minimizing lead umbrellas in favor of higher positions within insurance programs.

For example, our Excess Casualty average attachment points for national and corporate U.S. accounts have also increased approximately 3.5 times and 5.5 times, respectively, since 2018. This significantly increased distance from attaching is a key overall portfolio benefit. Taken all together, a U.S.

view toward the total inflation rate of 4% to 5% is arguably reasonable for the near to medium term. Our second-quarter rate increases, together with our view of pricing for the rest of the year provide continued margin in excess of this loss cost trend. Now turning to Life and Retirement. When compared with the prior year, favorable equity markets drove higher alternative investment returns, principally higher than private equity returns, which reflect the impact of the one quarter lag on the period.

Life Insurance continues to reflect the COVID-19-related mortality provision that has dropped relative to the prior quarters. We estimate our exposure to the population is approximately $65 million to $75 million per 100,000 population deaths. Mortality, however, exclusive of COVID-19 continues to be favorable compared to pricing assumptions. Within Individual Retirement, excluding the Retail Mutual Fund business, net flows were positive for the quarter and favorable by over $1.2 billion when compared within second-quarter 2020, led by the Index Annuities rebounding to be higher by approximately $700 million with Variable Annuity net flow of about $365 million stronger year over year.

Group Retirement premiums and deposits were up with net flows being relatively flat while also experiencing an improved surrender rate sequentially. The Life business has seen consistent premiums and the lower lapse [Inaudible] rates over the last four quarters than prior. And for Institutional Markets, premiums and deposits were up compared to the prior year and sequentially. GIC issuance was also higher but sequentially and year over year.

And we executed several large pension risk transfer transactions during the quarter. The pipeline for pension risk transfer opportunities, both direct and through reinsurance, we remain very strong in both the U.S. and in the U.K. We continue to actively manage the impacts from the low interest rate and tighter credit spread environment.

In our earlier provided range for expected annual spread, compression has not changed as our base investment spreads for the second quarter were within our annual eight to 16-point guidance. Further, new business margins have generally remained within our targets at current new money returns due to active product management and a disciplined pricing approach. Lastly, post June 30th, we closed on the sale of our Retail Mutual Fund operation. As you are aware, Retail Mutual Funds has contributed to he negative flows over the last two years.

And the drag from this will now cease. Moving to Other Operations. The adjusted pre-tax loss was $610 million, inclusive of $94 million from consolidation and elimination entries, which principally reflect adjustments offsetting investment returns in the subsidiaries, which are in alignment at Other Operations. Before consolidations and eliminations, the adjusted pre-tax loss was $516 million, $184 million worse than the second quarter of 2020.

But that quarter included two months of Fortitude Re results of $96 million. And in addition, during the second quarter of 2021, we also increased prior-year legacy loss reserves by a net $65 million that’s driven mostly by Blackboard exposures. And we increased our incentive program accrual to reflect the strong performance year-to-date, whereas in 2020, we began adjusting our incentive program accrual in the third quarter. After applying for these adjustments, we — the comparison is actually favorable year over year.

Shifting to investments, our overall net investment income on APTI basis was $3.2 billion. That’s virtually flat from the second quarter of 2020 but again, adjusting the second quarter of 2020 for Fortitude net investment income of over that two-month period, this quarter’s net investment income was $362 million higher than the prior year, reflecting our strong private equity returns at an annualized 27% return rate for the quarter. And hedge fund results at a 21% annualized return rate for the quarter, along with stable interest and dividend income. Turning to the balance sheet, at June 30th, book value per common share was $76.73, up 7% from one year ago.

Adjusted book value per common share was $60.07 per share, up 7.5% from one year ago, driven primarily by strong operating performance. Adjusted tangible book value per common share was $54.24, up 8.1% from a year ago. As Peter noted, at quarter end, AIG parent liquidity was $7.2 billion. During the second quarter, we made $354 million prepayment to the U.S.

Treasury in connection with some certain tax settlement agreements emanating from pre-2007 as well as completed debt tenders for an aggregate purchase price of $359 million. Our debt leverage at June 30 was 27% even, down 140 basis points from the end of 2020 and down 360 basis points from June 30th of one year ago. 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 second quarter to be between 460% and 470% and Life and Retirement is estimated to be between 440% and 450%, both in — above the target range. Lastly, as respect to tax, I want to reiterate that the remaining net operating loss or NOL portion of AIG’s DTA at the time of deconsolidating L&R for tax purposes will still then be available for offset of future General Insurance and/or AIG taxable income through their natural expiration. As of June 30, that portion of the DTA totaled $6.3 billion and is available to offset up to $30 billion of taxable income. So upon tax deconsolidation, what we’ll see is the ability to utilize up to 35% of Life Insurance company income against NOLs or any remaining FTCs.

With that, I will now turn it back over to Peter.

Peter ZaffinoPresident and Chief Executive Officer

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

Questions & Answers:

Operator

[Operator instructions] We’ll take our first question from Elyse Greenspan from Wells Fargo. Your line is open. Please state your question.

Elyse GreenspanWells Fargo Securities — Analyst

Hi. Thanks. Good morning. 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 in terms of time frame. And when you made that comment, were you assuming stable pricing and inflation kind of remains around 4% to 5% based on what Mark said into 2022?

Peter ZaffinoPresident and Chief Executive Officer

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. And 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 we 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 also gave some numbers on my prepared remarks that we have really 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 just one component, there’s four to five 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 then loss cost inflation. But we watch that all the time and believe that we have a lot of momentum. I’ll give you 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.

Elyse GreenspanWells Fargo Securities — Analyst

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. Did you have a sense of how much you’re going to bring on to the public market? And then in terms of the proceeds you guys get there, since you’re paying down $2.5 billion of debt now, will the majority of the proceeds from future transactions be used for buyback, kind of organic growth?

Peter ZaffinoPresident and Chief Executive Officer

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 we’re working over the next six months to position Life and Retirement to have a very successful IPO is the primary focus. Second is we have to think about — as I said in my prepared remarks, of 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 and the debt.

Mark LyonsExecutive Vice President and Chief Financial Officer

Just I think that the — I think that the core point was to emphasize that this removes the constraints. So rather than on the specifics of the sizing, which as Peter said 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.

Peter ZaffinoPresident and Chief Executive Officer

Thanks. Next question, please.

Operator

We’ll take our next question from Meyer Shields from KBW Investment Bank. Your line is open. Please go ahead.

Meyer ShieldsKBW Investment Bank — Analyst

Great. Thanks. 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?

Peter ZaffinoPresident and Chief Executive Officer

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 are still maintained in its authority and ability to shape the investments with Blackstone, so we contained that. And 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 the Life and Retirement. And so this has become a smaller percentage and the base case was that not only with 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.

Mark LyonsExecutive Vice President and Chief Financial Officer

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. You can think of it in a rate card sense. And so that part is completely within expectations is what we would say.

And then 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. It’s going to be more than worth it.

Meyer ShieldsKBW Investment Bank — Analyst

OK. Understood. The 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?

Mark LyonsExecutive Vice President and Chief Financial Officer

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 a bit — 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. You’ve got a lot more stability in the loss ratios on there, so you’ll continue to see that. But to the extent that — it’s roughly a — if — I would actually say you should anticipate the expense ratio to continue to improve in North America personal.

Peter ZaffinoPresident and Chief Executive Officer

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 continued change in the excess and surplus Lines as more alternative. 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 our market-leading position that we take advantage of solving problems for clients but also repositioning the portfolio to have less volatility.

Quentin McMillan

OK. Next question, please.

Operator

We’ll take our next question from Erik Bass from Autonomous Research.Your line is open. Please state your question.

Erik BassAutonomous Research — Analyst

Hi. Thank you. Can you talk a little bit more about the asset management agreement with Blackstone and how you’d say 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 and next annuity offerings?

Peter ZaffinoPresident and Chief Executive Officer

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

Mark LyonsExecutive Vice President and Chief Financial Officer

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 — think of it like — thinking about it mostly, it takes seven 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%. It will be at 45 bps, so you kind of have that curve that I was alluding to in my prepared remarks. And 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 that you’ll really — the end of year 1.

And 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 — which is the important point to remember here 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?

Kevin HoganExecutive Vice President and Chief Executive Officer

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 that 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 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.

Erik BassAutonomous Research — Analyst

Thank you. And then can you help us think about the level of new public expenses that Life and Retirement will have? And these be stable 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?

Peter ZaffinoPresident and Chief Executive Officer

Erik, the — 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 the $125 million.

Life and Retirement achieved some of that. But there’s a big number left for us in terms of earning through over the next 18 months, so think about roughly $100 million of AIG 200 benefits. Then there is allocations and the parent service fees that goes over to Life and Retirement today that will either dissipate or — and we’ll still have those services as we transition for Life and Retirement to become a public company. And so I think that’s in the range of $75-plus million.

So Kevin has a decent amount to invest toward 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 when we think of 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.

Operator

Thank you. We’ll take our next question from Phil Stefano from Deutsche Bank. Your line is open. Please go ahead.

Phil StefanoDeutsche Bank — Analyst

Yes. Thanks, and good morning. And looking at the General Insurance look 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 sort of 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? Like how are you balancing these two dynamics?

Peter ZaffinoPresident and Chief Executive Officer

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 the 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 really an optimized portfolio.

We’ve had several years of rate increases. We’re building margin. So some of the 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 we believe 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 sort of the different segments of the business that you’re focused on?

Dave McElroyExecutive Vice President and Chief Executive Officer

Yes. Thank you, Peter, and 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 three years is a lot risk selection and terms and conditions and attachment point and account exposures and managing that.

And 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 — I guess into 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, OK? So for the industry, it’s a little bit of like commercial auto.

We’ve been getting rate increases in the commercial auto for eight years and we will still haven’t solved that problem. So rate increase can be a false positive. What we’ve done with just sort of the 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 what — we think that’s sustainable going into the latter part of this year, OK? And we think we can accommodate what would be expected loss cost inflations.

So at the same time that 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, like a little bit, OK? But it’s moderated off of still over loss cost trends. And what I would say, when I look at my dispersion charts, but we don’t have the same outlier plus 30% up. What we have is a swell of more or a plus 5% to 10%, plus 10% to 20%, plus 20% to 30% type of accounts that are basically aggregating in that in terms of rate reflecting the exposure.

Now the other piece of the — I think that we have to be careful with it because we want to reflect our book and our clients, but we do — we are in the multiyear phase of a reunderwriting and an influence in the market. And when you look at compounding and you look at the compounding what might exist in Excess Casualty or primary D&O, OK, or even programs, OK, these are numbers that are plus 93%, the plus 86%, OK? Plus 70% over a period of time of starting in late ’18 to the first half of 2021. It’s not a panacea, OK? And if you’re — if I was trying to write investment banking E&O and I’ve got 90%, I probably would still lose but — I mean it’s a good baseline to progress that we’ve done with the business, and the last thing I’d say is that we had a lot of new business this quarter. I think it was cited on a couple of calls.

And so remember, this is also being priced now with an elevated rate/price structure. So for the same business two years ago or three years ago is now up that 30% to 40% when we can produce as a piece of new business, and that’s very much from a lot of our success in this quarter was moving from remediation to an offensive point and capturing quality of what AIG has with these multinational claims reputation of complexity and actually building off that for the strongest new business we’ve had in a while. So that flows off of technical rate increases and our consistent view of that, but it’s important to sort of lay that all out. So you understand that we’re not what — really looking at this with the lens on all aspects of the business.

So with that, I’ll [Inaudible]

Phil StefanoDeutsche Bank — Analyst

Yes. Thanks, guys. That’s very thorough. Look, maybe a quicker one [Inaudible]

Operator

We’ll take our next question from Tracy Benguigui from Barclays. [Inaudible] Please go ahead.

Peter ZaffinoPresident and Chief Executive Officer

Yes, thank you.

Operator

Yes. Please go ahead, Tracy.

Tracy BenguiguiBarclays Investment Bank — Analyst

Thank you. 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 for minority IPO proceeds or a minimum equity stake size?

Peter ZaffinoPresident and Chief Executive Officer

Thanks, Tracy. No, I — the 9.9% is predicated on a strategic partnership. They start 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 out to do that. And again, there’s regulatory and market considerations that we’ll always look at but those are really the bigger ones then — 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 in 2022, we’ll start to outline what we think will likely happen as we get closer to the end of the year.

Tracy BenguiguiBarclays Investment Bank — Analyst

OK. 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.

Peter ZaffinoPresident and Chief Executive Officer

No.

Tracy BenguiguiBarclays Investment Bank — Analyst

OK. Perfect. Look, anyone could trade gross 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 lost picks. So can you contextualize how your current accident year lost picks have been tracking maybe relative to last year in your five-year average?

Peter ZaffinoPresident and Chief Executive Officer

Mark, do you want to cover that?

Mark LyonsExecutive Vice President and Chief Financial Officer

Sure. Sure. Hi, Tracy. 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 on past calls, there has been a lot of change over the last three 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 — I hope that’s helpful.

Peter ZaffinoPresident and Chief Executive Officer

Yes. Thanks, Mark. And I want to 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 six 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.

Operator

[Operator signoff]

Duration: 67 minutes

Call participants:

Quentin McMillan

Peter ZaffinoPresident and Chief Executive Officer

Mark LyonsExecutive Vice President and Chief Financial Officer

Elyse GreenspanWells Fargo Securities — Analyst

Meyer ShieldsKBW Investment Bank — Analyst

Erik BassAutonomous Research — Analyst

Kevin HoganExecutive Vice President and Chief Executive Officer

Phil StefanoDeutsche Bank — Analyst

Dave McElroyExecutive Vice President and Chief Executive Officer

Phil Stefano Deutsche Bank — Analyst

Tracy BenguiguiBarclays Investment Bank — Analyst

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