American International Group, Inc. (NYSE:AIG) Q4 2023 Earnings Call Transcript

American International Group, Inc. (NYSE:AIG) Q4 2023 Earnings Call Transcript February 14, 2024

American International Group, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

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

Quentin McMillan: Thanks very much, and good morning. Today’s remarks may include forward-looking statements, which are subject to risks and uncertainties. These statements are not guarantees of future performance or events, and are based on management’s current expectations. AIG’s filings with the SEC provide details on important factors that could cause actual results or events to differ materially. Except as required by applicable securities laws, AIG is under no obligation to update any forward-looking statements, circumstances or management estimates or opinions should change. Today’s remarks may also 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 aig.com.

Additionally, note that today’s remarks will include results of AIG’s Life & Retirement segment and other operations on the same basis as prior quarters, which is how we expect to continue to report until the deconsolidation of Corebridge Financial. AIG’s segments and U.S. GAAP financial results, as well as AIG’s key financial metrics with respect thereto differ from those reported by Corebridge Financial. Corebridge Financial will host its earnings call on Thursday, February 15th. Finally, today’s remarks, as they relate to net premiums written in general insurance, are presented on a comparable basis, which reflects year-over-year comparison on a constant dollar basis, adjusted for the international lag elimination, the sale of Crop Risk Services, and the sale of Validus Re. Please refer to the footnote on Page 26 of the fourth quarter financial supplement for prior period results for the Crop business and Validus RE.

With that, I’d now like to turn the call over to our chairman and CEO, Peter Zaffino.

Peter Zaffino: Good morning, and thank you for joining us today to review our fourth quarter and full year 2023 financial results. Following my remarks, Sabra will provide more detail on the quarter and some perspective on the year, and then we’ll take questions. Kevin Hogan and David McElroy will join us for the Q&A portion of the call. We had a very strong fourth quarter, which highlighted a significant year of achievements at AIG. Throughout 2023, we continue to build on our underwriting excellence, reposition the portfolio through several divestitures, made meaningful progress towards the deconsolidation of Corebridge, including three secondary sell-downs, deliver disciplined premium growth in businesses where we have scale and outstanding combined ratios, and continue to execute on our balanced capital management strategy.

I’m very proud of the work our colleagues delivered for all of our stakeholders throughout the entire year. In the fourth quarter, adjusted after-tax income per diluted common share was $1.79, an increase of 29% year-over-year, driven by continued strong underwriting results, 17% growth in net investment income, and excellent execution of our balanced capital management strategy that resulted in a 6% reduction in diluted common shares outstanding. For the full year 2023, adjusted after-tax income per diluted common share was $6.79, an increase of 33% over 2022. AIG overall produced an adjusted return on common equity of 9% for the year, up from 7% in 2022. As I will share with you today, 2023 was an extraordinary year for AIG. During my remarks this morning, I’ll discuss the following topics: First, I will provide an overview of our fourth quarter financial results; Second, I will review AIG’s significant accomplishments in 2023, including our strategic repositioning and our financial highlights.

Sabra will comment on the Life Retirement business in her prepared remarks; Third, I will cover insights on the January 1 reinsurance market and specifically AIG’s reinsurance renewals; And finally, I’ll share some thoughts on how we’re building on our momentum and positioning the company as we enter 2024, including some specifics on AIG Next, our initiative focused on creating the AIG of the future. I will also discuss our capital management strategy and growth expectations. AIG’s Strong fourth quarter results demonstrated our continued execution across all aspects of our strategy. Within general insurance, underwriting income was $642 million. Gross premiums written for the fourth quarter were $7.6 billion, an increase of 4% from the prior year quarter.

Net premiums written for the quarter increased by 7% from the prior year quarter to $5.7 billion. Global commercial grew 5% and global personal grew 9% from the prior year quarter. If you exclude Financial Lines, Global Commercial would have grown 11%. In North America commercial, fourth quarter net premiums written grew 5% over the prior year quarter, led by retail property, which grew 32%, Lexington, which grew 20%. These were offset by North America Financial Lines, which was lower by 13%. In international commercial, fourth quarter net premiums written grew 6% over the prior year quarter as international property grew 28% and Talbot grew 12%. These were offset by international Financial Lines, which was lower by 7%. In the fourth quarter Global Commercial had very strong renewal retention of 86% in its enforced portfolio, as well as very strong new business performance.

North America commercial produced new business of $503 million in the quarter, an increase of 21% year-over-year. The growth was led by retail casualty, Lexington, and retail property. International commercial produced new business of $467 million for the quarter, representing an increase of 14% year-over-year. This growth was led by Global Specialty and Talbot. Moving to rate, in North America commercial, overall rate increased 4% in the fourth quarter, with exposure adding 3 points, and the overall pricing was up 7%. In North America commercial, if you exclude Financial Lines and workers’ compensation, overall rate would have increased 11% in the quarter and with exposure adding 4 points, overall pricing would have been 15%, meaningfully above the loss cost trend.

North America commercial rate increases were driven by Lexington wholesale, which was up 17%, retail property, which was up 19%, and excess casualty, which was up 13%. In international commercial, overall rate increased 3% in the fourth quarter with exposure adding 2 points and the overall pricing was up 5%, which is slightly below loss cost trend. The rate increase was driven by property which was up 12% and Marine which was up 8%. Turning to personal insurance, fourth quarter net premiums written increased 9% from the prior year quarter, primarily driven by North America. In North America personal, net premiums written increased 37% in the quarter. As we’ve seen in prior quarters in 2023 the significant premium growth for North America personal was driven by our high net worth business.

And, as we discussed in prior quarters, the growth in North America earned premium continued to generate a lower expense ratio and we expect the expense ratio will continue to improve in 2024. Now let me turn to the full year financial results. 2023 was another year of meaningful strategic repositioning and was in many ways our best year yet. The repositioning included the disposition of Validus RE and Crop Risk Services, which generated a combined $3.5 billion of proceeds, including a pre-closed dividend. Additionally, we settled a $1 billion intercompany loan from Validus RE to AIG and received approximately $250 million of RenaissanceRe common stock. The changes to our portfolio further reduced volatility and allowed us to focus on businesses where we believe we have better opportunities for stronger risk-adjusted returns.

We reshaped the reinsurance structure of our high-net-worth business and launched a newly formed MGA called Private Client Select. We made significant progress towards Corebridge’s separation, another major strategic milestone on our journey to becoming a less complex company. We completed three secondary offerings in 2023 that generated approximately $2.9 billion in cash. We worked with Corebridge on the divestiture of Laya Healthcare and announced the sale of the UK Life business. In 2023, AIG received $1.4 billion of capital from Corebridge through $385 million of regular dividends, $688 million of special dividends, and $315 million of share repurchases. At the end of 2023, our ownership stake in Corebridge was approximately 52%. In 2023, we continue to execute on a thoughtful and balanced capital management strategy.

During the year, AIG returned $4 billion of capital to shareholders through $3 billion of share repurchases and $1 billion of dividends. We reduced our common shares outstanding by 6% and increased quarterly dividends by 12.5%. On August 1st, the AIG Board of Directors increased our share buyback authorization to $7.5 billion. At the year-end 2023, we had $6.2 billion remaining on that authorization. We reduced AIG net debt by $1.4 billion in 2023 after successfully conducting a senior notes tender offer in November. We finished 2023 with very strong parent liquidity of $7.6 billion, which gives us ample capacity to continue executing on our capital management priorities. Turning to the full year result for general insurance, throughout 2023, we delivered terrific financial performance.

General insurance full year underwriting income was $2.3 billion, a 15% increase year-over-year. For the full year, the general insurance accident year combined ratio excluding catastrophes was 87.7%, an improvement of 100 basis points year-over-year. Global Commercial achieved an accident year combined ratio, excluding catastrophes of 83.3% for the full year. An improvement of 120 basis points year-over-year, driven by loss ratio improvement. The calendar year combined ratio was 87.1%, a 250 basis point improvement year-over-year. Excluding Validus Re and Crop Risk Services for the full year results, the Global Commercial accident year combined ratio, excluding catastrophes, would have increased by 50 basis points to 83.8% and the calendar year combined ratio would have increased by slightly over 20 basis points to 87.3%.

In global personal, the full year accident year combined ratio, excluding catastrophes, was 99.3%, in line with the prior year. For the full year, general insurance grew net premiums written by 7% year-over-year, driven by 5% growth in Global Commercial and 10% in personal insurance. North America commercial grew 5% and international commercial grew 6% year-over-year. A couple of highlights. Lexington and Global Specialty had outstanding years. We remained very focused on these businesses and made investments to accelerate growth and continue to deliver strong underwriting profitability. Lexington grew its net premiums written by 17% year-over-year. Growth was driven by historically high retention, which was 80%. $1 billion of new business and rate increases of approximately 18%.

Global specialty, which includes businesses in marine, energy, trade, credit, and aviation, grew its net premiums written 10% year-over-year, driven by 88% retention, almost $750 million of new business, and rate increases of 7% for the year. Also, there are two parts of our business that impacted growth in Global Commercial, which I would like to offer some perspective. First, if you exclude Financial Lines, our net premiums written growth would have been 10%. Second, as we’ve outlined on prior calls, we decided to non-renew two programs that had significant property catastrophe exposure that no longer met our underwriting guidelines. We did not believe that the premium increases on a risk-adjusted basis for these two programs delivered an acceptable return.

The decision to non-renew impacted the gross and net premiums written for Lexington specifically, as well as the Global Commercial business throughout 2023. If you exclude Financial Lines and these two programs that I just mentioned, our year-over-year net premiums written growth would have been 13%, which gives you a sense as to why we have significant confidence in our core portfolio where we saw meaningful overall growth for the year. It’s worth providing a little bit more detail on Financial Lines. In Financial Lines, particularly in our public directors and officers book of business, we continue to exercise underwriting discipline by maintaining our primary position in our portfolio and being very prudent on large account excess layers, where there’s significant exposure to vertical loss.

And these layers are highly commoditized where typically the best price wins. We’ve spoken about the cumulative rate change in Financial Lines before, but I want to provide a little bit more detail. The compound annual growth rate for Financial Lines achieved from 2019 through 2023 was 49%. If you exclude 2023, the compound annual growth rate was 63%. It’s a business we’re very focused on, and our underwriters are continuing to carefully monitor market conditions and underwrite conservatively. Now, I’d like to provide you with some insight into the current reinsurance market generally and an overview of our January 1 reinsurance renewals. As I mentioned on previous calls, AIG’s reinsurance purchasing is deliberately weighted to January 1, which enables us to strategically optimize the outcome across our reinsurance placements and provides us with clarity on our cost of reinsurance at the beginning of the year.

Before I go into detail on this year’s outcomes, I want to speak about how we evaluate our reinsurance purchased. We’ve seen significant changes in the global property market over the last two years and analyzing and quantifying changes in a portfolio’s risk profile has become increasingly complex. Currently, one of the most overused phrases that has been used with more frequency in the last year is risk-adjusted pricing or risk-adjusted rate changes, which have multiple interpretations, particularly when it comes to property treaty reinsurance. Calculating the risk-adjusted rate change can be complicated and is often inconsistent. I want to outline how AIG determines risk-adjusted pricing changes, which we believe is an industry best practice.

To begin, you must determine the baseline structure and all the variables required to assess and quantify the risk-adjusted pricing change. To do that, the base analysis should be set at the identical structure and coverage with the exact terms and conditions of the prior year structure. The analysis needs to compare the cost of capital year-over-year, and any model changes from vendor model output, such as RMS, to determine if the loss costs have increased or decreased at the attachment point and the vertical limits deployed. Also, an analysis is needed for any changes to the coverage provided in the treaty placement. For instance, over the last few years many programs have gone from an all risk coverage basis to a named or peak peril basis.

To correctly calculate the risk adjusted rate change, perils no longer covered need to be analyzed and priced separately and the impact of any reduced coverage should be factored into the assessment of the price change. This can be particularly difficult when assessing perils that would not be economically viable to place on a standalone basis with significant limits, which could include wildfire, flood, or terrorism. There needs to be consideration given to the volatility associated with the expected loss in calculating the risk-adjusted rate change. Given the complexity of these calculations, the methodologies applied should be done with consistency and discipline. When applying the methodology I just described, AIG had a tremendous outcome with our reinsurance partners at the January 1 renewal season, building upon the very strong result achieved in a very challenging market in 2023.

Now, let me turn to AIG’s reinsurance renewals at January 1 of this year. To level set, the natural catastrophe insured loss activity remained at the forefront of the market with a record-setting 37 events in 2023 that exceed $1 billion of insured loss. These events contributed to a total annual insured loss currently estimated at over a $100 billion, marking the sixth time in the past seven years that insured loss from natural catastrophes has exceeded $100 billion. Over the last seven years, there’s been nearly $1 trillion of aggregate losses with over 60% driven by secondary perils. The headline is, that we were able to significantly improve our property CAT structure and reinsurance coverage provided. When you review what we purchased last year, including for Validus RE, the overall spend has reduced by approximately $200 million and our core property treaties excluding Validus RE have slightly lower seated premium year-over-year.

Let’s start with our property catastrophe placements. Our core commercial North America retention of $500 million remained unchanged for the second straight year. The attachment on our dedicated Lexington occurrence tower was unchanged at $300 million. In both cases, the modeled attachment point is lower and the exhaust limit is higher. Our international property CAT per current structures renewed with a reduced retention in Japan to $150 million, a $50 million improvement from the prior year. The rest of the world attachment remains unchanged at $125 million. We were very pleased to have achieved broader coverage across all of our core occurrence towers. With nominal attachment points unchanged, or in the case of Japan, decreasing, the model probability of attaching our CAT reinsurance improved with respect to key perils and across every major territory following the growth achieved in the property portfolio in 2023.

Our property CAT aggregate cover was also successfully renewed with improved coverage, further reducing our volatility from frequency of loss. The aggregate now includes a standalone sublimit dedicated to losses in North America arising from secondary perils. Importantly, it also now covers contributing losses from our high net worth portfolio. Our annual aggregate deductible for North America is $825 million. The North America Other Perils deductible is $350 million, which is a new deductible, and Japan and the rest of the world deductibles are $200 million and $175 million, respectively. These are subject to each and every loss deductible of $20 million, other than for North America wind and earthquake, which are at $50 million. Our return period attachment point is lower year-over-year.

For all of our major proportional treaties across a range of classes, we improved or maintain our ceding commission levels, reflecting our market leading underwriting expertise, and position in the market. Turning to casualty, the challenges we’ve spoken about previously regarding the impact of inflation, both social and economic, and litigation funding in the U.S. were a focal point for reinsurers at one-one. For casualty at AIG, we remain very focused on our underwriting standards and the positioning of the portfolio. Our team has done a terrific job of re-underwriting the entire business, particularly considering the amount of work that was needed to reposition it to where it is today. Additionally, our pricing assumptions today have lost trends ranging from the high single digits to over 10%.

These were increased over the past two years given inflationary dynamics. I do want to make a few comments about the last 10 years of casualty results for the industry. The industry as a whole has reported meaningful reserve releases in four of the past 10 calendar years, including in calendar year 2017. At the same time, there have been six years of significant reported industry strengthening in the last 10 calendar years, including in all of the most recent five calendar years. Focusing on AIG, for accident years 2016 through 2019, our initial loss picks in our casualty lines excluding workers compensation averaged 78%. Looking specifically at accident years 2016 and 2017, the initial loss picks were approximately 81% in both years. These loss picks exclude unallocated loss adjustment expense.

We significantly strengthened the reserves by over $1 billion for accident years 2016 through 2019, which revised our year-end ultimate loss picks to 91% in 2016 and 96% in 2017 and an average of 87% over accident years 2016 through 2019. To further analyze our casualty results compared to industry results for other liability in commercial auto, using the most recent Schedule P data, they are well above the average industry loss picks on both measures. Our initial and year-end ultimates for both lines are roughly 10 to 20 points higher than the overall industry average. In addition, we have reinsurance in place for 2016 and 2017 to mitigate our gross results. As we outlined last quarter, we put a comprehensive reinsurance treaty in place starting in 2018 that provides us with a substantial amount of vertical protection.

Our renewal of the casualty reinsurance protections allowed us to maintain the same net retain lines with no impact on ceding commissions, which is an outstanding outcome. At January 1, our reinsurance partners maintained their significant support of AIG with consistent capacity and improved reinsurance terms that demonstrate a clear recognition of the quality of our portfolio and our underwriting teams. I’ll now turn to discuss our efforts to create a future state business structure for AIG post-deconsolidation of Corebridge. As part of this effort, we’ve launched a new program, AIG Next, to create a company that’s leaner, less complex, and more effective with the appropriate infrastructure and capabilities for the size of business we will be post-deconsolidation.

AIG Next will focus on the following key principles: Driving global consistency and local relevancy across our end-to-end processes to improve operational efficiency and effectiveness; Reducing organizational complexity to create a better and differentiated experience for our clients and colleagues, creating an agile and scalable organization to support business growth, optimizing our ecosystem to modernize our data analytics, digital, and technology capabilities, clarifying roles responsibilities while eliminating duplication, and increasing our speed of execution. As we’ve stated in the past, we expect the simplification and efficiencies created through this program to generate $500 million of sustained annual run rate savings and to incur approximately $500 million in one-time spend to achieve these savings.

As part of AIG Next, we are creating a leaner parent company with a target cost structure of 1% to 1.5% of net premiums earned. Some of the current costs and other operations will be eliminated, contributing to the $500 million savings, and others will be moved into the business where the service is utilized. In 2023, we began this work. As we’ve moved approximately $140 million of expenses from other operations into general insurance for services that are more closely aligned to our business operations. Even with this shift, the full year combined ratio of 90.6% improved 130 basis points year-over-year, and the full year GOE ratio only increased 40 basis points due to offsetting savings within general insurance. Throughout the year, we’ve built efficiencies into our business which have allowed general insurers to absorb these costs.

We’ve already begun to make meaningful progress against our $500 million savings target and have established a team to drive and govern the AIG Next program with focus and discipline. Sabra and I will provide more detail on next quarter’s call regarding the specific cost to achieve by category and the expected timeline for the realized benefits in 2024 and 2025. As we are approaching the final steps of the Corebridge deconsolidation, we remain agile and continue to explore all options based on market conditions with respect to our remaining ownership of Corebridge, always focusing on what’s aligned with the best interests of our stakeholders. Sabra will take you through a pro forma capital structure based on assumptions about the deconsolidation.

Throughout 2024, we expect to continue to execute the capital management strategy we’ve outlined before. Our insurance company subsidiaries continue to have excess capital to support the type of organic growth we have seen through 2023 and would expect to see in the future. We’ve made enormous progress on our debt structure and maturities. Since year-end 2021, we’ve reduced over 50% of AIG’s debt outstanding, which is over $11 billion of debt reduction. The primary focus in 2024 will be on returning capital to shareholders through share repurchases and dividends. Since the start of 2024, we have repurchased an additional $760 million of common shares. We expect to continue at this pace for the first half of 2024, subject to market conditions, which should bring us near the high end of our target share count range.

Post Corebridge deconsolidation, we should achieve the low end of our range, which is approximately 600 million of common shares. The AIG board increased the dividend in 2023, reflecting our confidence in the future earnings power of AIG, and we will continue to evaluate our dividend policy in 2024. And lastly, as I enter my seventh year at AIG, I’ve never been more optimistic about our opportunities for growth and the momentum that AIG has entering 2024. We now have a terrific business. Global Commercial, which we’ve been working on for years to reposition, is now one of the most respected portfolios in the industry. While there’s always pruning to do in any business, the remediation is now behind us. We’re well positioned to grow based on AIG’s strong retention, strong opportunities for new business, excellent combined ratios, and a company that has been able to distinguish itself amongst our clients and distribution partners.

In personal insurance, we will continue to make investments, particularly in our Japan business, our global A&H business, and our high-net-worth business, where we anticipate continued growth, and more importantly, profitability improvement. With that, I will turn the call over to Sabra.

Sabra Purtill: Thank you, Peter. This morning I will provide more detail on AIG’s fourth quarter results, but first, as we are getting closer to Corebridge deconsolidation, I would like to start with an illustrative pro forma. With AIG’s current ownership of Corebridge at 52%, the next transaction may likely result in deconsolidation. Today, Corebridge is consolidated in both AIG’s balance sheet and income statement with offsets of non-controlling interest for the portion that AIG does not own. You can see those adjustments in the financial supplement on Pages 8 and 11. When we deconsolidate, we will report Corebridge as an investment with dividends reported in net investment income and Corebridge shares included in parent investments.

Corebridge’s balance sheet and income statement will no longer be in our financials. If we were able to deconsolidate Corebridge now, accounting rules require us to fair value their assets and liabilities and recognize the net difference between that valuation and the current [GAAP] (ph) carrying value in AIG’s equity. That process also includes some changes, primarily driven by differences in basis and deconsolidation of variable investment entities. The example I will provide is a hypothetical pro-forma view. Please remember that there are many factors and each one impacts the output. This view builds on the remarks I provided last quarter about pro-forma adjusted shareholders’ equity. For simplicity, in this example we use Corebridge’s current stock price as a proxy for fair value, but the process is more complicated than that and is more dependent on interest rates than stock price, as the investment portfolio has to be valued on the day of deconsolidation, which will change based on interest rates.

As a very high-level illustration, as of year-end, the fair value of Corebridge’s net assets and liabilities was about $2 billion higher than the book value on AIG’s balance sheet. As a result, deconsolidation would have increased AIG’s book value per share by almost $3 a share. However, for AIG’s adjusted shareholders’ equity, the fair value adjustment would have resulted in a reduction of about $4 billion, or around $6 per AIG share, given Corebridge’s stock price relative to its adjusted book value. Now let me link these items to the AIG year-end pro forma estimate that I provided last quarter of adjusted shareholders equity of approximately $33 billion, adjusted for the sale of Validus RE to be used in evaluating the ROCE target. At December 31, 2023, AIG’s adjusted shareholders’ equity was approximately $53 billion.

With the pro forma fair value decrease of $4 billion at deconsolidation, adjusted shareholders’ equity would be roughly $49 billion, including about $8 billion of value for our Corebridge shares. To get to the [E] (ph), we subtract the value of core bridge shares, and for the purposes of this exercise today, we also subtract year in parent liquidity of almost $8 billion, most of which is to be used for 2024 capital management, interest, and other parent expenses, as Peter described. That results in pro forma adjusted shareholders equity of about $33 billion invested in our business, plus whatever liquidity is at the parent as the focus of our 10% plus target. This example is illustrative based on year-end financials and subject to change based on markets and the actual path to deconsolidation, but I hope it is helpful.

Now I will turn to fourth quarter results. Fourth quarter consolidated net investment income on an APTI basis was $3.5 billion, up 17% over the fourth quarter of 2022. General insurance net investment income was 38%, while Life & Retirement was up 15%. Higher new money reinvestment rates in both businesses drove the improvement. Fourth quarter new money rates on fixed maturities and loans averaged 6.5%, about 180 basis points higher than the yield on sales and maturities in the quarter. Fourth quarter new money rates were 160 basis points higher in GI and 190 basis points higher in L&R. With higher reinvestment rates, the yield on general insurance fixed maturities and loans, excluding calls and prepayments rose to an annualized yield of 3.8% in the quarter, up from 3.0% in 4Q 2022 and up 9 basis points sequentially.

L&R’s fourth quarter portfolio yield was 5.0% compared to 4.4% in 4Q 2022 and up 10 basis points sequentially. In the first half of 2024, we currently expect continued yield pickup on fixed maturities over the prior year, but less improvement sequentially, given the cessation of Fed interest rate hikes and the current shape of the yield curve. In contrast, alternative investment returns were weak this year, coming in slightly negative in the fourth quarter and at only 2.4% for the full year. GI alternative income was $41 million in the fourth quarter, down 11% from the prior year quarter, for an annualized return of 3.9%. L&R’s alternative portfolio generated a loss of $24 million in the quarter for an annualized yield of negative 1.8% compared to income of $16 million last year.

Turning to general insurance, as Peter said, our underwriting results remain very strong. The 4Q 2023 calendar year combined ratio was 89.1%, 80 basis points better than the fourth quarter of 2022, and the accident year combined ratio ex-CATs was 87.9%, 50 basis points better. Global Commercial Lines delivered outstanding fourth quarter results with a calendar year combined ratio of 85.4%, a 90 basis point improvement over the prior year. The accident year combined ratio ex-CATs was 82.4%, a 170 basis point improvement, reflecting exceptional underwriting profitability in both North America and International. The fourth quarter included only one month of Validus RE due to the timing of the divestiture. Excluding Validus RE from fourth quarter results, the pro forma Global Commercial Line’s calendar year combined ratio would have been 85.1%, 30 basis points lower than reported.

The accident year combined ratio ex-CATs would have been 82.5%, only 10 basis points higher. The fourth quarter calendar year combined ratio for Global Personal Insurance was 98.8%, 90 basis points better than 4Q 2022. The accident year combined ratio ex-CATs was 101.8%, 140 basis points higher, driven by the repositioning of the high net worth business, which made significant progress in 2023. Fourth quarter underwriting income for GI was $642 million, up slightly from $635 million in 4Q 2022, as improved accident year results, including catastrophe losses, were offset by lower favorable prior year development, net of reinsurance, and prior year premiums. Catastrophe losses totaled $126 million in the quarter, down from $235 million last year.

The largest event was Hurricane Otis in Mexico. For the fourth quarter and the year, catastrophe losses excluding Validus RE would have been $111 million and $937 million, respectively. Favorable prior year development totaled $69 million in the fourth quarter compared to $151 million in 4Q 2022. Including the impact of prior year premiums, the total impact of prior year loss reserve development was favorable by $37 million compared to favorable development of $150 million in 4Q 2022. Fourth quarter net favorable development this quarter includes $41 million of ADC gain amortization and $28 million of net favorable development from annual DVRs and other reserve reviews, particularly prior year catastrophes. The $28 million included $75 million in additional reserves for Russia-Ukraine related claims offset by net favorable development on shorter tail lines and older catastrophes.

Turning to L&R, fourth quarter results were solid, especially considering the continued headwinds from alternative investment returns. Fourth quarter APTI was $957 million, up 12% over the prior year, driven by base spread expansion, strong sales, and growth in assets under management and administration. Base net investment spreads and individual group retirement together widen 23 basis points in the quarter. Fourth quarter premiums and deposits were $10.6 billion, up 20% from 4Q 2022. For the fourth quarter, Corebridge’s earnings included an AIG-adjusted after-tax income decreased by about 25% due to the reduction in AIG ownership from 78% last year to 52% as of year-end. For the full year, Corebridge earnings in our adjusted after-tax income declined 20%.

Turning to other operations, fourth quarter 2023 adjusted pre-tax loss improved by $52 million from 4Q 2022 due to a $72 million reduction in AIG general operating expenses. Total other operations GOE was $242 million for the quarter, including $61 million for Corebridge. On a consolidated basis, AIG’s fourth quarter adjusted after-tax income rose 21% to $1.3 billion, driven by 19% growth in general insurance, APTI. The annualized adjusted return on common equity was 9.4% for the quarter, almost 2 points higher than the fourth quarter of 2022. Moving to the balance sheet, book value per common share ended the year at $65.14, up 18% from year-end 2022, and up 16% from September 30th, primarily due to the impact of lower interest rates. Adjusted book value per share was $76.65 at year-end, up 1% from year-end 2022, and down 2% for September 30th, reflecting the net impact of income, dividends, share repurchases, and Corebridge secondary sales.

At December 31st, AIG’s consolidated debt and preferred stock to total capital excluding AOCI was 24.3%, down 1.3 points from year-end 2022. With first quarter 2024 debt reduction, leverage is likely to be at the low end of our 20% to 25% range upon deconsolidation. As Peter noted, we made substantial progress towards a 10% plus ROCE goal this year. 2023 full year adjusted ROCE for AIG was 9.0% compared to 7.1% in 2022 and was 12.5% in general insurance and 11.5% in L&R. The actions to reach 10% or greater will be driven by the four levers we have discussed before, including AIG Next. We are confident in our ability to achieve this goal, subject to market conditions, and look forward to updating you on our progress. With that, I will turn the call back over to Peter.

Peter Zaffino: Thank you, Sabra. Michelle, we’re ready for questions.

Operator: Thank you. [Operator Instructions] Our first question comes from Michael Zaremski with BMO Capital Markets. Your line is open.

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Q&A Session

Michael Zaremski: Hey, good morning. Thanks. Maybe first on the expense ratio. I appreciate the color, Peter, you gave us on the continued improvement. Anything — it looks like this quarter specifically though, it took — it was a bit higher than expected. Anything we should be thinking about or — I don’t know if it’s profit share given the accident loss ratio or just anything — any noise in there or seasonality.

Peter Zaffino: Thanks, Mike. We outlined in my script that the business has been taking a lot of additional costs. Think about cyber and usage on the cloud. And so, that might’ve been held centrally in the past. That has now been put into the business. And so, you see that they’re absorbing most of it, but there is some timing on that. Also in personal insurance, there is a lot of noise in the quarter. There’s some one-time true-up adjustments. There’s also some profit sharing, as you mentioned, in some of our personal insurance businesses. And there was also some catch-up on some of the reinsurance on earned premiums. So I am not concerned at all about the uptick in expenses. It was very nominal. When I look at what the business has actually absorbed in terms of increased costs year-over-year, They’ve really built capacity to be able to invest in the future and the fourth quarter reflected that, but there was a little bit of noise as well, particularly on the personal insurance side.

Michael Zaremski: Okay, great. And my final follow-up is specifically on the accident year loss ratio. The Validus is property-centric and is going to be kind if fully out of the numbers next quarter. You talked about non-renewing some property throughout the year, and I understand Financial Lines has got a lot of pricing, but Financial Lines pricing isn’t great on a 12-month basis. So just — on the underlying loss ratio, given just all the dynamics, should we be thinking about any material changes to that underlying loss ratio as the year progresses, given the moving parts?

Peter Zaffino: I don’t think so. I think the accident year loss ratio that we finished the year is what I would expect in in 2024. Like you said, there’s always a mix of business changes, there’s always a little bit of noise. There could be some shift in composition. As you mentioned, property, we think we have tremendous opportunities there based on having five or six entry points across the world in terms of getting the best risk adjusted returns. When I look at what we’ve done in property over the last five years, we’ve gone from combined ratios in North America that are well north of 130 combines into the 70s and 80s now. So I think we have a really good platform. We’re able to scale up businesses when we see opportunities.

But I would think absent big mix of business changes, I would not expect any changes in the loss ratio. And I signaled on the call that the remediation is largely behind us. And again, we’re always going to be re-underwriting, but large programs or portions of the business in commercial, we really like what we have and think that there’s real good opportunities for growth.

Michael Zaremski: Thank you.

Peter Zaffino: Thanks, Mike.

Operator: Thank you. Our next question comes from Meyer Shields with KBW. Your line is open.

Meyer Shields: Great, thanks. One quick question just to make sure I understand it. So you talked about pricing assumptions for casualty, assuming loss trends of either high single digits or low teens. Did that match the loss trends embedded in the reserves?

Peter Zaffino: Good morning, Meyer. Sabra, do you want to talk about the reserves commensurate to the increase in premium and — sorry, an increase in rate change, particularly on excess?

Sabra Purtill: Yes. And we’ve talked about it in the past, we’ve taken a proactive approach to trying to react quickly to bad news that we see in trends. And as you know, even back in 2017, we moved to increase the reserves on casualty lines. Our underlying assumptions for casualty loss trend is in the 10% range. It does vary between primary and excess. Our book historically has been a little bit more balanced towards excess and that’s why you can see some of the changes in the loss ratios, accident year by accident year. I would note that we do our deeper dive on the casualty lines largely in the third quarter. There’s some that are in the second quarter and we did complete those reserves this year without any meaningful changes in the reserves.

Peter Zaffino: One other observation Meyer on that is that, the rates as we got to the back half of the year in casually, particularly in excess casually started to accelerate into double digits. And also, not that this is a bellwether, because there’s different mix of business, but our casually submissions in Lexington in the fourth quarter were up 100%, which just means it’s getting harder to get casualty placements done in the middle market. Pricing is going up, driven by rate, terms and conditions are being tightened, and there’s more activity in [ENS] (ph).

Meyer Shields: Okay, fantastic. That’s very helpful. Second question, I guess maybe jumping off from that. I guess I’m a little surprised that there’s still, if I understand correctly, the same level of proportional sessions on North American casualty, despite the fact that overall profitability has gotten so much better and higher interest rates. I was hoping you could take us through your thinking on that.

Peter Zaffino: Sure. Look, our casualty placements have evolved over time to reflect the portfolio, the gross limit deployment. And if I could take you back to even 2016 and 2017, where we had quota shares before we arrived, where we had a 50% quota share on primary casualty and then we had a 37.5% placement on excess casualty. That’s just continued to evolve as we got into 2018 where we bought a large excess loss placements for our worldwide casualty portfolio for 75 [indiscernible] 25. And then at the end of 2018, we bought a 50% quota share for our casualty portfolio within the United States. And the reason why I just give you that as a baseline is, we’ve changed, evolved, we’ve had reinsurance in place since 2016. But when you look at what we place on the quota share today, it’s basically 20%.

So we’ve taken that down while we’ve improved ceding commissions over 800 basis points from the original placement to 20% from north of 50%. So I think we have been recognizing that we don’t need to do as much proportional, but there’s a balance in those placements between the excess and the quota share partnerships with reinsurers. They like a balance between the excess of loss and quota share in terms of our underwriting and feel very comfortable that that’s a good amount to cede off for looking at our overall casualty portfolio.

Meyer Shields: Okay. That’s very helpful. Thank you so much.

Peter Zaffino: Thank you.

Operator: Thank you. Our next question comes from Elyse Greenspan with Wells Fargo. Your line is open.

Elyse Greenspan: Thanks. Good morning. My first question was on the equity that you laid out, Sabra. So $33 billion pro forma adjusted equity. And then I believe you said parent liquidity would come on top of that. So can you just give us a sense of, once you’re through deconsolidation, what type of liquidity you would like to have in parent? Because I’m assuming it would be $33 billion plus the parent liquidity would be the equity that we should consider in reference to the double digit plus ROCE target?

Peter Zaffino: Thanks, Elyse. I’ll turn it over to Sabra in two seconds, but I just want to caution us that we tried to outline what we expect shareholders’ equity with a variety of different variables, but it was all pro forma. So I think Sabra can answer the question sort of technically as to how we should be looking about our capital relative to how we get to the 10% ROCE, but I just don’t want to go into too many more variables because that was the pro forma that had a lot of assumptions. Sabra?

Sabra Purtill: Yes, certainly. Look, we have a framework around our liquidity position and clearly given the timing of the Corebridge secondaries and the Validus sale in the fourth quarter, parent liquidity was at very attractive and high levels at year end. The way we think of it in a normal framework is we look at what our forward holding company needs are. So think about common dividend payments of roughly $1 billion a year, AIG only interest expense roughly $500 million a year, and then parent expenses, which as we’ve talked about, we’re focused on getting those down to a 1% to 1.5% of NPE range. So that’s what we think about in terms of a normal liquidity position, which is lower, obviously, than where we end of the year.

Elyse Greenspan: Thanks. And then my second question, appreciate all the color on the call on premium growth. I think it was around 9% in the quarter kind of ex-Validus and Crop. And so, as we think about the moving pieces and just your view of price, loss trend, et cetera, would you expect top line growth kind of on an adjusted basis to be within that range in 2024, are there other things that we should consider?

Peter Zaffino: Well, when you take out — again, there’s a lot of moving pieces, but like you take out Validus, Crop Risk Services, and so we have a baseline. And then when we look at our commercial portfolio, yes, I look at the fundamentals Elyse in terms of how are we growing the business and we gave you highlights in the fourth quarter about our new business which was simply terrific and that momentum continues. Our retentions have been fantastic and so, again, it’s a portfolio that we have done such a great job to get to a place where we really like and find opportunities for stability and more growth. Agree on the rate, I mean, again, the fourth quarter was just a moment, but we would expect Financial Lines in 2024 not to keep up at the same pace on excess.

We’ll see as we get into the market, but really like the opportunities in our core businesses to drive growth. Lexington, I know there’s been a lot of discussion in this quarter around is excess and surplus lines slowing down, things going back to the admitted. There’s no evidence to suggest that’s true. Again, submission count is significantly up and it’s not just property. Property, if I looked at the fourth quarter, was the lowest submission count growth and that was up over 30%. As I said, property is around 30%. Casualty was up over 100% and healthcare was around 50%. So there’s a lot more opportunity to continue to grow in excess and surplus lines And you know what the property market you get to the second quarter and there’s your opportunity.