American International Group Inc (AIG) CEO Brian Duperreault on Q1 2019 Results - Earnings Call Transcript

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About: American International Group, Inc. (AIG)
by: SA Transcripts
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Earning Call Audio

American International Group Inc (NYSE:AIG) Q1 2019 Earnings Conference Call May 7, 2019 8:00 AM ET

Company Participants

Liz Werner - Head of Investor Relations

Brian Duperreault - President and Chief Executive Officer

Mark Lyons - Chief Financial Officer

Peter Zaffino - COO and CEO of General Insurance

Kevin Hogan - CEO of Life and Retirement

Conference Call Participants

Elyse Greenspan - Wells Fargo

Yaron Kinar - Goldman Sachs

Paul Newsome - Sandler O'Neill

Josh Shanker - Deutsche Bank

Ryan Tunis - Autonomous Research

Andrew Kligerman - Credit Suisse

Tom Gallagher - Evercore

Operator

Good day, ladies and gentlemen, and welcome to AIG’s First Quarter 2019 Financial Results Conference Call. Today’s conference is being recorded.

At this time, I would like to turn the conference over to Ms. Liz Werner, Head of Investor Relations. Please go ahead.

Liz Werner

Good morning. And before we get started this morning, I’d like to remind you that today’s presentation may contain forward-looking statements, which are based on management’s current expectations and are subject to uncertainty and changes and circumstances. Any forward-looking statements are not guarantees of future performance or events. Actual performance and events may differ possibly materially from such forward-looking statements.

Factors that could cause this include the factors described in our first quarter 2019 Form 10-Q to be filed in our 2018 Form 10-K under Management’s Discussion and Analysis of Financial Conditions and Results of Operations, and under Risk Factors. AIG is not under any obligation and expressly disclaims any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

Today’s presentation may contain non-GAAP financial measures. The reconciliation of such measures to the most comparable GAAP figures is included in the slides for today’s presentation and in our financial supplement, which are available on our website.

This morning, we ask again that you limit yourself to one question and one follow up. We're joined in a room today by members of senior management, including Brian Duperreault; President and CEO; Mark Lyons, CFO; Peter Zaffino, COO and CEO of General Insurance; and Kevin Hogan, CEO of Life and Retirement.

At this time, I’d like to turn the call over to Brian.

Brian Duperreault

Good morning and thank you for joining us today. Our first quarter results reflect the significant foundational work we've been undertaking since late 2017 and that described to you in detail on our last earnings call in February. I’m pleased with our progress to date and remain confident, and will continue through the remainder of the year.

Today we will provide additional detail on our financial results as well as progress we're making on a number of fronts in our General Insurance, Life and Retirement and Legacy segments. We're changing our usual line. So after my opening marks, I will be followed by Peter Zaffino, then Kevin Hogan. And Mark Lyons will close our prepared comments before we move to Q&A.

In the first quarter, we achieved an adjusted after-tax EPS was $1 58 compared to $1.4 in the first quarter of last year. This reflects significant improvement in the core operations of General Insurance in addition to increase investment income due to the rebound and equity markets. Mark will provide more detail regarding the positive impact investment income had across our businesses, which represent $0.32 of our EPS improvement year-over-year.

In the first quarter, General Insurance achieved an underwriting profit of $179 million in a calendar year combined ratio of 97.4. First quarter accident year combined ratio as adjusted was 96.1. This quarter's underwriting profit represents a significant milestone for AIG, and reflects the tremendous work undertaken by Peter and his leadership team over the last 18 months to radically improve underwriting fundamentals. Overall our approach to reinsurance dramatically reduce risk and volatility, onboard acquisitions and then still continuous expense discipline across General Insurance. We remain confident that GI will continue to improve its financial performance and deliver and underwriting profit for the full year 2019 as already evidenced by our first quarter results.

I'd like to comment briefly on AAL. As you know, over the last few quarters, as I have been reluctant to talk about AAL because of the significant changes taking place in General Insurance and because our historical disclosure was not in line with our peers. I did say it previously that you should assume AAL will be going down, indeed, it has. Our estimated 2019 AAL was 3.5. The number I'm not too focused on as it will continue to change as our General Insurance strategy evolves and matures and because we view catastrophe management as a balance sheet topic as opposed to P&L.

As a result of the strategic actions we are taking, AIG is again recognized as a leader in the insurance market. Many of us attended RIMS [ph] last week, and we're gratified to the level of engagement and support we've received from our clients and distribution partners.

The marketplace has taken note of our delivery broad based actions to recalibrate our book and aggressively reduce limits, risk and volatility. It is noteworthy that we are seeing corresponding improvements in almost every area, including retail, E&S, reinsurance. And these improvements are not just occurring in the United States, but also in a number of other countries. Peter will discuss this in more detail in his remarks.

I also want to briefly comment on the recent news about changes at Lloyd's. In my view Lloyd's is taking actions that are necessary for us to regain its preeminent position in the industry. Our acquisition of VALIDUS was driven in part by because of Talbot, a Lloyd's platform. So we are pleased to see Lloyd's embarking on plan to restore its position in the marketplace.

Turning to Life and Retirement. This segment delivered another solid quarter with adjusted pre-tax income of $924 million and an adjusted ROE of 15%. We are reconfirming our guidance for L&R for the full year and continue to expect the low to mid-teens adjusted ROE. Kevin will provide more detail on L&R's first quarter in his remarks, including the impacts of the rebound in the equity markets.

With respect to our Legacy segment, we continue to make progress on our plan to deconsolidate and fully separate this business, while ensuring to meet our commitments to our policyholders and regulators.

As you saw in our press release for consolidated AIG, we continue to expect to achieve a double-digit adjusted return on equity within three years. Our first quarter results demonstrate that our world-class team continues to make progress and our journey to restore AIG as a leading insurance company in the world.

With that, I will turn it over to Peter to expand on General Insurance.

Peter Zaffino

Thank you, Brian. Good morning, everyone. Today I will share high level financial information for General Insurance. I will explain on Brian comments and highlight some of our accomplishments in the quarter, including notable financial progress that’s being realized its result for our underwriting strategy and the overall repositioning of our business. I will provide insight on our revolving reinsurance program, which had substantially reduced and accelerated volatility containment.

And lastly, I will provide market observations based on our experience in the first quarter and make some brief comments as we look ahead to the rest of 2019.

As Brian noted since the beginning of 2018, we've been undertaking significant foundational work in General Insurance around organizational structure, talent recruitment and improving underwriting capabilities, while at the same time rapidly evolving or reinsurance program and exercising expense discipline. As a result, in the first quarter of 2019, we achieved an accident year combine ratio; including actual CATs of 98.8% or 96.1% as adjusted. The calendar year combined ratio was 97.4%. The accident year loss ratio, excluding cash for the quarter, was 61.8%, a 130 basis point improvement year-over-year, and a 210 basis points sequential improvement from fourth quarter 2018. In the first quarter, we experienced CAT losses of $175 million, which were lower than a year ago.

The first quarter expense ratio of 34.3% represents a 230-basis-point improvement year-over-year and a 60-basis-point improvement from the fourth quarter of 2018. The general operating expense ratio was 12.5% for the first quarter in line with the fourth quarter of 2018 and 240 basis points lower than the first quarter of 2018. On a like-for-like basis, excluding the impact of acquisitions, operating expense is declined by approximately 18% year-over-year. These reductions were achieved while we remain committed to making investment in talent, business process and infrastructure to support our long-term profitable growth objectives. The acquisition ratio of 21.8% in the first quarter was in line with the prior year quarter and the fourth quarter of 2018, and in line with our expectations given our current mix of business.

In addition to improved underwriting results, net investment income was favorable this quarter coming in at $1.1 billion, bringing General Insurance's pre-tax operating income to $1.3 billion. Mark will provide more details on the General Insurance financial results in his prepared remarks. As we stated over the last few quarters, we delivered improvement, particularly in our commercial businesses, our primary area of focus was to create a framework that clearly defines the segments of business that we wanted to underwrite, while leveraging the sustained value believe AIG delivers in the insurance market. This framework enabled us to develop cohesive risk appetite and the pivot to becoming a valued added partner to our brokers and clients based on our expertise not just our capacity. While it may sounds simple and perhaps even repetitive, this was our major initiative in 2018, and when coupled with the strengthening of our core underwriting fundamentals, the changing mix of our business, the addition of Validus and Glatfelter, and the improvement we have driven in race, we were able to craft and dramatically improve comprehensive and strategic reinsurance program for 2019.

We remain committed to our journey of continuous improvement across General Insurance and are executing on changes to core businesses to shift our overall portfolio composition. Some highlights of actions we are taking that are driving improved operating and financial results include the following. In Lexington, for both property and casualty, we've narrowed our risk appetite and are focused on smaller and mid-market insurers and are committed to the wholesale distribution channel. We're also taking an aggressive action on our renewal portfolio to align with our new risk appetite, while exiting underperforming risks. As a result, we see momentum in both property and cash. Property submissions are up over 20% year-over-year, and we are achieving low to mid-teens rate improvement on the portfolio.

In our casualty business, our submission account is up over 20% year-over-year, as the marketplace has responded positively to our more tailored distribution strategy enabling us to identify opportunities for profitable new business growth. In our casualty portfolio, we're achieving low teens rate improvement. Overall, we're very seasoned to pace of the repositioning of our Lexington portfolio.

In financial line, as I mentioned on last quarter's call, we've been focused on reducing growth primary limits, and we remained very committed to the point capacity for lead layers, while obtaining better balance by participating in excess layers.

We also have been discipline on rate. For example, we've achieved in the primary corporate DNO over 20% rate and primary private DNO over 15% and an excess DNO over 10%.

In our North American book across primary U.S. DNO segments, aggregate limits were reduced by approximately 20% in the first quarter of 2018 to the first quarter of 2019. And we also significantly reduced our policies above $10 million in lead layers by almost 35%. The impact of our disciplined approach to risk selection pricing is also reflected in our UK financial lines book where our total limits across all layers for public DNO decreased nearly 35% year-over-year. Yet our repeat premium was only down slightly despite our underwriting actions.

In North American property, we continue to take aggressive actions to improve our portfolio. Our total gross limits in the first quarter declined 49% compared with the first quarter 2018. Our average gross limit for risk management accounts declined 14%, our average deductible increased 25%; and we've been able to achieve high single-digit rate increases on our enforced portfolio.

In addition to these portfolio actions, the acquisitions of Validus & Glatfelter directly aligned with our objective to improve our core business and diversify our portfolio. Both companies have delivered on their strong reputation for underwriting excellence in track record of generating underwriting process.

On our year-end 2018 earnings call, we provided considerable detail on the substantial enhancement we're making to our reinsurance program. I do not intend to repeat that information today. However, I do want to stress that reinsurance continues to play a critical role in our overall strategy I'm very pleased with what we've accomplished.

Together with the substantial improvement for making sure our underwriting approach and capabilities, our reinsurance program is contributing to our reduced risk profile and helping us to reshape the better balance of our portfolio. The relationship we're building with reinsurers and the support we have received as we overhaul our reinsurance program is clear and strong industry endorsement of the work we're undertaking to improve our core business. We'll continue to refine and enhance our reinsurance program as our portfolio improves.

Let me briefly comment on rate. As I mention when I highlighted our progress in some businesses, we're seeing broad based market support for premium rate increases across multiple lines at/or better than our lost cost trends, which mark will discuss in more detail. At a high level, we obtained rate increases of around 4% in our commercial portfolio, including over 4% in North American commercial lines, excluding Validus & Glatfelter and almost 6% in UK and 3% in Europe. While rates remains an important area focus for us, we continue to believe that discipline methodical risk selection coupled with the focus on terms and conditions will be the primary drivers of sustained improved financial performance and profitability.

Turning to our reinsurance business, Validus Re had a very strong start to the year. In the first quarter, we did see market loss increases for piping Jebi and other 2018 events. Despite these increases, Validus Re did not have any net adverse development in the quarter due to reinsurance treaty that absorb these loses. Instead Validus Re produced a $16 million favorable loss development in the first quarter. Year-over-year net premiums earned increased approximately 20% as we successfully executed on growth initiatives and diversified non-CAT classes.

We're also seeing increased evidence of prices discipline. Ceded commissions are broadly flat to slightly down, and on excess of loss placements, pricing is generally flat to modestly up. While not part of our first quarter results, I do want to briefly comment on the April 1 Japanese renewals and the Florida's June 1 results. For Japan, rate increases range from 15% to 25% on loss impacted CAT layers, layers that were not impacted by catastrophes were priced flat of 6%. We chose not to increase our Japan exposure during this renewal season.

Shifting to Florida the property reinsurance had meaningfully underperformed over the last two years, and we believe that we will undergo a meaningful price pressure at June 1. This is driven by loss activity in 2017 and 18, and the need to modify lost cost to account for both increased frequency and severity.

Before closing, I’d be remiss if I didn't acknowledge the efforts of the General Increase leadership team and all of our colleagues around the world. I’m extremely proud of their hard work and accomplishments to date. Our improved results are in due and large parts achieved tireless efforts coupled with their incredible focus, dedication and courage to make material changes and difficult choices all which have positioned us well for the remainder of 2019.

Looking ahead, we will continue to evolve our underwriting capabilities, streamline our operations, maintain expense control and invest in people and strategy that will enable us to further strengthen relationships with our clients and distribution partners. While there is still much work ahead of us, we remain laser-focused on our longer-term goal of achieving underwriting excellence and sustained profitability. Our momentum is profitable and we will continue our disciplined approach to decision making as we work to restore AIG as an industry leader.

With that, I will turn the call over to Kevin.

Kevin Hogan

Thank you, Peter, and good morning, everyone. Life and Retirement recorded adjusted pretax income of $924 million for the quarter and adjusted return on equity of 15%. Adjusted pretax income increased by $32 million from the prior year quarter. The primary drivers of this increase were capital market-driven impacting acquisition costs through lower deferred acquisition cost amortization of $46 million due to rising equity markets in the quarter resulting in increased expected future fee income, and net investment income reflecting both higher returns on fair value option securities of $46 million, driven by tightening credit spreads and higher efficient income of $26 million reflecting interest rate declining in the quarter.

Our earnings also benefited from non recurring expense items and reserve refinements in our international life business of approximately $25 million. These favorable impacts were partially offset by lower returns from alternative investments, and lower fee and advisory income due to lower asset levels during the quarter, driven by the market downturn at the end of last year. Prior year comparison also reflects a onetime bond payment recovery in the first quarter of 2018.

Our full year expectations for adjusted pre-tax income as well as our market assumptions have not changed. There could be some upside to our full year outlook should market conditions hold or improve. Keep in mind the declining equity markets and widening of credit spreads would accelerate deferred acquisition cost amortization and lower net investment income on fair value option securities, respectively.

In addition, absent significant changes in the overall rate environment, our current expectation is that base net spreads will define by approximately zero to two basis points per quarter at least through the end of this year.

From a statutory perspective, we expect to generate solid earnings and for our strong year risk based capital levels to improve over year end 2018. Our team continues to do an outstanding job leveraging our broad product expertise and diversified distribution network to meet the evolving needs of our customers. In fact, LIMRA recently published 2018 results and we were ranked as the number one provider in total annuity sales reflecting our capabilities and balance across annuity lines. This is the first time we have held this position since 2007. Although we are pleased with the results, I want to stress that our strategy is not about market share, but instead to be in a position to compete at scale in each of our businesses.

Our strong top line growth in the first quarter reflects the execution of our ongoing strategy. With favorable pricing conditions during the quarter, we significantly grew fix and index annuity sales. We also increased group retirement deposits through international life sales and close to large pension risk transfer transaction in the quarter.

The pension risk transfer deal, which we recently announced, represented approximately $750 million of pension obligations. As with all such transactions, earnings will emerge over time, and the earnings impact during the first quarter was immaterial. We remain well positioned across our businesses to serve a growing market, enabling us to continue to deploy capital at or above our targeted economic returns, while recognizing we will incur some additional new business expenses associated with such growth.

I will now talk briefly about the results for each of the businesses. For individual retirement, premiums and deposits grew by 30%. With these strong sales levels, we achieved positive net flows for the first time since the third quarter of 2016. Net flows for retail mutual funds continued to be challenged. Retail mutual funds, which is a comparatively small part of our earnings, is a defensively position portfolio that is countercyclical to our individual annuities and may continue to face headwinds in the current environment.

Assets under management and related fee income decreased, driven by lower asset levels following the equity markets decline in the fourth quarter. Net investment income increased, primarily due to the market driven factors mentioned earlier.

For group retirement, premiums and deposits grew by approximately 11% for the quarter with higher group acquisitions, in plan annuity contributions and individual product sales. Surrenders and other withdrawals increased, primarily driven by the loss of one large group due to the planned sponsor reducing the number of providers offered in its plan and higher individual surrenders and other withdrawals. We expect higher surrenders and other withdrawals to continue to negatively impact net flows, but it is important to note that the financial impact of outflows will vary based on product characteristics. For example, the impact will be lower if the outflow is from a higher guaranteed minimum interest rate annuity policy or from a lower-margin group mutual fund offering. Despite facing negative net flows for a period of time, we've continued to produce solid earnings for this business and assets under administration were at the same level as the first quarter of 2018.

After adjusting for accretion income and unusual items new money rates are still below portfolio yields across our retirement portfolios resulting in reduced, but still attract spreads in many products. Also on a rising rate environment, it may be appropriate to us to increase crediting rates for certain of our in-force business. For our Life Insurance business, total premiums and deposits and sales increased for the quarter, driven by strong sales growth in our UK individual protection product line as well as the addition of group protection sales with the acquisition of Ellipse.

Our U.S life sales declined as we deemphasize guaranteed universal life sales in the current interest rate environment. For our U.S. life business, we continued to make progress or making the necessary infrastructure changes to completely separate our operating model from Fortitude Re and to pursue possible transactions that will lead to deconsolidation in the future. Adjusted pretax income increased due to overall mortality experience, which was within pricing expectations, positive reserve and insurance requirements and lower operating expenses and commissions.

Lastly, the Institutional Markets, as I mentioned earlier, we executed a large pension risk transfers transaction in the quarter at attractive economics, statutory and accounting returns. The market pipeline for pension risk transfer transactions over the next 12 to18 months continues to be robust. We also executed a GIC issuance of $250 million in the quarter. Overall, our Institutional Markets business continues to be well positioned to capitalize on available growth across its product lines, while remaining focused on achieving targeted returns.

To close, we remain committed to our ongoing strategy to leverage our broad product expertise and distribution footprint and deploy capital to the most attractive opportunities, which we believe positions us well to help meet growing needs for protection, retirement savings and lifetime income solutions.

Now, I will turn it over to Mark.

Mark Lyons

Thank you, Kevin, and good morning all. So getting right into it, AIG's adjusted after-tax earnings per share was $1.58 for the quarter compared to $1.4 for per share in the corresponding quarter of 2018. In dollar terms, AIG has $1.85 billion of adjusted pretax income and $1.39 billion of adjusted after-tax income. Book value per share, excluding AOCI and DTA, increased $0.52 per share or nearly 1% as compared to fourth quarter of 2018. As respect to adjusted return on common equity, or ROCE, which also exclude AOCI and DTA, AIG returned an annualized 11.6% for the quarter and the segments achieved the following returns and attributed equity. General Insurance achieved a 14%, Life and Retirement a 15% return, Legacy had 4.4% annualized return.

AIG is now using the term return on common equity, because this quarter we introduced some preferred into our capital structure. As respect net investment income or NII, it should be noted that due to the markets rebounding from fourth quarter 2018 performance, this quarter had outside gains, the likes of which should not be viewed as recurrent across the next three quarters in 2019. As a result, I will begin my comments about NII across the company, so I don't need to do so with any segment.

Net investment income for the first quarter was $3.72 billion on an adjusted pre-tax income basis, and $3.88 billion on a GAAP basis compared to $2.81 million and $2.75 billion respectively in the sequential fourth quarter of 2018. This material improvement was predominantly due the improving equity markets; tighter credit spreads and improved alternative investment performance, but was also partially due to changes in accounting presentation by AIG, affected in the quarter in two ways.

Firstly, AIG now recognizes changes in the fair value of equity securities below the line, which is much more consistent with the vast majority of our peers. The impact of this geography change for the quarter was a reduction in net investment income of $79 million. Secondly, we re-class NII that has heretofore been recorded in the other income line of non insurance subsidiary into the official net investment income line. The impact of this change was $116 million increase to the NII line this quarter. And it is hope that this reclassification and now removes a consistent source of confusion amongst the investor and analyst communities. It's important to note that this reclassification did not alter adjusted pre-tax earnings at all, simply geography. And I also want to point you to the Pages 12 and 13 in the financial supplement to see the historical quarterly impact of these two reclassifications.

When assessing AIG's investment portfolio volatility and result and NII, we believe it's helpful to provide a summarized view somewhat again to the way our Chief Investment Officer thinks about the portfolio. If you look at the portfolio as two broad asset classes, assets that are inherently fairly predictable, and those that are inherently fairly volatile. The fairly predictable class is comprised and available for sales fixed maturity securities, mortgages and other loans, and short-term investments, which totaled about $293 billion carrying value of assets or approximately 91% of the portfolio. The other $29 billion of carrying value assets are fairly volatile and are comprised the fair value option securities, hedge funds, private equity, real estate, and miscellaneous other investments. The fairly predictable assets provide about $12.5 billion of gross NII on an annual basis or about a 4.25% yield, whereas the fairly volatile assets have yielded NII of approximately 5.8% over the last five quarters or what you can see in this financial supplement ranging from about 2% to over 9%. Therefore, just using the last five quarters as a simple volatility measure, the NII from the fairly volatile assets could range from nearly $600 million to $2.6 billion annually.

One must also reflect that there are annual investment expenses of roughly $450 million that must be netted against that. The volatility shown in the fourth quarter of 2018 and the first quarter of 2019 implies that an overreaction to the fourth quarter's lower net investment income wasn't warranted and neither is overreaction to the higher net investment income this quarter. It's nearly impossible to accurately forecast market performance over the balance of the year, and the simple framework we just provided shows the difficulty in predicting short-term market performance. It's also important to recall that in the fourth quarter, due to materiality, we recorded an $86 million pretax hedge to income associated with hedge funds and Japanese equity mark usually recorded on a one month lag. For the first quarter of 2019 forward we are now recognizing hedge funds without any lag at all. So the first quarter did indeed reflect a full three months of results and therefore all current and future hedge fund commentary will center on that quarter's activities rather than containing one month of the prior quarter.

The only remaining lags investment recognition is for private equity holdings, which has a full one quarter lag. Nevertheless the fourth quarter lag results book entirely in AIG's first quarter contributed positive net investment income, highlighting AIG's positive selection benefit versus any broad applicable market index.

Turning to General Insurance and as previously noted, the segment produced both the calendar quarter and accident quarter underwriting profit with an actual CAT ratio of 2.7% this first quarter versus 5.7% in the first quarter of 2018. The North America segment of general insurance produced a 98% accident quarter, excluding CATs combined ratio within North America commercial lines component producing a 96.4% accident quarter ex-CATs, which represents a 10.7 combined ratio point improvement over the first quarter of 2018. Although 1.8 points of this was due to expense ratio improvement, the 8.9 point of accident total loss ratio improvement can be largely attributed with the gross underwriting changes beginning to earn in along with the material reinsurance protection that Peter highlighted. The North American personalized operation worsened this quarter, primarily due to increased frequency in attritional loss ratio. The international segment of General Insurance produced a 94.5% accident quarter combine ratio ex-CATs versus 96.8 comparable ratios in the first quarter of 2018, both the commercial and the personalized segments contributed improvement predominantly on the expense ratio side.

Looking at the quarter from an AAL prospective, the 2019 full year AAL is estimated to be 3.5%. And as Brian noted in his remarks, the combination of gross underwriting changes, most notably, the reduction in gross fire and associated parallel limits, along with purposeful reductions in exposures, was complimented while radically alter reinsurance program that provides critical and non critical CAT protection within many of the part restructures along with the CAT program that provides material vertical and horizontal, regional and global protection, which is also further enhance the specific carve out CAT programs for applying private client within United States.

The combination of this front and backend actions has provided material volatility containment at all upper return period levels leading to a reduced AAL. My view of the first quarter's action year results is therefore a 99.6% combined ratio inclusive of AAL, and the 98.8% actual combined ratio inclusive of actual CATs. As a result, we will be speaking of CATs in the future only in terms of risk tolerance along with our measurement against that tolerance by various return periods and not focusing on AAL.

Now shifting to the business mix in General Insurance. The overall quarter-over-quarter net written premium reduced by 2.3%, but some areas have large swings goes up and down that can be seen in the financial supplement. However at a high level and excluding the impact of Validus and Glatfelter and adjusting for the Fuji two month lag elimination in the first quarter of 2018, net written premiums decreased approximately 78% after additionally adjusting for foreign exchange. Approximately one third of this 17% reduction is associated with direct under writing action and about two thirds could be attributed to increase reinsurance premiums. We respect the general operating expenses for GOE, the reduction was $237 million quarter-over-quarter but adjusting for Validus and Glatfelter since neither was part of AIG in the first quarter of 2018. This represents, as Peter noted, a 240-basis-point improvement in the GOE ratio quarter-over-quarter. As we stated on previous calls, in General Insurance and across the company more broadly, we continued to undertake a comprehensive review of workflows and process improvement opportunities as well as overall expense levels.

Turning to prior year development, the quarter saw $74 million of net favorable development, the 72 of this favorable development stemming from General Insurance, and $2 million favorable from the Legacy operations. There were no reserve deep dives into any specific lines of business this quarter, but the actual risk expected review was done comprehensively across all global operations. The result was that most areas had lost emergence either better or in lines of expectation. So no material reserve changes would be necessary. The $74 million in net favorable development is mostly driven by the amortization associated with the deferred gain of the adverse development cover, namely $58 million, and the remaining $68 million of General Insurance net favorable development was scattered across many lines and regions. Additionally, with the revised underwriting and low per risk attachment reinsurance strategy, our historical reporting on net severe loss is no longer makes sense. So from now on, we will be commenting on attritional and CAT losses only.

Peter commented on General Insurance has achieved rate increases for the quarter. And I'd like to additionally point out that for North American commercial, in particular, the rate increases have been accelerating, and the March increase alone averaged over 7%, which is clearly an excess of loss trend, and thereby providing additional margin expansion.

Similarly, our monitoring of portfolio composition clearly shows the superior rate advocacy of new business relative to that of lost business as well as improvements to the renewal books adequacy. These shifts and overall portfolio rate adequacies provide additional lift for continued improved performance.

Turning to the Life and Retirement segment, adjusted pretax income of $924 million represents a $32 million increase over the first quarter of 2018 and a $301 million increase sequentially over the fourth quarter of 2018. These results, as Kevin mentioned, translates to a 15% annualized return on average attributed common equity for the quarter. All units reported increases in adjusted pretax income sequentially relative to the fourth quarter of last year. And this retirement has stronger investment income and positive net flows for the quarter, but with base net investment spreads that are expected to experience a downward breath as Kevin highlighted.

Group Retirement's net flows were negative due to the slightly lower sequential premiums and deposits and sequentially higher surrenders and withdrawals. Group retirement business like others in the industry is exposed to client consolidation via mergers or by the reduction of providers offered implants. The quarter saw favorable results from life international operations and institutional markets for the second quarter in a row with successful in the pension risk transfer space.

Turning to Legacy, adjusted pre-tax income was up $262 million sequentially to the fourth quarter of last year. But such comparisons are not overly meaningful given the nonrecurring loss recognition charge taken on certain cancer and disability A&H last quarter. However, the quarter's $89 million have adjusted after-tax income translates into a 4.4% annualized return on attributed common equity. But given that the quarter experienced the already discussed investment rebound as well, our view of a 2% to 3% return for the full 2019 year remains valid.

As respect tax, the effective tax rate is 22.5% for the quarter, excluding discreet items, applicable to adjusted pretax income. Including discrete items, the tax rate was 22.9%. As you know the effective tax rate is updated each quarter using actual results to then supplement by reforecast to the remaining quarters, and as always the tax rate is heavily influenced this quarter by the geographic distribution of combine tax jurisdictions.

Moving on to capital actions, we issued $1.1 billion of securities in the first quarter split between $600 million of tenure debt with a 4.25% coupon and $500 million of non cumulative proffered stock with a 5.85% dividend. We do not repurchase any shares in the quarter, so our afford authorization remains at $2 billion.

With that I will turn it back over to Brian.

Brian Duperreault

Thank you, Mark. I think we can go to questions and answers. So first question please.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question now comes from Elyse Greenspan from Wells Fargo. Please go ahead. Your line is now open.

Elyse Greenspan

My first question going back to some of your comments on this call and prior calls, made reference of all these underwriting changes and how they're beginning to earn in, I guess I would like to get a better sense of the forward momentum. I know on last quarter's call you guys had mentioned that the prior management teams go big strategy at AIG resulted in multi-year policies that are still on your books in 2019. So could you just give us a sense of the running of those policies and how that could benefit to incremental underlying margin improvement as we go through the balance of 2019 and into 2020.

Brian Duperreault

Okay, Elyse. Well, Peter, I think you should take this.

Peter Zaffino

Hey Elyse, thanks for the question. So we're a meaningful amount of long-term deals done in the core property book historically. And we had announced that we're changing underwriting guidelines that was something we do not want to do going forward. But as you mention, it takes little bit of time to earn out. So we should see a meaningful reduction in long-term deals by the back half of 2019. So I think as we -- back half of '19, as we enter 2020, we will have cut our long-term deals in half and will start to see the majority of the portfolio increasing in terms of just annual 12 month deals.

Elyse Greenspan

And then my second question, you guys referenced strong prices. It seems like you guys saw in March, really improving from the trend, I guess. Could you just give us a sense your forward view on pricing? And then as we think about pricing versus trend, can you give us -- help give us a sense of when that could really start to earn and be beneficial to the margins you saw in the first quarter?

Brian Duperreault

Yes, I’m going to talk about a little bit about this, and let Peter about the pricing. So I just want to point out that this pricing is wanted, needed. The whole industry is recognizing that. In our own case, we had other things we had to do too. So there are more things going on and just getting price on the portfolio. And that is Peter said, the selection process getting the right risk on board positioning ourselves properly in their program at attachment point putting the right limit out et cetera. So a lot of that is causing the improvement around portfolio. Pricing is a component of it, an important component, but a component. Peter, do you want to go a little bit more into the pricing?

Peter Zaffino

Sure. I think we outline a lot of this in the prepared remarks. I think what's happening, which is a little bit different is that we're seeing it across the board. There is a multiple lines. I mean certainly property has underperformed the most. And so whether it's CAT capacity, attritional losses on how capacity has been deployed, we're seeing rate within the E&S as well as the admitted market. So that's, I think, it would be consistent throughout the rest of the year. We've seen it in financial lines. I think, as we can participate in many lines of business, and then in many parts of the program, we're seeing that momentum, as Mark mentioned in his prepared remarks, take up and margin and we would expect that to continue throughout the year. So it's a very orderly meeting. This is one that is not just spiking at one line. It's across multiple lines and in a lot of parts of the world. So I think this is something that hard to predict how long it lasts, but we're going to lead with, again, risk selection, but also making sure we're getting paid appropriately for the limits that we put out and the risk that we're underwriting.

Brian Duperreault

Yes. This pricing isn't just the first quarter phenomenon. It's been building through '18. And so it'll bleed in as earn these premiums. And as Mark pointed out, there seems to be some acceleration.

Elyse Greenspan

Okay. Thank you very much.

Brian Duperreault

Okay. You're welcome. Next question, please.

Operator

Our next question comes from Yaron Kinar from Goldman Sachs. Please go ahead. Your line is now open.

Yaron Kinar

So two questions. First, I think in the press release, Brian, you talked about an expectation that this year will be profitable on both from the calendar year and accident year basis? I was just curious is that with catastrophes your commentaries on?

Brian Duperreault

Well, with catastrophes, I can't tell you whether we're going to have a large catastrophe or a small catastrophe or, I mean, we have this thing called AAL, which I did insert into the number. And as we said, it's 3, 3.5. I don't really want to talk about it after that. So I mean, look, I think over a long period of time, there will be years where we have catastrophe years we don't, but on the average, we expect to make an underpinning profit. And I expect to make an underwriting profit this year. But I can't predict whether it's going to be a big CAT year or not. But I mean, on some kind of an average basis, certainly that is our belief, a very strong belief.

Yaron Kinar

Okay. So basically, this comment is without using AAL still seems some normalized catastrophe load?

Peter Zaffino

We already put AAL in. I mean, I said we put an AAL in the first quarter. And it was -- there were some tickets under 100.

Yaron Kinar

Right.

Peter Zaffino

You put an AAL and for the whole year, I'm saying, we believe it'll be under 100, but I can't tell you the actual CATs. That's that's my point.

Yaron Kinar

Okay. Appreciated. And then, my second question is on NII. So Mark, if I do the math or the sum of the price that you laid out, I guess about $13.7 billion of NII for the year. And I think that's a little bit above the $13 billion guidance that measure previously offered. So how should we think of NII on a normalized basis from here?

Mark Lyons

Well, first off, some features would give you partial credit, and some features just a binary and say yes or no. So I'll give you partial credit on that. So you've reflected the $450 million of investment expenses and take gross to that, but you have to recognize that the original

guidance of $13 billion did not include the re-class. And depending on whether you look at the last quarter whether re-class $116 million or you look at a longer period of time where it's closer to $150 million, which will be $600 million, I would get closer 13.2, 13.3, if that’s helpful.

Yaron Kinar

Yes. But you also had a re-class of the equity per value adjustment rate. So …

Mark Lyons

That's right. $39 million in the quarter.

Yaron Kinar

Okay. So you got the 13.2, 13.3 with both re-classes.

Mark Lyons

Yes. If you reflect that, you will be approximately there. Next question please.

Operator

The next question is from Paul Newsome from Sandler O'Neill. Please go ahead. Your line is now open.

Paul Newsome

I was hoping you could talk a little bit about capital volatility just on a normalized basis. There has been so much change with your business mix and reinsurance in the light. And I guess I seriously think of insurance companies having their toughest CAT quarter in the third and second -- sort of the second worst may be first and second are about the same. You think that AIG is going to follow through the traditional pattern? Or with all these changes, do you think there will be a difference in your normal capital volatility quarter-to-quarter?

Brian Duperreault

I would love to give this to somebody else. So we will try to start with. And so I think, yes, there is an inherent seasonality to CATs because of the storm seasons, which are third and fourth quarter, equates can happen anytime. I mean, we've had weather in the first quarter was storm losses, winter storm losses et cetera. But yes, by enlarge, so we have the first half would be a little lighter than the second half that’s just traditional. I don’t think that’s changing now, but I don’t -- first lot of all, I don't know they want to talk about ALL than it were. But anyway, we think about it as an annual number because you really have to think about it at least on an annual basis. Peter, do you want to say something?

Peter Zaffino

There is one thing I would add Brian because the question was also around volatility and we use that word a lot in our scripts, but in addition to putting together much more comprehensive program and in addition to making it an aggregate, our standard deviation and expected volatility around our different return periods has decreased by 50%. So while it's not certain, the expected value around whether its ALLs or PMLs has reduced significantly in terms of what we think is going to happen. So that is something that through the entire reinsurance design had been very beneficial and gives us more confidence.

Brian Duperreault

And one thing I would add into that, because it's a good question, Paul, is in my prepared remarks I tried to show that the risk is also helpful in that regard. And the CAT programs that were put in place let alone the carveouts of DCG gives materially better vertical and horizontal protection regionally and globally. So I think that helps with the containment. And I would ask it to not forget one thing we talked about last quarter, which was the way the gross underwriting changes are in is because they started earlier, it gives one view, but the reinsurance mostly attached the latter half of 2018. So that was risk-attaching, some of that inures to the benefit of the CAT program, which is also occurring. But the point is we will get increasing protection in volatility reduction as we go from quarter to quarter to quarter in 2019.

Paul Newsome

And then any updates on the capital management thoughts. They weren't any buybacks this quarter, but you did raise some capital. I just want to see if there's any additional thoughts you got there?

Brian Duperreault

Look, we were largely blacked out first quarter. So at the end, because of those offerings you mentioned. So I think we continue to look at it. My philosophy hasn't changed. I think it's an appropriate capital management tool. And as we go through the year, we'll look at how we want to use that capital. And so no changes there. Next question please.

Operator

Certainly sir. This question is from Josh Shanker from Deutsche Bank. Please go ahead.

Josh Shanker

I was interesting in understanding about the timing of the reinsurance purchasing for the remainder of the year. You have said about two-thirds of the reduction, I guess, was sum of AIG's and Validus' 1Q '18 premium year-over-year was related to reinsurance buying. Are you buying more reinsurance, which will have a similar effect in the quarters to come? Or the first quarter the big by quarter? And then how does that affect expense ratio as we go forward?

Brian Duperreault

Peter?

Peter Zaffino

We have the only probably material impact that we foresee as of now is how the sort of casualty quarter share will earn through the year for the U.S. That's a big session. And then one that just commenced on a risk attaching base from the first quarter. So that was the most material. I don't believe that we will see any other material purchases on property. So we've done a lot on the -- per risk, as Mark mentioned, on the aggregate. We have done some facultative purchasing to make sure that we take out the volatility of our long-term deals on property. And I don't think that as we look to the remaining part of the year, we have thought about the impact of reinsurance and do not believe it will impact our expense ratio as we get into the second and third quarters.

Brian Duperreault

Next question?

Operator

Our next question is from Ryan Tunis from Autonomous Research. Please go ahead.

Ryan Tunis

Question for Peter and maybe Mark can help. But some of your reps, I know you're not disclosing those anymore. But could you give us some idea of how those ran here verses I think $125 million as expected level last year? And also, in terms of the GOE run rate, it was $839 this quarter in General Insurance which is down about $50 million from 4Q levels. Is that $839 million number a pretty good one to use over the remainder of the year, do you think?

Brian Duperreault

So let me comment on severes, and I will turn it over to Mark. But in the quarter, we had less gross activity than if you look that our multiple quarter average. But I think the bigger issue was just in terms of how we address the property for risk and buying down and taking out volatility in addition to one of the areas of our business, which had a little bit more frequency on severity. We ended up working through a quarter share to mitigate a lot in the volatility. So I think it was, one was the growth, but more importantly is what we've done to protect volatility through reinsurance. Mark, anything you want to add?

Mark Lyons

Yes, I would just say on this severes without getting into any specifics. It was a very late view of it, so it's, which is another reason. But with the front end underwriting changes, Peter talked about the reinsurance stages again, but there was nothing adverse and severes.

Brian Duperreault

Do you want to comment on the GOE?

Mark Lyons

The GOE, because the $839 million you are quoting incorporates Validus, so we intent to do quarter-over-quarter that excellent to that to get apples to apples. So it's probably a more realistic way, but I think you should be thinking more in terms of ratio rather than on the dollar sense. We have had two consecutive quarters of GOE being 12.5% around premium. And that can move a little bit as a function of miscellaneous items and accounting that could affect our premium and things like that. But that's probably the preferred way to look at.

Ryan Tunis

And I just had a follow-up on, I mean, we should on CAT volatility. But curious on how you guys are thinking about volatility within the attritional loss ratio. So if you have a view of what the central tendency is, let's say 631 you think is a good run rate. How many points away from that is you think one synergy could easily be explained by adverse luck. Is it one point now? Is it two points, because companies like Travelers were used to being less than a point for quarter can be just explained by adverse activity. Are we at that point yet or could we still see two to three points swing is also what you think really running at?

Brian Duperreault

I think it's Mark.

Mark Lyons

So couple of thoughts come to mind. One is that, one, I don't want to look at it that way. I can go back. But we have a massively diverse global geographic presence and different characteristics. As a company you mentioned is much more of a frequency driven company, and therefore more predicted. We have a lot of -- we're changing that mix next to be much more mid and smaller, but in-force book still has a lot of severity characteristics both frequency and high severity characteristics. So I would say there is the fair amount. The reinsurance is going to contain that because you asked a net loss ratio question. So it's going to contain that more, but I would expect it to be wider than Travelers.

Brian Duperreault

Okay. Next question?

Operator

Next question is from Andrew Kligerman from Credit Suisse. Please go ahead.

Andrew Kligerman

Just want to follow-up on Paul's question about the buybacks and understand you're in blackout period. But given your debt to capital is pretty close to 30%. Is it fair to assume that you probably don't want to do much by way of buybacks for the balance of the year?

Brian Duperreault

I don’t want to predict anything here. Do I want to, don't I want to. I mean, I think we have both do it quarter-by-quarter and really understand uses of that capital? So we have a buyback authorization in place continues to be there to be used. I don’t want to commenting more than that.

Andrew Kligerman

All right. And then just with regard to the personal line. So I know Mark earlier was talking about two third of the normal -- when you take out the acquisitions et cetera, net written premium was down 17%, two thirds due to the reinsurance. And now just looking at the personal line, North America down 6%, international down 12%, could you give us a sense of what the reinsurance component of that decline was? And also you mentioned in the release A&H premiums were lower. Is there some competitive situation going on with that that's putting pressure on A&H?

Brian Duperreault

Peter?

Peter Zaffino

So on the Personal Insurance in the United States, our travel book, our warranty book came in exactly where we had thought it would in terms of a combined ratio for the quarter. So we're really talking more about the high net worth book. And looking at the composition of that book, we not only had that contribute from the sort of global aggregate where we lowered our attachment point, we also bought more per risk. We also bought Asia-Pacific CAT program that has different attachment points depending on peak zones for our high network book that we think will dampen volatility, and also allow us as we want to reposition in certain peak zones. The portfolio and accelerate our underwriting, we just hired a terrific individual in capital Kathleen Zortman who has decades of experience in driving high net worth portfolios, who is really excited. She's joining us. And that will happen in the second quarter. And we'll begin to accelerate like we have on other portions of the portfolio, and an improvement in terms of its footprint. And the reinsurance is, I think, very responsible. And it will respond well throughout the year depending on what will happen in terms of CATs.

Andrew Kligerman

And so the question was …

Peter Zaffino

And then something on the A&H, it's not -- we should not bring anything on A&H. It's a terrific portfolio, performs very well in terms of its combined ratio. And it's an area where Brian and I very much want to grow our book, and we should take a longer term view, but it's an area where we think will have growth over the long term.

Brian Duperreault

And we've been so far. And we just …

Peter Zaffino

We just have named a global leader Ed Levin. And so he joined us. And we have the strategy in place and beginning to accelerate our growth. It'll take some time. But, we really excited about that portfolio. I wanted to come in for us long term.

Brian Duperreault

Sort of one last question, and then we'll wrap it up. So operator, the last question, please.

Operator

Certainly. And this comes from Tom Gallagher from Evercore. Please go ahead.

Tom Gallagher

Thanks. First question on P&C. You had big growth in specialty risk in terms of net premium written just curious what kind of combined ratio that's being booked at? Is that going to add meaningfully to underwriting improvement as that earns in? And can you just provide a little color what -- kind of what drove that significant growth?

Brian Duperreault

It was mostly the acquisition. We had Talbot and CRS, which is the crop. And so that's in the specialty classes. Now look at Talbot is a terrific syndicate and has very balanced portfolio with marine, specialty classes, including energy, political risk and political violence. And we've been working very hard to determine what's going to fit within AIG, what's going to fit within the syndicate. And do believe that that business will perform well over the short, medium and long term and will contribute like Validus to our overall improvement in combined ratio. But it's very good, and on a calendar year basis performed on quite well in the quarter.

Tom Gallagher

And then just a follow-up on net investment income, Mark, I was following the stable asset class returns versus the more volatile ones. And just looking at the $29 billion that you characterized as more volatile, if I'm looking at your guide for full year NII, I think that only would imply something like a 3% return on that $29 billion carrying value portfolio. And you have, I think plenty of higher returning asset classes in their like private equity in the like. First off is that right? And secondly does that imply your $13.2 billion NII guidance just conservatively assuming returns on that portfolio. Can you provide some color on that? Thanks.

Brian Duperreault

First off the Tom, the first question would be what period of time should you assess volatility. I purposely look this something that work for this since up, which was current in four prior quarters or five quarters. That particular one average 5.8% over that period of the swing of 2% to 9% that shows you some of that volatility. So that’s implying like another $1.7 billion on 5.8% basis, which to the $12.5 billion takes you $14.2 billion. You have to take out to $450 million annually for investment expenses, and then the re-class impact that wouldn’t have been in there in the original guidance for $13 billion even. And that composite gets you down to the $13.2 billion to $13.3 billion. But I think what question you have to answer for yourself is what's the proper volatility measurement I just gave you an example of what.

Tom Gallagher

Thank you everybody.

Brian Duperreault

So before we end the call I want to thank everyone who is dialed in, to your remarks. I’m approaching my two year anniversary at AIG, and I couldn’t be proud of what we're accomplishing at this great company. And I’m grateful for the tremendous support we're receiving across the industry. And I want to thank all our colleagues at AIG for their hard work, dedication and resiliency. We still have a lot of work ahead of this. But our first quarter results demonstrate that we're on the right path. So thank you very much. Have a great day.

Operator

Ladies and gentlemen, that's now concluded today's conference call. Thank you for your participation. You may now disconnect.