American International Group - Earnings Call - Q1 2020
May 5, 2020
Transcript
Speaker 0
Ladies and gentlemen, good day, and welcome to AIG's First Quarter twenty twenty Financial Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Deborah Perkins Hill, Head of Investor Relations. Please go ahead, ma'am.
Speaker 1
Thank you. Good morning, and thank you all for joining us today. Our call today will cover AIG's first quarter twenty twenty financial results announced yesterday afternoon. The news release, financial results presentation and financial supplement were posted on our website at www.aig.com and the 10 Q will be filed later today. Our speakers today are Brian Dupero, CEO Gitter Zaffino, President and COO of AIG and CEO, General Insurance Kevin Hogan, CEO, Life and Retirement and Mark Lyons, Chief Financial Officer.
We will have time for Q and A after their remarks. Today's call may contain forward looking statements relating to company performance, strategic priorities, business mix and market conditions, including the effects of COVID-nineteen on AIG. These statements are not guarantees of future performance or events and are based on management's current expectations. Actual performance and events may differ materially. Factors that could cause results to differ include those described in our 2019 annual report on Form 10 ks and other recent filings made with the SEC, inclusive of the effects of COVID-nineteen on AIG, which cannot be fully determined at this time.
AIG is not under any obligation and expressly disclaims any obligation to update any forward looking statement, whether as a result of new information, future events or otherwise. Additionally, some remarks will refer to non GAAP financial measures. The reconciliation of such measures to the most comparable GAAP figures is provided in our news release and other financial results materials, all of which are available on our website. I'll now turn the call over to Brian.
Speaker 2
Good morning, everyone. It's been an extraordinary few months since we last spoke. Before we start, I wanna say that I hope you and your families are healthy, and that you've been able to adjust to the new normal that COVID nineteen is creating for all of us. This crisis has been heartbreaking to witness as it unfolds across the globe. It's a tough time for everyone, and the uncertainty about how long it will last and what life will be like afterward makes this time even harder.
I've witnessed a lot in my forty plus year career in the insurance industry. This health and humanitarian crisis, which quickly became a threat to the world economy, is like nothing any of us has experienced. We believe COVID nineteen will be the single largest cat loss industry has ever seen and it will continue to have significant global economic ramifications for the foreseeable future. Having said that, it's been heartwarming to see the compassion and empathy that has emerged. The strength of the first responders, health care providers, and other essential workers on the front lines, risking their lives to help others, And the people all over the globe sharing resources and helping each other are some examples of how we've come together to fight a common enemy.
In many ways, this crisis has shown us that we have more in common than we do differences. AIG is not immune to this health threat. We've been fortunate to have a relatively small number of colleagues who tested positive for COVID nineteen. Our hearts go out to them and particularly to the families of a few who sadly passed away. Insurance companies play an important role during times of stress by helping companies and individuals manage risk and reassess risk appetite.
The industry leadership AIG has demonstrated over the last couple of years continues, and we will take a leading role in helping clients and other industry partners manage through this unprecedented time. Turning to the topic of this call, I wanna thank you for joining us. Our team is working remotely, so we are in different locations this morning. In addition to my remarks, you will hear from Peter, Kevin, and Mark. And Doug DeShield, our Chief Investment Officer, will be available for q and a.
We will lengthen today's call because we wanna make sure there is sufficient time to cover our usual topics in addition to COVID nineteen, and we wanna answer your questions. I wanna be very clear at the outset that AIG was in a strong financial position before this crisis began, remains and remains in a strong financial position today. We have been and will continue to be laser focused on actions that further strengthen our liquidity and capital. Our focus on fundamentals and the foundational work we have done since late twenty seventeen to derisk AIG and prudently protect our balance sheet has served us well as we navigate this crisis. Because of this ongoing work, I believe AIG will emerge from COVID nineteen stronger and more unified with greater perspective, wisdom, and gratitude.
Price is reveals character, and our leaders across AIG have shown incredible strength and character as they help colleagues adjust to new working conditions, assess what we need to do to keep AIG operating seamlessly, and focus on what we do best, which is helping our clients manage their most complex risks, especially through difficult times. Our executive leadership team in particular has navigated through many catastrophes, and they're applying their knowledge and experience as we work hard to protect our colleagues, serve our clients, keep an open lines of communications with our global regulators and policymakers, and generally be a good global citizen. Our global workforce has shown tremendous resiliency over the last few months. Helping our colleagues has been top of mind for our executive team. In mid March, we issued a $500 grant to each colleague globally, which equates to $30,000,000 in the aggregate to help with unanticipated cost.
We we are also focused on helping communities where we live and work. To date, we have contributed masks, gowns, gloves, and other much needed personal protective equipment. As we move to remote working, we donated unused produce, perishables, and dairy products from our cafeterias and pantries to local shelters and other charitable organizations. We recently rein reinstated the AIG Foundation. We'll be making an inaugural $5,000,000 contribution.
The foundation's primary focus for the foreseeable future will be on COVID nineteen relief efforts across the globe. Turning to our first quarter results, we reported net income of a dollar 98 per common share and adjusted after tax operating income of 11¢ per common share. Although our operating results were negatively impacted by COVID nineteen, our net income positively benefited from successful hedging strategies in our investment portfolio. It is important to note that our core business delivered strong results, and we are taking decisive actions to ensure that we do not lose the significant momentum we had as we moved into 2020, which continued through the first quarter of this year. While not easy, we took a very prudent yet robust approach to analyzing COVID nineteen impacts across AIG.
This is a very unique catastrophe, and we will continue to be thoughtful and thorough as we move through each quarter while this ongoing event evolves. Forecasting the impact of COVID COVID nineteen in future quarters is difficult. In light of this week and the continued uncertainty across the global economy, we are withdrawing the guidance we provided on our last earnings call, including our adjusted return on common equity outlook. Having said that, in general insurance, we do expect to see continued improvement in the combined ratio ex cats for 2020, and I believe that our global capabilities and expertise, coupled with our strong capital position, will be an even greater demand when COVID nineteen begins to stabilize. In life and retirement, while there will continue to be short term effects of volatile market, we do not believe that the impact of COVID nineteen will result in a material reduction of our long term return profile.
With respect to our investment portfolio, it is well matched to our liabilities and is diversified by asset class and industry sector, making it resilient to a credit downturn. Furthermore, spreads tightened through the April resulting in a 70% or $6,500,000,000 recapture of the mark to market loss reflected on our March 31 balance sheet for fixed income available for sale securities. Looking ahead, the ongoing work we are doing particularly as part of AIG 200 will result in AIG not only emerging from this crisis as a stronger, better company, but also as a global insurer of choice with significant capital and financial flexibility. I'm very confident AIG will successfully move forward on its journey to become a top performing company and a leading insurance franchise. With that, I will turn it over to Peter.
Speaker 3
Thank you, Brian. Good morning, everyone, and thank you for joining us. Today, I plan to review the following topics: a brief overview of the potential near and longer term impact of COVID-nineteen on the insurance and reinsurance markets generally how we analyze the impact of COVID-nineteen on GI through March results for General Insurance excluded COVID-nineteen, including Validus Re, our recently announced launch of Syndicate 2019 and AIG 200 and the progress that we've made since our last earnings call. As Brian said, the near and long term impact of COVID-nineteen on the global economy in insurance and reinsurance industries remains unclear. In contrast to other catastrophes like wildfires, hurricanes and earthquakes, this event is not confined to any specific geographic region, and it has already impacted over 200 countries and territories.
In addition, its duration is not limited as is typically the case with traditional CATs. While the insurance industry manages risk of all kinds, it's fair to say that the profound impact and global nature of COVID-nineteen is something we have never encountered. There's no playbook. And as a result, we are called upon to make thoughtful and prudent decisions in a climate of unprecedented uncertainty. Before COVID, the largest catastrophes on record were Hurricane Katrina with $65,000,000,000 losses, then the Tohoku earthquake with $35,000,000,000 in loss, Hurricane Irma with $30,000,000,000 losses and Superstorm Sandy, also with approximately $30,000,000,000 in losses.
With respect to COVID-nineteen, we're starting to see early industry estimates, but they have significant ranges. While it's too early to gauge the ultimate size of the loss, we believe COVID-nineteen will result in the largest individual cat loss the insurance industry has ever seen. Going forward, COVID related losses will impact all aspects of underwriting insurance from absolute limits available, limits deployed to certain lines of business, terms and conditions, coinsurance and structure of coverage, just to name a few. With respect to the reinsurance market, unlike traditional main peril catastrophes, COVID was not modeled, and therefore, it will be a headwind for future capacity. We believe the retro market will contract.
And in the ILS market, there will be trapped capital, which will lock up collateral, therefore restricting capacity on a go forward basis. And we're already seeing this. At AIG, the body of work in general insurance, which started in late twenty seventeen, has significantly improved our company's financial position and has allowed us to take a leadership position in the market. Our strategic decisions and disciplined focus on areas such as underwriting excellence, the rebalancing of our portfolio, improved rate adequacy and the strengthening of our leadership and underwriting capabilities, coupled with the addition of Validus in a comprehensive and revamped reinsurance program, has served us very well and enabled us to preserve capital and provide more predictable outcomes aligned with our risk tolerance. AIG is well positioned to be the insurer that clients turn to for advice on risk and risk management issues, and our partnerships with distribution have continued to strengthen as we problem solve risk issues through this challenging time.
Turning to General Insurance. Before reviewing our first quarter results, I'd like to address the loss estimate we booked for COVID-nineteen. As Brian noted, we spent a considerable amount of time analyzing our potential exposure across multiple lines of business and geographies. Given that COVID-nineteen initially emerged from outside The U. S, we sought claims from Asia, The U.
K. And Continental Europe and later in the first quarter from The United States, in each case, predominantly in travel and contingency. As you saw in our earnings release, our estimated total COVID-nineteen net cat loss in the first quarter was $272,000,000 which includes significant IBNR. We reached this estimate notwithstanding that there is uncertainty as to how this ongoing event will evolve and ultimately impact our insurers. It is far from clear at this stage the extent to which those impacts will even result in covered losses.
Having said that, we did think it was incumbent upon us to come up with a loss estimate for the first quarter. Let me take you through the process we undertook to arrive at this estimate. Over the past several weeks, we pulled together multidisciplinary team of professionals at AIG with significant industry expertise and experience in underwriting, claims, finance, actuarial and reinsurance. This team did a top down and bottom up policy level review of every account with activity in the first quarter as well as a review more generally across our portfolio. Due to the significant claim activity we saw in travel and related accident and health losses, I want to provide more detail on this aspect of our estimate.
On a global basis, after applying expected reinsurance recoveries, our estimate was $86,000,000 An important point to note is that we have a sliding scale commission structure in travel, which will result in acquisition expenses being reduced by approximately $50,000,000 during 2020 based on our first quarter loss estimates. Therefore, you should think of our $86,000,000 first quarter net loss estimate for travel and related accident health as closer to $36,000,000 The remaining $186,000,000 of the estimate relates to contingency, commercial property, trade credit, workers' compensation and balance sheet. This estimate also encompasses potential losses arising from business interruption coverage in our commercial property policies. As to those policies, I want to emphasize that the overwhelming majority contain exclusions for losses related to viruses and otherwise require a showing that the virus caused direct physical loss or damage that was the cause of the business interruption. We are confident these exclusions and related terms and conditions will be upheld should they be challenged.
In the small fraction of commercial property policies where we have provided affirmative coverage for infectious disease, we've done so under strict underwriting guidelines, offering small supplements with terms and conditions limiting coverage. In many instances, only to certain specified diseases and regardless, only where it can be shown that the disease was physically present and led to a governmental suspension of the business operations. Additionally, our reinsurance program will help protect our portfolio from COVID-nineteen losses. And depending on the line of business, geography and size of the loss, our net exposure will be significantly limited. Lastly, I want to note that there's been a fair amount of attention to various U.
S. Legislative efforts to retroactively impose coverage for COVID-nineteen related business interruption losses, notwithstanding the clear terms and conditions in commercial property insurance policies. We are confident that these efforts will not be broadly successful or survive constitutional scrutiny. Turning to the rest of the first quarter. As I said earlier, we had a very good result in our general core General Insurance business with continuing momentum and profitability improvement.
The adjusted accident year combined ratio improved 60 basis basis points to 95.5% year over year, primarily due to a 100 basis point improvement in the loss ratio. Our expense ratio increased marginally as a function of lower net premiums earned, although on a year over year basis, we reduced general operating expenses by approximately 8%, reflecting our continued focus and discipline on expenses. North America's adjusted accident year combined ratio for the first quarter improved 180 basis points year over year, reflecting the improved quality of our North America portfolio. Highlights in the quarter included lower attritional and severe losses in U. S.
Retail property and Lexington property, and PCG experienced lower attritional losses, reflecting improvements in this portfolio. We had strong new business in the quarter, highlighted by admitted and non admitted property and lead mid market casualty. In addition, North America leadership team remained focused on expenses and reduced general operating expenses by 10% year over year while continuing to invest in International's adjusted accident year combined ratio was flat year over year. The loss ratio decreased due to improved rate and portfolio optimization actions. We had strong performance in Japan, Asia Pacific Commercial and The U.
K. The portfolio actions we took led to reduced net premiums, so the expense ratio was higher, although in dollar terms, general operating expenses decreased 6%. Throughout the first quarter, we saw meaningful acceleration in rate year over year across the portfolio. These rate increases are in addition to those we saw beginning with the 2019 and continue to strengthen throughout last year. Overall, rate improvement, excluding Validus and Glatfelter, was low double digits, with North America having the strongest rate strengthening with low double digit rate increases.
In North America, areas that we focused on for improved financial performance included Excess Casualty, which achieved over 30% rate increases Financial Lines overall and D and O specifically, which achieved over 2040%, respectively and Wholesale Casualty and Property, which achieved 30% rate increases. Rate increases in International were also strong with high single digit increases. Europe, The U. K. And The Middle East achieved the strongest rate increases in our international portfolio.
In U. K. Financial Lines, we saw rate increases of over 15%, D and O was over 20%, and our U. K. And Middle East and Africa specialty portfolios achieved 20% rate increases.
And in Europe overall, we were able to achieve high single digit rate increases led by our specialty and motor portfolio. Net written premium was down approximately 1.5% year over year after adjusting for foreign exchange impact, which was in line with our expectations. COVID-nineteen had a limited impact on our net premiums written in the first quarter with the exception of a falloff in travel and M and A during the month of March, which were the first areas to be impacted by the pandemic. Net premiums earned were $6,100,000,000 in the first quarter compared to $6,700,000,000 in the 2019. This decline was due to the impact of our casualty and energy quota shares earning through and improving the overall mix of business as well as reflecting the impact of lower gross underwriting and discontinued business.
Turning to Validus Re. Gross premiums written were up 15% as our team continued to execute with disciplined underwriting and a focus on areas with rate improvement and better terms and conditions. With respect to April 1 renewals, our Japan portfolio achieved strong risk adjusted rate improvements. Rate increases of 35% to 55% on Japan wind business occurred for non loss impacted business, and loss impacted layers were up between 75100%. Validus Re increased premiums written while derisking its portfolio in lower layer business.
Specifically, Japan premium increased 13% year over year, while Japan wind PMLs decreased by approximately 15% at the one in-one hundred year return period. The risk adjusted rate increase at April 1 for international property was 15%. Moving to our PCG business. Yesterday, we announced the official launch of our strategic partnership with Lloyd's called Syndicate twenty nineteen, which is now accepting new and renewal business. Syndicate twenty nineteen is managed by Calvin and is dedicated to supporting our U.
S. High and ultra high net worth business. This innovative business model is another example of actions we have been taking to derisk and reposition our portfolio, reduce volatility, preserve capital and strategically pursue profitable growth. Syndicate twenty nineteen is an important step forward for PCG and allows us to reposition the portfolio and reduce peak zone and concentration risks, which are inherent challenges with the portfolio of this nature. We were pleased with the support Syndicate twenty nineteen generated from highly regarded third party investors and capacity providers, many of whom have partnered with us and supported the broader general insurance turnaround since late twenty seventeen.
In addition, Syndicate twenty nineteen provides us with an alternative solution to traditional reinsurance, thereby reducing overall reinsurance costs for PCG and for the core program for AIG. Our PCG business is a recognized market leader, and the new management team that we put in place in 2019 is making significant and excellent progress in improving the financial and operating performance. We continued to execute on a disciplined underwriting strategy in the first quarter with PCG achieving meaningful rate increases across the portfolio, which we expect to continue through 2020. Turning to AIG two hundred. Despite the all hands on deck crisis management work related to our COVID-nineteen response, our team continued to make significant foundational progress on the operational programs I outlined in our last earnings call.
AIG two hundred remains a top priority for us, even more so now. As we discussed on our last call, after a robust bottom up exercise, we identified 10 operational programs designed to achieve transformational change by focusing on four core objectives: underwriting excellence modernizing our operating infrastructure enhancing user and customer experience and becoming a more unified company. Since that call, the world changed dramatically. The AIG two hundred leadership team, together with other leaders across AIG, did a truly incredible job in the early days of COVID-nineteen. The speed at which we were able to move validated that we have the right people in the right roles to take our transformational program to the next level.
As we repositioned our global colleagues to a work from home environment literally within days, we learned a tremendous amount about our systems and end to end processes. While our overall targets of achieving 1,000,000,000 in run rate savings by the 2022 with a cost to achieve of $1,300,000,000 have not changed, we are adjusting the timing and sequencing of certain operational programs based on recent learnings. For example, we are accelerating work related to AIG operations, which includes our shared services platforms. We now have significantly more data about our ability to connect our various platforms and confirm that we can operate in a more virtual and agile model in a post COVID world. We believe this will allow us to achieve greater efficiencies in the near term and to more flexibly source requisite skills needed to enable us to operate in a more effective manner.
With respect to IT transformation, we completed the design of a simple, more efficient IT organization and also finalized our plans to modernize and simplify our application portfolio. The last few months confirmed that our planned digital virtual target state is appropriate for our businesses and will give us the opportunity to enhance efficiencies and effectiveness. Turning to our standard commercial underwriting platform. We've moved into the testing phase, and we'll be launching an end to end model office where we can further test our new digital underwriting technology and prepare to scale IT across our commercial business. While we're still in the early stages of executing on AIG 200, we're even more committed to this critical strategic effort that will position AIG for long term sustainable and profitable growth.
Lastly, I want to thank our colleagues. During times of crisis, AIG's purpose is clear, and our colleagues have gone above and beyond to help each other and to support our clients and other stakeholders. I'm proud and grateful for all that they're doing, their professionalism and collaboration and for their dedication to our mission. With that, I'll turn the call over to Kevin.
Speaker 4
Thank you, Peter, and good morning, everyone. Today, I will discuss overall Life and Retirement results for the first quarter and our current outlook, changes in our operating environment due to COVID nineteen, and then briefly comment on the results for each of our businesses. Life and Retirement recorded adjusted pretax income of 574,000,000 for the quarter and delivered adjusted return on attributed common equity of 8.4%. Adjusted pretax income decreased by 350,000,000 year over year, primarily due to significant market stress in March compared with the strong market recovery we saw in the 2019. The main driver of the decrease was lower equity market returns, which primarily resulted in higher variable annuity reserves of 161,000,000 and higher deferred acquisition cost amortization back of a 138,000,000.
Also, widening credit spreads generated lower returns from fair value option bonds of 116,000,000, and the low interest rate environment resulted in continued spread compression across our individual and group retirement product lines. Lastly, I am pleased to report that our hedge program performed as expected in response to the market stress experienced in March, generating gains exceeding the movement in our economic view of the liability and related cash collateral. Recognizing the limits of sensitivities, especially in the context of first quarter's market volatility, our sensitivities provided on our last earnings call generally held up. Based on the environment we see today, we continue to expect base spread compression across the whole portfolio of approximately eight to 16 basis points annually. However, wider risk adjusted credit spreads should generate opportunities to attract new business at profitable margins, and the reinvestment of assets rolling off the portfolio should benefit from higher credit spreads.
We have updated our estimates of market sensitivities to reflect our balance sheet as of the end of the first quarter. We would expect a plus or minus 1% change in equity market returns to respectively increase or decrease adjusted pretax income by approximately 25,000,000 to 35,000,000 annually and a plus or minus 10 basis point movement in ten year treasury rates to respectively increase or decrease earnings by approximately 5 to 15,000,000 annually. These sensitivities assume the immediate impact of market movements on reserves, stack, and fair value option security as well as investment income and other items. It is important to note that these market sensitivity ranges are not exact nor linear since our earnings are also impacted by the timing and degree of movements as well as other factors. Market conditions began to improve in April, and one can expect that should conditions continue to improve, there may be immediate benefits in reserves, back or investments in the second quarter, although these benefits are likely to be offset slightly by lower private equity returns that are reported on a one quarter lag.
Despite the challenging environment COVID-nineteen created, our balance sheet is strong, and we currently estimate our fleet risk based capital ratio for the first quarter to be between 405415%, including both the impacts of variable annuity reserve and capital reform as well as our hedging program. Our risk based capital ratio will be sensitive to the impacts from COVID nineteen as they flow through our balance sheet throughout the year. Market stress in the first quarter due to COVID nineteen, while severe in nature, did not reach our modeled stress testing scenarios, although we recognize there is uncertainty in front of us. Although we expect lower levels of overall industry sales for the foreseeable future due to impacts from COVID nineteen, our leadership position continues to provide us with a unique competitive advantage. We have a broad position across variable index and fixed annuities, term and permanent life insurance, not for profit retirement plan markets, and institutional markets.
We are not dependent on any one product type or distribution channel, which allows us to maintain our long standing disciplined approach with respect to product pricing and future development regardless of the economic environment. Over many years, we have proven our ability to redirect our marketing efforts from one product type to another as market needs and pricing conditions change. We also have a large and diverse in force portfolio that does not have the significant risks associated with pre 2010 living benefits or long term care. Our very small block of remaining long term care business has been reinsured to Portitude. Our strong capital levels and broad market presence position us well to deploy capital as potential attractive opportunities arise in this widening spread environment.
Now I'd like to touch on our operations over the last few months. As Peter noted, we transitioned quickly to a remote working model. With the support of our regulators where needed, we successfully adapted our esignature policies, procedures, and controls to support the needs of our plan sponsors, distribution partner firms, and individual customers. Also, investments we have made to enhance our digital capability have served us well as many more customers are taking advantage of our enhanced self-service tools. We've also been very responsive in adopting changes to address the financial hardship faced by some of our customers, such as extending the grace period for premium payments and meeting the requirements of the CARES Act.
Our sales and relationship management professionals quickly shifted from face to face to virtual meetings and have conducted thousands of such meetings and educational webinars with our producers and customers. Turning to our first quarter financial results. As mentioned, the primary drivers of the decline in life and retirement total adjusted pretax income were short term impacts to our individual and group retirement businesses from significant market movements. As to the top line results for individual retirement, premiums and deposits decreased primarily due to significantly lower fixed annuity sales as we maintained our pricing discipline as treasury rates dropped throughout the quarter with credit spreads only beginning to widen late in the period. Our index annuity sales remained strong, but we again grew variable annuity sales.
Lower sales of fixed annuities resulted in negative net flows for total individual annuities. For group retirement, premiums and deposits decreased due to lower new group acquisitions as well as reduced individual product sales driven by the uncertain environment. Net flows improved year over year primarily due to lower group surrenders. In this period of uncertainty, we expect fewer plan sponsors to change providers, which may reduce new group acquisitions but would support plan retention. For our life insurance business, total premiums and deposits increased due to higher international premiums.
Our mortality trends continued to be favorable to overall pricing assumptions, and the first quarter included a modest IBNR reserve strengthening to reflect the fluidity of COVID-nineteen. Although we may experience some acceleration, we are not expecting large incremental impacts to mortality rates and expect any incremental impacts to be manageable in the context of our overall balance sheet. For institutional markets, we have continued to grow our asset base and earnings, and this business continues to be well positioned. We remain focused on new opportunities and have the capacity to participate as activity arises in the pension risk transfer and other institutional businesses. To close, despite these challenging times, we remain available to serve our customers, plan sponsors, and distribution partners.
We are committed to further mobilizing our broad product expertise and distribution footprint to serve our stakeholders in new ways as their needs evolve. We will continue to deploy capital to the most attractive opportunities and focus on meeting ever growing needs for protection, retirement savings and lifetime income solutions. Now I will turn it over to Mark.
Speaker 5
Thank you, Kevin. Before providing summary comments about the first quarter, I'd like to give a COVID-nineteen perspective from where I sit. First, this health crisis, which quickly evolved into an associated financial crisis, is unprecedented in scope, uncertainty and length and depth of economic impact. Additionally, this ongoing event has simultaneously impacted both sides of the balance sheet, thereby nullifying most underlying assumptions that investment assets and insurance liabilities are marginally correlated. As a result, it's extremely difficult to forecast one quarter in advance, let alone a full year or longer.
However, as Brian also noted, I want to reiterate that AIG was strongly financially positioned entering the crisis both from a parent and subsidiary liquidity and capital perspective and is well positioned today, including our investment portfolio. Evolving situation causes us to view liquidity and capital strength as an imperative. When the crisis suddenly took hold on capital markets in mid March and not knowing what could come next, we thought it was prudent to augment our already strong current liquidity with a $1,300,000,000 partial drawdown of our revolving credit facility. We did this solely as a precautionary measure given the significant uncertainty at the time about the near term impacts of COVID-nineteen. I will provide an update on our capital management plans and liquidity position later in these remarks after I review our first quarter results.
So turning to the first quarter, AIG reported adjusted after tax operating earnings of $0.11 per diluted share compared to $1.58 per share in the 2019. Contained within this result is the continued improvement of General Insurance with a 95.5% accident year 2020 ex cat combined ratio, as Peter noted. First quarter results reflect direct and indirect impacts related to COVID-nineteen, including the market impact on net investment income and book value with a lesser impact on core operations in APTI. Peter discussed, the General Insurance COVID reserve reflects our best estimate for losses occurring through March 31. For the first quarter, adjusted book value per share increased 2.8% and adjusted tangible book value per share increased 3.2%, both since year end.
It's also notable that AIG's adjusted tangible book value per share increased nearly 11% since March 31, one year ago, which we believe is a better measurement of the improvement in AIG's core operating performance over the last year. Book value and tangible book value per share, both of which include changes in AOCI and the DTA, were virtually flat year over year, even with the significant AOCI change we saw in the first quarter of this year. In the first quarter, on an adjusted pretax income basis, net investment income or NII was $2,700,000,000 down approximately 1,000,000,000 from the 2019. Recall that the 2019 included significant gains following the downturn that occurred in the 2018. And this year's first quarter experienced significant losses due to the COVID-nineteen volatility in March, resulting in a distorted quarter over quarter comparison.
I want to spend some time on our global investment portfolio because in the current environment, I think it's important to understand its composition. Several reports have been published that used incorrect assumptions and information about our portfolio. In many cases, our consolidated global portfolio has been compared to U. S. Life or P and C peers or the industry generally without taking into account our unique position as a global composite or multi line insurer.
In addition, some believe our portfolio has above average inherent risk, which is simply not the case. Then we believe our portfolio is below average in terms of risk, and we'll get into some of that. In addition, certain accounting elections AIG took in prior years relating to specific securities have created above the line accounting volatility, which
Speaker 6
has led to some confusion.
Speaker 5
But this volatility does not impact AIG on a total return basis. To address these complexities and the many questions and comments we have received, we've provided much more disclosure regarding our portfolio, including the general insurance, life and retirement, and legacy portfolio composition on Pages 46 through 65 in our financial supplement. There you will find a significant expansion of our disclosure beyond segment and into credit quality distribution and asset or industry characteristic. As Brian mentioned, Doug DeShield, our Chief Investment Officer, can help address follow-up questions during Q and A, but I'll give some high level comments now. At March 31, AIG had a $332,000,000,000 investable asset portfolio.
This portfolio is about 73% fixed income available for sale securities, which represents 75% of General Insurance's portfolio and 74% of Life and Retirement. In addition, roughly 14% of the portfolio is invested in mortgage and other loans, 6% in short term investments, 2.5% in real estate investments, less than 2% in private equity, approximately one and a half percent is in fair value option fixed income securities or FBO securities, and about 0.7 is in hedge funds. It's important to recognize though that roughly 80% of the FBO fixed income portfolio, which historically has had higher volatility than our available to sale fixed maturity securities, is held in legacy. Notably, the FBO portfolio makes up only 1.4% of general insurance's portfolio and 0.3% of life and retirement. Our historical FBO accounting election mostly on legacy non agency RMBS that were previously credit impaired cannot be changed or modified and move mark to market volatility above the line into our income statement within net investment income.
For available for sale security, such volatility would be below the line in AOCI. As a result, this FBO county treatment puts more volatility into our income statement by NII with less relative volatility in AOCI, which is where one would ordinarily expect to see the volatility. Financial statement geography is important to note when examining AIG's NII, but it is irrelevant when you look at total return, which is how our investment function manages our portfolio. Over the last four plus years, and Doug can address this in more detail, AIG had seen significant derisking of its investment portfolio with material reductions in hedge funds, life settlement, CDOs and FBO securities, building approximately $32,000,000,000 which is a 60% drop in these asset classes since year end twenty fifteen. Additionally, AIG's portfolio has only a very small direct equity exposure, representing just 0.2% of the portfolio.
The volatility in the equity markets has a minimal impact on our investment income, and even that is below the line. On Page 63 of the financial supplement, you will also see a significant $9,000,000,000 plus credit quality difference in the low investment grade securities between the rating agency view and the NAIC designation view. Most of this is non agency RMBS on an FBO basis, which we have had evaluated and rated NAIC one by the securities valuation office of the NAIC. This is the highest rating category, which is important because these assets strengthen subsidiary RBC levels and and can sustain RBC levels even if they fall one notch because they still will be investment grade. However, rating agencies have not rerated these securities with current information.
So from their perspective, the securities still retain legacy below investment grade status. When examining our 144,000,000,000 of corporate debt, which is summarized on page 56 of the financial supplement and expanded beginning on page 59, note that nearly 130,000,000 is investment grade. And of this total, 15% is rated AA or AAA, 34 is A rated, and 51% is BBB rated. Compared to the overall investment grade market, we have a superior distribution of such assets by rating. Similarly, when viewing the entire corporate debt portfolio, 10% is below investment grade, which is much lower than the market average of 28%.
I wanted to point this out because given the magnitude of AIG's investment portfolio, some may assume that our portfolio mirrors the industry average, which is not the case. With respect to CECL credit impacts in the first quarter, which are included in realized gains and losses and not NII, we recognized approximately $236,000,000 of credit losses. This stems from about $198,000,000 in fixed income securities and $38,000,000 in loans. Now turning to the operating segment. Since Peter and Kevin discussed their financial results in detail, I will just add a few remarks to augment their comments.
General Insurance, I'd point out that the $419,000,000 of total cat reserves for the quarter represents 6.9 loss ratio points, with $272,000,000 or 4.5 loss ratio points being attributed to COVID nineteen and a 147,000,000 or 2.4 loss ratio point related to other cat events, the largest of which was the tornado storm system that hit Nashville in early March. Excluding COVID-nineteen, General Insurance generated $185,000,000 of underwriting income, which includes the non COVID cat loss. Prior year development was minimal in the first quarter with $60,000,000 of net favorable development, 53,000,000 of which emanated from the amortization of the ADC deferred gain. On a pre ADC basis, there was a net $1,000,000 of favorable development, representing $30,000,000 of unfavorable in North America, mostly from shorter tailed lines, largely offset by favorable $31,000,000 from international across many product lines. Lastly, as Peter discussed, Syndicate 2019 will favorably alter AIG's risk profile as concentration risk is distributed across an innovative structure and set of capital providers.
We anticipate that in the second quarter and for the balance of the 2020, ceded premiums will increase over original expectations and therefore net premiums will correspondingly reduce. We project that second quarter net written premium in high net worth will be down approximately $650,000,000 from original expectation and that net earned premiums for the 2020 year will reduce by approximately 675,000,000 as a result. Beginning in 2021, however, catastrophe cover costs will decrease for AIG since the high net worth exposure subject to the CAT program will be a fraction of what it is today. For 2020 underwriting income for the high net worth unit, we anticipate approximately the same underwriting result pre and post 2019 and then to become accretive thereafter. Turning to life and retirement, I would just add that institutional markets benefited from approximately $700,000,000 of pension risk transfer premium in the quarter, albeit down a bit from corresponding quarter of last year.
Legacy, a $368,000,000 adjusted pretax loss in the first quarter was due to a reduction in NII driven by capital markets volatility we saw in March, which abated, as mentioned, in April. As a reminder, we signed a definitive agreement to sell Fortitude last year with the economic set as of December 3138, which means that all net income subsequent to year end 2018 up through closing will be included in the gain or sale or loss on sale we recognized upon the closing of the transaction. We continue on course towards a midyear closing subject to regulatory approval. And it is noteworthy that Fortitude also has benefited from strategic hedging transaction and performed as expected and in fact, helped capital ratios remain virtually unchanged since early twenty nineteen. Next, moving to other operations.
And as I discussed on last quarter's earnings call, you will see on Pages 37 to 39 of the financial supplement a revised and simplified presentation that helps identify key drivers of APTI. Our previous disclosures on this segment could be difficult to understand and volatile in part due to the gross up of income and expense for internal items, mostly investment services, which increased other income and GOE. We simplified that and also provided ABTI by activity, which should help. As for magnitude, this quarter's 280,000,000 of other operations GOE included the COVID nineteen employee grants totaling 30,000,000 that Brian referenced and remote access IT costs of $3,000,000 Excluding that, other operations GOE would have only been $247,000,000 Turning to tax. We had a core 23% tax rate on adjusted pretax income for the first quarter, higher than recent prior quarters due to additional items dominated by a $37,000,000 impact reflecting share based compensation differences, plus by grant date versus delivery date of value resulting from stock price declines during the first quarter.
Turning to liquidity and capital resources. We believe that liquidity and operating subsidiary capital strength are paramount priorities in this uncertain economic environment. At year end 2019, AIG had $7,500,000,000 of liquidity at the parent, and the RBC fleet ratios for General Insurance's U. S. Pool finished 2019 at 419% and for Life and Retirement at 402%.
During the first quarter, we repurchased $500,000,000 of our stock and called $350,000,000 of Formosa bond. Share repurchases helped to offset share count dilution stemming from equity compensation, and the Formosa bond calls aided our debt leverage ratio. As of March 31, AIG had a similar $7,500,000,000 of current liquidity, including the $1,300,000,000 draw from our revolver that I referenced earlier in my remarks, as well as strong liquidity in both General Insurance and Life and Retirement. Before turning to AIG two hundred, there were two below the line items in the first quarter that I would like to highlight. First, the success of our hedging program and the second would be Blackboard.
Turning first to our hedging program, roughly $3,600,000,000 of variable annuity fair value benefits were reflected during the first quarter within the realized gains line as a direct result of successful interest rate and equity risk hedging within the Life and Retirement and Legacy segment. They clearly preserve book value. It should be noted though that on a GAAP basis, this gain was aided by the NPA or nonperformance adjustment impact, which is highly volatile and reversible depending upon rates, spreads and equity markets. Secondly, at the March, AIG made a strategic decision to discontinue Blackboard, our internal insured ex startup in light of current market condition. Blackboard's GOE, which was $16,000,000 in the quarter, has been historically recorded in other operations, but that will cease starting with the second quarter of this year.
Associated with this decision, we recorded an approximate $165,000,000 after tax charge not included in APTI. Pivoting to AIG 200, as Peter noted, we continue to refine our operational plans in response to COVID-nineteen. We still expect that this strategic three year transformation will result in $1,300,000,000 in costs to achieve an annualized $1,000,000,000 of run rate GOE savings by year end 2022. Let me first just provide a quick review, and then I'll give you the AIG two hundred three year walk as well as its impact on the 2020. From a reporting perspective, all costs to achieve aside from $400,000,000 of pretax spending that will be capitalized will be recorded below the line, not in ABPI, as restructuring and other costs, which will make it straightforward to track.
Below the line charges mostly involve employee related costs, dedicated internal resources, and associated professional services. Capitalized costs of 400,000,000 before tax represent mostly investments in systems development, interfaces, data conversions, and associated integrated workflow processes, which have an impact on cash but are not expensed immediately in the income statement. Instead, each investment will be capitalized and then amortized through GOE based on its useful life according to accounting principles. Hence, by year end 2022, we would expect that the amortization portion of the $400,000,000 will be included in our annual expense run rate, where our goal is a total annual run rate savings of $1,000,000,000 including the amortization of these capitalized investments. So let's turn towards what this means for the next three years, acknowledging that in this uncertain world, timing of plans can can somewhat change.
Under Peter's leadership, we are governing AIG 200 via structured checkpoints and toll gates the control costs confirm scope and reconfirm scope and drive key milestone achievements. Overall, we expect a total cash cost at the holding company of 1,300,000,000.0 As shown on Page eight of the financial results slide, dollars $350,000,000 of this is expected in 2020, although still being reviewed due to COVID-nineteen impact, 500,000,000 in 2021 and $450,000,000 in 2022. Of these amounts, approximately $100,000,000 in 2020 will be capitalized with later amortization into GOE. The combination of these two results in a below the line projected charge of $250,000,000 before tax. Then in 2021, about $200,000,000 will be capitalized with a below the line charge of roughly $300,000,000 And finally, about $100,000,000 will be capitalized in 2022 with a below the line charge of $350,000,000 Based on our current useful life schedule for depreciation, and assumptions about when we expect the 400,000,000 in capitalized assets to be placed into service, calendar year depreciation included in GOE should be zero in 2020 as the project will still be in development, rising in 2021 to be between 10,000,000 to $15,000,000 before tax and 25,000,000 to $30,000,000 in 2022.
Based on projected completion by year end 2022, the unamortized balance of about $350,000,000 will be amortized at about a seven year average life with $50,000,000 per year in 2023 through 2027 and then trailing off a bit from there. Finally, in the 2020, we had a $90,000,000 restructuring charge below the line, of which about $23,000,000 related to AIG two hundred and the balance from other action. Going forward, restructuring charges will primarily reflect AIG two hundred costs. Relative to expense savings, this quarter had $10,000,000 of GOE savings, which will translate to $60,000,000 on an annualized run rate basis, which is part of the 300,000,000 plan run rate benefit by year end 2020. Now shifting to capital management and looking ahead, in light of the significant uncertainty on many fronts due to COVID-nineteen, we do not plan to do additional share repurchases or debt reduction actions for the foreseeable future, but we will reassess this as COVID nineteen impacts stabilize.
However, given improved stability in and access to the capital market since March, we are reevaluating our debt and capital plan. While reducing debt leverage to 25% or below is a minimum term goal, in the near term, our priority is maintaining strong operating capitalization, financial flexibility, and liquidity. As a result, we are considering options to generate additional near term liquidity in light of ongoing economic volatility as well as upcoming debt maturities in 2020 and in the medium term. Although spreads have widened since year end, all in coupons are attractive. Given the significant uncertainty around the duration and depth of global recession created by COVID nineteen as well as taking into account our global operating footprint and different regulatory capital regimes, we think it is prudent to evaluate debt capital market opportunities in the near term rather than waiting until later in the year, which was our original plan prior to COVID-nineteen.
Lastly, and reflecting back, the first quarter benefited in the first two months from strong momentum in GI pricing, investment returns and operating initiatives. In March, COVID-nineteen spread incredibly fast and dramatically changed everyone's everyday world. AIG entered this crisis from a position of strength. While it it had certainly impacted us and caused us to recalibrate some of our plans, AIG is more resilient than it has ever been with strong leadership and greater portfolio and risk management across the organization. We are confident in our ability to weather this storm and look forward to being able to engage with you again in person, hopefully, in the near term.
With that, I will turn it back to Brian.
Speaker 2
Thanks, Mark. Abby, I think we're ready for, the q and a portion. So please, please get us started and let us know who's perfect.
Speaker 0
Thank you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, it is star one if you would like to ask a question. And we will take our first question from Elyse Greenspan with Wells Fargo.
Speaker 7
Hi. Thanks. Good morning. My first question, in your prepared remarks, you guys mentioned that a small fraction of your commercial property policies contain coverage for infectious diseases and that those policies do have small sublimits. I'm just trying to get a sense for both policies where you think you could see losses.
Have you set up reserves in the in within your COVID losses in the first quarter?
Speaker 2
Okay, Elyse. I think that's a question for Peter. Peter, would you take that, please?
Speaker 3
Yes, sure, Brian. Hey, Elyse. Let me just give you a little bit more detail. Yes, we did go through it very thoroughly in the first quarter. I outlined our process that we did bottom up and top down.
But when you look at the size and scope of our global portfolio, the nature of our clients in terms of the segmentation, we do have commercial property policy that have some manuscript wording. As I said in my opening remarks, the overwhelming majority of the standard commercial property policies do contain clear exclusions for viruses, and it's fairly standard in the industry. These policies also require that there's direct physical loss or damage that impact the insured's business operations. As to these policies, COVID is not covered. So that's point one.
There are limited instances where we do write affirmative coverage for communicable diseases. But even in those cases, it's only on a supplemented basis, and it's pursuant we have very strict underwriting guidelines that often result in coverage for only specified diseases. And in an event that there's a requirement that there also be a government closure caused by physical presence of the disease itself. So again, it's fairly clear. And just to give you some context in terms of what I'm talking about is that 100% of our sublimits aggregate to well less than 1% of our total limits in our commercial property policy.
So it's a very small portion of the overall property exposure. And I would just note that I mentioned in my prepared remarks, we have really comprehensive reinsurance, whether it's on a property per risk basis, We have low attachment points on a per occurrence basis that's regional. And we also have global aggregates that attach to reduce volatility on a frequency and severity basis. So sorry for the long answer, but I think it's important to get into the detail.
Speaker 2
Thank you, Peter. Next question?
Speaker 0
We will take our next question from Tom Gallagher with Evercore.
Speaker 5
Morning.
Speaker 8
Mark, you mentioned your plan on running with higher debt for the time being, which I think that makes sense given the current environment. Have you gotten any sense from the rating agencies on their reaction to the higher leverage for now? And then just a follow-up question on the investment portfolio. I appreciate all the disclosure there. The $18,000,000,000 of other invested assets, it looks like $6,700,000,000 of that is in legacy.
Would you expect most of that to be transferred with the Fortitude resale? And then sorry for the strain here, but then just one related question. The $8,500,000,000 of real estate alternative investments, should we expect there to be any kind of impairment on that in 2Q? Or is there some buffer with historical cost accounting there? Thanks.
Speaker 2
Okay, Tom. Listen, why don't we have Mark, you wanted to talk about the debt. And then I'm going to ask Doug to take over on the investment portfolio question. So Mark, why don't you go first?
Speaker 5
Sure. Thank you, Brian. And I I will do that as well. With regards to debt, yes, we've spoken to the rating agencies. In fact, we were in in conversation with them on the, revolver drawdown, as a matter of fact, and, had very good, strong, and supportive conversations for them.
And anything in the in the we may contemplate, of course, we'd be involved in discussions with them as well. With that, I will, turn it over to Doug to ask, talk about this to investment question.
Speaker 9
Thank you, Mark, and good morning. Well, I would refer you to Page 49 of the financial supplement, which basically goes through the legacy segment and the assets that are held in that segment in pretty robust detail. As you know, in addition, there's approximately $40,000,000,000 of assets, which we also disclose in our financials, which are gonna be part of the sale related to Fortitude. The portions that we'll be retaining, there will be some real estate investments that we'll be retaining that are part of legacy. There will also be some some fair value option bonds that will be retained in legacy that were part of the old financial products direct investment book.
So those will not be part of the sale transaction. But the material amount of the assets will be, as you know, over $40,000,000,000 will be separating as part of this the sale of Fortitude. With respect to the real estate, you know, it's you know, as you know, we only experienced a rapid acceleration in the month of March with respect to the the the development and emergence of the COVID situation. So we're still in the midst of analyzing the impact. We and I think it's very early to determine what the impact will be on our real estate portfolio.
But it should be noted that our real estate portfolio is diverse. It's inter it it includes both domestic and international exposures. So, you know, the the impact will be you know, we'll learn more as things go on. I think where we're learning the most about our real estate is obviously on the commercial mortgage loan side. So that's where we're getting some real insight into what's going on in the real estate market.
And those teams, the commercial mortgage loan team, work very, very closely with the real estate equity team at AIG. All all of those investments are managed directly. So we have great, level of of sight of what line of sight to the to what's going on in that market. But it's still really early to determine what's gonna happen.
Speaker 10
Okay. Thanks.
Speaker 2
K. Thanks, Doug. So why don't we go to the next question then?
Speaker 0
We will take our next question from Yaron Kinar with Goldman Sachs.
Speaker 10
Hi. Good morning, everybody, and thanks for the very helpful opening comments. Just wanna start with one question on the the removal of the 2021 exit rate return guidance. Just wanna make sure I understand what it does and what it does not mean. Does it mean from your perspective that you could see the the COVID impact linger or continue into well into 2021?
Speaker 2
Well, let me let me take that. You know, we who knows? I mean, you don't know what what you know, whether COVID will, you know, will reemerge if it does, you know, go down and impact in 2020. It's really a question of, you know, how much predictability is there to quarterly earnings, and it's difficult to predict, you know, quarters. So if you can't predict the quarter, I don't wanna try to predict a year or several years.
I think it's important to note though that the underlying power of the company remains. You know, we're we're very, strong in the GI. GI has continued to show improvement. You know, the good work that has been done over the last three years by Peter and Pete. And his team have continued on.
So, you know, the the returns that we were talking about, I believe, if you certainly, if you take the COVID out for a second, are going to continue to improve. And so that trajectory we're on is we're still on. Now you have a COVID event, and I think the COVID event certainly would impact L and R on a short term basis. But, again, we think the long term power of the company is there. So, you know, COVID itself, it's it's it it'll be large.
I told you that I believe it'll be the largest, you know, event in in the insurance industry, but it is a you know, it's an inflection point. And that that effect that we're that we'll see, you know, we've already been in a market on the on the GI side, general insurance, PNC side, you know, that was was turning, you know, was improving. And the rates and terms and conditions were were were improving for for the risk taker. This COVID is is gonna prove to be an inflection point. So, you know, companies with strong balance sheet, we have one.
Companies with strong management, we have one. Companies that have, you know, been well risk managed, and we've done that now, they're gonna be, you know, on the right side of that. And and so we, you know, we, you know, we we believe we can handle anything that comes with COVID, and we feel very strong. But predicting quarter to quarter is just impossible. So I hope that helps.
Speaker 10
It it does. Thank you. So so my follow-up question on that is because when you talk about the COVID being the the largest catastrophe event in the industry's history, can you maybe talk about what P and C lines in particular you would foresee having very large losses here? And maybe also, the the proportion of losses that you'd expect coming from L and R, maybe not directly COVID related, but more from capital markets activity.
Speaker 2
Well, I'm I you know, I'm gonna have Peter talk about, you know, what we see, you know, in the the PNC side, and then I'll let Kevin talk about L and R. So Peter, do you want to talk about that first?
Speaker 3
Sure. Thank you, Brian. We mentioned quite a few lines when we were referring to the first quarter, whether it's travel, M and A, A and H. Some other lines to think about that could have activities, workers' compensation. We don't know about D and O liability.
We have been watching it very carefully and making certain that we're looking at any line that we think could have an impact. But I mean, what I can tell you to add to Brian's comments before is that we have a very thorough process and we'll be consistent all the way through. We know the CAD is still ongoing, which is very rare. So as things emerge and develop, we will adapt to that. And we're looking at this across every global geography where we think there's impact and multiple lines of business.
But because the cat is still going, we even have two months left in the quarter. It's hard to see what may transpire in the future. But as I said, we have a great process, and we'll keep everybody updated on lines of business as they emerge. Yes,
Speaker 4
thanks. So I'll address it really in three pieces, mortality in the markets and then maybe just a reminder on pricing. So our reported mortality in the first quarter was below pricing, which continues the trend that we've had for the last three plus years. But later in the period, what we did notice is is that there were some delays in reporting generally related to the, issuance of, certain, documentation. So
Speaker 10
we put up
Speaker 4
the modest IBNR, really for just that late running reporting. As we look ahead, we do expect that there will be additional mortality in the second and the third quarter depending upon how circumstances and behaviors evolve. So where does that leave us? We we expect some adverse mortality overall for 2020, but we don't expect to see significant impacts to the balance sheets based on what we know, and and there could be some offsetting factors. In terms of the market effects, look.
There there's two things. I mean, when equity markets move, particularly when they go down, that ultimately reduces our future expected fee income, particularly in the annuities portfolio, which we have to reflect immediately in back. The reality is is that the reduced reserve overall, actually emerges as additional profit in the future, and also serves to increase our SOP o three one reserves. And when changes in credit spreads, we see the immediate impact on fair value options. So those two short term market effects are reversible.
And that leads to the third thing, which is pricing and how do we feel about current pricing. And certainly, treasury rates are at all time lows, but our ability to price product is to pace is is based not only on where base rates are, but also where credit spreads are, what is the shape of the yield curve, and where investor expectations and appetites are. And so based on the current environment, we're still able to, price the long term expectations that we have. Certainly, there's disruptions in the sales environment, but it's difficult to anticipate what the future on that is going to be and how it results. So those are the three perspectives I have on the long term earnings potential of the life of the life planet.
Speaker 5
And one thing I'd just like to add there, Yaron, Peter's comments about certain lines of business, you mentioned workers' comp. I think it's important to remember that AIG has de risked that workers' compensation business significantly, probably over the last seven, eight years. And where AIG finds itself now is mostly in loss sensitive related programs, which have average, deductibles north of a million dollars. So when you think about deaths in in the work comp area, that's statutorily determined by state. That's gonna be under the underneath that deductible.
Standard medical and temporary, all that falls away. It has to be a major permanent partial to really penetrate it. So I think the book is well positioned given what we're talking about here.
Speaker 2
Yeah. And just one other piece on the copy. And I and and Peter mentioned this earlier, but, you know, we yes. There are COVID claims coming in, but I think you have to recognize that there's been a decline in the number of of claims coming in otherwise. And so it remains to be seen what the net effect, of COVID has on the workers' comp.
That's, that's something to keep, keep an eye on. But with that, Abby, let's go to the next question.
Speaker 0
We will take our next question from Michael Phillips with Morgan Stanley.
Speaker 9
Thank you. Good morning. I wanted to touch on comments on expected continued underwriting core profitability in General Insurance and maybe how you think about the near term impact of exposure drops given the economy and how that might affect the profitability improvement plan for the remainder of this year?
Speaker 2
Okay, Michael. Well, that's Peter. So Peter, why don't you do that?
Speaker 3
Okay. Thank you for the question. I mentioned some of them in the prior question in areas where we're for loss. But I would think that there's going be a meaningful falloff of travel in the second quarter. M and A could be some falloff in aerospace, marine and energy, and we mentioned workers' compensation.
Having said all that is that you've got to remember the segmentation and demographic of our portfolio. I mean over 75% of our business is on some form of either deductible SIR or funded captive. And so we don't have a direct correlation. Even though it is rated off of a payroll, sales, auto, it's done on an excess basis. And therefore, we do not think we will have as much headwind in terms of premium reduction.
There will be some, but it will be more modest because it's not a direct ratable exposure that generates the premium. We have different factors in terms of how we adjust excess premiums. So we just don't think it's going to be as pronounced. Brian mentioned on workers' compensation, the decrease in frequency. It's not a trend yet, but it's an observation that while COVID losses are increasing, we're seeing a commensurate drop in where our clients are retaining losses, that those are dropping.
So as we look at repositioning our portfolio, where we attach on an excess basis and the commensurate premium, I said, there's going to be some lines of business that will affect, but we think there's opportunities for other areas of growth. As we have repositioned the portfolio, we like where we are and think that the leadership position that AIG can demonstrate in the marketplace will give us also some select opportunities for growth.
Speaker 2
Thanks, Peter. Michael, anything else?
Speaker 9
No, that's it. Thank you, Peter. Appreciate it.
Speaker 2
Okay. Thanks, Michael. Happy, next question.
Speaker 0
We will take our next question from Paul Newsome with Piper Sandler.
Speaker 10
Good morning, and thanks for the call, everyone. I am a little concerned that the swap with the the big cat loss that you have from COVID nineteen is more of a liability loss than a property loss. Could you talk about how the reinsurance would protect you in a liability type catastrophe versus the property? I think we're all familiar with that because of lost property, but I can't recall liability catastrophe event with central size. So I don't know what we got to do in terms of coverage.
It's actually in my back.
Speaker 2
Okay. So so, Paul, you wanna you want us to talk about, you know, COVID versus our reinsurance program?
Speaker 10
Yeah. If if COVID was a liability loss instead of a property loss.
Speaker 2
Yeah. Okay. Well, Peter, I guess that's you again.
Speaker 3
Yeah. Thanks, Brian and Paul. So I outlined our property program and said that we had reduced volatility significantly. On the liability side, I think we've done actually even more. We used to retain significant limits within AIG, and so we've been building a program over time that significantly reduced the net limits that we put out as well as the gross limits.
And also, we did it on an excess of loss basis and also on a quota share. So on a general liability policy, as an example, we would have less than probably depending on the limit, we have a 50% plus quota share on our first limit retention, and we have 100% reinsurance above $25,000,000 So we have if you issued a policy, a significant size policy, the most you have net is between 10,000,000 and $12,000,000 So we actually have significant protection on the quota share as well as the excess of loss.
Speaker 2
So Paul, let me just jump in. Look, you know, our reinsurance, is is good and solid, and Peter's done a, you know, tremendous job along with his team to put that together. Our first line of defense is the way we manage our portfolio to start with, you know. And so, you know, you can't rely on reinsurance to to make, you know, a portfolio better than it is. So we've done, you know, a tremendous amount of work, you know, risk selection, limits management, attachment point, and pricing along all the lines of business property and casualty.
And that's where we feel very confident about our situation vis a vis the impacts that COVID will will, you know, will as as those impacts unfold. So I just wanna add that. So, Paul, did you have another anything else?
Speaker 10
No. That's it for me. Thank reassurance.
Speaker 4
Thank you very much.
Speaker 2
Oh, you're welcome, Paul. Thank you. Next question, Abby.
Speaker 0
Our next question is from Ryan Tunis with Autonomous Research.
Speaker 4
Hey. Thanks. Good morning. I I I just wanted to confirm something that, I guess, Peter said earlier in the q and a that there's affirmative BI coverage for 1% of total property limit. That sounds like that could be somewhat of a big notional number.
Did did I hear that correctly?
Speaker 3
Well Well, I said one
Speaker 2
Peter, go ahead. Peter, go ahead.
Speaker 3
Alright, Brian. Right. What I said was not that that was affirmative coverage and those sub limits would trigger coverage. What I said is that the limits that we provided on the affirmative, which have, again, a bunch of triggers that I outlined in my previous answer, that we have well less than 1% of our total limits when you compare that to our property gross limits. So again, it's well less than 1%.
And I'm not suggesting that we confirm that there is coverage or that we are adjudicating claims on that amount. It's just that that's what we have for limits, and then it goes case by case, insured by insured in terms of what the loss is.
Speaker 2
Yes. Brian, let me just add something here, and that is, you know, it yeah. Peter talked about that process of evaluating the losses, you know, occurring in the first quarter. I've I've been in this business a long time, forty plus years. And, you know, I've seen a lot of, you know, things come and go.
I've seen, you know, difficulties in trying to assess loss. I I have to tell you the process that they that we went through, that they went through, we went through, you know, as good as anything I've ever seen. They have gone through every bit of the portfolio. You know? They looked at everything where there was a potential and and and evaluated whether there would be reason to put up a reserve.
If there was, it was done. So we have posted the reserve that we believe are appropriate, you know, albeit conservative for that everything that happened in the first quarter. I just wanna make sure that everybody understands that. That's the case. Yeah.
Speaker 4
Yeah. So could you just talk a little bit about how you're you're assuming business interruption losses might respond within the balance book? And also just the $2.72 net loss number, what does that look like on a gross basis of reinsurance? Thanks.
Speaker 2
Okay. Well, Peter, that's you again.
Speaker 3
Okay. You know, with Validus Re, we've gone seeded by seeded, have taken a look at our gross net exposures and put up what we thought was the best estimate based on, again, the same process that we outlined for the core of AIG in the first quarter. In terms of the net and growth, I mean, look, there's some reinsurance. I'm not going to go into great detail in terms of what the net is versus the growth. It's still an evolving loss, as we outlined, with meaningful IBNR.
But again, I've outlined what I thought were the reinsurance structures that could apply in the event that the loss were to grow over time.
Speaker 2
Okay. Thanks, Ryan. Abby, let's go to the next question.
Speaker 0
We will take our next question from Meyer Shields with KBW. Thanks.
Speaker 5
This is sort of a related question, but it seems to be top of mind for a lot of investors. How do we think about commercial property where there is no affirmative coverage but no virus exclusion, given some apparent court decision saying that non structural damage would qualify?
Speaker 2
Well, it's a technical question. But, Peter, can you do that?
Speaker 3
Hey, Meyer. It's a really hard question to answer because it's, you know, hypothetical. You know, the only thing I can really do is comment on the policies that we have and where we think you know, again, I outlined the demographics of it and think that the exclusions that we have and where we granted affirmative coverage is it's very specific. And so it's hard to answer that because I don't think it really applies to our portfolio.
Speaker 5
Okay. That's fair. Unrelated question. I guess I would have expected maybe better results in international personal lines, assuming an international sell through in place order. Am I missing something there?
Speaker 2
International personal lines, Peter?
Speaker 3
Yeah. What what what happened in international personal lines, it's not an anomaly, but we basically had a runoff program that impacted we saw it earned premium. So it was put into runoff in 2018 and earned premium in 2019. And as we've been doing the reunderwriting of the portfolio, again, not as much as we did on the commercial, we've just lost a little bit of premium. And so the ratios look like they perhaps are not going in the right direction, but the absolute performance is very strong.
We like the personal book very much and think that there's some real discrete opportunities for growth, particularly in A and H and areas across all of international and Accent Health with the new digital platform we're putting in. So I wouldn't read into that in terms of a trend. It's just the impact of a runoff business, Meyer.
Speaker 2
Our
Speaker 0
next question is from Brian Meredith with UBS.
Speaker 9
Yeah. Thanks. So, Brian, I'll have this
Speaker 11
one for you instead of
Speaker 10
going up to you on it.
Speaker 9
Given the impact we're seeing of COVID nineteen on the general insurance business as well as the life insurance businesses, I'm wondering if you're at all rethinking the strategic rationale of actually having both a life and a P and C operation in the same company.
Speaker 2
Well, know, Brian, I guess, know, my job is to continually always think about, you know, the structure that we have. Does it make sense? Would we be better in a different structure? And so that that thinking continues. I think at this point, you you know, we're we're comfortable with where we are, but I I you know, that's my job is to continue to do that.
So we'll we'll continue to keep looking at that, you know, there's, you know, there were reasons why these two belong together and they those two are are still there. But we would I'll always think about this. But there's nothing that I would talk about. You know, right now, I think we're comfortable with it. Any other questions, Brent?
Speaker 9
Yeah. Just just one other quick one here. I'm just thinking about it. So given this is, as you're saying, the largest catastrophe loss for each, you know, in the insurance industry, you know, probably ever. You know, if I kinda think back, you know, AIG with KRW had well over $2,000,000,000 of losses.
You know, are we are we talking about a potential loss here, you know, that's gonna be well north of a billion dollars for you guys ultimately at the end of the day if this is truly the largest cash loss ever?
Speaker 2
Well, I look at it. We're not the company we were, Brian. Mhmm. We're not the company then. You know, there's been a complete, you know, change in we look at the risk, you know, the derisking that we've done, you know, the limits management, the improved reinsurance profiles, all lead us, you know, put us in a position where we are much stronger and and and able to withstand an event.
And so, you know, I I point out that this is the largest event because I want I want people to understand that, it's creating an inflection point in the industry. But there are gonna be some who do well in this process and some that won't. We're in we believe we will do well through this event and that we will we're gonna emerge stronger and more in demand, than we were before.
Speaker 9
Makes sense. Thank you.
Speaker 2
You're welcome. Abby, next question.
Speaker 0
We will take our next question from Andrew Kligerman with Credit Suisse.
Speaker 10
Hey. Good morning. Thank you for taking my question. On the life insurance side, I'm wondering if you could give a bit more of a sensitivity in terms of the COVID nineteen exposure, what you might expect during the course of the year. And then with regard to your variable annuity hedging, it looks very strong.
What was your hedging effective number for the variable annuity? And lastly, just in terms of the press release and what you said on the call, you talked about maintaining the return on equity profile for the life business. What might that profile be? Mean, could you could you kinda grow into where you think a good range for an all fee and the life the life and retirement business would be?
Speaker 2
Okay. Andrew, thanks. So I'm gonna have Kevin and obviously talk about the sensitivity around COVID nineteen and the hedging program. In the hedging program, I think, Kevin, why don't you do the piece about the variable annuity, but I would like Doug to jump in on the, what what happened with, Fortitude as well. So, Kevin, why don't you start?
Speaker 6
Yeah. Thanks, Brian. Thanks, thanks, Andrew. So so look, I guess I'll address that from a couple of, perspectives. I I covered the market impacts, the short term, market impacts.
So I'm not sure I need to go back to that. But, I mean, clearly, equity markets move, it impacts the SOP and the and the and the DAC. And when the fair values move, that impacts the fair value options.
Speaker 10
You know, those will unwind over the mortality.
Speaker 6
I'm sorry, Andrew?
Speaker 10
Yeah. Apologize. I needed to be clearer. I meant strictly the mortality. What would you say?
Speaker 2
Oh, mortality
Speaker 5
is fine.
Speaker 10
Yeah. So so it's very
Speaker 6
it's it's very it's it's very straightforward, that in the first quarter, we saw mortality, better than, pricing. We believe there were delays in the reporting of those claims. As we look at second quarter and third quarter, based on, you know, where the current estimates are, this is well within our first level, modeled stress scenario. We don't expect any significant impact, on the balance sheet. And there's also, you know, it's difficult to project how people are going to behave, how people are gonna respond.
So that's about the best that we can do is just based on where we believe our market presence and geographical presence are versus the current expected losses. You know, in terms of hedging, what I would say is first of all, you can only hedge what you have. And so the liability profile that we have is a big part of the success of our hedging program because we have primarily derisked benefits sold well after the VA arms race of the mid two thousands. And so, you know, that includes our feature of requiring fixed income allocation, volatility control funds, etcetera. We've hedged all, know, hedgeable market risks.
We've left an open position relative to credit spread because we believe that that is a natural hedge against our general account portfolio. Over time, our hedge effectiveness is around 90% and it's continued to perform almost exactly as we expected in the various market dynamics resulting you know, I think the results, the good results reported for the quarter. But I'm going to pass on to Doug because another feature of our hedging success in the first quarter, was, also in the Fortitude portfolio.
Speaker 9
Thank you, Kevin. So I just wanted to comment on the fact that what you don't really see in the financials is with respect to the legacy segment, you're seeing all the mark to market impact, particularly of the fair value option securities that are in legacy and to some extent in Fortitude. What you don't see is the fact that we had established interest rate and credit hedges, which all that P and L and effect goes through realized capital gains and losses. So you don't really see the net effect. But the best way to look at how that how the, entity performed and how those hedges are formed and how effective they were is, as Mark made in his prepared remarks, he said that the, regulatory capital ratios for the entity were preserved from over a year ago.
So that gives you a sense of how effective our hedging strategy was for things that you're not necessarily seeing when you look at the mark to market volatility that is reported in our financial statements in the APTI. So thank you.
Speaker 2
Okay. Thanks, Doug. And Abby, I think we're running a little long, but why don't we take one last question?
Speaker 0
Yes. Our next question will be from Scott Frost with State Street Global Advisors. Thank
Speaker 11
you for taking my question. You said you expect COVID to be the largest single PNC event the industry has ever seen. Could you give us some background on what the basis is for this assessment, specifically the length of shutdown you're assuming here, and what are your thoughts on the Willis piece released Friday? And over how many years do you expect claims to develop and be paid? I'm assuming multiyear payment profile, but if I'm wrong, please correct me.
Speaker 2
Okay. Well, let me let me start with that, and then, you know, Peter can can add from it. But, you know, in terms just in terms of the payments, you know, these particularly business interruption claims are very, you know, long and processed and and and payments. So, you know, I think we're just I think we just cleaned up the last business interruption from from from superstorm Sandy to give you some idea. So anyway, but, you know, in terms of the of the estimate, I mean, we've seen a lot of different estimates.
I think, you know, they run the range, but the first thing you have to understand is this is global in nature. This this pandemic has affected every corner of the world. It isn't that hard to, you know, come up with a, you know, a reasonable assumption around, you know, the effects because we're seeing effects in Europe. We're seeing effects in Japan. We're seeing effects in Latin America, and of course, you know, here in North America.
So, you know, whether it's whether it's the, you know, the effects of comp that we talked about or the business interruption. We've seen travel and, you know, event cancellations and on and on and on. It doesn't it doesn't take much to figure out how this is spread across the globe. You know, the question for us is, you know, what what is our, what's our position on all those things? And, you know, we feel very, very comfortable with, you know, how we've managed this risk, in general and how we you know, we're well positioned for COVID.
Peter, do you wanna add anything to that?
Speaker 3
The Probably not much. The only thing I would just add is what you said. We've seen a lot of very good written documents that have come out. But just because of the ongoing nature of the event and the complexity of the different lines of business, it's the wide range of scale in terms of the low end to the high end is about as wide as you'll see in terms of predicting cash. So it's very hard to pinpoint anything or the level of accuracy until this evolves over time.
Speaker 11
Well, how can we say that it's gonna be the largest event we've ever seen when there's a wide range? I mean, again, you're you're saying this is gonna exceed Katrina. So on the basis of that, what I mean, again, what what are we what are we saying? I mean, the the Willis report says length of shutdown is really the determining factor. They're saying a year at $80,000,000,000.
When you say it's greater than Katrina, is that is that the basis of your statement, or can it be less than that? I mean, what I'm trying to
Speaker 5
get at is how are
Speaker 11
you getting to that statement?
Speaker 9
You see what I mean?
Speaker 2
Peter?
Speaker 3
Yes. I mean so looking at I mean, let's get off the Willis, is that we've done a ground up analysis based on what we think can be an industry loss with a lot of assumptions, again, length of time, severity, geographic spread, and have done it across multiple lines of business. And again, we're not in the business of putting out ranges as to what is going to happen to the industry as we look at our own portfolio. But when we look at market share of different lines of business, we came up with an estimate that exceeded Katrina. And I think that was the basis of Brian's statement.
Speaker 2
Yes. Okay.
Speaker 11
It would be helpful in the future if you told us some of the assumptions behind that. That's all I'm driving at. Thank you. I appreciate the comments.
Speaker 2
Well, thank you very much. Like I said, we've gone past our time, so I wanna wrap this up. And so, first of all, I I wanna thank everyone again for joining us today. And I also wanna thank our clients and distribution partners, our shareholders, other stakeholders. You know, we're all in this together, and and we will get through this challenging time together.
Most importantly, finally, again, I wanna thank our colleagues around the world. Guys, you you you've exceeded my expectations, and and I could not be prouder of of what we've accomplished together over the last few months. So everyone, please be safe and be healthy, and thank you again. Goodbye.
Speaker 0
Ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.