May 7, 2021
Operator
Good day and welcome to AIG’s First Quarter 2021 Financial Results Conference Call. Today’s conference is being recorded.
At this time, I’d like to turn the conference over to Ms. Sabra Purtill, Head of Investor Relations.
Please go ahead.
Sabra Purtill
Thank you. Good morning and thank you all for joining us.
Today’s call will cover AIG’s first quarter 2021 financial results announced yesterday afternoon. The news release, the financial supplement and financial results presentation were posted on our website at www.aig.com and the 10-Q for the quarter will be filed later today after the call.
Peter Zaffino
Hello and thank you for joining us today. This morning, I will start our call with a high-level overview of AIG’s consolidated financial results for the first quarter.
I will then review results from general insurance and the significant progress we have made with our portfolio, which allowed us to pivot from remediation to growth heading into 2021. Following that, I will review first quarter results for Life Retirement.
I will then provide an update on the work we are doing on the separation of Life Retirement from AIG. And lastly, I will provide an AIG 200 update.
Mark will give you more details on the financial results and then we will take questions. AIG had an excellent start to the year and we have significant momentum across the entire organization.
In the first quarter, we delivered outstanding performance in general insurance. We saw continued solid results in Life Retirement.
We made meaningful progress on the separation of Life Retirement from AIG and we significantly advanced AIG 200 with the transformation remaining on track to deliver $1 billion in savings by the end of 2022 against the cost to achieve of $1.3 billion. In addition, our balance sheet and financial flexibility remain exceptionally strong, allowing us to focus on profitable growth across our portfolio; prudent investments in modern technology and digital capabilities; separating Life Retirement from AIG in a manner that maximizes value for our stakeholders and positions both companies for long-term success and returning capital to our shareholders when appropriate.
Mark Lyons
Thank you, Peter and good morning everyone. Since Peter has already provided a good overview of the quarter, I will just add that we posted a 7.4% annualized adjusted return on common equity at the AIG level, an 8.2% adjusted return on tangible common equity at the AIG level, an 8.5% adjusted return on segment common equity for General Insurance and a 14.2% adjusted return on segment common equity for Life and Retirement.
Now, moving to general insurance, first quarter adjusted pre-tax income was $845 million, up $344 million year-over-year, primarily reflecting increased underwriting income in international as well as increased global net investment income driven by alternatives. Catastrophe losses totaled $422 million pre-tax or 7.3 loss ratio points this quarter compared to 6.9 loss ratio points in the prior year quarter.
The cat losses were mostly comprised of $390 million related to the winter storms, primarily impacting commercial lines, including AIG Re. The net impact of the winter storms reflects the benefit of our commercial reinsurance program and changes to our PCG portfolio as a result of Syndicate 2019.
Overall, prior year development was $56 million favorable this quarter, which included $58 million of net favorable development in North America, driven by $52 million of favorable development from the ADC amortization and $2 million of net unfavorable development in international. It’s worthwhile to note that general insurance still has $6.6 billion remaining of the 80% quota share ADC cover.
There was also, embedded within these figures, $33 million of unfavorable development related to COVID-19 claims that relate back to 2020 loss occurrence or a movement of less than 3% emanating primarily from Validus Re and Talbot are Lloyd’s Syndicate. Our general insurance business continued to materially improve driven largely by strong accident year 2021 ex-cat showings in both North America and international commercial lines.
So rather than double up on facts that Peter has shared, the main drivers of the attritional underwriting gain improvements were for North America Commercial, Lexington, Financial Lines and Excess Casualty. And from international commercial, the main drivers of improvement stem from property, Talbot and Financial Lines.
As Peter noted, on a global commercial lines basis, the accident year combined ratio, excluding cat, was 90.4%, which represents a 440 basis point improvement over the prior year’s quarter, with 75% of that improvement attributable to a lower loss ratio and 25% of the improvement attributable to a lower expense ratio. Turning to personal insurance, starting in the second quarter of this year, meaning next quarter, our year-over-year comparisons will begin to improve given the timing of the initial COVID-19 impact and the formation of Syndicate 2019 in May of 2020.
Although North American personal lines had a 74% drop in net premiums written, as Peter highlighted, it’s also important to understand that the other units within the segment, which represented nearly 50% of the quarter’s net earned premium, is comprised mostly of warranty and personal A&H business, had their net premium only falloff marginally. Our international personal lines business, which by size, dominates our overall global personal insurance business, continues to perform well with 150 basis points improvement in the accident year ex-cat combined ratio, reflecting an improved loss ratio and expense discipline.
Now, to expand on some of Peter’s marketplace commentary, various areas continued to accelerate the adequacy of achieved rate beyond that of prior quarters. For example, the level of excess casualty rate increases continued and then many units exceed prior results, such as cat excess coverage out of Bermuda, North America Corporate and National Admitted Excess and the Lexington.
The increase achieved in the first quarter of 2020 and compounded in the first quarter of 2021 alone, ignoring prior to 2020 rate increases, exceeded 150% for Bermuda-based capacity business, which makes sense given recent years’ price efficiency on these capacity excess layers, and approximately 115% for the other mentioned units. U.S.
Financial Lines on the same compound basis has seen an excess of 80% increases for the staples of D&O and EPLI. Internationally, the 14% first quarter overall rate increase saw continued rate expansion in key markets such as the UK at plus 23%; global specialty at plus 15%; Europe and the Middle East at 14%; Latin America at 13%; and Asia-Pacific also at 13%, when excluding the tempering influence of predominantly Japan at 3%.
Lastly, cyber achieved our highest rate increase yet at 41% for the quarter. These increases are clearly broad-based by region and line of business all around the world.
I would now like to spend a few minutes on two observations: one, the impact of net rate change versus gross rate change; and two, some examples of new business rate adequacy relative to a renewal rate adequacy. So first, our achieved North America commercial rate change for the quarter on a net basis is now estimated to be at least 150 basis points stronger than the corresponding gross rate change largely due to our increased net positions across selected product lines.
Last year, much of the achieved growth rate increase was being ceded to re-insurers, where now there is much less so. The shift to higher net positions resulted directly from our prior stated strategy of improving the gross book such that we had increased confidence to retain the appropriate amount of net and because we could not take a higher net position previously because of the legacy imbalance of very large limits written.
Now moving on to relative rate adequacy, we see continuing indications in North America of new business having stronger relative rate adequacy over renewal rate levels in most lines of business. This likely doesn’t reflect different class mixes, but instead an additional margin for a lesser known exposure.
However, this should be expected and is also historically supported, given where we are in the underwriting cycle as new business is less established with an insurer versus an existing client renewal relationship. A further related item involves renewal retention.
As General Insurance implemented revised underwriting standards, renewal retentions predictably would have been impacted, especially in the target line. Now even with superior risk selection, rate and term condition changes that have been achieved, renewal retentions have improved to the mid-80% in the aggregate across all commercial lines in both North America and across internationally.
We also see improvement in the Lexington, where E&S has lower industry retentions based on the nature of the business, and this is very positive for the book. And we see it across specialty lines and across most admitted retail books.
This is indicative of the re-underwriting actions being successful, having settled down and now with General Insurance being comfortable with the underlying insured exposures that meet our risk appetite. Based on current market conditions and our view of the foreseeable future, we continue to anticipate earned margin expansion throughout 2021 and into 2022, resulting from AIG’s favorable underwriting actions taken, favorable global market conditions, materially improved terms and conditions and a more profitable, less volatile business mix.
As a result, I would like to reconfirm our outlook for a sub-90% accident year combined ratio, excluding cat by the end of 2022. Global commercial lines are very nearly at the sub-90% level now, and global personal lines is running at 96% for the first quarter.
Given our portfolio composition, the market conditions and our strategic repositioning of North America personal, we anticipate greater continued margin expansion within commercial lines than personal lines. We are highly confident that we will achieve our sub-90% target and have several paths to help us get there, some via mix, some via reasonable market conditions persisting and some via expense levers.
Now, I would also like to unpack some of Peter’s high level net written premium growth comments for 2021 with an emphasis here on next quarter – second quarter. North America commercial is expecting to see growth of approximately 10% for the second quarter of 2021 relative to the prior year quarter driven mostly from Lexington across a host of product lines and admitted casualty, both primary and excess.
This growth will be two-pronged as growth on the front end will be coupled with lower reinsurance sessions, especially from those lines subject to the casualty quota share. North America personal is expected to see significant second quarter 2021 growth, but it is driven by the Syndicate 2019 reinsurance session change that we have been signaling.
You will recall North American personal had a negative $150 million net written premium in the second quarter of 2020 due to many Syndicate 2019 treaties becoming effective, including an unearned premium cover for the PCG high net worth book. That distortive spike in session, which is not repeatable in the second quarter of 2021, will give the appearance of considerable growth, but instead will provide a PCG net premium that is more stable on an ongoing basis.
So overall, for North America, both personal and commercial combined, we anticipate net written premium growth between 35% to 40% for the second quarter over the second quarter of the prior year. International commercial in the second quarter of 2021 is expected to be roughly plus 7% net written premium growth driven by Global Specialty, Financial Lines and Talbot, and international personal is expected to be approximately flat relative to the prior year quarter.
Now turning to Life and Retirement, adjusted pretax income increased by 57% or $340 million compared to the first quarter of 2020 with favorable equity markets driving higher private equity returns, lower deferred acquisition cost amortization, a rebound in most areas of sales and higher fee income. The increase also reflects favorable short-term impacts from tighter credit spreads driving higher call and tender income and higher fair value option bond returns.
This increase was partially offset by adverse mortality as U.S. COVID-related population deaths of approximately 205,000 in the first quarter were higher than earlier anticipated, which was also reflected in our own experience.
In terms of premiums and deposits, we continued to see encouraging improvement in retail sales. Individual retirement premium and deposits grew 8% from the prior year quarter, which we consider a pre-COVID quarter as the sales pipeline carried through March of last year with index and variable annuities, both exceeding prior year levels.
In Group Retirement, group acquisition deposits increased significantly from prior year, although both periodic and non-periodic deposits declined leading to a marginal reduction in overall gross group premiums and deposits of 2%. In Life Insurance, premiums and deposits grew 6% overall with year-over-year growth in both the U.S.
and international. Finally, while institutional markets did not conclude any significant pension risk transfer transactions in the quarter, the pipeline of direct and reinsurance transactions going into the second quarter is very strong, particularly with many defined benefit plans nearing fully funded status.
Turning to net flows and related activity, our portfolio reflects the dynamic environment quarter-by-quarter of the last year. Individual retirement net flows improved by approximately $1 billion over the first quarter of 2020 driven by variable annuities and retail mutual fund.
And yet when excluding retail mutual funds, net flows were positive, led by index annuities rebounding to be plus $1 billion for the quarter, which is virtually identical to 1 year ago, but with steady progress from a low of $439 million in the second quarter of 2020 to the plus $1 billion this quarter. Surrender rates were up slightly over the last few quarters within individual retirement, for fixed and index, whereas variable annuity surrender rates have been more comparable as have for group retirement.
Similarly, the Life business has seen consistently lower lapse and surrender rates over the last 4 quarters than prior. Life and Retirement continues to actively manage the impacts from the low interest rate and tighter credit spread environment, and the previously provided range for expected annual spread compression has not changed.
New business margins generally remain within our targets at current new money returns due to active product management, disciplined pricing approaches and our significant asset origination and structuring capabilities. Moving to other operations, adjusted pretax loss was $530 million, which was inclusive of $176 million of losses from the consolidation and eliminations line, which principally reflects adjustments offsetting investment returns in the subsidiaries by being eliminated in other operations.
So, it wouldn’t be double counting. Before consolidation and eliminations, adjusted pretax loss was $354 million, which was $481 million better than the first quarter of 2020, which included a $317 million adjusted pretax loss related to Fortitude and a $30 million one-time cash grant given to employees to help with unanticipated costs when the global pandemic began last March.
The first quarter also reflects lower corporate interest expense and lower corporate general expenses, and we expect this to continue throughout 2021. However, one might expect some continued volatility within the consolidation and eliminations line, which can fluctuate based on investment returns.
Now shifting to investment, net investment income on an APTI basis was $3.2 billion or $492 million higher than the first quarter of 2020. Adjusting first quarter 2020 for Fortitude’s investment income to make the comparison apples-to-apples, this quarter’s net investment income on an APTI basis was actually $611 million higher than the prior year or plus 23%, reflecting strong private equity and real estate returns as well as bond tender and call premiums, which more than offset the lower income on the AFS fixed income portfolio.
We continue to have a high-quality investment portfolio that is positioned well under any market condition. Turning to the balance sheet, at March 31, book value per common share was $72.37, down 5.3% from year end, reflecting net unrealized mark-to-market losses on the investment portfolio.
Adjusted book value per share was $58.69, up nearly 3% from December 31. At quarter end, AIG parent, as Peter noted, had cash and short-term liquidity assets of $7.9 billion, and we repaid our March debt maturity of $1.5 billion and repurchased the $362 million of shares, as Peter outlined.
Our GAAP debt leverage at March 31 was 28.4%, flat to year end, given downward fixed income market movements negatively impacting AOCI despite the repaid debt maturity mentioned earlier. Our primary operating subsidiaries remain profitable and well capitalized.
For General Insurance, we estimate the U.S. pool fleet risk-based capital ratio for the first quarter to be between 465% and 475%, and Life and Retirement fleet is estimated to be between 435% and 445%, both well above our target ranges.
And with that, I will now turn it back over to Peter.
Peter Zaffino
Thank you, Mark. And Jake, I think we are ready to start Q&A.
Operator
And we will begin with Elyse Greenspan with Wells Fargo.
Elyse Greenspan
Hi, thanks. Good morning.
My first question is on the – sorry, the Life and Retirement separation. I appreciate the update in terms of working towards the IPO.
Is the plan in terms of timing for that to still take place at some point later this year or do you have a more finer tune around that?
Peter Zaffino
Yes. Thanks, Elyse.
As I said in my prepared remarks, we are working with a sense of urgency on the IPO. We have made really significant progress working on standalone financial statements, actuarial, have set up the organization to operationally separate.
So, we are working very hard on several fronts related to the IPO. I mean the ultimate timing of completing this step, it should depend on a number of factors.
Some are out of our control, such as regulatory and market conditions. But we are still working towards the same timeline, which is by the end of 2021.
But again, depending on those factors, it could always slip into the first quarter 2022. But it’s – the company is focused, and we are going through all the details and moving forward.
Elyse Greenspan
Okay. And then my second question is on the market commentary you guys gave.
A lot of helpful color. Mark, you said that you guys expect continued earned margin expansion throughout 2021 and into 2022.
So, is – I guess you are kind of giving us a market view, it sounds like, for the next year. Is the expectation that rates would stabilize and get closer to trend in 2022?
I am just trying to put that together. You are just kind of giving us the outlook that rates should remain strong through 2021.
And then we will see how 2022 transpires with earned versus plus trends?
Peter Zaffino
Let me start with your question on rate, and then I will turn it over to Mark to provide a little more context and then talk about the earned. But I think, look, this is the third year where we are seeing rate, at least at AIG, above loss cost.
And again, you really have to just take a look at the overall portfolio because quarter-to-quarter, it may be a little bit different, meaning just the seasonality of our business, whether it’s Validus Re having a big inception date in the first quarter, crop specialty Europe driven more towards the first quarter. So when we look at it, we are looking at first quarter to first quarter, and there has been no slowdown in terms of the rate environment and believe that we are building margin above loss cost rate on rate.
And I think that’s kind of where Mark was alluding to. The market environment, at least always hard to predict, but we think the market that we are in is the market we are going to see for the remaining part of the year, and it’s very hard to predict beyond that.
Mark, do you want to add any more context?
Mark Lyons
Just a bit. Thank you, Peter.
I think Peter nailed it both, Elyse. But I want to reemphasize, though, what Peter said.
Every quarter’s mix is pretty different. And I know that’s a written viewpoint that earns in.
But we have already written business in – that we can – last year that’s going to earn in 2021. And we have already written 1 quarter that’s going to go into 2022.
So, we are not counting – we believe we are going to have the margin expansion, as denoted, that doesn’t really depend on the existing level of rate levels in the market.
Elyse Greenspan
Okay. Thanks for the color.
Peter Zaffino
Thanks Elyse. Next question please.
Operator
Next question will come from Brian Meredith with UBS.
Brian Meredith
Yes. Thanks.
So, a couple here. Quickly, just Mark, I am curious, you said you had some COVID development in the quarter.
Where did that come from? And are we pretty close to, you think, kind of being done with the COVID-related losses, at least in the General Insurance business, I understand there could still be some more in Life?
Peter Zaffino
Go ahead Mike.
Mark Lyons
So yes, we can localize a lot of that to contingency business out of Talbot. And on Validus, I think there was really just 2 contracts involved.
So, it’s not like a widespread in any way. So, that overwhelmingly accounts for it.
And I think for your second question, yes, we didn’t put any additional provisions. We are happy where we are associated with it.
So I think we are on the down flow, to say the least.
Brian Meredith
Got it. And then my second question, I guess, for Peter for both of you all.
What is your kind of view with respect to loss trend or kind of inflation and loss trend as we kind of – the economy reopens here, courts reopen, kind of how are you thinking about that from a reserving perspective and maybe also from a pricing perspective?
Peter Zaffino
Yes. So, I will have Mark add to my comments.
We are watching it very carefully, Brian. It’s something that, again, as it emerges throughout the world, the economy starts to reopen.
We look at it line of business by line of business, lead versus excess, different trends that we are seeing in the portfolio emerging over the last year and then how we forecast that to look for the future. So, I think the balance of the portfolio is being shaped in a way to mitigate that.
And we are very focused on making sure that even in the growth that we outlined in the first quarter that we are growing, where we know that we are going to get the risk adjusted returns in terms of deploying the capital. So, I think we are very disciplined.
It’s circular with underwriting actuarial claims. We are learning a lot and making sure that we are positioned the portfolio accordingly.
Mark, do you want to add anything to that?
Mark Lyons
Yes. Thank you, Peter.
I think I may have commented on this before, but I think it’s probably worth bearing again is, long-term there has generally been a 200 basis point addition beyond economic inflation for social inflation. Clearly, that’s been south of that over the last few years.
But that’s one way of looking at it by having a range of loss trends and not necessarily just point estimating it, and it really varies by line of business, clearly. I think in the past, I have also commented that our loss trend in excess casualty, for example, is very close to double digits, number one.
And so really it varies across the board. And when you get to Peter’s comment on portfolio, think of the best way to insulate yourself from unexpected spikes in economic or social inflation, irrespective of which one, is by having the portfolio change.
And the mix away from leads and having more mid excess, not just in casualty, but other places, aggregately moves that portfolio further away from risk insulating you more from any compound views of that. So, I think that’s how we look at it.
And I think all of that is important when it comes to bear.
Brian Meredith
Yes. Mark, I was just part of my question, though, was I was just asking this, do you think about when you make reserve assumptions or pick assumptions, are you making different assumptions with respect to what potential loss trend in when you are pricing the business?
Mark Lyons
Not materially because you have calendar year views, right? So, claims when they are settled or when they are reported don’t care what their accident year was.
Brian Meredith
Got it. Thank you.
Peter Zaffino
Thanks Brian. Next question.
Operator
We will now hear from Paul Newsome with Piper Sandler.
Paul Newsome
Good morning and congratulations on the quarter. I was hoping you turn to maybe a big picture question about the life insurance business.
And just – is there kind of a path to positive net flows? Obviously, the institutional business is volatile quarter-to-quarter.
But maybe you could just give us a sense of – especially as we get closer to thinking about the IPO, how those net flows might recover to a positive level?
Peter Zaffino
Okay. Thanks, Paul.
Kevin?
Kevin Hogan
Yes. Thanks, Paul.
Look, net flows reflect the trends of premiums and deposits as against the surrender behavior. As Mark pointed out, we haven’t really seen much material change in the surrender behavior a little bit within sort of expected margins.
But premiums and deposits is really another story. And we said that the second quarter last year was going to be the low water mark.
It certainly was. And in fact, the first quarter of this year is one of the largest sales quarters we’ve had in the individual businesses since we created AIG Financial distributors.
And while the month of January was actually still below last year, and we consider last year’s first quarter a pre-COVID quarter because, really, the pipelines were full right through March, April, we saw growth from February over January, March over February a pretty significant growth. So the end of the quarter, we’re really back at what we consider to be normal run rates for that business and as Mark pointed out both index and variable annuity very strong for us there.
And so the one line of business, fixed annuities, they are a little bit lower than historical levels, but we also saw recovery in fixed annuities towards the end of the quarter. And so we’re feeling optimistic about the forward curve for the individual business.
And as Mark pointed out, across annuities, because we’ve announced relative to the retail mutual funds, right, we had positive flows. So I’m confident relative to the flows in the Individual Retirement business.
For Group Retirement, it’s a little bit of a different story. The group acquisitions, the new group acquisitions actually were one of our strongest quarters and increased by $150 million over the prior year, whereas periodic were down about $50 million, and I think that reflects furloughs and people leaving the workforce.
And then the non-periodic were also down a little bit for a variety of reasons. And in the Group Retirement business, we still see some modest negative flows.
But I think that reflects the fact that we’re a small, medium-sized plan provider. And in the consolidation that continues to go on in health care, we do see some of that large case consolidation.
But the assets under management have continued to grow, obviously, supported by equity markets, and that’s an important base of earnings for the fee side of the business. So we feel confident.
We’re being careful about capital deployment. We’re seeing conditions improve, and our diverse product range and channel allow us to be careful where we deploy the capital, and we’re seeing that start to come through in the first quarter.
Paul Newsome
Is there a market component to – or an interest rate component to keeping the ROE at least stable in the life business, in your opinion?
Kevin Hogan
Well, certainly, we provide the sensitivities and depending upon where equity markets are, where interest rates are, where credit spreads are and which way they are going, they have kind of a short-term impact on earnings volatility, but we price our products to make sure that we’re making our returns based on broadly expected market conditions, not necessarily a single deterministic scenario. So we’re not relying on market returns necessarily in the pricing of our products.
Peter Zaffino
Thanks, Paul. Nest question?
Paul Newsome
Thank you.
Operator
Next question will come from Ryan Tunis with Autonomous Research.
Ryan Tunis
Thanks. Good morning.
I had one for Mark, and would you even be interested in David’s thought if he’s on the call. But I guess thinking about classic economic inflation, wage-driven, historically been kind of bad for workers’ confidence.
It’s been a long time since we’ve had it. Are the risks from that type of scenarios on that line kind of still the same as they were 20 years ago?
Or are there mitigating factors? Just how are you thinking about workers’ comp, if we do have just a normal inflationary economic cycle?
Peter Zaffino
Let me start. You got to remember that two-thirds of our business is on high retentions.
And so the fluctuation of frequency and wage inflation and loss cost inflation is largely retained by our clients. I mean so we’ve seen some fluctuation just because of high attachment points in which we have in the workers’ comp book.
And so Dave has been working really hard on our large account business as well as workers’ compensation in terms of the positioning in that. And I think the attachment points, the positioning of the book is really important.
Dave, do you want to just talk a little bit about what you’re seeing in the marketplace and how we are reacting to it?
David McElroy
Yes. Thank you, Peter.
The – I think workers’ comp, I think there was some concern with COVID that there would be presumption. That mostly does not affect our book, okay, because of the high retentions that our clients have that’s very different than the middle market books and the small commercial books that might exist.
I think the more illuminating issue is that workers’ comp has been a profitable line, whether it was the state laws that muted it. And often, we get lost in our generalization of what is rate increase.
Workers’ comp has had modest to negative rate increase because it’s been profitable for the industry. And I think it’s very important for everybody to understand that, that’s a discrete market and a lot of the different parts of the market that we trade in, we – that’s absorbed by our clients.
So the – if that same client has general liability or Financial Lines or even property, that’s a different market with different pricing than might be existing in the workers’ comp market. So workers’ comp market has actually worked.
And everybody talks about it in terms of the rate increase, but that’s a discrete type market that reflects that. And I think our industry is fairly sophisticated to understand why that happens and then why other businesses need rate or need rate to expect – to reflect exposure.
So it’s – that’s the workers’ comp market. It’s been a winner for this industry because of the reforms that happened at the state level.
Mark Lyons
Ryan, I’d add just one quick thing, if I could. You really started the question in the correlation on wage.
And given Peter really talking about two-thirds of the book is really low sensitive over high attachment points, it’s actually more of a medical question than a wage indemnity question because medical trend is what could sneak over, especially on major permanent partial and things of that nature and permanent totals. So that’s why it was actually a – we’re in a really good position on that because of the analysis that was done about 3 years ago on that book that’s still holding today.
So, all those past assumptions are absolutely holding.
Ryan Tunis
Understood. And then my follow-up is just thinking about – you’re running at a little bit over 92, so you need about 2 points to get sub-90.
Just you said rate alone, I assume, would be able to get you there. Obviously, I think that there are some offsetting headwinds or just other things that along the way you got to get past.
I’m not sure if that’s more new business or what, could you just remind us of some offsets to rate in terms of getting down to that 90 over the next couple of years?
Peter Zaffino
Thanks, Ryan. So there is multiple factors in terms of driving the sub-90 combined ratio.
One is we had a terrific start to the year, and so you can see we’re driving top line growth, driving margin, improving combined ratios. So we like the momentum that we have.
I think we’re going to focus on continuing on the underwriting side. Certainly, the culture we’re building out of risk selection, terms and conditions, making sure that we’re getting rate above loss cost is the discipline that Dave is driving through General Insurance, and they are doing very well.
I think you’ll start to see – I talked about in my prepared remarks, the AIG 200, while we announced run rate, we got to catch up a little bit in terms of some of the implementations. So we know that we have expense tailwinds in terms of what will be coming through with AIG 200, in addition to that, just normal expense management and being very disciplined on reinvestment and making sure that we are a company that’s very focused on ways in which we can improve what we’re doing and create our own investment capacity.
I think you’ll start to see the earned premium increasing from growth and strong new business. International had the best quarter new business that they have had since the new teams arrived.
So that’s – there is a lot of momentum there and then expect to see new business pick up as we continue throughout the year and the economy starts to recover. And then what I also mentioned in my prepared remarks is that we are not going to need as much reinsurance going forward just based on the gross portfolio.
And so like we needed to probably buy a little bit more cat a little bit more on the risk side. Those are all improving, and those will be tailwinds over a period of time.
So there is four or five components that will drive improved combined ratio in the subsequent quarters and into next year. Next question, please.
Operator
We will hear from Brian Shields with KBW. Meyer Shields, go ahead.
Meyer Shields
Good morning. Can you hear me?
Peter Zaffino
Yes, Meyer.
Meyer Shields
Okay. Sorry about that.
So Mark, I’m trying to tie together a couple of comments because you’re expecting, if I understand correctly, margin improvement into 2020. But we still get below the 90% on the underlying by year-end.
So does that mean that we should expect to be there sooner if you won’t need margin improvement later in 2022 get below 90?
Mark Lyons
Let me just start with that, Peter?
Peter Zaffino
Yes. Go ahead, Mark.
Mark Lyons
So I think what we’re trying to say in various ways is that looking sequentially is really not the way. You’ve got to really look at it quarter-over-quarter for the points that Peter brought up before about the mix being pretty different, the fact that although we’ve reduced the volatility dramatically, we still write volatile lines, right?
So you still have a pop here or there that may not have really occurred in this quarter or the last quarter that still could at another time. We really need to see a few more accident quarters, if you will, pop in before we can declare victory in that sense.
So, you can’t look at each quarter as a totally independent standalone on ?
Meyer Shields
Okay. That makes sense.
The second question, I guess you talked about cyber rate increases. And I don’t know whether sort of the way we typically think about trend is relevant.
But is there any way you can outline how cyber loss expectations are changing?
Peter Zaffino
Dave, do you want to take that?
David McElroy
Yes. The – thank you.
The – when we looked, sometimes there is – we index off of rate increases and in fact, a big part of our story here at AIG has actually been risk elected and limit management and retentions and terms and conditions. And cyber was this year’s case stuff, okay?
It had been a profitable business. Ransomware started showing up.
And what we’ve done is we’ve cauterized that with sub-limits and coinsurance to reflect the fact that we’re a big primary player, and we need to manage ransomware, and that’s what we’ve done. And our renewal retention has come down.
Our rate increase, which maybe something cited and exciting for others, is up 40 – it’s 41% But for us, it’s actually managing the risk on the other side. So I look at that rate increase as a factor as opposed to our not only vertical but horizontal risk.
It’s a tough risk. We have it worldwide.
We’re leaders. We’ve been very active in terms of our prophylactic and our involvement in terms of trying to stem the actual loss itself.
And we look at that as a viable product that we have controlled horizontally with reinsurance and vertically with reinsurance and with partnerships. And we look at that not only like every other specialty business that we have in this company.
We have a lot of them. We have to attack it and we have to underwrite it with the facts of that business, and that’s what we’re doing.
It should be – it should scare the industry. It certainly gives us pause, and that’s why we’ve been underwriting it very aggressively over the last 3 years.
Meyer Shields
Okay. Thank you.
Peter Zaffino
Thank you, Dave. I think, we have time for one last question.
Operator
That last question will come from Tom Gallagher with Evercore.
Tom Gallagher
Thanks. Peter, just first a question on decision to pursue the IPO versus the private sale.
Was it mainly because we’ve gotten so much improvement in peer L&R public valuations that the gap narrowed where it wouldn’t give you as much of a benefit? But any color you can give us as to what drove that decision?
Peter Zaffino
Thanks, Tom. That is certainly one component.
We always said the base case was going to be the IPO of 19.9%. So when we had entertained some of the inbounds from terrific companies, we evaluated the relative merits of the sale compared to the minority IPO.
We took into account value creation, execution certainty, regulatory and rating agency implications. The delivery of Life Retirement growth strategy over the long-term, where we’re going to be making the right investments to make sure we’re getting the value of the 80.1%, it’s a great business.
And so we want to make sure that we are investing in it. And so when we weigh all those merits, ultimately, we felt that an IPO was going to fulfill the value for our stakeholders and decided that, that was the appropriate path for us.
Tom Gallagher
Okay, okay. Thanks.
And then just a follow-up for Kevin on L&R, I think – Peter, I think I heard you say you’re reiterating the 8 to 16 basis point spread compression guide. I guess my question is interest rates have risen a pretty good amount.
Would you change within the 8 to 16 basis point band where you expect to operate? I think you used to say it was toward the high end of that?
Peter Zaffino
Kevin, do you want to finish?
Kevin Hogan
Yes, absolutely. Yes, Tom.
We have moved from the high end of the 8 to 16 towards the middle to the lower end based on the recent improvement in the yields. You have to monitor, obviously, the combination of where credit spreads are versus where actual base rates are.
So it’s not all what we saw in the base rates. So I have to look at the total reinvestment position.
Peter Zaffino
Alright, great. Thanks everyone for joining us today and have a great day.
Operator
And with that, ladies and gentlemen, this will conclude your conference for today. Thank you for your participation and you may now disconnect.