American International Group Inc (AIG) 2005 Q2 法說會逐字稿

Good morning and welcome to today's AIG conference call.

All parties will be in a listen-only mode for the duration of the call until the question-and-answer session.

Today's call is also being recorded.

I would now like to turn the call over to Miss Charlene Hamrah, Vice President and Director of Investor Relations.

Thank you, Ms. Hamrah.

You may begin.

Thank you very much.

Good morning, and thank you all for joining us this morning to discuss our second-quarter earnings report.

Before we begin, I would just like to remind you that the remarks made today may contain forward-looking statements.

Please refer to the AIG annual report on form 10-K for the year ended December 31, 2004, the AIG quarterly reports on Form 10-Q and AIG's past and future filings and reports filed with the SEC for a description of the business environment in which AIG operates and (technical difficulty) that may affect its business.

AIG is not under any obligation and expressly disclaims any such obligation to update or alter its forward-looking statements, whether as a result of new information, future events or otherwise.

The information provided today may include certain non-GAAP financial measures.

The reconciliation of such measures to the comparable GAAP figures are included in the supplementary financial data that is available in the investor information section of AIG's website.

And now, I would like to turn this conference call over to Martin Sullivan.

Thank you, Charlene, and good morning, ladies and gentlemen, and thank you for joining us this morning.

I would first like to make some opening remarks, and then my colleagues and I would be very pleased to answer any questions you may have.

First of all, I am very pleased to report that in the quarter, where a lot of time and energy was spent conducting our internal review and issuing our Form 10-K on May 31st, we nonetheless remained very focused on our business, resulting in the following.

First, net income of almost $4 billion, an increase of 51%, or $1.53 per share, an increase of 52%.

Second, adjusted net income, excluding the cumulative effect of the ILFC correction, of some $3.3 billion, an increase of 14%, or $1.27 per share, an increase of 16%.

Third, total revenues of $26.9 billion, an increase of 47%.

Fourth, insurance cash flow of almost $12 billion.

Fifth, shareholder equity as of June 30th of almost $89 billion and consolidated assets of some $829 billion.

And lastly, an annualized return on equity for the second quarter of 18.6%.

Turning specifically to the four segments of our business, first in General Insurance, which had an excellent quarter, with income before realized capital gains/losses of 21% to $1.7 billion and a combined ratio of 92.04%. (technical difficulty) accruals of $100 million including estimated interest to cover our current estimate of the liability related to the previously disclosed workers' compensation issues on policies written between 1985 and 1996.

The growth in net premium written was impacted through the quarter by continuing reduction in pricing, although terms and conditions, such as deductibles and policy forms, are holding reasonably well.

We continue to focus on generating underwriting profits, and will not pursue business below a level where we do not believe this to be possible.

The combined ratios for the two largest units within General Insurance, namely the Domestic Brokerage Group and Foreign General, were 96.05% and an excellent 82.04%, respectively.

During the quarter $1.24 billion was added to loss reserves on a U.S. dollar basis.

On a local currency basis, loss reserves increased by some $1.6 billion.

We also received our license to begin operations in the Republic of Georgia and news that the Vietnamese government will grant us the general license by the end of this year, complementing the life license we already have.

I would also like to advise you that Milliman have begun the comprehensive independent actuarial loss review we previously announced.

Our Life and Retirement Services division had a good quarter, with operating income before realized capital gains/losses up 13% to $2.4 billion.

Premiums, deposits and other considerations grew 5% to $17.1 billion, while GAAP premiums grew 7% to $7.3 billion.

As we had previously anticipated, revenues were adversely affected by the slight yield curve and some cautiousness by certain of our distribution partners in North America.

I am pleased to say that some of this caution has dissipated over the past 60 days, and we are gaining sales momentum in our domestic, independent distribution channels.

The Foreign Life and Retirement Services division had a particularly good quarter, with strong sales in Japan, Korea and Taiwan.

Personal accident sales were also strong, particularly in China, Korea, Hong Kong and Thailand.

Annuity sales in Japan and Asia were also very strong.

Within our Financial Services Segment, Consumer Finance did exceptionally well in the quarter, with operating revenue and income up 23%.

Operations domestically and internationally performed well, with delinquency ratios well within acceptable margins.

Our Capital Markets business was adversely affected by difficult market conditions and customer uncertainty during much of the quarter surrounding the negative publicity and ongoing investigation.

Now as you will note from its 8-K, ILFC will be restating its financial statement.

This statement arises from two issues.

First, ILFC has taken into its financials the portion of the FAS 133 adjustment relating to ILFC that AIG included in its restatement.

Second, ILFC has determined that its prior accounting for seven manufacturer payments was in error.

These details are discussed fully in our 10-Q and ILFC's 8-K.

The cumulative effect of AIG's second-quarter earnings was a decrease of $333 million to net income.

We will be contributing $400 million to the capital of ILFC by the end of this week.

Now this raises an obvious question as to why the manufacturer's payment correction was not included in AIG's restatement.

In its internal review, AIG focused on its critical accounting policies and lines of business and looked deeply at all areas in which our management, regulators, employees or the results of our review raised concerns or questions.

The ILFC issue did not relate to any of the areas of concern raised in that process.

It simply fell outside even the very comprehensive scope of our internal review.

Operating income in the Asset Management division was up 10% at $475 million before the impact of FIN 46R and 8.4% thereafter.

Third party assets under management increased by some $6 billion to $61 billion in the quarter, and significant mandates for certain of its funds and strategies resulted in new assets for the International Asset Management business.

The sharp decline in second-quarter GIC deposits reflects a delay in the launch of AIG's previously announced matched investment program.

Overall, I am pleased to say that in a quarter where great demands on the organization from outside our fundamental business, AIG performed very well and demonstrated great resilience with the diversity of the Company never more visible.

Now before we take your questions, once again, I have to advise we cannot respond to any questions relating to the regulatory investigations, other than to say we continue to co-operate with all the authorities to the fullest extent possible.

I personally, however, would like to thank all of you for the professionalism you have demonstrated throughout these calls by adhering to this request.

I can tell you it is greatly appreciated by all of us at AIG.

Now we would be more than happy to take your questions.

(OPERATOR INSTRUCTIONS) Jamminder Bhullar of JP Morgan.

I just have a couple questions.

First, if you could give us the benefit to the GIC business in terms of revenues from SunAmerica partnership earnings.

And then I have a follow-up.

I think while Jay (ph) is looking for that information, would you like to give us the second part of your question?

Sure.

The second one is for Steve.

I think you have commitments to buy about 310 new aircraft scheduled for delivery from '05 to 2010.

If you could just discuss how many of those have already been placed and what sort of the outlook is for the business, and whether you're still getting rate increases in the ILFC business.

Basically, all the new aircraft that are ordered for 2005 and 2006 have been placed.

Roughly a third of our 2007 deliveries are already placed on firm leases.

And actually, we have a quite a few aircrafts 2008 and beyond that have already been leased.

The general business trends have been good.

We recently completed analysis of lease rate trends, and it's showing a positive increase in all geographic areas except North America, which we have deemphasized.

Okay.

I think Jay has the answer to the first part of your question.

Okay.

When you pull down the supplementary financial data, you will see on page 38 a lot of enhanced information.

And on that page, you will see the spread information on the Guaranteed Investment Contract.

It showed that partnerships contributed about 159 million this quarter, straight income, versus 137 last quarter.

And we showed a yield as reported and also the incremental impact of the partnership contribution.

Partnerships contributed about 94 bp on the yield side this quarter versus 78 bp last quarter.

That's all on page 38 of the supplementary data.

Okay, and just one last one, if I could ask.

On the impact of tax credits from synthetic fueling licenses, those are disallowed.

You do mention the total amount of benefit you have gotten over the last several years -- I think it is 875 million.

But what is the amount then in any one specific -- or how much has it been in any one year or a quarter, just so that we can get an idea of what the impact would be if those are really disallowed going forward?

And that's all I have.

Thanks.

Thank you very much.

I think Steve has the answer to that.

Well, in the second quarter of this year, of '05, the amount was a little over $80 million.

So in the second quarter of last year, comparatively, it was a little under 70 million.

So it has been averaging around that kind of a number per quarter.

Okay.

Thanks.

I would just an add, of course, as you've seen fully disclosed in the 10-Q, that AIG strongly believes that the production facilities did in fact meet the placed in service requirements.

But that is fully disclosed, and you can read that in the 10-Q.

Okay.

Dan Johnson, Citadel Investment Group.

Thank you.

Two questions, please.

Just to make sure I understand the math correctly, your pricing net investment gains in the Foreign Life business that you had disclose -- I don't have the page number, but it is back in that segment -- I guess page 30 -- that 100 million of gains, is that included or excluded from your view of adjusted operating income?

This is David Herzog, Dan.

That would be excluded.

That is included in the RCGs that we take out.

Okay.

So it's in the operating earnings in the segment, but when you roll all the segments together, you take the 100 million out.

Correct.

And does the performance of that number going forward, would you consider the 100 million this quarter abnormal, expected, below expected?

It will range (technical difficulty) -- I think if you -- it's opportunistic.

It is principally equity gains, and some of the Southeast Asia.

And there is also some other alternative investment strategies in Japan.

It could range from in the 50, 60, 70 million, that kind of range.

Okay, great.

And then second question on the -- it's probably the Japanese fixed annuity business.

It has grown from kind of single digit billions in reserves to probably approaching 40 now.

Do you think that the returns you are generating off that book of business are now kind of at normal levels, or is there still yet some sort of scale efficiency to come from the next 5 or 10 billion that you put on the books?

This is Ken Nottingham replying.

Certainly we achieve a benefit of scale as this business has grown.

The growth has slowed slightly in the last several months as a result of a combination of factor of slight decline in U.S. interest rates.

You will remember these are U.S. dollar annuities in Japan -- and the depreciation of the Japanese yen, which makes the purchase, of course, of the dollar a little more expensive.

We are still achieving spreads in Japan that are in excess of the normal spreads in the United States.

So the Japanese report fixed product is fundamentally a more profitable product than the typical U.S. domestic market products.

Would you say, though -- and when I'm thinking of not even necessarily spreads -- just thinking bottom-line earnings -- for every billion that you are adding, are you at the scale that the next couple of billion is equally as profitable as what you're reporting now?

I think we've reached scale at this juncture in Japan, and -- but that is not to imply that those margins will shrink in the future.

It is rather that they will not continue to accelerate as we went up the scale.

Thank you very much.

Tom Cholnoky, Goldman Sachs.

Good morning, everyone.

Can you give us a little bit more specifics, please, about the reserve development that you reported in your Q, specifically the strengthening and the release, what lines -- I know you gave some color, but if you can go into a little bit more depth.

And more importantly, given your action with the reserves, what are the implications for the Milliman study on this?

Are you just trying to stay ahead, so should we feel more comfortable about where ultimately that reserve review will come?

Obviously, in the quarter, there is about 400 million that we are seeing of adverse developments, 2001 and prior years, primarily from excess casualty and D&O.

We are also seeing, though, about 350 million of favorable development for accident year 2004 and about 100 million for accident year 2003.

I think with the Milliman study, it has just started.

So that work has just begun, and we will have to see how that develops throughout the next four, five months.

Frank would like to add any --.

On the releases, if you could just give us more clarity.

Is that mostly short tail lines?

Longer tail lines?

What are you actually releasing here?

Tom, this is Frank Douglas.

What we are reporting for accident years 2004 and 2003, which is what I think you're referring to there, is simply the comparison of what losses actually emerged in the quarter versus the expectation based on the 2004 year-end loss reserve study.

When we complete the loss reserve study for each division of the company, we include a projection forward, based on those estimates, of what losses will emerge by accident year each quarter thereafter.

And so when we report to you these quarterly developments, we are giving you that comparison.

So it is not like we are releasing reserves.

We are simply advising that the development from accident year 2004 and 2003 is coming in better-than-expected by the reserve studies, which should lead to favorable development from those accident years.

And obviously, 2001 and prior, you would see adverse development coming in, especially from the classes, as Martin mentioned, excess casualty and D&O.

Right.

But the '03, '04, would that be short tail or long tail where you're seeing the --.

We're actually seeing it across the vast majority of profit centers, Tom, both short tail and long tail.

It is really across the vast majority of profit centers.

There is hardly any profit center showing any adverse development at all from the current accident years, which bodes well for accident year 2005.

I agree.

Okay.

And then just one follow-up, Martin, and I apologize if this falls under your comment about how good we've been about not asking you about regulatory stuff, but --.

We will let you know, Tom.

Do you have any comments at all that you would make regarding Mr. Greenberg's White paper?

I haven't seen it, Tom.

Okay.

Fair enough.

I will leave it at that.

Thank you.

Andrew Kligerman of UBS.

Good morning.

A couple questions.

Net written premium as a percent of gross written premium jumped up to 79.6% relative to 76.5.

I have a few follow-ups, but could you give a little color around your reinsurance buying in the quarter and what the outlook is for the purchase of reinsurance?

As I said earlier, we will continue to apply reinsurance where we believe it is prudent to do so.

I think we bought approximately about 400 million less of reinsurance in the second quarter.

But also that is impacted, Andrew, by the portfolio mix in the various portfolios.

Certainly when you look at Foreign General during the second quarter, there was clearly a switch in emphasis to more consumer-based products than commercial products, which by definition maintains a much higher net retention.

So I think it is a combination of buying reinsurance where it makes sense to do so and the overall portfolio mix of the various P&C businesses.

So more of a portfolio mix.

So that leads me to the next question about gross written premium only going up 0.2%.

Given some of the verbiage that I read about pressure on D&O and other commercial lines of business, what can we look forward to in terms of premium growth?

Does it seem like we are going to see a downturn?

As I said in the press release, I've given clear instructions to our underwriters that we are only going to write business where we believe that we can make an underwriting profit.

And that is the mandate under which they are operating.

And obviously we will not follow rates down below a level where we don't believe we can achieve that.

So from our perspective, we will pursue the quality of business that we believe will achieve those goals.

Okay.

Even if that means a drop-off a little bit --?

If we have to let an account go because we don't think we'll make money on it, we will let go.

Two data questions.

Partnership income on a consolidated basis across all divisions, what was that and what was the yield?

And secondly, Milliman, are they the same firm that annually performs independent reviews each year?

I am looking at Frank.

I don't think we have a firm prepare annual --.

We have not had an independent outside actuarial firm come in.

We have obviously our auditors -- our auditors have their actuary do a review, and state insurance departments, when they examine us, bring in outside actuaries.

But this is the first self-commissioned actuarial review that we've done.

Okay, so typically your auditors would be your accounting firm.

Okay.

And then just with regard to partnership income.

Steve Bensinger has that information, Andrew.

Andrew, in the second quarter, total partnership income totaled a little over $550 million.

And the yield on that is a little north of 10%.

And what would that be relative to last quarter?

Last quarter, we were -- it's slightly lower than last quarter, about $30 million lower than last quarter.

Last quarter was close to 590 million and with similar yields.

Got it.

Okay.

Thanks a lot.

Ron Bobman, Capital Returns.

Good morning, everyone, and thanks to all the members of management for getting so much done so fast.

These last six months must seem like the longest two years of your lives.

I think you've underestimated the two years.

My colleagues appreciate your kind words and they are all nodding in agreement.

I had a couple of questions.

The Company owns -- we own significant but varying amounts of 21st Century, TransAtlantic and IPC Re.

And my question is from, I guess, a strategic and a capital allocation perspective.

What is your view, Martin, on the holdings there, whether they are core or noncore?

And somewhat related, with so much of the investigation revolving around affiliated reinsurance and the restatement, as well, might the intercompany -- the business dealings with a noteworthy TransAtlantic and IPC Re be effective going forward?

Let me take the first part of that question.

Obviously, we are looking at all of the capital allocation within AIG between the various segments, divisions and other interests.

Clearly, 21st Century, TransAtlantic, IPC Re are very important parts of AIG, and I think what the quarter really demonstrates is that the diversity of AIG, whether it is in product or geography, has really paid off.

And looking forward, I think that diversity is really going to serve us very well in the quarter's ahead.

But as I've said on earlier calls, we are looking at all entities of AIG to determine the best return on capital that we can get.

With regard to obviously anything related to the regulatory investigations, I hope you'll forgive me at this stage if I don't respond to the second part in detail of your question, other than to say obviously that we continue to trade business with TransAtlantic and IPC Re.

Thanks a lot, and continued good luck and hard work, unfortunately.

Thank you very much, indeed.

Ron Frank, Smith Barney.

Good morning, everyone.

Good morning, Frank.

Well, my friends call me Ron.

It's been a long (indiscernible), Ron, but I think I've heard that one before.

I'd believe it.

I don't take it personally, Sullivan.

But anyway --.

We needed your humor here a few nights ago.

Just a few things.

First, in the footnotes, in footnote 1 in the Q, in 1C, actually, there is a comment the net pretax charge to operating income for adjustments from prior periods was approximately 375 million.

Does that somehow relate to the 516 for ILFC, or is that apples and oranges?

I was wondering if you could help me with what that means.

Steve has the response to that, Ron.

Ron, it does.

The 516 is part of the 375 , and then that is offset by the difference, which relates principally to a true-up that we booked in the second quarter relating to FAS 133, which was included in both realized capital gains and also in the FAS 133 gains and losses, which are included in the determination of our adjusted net income.

So it is the 516 less that true-up that gets you to the 375.

Okay, but the adjusted operating number, the reason you excluded the 516, not the lesser number, is because that difference comes out in other adjustments when you get to operating income.

Exactly.

Okay, great.

Second, there was a reference in the Q to A&H claims being up in Southeast Asia, and that caught my eye because that is such a great business for you.

And I was wondering if you could elaborate.

Edmund is going to add a little color.

Edmund Tse here.

Over the past couple years and because of decline in the interest rate, (indiscernible) our profitability, so we put a lot of emphasis to switch more to list products, in particular A&H always gave us a good return.

So we put up a lot of our new products in Southeast Asia and also revised in the way of our compensation alignment and encourage our agents to sell more niche products, and that worked out quite well.

So in most of our areas we had the campaign to promote A&H, and we just had a special contest attendance in Beijing, which was well-received.

We had a lot of good (indiscernible) attending our convention (indiscernible) to promote A&H products.

All of this action together will help us to really improve our A&H production throughout Southeast Asia and other regions.

Edmund, I appreciate that, but I was referring to a reference that claims were up in the A&H business in Southeast Asia, in particular.

There was a comment to that effect.

You must understand that our fundamental core A&H business in the agency-driven distribution is in fact the A&H rider to the life product.

The A&H rider is the single most profitable and carries the best loss ratio, extremely strong loss ratios.

Now as we step up production and go into the stand-alone A&H products, which are still extraordinarily profitable income -- frequently five to eight times the profitability of a life product -- that while profitable, they are not as profitable as the rider product.

So as we ramp up production with the stand-alone A&H, there will be a statistical deterioration of the loss ratio within the context of a very strong profitability.

Okay, great.

And the final one might also be for Ken, but I leave it to you, would be the first-year premiums in China seem to have flattened out for the quarter and six months, and I was wondering if you could comment on that.

Edmund again.

I'm responding to it.

The last year or so, our customers are stricter (ph) or (indiscernible) in buying insurance a little bit more from the traditional or life endowment to retirement savings and the long-term products.

And you could see from the (indiscernible) supplements that we have a pretty good annuity production for the quarter.

There was 24 million there.

And though the life (indiscernible), first-year premium, was only a single digit, that if you add that annuity business onto it, it would give you a good double digit -- a little north of 10.

And we need to look at the total together, not just look at the life basic product itself.

Thanks very much for those answers.

Jay Cohen, Merrill Lynch.

Thank you.

Good morning.

I have a question about the accounting for the ILFC change or error.

And the way I am reading the 10-Q, the revenues that were coming from these notional accounts should not have been recorded as revenues, but should have been recorded as a reduction of the purchase price of the aircraft at the time of delivery.

And so I am wondering if there has been an offsetting charge or offsetting entry on the balance sheet side to adjust the purchase price of aircraft.

All we see is this net $516 million charge to earnings.

The answer is, Jay, that the corresponding balance sheet item is a reduction in the flight equipment asset.

The purchase price was adjusted to reduce the original recorded amount by the amounts in question here.

And then the depreciation expense going forward was also adjusted.

So what you see at June 30th is the fully adjusted amount on a cumulative effect basis.

So that would be the other side of the entry.

Okay.

That's helpful.

Thank you, Steve.

You're welcome, Jay.

Mark Lane, William Blair & Company.

Good morning.

First of all, on the Foreign Life margins, I think last quarter you had stated that one of the reasons for the improvement in margins was a product mix shift towards more savings-oriented products.

Can you give us any sort of sense as to how much more profitable the savings-oriented products are that you are selling and what is the potential for margin expansion within Foreign Life over a reasonable period of time?

Sorry.

The first couple sentences were a little bit garbled.

Do you mind to repeat it?

On the Foreign Life business, last quarter you had stated that the improvement in margins was driven in part by a product mix shift towards more savings-oriented products.

And there was further margin expansion this quarter.

So can you give us some idea of how much more profitable the savings-oriented products are and what are the opportunities for margin expansion in the Foreign Life business over any reasonable period of time?

Really, on the product mix, we normally to really put it together.

And when the traditional product (indiscernible) margin is declining due to the interest rates, then we will switch more to the other type of product, the risk type of product, including the A&H rider as stand-alone PA products.

We package these products together so in order to maintain the same profit margin.

And (indiscernible) that's a little bit decline in the traditional endowment type of products, the whole life products, we improve the other (ph) package profit margin normally by 2 to 3% of the profit margin.

And so that the total will still be maintained at our normal profit margin level.

So are you saying that what we're seeing right now in profit margin is just conditions in the market because those products are more favorable to see right now, or what are you trying to communicate?

We are able to sell the product in a package form so that that separate margin be maintained.

And of course there's a more retirement saving type product, which is more popular now -- we are able to sell more.

But those are part of the profit margin slightly below the traditional.

So we need to add on the risk product to compensate to still maintain the same profit margin.

Mark, this is David Herzog.

If I could maybe add to what Edmund has said.

The last couple of quarters, you are seeing -- if you're looking at the GAAP profit divided into the GAAP premium, which is a measure of GAAP profit margin, again, you will see an increase, a trending increase, again due to the shift in the product mix and what counts toward the GAAP premium.

That mix shift, in terms of the measure that you're looking at, shows a couple of percent to the profit margin, and we are seeing that as fairly consistent.

So in terms of future profit margin expansion, again, there is -- Edmund has commented on the strategies that we are using to enhance overall profit margin.

But I think in terms of the measure you're looking at, again it has added about a couple of percent.

And I'm not sure I see that going much further.

Okay.

And the party line on foreign exchange impact in the past has always been there is an impact on the top line, but there is really no material impact on the bottom line.

Is that still the case?

There is no translation gains at all included within operating and EPS?

It does add, again, to the Life division worldwide, adds a couple of percent.

This quarter adds a couple of percent.

Sometimes it's plus, sometimes it's minus.

This particular quarter it was a couple of percent.

How about overall, Steve?

Overall on foreign exchange?

Yes, pure translation gains.

On translation?

Well, in terms of -- I don't think I have the number for overall translation.

On realized capital gains, I can tell you that the effect of FAS 52 was only $20 million loss (ph) for the second quarter.

So not significant to that.

In terms of the aggregate effect overall on operating earnings, I don't have that number in front of me.

Okay.

So what you're saying, the pricing net investment gains, that $100 million, in response to the question earlier, that that is coming out below the line and if that's buried inside that $185 million number, it is coming out against operating income?

That's right, because it is part of realized capital gains or losses.

So it does come out.

Okay.

Thanks.

Terry Shue (ph), JP Morgan.

Thank you.

I have a couple of questions.

First on spreads going forward, you have provided fairly detailed information this time on spreads.

If you look at the Group Retirement products, in terms of cost of funds, it looks relatively low when I compare into some industry numbers -- there are no good industry numbers -- this other comparable.

Is there pressure for the cost of funds to rise with rising interest rates?

And can you maintain your spread?

And for the individual fixed annuities, you've also enjoyed quite a bit higher spreads than many other industry participants.

With the fairly low cost of funds, are their pressures there on the spread, as well?

I'm going to ask Jay to respond to that, Terry.

I'll just make the general comment that there is always pressure in the case of fixed annuities.

Now, the real pressure comes from alternative fixed income products, such as Jumbo CDs in banks and, to a lesser extent, money market funds.

And as those rates approach the rates offered on fixed annuities, that applies pressure to all industry participants.

In terms of pressure from other competitors, all observation has been over a long period of time that there are several competitors that become aggressive for a period of time.

And then after they've allocated their allocated capital they have for the fixed annuity business runs out, they tend to pull back.

And like other quarters, this last quarter showed that same activity by two or three competitors that hadn't been competitors just a year ago.

But that is not something new.

That is something we face each and every quarter.

So going forward in the current macroenvironment, should we see a narrowing of spreads, both on the group side and the individual side for domestic?

(indiscernible) question to answer.

If the yield curve -- I can only talk about the -- I'm not sure what you mean by the group side, but on the individual side, if the yield curve remains flat or goes inverted for an extended period of time, that will put added pressure on spreads.

And if you could also comment on the GIC, part of your very high margins there is the partnership income, which I gather it is hard to project out into future quarters.

You mentioned during the call something about a match funding product which should be coming in.

Can you describe that a little bit?

I believe the match funding program will be working quite similarly to the prior GIC (indiscernible) note -- global GIC (indiscernible) note program that we had done through the insurance companies.

So a relatively similar program.

At the moment, that has been delayed in being launched, but it is being worked on.

Terry, we made the announcement late last year that we're going to be moving to a corporate matched investment program at the AIG Inc. level.

Because of the issues that we've been confronting this year, as we've noted in our filings, we've delayed that until we have an opportunity to get an effective registration statement in place.

And that we will embark on that program.

So that is something that is on our high priority list to get started before the end of the year.

Okay.

But it's fair to say, though, that maintaining the 200 basis points type spread depends on a high level of partnership income.

I'm not sure where you are referring to the two -- again, if you look at the --.

Page 38.

Right, if you look at page 38, what we've done there in response to a lot of questions such as this over the period, is show exactly what the contribution is from the different components of that spread.

Right, and that is the only comment or question, is that it does depend on that staying high, the partnership income.

Absolutely.

Right.

Okay.

If I could ask a quick question on personal accident and health.

I thought that the last quarter there was some comment that the growth there is moderating.

But I see that the second quarter was also very strong.

And you talked about the very high profitability that you have for Farm A&H.

The only comparative one has, really, is to look at AFLAC, and your GAAP margins are substantially -- like, let's say 80% --higher than theirs.

Can you describe what kind of products you sell in Japan and in Southeast Asia, what types of accident & health product?

Are they long-term products, short-term products?

And why is the profitability so high relative to the only other industry comparison that I have?

Let me say first of all that the sales of A&H is a clear differentiator for AIG around the globe.

These are predominantly short-tail products, but we have a vast array of those products.

And we have people focused very much on developing new products constantly.

Also, under Ken Nottingham's leadership and a number of our senior management colleagues, we have a real focus on Accident & Health (indiscernible) throughout the organization at this present moment.

I am going to ask Ken to say a few words there.

The first I'd emphasize -- this is a global A&H business, it is not a Southeast Asia/Japan business.

It is core to us.

We are the largest A&H writer in the world outside the United States.

We are in no way a comparable company really to American Family.

American Family is very predominantly a Japanese company and not in any way a global reach company.

And they are also much more a mono product company.

They introduced and built their business in Japan based on cancer insurance, which is really only one part of an A&H array a products and really, on a global basis, a minor part.

And they have moved into the in-hospital business in Japan.

We sell a completely different mix of business worldwide.

And our mix is more profitable on a product-by-product comparison basis.

We are also selling far more rider to life insurance product than American Family, and able to maintain a very, very, very strong profitability based essentially on risk product, and not based on medical product in any way exclusively or even as a majority of our sales.

So it is a very different business and a very different product.

When you say risk product, what does that mean?

And when you say short-term, is it just one-year products?

Essentially, we are usually selling on a stand-alone basis annually renewable products -- that is, as opposed to a rider to a life policy, which will of course be for the life of the life policy.

And we are selling accidental death.

We are selling catastrophe medical.

We are selling accidental disability.

We are selling every form of -- we should have a broader array of accident & health products than any other company the world.

And we have an agency force globally that is trained to sell those products.

The premium earns out quickly, the loss ratios drop to the bottom line very quickly.

There is no long tail to this business.

And the difference between the GAAP premiums, life premiums and premiums in deposits, the 5% increase in life premiums and 19% increase in premiums and deposits, that is due to -- you talked about mix in the first quarter.

That is due to more retirement products?

Is that what it is?

As I mentioned earlier, there's a lot of switch in product mix, with local people now buying a lot more long-term retirement savings type of product, which include annuity products in gold (ph) premium, and some of those have really sold (indiscernible).

And those are really not included in the GAAP premium.

But you take a look at (indiscernible), that gave you a total roughly like a 19% instead of 5% increase.

And you mentioned that is less profitable than the traditional endowments.

No -- the traditional endowment, that is really normally the premium amount is a little bit lower than debt (ph) retirement savings in gold premium. (multiple speakers) your profit margins on a total single premium in term would be lower.

On the other hand, the total magnitude, the quantity, if you (indiscernible) it out together, it would still give you a very good net profit.

Thank you.

I'm just going to ask Don to say few words on the products in Japan.

I don't want to draw a contrast with any other company.

I just had couple of points.

One is that our distribution is very multifaceted.

We get a substantial amount of the Life A&H production and the general A&H production through direct response and through independent agents, as well as career agents.

And our direct response is both broad market and through sponsors.

So that is one difference.

Another difference is I would say the focus has not been just on short-term products.

We have also introduced 10-year products in certain whole life coverages which seem to fit very well with the taste in the market there.

And that has been an evolution of the business over time.

And the third point, I guess, which I think Ken touched on -- I'll just emphasize -- is we work very hard to price the products and underwrite the products to a high profit margin target.

Not to say we couldn't work another way, but we definitely work very hard to keep those margins at a high level.

Okay, but they are inherently higher margin products.

There is nothing inherently higher about writing risk products.

You have to work very hard to keep your pricing discipline, to avoid head-to-head price competition, to diversify into new products when the competition gets to the old product and to package the products, as Edmund referred, in various ways so that you're not pricing head-to-head and making the product a commodity.

I would never say anything we do is inherently higher margin.

You have to work very hard to achieve that.

Thank you.

Larry Greenberg, Langen McAlenney.

Thank you, and good morning.

Marty, if you look at AIG's Property Casualty underwriting over the last 5, 10, 20 years, you've had a pretty consistent margin of superiority versus the industry.

I calculate roughly 8 points or so.

In the first and second quarter, you have been, I would say, generally in line with the industry.

Arguably, your combined ratio might have been a little bit higher than the industry.

And I'm just wondering how you are thinking about how those comparisons have evolved.

One of the things that we've focused on, I mentioned earlier, Larry, is a focused underwriting discipline.

And that is a culture that exists throughout the organization.

And as I mentioned earlier, I'd certainly given Kris Moor and Nick Walsh and others a clear mandate in what is a softening rate environment that we are clearly not going to chase business down to a level that we don't believe we can maintain a margin.

We are in the risk business.

It does come down to risk selection.

And as long as our underwriters continue to do the right things and use all their experience to obtain the best rates, terms and conditions, then I think we will see the underwriting margins maintained.

But do you think that the industry is doing a better job?

Do you think you might be reserving more conservatively now than the industry?

Do you have an explanation for why that gap has narrowed?

I think from an industry perspective, what we are seeing as of today's date is some discipline in the area of terms and conditions, which I think bodes well.

I think deductibles are holding up reasonably well.

We've seen some discipline in policy forms where the softening is occurring is obviously in the upfront pricing.

But I think if the terms and conditions continue to hold, that is a good discipline from an industry standpoint.

I'll let Frank comment on the reserving practices.

I think as we've been saying for the past several years, we've been trying to maintain reasonably conservative estimates of current accident year loss ratios.

We are not trying to anticipate favorable emergents until we see them.

And as we said earlier today, we are starting to see more favorable developments.

We actually have lowered some of our loss picks this quarter.

I think you would see that if you look at the comparisons of the loss ratios this quarter versus the same quarter last year.

So we are reacting to favorable emergents only after we are pretty confident that the results are supporting those better assumptions.

So maybe some of our competitors are more willing to go with an early indication.

We are trying to be conservative in the current accident years until we are confident, and we are seeing that in the recent quarters.

So we are reflecting a better loss ratio this quarter.

I think, Larry, if you look at the trend quarter-on-quarter-on-quarter, excluding the cats in the fourth quarter A&E charge, you are seeing that improving trend.

If you look at the fourth quarter, both domestic and foreign joined together, it was 75 going down to -- 70.5 going down to 69.8.

So you're seeing that improving trend.

Thanks.

And just a quick follow-up.

Do you have any idea on the time that this synfuel resolution will take?

No, we can't estimate that, Larry.

Great, thanks.

Gary Ransom, Fox-Pitt, Kelton.

Good morning.

I had a couple of questions.

One was on the ILFC charge.

And if I look at the ILFC level, it looks like each of the past five years were reduced in net income.

And since this is technically just an accounting change and ought to be timing oriented, somewhere else there is a gain.

I'm just wondering if it is correct to assume that if you've reduced what you earned in the past, is there a future point where earnings are going to be higher than what they otherwise might have been?

Gary, there is.

Really two parts to that.

One is we've got reduced depreciation expense on a perspective basis because of the lower basis of the aircraft on a GAAP basis.

And secondly is when the planes are sold and you know its ILFC's model to sell those planes, I think on average -- Steve, correct me -- but somewhere around eight years or so is on average when we sell a plane.

When the plane is sold, it effectively washes out the entire issue because at that point you've got a higher gain on the sale because you have a lower basis.

Okay, thank you.

That helps.

The other question I had was on the life side.

I was wondering if you could expand on having the pressure during the second quarter and having some producers being cautious.

If you could expand on what you're seeing currently and how that might be coming back, and elaborate on those trends a little bit.

I think since we've issued the Form 10-K and the first 10-Q, we've seen some of that cautiousness dissipate.

And as I mentioned in the opening remarks, some of our independent partners have certainly -- that cautiousness has gone away, and we are seeing an uptick in sales.

So we see that as a positive trend.

So it would be reasonable to assume that the next couple of quarters we will start to see higher sales, or sales coming back.

One would hope so.

I emphasize that not all that caution has dissipated yet.

We are beginning to see it dissipate.

We are beginning to see some improvement, but there is a ways to go yet.

Okay.

Thank you very much.

Shelby Davis, Davis Funds.

Yes, thanks.

Martin, you mentioned in your opening remarks, I think, that one of the keys to the Company is diversity by product and by geography.

Now, every year you generate enormous amounts of cash flow.

So as a softening property casualty cycle may affect the premiums, would a rising interest rate cycle benefit you over the whole company a lot, because you would be investing presumably at higher rates?

And has that been a headwind that might go away as you look forward to offset some softening areas?

Well, certainly given the cash flows that we have, Shelby, any hike in interest rates would clearly benefit net investment income.

I'll ask Richard to add a bit more color to that if I may.

Obviously, the impact varies depending on the average life of the liabilities involved and the average life of the assets supporting those liabilities.

So, in general, you'll see the quickest turnaround in the shortest average life portfolios, which tend to be the annuity type businesses.

You'll see the slowest impact on the longer life portfolios, which tend to be traditional life.

And the impact on others will obviously be in between.

But overall, the impact on earnings going forward should, in general, be positive barring what I would call a catastrophic increase in interest rates, which might prompt unusual withdrawal activity.

Shelby, I should point out, we would lose some of the unrealized gains, but we certainly like to see it in operating income.

Right, and I've learned a lot about the A&H business today.

I also wondered if -- I think when I read the 10-K, the first one that came out after the restatements, I calculated that it was over 50% of earnings came from international operations, and maybe even more than that.

But that was somewhat overstated possibly by hurricane losses that were mostly domestic and things like that last year.

Of the international operations, it seems as over half of those, the earnings come from Far East or Asia in general.

Am I right on that, and is that a growth engine that you are going to rely on more as you go forward?

Your math sounds right to me, Shelby.

And clearly, it is an opportunity going forward.

But I come back to what I said, and you just echoed the same words.

It is the diversity of the organization that has really proved its strength in the second quarter, and I think will clearly differentiate us from the rest in the quarters ahead.

It is the difference between the product and the geography that really gives us a number of countercyclical businesses.

And I think it has proved its benefits in the second quarter.

Great.

Thank you very much.

Ladies and gentlemen, thank you very much indeed for your time and attention this morning.

I look forward to seeing you all very soon.

Thank you very much indeed.

Thank you.

That concludes today's call.

You may disconnect at this time.