American International Group Inc (AIG) 2005 Q3 法說會逐字稿

Good morning, good afternoon and good evening to everyone and thank you for standing by.

At this time I would like to inform all participants that you'll be able to listen only until the question-and-answer session of today's conference call.

Today's conference is being recorded.

If you have any objections, you may disconnect at this time. (OPERATOR INSTRUCTIONS) I would now like to turn the conference call over to Ms. Charlene Hamrah.

Thank you ma'am, you may begin.

Good morning and thank you for joining us.

Before we begin I would like to remind you of a couple of things.

First of all the remarks made today may contain forward-looking statements.

Please refer to the AIG quarterly report on Form 10-Q for the period ending September 30, 2005 and AIG's past and future filings with and reports to the SEC for a description of the business environment in which AIG operates for the important factors 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.

In addition, 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 available in the investor information section on AIG's website.

Now I would like to turn this morning's conference call over to Martin Sullivan.

Thank you very much, Charlene, and good morning, ladies and gentlemen.

I'm joined this morning by a number of my senior management colleagues and I would first like to make a few comments and then we would be more than happy to take your questions.

First may I apologize for the delay in announcing our third-quarter results?

As announced in our November 9 press release, we needed the five-day extension to incorporate into our third-quarter and nine-month financial statements, the corrections of certain errors, the preponderance of which were identified during the remediation of previously disclosed material weaknesses and internal controls.

While disappointing, as I've said many times in the past, AIG will do whatever is right.

The most significant errors identified relates to the previously disclosed material weaknesses in internal controls surrounding accounting for derivatives and related assets under FAS 133, reconciliation of certain balance sheet accounts and income tax accounting.

AIG continues to believe its hedging activities have been and remain economically affective but do not qualify us for hedge accounting treatment.

Due to the significance of the corrections, AIG will restate prior period annual and quarterly financial statements as soon as possible, although the 2004 periods in that 10-Q we filed last night have already been restated.

In a quarter dominated by the effects of natural catastrophes, AIG performed well, generating some $1.72 billion of net income or $0.65 per diluted share.

Adjusting for realized capital gains losses and FAS 133, adjusted net income was $1.8 billion or $0.68 per diluted share.

The overall impact of catastrophe losses in the quarter was approximately $1.57 billion or $0.60 per diluted share.

These results once again clearly demonstrate the benefit AIG derives from its financial strength and diversity in both geography and product.

Turning specifically to General Insurance, net premiums for the quarter were basically flat, reflecting the affect of reinstatement premiums following the catastrophes and our focus on generating underwriting profits in a market that during the quarter experienced some continuing weakening of rates in certain lines of business.

In the past few weeks, we have seen improvements in U.S. property rates both in catastrophe and non catastrophe accounts and in the on and offshore energy sectors.

I'm very pleased to say AIG has the market leading position, capacity, and financial strength to respond to our customer needs.

The combined ratio for the quarter was 112.2.

Excluding the impact of catastrophe losses, it would've been 91.6 against the prior year of 93.9.

Worthy of specific mention is Foreign General, which had an excellent quarter with net premiums increasing 13.5% with a combined ratio of 92.2.

Excluding catastrophe losses, their combined ratio would have been an outstanding 81.8.

While there may be a reduction in catastrophe reinsurance capacity for the coming year, given our capital and financial resources we do not foresee this presenting any significant issues for AIG.

Turning to our Life Insurance and Retirement Services division, which had a solid quarter with operating income increasing 12.9% to $2.34 billion.

Foreign License Retirement Services had a particularly strong quarter with operating income increasing 9.2% to $1.44 billion.

In particular Japan and China had strong first year premium growth of 27 and 18% respectively.

Domestically our Life Insurance and Retirement Services division saw operating income growth 4.2% to $900 million.

Term and Universal Life insurance had solid growth with good performance through our independent distribution channels.

Retirement services continued to be adversely affected by the interest rate environment and lackluster equity markets, although operating income in the group retirement and individual fixed annuity businesses improved as a result of stronger investment income.

Financial Services operating income was adversely affected in the quarter by some $62 million at catastrophe losses in our domestic consumer finance operation.

Operating income before the affect of FAS 133 and the catastrophe losses was up 7% to some $663 million.

Our global consumer finance business saw operating income increase by 25% excluding the catastrophe losses while the capital markets division operating income increased by 3%.

With an improved transaction flow in its credit, commodities, and energy products reflected a more favorable customer sentiment during the quarter than earlier this year.

Our (indiscernible) continues to experience strong demand and an overall strengthening of lease rates.

Asset Management also had an excellent quarter with operating income excluding FIN 46R and FAS 133 up 26% to $448 million and revenues up 20% to some $1.3 billion.

In conclusion ladies and gentlemen, AIG had a good quarter finishing with consolidated assets of some $843 billion, consolidated shareholders equity of some $89.3 billion and retained earnings of $73.2 billion, an increase of 14% from year end '04.

Return on equity was 15.6% for the nine months year-to-date compared to 15% for the comparable period in 2004.

Now before we take your questions I would like to address a few questions I know a number of you may have.

The first one is obviously why did we have a second restatement?

I would like to reiterate that our overall objective is to get it right.

We have been actively engaged in remediating and material weaknesses in internal control over the past several months.

These efforts have resulted in the identification of some errors, primarily relating to derivative accounting under FAS 133, one of the most highly technical areas of GAAP.

We assessed the significance of these errors and we determined that a restatement was required.

Our efforts will continue until we are comfortable that the weaknesses have been fully remediated.

Now obviously the second follow-up question is will there be further restatements?

Well, right now we are not aware of any other issues that would require a restatement.

But I have said many times before, our goal is to get it right and that is exactly what we will do.

The third question, the most obvious question is what is the status of AIG's discussions with the regulators?

Well, we are continuing to cooperate fully with all of our regulators and we are engaged in constructive ongoing discussions with them.

Beyond that unfortunately I am not able to comment any further at this time.

The fourth question is what is the status of the independent actuarial reserve review?

Well, the review is continuing as planned.

There is nothing to report right now but we still expect that we will report the results of the Milliman review with the filing of our 2005 10-K.

Thank you very much and now he would be happy to take your questions.

(OPERATOR INSTRUCTIONS) Tom Cholnoky, Goldman Sachs.

Good morning.

Martin, just to follow up on the regulatory discussion, I guess in the last paragraph of your Q you indicated that a number of employees have received Wells notices and that you would not be surprised or anticipate that you might get further ones.

Can you give us a little bit more color on how many Wells notices have actually been received, what level of management is involved with this and just a little bit more color on these?

And then I've got a follow up.

Okay, Tom.

Obviously the individuals that have received Wells notices to date are not senior corporate officers.

Should that occur, then obviously we would fully disclose that.

Beyond that I would not want to say anything more than what is already in the Q itself.

Okay, so we should have some comfort that no senior officers have received any?

That is correct.

Turning to your operations then, can you just talk a little bit about what's going on with your expense ratio in DBG (ph)?

It continues to climb even adding back the impact of reinstatement premiums.

How should we view that on a go forward basis?

Well, a lot of that is obviously driven by a reduction in MPW, Tom, for the reasons you outlined; one being obviously the impact of restatement premiums.

Another contributing factor obviously is the change in portfolio mix, but I would ask Chris if he would like to add any further color to that?

Picking up on Martin's last comment, one of our main strategies is to diversify our product and go into middle market and small business arena and that carries a higher expense ratio but a lower loss ratio.

Okay, so we should not be surprised to see that continue to move a little bit higher in subsequent quarters?

That is correct.

Okay.

I will get back in the queue.

Thank you.

Jimmy Bhullar, JPMorgan.

I just have a couple of questions.

First, Martin, you mentioned tighter reinsurance capacity and higher property and energy rates.

If you could just elaborate on the rate environment a little bit more in P&C?

And also what you intend to do in terms of retention rates given the tighter reinsurance capacity?

Then I had a question on the foreign annuities business, your sales were very weak in the third quarter.

If you could just give us some color on what is driving that?

Is it the variable annuity business or is it just fixed annuities because of low interest rates?

That's it.

Was the second part of a question, that is related to foreign or --?

That's related to foreign annuity sales.

Let me just give you a little bit more color on PNC market as we see it at the present moment.

Obviously as I said we are seeing rate increases in the domestic property market both in catastrophe and non catastrophe areas and obviously we are seeing rate increases in the energy sector both on and offshore.

Internationally we are seeing rate increases in our Lloyd's portfolio.

A lot of that is driven by U.S. property business.

And we are seeing property rates (indiscernible) in certain countries although in other countries there are still some pressures on property rates.

I think what is going to be interesting is what happens on the 1/1 renewals in the property and catastrophe area.

Obviously a lot of new capital has come in for the sector in the last few weeks.

It will be interesting to see what emerges from that but in my opinion, this is going to be of very late renewal season driven by some obviously some of the capital that is left the retrocession market which has slowed down what some of the reinsurance market can do, which will then obviously slow down what some of the retail market can do.

So I think the one month season could be quite late this year and I think the rating environment will continue to evolve as we get closer to the end of the year.

On the foreign annuity business and (multiple speakers)

On the foreign annuity, it's really the decreased private deals attributed to both our business in Japan.

In (indiscernible) Japan we have a much lower sale in the quarter below last year that's due to a lower fixed annuity sale resulting from a diversion of a sale of AIG stock and also Anderson (ph).

And the decline is for both of these companies are really in a range of mid 20%, 25 or 26%.

And this also is because of competition from the local banks and part of our major source of income of fixed annuities sales were from major Japanese banks.

During the period they are promoting a variety of other financial products in terms of annuity products that include foreign bonds and mutual funds and guarantee variable annuities.

That is taking very similar to our business and that is why it's coming down in the quarter mainly because of the annuity, fixed annuities sales in Japan.

Don, would you like to add some color there as well from a foreign exchange environment and local market terms and conditions?

Right.

From a foreign exchange environment during the third quarter as you know the dollar appreciated substantially against the yen and as that happened, the banks I think pulled back a little bit from recommending the fixed dollar product.

You have to realize that almost all of our fixed annuity sales in Japan are foreign currency primarily U.S. dollars.

So the combination of this appreciation of the dollar and the flattening of the dollar yield curve as we saw it, the same as in the U.S. of course because rates are essentially global, the attractiveness of the annuities being a longer-term product was less relative to what it had been previously.

A couple of things have happened since then.

I think there's been a bit of a mental adjustment to the higher dollar/weaker yen.

We have introduced some new products including some shorter buckets into the dollar products. (indiscernible) come out with an enhanced five currency product and there have been some new distribution initiatives.

So in the last few weeks I think we have seen a much better sales environment.

And just a follow up on P&C, what is your intention in terms of retention rates going forward -- in response to higher reinsurance rates?

Obviously given our financial strength, we will look to increase retentions where we believe it is responsible to do so.

And obviously if there is a shortening of capacity in the reinsurance arena, we don't believe it will have any significant impact on AIG.

And we are well positioned to respond to our customers' needs.

So where it makes sense to increase retentions, we will certainly do so.

Okay, thank you.

Andrew Kligerman, UBS.

I have three questions.

First, Martin, I just want to go back to the accounting restatement because I guess you've got primarily derivatives and there's an asset realization, income tax accounting and then something related to ILFC (ph).

So what I want to understand, Martin, is how did you come across these other issues?

What was it that prompted AIG to find it and then ultimately have to disclose it?

Because that might help me to better understand why it will or won't happen again.

My second question is just quickly what is the partnership yield overall across the Corporation?

And my third question is around investment spreads, asset management at 102 basis points, fixed annuities at 228 and group retirement at 240.

Of course that is ex partnership and enhancements.

Could you talk about the outlook on those spreads?

Are they sustainable?

Will they go up, down, etc.?

Okay, Andrew.

Let me take the first part of your three-part questions.

Obviously over the last several months AIG has been going through a process of remediation of its material weaknesses that were outlined in the 10-K we filed on May 31.

As we go through that remediation process, and install new systems, add new procedures, you identify errors and we identified those errors.

We analyzed them and then made the determination obviously to restate in accordance with SEC guidelines.

I don't know, Steve, if you'd like anything to that.

No, I think that is the answer, Martin.

Okay, so then there are I guess new systems and procedures still being put in place as we speak, correct?

Absolutely.

We are continuing the remediation process.

Partnership yields, Steve, do you have that information? (multiple speakers)

Overall and this includes domestic and foreign, private equity and hedge funds and other partnerships, it’s about 12.9% for the year-to-date.

What would you like to see as a normalized return in that business?

We kind of look at it, when we model it out, (multiple speakers)

What would you expect to see (multiple speakers).

When we model it out, we look at the hedge fund portfolio as targeting somewhere in the 8 to 10% range.

And for private equity, we would like to see that up closer to 15%.

So the numbers this year are actually pretty close to what I think we might expect on a long-term basis although as we have talked about before, quarter-to-quarter that number is going to bounce around a bit.

Do you want to handle the third part of Andrew's question, Win, on the -- I think the third part was on the spreads, Andrew?

Yes, asset management and fixed annuity group retirement sustainable, where are they likely to go?

Actually Richard Scott is going to respond to that, I think.

I think that what you were seeing in the current quarter is really more driven on the liability side than the asset side.

If you look the asset yield, it actually kicked up in this quarter because a what I would call modest repricing gap between the asset side and the liability side in that business which is temporarily squeezing us as the short rates go up.

Depending on what happens to the short rates, that should work itself out.

In all candor, it is a relatively short-term issue.

So you were saying short rates are going to impact what the liability side in an obvious way?

There are a number of floating-rate liabilities in the asset management line.

Those floating-rate liabilities reprice as short rates reprice.

We also have floating-rate assets, but the amount of our floating-rate assets is not exactly equal to the amount of our floating-rate liability.

Got it.

So a little bit of pressure in the asset management area.

How about fixed annuities and retirement?

Are we solid there?

If you look at the fixed annuity spreads, obviously including partnership income they are actually better this year than they were last year.

But if you look at the fixed annuity spreads even excluding partnerships, the spreads this quarter were actually slightly better than the spreads in the comparable quarter of the year before on the individual fixed annuity line at 228 excluding partnerships versus 225 last year.

And you feel good about the flexibility of spreading rates there in fixed annuities?

No, frankly I would defer the liability (multiple speakers)

Jay, why don't you contribute something now.

As Richard mentioned, if you look on page 18 of the supplement, you'll see the spreads on the individual fixed annuities, which for the moment on the asset side excludes both the partnerships and the other enhancement income -- things like dollar rolls, gains on calls, repayment income.

We are up about 3 basis points.

Posted (indiscernible), you can see it was booked on the -- the base yield came down about 14 bp, profit of funds came down about 17 bp.

There is still flexibility on the liability side and we will continue to price in a disciplined fashion there vis-à-vis market interest rates.

Flip side that of course is one of things that has impacted sales negatively, new sales.

And on the asset side, my expectation is that the base yield will continue to all things being equal, the base yield will continue to slip modestly as I believe the new money continues to be invested at a modestly lower rate than the portfolio base yield rate.

So I think we will be able to keep up with that on the liability side or close to it.

So I think that 228, 220, 225 range, I think that should be sustainable on the enforce block.

And more story on the retirement business as well?

The group product?

I think to group products business is a little bit of a different story.

There we don't have much of room at all on the liability side.

So for example you see that the decline in rates there from 385 to 380 was less than the decline in the base yield.

There will be some modest spread compression there depending on interest rates going forward.

By the same token, the duration of the portfolio is longer in the group products business, so the pressure on the base yield from a flat curve is not as great as it is on the slightly shorter duration individual fixed annuity block.

Got it.

Very helpful, thank you.

Rob Bobman (ph), Capital Returns (ph).

Martin, you commented on property rates -- sort of cat exposed, not cat exposed, domestic, internationally.

I am wondering sort of on the nonproperty lines given that the company is a leader in so many of these casualty lines particularly commercial, why not initiate rate increases and/or sort of a contraction of terms and conditions?

Well, let me respond by saying that so far we are seeing terms and conditions hold up pretty well.

So from that standpoint that has not heretofore been an issue.

Deductibles are holding up reasonably well.

Policy terms and conditions are holding up pretty well.

On the nonproperty lines of business in certain instances around the world we have seen some rates stabilize, i.e., there have been no further reductions but in other lines there has been a continuing weakness.

So it is a very fluid scene at the present moment.

I'll ask Chris to add a little bit of color on the domestic side if that would help and then Nick Walsh is here on the foreign side.

Definitely after the hurricanes, Katrina and Wilma and Rita, we saw a slide to quality and saw a firming of rates and the slide stopped.

Obviously we answered the property issue and on the casualty side, we're definitely starting to see an uptick a little bit on the rates or less of a slide -- so moderation.

We expect to see that continue going forward.

To your specific point, we are indeed a leader in many of these classes around the world and you can be sure that as we are used as a benchmark for the rest of the market, we are testing the pricing all the time.

And as others have said, there is a firming in pricing and in some areas we're seeing a little bit of uplift.

So I think that will continue as we get through the end of the year.

Thanks, definitely hoping -- (multiple speakers).

I think it is going to be pretty fluid between now and 1/1.

Thanks.

I was wondering in the quarter was there any adverse development on the reserves previously set on the four storms of last year?

Frank is going to respond to that one, Rob.

Yes, there was a 39 million additional increase in those reserves in the quarter.

Okay, thanks a lot.

Continued good luck.

Ron Frank, Citigroup.

A couple of things.

First probably for Steve, I was wondering if you could share with us what the math was behind the $750 million infusion into the subs following the completion of the statutory restatements?

Were you targeting particular RBC ratio ranges?

Or just want to get a feel for what the calculus was behind the 750 as opposed to 500 or 1 billion or what have you?

And also how that interacts with rating agency conversations at this point?

And then I have a follow up.

Okay, Ron.

Good morning.

The 750 was put into a American Home and the reason we did that was simply to increase the risk-based capital ratio on a restated basis at year end '04 above the 250% level on the company action level basis.

So it was simply that all of the other companies on a restated basis were well above that, so there was no need to adjust their capital.

It was as simple as that.

In terms of rating agency discussions, they are fully apprised of what we have done but we will be engaging in conversations with them over the next few weeks and months and then we will make a determination on what if any additional capital needs to be injected into those companies.

I don't have any specificity other than that at this point in time.

Would a decision to increase retentions as was discussed earlier trigger such an infusion or not necessarily?

I am not sure they are necessarily correlated.

It depends on the underlying risk-based capital ratios, which would also depend on the level of premium adequacy.

So if the premiums are going up and retentions are going up, it is not a one-for-one correlation there.

Okay, thanks.

I wanted to follow up in your response to the casualty market question.

Martin, I think I heard you say that you're seeing stabilization in some instances and further softness in others.

Then Chris seemed to say that he is seeing stabilization in some areas and some uptick in others.

When I put it all together, it seems to pretty much run the gamut.

Is that a correct impression?

I was talking on the global perspective, Ron, and Chris was talking specifically domestically.

Okay, so the U.S. market is a little bit out front on whatever is happening, which makes some sense.

Okay, thanks very much.

Jay Gelb, Lehman Brothers.

Martin, I was wondering if you could touch on AIG's ability to pass on higher reinsurance costs on the primary side?

I think that has been the subject indirectly of other questions, Jay.

Obviously we look to price our product to generate an underwriting profit.

We will take a look at what our reinsurance costs are as we go through the catastrophe to renewal cycle, then make a determination what makes sense to buy given market conditions at that time.

Okay, thanks.

Separately, AIG on the property casualty side showed pretty amazing growth post 9/11, 30% plus growth in both 2002 in 2003.

Do you get the sense that the events of the hurricanes are going to position AIG for that type of growth going forward?

Well of course obviously as the leading commercial and industrial writer in the U.S. we are well-positioned as I said to respond to our customers' needs in whatever the market environment is.

I think what we're seeing at the present moment, Jay, is the rate increases in the marketplace today particularly on third-party exposures and not generally across all lines of business.

If you recall post 9/11, rating increases generally went across multiple lines of business.

We are not seeing that as of today's date, so as I said, I think this will be something that will be very fluid as we get closer to the 1/1 renewal cycle.

What I would say is echo the words that Chris said, is that we have seen in the last few weeks a slide to quality and an uptick in our submission level.

So that is all very positive.

Great.

Finally on Lexington, they showed pretty substantial growth as well as more business moved into the surplus lines market last time.

Are you starting to see that trend again?

Yes, and of course there are our main profiting carrier in the U.S.

Great, thanks very much.

Jay Cohen, Merrill Lynch.

I was wondering if you could talk a little bit more about AIG capital markets?

You seem to suggest that the demand situation there from your clients was stabilizing a bit.

If you could talk a bit more about that business?

Absolutely.

I think Joe Casano (ph), is on the line, so Joe, do you want to add some comments there?

Sure.

What we saw is during the earlier part of the year, people I think the word we're using was that people were cautious about trading with us.

We've had a series of direct meetings with almost all of our clients to lay out the conditions of the company, the remediations that we're going through, the strength of the organization.

And what we think we're seeing from that now is that people are beginning to look at us again in the same light that they looked at us in the past.

They now see us as an extremely strongly capitalized AA institution and are now willing to engage with us in the types of business with the types of margins that we are always looking for.

And we are quite pleased to see it and even now we still see that continuing in this period now.

Thank you.

Paul Newsome, A.G. Edwards.

I want to turn to the personal lines business and I noticed just looking at the combined ratio ex cat, it was good but not as good as some of your peers.

I was wondering if that is a scale issue or if there is something else going on in that business?

As well as if it is a scale issue, have you thought about strategically what you want to do with that business particularly in light of the turmoil that we have seen in the market in the Gulf states?

This is Bob Sandler.

I will try to answer that question if I can here.

There are a certain number of items which occurred in the third quarter beyond simply the cat indemnity losses, some of which are not repeatable.

For one thing there is some non indemnity losses in the quarter relating to things like bad debt particularly with respect to our nonstandard business, which depressed the results.

There was a loss of a claim office in Louisiana which also cost us something in the third quarter.

There was a pushback from corporate to the segment of about a little under $9 million of E&O reserves which is a onetime adjustment in geography that affected the quarter.

And then from an operational standpoint, the assigned risk business has been really declining very rapidly both the topline and the margins in that business and that has probably cost us in the neighborhood of about 12 or 13 million in the quarter.

So you can't strip away those transactions, but if you do look at the underlying core businesses, they are really doing much, much better than the overall results would suggest.

The agency auto business and the private client group business which are independent agency and broker operations are expanding very rapidly both in excess of 30% in the quarter.

There has been some slow down on the direct side.

Part of that is in the Gulf states and as a result of the hurricane where there has been power outages, telephone interruptions, mail delivery problems.

So we have certainly see a reduction in our willingness to mail into a lot of those areas because of the lack of response that you would get from doing that.

So we expect that is a short-term situation.

We expect that we will start to see a pickup again in our marketing heavily into those areas.

So it is not again a permanent reduction.

But all of these things happened in the quarter and as you can see, the overall topline growth rate was still pretty strong, about 8.5%, which is certainly better than the industry has been doing.

And the bottom line is probably really on a core business basis is running somewhat better than what you are seeing in the aggregate results.

Well I would just add that obviously we always continue to look for operational efficiencies between the various parts of our personal lines businesses and we will continue to do so.

Great, thank you very much.

Al Copacino (ph), Columbia Management (ph).

I have two questions.

On the PNC side, can you give us a little bit more detail where you stand on your push into the small and mid case market, just how far you have progressed there?

Whether by product or geography or what have you and how far do you want to go?

The small and mid case market -- I guess part of that question would also be AIG has historically been very opportunistic, very nimble.

My question I guess would be what would be your long-term commitment to the small and mid case market domestically?

Let me just say a few words there if I can.

Obviously as you are aware some years ago we established an operation in Berkeley Heights that focused on this sector of the market.

They have done an exceptionally good job and we continue to expand the business breadth that they handle.

Obviously we're building upon that base to expand into this sector.

It is still a very small sector for us.

It is a real opportunity but we have got to find a way of doing it on a cost-effective basis.

And Chris is obviously looking into this.

Chris, if you want to --?

Good point, Martin.

First we're not in the box (ph) business.

This is small specialty lines business that we are comfortable with and used to.

We are doing it in a cost-efficient way.

We are doing it by systems.

Mostly have been on the large and middle market is by local underwriting and centralized underwriting, but it is also broadening our progressive distribution which is important to us on our overall business.

So the overall strategy is critical going forward for us and the market that is out there that's available to us is enormous -- we're just a very small piece of it.

I'd also like Nick just to show you what we are doing on the international side as well.

Foreign (indiscernible) in Asia and Latin America -- that is the business we are in and always have been.

So we just crack on with that as before but we do have initiatives across the UK and parts of continental Europe and we had a long discussion about Germany in one of the previous calls and they are in what we call the Mittelstand AIG is doing very well.

We think we have a great business to develop.

So continental Europe and UK are important for this strategy going forward and we are on track.

That's great, thank you.

My second question if I could is on the life side, the weakness in the domestic top line.

I wonder if -- it might be very difficult to do this -- I wonder if you could try to quantify through to what extent the weakness relates if at all to ongoing bad press from earlier in the year versus simply a difficult macroeconomic environment as far as rates in the stock market goes versus seeing any potential or rational competition within any of the productlines?

That is a good question.

Rod Martin is with us this morning, so he is going to respond.

As we have discussed previously, earnings will fluctuate quarter-to-quarter due to variances in mortalities, calls, prepayment, partnership and investment earnings.

That said, our earnings in the life segment were up 6.2%.

I would steer you to some of the key metrics that are driving the business.

By way of example, our periodic light retail sales increased 25.5% in the quarter and up 13.6% year-to-date.

That is a clear signal and a difference between what was happening in the second half of the first quarter and the second quarter, versus what occurred in the third quarter, so we are very encouraged by that.

Premium in force increased 10.5%.

General and separate account reserves up 5 and 18.4%.

Base amount increased 22%.

Our margins also improved.

Our expenses were below pricing.

Our mortality was more favorable than expected, and interest due to slower capitalization was modestly improved.

So the fundamentals are encouraging.

The top line, the earnings line will, as I mentioned, vary quarter-to-quarter due to the items that we discussed.

Okay, thank you very much.

This would be on the independent distribution channels, Rod, (indiscernible)?

Yes, the independent distribution channels, Martin, had a very strong quarter.

In fact, Applewood (ph) had a record quarter, was up 48% over prior year.

Our brokerage had one of the best quarters in its history, up 27% over prior year.

Our term insurance and our universal life were strong leading components.

Again, we have either the number one or number two position in the market, and that continues even in light of what has occurred.

Great, thank you very much.

Tom Gallagher, Credit Suisse First Boston.

Just a follow-up on the U.S. life business.

I guess, Rod, aside from the individual life insurance sales, if you just look at the net flow figures for really I guess the number of the annuity productlines, they've continued to deteriorate.

Should we look for any new product launches either on the variable annuity side, fixed annuity side, to help turn things around there?

Or do you think potentially the implementation of (indiscernible) too may help from a competitive standpoint?

Thanks, Tom.

I will actually ask Jay to respond to that if I may.

First of all, we do have new product launches in each of the retirement services productlines.

Most recently in our variable annuity business domestically, where due to some of the delays in the filing of the statutory financials and such, some of our new product features as well as new products have been delayed because of some interlocking guarantees between some of the P&C companies, the life companies.

We are now effective November 1 out with our latest GMWB feature which we call market lock and this one has a max anniversary component to it.

That has now been launched November 1.

The uptake early is very constructive.

Also we were delayed quite a bit in a couple of key markets most notably New York.

Also we have on the horizon a market launch product with -- we call market lock for life where the GMWB feature will allow a guaranteed minimum withdrawal benefit over the life of the policy holder under the terms of the contract.

That will be out in the first quarter of 2006.

On the fixed annuity side in terms of new products, really there we are focusing on equity index annuity and new equity index annuity again early in '06.

There however though, I think the main issue on the sales side is really those macroeconomic factors you referred to and we're going to remain highly disciplined in the pricing there.

As I mentioned earlier, we talked about maintaining the spreads in the enforce in answering an earlier question.

The flip side of that is you have to price new money rates on new annuities in line with market rates.

Finally on the group retirement product side, we also have new product launches.

The focus there is a new writer feature on the variable annuity which will bring a guaranteed minimum withdrawal benefit or living benefit if you will to some of our group annuity participants that don't currently have that feature as well as an enhanced menu of what we call rollover products as some of our participants base ages and is looking for what to do once they sever employment from their current group.

So there are new product activities in all of those areas which I do think will help on the gross deposit side on all three product lines.

I guess two follow-ups.

Jay, do you think C3 Phase II is going to change the competitive landscape at all?

And then relatedly to the surrender issue and accounting question, have you made any adjustments to your DAC amortization to account for the increases in lapse rates or are you assuming that lapse rates will improve from current levels?

Let me take a crack at that.

It's hard to determine on the C3 Phase II.

Logically it should impact the competitive landscape and logically AIG with its strong balance sheet and access to capital should benefit from that.

It really depends on how the competitors handle this initially and over time.

But there should be some benefit but to be frank not all the competition is always logical all the time.

So we will just see.

In terms of the lapse rates, no, we are not just making a gross assumption that lapse or surrender rates will improve and in fact, our individual VA business -- I'm trying to find the number here -- we had about a $6 million DAC true up in the quarter for the increased surrender rates that are shown in the information that was released.

We helped by the similar true up in the quarter in the (indiscernible).

I can't find the number right here but it is not dissimilar.

So we do (multiple speakers) monitor surrender rates closely and where we believe it is necessary, we will true up the DAC amortization rate.

That also applies where we have decided to discontinue a particular group or productline because we don't think we're getting appropriate pricing.

That has been a big driver in VALEC (ph) in particular in some of the increase in the surrender rates.

We have proactively decided not to renew a particular group on the basis they were seeking, there would be a onetime blip in surrenders there and obviously we take that into account on a current basis in increasing our DAC amortization expense.

Got it.

That's helpful.

Thanks.

Tom, I would just add that I spent two days down in Houston with Rod and Jay's team last week and I was certainly very pleased with the new product development we have in motion down there.

And also on the VALEC side, some of the new services that we had added -- firm line enrollments and a new system assisting our customers on how to manage their retirement plan.

So I think we're making good progress there.

Okay, thanks.

Alain Karaoglan, Deutsche Bank.

I have a couple of questions.

The first one is on the foreign life business.

The investment income growth was around 55% from a year ago and I realize that statement of position 03-1 has that growth rate.

If I try to exclude it and I had growth rate of around 24%.

Could you tell us which lines of business did that effect and what is behind that strong growth rate on the foreign life investment income?

On the investment income generally, I mean the strong growth is being driven by the very strong growth we have had over the last 18 months or so in particularly the annuities line of business.

But the balance of funds earning interest has gone up very dramatically particularly in Japan.

And obviously there is sort of a lag effect on income but particularly investment income from those sites.

Okay.

And the margins again expanded this year from 17% last year's quarter to around 18.4% and that is including the impact of statement of position 03-1, which I would've thought would have reduced the margin given that you're putting revenues and expenses equal to each other so it is a 0% margin.

What is behind the margin expansion in the foreign life operations?

Edmund or Don, would you like to respond that?

Martin, probably I first respond and then probably Don may add on.

On the margin and as you probably know that during the last few quarters, we have been switching our products from the old traditional products principally because of the low interest rates that we have a lower margin and even a very thin margin for all those products and now switching to three basic payer products -- the risk product which would include the writers, that would give us a lot of (indiscernible) medical business with a very high profit margin.

And on the second, is that we also switch from this traditional endowment product to an investment linked type and universal life product that we would have a lot lower downside risk and that this type of product also gives us a more steady profit margin.

And the third product is that we also switched to more participating product, a nonparticipating product so our guarantees for all the newer products we are assumed interest guarantees would be much lower than the old products with higher assumed interest guarantees.

All this added together gives on average gives us a higher profit margin.

Then maybe Don can add any color to it?

I think I wouldn't add anything to what you have said.

Okay, going to just a follow up on the first on the lines business, if I look at the nine-month results and exclude catastrophes, the combined ratio was around 96% and your competitors such as Progressive and Allstate, etc. are having margins in this environment in the low to mid-80s.

Do you think you are at a competitive disadvantage long-term?

Do you think that its fixable?

What happens when these competitors combined ratio -- because it seems like they have the ability to lower prices and achieve still decent margins.

How do you compare your competitive position in the market?

I think our competitive position is strong.

We're certainly not spending the kind of money that the likes of Progressive and Geico and Allstate and State Farm are spending which is certainly part of it.

But the overall answer is we are really being helped recently by the loss plus being in a pretty flat trend and that is really one of the reasons why the situation you described has occurred.

That there is a (indiscernible) and there's been very slow growth on the loss trend side.

That won't continue forever and when that happens, prices will have to go up.

And in fact I think they will start going up in the very near future.

In terms of our results, we've both been in our automobile businesses rolling out multi-tier pricing plans as AIG Direct has been trying to move towards -- from a preferred all the way down the scale to a nonstandard writer and as agency auto has been trying to go from a nonstandard writer to move towards the preferred scale, we have introduced a lot of multi-tier pricing plans countrywide which are essentially a redistribution of our rating plans to be able to attract a lot bigger marketplace.

In the past those businesses have focused on perhaps 40% of the market.

We're currently engaged in trying to go after 80 to 85% of the market with our products.

So on the one hand, we're writing a lot of business we haven't written before and I think we have been very cautious because of the amount of new business that we're writing that we have not written before.

We're being very cautious with how we're reserving that business until we get a bit more experience with it.

And that is part of the reason.

But in point of fact, we really have been outgrowing most companies in the industry.

And one of the strengths of our personal lines businesses have really been that like the rest of AIG it is a pretty diverse business.

Several years ago we were growing our direct business by 20 and 30% and our agency business was a little sluggish.

Now that has been changing and our agency and broker business have been coming along very, very well and our direct business has been a little sluggish.

But I have never been put in a position in all the years I have been here where I have had to apologize for producing 95% combined and I guess I don't think I'm going to start now.

We think our underlying results may be a little bit better than that, but we are being somewhat conservative I think in the way in which we're looking at the new business that we're putting on the books.

So we don't feel we are at a competitive disadvantage against the other guys.

We think we are in pretty good shape and we think particularly in the Gulf states now, we think a monoline automobile writer is going to have a lot of opportunities in the '06 period.

As many of the homeowner carriers are running to the hills on homeowners and as they do that, I think we may find ourselves in a better position to grow and profit in those areas of geography.

So fundamentally our expense ratios are pretty competitive.

All of our distribution models I think could be better.

We're striving, working hard to get them better, but we think all in all we're in pretty good shape going into the following year.

I will just add that while Bob (ph) has never been criticized, he has always been encouraged to produce a combined ratio below 95%.

Thank you very much.

Scott Frost (ph), HSBC.

I just wanted to go over -- as far as the remediation process, you said earlier that clearly you don't think there are additional errors or they would've been disclosed too, but that you are still implementing new accounting systems and remediating your controlled efficiencies.

How long will it be do you think before that process is fully complete?

I'm going to ask Steve to make a few comments on that.

Scott, we are remediating the five material weaknesses that we identified with the filing of the 2004 10-K.

All of those are being actively addressed by a significant number of people both management and outside parties to help us in all of the areas.

I cannot give you a specific timeframe on remediation.

What I said before publicly is that our objective is to remediate all of the material weaknesses by the time we issue our 2005 10-K.

I can tell you that -- I also said that that is a very ambitious goal but we're going flat out to see whether we can do it.

So we're doing the best we can.

I can't give you any precise timeframes other than that our main objective as Martin said earlier is to get it right and we won't to put in and remediate it until that is the case.

Understood, thank you.

Tom Cholnoky, Goldman Sachs.

I didn't realize I would finish and start or start and finish. (multiple speakers).

I will ask a real simple question.

Can you give us any guidance of what is going on in other income?

I recognize that you had losses from some of your other entities in there from catastrophes such as AWAC and IPC, but still stripping those out, those numbers seem rather high.

How should we think about that line on a go forward basis?

Steve has the details for you there.

I would think that usually the run rate is somewhat around $200 million.

This quarter it is higher because of what you spoke about in terms of the catastrophe losses for our shares of IPC and AWAC.

Also SECO (ph) expenses come through.

They were somewhat higher this quarter because of the increase in AIG's stock price.

And finally, the expenses associated with our remediation efforts and also with our continuing settlement discussion, legal, auditing, consulting fees are all included in that line item.

And those are higher than they would be normally.

So those are all the reasons that it would be higher but the run rate is what I had articulated earlier.

So I'm sorry, it's 200 million on an annualized basis or on a quarterly basis?

Quarterly.

Okay, thank you.

Thanks, Tom.

And thank you again ladies and gentlemen for your attention.

Can I take this opportunity of also wishing you a great Thanksgiving.

Thanks very much indeed.