American International Group Inc (AIG) 2005 Q4 法說會逐字稿

Good morning and thank you for joining us for the AIG fourth-quarter earnings and year-end 2005 conference call.

I would like to inform all participants that you will be on listen-only until the question-and-answer portion of today's conference. (OPERATOR INSTRUCTIONS) Also today's call is being recorded.

If you have any objections you may disconnect at this time.

I would now like to turn the conference over to Ms. Charlene Hamrah, Director of Investor Relations for AIG.

Thank you, ma'am.

You may begin.

Thank you.

Good morning and thank you for joining us today to discuss AIG's fourth-quarter and year 2005 earnings report.

Before we begin I would like to remind you that the remarks made today may contain projections concerning financial information and statements concerning future economic performance and events, plans and objectives relating to management, operations, products and services and assumptions underlying these projections and statements.

Please refer to AIG's annual report on Form 10-K for the year ended December 31, 2005, filed yesterday with the Securities and Exchange Commission and AIG's past and future filings with the SEC for a description of the business environment in which AIG operates and the factors that may affect its business.

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

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

The reconciliation of these measures to the comparable GAAP figures are included in the fourth-quarter 2005 financial supplement and the restated financial supplement, both available in the information section of AIG's corporate website.

And now I would like to turn the 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.

I will make some opening remarks and then we will be very happy to take any questions you may have.

We are pleased to have announced our fourth-quarter and 2005 results on schedule and we appreciate your patience throughout the past year.

As we noted in November, the year in process included the preparation of an amended Form 10-K for 2004 as well as a Company revised supplement.

This has been an eventful year to say the least and we believe our results speak volumes about the ability of our employees to rise to the occasion.

AIG is financially strong and each of our major business unit remains well positioned to achieve our strategic objectives.

Our tradition of entrepreneurship and innovation is alive and well.

And as we enter 2006, we expect AIG will continue to perform successfully, enter new markets, develop new products and meet our client's needs.

As we reflect on the results for 2005, I'd like to highlight three significant points.

First, we reached a settlement with Federal and New York authorities which represent an important step in resolving our registry issues and allows us to focus intently on our business going forward.

Second, we have made and will continue to make important improvements in our corporate governance practices as well as in our financial reporting and disclosure.

And third, despite the largest catastrophe losses in the insurance industry's history, a significant strengthening of our reserves and substantial settlement costs, we generated 2005 net income of $10.48 billion on total revenues of $108.9 billion resulting in a return on equity of over 12%.

We think these results demonstrate AIG's diversification and the underlying strength of the Company and its business units.

Now rather than go through an operational review, which is fully disclosed in the materials released last night, I'd like to take some time to highlight a few points.

First, let me provide some detail about our second restatement.

In mid-November we announced the second restatement which had the effect of reducing our year-end 2004 shareholder equity by $79 million.

As we continued the process of remediating our material weaknesses and internal control over financial reporting, we identified additional errors that required correction in the second restatement.

These additional adjustments resulted in a further reduction in our year-end 2004 shareholder's equity of $855 million, the majority of which related to the continuing remediation of the material weaknesses in controls over certain balance sheet reconciliations, principally in the domestic brokerage group.

The details of the second restatement are described fully in the 2004 10-Ka we filed last night.

The additional adjustments in the second restatement also affected our results for the first three quarters of 2005, the effects of which you can see in footnote 22 of our 2005 10-K.

Next I'd like to comment briefly on the status of our ongoing remediation efforts.

In our 2004 10-K, we identified five material weaknesses in internal control over financial reporting.

As detailed in our 2005 10-K, we have remediated the material weaknesses relating to the control environment and risk transfer.

The remaining at three material weaknesses relating to balance sheet reconciliations, income tax accounting and derivatives accounting remained at year-end 2005.

As we have noted in item 9-A of our 2005 10-K, we continue to assign the highest priority towards our goal of remediating these remaining material weaknesses by the time we file our 2006 10-K.

While good progress is being made we have much left to do.

Next I'd like to comment briefly on our year-end loss reserve evaluation.

As we disclosed a few weeks ago, AIG recently completed one of the most comprehensive third-party reviews of property casualty loss reserves ever conducted.

We incorporated the results of that review together with our own actuarial analysis into the determination of our best estimate of AIG's reserves at year-end 2005.

I just want to highlight a small difference in the amounts of the fourth-quarter 2005 charge compared to what we provided last month.

The difference between the fourth-quarter after-tax charge announced yesterday of $1.19 billion and the $1.1 billion included in our release of February 9th relates to a change in estimate attributable to a single commuted reinsurance agreement.

Finally I'd like to draw your attention to a few additional specific items that affected adjusted fourth-quarter earnings.

The largest single item, as noted in the press release, was the change in estimates to the domestic brokerage group balance sheet accounts of $291 million pretax.

Also as more fully described in our filings, earnings were affected by a pretax charge of $137 million related to the settlement of a long disputed tax issue in Singapore.

And in addition to the development related to the 2005 catastrophes that we have disclosed, fourth-quarter results were also affected by an additional $40 million of pretax development related to the 2004 catastrophes.

In conclusion, our results for 2005 demonstrate both the strength and diversification of the organization and its true resilience.

With all of the adjustments that we took and the fourth quarter, we still generated $444 million in net income.

And now we would be happy to take any questions.

(OPERATOR INSTRUCTIONS) Ron Frank from Citigroup.

Good morning.

Hey, you got it!

Listen I remembered on the last call you told me three strikes and I was out.

I pay attention, Ron.

That is a detail oriented person.

I give you credit.

My question does relate to the increase.

You had in the fourth quarter prior year development of $2.3 billion outside of the reserve charge and about a same amount of prior year development outside of the charge for the year.

My question is, can you help us in distinguishing what you call prior year development versus the reserve charge?

I mean they are both in essence prior year development so what if any is the distinction being drawn there and how should we view it?

And I have a follow-up.

Thanks, Ron, well, I'm going to ask Frank to answer that question.

Ron, it's Frank Douglas.

The prior year development relates to all accident years 2004 and prior as we show in the reserve development table.

So when we talk about prior year development we're referring to all prior accident years.

The reserve charge is a different number.

It's really the amount of reserve increase we need for all accident years including the current accident year, 2005, to bring our overall reserve level to the proper total.

The reason those two numbers won't be equal and by the way they are never equal.

In prior years he would have observed there has been prior year adverse development without a reserve charge.

That difference is the margin in the current accident year, 2005.

So in this particular year what you would see is as a margin of roughly 7 points in the current accident year.

And if you did that math, if you added the reserve charge to 7 points of the current accident year lost ratio, you would get the total development from prior accident years which is about $4.68 billion.

I guess what is confusing me is I don't -- it doesn't look from this like one number is inclusive of the other.

It looks like they are additive to each other.

Isn't that right?

No. no, the one year total development is $4.68 billion.

Right.

And the reserve charge is approximately $1.8 billion.

And then prior year development of 2.4?

Where are you getting the 2.4?

I'm looking at page 10 of your supplement.

That's 2003.

The 2005 number is the 4.665.

That's what I'm looking at.

On page 10 in the 12-month column, it has for 2005 a reserve charge of $1.8 billion and a prior year development of 2.4 and a total of 4.7 roughly with some other smaller items.

Yes and that is your 4.68.

Right.

That is right.

So the two numbers are additive.

One is not inclusive of the other.

The charge and the prior year number --

Frank was saying that the 4.6 inclusive of the 1.8.

And the two -- I'm sorry -- let me rephrase my question perhaps.

If I look at page 10 of the supplement I see in the 12-month column total reserve development, prior year development of $4.665 billion.

The main components of that are the reserve charge of 1.8 and a line call prior year development of about $2.4 billion.

And so my question is, what is the distinction between the reserve charge component of the total and the prior year development component of the total, not what is the difference because they seem to both add up to the 4.665?

I think the distinction is that the reserve charge for purposes of this statistical supplement is being viewed as simply an additional amount to the prior year development.

Okay, so --

I was going to page 10 of the 10-K itself which happens to have the same number on it.

So the prior year development might be viewed as what you ordinarily would have put up had you not done the reserve study?

Absent the reserve charge.

That is what the statistical supplement page 10 is breaking out is had we not had that additional charge -- to the prior accident years, it would have been that much less, yes.

Right.

So the 2.4 is probably what you would have done in the ordinary course?

Yes.

Okay.

My second question is that offsetting that 2.4, roughly, was a significant reduction from what I could see in the accident year loss ratio pick.

It looked like you brought it down from what had been running around 68 or so for the first nine months to about 63 for the full year, if I did that math correctly, excluding catastrophes.

And so I was wondering if you --?

As I said earlier, it's about 7 points in total, I believe, Ron.

We said it's about a 7 point difference at year end from the reserve that we level, the lost ratio level we had accrued during the year.

Okay.

Could you give us a little color as to the improvement in the view of the accident year?

It is really a summation across all of our profit centers.

It's not like we're looking from AIG down.

What we have done is in our reserve analysis for each of the segments, each division, each profit center as well as from Milliman reviews, is our own review as well as the Milliman review; they are all done at the segment level.

We're arriving at our best estimate of the accident year loss ratio for every accident year including 2005.

The 2005 year is normally determined by evaluating the prior accident year results and adjusting forward to 2005 based on rate changes, loss cost changes and to the extent the experience is credible, any actual experience in accident year 2005.

But it's done at the segment level taking into account all the information from prior accident years as well as what we know about 2005.

That result is then summed across all segments and that's what produces the overall AIG result that you see.

Okay, thanks very much.

Jimmy Bhullar with JPMorgan.

Thank you.

I just have a couple of questions.

First in the P&C business if you could discuss what is causing the big spike up in the expense ratio area?

You mentioned the mix shift and the use of excess of loss reinsurance but if you could just give us a little bit more color on what your outlook is for that number going forward?

And then I have a follow-up I will ask later.

Jimmy, what I would refer you to is the number I referred to earlier relating to the change in estimates of the domestic brokerage group balance sheet accounts of some 291 million pretax which would impact obviously the expense ratio.

In fact this increased the total general expense ratio by some 2.9 points and the expense ratio for DBG alone by 4.8 points in the quarter.

Yes, but even with the 290 basis points it does still seem a little bit higher.

And is that just because you are using more excess of [losses], the reinsurance or mix shift in general or is there something else besides that in that number?

I think it's a combination of portfolio mix and change in reinsurance.

Okay.

And then second, in the foreign life business, if you could comment on one, your sales levels overall, it seemed a little bit weak?

And then second, just on weak margins in the life insurance product of foreign life and I understand that there is a charge in Singapore but if you could -- I don't know how much of that $137 million was in the fourth quarter?

There is a trouble of errors that I would point out obviously the strengthening of the dollar has impacted our annuity sales in Japan and you can see that in the supplemental data.

And also the fact that we have initiated a strategy change in Asia, in particular, in selling more protection policies than endowment saving contracts, which we've sold a lot of in the past.

We think the margins given the low-interest rate environment in Asia at the present moment makes more sense to sell protection or risk type products.

I'll ask Edmund and Ken Nottingham to add any additional color there.

This is Edmund here.

As I also explained in the last quarter that we have arranged a shift of the product mix as market investments and about.

For those in that mix would be the overall premium in general would be lower than the old savings product.

But on the other hand it would give us a much better profit margin.

And the other impact in particular to our Asia sales more or less, (technical difficulty), and that's because last year, early last year we had that term endowment saving product which we took the opportunity to tap the market through bank insurance.

But when the next half of the year that the interest rate declining then we feel the margins (indiscernible) so that we procure that product.

That affects the total sales of the overall Asia ex Japan and China.

That is roughly the impact to the sales.

But on the other hand we maintain a good increase in profit.

That $137 million is a onetime impact in Singapore, without that our --

Was that all in the fourth quarter?

It is all in fourth quarter.

Yes.

So this all affect the fourth quarter, without that impact our fourth-quarter profit would show a much better increase than it showed in the quarter (inaudible).

In fact we could go up from 5.9 to 17.3, without that onetime impact adjustment of $137 million in Singapore.

And that was all in the life insurance product?

That is all in the life insurance side.

That is attributed to the product holder's dividends that we have to put it to the product holder's dividend provision and for future payment for the settlement of the tax issued in Singapore.

Okay, thank you.

Tom Cholnoky with Goldman Sachs.

Good morning.

I've got a couple of questions if I can real quickly?

First, Martin, on Starr, there has been a lot in the press about obviously breaking off the agreement with AIG and coming up with agreements with other people.

Can you quantify for us what that arrangement meant to you in prior years and how you foresee the absence of Starr impacting your business going forward?

Right.

We still are a transaction business;

C.V.

Starr still represents us and the Marine field.

But the other three relationships are in the process of either having been terminated or being terminated.

The impact of any business that is lost is very difficult to quantify.

I don't think it's very meaningful at all just to suffice to say that AIG has been in the Marine energy and aviation business, continues to be and will be in those sectors of business.

Okay.

And then on the reserves, Frank, if I can just go back I wasn't surprised that you guys strengthened your '99, 2000 and '01 accident years.

But it looks of though you put in about close to $1.4 billion into your '02 accident year.

I'm a little surprise by that.

Could you give us a little bit more caller what that actually was reflecting?

Sure, Tom.

Nearly half of that actually was related to the D&O and other management liability in financial services classes; 2002 was the year most impacted there.

Excess Workers Comp which we also highlighted at the earlier conference call was probably about $200 million, 100 to $200 million for that year.

Other primary classes in general did have some adverse development.

In total it would probably add up to about 500 or $600 million.

But by far the largest component would be the D&O and related classes.

Okay.

And then if you could just touch on the capital markets group which seemed to have not a very good quarter in terms of revenues and also earnings a little bit more color on what happened there?

I think Joe Cassano is on the line, Tom.

I'd like him to say a few words if I may.

I'm sorry, Tom, can you repeat the question?

I just came in the room.

I'm sorry, Joe.

I was just commenting it seemed as though your revenues were down considerably in the fourth quarter as well as your earnings.

Can you give us a little bit more color as to what caused that?

Yes.

You know, Martin mentioned it in the press release also.

I think for us the biggest contributor to that has been the blackout that we have been in.

Tom, as you know, a lot of what we do is issue products to an investor base through the structured note market.

And when AIG was without its financial statements and unable to issue, we were unable to provide that instrument and we ended up ceding a lot of territory to our competitors I think in terms of not being able to provide the large asset buyers, the investment type derivatives that they were looking for.

So it cost of dearly.

Where we were able to do it, we ended up having to split the value with an issuer that we found that were able to do it.

So again, it ate into our margin.

So all in all when we looked at what we did last quarter, I think the propensity for us to have, or the need for us to have to go out and find other issuers or to be beaten directly by our competitors by not being able to provide the [promises] is what the cause was.

So is it fair to say that that will exist in the first quarter as well?

Yes, because this has been pretty painful for us.

Right?

The blackout has been pretty much for the last six months.

We're really looking forward to Monday where after we finished this call, we're able to get out and issue again.

I don't want to overstate expectations here either; it's going to take us some time to get traction back with the class of investors and to regain some of the territory that has been lost.

It may take us a quarter or two to get back to the kind of issuance levels and the kinds of profitability we saw before.

Okay --

It's always also worth mentioning to Tom obviously the ongoing effects of the change in the Finance Act in the UK which continued to impact the capital markets division throughout the year.

Yes, that's a good point, Martin.

And we talked about that before is that the Finance Act here in the UK changed in March and so there is a full cycle that we have to go through until the -- until about May of having lost some of the income from structured deals that were called because of the Finance Act.

We've been fortunate in having come up with other structures that have been able to replace some of that revenue but there is still a catch-up that needs to take place.

That comes to full bear in May of probably of this year.

Okay, great.

Thank you.

Dan Johnson with Citadel.

Great, thank you very much.

A few questions both from life oriented.

The foreign life business, Edmund, as you had pointed out was running in the high teens excluding the Singapore adjustment in the quarter and about 20 for the year which I don't think is off materially much from what you've done over the last few years.

For the first question, can you talk a little bit about the sustainability of those sort of growth rates into the next year or two?

And what are going to be some of the key drivers that will either allow that to happen or not?

First, really it's a little bit difficult for me to give you a projection for next year.

But over the last couple of years we have made a good shift of our product mix so that the old savings product will not give us sustainable profit margin because the low interest rate environment in Asia in particular, that we have been able to switch it to either the risk product or the ILP investment linked products, which we would not take directly that much investment risk.

But on the other hand still give us the profit margin.

Then when you look at our overall for this year and we have been able to sustain it quarter by quarter and naturally that we have a good track record for very high profit growth for all this year.

But going forward, we surely would expect that we will be able to maintain that kind of profit growth at least in the mid-teens.

Of course there is a one negative factor right now is like a currency exchange rate in Japan that might affect our profit growth.

Probably this year the Japan [foreign exchange] may have a negative impact to our life operation, the Japan operation is a significant part of our operation, contributing to profit.

Bearing that unforeseen (indiscernible) expenses, I am pretty confident that we will be able to sustain the growth.

Ken, did you want to add anything?

I would just add that a lot of the recent year's growth has come from a continuing broadening of our distribution base in really on a global basis.

And of course that is quite sustainable and compounds itself going forward.

We have enjoyed favorable foreign exchange more or less everywhere in the foreign life division in recent years and that has changed somewhat on the downside in the past three or four months.

And so it depends a little bit on your view of the dollars actually moved the results several percentage points up or down.

Great.

The second question is on the U.S. or excuse me, the domestic life business.

There is a lot of pluses and minuses here to try to get to some sense of what the real run rate is.

It would appear that the business has improved a bit from the sort of numbers that were being put up previously but I can't quite be sure of that.

Can you talk a little bit about, Martin, how you see that business in this quarter?

And some of the negative trends we've seen in the last couple of quarters, have we seen the worst of that?

I think the takeaway point, is the fact that individual periodic premium sales rose 17.1% in the quarter.

We have very good momentum there.

Some of the areas that we've identified as a being somewhat weak in the past and certainly in the group products arena, we've taken some corrective action there.

We have downsized, we've reduced some expense, we're working on outsourcing some of the operation functions.

That area has been refocused.

And obviously we've taken corrective action in [agg here].

It is still a slow growth business.

But we've taken some steps to improve efficiency in the agency force and we have seen some benefits from that.

But I'd certainly like Rob to add some more color there as well.

Thank you, Martin.

I would just add a little more around the metrics that we've talked about in prior periods.

Martin mentioned in the quarter 17.9% up on periodic premium.

It was also up 15% on a year-to-date basis; premium in force was up 9.3%; general separate account reserves were up 5.6 and 14.1 either each; base amount was up 19.5.

All of these are pointing to I think favorable improvement as we push out into '06.

The early indication of '06 sales is very positive.

In fact are nicely up over the prior period.

Great, I've got more questions but I will get back in queue.

Thanks.

Andrew Kligerman with UBS.

Good morning.

I wanted to shoot a couple of quick questions at you.

First one, tax benefit on a consolidated basis of 279, if I were calculating a normalized tax rate, you would have paid $90 million instead of having the benefit.

What was that?

Number two, I was a little surprised to see that E&Y still sees some material weaknesses in internal control.

Can you give us a timeline as to you expect to repair that?

And how long -- and when we get to this point next year will we see a lot of restatements?

Third, partnership income, what was the yield in the aggregate versus the year-ago period?

And I was just minutiae, not really minutiae, mortgage guaranty.

Why did the loss ratio spike up so much just curious there?

That was the fourth one.

Steve Bensinger will take the first two questions there, Andrew.

With regard to the tax rate, it's really very simply attributable to the fact that in the fourth quarter we had the confluence of all of those charges visibly being the settlement charges, the additional charge on the reserves and additional development as well on the catastrophes as well as Wilma.

When you put all of that together plus some changes in estimates that we talk about, those deductions for the most part are at a 35% tax rate other than the nondeductible portions which are relatively small.

When you compare that to the estimated accrual for the year, which we are obligated to estimate and accrue in each quarter, there was effectively a true up of the year of the annual effective tax rate in the fourth quarter that drives that rate negative.

Okay.

Okay?

But that is the principal reason.

Now your second question on restatements.

I think you probably meant Price Waterhouse Coopers who are our auditors.

I'm sorry, yes.

That is okay.

E&Y will be happy that you (inaudible).

It was late at night.

That's okay.

But if you look at our sections 9, item 9-A, which starts on page 140 of the '05 10-K, you will see a pretty exhaustive discussion in there of both the remediation of two of the five material weaknesses that we identified last year.

And also the reasons why we believe we still have remaining material weaknesses in three areas.

I can give you some commentary.

On derivatives accounting, AIG financial product has developed a platform that will allow it to apply at hedge accounting to a large percentage of its derivatives on a prospective basis.

However, this platform is currently under testing and we have not yet decided when we will reinstitute hedge accounting.

We're not going to do so until we are fully remediated and we're sure all the t's are crossed and i's are dotted.

There is not as much complexity at a subsidiary level but hedge accounting will also be applied there as soon as the controls to assure compliance are in place.

With regard to the DBG, the reconciliation of sheet accounts, principally DBG, the balance sheet accounts have been reconciled.

The exposure analysis has been completed.

That resulted in the adjustments that you saw that we made.

We fully expect that we will be able to remediate this, our objective is by the end of 2006, that's what we stated as our goal in 9-A.

There is no assurances but we are certainly taking every step to try to get there.

With regard to the third one, income tax accounting reconciliations.

An extensive tax remediation plan is in place also to achieve that remediation by the end of 2006 by the time we file our '06 10-K.

We've got teams of people that are working on this full time.

We're doing our best and we hope to get there by the end of the year.

But again, we're not going to declare victory on these until we are absolutely certain they are done.

And, Steve, do you feel comfortable that we won't see another set of major restatements 12 months from now?

You know, Andrew, we certainly did a lot of work and a lot of additional work over and above what would normally be required or expected in a closing process because of the existence of the material weaknesses that we had at year end '05.

I believe we are very far along but you have to recognize we can't give you assurances that as we continue to finish the remediation efforts of these other weaknesses that more adjustments won't necessarily emanate.

So we've made a lot of progress.

We've still got more to go and we feel very comfortable with the -- that our year-end 2005 financials are presented fairly in all material respects.

We've said that.

We certified to it.

But there is still more to go and we will just have to see.

Very fair.

Andrew, [Win] is going to comment on the partnership income question and then I'll come back to you on the mortgage guaranty business.

Andrew, both '04 and '05 were very strong partnership years.

The yield for general insurance for partnerships was about 15.1% in 2004 and 14.4 in 2005.

Those are both above what we would expect to achieve on a longer-term basis.

But realizations particularly in the private equity side have been very strong in both years.

Hedge funds in '05 were a little bit weaker but nevertheless the combined number very strong.

If you take the total AIG exposure, the numbers were 11% for '05 and 12% for '04.

That has dragged a little bit by the synfuel projects that we talked about in prior times from an above the line point of view cause a drag on that yield.

Andrew, on the mortgage guaranty side, there are a couple of issues that impacted the fourth quarter just so you can do some comparisons.

In the fourth quarter of 2004, there was a benefit from a change in the estimates of deferred acquisition expenses.

And then during the fourth quarter of 2005, there was an increase in the delinquency ratio on the first lien business by approximately 50 basis points when compared to the third quarter of 2005 and the fourth quarter of 2004.

This was impacted obviously by the Gulf Coast region where we saw an increase in delinquencies, mortgage delinquencies reported by lenders.

Obviously you will see in the footnote on page 13 there was obviously a benefit from the reserve charge as well.

There is a decrease there that I'd draw your attention to.

It's footnote 2 on page 13 of the supplement.

Okay, thanks very much.

J.F.

Tremblay with HSBC.

Good morning.

I'd like to focus on your foreign life insurance operations for a second.

I think a year ago you withdrew your application to sell group life insurance products in China as a result of authorities (inaudible) -- on some of your sales practices.

Can you give us an update on where you are at in that process in terms of discussions with the Chinese regulators?

I couldn't see much detail in your 10-K.

Edmund here.

We are in fact in the final process of the whole issue.

And we may expect to release, resubmit our application in a matter of course release of (indiscernible), so that will probably give you a little bit more comfort.

So you are saying in the near term you would be expecting some form of settlement and then you could move forward with your plan of entering the group life insurance?

That is exactly what I meant.

Thank you.

In fact Edmund and I will be in Beijing tomorrow.

Excellent.

Thank you.

Paul Newsome with A.G. Edwards.

Thank you and good morning.

There has been a lot of shifting around of the numbers.

I'd like to ask a broad question.

Has the restatements within segments and -- changed your view of what parts of AIG are making adequate returns versus other parts?

Has your view changed on any pieces of AIG being businesses you want to focus on versus others through all of these shiftings of the accounting?

Paul, Steve Bensinger.

The answer is no.

These restatements have not done that.

If you look at the reasons for the restatements and it is very well detailed in our SEC filings, I think you'll find most of them to be accounting related and not necessarily business related.

Some of the issues that are causing the restatement are really cleanups of some past issues that really don't have relevance or specificity to current practices that we are employing now for the business itself.

So I would say no.

Thanks.

Jay Gelb with Lehman Brothers.

Thanks and good morning.

I was hoping we could just walk through a little bit of the math in figuring out the underlying earnings power for 2005.

I think you made it pretty clear if you back out the settlement charge and the reserve charge and general insurances as well as adjust for some of the catastrophes, you've got underlying earnings power of around $5 a share.

The things I was looking to -- first, I want to confirm that.

And then second, I also want to make sure we should be backing out a couple of items; one, the tax issue in Singapore, and I just wanted to clarify first whether that was a positive or negative impact on results.

And then second, the domestic brokerage group balance sheet issues, if we should just consider that one-time as well?

And then I have a follow-up.

The Singapore issue was a negative to the results, and that stands alone.

With regard to your question about run rates, I think in Martin's opening remarks he discussed a number of items in addition to sort of the headline issues for the quarter that we identified as being unusual in nature.

And I think it would be difficult for us to -- we've said were not going to provide specific guidance going forward, but I think if you look at what we've tried to do in both the 10-K and also in a very large supplement that is on our website, we've tried to identify in both the MD&A and also in the supplemental data all of the items that seem to be somewhat unusual for a particular reporting period, the fourth quarter included.

So I think if you analyze all of that, you will see what kind of -- what those items are and how they affected the results.

Jay, I would just add there that in my last statement in my opening remarks, I really wanted to draw everybody's attention that with all of the adjustments that we had in the fourth quarter of some size, we still generated $444 million of net income, which we believe truly demonstrates the diversification and the benefits of that diversification that AIG has both in product and geography.

Understood.

Martin, could you comment a little more on what you are seeing in the property/casualty environment, both domestically and in the foreign general?

Sure.

Well, I'll certainly give my views, and Chris and Nick are both with us.

Clearly, in the first party filled both property and energy, both on and offshore in the United States.

We are seeing rate increases.

The average in the first quarter is around 30%.

Obviously, that is an average between cat and non-cat areas.

And in the third-party arena, we're seeing rates really plateauing to plus +5 and -5 in certain classes.

So certainly first party increasing in the U.S. and third party stabilizing to plus/minus, depending on specific accounts and specific lines of business.

Internationally, still some softening, quite a competitive environment, but both on the first party and the third party side.

But I'll ask Chris and Nick to give you some specific color.

Overall in the fourth quarter just to give you a sense, the fourth quarter overall rates were down between 3% and 4% with property up about 10%.

And in the first quarter overall rates were up about 4% with property being up 40%.

So if you took property out, rates were down for everything else maybe about 2%.

So we are very comfortable with the rating environment.

Where do we see some spots that might give rise to concern?

I think in some D&O areas you are seeing three-year policies coming out and I think healthcare.

But beside that we're party bullish on where all the rates are.

So you are seeing the rates swing just for the fourth quarter to -3 to -4 positive 4% in the first quarter and that is of an environment you would expect some accelerating premium growth out of General Insurance in '06?

Well you also have to look at how -- one, it's driven a lot by property and two, our strategies in controlling our aggregates on the property side.

We think the rates are favorable but we are going to control our aggregate.

Understood.

Thanks very much.

I would just add also that we are seeing a reduction in those aggregates even in the first quarter as we take the appropriate action.

Great, thanks very much.

Do you want to hear from Nick on the international side?

Yes, yes, that would be great.

Thank you.

On the foreign side, its the fourth quarter turned out to be the worst quarter of the year for the pricing as we went into [1-1], and of course a very big renewal date for particularly for Continental Europe.

Properties off about 2 to 5%; casualty around the same but in Continental Europe which is always kind of cyclical, we're seeing a little bit of improvement; financial lines is quite competitive around the whole world and that is probably off 10 to 15.

But those are improvements on the fourth quarter.

And importantly terms and conditions are still holding and that bodes well for ratios going forward.

On the energy business anything around the Gulf of Mexico which had a loss onshore rates are up 30% to 50%, offshore they are any number you can think of and 300 to 500% is probably a better number.

Onshore rest of the world mostly 10% to 20%;

Europe is the exception to that and that is still very competitive.

But that is a good environment for us to be in in the energy business right now.

Chris, could you say the same about terms conditions in the U.S. if they're holding and that could lead to underlying margin improvement?

Yes, we see very little changes in any terms and conditions.

Some pieces in environmental we might see mold being added into some coverages which we refuse to do.

But besides that, we're three-year policies as I said before and some D&O.

That hasn't had any real major affect on our folks so there has not been any significant change in terms or conditions.

Okay, thanks for the answers.

Terry Shu with the JPMorgan.

I have four questions all relating to the life business.

First, in the U.S. life business the big earnings improvement seems to be in fixed annuities.

I can't quite figure it out.

Spreads were stable.

The in force growth slowed because of the flows.

However, margins went up a lot.

If you just calculated the margins or the fixed annuity line it went up quite a bit which helped earnings.

Can you explain that, please, why that was the case?

Yes, we have [Joey Winthrop] on the line.

Joey, would you like to respond?

Yes, I have it right in front of me.

It was up quite a bit.

Yes, I think, good morning Terry.

I think the largest item impacting it that isn't obvious from just looking at the statistical supplement were significant realized capital losses taken in the fourth quarter in the portfolio back in fixed annuity reserves in connection with the planned restructuring of the portfolio going into '06.

That had an offsetting impact of slowing DAC amortization in that line of business and that contributed a significant portion of the increase in the quarter -- (multiple speakers)

But that is sort of a quarterly event.

It's kind of an out of period adjustment?

Is that a fair comment?

No, I don't think that is a fair comment.

I think it is the GAAP accounting for the interaction between realized capital losses and the calculation of DAC amortization period.

Terry, its Chris Swift.

If you look on page 44 of our MD&A, we actually do disclose (multiple speakers).

Yes, you do but you talked about the foreign DAC situation.

I thought it was more -- something about a rise in rates in Japan causing DAC to be or the amortization rate to be low -- I didn't realize that it was also for the domestic fixed annuity which leads into my nest question.

If you look at your 10-K disclosure, you give overall DAC for life insurance.

But that is aggregate for both domestic and foreign going off of 25.8 billion to 29.2 billion and yet the amortization on an annual basis went from 3.55 billion to 3.38 billion.

And if you look at both the domestic and the foreign life side, earnings were helped quite a bit by the fact that the amortization of DAC was lower.

In fact if you looked at the foreign life, you talked about the Singapore tax issue as being one time.

Is there also some offsetting DAC of locking that's also one time that helped earnings?

I'm a little confused there Why amortization went down so much as a percentage of the balance?

Terry, its Chris again.

There's a lot of underlying questions and themes you ask there.

I'll try to take them in order.

And again, we can always take some of this off-line also.

Page 44 what Jay was responding to was the impact of DAC slowdown due to realized capital gains and losses which is disclosed in footnote H. Again, that is primarily domestic that was about a $32 million item in the fourth quarter.

Your comparisons on DAC year-over-year relate to some purchase accounting adjustments in VLBA in '04 so it's not a comparison.

I wouldn't jump to conclusions that there is a slowdown in DAC amortization at all.

Everything has been consistent between periods.

So what is this -- the Japan interest rate thing that causes lower DAC amortization?

What does that mean?

I didn't understand that.

I don't think the Japan interest rate environment would cause lower DAC --

It was discussed in your 10-K MD&A, that's why I asked.

Rates are rising which will add a level of margin profitability going forward that will allow us to reanalyze DAC and potentially slow down the amortization as margins widen out from interest rates.

Right, you referred to that in your MD&A, that's why I asked.

So this is an ongoing thing?

Yes I mean again, it's not due to lower interest rates it's due to rising (multiple speakers) --

Right, I'm sorry, rising interest rates, I didn't mean that.

That is what it was said, the rising interest rates, I meant that.

That was just -- was that the reason and therefore on a forward going basis, the DAC amortization is at a lower level because you are now assuming higher profit margins?

Is that sort of the bottom line?

Again when we (multiple speakers) DAC on a quarterly basis and re-project going forward margins, we are raising our assumptions of spreads in the Japanese annuity business.

Okay, but there is no onetime adjustment?

This is just an increment up, is that right?

Correct.

Okay.

The other point that you discuss in your MD&A also about foreign life something about a change in tax deductions for personal accident and health in Japan which may cause lapses to rise and a slowdown in sales.

Edmund, can you --?

Yes, Terry, I can answer that.

Just really a price to one specific product more or less like the long-term personal accident product.

And this product in the past mainly sold through independent agents to corporate clients and that was a tax deductible exemption from the revenue.

Now they would like to put a ceiling to it.

So in that case and that would affect some of those sales to public clients.

But that product line is really represent a very small portion of our overall total Asia portfolio in Japan.

Even if that may slow down our sale in that particular line, it would not affect our total overall sale in A&H business in Japan.

Okay, thank you.

And then finally the last question, you show life insurance in force in your 10-K disclosure, the foreign life insurance in force actually went down in '05 versus '04.

I thought that you said you were moving more towards higher margin protection products.

And wouldn't those have higher face amounts so wouldn't the life insurance in force be moving up rather than going down?

Terry, Chris can explain that.

Terry, that as a good observation.

That is primarily driven by foreign exchange rates at the balance sheet base.

Again, if you would normalize the currency rate actually in force would grow about 3.5%.

But that is primarily an FX translation decrease.

Okay, thank you.

Alain Karaoglan with Deutsche Bank.

Good morning.

I have a couple of questions.

On the property casualty side, you made a contribution of $2.3 billion in February to your P&C operation in the U.S.

Was that a cash contribution or did you contribute the business?

And if it was a cash contribution, what was the source of funds?

Did you do any financing for it?

And if it's a business, then which business did you contribute?

Alain, this is Steve Bensinger.

Let me just give you a little history here.

In November when we announced -- shortly after we announced the results of the first restatement on a statutory basis, we put in 3.5 -- I'm sorry -- we put in $750 million to American Home.

And then in February we put in another $3.75 billion to a variety of the domestic brokerage group companies including American Home and others -- $2.75 billion, totaling $3 billion.

That was in cash.

There was no business transfer.

That is fully described in our 10-K and MD&A on page 64.

And the reasons for that were really the confluence of a lot of factors.

It was the restatements.

It was the reserve increases.

It was the catastrophes that were incurred by the Company and it was remediation.

All of those brought the capital levels of those companies below the standards at which we were looking to maintain them and we brought them up with those capital contributions.

And the source of the financing?

The source of the financing was our normal liquidity facilities.

Again in our 10-K we disclose that our CP levels are a little bit higher than they usually are on a run rate basis and we were able to fund that through our normal liquidity.

Okay.

And the second question relates to reserve, following up --I'm sorry, Frank, we're peppering you with these reserve questions.

But the accident year results, if I look at the 2004 accident year, it seems that that year had $3.8 billion of reserve releases and I did the math -- probably it's around 14% to 15% of the 2004 accident year result reserve.

Could you tell us a little bit which lines of business and why you felt comfortable that to release so much so soon in 2005?

Yes, my math says it was about 13 points but I think we're in the same ballpark.

It is about $3.8 billion.

It was spread across a wide variety of profit centers.

Really almost all lines of business did degenerate favorable development from accident year 2004.

We did set what we felt and I think we said at the time were conservative loss ratios for that accident year.

And now with the comprehensive reserve review we just completed having now got two years of loss development from that accident year for most classes of business, we do have significant credibility in the results for accident year 2004.

And we are quite comfortable with the loss ratios that we determined and allocated as per our reserve studies to accident year 2004 and all other accident years.

A lot of the redundancy margin came from the foreign side, foreign general had excellent results for accident year 2004.

The business is written by Lexington, the healthcare, casualty and property all generated significant favorable developments in accident year 2004.

Even Workers Comp, which is a line as you know we had adverse development from the older accident years.

We actually had set some very conservative initial loss ratio assumptions for the more recent years and accident 2004 is developing favorably.

I could go on.

There are many, many other classes that generated a smaller amount of favorable development.

But really all lines of business did generate favorable development for accident year 2004.

So they add up to a very large number.

But in part it is the result of us having set a conservative initial loss ratio which now we're booking our best estimate for that accident year as we are for every other year.

And we think we've got a very good estimate.

Okay.

And that is what is giving you the confidence and comfort in the 2005 accident year loss ratios which were very good?

Yes, 2005 as being key to the results of 2004, 2003 and all prior years to the extent they are credible.

To the extent 2004, 2003 are credible, we are relying in large part on those years adjusting for rate changes, loss cost trends etc.

And, yes, we are comfortable with 2005 which if you did the math, you'd see we actually currently have accident year 2005 about six points higher than accident year 2004, ex cat.

We are not trying to be tasty in taking any favorable results into 2005.

We currently have it set at a higher loss ratio in total than either 2004 or 2003.

Thank you very much.

Charlie Gates with Credit Suisse First Boston.

Hi, I just had one question.

Do you have any comment specific to the possible combination of St. Paul Travelers and (technical difficulty)

Charlie, I'm not going to comment on other companies or speculation.

Thank you.

Al Copersino with Columbia Management.

Thank you.

I just wanted to get back very quickly to Ron Frank's earlier question about the difference between the reserve charge and the prior year development that it sounded like was more say a normal course of business to have that prior year development.

My question is, is it normal that would you have normally expected to have that prior year development because simply there is always changes to initial reserve estimates?

There is always some guess work some uncertainty involved.

Or is it simply that each year you just move forward the discounts on Workers Comp reserves and things like that?

Which is it that makes it normal to have a fairly large change to reserves of that sort?

Frank?

We wouldn't say it's normal.

I think what has happened the last couple of years is obviously we've entered into a hard market period. 2003, 2004, 2005, where we are enjoying the benefit of substantial rate increases across most lines of business and our initial policy, especially since we were seeing adverse development from the earlier accident years, was not to be hasty in recognizing the expected better results that might occur for those accident years, 2003, 2004 and 2005.

So in each of those three years we initially recorded what we I think said each quarter were hopefully conservative loss ratios not yet taking into account all the improvements that we knew could occur.

I think we what we are seeing now is we actually have seen three full years, four full years of really of improvement since the hard market of 2001 and '04, really five years for some classes.

We are more comfortable now I think than I would say we've been in the last three years by far.

On top of that we've done the comprehensive reserve review for the past six months which makes us even more comfortable that in fact what we've seen in the past is unlikely to repeat or anywhere nearly so.

It wouldn't be normal.

We didn't expect adverse development.

We certainly didn't expect this much adverse development but we did set and said at the time what we thought were cautious loss ratios in light of the adverse development we had been seeing.

I will just add also that you heard from both Chris and Nick that overall terms and conditions are holding reasonably well.

You know, we have policy wordings, still have good degree of discipline, deductibles are holding reasonably well.

I would just add that to Frank's comments.

Okay, thank you very much.

[Ernest Jacob] with [Long Note Capital].

Thank you.

I'd like to know whether your cat program is placed in full?

And also how it looks at both the top and the bottom versus a year ago?

Ernest, that is a good question.

We decided to keep an additional retention so I think I believe we are in excess of 750 million domestically.

And again off the top of my head, I don't have the exact facts in front of me but I think around 52% of that is priced.

We feel very comfortable (technical difficulty) that we have and with the controls that Chris and his colleagues are putting in place to further reduce our aggs, I think we feel that we're well-positioned for '06.

You're attaching (multiple speakers) --

(multiple speakers) I can have Charlene really give you some more detail there.

Okay, thank you.

Thank you very much.

I think ladies and gentlemen as Edmund and I have to jump on a plane for Beijing, we've got time for one more question.

Ron Bobman with Capital Returns.

Thanks a lot.

I think I was reading in the K that you added if I'm right $197 million in reserves for the '04 hurricanes.

And I wanted to know was that a fourth-quarter '05 event, the addition?

And was that for the domestic brokerage group?

And I also wanted to ask sort of related to that how that compared to what the initial estimates for those storms were?

Because I don't think you've changed them in the interim.

And then I have one unrelated.

(multiple speakers) The 97 million was for the full year, is that right Frank?

I believe so, yes.

And the second part of your question, I didn't hear it.

Was the 197 -- but was the addition all taken in the fourth quarter or was it spread?

No, no.

Martin indicated in his opening comments that 40 million, 40, of the 197 was in the fourth quarter.

The other amounts were in previous periods.

I'd just point you to page 11 of our stat supplement which has that all detailed for the domestic brokerage group.

Okay.

And does it also have what the initial estimates were for those four events?

Well, it doesn't talk about previous periods.

If that is something you're interested in, we can get you that.

Okay.

And then I'm wondering if you can expand the actuarial study, the M&R work to include Trans-Atlantic?

Trans-Atlantic is a separately publicly traded company.

They have their own governance and their own decision-making.

So that is a decision that that they will make on their own.

That's not one that we dictate to them.

Is that really reflective of reality given the fact that you control the Board and you own 60%?

In today's environment, that is reflective of reality.

Thanks a lot and continued good luck.

Thank you very much, ladies and gentlemen.

Thank you.

That concludes today's conference.

You may disconnect at this time.