American International Group Inc (AIG) 2006 Q1 法說會逐字稿

Welcome to the AIG first-quarter earnings conference call.

At this time, all participants are in a listen-only mode. (OPERATOR INSTRUCTIONS) Today's conference is being recorded.

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

Now I will turn the meeting over to Ms. Charlene Hamrah, Director of Investor Relations.

Ma'am, you may begin.

Thank you.

Good morning.

Thank you for joining us today to discuss AIG's first-quarter 2006 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's operations, products, and services, and assumptions underlying these projections and statements.

Please refer to AIG's quarterly report on Form 10-Q for the period ended March 31, 2006, filed yesterday with the SEC, 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 contain certain non-GAAP financial measures.

The reconciliation of these measures to the comparable GAAP figures are included in the first-quarter 2006 financial supplement, which is available in the information section of AIG's corporate website.

Now I would like to begin today's meeting and turn the call over to Martin Sullivan.

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

I am joined this morning by a number of my senior management colleagues.

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

We announced our first-quarter 2006 results last night, with adjusted net income of $3.38 billion, or $1.29 per share, an increase of 4.6% over the same period in 2005.

However, as stated in the press release, the results for the quarter were adversely affected by one-time after-tax charges of $115 million relating to expenses from the SICO compensation plans and the Starr tender offer.

Results were also negatively affected by an additional allowance for losses in our credit card operation in Taiwan of $57 million after-tax and an adjustment relating to deferred advertising costs in General Insurance of $38 million after-tax.

A number of our major business units performed well in the quarter, while others were affected by conditions specific to their business.

These results once again demonstrate the importance of AIG's globally diverse portfolio of businesses.

General Insurance reported impressive results, with record operating income before realized capital gains of $2.26 billion and a combined ratio of 89.17.

U.S. property and energy rates, both on and offshore, continued to increase, both in catastrophe and non-catastrophe areas.

General Insurance rates are modestly down in the U.S.

Outside the U.S., property rates are basically flat, while longer tail lines are down approximately 10%.

More important, terms and conditions globally are holding firm in areas such as deductibles and coverage.

Life & Retirement Services performed reasonably well, with good growth in life reserves, although results were negatively affected by foreign exchange.

The first-quarter 2006 growth rate in the Foreign Life & Retirement Services operating income, including price in net investment gains but excluding realized capital gains or losses, would have been more consistent with our historical performance of approximately 15% were it not for foreign exchange and the effects of the Taiwan credit card charge, which was shared 50% with Foreign Life, and actuarial changes in estimates for deferred acquisition costs and reserves.

In Financial Services, the negative effect of rising interest rates on aircraft leasing and consumer finance operating results were partially offset by improved operating income, excluding the effect of FAS 133 from Capital Markets, which benefited from increased transaction flow.

The decline in Asset Management operating income was largely the result of the runoff of the Guaranteed Investment Contract portfolio and the significantly fewer real estate investment gains within the institutional investment business when compared to the first quarter of last year.

I am pleased to advise that we issued $500 million in Euro-denominated debt securities last month in the first offering under our new matched investment program.

During the quarter in which significant registry matters were resolved, we also remained focused on executing some key strategic growth initiatives, such as the Domestic Brokerage Group continued to expand distribution through national, regional, and local producers, and grow its presence in the small business segment.

And as we have said many times, that has been a key strategy for us and we are proceeding well.

We also announced an agreement to acquire the Central Insurance Company in Taiwan, which when consolidated with our existing business will make us the number three general insurer in the country.

In early May, we also acquired Travel Guard, a leading provider of travel insurance.

We are now also seeing the benefits of our international expansion from our mortgage indemnity business and our Private Client Group also continued its strong growth.

Finally, we are delighted that we received approval a few weeks ago for provincial expansion of AIG's life insurance operations in Guangdong and Jiangsu in China.

Provincial expansion was also given for our non-life operations in Guangdong.

This significantly expands our marketing and sales opportunities in two very large markets.

We also have resubmitted our Group Life license application, which is now being processed.

You can see all the details of our results in the 10-Q and in the financial supplement we filed last night.

In conclusion, our results for the first quarter of 2006 generated an annualized return on equity of [14.6%], again demonstrating the strength and diversification of the organization and our sharp focus on growing all of our businesses worldwide.

Now we would be very happy to take your questions.

(OPERATOR INSTRUCTIONS) Tom Cholnoky, Goldman Sachs.

Martin, I guess I want to ask kind of a broader question.

Obviously, AIG has been undergoing a lot of transformation over the last year.

Obviously, if you strip out charges, it looks as though the underlying earnings are quite strong.

And really the question comes around is with other companies we ask what is kind of normalized catastrophe losses we ought to bake in.

I'm getting a little worried.

Do we have to figure in normalized kind of quarterly charges that we have to bake in, or are we at a point where kind of the housecleaning is getting more and more behind us, and the true underlying earnings of AIG is ultimately going to emerge?

Absolutely, I think we have made tremendous progress over the last 14 months, Tom.

Obviously, I can't foresee the impact of catastrophe losses.

But what we said from the outset back in March of last year is that we would give very [fulsome] disclosure and that is what we attempted to do in prior Qs and Ks, and certainly in last night's filing of the 10-Q, to give you and your colleagues as much information on the underlying strengths of the businesses, what areas are working and where do we have some issues to address and what we're doing about them.

So hopefully as we go through the balance of 2006, the underlying strength of AIG's earnings will come forward, and hopefully these one-off adjustments will begin to be eliminated.

Okay, just to follow up, if I could get maybe Edmund to talk a little bit about a little bit more detail of what's going on in Taiwan with the very big drop in first-year premiums.

And then also in Japan, the big drop in fixed annuity production.

Thank you, Tom.

In fact, I mentioned also briefly in the last quarterly meeting the drop in Taiwan, the first-year premium income.

Last year, '05, the first two quarters we issued very substantial premium first-year premiums in the short-term endowment policies in Taiwan, mainly selling through banks, which was a three payment, six-year endowment.

Just in that quarter we enrolled has been sold about $600 million of those first-year premiums.

That's in the two quarters?

Yes, for the quarter.

And eventually --.

For one quarter, Edmund, was it?

For one quarter.

Yes.

Eventually that (indiscernible) by second quarter, the Taiwan interest rate dropped quite substantially. (indiscernible) when we first issued the policies, we had to still maintain the margin, but by then on the second quarter, we found that there's no more profit margin for that product.

So we withdraw that product since the second quarter.

And we have encouraged our agents to switch the product mix more to the risk premium than also to the investment-linked products.

So that is why this year you can see that we have been selling a lot more personal accident. (indiscernible) it was up 36%.

And also switch to single premium, and the single premium for the quarter, it was over 200% of growth in Taiwan.

And we don't sell that particular premium anymore.

So that is why that in fact we specifically split out the Taiwan result in this quarter, so that all of you were really aware that we did make a switch and that that worked for Taiwan.

As to the annuity sales and -- probably after I give a little bit explanation, I also ask [Jay Winthrop] to also add some color to it.

And the Japan, there was substantial drop in fixed annuity production the first quarter.

A couple reasons.

One, the weakening of the yen, so that the customers are no more interested in buying foreign currency fixed annuity product.

And two, also the increased interest rate in Japan and the current yen interest rates have been increased over the quarter, so that also that people less enthusiastic to buy the foreign currency fixed annuities.

But because of also the improvement in equity market and so the more switch to a variable annuity, we also have also switch to variable annuity in Japan.

And you can also see that our variable annuity production has increased by more than a couple hundred percent, but we are now maintaining momentum just to fill up the momentum to have more variable annuity in place of fixed annuities.

Maybe Jay could add some color to it.

Edmund I think is spot on.

Just a couple of additional comments.

If you look at the entire Japanese annuity market, about a year ago, half the sales were roughly fixed annuities and half were variable.

As we got towards the fourth quarter of '05, and we believe in the first quarter of '06, the market appears to now be about 85% variable annuities and 15% fixed annuities.

So the market has shifted dramatically.

I don't have a good sense of our share of fixed annuities, but I suspect it is still very strong.

Edmund mentioned the Yen versus the dollar.

Interestingly, things have actually changed again here recently.

The Yen has strengthened considerably.

I am not sure how much benefit we will get from that in our dollar-denominated fixed annuities, only because the market has shifted so dramatically.

But if the past is any sort of guide, it should be modestly helpful.

In the meantime, our variable annuity sales have been strong growers, and that is really without us having contemporary living benefits and income benefits, which is also taking hold in Japan as it is in the United States.

But really I think it is important to keep it in context.

The entire market has shifted to 85 variable percentage points and 15 fixed.

The other thing I would mention, Tom, is if you look back the last two to three years for AIG, you're looking at really extraordinary growth in those dollar-denominated fixed annuity sales.

I think they've compounded at almost 100% a year; that's why the earnings are so strong.

So I do think we do have some very challenging comparisons if you only look at dollar-denominated fixed annuities, but I think other parts of the market are now starting to grow.

Okay, great.

Thank you.

It may be helpful to you if just excluding in Taiwan the product that Edmund described, the three-paid six.

If you exclude that from FYP, Taiwan's sales were up about 44% FYP in the quarter.

Okay, great.

Thank you.

Jamminder Bhullar, JPMorgan.

I just have a couple of questions.

First, if you could, Martin, give us a little more details on what you see in the pricing environment in the P&C market.

And then second, in ILFC and Asset Management, even if you back out the -- or ILFC and in the Consumer Finance business, even if you back out some of the unusuals, the margins seem to be going down.

And one of the reasons you mention in the Q is the higher funding costs.

I just want to get an idea on what your outlook is for margins in those businesses on a normalized basis, X the unusuals going forward.

I'll be happy to start off on the first part of your question on the P&C conditions.

As I mentioned in my opening remarks, clearly in the U.S. property and energy sectors, both on and offshore, we continue to see increasing pricing in those product ranges.

And our own view is as we see it today is that that continuing price increase will continue through the balance of this year.

As I mentioned, casualty is modestly flat to down, internationally we are seeing property rates holding reasonably flat, and the longer tail lines, again down some 10% overall.

Clearly, it varies by region of the world.

But as I have said for many years, what is also critical in the P&C industry is that terms and conditions continue to hold.

And that is what we are seeing.

We're not seeing any overall pricing on -- pressure on deductibles reducing, and we're not seeing policy coverage being extended.

So when you look at it overall, it does not look a terribly bad picture.

I don't know if Chris or Nick would like to add anything on that.

Yes, I think that on the property side, every month the rates are going up, going from January through to today, each month they have been increasing.

On the non-Cat, we're seeing about 15 to 20% right now and on the Cat side, over 40%.

On our casualty business, it is down about 3 to 4%.

On the national account side, it is less than that, basically almost flat.

And on the middle market business, it is down a little bit more than that.

Just for property, as Martin said, in the UK there was somewhat sympathy for the losses in the U.S. so the rate softening has certainly been curtailed.

In the rest of the world, it is much more of an open market, so we are battling to keep where we were.

On the second part of your question, I'm going to ask Bill Dooley just to respond on that.

As far as the domestic consumer finance businesses are concerned, we are looking at a strong economy here in the United States and we're in a strong credit environment, and we have seen improvement on our credit loss rates.

And as well, we have also seen strong loan growth, which is driving up the revenue numbers.

But as you indicated, it is an interest rate scenario here in the U.S., and as interest rates continue, our margins will be impacted.

So I think the prime factor on a margin compression is really due to just the interest rate margin environment that we are in.

Is it just interest rates or does it have something to do with your ratings also, relative to last year -- relative to (multiple speakers)?

No, it has nothing at all to do with ratings.

The ratings have been stable in these businesses and it has nothing at all to do with that.

The participation in the Capital Markets for our funding has been excellent, and absolutely no issues in that at all.

As far as our origination business, which is also consolidated under AGF, there has been a depressed whole-loan sale pricing as a result of the flat yield curve.

So the pricing on that has come off over the last two quarters.

I should note that over the last few weeks because the yield curve has steepened a little bit, the pricing has improved somewhat.

New originations have also slowed down, though, mainly due to the refinancing mortgage area here in the United States, so that does have a negative effect.

But overall, as I said before, it is really driven by the course of interest rates.

As far as ILFC is concerned -- and Alan Lund is on the call -- maybe he can add something to what I am about to say -- but basically, in ILFC, the lease rates have continued to be extremely strong.

The fleet has been totally leased out for this year.

About three-quarters of the new deliveries for next year have been leased out.

They have had some one-off adjustments in their books that Alan can go through.

But again, that is being affected predominantly again on a going-forward basis by the higher interest rate margins that the market has.

They have not been affected at all by any rating agencies.

They have held their rating agency ratings.

And the capital markets have been very favorable to them.

As a matter of fact, they have had improved spreads in that marketplace over the last year or so.

The reason I was asking is because the pricing environment has improved over the last several quarters, but we haven't really seen an improvement in your margins.

They have actually been declining.

And maybe if you could just give us an idea on what the unusuals were in this quarter and what underlying margins would have been.

It is pretty much totally driven -- the core business is extremely strong, and it has totally been driven by the rise in interest rates.

But there were not any unusual one-timers in the 129 million number you (multiple speakers)?

(multiple speakers) have disclosed.

Alan, do you want to go through the --?

Excuse me, I would point out the revenues are up in aircraft financing by 16.7%.

Sorry, Alan.

The usuals that we had is we had -- the primary and largest single one was a battle with the Australian tax office that we ended up settling out in the first quarter.

And that one was expensive for us.

And it related to a general sales tax, or other countries may know it more as a VAT issue, on our Australia leases.

In addition to that, we had a couple of follow-on issues with respect to lease adjustments and a write-down on some restructured note receivables -- or lease receivables in the form of notes that we had with one particular customer.

And those with primary drivers of the (multiple speakers).

Can you -- have you quantified these in queue?

I didn't see them in there.

They will be quantified more in our Q, which will get released later this week.

Okay, thank you.

Mark Lane, William Blair & Company.

First question, on the foreign life, you mentioned just not the impact of the Taiwanese business, but also foreign exchange and the change in DAC.

So I'm assuming that the foreign exchange was something that might continue.

Last quarter, I think Edmund said that he felt like margins were sustainable in and around the levels he had been producing the past couple of quarters.

What is the thought process right now?

Mark, as Martin pointed out at his opening remarks, the Foreign Life operations operating income was adversely affected by a few one-off items.

And one, mainly the foreign exchange, and that is mainly from the weakening of the Japanese yen.

For that particular impact, it's about 4.5 to 5%, almost like 5 points to the bottom line.

And the second issue it was the Customer Finance Group that we share 50% of the loss provisions, which was about $44 million.

That again affecting 3 points to the bottom line.

And the last but not least item was really the actual (indiscernible) adjustment unlocking of the DAC and efforts this year from (indiscernible).

That is a little bit more unfavorable.

So that affects about 2 points.

So adding all this together, to the 6.3% of foreign operating income, this would give you back to 15, 16% level, that if not because of these three unusual one-off items, we are still able to maintain the level of operating income for the Life division.

So we should get back there over the next couple quarters then?

I believe so, assuming that there's no adverse impact to continue in the foreign exchange.

And I'm sure that that that onetime CFG provision would not be there in the future quarters.

Okay.

Chris, the expense ratio within General Insurance for, the party line has been product mix change is pushing up the expense ratio.

That should continue.

And then this quarter, it was down.

On the General Insurance side, it was pretty much flat over the previous last --

In Domestic Brokerage Group, Mark, I think the increase that you are referring to overall was primarily driven by the deferred advertising charge in Foreign General of about $53 million, if I am correct.

But it had been increasing year-over-year the last few quarters, which was suggested that that was something that was going to continue, but that did not continue in the first quarter.

So has something changed or is the expense ratio going to remain pretty stable year-over-year?

What is your view there?

In the first quarter, the expense ratio overall went up to 22.53 from 21.73.

And if you -- the prime mover for that increase was Foreign General on the preferred advertising charge.

Obviously, we continue to manage expenses very efficiently, as you would expect, in AIG.

But foreign portfolio mix can make a big difference, depending on whether consumer business is growing quicker than commercial or vice versa.

Okay, and last quick one.

The Capital Markets business, is that business back or was it an unusually good quarter?

Should I answer that, Martin?

Absolutely, John.

I would like to say it's back, but you can't predict this business because it is just so transactional.

But one feeling we have sitting here is that perhaps last year's kerfuffle that went on with the Company has had a greater impact on people accepting us as a counterpart than what we have seen this year.

It is clear that clients are much more accepting of us again, and so the transaction flow is back.

And once the transaction flow is back with us, we are able to work as the intermediary to take value out of these transactions.

And it seems to be working pretty well for us right now.

But it is transactional business and it is hard to predict from quarter-to-quarter where we're going to end up.

But it does feel much better than it has in the past.

Thank you.

Mark, let me just add on your expense ratio question on the DBG.

You have a good point.

Quarter-to-quarter, we could have some accounts, whether we have low commission or special deals that we have done that reduced expense ratio.

I think what we have seen before and what you should expect in the future is that we will still have some upward pressure on the expense ratio due to our mix of business.

Okay, thank you.

Jay Gelb, Lehman Brothers.

Martin, I was hoping you could give us an update on the strategic review of the business you are going through.

We saw the announcement of IPC Re this quarter in terms of the plans to sell that back.

And I just want again update there, as well as an update on, I guess you would call it litigation with the Starr entities to figure out who controls those shares.

Well, obviously, on the latter subject, as you can appreciate, that is subject to litigation, so I can't comment specifically on that.

With the review -- with the overall business review, that is very much work in progress.

As we speak, we're making very good progress.

And obviously, that is somewhat tied in with the economic capital review that we're doing, which we are still targeting to have completed hopefully by the end of this year.

Okay.

And then separately, it sounded interesting that partnership income appeared to be up in the Life and Asset Management businesses but down in P&C.

Can you give us a sense of why that may be or if it could reverse at some point?

I am going to let Win respond to that, Jay.

Yes, as we have talked about before, as we look at partnership income, it is a bit volatile quarter-to-quarter, especially as we take it down into segments.

So if you look -- I think in the fourth quarter it was the other way around.

So it does change quarter-to-quarter.

It was a very strong quarter in the first quarter last year -- first and second quarter last year, particularly in General Insurance -- both sides, but especially in general.

So I don't read much into it in terms of which segment in any given quarter.

As I've said before, we are kind of earning at the high end of our expectations in partnerships that persisted in the first quarter, but we are happy with that segment of the portfolio.

Okay.

Then final question on the strength in the yen, which has come back as I believe it was mentioned in the quarter.

Should that reverse out the impact we saw in Foreign Life in the first quarter?

Certainly it will have somewhat of a positive effect.

It is obviously a little bit too early to say, because we don't know how it is going to play out for the balance of the quarter.

But expectations would be that that would be positive.

Great, thanks very much.

[Dan Johnson], (indiscernible) Investment Group.

You have obviously well documented the foreign exchange impact in the Foreign Life segment.

Could you turn back to Foreign General and give us a similar sense as to how much, if any, the foreign exchange environment hurt the operating growth results there?

I certainly can.

From what we can determine, it is approximately plus or minus about $35 million.

Okay, so really not much.

So that was that one.

In terms of Lexington's gross -- I guess I will call it appetite and capacity, there has been significant dislocation in the E&S marketplace, even more so just in the last few days.

Does Lexington have the capacity and sort of management appetite, if you will, to absorb some of the probably additional need that is coming to the market at a time when supply is probably actually being cut back by many others?

I will certainly respond to that and ask Chris to add some color.

Certainly it has the capabilities to do so.

Obviously, at the same time, we are continuing to manage our aggregates as well, somewhat using some quota share reinsurance and some additional excess of loss reinsurance.

But Lexington certainly has the capacity to continue to move forward where opportunities exist.

Chris, if you want to --.

Martin said it right.

We do have the capacity, we have the ability and we keep looking at opportunities and it gives us broadening opportunities.

We are also at the same time managing our own aggregates and our own exposures.

Okay, finally switching to the variable annuity marketplace, both here and abroad, I recall that you have been somewhat prevented from launching new product here in the U.S. up until even maybe just a few months ago.

Can we talk a little bit about what the plans are for rolling out new product here in the U.S. and whether or not we're seeing the sort of full impact of recent product and distribution changes in Japan as well?

(indiscernible), do you want to respond to that?

Yes.

Domestically, I don't know if we are seeing the full impact, but as you saw in the statistical supplement on page 17, our deposits on variable annuities were up about 15.3% in the quarter, sequentially up about 19%, and remain very strong going forward.

As you know we launched our initial what I call contemporary living benefit last November, and we launched further variations on that earlier this year.

On May 1, we launched our core life version of our market lock guaranteed minimum withdrawal benefit called MarketLock on the individual side and we call it IncomeLOCK on the group side.

And we are very optimistic about that particular feature and how it will compete in the marketplace.

There are still a few states lingering in terms of product approval.

That is sort of course, although it has been a little more challenging for us just because of some of the things going on last year.

But I think will be through most of that shortly.

As I mentioned -- and again, I think our outlook is pretty optimistic, based on what we're seeing on the sales side.

On the foreign side, I really can only speak primarily to Asia and there I'm really speaking about Japan.

As I mentioned earlier, our variable annuity sales have been quite strong there, especially again if you look in the statistical supplement.

I think that is shown on page 22.

You can see that variable annuity production in Japan in the quarter was up about 160%.

The market has shifted dramatically.

We currently do not have what I call contemporary income benefits in Japan.

We are working hard to develop that and get comfortable with all of our modeling hedging.

I think it is reasonable to expect we will be there sometime in either late this quarter or third quarter more likely of this year.

And I think that will be very, very helpful to be competitive, even more competitive in Japan.

Whether the market will remain as skewed to variable annuities or not really depends in large part on the Japanese appetite for equities, and right now that is very strong.

Great.

Thank you very much for the answers.

Andrew Kligerman, UBS.

Two questions.

First, on the premium side, you had net written premiums up roughly 4%, gross written premiums up about 2%.

Could you give a little color on what you expect (technical difficulty) growth over the next two to three years and how the session rates are going to be affecting that as well?

Second question is on the spreads.

We saw nice 4 basis point sequential pickup in fixed annuities.

On an economic basis, both of these numbers adjusted, but GIC spreads were up about 18 bps sequentially.

In this higher interest rate environment, where do you see spreads going on your more important lines of business?

Then lastly, the one-off items, could you give a little more color around the Taiwan credit card loss?

And then I wasn't quite clear on the deferred advertising costs in Foreign Life.

A little more color on that.

Thanks a lot.

I wish I could see what the rating environment would be like on the P&C side out two or three years.

Obviously, from our perspective you saw the Foreign General had particularly good growth in the first quarter, despite the impact of some foreign exchange there.

Certainly good growth in their consumer business, reasonable growth in their commercial business., as you saw the numbers of the DVG.

And if the rating environment continues as we see it at the present moment, I think our expectation is that as Chris articulated the property rates in the U.S. will continue to increase as the year unwinds.

Beyond that, I would expect us to continue to see growth in the P&C top line.

But without knowing what the rating environment is going to be next year or the year after without the magical crystal ball, Andrew, I am not sure I can comment any further on that.

And the session rate, Martin, do you think that will be going up regardless?

The reinsurance session rate?

Yes.

Oh, that will depend very much on market conditions and our view as to whether the pricing is adequate to meet our underwriting standards.

So again, that's very much dependent on the environment in which we're trading in.

Fair enough.

With regards to spreads, Jay, would you like to make any comment there?

I guess I'd just make the following comments, which is we continue to feel good about maintaining our spreads in our fixed annuity business, Andrew.

We keep using this word pricing discipline, but that is what it is all about.

You can see in the statistical supplements where the trade-off between what has been happening in the base portfolio yield, the enhancements, particularly partnerships, versus the cost of funds.

As I have also said previously, where we are more challenged is in our group retirement products, our VALIC business.

That is principally because most of our general account liabilities on a crediting rate side are credited at their minimum guaranteed crediting rates.

And so there I don't expect us to be able to certainly widen spreads, and I'm looking at the base spreads.

And I think we will be pressured there as long as this yield curve remains relatively flat and modestly rises.

So feel good on the fixed annuity side.

I think we've got bigger challenges on the group side, which is expected with this kind of an interest rate environment.

And as that changes, my outlook will probably change.

Andrew, on the Taiwan credit card issue, I'm going to ask Bill to give you more color there.

Andrew, the $88 million is our best estimate given the information that we have today.

I must note, though, that the Taiwan situation is fluid.

It is an industrywide credit deterioration in the Taiwan credit card market, and it really resulted in after years of aggressive lending.

But the government has also -- has imposed certain restrictions on lenders' collections and that is still ongoing.

And one of the big pieces of legislation too in Taiwan is a new bankruptcy bill, and we were expecting that in June of this year, and indications are today that that might be delayed until later in the year.

So there's some certain aspect to this that makes the business a little fluid or the number a little fluid, but right now the $88 million we believe is the good number.

And as an example to date so far, we have only taken charge-offs of $15 million.

So we think it is a proper number to book, but we will continue to monitor the situation.

Andrew, Steve Bensinger is going to give you a little bit more detail on the deferred advertising.

In the first quarter, as we disclosed, we corrected the amortization expense to bring our General Insurance deferred advertising cost accounting in compliance with the accounting standard, which is SOP 93-7.

That was $59 million pretax.

The predominance of $53 million related to Foreign General.

The remaining $6 million was for Personal Lines.

It is a non-recurring item as far as we are concerned, and it does not affect recoverability.

Thanks very much.

Ron Frank, Citigroup Investment Research.

A couple of things.

First of all, if I understand correctly, prior-year development was negligible in the quarter at about $35 million net, and I assume that catastrophes outside of the prior-year development were likewise very small.

If that is correct, then the ex catastrophe accident year loss ratio for General Insurance came in at about 66, after having declined from 67 in '04 to about 63 last year.

My question is perhaps for Frank.

Does this represent a significant change in view of the '06 accident year versus '05, or are we simply going to see a similar pattern last year in that you reserved relatively conservatively for the short- tail lines in the first nine months of the year and then in the fourth quarter there was a substantial ratchet down when no losses emerged?

Hi, Ron; it is Frank Douglas.

First of all, I agree with your numbers.

I think the loss ratio was about 65.5 in the quarter ex cat.

That is a few points higher than the loss ratio we just reported for (indiscernible) in 2005.

What we have done is basically referred back to the comprehensive reserve review that we just completed, and that is really the change that's occurred.

We're getting a lot more weight to that study.

These reflected rate changes, loss trend assumptions on a bottom-up basis.

We've looked at it division by division, product by product.

So the loss ratio you see is the result of many, many analyses across each division of AIG.

I guess to answer the other part of your question, I am not expecting any significant changes.

We've got a huge book of business obviously across AIG, a lot of credibility in the reported losses.

We are seeing favorable development for accident years 2003, 2004, and 2005, so as long as we continue to see even stable development from those years, we're going to be comfortable with what we are recording for accident year 2006.

Frank, let me attack the question a slightly different way then.

Given that the reserve study was done at the end of last year, you basically applied the same methods and methodologies and so on to this quarter as you did to last year from a reserving perspective.

Then let me ask it a different way.

In terms of looking at the 63 roughly that you booked for last year and the 65.5 you booked for first quarter, what did you see?

Were there any significant items you saw in terms of loss trend or particular lines that caused that worsening year-to-year of your view of the accident year?

No.

It is really, Ron, it's rates are down a few percent.

As we reported throughout 2005, every division's calculation of expected loss ratio, every casualty division, would take that into account.

So (multiple speakers) 62 or (indiscernible) 63 and rates are down 3%, you are taking that into account.

And we're also building in a provision for loss trends.

We're trying to not assume that there is going to be a favorable loss trend for 2006 until we see more actual emergence.

And so far, as I said, we have been seeing probably about eight to ten quarters now continued favorable development in the recent accident years -- 2003, 4 and 5.

So if that continues, we might be able to relax the loss ratio for 2006.

That is certainly a possibility.

And we haven't done it now; it's just the first quarter since we completed the reserve review.

Okay, then a question on a totally different subject.

The adjustments you gave us for the Foreign Life segment overall, do those apply principally to the Life Insurance line within that segment?

In other words, if we made the adjustments to that line, would we come out with a decent normalized comparison?

Chris Swift is going to respond that, Ron.

Yes, that would be true.

What we also have provided -- again, the foreign exchange obviously is primarily in Japan.

So there's other lines of business that are significantly affected, primarily the PA Accident and Health has a significant impact there on foreign exchange.

Taiwan, it is primarily in the Life line also.

Okay.

Thanks very much.

Ron, I would just add obviously on your point on the property side, obviously if rates continue to go in the direction we expect them to go to, we will see the benefit of that earned premium coming through later on during the balance of the year.

Right.

Okay.

Thanks, Martin.

Paul Newsome, AG Edwards.

Thank you for the call.

I want to ask a little bit more of a broad question.

Triggered by the announcement of the sale of your position in IPC Re, what is your thinking about divestitures and mergers across your business lines?

Do you have any focuses that you're interested in?

And I think people are wondering whether or not we're going to see more divestitures of minority positions.

Obviously, the decision made pertaining to IPC Re was obviously specific to IPC Re.

And as I mentioned earlier, we continue with our overall business review.

From an acquisition standpoint, as I mentioned, we made a couple of small acquisitions in the early part of this year, one in Taiwan and then the Travel Guard acquisition.

And we continue to look at possible acquisitions where it makes sense to do so, and it is obviously strategic to our business and accretive to earnings.

So that is the way we are proceeding.

Steve, if you want to add anything.

Only that the IPC announcement in our view should not be construed as any signal of our intentions with regard to other holdings.

However, as Martin noted earlier, we are in the midst of the portfolio review and the development of our economic capital model, and the results of that could have indications that lead to other decisions.

But those have not been determined at this point in time.

Do you anticipate that after the review is done you will be coming back to us about sort of a revised vision for AIG from a business strategy perspective?

I'm terribly sorry, Paul.

I don't think we heard the end of your question there.

I apologize.

I'm losing my voice.

Do you anticipate that after the review, you will be communicating to us a revised vision for AIG in terms of the business strategy?

Paul, I think that is going to be an evolving type of an issue.

I don't think there is going to be a point in time later this year where we will have a redefined strategy based on this review.

These reviews are a tool among many others that we are using to evaluate the construct of our portfolio of businesses.

I think more likely you will see some fine-tuning around the edges rather than any major strategic shift.

Great.

Thank you very much.

Jay Cohen, Merrill Lynch.

A couple of questions.

First, on the foreign currency side, typically in the past what we have heard from AIG is that currency has an impact on revenues, but does not have a big impact on earnings, so I was a little surprised on the Foreign Life side to see that impact.

Can you quantify what the impact overall in the Company was in the quarter?

Jake, it is Steve.

The two that we talked about on Foreign Life and General Insurance would be the preponderance of it.

And again, when you put those numbers together in the context of our overall quarterly results and our revenues, I am not sure that that would not be consistent with what has been said before about the relativity.

Look at it in the context of the overall income statement and the revenues for the quarter.

Yes.

Secondly, with the reserve development, I noticed there was still a reasonable amount of adverse developments in the '02 and prior accident years, just a quarter after taking a very sizable charge.

And I'm wondering what new information you had there that caused that number to go up.

It's Frank Douglas again.

For all prior accident years combined, X Cat, we actually had favorable development.

We did note in the 10-Q that there was development of a couple hundred million from accident years 2002 and prior.

I assume that is what you're referring to.

You just figure that once you get that behind you, the more recent years are looking more favorable and that you would see a real favorable impact.

But you are still getting that -- more modest, obviously, but still a drag from the older years.

I'm wondering what changed.

I should note that what we're doing now -- and we do disclose it in Q -- is we're doing a more comprehensive quarterly update than we did in the past.

So what you see in this development for 2002 and prior is largely a function of that more comprehensive review.

It mostly relates to the excess casualty line.

We did have $60 million of higher-than-expected emergence in the quarter for excess casualty.

But when we ran it through our reserve model, it actually generated about three times that in loss reserve development.

So we did allocate about $175 million to accident years 2002 and prior related to excess casualty.

But that really takes fully into account what has happened.

So there is not something that is lingering, if you will, that is going to show up later in the year.

We have already now accounted for that fully as a result of these more enhanced analyses that we're doing each quarter, beginning 2006.

So that's really what happened.

It was actually a lot less adverse emergence than the prior accident year development we're reporting, because we did apply loss development factors and revisit all of the assumptions of our reserve analysis to make sure we're properly reporting prior accident year development.

So instead of waiting until the fourth quarter like you had done and doing the more in-depth study, it will be taking care of on a quarterly basis.

Yes.

We can't guarantee there won't be any development in the fourth quarter.

Obviously, we complete the comprehensive review in the fourth quarter.

But we're making sure every time we observe different than expected emergence, we now look at it much more closely.

We conduct additional analyses.

And the results you see this quarter for 2002 and prior reflect that.

But as I said, even including that for all accident years combined, 2005 and prior, there still was favorable development X Cat.

So we're pretty pleased that on balance things were fine.

Okay, then the last question.

On the Consumer Finance business and the compression on the spreads there because of higher interest rates, does that reflect some sort of mismatch between the duration of assets and liabilities?

Jay, it is Bill.

No, we have an asset liability committee and we closely match their book.

There is some timing between the reset of the prices and the reset of the assets.

But overall we try to keep that book matched.

There is a sub portion in our businesses of floating-rate notes, which are commercial paper driven predominantly.

And if there is any segment at all that has been affected, it is on the commercial paper side.

Great.

Thank you.

Gary Ransom, Fox-Pitt Kelton.

I had a follow-up question on the advertising adjustment expense -- just how you do it generally.

Are there many areas where you defer advertising costs beyond the term of the policies themselves?

No, it is very limited to only those areas where it is direct marketing on the General Insurance side.

Chris, do you want to talk about anything else?

Obviously, we defer a lot of different types of acquisition costs on the Life side.

Some of it could include direct marketing related expenses, particularly in Japan.

Okay, thanks.

One other broader question for Martin.

Now that you have a lot of the regulatory issues behind you that I assume took up a lot of time in the past quarters --

A little bit, Gary.

Yes.

And now I am guessing that you're able to focus more on the actual operations of the Company.

Where do you find that you're spending most of your time and where do you feel like you need to put the most effort or focus?

I'm glad you asked that question.

First of all, I think the results have demonstrated that the management team remained very focused during the past 14 months while we had to address the regulatory issues.

As we have emerged out of that, from my perspective, I have been an airplane a lot of my time over the last six or seven weeks, getting out meeting our customers, meeting our employees, and really doing an overall review of our operations in many important parts of the world.

Along with Edmund and others, I've spent a lot of time in China, and obviously we are delighted with the news of our provincial expansion for two of our Life operations and one of our General.

These are very large markets and will give us very good sales opportunities.

So I am really getting into the fabric of the organization, looking where we can expand organically, where there may be acquisitions that are strategic to the organization, would add value, and where we have further greenfield side operations.

All right.

Thank you very much for that answer.

Larry Greenberg.

In the Other income line, and specifically the unallocated expense line seemed to increase pretty dramatically this quarter from the last couple.

Can you talk about what is in that and perhaps what we should expect going forward?

Yes, Steve's got that detail, Larry.

In terms of the recurring types of items, I think what you would look at is interest expense has increased from period to period, both because of rates and also because of an increase in our borrowings.

That is all, I think, very fully disclosed in our 10-Q.

We have also got increased compensation-related expenses.

So for example, bonus accruals and share-based awards that are now the AIG plans, the BCPPP, the [RSUs], etc. which are now in our results.

So I estimate both of those were about $50 million each for the quarter.

And then you have the earnings and unconsolidated subsidiaries, which is included in that provision as well, which was a little bit lower in the first quarter of this year than it was last year.

So those are really the recurring items, those interest share-based comp, pension and incentive comp and unallocated corporate overhead and so --.

I just want to specifically focus on the unallocated corporate overhead, which went up to 199 from roughly 115, 120 the last couple of quarters.

Right.

Well, I could tell you that it is really --it is sort of all over the place.

Part of it includes the effects of some of the adjustments that we talk about.

Just give me one sec to get this in front of me.

We have got severance payments in there.

Other than in the items that I talked about, we have got severance payments, we have got audit fees.

We have got about 30% of the cost of the parent company that is included in unallocated corporate expenses.

We have got the amortization of stock options.

We have got some of the issues that we talked about in terms of acceleration of stock option grants that were attributable to the parted employees.

So to be honest with you, it is a significant list of different items, none of which are individually that significant.

So there were some unusual items in this quarter's number, it would appear, that may last for another quarter or so but would eventually tail off.

Well, in the first quarter, for example, in Other income and deductions, you have the effects of the Starr tender offer, which is non-recurring.

That was $54 million.

You had the adjustments to the SICO plans that we disclosed at $61 million.

And we had severance-related costs of $30 million.

So there was close to $150 million of items in this quarter.

And then you also have FAS 133 effects, which we separately identified, are included in Other income and deductions as well.

So there is a lot in there.

We are trying to give as much disclosure as we can, so you can get to the heart of it.

But on a run rate basis, without 133, my expectation is we would be on a quarterly basis of $250 million to $350 million range, but that can vary -- all in, everything.

Thanks.

Secondly, you referenced before that a lot of the foreign exchange impact in Foreign Life fell in the personal A&H area.

Just looking at the reported operating earnings in that segment, they have been relatively flat for the last five quarters.

And I am just wondering if maybe you can give us where you think a normalized earnings growth rate is there adjusted for FX, and perhaps talk about anything else that might be influencing that number.

As you know the for the Asian business, the bulk of our business is really from Japan.

And this quarter, the economic change impact, really mainly from Japan as well.

So as a result, that would have a significant impact at our bottom line of our (indiscernible) operating income.

But other than that, we have been able to maintain our profit margin for that line of business.

And so we expect that going forward, assuming no further exchange adjustment in the future quarters, that we are able to maintain our good profit margin in Japan.

And also for the quarter, that also a little bit negatively impact of our bottom line in A&H was fact that we had good growth in many different areas other than Japan, including China, Taiwan, and other Asia.

They have been encouraging to write more A&H business that also really will have a little bit of impact on the first year's trade in our business on A&H.

But we are pretty confident that we are able to maintain our normal profit margins in future quarters.

Larry, it's Chris Swift.

That line probably had 9.5% effective growth rates for foreign exchange if you kept the end constant with prior year.

We did our conversion this quarter on an average rate of about [117], which was about 11.5 points lower when you compare it to last year.

So that line probably had the bulk of the Japanese foreign exchange rate.

Great.

That very helpful.

Thank you.

J.F.

Tremblay, HSBC.

I would like to focus on your Chinese Life Insurance business for a second.

Here's a market where we've seen tremendous growth overall, but the market shares of foreign companies, including AIG, hasn't changed significantly.

I have two questions about that.

First of all, should your sponsorship deal with Manchester United, which has tremendous following in Asia, should it be viewed as a wait and (indiscernible) issue?

Second, what else are you doing to increase your market share -- marketing or just (indiscernible) as you mentioned.

So can you elaborate on some of your initiates there?

Absolutely.

Obviously, with regard to the Manchester United sponsorship bill, we are absolutely delighted to secure that franchise.

It is the best global sports brand and it is going to add tremendous value to our Asian operations.

I was recently out in Beijing, Tokyo, and Korea, and I can tell you our agents, our employees and customers are very excited about that transaction.

They have a huge following throughout Southeast Asia and the Far East.

In fact from memory, I think they have 20 million fans in China alone.

Obviously with the second question, as we have said we are absolutely delighted with the expansion of these provincial licenses.

Edmund can add more color to the size of the population base that that brings in to our catchment area.

And obviously, with the Group Life license now being resubmitted and now a work in progress, we have a number of key strategies to drive that business forward.

For that two province we just have put the new licenses, it is not just the population.

And the Guangdong we roughly have like 80, 90 million people and the Jiangsu about 70 million.

But in these two provinces, they are two of the top three economies among all the provinces in China.

The third one is (indiscernible).

So it's with this in mind and -- in fact, right now the premium income for those two provinces, they are always the top two in China.

And with our expansion license, we would be able to expand throughout the whole province, and by adding more sales centers, we call SST, to be under the management of the capital of Guangdong, which is Guangzhou.

And then we also we are trying to the headquarters in Nanjing, which of Jiangsu.

And so with that expansion, we are thinking that we would have a much bigger Life operation base for those two provinces.

And as Martin mentioned about it, we also resubmitted our application for the group license, and this has been acknowledged by the regulators.

And I was told that they are now in process of this application, and we hope that in the near future they are able also get this group license.

And in those two provinces and in many of the small entities, including those from Taiwan, the [rest] are from Taiwan.

So would expect that with these expenses that we would be able to capture more of the market share, though for the time being, we are still limited to two provinces.

Thank you.

Thank you very much.

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

I look forward to seeing you all very soon.

Thank you very much.