American International Group Inc (AIG) 2006 Q2 法說會逐字稿

Welcome and thank you for standing by.

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

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

I would now like to turn the call over to Ms. Charlene Hamrah.

Ma'am, you may begin.

Thank you.

Good morning and welcome to AIG's second-quarter earnings conference call.

Before we begin, please note 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 June 30, 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 also contain non-GAAP financial measures.

The reconciliation of such measures to the comparable GAAP figures are included in the second-quarter 2006 financial supplement available in the information section of AIG's corporate website.

Now, I am pleased to turn the call over to and introduce Martin Sullivan, AIG's President and Chief Executive Officer.

Thank you, 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 happy to take any questions you may have.

We announced AIG's second-quarter 2006 results last evening.

We had a very good quarter.

Once again, our performance underscored the strength of AIG's widely diversified business portfolio.

Adjusted net income, which excludes realized capital losses and the effects of FAS 133, was $4.16 billion or $1.58 per diluted share compared to $1.25 per diluted share in the second quarter of 2005.

Second-quarter net income was $3.19 billion.

Second quarter net income and adjusted net income include a positive out of period accounting adjustment of $374 million or $0.14 per share, relating to unit investment trust accounting that was identified as a result of our ongoing remediation efforts.

These investments have previously been accounted for as available for sale securities, with changes in market values being reflected in other comprehensive income.

The changes in market values are now included in AIG's net investment income.

This adjustment had no effect on total shareholders' equity.

Excluding this item, second-quarter adjusted net income was $1.44 per share, an increase of 15.2% over the second quarter of 2005, a very strong result.

Our return on equity through six months was 14.6%.

Total assets at June 30, 2006, amounted to just over $900 billion.

Shareholders' equity stood at $87.7 billion, including retained earnings of $78.2 billion.

Insurance cash flow from operations for the first six months amounted to over $19 billion.

Now I would like to say a few words about the effect of our hedging activities, which in the second quarter of 2006 amounted to an after-tax accounting loss of $824 million, compared to a second-quarter 2005 gain of $1.27 billion.

This had a significant effect on the year-over-year net income comparisons.

We have touched on the effect of FAS 133 and its accounting in prior calls, but it warrants further discussion.

These hedging activities are effective economic hedges of the market risk exposures principally on our available for sale securities and borrowings.

Since hedge accounting under FAS 133 is not currently applied, GAAP requires that we recognize the gains and losses on the derivatives in our operating results.

But we are precluded from recognizing the offsetting gains or losses on the available for sale securities or borrowings.

As a result, our operating results contain large swings which do not appropriately reflect our true economic results.

It is for that reason we exclude the effect of FAS 133 when presenting the results of operations affected by hedging activities, principally Capital Markets, as well as when presenting our adjusted net income.

I would also note that these derivatives gains and losses have no effect on the quality of our economic earnings and cash flows.

I also want to provide some additional clarity on what caused the large swings when comparing 2006 to 2005.

During the second quarter of 2005, we recognized in excess of $1.9 billion in pre-tax gains on the derivatives; and now in the second quarter of 2006, we are recognizing approximately $1.3 billion in pre-tax losses.

The large fluctuations are driven by how the U.S. dollar has performed against the euro and British pound and the impact of changing interest rates.

In my discussion of our second-quarter results, I will be speaking to our results excluding the benefit of the unit investment trust correction.

General Insurance had an outstanding quarter across the board.

Underwriting results were very good, particularly in DBG, as a result of improved loss ratios for the current accident year when compared to accident year loss ratios recorded in the second quarter of 2005.

Net investment income benefited from positive cash flow and rising interest rates.

Our General Insurance businesses are identifying profitable opportunities for growth, executing their strategies, and maintaining underwriting discipline.

DBG's premium growth was not limited solely to the proxy business, as we saw increases across many lines.

Foreign General had very good growth in accident and health and Personal Lines, where are diversifying our mix of business to offer more homeowners and warranty product.

UGC and domestic Personal Lines, excluding the assigned risk business, had good premium growth as well.

Of particular note is the strong growth in our Private Client Group.

As noted in the earnings release, UGC cleared an important hurdle to enter the Canadian mortgage guaranty market, the second-largest in the world.

Additionally, with the acquisition of Central Insurance Company in Taiwan, AIG's General Insurance operations in that country are third in gross premiums written, and Central's extensive distribution network will provide an enhanced growth platform in this important market.

We also received approval for expansion of our Chinese General Insurance operations in Guangdong province.

Regarding market conditions, U.S. proxy and energy rates both on and offshore continue to increase both in catastrophe and non-catastrophe areas.

Excluding proxy and energy, rates are overall modestly down in the U.S., with some parties experiencing slightly greater rate decreases while others are obtaining very modest increases.

Outside the U.S., proxy business is experiencing competition in all areas, except for major cat exposures in Latin America, which are experiencing some hardening.

Casualty rates are down approximately 5 to 10%.

Overall terms and conditions globally continue to hold firm.

Now if I may, let me briefly comment on the current issue of the stock option backdating.

We're following developments closely.

At this time, it does not appear to be a significant issue for our domestic brokerage group.

We have received notices; the large majority of notices are from technology companies with low limit policies, approximately in the $10 million area.

In all cases, defense costs are within the limits.

Although it is being treated as a single issue in the media, the facts and therefore potential liability will vary in each case.

Damages from the few class actions that are filed should be mitigated due to the relatively low drop in share price in these companies.

The majority of the cases involve derivative suits where damages are typically less significant.

To the extent that many of them involve personal profit and [disgorgement], the policies' built-in defenses may limit coverage.

Before moving on to life and retirement services, I want to turn your attention to a new disclosure on catastrophe exposures, which starts on page 88 of our 10-Q.

This is intended to provide you with an overview of our exposure to hurricanes, earthquakes, pandemic influenza, and terrorism.

We added this disclosure in response to feedback we received from various members in the investor community.

So we are listening, and we hope you find it informative.

Turning to Life Insurance & Retirement Services, which had mixed results.

Domestic Life operating income declined in the quarter due principally to lower investment income from yield enhancements.

Additionally, the continuing restructuring activities from the group life health and health business affected second-quarter results along with the accrual for the legal contingency reserve.

Domestic Life continued to perform well in its core life insurance business, with strong periodic premium sales from the independent distribution platform, and solid growth in life insurance reserves, while maintaining expense and pricing discipline.

Payout annuities also experienced good premium and reserve growth in the quarter.

In Domestic Retirement Services, individual fixed annuity deposits again were affected by competitive bank CDs and a flat yield curve environment.

However, AIG annuity is maintaining spreads and its leading position in bank distribution.

Individual variable annuities reported strong deposit growth on the strength of their new living benefit features.

Now if I can, I would just like to just make one quick comment on net investment income.

The Domestic Life & Retirement Services businesses incurred a combined $44 million in mark-to-market currency losses in the second quarter of 2006 on investments in structured notes linked to emerging market sovereign debt.

These investment activities, like other yield enhancements, may generate short-term volatility and create difficult quarter-over-quarter comparisons within individual business line results.

These investments are ultimately made to enhance our yields over the long-term.

On the Foreign Life Insurance & Retirement Services side, net investment income is affected by policyholder trading gains and losses that did not qualify for separate account treatment under SOP 03-1.

These amounts are offset by an equal amount included in incurred policy losses and benefits and have no effect on operating income.

In our Foreign Life Retirement Services operations, results in most regions of the world were very good.

However, challenging market conditions in Japan and Taiwan had a dampening effect on overall results.

Taiwan, as in many overseas markets, has experienced a low interest rate environment for several years.

This has resulted in a declining spread on the in-force book of business.

To address this challenge we're implementing new product strategies to generate acceptable profitability.

As previously discussed, we discontinued the sales of a popular life endowment product that was not providing adequate margins.

We have shifted our product mix towards personal accident and health products and investment-linked savings products where the policy holder bears more of the risk, away from traditional life savings products with higher guarantees and more risk on AIG's balance sheet.

We are also maintaining our pricing and expense discipline and actively managing our investment portfolio to generate adequate yields, investing in foreign assets where permitted, as well as in alternative assets such as private equity and real estate.

In Japan, interest rates remain low and the yen is relatively weak against the dollar.

The past financial troubles of the Japanese insurers allowed us to expand our presence.

Now the domestic companies have regained their financial footing and are increasing competition, especially in the third sector personal accident and medical supplemental market, which was once solely available to foreign insurers.

The impressive initial success of U.S. dollar fixed annuity sales following the deregulation of the bank channel has now moderated.

The earnings growth of AIG Star and AIG Edison reflects a runoff of more profitable acquired in-force business in comparison to the lower margins being generated on new business.

We are merging Star and Edison to boost the combined entity's ability to expand distribution, offer new products, and achieve efficiencies.

We are confident in our long-term prospects for Japan.

We're still the leading foreign insurer with excellent brand recognition, multiple product and distribution capabilities, and performance that has consistently outpaced the industry.

The economy is improving and interest rates are rising.

We're well positioned for further deregulation of the bank channel, with over 200,000 bank employees licensed to sell our products; and we have had initial success introducing single premium life insurance products through this channel.

In Foreign Retirement Services, new product features and a brief strengthening of the yen during the quarter helped increase fixed annuity deposits in Japan sequentially.

However, deposits declined compared to the second quarter of last year.

Despite the continued market shift to variable annuities, we still generated $1.9 billion of fixed annuity deposits in the second quarter due to our outstanding distribution platform and reported very good growth in operating income.

On the variable annuity side, deposit growth improved over the prior year.

We introduced the guaranteed minimum income benefit feature in June, and we're working to develop more attractive and competitive living benefit features for this market.

You can be assured that management is intently focused on the issues confronting us.

I want you to know that my senior management colleagues and I have traveled extensively over the past few months, including multiple visits to China, along with Japan, Taiwan, Korea, Thailand, Singapore, Hong Kong, Brazil, and various points in Europe, meeting with business partners, customers, regulators, and government officials in these key markets.

These efforts resulted amongst other things in a general license being obtained in Vietnam and our life operations in China being granted permission to expand throughout Guangdong and Jiangsu provinces.

This significantly expands our distribution footprint and sales opportunities in two very attractive markets.

We also received approval to conduct group insurance business through AIA's China operations.

We have served in many overseas life markets for 50 years or more and have encountered competition and changing market conditions over these years.

We have become the leading Foreign Life insurer in many markets, due to our ability to quickly adjust strategies, develop innovative products and distribution, and generate profitable returns in challenging environments.

We continue to plant the seeds for future growth.

Turning to Financial Services, which reported good results despite the negative effect of rising interest rates on ILFC and our Consumer Finance businesses.

The competitive advantage of ILFC's advanced fuel-efficient aircraft has been evident in the continued high energy cost environment. 80 of the 83 new planes to be delivered in 2007 have already been placed.

Second-quarter revenues were also positively affected by increased utilization of ILFC's aircraft.

Capital Markets continued to see increased transaction flows and improved bottom-line growth over prior year, excluding the effects of FAS 133.

Our U.S.

Consumer Finance business was affected by increased interest rates and a cooling residential real estate market, but credit quality remains strong.

Overseas, we experienced a slowdown in the Taiwan credit card business, following the industrywide credit deterioration discussed in the first quarter.

No further adjustments of the reserve we established for this issue in the first quarter was required.

Asset Management reported very strong growth despite the continued runoff of the U.S.

GIC portfolio.

The institutional business was the main driver of second-quarter results.

This business has been very successful increasing years, attracting assets from both new and existing clients, especially in its international equity products and is well positioned with a broad range of innovative product offerings in many asset classes.

Lastly, we launched our matched investment program during the quarter.

As a result of a related registration statement becoming effective in July, we are now able to access the U.S. registered securities market for this program.

In conclusion, ladies and gentlemen, AIG's strong second-quarter results reflect the diversification and strength of our major businesses.

AIG's franchise is strong; morale is high; our strategies are sound; and our ability to overcome challenges is unmatched, something we have demonstrated repeatedly over the years.

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

(OPERATOR INSTRUCTIONS) Jimmy Bhullar.

JPMorgan.

I just have a couple questions.

One, the first one for Edmund on sales and Japan, China, and Taiwan.

They were down in all three countries on a first-year premium basis.

Is it just competition?

What is your outlook for sales for the second half of this year and going into '07?

Then second, Martin, on the P&C business, you had favorable development.

You gave some commentary on that in the 10-Q.

But I was wondering if you could give us some more details on which lines and accident years are developing favorably, and where you have maybe seen some adverse development.

Certainly.

Edmund, would you like to answer the first part?

Yes.

Jimmy, you know, that on [this particular] question even at the last quarter I have mentioned that indeed [the] countries we have switched more and more from the traditional savings products into the investment-linked [year] products, so that more and more single premium products are selling.

As you can see even from this current quarter, we have a very good increase in single premium products happen in all the three countries, Japan, China, and Taiwan.

If you put the two together, in both Japan and China we have a [positive] growth over the previous quarter, the same last year.

As for Taiwan, it was mainly due to last year that we had sold some very large amount of short-term savings and (indiscernible) products which we have withdrawn in the second quarter, which was still recorded there; so that is why the second quarter we still have a little bit negative.

But the overall trends that Nan Shen has been improving in sales, and that we foresee that both China and Taiwan in the third and fourth quarter this year, and that they will continue to improve over the first couple quarters.

We foresee the positive trend.

As far as for Japan, and we now that -- also introducing the single premium whole life through bank sales channel, which was only introduced first quarter.

And now is on an increasing trend.

Overall, we sold $150 million single premium whole life through bank channels.

This should be on the increasing; and definitely we will expect better sales in the second half as well.

Jimmy, I'm going to ask Frank Douglas to expand upon the response to the second part of your question.

Yes, the favorable development was spread throughout the short-tail classes, mostly throughout AIG.

Each of the major segments had some favorable development -- DBG, Foreign General, Personal Lines, and mortgage guarantee all contributed to the overall development roughly equally.

The favorable development was concentrated in accident years 2003, '04, and '05.

In total, those three accident years had about $410 million of favorable development, roughly $135 million in each of those three years.

We did note that there was some adverse development in accident years 2001 and prior, primarily relating to excess casualty business.

It was spread across a number of accident years; there was no one accident year in particular.

But overall, excess casualty and other classes did develop favorably in the more recent accident years.

So '03, '04, and '05 clearly drove the overall favorable development; and the overall number did include about $53 million of catastrophe favorable development as well.

Just a follow-up on P&C, you mentioned that outside of property and energy, rates were down.

I was wondering if you could just talk about where you are seeing the most pressure.

Obviously, as I mentioned in my opening remarks, Jimmy, there is some weakening on international casualty business in the 5% to 10% area.

In North America, certain of the longer-tail lines are seen some rate decreases.

Others are moderately up, as I mentioned in my opening remarks.

But I will ask Kris Moor and Nick Walsh to add some color to that.

Yes, rates for the second quarter overall excluding property were down about 3.7%; and year-to-date down about 3.9%.

If I had to pick out one line of business that we feel that the rates still have not come back to where we think that they need to be, it is healthcare.

But besides that, we are pretty satisfied with where the rates are.

Okay, thank you.

The Foreign Gen were down about 9% in rate across the world.

But always recall that about half of Foreign Gen's business is consumer rather than commercial; so the effect is mitigated by that.

Thank you.

Jay Gelb.

Lehman Brothers.

In following up on the property casualty loss reserves, can you give us a sense if you have any plans to adjust your loss picks there, given the favorable development in the recent accident years?

This is Frank Douglas again.

Yes, we are monitoring our loss ratio picks every quarter for every one of our longer-tail classes.

We did make some adjustments this quarter to roughly half a dozen or so classes, which did help the results for accident year '06 by roughly $25 million.

We continue to evaluate every class every quarter.

In general, every time we note development in the recent accident years, we consider whether that has an impact on the loss ratio we are recording for accident year 2006.

So there was some improvement in the quarter.

It was relatively modest.

If you compared it to the first quarter, it would not be a big overall change;

I believe less than 1 point.

But there was some movement, and it was generally favorable.

There were no adverse adjustments to any segment in the quarter.

So the trends have generally been favorable.

Great, thank you.

Then on two separate issues, Martin, could you update us on your economic value analysis that you have been going through?

Then, on a separate topic, you already addressed the backdating of stock options.

Could you talk about Big Dig exposure in Boston?

Certainly.

On the economic capital model, we are making good progress.

Bob Lewis and Steve Bensinger, as you are aware, are leading that initiative.

They are in dialogue with our senior management in the trading entities now on certain of our initial findings.

We have still got some work to do.

As I have mentioned many times our goal is to try and have this in some fashion completed by the end of the year.

Given that depth of analysis that we are doing, that is a challenging assignment for Steve and Bob.

But we are making very good progress.

As I say, dialogue is already taking place with the heads of our trading units.

On the Big Dig, obviously, I will ask Kris to give you some more detail on that.

But we do not see any significant issues for AIG in that regard.

But Kris can give you more details on the exposures.

During the development of the project we had some surety bonds exposed.

Those have all been closed, so we don't have any surety exposure.

We do have a $25 million primary casualty wrap-up on the Big Dig.

The ceiling designer was not covered under this policy.

It attaches over a pretty significant deductible, so we don't see this as a big event for us.

So just $25 million on the casualty; that is the only exposure essentially over a high deductible?

Not significantly high, but over a deductible that handles most of the claims.

We have some very small surety exposures as well, but they are very small.

Yes, and they have been pretty much closed.

There's a lot of people involved in that project, so you might have a small limit here or there that people haven't been aware of yet.

But we don't see it as a big exposure for us.

Okay, thanks for the answers.

Mark Lane.

William Blair & Company.

On the Foreign Life business, the last -- well, particularly last quarter results were kind of lagging.

You specified a few reasons, one of which was currency.

This quarter it seems to be broader issues that you are citing -- competition and the impact from low interest rates, etc. etc.

Can you be a little bit more specific on what the impact of currency was on earnings growth, and how much Japan and Taiwan affected results this quarter, and when you might expect this business to start growing once again in the low double-digits or mid-teens level?

Absolutely, Mark.

Thank you.

Currency, I believe, affected operating income by 3 points in the Foreign Life segment; and about 2 points in the overall segment.

Kris, is that right?

Yes, it is.

Yes, so 3 in Foreign Life, and 2 in the overall segment.

Obviously, as I said in my opening remarks, we are seeing -- well, let me just preface this by saying with the exception of Japan and Taiwan, our businesses throughout the rest of the world in the Life Retirement Services segment are performing very well.

But in Japan, where we are seeing increased competition and continuing pressures in the currency area, as I have said, we have changed -- and Edmund mentioned in response to the first question -- the products that we are selling.

Clearly we are enhancing our distribution channels there.

And the same applies to Taiwan, where again in a low-interest rate environment, we saw that one particular product that we had sold a huge amount of, a very large amount, in the first quarter of last year and into the second quarter, was not generating the margins that we would expect.

We stopped selling that product.

We have refocused our energies more onto accident and health and some of the investment-linked products.

So, over time -- I don't want to predict the time -- we will see that coming through in our operating results.

Edmund is on the line from Hong Kong.

Edmund, would you like to add anything further there?

Yes, Martin.

On Taiwan, really just the last few quarters, we have been aggressively switching products, and from the short-term savings products to the investment-linked and accident and health products.

Today, our total new business, 85% of the new business really from these equity investment-linked products and accident and health products; and only still with 15% of new business in the traditional savings product.

For the switch, as a result, and the profit margin for these new products, it went up from 0.07% to today's 11%, which is more than 50% increase over the last few quarters.

So we can see that the profit eventually will emerge much better for Taiwan operations, which is pretty large among the foreign.

In fact, even today, you see that our first-year premium and the -- which was lower than last year, but we value the new business.

And our new business value in fact increased by 23% over last year, the corresponding quarter, although the new production was down.

So that means we are building up the portfolio gradually; and so that the profit emergence will be gradually also increasing over the future quarters.

Lately, also there is a little bit of trend of the increase in interest rate in Taiwan.

So every bit of increase in interest in Taiwan, that would help substantially to our profit growth eventually in Taiwan.

So that, I think that we would -- hopefully that over the next few quarters in Taiwan profit will be increasing, and let us go back to the high single digit or low double-digit numbers.

Is earnings growth in Foreign Life excluding Japan and Taiwan in the teens?

No, no.

This is total, it is inclusive, the Foreign Life numbers.

No, but I mean if you take --

(inaudible) Taiwan and Japan, we are all in the good double-digit growth in operating income.

Okay, then lastly, on capital management, Martin, in the past when you have discussed this capital management plan and process that you just discussed, you had always stated that that project was not an obstacle to looking at share repurchase and other options to use your capital a little bit more aggressively.

Where do you stand on share repurchase today?

Well,, Mark, we obviously keep it under constant review.

But as you are aware, we had to replenish some capital in our domestic brokerage operations over the past quarters.

You can rest assured that management here is very focused on share repurchase and obviously any possibility of increasing the dividends on a constant basis.

I will ask Steve to say few words just on the overall management of the capital as we speak today.

Yes, we are obviously, as part of the economic capital modeling that Martin mentioned earlier, we are going to look at the results of that analysis when it's available, make a determination on whether or not there is excess capital, based on the modeling that we do; and then how we redeploy that capital in different forms.

So it would be premature at this point in time to make any judgments until we see the answers.

But we can assure you that it's getting significant attention.

But it seems like to me that that is a change from the prior position, that during this process you'd still be open to share repurchase.

It seems like right now that you are telling us that share repurchase is off the table until you finish this capital model project.

Is that accurate?

I am not sure there is any change in what we have been stating from what we just articulated at all.

I think we have been consistent in saying that we are looking at it constantly, but that we are waiting for the results from the analysis before we take any significant action.

Okay, thanks.

Tom Cholnoky.

Goldman Sachs.

Two questions.

I guess, one, obviously, given the events in London today, can you remind us what your insurance exposure is to the global airline industry, and what if any market reaction you think will arise following the events that occurred in London today?

You want me to answer the first part?

Is that -- ?

It is kind of, I guess, a 1A, 1B.

Okay, let me start with 1A.

Obviously, it's very early in the process with the news developing over the last 12 hours.

Obviously, hopefully, this will be -- whatever impact will be short-term.

Obviously, I would like to give great credit to the British authorities for identifying this issue.

They have moved very quickly.

We have got Alan Lund on the line.

Our quick analysis this morning was we didn't see any immediate short-term or long-term impact.

But Alan, would you like to add something there?

I am not sure there is a whole lot more to add until we know more, and know what the length of the heightened alerts is going to be.

People for August, they have already committed to their travel term trips, and many of them are out there.

It is a question of what it will have on an ongoing basis.

We will have to wait and see.

This is an area that we have identified in the ILFC's Qs and Ks in the past as an area of concern for us.

I guess what I am really after is your insurance exposure.

I mean, had this disaster not been averted, we would have been facing a very significant loss potentially today.

I am just wondering how much insurance exposure do you have to the global airline industry.

Well, obviously, we have participation in the aviation sector.

We are a leader of that market in London.

We would have an exposure both to obviously the hull and to any liability exposures that may attach.

I can't actually quantify that in a numeric term, Tom; but suffice to say we are a leader in the aviation market.

Okay, okay.

Two other quick questions if I can.

Just in terms of future earnings, the impact of the unit trust, of including that now in investment income.

Should we assume now that there will be a lot more volatility in investment income on a go-forward basis?

Certainly it will have an impact on a quarter-to-quarter basis.

In fact, in the second quarter, it was a negative impact.

Steve has got some of the numbers that he can you there, Tom.

Hi, Tom.

Just to put it in perspective, the principal amount that we are talking about here is $2.8 billion of securities.

So I think you need to keep that in context of the overall size of the portfolio.

So there will be more volatility, because they will be marked-to-market through income, but it is on $2.8 million worth of principal.

Okay, so what would the actual impact on the second quarter have been?

The second quarter was a negative effect.

Net investment income was down by approximately $60 million because the emerging markets, as you know, in the second quarter had some challenges.

Therefore, many of the securities in these portfolios had a decrease in value.

The catch-up adjustment that we have detailed in the 10-Q was a positive adjustment because there were significant increases in value through March 31.

Right, okay.

Sorry, the last quick question is just -- you mentioned a cost of a bankruptcy in ILFC.

Could you quantify that?

Certainly.

They related to Varig and to Canada 3000.

Bill has the exact number.

Yes, Tom, the total number on both of those are approximately $18 million.

Each, or total?

In total.

Okay, great.

Thank you.

Dan Johnson.

Citadel Investment Group.

Most of my questions have actually been answered, but the one that you can help me with is on the tax amount for the quarter.

If we are going to use a net income number to get to 144 for the quarter, what would be the actual dollar amount of taxes that it would take to get there?

The actual dollar amount are the taxes that are included in the income statement.

But the taxes you have listed in the income statement are the taxes required to get you to $1.58, I believe.

Maybe I'm not following your question.

Are you asking, Dan, if I can just clarify.

Are you asking what you could anticipate as a tax rate for the third and fourth quarter because of the increase in the second over the first?

Actually that was going to be the second part of it and probably the more important.

So let's just go to that one.

I'm sorry, I was trying to find (multiple speakers).

Steve was trying to find the answer to the first part of that question.

He was not listening there.

But Dan's question was -- what is the forecast going forward in the third and fourth quarter based on the increase second over first?

All right, well, if you look at the six-month tax rate, that is our best estimate at this point in time on the overall tax rate for the year.

Under GAAP that is the way you're supposed to do it.

So the second-quarter rate is higher, because it is effectively a catch-up in the second quarter to get the six-month number to where we believe it is going to be for the rest of the year.

That is going to be influenced by the mix of foreign source income, which is right now based on our best estimates; and it is also going to be based upon the phase-out of synfuel credits which will be dependent on the price of oil.

So those are the significant variables.

But the six-month rate is the one you should be looking at, at this point in time.

Great, thank you very much.

Andrew Kligerman.

UBS.

I have a few questions.

Just starting out with the property casualty.

Domestic brokerage had some terrific net written premium growth;

I think around 10%.

Could you specify the two or three lines that are the strong drivers?

Then the second part to it is -- what do you think the outlook is on growth in DBG?

Then I have some follow-ups.

Obviously, we are benefiting from the significant rate increases in the proxy areas.

But we are seeing increases in lines of business like accident and health, which obviously has very good margins, and in some of our construction and risk management areas.

I will ask Kris to expand on that.

I think that is really emanating out of the strategies that DBG has in place, where they are expanding their production from the national and regional brokers, the product innovation that continues to flow out of DBG, and really the continuing flight to quality that we are experiencing.

They're certainly from our perspective the areas that we continue to work on.

I don't know, Kris, if you want to add any color?

Yes, Andrew, just a couple more things.

Property accounted for about 3% of that growth in the quarter.

The rest was spread, as Martin said, through many of our casualty lines.

Construction was strong.

A&H was very strong.

So it is spread throughout the organization.

It is not one other specific area.

So it sounds like with property maybe that is more rate-increase oriented; and the other lines are more AIG innovating and looking for new opportunities.

So it is sort of an equal mix on both fronts; and hence I could look forward to maybe some further growth down the road.

Our new business in the second quarter was up pretty good over the second quarter of last year, also.

So you are right.

And retention was a very good as well, Andrew.

Great.

Shifting over to Japan, AIG Star and AIG Edison, you are merging the two operations.

Could you provide a little color around the size of the combined sales force, and what was happening with the separate sales forces going into this merger, and why you may or may not be optimistic about their growth in the extremely competitive Japanese market?

Andrew, actually foreseeing that question, I asked Bob Clyde who runs our operations in Japan to join us this morning on the line.

So Bob, would you like to respond to Andrew's question?

You bet.

This integration strategy is really focused on preserving and growing our production momentum in the field, while the home and back offices are restructured.

What we intend is that will free up some investment for improved distribution and also some infrastructural needs.

So kind of in summary, the intent of this is to maintain our growth on the top line, and capture some GOE savings, and also invest in distribution in the future.

You asked about the environment.

I think, currently I consider these two companies mid-size companies.

By production A&P standards I think they are respectively 16th and 22nd in the industry.

When we -- once they are merged, the entity would be ranked about 9th in the industry.

We believe that we have a vision we could become in the top five in five years when you compare our historic growth rates against the industry.

So this is really a growth story.

It's a growth strategy.

It wasn't motivated entirely by GOE savings.

It is more of a growth strategy, although we will get some savings.

You will be making a push with the individual life, it is sort of the lead product with the combined entity?

You know, life insurance is an area in Japan that has been on the decline from an industry standpoint.

We have bucked the trends in the industry for a long time with dollar products and other innovations, and we will continue to do so.

The real -- given the demographic changes in Japan, it's been a great market and I think will continue to be a good market in the medical market and the annuity market.

We have excelled in that respect in the past and expect to continue to do well.

So, I think the new merged company will just, like ALICO Japan, will be focusing on all product lines not just life insurance.

Really there is more room for growth in medical, we feel, and certainly in the annuity area.

Life insurance is going to be challenging, but as Edmund mentioned already we have taken advantage of the deregulation of the banks; and we are number one in the market in selling life insurance -- unofficially, from what we can glean, number one, in single premium life sales through banks as an example of that.

Okay, maybe I will follow up later for some more detail.

Just a last quick question is on this -- on the remediation and the $32 million taken for material weakness.

When does that sort of label -- what was it you were -- the controls were technically ineffective, I think I read in the 10-Q last night.

When does that label likely go away?

What do you foresee down the next few quarters in terms of any potential charges there?

Well, obviously, Andrew, we have three material weaknesses that we are working very hard to remediate.

As we have mentioned many times, our aspiration is to have those remediated by the time we file our 2006 annual report.

There is no guarantee we can achieve that.

A lot of effort is being expended on remediation.

But as I say, hopefully by the end of the year; it will be actually before we file the 2006 [reformed] accounts, we will have them remediated.

But I said there is no guarantee.

I don't know if Steve wants to add anything there.

No, all I will add is that the ineffectiveness of the control environment is triggered by the existence of even one material weakness.

So even one material weakness would cause that conclusion to remain in effect.

So that will be the case until all of our material weaknesses are remediated.

Thanks.

Jay Cohen.

Merrill Lynch.

Several questions.

The first is, in the property casualty business you had mentioned that the accident year loss ratio improved from a year ago.

In the fourth quarter of last year, however, as I recall, you had released reserves from earlier in the year.

So in essence, I would assume today your view of the accident year loss ratio from 2Q '05 is better than it was then.

If you look at the developed loss ratio, did you still see improvement?

Or is it more even?

This is Frank Douglas, Jay.

As you say, at the end of the year when we completed our reserve review, we did adjust our accident year 2005 loss ratios downward.

The final loss ratio for accident year 2005 was roughly 63% at the end of the year.

That has developed favorably in the first two quarters, so it has probably come down close to 62% as of now.

We are recording a current accident year loss ratio for 2006 close to 66%.

So I think as you imply we are recording a conservative loss ratio, a higher loss ratio currently for accident year 2006 as compared to 2005.

That is to take into account the rate decreases that did occur in the past year, and the provision for loss trends and other changes we believe are occurring.

Obviously, we're hoping to see the favorable developments continue for the recent accident years, and that would obviously come to help accident year 2006 results as well.

That's a helpful answer, thank you.

Second one, you mentioned a legal contingency, I think it was in the U.S. life business.

Is that something you can quantify?

I think, to the best of my knowledge, Jay, it is $24 million.

Okay.

Next question.

In Japan, you are having obviously the runoff of an in-force business that is more profitable than the new business.

How long does that process take to complete?

Is that a multiyear process that will happen?

Or is it shorter?

Sorry, Jay.

I missed it.

The question is the convergence of the two entities?

No, it was more related to I guess the runoff.

You said you were running off an in-force book of business that was more profitable than the new business you're writing.

I am wondering how long that process takes to run that business off, so the comparisons get easier at some point.

We have done some work there.

Chris Swift will respond.

Jay, thank you.

Is hard to predict with precision, but at least for '06 we still see the effects of that runoff business.

That is a high profit margin acquired business.

It is probably 15 points in total difference between what we're putting on the books these days.

We are going through our '07 planning process right now.

It does look like '07 could be the inflection point towards the tail end of it, where that decline does stop.

That's great.

Then last question.

You mentioned property premiums in the U.S. were up, and they contributed to the growth.

Are your exposures net-net up or down, would you guess?

I believe that with the management that we are doing on our aggregations and the effect of the quota share reinsurance that we have obtained, I believe they're slightly down.

There are slightly down.

Great, thank you very much.

Dan, before we take the next question, Dan, Steve has found the answer to the first part of your question.

So we would just like to go back to that if we can.

Dan, if I understood your question correctly, just to clarify, the effective tax rate on net income for the three months for the second quarter is 31.1%.

If you want to take that to an effective tax rate on adjusted net income, you can use a 35% tax rate on every one of the adjustments that are made, to get from net income to adjusted net income.

There is also a 35% rate applied to the out of period adjustment relating to unit investment trust.

So if you want to calculate an adjusted net income effective tax rate, that is how you can do it.

Ready for the next question, please.

Larry Greenberg.

Langen McAlenney.

Martin, I think one of the biggest questions that investors are struggling with is the underlying earnings growth in the Foreign Life business today.

Historically, it had been 15%-plus.

First quarter was low, but I think you said with some adjustments it would have been around 15%.

Obviously, there were some additional headwinds this quarter.

Edmund talked a lot about some of the new products being introduced.

I guess my question is, is there something fundamentally different in the Foreign Life operation today that should make people think differently about the potential earnings growth rates in that business?

Clearly, Larry, I don't think there is anything fundamentally wrong.

As I mentioned in my remarks, operations throughout the rest of the Foreign Life arena are doing well.

There are specific issues in Japan and Taiwan that we are addressing.

Edmund clearly laid out some of the product initiatives that we have underway.

Some of the expansion that we have planned in our distribution channels, as I had mentioned to you.

The bank distribution in Japan, we have over 200,000 bank employees licensed to sell our products.

So we're taking specific action to address the issues that we have in Japan and Taiwan, some of which are market-driven.

But what I want to leave you with is the thought that the rest of the franchise is operating well at the present moment.

The focus from management at this moment in time is Japan and Taiwan.

Okay, thank you.

Just a couple of specific questions.

You gave a cash flow number, I think, for total insurance.

Do you have that number for General Insurance only?

We do; and if you give us a second we will find it, Larry.

Okay.

Then also, in the Institutional Asset Management business, you mentioned there were gains in some real estate investments and performance-based fees.

Can you quantify that piece?

Win, can we -- do you have that available?

Let me answer the second part of your question first, then, Larry, while Win is finding the answer to the third question.

General Insurance, I think, was $6.3 billion.

Great, thank you.

Win is desperately looking for the answer to that question.

Larry, maybe we can take another question and revert back on that one.

That will be fine.

Rather than keeping everybody holding.

Yes, that's fine.

Terry Shu.

JPMorgan.

I have a question for Edmund.

A while back, I asked about the Taiwan market and the issue of the legacy business.

Last year, I believe, some of the -- not last year but in '85, some of the -- last year, the -- some of the European insurers commented on the legacy business, and the negative interest spread, and the drag there, and the need to add to reserves.

Can you comment on that?

I think at the time you had said that AIG didn't have such a problem, or Nan Shan didn't have such a problem because you were able to invest in higher-yielding instruments back then.

But given that back in the pre-2001 period the guaranteed rates were as high as 5% to 6% and the current interest rates have declined substantially, can you revisit that issue?

Certainly.

I will just reemphasize again that we're taking appropriate action to obviously enhance our yield returns, whether it's in [Internet] classes, particularly in foreign investments.

But given the questions going back, I will ask Edmund if he wants to just clarify on that specific point.

Yes, Terry, we have discussed this issue between you and me a couple times.

As I mentioned in the past, we do have a very good long bond portfolio which we acquired (inaudible) days [since] the '70s, and which is for 30-year term.

Most of those are bonds of [purely] of the past and are not yet mature.

Far from mature.

So that we could have an average portfolio yield which is much, much better than any other foreign insurer.

Those are companies that invested [for] in stock [term]; when it comes to mature debt they need to reinvest.

We don't have to.

But having said that, and --?

What is your portfolio yield for the Nan Shan book?

Excuse me?

What is the investment portfolio yield?

The [whole] portfolio?

The whole portfolio, right?

Right.

It is still [about] 5% today even including the new investment.

Plus that, Terry, we have lately invested most of our -- 35% of our investment assets in foreign equities and securities, and mainly in the U.S. dollar, which has generated a 6% to 7% yield also earlier.

Lately, as [in our investor regimen] we have tried to mitigate some of the exchange risk; and we have put some of the more investment in Asian currency bonds.

Such like the Korean won, which we believe that would be more linked to the NT dollar but still give us a good yield enhancement of about 5% yield in that currency.

So overall, we still are really meeting our assumed interest rate of the whole planned [debt] portfolio.

You also need to bear in mind that some of the reserves, really they don't meet the interest required; such like we put a lot of our products in risk A&H products, which would not require any guaranteed interest assumption.

So on average, we are still able to cover all our interest required without any deficiency, and not like many of the other foreign companies. (multiple speakers) say that now the margin is becoming thinner and thinner, but still we are able to cover at the required interest, Terry.

Thank you.

If I could just ask one question on DACs.

Looking at your 10-Q report page 62, this is for the Domestic Life & Retirement Services business, why is there such a big jump in terms of in 2006 the increase in the DACs balance due to unrealized gains on securities?

If you could explain that, why is there such a big number, the $1.8 billion?

Terry, it's Chris Swift.

I would like to just go back to your Taiwan question, just to clarify.

Edmund is right; we have adequate resources.

We do look at our gross premium valuations quarterly and they do show full recoverability at this point in time with our assumption.

But the simple fact, also, is that Taiwan has experienced some long-term, low interest rates.

Rates are rising slightly, but there is some slight spread compression.

On your question on Domestic Life, that is basically a shadow DAC concept.

So as interest rates rise or decline, your balance sheet needs to be affected for the -- I will call it the assumed realization of those unrealized gains and losses.

So it is the shadow DAC concept.

Thank you.

Thanks, Terry.

Ladies and gentlemen, we have got time, I think, for one more question.

But before we do so, Larry, Win has the answer.

Right, the combination of realized gains and carried interest for the second quarter in Asset Management was $64 million, up from about $22 million a year ago, and a very low number in the first quarter.

So that number as we have talked about before, bounces around a little bit from quarter-to-quarter.

But I would say the first half level is pretty consistent with what we would expect on a longer-term basis, although not every quarter.

Thanks, Win.

If we could have one more question please.

[Josh Smith].

TIAA-CREF.

I just wanted to follow up on Larry's question about Foreign Life.

Last quarter, you gave some detail helping us get from the 6% growth into the midteens.

I think there was 5 points for yen weakening, 3 points for consumer losses, 2 points for adverse developments.

This quarter, we had again sort of very low single digit growth. 3 points for yen, so that was a little bit better.

Have you quantified the weakness that was in Taiwan and Japan?

Weakness for foreign exchange?

It looks like the ForEx hit you by 3 points versus 5 points; and you didn't have the other two onetimers; so was it just underlying operations were that much weaker?

Josh, it's Chris Swift.

We do look obviously at things on a country by country basis.

The two countries that, as Mr. Sullivan said, are experiencing difficulties are Taiwan and Japan.

It is hard to pinpoint.

Again there is some spread compression that we just talked about that is occurring.

If I look at the total Foreign Life on a local currency basis, really we measure and manage this quarter ex the UIT, we are up 7 points in totality for the foreign division.

Again, the vast majority of the operations are performing well in the ALICO world; and those two countries are basically dampening the overall growth rate from there.

Understood, I guess the first quarter looked like we could explain away a lot of the shortfall from some onetimers; and now looks like it is more of a problem with --.

I think we are going through a little bit of a pattern of earnings emergence.

When we shift to single pay products and more investment-linked, those are fee driven as opposed to FAS 60 premium driven.

The emergence just takes a little bit longer.

You need to build up more scale for that profitability to really start to emerge over time.

Fair point.

Just finally on the yen, if the yen-dollar stays where it is today over the second half of the year, how much of a drag would you expect on operating income growth versus the 5 points in the first quarter and 3 points in the second quarter?

That is a good question because it's obviously a moving target.

It is really hard to predict at this point in time.

As you can see each quarter the drag becomes less; but at 115, 116, that will continue to dampen our second half of the year.

Okay, thank you.

Thanks very much, Josh.

Ladies and gentlemen, thank you very much indeed.

That concludes today's conference.

Please disconnect your line at this time.