American International Group Inc (AIG) 2006 Q3 法說會逐字稿

Good morning and thank you all for patiently holding. I would like to remind all parties that your lines are on a listen-only mode until the question-and-answer segment of today's conference call. Also today's call is being recorded. (OPERATOR INSTRUCTIONS) 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 third-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 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 September 30, 2006 filed yesterday with the Securities and Exchange Commission and AIG's past and future filings with the SEC for a description of the business environment in which AIG operates and the factors that may affect its business. AIG is not under any obligation and expressly disclaims any such obligation to update or alter its projections and other statements whether as a result of new information, future events or otherwise.

The information provided today may also contain certain non-GAAP financial measures. The reconciliation of these measures to the comparable GAAP figures are included in the third-quarter 2006 financial supplement which is available in the investor information section of AIG's corporate website. And now I am pleased to 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 be making some opening remarks and then we will be very happy to take any questions you may have. We announced AIG's third-quarter 2006 results last evening. We had a very good quarter. Third-quarter net income was $4.22 billion U.S. Once again, performance underscored the strength of AIG's widely diversified business portfolio. Adjusted net income, which excludes realized capital gains and losses and the effect of FAS $133 billion was $4.02 billion or $1.53 per diluted share compared to $0.71 per diluted share in the third quarter of 2005. Of course last year's results included the effects of devastating Hurricanes Katrina and Rita which cost the quarter $1.57 billion or $0.60 per share.

Excluding last year's catastrophe losses, AIG's third-quarter 2006 adjusted net income increased 17.1% over the third quarter of 2005. Third-quarter 2006 results include certain out of period accounting adjustments identified as a result of the continuing progress in our remediation efforts that collectively increased net income by $73 million or $0.03 per diluted share and increased adjusted net income by $50 million or $0.02 per diluted share. These adjustments are related to unit investment trust accounting as well as other items that are detailed in AIG's third-quarter 2006 Form 10-Q.

Excluding the effect the third-quarter 2006 out of period adjustments and the 2005 catastrophe losses, third-quarter adjusted net income was $1.51 per diluted share an increase of 15.3% over the third quarter of 2005. The effect of our hedging activities which is included in net income amounted to an after-tax accounting gain of $267 million in the third quarter of 2006 compared to a third-quarter 2005 loss of $133 million. The fluctuation from the third quarter of 2005 was largely driven by changes in long-term interest rates and the performance of the U.S. dollar. Our return on equity for the quarter was 18.8% and through nine months was 15.8%.

Total assets at September 30, 2006 amounted to over $941 billion and shareholder's equity stood at $96.2 billion including retained earnings of approximately $82 billion. In the third quarter of 2006, our insurance operations generated cash for investment of nearly $9.3 billion.

Turning now to our various business segment results. General insurance had another outstanding quarter. Our general insurance businesses are executing on their growth strategies, leveraging product innovation, multiple distribution channels and financial strength while maintaining underwriting and expense discipline. Our general insurance operations generated cash for investment of $3.7 billion in the third quarter and $10.1 billion in the nine months of 2006. DBG reported excellent growth in underwriting profit and net investment income with a combined ratio of 89.99. Net premium growth continued to be driven by the proxy line as well as primary casualty, environmental and accident and health. In nonproperty lines, submission activity continues to increase. Rate declines are modest and terms and conditions are holding.

Personal lines reported excellent underwriting results and an improved combined ratio. Private client group's multi products and innovative loss prevention and customer service programs have helped this unit quickly establish itself as a leading provider to higher net worth clients. The competitive order market is adversely affecting premium growth. United Guaranty had excellent growth in operating income with positive contributions from all business lines. UGC's global expansion efforts continues as planned and has proven to be an excellent source of diversification and growth. Foreign General's reflect the implementation of new business and distribution initiatives throughout its core commercial and consumer lines operations as well as a positive effect of the addition of the Central Insurance Company in Taiwan.

Additionally, Ascot, our Lloyd's syndicate continues to experience strong premium growth. The acquisition of the Arch marine portfolio announced in early October will expand our base of clients and production sources. Foreign General has also established regional operations in the Dubai International Finance Centre expanding its presence in the Middle East, Mediterranean and South Asia regions. As part of this effort, Foreign General has also launched a new Takaful insurance initiative. According to a recent study, the potential exists for the world's Takaful insurance market to increase fivefold to $14 billion by 2015. We want to be part of that.

I will turn now to the subject of market conditions which are currently mixed but in the aggregate generally stable. In the U.S., the commercial property market place experienced a continued tightening in cat exposed areas. Capacity is short for critical wind and earthquake exposures; rates were up in excess of 50% throughout the quarter, sometimes substantially more. Rates in non-cat areas are flat to up 25% with rate increases being driven by account experience. Overall excluding property, rates decreased an average 3% to 4% while terms, conditions and attachment points continue to hold up well. Outside the U.S. retail commercial insurance third-quarter rate decreases averaged 7% similar to the private previous two quarters. There was little change in terms, conditions and deductibles in the quarter.

Regarding our D&O line of business, let me briefly update you on the stock option back dating issue which we continue to monitor carefully. Of the notices we have received, just over half involve primary D&O policies. A large majority of notice policies are low limit and all policies include defense cost within the limits. Few of these notices include securities -- class action suits. The majority of notices involve shareholder derivative suits which historically are less expensive to defend and settle than class-action suits. This appears to be a manageable issue for us.

Turning to be Life Insurance & Retirement Services businesses. The Domestic Life Insurance segment reported improved results largely the result of increased premium growth and improved net investment income growth in the Life insurance line as well as premium and reserve growth in the payout annuity business. Home services growth and operating income was up largely as a result of a $17 million increase in net investment income due to higher partnership income compared to the prior year and $8 million in third quarter 2005 catastrophe losses. Retail periodic premium sales of Life insurance declined compared to the third quarter of 2005 as we repriced certain universal Life products and tightened underwriting standards in the order age segment to maintain margins. As a result of this action we are likely to report unfavorable comparisons in sales of Universal Life in the coming quarters.

Domestic Retirement Services, individual fixed annuities are facing a continued difficult sales environment while sales of individual variable annuities remain strong. Results in the group retirement products business reflect in part the continuing trend favoring low-cost group Mutual Funds over variable annuities. In addition, we experienced moderate asset growth and spread compression. Management is focused on deposit growth, asset retention and changing client needs resulting in expanded product portfolios that includes an initiative that has helped retain and attract $1 billion in rollout --rollover assets this year.

Foreign Life Insurance and Retirement Services performed well across all productlines this quarter. Results were also positively affected by out of period adjustments of $42 million. The introduction of the investment link to the single premium life insurance has been well received in a number of key markets and distribution channels. Our ongoing focus on accident health products is increasing margins as intended. We are encouraged by the progress we've made in Taiwan. Our efforts to shift the product mix to personal accident and investment linked products are increasing margins as planned. These efforts are apparent in Nan Shan's personal accident first-year premium and single premium life insurance group. We have also implemented a shift in investment strategy that allocates more assets into equities with high dividend yields. This has led to a higher net investment income.

Maintaining investment margins has been an ongoing challenge in the life industry in Taiwan given the prolonged low interest rate environment. This has led to certain negative investment spreads but with Nan Shan's mortality and expense margins the overall portfolio is still profitable. Results in Japan continue to be affected by increased competition especially in the personal accident and health market and by the runoff of the higher margin acquired in-force business at AIG Star Life and AIG Edison Life.

In the Life segment we have extended our leadership in bank channel sales of single premium whole life insurance and we are also experiencing success in the face-to-face channels. In the accident and health market we reacted quickly to the change in the tax treatment affecting the long-term personal accident product by launching a number of new products. In the annuity market, ALICO has been able to maintain its fixed annuity leadership position due to product upgrades like the automatic withdrawal feature that helped this quarter's deposits grew sequentially.

Our Foreign Life operations outside of Taiwan and Japan performed well this quarter. We have positive news in most regions of the world where these operations consistently generate very good results and have either long-standing leadership positions or are newer operations that will be the cornerstone of future growth. What all these operations have in common is the proven ability to execute on a multiple distribution strategy to support a broad array of protection and savings products regardless of the market stage economic development while meeting the changing needs of our customers. The shift in product mix has not been limited to Taiwan and Japan as we have seen increased sales of investment linked products in many markets. Accident and health remains a core competency and contributes to the stability and profitability of our worldwide life business.

Turning now to financial services, ILFC's operating income excluding the effect of FAS 133 declined compared to the third quarter of 2005 as increased lease revenue was offset by an increased interest expense. ILFC has expanded the size of its fleet over the past year and is well positioned to meet the strong demand for its aircraft in a lease rate environment that remains favorable. Economically, ILFC's revenues are growing at a faster pace than interest expense. The inability to get FAS 133 treatment for interest rate and foreign currency hedges exacerbated the increase in GAAP interest expense. Capital Markets results declined compared to the third quarter of 2005.

The transaction oriented nature of this business affects comparison of quarterly results. However, transaction flow has remained strong throughout the year which is reflected in the year-to-date results. Capital Markets is well regarded for its track record of innovation that is developed in these strengths such its unique expertise in the super senior credit derivative market. That market continues to grow as international banks prepare their balance sheets for the implementation of Basel II capital measurements. The comparison of our consumer finance results for last year was affected by the $62 million loss related to Hurricane Katrina in the third quarter of 2005.

During the third quarter of 2006, American General Finance reassessed the adequacy of the finance receivable portion of the reserve and reduced it by $22 million. The U.S. consumer finance business continues to be affected by increased interest rates and a cooling residential real estate market. Results were also affected by depressed whole loan sale prices as a result of the flattened yield curve, an environment that has been prevalent throughout 2006. However, credit quality remain strong. In response to these conditions, AGF is emphasizing retail finance and branch generated products. Overseas, loan growth drove an increase in revenues largely in Poland and Argentina. Revenue growth was offset by higher expenses related to expansion initiatives in Poland, Argentina, Mexico and China.

The decline in asset management operating income is largely due to the runoff of domestic GIC balances combined with spread compression in the remaining portfolio. Institutional asset management results also declined compared to the third quarter of 2005 as lower transaction driven revenues were only partially offset by growth in asset-based management fees. Similar to the cancel markets business, transaction timing affects the quarterly comparison of institutional asset management results. For example, results are affected by the timing of realized gains and performance fees. The matched investment program reported positive operating income in the third quarter.

The matched investment program was established in September 2005 through AIG's $10 billion euro medium note program and began issuing securities in April. AIG has issued the equivalent of $3.3 billion for the matched investment program in euro, U.S. rule 144A and U.S. public markets through September 30, 2006 and $4.5 billion through the end of October. Lastly, after the quarter's close, AIG received regulatory approval from the Reserve Bank of India to operate a wholly-owned non bank finance company that will serve as a platform to build an asset management and consumer finance franchise in India. This and many of the other initiatives we have highlighted demonstrate our commitment to extending our diversified global franchise in identifying opportunities that will contribute to future profitable growth.

In conclusion, ladies and gentlemen, while conditions in certain of our markets remain challenging, our strong third-quarter performance again underscored the strength of AIG's widely diversified business portfolio and the demonstrated ability of our employees to identify opportunities, execute on our growth strategies. Finally as you may have seen this morning, S&P revised AIG's outlook from negative to stable. We now have stable outlooks from all of the major rating agencies.

Now we will be very happy to take your questions.

(OPERATOR INSTRUCTIONS) Jimmy Bhullar.

Thank you. I just have a couple of questions on the business but before that a numbers question. On your tax rate, the 29.2%, you mentioned the remediation adjustment but is there anything else that is unusual or do you think that is a sustainable rate going forward? And then I have a couple of questions on the business.

You're talking about the tax rate?

Yes.

Yes, let me explain that.

Mrs. Steve Bensinger, Jimmy.

Did you say the tax rate?

I thought Jimmy said DAC.

That's what I thought.

No the tax rate, the tax rate.

Tax rate, okay, thanks. The effective tax rate for the third quarter is derived as the difference between our best estimate of the annual effective tax rate for 2006. That is about 31.6% as of September 30. That is compared to the tax rate we estimated as of the second quarter of 32.4%. This is on adjusted net income. That difference is about $135 million for the quarter or about $0.05 per share that positively affects third-quarter results. The effective tax rate decline in the third quarter principally due to taxes on the updated full-year projections for investment income, partnerships and the mix of our business.

Okay. And then just a question on your life business for Edmund. You've had good single premium sales the last couple of quarters but the first-year premium recurring business has actually been weak. How do you think about that and if you can just discuss your outlook for overall sales? And then whether the margins on single premium business are they the same as margins on first normal recurring premium type business?

Jimmy, I have discussed this a couple of times in the last two quarterly calls. Overall on the foreign side, we gradually switched from the (indiscernible) regular premium basis of our new business to the single premium mainly investment linked product to mitigate our risk in investment return. In the old days and naturally the profit margin of those regular premium business would give us a better profit margin because of the high interest rate environment but in today's world we couldn't afford to continue. So those guaranteed assumed interest products. I think we have the good success in switching to single premium investment linked products just not just in Japan and Thailand and Taiwan as Martin earlier mentioned. And this in fact across the board in many of the foreign countries.

As to your question as to the profit margin, naturally that may -- we may not be able to get the high double-digit profit margin as in the old products. But this is as I said, there really is one thing is to mitigate our risk in investment return but on the other hand still gives us a good profit margin, the up single digit or low double digit in most of the countries. So going forward we are going to do up a portfolio that we would have a more sustainable profit growth in order for life operations.

Thank you. And then finally just a question on the expense issue on P&C. It has ticked up the last few year quarters. I think there was some unusual items this quarter. And also you mentioned in the Q the mix shift in foreign general. If you can just discuss your outlook for where you expect that number to go?

Yes, Jimmy, I think from the general expense ratio you have to take into account the balance sheet remediation which amounted to $225 million in the quarter. And for DBG, the increase of 4.26, that was 3.7 points of that 4.26. The balance was really related to premium and residual market assessments. On the AAU, it's more a product mix issue with more focus on consumer business than commercial which has by definitional higher acquisition rate and therefore that is pushing up foreign general's expense ratio in the quarter. I will ask Chris and Nick if they want to add anything there.

Yes, Jimmy, the only other thing I will add is on the expense ratio on the Domestic Brokerage Group, growth in net commissions didn't see any increases in the third quarter.

Another effect on Foreign Gen is the growth of Ascot, our Lloyd's business. It's a wholesale business so the acquisition cost is higher than the rest of the portfolio so that is a slight shift upwards as well.

Thanks, Nick.

Josh Shanker.

Good morning everyone. My first question really all my questions relate to the same issue. This quarter you announced both gross and net favorable developments in the P&C business. I haven't seen that in the past. I'm wondering of the $480 million for three months whether you have a nine-month number available to tell us also so we can compare the previous quarters of reporting?

Frank Douglas is going to respond to that.

We disclose on pages 50 and 51 of the Q those numbers. We've had 1.23 billion of favorable development from accident years 2003, '04 and '05 for the nine months. That compares with the $490 million I believe you just quoted for the third quarter. And we have had favorable development ex cat. I believe for each of the last two quarters possibly each of the last three quarters. So it is not the first quarter we've experienced overall favorable development.

Which lines are you seeing that come through in mostly and is that a frequency issue or a severity issue?

It's mostly the shorter tail classes. We also provide a breakout for you beginning this quarter. I think its the first time we've done it by segment. So you will see what part came from Foreign Gen, DBG, Personal Lines, etc. The largest component this quarter was actually Foreign Gen where we saw favorable development across a variety of classes of business. There was no one single driver. And I said the same thing in actually years 2003, '04, and '05 for DBG and actually across AIG. We are seeing favorable development of those three accident years pretty much across the board. The '02 and prior adverse development has been pretty much confined to the DBG where the long tail business is. But the favorable development has been pretty broad based.

Is that both frequency and severity of claims or is it one or the other?

From most of our businesses we look at overall loss costs. A lot of our business is low-frequency, high severity and for this classes of business we generally look at overall loss costs just as opposed to claim counts. For example, for excess casualty, eight or nine out of every 10 claims don't even result in a payment. So we prefer to look at overall loss costs rather than just claim frequency versus severity.

And finally, excluding the catastrophes of '05, do you see '05 evolving through the '06 years similar in the way that '04 evolved through '05?

That's what we are seeing so far because the '06 year by itself is still very green. It's a little early to say anything specifically about accident year '06.

No. Accident year '05 actually going through the '06 numbers? Going through the '06 analysis.

Yes, to set the accident year 2006 loss ratio, we're obviously using the accident year '05 as a baseline, if you will, we're using the more recent years primarily. So, yes, to the extent '05, '04, '03 are improving, that bodes well for accident year 2006. And as we disclosed in the Q, we did lower some loss ratios this quarter for accident year 2006 for a number of classes.

Okay. Well thank you very much.

Andrew Kligerman.

Good morning. A couple of questions. Quick one just out of curiosity, the ballot deposits declined 4% year-over-year 1.3 --

Andrew, we couldn't hear the beginning of your question.

Okay let me speak a little bit later. The valid deposits, they declined 4% year-over-year to $1.3 billion in the quarter and I was reading through and it was pretty late but the Q indicated that it declined due to the increased number of policyholders nearing retirement age. And it kind of it was kind of a curious comment. So why the declined in that area? And then maybe a little clarity around that comment and then I have a few follow-up questions.

Andrew, I think Joey is on the line there. Joey, do you want to add some color there?

I guess the only color I would add is I would think that that explanation is just one of several factors. All that alludes to is that we see a greater increase in flow suspended participants. People generally stop flowing or making monthly or quarterly deductions for their plans when they approach or are about to terminate the service or retire. But I would describe that as really one of several reasons and not the only reason for that. And we haven't seen a huge spike in that area either.

Can you turn that tide on that and see a big pick up or a modest increase in sales going forward?

I think we can definitely see a modest increase going forward, but to be clear, we certainly can't turn the tide on people aging and getting closer to retirement age. Our real driver is going to be getting new participants into our system either through new enrollments, new employees or winning new groups and enrolling entire new plans.

Got it. And then shifting over to the property casualty. Just very broadly, net of the remediation portion -- premium was still up 6% very strong relative to your competitors. As we look out in the next year or two what kind of premium growth do you think AIG can generate?

As you know, Andrew, we're not giving any guidance. But clearly if we continue to execute the strategies that we have in place, clearly continue to expand our distribution base, which Chris and the team in DBG has been executing successfully particularly into the national and regional brokers. And as you've seen in Foreign General, more of the growth in the consumer business as well as our Lloyd's operations, we hope to essentially to continue to grow the business. A lot will depend on what occurs to market conditions over the next three to six months.

Okay. And then just lastly, mortgage insurance, the loss ratio picked up from about 55% or the combined ratio rather from 55% to 70%. In consumer finance you talked about a less robust real estate market. Could you give a sense of the overall trends in both businesses and the potential for a pick-up in the loss experience?

Yes, I think on UGC the pick-up in the loss experience there was that in the domestic first lien businesses, they were up due to the aging of the book and somewhat to the slowing housing market. And also the second lien business also experienced an increase in losses compared to the third quarter of 2005.

And your thinking going forward, is it just a seasoning issue or do you think that the losses can continue (indiscernible)?

Well, I think clearly there's a seasoning issue there, but also who knows what could occur prospectively, depending on what happens to the slowdown in the housing market.

And then consumer fi looked pretty good. Any concerns there?

No. This is Bill Dooley. The consumer finance businesses obviously have been affected by the slowdown in the real estate market. But as far as the delinquency rates are concerned, AGF is at historical lows on those. So we are at a very good spot here in the cycle. The fourth quarter, the end of the year, you do have tendencies for some pickup in that on a historical basis. So I see no issues going forward.

Thanks a lot.

Dan Johnson.

Great, thank you very much. Good morning. Two questions, please. The Foreign Life business, the fixed annuity profitability looked like it was up meaningfully both sort of sequentially versus the recent run rate and definitely versus last year as well. I'm wondering if you could talk a little bit about that? And ten within the DBG business, can you help us point out the economic impact that the new sidecar had in terms of either ability to help with gross or net premium growth or if we have not seen that yet?

Certainly on the issue of the sidecar, Dan, very little in the third quarter. It has certainly taken off and we obviously using the new facility. But the financial impact in the third quarter is quite small. So you will continue to see the benefit of that as the future quarters roll out. On the fixed annuity side, Chris Swift is going to respond to that.

Dan, I think the major reason for the slight increase this quarter is we did have a DAC unlocking of future assumptions of approximately $22 million U.S. in the third quarter. We do disclose in total in our DAC table all the lockings for the period but that particular line had a $22 million DAC unlocking.

Okay, even without that it would look like it probably was a pretty good profitability quarter and again we're talking on the foreign side, correct?

Yes.

Okay, great. Thank you.

Bill Wilt.

Thanks very much. A couple of questions if I may. Steve had mentioned the lowering of the loss ratio ticks. I think that was in DBG or maybe the reference was to general insurance. I wonder if you could quantify how much that is and I guess also specifically how has is that affecting, if it all, the pricing decisions you are making?

Frank, do you want to take the first one?

Sure. The overall impact was not that large. This is Frank Douglas. Overall I think the loss ratio at the AIG level we're talking about a point or less. These were not enormous changes but they were a series of a couple of point changes. So I don't think any of them by themselves are saying change the pricing dramatically. We monitor every quarter what the loss developments are for each of our many products and recognizing these modest adjustments that we made in the quarter, as I said on a loss ratio basis they are not that large, I would say had a de minimus on our current outlook of pricing and profitability for the various classes. Its more an indication of the trend that we've been seeing which has been favorable.

That is helpful, thanks. And then turning to foreign life, a couple of questions. The negative spread compression in Taiwan, is that likely to require a capital infusion into that legal entity?

[It will]. And in fact our Taiwan books are still overall still quite profitable though we have a tough (indiscernible) spread because of the lower interest environment. As we reported in the 10-Q, this quarter we have extract dividend income of 35 million comparing to the same quarter last year. This is because of switch in our investment strategy more to the high yield dividend stocks and also to invest more in foreign parts. In addition we also look at the possible investment in real estate and also increase our mortgage portfolio.

Overall we still have a negative spread. But all those old policies and we had very good profit generated from mortality in (indiscernible), I show mortality was much higher. And our actual mortality experience is really less than 50% of our assumed mortality. And second, is on the expense loading. Our Nan Shan operations expense ratio is the lowest in the market in fact probably in the whole world that expense ratio is very low.

So we've been able to generate the profit from expense loading. And overall the Taiwan operations still were profitable despite a somewhat negative spread compression but also we are now writing more and more investment linked type products and gradually debt investment spread compression gradually go away. So there is no need to -- absolutely no need for us to have any capital [injection inclusion] at this stage.

That is helpful. And then one other point of clarification if I may while I have you. Going back to comments you made earlier with the regular foreign life you made a reference to earnings growth up single or low double digits. I didn't know whether that was a reference, a broad reference to foreign life or whether that -- I think the context was addressing a question about the (multiple speakers).

When I answered that question, Will, I referred to the productline just the profit margin not -- I'm not really referring to any future growth as we don't give guidance as to future growth.

Okay, that is helpful. This is the profit margin --?

Yes, the profit margin.

Of overall or was it with regard to a specific distribution channel? I'm sorry, was it a broad reference to foreign general, the profit margin I'm just --?

(multiple speakers) talked about the investment linked type of product earlier. So I referred to that particular product.

Just for clarification, that was product specific.

That is helpful. Thank you.

Mark Lane.

Good morning. The first question is, Steve, in light of the move to stable from S&P, can you give us an update on where you are at with that capital model project and when we might see some more substantive decision making coming out of that process either addressing share repurchase or the dividend? I know you say you look at it consistently but there has really been no action taken.

Right, Mark. There hasn't been yet but we continue to make very good progress in the development of our economic capital model and that is consistent with our project plan. At the moment we are actively involved in evaluating and validating our methodology and our findings with our business units around the company. We are also at this point starting to engage the rating agencies in the discussions around the economic capital model. Over the course of 2007 and beyond that we'll continue to improve and refine our thinking across all of the segments of AIG and of course further develop the model.

Now what you'll see from us regarding the results of our modeling efforts is the actions we take in terms of our business strategy, acquisitions and capital management. Our economic capital model will increasingly be used as a tool as we now have it in sort of the final stages of initial development to assist us in our decision-making. So I think we have been pretty consistent in saying that by the time we get to the filing of our 2006 10-K that at that point in time you ought to start to see some of the decisions emanating out of the results of that model. We continue to believe that is the case. We are getting closer.

Okay, great. And then regarding the foreign life business, any way to quantify what the bottom-line impact was -- the earnings impact either positive or negative with foreign exchange?

It's Chris Swift. For the quarter it was basically neutral in totality. In Japan from a country specific basis we still had a roughly 2.5 -- 2% impact dampening of earnings growth but in total for the quarter it was neutral.

Okay. And then last quick one is the hedge accounting, the FAS 133 hedge accounting in ILFC, the inability to qualify for that hedge accounting, can you quantify what that impact would be? You mentioned that revenue growth would be exceeding expense growth. But can you put an absolute dollar number on it even if it is a range?

It's Bill Dooley. The best I can do right now is that the results of ILFC on an economic basis for the quarter would have been slightly ahead of the third quarter last year.

So operating income would be up just a bit?

That is correct.

Okay, thank you.

Alain Karaoglan.

Good morning. Just a follow-up on the tax. I have a couple of questions the first one is a follow-up on the tax rate, Steve. Did I understand correctly that they expect the tax rate to run 31.6%?

That's right.

Going forward that is what you should expect?

That is that effective tax rate we use for the nine months and that is our best estimate for the annual effective tax rate for '06.

Looking at page 65 of the 10-Q and the deferred acquisition cost balances, there was another category that moved around $1 billion out of the DAC into other assets. And the footnote says represent sales inducements as that's reclassified from DAC to other assets. Could you clarify what that is and what is happening? Will that be amortized going forward or?

Alain, Chris Swift is going to respond to that.

That is basically a reclass out of the deferred acquisition cost line into an other asset line for sales inducements primarily coming out of Domestic Retirement Services in Foreign Retirement Services. It is really just a classification issue. It is amortized consistently and similarly to any FAS 97 product with the sales inducements by definition of SOP 3-1, you can't put in a DAC line, you have to call another asset on the balance sheet.

But it is subject to the same amortization?

Correct, yes the same profit margin. EGP profit margin [emergent].

And the last question is on the property casualty side. You have been growing nicely in a softening market. The other companies have been and all the discussions was that the large accounts are much more competitive than the smaller accounts. Are you concerned that you might be growing maybe too much or in areas given the price environments and the competition? And could you comment on large accounts versus middle market or smaller accounts?

Why don't I let Chris and Nick give you some specific color on that?

This is Chris. On the larger accounts what you have to remember is that we are a lead market on almost all our product lines. So our view is generally a little different than other people. We see actually the rates on the larger accounts holding pretty firmly. We see more competition on the middle market business as opposed to the larger business. We offer basically over 400 products and services. So there's always a shift in where we see opportunities and that shifts quarter to quarter.

Okay. And how are your retentions in these businesses? Are the improving?

Yes, they are improved. They are slightly up over the second quarter of this year in the third quarter.

Thank you very much.

Nick, do want to (multiple speakers)

Just and add from the standpoint of Foreign Gen. It is really the beauty of the operation is that we're operating in so many different markets we've got rate movements which are different from territory to territory. So right now for example you've got a lot of pressure on pricing in Europe and in Latin America because of the wind exposure of the pricing is improving. So on balance we can manage the portfolio in that way.

And I will also mention of course we continue to benefit from the rate increases in [collections] a property portfolio although it is a reasonably small part of DBG and AIG's general revenues overall. It is obviously still contributing to the growth.

Jay Cohen.

A couple of questions. ILFC, we continue to hear good news about the lease market. Your numbers aren't yet reflecting that and obviously you got the FAS 133 issue but excluding that, when would you expect to see these higher lease rates begin now to flow into earnings? Is it an '07 or '08 event?

Jay, we've got Alan Lund on the line from ILEC. Alan, do you want to respond to that?

I would expect that we'd see significant improvement definitely in '08 but even starting to show into '07 that we will be seeing that much of the fleet that we took back as a result of 9-11 went through short period leases and they are now transitioning into other leases where the lease rates have recovered. We are starting to see more and more of that impact and it will show in '07 and even more so in '08.

That's great. Second question, the dividend income in Taiwan that you highlighted in the 10-Q, I guess as you read it in the 10-Q it sounds like it's something unusual but based on the comments this morning it sounds like that is just the change in investment strategy. That should be an ongoing source of income, is that correct?

Jay, yes, Edmund here. Because of our switch in investment strategy we put more investment into the equity market and we also select those equity sectors that risk a high cash dividend yield. And the normal in Taiwan, they declared a cash dividend in the third quarter. And so this year the third quarter our cash dividend from stocks -- we are investing are substantially higher almost by $35 million as comparing to last year the same quarter. And so assuming we hope continue to hope this stock investment in our portfolio naturally next year it will continue flowing in with the stock dividends. And hopefully an increasing rate.

That's helpful. And then one last quick one. In Japan I understand the comparisons are tough because of the business that is coming off the books from the old Chiyoda or Star Life. Have you thought more about how that process unfolds? In other words, when do the comparisons become a little bit more neutral for you?

Jay, Chris is going to respond to that.

Jay, it is Chris Swift. Again it's hard to predict with certainty. We are finalizing our '07 plans. Without giving a specific guidance we think at the end of '07 it's sort of the inflection point of when we could start to see organic growth out of those entities, more organic growth. We think the tail end of '07 could be the inflection point.

It just seems like with Taiwan maybe starting to stabilize, Japan getting into '08 looking better, it seems as if the entire foreign life business should get back on an historic growth track record say by 2008. Is that a fair assessment?

We surely hope so.

Great. Thanks for the answers.

Tom Cholnoky.

Tom Cholnoky, Goldman Sachs. Just sorry, Steve, back on the tax rate for a second. I know it's an adjustment for '06 but it is kind of lower than I think at least certainly lower than the run rate I was thinking in some of the out years. Is there anything going on that could keep your tax rate at these levels? I realize it is kind of a forward-looking question but it is enough of a difference that it probably would require maybe hopefully some commentary?

Tom, our tax rate is obviously affected by a lot of factors and one of the principal factors is the mix of our business. We have a large portfolio in different jurisdictions and depending on which products, which jurisdictions we're emphasizing depending on conditions and profitability will have a direct affect on that tax rate. So for the rest of this year as I said earlier, we are really looking at an expected tax rate on unadjusted net income of somewhere around 31.5, 31.6%.

How that moves forward is really going to be dependent on all of those factors and there are so many variables that go into it, it will be very hard to predict. But that is our best guess right now in terms of the current mix of business and where we are in different jurisdictions.

Right, but given that directionally it has been driving the tax rate down and given your focus on different products in different regions, is there any reason to believe that the tax rate wouldn't zoom up in 2007 or perhaps just stay stable recognizing the different components?

No. At this point I have no reason to believe that it will move in either direction. I really -- it is just -- it is hard to tell.

I understand. I'm just trying to understand a little bit more. On the asset management side, obviously the GIC runoff has been hurting results somewhat. When do the comparisons start to become easier in that? I mean are we going to continue to see year-over-year declines in asset management?

Tom, it's Win Neuger. In terms of that GIC runoff which is as you know is primarily in [Sun] America companies. That will continue over I think the next five years or even a little bit longer. A lot of it, I mean the vast majority I think in the first three years of that period but it will continue to roll off at a pace that is not that different than what it has been doing over this period of time.

As you know, we've also started to offset some of that though with the matched investment program. But the matched investment program today is very small in terms of assets and it also has a somewhat different asset allocation so that the spreads on that portfolio are going to be different and lower than they have historically been on the GIC portfolio. I should add, but from an ROE point of view, we think equally attractive. It's just that we are doing a less risky asset allocation in that portfolio.

But from an operating earnings standpoint we should probably still be seeing down quarter year-over-year for a little while?

I would expect that to be the case.

Okay.

Tom, if I could just that a little bit. It's Steve. Just to give you some more color. At September 30, our domestic GIC reserves were a little over $33 billion. And we are expecting about one-fourth of that is going to run off within the next year or so and then after that 40% between one and three years. The preponderance of it over the course of the next three years, so that gives you an idea of how you can expect to see that develop.

Okay, great. And then just sorry, one other quick comment on the capital markets. You were mentioning that obviously the flows are pretty good. Where are we in terms of seeing some better comparisons on that business?

As I mentioned, Tom, on a year-to-year basis capital markets have performed very well and transaction flow is robust. But Joe is on the line from London. So, Joe, do you want to add some color there?

Hi, Tom. Part of the problem is for us this quarter was in the structured note markets. And really in a lot of ways it was self-inflicted that we decided to stay out because the market was doing things pricing wise that I couldn't justify doing in finding proper hedges for. This is really driven off of a lot of business that was going on in Asia. And some of the business that was being driven here in Europe.

And so what we did is we took a look especially in our interest rate market and our currency segments and said look, this is a little too risky for the kind of risk parameters we want to run to be participating in this business. So we stepped aside. And it has always been our posture is to try and stay as risk adverse as possible as we participate in the capital market structure.

Businesses that have been doing really well for us though are our commodity business and our commodity index business and you see that manifested in the Dow Jones AIG commodity index. Year-on-year we've just seen fantastic growth in that business as commodities as an asset class have captured the attention of investors as a diversifier within their portfolio mixes. That has done very well for us.

Martin mentioned earlier is the credit through and we're seeing a huge uplift for us in that business in terms of the big international banks coming to us in the super senior segment which is I think as everyone knows is the most risk adverse segment but is being driven by what banks need to do in order to manage their regulatory capital. And that has been a big push for us along with the equity side of the business for us.

So while we are down, it is really a decision that we've made in terms of our risk posture in segments where we think the risk doesn't really -- can't be hedged and there isn't just enough money in it for us to find the appropriate hedges for that business.

Ian Gutterman.

My main question was asked, but I just had a numbers question. To be honest I'm confused trying to reconcile these out of period adjustments to the segment disclosure you provide on them in the Q and supplement. So I was hoping I could ask a couple of questions to get me started and maybe I can do the rest off line. Does 50 million impact on adjusted net income? Do you have what that number was on pretax?

On pretax, yes, give me a second. We will get to that. (multiple speakers) Yes, it is $142 million pretax.

Okay so there is a very high tax rate and it seemed like it would have -- I was getting something near that but I was surprised the tax rate would have been so high.

Will there is some specific tax adjustments out of the tax remediation that directly affect the tax line. So that's why that happened.

For that 142, what exactly is in that? Is that -- I found four items I guess. I just wasn't to be sure if they were all in. Is it the investment income, the earned premium in General Insurance, the Reinsurance benefit in Foreign Life and the bad debt in P&C? Are all four of those items in that 142?

They are all in there and there is also partnership income. There is the adjustments on unit investment trusts that we've disclosed. There's some tax adjustments that I mentioned. So those are the main ones.

Okay. And then the other part related to that was I was a little confused on the unit investment side. At different places I think in the supplement it said in DBG there was 191 million. And in the Q it said it was 70 million. I wasn't sure what the difference was between those two numbers and which one I should be using?

Okay, I will have to take a look at that. Can we move onto one more question? I'll check those references and give you an answer?

Okay, thanks.

Charlie Gates.

Good morning. I only have one question, maybe it has two parts. When you complete your capital model analysis, would you foresee sending out a news release to investors and possibly having a conference call?

I think as Steve mentioned earlier -- oh, he has now regrouped his thoughts.

Charlie, sorry, I was working on the other thing when you asked me that question. So you asked about what we're going to disclose effectively?

Yes. You've been telling people for at least seven months that you're going through this analysis.

That's right.

And seemingly that analysis or the completion of that analysis might be a catalyst for the stock. I was wondering whether you wouldn't send out a news release and maybe have a conference call?

Okay. Let me just put it in perspective for you. You are all well aware that AIG is an organization whose financial ratings play a very important role in our ability to access markets and expand our businesses. As I said earlier we are in the process now of engaging the rating agencies in discussions of our new methodologies, the approaches we are taking and eventually some of the results that we are seeing.

Now only after we've concluded those discussions can we -- would it really be appropriate to consider any sort of public disclosure of those results. Now we understand that several European insurers and a few U.S. banking institutions make disclosure of their capital modeling approaches and in some cases their results. Those companies have been engaged in their efforts for quite some time in conjunction with their own regulatory guidelines and also requirements around solvency whether it is Basel II or the developing conversation around Solvency II in Europe.

What you should expect to see from us is disclosure on as I said earlier on the actions that we initiate based on the results of our new capital model, transactions, strategies, perhaps acquisitions or dispositions, capital management, all of those can be outgrowth of it. And we will increasingly utilize our economic capital model as a tool as I said earlier in our strategic planning and our decision-making.

So you can expect to see those types of actions in terms of specific disclosure. Again, we'd really be reluctant to talk about numbers until we have a chance to fully vet all but with all the rating agencies. That is not an overnight process. But we will do the best we can. And we will try to keep you as apprised as possible as we move forward.

I guess my only follow-up question. The previous management had a problem with share repurchase for as long as they were in place pretty much. Would you think that the new management would have a different view on that?

Charlie, as I've said many times we truly believe this is a growth organization but we keep that option clearly very visible. Obviously from our perspective, we want to reinvest in the organization, reinvest in the growth of the Company and that is what we are looking to do. As Steve and I have said over the last twenty months or so, we continue to look at dividend increase; we continue to look at share repurchase as an option.

Thank you.

Ian, I have the answer for you. In terms of the question you asked, the $70 million for DBG relates to unit investment trusts for the third quarter. There is also $121 million in the third quarter for DBG relating to overall partnerships, non investment unit investment trusts. So the total is $191 million for the third quarter.

Thanks, Steve. Ladies and gentlemen, unfortunately we've run out of time for any further questions. So again, thank you for joining us this morning and have a great day. Thank you.