American International Group Inc (AIG) 2006 Q4 法說會逐字稿

Good morning and thank you for standing by.

I would like to inform all parties that your lines have been placed on listen-only until the question-and-answer portion of today's conference.

This call is being recorded.

If you should have any objection, please disconnect at this time.

I would now like to turn the call over to Miss Charlene Hamrah, Vice President and Director of Investor Relations.

Thank you, ma'am, you may begin.

Thank you.

And good morning, everyone.

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

Please refer to AIG's annual report on Form 10-K for the year ended December 31, 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 fourth quarter 2006 financial supplement, which is posted in the information section of the investor information section of AIG's corporate website.

And now, I would like to turn this conference call over to Martin Sullivan, AIG's President and Chief Executive Officer.

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

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

I will make some opening remarks and then we would be very pleased to take your questions.

2006 was an excellent year for AIG for several reasons.

First, we achieved record results by many standards.

Second, we put our principal regulatory challenges behind us while remaining sharply focused on our business.

Third, we made great strides at improving our financial control environment, enhancing disclosures in our financial statements, and furthering our commitment to good corporate governance.

And fourth, we made significant progress in capsule management, allowing us to announce a new dividend policy and share repurchase program last evening.

Now, let me now provide a brief review of our results.

For the full year, we reported record net income of $14.05 billion.

Fourth quarter net income was $3.44 billion.

Fourth quarter adjusted net income, which excludes realized capital gains and losses and the effect of hedging activities that did not qualify for hedge accounting treatment under FAS 133, was $3.85 billion, or $1.47 per diluted share, compared to $0.14 per diluted share in the fourth quarter of 2005.

The comparison purposes fourth quarter 2005 earnings per share were negatively affected by $0.44 per share for AIG's regulatory settlement, $0.45 per share for the General Insurance reserve charge and $0.20 per share for catastrophe losses.

Fourth quarter 2006 results include adjustments for the adverse ruling in the Superior National arbitration, the exit of the domestic financial institutions credit life business, and an increase in asbestos and environmental reserves resulting from the updated ground-up analysis of these exposures.

These three items, collectively, reduced net income by $0.10 per share.

The quarter also included certain out-of-period accounting adjustments that, collectively, increased net income by $0.02 per share.

Return on equity, using adjusted net income as the measure, was approximately 17% for the fourth quarter and the full year.

Total assets at December 31, 2006 amounted to over $979 billion and shareholders equity stood at approximately $102 billion, including retained earnings of $85 billion.

Book value per share increased 17.6% to $39.09 from $33.24 a year ago.

General Insurance had a very strong quarter with excellent growth in underwriting profit and net investment income that benefited from strong cash flow, high interest rates, higher interest rates and a substantial increase in partnership income.

Additionally, General Insurance fourth quarter 2006 performance benefited from the lack of catastrophe activity and a favorable loss experience compared to the fourth quarter of 2005.

During the quarter, our General Insurance business continued to successfully execute on its product and distribution strategies, generating good premium growth.

In mortgage guarantee, operating income declined primarily as the result of unfavorable loss experience on third-party-originated second lien business with lower than usual credit quality and a softening U.S. housing market.

The writing off this second lien product, which is about 2% of UGC's total portfolio, was discontinued at of year-end 2006.

As I mentioned earlier, Domestic Life Insurance and Retirement Services results were adversely affected by charges related to the Superior National ruling and our exit from the financial institutions credit life business.

By exiting this business we will focus our efforts on growing the small-case employer benefits and voluntary work cycle portfolio, where we believe significant market opportunities exist.

In Domestic Retirement Services, the fixed annuity business continued to face a very difficult sales environment and surrender activity remained high.

Foreign Life Insurance and Retirement Services results were positive in most regions, yet certain markets experienced difficult conditions, particularly Japan.

Results in the Japan Life and Retirement Services businesses improved modestly over prior year despite the continued weakness in the yen, increased competition, and the negative effect of the runoff of the higher margin acquired in-force business at AIG Star Life and AIG Edison Life.

As we have stated previously, we have taken action that successfully increased single premium life sales through the de-regulated bank channel and introduced a new life and excellent health products in response to a tax law change that affected certain A&H policies.

There are also plans to introduce new competitive annuity features over the first half of 2007.

In Taiwan, the low interest rate environment continues to challenge the life insurance industry.

As we have disclosed, interest spreads on certain in-force blocks in Taiwan are negative.

However, our management team has been very successful in developing and implementing strategies to maintain the profitability of our in-force business by diversifying our product mix to investment-linked and A&H products and allocating assets into investments that provide higher yields than local bonds.

Additionally, the business continues to generate significant mortality and morbidity margins and our expense ratio is the lowest in the market.

Financial Services results were led by capital markets, driven by strong transaction across AIG FP's product offerings.

ILFC's results reflected the continued favorable lease environment.

Demand for its fleet remained strong and ILFC is benefiting from its efforts in the European and Asian markets.

Spread compression and a softening of the U.S. housing market adversely affected our consumer finance results.

However, credit quality remains stable and AGF is emphasizing higher-margin non-real estate and retail sales finance, which experience strong receivables growth.

Fourth quarter 2006 institutional asset management results declined compared to the prior year, as transaction-driven revenue in this business affected quarterly comparisons.

However, our business made significant strides throughout 2006 in attracting new client assets and expanding the breadth of its product offerings.

2006 was also marked by a number of other accomplishments.

During the year, we made further progress in our remediation efforts.

As detailed in the 2006 10-K, we have remediated the material weaknesses related to balance sheet reconciliation and derivatives accounting.

The one material weakness remaining relates to income tax accounting.

We are making good progress on this last issue and our goal is to complete remediation of this material weakness by year-end 2007.

With the remediation of the material weakness in derivatives accounting, we anticipate AIG capital markets will reinstitute hedge accounting in the first quarter of 2007, with the remaining affected subsidiaries anticipated to be on hedge accounting beginning in the second quarter of 2007.

In the fourth quarter of 2006, we advanced our economic capsule modeling initiative by completing the initial firmwide review of AIG's economic capsule requirements.

Last evening, we provided a summary of this initiative on our website.

This model is a more sophisticated tool to help AIG optimize risk-adjusted returns, manage competing demands for capital, maintain our superior capital strength, and support current and future growth opportunities.

The analysis so far has reinforced our view that AIG's capsule position is strong and we estimate that approximately $15 billion to $20 billion in excess capital existed at year-end 2006.

Throughout 2007 and beyond, we will continue to enhance and implement the model, allowing us to deploy capital more efficiently and evaluate alternatives to utilize excess capital.

The initial results from the economic capsule modeling and initiative also supported the decision to move forward with a new dividend policy and common stock repurchase program.

The new dividend policy provides for AIG, under ordinary circumstances, to increase its common stock dividend by approximately 20% annually.

The new policy will be effective with a dividend to be declared in May of 2007.

Additionally, the Board has expanded AIG's existing share repurchase program by authorizing the repurchase of up to $8 billion in common stock.

We intend to repurchase $5 billion of common stock during 2007 and expect these repurchases will be made using our capital resources along with proceeds from one or more future issuances of hybrid securities.

AIG is very strong financially and well positioned for the future and the dividend and share repurchase actions are a reflection of this outlook.

By coupling our organic growth strategy and the competitive advantages of our diverse global operations with our capital management initiatives, we expect to create more opportunities to grow and ultimately drive greater shareholder returns.

AIG has a formidable portfolio of diversified businesses that are well positioned in attractive markets and offer AIG many growth opportunities.

We are also in a good position to take advantage of several important macro trends, including shifting centers of economic growth, a globally aging population, growth in the global middle class, and greater risk and uncertainty for our customers.

During the course of 2007, we will continue to build on the groundwork we laid in 2006, which could include strategic acquisitions, divestitures or restructurings of underperforming businesses, and additional capital management actions.

We will continue to better define our brand, corporate image, and strategies.

We have also emphasized new cross-selling initiatives through an enterprisewide effort we call delivering the firm to improved customer access to the extensive range and products and services we offer.

My job as CEO along with my senior management team is to ensure we keep making progress and increase shareholder value with every decision we make.

We are committed and determined to maximize value for our shareholders and we will.

And now we will be very happy to take your questions.

(OPERATOR INSTRUCTIONS).

Operator, are you taking questions?

Yes, sir, I am.

Jimmy Bhullar, JPMorgan.

I just had a couple of questions.

First one for Steve, you had pretty high partnership income across the board in most of your businesses.

Could you just give us some color on how much was above your normal assumptions or just give us an idea on what the recurring rate should be going forward?

And the second one for Martin, you mentioned in your comments that you would consider strategic acquisitions and divestitures of underperforming businesses.

If you can just give us a little bit more color on what businesses would you consider making acquisitions in and what are some of the underperforming businesses that you're in currently?

That's it.

I will take the first question -- it's Steve -- and then I will ask Win for some more color.

But as you know, partnership income is not going to be a consistent metric over the quarter.

We had an outstanding fourth quarter in '06 with well over -- about $1 billion for AIG's account and partnership income.

That is a historic high for a quarter.

The markets, as we have seen in the last few days, can be volatile.

However, we believe we have a strong portfolio of investments, but you can't -- I can't give you a run rate on that particular issue, because it will be choppy.

Win, maybe you would like to add something there.

No, I mean only -- I think that if you look at the past two years, it has been volatile quarter to quarter.

But for those last two years, we have been at the high or above the high-end of what we expect as our return from that portfolio over a long period of time.

I would expect over time that we will move back into that range.

And we have historically said that from that overall portfolio for AIG we expect to be in the 10% to 15% return on a long-term basis.

And the last couple of quarters we have been well above that.

I think you'll also see in our statistical supplement that there is more information on partnership income, again, and I would encourage you to take a look at that and you can see some of that volatility.

Jimmy, yes, on the second part of your question there, obviously when we talk about strategic acquisitions, you wouldn't expect me to expend too much on that on a looking-forward basis.

But what I would like to point you to is during the past year or so, we have expanded our global footprint in our key areas.

And examples of that, obviously, would be the acquisition of Ocean Finance in United Kingdom, Travel Guard in the U.S., and Central Insurance in Taiwan.

And of course we are forever looking for opportunities where it made strategic sense to add to that global footprint.

And, again, on the divestiture's, an example of that, of course, is in the fourth quarter in the financial institutions credit life business we made a determination that it wasn't a strategic fit and that we would be better served by focusing on a different sector of the market place.

So there, I think, looking backwards there are good examples of how we are thinking, but obviously on a go-forward basis, I guarantee you will be the second or third to know, Jimmy.

And just a quick follow-up on your excess capital numbers that you gave out, $15 billion to $20 billion.

Does that include hybrid capacity or is that -- hybrid capacity is in addition to the excess capital that you have in the Company right now?

No, the $15 billion to $20 billion is our assessment of the difference between the economic value of our assets and the economic value of our liabilities.

So it takes everything into account.

There is nothing that is not included in that number.

Josh Shanker, Citigroup.

Questions regarding the share repurchase.

First, following up on Jimmy's, the decision to potentially issue out some hybrid securities, would the share repurchase go through without issuance?

Is this coincident or is this necessary?

The second question involve the potential of doing a block trade with Star.

And I will have one more follow-up unrelated to this afterwards.

Do you want to answer the second question --

I'll let Steve respond to that, Josh.

Josh, your first question, we don't need to issue hybrid securities.

However, issuing hybrid securities is a method for AIG to better optimize its capital structures.

As you know, hybrid securities qualify for equity treatment from the rating agencies -- in some cases up to 100%, in other cases 75$, others will vary -- thereby providing a more cost-effective form of capital than common equity.

The issuance of hybrid securities tied to the repurchase of common stock effectively replaces high-cost common equity with low-cost equity hybrid equity.

So this will lower AIG's overall cost of capital, but doesn't change AIG's overall capital from a rating agency perspective.

Obviously, from an ROE perspective and for an EPS perspective it does because we would be eliminating common equity.

With regard to the second question.

Josh, in regard to the second part of your question, we obviously expect that the form of any share repurchase program will depend upon, obviously, the market conditions and may include open market repurchases.

It could include private transactions, it could include derivative contracts, and it could include automatic repurchase plans.

So I think that sort of lays out the options available to us.

Regarding the answer, in terms of the rating agency view of your capital, how far off do you think the rating agencies are before they begin to adopt the new capital model?

I think there is a few elements to that.

One is the rating agencies are at different points within determining their own frameworks for evaluating individual companies' economic capital modeling and enterprise risk management.

So that I think they are all on different points in the spectrum on that.

Also, the extent to which they actually utilize and consider diversification benefits and correlation benefits, which is a significant part of our model, is also variable and evolving.

So I would say that right now our task in the next year, as we said in the white paper that we posted to the website, is to give them continuing education on how we are looking at it, try to prove the efficacy of our modeling.

One of the ways we will do that is through the third-party validation, independent validation that we have talked about.

And hopefully in the near to medium-term get more credit for what we believe is a robust model from the agencies.

Thank you very much.

Good quarter.

Tom Cholnoky, Goldman Sachs.

I have got two unrelated questions.

I guess first on the capital management side, Martin, how should we think about your buyback?

Should we think about it that you found some loose change in your pocket that you want to get back to shareholders, or will this really be just an ongoing plan?

In other words, should we think about buybacks as being a new part of AIG on a go-forward basis?

All I can say, Tom, is your definition of loose change and my definition don't correlate to one another.

But clearly from, let me say, from the outset we see AIG as a growth organization and we are committed to growing the business forward.

But as I have said, we are going to apply and focus on effective capital management.

As we posted on our website, we believe that at the present moment there is $15 billion to $20 billion of surplus capital there.

We believe the share repurchase that we announced last night is an effective use of capital and it is the beginning of the whole process.

And we will keep it under continued review.

So in other words are we kind of like taking capital and basically optimizing it right now, and then on a go-forward basis, we may see share repurchase come down as you try to grow the business?

Absolutely, I note know Steve wants to add in more color, but I think that is a good evaluation.

We believe we will continue to generate excess capital and along with that, we will continue to explore additional opportunities, both, as Martin said, to grow organically, to provide new products, to increase our capacity and risk retention, and introduce richer product features to meet demand.

Those are some of the ways.

Aside from your more traditional capital management of dividends, which we have talked about, and potential share repurchases.

And I think it is also important to note that in 2007 we are going to make a more-precise determination of the mobility of the excess capital.

I think you saw a footnote and also a note in our white paper that a large portion of our excess capital, or total capital is in regulated entities.

And one of the things we will be working on over the course of 2007 is to see whether we can try to gain more flexibility in the mobility of capital.

And, finally, also with respect to frictional costs of moving that capital, we have to evaluate those, which would include taxes, and also analyze new possible financing alternatives to make our capital structure more efficient.

So it is broad and it is encompassing.

And then I don't know if Frank Douglas is on the line, but just in terms of reserves, you put up almost a little over $2.2 billion on 2002 prior year reserves and over the last three years it has been over $15 billion.

Are we starting to get to the point where we are getting a little bit more comfortable with the reserves in this area?

I mean, that is a lot of money to be putting up.

And then I just have sort of one other question on the accident year loss ratio.

Well, Frank is here Tom.

Hi Tom.

We are obviously seeing much less development than we had been for accident years 2002 and prior.

In the 10-K, we do show a table for the past three years by accident year and by segment and I think you will see that.

Essentially, what we have seen in the last three or four years, Tom, is search surge, as you know, in loss trends and loss emergence patterns resulting from the soft market years.

Primarily in the D&O and excess casualty areas, and to a lesser extent excess workers comp and other areas.

We do believe that those years are obviously another year more mature.

There is obviously less reserves remaining from those years.

We now have another healthy accident year, we believe, in our loss reserves, accident year 2006.

We are very comforted by the fact that 2003 and 2004 accident years continue to develop favorably, even as the prior years continue to drift upward.

So we are increasingly comfortable with our overall reserves, and as you saw in the 10-K, the overall reserves were favorable.

Just sorry one last question on the accident year.

It looks like on your '06 accident year X cats relative to '05 X cats that you are booking a loss ratio almost six points higher and I am just wondering why such pessimism on '06 versus '05?

I don't know if I would call it pessimism as much as trying to be appropriately conservative.

I think we had a similar difference last year.

My calculations, by the way, was about five points.

I think that is similar to what you quoted.

Basically, when rates are drifting down a couple of percent, and we do as a positive loss trend for most of our casualty profit centers, that is the way we set our expected loss ratios.

So even though we have seen favorable loss trends over the last couple of calendar years and accident years, we don't want to presume no inflation on loss cost trends.

We don't do that when we are setting a new accident year.

So we are building in an assumption of positive loss trends and taking into account any rate decreases that have occurred.

And that is the reason you get that five or six points differential, which, hopefully, if '06 follows '05's pattern, it might develop favorably.

But we are not going to start the year under that assumption.

Mark Lane, William Blair & Co.

A question for Steve.

Back on the capital management question, I guess I don't understand exactly the definition of excess capital.

When you say $15 billion to $20 billion, but it is includes capacities for hybrids, etc., I mean what exactly (technical difficulty)

Sorry, Mark, we have lost the last part.

Gentlemen, Mark's line dropped out of queue.

I do apologize.

Do you wish to go on to the next question and if Mark is online, perhaps he will press star one again for us.

Yes, please.

Thank you.

Jay Gelb, Lehman Brothers.

I guess I will follow up on the last excess capital question.

Steve, you mentioned that the excess capital is primarily in regulatory regulated entities.

Can you give us a little more specifics on that?

Is it captured in the property casualty piece, and whether that is foreign or domestic, or the life business, or somewhere else?

It is all across the board, Jay.

We haven't gotten into that level of detail at this point in time in terms of a public disclosure, because we need to determine more precisely where it resides and the mobility of it, as I said, and the frictional costs involved in either moving it or leveraging it in some other way.

So to answer Mark's question, and hopefully he is back on the line and can hear the answer, again, I will just say the determination of the $15 billion to $20 billion number was based upon the model in its entirety.

It basically is a derivative of the valuation, the economic valuation of all of our assets, and the economic valuation of all of our liabilities.

The difference when you compare it to our year-end 2006 shareholders' equity is about $15 billion to $20 billion less or greater than what we are carrying in terms of equity.

So that is how we get to that number.

That's helpful.

And if I look at the General Insurance premium to surplus ratio, I know that is a pretty rough measure, but it dropped significantly.

It went from 1.7 in 2005 down to 1.4 in 2006.

Where do you like to -- I don't know if you target that ratio, but where is your comfort zone in terms of operational leverage in the general insurance business?

I will take a shot at that first.

We are, as you stated, we are beyond looking at measures like that.

This model, for example, is based upon advanced probabilistic stochastic simulation that incorporates the interaction of the correlation of different types of risks in our businesses.

And it attempts to quantify the tale of the distribution of those outcomes as accurately as we can.

So we are going into really stochastic probability simulation in this kind of a model.

And that is what going to help us determine what kind of leverage we can apply to these businesses within our risk parameters, and also to optimize the risk-adjusted returns on that business.

Okay.

And then separate question, for the overall business on the bottom of page 2 of the supplement, the effective tax rate for adjusted net income was 31% for all of 2006.

What are your expectations for 2007?

Okay.

We have thought about that.

I think right now I will give you a range that we expect to be in for 2007 of between 28% and 30%.

And where we will end up will depend on the mix of our business in terms of jurisdiction and the tax rates in those jurisdictions.

And also it will be dependent upon the success of our evolving tax planning strategies.

So I would say that is a reasonable range to work with.

Great, thanks.

And then final one, can you just comment briefly on the consumer finance business and how much of that is subprime exposure and where you think that may bottom out?

Jay, I think we have got Rick Geissinger on the line from AGF.

So Rick, can I ask you to respond to that?

AGF has a portfolio of a little over $24 billion, most of that is subprime.

We have seen some softening in real estate markets during the course of 2006.

We managed our volume, if you look at quarter by quarter, we managed that down and did not try to chase the market down in terms of lower credit quality.

Delinquency and charge-offs are somewhat higher than last year's all-time lows.

We were at a historical low in the 86-year history of this Company last summer.

If you look at fourth quarter versus fourth quarter charge-offs, we were 114 basis points in fourth quarter '06, 133 a year ago.

So that has improved.

In terms of delinquency, it is slightly up year over year. 2.06 at the end of the fourth quarter '06, 1.93 now.

Part of the reason I think that we are performing better than some of our friendly competitors is there were certain products, option ARMs with negative amortization and so-called (technical difficulty) 80% first, with a piggyback 20% second lien, second 20% loan to value.

We did not offer either one of those products and so I think that is helping our credit quality trends.

Thank you very much for the answers.

Charles Gates, Credit Suisse.

Good morning.

Congratulations on a great earnings report.

Thank you.

Here is the question.

I realize it is a corporate finance question, but can you help us all with regard to ascertaining what kind of return you are currently enjoying on this excess capital?

Charlie, unfortunately you were breaking up there on the question.

I'm sorry.

Can you hear me better now, sir.

It's much better.

Thank you.

Can you opine -- this is a corporate finance question.

Can you opine as to what kind of a return you were achieving on this excess capital now?

I would say the return would be consistent with our return on equity, because the excess capital is included in our overall equity at this point in time, to the extent that we can make our capital structure more efficient by reducing the common equity and either replacing it with lower cost of capital equity, such as hybrid, or out of our normal liquidity.

That should have an accretive effect on risk-adjusted returns because there will be less capital supporting those risks.

So that is how I would look at it.

Okay.

There was the first question.

Could you opine, as well, on how you see commercial lines pricing in the United States and elsewhere now.

That is my only other question.

How we are looking at the present moment is that in the U.S. we are continuing to see rate increases in the 10% to 20% range on the catastrophe-exposed property accounts.

We are beginning to see, obviously, some rating pressures on the non-cat area.

And in the longer-tail lines of business, rates are coming off close to 10%.

Internationally, we are seeing rates come off around 7% around the globe, but that is not to say we are not losing business for much larger margins on individual accounts.

There are a couple of portfolios that are quite worrying at the present moment.

I think the aviation rating levels are reducing rapidly, obviously due new capital coming into that sector.

And we are also somewhat concerned about the commercial D&O sector as well.

They are two areas where rates seem to be particularly soft at the present moment.

What you mean -- this is my last question.

What you mean by commercial D&O, sir?

Well, by our definition, more sort of not major account D&O, but more middle-market.

I don't know if Chris can be more specific on our definition there.

We look at revenues up to $500 million.

We are looking at the mid-cap D&O is becoming a very, very -- the public mid-cap D&O is becoming very competitive where we are walking away from some of that business.

What kind of pricing pressures do you see in that business?

And that is my last question, I promise.

Our rates for that for the first for the year to date right now are down about 9% to 10%, but we are losing the business, the business that we lose is down probably 30% to 35%

Paul Newsome, A.G. Edwards.

Good morning and thank you.

I was wondering about what it will mean, just from the reporting perspective, when these very various units of yours start going back on hedge accounting?

If you could just kind of elaborate a little bit more about what we should look for.

I think you're referring to hedge accounting, Paul, because you were breaking up there.

Yes, absolutely.

What are we going to see different in your financial results when these companies start reporting on hedge accounting?

Steve is going to respond to that.

What you will be seeing is much less volatility in reported net income.

So the adjustments that we make to get to adjusted net income from net income should reduce significantly, because at this point in time, we will have a better matching within our normal GAAP income statements of effective hedges against the underlying assets or liabilities that they are hedging.

So you will see that volatility significantly reduced.

That is what you should expect.

So, what specific -- can you be a little bit more specific as to which -- are we going to see some of these 133 line items disappear or will they just get smaller?

They will get smaller because -- as an example, if you look at the, lets just say, the 12 months that we reported of 2006 versus 2005, and that is on page 2 of our press release, you can see about $1.4 billion of a FAS 133 loss in 2006 versus $1.5 billion gain in 2005.

So almost $3 billion of after-tax variability between the two years in net income.

You will see that number reduced significantly.

I can't tell you by how many percent, but significantly.

There will still be some hedges that we either don't want to qualify for hedge accounting because they don't meet the criteria of FAS 133 as high-level (technical difficulty) and we structure them that way.

Or there might be some hedges that we simply can't get to meet that criteria.

So there will still be some that we will be (technical difficulty) hedge accounting.

And don't forget, Paul, we mention that certain subsidiaries won't apply that that until the second quarter of 2007, while AIG FP, the capital markets division, will initiate it in the first quarter.

It's good news.

I have a separate question which was I think investors are trying to figure out sort of what some of the results from the capital model, the restructuring will have on particular business lines that you are interested in, divestiture's and adding.

Maybe just to get a cut at this real briefly, could you talk about, say, the couple of businesses in particular that you think are really the great opportunities right now?

I think frankly we believe, Paul, that we have got many opportunities for growth in all of our segments, so it will be very hard to differentiate.

As we stated, a key goal of this new model is to use it to assess risk-adjusted returns on all of our business units across the Corporation.

And we think it will give us new insights into the capital allocation process.

So businesses that we have determined have superior risk-adjusted returns and competitive advantage and growth potential will be allocated greater amounts of capital.

And I think we have said consistently, and hopefully we have now proved the point, that you will be seeing the results as we continue to evolve in this model in our actions.

So you will see businesses that we elect to grow more heavily, or perhaps businesses that we reduce or even divest, same thing for acquisitions.

So we will use this tool to continue to refine the structure and scope of our portfolio of businesses.

I think I would just follow one from Steve's comments and say this continues to be a work in progress.

This is not the end, this is just the beginning.

Alain Karaoglan, Deutsche Bank.

I have several questions.

The first one is on the foreign life business and it is a sort of a numbers question.

If we look at page 29 of the supplement and at the policy trading gains and losses, and if I understand the footnote properly, it says that an equal amount is affecting the expense line increase in policy benefits.

So that net investment income went up, but there is an equal offset in the increased policy benefits line.

If I were to exclude policy trading gains and losses from that expense line, the expense line went from $2.7 billion to $2.1 billion.

And I doing the math right, and if yes, what would account for that decrease in future policy benefits?

Well Chris Swift is here and he will respond to that.

It's a good question.

I would point out two items.

In '05 there was $137 million increase in that line for our Singapore tax settlement.

And then this year, we had $180 million benefit from our tax remediation work, so there is about a $300 million swing that accounts for half of your analysis.

And then the other half is, again in Japan, is our Star Life and Edison book year runs off, we have higher surrender expenses.

So that comes up in the line right above it, in death benefits and other benefits, and then we just released reserves.

So it is the general interplay between those two line items when we settle for surrender policies accounts for the other half of the difference.

That's helpful.

Thank you.

The second question relates to the partnership income and other investment income.

Looking again at the financial supplement on page 48 is the right investment balance to use for both partnership income and investment and other invested income, the $9.2 billion for example, for General Insurance?

Is that the right investment on which you're earning the investment income that is highlighted in the supplement under the two lines partnership and other investment income?

Win, do you want me to take that or do you want to?

Okay, the assets on the General Insurance side for partnerships is approximately $6 billion at year-end 2006.

And what about for the other investment income which is also significant?

For the other investment income -- I'm not sure I have the asset base handy on that one.

Give me a couple of minutes to look for that.

And if I could -- should I go to the next question while you are looking for that, Steve?

Absolutely.

In terms of excess capital, I just want to make sure that I understand the $15 billion to $20 billion concept.

This is based on your, if I heard correctly, economic value of assets minus economic liabilities.

But it is not based on the risk-based capital ratios or capital requirements that the rating agencies require you to keep to maintain a certain rating.

Am I correct and then maybe you can quantify, what is the difference?

Well, I can't quantify the difference because it is different depending on which rating agency you are speaking about.

They have variable approaches to how they look at capital adequacy and they all have different models that they apply.

And obviously regulatory models are also different, both in the United States and other jurisdictions around the world.

So there is no specific comparison.

What I was trying to say earlier is that we will spend a significant amount of time with all of the major rating agencies and with key regulators, as well, demonstrating the efficacy of our new, much more advanced stochastic capital modeling.

It is going to be different than the results that any of those particular constituents have.

So our job over the course of the next couple of years is hopefully to assist them in understanding our model better, the robustness of that model, where the differences lie between the way they have historically looked at capital adequacy, or the way that they look at it now, and how we are looking at it, and try to demonstrate that we have a good handle both on our risks, on our risk management, and the quantification of those risks.

If we can do that effectively, hopefully the amount of credit that is applied to our own point of view on capital requirements is going to eventually have more of a -- more significance within their overall determination.

And when that happens, I think they will start to converge.

If I understood your question, you were asking about the other line in gen, which is about, in round numbers, $3.5 billion of assets.

It is made up of several factors.

It includes real estate, it includes mutual funds, and then a variety of other categories.

So those are the main ones.

And then the earnings include some other things like, which is not a very large number in gen, but is a much larger number in life.

Securities lending revenue, as well.

Okay.

So essentially it is around the $9.2 billion balance that you had on page 48 for both items?

That's correct.

And if I calculate the return, Win, it is around 29% return on invested capital on average for last year.

And so going forward we should think about it more as what you are saying, a 10%, 15% return on these investments?

Look, you basically say -- I think you have to say what do you expect in the mutual funds, basically assume that is mostly equity-like returns.

It includes hedge funds, it includes private equity partnerships.

So the numbers that we use in our modeling as we look forward are 10% to 15%, but it obviously depends on what happens to the equity markets overall, what happens to private equity returns, etc.

But from my point of view, that is not a bad number.

Andrew Kligerman, UBS.

A couple of quick questions.

I was under the impression, just based on AIG historically, that you would be more focused on M&A.

And does this buyback imply that maybe the environment is not as ripe for acquisitions, you would like to optimize your capital position in the near term?

What is the outlook for M&A in general for AIG and the environment?

Next question would be on the consumer finance and mortgage insurance areas, the consumer finance I missed a little bit of what Rick had said, but I did see a tick-up in delinquencies, charge-offs.

And I think I heard him say that you do have some subprime there.

What is the outlook there?

And then just tying it in with the mortgage insurance, the benefit ratio picked up -- the loss ratio picked up dramatically to 73% in the fourth quarter.

It was only about 32% fourth quarter of '05.

So what is going on in the environment for credit in general, and what are you thinking about these two businesses for the outlook?

Last one, I am giving them all upfront.

I hope we can remember them all, Andrew.

We are writing feverishly here.

Thank you.

The last one is Japan.

In the K, there was some mention about competition picking up once the new mortalities come out, mortality tables come out on April 1.

What is your thinking there about the sales outlook for life insurance in Japan?

Okay.

Well, we will take them in the order you have asked them.

I wouldn't interpret the economic capital model the way you have.

We continue to view AIG as a growth company.

The excess capital range of $15 billion to $20 billion is a conservative estimate.

I think with our strong capital base, we believe we are well-positioned to pursue attractive growth opportunities including M&A around the globe, and that is the way we are viewing it.

If it makes sense, it is strategic and we think it is for the benefit of AIG shareholders, then we will certainly do that.

And Martin, do you see opportunities out there?

You wouldn't expect me to respond there.

Why not?

I think there are always opportunities, and I wouldn't want to say anything further.

Maybe I could ask Rick just to repeat what he said that you missed earlier; then I will move on to UGC.

Okay, Andrew.

The housing market has softened a bit through 2006.

We track about 350 markets on a monthly or quarterly basis, depending on how often we can get data.

We have been concerned about 25 of those markets and have tightened underwriting standards, even going back as much as two to three years ago.

Examples of that would be Las Vegas, Phoenix, the suburbs of Phoenix, and so forth.

There is about another 25 of those markets, Andrew, that we have some concern about and have tightened to a lesser extent.

But we also experienced reduced volume as we did not chase the market down in terms of credit quality during last year, and you can see that in our volume numbers if you look at them quarter by quarter.

And as I also mentioned, Andrew, there were some very aggressive products that were offered by some people in the marketplace; option ARMs with negative atomization were an illustration, and the so-called piggyback loans, the 80% first, 20% LTV second.

We did not offer either one of those products because we didn't like the risk return equation.

But as you indicated, our delinquency in the real estate portfolio is up a little bit from a year ago.

Delinquency was at 152 at the end of '05, and it is 176 at the end of '06.

So that is up about 24 basis points.

But just to benchmark that for you, if you look back to December of '04, it was 183, and if you look at year-end of '03, it was 279.

So we have had an excellent experience over the course of the last three or four years.

It is ticking up a little bit now.

We expected that.

It is just the natural maturation of the portfolio as the real estate market slows down a little bit.

I think it is worth saying also that these ranges, these delinquency ratios, are still substantially better than the ranges we have been managing to since the mid-'90s.

That's correct.

Andrew, on the UGC issue, that is quite an interesting situation.

The deterioration and the loss experience is not in the subprime segment.

The area it is in is really defined as the A- range, and consists of borrowers with credit histories that fall in the credit spectrum of between prime and subprime.

And as I mentioned, that is a portfolio of second-lien products that is about 2% of UGC's total portfolio.

And as I said, it was discontinued at the end of 2006.

Billy Nutt is on the line who runs UGC.

Billy, I don't know if you want to add anything now.

I think you said it well, Martin.

I will say that excluding the third-party originated second-lien A- type product -- again, it is not subprime -- that resulted in our unfavorable loss experience, our second-lien products have been and continue to be quite profitable for us.

The second liens that we insure, we do not insure a second lien on top of an option ARM, and for the most part they are a prime credit quality.

UGC does not insure subprime loans in its second-lien business, and we have a very minimal amount of subprime exposure in our first-lien business.

All total on a consolidated basis, subprime loans would -- insurance on subprime loans would represent 1.2% of our consolidated insurance in force, so we have little exposure there.

In terms of the outlook, we do expect that new mortgage delinquencies will continue to be reported at a higher level and at least through the first half of '07, perhaps a little longer due to the continued softness in the housing market that Rick referred to, and also as we continue to flush through some of this A- second lien business.

And the higher level means the level that we saw in the fourth quarter?

We would say we would see an increase in new mortgage delinquencies and loss ratios will probably be somewhat similar to what we saw in the fourth quarter.

And Edmund is with us, so Edmund will respond on Japan.

On the question about the competition in Japan and also this introduction of new mortality table.

And as you know in the last couple of years, the domestic life companies, their financial position and capital position much stronger.

So they now got back into the market more aggressively in tapping the risk business.

And also now they are admitted to the third sector, so they are also aggressively competing on the third sector.

Now, on this mortality issue, there are really two parts.

One is on the life side and when we have to use a new life mortality, then naturally that we need to lower down the premium pricing.

But another part is on the more morbidity side, and for A&H products we could, on the other hand, increase our product pricing a little bit.

So on the life side, we have already announced that we are going to introduce the new mortality table for all of our three life companies in Japan.

And, in fact, ALICO already introduced that in February, even before the April deadline.

And we believe with that reduction in pricing that may help our competition situation.

As you also might know that we have re-priced our product by introducing a single premium dollar whole life products.

And because of a lower pricing, we have been able to sell a lot of our single premium dollar whole life product in place of the traditional regular premium products.

So this new reduction in traditional product pricing we believe that will also help us to sell the product, because then people would get the higher protection and lower premium.

On the A&H side, we will be able to increase our pricing a little bit and that probably would also help our to improve our profit margin on the A&H, which has been declining recently to a certain extent.

I understand our colleague Bob Clyde is also on the line, might be that Bob would like to add some color to that?

Yes, good morning.

On the A&H specifically, the industry for the time we have numbers through the first fiscal half of 2006, the industry sales were down 17% during that period of time.

And that was due a lot to the long-term PA product that the tax law changed for, if you will recall.

It used to be this was a tax leverage product, it was 100% tax-deductible, it is now 25% tax-deductible and it really hurt the sales of significantly.

I think our sales were about 10% of what they were.

And we were the first and we were the largest in that business.

But if you exclude those sales, our A&H business is only down 1%.

Another way to look at it is AFLAC, who is a big competitor, during that period of time were down 13% and they don't sell long-term PA product, the tax-qualified product.

So comparing us to AFLAC as an example, we are down 1%, they're 13%, the industry is down 17%.

So that is not good.

It just, I think it brings some attention to the fact that it is crowded, it is competitive environment, but we are committed to developing products in the market.

And we feel that over the intermediate and long-term that there is still a lot of opportunity for growth as the government sector continues to shift more of their healthcare burdens to the consumer.

Very helpful.

Was that helpful, Andrew?

Very much.

Thank you.

Ladies and gentlemen, unfortunately we only have time for one more question.

Tamara Kravec, Banc of America Securities.

Your universal life sales were down sequentially, and I guess there is still the IOLI issue in the marketplace, and it seems like there was a dichotomy in the four quarter between -- among companies, where some had higher sales and some had lower sales.

But can you comment just from what you saw a quarter before, how is the market now, what steps are you taking to make sure that you can better have a sense of what IOLI you may have, and what your exposure may be there?

That's a good question and Matt Winter is going to respond to that, Tamara.

As we discussed at our investor day, in the latter half of 2006 you began to see the industry tighten down on the investor-owned life insurance sale.

We believe we took a leading position in trying to tighten that down and stem the tide of that.

We, like several other companies, did it through a combination of changes in our underwriting process, certifications by both agents and by customers, reviewing trusts, and generally reviewing the entire process, specifically in the older age marketplace at the higher face amounts where that type of business tended to come in.

We stemmed the tide fairly successfully, so much so that we saw a fairly significant drop in our universal life sales at the older ages.

In the second half of 2006, we indicated to you, as I believe has come true, that we were going to establish a fairly new baseline from which to grow.

We believe that that has occurred and we have indicated that we believe most of the investor-owned life insurance sales have stopped coming through our reported numbers.

We continue to grow in a healthy way, profitable way and without the investor-owned life insurance sales that previously had come through.

Most of the competition has done the same and I believe you will see, as industry numbers come out, a shift away from the older age universal life growth trends that shocked everybody in the early half of 2006.

And how much of your book is reinsurance?

It's Chris Swift.

On the Life Insurance side we use excess reinsurance.

So right now in our UL policies beginning in '07 we will retain up to the first $10 million of risk and excess mortality over that we will cede out.

So it is hard to say.

This is not proportional, so it is really excess and we cede maybe $10 million to $15 million of premium, new premium annually.

Thank you.

Thank you very much.

And thank you very much ladies and gentlemen.