American International Group Inc (AIG) 2007 Q1 法說會逐字稿

Welcome and thank you for standing by.

At this time, all participants are in a listen-only mode.

(OPERATOR INSTRUCTIONS).

Today's conference is being recorded.

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

And now I will turn the meeting over to Ms.

Charlene Hamrah, Director of Investor Relations.

You may begin.

Thank you.

Good morning and welcome to AIG's first-quarter 2007 earnings conference call.

Before we begin, I would just like to remind you that the remarks make 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 March 31, 2007 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 first-quarter 2007 financial supplement, which is available in the investor information section on AIG's corporate website.

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

Thank you, 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 will be very pleased to take your questions.

Overall, AIG performed very well in the first quarter.

Results were driven by solid increases in operating income in General Insurance, foreign Life Insurance and Retirement Services, ILFC and Asset Management.

Partnership returns were strong, positively affecting Insurance net investment income and Asset Management results.

The continued slowdown in the US housing market adversely affected results at United Guaranty and American General Finance.

Domestic Life Insurance and Retirement Services results were mixed.

Net income was $4.13 billion, a 29.3% increase over the first quarter of 2006.

First-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 all for which hedge accounting was not applied, was $4.39 billion or $1.68 per diluted share compared to $1.29 per diluted share in the first quarter of 2006.

This is a 30.2% increase on a per share basis.

Return on equity using adjusted net income as the measure was 18.9% for the first quarter.

Total assets at March 31, 2007 amounted to just under $1 trillion and shareholders' equity stood at just over $103 billion, including retained earnings of some $88.5 billion.

Book value per share increased to $39.64 from $39.09 at year-end.

Following the announcement of a new share repurchase authorization on March 1, a total of 2.47 million shares were repurchased during the month of March.

An additional 6.64 million shares were purchased during April and purchases are anticipated to continue throughout 2007.

Before getting into the details of the quarter's results, I wanted to point out that our financial supplement includes a number of new disclosures, including partnership assets and returns, additional life insurance disclosures and consumer finance receivables and credit metrics.

We appreciate the feedback received from the investment community on our disclosures and we will continue to work towards providing even greater transparency going forward.

Results were led again by the performance of our worldwide General Insurance operations.

Net premiums written increased 7.6%, loss development was favorable and net investment income was strong on higher levels of invested assets and increased partnership income.

The increase in DBG's net premiums written is due to the strength of our capacity commitment during challenging market conditions and diverse product offerings.

We are finding growth in markets where we have distinct advantages such as energy, environmental and construction.

We are also generating new business with existing customers.

Additionally, DBG experienced strong growth in accident and health driven by a combination of continued execution of product development and distribution strategies, as well as the second quarter of 2006 acquisition of Travel Guard.

This growth was offset by declines in certain classes of D&O and excess casualty that are experiencing increasing competition which intensified during the month of April.

Foreign General experienced strong growth in both commercial and personal lines.

Financial lines in primary casualty drove commercial production mainly in Europe where our major and corporate accounts segment strategy is helping us grow in markets where our overall marketshare has been relatively small.

The decline in mortgage guaranty operating income compared to the first quarter of 2006 was due primarily to unfavorable loss experience as a result of the continued softening in the US housing market affecting first and second lien business.

The third-party originated second lien business continued to perform poorly and although UGC discontinued writing this product as of year-end 2006, renewal premiums will be received over the life of the loans estimated to be three to five years.

UGC's international expansion, one of its key strategies for diversifying its portfolio from the US real estate market, is progressing well.

Growth in European markets drove significant increase in international net premiums written.

In domestic personal lines, the direct auto business had strong underwriting results and the private client group continued its profitable expansion through its creative products and services to the high net worth segment.

Life Insurance and Retirement Services results were adversely affected by a few items, including a $32 million charge relating to the adoption of SOP 05-1, a $50 million charge for balance sheet reconciliation remediation activity in Asia and a $37 million provision for the regulatory review of claims in Japan.

Domestic life insurance periodic premium sales declined over the prior year as expected following our actions to limit investor-owned universal life policies.

The unfavorable comparison to 2006 will continue through the second-quarter's results.

However, we view the current quarter's level of sales as the base on which we resume growth.

We are taking action to drive sales growth by introducing market-leading products such as an index universal life policy that offers the diversity of three external global indices and a term life product with flexible period options.

American General also acquired Matrix Direct, a leading direct marketer of term life insurance that will complement our already broad distribution network.

Terminal pension funding, which had its best sales quarter since 2001 in structured settlements, both experienced strong growth.

In domestic Retirement Services, the individual fixed annuity business continues to face challenging interest rate conditions and competition from bank and money market fund products.

In the face of these challenges, AIG Annuity has maintained its leadership in the bank channel due to its flexible product portfolio, disciplined pricing strategy and strong relationships with our bank distribution partners.

The group retirement products business is in transition due to the continuing trends favoring lower cost, lower margin, group mutual funds over variable annuities.

Over time, we expect the trend toward mutual fund sales will result in a gradual reduction in overall profit margins of this business.

However, we are providing additional product options to increase retention of existing client assets and introducing products and services to attract new rollover assets with a focus on leading-edge income protection products.

Individual variable annuities operating income declined on higher DAC amortization resulting from increased capital gains from hedging activities.

Foreign life results continue to benefit from the demand for investment-orientated products and higher sales of risk-based accident and health products, particularly in Korea and in Taiwan.

The A&H market in Japan remains competitive, but we believe this market will continue to offer opportunities for growth.

We will continue to develop new products for that market to be distributed through our existing agency and direct marketing channels and later this year through the bank channel.

Foreign annuity deposits declined as our dollar denominated fixed annuity business in Japan remains sensitive to the weak yen and the market for variable annuity live-in benefit features remains competitive.

However, in April, we introduced a new guaranteed minimum withdrawal benefit variable annuity feature, which is being well-received.

We have been encouraged by the favorable interest at our bank distribution partners.

In Financial Services, ILFC continues to experience a favorable lease environment and strong global demand for its modern fuel-efficient fleet.

Capsule markets results declined compared to the first quarter of 2006 and as the transaction-orientated nature of this business affects comparison with quarterly results.

CFG, our overseas consumer finance operation, had a very good performance in Poland and Argentina offset by expenses related to business expansion efforts.

Continuing the effort to expand our global presence in this business, this quarter, CFG acquired the sales finance lending operation in India and the consumer lending operation that expands our existing presence in Thailand.

With regard to American General Finance, AGF's core business generates consumer real estate, non-real estate and sales finance loans through its branch network, as well as real estate loans originated through its centralized real estate operation.

Over the past few years, AGF made a conscious decision to pull back from certain geographic markets and not offer certain mortgage products with risk profiles that did not meet our standards.

Under this discipline and with the slowdown in housing markets, real estate production volumes have declined considerably.

However, AGF has emphasized its non-real estate and sales finance products to offset this decline.

The decline in real estate production volumes and spread compression has adversely affected operating results.

However, credit quality has remained stable.

The actions previously taken at AGF avoid some of the credit issues currently facing the lending industry.

AGF also has a mortgage banking operation that sells real estate loans to third-party investors.

The results of this business have been affected in recent periods by tighter operating margins and lower volumes.

AGF and AIG Federal Savings Bank are in ongoing discussions with the office of Thrift Supervision relating to loans originated from July of 2003 to May 2006 in the name of AIG Federal Savings Bank.

We expect that the application of underwriting criteria developed in consideration of regulatory guidance issued by the banking agencies will result in significant cost to our domestic consumer finance operations.

At this time, our best estimate of these costs is $128 million and a pretax charge for this amount has been included in first-quarter 2007 consumer finance results.

Asset Management results were up strongly over the prior year.

Institutional Asset Management benefited from performance of all asset classes globally and despite the run-up of reserves, guaranteed investment contracts benefited from an increase in partnership income primarily due to a single large distribution in the first quarter.

Additionally, the matched investment program contributed $26 million of operating income in the first-quarter's results.

In the first quarter of 2007, we continued to make progress in the development of our economic capsule model.

During the quarter, we completed a preliminary analysis of firmwide economic capsule requirements using year-end 2006 data and affirmed that at year-end 2006 on a conservative basis, AIG had excess capital in the range of $15 billion to $20 billion as we have previously disclosed.

Last evening, we posted on our website an update of the progress made since our initial March 2007 communication.

Throughout 2007, we will further enhance and implement the model, address specific business issues more thoroughly, assess our ability to optimize the deployment of the capital in our businesses and continue to evaluate alternatives to further utilize excess capital.

We are carrying out extensive internal communication, training and educational activities related to economic capsule globally throughout the organization.

The results continue to reinforce our view that AIG's capital position is strong, that excess capital exists, and that we will continue to generate excess capital throughout diversified global operations.

In conclusion, I am pleased to say that AIG's first quarter was a record in terms of adjusted net income, which was just over $1 billion higher than the same period last year.

These results demonstrate once again the importance of AIG's diverse portfolio of businesses and global footprint.

Although some of our businesses did not meet expectations in the quarter, they are taking action with new products, expanded distribution and other measures to gain momentum in a dynamic marketplace.

Meanwhile, the fine-tuning of our economic capsule model is helping us to deploy capital more efficiently and continue to deliver the returns that our shareholders expect.

I can assure you that my colleagues and I are completely committed to achieving these results and now we would be more than happy to take your questions.

(OPERATOR INSTRUCTIONS).

Jimmy Bhullar, JPMorgan.

Hi, thank you.

I just have a couple of questions.

The first one is on the P&C business.

You did mention in your 10-K or 10-Q just on reserves for '03 and -- accident years '03 and beyond just developing favorably, prior years unfavorably.

If you can talk a little bit about lines of business and how those are developing.

And then secondly, if Edmund is on the line, in April, I think you stopped selling -- increasing term life policies in Japan because of a tax rule change.

If you can discuss how much these policies have contributed to sales in Japan in the past and what you expect the impact to be going forward.

Okay.

Thank you, Jimmy.

Frank is here so he can add some additional color on your first question.

Yes, the developments -- we do show by segment in the Q as well so you can see they were spread across DBG foreign (inaudible) line.

They were mostly short-tail lines of business, but they did -- the favorable development did include some long-tail classes as well.

None of such significance that we really felt it needed to be disclosed, but I can mention a few.

Healthcare, for example, we saw favorable development, about $30 million.

D&O, about $20 million.

Other EMS classes, about $15 million.

The rest is spread around in relatively small amounts, $5 million to $10 million across very many different classes.

So it was a good, well-balanced emergence across the recent accident years.

Jimmy, Edmund here.

On the increasing term product in Japan, right now the NPA, the Japan tax authority is still reviewing, they have still not made any final decision yet.

But as far as we are concerned, that particular product is more or less a [lap] supporting product.

It won't affect that much of our bottom line even if we stop writing it or if many of those policies are surrendered because of the tax issue.

If we have a (inaudible) to be surrendered say like next quarter, probably some of it would be a positive impact to our bottom line because under that -- for that particular product, the early years of cash surrender value, it is relatively low comparatively so that we may have a gain through the surrenders and in case that the tax authority decided to reduce the ability of the premium recognition for tax and we still will have 100% to 50%.

Our agency force may still believe that could be a salable product because the consumers still could have a 50% recognition for tax deduction.

But in cases competitively, not recognized (inaudible) that naturally would affect our sales.

But this is an industry issue, Jimmy, and we are now right now working with the Life Insurance Association to get other domestic companies hopefully to work with the tax authority to really try to minimize that tax impact.

Okay.

And just lastly on the partnership income, your disclosures improved and we can sort of calculate yields on that portfolio, but what would you consider to be -- and I realize there is no such thing as normal -- but what would you consider to be a long-term run rate or return that you could earn on that portfolio and if you can quantify or just discuss how much was that return higher this quarter than what you would normally expect?

And that's it.

Okay, Jimmy, I think Win Neuger anticipated that question, so I am going to move the microphone over to him.

Right.

As we have talked about in the past, we believe that the combination of hedge funds and private equity portfolios or investments in our portfolio will give a long-term return that is in the 10% to 15% range.

This quarter was obviously well above that.

In our reporting, we break it down by segment, but it was running well in the 20s.

So I guess that excess would be what we expect to be the excess.

But clearly we have had several quarters in a row that have been above our long-term expectations and we have had quarters in the past that have been below it, but that portfolio has for many years generated returns that are in that range or slightly above.

Okay.

Thank you.

Jimmy, I just wanted to add a little bit of color to make sure you understood what Edmund was saying is that our field force believe that term life product in Japan is viable even if the tax deductibility is reduced to 50%.

Okay.

Thank you.

Dan Johnson, Citadel Investment Group.

Great.

Thank you very much.

I've got a couple --.

Hi, Dan.

Thank you.

The loss ratios in General Insurance have been much like the industry, quite stable.

Maybe, Frank, if you wouldn't mind talking a little bit about what you are seeing in the loss cost environment and how that helps us think about the sustainability of the accident year loss ratios for the year.

And then I have got a couple more, please.

Yes, we continue as we have reported to see the favorable loss trends in the recent accident years after 2002.

Just to quote a few loss ratios for you.

It may describe what we are currently seeing.

Accident year 2004 is currently booked at about a 55.8 loss ratio.

After 2005, it's about a 59.2.

This is for all AIG General Insurance.

Accident year 2006 is about a 63.5 and accident year 2007 for the first quarter was a 64.3.

So you can see we are reserving to higher loss ratios as you move to the more recent accident years.

We start out each year by assuming rate changes and loss trends are doing whatever they normally will do, which is adverse on loss cost trends and if rates are down as they have been the last year or two, that is factored in as well.

But the actual developments eventually are recognized obviously over time.

So we are seeing -- even this quarter, we saw significant favorable emergence from accident year 2006 and that is I think the biggest change from last year is 2006 of course is now another year that is in the prior accident years and it is off to an exceptional start.

So that is I think the biggest change from what you were seeing last year is that we now have another very good accident year in the prior accident years.

Great.

A couple accounting questions.

The payment advances for purchase of shares was a -- a rough go-around at the number is about a $3 billion reduction in equity, a $3 billion reduction in the cash flow statement, but I don't see the share count implications.

Can you add a little color on that?

Sure, Dan, it's Steve.

I can add that color.

That represents the money that we advanced to our investment banking institutions through pre-negotiated, privately negotiated arrangements to repurchase our shares through a program.

So we have provided those funds.

They are out of our control.

It is $2.85 billion, so the correct accounting is to reduce shareholders' equity by that amount.

The benefit to the share count will occur through 2007 as those funds are used to actually repurchase the shares.

Interesting.

Other companies have taken the share count credit at the same time that they have instituted what looks like an accelerated share repurchase program.

Why is yours different?

Well, we don't actually know the cost of those shares until they are actually purchased in the market, so there would be no way to accurately estimate the actual share count.

Okay.

Interesting.

Maybe then last question -- Steve, in the FT article interview you did maybe about two months ago it seems, you mentioned -- the article represented that the Company's return on equity was about 17% last year and you have made the comments that overall returns over time would be considerably increased in light of the sort of capital reductions planned.

Can you add a little more color on what you were saying in that?

Obviously I am not going to quantify that, but our objective in the economic capital modeling ultimately is to optimize our risk-adjusted returns on capital.

The way we do that is both through capital allocation into the areas we believe have the highest returns and also through the reduction of our cost of capital through optimization of our capital structure through better allocation of capital and through better, more let's say informed decisions, quantitatively informed decisions on returns.

So if we can take advantage of all of that, which is our intention, we expect that will redound to the benefit of the overall returns on equity.

Fair enough.

Thanks for taking my questions.

Dan, can I just clarify also the fact that with regard to the accrual, without that, the book value for the organization would have been $40.73.

So that would've been an increase of 4.2%.

Yes, that's why I am confused because every other company is taking the share count credit.

I think there are different types of programs that may be used.

The one that we have elected to use doesn't give us the ability to do that because of the reasons I cited.

Okay.

Well, fair enough.

Thank you very much.

Thanks, Dan.

Josh Shanker, Citigroup.

Good morning, Josh.

Hi there.

My first question regards the $128 million charge.

I was wondering if we can go through a little bit the methodology about how you come to that and how we can have confidence that this is somewhat at the end at this point and the second question involves share repurchase.

I was curious to know if you are in any discussions with the Star entities about arranging something in terms of a block trade or whatnot?

Hi.

Josh, this is Bill Dooley.

Let me just cover it in probably five points here to try to wrap up the issue this way.

First of all, I think we should say that we have an excellent relationship with the OTS.

The second thing is that we are in the advanced stage of our discussions with them and we are working on the details as we speak.

The third thing is that I think that we should be clear that this is not only an AIG issue, but it is a market issue.

Four, as far as the number is concerned, it is our best estimate as of today on what we think the cost will be to the consumer finance operations in the United States as stated in the Q and finally, when we have additional information on this, we will make a public announcement to hopefully clarify some other questions that you might have.

But can we explain at all what the $128 million represents?

I think when you kind of look at the nature of our discussions with the OTS, first of all, it is limited to the banking -- the mortgage banking activities of AIG's Federal Savings Bank and that was serviced by the Wilmington Finance entity and it was during the period of July '03 to May '06 and then like other regulated companies, we discussed the market and regulatory developments with our regulator, as well as issues that arise in the examination process.

Although we are not permitted to discuss examined information with you, we can share the fact, as the media has reported, the federal banking regulations are seeking to have lenders assist certain non-prime borrowers to remain in their homes and these discussions have centered around that and the related issues.

So the number has been derived from discussions with them on estimating the costs associated with what I just described.

Josh, if I can just add on there from what Bill has said.

These numbers have been developed or this number has been developed based on an understanding or the understanding reached so far with the OTS and after carefully analyzing both past and expected performance of AIG's Financial Savings Bank's prior mortgage banking production.

Obviously since these discussions are ongoing and the estimate was derived based on certain assumptions, we will be reassessing it on a regular basis in accordance with GAAP and of course making any adjustments and disclosures if necessary.

Okay.

Very good.

Thank you.

And the second question regarding potentially doing a large share repurchase in a block trade form?

The answer to that question is at the moment no.

Okay.

Great.

Thank you.

Jay Gelb, Lehman Brothers.

Thanks very much.

First, I had a question on excess capital.

I don't know if you have communicated to speed at which you anticipate completing the $8 billion share repurchase authorization.

No, what we committed to is 5 billion share repurchase during the course of 2007 and that is still our intent.

Okay.

And when you talk to the rating agencies about your view of at least $15 billion to $20 billion of excess capital, how are those discussions received and what is it going to take for the rating agencies to come in line with your view that you have that much excess capital?

Well, Jay, frankly I think it is a couple of things.

One is all of the rating agencies are at different points at this stage in the development of their own framework to evaluate both companies own enterprisewide management and also their economic capital modeling capabilities.

So we are obviously spending quite a bit of time talking with each one of the major rating agencies about our approach, why we believe it has efficacy, the results that are being produced, the methodologies used.

One of the initiatives that we are undertaking this year as we have described is an external validation of our modeling, our modeling techniques, the assumptions used.

We believe that will help in those discussions, but it is a combination of the evolution of our own modeling and period of time to review the validity and the efficacy of those results and also at the same time, the rating agencies' movement towards a framework in which they can really evaluate and incorporate companies own excess capital -- I'm sorry -- economic capital models into their own rating methodology.

So it is a combination of those two.

We have said that is not going to be an overnight process.

I think so far what we have done has been largely accepted by the rating agencies, but as we go further with the process, it will take extra work and that is what we are working on.

Okay.

And then separately on the consumer finance operations, on page 44 of the supplement, you identify about $28 billion of net receivables.

I would just like to get your views in terms of how -- your comfort level in terms of the current allowance for loan losses and in terms of mix of the overall portfolio, how much of that is subprime or the Alt-A, Alt-B, etc.?

Any color you can provide would be helpful.

Hi, Jay.

I am going to ask [Rick Gleisinger], responsible for AGF, to respond to that.

Well, our credit quality has held up very well in this quarter.

We have been very disciplined in terms of the kinds of products that we offer and we track about 350 markets on a monthly or quarterly basis and there are about 50 or 60 of those that we have some concern about for the last 12 to 18 month and when we have that concern, we adjust our underwriting criteria.

There are a number of so-called exotic products that have been offered by others.

One in particular, option ARM, which has a negative amortization feature.

We decided not to offer that product at all and that is causing credit quality problems in some of our friendly competitors.

The market in our view has gone down in terms of credit quality beginning in the summer of '05 and we decided not to chase the market down and compromise credit quality.

The net result of that is that we have had less growth than we would like.

Our year-over-year growth first quarter '07 versus first quarter '06 has only been 2% or about $0.5 billion, but our credit quality has held up very well.

In terms of delinquency, end of first quarter '07, it was 2.05% and that is actually one basis point better than it was at year-end '06.

In terms of charge-offs, for the first quarter, it was 0.98%, which is an improvement from the fourth quarter of '06 when it was 1.14%.

It is a slight deterioration from a year ago when the charge-off ratio was 0.88%, but all of those numbers are much better than our typical operating performance from a historical basis.

So you feel confident in the level of reserves currently?

Very much.

There has not been much a change in our allowance.

The coverage ratio related to charge-offs is 1.97% and we made -- we go through a very extensive analysis of that every quarter and we made very little change in the allowance and I am very comfortable that it is a conservative figure.

Jay, it's Steve.

I would also add that we have added some of the new disclosure Martin talked about in his opening remarks.

Page 43 and 44 of the statistical supplement will give you a lot more detail on the consumer finance operating statistics.

Okay.

Thanks very much.

Thanks, Jay.

Tamara Kravec, Banc of America Securities.

Thank you.

Good morning.

Good morning, Tamara.

Just a couple questions.

You adopted hedge accounting in the first quarter of '07 and noted that it had an effect on the capital markets business primarily.

Can you just walk through what the effect on the financials was this quarter and how that is going to work going forward?

And my second question is on Japan.

You have your new VA product out, your GMWB and you said it was well-received.

Is there -- if you can give us a sense of how that product compares to what is already out there.

I know originally you had said it wasn't a "me too" product, but any comments on ongoing claims review costs.

They seem to be coming every quarter and there is obviously a lot going on with the FSA out there, but if you can give us a sense of whether or not that is going to continue to run on a quarterly rate.

Okay.

I think Steve is going to respond to your first question.

I know Bob Clyde is on the line from Japan and he can respond to your second question.

Okay, Tamara, as you know, in the first quarter of 2007, we began to apply hedge accounting under FAS 133 in a phased approach by first applying hedge accounting to a limited number of transactions and principally in our capital markets area, obviously our largest user of derivatives and to a lesser extent at the AIG parent and matched investment program transactions.

Our plan is to apply hedge accounting to a larger population of derivatives at other subsidiaries and operations of the Company over the course of this year.

It is also important to recognize that certain of our hedges, while economically effective hedges, will not qualify for hedge accounting under FAS 133.

As you know, FAS 133 has very prescriptive guidelines and we will only be applying where they meet those criteria, even where the economic -- the hedges are highly effective in our view.

Just to give you an idea -- the after-tax first quarter effect of FAS 133 we disclosed is $205 million.

If you look at the components of that, in capital markets, principally AIG financial products, there was about a -- a little over a $50 million gain in the first quarter that involved derivatives that don't qualify for hedge accounting.

So those are derivatives for which we did not apply hedge accounting.

That was a $50 million gain offset by a $108 million loss on 133 and that relates to the derivative adjustments to the tax preference deals that we talk about in our first-quarter Q.

So that is about a $55 million loss relating to capital markets in the first quarter.

The other 150 is made up principally of foreign exchange rates on hedged exposures for which we are not yet applying FAS 133.

ILFC, American General Finance, the parent company, certain transactions would constitute the rest.

I hope that answers your question.

Yes, thanks.

And, Bob, are you on the line?

Yes, I am.

Good morning, Tamara.

As far as our new guaranteed minimum withdrawal benefit VA product that was just introduced in April, the GMWB rate increases by attained age rather than deferral period and also it offers a higher withdrawal percentage for all ages.

It has got a step-up at the time of withdrawals commencing.

Also has a knockout option for daily checks to see if targeted payments amount can be attained earlier due to market value gain and then an attained age gain.

It has got a step-up formula after our first withdrawal and compares both account values after withdrawal, annuity values after withdrawal rather than just account value after.

In the max premiums, we are currently at JPY500 million and we are hoping to increase that.

Bob, do you just want to add a little bit of color to the FSA claim review?

Sure.

I didn't hear that question, I'm sorry, but yes, certainly.

All three of our life companies along with the entire industry have completed reviewing the last five years of claims paid to our customers to determine if those claims were paid fully and accurately as we should do under the terms of the contract.

And our submitted report for all the companies together identified 9900 additional claims totaling about $8 million, and this represented less than 1% of our total claims.

Okay.

And that's -- I'm sorry, just to clarify, that is on the life side or on the non-life?

That is on the life side, yes.

The life side, okay.

And then you had a nonlife issue as well, right?

Yes.

AIU reported 13,517 errors for a total -- out of a total of $1.63 million for an incident rate of about 0.8%.

And that compares favorably to the statistics that have been published from some other companies.

Okay.

So would you anticipate --?

Which is about in the 1% range.

Would you anticipate then that the claims review costs are done with this quarter, just given that you've completed the review, or could there be more costs coming?

Well, no, I don't think that we are done.

I think that there is still -- this is going to take probably a few more -- a couple more quarters to work its way out.

And then, of course, we will be required to just do a much better -- we the industry will be required to do a much better job in the future.

So some of the costs associated with claims and product development related to -- and operations related to claims will be ongoing.

And it seems like the FSA right now has the ability -- you know, the life claims review was just completed, so the FSA seems to have the ability to put some sanctions on in the next couple of months.

Do you have any sense of whether that is possible, whether it is going to hurt your business?

Well, there have been sanctions already for claims, missed payments, and we are not anticipating any sanctions for us, particularly vis-a-vis the rest of the industry.

Certainly the bad press related to claims in the industry is -- may have some effect on consumer behavior, but we don't see too much of a direct effect of that right now.

Okay.

Thank you.

Thanks, Tamara.

Jay Cohen, Merrill Lynch.

Thank you.

Yes, a couple of questions.

In the foreign life business, the page where you break out single premium -- single premium production.

In sort of rest of the world, there was a fairly enormous jump in single premium production.

I am wondering if you can talk about that?

Yes, Jay.

This is Edmund.

There is a very large sum under the single premium under other region.

These are really the product of GIB that is guaranteed income bond we write in UK and we have written a substantial amount because the people taking advantage of the high interest rate at the current market.

The Bank of England lately announced a raise in the interest rate to 5.25%.

So this is really -- but this kind of market, the sales is normally quite volatile, depends on the interest market.

But our second quarter, the first month also sold very good production itself in the amount of $340 million for the first quarter and under the same product in the UK.

Great.

Thank you.

Unrelated question.

The synthetic fuel tax credits I guess go away at the end of the year.

So one would suspect your tax rate moves up, but at the same time, you won't have the expenses associated with that production.

I am wondering maybe, Steve, if you can talk about the net impact you expect to see on earnings from that change?

Yes, it is hard to talk about earnings as a whole but what I can tell you, Jay, is that the forecasted effective tax rate for 2007 includes about a 1% benefit from the synfuels.

That is obviously offset by some of the losses that are taken on the pretax basis.

So it is -- I don't see it being that significant to us.

That's great.

That's helpful, actually.

Last question -- in the 10-Q, you talk about total out-of-period adjustments.

I guess it was $129 million related to taxes, $130 million with other remediation activities and I was able to track down I think some of that in the Q and the release, but of those numbers, do you know what applies to sort of the pre-realized gain operating earnings that we tend to look at?

Yes, it would be most of it other than the tax remediation cost of $129 million.

The rest of it would all affect the pretax.

That's great.

That's all I've got.

Thank you.

Thanks, Jay.

David Taylor, David P.

Taylor & Co.

Thank you.

As I have been surveying the malaise in the subprime market over the last several months, it occurred to me that American General and particularly American General Finance might be in a fairly unique position to scoop up distressed mortgages at a significant discount and help the borrowers refinance and stay in their homes and it might be a situation where you could be doing well by doing good.

Do you want to comment on that observation?

Actually we agree with you.

I see the market as it is evolving as being an opportunity for American General Finance and AIG.

We have been very disciplined in credit quality as I mentioned a few minutes ago.

What is happening is players are leaving the market or abandoning the business.

Some of them have gone bankrupt as I am sure you know.

And some of the exotic products that have been offered, particularly the negative am loans, which we never did offer, are I think going to be a very, very reduced part of the marketplace.

That means that there is going to be much more of a level playing field from our perspective.

Therefore, I think there is a lot of opportunity for us in the next 18 to 24 months.

Might you purchase subprime loans at a discount where appropriate?

We are looking at that.

At this point, the answer would be no, but if that turns into an opportunity that makes sense to us from a risk return point of view then we would consider it.

Thank you very much.

Thanks, David.

Bill Wilt, Morgan Stanley.

Hi, good morning.

A question for you on foreign life.

The benefit ratio ticked up in the quarter certainly sequentially.

I understand there may be some seasonality there, but if you could speak to the foreign life benefit ratio this quarter, that would be helpful.

Bill, this is Chris Swift.

What I wanted to point out is two items that we mentioned in the Q, the $50 million remediation and the $37 million were recorded in the benefit line.

In fourth quarter prior year, we had a $125 million good guy that is creating a $200 million delta related to the Singapore par fund tax issue.

So that is what I think is throwing off the sequential trends.

That's helpful.

That's helpful.

Thanks.

Is there any -- broadly speaking, any seasonality to that beyond the one-time items you mentioned?

No, actually the benefit ratios, particularly from the A&H side have been relatively strong, good this quarter, so we didn't see much anything else unusual here this quarter.

That's helpful.

And an unrelated question if I may.

I guess back to the $120 million charge in consumer finance, could that be fairly characterized as a retroactive application of newly agreed-upon criteria?

I guess I am still trying to frame it in my mind as ongoing versus one-time.

So it occurred to me perhaps that is a reasonable way to think about it, a retroactive application of new criteria, but your perspective on that would be helpful.

Bill, obviously as we said earlier, negotiation and discussions continue with the OTS.

So from -- these loans originated within a defined period that we mentioned and at this stage, this is very much our best estimate of the costs involved.

That's helpful.

And a quick one if I may, just the impact of weather in the General Insurance operations this quarter versus a year ago, any quantification you can offer on the delta there?

Yes, I think that the cat losses for AIG were pretty small in the first quarter, something like I think $61 million, which primarily was from [Kyle] in Northern Europe and the bulk of that was incurred through transatlantic re and obviously foreign gen and there was a cat loss incurred in Indonesia, but a fairly quiet quarter for cats.

Thanks.

The year-ago, any sense?

I don't have the year-ago number.

A year ago, it would have been close to $100 million compared to that $60 million that Martin mentioned, so not too much different.

That's great.

Thanks very much.

Thank you.

Alain Karaoglan, Deutsche Bank.

Good morning and first, thank you for the increased and improved disclosure.

It is much appreciated.

Thank you.

Sorry.

The question that I have is you have revised your financial supplement or last year's results and if I look at the foreign life business, the difference between the first quarter reported last year and the new number is around -- it is around $110 million lower.

Could you tell us what is happening?

What is the change that you are making and what should we expect for the full year in terms of the base of earnings on the foreign life business in 2006 relative to what you reported before?

It's Chris Swift.

The basic change was one or two productlines.

We had some investment-orientated products that had mortality exposure characterized in the Asset Management section that we, primarily in the UK and Europe, that we moved back into the Life segment.

So that actually should have increased prior year's operating income by that roughly $100 million amount that you had.

So we just viewed it as a minor product reclassification when we looked closely at the nature of the products.

Okay.

Because I had $1.4 billion for last year foreign life and the revised number is $1.3 billion, but I can follow up with you on that.

The other question is on the -- the disclosure is much improved on the partnership income, but there is, on page 52, an item called all other of $1.9 billion in the property/casualty.

What is that?

And that all other seems to have, and mutual funds, seems to have gotten also a 20% sort of return.

I don't have the breakout of that detail right off hand.

I can get it for you in a second if you can give me a minute.

Okay.

It is on page 52 in the supplement.

I see it.

$1.845 billion.

I see it.

Thanks.

Could I follow up with another question while you are looking?

Sure.

In just reconciling two numbers, in the Asset Management partnership on page 53, you have $627 million and then we look back in the segment under the GIC, there is $412 million.

What is the difference and where does the difference in this income go to?

Okay.

I think Win is just pulling out page 53.

Just bear with us a sec on that.

Maybe quickly I will answer your other question first and then I will flip over to that.

But the all other, if you look a the footnote on page 52, it breaks that down.

It is basically life settlement and aircraft equipment that is in the Life company segment where they have made those investments.

So that is what the all other category is.

Now in terms of the return --.

I'm sorry.

The all other in the P&C is life settlement?

No.

In P&C, I'm sorry.

It's the $1.8 billion.

I think we're going to have to get back to you with that particular detail.

Okay.

Sorry.

Page 53.

Sorry.

Can you run through that --?

Sure.

On page 53, the Asset Management has partnership income of $627 million and then in the supplement page on the operations within the Asset Management under the GIC, it is only around $412 million, the partnership income and -- I'm sorry -- $462 million on page 46.

All right.

Can you go through that again?

I'm sorry.

Alain, this is Jay Winthrop.

I think if this is helpful, gentlemen, I think the remainder is what we have disclosed before as the old SunAmerica partnerships held at the holding company that are not specifically allocated to the GIC segment.

But they are going to the Asset Management segment?

Yes and I think they were about $147 million this quarter.

Thank you very much.

You're welcome.

Terry Shu, JPMorgan.

If I could follow up on Alain's question on the prior year's life insurance earnings.

I think the difference - there are minor differences by category, but the pricing investment gains, which had been previously reported in the life insurance breakdown and you don't show that anymore.

That seems to be the major difference.

Can you explain that please?

Do you not include that pricing investment gain?

Were there any and is it now in the category?

If you again looked at the prior year, it would have been -- as reported, it was about $100 million higher and that seems to be the big difference.

Can you explain that again, please?

Terry, it's Chris.

We changed that fourth quarter as you might recall.

Right, right.

We eliminated the, I'll call it, breakout --

Right.

Yes, yes.

-- of the pricing gains and again those pricing gains are realized capital gains and losses that were in our GAAP statements --

Right, right.

-- in the line item and we broke out --

Right.

-- in our stat supplement.

Right, right.

So we just include them in realized capital gains in both places.

Right, right.

Supplement and DAC.

Yes, it is confusing because that is the main difference in the prior year base, but I will follow up with you afterwards.

The other question is if you can comment, the -- Edmund, the significant shift to the single premium products, the investment linked products.

Can you talk a little bit about profitability and profit emergence, those products versus traditional products?

Terry, you are talking about the whole of a foreign operation?

Yes, foreign life, right, right, because there's a big surge in growth in the --.

Yes, as I said earlier, that is a substantial single premium in UK, but overall in all our different countries, we are now putting more emphasis on single premium products.

First of all like Japan, we introduced a single premium whole life.

Primary marketing through a bank channel, that has been a very good increase.

Right now, we also try to sell it through our face-to-face distribution channel, but also with pretty good success.

How does the profit emerge?

Yes, and that single premium that now -- most of this are really -- some of those are really relating to investment linked products.

The profit emergence that would be -- basically that would be lower in terms of profit margin than some with the traditional products.

But on the other hand, the total premium volume is much bigger, so that when the total profit emergence coming from the single premiums would be comparable to the old traditional product sales in time and all the profits will emerge from the single premium to mitigate the lower profit from the traditional products.

This is really more or less across the board for all the foreign countries, including Japan, China and Taiwan and also other regions, Korea and earlier the big number from UK.

And also just one last question, numbers question and for personal accident and health and thank you for breaking down the expenses between acquisition expense and benefits.

If you could break down further like for personal accident and health, what is the amortization of DAC and the current incurred expenses because it seems like the DAC balance is fairly large.

If you could break that down, please.

I first answer that and then Chris Swift will add more color.

Indeed for our accident and health, the major part of it is really accident and health riders attached to the life policies.

So in that way that the DAC more or less is combined into the basic life policies about -- we using the same DAC principle to amortize over year and that might be -- Chris could add some more color to it.

Terry, that is good feedback too.

We are considering a number of different disclosures going forward and we will put that one on the list also.

I don't have the precise numbers there.

Everything was fairly normal in the quarter except in Japan where we did have an accelerated DAC amortization in the personal accident line of approximately $15 million for higher than normal lapses due to the LTPA product.

I think that is the only item of note that I would like to share with you.

Thank you.

Thanks, Terry.

Ladies and gentlemen, unfortunately we only have time for one more question, but Steve just wants to respond to Alain's earlier question.

The $1.8 billion represents really a series of miscellaneous investments.

There is no particular category that I could cite on the General Insurance, but what we will do is, if you like, get back to you off line with more detail on what is in there.

We can take one more question unfortunately.

Andrew Kligerman, UBS.

Excellent.

I have got a couple of quick questions.

The first one on property/casualty.

You saw 27% growth in commercial property gross written premium in the quarter and my colleague, Brian Meredith, tells me that this is a market that is quite competitive and I would like to get a sense of why AIG finds that attractive.

The second question is around the IOLI being the reason for the steep drop in individual life premiums.

I wish I could go back and look at a bunch of transcripts right now, but my sense is that everybody was saying exactly the same thing last year that they were fighting the IOLI business, they weren't writing it.

So why the steep drop now?

Then just lastly back to Japan, with all the regulatory pressures around the A&H business and I know there was an earlier question on it, but what do you think the outlook for that business is.

Is it time for the accident process to start ticking up now that the regulators are almost done and should be finished?

(inaudible) Insurance in Japan and the repricing, do you think you will see a big tickup in sales starting in the second quarter?

We may have to ask you, unless my colleagues heard your third question much clearer than I did, to restate that, Andrew, but let's tackle the first two first.

On the property side, certainly in North America during the first quarter, we continued to see rate increases in the cat area of between 10% to 20% and in the non-cat area, flat to down maybe 5%.

So from a rating environment standpoint, we considered it a market that we wanted to continue to play in.

Obviously if rates get to a level where we don't believe it is sensible to participate, then obviously we will deploy capital elsewhere.

On the IOLI question, Matt Winter is going to respond and I'll ask Edmund to respond to your third question, but you may have to restate it.

Andrew, on the IOLI, you asked why the extensive drop right now.

If you look back historically on IOLI, it essentially started in the second quarter of '05 and reached its peak at the first quarter of '06.

For us specifically, if you look at our segment, the Life Insurance segment and look at UL in particular, back in second quarter '05, we had about $51 million, $52 million of UL premium.

That reached its peak in first quarter of '06 at $135 million.

Then in the end of the second quarter of '06, we told you that we were going to take a very serious pricing action in our universal life products in order to discourage those sales.

We did that and we saw an immediate drop-off.

It went from $135 million in the first quarter of '06 to $107 million second quarter of '06, down all the way to $45 million in the third quarter of '06, which is why we told you at last year's investor day that through the end of the second quarter '07, year-over-year comparisons would be inappropriate.

We believe that since the beginning of the third quarter of '06, we have reached a new baseline.

UL sales that quarter were $45 million.

Fourth quarter, they were $46 million and this last quarter, they were $51 million.

So as we told you, we were building off of that new base and we expect to see continued growth from there.

Andrew, Edmund here.

Do you mind restating your third question about (inaudible)?

Sure, Edmund.

Just with accident and health sales down 17% in the quarter and it looks like the FSA is going to wrap things up in this quarter, where do you think sales of that product can go in the second half of the year?

Will they start to rise and as long as I am on the subject of Japan, Life Insurance sales were up actually pretty good, 4.5% considering that there will likely be rate decreases across the industry.

Where do you see the Life Insurance sales in Japan going as we move through the year as well?

Andrew, our first-quarter A&H was down by 17% in Japan.

There were a couple of main factors.

First, we intentionally cut down the direct marketing because mass marketing is becoming higher and higher and because they are not getting that return.

So for that quarter, we cut down the direct marketing program.

And also of course in that we mentioned earlier, this LTPA, the long-term PA because of the tax issue that we are now writing are substantially lower in that quarter.

So that there is a total -- we are writing much lower A&H in that quarter.

But the whole industry since deregulation is becoming more competitive in A&H and many competitors said they are cutting rates and the whole industry that -- it was a -17% in the first half of the first fiscal year Japan.

But for our companies, the three companies together in Japan, we are only down 1% if excluding that tax LTPA product.

So we are doing much better than the industry.

Now for the potential in the second half going forward, the government right now, they are now encouraging to switch the healthcare product to the customers and the private sector and so that would be a good potential for the A&H and Japan that we could write more of those healthcare products.

We are also now designing more new products to meet the senior market, so we believe this is still good potential for us to catch up in the A&H sales in the second half.

You also asked about the Life sale in Japan and we are now coming up with the dollar -- US dollar whole life product and that would offer much better interest rate, 5% versus the 1.5% or the yen rate.

For that, we could sell the product with higher death benefit, so that is one of the reasons why we are selling well.

Our product is -- if they pay the same amount in the yen equivalent, we could offer about 50% higher death benefit to the policyholders.

That is one of the reasons why it's selling well even now through the face-to-face agency distribution in addition to the -- in addition to the bank channel.

So that is why we have a good growth in those product sales in Life.

Since my colleague, Bob Clyde, is also on the line, maybe Bob could add a couple -- add some color to it.

No, you did a pretty good job, but I would just add that on the A&H side, the medical side, we have introduced some simplified issue products to take advantage of niches, particularly in the senior market and we have other new products online to be launched the balance of this year and we will be refreshing some of our other products and of course the bank deregulation, which is scheduled to take place in December, while that will effectively be the first quarter of 2008 for us, should that come through on time, we have plans to introduce some medical products within the bank distribution as well.

With the challenges with the increasing term on the Life side, I expect in the next couple of quarters, we will see some movement of some of those sales over to the A&H side with a corporate cancer product that is still enjoying some tax deductibility advantages.

Interesting stuff.

Hey, just one last quick follow-up.

I'm sorry.

I got everybody around the world here and I am the last question.

106,000 headcount at year-end.

It was 97,000 the year earlier.

Can you talk about where you are investing and what is going to happen with headcount going forward?

Well, clearly, Andrew, where we are investing is where we believe we are going to get a return on that investment and growing our operations in India or obviously China, we are adding staff in the finance and accounting areas.

We are adding staff in the claims areas to make sure that we are providing the level of service that our customers expect and deserve.

So from our perspective, this is a broad-based increase in headcount across the organization, both globally and by productline.

Okay.

Thanks a lot.

Okay.

Well thank you very much indeed, ladies and gentlemen.

Goodbye.

Thank you.

This does conclude the first-quarter conference call today.

You may disconnect your lines.