American International Group Inc (AIG) 2008 Q1 法說會逐字稿

Good morning and thank you for standing by. At this time all participants are on listen-only. After the presentation we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS)

And I'd also like to turn the call over to your conference host this morning to Ms. Charlene Hamrah. You may begin.

Thank you. Good morning. Thank you for joining us this morning to discuss AIG's first quarter 2008 earnings report.

Before we begin I would like to remind you again that the remarks made today may contain projections concerning financial information and statements concerning future economic performance and events, plans, and objectives relating to management, operations, products and services, and assumptions underlying these projections and statements. It is possible that AIG's actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these projections and statements.

Factors that could cause AIG's actual results to differ, possibly materially, from those in the specific projections and statements are discussed in item 1A, Risk Factors, of AIG's annual report on Form 10-K for the year ended December 31, 2007 as well as in the Outlook section of management's discussion and analysis of financial condition and results of operations in the quarterly report on Form 10-Q for the period ended March 31, 2008. 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 such measures to the comparable GAAP figures are included in the first quarter 2008 financial supplement which is available in the Investor Information section of AIG's corporate Web site.

Now I would like to turn this conference call over to Martin Sullivan.

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.

As we anticipated in our fourth quarter earnings discussion, the U.S. housing market has remained weak and credit market disruption has persisted in the first quarter of 2008. These external factors caused AIG to report additional unrealized market valuation losses and impairment charges which negatively affected reported results.

Additionally, market conditions were not good for our alternative investment portfolio leading to a decline in partnership income from a record high in the first quarter of 2007 creating a significant unfavorable comparison. Excluding these external market issues, the underlying fundamentals of our core businesses remain solid and several units performed quite well in the quarter.

As we will discuss, top line production was strong in many of our businesses and operations facing competitive market challenges while maintaining their focus on profitable growth and underwriting discipline. Additionally, as announced last evening, we have initiated a process to raise $12.5 billion of capital through the issuance of common stock, equity linked and high equity content fixed income securities.

We've been asked why we raised the dividend when we're also in a capital raising mode. The answer is that the dividend increase is a reflection of the board's and management's long-term view of the strength of the Company's business, earnings, and capital generating power.

The capital raise is a response to the events of the last two quarters and its effect on our capital position. It will fortify the fortress balance sheet you expect to us maintain and provide us with increased financial flexibility in these turbulent times.

It will also position us well for the future. The two are simply reflections of a positive long-term view and a prudent response to the current environment.

Last night, two of our major rating agencies downgraded AIG's holding company rating by one-notch to AA minus and placed us on watch pending the completion of our capital raising. A one notch downgrade of the holding company is very manageable for us, and we do not believe that it will have a significant effect on our operations. Importantly, both agencies kept the financial strength ratings of our insurance company subsidiaries at the AA plus level which is most important to us.

Now let me provide a brief review of our results. As you have seen, AIG reported a net loss of $7.81 billion in the first quarter of 2008 and an adjusted net loss of $3.56 billion.

There were five principle factors that affected our performance in the quarter. First, we reported a net unrealized market valuation loss of $9.11 billion pretax, or $5.92 billion after-tax related to the AIG financial product's super senior credit default swap portfolio.

Second, net income was affected by $3.96 billion in after-tax net realized capital losses. The pretax net realized capital losses of $6.09 billion included $5.59 billion for other than temporary impairment charges with the majority relating to severity losses.

The impairment charges resulted primarily from the significant rapid declines in market values of certain residential mortgage-backed securities and other structured securities in the first quarter for which AIG concluded it could not assert the recovery period would be temporary. Though there is diversity in practice within the industry on determining impairments, we believe the judgments we have made are prudent.

A third significant driver was net investment income performance, primarily the sharper lower returns our partnership and other alternative investments. We reported aggregate partnership income of $197 million in the first quarter of 2008, a $1 billion decline from the first quarter of 2007. Mutual fund income also declined compared to a strong first quarter of 2007.

In response to the market disruption, AIG has been increasing its liquidity position and investing in shorter duration investments. Our overall cash position has increased 9% from year-end 2007. While prudent in the current environment, such actions had a negative effect on overall investment yields primarily in domestic life insurance and retirement services.

The fourth area affecting our results was the continued unfavorable results at United Guarantee and American General Finance. The operating results of these business have been and will likely continue to be affected into 2009 by continued credit quality deterioration of mortgages a weak residential housing market, and the overall U.S. economy.

Fifth, we saw market volatility affect individual segments to a lesser degree. For example, foreign life insurance and retirement services results included $88 million in trading account losses related to certain U.K. variable annuity products, and an $80 million increase in incurred policyholder benefits related to a closed block of Japan variable life business we guaranteed benefits.

At March 31, 2008, shareholders equity stood at $79.7 million, a $16.1 billion decline from year-end. The decline in shareholders equity was largely the result of the first quarter loss, as well as a $6.8 billion in after-tax unrealized depreciation of investments included in other comprehensive income, and a $1.1 billion decrease to 2008 opening shareholders equity due to the adoption of FAS 157 and FAS 159.

Looking beyond the effects of market volatility, AIG's current insurance businesses are performing quite well. General insurance operating income declined compared to first quarter of 2007 primarily due to lower partnership income and unfavorable loss development in certain segments.

In particular, foreign general produced excellent premium growth than original currency driven by strong action in health production, commercial lines growth in Europe including Wuba, the company we acquired in Germany and increases in all lines in Latin America. With a 51.78% loss ratio [foreign general] continues to produce excellent underwriting results.

Net premiums written in the commercial insurance group declined due to return premiums related to loss-sensitive policies, declines in workers' compensation, and increased competition. Workers' compensation remains under considerable pressures as statutory rates continue to decline. Rates in most lines have also declined due to competitive pressure, particularly for aviation, excess casualty, and D&O.

Commercial property rates are also declining falling relatively low catastrophe losses. In domestic personal lines we achieved strong premium growth in the private client group with virtually no growth in direct and agency, also.

First quarter loss experience, however, was unsatisfactory. The order market has suffered considerably. In response to the change in market conditions, we are filing rate increases and tightening underwriting guidelines to improve results.

While UGC's results continue to be affected by the deterioration of the U.S. housing market, the Company's prudently pursuing opportunities at favorable terms and conditions through the increased use of mortgage insurance on domestic [firstly] and mortgages.

Net investment income and certain products in life insurance and retirement services were negatively affected by the volatile markets in the first quarter. However, our ongoing focus on product innovation and multi-distribution led to strong premium and deposit growth in most lines and regions.

The domestic life insurance business reported improved operating income in the quarter, due to an increase in payout annuity business and growth in the life insurance in force. The U.S. life insurance market remains competitive and we remain focused on achieving profitable growth while maintaining margins in this business.

In domestic retirement services the significant increase in individual fixed annuity deposits is due to the continued improvement in the yield curve environment and less competitive crediting rates from the bank and money market fund products. Despite pressures in the equity markets, individual and group retirement variable annuity sales improved slightly while surrender rates and net flows improved at all three retirement services lines.

Overall, excluding the effect of market volatility, AIG's foreign life insurance and retirement services operations performed well with continued growth in premiums and reserves. Results also benefited from favorable foreign exchange.

As we addressed in our recent investor conference, our global footprint, long-term presence in many growing and emerging markets, and ability to maximize our broad product range and multiple distribution channels are key advantages that will continue to drive growth. For example, we were able to take advantage of our extensive bank assurance relationships in Japan to offer a single premium foreign hospital A&H product that generated substantial sales in the quarter following the four deregulation of bank channel in December.

While financial services results continue to be affected by the marks on the credit default swap portfolio and lower operating income from AGF, there remained clear strengths and potential in each of the businesses. ILFC continues to produce exceptional results. Despite recent headlines about the health of the U.S. airline industry, ILFC remains well positioned given its emphasis on foreign markets and its ability to manage the placement of its fleet.

Excluding the effects of the super senior CDS marks and the adoption of FAS 157 and FAS 159, AIGFP enjoyed good performance from its commodity index and currency products and energy and infrastructure investments. This performance reinforces the fact that credit derivatives are not AIGFP's only line of business.

Throughout its history the majority of AIGFP's businesses have generated excellent returns, efficiently utilized capital and generated low volatility in its economic results. I should also reiterate that the super senior business is essentially in run-off with regulatory capital transactions ending as a result of Basal II, and the fact that AIGFP substantially stopped writing credit default swaps on multi-sector CDOs with subprime collateral at the end of 2005.

Despite the near-term pressures on its results, AGF's management of mortgage credit risks through disciplined underwriting, conservative lending standards and emphasis on fixed-rate loans, has enabled the Company to perform better than its peer group. The Company prudently increased its finance receivables with the acquisition of the Equity One portfolio that added receivables with a credit quality similar to AGF's portfolio as well as 130,000 new accounts in attractive regions.

Loan growth, particularly in Poland and Latin America and recently acquired businesses in India and Thailand, were the primary drivers of strong first quarter revenue growth in the consumer finance group.

This business continues to explore opportunities to expand its geographic presence in emerging and developing countries throughout the world. For example, during the quarter we reached an agreement to purchase the third largest consumer finance company in Columbia.

Asset management results reflect lower partnership income, lower carried interest and increased depreciation and amortization expense on real estate investments and operating losses on consolidated private equity investments in institutional asset management. Growth in client assets will provide ongoing base management fees as well as the opportunity to own future performance fees.

Non-affiliated client assets under management increased 19% year-over-year to $91.4 million. Our institutional asset management business generated $2 billion of gross new business wins from new and existing clients, a good result in challenging market conditions.

Before turning to your Q&A, Steve will now provide you with a brief update on our exposure to the current credit market conditions. This presentation and additional supplemental materials are currently available on our Web site. Now, let me turn the call over to Steve.

Thank you, Martin, and good morning. I'll refer to the file entitled, "Conference Call Credit Presentation" accessible on our Investor Relations Web site.

First on capital markets. As itemized on Page 8, the total net notional exposure in AIGFP super senior CDS portfolios was $469.5 billion as of March 31st. The portfolio of credit default swaps is divided into three major categories, regulatory capital motivated transactions in respect of corporate debt and European residential mortgages, corporate debt arbitrage transactions, and transactions in respect of multi-sector CDOs.

The portfolio is essentially in run-off and during the quarter the notional exposure in the portfolio declined by almost $58 billion resulting from amortization, maturities, and early terminations of regulatory capital transactions by counter parties.

In the quarter, AIG recorded a further pretax unrealized market valuation loss on the AIGFP super senior CDS portfolio of $9.1 billion, bringing the total unrealized market valuation loss at March 31st to $20.6 billion. The regulatory capital book is the largest by notional amount, representing $191.6 billion in corporate and $143.3 billion in European mortgages.

These transactions were structured to provide counter parties with regulatory capital relief in their respective regulatory jurisdictions rather than risk mitigation. Counter parties achieved lower capital charges under the Basal I accord by entering into credit derivatives on portfolios of corporate loans and residential mortgages with AIGFP.

Typically the transactions are subject to both regulatory and contractual calls by the counter parties as Basal II takes effect in Europe, as Martin noted. In fact, as of April 30th, $55 billion in notional exposure has either been terminated or is in the process of being terminated.

The expected maturity of the transactions, based only on the contractual call dates, is 1.3 and 2.5 years respectively, but many of these trades may be terminated by the counter parties earlier than that. These transactions are highly customized and are protected by significant subordination with high attachment points.

AIG conducted a comprehensive analysis of information available at quarter end including counter party motivation, portfolio performance, marketplace indicators, and transaction specific considerations. This fundamental credit analysis does not indicate any significant risk of suffering realized losses.

Regarding valuation, the most compelling market observable data are these early terminations without any costs to AIGFP, hence, AIG believes that it should not record a valuation adjustment on these trades for the first quarter of 2008 and we have not. We'll continue, however, to monitor developments in the marketplace and our counter party's behavior to assess the valuation of this portfolio and there can be no assurance that AIG will not recognize unrealized market valuation losses on this book in future periods.

AIGFP arbitrage motivated corporate book represented $57.1 billion in notional exposure as of March 31st, down $13.3 billion from year-end. The underlying collateral in these deals is comprised of primarily investment grade corporate debt and to a much lesser extent collateralized loan obligations.

AIGFP recorded an unrealized market valuation loss of $900 million in the first quarter as a result of general credit spread widening experienced in the market indices that are highly correlated to the exposures in the book. This mark brings our cumulative valuation loss on this category to $1.1 billion. Our fundamental analysis in stress testing does not indicate any significant risk of incurring realized losses in this portfolio.

AIGFP's exposure to multi-sector CDOs in its super senior credit derivative portfolio, the third category of exposure, totaled $77.5 billion as of March 31st, of which $60.6 billion had some level of exposure to subprime mortgages.

As we said in previous presentations, during 2005 AIGFP observed deterioration in underwriting standards, structures, and documentation and essentially ceased committing to new residential mortgage transactions in late 2005 into very early 2006. Therefore, the exposure to the 2006 and 2007 vintages in our collateral pools is limited to $2 billion and $1.9 billion respectively.

The attachment points for these transactions are extremely important features to reduce risk in these deals. As shown on page A-3 in the appendix, of the deals with some subprime exposure, the attachment points range from an average of 15.5% on the high-grade deals to an average of 38% on the deals with mezzanine collateral.

Other important risk mitigants in the super senior structures of AIGFP are the payment priorities reflected in the cash flow waterfalls that benefit the super senior layers. While the super senior tranches we protect always sit at the top of the payment waterfall as it is applied to the capital structure, when it comes to being paid, this position is typically further enhanced by the existence of one or more over collateralization or interest coverage tests that if breached, further direct available cash flows to amortize our position more rapidly.

As shown on Page 34, AIG recorded a further pretax unrealized market valuation loss in this category in the quarter of $8 billion bringing the cumulative valuation loss to $19.3 billion. AIG follows a rigorous process to determine its best estimate of fair value for these credit derivatives on multi-sector CDOs.

This process is required because there are no observable market prices for the actual credit derivatives AIGFP has written. Therefore, AIGFP utilizes a modified version of the binomial expansion technique, or BET model, to value these derivatives.

On the earnings call in February, we explained our valuation methodology in great detail. Today, I'll just refer to you Pages 35 through 40 of our presentation slides for the detailed review.

Although the fair value of the CDS under GAAP is our best estimate of the fair value of the underlying CDOs, the substantial risk that AIGFP covers for the CDO investors is the risk of suffering actual realized losses, not the variance in fair value of the CDOs. Therefore, AIG has undertaken fundamental credit stress tests to analyze the risk of actually suffering realized losses.

On Page 21 we illustrate the static rating agency migration analysis we conducted as of year-end which resulted in a modeled stress scenario realizable loss of approximately $900 million. Given the further rating agency downgrades and the underlying collateral securities occurring since year-end and deploying the same stress to the portfolio with new ratings, the number has increased to $1.25 billion.

During the first quarter of 2008 AIG developed a new methodology to estimate more precisely its potential realized losses from this portfolio. This methodology, described on Pages 27 through 29, combines a roll rate estimate of the losses emanating from the subprime and Alt-A collateral securities in the CDOs, plus an estimate of losses arising from the CDOs inside the collateral pools known as inner CDOs.

In the roll rate analysis default rates on mortgages in various stages of delinquency are projected out at various rates to arrive at total expected defaults. Loss severities are then applied to the defaults to estimate realized losses.

Finally, we applied loss estimates to the inner CDOs on the collateral pools using loss estimates that depend on the vintage of the CDO, its type, and its rating. On Page 29 we show the results of this analysis showing a range of loss between 1.2 and $2.4 billion. The estimate of potential realized loss is, like the static rating stress, far below the cumulative GAAP valuation loss posted of $19.3 billion for this book.

AIG is aware that other market participants have used different assumptions and methodologies to estimate the potential losses on AIGFP super senior credit derivative portfolio. For example, as described on Page 30, a third party market-based analysis provided to AIG in connection with the capital raising process estimates that potential realized losses are at between 9 and $11 billion.

AIG has reviewed this third party analysis but because of the disruption in the marketplace we continue to believe that a market-based analysis is not the best methodology to use as a predictor of AIG's potential realized losses. And we do not intend to update this analysis in future periods.

So, as Page 29 shows, the disparities between the $19.3 billion fair value estimate and the conservative stress scenario estimates of losses between approximately 1.2 and $2.4 billion have grown much wider in the first quarter. These disparities emphasize the effect of marking to market the portfolio in the current disrupted, illiquid and distressed CDO market.

We expect market conditions to remain under stress for some time in the residential mortgage markets. Market values will be difficult to discover and secondary market trading will remain thin.

Furthermore, the end of the down cycle in credit quality is not over with delinquencies in various segments still on the rise and house price appreciation in decline. However, through high attachment points and low exposure to the later vintage mortgages, AIGFP has structured its super senior credit default swap portfolio to withstand considerable stress.

I'll now move to AIG's insurance investment portfolios. Referring to Page 58, our total holdings in residential mortgage-backed securities were $82.3 billion at the end of the first quarter. On the next slide you'll see that our RMBS portfolio continues to be of high quality with approximately 90% being agency paper or Triple A rated and approximately 6% Double A rated.

As shown on Page 58, $21.6 billion, or 26% of the RMBS portfolio is subprime. This portfolio continues to be of high rating quality with 95% still rated Triple A or Double A, while day holdings at March 31st amounted to $23.7 billion. On Page 64 we show that 98.3% of this portfolio is still rated Triple A or Double A.

Despite the overall good credit quality of the insurance portfolio, as a consequence of the deterioration and market valuations of securities, particularly in the structured product space, we recorded a pretax net realized capital loss of $6.1 billion in the first quarter. However, as noted on Page 55, over 90%, or $5.6 billion relates to other than temporary impairment charges of which over $4 billion is attributable to severity losses.

Severity losses represent rapid and severe market valuation declines such as that experienced in current credit markets where AIG cannot reasonably assert that the recovery period will be temporary. We do have confidence, however, that a significant amount of these losses will be recovered over the remaining lives of the securities.

We also recorded in the quarter $10.7 billion before tax of net unrealized depreciation of available for sale investments through accumulated other comprehensive income on the balance sheet. Although many risk assets were affected, over half were predominantly Triple A rated RMBS.

While AIG has marked these assets down to fair value in this severe housing downturn, we believe the strong credit enhancement levels described on Page 57 and other structural protections in our RMBS holdings will substantially protect us for recovery of our principle. In fact, during the quarter we received over $2 billion in principle pay downs, the same level as in the fourth quarter.

As we've discussed in previous presentations, an important component in assessing the risk in our RMBS holdings is the level of credit enhancement or the degree to which a mortgage pool can suffer losses before we experience any permanent loss.

On Page 61 we've presented our original and current average credit enhancements for the subprime 2006 and 2007 vintages, the largest components of our subprime holdings and the ones most subject to market pressure. Although the market's loss expectations for these vintages have increased, the average credit enhancements have actually improved.

For the 2006 vintage we have average credit enhancement of 31.7% for our Triple A holdings and 23.5% for all holdings below Triple A, and for the 2007 vintage the average credit enhancement is 25.5% for Triple A and 21.8% for holdings below Triple A. While lifetime loss estimates for 2006 and 2007 vintages have risen into the 20 to 30% range, the combination of excess spread and current credit enhancement provides cushion for our exposures.

On Pages 69 through 90 we provide detailed information on our CMBS, CDO and monoline related exposures. These portfolios are currently performing well. In fact, the CMBS market, which has been under contagion stress with RMBS, has rallied over the past weeks.

In conclusion, since August 2007 the broader capital markets have emphasized preservation of liquidity and diversion to risk. The U.S. residential mortgage market has continued to deteriorate with limited financing opportunities for mortgage borrowers and substantial increases in lifetime loss expectations on '06 and '07 U.S. subprime and Alt-A mortgages.

This deterioration has increased our mark-to-market and downgrade risks. However, our historical preference for RMBS exposures high in the capital structure continues to guide our current expectation that the risk of an ultimate loss to investment principle in these securities remains moderate.

As we stated in February, we have opportunistically increased liquidity to be prepared for continued market disruption. While larger liquidity positions have cost us some yield in the first quarter, it's also positioned us well to take advantage of compelling market values had we see them and we've begun to do that slowly in the first quarter.

Moving to Page 94 and AIG's mortgage insurance subsidiary, United Guarantee, the composition of UGC's portfolio has not changed significantly since year-end 2007. However, actions taken by UGC, including adjustments to underwriting and eligibility requirements and increased pricing, combined with more rigorous underwriting standards by UGC's lender customers, are targeted at improving the portfolio quality of new business.

As shown on Page 96, loans with FICO scores less than 620 have decreased to about 7.9% of UGC's domestic mortgage risk, while over 71% of their net risk in force has FICO scores greater than 660. Furthermore, higher risk products, such as interest-only and option adjustable rate mortgages, have declined and remain less than 10% of the risk in force.

Further, to Page 97, UGC recorded an operating loss of $354 million in the first quarter as the benefits from tighter eligibility and underwriting requirements will not be incurred until future periods.

The deterioration of the U.S. housing market has affected all segments of the mortgage business, but the high LTV second lien product is particularly sensitive and accounts for 43% of UGC's first quarter 2008 domestic mortgage net losses incurred. First lien net losses incurred, however, are also having a significant effect on operating results and further deterioration is expected in 2008.

In summary, UGC expects that the downward market cycle will continue to adversely affect its operating results for the foreseeable future and is likely to result in another significant full-year 2008 operating loss.

American General Finance is AIG's domestic consumer finance division. The residential mortgage market deterioration has also affected AGF's results as operating income fell to $11.4 million from $50 million in the first quarter of 2007, as AGF increased its allowance for finance receivable losses by over $78 million during the quarter.

Turning to Page 109. During the first quarter of 2008 AGF acquired $1.5 billion in outstanding balances of branch-based consumer loans of Equity One including $1 billion of real estate mortgages. Since the acquisition was completed at the end of February, there's approximately one month of earnings effect in AGF's first quarter results.

As shown on Page 111, the Company's credit quality measurements continued to perform favorably, relatively favorably I should say, despite the current upheaval in the U.S. housing market. AGF's real estate 60 plus day delinquency rate of 2.99% and its real estate net charge-off ratio of 0.68%, are still both below their target ranges which were set by AGF management to denote sound credit quality parameters. This is largely because well over 90% of AGF's mortgages are full documentation, fixed rate mortgages.

AGF maintained its disciplined underwriting approach throughout the rise and subsequent deterioration of the residential real estate market by continually re-evaluating guidelines and adjusting as appropriate. This has resulted in delinquency and charge-off rates that continue to be better than industry experienced rates albeit at the expense of growth.

AGF believes that the housing market will likely continue to deteriorate for the remainder of 2008, but the Company's business model and underwriting approach are sound and will allow the Company to continue to pursue opportunities as they arise.

Now I'll turn it back to Martin.

Thanks very much, Steve.

On our fourth quarter call I made the point that we are obviously witnessing and living through extraordinary market conditions. We have no illusions about the challenges ahead in the remainder of 2008 and recognize that many of our businesses, while largely affected by external factors, fell short of our own high expectations.

We have plans to address the issues we face and are confident that we have the right strategies and resources to succeed and generate long-term shareholder value.

Now before we take your questions, you will see from our release yesterday of Steve's appointment as Vice Chairman, Financial Services. I just want to recognize that Steve has made a significant contribution to AIG over the past three years as our CFO and has developed a top-notch financial team which his successor will be fortunate to inherit. The Board and I felt that this was the right time to utilize Steve's talents and expertise in a segment of our business that is operating in a challenging environment. So congratulation to Steve.

Ladies and gentlemen, we'd be very happy to respond to any of your questions. Thank you.

(OPERATOR INSTRUCTIONS) Our first question does come from Nigel Dally of Morgan Stanley. You may ask your question.

Great. Thank you. Good morning.

First question. I know you downplayed it in your opening statements, but the one notch ratings downgrade, can you discuss the fundamental impact across your various businesses, especially aircraft leasing?

Second, just wondering whether you have an estimate on the CDS mark through the end of April given we're seeing some improvement in credit spreads?

And then just lastly, timing on the raising of the remaining $5 billion of the capital raised? Thanks.

Make sure we got all your questions there, Nigel. Obviously, we've given a lot of detailed analysis to the impact of the one notch downgrade of AIG, and as I mentioned in my opening remarks, we don't believe that is significant to the operations. The key takeaway there is the ratings of our insurance subsidiaries which were maintained and that's, as I said, very important.

There is a possibility, obviously, of increased funding costs to a subsidiary like ILFC, but other than that, Steve, I don't think we've identified anything that --

No.

I think we did disclose the collateral.

We did. Results in about $1.6 billion of additional collateral posting, but from an operational perspective we were prepared as an organization in the event that any downgrade occurred, given that we were on both watch and negative outlook from the various rating agencies, and these actions should not have any significant effect at all on the operations. As Martin said, it could have a nominal increase in borrowing costs, but we'll see how that turns out.

In terms of your second question on the April 30th mark, we do not have an updated mark through April 30th. When you look at the various portfolios of our business, you know, we can say the following. If you look at what's happened in the credit markets since March 31st, clearly, you've seen a rally in corporate credit spreads which if it sustains itself, and we can't certainly be certain of that, should have somewhat of a positive effect on that part of our book.

If you look at the commercial mortgage-backed securities market, that's certainly done somewhat better in the second quarter so far than in the previous quarter, few quarters. However, in the highly structured credit market with residential mortgage, subprime and Alt-A securities, we don't see any precise evidence to date that those markets have rebounded.

People point to the ABX index. We've said pretty consistently that we don't think the ABX is very well correlated to our books and therefore the volatility both up and down associated with that index is not a good measure of what's happening in our portfolios.

The process of coming up with a valuation of those types of securities and CDOs and CDSs at this point in time is a long process. It requires significant data input from collateral managers and other market participants that are not available within a short period of time after the end of the month, and so to develop the type of mark that we use for valuation purposes, unfortunately, is -- as a requirement to obtain the information that we simply can't get on a timely basis in these market conditions.

With regard to the -- your last question was --

Timing of the fixed -- I think the last question, Nigel, you had, was the timing of the high equity content fixed income?

That's right.

We've said that we'll launch that shortly after we launch the first two tranches of the capital raise which are the common equity and the mandatory convertible securities, so we'll -- that will be based on our judgment of the market.

Very good. Thanks.

Thank you.

Jimmy Bhullar of JPMorgan, you may ask your question.

Hi, Jimmy.

I have a few questions.

The first is on your capital. I saw you updated the economic capital model. How much progress have you made in convincing the rating agencies of your output from that model and convincing them that the capital position that you're taking 2.5 to 7.5 or just convincing them of that?

And then secondly, if you could give us an idea on the subprime CDS that you have, the $77 dollar notional amount, an idea on the majority schedule of that, how much of it rolls off over the next year or two years or over the next three or four years? Any metrics that you could give on that.

And then finally on loss trends in the P&C business, you had had consistent positive development for the last few periods, and this quarter outside of the loss sensitive business I think you had adverse development of approximately $175 million. If you could talk to what caused that, is it the total environment or anything else, if you can just talk about what caused the adverse development in the P&C line?

Okay. I think we've got all three there, Jimmy. I think Steve's going to respond to the first point.

Okay, Jimmy, as far as the excess capital position, first let me, before I get to your rating agency point let me also clarify, because I'm sure we'll get the question, why did our excess capital range reduce from what was pretty consistently close to 15 to 20 down to 2.5 to 7.5?

Using best practice market consistent approaches now toward economic capital modeling, the full extent of level two asset changes come through as a reduction of available economic capital. So this quarter, because we had a significant decline in value of the investment portfolio for the reasons that I cited in my presentation earlier, we had a significant reduction in available economic capital, and despite our views of ultimate realized losses, that comes through at full fair value without adjustment. And so that's why the range of excess capital, and this is before the capital raise, has decreased to the 2.5 to 7.5.

With regard to your question on rating agencies, the fact is that I don't think there's been significant progress so far with regard to the rating agencies embracing our economic capital modeling, and I think that's a more general issue, not just related to AIG.

I also think that the credit market events of the last few quarters have certainly been keeping the rating agencies quite busy on other fronts, and I'm not sure that this has really gotten their first line attention at this point in time. So I think all of these events were set back in making progress on that.

So the short answer is our views of our capital and the rating agency's views are different, and each of the rating agencies have differences on how they view it as well. So really no progress on that front.

Did you want to add anything, Steve?

No.

On the second point you raised, Jimmy, Andy Foster's with us from AIGFP, and he's going to give you some color on that.

On the multi-sector CDOs with subprime calculating what the expected average life or expected maturities is a fairly difficult process to do. We outlined in our presentation that looking at the underlying collateral we came up with a value of around 6, 6.5 years for the average life of it.

But the reason it's complicated, obviously, is the different collateral deteriorates, and as Martin and Steve alluded to, we have lots of different cash flow triggers within the different deals and actually as the quality of the collateral is deteriorating we're triggering a lot of those over collateralization triggers which is actually diverting cash towards us. So we would hope that our portfolios will pay down faster than what's outlined in the presentation.

I think we're in the process of trying to do a better assessment of what those cash flows will be given these different triggers and we're sort of almost at the end of that process, so I would hope that certainly by the next call we'd be able to give you a more accurate assessment of what that average life would be.

Okay.

On the third point, there, Jimmy, I think, obviously, there was some adverse development in one particular area in excess casualty and I think I'll ask Frank just to give you some additional background there because that's not necessarily reflective of a trend going forward.

That's right, Martin. As you mentioned in the question, Jimmy, there was about $175 million of adverse development if you exclude the favorable development from loss sensitive business. That was driven almost entirely by excess casualty from accident years primarily in the late 1990s through 2000. It was largely related to one specific exposure, MTBE, a gasoline additive, certain policies during that time period.

I can't quote you a number on those exposures exactly since it's in litigation at this time, but if you took excess casualty out of the mix as a whole or if you just assigned it a normal quarter, development, the overall development would have been favorable even excluding the loss sensitive business. So we regard this as largely non-recurring. What happened this quarter relating to MTBE is still going to be out there.

Excess casualty is always, as you know, a long tail line is always the risk of more developments of many latent types, but this quarter obviously had an outsize development which we don't expect to recur. It hasn't happened in the last couple of years, and we don't think it's a trend of what you should expect to see going forward.

And you don't believe that the MTBE reserves will develop adversely going forward from here?

Well, we've established what we think is the appropriate reserve overall. I mean, excess casualty, you don't have exact reserves for every type of exposure. What happened this quarter is we learned about certain additional exposures and we adjusted our overall reserves accordingly.

So there's certainly a risk that any particular type of claim could develop further, excess casualty, that's a risk we're just always going to have, but this quarter is certainly unique in the magnitude of the adjustment that we need because of information that developed this quarter.

Thank you.

Thanks, Jimmy.

Alain Karaoglan of Banc of America Securities, you may ask your question.

Good morning.

Good morning, Alain.

I have three questions.

The first one, with respect to the capital that you're raising of $12.5 billion, what are the use of proceeds in terms of what are the businesses that you plan, do you think need them or you plan to deploy them in?

The second question with respect to Taiwan, do you have any new thoughts on rather than assuming that interest rates are going to go up and maybe taking more risk on the investment portfolio to clean up the slate, maybe take a charge and if interest rates do go up, then we'll have a lot better earnings going forward given all the mark-to-markets and the capital that you've raised?

And third, you had a comment in the 10-Q about personalized on the writing results to worsen in further going forward. Were you referring to worsen further from where they were in the first quarter or further from where they were last year?

On the capital our plan, obviously, is to use it for general purposes. What we've said, clearly, is that we want to fortify the fortress balance sheet that we have.

Obviously, from our standpoint we want the ability to continue to grow while maintaining strength to withstand potential short-term market volatility that we're, obviously, the financial services sector is facing at the present moment. So at the present time it's for general purposes to fortify the fortress balance sheet and to give us the ability to grow in certain areas and, obviously, withstand any potential short-term market volatility. Steve?

Just add that holding the proceeds in the holding company at the parent company level will give us the optimum financial flexibility to respond to any capital needs that might arise within all of the various operating companies that we have, and that's our current intention as Martin said.

I think, Alain, in response to your question on Taiwan, I'm going to Chris and Edmund to give you some additional background on that.

Alain, good morning.

Good morning.

Edmund here. On Taiwan investment we are not betting on really any increase on the investment interest trend in the near future, so our [alternative] we really diversify more to take a little bit more higher risk in our other investments including the equities and the (inaudible) and we believe with the change of administration that the local markets we'll be stronger in the near future so we'll put probably more a little bit more in those higher risk investments.

And in addition that we are now applying to directly to increase our foreign investments from the 35% to 40%. Hopefully we get approval that we could also put more to the foreign investments that that would include in the higher long duration, higher high return bonds and also probably put some in the Asian market in equities and to increase our hopefully increase and enhance our return.

On your point about whether we should take a one-time charge and to take it we are studied this for quite a while and we believe our Taiwan operation still quite profitable, and over the years we have keep on having a good profit increase and we are able to maintain our high profit, so for the time being we have no plan to take a one-time charge, but if situation change, we may reconsider that.

I may refer back to also to Chris to add some color.

Our gross premium valuation analysis does show that our DAC is fully recoverable and to pay reserves right now, Alain, as we talked at our investor conference, so no real news. And again, from a U.S. GAAP accounting side, we just can't take a charge unless the facts warrant it, and right now our best estimate of the facts is based on what Edmund said and some of our philosophy, we just can't take a charge.

We did consider the fair value option for Taiwan, but did reject it just given the ongoing volatility. And then the only other update, as we disclosed in the 10-Q, we did commit to move approximately $400 million in roughly in either June or July of this year once we get full regulatory approval.

On the third point that you raised, I think the key area where we're seeing loss ratios deteriorate year-on-year is primarily in our agency order portfolio to a lesser degree in the direct portfolio. The little uptick we got in our private client group, which has an excellent loss ratio, was increased frequency in the homeowner's sector.

Kevin Kelly's on the line. Kevin, I don't know what trends you're seeing from the fourth quarter I think which was Alain's specific question, you know, quarter-on-quarter sequentially.

What I can say is that none of us are happy with the performance. In the first quarter 5.5 points came from prior policy year developments, so what we're seeing in the current results are about approximately 3 points in the current accident year driven principally by auto severity, as Martin has point out, and most pointedly in our agency auto business. We continue to work on that business and we continue, I think, to make improvements in that business going forward.

Thank you very much.

Thank, Alain.

Tom Cholnoky of Goldman Sachs, you may ask your question.

Good morning.

I guess, Martin, to go back to the capital raise, can we look at this because I guess what I'm struggling with is whether this is really a dilutive event, which ii certainly appears to be on the surface, or whether you can make the case that it's going to be accretive, and if so, when would this be accretive?

Tom, it's Steve.

I think, certainly, the initial raise of common equity will be dilutive to EPS and earnings per share by definition. The mandatory has somewhat of a delayed dilutive effect but that's dilutive as well when it's converted.

I think the dilution is something that we hope we will be able to offset by the use of that capital in very productive ways as the opportunities manifest themselves over the course of the next few quarters, so certainly initial dilution and our, you know that we're active capital managers, now we have a situation now where the markets are very turbulent and volatile. We felt this was the absolutely right thing to do to fortify the balance sheet, as Martin said, and preserve our financial flexibility that we've always enjoyed and also, of course, there are rating agency considerations, as you've read, toward the capital raising.

This was not driven by the rating agencies. I will tell you that we went to the rating agencies and told them of our plans to raise capital, they didn't direct us to raise capital. Nonetheless, all those features factored into the development of our capital plan. We think it's absolutely the right thing to do at this point in time at the sacrifice of some near-term dilution.

So you would characterize this, not to put words in your mouth, but purely as offensive or much more offensive than defensive?

Proactive.

Proactive. Okay. Just a second question, I realize there have been a lot of people in the queue.

On the alternative portfolios, investment portfolios, there's clearly a lag in here, and how should we think about that given what's transpired in the previous quarters or are we likely still to face some real headwinds in here for the next couple of quarters on the alternative portfolios?

I think I'll have Win add some color, but the first thing I'd point out, Tom, is obviously in the first half of 2007 we had record contributions from partnership income, way in excess I think if I'm not correct and correct $2 billion, I think contributed to earnings in the first half of 2007. Obviously, Win has articulated, I think, for at least two and a half if not longer years, the average expected run rate of that portfolio is in the area of 10 to 15%, but specifically on the lag I'll ask Win to add some color there.

All right. Tom, I think the way the accounting goes today, the lag is much less significant than it was two or three years ago because of the marks that place in the underlying funds in which we invest, so that's compressed from what it historically has been. If we look at the first quarter, the total for the Company return on the portfolio was a little under 3%.

We've said, as Martin said consistently, we think that that portfolio will generate 10 to 15% returns over longer periods of time. And it was running significantly above that for a couple of years with last year's first quarter being a peak in excess of 20% return on the portfolio, so we've come down now below what we expect to be our normal range, but we have no reason to expect that to be different.

Hedge funds were the real laggard in the first quarter given the market turbulence, but again, not in any way alarming to us in terms of the results.

So would you think that on a sequential basis that this would hopefully mark a low point in terms of alternative investment returns or could they get worse in the second quarter?

I think that's largely going to be a function of what happens in the capital markets. If equity markets turn around and do extremely well, then I would expect that we would catch up with that, if equity markets are down, it's going to be continued tough sledding I think for the partnership returns.

Right. Okay. Great. Thank you.

Thank you, Tom.

Dan Johnson of Citadel Investment, you may ask your question.

Great. Thanks. Got a couple of just following up on Tom's question.

You noted that you list private equity returns, but then note that it's or, I'm sorry, partnership, I should say, returns. Can you just at a high level just split that between something that looks like private equity and something that looks like hedge fund? We're talking like $29 billion in assets.

Sorry, I'm just trying to find --

Why don't you go to another question?

Perfect. If we look into the life businesses, you do a nice job of breaking out the earnings in a couple different views. One of them is earnings before DAC benefit generated from realized capital losses, and one of them is earnings afterwards. They give somewhat of a different picture to the performance in the quarter and somewhat last quarter, too.

What's the better way to look at the operating performance of the life businesses? Should we include or exclude the roughly $270 million of benefit in the quarter that was generated from capital losses or realized or unrealized capital losses?

Chris is with us. He's going to respond to that.

I think most of our management metrics are excluding the DAC benefit, the capital markets are what they are. We reposition portfolios from time to time. We generate OTD, again, it's somewhat timing, so that's really why we excluded, and that's our internal metrics. (overlapping speakers)

The (inaudible) is managed without the benefit of the DAC contribution.

Understood. On the $1.8 billion of benefit from FAS 157 implementation due to widening of your credit spreads, does that somehow just benefit the balance sheet or did that flow through a particular segment on the earnings statement?

I'll let David Herzog, our Controller, give you the intricacies of FAS 157.

Good morning, Dan.

The 1.8 is I think what you're referring to. That is a benefit that runs through the current period, but it's also in the books of business that we elected the fair value option FAS 159.

For example, at AIG Financial Products, any effect of our credit spreads on AIG are largely offset by effects of credit spreads on the underlying assets as well, and that was one of the considerations that we took under review when we elected the fair value option. There was a reasonable correlation between the effects of the credit spreads on the underlying assets versus AIG, so they're by and large offset, and I think we disclose that in the Q, in our 10-Q that the effects of that were largely offset in the period.

In AIGFP they were but maybe I'm misreading the table on Page 11 of the Q. Even adjusting for that, don't we still end up with what looks like a $2.8 billion pretax benefit from basically credit spread widening of AIG in the quarter?

Well, you see the effects of the total. Again, you've got $2.6 billion offset in AIGFP that was a reduction in earnings that ran through the current period earnings on counter party spread widening as well. So you've got 2.7 benefit versus $2.6 billion expense.

So the $1.8 billion after-tax overall includes or does not include the offset item from other counter parties credit spreads?

Can you just clarify where you're seeing the 1.8?

Sure. I'm sorry, I keep flipping between pre and post tax. Page 11 of the Q says that the --

You're just tax effecting that number.

Yes. So I'm trying to figure out were there two benefits?

No, no, that's one benefit, and the net effect of all of this was relatively small on a pretax and after-tax basis because what you have going through, as David said, on the income and on expense relating to credit spread widening of our own credits and also credits of counter party financial institutions in which we have investments and transactions largely offset that, so the net effect on the financials was very small.

Okay. I probably will want to circle back. Any luck on the private equity question?

I think Will has some information. May not be exactly what you want, Dan, but if it's not then we'll have to revert back to you.

If you break down the NII during the quarter between partnerships that are hedge funds versus partnerships that are private equity, private equity actually generated a positive return during the quarter of close to 7% and hedge funds a slight decline, 2 or 3%.

A couple things I'd note on that. Number one, I don't have the exact size of the two portfolios, but the private equity portfolio is slightly larger than the hedge fund portfolio, although they're not that far off of even.

The second thing is that in hedge funds in particular, we have a not insignificant part of our portfolio that is still on the cost method, and therefore the returns on that portfolio only reflect realizations or equity method partnerships, so there's significant embedded profitability still in the cost method partnerships in hedge funds that don't get reflected in those numbers.

Do you feel like you've good visibility on the private equity piece for this year?

Well, I mean as you know, I mean most of the holdings in the private equities sector are private companies, so you have to look at the underlying investments and how those companies are doing, what their results are, what valuations are.

We spend a lot of time working with, obviously, our portfolios but also with our managed accounts that are managed by others understanding the valuations, and I think that most managers are being very rigorous in terms of how they do the marks within their portfolio, but there's always a certain lack of visibility in private equity by definition.

Last question. Related to this then, do these marks include first quarter performance or are they only updated via fourth quarter? Or February if that's the case?

Right. It varies by the two asset classes so hedge funds do reflect most of the first quarter the way we do hedge fund partnership is with a one-month lag, so it's performance through, primarily performance through February, whereas private equity reflects the most recent valuations which typically would be year-end valuations.

Thank you very much for the questions.

Can I just finally, let me just go back to your Page 11 question, hopefully to put it to bed. I have it in front of me now.

The table shows the 2.781 pretax increase. The footnote talks about the amount for AIGFP which is the predominant component of that $2.78 billion.

If you add up the 2.58 and the $65 million in the table, you get to the 2.648 for AIGFP, which is largely in the footnote under it shows that it's offset by the counter party credit spreads for assets. So the net effect on the income statement for FP was $28 million, and then the rest of it you take into account are the first two items on the table, 218 minus the 155 so that brings you down to a very small number.

Very good. Thank you.

Andrew Kligerman of UBS, you may ask your question.

Good morning, Andrew.

Andrew, your line is open. Please check your mute button. We can go to the next question if you like.

Yes. I'm here. Sorry about that.

Question around the property-casualty business. It looks to me like the expense ratio has really trended up a fair amount. You got 23.6 in '06, 24.7 in '07, this quarter it came in at 26.4.

It looks like domestic brokerage spiked up a fair amount while the other main areas came down. Could you talk to the, or discuss the outlook for that expense ratio and what might be driving it?

Yes. Well, obviously, one of the key factors was oversee the return premiums that were discussed earlier in the loss sensitive business. You see that reduced the premiums and therefore, obviously, the expense ratio would, obviously, by definition go up, and, obviously, we experienced something like $0.5 billion, I think, Chris, of MPW reduction which accounted for a couple of points of expense there.

I think the actual increase in expense in the commercial insurance group was probably around 1 point of true underlying growth in the expense ratio.

Obviously, we're very focused on expense discipline here in AIG. That's been a hallmark of the organization. That's certainly not going to change. Obviously, we've invested where we've needed to invest in remediation efforts, but the focus on expense discipline is there.

I think there was also, and Rob Schimek's with us, the CFO of the General Insurance Sector, and I think there was some increase in acquisition costs as well.

Yes. Andrew, it's Rob Schimek.

Just two other points I might add to of what Martin was just saying, one is that there are a couple of quota share agreements that we had on the property side of the house where there's no longer seating commission or profit share coming in that is reflected in the prior year as a reduction to acquisition costs, as well as the fact that as we work on the mix of our business, you'll see us shift to lines of business that might have a lower loss ratio and a higher expense ratio, so those are a couple of key points.

What areas would have that new metric, what would be more prominent with the higher expense ratio?

Yes, this is Kris Moor.

There's a change in a mix of business issue there, but overall the gross commissions on our book are only up slightly and that is almost mainly due to change of the mix.

And the areas that have the higher conditions or --

Yes, it's usually the smaller business and businesses like accident and health.

So I guess just finally, where might you see the expense ratio overall leveling out? I mean is there any sense of where that's going?

I think you'll probably see an improvement. I don't know the exact number, but you'll see an improvement probably in the second quarter.

And then just lastly, on the capital initiatives, again, just, it sounds like deals are not part of the equation at all. Is that right?

Was your question are deals part --

Yes, in acquisitions it sounds you really, as Martin said several times it's the fortress fortifying the balance sheet is the key. It doesn't sound to me like M&A is part of this equation in raising the $12.5 billion. Am I reading into it properly?

Yes, you're reading into it properly. That's not a driving factor in this capital raise.

Thanks a lot.

Thank you. Ladies and gentlemen, just so you're aware of our timing, obviously, we can stay online to around 10:00, so given the (inaudible) disclosure we've made, if you could limit your questions maybe to one or possibly two, then we have a chance of trying to get to everybody who's in the queue at the moment.

Tom Gallagher of Credit Suisse, you may ask your question.

Good morning. I'll just have one and then I'll turn it over to Charlie Gates for one on the P&C side.

On Page 103 of your 10-Q it says that as of April 30th AIGFP posted collateral of $9.7 billion. Just curious if you could talk a little bit about how that's funded? Are you funding that with debt? Is it equity? And also if the marks come down in AIGFP will the collateral come down in proportion?

All right. This is Bill Dooley. Sorry, this is Bill Dooley.

Just to talk about the liquidity position in FP. First of all, we've been managing that extremely carefully for quite some time. We started to build in FP cash last summer when we saw the markets starting to deteriorate so right now we do have adequate cash. Also, FP continues to have normalized business inn their book and they generate cash every day from their book.

The third thing is the capital markets, we can raise money in the capital markets and as far as any other liquidity needs that we have, we do have assets that can be monetized, so overall I'm very comfortable with the liquidity position and for the most part that's where the cash is. That's not for the most part, for the entire part that's where the cash has come from over the last few quarters.

As far as the marks are concerned, if the marks do change and the marks start to move up, then the collateral will be returned to us.

And, Bill, is it fairly straightforward in terms of the 9.7 sort of rising and falling in direct proportion with the marks or is it not that straightforward?

It's related to the mark, yes.

Okay. So in other words, if credit spreads keep widening, it would continue to consume more collateral?

Yes, it's the marks that we get from the collateral agents, and those marks are compared to our own marks, and we debate the difference between the two marks. Those debates have really quieted down recently and we really have very, very little disagreement between the various parties, so it's true from what you just said.

Okay. Thanks. And then Charlie Gates, I think, had something on the P&C side.

My one question, could you elaborate in as much detail as possible on the commercial lines property-casualty insurance competitive environment in the United States speaking to both pricing and changes in terms and conditions?

Happy to do so, Charlie. If you want a good level of detail, I'm going to Chris the microphone and maybe I'll add some color as well.

Hi, Charlie.

You know it's a competitive market with rate pressures in most of our lines, particularly workers' compensation, aviation. Terms and conditions remain stable overall. If you go into the rates, I'll give you a year-to-date this year so far, overall rates are down a little bit over 10%, in the property area rates are down averaging about 18% with cat rates averaging a little higher than that and non-cat rates averaging a little lower.

Probably our biggest concern right now in our lines of business are workers' comp and aviation, but besides that we see opportunities throughout most of our other lines. Our account retentions are very strong with our new business. We're not seeing as much opportunity as before because of this environment. New business year-over-year is down about 13%.

I would just add, Charlie, I've been in this business nearly 40 years and seen many cycles. I think the one thing that is holding up reasonably well is terms and conditions globally.

I think we're still seeing there's always exceptions, but we're still seeing reasonable discipline on deductibles and certainly reasonable discipline on policy wordings, and that is a component part of the overall profitability of underwriting a risk. So I think that's one change that's a little bit different from maybe past cycles that I've certainly personally experienced.

Thank you.

Thank you.

Paul Newsome of Sandler O'Neill & Partners, you may ask your question.

Good morning and thank you for the call.

How should I think about or how should we think about the excess capital number that is in your capital adequacy model versus the capital raise? Isn't there a bit of a conflict on one hand saying that the capital is in excess and then raising more capital or are you -- or should we be thinking of sort of AIG is having some sort of cushion that they need?

What I said earlier on the call, Paul, I'm not sure you were on yet, then, that our -- the level of excess capital at March 31st has decreased from the 15 to 20 range where we've been since we've been publishing that statistic a year ago to 2.5 to $7.5 billion largely because of the decline in the investment portfolio.

That is an excess capital cushion that is simply too low for comfort for us in this kind of a volatile period within the capital markets, so among many other reasons, the capital raise restores the excess capital position to something much more comfortable during this kind of a turbulent period, and we think it's the right thing to do.

So there's a level of a cushion that you are going to want prospectively?

I don't think a company like AIG should be running at a capital position that is too close to the line. You want to have excess capital cushions to take into account a lot of uncertainty out there in the capital markets and what mother nature might have in store, what man-made events might be, I mean there are issues you have to be prepared for in terms of unexpected liquidity and capital demands. That's what we're here for.

Great. Thank you very much. Thank you.

Jay Cohen of Merrill Lynch, you may ask your question.

Yes, thank you. A couple of questions. Two topics.

First is on the capital raise on the equity and equity linked component, can you talk about how much straight equity you will be issuing, roughly, and if you can talk about what the actual dilution to EPS will be from the cap, from the equity portion of capital raise?

Jay, as you can well appreciate, now the offering has been made, there are legal restrictions, as you will well appreciate, and I can't really make any additional comments on the offerings at this time.

Okay. Fair enough.

Jay, we really can't comment on dilution because that depends on the composition of the raise and the final pricing, so there's really no way to do that yet.

We'll just wait for that then.

Second topic, on Page 100 of the slide presentation, it shows that the delinquency rate at UGC based on that graph looks like it may have peaked and is beginning now to come down. I don't want to read too much into two quarters worth of data, but should we look at that and say, hey, it looks like things have peaked or you just can't tell?

You're certainly reading it right and I'll ask Billy to give you some color on that.

Sure, Jay, good morning to you. I would not read too much into that at this point. That is a seasonal downturn that we normally experience in the early part of the year. As you're very much aware, the housing market continues to deteriorate and we're likely to see further increases in our delinquency.

What is noted there, though, is the widening spread between UGC and the rest of our competitors but in response to your question, that's a seasonal downturn.

Fair enough. Thanks for that clarification.

Thanks, Jay.

Jonathan Adams of Oppenheimer Capital, you may ask your question.

Good morning.

(Inaudible) understand the message the board is trying to send with the increase in the dividend but given the fairly sophisticated capital deployment models that you use isn't this pretty clearly an inefficient way of using capital?

Well, all I can tell you, Jonathan, is that, obviously, when the subject of the raise in dividend was discussed with the board, that we believe clearly that it reflects the long-term prospects, the positive long-term prospects of the organization and that's really what the decision was based on.

But, I guess, what does it say about your capability or your board's capability of allocating capital efficiency? Since you've got to generate capital and then make decisions about how you deploy it?

Can we put this in perspective, Jonathan? A 10% increase in our dividend is about $200 million annually.

I understand it's a small amount but, again, if partly they're making a symbolic statement to show the strength of the Company, I would think you'd also be equally concerned about the symbolism of efficient versus inefficient capital deployment.

Sorry, I don't think we've said it's symbolic. I think we said that it was a judgment that was made, all things considered, about the long-term future of the organization and its capability.

Our shareholders have told us, and one of the reasons we established the dividend policy, they told us that yield is also important to them. Our yields are relatively low and we've been trying to get them to a higher level over the course of time reasonably. This is just one step in that direction and we felt it was prudent even in the current circumstances.

Okay. Thank you.

Thank you.

Scott Frost of HSBC, you may ask your question.

Yes, I want to make sure I just understand the loss figures. You've got $6 billion in realized losses, that's mostly other than temporarily impaired, that's those are securities that have been downgraded or defaulted been marked down.

The unrealized mark-to-market of $9.1 billion plus the 10.6, are you saying that that's the market valuation loss, mark-to-market valuation, but what's your, are you saying that there's a much smaller, like the actual loss is only going to be a small portion of that according to you and the rest will revert and go back into, I guess, shareholders equity? Is that how you see it?

I think you're very close. Let me just clarify. What goes through income is predominantly this quarter related to, even though it comes through the realized capital loss line, these are not realized. In fact, net realized capital, net realized sales for the quarter were a small net gain.

Are these just write-downs, right? (inaudible)

These are principally other than temporary impairments and the way we judge what goes through the income statement versus what stays on the balance sheet through other comprehensive income is based on our judgment of whether the decline in value is other than temporary.

And if we can't make the assertion, and which we can't in many cases, in today's market condition that some of these prices, which are 50% or 40% or more down from our carrying value, will recover in the course of the next few quarters, we've taken the position that they are candidates for impairment and write-down through the income statement at this point in time. That contrasts to the other $10.7 billion that you'd referred to that's going through the balance sheet as a reduction in unrealized depreciation of securities.

Those securities have not reached a level of decline where we felt they were candidates for impairment and permanent write-down on the, through the income statement but rather simply reflecting those through the balance sheet. The differential is really a degree of severity of price reduction at this point in time and not necessarily a differential between our expectations of ultimate value recovery.

If you look in the 10-Q you'll see a table and the number associated with actual credit impairments in the table, what page (inaudible) get to it now, is a small number compared to the overall other than temporary impairment charge for the quarter.

Right. But just to reiterate. Of that $19.7 billion of unrealized losses through P&L and (inaudible), what amount of that is going to actually be, in your view, paid losses? Is that the right way to think about that versus (inaudible)?

We're not, I can't give you an exact number of what's going to come in. If you look at Page 96 of the Q, there's a table on other than temporary impairment charges. Issuer-specific credit events is $171 million out of the $5.6 billion.

Market severity is $4.1 billion.

So where our credit experts have actually determined that we think there will be a permanent impairment in value is $171 million out of that whole lot. Now is it possible, of course, that the rest of it won't come back and transform into some further impairments? I think that depends on the economy, on unemployment, or the credit markets, on the housing market, a lot of variables that, unfortunately, our crystal ball isn't clear enough to accurately predict right now.

Okay. Okay.

But the severity number that, this is after-tax, right? And this includes AOCI and the $9.1 billion on the P&L. You're saying that the vast majority of that is mark-to-market severity not what you consider to be issuer-specific credit. Is that accurate?

The vast majority is related to price issues in the market right now and not necessarily what we believe to be permanent impairments of value.

Okay. Thank you.

And I just wanted to add something to what you said, Scott, at the outset. You talked about the fact that it was tied to defaults and downgrades.

That's your other than temporarily impaired that's in realized losses you marked those down right?

As Steve said, number one, it's not realized in terms of having sold them, but furthermore, virtually none of these securities except for the ones that Steve talked about as some of those, perhaps. The rest is not in default, it's still paying currently and the vast majority of it is still rated Triple A. So it's not even that it's not performing, it's simply that the price decline in the market for RMBS has been so significant that it's put us in this other than temporary impairment position.

Oh, okay. All right. I understand. Thank you.

Thank you. Unfortunately, ladies and gentlemen, as I said, we have to close the call around 10:00 this morning. I'm sorry if we didn't get to all of your questions. Anybody that has any specific questions I'd encourage you to go to Charlene Hamrah and we'll try and respond as soon as we can. So thank you very much indeed.