American International Group Inc (AIG) 2008 Q3 法說會逐字稿

Welcome and thank you for standing by.

At this time all participants are in a listen-only mode until the question and answer period.

(OPERATOR INSTRUCTIONS) Today's conference is being recorded.

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

Now, I would like to turn the meeting over to your host for today's call, Director of Investor Relations Ms.

Charlene Hamrah.

Ma'am, you may begin.

Thank you.

Good morning and thank you for joining us for this mornings conference call.

before we begin, it should be noted that the remarks made today may contain projections concerning certain financial information and statements concerning future economic performance and events, plans and objectives relating to special purpose vehicles formed with the federal reserve bank of new york, asset dispositions, liquidity, collateral posting requirements, 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 include developments in global credit markets and such factors as are discussed in Items 1a Risk Factors of AIG's Annual Report on Form 10-K for the year-ended December 31, 2007, and an Item 1a Risk Factors and Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations of AIG's Quarterly Report on Form 10-Q for the period ended September 30, 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.

Remarks made on the conference call may also contain certain non-GAAP financial measures.

The reconciliation of such measures to the comparable GAAP figures will be included in the third quarter financial supplement available in the investor section of AIG's corporate website.

And now I would like to turn the call over to Ed Liddy, AIG's Chairman and CEO.

Thanks and good morning everyone.

We have a, really an awful lot to cover this morning so bear with us.

We're going to try to do all this in about an hour.

I think that will leave time for many of your questions.

If we don't get to them I invite you to call Charlene at the conclusion of the meeting.

Sorry also to play traffic cop, but if you'd turn off all BlackBerrys and things like that near your phones it it will make it possible for everyone else to hear.

On October 3rd, a scant five weeks ago, sometimes it seems like five years, I laid out an initial game plan to address AIG's immediate liquidity problems, to divest assets to repay the government loan, to refocus AIG on its historic strengths, and to restore the Company to profitability.

At that point, there were a number of unresolved issues that still needed to be addressed.

We've been hard at work since then and that work has resulted in the very comprehensive plan we announced this morning in conjunction with the US Treasury, the Federal Reserve Board and the Federal Reserve Bank of New York.

We believe this plan is win-win.

It sends a strong signal to our policyholders, to governments, and to regulators around the world, to our business partners and counterparties that AIG is in fact on the road to recovery.

It gives us a durable capital structure, both now and in the future, it addresses the liquidity issues that have threatened AIG, it gives us greater financial flexibility to complete our restructuring for the benefit of all of our constituencies, it gives US taxpayers a very attractive return on preferred stock and debt investments in AIG, as well as the potential for gains on asset purchases and the future appreciation in AIG common shares, which they own.

This plan represents substantial progress over the past six weeks.

It's part of a multi-year journey of which today is really the second milestone.

The third milestone will be the business divestitures and I'll talk a little bit more about those in a moment.

The subsequent phases of our plan will include appropriately recapitalizing the Company after the federal credit facility is paid down.

So, all investors should recognize that this will be a several year process, tied in no small part to the recovery of financial markets around the world, but importantly, following the restructuring transactions we are announcing today, we'll have the stability to restore confidence in our global franchise.

Business partners and customers can confidently continue to place business with us.

Before I go into the details of the restructuring plan and AIG's Third Quarter results, I want to take this opportunity to qualify certain facts that may have been inaccurately characterized or may have been quite simply misunderstood.

I know that many of you have tried to piece together information from different sources to understand the big picture.

Our goal on this call is to give you the information you need to clearly understand the plan announced today in its totality, as well as each of its components.

There's also a substantial amount of detail in our 10-Q, which was released this morning.

Now in particular I'd like to focus on just a couple of key points.

First, our indebtedness to the Federal Reserve Bank of New York under the original bridge loan currently stands at $ 61 billion.

There have been reports citing indebtedness as high as $123 billion.

To get to this number, commentators are adding together the $85 billion of total capacity available under the bridge loan and the $37.8 billion available, though not currently borrowed, under the securities lending facility.

We do have $19.9 billion outstanding under that facility, but the Federal Reserve Bank of New York holds collateral in the form of third party investment grade securities from our portfolio.

So, it's apples and oranges that are being compared here.

As evidence of why the two amounts should not be added together, the Federal Reserve is now providing an alternate mechanism that will completely extinguish the $37.8 billion facility.

Second -- The terms of the restructuring are commercial in nature.

All of the facilities being provided by the US Government are at market rates.

Third -- As we anticipated, to undertake such a dramatic restructuring of the Company's businesses, our quarterly earnings are showing and may continue to exhibit substantial volatility, reflecting the unprecedented conditions in global financial markets.

Nevertheless, there is stability in our underlying insurance business, notwithstanding catastrophe losses and competitive market conditions.

Our insurance Companies remain disciplined in their underwriting, they 're well capitalized and they continue to meet or exceed all regulatory requirements.

Last -- Because these businesses remain strong, a disciplined, well sequenced process of divestitures has been undertaken.

The interest of the taxpayers, as well as the shareholders and bondholders of AIG, will be best served by our ability to offer our remarkable assets for sale as market conditions permit.

We expect to announce several key dispositions this year, proving that good deals can get done in this marketplace.

But while we will report our progress and announce deals, we will not share a specific schedule for divestitures.

Now, let me turn to our discussion of the plan.

This plan is designed to accomplish a number of objectives.

It creates a durable capital structure for AIG, with new equity capital and substantially reduced debt.

These are good things.

The terms of the debt are restructured to give AIG a lower cost of capital, as well as some financing breathing room.

The plan directly addresses our securities lending and multi-sector CDO issues.

It puts AIG in a much better position to successfully execute our divestiture plan and to emerge as a global insurance Company.

The plan addresses all of these issues, while giving taxpayers both an attractive current return on their investment in AIG and the potential for upside from the assets purchased from AIG and in AIG common stock.

It is not exactly a bailout.

Let me walk you through the current funding sources and how they will change as a result of the restructuring.

I think you know and I just hinted at or mentioned there are three components of the current structure.

First, we presently have an $85 billion, two year bridge loan facility from the Federal Reserve Bank of New York, against which $61 billion is currently outstanding.

That $61 billion carries a rate of LIBOR plus 8.5 and the committment fee of 2% and a fee on the undrawn portion of 8.5%.

Clearly these terms are not sustainable.

Second, we have a $37.8 billion security lending facility from the Federal Reserve of New York with $19.9 billion currently outstanding and as noted earlier, this amount is fully collateralized.

It's a liquidity facility not a loan.

Third, we're participating in the governments commercial paper funding facility, that's a temporary facility designed to restore liquidity in the commercial paper market.

We have an approved line of $20.9 billion with $8 billion currently outstanding.

Note that this is a broadly available program, not a program specific to AIG.

Many of Americas largest companies are also participating in this program because the commercial paper market simply is not working.

The next slide provides a schematic of the comprehensive plan we've announced today.

The way I think about this plan is as a combination of ongoing financing, which is shown on the top part of the page, and one-time transactions, which are shown on the bottom half.

Let's start with the ongoing financing.

That has several components.

First, the US Treasury will purchase $40 billion of newly issued AIG preferred stock.

The preferred has a 10% coupon.

All the proceeds will be used to pay down a portion of the Federal Reserve Credit Facility that is currently outstanding.

Second, the size of the current credit facility will be amended to reduce the capacity from $85 billion to $60 billion.

Its terms will be extended from two years to five years and the interest rate and fee on undrawn portions will be reduced to LIBOR plus 3% on the drawn portion, which will be approximately $21 billion at the outset, and the fee on the un drawn portion will be reduced to three-quarters of a point.

Third, AIG will continue to participate in the commercial paper funding facility.

That's the ongoing portion.

On the bottom of the slide are diagrams of two onetime transactions we will undertake in partnership with the Federal Reserve.

These transactions are designed to address our liquidity issues related to securities lending and multi-sector CDSs.

On the left is a securities lending solution.

And first just let me remind you how the problem developed and then discuss the solution.

In our securities lending program, AIG, like most institutional investors, lends securities from our portfolios to third parties, who give us cash, collateral in return.

We invest the cash collateral for the term of the loan.

Much of the collateral was invested in residential mortgage backed securities.

With the turmoil in the housing and the mortgage markets, these RMBSs have declined sharply in price, to levels well below those implied by the underlying cash flows they are producing.

When securities lending trades expire or are unwound, we have to return cash to our counterparties.

In this case the combination of an ill-liquid market for RMBSs and the attended market value pressures resulted in unprecedented liquidity pressures.

This has been a major source of our liquidity shortfalls.

To address this issue, we and the Federal Reserve Bank of New York are creating a new financing entity that will be capitalized with $1 billion of funding from AIG and up to $22.5 billion of funding from the Federal Reserve.

This entity will acquire substantially all of the RMBSs from AIG's securities lending program.

It's really important that you note as a result of this transaction, AIG's remaining exposure to losses from its US securities lending program will be limited to declines in market value prior to the closing of this entity and our $1 billion of funding.

Similarly, on the bottom right hand portion of slide three is a diagram of our solution to the multi-sector credit default swap issue.

Again, let me summarize how the problem developed and then explain how the solution addresses the problem.

AIG has written credit default swaps against collateralized debt obligations, or CDOs, which are securities backed by pools of debt.

A credit default swap is essentially an insurance policy that reimburses the holder of the CDO for specified covered events.

There are two problems that have developed with our CDSs.

First, even though defaults on the securities and loans in the underlying pools haven't risen to levels that have required us to incur significant credit losses, the market prices of the underlying CDOs have declined sharply.

As a result, we've been required to write-down our CDS positions.

This write-down has caused hits to AIG's equity, which in turn contributed to credit ratings downgrades.

Second, our credit default swap contracts also specify that under certain conditions we have to post cash collateral to our counterparties.

This confluence of events has been particularly acute in our multi-sector credit default swaps, which account for less than 25% of our total swap portfolio, but about 95% of our write-downs.

So, to address this issue, we and the Federal Reserve Board will create a second financing entity that will purchase up to approximately $70 billion face amount of multi-sector CDOs on which AIG has written credit default swaps.

As I mentioned, approximately 95% of the write-downs AIG financial products has taken to date is in its CDS portfolio.

These were the ones related to the multi-sector CDOs.

AIG will provide up to $5 billion in subordinated funding and the Federal Reserve will provide up to $30 billion in senior funding to the financing entities.

The CDS contracts will be terminated on multi-sector CDOs that are purchased and again importantly, as a result of this transaction, AIG's remaining exposure to losses will be limited to declines in market values of multi-sector CDOs prior to the pricing date of establishing this entity and to our up to $5 billion funding.

Now, AIG will continue to have exposure to CDS contracts on multi-sector CDOs that are not terminated and as AIG winds down its financial products division, it will also have exposure to other types of remaining CDS contracts, but these have generated substantially smaller total collateral demands than the CDSs in our multi-sector CDOs.

So to sum up, the plan we announced today represents a significant step forward for AIG.

We still have a lot of work to do to execute this plan and ultimately transition to a restructured and recapitalizing AIG, but today's agreements put us in an improved position to succeed and emerge as a focused, profitable global Insurance Company.

Before moving on to earnings let me briefly turn you to slide four.

I won't dwell on this slide, but I'll merely offer this perspective.

The American tax payer has and will be offered considerable returns as a result of the restructuring of AIG.

Now, let's turn to a review of third quarter results.

Dave Herzog is going to take you through the numbers in a minute, but first I want to give you some perspective on the quarter.

The loss we reported reflects a confluence of really unprecedented events, rather than the core earnings power of AIG's insurance businesses.

The strengths of our global franchise allowed us to continue to write significant amounts of new business this quarter.

Despite financial market turmoil, continuing price competition in property casualty, and all the negative publicity about AIG, our consolidated premiums and other considerations were still $21 billion, up almost 7% from last year.

Foreign General had a strong quarter with net premiums written up 11.5%.

In Domestic Life, premiums, deposits and other considerations were up nearly 14%.

We did see some top-line pressure in the domestic commercial insurance business and Chris will have a couple of comments on that in a few moments.

This reflected market concerns following the September 6th announcement, as well as our decision, which we communicated to our brokers, that we would maintain underwriting discipline in markets where rates were not adequate to generate appropriate returns.

There are now indications that the situation in Commercial Insurance began to stabilize in October and our prices are gaining traction in the market.

All of our insurance businesses are making a concerted effort to get in front of customers and brokers to address their concerns.

Today's announcement should alleviate many of those concerns and put our businesses in a much better position going forward.

Nevertheless, AIG's exposure to the US housing market and associated financial instruments has materially undermined our financial performance.

And now let me turn it over to David Herzog, who will take you through the significant items affecting reported earnings in the quarter.

Dave?

Thanks, Ed, and good morning, everyone.

AIG reported a third quarter loss of over $24 billion.

After making the usual adjustments for our net realized capital gains and losses and FAS 133, our adjusted net loss for the quarter was $9.2 billion.

This is the largest quarterly loss we've ever reported and it reflects the extreme dislocations and volatility in the capital markets and significant charges related to restructuring activities that I'll comment on more in a minute, as well as catastrophe losses.

First, with respect to realized capital losses, which totaled $18.3 billion before tax, the primary driver was other than temporary impairment charges of about $19.9 billion before tax.

Securities lending related OTTI amounted to roughly $11.7 billion, of which almost $7 billion stems from our decision to change our intent to hold such securities in light of the solutions that are announced this morning.

More detailed discussion of the OTTI charges is included in our Form 10-Q that we filed this morning.

There's a table on page two of the earnings release which is also included as an appendix to the earnings presentation.

This table details the major items affected both reported and adjusted earnings for the quarter.

These items are also discussed in more detail on our Form 10-Q.

In the interest of time, I'm not going to describe each of the items in the table.

If you'd like more information, once you've had a chance to review our 10-Q, again, please feel free to contact our Investor Relations.

I think it's helpful to think about these charges in three broad categories.

The first category relates to capital markets disruption.

The biggest item in this category is the $7.5 billion charge related to AIGFP, mostly due to the marks on the credit default swap portfolio.

The restructuring plan we announced this morning will limit losses on this portion of the AIGFP portfolio and Ed described that earlier.

The second category is charges related to restructuring activities.

The largest item in this category is a provision for deferred income taxes related to certain of our foreign businesses for sale where we can no longer assert for tax purposes that we will reinvest profits indefinitely in tax jurisdictions outside the US.

As a result, we've recorded a charge of about $3.6 billion.

The third category includes other noteworthy items, the largest of which is our catastrophe losses related to hurricanes Gustav and Ike, totaling about $1.4 billion.

Given the industry's CAT loss this season, this loss is in-line with the industry.

And finally, I wanted to mention the $23 billion increase to additional paid in capital.

This represents the fair value of consideration received for preferred stock not yet issued in conjunction with the entering the Fed Credit Facility.

And with that I'll turn it back over to Ed.

As you know, back on October 3rd, we announced what we would look like when we emerge from this crisis, and we will emerge from it, and that is we would have a foreign gen business, a commercial insurance and a continuing ownership interest in AIA.

I thought what I would do is ask Chris Moore and Nick Walsh to talk about the Commercial Insurance and Foreign Gen.

The only reason we're not talking about AIA or any of the other businesses is that all of those businesses are either in total or in part for sale and I thought it wise to simply not go into those conversations.

So first let me turn it over to Chris for a couple of comments on the Commercial Insurance business.

Thank you, Ed.

I appreciate this opportunity to discuss with you the state of our Commercial Insurance operations.

There has been misinformation about the performance of these businesses in the marketplace, but I am happy to report the facts to you today.

There is no doubt that the days surrounding September 16th were difficult, but thanks to the extraordinary efforts of Commercial Insurance employees, our businesses have performed well.

The tremendous support from the insurance brokerage community and our many customers has been gratifying.

In the two weeks after September 16th, we were able to speak to tens of thousands of brokers and customers to address their most immediate concerns with the following facts -- First, Commercial Insurance maintains an exceptionally strong financial position, distinguished by its highest statutory policyholder surplus among its USPers; Second our investment portfolio is conservative; Third, no part of Commercial Insurance is for sale; And fourth, policyholder interests are protected by state regulators, who have made strong public statements supporting our financial strength.

These efforts have helped us retain a vast majority of accounts.

In September, account retention was down approximately 6.5% compared to September, 2007.

October's retention was down modestly from the previous October and that variance improved from September.

New business writings year-to-date through August has been declining approximately 20% from our deliberate decision to maintain underwriting discipline in competitive market conditions.

In September, new business was down an additional 10%.

October was consistent with September.

That said, we continued to write a substantial amount of new business in both months.

While it's true that our accounts are marketed, as they've always been, it is also true that our franchise is intact and we continue to retain and win business, which speaks volumes about the extent of our offerings and depth of our customer relationships.

I want to make an additional point very clear.

Commercial Insurance is not sacrificing underwriting integrity to retain market share.

In fact, our actuarial report shows that year-to-date rate change through September was a negative 10%, while key indicators for October confirm several points of rate improvement compared to September.

Terms and conditions continue to remain stable.

I believe that allegations of excessive price cutting are coming from certain carriers frustrated by their inability to win significant market share from us.

Thankfully customers continue to choose to do business with Commercial Insurance because of our unique market strengths, which are not easily replicated and include a strong balance sheet, the broadest product selection with over 450 products and services, an innovative culture, it's worth noting that we launched 14 new products and services since September 16th, committment of at least 40 years of experience in most complex lines such as property, D& O and excess casualty, a large and experienced in-house claims staff, and AIG service infrastructure that regularly engages customers around the globe.

But perhaps the greatest advantage is our over 12,000 dedicated professionals.

It is not surprising that this seasoned staff is highly sought after by competitors.

Of the more than 700 employees in the Senior Management ranks, recent turnover is less than 6%.

Any open positions have been quickly and suitably filled.

It is our top priority to insure a bright future for all employees and we have a number of initiatives in place to do just that.

We know full well that our business and people are highly valued by competitors.

This is not new given our decade-long leadership in the industry.

However, I truly believe that our team continues to prove itself, they're fighters.

Our results and key performance indicators support the fact that our business is strong and we maintain a leading market position, but we will not relax.

We will continue to earn our customers business every single day.

Finally, with the changes announced today by AIG, I believe that our greatest remaining challenge, the uncertainty of our parent's financial situation, will be behind us and we will be free to compete on the merits of this great franchise.

Nick?

As an opening remark, it's important to remember that the foreign Gen portfolio is well balanced with approximately half of our business coming from commercial and half from consumer lines.

There's obviously a different pricing dynamic between these two segments, with much of consumer lines being much less sensitive to rate movements and market volatility.

Turning specifically to the third quarter results, foreign Gen delivered an underwriting profit of $99 million at 96.7 combined.

Excluding the impact of the unusually high level of catastrophe losses, the underwriting profit was $232 million at 92.97% combined.

This compares with combined ratio of 88.78 in the third quarter '07.

With regard to rate movements we've always been and are still known for our superior technical underwriting discipline and capability.

We have maintained our discipline over the years and have not changed this in the current environment.

For commercial lines business, the market remains broadly soft and in most regions rate reductions average around 10%.

We will continue to service our customers and deliver world class underwriting results for the desirable combined ratio.

Our business retention remains strong, even exceeding 90% in some areas.

We are achieving this by the support and loyalty of our long term partners, customers, intermediaries, and sponsors, not by cutting rates despite the claims of certain competitors and despite competitors' attempts to restrict our access to business and deprive customers of choice.

We are maintaining the right technical pricing as we've always done.

At the same time, while new business is done in some areas, we are winning new business and growing our base in a number of regions.

For example, we had two record weeks for sales in AIG Direct Consumer Lines business in October and despite the attacks on our D&O book, we also managed to close a new trophy D&O account in Germany.

The strategy of competition is price.

There are examples of companies offering the assumption of portfolios blind at a big rate discount.

This is flattering to our underwriting process.

Price appears to be their only differentiator as we are not beatable on service, breadth of product, or professional claims response.

Our [stock] turner is close to normal levels.

Due to our bench strength we have instantly been able to replace the few senior people who left with very experienced and capable business leaders.

Despite the recent events we're still hiring new people to support our global franchise, retention, and growth strategies.

We've had a continuous dialogue with our regulators around the world who have been very supportive.

They are doing their job in making sure the policyholders are protected and we are fully cooperating with their requests.

In summary, the core Foreign Gen Insurance operations once again produced good top-line growth and an underwriting profit, despite the unusually high level of catastrophe losses.

Unprecedented conditions in the financial markets impacted our results, nevertheless we remain committed to our growth strategies and look forward to continuing to serve our customers and producers around the world.

Thanks, Nick.

This is David.

I just want to amplify on a point made earlier.

The borrowings under the commercial paper funding facility as of November 5th stood at $15.2 billion.

Ed.

Okay, we're ready to take your questions.

It will make great sense if we kind of divide the Q&A into two sessions.

Let's first take any questions you might have about the announcement we had with the US Treasury and the Federal Reserve, and then we'll save time for any questions and answers that you might have with respect to our results for the third quarter.

Charlene, I'm not quite sure how to do that.

I don't want anyone to lose their place in line.

We'll try not to make that happen but let's, again, let's start with first any questions you might have regarding the relationships with the US Government entities.

So, first question.

(OPERATOR INSTRUCTIONS) Our first question is from John Levin with Levin Capital.

Hi, Mr Liddy, John Levin.

Thank you very much for recognizing me.

I think today's announcement is absolutely a step in the right direction to which I absolutely congratulate you for.

That is not - has any comment about all of the other aspects of the process that have occurred, but the conceptual question would be this.

There have been many change in this process from the beginning.

It seems to me that the outcome is uncertain because of the financial markets and the marks, not just losses but so much could change depending on mortgages that it will be desirable to have the Federal Government, it looks like there is a transfer of $25 billion or $30 billion or $35 billion to the Federal Government so that their outcome would also be tiered, such that they would get $10 billion or $15 billion back, maybe the first $10 billion or $15 billion, but if the equity turned out to be hugely valuable, they would be scaled so that the government interest came down to 60% or 40% or 30%.

My point is, some scaling would seem to be appropriate given the variables.

John, I guess I have two comments.

First, you are correct.

I very much view this as a journey and this is kind of the second or third stop on that journey, and it's a good stop.

I agree.

The journey is going to go through some unchartered waters called what happens to the liquidity in the financial marketplace.

It is really a confused place right now.

We have not given up all of the upside on the credit default swaps or on the RMBSs.

With respect to the securities lending program, we have about a sixth of the upside and with respect to the credit default swaps, we retain about a third of the upside, so that as things get better, which I would project at some point in time they will, the government will do well and we will do well.

If on this phone call we were all wealthy men and wealthy women, we would buy these RMBSs.

The government can afford to hold these things for a long time, so if they buy them at $0.60 or $0.50 or $0.40 on the dollar, these are for the most part performing loans.

If you just hold them to duration you're going to do very, very well.

If the marketplace recovers you're going to do very, very well.

So the government, I think, is very, very smart in what it's doing.

We have not, we are not totally precluded from participating in that upside.

But the 79% ownership is the huge equity transfer value here that I would hope could possibly be scaled with the kind of look back depending on results.

John, right now the deal is what the deal is, not fixed in concrete forever.

As you can see the movement we made from the first transaction to the second one is a rather quantum improvement.

We'll continue to do everything we can to put AIG in the best possible position.

What these two arrangements do is they stop the cash out flows, for the most part.

I agree with you and I congratulate you on that.

Thank you.

Next?

Our next question is from Andrew Kligerman with UBS.

Yes, great.

A couple of quick questions.

First, what assets are still not on the table for sale?

Could you just reconfirm, reaffirm that?

Yes.

Our commercial insurance, let's say primarily in the US, our Foreign General Insurance, and we would like to maintain a majority ownership interest in AIA.

Okay, so that still stands.

Yes, I'm sorry, Andrew.

Let me just be very clear on that.

We have no new announcement today on what this Company will look like when we emerge from this crisis or what assets are for sale.

We are absolutely spot on consistent with where we were back in the beginning of October.

And then with regard to the CDS, you said that your losses on CDS would be limited to the amount that you've taken already.

Now, should the government buy-in the underlying CDOs, and it seems likely they will on most of these multi-sector CDOs, it seems there's a good chance that over time you could reverse those charges.

Is that correct?

David?

Andrew, good morning.

It's David.

The way the structure will work is, as Ed described, we will earn a return on the equity that we've invested in the vehicle.

We'll then share, as Ed described, in the upside of that.

So you're correct in that we will participate in the upside.

I know, but David, what I meant is on the insurance Company's balance sheet, or the holding Company's balance sheet, you have these CDS in AIG Financial Products.

Over time those marks that you've taken, I think like $30 billion in the aggregate to date, could be reversed.

Is that correct?

That is not correct.

We will settle the credit default swap liability by this transaction.

Our upside participation will be through the subordinated funding vehicle that we're providing to the new structure.

Got it.

In terms of employee retention, I think I heard that retention was pretty good in the Foreign General P&C operation.

Excuse me if I missed it, but how is retention in the US operations in Domestic General and P&C?

Andrew, you missed it but because it's such an important point --

Sorry about that.

I'll have Chris repeat it.

Yes, Andrew, as I stated before, of our 700 Senior Management ranks, turnover is less than 6% and we have about 12,000 talented and sought after professionals in our organization domestically.

Okay and then just the last question on the Life Insurance operations, I saw that you said premiums and deposits were up 14% last quarter.

How about October?

Are we looking up or down or sideways?

We're not going there, Andrew.

We're not talking about October.

We're just talking about third quarter results.

All right, thank you.

Our next question is from Michael Barry with Banc of America.

Your line is open.

Thank you, gentlemen.

First, a point of clarification.

When we start to talk about CDO LLC, this is not a direct commutation of the CDS but instead it's a purchase of the underlying CDO upon which the CDS would be terminated.

The second question is who is going to be driving the negotiations with the CDO counterparties in CDO LLC, and who is the ultimate decision-maker in terms of the price point?

And then one other point of clarification, I'm looking at slide five here.

Is there $35 billion available to go and buy the CDOs or is there $70 billion, the $70 billion being the difference between the $35 billion of equity, of funding and the $35 billion of collateral posting?

Thank you.

Michael, I'm going to do the middle of those two and Dave will do the other two.

The Federal Reserve and it's rather substantial influence will be the driver of the negotiations with the counterparties and we would expect that they will have substantially more success with those discussions than we had.

With respect to your first and third point, David, do you want to go through those?

Sure.

The funding we are in fact, the vehicle is in fact purchasing the CDO and the CDS will be, if you will, torn up as a result.

Okay?

And then with respect to the amount of funds available, it will be sufficient to purchase the CDO at the negotiated price that Ed just referred to.

And again, is there $35 billion available to purchase CDOs or $70 billion?

It's $35 billion, but again, part of the proceeds from the collateral that we have already posted will likewise help fund that.

I guess the reason for the confusion here is that it doesn't seem, at least to us, that these things are worth anywhere near par, so if you are going to purchase $70 billion worth of underlying CDOs with $70 billion that would suggest that you're looking to pay close to par on some of these underlying CDOs.

Is that the situation?

(inaudible)

Well the way the transaction is going to work is we are going to have to tear up the credit default swap it's valuation and you would adjust the collateral closest against what the value of the CDS that was agreed to and then the CDO LLC will purchase the underlying bond that's held by our counterpart at its market value and there's about $35 billion available to execute this trade.

I understand.

Thank you very much.

Okay.

Next?

Our next question is from Jimmy Bhullar with JPMorgan.

Hi, thank you.

I had a few questions.

First, you mentioned this briefly in your comments but if you could talk about pricing trends in the P&C market and if you have seen some hardening recently, what's your view as to if it will sustain?

And then secondly on your sales in domestic and in foreign life, they were down across many of the products but down maybe less than we would have expected.

If you could talk about sales progression during the quarter and if you saw a noticeable downward trend after the second week of September?

And then the last one I have is just on the environment for selling assets, if you could just, to whatever extent you can discuss given that market prices for public companies are down a lot, how much interest are you seeing and how much are the valuations that you're seeing down because of that?

Jimmy, Ed Liddy, we'll do those in reverse order.

We have a smart, disciplined competitive process for selling assets.

The announcement of today gives us more flexibility and more time.

We have great confidence in our ability to sell these remarkable assets.

Beyond that, we won't have any comments.

When we enter into transactions that are announceable, we will absolutely let the marketplace know that.

I can't underscore enough we have great demand for these various properties.

We're probably dealing with, I don't know, north of 75 or 100 different people, complex complicated transactions, assets that have a presence in worldwide markets.

It's just not something that someone comes to you on Friday and says, " Here is my price".

It requires great diligence and great thought and that's exactly what we're doing.

It's a smart, disciplined, thoughtful process.

And just on that, with the change in the terms on the loan, if the environment stays the way it is right now would you be willing to wait a little bit to get better prices or would you want to announce stuff based on your internal schedule?

It's a smart, disciplined process.

We will do the right thing at the right time in the right way.

Chris, do you want to, recognizing that always the difficulty of pricing conversations, would you like to give a little color to that, but not too much?

Sure.

Year-to-date on our overall pricing was down about, at the end of September it was down about a little over 10%, around 10%.

From the middle of September to the end of October, it was down a little bit less than that so there was a slight improvement.

Jimmy, Rod Morton, I'll speak briefly to your question concerning our Domestic Life and Retirement services.

As you noted, it had frankly a very strong quarter.

In the areas it was down, it was down consistent with the industry.

Example of that would be universal life, but our term sales were up in the third quarter 9%, our variable universal life sales, albeit on a smaller bases, up 16% and payout annuities and sales in deposits were up 22%.

So very solid quarter.

Clearly and consistent with what we've discussed and reported previously, tied to the events and the announcements, there was a dampening in the September and October third piece and it is reflected in the quarter accordingly.

And similarly on the foreign business?

Jimmy?

Edmond here.

I'll add a little bit color on the foreign business.

Our foreign business on a regular premium basis, it has been continuing to do quite well.

And even during those economy situation, the foreign life altogether for the quarter, we had the 9.6% growth in regular premium basis and for the AIA territories and we have 7.2% growth.

The only slowing down is in the single premium investment link type products because of the equity market volatility and that we have been slowing down and studying the investment link type product because of the very weak equity markets almost throughout the world, particularly in Asia.

Otherwise we continue to do quite well.

Okay, thank you.

Next question?

Our next question is from Ron Bobman with Capital Returns.

Your line is open.

Hi, good morning thanks.

I was curious to know what portion of the securities lending balances are from securities at the insurance subs.

And then I also wanted to know if the team or the group that's been responsible for managing the securities lending program is continuing to do so.

This is David Herzog.

I'll cover the first part of that.

It is entirely related to the Insurance Companies.

There's a -- and that's all the domestic program.

This is a US domestic solution.

The foreign pools continue to perform in an orderly way and so we will unwind the US domestic.

The solution focuses on the RMBS related portion of the portfolio and then there's a second leg of this transaction or the solution that will be executed with available funds from our Insurance Companies.

And we have changed the leadership of that, the group that manages that particular segment of our investment portfolio.

Thanks, and just one little small follow-up.

Was that group part of AIG Investments or is it separate and apart from that?

No, it's part of AIG Investments.

Thanks a lot and best of luck.

Our next question is from Tom Gallagher with Credit Suisse.

Your line is open.

Good morning.

A few questions.

Let's see.

First, I just want to understand the logistics around the transfer of the CDS on CDOs in the securities lending.

I guess are we looking at -- what kind of timing are we looking at for the transfer of this and is there potentially a substantial loss ahead when that transfer takes place or has the pricing been predetermined?

Why don't I just start with that and then I'll follow-up.

That really was my comment earlier, Tom.

We're going to put these entities in place as soon as we can.

It's not going to happen tomorrow, but it will happen as soon as we can.

So any further erosion between now and when that entity gets put in place is for our account, so that's going to be what it's going to be.

Second, whatever money we put into these transactions, we are also potentially at risk for us, so that's roughly $1 billion into the securities lending and roughly $5 billion into the credit default swaps.

So we'll endeavor to put these in place just as quickly as we can.

Okay, and so the pricing on this is -- what we should think about is both of these portfolios were marked as of the end of 3Q, any erosion that has occurred in 4Q plus any that may occur whenever this transaction closes would be absorbed by AIG?

Yes, I would say any movement.

Got it, okay.

Up or down.

Okay.

Is there any, and I realize things have been all over the place in terms of the market, but I presume given how big of an issue this is for AIG, you've looked at some kind of estimate ballpark.

Will this result in a very large loss, in a 10%, 15% hit to shareholders equity?

Something more modest or larger?

Can you give us some scope for based on the way you think this plays out what the impact may be?

No.

I have to tell you, we really have not thought about it in those terms.

We thought about it from the context of for us to emerge successfully from this crisis we cannot continue to hemorrhage cash in the two areas of securities lending and credit default swaps.

We need to stop that and we need to stop it now.

That's what we want to do, but neither do we want to walk away from any upside at all, so we've tried to thread that needle as best we can so that we are protected from the downside and have some opportunity on the upside.

Once those two, if you think about the $61 billion that we have drawn down from the Fed facility, I'm close on this number, please accept that as a boxcar, something in the range of $53 billion is related to, $53 billion to $55 billion maybe, is related to the posting of collateral on the credit default swaps and issues surrounding the securities lending.

We need to stop that and that's what this is designed to do.

Okay.

I guess just not to beat a dead horse, but I guess I just want to get some clarification or comfort that what we see today from a capital structure standpoint, we aren't looking at an enormous change in the loss content looking ahead to 4Q, because this is such a transformational transaction for the Company.

Is there any further detail you can give us on this because in my mind, until we get a sense for how big the problem may be, if in fact it even is a problem in terms of what the loss would be on this transaction, it's very hard to get a sense for what does this mean for AIG, if you know what I mean.

Yes, Tom, I do but I don't know how anybody could answer that question.

The condition precedent to answer that question is what do you think is going to happen to the capital markets, either equity or credit default spreads or what have you, so I think it's just impossible to answer.

Are markets going to continue to move south, I just do not know.

We have the risk until this thing is put to bed.

The issue you're poking at, to a certain extent the rating agencies have considered and they've looked at this and I think if you have not had the opportunity, we've shared this whole structure with them, they've made certain judgments about what their view is on this transaction and on balance, it's been well received.

Okay, and then I guess just on a related note, since the, I believe, the valuation approach you're using is more looking at sort of a trading approach, just broadly speaking because you're planning on transferring these assets, so is it fair to say then the valuation methodology used at the end of 3Q would be similar to the one that we would see when the assets are transferred, if that makes sense?

Yes, I think that's a good assumption on your part.

Okay, then just a couple of other quick follow-ups.

Tom, I'm going to give you one more and that's it.

Make it the one that's important to you.

All right, I'll go for the big one then.

$48 billion deferred acquisition costs.

That was up a little over $1 billion from last quarter.

How should we think about AIG's methodology for valuing DAC as you think about selling assets?

Should we expect there will be major adjustments to this and maybe just fill us in a little bit about how to think about that prospectively.

Thanks.

This is David, and I'll make some initial comments and ask Chris Swift, the CFO for Life & Retirement Services segment.

Our methodologies around DAC and the sales inducement assets that we have on the books hasn't changed.

We did, as you saw in the table on the earnings release, we did in fact have a DAC unlocking, which is reflective of ongoing market disruption.

We had reversion to the mean and we made some modifications to some near-term lapse assumptions in parts of our business.

So again, our methodology's controls around that haven't changed.

Chris do you want to comment on that further?

Sure, David.

That is true, what we did in the third quarter for the domestic, looked hard at our assumptions and did need to unlock for reversion to the mean and for higher anticipated lapses.

We are in the midst of our fourth quarter review process for the Foreign Life and I can't predict how it's going to come out at this point in time.

Thank you.

Next question?

And we have, sorry to do this to you all, we have time for probably two more.

Our next question is from Scott Froth with HSBC.

Your line is open.

Just want to make sure I understand, I want to go back to the facilities here.

This is dealing with the multi-sector CDOs.

You're showing about $71.6 billion of notional outstanding.

Is the idea you're going to pay par, I guess, to the holders of the Super Senior CDOs effectively either through -- is that what's going to happen?

You're going to pay $70 billion to holders of these CDOs.

In exchange you are going to acquire the underlying collateral that is marked at $35 billion.

You are going to give $5 billion, the Fed is going to give $30, the CDO holder's made whole and then you think that over time this collateral will mature or eventually be worth par again.

Is that, first of all is that how this is working and are you actually acquiring the collateral or is the holder of the CDO expected to take this as a settlement and then they liquidate the collateral themselves or hold it.

And the second one is on the Sec lending line, you have $22 billion of -- you owe the Fed I guess what, roughly $37.8 billion, but that's the line that you have $19.9 that you've drawn in exchange for securities.

Is the Fed now again taking those issues and those securities and putting them in a special, in a special purpose vehicle and that effectively removes all of the securities lending payables from your balance sheet, as well as the asset associated with them.

Is that what we are kind of looking at on a pro forma basis?

Is that how it is going to work?

Yes, this is David.

Let me take those in the order you offered them.

First of all on the credit default swap, the facility or the entity will purchase the underlying CDOs.

And the assets with them, right?

Correct.

They are buying the CDO at essentially at whatever the negotiated price is, but they are buying the underlying CDOs.

The credit default swap that we wrote will be torn up.

Yes, you own the assets, therefore -- and you have the swap so you tear it up?

We don't own the assets.

We never did own the assets.

We wrote the credit default swap on the asset.

So the structure is working that the vehicle that is being created that we are contributing the junior funding, the subordinated funding to will own those underlying CDOs that are purchased.

That vehicle will not be consolidated on AIG's books.

We will participate in the returns on the underlying CDOs in the form of our equity plus, as Ed mentioned earlier, a sharing of the upside.

So, let me back up a second.

So the CDO holder is not being made whole here.

Is that correct?

You're essentially buying the CDO for $0.50 on the dollar?

Is that what you expect to have happen here?

No, Scott.

Let's be clear.

The CDO is being purchased at a negotiated rate and I think Ed commented that the Fed is involved, heavily involved in that negotiation.

Well, I mean, are you suggesting that well if I'm the counterparty, why wouldn't I accept less -- why would I accept less than par unless you're saying the Fed is going to -- I mean you're not saying the Fed is going to strong arm holders or anything, right?

No, of course not.

I'm just telling you there's a negotiated price, Scott.

So there - it is a negotiated price between the owner of the CDO and this newly formed structure.

And again, if I'm the holder of the CDO, why do I accept less than par now?

It's a negotiated price.

Okay.

Again, if you're saying that -- what is the motivation of the CDO holder to accept less than -- is it because you're saying look, I'm going to offer this to you, take it or leave it and if the CDO holder says I'll leave it, what do you do about it?

Yes, well they can also tear the credit default swap up.

So I think there again, I think there's, the structure has been designed in a way that's balanced in terms of the various stakeholders' motivations and incentives.

So we believe this structure will be successful in accomplishing the restructuring and the de-risking of the AIG portfolio in this regard.

Okay, I see.

Is it fair to say then that there's going to be some kind, a little bit of execution risk here in your ability to get the holders of the CDOs to accept what you're offering them?

Is that -- that's a fair, is that accurate?

We're optimistic that we think this structure will be successful.

Okay, great.

And then second of all, on the securities lending, there's again this is a US domestic securities lending portfolio.

The solution is focused on that.

There will be RMBS securities that will be purchased by the vehicle.

Again we are providing the junior or the subordinated funding for that vehicle.

Like the credit default swap solution, this vehicle will not be consolidated on AIG's books and the underlying RMBS will be owned by the new vehicle.

And again, we will participate in the economics of that through the returns on our subordinated investment, as well as the sharing of the upside that Ed spoke to.

Next and last question?

Next question is with Dan Johnson with Citadel Investment Group.

Thank you, Ed.

Just a couple.

I'll make it quick.

Statutory capital in the US Life & Retirement business.

Where was it at the end of the second quarter and where is it at the end of third, please?

Dan, it's Chris Swift.

In the aggregate, both quarters ended right around 300%.

How we got there, it was a lot of pluses and minuses.

How about in a dollar term, if you would?

I don't have the exact number in front of me, Dan.

So it was, I think, something in the mid-teens billions, excluding ALICO, if you were just looking at the real domestic business.

Dan, if you'd follow-up with Charlene, we'll get you the number.

Okay, then I'll just skip to the other ones.

So hopefully the multi-sector CDO issues are mainly behind us.

The remaining regulatory and capital arbitrage portfolios looked like they came down a bit in the quarter as well.

I wanted to compare what looked like on slide eight of the credit presentation shows about $30 billion of maturities and early terminations.

How does that compare to the $80 billion that was referenced in the second quarter 10-Q as of the end of July?

There's a comment that said $80 billion were in the process of being terminated early and then I do have one final question.

Okay, this is David.

The $30 billion on page eight, I believe, is for the quarter, during the quarter and that again, that portfolio continues to perform and terminate very much in-line with our expectations.

Again, did I have, am I comparing apples to oranges, the comment in the Q that said about $80 billion was in process of being terminated?

That's right.

Some of the $80 billion is included here.

And the remainder is still in process of being terminated early?

Yes, remember the $80 billion was inception to date through then.

Very good apples and oranges.

Then finally last question was on the capital contribution in the shareholders equity, the $23 billion, is there actually any capital or even cash being transacted here and how is that number determined?

I'm sorry, Dan, the 23?

There's a $23 billion --

Oh, the $23 billion, yes, okay, thank you.

What that represents is the fair value at that point in time.

That's the consideration, so there's no cash that changes hand with that, in that regard.

That's the fair value ascribed to the value of the credit facility.

It represents the 79.9% at that date in time.

Well I'm just going to round it call it 80%, the 80% fair value of what?

Of AIG at the date of that transaction.

So again, we gave a promise, if you will, to or an obligation to issue preferred stock at the date of the credit, at the date we entered into the credit facility.

The fair value of that obligation was approximately $23 billion at that date.

Sort of like an option valuation model?

No, it was based upon the market value of the outstanding common stock at the date of that transaction.

What was the share price at that date?

It was around $2 a share.

Okay.

And as that $23 billion, does that play any role in any statutory calculations, capital calculations?

It does not, Dan.

What it will do, it will amortize off through interest expense in proportion to the outstanding capacity on the credit line.

Okay, I get it so it's $23 billion now, it will decline over time over the five year time period?

That's correct.

Through the income statement, I presume?

That's correct, through interest expense.

Got it.

Understood.

I will follow-up on the stat capital question.

Thank you.

We're going to bring our session to a conclusion.

Thanks for your time.

I'd make two remarks as we end.

First, our Insurance Companies remain very strong.

We continue to do well.

We remind you this is the largest Insurance Company in the US and the largest Insurance Company in the world.

Second, we've worked hard to fashion a very comprehensive plan in order to put AIG in a much more solid footing.

I think the plan we've represented, we've put forward, if you think about what the Dutch government has done for ING or Agon or what have you, I think it's just a recognition on the part of the Federal Reserve and the US Treasury that this really is a systemic issue that's going on and to try to address on a company by company basis simply wasn't the right way to do it and so what the government has really done is they've stepped up and they have, we have fashioned a much more holistic and comprehensive solution.

What we've got probably would not have been possible back in September because some of the tools that we are availing ourselves of just simply weren't there, so we're -- we very much like the changes.

We think they are good for all of our constituents.

We look forward to making progress on our asset divestiture plan and we will keep you posted as we go.

Thank you all.