American International Group Inc (AIG) 2009 Q1 法說會逐字稿

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I would now like to turn the call over to Teri Watson.

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You may begin.

Good afternoon and thank you for joining us.

Before we begin, I would like to remind you that remarks made on this call may contain projections and statements that may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These projections and statements are not historical facts but instead represent only AIG's beliefs regarding future events, many of which, by their nature, are inherently uncertain and outside AIG's control.

These projections and statements may address among other things the outcome of recently completed and proposed transactions with the Federal Reserve Bank of New York and the United States Department of the Treasury, the number, size, terms, cost, and timing of dispositions and their potential effect on AIG's businesses' financial condition, results of operation, cash flows, and liquidity.

And AIG at any time and from time to time may change its plans with respect to the sale of one or more businesses.

These projections and statements may also address AIG's exposures to subprime mortgages, monoline insurers, and the residential and commercial real estate markets, the separation of AIG's businesses from AIG parent company, AIG's ability to retain and motivate its employees, and AIG's strategy for growth, product development, market position, financial results, and reserves.

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 a failure of the completed transactions with the New York Fed or the United States Department of the Treasury to achieve their desired objectives, or a failure to complete the proposed transactions with the New York Fed, developments in the global credit markets, and such other factors are discussed in Item 1A Risk Factors and throughout management's discussion and analysis of financial conditions and results of operations in AIG's quarterly report on Form 10-Q, filed today, and in Item 1A of Risk Factors of AIG's annual report on Form 10-K for the year ended December 31, 2008.

AIG is not under any obligation, and expressly disclaims any obligation, to update or alter any projection or other statement whether written or oral that may be made from time to time 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 will be included in the first quarter 2009 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.

Good afternoon everyone and thanks for joining us.

I'm here in New York with Paula Reynolds, our Chief Restructuring Officer; David Herzog, our CFO; Teri Watson, whom you just heard from, our VP of Investor Relations; and then several of our business heads who I will introduce when it's their time to talk about their individual businesses.

We have some prepared remarks, and then we'll open up the call for your questions.

And we will end it promptly at 6.30.

AIG's first-quarter earnings continue to reflect a number of significant items relating to our restructuring of the business and the ongoing turmoil in the capital markets.

However, as hopefully you've seen by your reading of the release, the loss we reported was substantially -- I repeat substantially -- lower than the last quarter -- that would be the fourth quarter of 2008 -- and also lower than the first quarter of 2008.

We are making good progress in stabilizing the business.

We have a comprehensive plan in place, and our job now is to execute on that plan as effectively as possible.

After my brief remarks, David will take you through the first-quarter financial results, Paula will review our progress in our restructuring activities, we'll have a couple of comments from our business heads.

So this afternoon I would like to provide a progress report on some of the initiatives that we've recently announced.

Our overriding goal, as you know, is to put the company in the best possible position to repay US taxpayers by protecting and enhancing the value of our businesses and positioning our key franchises for the future.

I've said many times that the time frame and the path for achieving this goal will be highly dependent on market conditions.

Today we are not announcing any new arrangements with the Federal Reserve or with the U.S.

Treasury.

We are simply executing on what we have previously announced.

Back on March 2, 2009, when we announced our full-year results, we announced a number of steps to improve our capital structure and execute on an orderly and effective asset disposition plan.

We also announced other mechanisms that will begin to position certain of our businesses for the future as independent, more transparent companies.

In the last 60 days we've made progress on both fronts.

First, let me update you on the U.S.

Treasury Series E and F preferred stock.

As a result of the steps we've taken, the preferred shares more closely resemble common equity and have strengthened AIG's capital structure.

In terms of the Series E, the U.S.

Treasury exchanged its shares of AIG's Series D, which were fixed-rate, cumulative, perpetual preferred.

They were exchanged for AIG Series E, which are fixed-rate, non-cumulative, perpetual preferred.

That transaction, which was announced on March 2, closed on April 17.

In terms of the Series F, as we said back in March, the U.S.

Treasury provided AIG with a new, five-year equity capital facility with a maximum of just under $30 billion available to AIG in the form of new, non-voting, non-cumulative preferred.

We've closed on that facility but we have not drawn on it.

We also made some changes to the Federal Reserve Bank of New York's credit agreement.

As of March 31, 2009, AIG had net borrowings of approximately $43 billion under that facility with about $17 billion of available capacity.

As of April 17 the credit agreement was amended to remove the minimum 3.5% LIBOR floor on the senior secured credit facility.

This will reduce our interest costs in each of the quarters going forward.

We also are moving forward on the steps announced March 2 to repay a significant portion of this debt through subsidiary preferred interest and securitization notes.

AIG intends to transfer to the Federal Reserve Bank of New York our preferred interests in ALICO and AIA that will be held in newly formed, special purpose vehicles.

In exchange for those preferred interests, there will be a concurrent reduction in the outstanding balance to be borrowed on the Federal Reserve facility.

We also intend to transfer to the Federal Reserve securitization notes to be held in one or more SPVs backed by in-force blocks of life insurance policies in settlement of a portion of the outstanding balance of the Federal Reserve facility.

Additionally the Federal Reserve has agreed in principle that after repayment of the facility with the preferred interest and securitization notes, at least $25 billion will be available under that facility, and it will remain in place.

These measures are expected to be in place sometime in the third quarter, and we've made great progress on them thus far.

We also continue to make good progress in unwinding AIGFP's portfolio.

AIGFP reduced the notional value of its portfolio to $1.4 trillion as of March 31, 2009.

That was down from $1.6 trillion at December 31, '08 and $1.8 trillion at September 30, '08.

The number of trade positions in the portfolio is $28,000 at March 31.

That was down more than 20% from the beginning of the year and down 36% from September 31, 2008.

We've also reduced FP's exposure to changes in volatility by almost 40%, and we continued to make additional progress in the month of April.

In short, we are making progress.

David, would you like to walk through the financials?

Thanks Ed.

And good afternoon everyone.

As you've seen from our press release, we reported a GAAP net loss of about $4.35 billion and an adjusted net loss of about $1.6 billion.

The adjusted net loss reflects our historical definition of adjusted earnings, which excludes realized capital gains and losses and the effects of derivatives that do not qualify for hedge accounting under FAS 133.

These results were affected by a number of significant items that are summarized on the first page of our press release as well as within our financial supplement where we break it out for you by business segment.

The significant items affecting adjusted net loss included costs related to the Fed credit facility, charges related to the ongoing restructuring activities -- particularly at FP, several items related to the ongoing market disruption, and some tax-related charges for benefits not obtained for losses incurred during the quarter, and some other discrete items.

Now, let's go through if we could some of the more significant items affecting adjusted net loss.

The first item is interest and amortization charges totaling about $1 billion related to the Fed credit facility.

Amortization runs ratably over the term of the facility and gets accelerated when the credit line decreases as a result of mandatory repayments.

This quarter, there were only normal amortization charges of roughly $530 million after tax.

As Ed said, beginning in the second quarter interest charges will reflect the elimination (technical difficulty)

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This is David Herzog.

The first item I was describing was the $1 billion of interest and amortization charges related to the Fed credit facility.

The interest charges in the first -- in the second quarter, as I was saying, will reflect the elimination of the LIBOR floor.

The second item is a category related to restructuring-related charges, again, particularly with respect to AIGFP.

As Ed mentioned, we've made good progress on the wind-down, and this quarter we terminated a number of books resulting in a P&L charge, a GAAP P&L charge, but taken together were largely liquidity-neutral, all in all a very acceptable outcome.

In addition, included in this category is a total of about $360 million before-tax of restructuring and separation charges.

You can get more details on this in our Form 10-Q in Footnote 2 as well as in the MD&A.

The third category consists of market-disruption-related items totaling about $1.6 billion.

AIGFP reported about $290 million in unrealized market valuation losses on the remaining super senior credit default swaps and about a $1.1 billion gain related to AIGFP's credit valuation adjustment for mark to market fair value adjustments where counterparty spreads increased, which reduces the fair value of AIGFP's assets and AIG's own credit spreads increased, which decreases the fair value of AIGFP's liabilities.

This category also includes partnership and mutual fund losses of about $700 million and a total of about $1.4 billion in fair value mark to market losses on retained equity interests in Maiden Lanes II and III.

While we still expect to receive full recovery of our principal, most of this mark to market loss stems from increases in credit spreads used to estimate the fair value.

Finally, we recorded some after-tax charges -- or tax-only charges of about $380 million for tax benefits we are not likely to receive for losses incurred in the quarter.

At March 31, our consolidated equity stood at about $53.2 billion, which includes a little over $7 billion related to the implementation of FAS 160.

Consolidated assets were approximately $820 billion.

We believe the results that we announce today indicate good progress on our efforts to stabilize the company and preserve value of our businesses.

We expect that negative effects of market disruption and the ongoing restructuring activities will continue to adversely affect our quarterly results for at least the next several quarters.

And with that, I will turn it over to Paula Reynolds.

Thanks David.

Since our last earnings announcement we've been running a comprehensive process to evaluate and determine a clear destiny for each of our businesses.

You saw the results of this process -- one result of this process when we announced on March 2 our decision to place AIA and ALICO into SPVs and to consider various paths to monetization including IPOs.

Since that time we've also announced our decision to form AIU Holdings and put it into another SPV as a first separation step to enhance the value of the underlying businesses in the property and casualty space.

We are currently considering an IPO of up to 20% of AIU Holdings, dependant on market conditions.

Another track we are working is on the repositioning of American General Finance and UGC.

We are currently downsizing the origination activities of both of those units and managing down the cost structure of them as well.

On another track, Transatlantic, Star Edison, and ILFC remain the subject of various types of negotiations, but we will not comment today on the status of those negotiations.

Once they mature we will be in a position to make public announcements regarding our intentions there.

We are also in the early stages of a plan to combine our domestic life and retirement services businesses in order to achieve separation and a brand that is distinguishable from AIG.

Throughout this process, we have been in close touch with Treasury and the New York Federal Reserve Bank to keep them informed of how we are progressing.

So to summarize, our restructuring program is clearly a work in progress.

We have a lot to do.

However we are moving forward with what we believe is an achievable plan, practical in its implementation.

And the current financing arrangements we have with the federal government should enable us to complete this process over time.

As both Ed and David have pointed out, our liquidity needs have been stabilized and the debt for equity swaps and the securitizations we are implementing should materially reduce the debt we are carrying.

At the same time, the separation strategies we have developed for our large businesses should further stabilize these franchises.

And as we move ahead, we look forward to managing both sides of the balance sheet going forward.

So with that, I will turn the call over to Kris Moor, I believe, who is going to speak about AIU Holdings, and Nick Walsh as well.

Thank you Paula.

And good evening everybody.

First, on behalf of the AIU Holdings, more than 30,000 employees, let me thank our clients and brokers around the world for their support.

With the challenges facing the broader economy, our industry, and AIG, our commercial insurance operations in the US and Canada reported net written premiums of $4.2 billion, down 18% compared to the first quarter of 2008.

More than 12% of this decline was driven by three items.

First, the economy's impact on the construction, real estate, and transportation sectors.

Second, our deliberate strategy to remain price disciplined in Workers Compensation, and finally, the changes in the environment, the amount of premiums ceded to reinsurers.

The remainder of the decrease was from the overall effect of the economy, our underwriting discipline, and the impact of AIG's challenges.

The GAAP combined ratio was just under 100%, reflecting an increase in the loss ratio of 4 points to 77.3%.

If you were to exclude prior-year developments, the accident year loss ratio in the first quarter was 73.1%.

Net investment income declined in the first quarter compared to the prior period by nearly $500 million but improved compared to the fourth quarter of 2008.

Despite the decline, operating cash flow remained strong, reflecting our well-balanced portfolio.

Premium retention in the quarter had its peaks and valleys.

Through mid February renewal retentions continued to improve to within 3 points of normal levels.

Rumors of an AIG bankruptcy prior to the fourth quarter earnings release and the AIGFP bonus issue drove retentions back down, averaging 8.9% decline for the quarter compared to the prior period.

In April with the announcement of AIU Holdings' special purpose vehicle, retention rates rebounded with early indications of a couple of points of improvement from the first quarter.

Overall, customer retention has remained strong and within historical levels.

We are seeing some customers diversify their risk portfolios, but we are confident that if we maintain the relationship, we can win back the business.

New business declined 34% in the quarter.

We estimate that the economy and our price discipline are impacting new business by approximately 25%, while AIG's reputation is most likely responsible for the remainder of the decline.

That said, we wrote over $900 million of new business in the first quarter.

Let me now turn to pricing.

Rest assured that we continue to maintain price discipline as we shed unprofitable accounts and carefully underwrite new business.

As a result, we ended the first quarter with less than 2% decline in pure rate as compared to a year ago, and 7 points better than in 2008.

Pricing continued to improve in April.

While this discipline has had a clear negative impact on our ability to retain renewals and grow new business, it should result in stronger underwriting profit going forward.

Furthermore, despite some market commentary to the contrary, reviews by the GAO, state regulators, and our own internal audits substantiate our normal pricing behavior and validate our controls.

Bottom line, we will not sacrifice topline production at the expense of profitability.

On the employee side, we have lost some good people in our management ranks, but the perception has been worse than the impact.

Of the nearly 12,000 employees, voluntary turnover was flat compared to prior first quarter.

Turnover in the senior ranks became more stable than in the fourth quarter.

We have filled open positions with very experienced and qualified internal candidates.

Nevertheless, we are focused on compensation structures that attract and retain key talent.

On a personal note, I would like to say that our employees have acted with incredible resolve throughout this period, and I'm grateful for their efforts.

The news of the acceleration of the separation of AIU Holdings on April 21 has energized our business.

The reaction from employees, customers, and brokers has been terrific.

Based on an initial assessment, we are seeing some positive signs with regard to higher renewal retention, and brokers' and clients' primary focus has moved from AIG to AIU Holdings.

Finally, with regard to the power of a global AIU Holdings, the company posted first-quarter net written premiums of $7.7 billion and a combined ratio of 96.65%.

I look forward to speaking with you in the future about the strength of this franchise.

Thank you.

Nick?

Thanks Kris.

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 is obviously a different pricing dynamic between these two segments, with consumer lines being less sensitive to rate movements and market volatility.

Turning specifically to our first quarter results, Foreign Gen's net income on an after-tax basis of (technical difficulty) and fifteen million dollars, decreased by 27% over prior year.

This and -- results include an underwriting profit of $298 million at a 90.3% combined ratio.

This compares to an underwriting profit of $576 million on a combined (technical difficulty) eighty three (technical difficulty)

Please do not disconnect from today's conference.

Please do not disconnect from today's conference.

The leader is having technical difficulties.

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The leader has rejoined the conference.

This is Ed Liddy.

I apologize to you all for the technical difficulties.

We're not exactly sure what's happening, but we have been dropped twice, and we can tell that others have also been dropped.

We will persevere and do the best we can.

Nick?

This result includes an underwriting profit of $298 million and a 90.3% combined ratio.

This compares to an underwriting profit of $576 million and a combined of 83.4% in the first quarter of 2008.

Excluding the impact of Unibanco that was sold in November 2008, Foreign Gen net premiums written in the first quarter of 2009 declined by 4.5% for continuing operations in original currency, or on a 12.8% decline, adjusted for the negative impact of foreign exchange.

Including Unibanco in the prior year results, net premiums written declined 10.3% in original currency or 18.1% including the effect of foreign exchange.

Given expected industry growth rates in the current economic climate coupled with the unprecedented attack on our people and our business, the Foreign Gen core business held up very well.

Therefore it's not a complete surprise that Foreign Gen tops every global category in Euromoney's recent insurance poll, a poll incidentally that took place through last year's trauma.

In our commercial business, renewal retention was solid while rates showed hardening, offset by reductions in insureds value, payrolls, sales, and inventories.

As with the US commercial business, there was also expected derisking amongst commercial customers to further diversify their portfolios, as well as a slight reduction in new business production.

Conversely, Foreign Gen should also benefit from the trend of customers derisking from other providers.

The European region retained strong client and policy retention results in their most significant renewal period.

In our consumer lines business the accelerated global economic downturn and continued recessionary pressure reduced the number of overseas travelers, and order sales impacted our growth, particularly in the Far East region.

The overall results show the continued broad-based strength of the core Foreign Gen insurance operations even in the extraordinarily difficult circumstances prevailing in the last six months.

Our net investment income and realized capital losses were impacted by the conditions in the financial markets and a volatile foreign currency environment, leading to impairments in our investment portfolio and foreign exchange losses.

Overall net investment income offset the realized capital losses resulting in an income of $49 million.

This compares to a gain of $160 million in the prior year.

However, conditions improved since fourth quarter 2008, [there] reported a loss of $680 million.

In commercial lines, first-quarter '08 -- first-quarter '09 renewal retention improved, but writing new business faced challenges due to the global economic downturn.

Rates are generally improving with decreases averaging about 2% compared to a 13% decrease in first-quarter '08.

Given our significant market share in many lines of business, we continue as was always the case, to influence market trends in rates and conditions.

However, we are losing some business to the very aggressive pricing of some of our international competitors.

I do not necessarily see this as negative, as the more they under price, the quicker their underwriting results will deteriorate.

Accident and health, impacted by the accelerated global economic downturn and the reduced number of overseas travelers, reported a decline in net premium versus prior year.

In its efforts to rejuvenate growth in accelerated demand, the division has implemented several strategic proactive initiatives across all lines of business.

In global marine and energy, rates are improving, posting an average rate change of plus-[2.1]% on renewals.

Rate changes are strong in our UK, Latin American, and Australian markets.

For marine rates continued to be flat to a small increase.

Personal lines demonstrated good retention and resilience in its worldwide business.

Several major wins in auto including a multimillion account in Europe combined with a focus on auto profitability will set positive fundamentals for the stability of the auto line.

We will continue to service our customers and deliver top-class underwriting results with a desired combined ratio.

Placing AIU Holdings into an SPV marks the latest significant step to position our strong insurance companies as independent businesses, which will benefit all stakeholders including policyholders, employees, and distribution partners.

AIU Holdings will build on its traditional capability of servicing our customers, innovation, and claims-paying ability.

We remain committed to underwriting for profit and continue to examine all risk rating coverage adequacy and rate improvement, as we always have done.

The strategy of competition is price.

The price appears to be the only differentiator, as we are foremost on service, breadth of product, and on professional claims response.

As for staff turnover, I have 40 direct reports and I've only lost one to a competitor, a new startup.

At the underwriting level, staff turnover has been higher but consistent with historical rates.

This is something we've always faced because, for a generation we have been developing our staff's career, and it produces rounded entrepreneurial business people rather than narrow specialists.

They have always been attracted to competitors.

In summary, the core Foreign Gen insurance business held up considerably well in the face of unprecedented conditions in the global economy and the attack on our franchise and people.

We remain committed to our global strategies and look forward to continuing to serve customers and producers around the world with the strength and future independence of AIU Holdings.

Rod, would you provide a quick update on international life and savings.

I will.

Thank you Ed.

Turning to AIA first, our financial results, particularly operating income, were solid in these market conditions and slightly ahead of our expectations.

The sales were mixed with some businesses achieving strong double-digit growth such as Malaysia, Australia, and Vietnam, whilst others, including Hong Kong and Korea, have been more challenging, consistent with the market and economic conditions in those regions.

Expenses were very much under control and tracked below last year.

Staff and agent turnover -- there is no abnormal agent turnover to date.

In fact, the number of in-force agents had positive growth in the period.

The surrenders remain stable, clearly are within the expectations for market conditions, and they broadly align with pricing.

Of the 331 executives in the region that are vice president and above in AIA, we've lost 15 in total, and very much consistent with market conditions of the past.

Other updates, we had two significant bank assurance deals signed in the quarter including CIMB Group of Malaysia, which we are quite excited about.

Operating income as I mentioned was up 12% in the quarter, supported by lower expenses and improved NII.

GOE was down by 3%.

FYP was down 21%, but very consistent again with industry trends.

We had positive momentum up-trend in Singapore.

Australia and Vietnam achieved year on year growth.

And the balance sheet derisking continued in the first quarter of '09 with equity exposure capped at less than 6%.

Liquidity remained high with cash holdings at over $3.8 billion across the organization.

Turning to ALICO.

The first quarter also delivered solid reported pretax operating earnings of slightly over $500 million including a net $9 million favorable foreign exchange.

This represents a significant improvement over the prior-quarter loss of $104 million and a modest decline on a year on year basis.

These amounts have been adjusted for the sale of the Brazilian operation.

The investment portfolio performed well in the quarter with minimal other than temporary impairments.

Current cash and short-term investments are roughly $9 billion, approximately 12% of the portfolio.

We were encouraged to see net asset flows beginning to stabilize, particularly in Japan.

Assets under management ended in the first quarter at about $84 billion, slightly down from the prior quarter, primarily related to the anticipated run-off from our UK operations.

Turning to sales and distribution.

Sales, annualized new premium for our risk products, life and A&H, our core distribution products, grew a solid 14% over the prior year across the organization.

The deposit business, the annuities, GIB, the PAB and the Unit Linked, as we expected and the industry is experiencing, were down, very much tied to the global economic terms and conditions in the market.

Our agency distribution continues to be a defining strength for ALICO.

Retention among ALICO's more than 40,000 tied agents was a strong.

In fact in some regions we see absolutely clear opportunities to expand and we are indeed expanding the agency force, supported by the renewal premiums that increased in the quarter 5%.

Lastly, ALICO's overall capital position improved during the quarter.

We remain above our target ratios of RBC and the S&P, and the SMR ratios in Japan.

For ALICO, from a staff and agent turnover, the number of in-force agents had positive growth in the period.

Of our top 200 executives in ALICO worldwide that are VP and above, we've lost seven in total during this period and are very much in line or less than prior periods.

Our surrenders remain stable and are clearly within our pricing expectations and largely represent the market conditions that we are facing on a global economic basis.

Ed, back to you.

Matt, do you want to do domestic life, and then we'll finish with Jay on domestic retirement services.

Sure, good evening.

I would like to give you a very quick update on AIG's domestic life companies.

Like many in the industry, we've been impacted by the dislocation in the capital markets and the turmoil in the US economy, both of which, combined with recent AIG events, continue to have a material affect on our business results.

I will begin by providing a general update on the business and follow with some observations on new business volumes, the performance of the in-force block, and our significant activities to preserve and maintain our distribution and existing customer relationships.

Lastly, I will update you on the divestiture of AIG Life of Canada.

The combination of the current economic environment, the recent rating agency actions, and the negative publicity surrounding AIG has had a considerable impact on our overall business.

Domestic life sales across all channels and product categories except American General Life and Accident and deferred annuities have been negatively impacted.

Life insurance sales and deposits of $77 million are down 55% over prior year while payout annuity sales of $208 million are down 64%.

Group life and health sales are down 8%.

American General Life and Accident has remained strong throughout this period with total sales up 43% over prior year.

Individual fixed annuity sales are up 138%.

Both of those businesses have been positively impacted by strong sales growth in the deferred annuity market, which has benefited from a favorable yield curve.

All of our businesses have benefited greatly from the support we have received from our strong distribution relationships, and I am deeply appreciative of their continued commitment to our business.

The sales outlook however continues to remain challenging due to the current economic environment, current ratings, and the negative press surrounding AIG.

We are very confident that once the markets stabilize, our primary distributors will continue to support and market our products.

While new business volumes have slowed, surrender levels have decreased from the elevated levels we saw in September through December of last year.

In January and February of this year, levels were roughly at historic norms but moved higher in March due to the negative media coverage surrounding AIG.

Premium revenue was $1.2 billion in the quarter, down 26% from the prior year, principally due to lower payout annuity sales I previously mentioned.

Pretax operating earnings excluding realized capital losses were $181 million in the quarter, down 57%.

This decline was principally driven by lower net investment income related to partnership investments, mark to market losses related to our equity interest in Maiden Lane II, and also due to our maintaining higher levels of liquidity, all of which represent virtually the entire $237 million decline.

Despite these challenges, we have been largely successful in retaining key components of our core enterprise value including our policyholders, our distribution partners, and our key employees.

We remain intently focused on developing a platform for success as the economy improves, and returning value ultimately to our stakeholders.

To that end, we have implemented the following key initiatives.

First, we have been aggressively reaching out to our top producers and clients in an effort to maintain persistency and encourage continued sales.

Proactive outreach and communication to brokers and policyholders has yielded favorable results, including entering into a brand-new distribution partnership with one of the largest associations of agents and agencies.

Second, recognizing that the AIG brand has been damaged, we have begun to market ourselves as American General Life companies, which will help to mitigate many of the AIG media issues and assist our distribution in presenting American General to potential customers.

Third, to proactively protect our in-force block, we have implemented a team of customer service experts dedicated solely to the preservation of in-force business.

This team provides support on inbound calls and makes proactive outbound calls to at-risk customers.

Finally, we continue to stay very disciplined with respect to new business pricing and related returns as well as risk selection, to ensure continued profitable future growth.

Despite these difficult conditions, we have made important progress in reshaping our organization and paying down some of the debt owed to the government.

Effective April 1, we successfully executed the sale of AIG Life of Canada to BMO Financial Group.

In conclusion, although significant challenges lie ahead of us, tremendous work is underway at American General to position the company for future growth.

Thank you.

I would like to turn it over to Jay Wintrob.

Thank you Matt.

I appreciate the opportunity to provide a brief overview of Q1 results for Domestic Retirement Services and to comment on a few of the trends we are seeing for our businesses.

Sales of all retail products, individual fixed and variable annuities, and group VA and mutual fund deposits into defined contribution plans totaled $3.4 billion in the quarter, an increase of 7.3% from last quarter.

Fixed annuity sales at AIG Annuity, soon to be renamed Western National Life, were up 19% in Q1 while sales of group and individual products at VALIC and of SunAmerica variable annuities were virtually flat with Q4 '08.

A positive yield curve and low CD and money market rates helped drive sales growth for fixed annuities while variable annuities and mutual fund sales remained weak across the industry due to volatile declining equity markets.

Sales comparisons to the first quarter of 2008, a decline of 38%, are less relevant given the greatly changed circumstances in the markets, the economy, and at AIG in the third quarter of last year.

Following the September 2008 events at AIG many, of our bank and broker-dealer distribution partners suspended sales of our fixed and variable annuity products.

Western National and SunAmerica, through extensive visitation, communication, and education efforts by our management and key account teams have made progress in restoring our relationships and getting reinstated on the shelves at many of these firms.

However, we continue to be suspended at firms representing approximately 38% and 49% of our fixed and variable annuity sales, respectively, during the first three quarters of 2008.

Obviously, getting our products reinstated at these firms remains a top priority for these businesses.

Based on feedback we've received, we believe these efforts will be successful once we can present a clearer picture of the future ownership and circumstances for our retirement services businesses.

Surrenders declined by over 45% across all product lines in Q1 versus Q4 '08.

And the surrender rates, though still elevated as a result of the events of last September and thereafter, declined from the fourth quarter.

Specifically, the surrender rate for group retirement products declined from 16.1% to 12.2%; for fixed annuities, from 35.8% to 20.1%; and for variable annuities, from 20.3% to 14.6%.

We believe there is a clear correlation between increased surrenders and negative AIG publicity, and conversely that surrenders will continue to trend lower in an environment where such publicity is less frequent.

Similar to Matt discussing the life side, in January and February of this year for example, surrender levels returned to historic norms but moved higher in March due to negative media coverage surrounding AIG and have started to moderate since.

Our annuity businesses had an operating loss before realized capital losses and goodwill impairments of $309 million this quarter as compared to an operating gain of $663 million a year ago and $151 million last quarter.

There were four primary reasons for our poor bottom-line results.

First, $149 million loss on partnerships due to declines in equity and fixed income markets.

A $148 million loss in our residual interest in the Maiden Lane II equity stub.

Third, increased holdings of cash and short-term investments reduced normalized portfolio income by an estimated $102 million.

And fourth, a negative DAC unlocking of $412 million and an increase in guaranteed minimum death benefit reserves of $146 million, with approximately 85% of that attributable to the variable annuity business and 15% to the group product business.

This unlocking and reserve increase was due to a change in our long-term separate account growth rate assumption from 10% to 7.5%, which we believe places us in a moderately conservative position versus our competitors.

We believe each of these four major items are unusual and don't reflect the normalized, long-term earnings power of our retirement services businesses.

Also, these items were partially offset by the beneficial impact on DAC amortization related to approximately $1.6 billion of realized capital losses in the quarter and increased accretion of investment income related to securities previously impaired as OTTI.

Finally, our dynamic hedging program related to variable annuity living benefit guarantees performed well in the quarter.

Taking into account contract fees received for these guarantees, the net result of the change in value of the embedded liabilities and the hedge instruments produced a gain of about $10 million this quarter.

Let me share two quick points related to product design and pricing.

The first of what we believe will be several rounds of product changes designed to derisk variable annuity living benefit guarantees is well underway.

Industry players have raised product fees, reduced living benefit roll-up rates, reduced permitted allocations to equity funds, raised the age at which lifetime withdrawals may begin, and in some cases pulled VA products altogether.

SunAmerica has undertaken all of these steps in derisking its VA product portfolio and intends to be positioned towards the conservative side of the product spectrum once the dust settles.

Second, we've maintained our pricing discipline in setting new business and renewal crediting rates for our fixed annuity business despite aggressive pricing by some competitors well aware of our challenges and despite negative though improving net sales and flows for this business.

We will continue to remain disciplined in our pricing and focus on our strong relationships with bank distribution partners and our high quality and efficient customer service and administration platform based in Amarillo, Texas.

Finally, despite many challenges and stresses, our employees remain focused and continue working very hard to deliver high-quality retirement savings products and solutions, financial planning and advice, unparalleled customer service, and to develop and reinforce strong relationships with our plan participants, distribution partner firms, and independent financial representatives who sell our products.

I'm very proud and appreciative of their efforts.

Thank you.

So in summary, we are making progress on our restructuring plan, although there is still much left to do.

Our financials are improving but continue to be burdened by restructuring costs and a very uneven capital market.

And our businesses are performing in line with most if not all of their industry competitors.

What I would like to do in the remaining time is open it up to questions, and we would be delighted to answer the best we can.

Questions?

(Operator Instructions).

Arun Kumar, JPMorgan.

Good afternoon.

I should say probably good evening.

A couple of quick questions for you.

During the call and also over the past several months you've talked about restructuring, reorganizing the company into domestic life, international life, and more recently the P&C businesses.

What we don't have a good idea is, you do have a substantial amount of obligations at the holding company, be it AIGFP matched paper, be it holding company debt, and so on.

What kind of capital structure would these companies have as you plan separation from the AIG family in one way or the other?

The second question I have is a follow-up to a question I asked the last time.

You did mention in your last conference call that you were going to do some kind of restructuring or reorganizing of American General Finance.

I wondered if you would give us any update on that or on ideas at this point?

Thank you.

Hi Arun.

This is Paula.

I think with respect to what kind of capital structure is ultimately going to emerge at the holding company, obviously right now we take great efforts in working with the Federal Reserve and the Treasury to make sure that we maintain the current restructure -- capital structure quality through the restructuring process.

Several years down the road the quality of the government support may change and our goals may change.

But I think you can reasonably expect for the restructuring that we have right in the front of the windshield here, that we would make every effort to maintain the current rating.

With respect to American General Finance, as I mentioned in the call, a key effort right now is to reduce originations and reduce costs, and they have continued to try to do work on both fronts, and in the meantime obviously we have obligations to meet and we will meet the obligations as they come due.

And beyond that, I think we will just again have to sort of feel our way through later on.

But for the near term, the responsible thing to do is reduce expensive origination, reduce expenses of the business, and wait for another day.

Would it be fair to say then that as you work through this restructuring and reallocation of the different business units and renaming some of them, that you don't have any intention of letting the debt or the other obligations at the holding company go by the wayside because there will be limited resources left under that umbrella to service that debt?

I think we've laid it out pretty clearly.

We have to work on both the asset and the liability side of the balance sheet.

And we will do that in I think a very appropriate and straightforward way.

Next question operator?

Josh Shanker, Citi.

I hope you'll indulge me.

Obviously a lot of your competitors are claiming -- you went through in some detail -- that you are engaged in aggressive pricing, and I'm wondering if I can just ask you a number of questions about, are there some instances of certain lines where you have been aggressive?

And you -- perhaps you can diffuse that just common principle of talking one's book that's leading to those conclusions.

I'm going to turn this over to Kris, Josh.

Let me just say, there's been so much noise in the system on this.

The General Accounting Office has looked at our pricing.

Ernst & Young, at the request of the Federal Reserve, has done an exhaustive study of our pricing, and several others have also.

And in all cases there is no indication whatsoever of the kinds of things that you have just asked about.

But let me ask Kris to respond in a more granular way.

Josh, we look at our business line by line, and we do actuarial studies and monitor our pricing line-by-line, and I can tell you that the one thing that we are not doing is, in any lines, becoming aggressive on the pricing as a result of any situation we're in.

What we do first is underwrite, and that's what we live by.

And if you look at the numbers that I stated, if you look at that in the first quarter, that our pricing -- our rate change was down 2%, our renewal retentions are down, and our new business is down, it's pretty much just a math exercise.

If you do the math with others, you might come up with a different conclusion.

And I could also tell you that when we are losing our business, we are not losing it at prices that are higher than our renewal price.

They are at prices that are lower.

So this is coming from competitors, not from brokers or other areas that Ed mentioned.

Are you finding that you're able to get pricing increases through in some of the popular areas right now, in D&O, wind-exposed property and whatnot?

Absolutely.

On -- I would say on the cat property, definitely.

And we saw our EBIT -- we are seeing, May, the prices are even going up a little bit further.

On D&O it just depends which segment.

On the financial institution side, definitely that's been going on for a while, and in certain classes.

And it just depends on the exposure on the commercial side.

Donna Halverstadt, Goldman Sachs.

Just two quick questions.

The first one is, given the cash flow or lack thereof that you can get to the hold co., have you considered an exchange offer for any of the unsecured bonds and/or switching off coupons on the hybrids?

That's the first question.

The second question is related to the restructuring costs on the AIGFP wind-down, the $1.2 billion charge.

Is that -- clearly there's still a lot of work to do.

You've made a lot of progress.

But should we look at that as a run rate charge?

Or are there a lot of -- is a significant portion of that a one-time charge?

Those are the two questions.

Thank you.

Donna, I will answer the first one.

This is Paula.

And I think (technical difficulty) as you can imagine with recognizing the need to restructure our liabilities, in fact, we've looked at and continued to evaluate a number of options.

Donna, I'm going to ask that Jerry -- oh, Elias is going to answer the second part of your question.

Yes.

With respect to the (technical difficulty) we classified as restructuring-related costs for AIGFP, this is basically their operating results for the quarter excluding the marks on the super senior credit derivative book and CVA, which we've separated into a different bucket.

With respect to their operating results, what -- the results for this quarter aren't necessarily a run rate.

It reflects the cost of unwinding transactions.

It does include also the effect of writing down certain investments down to the expected sales price, which will not materialize until the next quarter.

But I would not look at this as a run rate for FP.

But you are suggesting that there will be significant ongoing restructuring-related costs as you continue to wind down FP?

This is David.

Yes, the restructuring-related charges such as that, they will occur from time to time.

There won't be a pattern.

It will depend on the books of business and the opportunities we have and the trade-offs between GAAP charges and liquidity.

So it will be -- there won't be a specific, predictable pattern.

Operator, we are going to take two more questions and then bring our call to a close.

Scott Frost, HSBC.

Are we -- just to clarify on the transfers to the Fed, are we saying that the ownership transfer of AIA and ALICO and the other sort of non-general insurance subs are going to be -- are going to fully repay or be taken into full consideration of the Fed debt?

And what do you anticipate the use of proceeds from your expected sale of -- or 20% sale of AIU would be?

-- in the context of it sort of following on Arun's question.

You're going to have -- it kind of looks like $11 billion or so of -- or $13 billion or so of debt at the holding company.

I think some of that is coming due '09, but most of it's I think going to be in place.

Is there a plan to take that down or leave it outstanding?

And how -- is the debt service going to be made from the other general insurance operations?

Is that how we should sort of look at you on a going -- go-forward basis once you emerge?

Well, I think I caught three questions there.

So I think the first is is that these conveyances of portions of ALICO and AIA into the SPVs will not defease the debt in its entirety to the Federal Reserve.

In fact, I think we also mentioned securitizations will be part of how we reduce the debt to the Fed -- and then the proceeds from dispositions as well.

So it doesn't -- we don't clear it all off with these two conveyances.

Number two, in terms of -- I may have lost number two.

But I think the other thing is is when you think about the holding company going forward, the fact is is that in the current version of how we are running this restructuring, the 80% of AIU that remains will in fact be used in part to service the debt.

But as we said obviously, we have to review how much debt we are going to hold at the holding company over the course of the restructuring.

Do you think your parent will ask senior debt holders to kind of chip in and take a haircut in order to better capitalize your company?

Well, I think that you know there are a number of options of how you attack liabilities.

We have to keep in mind that the Fed is super senior and so the first of our proceeds -- I guess that was kind of question number two -- really always has to go to the Fed.

So we do have to have solutions over time to managing the rest of the debt on the balance sheet at the holding company level.

Last question.

[Sean Fareau], Deutsche Bank.

Not to beat a dead horse here, but the restructuring update presentation mentions preferred on the AIU SPV.

Just curious if that -- if you guys were thinking about preferred in the same way that you are using for AIA and ALICO as it relates to essentially paying down the Fed loan further, or essentially using that as a potential paydown of the preferred -- or pay-back of the preferred from the Treasury.

Hang on a second, Sean.

We are all flipping through the presentation to where we think you might be referring.

It just says in exchange for preferred and common interests.

I wasn't sure when the --

No, no.

I think, Sean, you are connecting two things that you need not connect.

The Federal Reserve -- I don't believe they can own common equity.

They have to own preferred stock, not common stock, and that would be why we use those words with respect to describing what the structure will be of the AIA and ALICO entities when they get put into the special purpose vehicles.

We've got that language around AIU, and it's really -- it's a structural device.

If in fact for example we should ultimately do a conveyance of some portion of AIU that's in the SPV to the Feds, they wouldn't take it in terms of common.

So really it's just -- it's a first step in the kind of structural considerations we have to have to ultimately establish AIU Holdings as independent, ready for the IPO, and so on.

But you could use that as a conveyance as well?

It could be, that's right.

And would you ever consider using AIU as a conveyance to potentially do something with the preferred with the Treasury?

Well, look at -- everything stays on the table until it comes off the table.

I think our first point of focus at this point is very much that the super senior has to be addressed, and then beyond that we will start working our way through the rest of the tranches of the capital structure.

I would like to thank you for your time.

I apologize again for the technical difficulties.

I don't know if that's associated with the weather here in New York or just some other things.

We'll talk to you again in a quarter.

Thanks.

That concludes today's conference.

Thank you for participating.

You may disconnect at this time.