American International Group Inc (AIG) 2011 Q1 法說會逐字稿

Good day, everyone, and welcome to American International Group's first-quarter financial results conference call.

Today's conference is being recorded.

Now I would like to turn the call over to Ms.

Liz Werner, Head of Investor Relations.

Please go ahead.

Good morning and thank you for joining us.

Before we get started today I would like to remind you that today's presentation may contain forward-looking statements, which are based on management's current expectations and are subject to uncertainty and changes in circumstances.

Any forward-looking statements are not guarantees of future performance or events.

Actual performance and events may differ, possibly materially, from such forward-looking statements.

Factors that could cause this include the factors described in our 10-Q under management's discussion and analysis and other risk factors and in our 10-K under risk factors.

AIG is not under obligation and expressly disclaims any obligation to update any forward-looking statements whether as a result of new information, future events, or otherwise.

Today's presentation may contain non-GAAP financial measures.

The reconciliations of such measures to the most comparable GAAP figures are included in our financial supplement, which is available on AIG's website at www.AIG.com.

With that I would like to turn our call over to our CEO, Bob Benmosche.

Good morning and thank you, Liz.

We have a lot to cover today, but let me start with the fact that it's a major quarter for us.

We had paid back the Federal Reserve, that is two years ahead of schedule.

Unfortunately, that requires us to take our final charge of $3.3 billion.

Let me ask each of you to pay attention to the DTA, the deferred tax asset.

We have now written off $23 billion, but that is the 80% of the Company that was taken by the government to give us the loan in the first place.

While we have taken the charge in this quarter, bringing it to a total of $23 billion over the last three years, what it represents to is that over the next few years we will not pay about a third of that in taxes.

So we will report after-tax income to all of you taking into account what would be the taxes.

When it comes into the holding company, because of the DTA, we will actually have that money available to fund our capital management program over the next several years.

So it's behind us.

We have it done.

We are now dealing with the US Treasury shares as we think about fair monetizing that and paying back the American taxpayer.

So we are finished on that aspect.

Our debt has been covered by the Fed.

We are ready to move forward.

If you look at the results in the quarter, we continue to show strong operating results of the Company.

We have a lot of pluses and minuses that went on, as you have all saw, but the fact is the underlying core businesses are doing extremely well.

If we look at Chartis, for example, we did have significant cat losses in the first quarter, unprecedented, as you see, not only for us but for others.

But the fact is the top line grew without Fuji about 6.2%.

In addition to that we continue to deemphasize those lines that have caused difficulty in the reserves in the past.

And so we see that at the end of the year those lines represented about 6.7% of our premiums and, by the way, in 2006 those lines represented 22% of our premiums.

They are now close to 5% in the first quarter.

So we continue to deemphasize those lines and at the same time we are continuing to grow the top line of the organization.

We did, in fact, close on a Berkshire transaction which we reported to all of you.

You can see that we bought $3.5 billion of coverage, basically for about $1.6 billion.

But more importantly, we got back $200 million which says that we were redundant $200 million at that point in time.

And so when we talk about the quality of our reserves at Chartis, we continue to stress that when we compare what we have done at the end of the year to outside actuaries we are still above the midpoint, the central estimates of all of the outside actuaries that looked at it, which we historically have never been.

So we have strong reserves.

Some people may say, but wait a minute, you just added to the development in the first quarter.

So if you are doing okay, how could you possibly add to the first quarter?

I think it's important that we answer that right at this point in time because we want to make sure it's clear that we believe with a great deal of confidence that we have our reserves correct.

So Rob, if you could, who is the CFO of Chartis, explain the legal settlement that is anticipated and why we chose to do what we did in the first quarter on reserve development.

Sure.

Good morning.

The largest component of the prior-year development in Chartis relates to the settlement agreement that we have disclosed in Footnote 11 of our 10-Q.

Following that settlement we restated our statutory financial statements dating back into the 1980s, which resulted in an increase in our participation in the workers' compensation residual markets.

While we have a significant amount of IBNR already established for the years that this would relate to, we concluded it was prudent to add to the reserves rather than to use a portion of our existing IBNR to cover this assessment.

So as you can see, this is conservatism on our part but we want to make sure we got this right and we keep it right on a go-forward basis.

I also want to stress -- and that is why I think it's important that you understand the deferred tax asset -- we do have about $2 billion of stacked capital sitting at Chartis.

And it's important that we preserve that $2 billion.

Because of the accounting rules, we did the Berkshire deal primarily to show from a GAAP basis that we would have the profits in the future such that we could preserve that $2 billion.

And so the transaction was done more around the DTA and preserving our capital at this time in Chartis rather than concerned about our reserves and what has been set up for the asbestos.

So that is pretty much where Chartis is.

We have, in fact, reorganized and this positions us better for the future, and so we want to make sure we focus on commercial as well as consumer.

We are focusing on ourselves as a global organization.

While we have a US and international operation, we have to operate far more seamlessly, like our clients do, and make sure that we are focusing not necessarily on the top line but getting the right combined ratios and the right risk-adjusted return for the equity we have committed to the business.

Peter is in that role now.

We made that change in the first quarter, and he is off and running.

And it's going extremely well for us.

If I move on to SunAmerica, again they had a very strong quarter.

You can see in 2010 we had strong positive flows on annuities, for example.

Our life sales are starting to come back and the first quarter also showed very positive flows on our annuity products.

We continue to be number one in the banking system on selling fixed annuities and it's very well received.

You can see also they have good stable income.

From ILFC we show that we sold some planes in the first quarter.

And keep in mind that ILFC is not just about buying and leasing aircraft; it's about managing the fleet.

Up until now we have not done a very effective job over the last many years of dealing with legacy aircraft.

We are now dealing with that, so you see a charge in the first quarter.

We still have a profit at ILFC, but you will see us throughout the year selling off aircraft.

But we still see this business, on a normalized basis, earning about $600 million.

But in that $600 million we also are assuming about $300 million of impairments or costs related to selling some of the older planes that we have in the inventory.

But we also announced that we have 133 new aircraft we are going to be buying to continue to keep this business strong in the marketplace as the leader in the marketplace.

We also have approximately, I think it's 74 787s on order and the early delivery of 787s.

So that also gives us a strong edge there.

We continue to run this business as an investment.

We have the debt worked out.

We have the future worked out in terms of how we manage the fleet.

We have got a strong management team in place now.

And to the extent -- over the next period of time, year or two, whatever it is, if we can monetize some of this asset, we are giving that serious consideration.

So, again, it is not core to AIG but we think we got it well-run, well-managed, and well-positioned in the Company.

United Guaranty, again we see that business showing a profit this quarter.

Their new model is working extremely well at the front end.

They are still maintaining good sales.

We see the performance of the new business very strong.

They continue to work on claims management, doing an effective job there as well.

We expect that business to enhance our profitability going forward and not be a drag, as it has been in the last couple of years.

I am going to turn it over to David now, but just stress the fact that we have come through unprecedented times, unprecedented vilification of the Company sometimes in the press.

The team is strong, the morale is high, our main momentum is gaining, and so we are pretty confident as we move into 2011 we will see a stronger and a more streamlined and more transparent AIG.

David?

Thanks, Bob, and good morning, everybody.

Let's turn to slide seven.

First-quarter 2011 net income was $269 million, down from about $1.8 billion a year ago.

First quarter this year included a pretax non-cash charge of $3.3 billion for the accelerated amortization of the pre-paid commitment fee relating to the repaying and the terminating of the Fed Reserve Bank of New York's credit facility.

And we did that two years early.

Importantly, after-tax operating income attributable to AIG, our principal non-GAAP measure which we believe over time is the best way to view the businesses, was over $2 billion for the quarter versus $637 million a year ago.

On a per-share basis, after-tax operating income was $1.30 for this quarter versus $0.95 a year ago.

I will take you through the EPS in a few minutes, because it can be perhaps a little bit counterintuitive, particularly this quarter.

Annualized operating ROE was 10.4% for the quarter and that excludes AOCI.

Including AOCI it was about 9.5% and that was up from about 4% a year ago.

Again, there were some noteworthy items that we highlighted in the first page of the press release.

Let's turn to slide eight to look at consolidated performance.

Again after-tax operating income was a little over $2 billion for the quarter.

Chartis had an operating loss of $463 million after including pretax $1.7 billion of catastrophe losses, largely from the Japan earthquake and tsunami.

SunAmerica posted $1.143 billion of operating income in the quarter, up a little over 2% from a very strong quarter a year ago.

ILFC had operating income of $117 million for the quarter, compared to a loss of $56 million a year ago.

ILFC took, as Bob mentioned, impairment charges of about $113 million for the quarter, due largely to some opportunistic sales of about 10 aircraft.

The impairment charge in the first quarter of 2010 was $430 million.

As ILFC manages its fleet and it's -- the age of the fleet and the composition of the fleet, we would expect to see some impairment charges or possibly losses on opportunistic sales from time to time, but generally not more than about $300 million a year going forward.

United Guaranty posted a profit of $13 million, driven mainly by favorable prior-year development in the second-lien business, which benefited from operational improvements in claims management.

In the first-lien book we had favorable trends in newly reported delinquencies and steady trends in the cure rates, but that was more than offset by higher overturns of previously denied or rescinded claims as mortgage lenders and servicers continue to deploy additional resources to address loan documentation issues on their end.

The other segment had profit of about $1.5 billion.

That was largely driven by about $750 million of appreciation on our [ML3] interest, driven by increases in value in the underlying multi-sector CDO assets in the portfolio, but it was essentially flat to last year.

It also includes improvements in the direct investment books, comprised of our matched investment program and the run-off of the FP asset book, which is marked to market.

And that had about $0.5 billion gain in it, largely from tightening of credit spreads in the capital markets.

Our remaining investment in AIA appreciated almost $1 billion in the quarter, slightly offset by the final monetization of the MetLife position which had been recorded on a mark-to-market basis prior to now.

Let's now turn to slide nine and look at after-tax operating income reconciliation.

This page shows a reconciliation from the after-tax operating income of about $2 billion, the net income attributable to AIG of $269 million.

The after-tax impact of the $3.3 billion charge on the amortization was about $2.4 billion.

The income from discontinued operations was $1.6 billion, largely from the sale of the Star and Edison businesses.

We have had net realized capital losses for the quarter, mainly from foreign exchange and derivatives not accounted for under FAS 133.

Finally, we need to adjust for taxes since we apply a pro forma tax on our operating income and the items on this page are shown net of tax.

In reality, as Bob said, we are really not going to pay much income tax to the US as we have very large deferred tax assets, which I will talk about in a moment.

I also would point out that we have a full valuation allowance on those deferred tax assets at this time.

I will take you through a slide or two in a few minutes to show you how that works.

Let's turn now to EPS on slide 10.

Earnings per share from continuing operations was a loss of $1.41 in the quarter in 2011 versus income per share of $2.16 a year ago.

For details of that I would refer you to page five of our financial supplement.

Earnings per share from discontinued operations was $1.06 in the quarter versus $0.50 a year ago.

Together, we had an EPS loss of $0.35 per share even though we had net income of $269 million.

Because we had two items associated with restructuring totaling about $800 million that gets subtracted from the earnings numerator in the EPS calculation in this quarter, the EPS loss occurs.

That charge goes to EPS calculation, not through the income statement.

Again, after-tax operating EPS was $1.30 versus $0.95 a year ago.

I should point out that the weighted average shares increased to 1.558 billion shares for the quarter, up from 136 million a year ago.

And that was driven by the issuance of 1.655 billion shares in January to the US Treasury as part of our restructuring.

Now let's take a look at our capital structure on page 11.

With the recapitalization that occurred in January we simplified our capital structure and reduced leverage.

Leverage has come down substantially and senior financial debt to total capitalization has decreased from 26% at year-end to just under 12% at the end of the quarter.

Our book value is currently $47.66 a share and $43.49 ex AOCI.

Again, want to remind you that excludes any value for the deferred tax asset as we have a full valuation allowance on our DTA.

Now let's turn to Chartis on slide 13.

Chartis reported pretax operating loss of $463 million, as I mentioned a moment ago, versus $879 million of income a year ago.

The current quarter loss reflects the $1.7 billion in cat losses, including about $1.3 billion related to the Japan earthquake.

Then we had an additional $400 million from the New Zealand earthquake, the Austrian floods, and the US winter storms.

Net premiums written were $9.2 billion in the first quarter 2011, up almost 20% from the $7.6 billion in the first quarter year ago.

And ex Fuji and the impact of foreign exchange, though, Chartis premiums increased about 6% in the quarter.

Catastrophe losses were $1.2 billion higher than a year ago and prior-year development was essentially insignificant in the quarter.

The four business lines with the largest reserve strengthening at year-end saw almost no activity in the first quarter.

Combined ratio on accident year basis, excluding cats, was 98.7% and it was flat to last year.

The expense ratio improved in part due to impact from the Fuji acquisition and lower domestic expenses.

Those were partially offset by some international increases for strategic investments, improving regional governance risk management, and some of the financial infrastructure systems Solvency II readiness that we are preparing for.

Let's now turn to slide 14 for a view of the Chartis premiums.

Let's really focus on the 6.2% increase during the period which excludes FX and Fuji.

The growth is largely driven by the US region from increased retention and a significant new customer program underwritten in the first quarter, as well as a modest organic growth in almost all of our international regions.

Chartis continues to execute on its strategy to grow with higher margin and less capital-intensive lines of business and, as required, implementing corrective actions on underperforming businesses to ensure that these businesses meet our overall profitability measure.

In the first quarter of 2011 the international share of Chartis overall net written premiums is 55%, up from 50% a year ago.

Now I am going to turn quickly to investments and I am going to start with Chartis on page 15.

Net investment income for Chartis was $1.2 billion in 2011, up 10% from a year ago.

The primary driver of the increase was improved investment and partnerships and the effect of consolidating Fuji.

Chartis has some excess cash still to be deployed over the coming months and we can talk about that as well as the muni holdings perhaps in the Q&A session.

Let's now turn to SunAmerica on page 17.

SunAmerica's operating income, as I said a moment ago, was $1.143 billion, up 2% or so from last year.

Premiums, deposits, and other considerations reached $6.2 billion in the quarter, up 31.4% which I will talk about more in a moment.

Net investment income was up $47 million, driven by investment partnership returns and the Maiden Lane II residual interest valuation increases.

DAC amortization was up about 27%, largely driven by it unlocking and the investment spread assumptions in our group retirement product line as a result of the Federal Reserve rejecting our offer to repurchase the ML II asset portfolio.

As you can see on the chart in the bottom-left corner of the slide, SunAmerica's operating income has continued to be strong and stable, posting essentially $1 billion of operating income in the last five quarters.

The pie chart at the bottom right-hand corner of the slide shows the contribution of each of SunAmerica's businesses to its operating income.

These different businesses provide balance and diversification to SunAmerica's earnings.

Let's now turn to slide 18, premiums, deposits and other considerations.

SunAmerica's premiums, deposits, and other considerations I said a moment ago increased 31.4% on increased sales of fixed and variable annuities as well as mutual funds.

Life insurance sales increased 17% for the quarter versus a year ago.

Western National, while continuing to maintain its pricing discipline, increased sales by almost $1 billion as certain bank partners negotiated lower commissions in exchange for higher crediting rates which made Western National's offerings more attractive to policyholders.

Let's turn to slide 19.

SunAmerica's investment income was up almost 2%, driven mainly by the Maiden Lane II performance, higher private equity hedge fund returns, partially offset by lower base yields.

The slow run-off of higher-yielding asset will put some pressure on the investment yields going forward, although we have taken action to reinvest excess cash which should benefit the base rate portfolio in the future.

We still have some substantial cash balances that we will be reinvesting.

We made good progress in April and we will start to see the impact of that in the second quarter.

On slide 20, at both VALIC and Western National net spreads improved.

Partnership income and a decrease in the average cost of funds, i.e., our interest crediting rate more than offset lower base yields and investments.

Now I am going to take a quick word or two on our taxes, page 22.

As Bob mentioned, we have very substantial deferred tax assets that are available to offset future tax obligations.

The slide lays out the gross attributes, gross assets, and a framework for utilizing or realizing that assets.

All of the assets, as I said, have a full valuation allowance that offsets them.

Accordingly, none of these assets are included in our book value.

This will become more straightforward as we apply our framework for assessing the need for the valuation allowance in the coming quarters.

Finally, on page 23, commencing this quarter we once again will use a full-year estimate of income and taxes to calculate a tax rate, like virtually every other company.

For the last few years we used the discreet period method because of the uncertainty around our annual results.

Because of our tax attributes we will not be paying very much tax, as I said before.

As long as we have a full valuation allowance on our deferred tax assets, we will apply a pro forma-type rate on our operating earnings to show you what the tax rate would be if we were paying or accruing taxes.

Because of the impact of the tax-free munis, our tax rate on a pro forma basis for operating earnings would be somewhere between 25% and 30% for the year.

Other discrete items in the quarter will impact the overall rate in any given quarter.

Items that are presented net of tax are shown using that similar rate.

As long as we have a full valuation allowance, virtually all of the tax impacts of the 25% to 30% rate will be reversed before we show net income.

Finally, I just want to point out, last night in our Q we included some expanded discussion in the outlook section about our aspirational long-term goals.

With that I will turn it back to Bob.

Just before we go to questions I would like to reiterate something that David had just pointed out in terms of the DAC unlocking in SunAmerica, because ML II.

We are, in fact, making very good progress investing that money.

Some of the investment is bidding on aspects of ML II; however, we found many other sources and so approximately a third of that money has now been invested.

Generally the yields are between 8% and 9% and we are dealing with fixed as well as some of the floaters that are part of ML II.

So we have made really good progress over the last several weeks dealing with this headwind, so we are trying to neutralize that affect as we get into the second quarter.

As you look at the results of this quarter you can see that Chartis still represents about 40% to 45% is the ballpark of its percent of operating earnings of the Company.

Therefore, when you look at the Company as a whole we still believe that the sum of the parts are less than the whole and the Company makes more sense as it is combining all of the risk diversification between our property-casualty business and the life and annuity business and other businesses we have.

So we are pretty comparable with the deck we have and, as you can see, pretty balanced.

So let me turn it back to Liz and we are going to take questions.

Thank you.

Operator, we can open the lines for questions now.

(Operator Instructions) Andrew Kligerman, UBS Securities.

Great.

Two questions.

First, read through the aspirational goals that you highlighted and looks like --

Peter, I think we are having a little hard time hearing you.

Yes.

Can you hear me?

There you go.

Okay, great.

Sorry about that.

Read through the aspirational goals that you have going from 6% to 10% and then being able to generate in 2015 roughly $25 billion to $30 billion.

Today sitting with a 12% debt to capital I was surprised with the priorities, or I am just wondering with regard to the priorities for 2011 it says executing one or more primary offerings of AIG common stock.

So maybe you could explain some of the rationale behind that given the earnings power that you have described in your aspirational goals.

Andrew, you have to keep in mind that in December when we said we were going to pay back the Federal Reserve and we were going to terminate $30 billion of direct government support as well as the implied support of the United States government beyond the $30 billion, although some said there would be no more money but there was the implication for sure, to do that and unplug -- and remember many of you said two years ago that AIG was gone and may it rest in peace.

Here we are strong, vibrant, and moving forward.

However not everybody kind of believes that yet, and so, therefore, we have to over-solve (inaudible).

Therefore, we have to demonstrate without any question that we have strong credit ratings, both at the insurance companies and particularly the insurance companies as well as the holding company.

Therefore, we were told, for example, last year that ILFC would never be able to access the unsecured market ever again.

The good news is never occurred.

We were told that AIG would have a very difficult time accessing the unsecured markets again after what happened.

And again never happened a second time.

However, we had to make sure that we could demonstrate access to the capital markets in every form and, therefore, part of the deal to be able to close with the Federal Reserve and get people comfortable at the rating agencies we have to raise $3 billion of primary capital.

Part of that is to give back to the US Treasury its G, the Series G.

So this is nothing more than showing that we can raise money, we can do it effectively, and that this company is very, very strong going forward.

As you continue to see throughout 2011, as you have seen in 2010, the operations of the core businesses continue to be strong.

We believe they can begin to manage, probably in the second half of 2012, the amount of equity we require in this company to support the liabilities that we have.

So it's really around that philosophy.

We want to make sure we project ourselves as a very strong company that can always live up to its guarantees at this point in time.

Okay.

So Bob, so I should interpret that as required as opposed to something that AIG needs to do, the capital raise there?

Something we just need to show that we can do it and to make sure that we have more than enough -- we have gone through a lot of pain.

The people in the government that have supported us during this crisis want to make sure that once AIG goes off on its own, and we are on our own at this stage of the game, that -- they like us, but not that much.

And so they don't want to ever have to come back.

They don't want us to leave here in any form crippled in any way that says the government sent us on our way and we were not financially strong.

So it's really dealing with those perceptions.

We are dealing with it, which is why we say that probably by mid-2012 -- and that is why we stress the deferred tax asset and understanding it, because that will be a source of funds that allow us to begin to buy back the 80% of the Company that was basically taken as part of the requirement to give us a loan.

So that is the whole concept.

Okay, I am with it.

It would be somewhat dilutive, but I understand.

Just lastly on the partnership income, so you ended the quarter with about $19.4 billion in that class of assets and a 14% return.

What is AIG's objective with that asset class going forward?

Do you want to grow that?

And what types of returns on average do you think you can do over time?

I am going to turn it over to Bill Dooley.

Andrew, it's an asset class where we are comfortable where we are right now.

I don't see us growing that substantially.

Both insurance companies have an allocation to that asset class.

The one at SunAmerica I think their assets are a little bit more aggressive than the Chartis assets.

So we could target somewhere between an 8% and a 6% return on that, so this quarter was much better than that.

But over a period of time that is what we are expecting to get on a run rate basis.

Great, thank you.

Maybe Jay would want to comment from SunAmerica's point of view.

Two points.

Good morning, Andrew.

One is the increase in the balances, especially with respect to SunAmerica, is not so much from allocating new money to that sector.

It's from strong appreciation in the fair value over the last two years as the markets have done well and this portfolio has done very well.

But in terms of what we are targeting, we don't have any plans to increase our holdings of alternatives in SunAmerica as a percentage of our total invest assets much beyond where we are now.

We have always been sort of in the 5%-ish range.

It's not a hard-and-fast target, but again a lot of the increase is really the appreciation that we have seen in the market as opposed to putting new money to work in the sector in the last couple of years.

Great, thanks.

Andrew, just keep in mind as -- I am sure you know this.

That it's really about the liabilities as well, so that is all part of the match that goes on.

Absolutely.

Dan Johnson, Citadel.

Thank you and good morning.

Couple of questions, if you would.

Maybe most importantly, amongst some of the assumptions that you put in the 10-Q last night was the outlook for Chartis.

Maybe you could help us understand a little bit more of the details behind the plan to both bring down the combined ratio while growing the top line.

At the same time, maybe you can tell us a little bit about where you think you might be growing, what sort of macro market assumptions are behind those projections.

And then I have got a separate question as well, please.

Let me have Peter Hancock -- while he is new to the role, he is knee-deep in the data.

So you got it, Peter.

So the assumptions in the outlook are, first of all, long-term outlook -- it goes out to 2015.

But to some extent what we are projecting is a continuation of current trends, which is faster growth in our international business than in our domestic business, faster growth in emerging markets than the international in general, faster growth in specialty lines, and faster growth in consumer lines versus commercial lines.

All of that is against the backdrop of the significant reduction in premium written in the lines that caused us to strengthen reserves in the fourth quarter.

Those four lines constituted about 22% of net premium written in 2006 and that was down to 6.7% in 2010 and under 6% in the first quarter.

So we are changing business mix at a macro level.

Secondly, we are investing in infrastructure, in particular the global claims initiative.

We have invested over $200 million in the global claims initiative, which we expect to help us get our combined down by -- the loss ratio in particular down by about 2 points.

Third, we have instituted organizational changes in the way we operate, globalizing our product areas and putting individuals in charge, not only of a global commercial and global consumer lines but within them the sub-lines which remove barriers to using common infrastructure, which will help us on the expense ratio, and also help us allocate our financial capital where the returns our greatest relative to risk.

So all of these steps, we think, will achieve the aspirational goals by 2015.

And then last, but not least, we are investing significantly in technical pricing tools to equip our very experienced team of underwriters with state-of-the-art tools to leverage the data that we have a unique comparative advantage in, which we haven't used to the degree we could have in the past.

So if I summarize, at least on the top-line comments, that in areas you are looking to grow you expect to grow well north of the 6%, but there is certain areas that you are shrinking in, have been shrinking in, and maybe will continue to shrink in that will bring down the growth areas down to an aggregate mid-single digits?

Is that fair?

Well, let me put it this way.

Our outlook is based on no hardening in the macro environment.

Our outlook is premised on no radical increase in interest rate beyond the forward curve.

And third, while we have for planning purposes a top-line assumption and a combined ratio assumption, that is not how we manage the business.

We have managed the business based on targeting risk-adjusted profitability which may, depending on the pricing environment and the reaction of customers to our offerings and pricing strategy, higher or lower top-line growth or a different combined, depending on the mix of short-tail versus long-tail business.

So to some extent we are moving away from any kind of top-line targeting.

We think that leads you to do business at the margin which is unattractive, so the top line will be what it will be.

We think it will grow at about 6% based on our best estimates, but we are really instead targeting risk-adjusted profitability.

Understood.

Okay, second question is on the deferred tax asset.

I think that is slide 22.

There is a discussion about changes to the corporate tax rate, who knows if anything happens there.

But what sort of scenario should we be thinking about that if, as some say, the top rate -- the corporate rate comes down to the mid-20%s and certainly loop holes are sort of taken out in instead, how should we think about the sort of value of the three different buckets you show here if we took corporate rates down into the mid-20%s?

Dan, it's David Herzog.

I think you understand the levers.

Again, since we have a full valuation allowance on it there won't be any affect on our GAAP book value.

From a utilization standpoint, obviously the present value of that asset will come down commensurate with the reduction in the rate.

So again, our expectation is that we are -- that we should be able to utilize, should be able to generate, which then will translate into our framework from an accounting standpoint that we are going to -- that we have a goal to utilize the NOL to certainly to utilize the foreign tax credits and to utilize the vast majority of the non-life capital loss carryforwards.

What, again, is a bit more challenging to us is in the life capital loss carryforwards that $8.1 billion asset is a bit more challenging for us because of the presence, or the lack thereof, of gross attributes, gross gains that can be used to realize that asset.

So again I think you understand the lever in terms of what that is.

So a reduction in the rate, while it would be helpful in other respects, but from a realization standpoint it would clearly diminish the value of this.

Yes, understood.

I can come back at a later time to understand magnitude.

Keep in mind, I mean the other thing is that the tax rate -- our underlying operating companies are all connected to the holding company by way of a tax sharing agreement.

It has been in place for a very long period of time and so that is -- that is still the mechanism by which we are going to monetize these assets.

I just want to follow up for a minute on the Chartis comment to reinforce some things about the outlook and the confidence in the outlook.

There has been a lot of talk about a brain drain here at AIG.

The fact is that is not the case.

We have had incredible retention of our employees and, more importantly, we have had incredible retention in the worst of times of our clients.

If you think about -- the fact is that we still have retained almost 92% of our clients during this period of time.

We have retained a little over 80% of their policies.

Some of the policies, for example, we did lose was D&O coverage.

But I will tell you that over the last year, and it's continuing into 2011, we are getting that D&O coverage back.

We are winning more and more of that as people have seen that AIG is actually going to be here and they can count on us going forward.

There is no more question about our solvency and a going concern.

So with the fact that -- and just a data point that of the top 2,000 people that operate AIG today in leadership positions 57% have been with our company more than 10 years, 20% more than 20 years.

And so we have a strong, experienced, well-established team of leaders around this company that know how to do it and how to do it right, and they are focused.

That is the benefit we have with our clients because that is what the clients are looking for, the people and the people who can solve their problems.

So that energy is here.

Of that top 2,000 people only 3% left for all reasons in 2010.

So we have got enormous retention of that group going forward.

That is the group that is gaining this momentum as we move into the first quarter that is producing these results and that is why we have this strong outlook for the future.

Bob, that is great.

While you are there, just on the concept of systemically important financial institutions, what do you think that is going to mean for AIG and when will we know?

I have no clue when we will know.

I sort of asked that question a while ago and I got that answer, so I assume that is still the answer.

My sense would be that as an insurance company -- remember we are becoming an insurance company and not a trading company, so the aspects that caused the difficulty have been completely derisked.

FP is derisked.

In fact, FP today represents maybe $150 million downside and $1.5 billion to $1 billion upside, so that is all part of what got us in trouble.

So my sense would be that we will be regulated by the Fed is my guess.

And my guess is the insurance companies will continue to be regulated by the states and the countries we do business in.

I think what the Fed will be looking at is predominately the holding company and making sure that we do the things we need to do to support the enterprise and not taking an inordinate risk at the holding company level.

Because clearly the way we are going to drive our ROE over time is to deal with the fact that we have capital maintenance agreements with our insurance companies, so it's a two-way street.

So clearly we got to make sure that we get our RBC to a level that is acceptable for the insurance company and the quality ratings we need.

And, therefore, we can also -- so that will help us on the [E] at the insurance companies levels and because we will be able to show strength in our ability to move capital around the Company in a very effective way.

So I think my sense is you won't see -- but we don't know -- won't see the kind of Tier 1 capital issues that you see raising in the banking community at this stage of the game.

But we will have to wait and see.

Thank you for all those questions and answers.

Paul Newsome, Sandler O'Neill.

Good morning, everyone.

Thank you for the call.

I wanted to ask about insurance pricing for the property-casualty business.

AIG has historically been the leader in pricing.

We saw some glimmers of hope of hearty market in commercial.

I know you said that your assumption is for no hard market, but could you talk about what you are trying to do yourself in terms of pricing?

Peter will talk about that.

Well, I think that we, in pricing, are operating in a competitive market so we can't do anything, per se, about the market.

What we can do is price individual policies to reflect what we think is a fair return on the risk.

But the net result of that is that what we observed in the market is relatively stable in the first quarter.

Our casualty market -- there has been a little bit of increase in some lines, but the most promising sliver of hope is in property cat we have seen, in the US, double-digit growth in rates in the last three weeks and overseas even more than that.

So encouraging trends there, but overall I think it's too early to call any kind of turn in the market.

And separately I wanted to ask about, just to clarify from a cash flow perspective perhaps, is AIG at the point where they are generating cash flow or are you still having to put money down into the subsidiaries?

Just wasn't really clear as to whether or not you need the access to capital markets or if at this point you are self-sustaining from a cash flow perspective.

Hi, Paul, it's David Herzog.

I guess a couple of things.

One, as part of our capital management protocol and framework that we have put in place throughout the Company, we have instituted capital maintenance agreements between the parent company and the operating companies.

What that does is clarifies and brings transparency to how we think about capital, capital management, and it helps really operationalize the diversification benefits of the capital flows within the Company.

It also helps support a notion, if you will, of strength from above that we have accumulating a pool of resources at the holding company in order to support the strength and the opportunities down in the operating companies.

So the long and short of it is the operating companies are in a position, and we expect that we will pay dividends from the operating companies out of operating earnings up to the holding company.

And so the dividend capacity of these operating companies as we sit here today is very significant.

So for Chartis it's in excess of $3 billion and for the SunAmerica companies about $1.4 billion.

And the teams, the management teams are aligned around achieving those dividend flows from the operating companies to the holding companies.

As I said a minute ago also, in addition to the dividends, importantly, are those tax sharing payments.

And so regardless of the rate, there are tax sharing payments that will flow from the operating companies to the holding company and the holding Company will not pay taxes because of our very valuable tax assets.

So that is from an operating cash flow standpoint.

I believe in the Q you can see the net flow position of the SunAmerica companies.

Maybe, Jay, you want to comment on the robust performance in the quarter?

Thank you, David.

First of all, in terms of a direct answer to what I think was the question from Paul, the SunAmerica Financial Group companies have been net cash generators I think now for over a year or so.

There is no need for cash to be put into the SunAmerica Financial Group companies and, as David mentioned, we are actually in a strong dividend paying position.

And that is what we started doing already in the fourth quarter of last year.

A slightly different topic though in terms of the fund flows.

As you can see, in the business we had a significant improvement in our -- not only our top-line premium deposits and other considerations across basically all of the major product lines, but also the net flows have become much stronger.

They are positive and the surrenders remain at or below historic levels.

Persistency is very good and we see continued progress going here and even into the second quarter.

Thanks.

Jay and Paul, one other thing and I am going to -- we are going to do this in two parts with respect to Chartis.

We put -- in the quarter put down about $3.7 billion and that was really in two pieces.

I will take the first piece and I will ask our CFO for Chartis, Rob Schimek, to comment on the second piece.

But there were two pieces.

The $2 billion piece Schimek will talk about and I will take the $1.7 billion.

What we did, Paul, with respect to the ownership structure inside the Company of the United Guaranty Company, our mortgage guaranty company, effectively what we did was injected capital and took a dividend or a distribution, if you will, out of the operating company that owned United Guaranty.

So think of it as a replacement capital.

Cash went in; United Guaranty, which was capital, came out.

And that capital -- the cash that was in the Chartis companies has been redeployed into appropriate assets for the various insurance companies.

So that was $1.7 billion.

Effectively, the cash went in, came back out, and we had other assets in other parts of the Company that we were able to redeploy, get the assets into Chartis.

So Rob, do you want to -- Peter, go ahead.

So just to be clear, prior to this UGC was owned by Chartis.

After this UGC is now owned by AIG Holding Company, so that is what that maneuver achieved.

It's Rob Schimek.

The primary motivator there is that, as a subsidiary of Chartis, UGC was not a capital efficient structures so obviously putting it up at the parent company rather than having it down in Chartis is more efficient overall from a capital perspective for Chartis.

The second element of the capital that was infused into Chartis, as David referred to, was about $2 billion of additional cash that was put into Chartis.

That was put in following our reserve strengthening at year-end.

Obviously, the strengthening reduced the surplus inside of the Chartis companies, but also importantly increased the risk-based capital charge, for example, that the new reserves we had added attract.

And so, therefore, there were two adverse effects on the RBC ratio.

One, reduced surplus and, two, higher levels of capital charges.

So the new capital that AIG put into the structure or into Chartis, ultimately provided us with a benefit of getting our RBC back to what we feel is a comfortable level.

Thank you.

Operator, next question.

Scott Frost, Bank of America Merrill Lynch.

Thanks for the clarification on the tax rate.

Could you remind me what is again the timetable or I guess restrictions on any kind of monetizing of the AIA or the Maiden Lane III interests?

And is it fair or accurate to say that the DTA could or would be used to offset any taxes on a sale?

I have a follow-up.

Yes, I think philosophically right now AIA is part of the SPV with Treasury.

We can monetize that later this year, but part of the issue we are thinking about is strategically how we want to handle that asset.

Right now it's part of AIG.

We have other alternatives we are considering to deal with the SPV.

And so we are -- a guiding principle would be that to the extent we could retain our ownership in this fast-growing market -- we sold off two-thirds, that doesn't mean we want to eliminate all of it.

But that depends on how we deal with the SPV.

So clearly we are working hard on (inaudible) to make sure that closes.

That is $2 billion that will come in.

And we are looking potentially at monetizing other assets that we have so that AIA might be sold much later on, if at all.

And with respect to the DTA, it would offset -- to the extent there is a gain it would help us utilize that tax assets.

Do you want to also comment on monetization of cash flows coming out of Maiden Lane III and how that shows up over time?

Scott, the value of ML III is carried on our books, as I think you probably are aware of, as a mark-to-market asset.

So inside the Maiden Lane III SPV, so to speak, are the remaining CDO investments that were acquired back in November of 2008.

The cash flow estimates inside that portfolio are upwards of about $45 billion of nominal cash flows.

Also, when you apply those cash flows over the long period of time the waterfall is such that the Federal Reserve Bank of New York has a first priority senior note that gets paid off at year-end that was about $17 billion.

Then next in line, so to speak, is obviously their -- their interest carried on it is theirs first.

And then our $5 billion of the principle that we had invested and then our ticking fee, so to speak, gets paid next.

And then we share the upside one-third, two-thirds.

So again the cash flows on ML III likely won't emerge for quite some time given the presence of the large senior note position.

But nonetheless there is still significant value inside the Maiden Lane III SPV.

Okay.

And if I could ask a question about the -- thank you for that.

If I could ask a question about the FP break out, the way I am reading it is you have got $278 billion total notional, 38 mezzanine and 19 CDO squared.

Is that the right -- and then the rest of it -- and then 221 (inaudible) cap portfolio.

Is that right?

I think it's in the back of the supplement, like page 37.

But what I wanted to ask is do you have any sense of -- I know that the portfolio has been derisked as much as you can derisk it.

But with respect to I guess Basel III, do you had any view as to whether or not that would or wouldn't give banks there a further incentive to unwind?

Is that something that is contemplated or do you have any views on that?

I will take that if you like.

I don't think Basel III has a material impact on our unwind strategy.

I think that banks have had an outlook on Basel III over the last year and a half, and both ourselves and our counterparties have had every motivation to unwind and simplify this portfolio.

We are getting close to the point where what is left represents, as Bob says, very modest downside.

We estimate about $150 million P&L downside and about 10 times that in terms of upside.

But some liquidity risks against it but the contingent liquidity risk is embedded in our stress test assumptions and more than adequately covered by the liquidity cushion that we have at the holding company.

So I think you can think of this as a run-off portfolio that we will amortize off and throw off some decent returns, but not recurring income.

It's a one-off windfall.

Okay, and that last question.

For the non-reg cap portfolio is there any sort of amortization schedule that you have put anywhere?

I didn't see one but I may have missed it.

But do we have any idea as to how that kind of eventually runs off, the non-reg cap part?

This is Bill Dooley.

They all have final maturity dates, so it's going to take a while for this to roll off.

But because of our valuation on those on a future value basis, we think we are going to capture the income on these positions.

The point is we have not disclosed the amortization schedule.

That is correct, right.

But (multiple speakers) termination at some point.

Okay, thank you.

Operator, we are going to take our last question now and finish it up.

Anyone left in queue, we will be sure to call you immediately following the call.

Eric Berg, RBC Capital Markets.

Thanks very much and good morning to everyone.

Maybe Jay or David or whoever you deem appropriate, one of the unfortunate developments in the current quarter is that the stock market has given up quite a bit of its early gains and interest rates have fallen -- I was just taking a look -- pretty steeply both on the long end and the short end of the yield curve.

So my question is just how is all this going to affect -- I have two questions.

How is this going to affect SunAmerica, especially on the interest rate side?

And secondly, while I certainly heard Jay's comments about you are not increasing your investments or you have no intention to substantially increase your investments in partnerships, what is the near-term outlook for partnership income?

Would you expect it to continue to be as strong in the June quarter or, if not as strong, stronger than your baseline expectations in the June quarter than it was in the March quarter?

Thank you.

Good morning, Eric.

A couple of comments.

First of all, in the quarter -- not that I follow these things closely -- I think the equity market is still substantially up for the quarter, even after the most recent sell-off.

Interest rates, you are correct.

Number two, the most equity sensitive part of the investment portfolio in SunAmerica Financial Group are the alternatives.

The hedge fund results are recorded on a one-month lag, so really the second quarter for us would be the month of March, April, and May so you can take a look at sort of the aggregate result there.

At this point in time, I am definitely not predicting, but I am not expecting any big issues with alternative investment income based on the results we have seen from March and early results for April.

But there is still May to complete.

And private equity it's just too early to tell.

Basically dependent on distributions from funds, completion of liquidity events, and so on and so forth.

On the interest rates, the interest rate is moving down.

Will have some impact on the fair value of the liabilities associated with VA guarantees, but our hedging program is designed to address that on an economic basis.

As far as the volatility that flows through the GAAP P&L, again into early to estimate that.

But again I don't -- at this point in time I don't see the market action as having a dramatic impact on results at this point in time for SunAmerica.

I should say that all of this activity has not slowed down the good momentum that was displayed on the top line in the first quarter.

And we continue to see good progress moving into the second quarter thus far.

When you said -- just one quick last one, when you say you don't expect major developments on the alternatives, what do you mean by -- is -- are you saying in effect that you expect a continuation of what you saw in the first quarter?

Is that what you mean?

No, actually, not really going to comment on the -- predict the results of the equity -- of a portfolio as large and diverse as ours.

Just saying that if you look at the change in value of the -- pick an S&P 500 and assume that the quarter starts on March 1 to today, I think you had positive results through today.

And I think that probably will be helpful on balance to the portfolio.

For planning purposes, we expect the SunAmerica Financial Group alternative investment portfolio to return approximately 10%.

The results, as you know, are very lumpy.

We have achieved, over-performed on the 10% over a long period of time.

Certainly the first quarter is an example of that.

We aren't planning for those kind of returns.

I think the first-quarter yield was roughly 16.5% in the SunAmerica portfolio.

But for planning purposes it's 10%, but the market will dictate that and we will call it out in the financial supplement as we do every quarter.

You can take that into account as the way you look at and model the Company.

Thanks very much.

Thank you, Eric.

Thank you, operator.

At this time we would like to conclude our call.

Thank you for joining us and we look forward to speaking with you in the future.

Thank you all very much.

With that we conclude today's conference.

Thank you everyone for joining us today.