American International Group Inc (AIG) 2013 Q3 法說會逐字稿

Good day and welcome to this American International Group third-quarter financial results conference call.

Today's conference is being recorded and now at this time I would like to turn the conference over to Mr. Liz Werner, Head of Investor Relations.

Thank you and good morning, everyone.

Welcome to AIG's discussion of third-quarter 2013 results.

Speaking today will be Bob Benmosche, President and CEO; David Herzog, Chief Financial Officer; Peter Hancock, CEO of AIG Property Casualty; and Jay Wintrob, CEO of AIG Life and Retirement.

Other members of senior management are also in the room and will be available for Q&A at the end of the period.

Before we get started 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 third-quarter and second-quarter 2013 Form 10-Q's and our 2012 Form 10-K under Management's Discussion and Analysis and under Risk Factors.

AIG is not under any 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 reconciliation of such measures to the most comparable GAAP figures is included in our financial supplement which is available on AIG's website, www.AIG.com.

Now I'd like to turn the call over to Bob.

Thanks, Liz, and good morning, everybody.

And this is another solid quarter for AIG and we clearly have said we are going to work on making sure that you see consistent and improving earnings of the Company over time.

And I think you see that in our operating numbers for the insurance companies in particular.

I would also like to welcome Kevin Hogan.

As you know, we have held the position of the consumer group open under Peter Hancock; we have waited for Kevin to return, 24-year veteran of AIG having run much of the consumer businesses over that career.

And we're pleased to have him back.

So, Kevin, welcome back and we are looking forward to you talking to our investors next quarter on the progress you are making on the consumer side.

Before we get into the numbers, first about ILFC.

We continue to work with the consortium that has been working with us over the almost past year.

We still feel that while they are making slow progress they are making progress.

But this quarter accounting suggests that we have to think about whether this continues to be a discontinued op and some other accounting rules.

So we are really thinking hard about if we can't get this transaction closed this quarter, then we may want to commit to a path of IPO for next year and not continue to carry it the way we are carrying it on our books.

So that is a decision we hope to make in this fourth quarter.

However, we still feel that there is a good chance this transaction can close as is.

On the aspirational goal comment that I made yesterday and we wanted to talk about today, clearly when we did our re-IPO in May of 2011, there was some serious concern in the marketplace -- could AIG survive and continue to grow and thrive?

And we put together some key points that we felt we needed to all work towards to give you the confidence that we can in fact return to a very strong Company.

And we have been committed to those aspirational goals and we are still committed to those aspirational goals and this entire Company is working towards achieving them.

However, as we get closer to 2015, we feel that comments going forward are more like guidance rather than a direction that we're all working towards.

And so, we are going to stop making comments on that progress towards the aspirational goals.

And we are still, as I said, committed to them, but we are not sure whether we will get them done by 2015.

And so, once we get closer and beginning to comment on it, that is where the theory of guidance comes into play.

So I do want you to understand we are committed to them, we are working hard to get there and we will get there as quickly as we can.

So let me move to page 3 and talk about capital management and liquidity.

You see our liquidity continues to be strong.

We are continuing to focus on our coverage ratio, which is what we said we would do in terms of buying back debt.

But we are also issuing debt where it makes sense for the future and looking at our future trend lines in terms of when debt is coming due.

We also declared a dividend for the quarter, so we are back doing that.

And in the middle of the quarter we were able to start our buyback program after we received authorization to do so.

So capital management continues to be strong and you can see also the dividends flowing into the holding Company continues to be strong, as we have said before.

On the Property Casualty front, continued progress on loss ratio when you look at the trend line.

Remember that it is not a linear line and it is a line that will up/down a little bit each quarter.

The main thing is to look at its pattern over time and it looks very good and continues to look good.

We continue to get rate change in the segments that make sense to get it.

Our programs are actually growing, in spite of what is reported, because primarily it is reported down because of the currency exchange between the dollar and the yen where we have such a big business in Japan.

And during the quarter, while we are supposed to have big CATs sometimes we have a little CATs and we also have severe losses and Peter will talk about that.

So it was a modest quarter of what I would call catastrophes and severe losses.

The Mortgage Guaranty business continues to show its strength after we have redesigned its risk selection model.

And so, today almost 55% of our premiums are in that new model.

That is throwing off good steady earnings on the legacy book.

Delinquencies are down slightly.

However, keep in mind that almost 75% of those who are delinquent have been delinquent before and they cure; it seems that people just can't keep up with the timeliness of their payments, but so far they're still keeping up with the mortgage overall.

On Life and Retirement a very strong quarter of sales, Jay will talk about that.

Good net flows as well, very good pricing on the products that are being offered out there.

And so, we are feeling very confident on that part of the business as well.

So overall I think all of AIG is performing well.

And that gives us the confidence to look forward to the things we have to do as a Company.

So let me turn it over to David who will take you through some more details.

Thank you, Bob, and good morning, everyone.

As Bob mentioned, our insurance operations delivered solid operating earnings of about $2.2 billion and we continue to execute on our capital management plans.

And our businesses continue to work towards growing their risk-adjusted returns.

As we have said in the past, ILFC remains a non-core asset and is accounted for as held for sale given our plans to monetize it through a sale or an IPO.

We have already written ILFC down to a fair market value and this quarter, when ILFC files their results with the SEC, they will have completed their annual aircraft impairment review.

This review resulted in a $1.1 billion impairment from older out of production aircraft, but this impairment has no affect on AIG's carrying value of ILFC.

Further, to Bob's comments on our work towards our long-term goals, we have made good progress on deploying capital.

We have deployed $18 billion in capital through equity buybacks, a combination of equity buybacks, debt capital management and a reestablishment of our common stock dividend.

And importantly, we remain focused on generating deployable capital with distributions from our insurance operating companies of about $4.6 billion year to date through the third quarter.

We made good progress on our expenses but we've still got a lot to do in terms of investing in our infrastructure and our growth opportunities.

We've also made good progress on improving our ROE and are committed to our strategies.

You can see the progress we've made in reducing the accident year loss ratio in Property Casualty which has declined roughly 3 points annually over the last couple of years.

Turning to our financials on slide 4, net income for the quarter was $2.2 billion and included an after-tax provision of $260 million for legacy litigation matters as a result of current period developments.

We also determined that recently identified tax planning strategies met the prudent and feasible criteria and we released, through income, about $900 million of our deferred tax asset valuation allowance relating to our capital loss carryforwards.

Our capital gains taking program has allowed us to realize roughly 63% of our capital loss carryforwards.

In addition, we also released about $300 million of valuation allowance from foreign DTAs.

Our operating ROE for the quarter was 6.2% and was 7.6% for the first nine months.

Since our earnings are tax affected and we are not paying US taxes, given our NOLs, our ROE excluding the DTA would be about 130 basis points higher.

Book value per share excluding AOCI was $62.68, up 8.3% from year end.

Our operating results begin on slide 5 and you can see the solid growth in our insurance operating income from a year ago.

Strong fundamentals are driving our business.

Property Casualty comparisons are driven by accident year loss ratio improvements and lower CATs and continued benign prior-year reserve development.

Mortgage Guaranty continues to benefit from improving housing market and risk selection.

Life and Retirement earnings were about $1.14 billion reflecting continued disciplined spread management and lower alternative investment returns offset by net favorable DAC unlocking from the annual assumption review.

Life and Retirement premiums and deposits were very strong totaling $8.4 billion.

Peter and Jay will discuss these results further in their remarks.

The direct investment book and global capital markets earnings collectively were $139 million in the quarter reflecting continued appreciation in the portfolios, albeit at a somewhat slower pace from the first two quarters of this year.

As we have stated in the past, the direct investment book and global capital markets results are impacted by market pricing; due to their mark to market accounting treatment and earnings can thus vary significantly from quarter to quarter.

Corporate expenses in the quarter reflect our ongoing infrastructure build out.

A year ago we benefited from an expense credit relating to the monetization of the US treasury stake in AIG, so the comparison is not straightforward.

Our reported operating effective tax rate for the quarter was 18% and reflected a favorable tax settlement and related discrete items for about $200 million.

Excluding this benefit the effective tax rate was more like 32% and we expect our annual effective tax rate to be roughly 31%.

Turning to slide 6, you can see the impact of capital management activity year-to-date.

In the quarter we issued $1 billion of seven year notes at just shy of 3.4%.

And also in the quarter we repurchased or redeemed -- in the quarter and thus far in the fourth quarter redeemed $1.1 billion with an average coupon of about 5.7%.

In October we also issued $1 billion of 10-year notes.

Including the direct investment book, when you take into account our year to date liability management and our full year maturities, we are on pace to reduce our leverage by over $6.5 billion and reduce our annualized interest expense by roughly $325 million.

On the equity side we distributed $147 million and dividends to our shareholders and deployed just over $190 million, repurchasing 4 million shares.

We will continue to be opportunistic in our debt capital management going forward and we will continue to deploy our existing unused share repurchase authorization in an orderly way.

As you can see on slide 7, our insurance operations remain a source of parental liquidity as they sent $1.9 billion in dividends and distribution to the parent and, as I mentioned earlier, $4.6 billion year to date.

These dividends, combined with the impact of our capital management activities I mentioned earlier, resulted in parent cash and unencumbered securities of $12.7 billion at the end of the quarter.

Included in the [impaired] liquidity is $5.9 billion related to the direct investment book which is allocated for future debt maturities and contingent liquidity stress needs.

As we've indicated in the past, nearly 80% of the direct investment book's liabilities mature by the end of 2018.

So at this time I would like to turn the call over to Peter for comments on Property Casualty.

Thank you, David, and good morning, everyone.

Before I begin my comments on the quarter, let me echo Bob's comments about Kevin Hogan's return to AIG.

Kevin is the right leader to grow our market leading global consumer business including life.

And I believe they will prosper under his very strong leadership.

AIG Property Casualty results in the third quarter reflect our consistent focus on underwriting improvements and targeted growth.

The current quarter benefited from modest catastrophe losses, our ongoing shift in business mix, increasing pricing and enhanced risk selection, partially offset by elevated severe losses and alternative investment returns that were lower than our expectation.

As we discuss the quarter's result today I will highlight our focus on balancing growth, risk and profitability.

Turning to slide 8, net premiums written grew 3% on a normalized basis.

This growth is consistent with our expectations for 2013 as we continue to be disciplined in our underwriting and opportunistic in our pricing actions.

The accident year loss ratio, excluding catastrophes, declined by 3 points from the year-ago quarter reflecting continued progress improving our business mix and risk selection.

We have said in the past that there would be quarterly volatility in the accident year loss ratio and this quarter we experienced severe losses of $211 million which are concentrated in seven property losses largely outside of the United States.

We continue to expect improvement in our underwriting results.

Pretax operating income of over $1 billion included lower catastrophe losses of $222 million versus $261 million a year ago.

Catastrophe losses related to multiple perils around the world including Colorado flooding, wildfires and European weather events, but no major US windstorms.

Our reserves remain stable and net adverse development was $72 million in the quarter compared to $145 million a year ago, a benign level given our $63 billion plus of reserves overall.

Turning to slide 9, commercial insurance continued to progress in reshaping its portfolio across products and geographies.

Excluding casualty, top-line growth was 9% and, as you know, we have been we underwriting our casualty book, thus overall commercial top-line growth was a net 2%.

We grew in risk-adjusted profitability accretive lines, or RAP accretive lines, and regions including property, financial lines and specialty while continuing to reduce exposure to US casualty and certain European liability segments.

Rate increases globally for commercial lines were 3.4% and the North American market continues to lead rate improvement with a 5.5% rate increase in the quarter.

US casualty led with a 7.3% rate increase while US financial lines increased 5.8% and US property increased 3.9%.

We've also used highly differentiated rate to improve our retention strategies and as a result retention is higher among our higher-quality risks.

Our commercial accident year loss ratio excluding catastrophes was down 4 points from the prior year to 66.2% despite a $91 million increase in severe losses as we see a sustained benefit from our enhanced risk selection, pricing discipline, exposure management and claims management.

The sequential trend was impacted by severe losses which demonstrates the volatility within any one quarter.

Turning to slide 10, consumer net premiums written grew by 4% on a normalized basis.

Consumer growth was driven by momentum through multiple distribution channels.

Accident and health net premiums written reflected declines in the US offset by growth in Asia while personal lines grew 7% on strong growth in the US.

Profitability in the quarter was negatively impacted by retail warranty losses in the US.

We've taken actions to improve rates and amend terms and conditions which should return margins to targeted levels promptly.

Slide 11 illustrates our investment portfolio mix and quality.

While the low interest rate environment and alternative investment returns affected net investment income in the quarter, we continue to be pleased with our overall returns and are satisfied with our strategic asset allocation.

In the quarter we made a $716 million dividend payment to the parent and expect to contribute our plan dividends for the remainder of the year.

As we look at our nine-month performance our continued focus on balancing growth, risk and profitability has delivered almost $1 billion of high quality additional operating profit from a year ago.

Turning to slide 12, our Mortgage Guaranty business reported operating income of $43 million, which represented another quarter of improving profitability and growth in new business.

Mortgage Guaranty continued to benefit from its proprietary risk selection model and an improving housing market with 55% of earned premiums generated by high-quality business written after 2008.

Delinquency fell to 6.4% at the end of the quarter for a one-third reduction compared to the third quarter of last year.

UGC continues to be strongly capitalized and holds an investment portfolio that is highly liquid with 85% of the investments rated A or better.

As a leading US mortgage insurer UGC currently insures 780,000 mortgages across the country.

Now I would like to turn the call over to Jay to discuss life and retirement results.

Jay, I think your line may be muted.

Thanks, Liz, and thank you, Peter, and good morning to everyone.

I'm going to begin on slide 13, where you can see that AIG Life and Retirement delivered another strong quarter from both a top-line and bottom-line perspective.

Operating income was $1.1 billion in the third quarter, up 38% from a year ago.

The year-over-year comparisons were impacted by several items in each period, including a net positive unlocking of assumptions in the current quarter versus a charge in the year-ago quarter primarily related to our GIC portfolio and other liabilities.

Even after adjusting for these items we delivered bottom-line growth in the quarter with positive comparisons across the majority of our product segments.

Strong fundamental trends, including variable annuity fee income growth and continued enhancement of profitability through active spread management, were key contributors to our favorable earnings comparison.

The third-quarter highlighted the strong cash generation capacity of our business.

As David mentioned, AIG Life and Retirement distributed $1.2 billion to the parent this quarter bringing our year-to-date dividends and loan repayments to more than $3.1 billion.

This reflects both our solid capital position and the strong profitability of our businesses across multiple product segments.

And even after the payment of dividends we grew shareholders equity, ex-OCI, by $2.2 billion since year-end 2012, ending the quarter at $33.8 billion in shareholders equity ex-OCI.

We continue to experience strong sales momentum and this quarter achieved our highest level of sales in Life and Retirement's history.

Innovative product design, favorable market conditions and increasing effectiveness of our distribution strategy all contributed to a 118% increase in retail premiums and deposits from the year-ago period.

Sales increased across all retail investment products from both the prior quarter and the year-ago period.

Surrender rates also declined sequentially across all product lines.

Individual variable annuity and retail mutual fund sales momentum continued reaching $2.4 billion and $1.6 billion respectively for the quarter.

We also saw meaningful acceleration in fixed annuity sales which reached nearly $1.2 billion in the quarter.

Growth in institutional premiums and deposits was driven by a midsized pension buyout case and a large group retirement plan takeover in the quarter.

Additionally, we closed on $5.3 billion of stable value wrap business in the quarter bringing total stable value wrap assets under management to approximately $19 billion at the end of the quarter.

Net investment income declined 5% in the quarter largely due to lower than expected alternative investment returns and the continued impact of reinvesting at rates below our current portfolio yields.

However, while reinvestment rates were lower than current portfolio yields, they have increased sequentially for the past two quarters.

We continue to be opportunistic in our investing strategy and seeing attractive opportunities across various asset classes.

Operating income benefited from the increase in fee income, as well as our ongoing strategy of active crediting rate management to enhance profitability in both our retail and institutional spread businesses.

Additionally, a net positive adjustment of $118 million related to the review of gross profit assumptions and an associated positive unlocking is reflected in operating income for the quarter.

Assets under management increased 10% from a year ago as a result of growth in both the retail and institutional businesses, demonstrating the value of our diversified business model.

Sales momentum and strong equity markets contributed to growth in retirement income solutions, retail mutual funds and group retirement assets.

Net flows from these products and our fixed annuities business were $2.5 billion in the quarter, or an increase of nearly $3 billion versus the year-ago quarter.

All product lines contributed to this favorable trend with the majority of the improvements driven by the increase in fixed annuity sales and continued strength of variable annuity and retail mutual fund activity.

In the institutional markets, as previously mentioned, the development of the stable value wrap business added over $19 billion in AUM over the past year, all with contractual fees and investment limitations on that wrapped assets, well within our targeted pricing and terms.

With the quarter's rise in interest rates we did see the unrealized gain position and our invested asset portfolio modestly declined.

This decline partially offset a portion of the increases in AUM we experienced from the improved net flows.

Overall we're pleased with the growth in AUM we're seeing across our portfolio of businesses.

Slide 14 highlights the diversity and scale of our businesses.

Retail operating income increased 54% versus a year ago primarily due to growth in fee income on separate accounts as well as crediting rate actions which together contributed approximately $100 million of the increase in earnings.

Retail earnings also benefited by $198 million from net positive adjustments related to our review of gross profit assumptions principally due to differences in our yield and mortality assumptions versus our models.

Institutional operating income increased 7% and also benefited from higher fee income on separate accounts and crediting rate actions.

These positive trends in our institutional business were partially offset in the quarter by lower net investment income as well as an $80 million negative unlocking adjustment related to our group retirement business as a result of lower investment yield than previously assumed in our DAC models.

The comparison to the year-ago period is also affected by a $110 million charge related to our GIC portfolio that we took in the third quarter of last year.

Our sales trends continue to reflect strong consumer demand and increased distribution penetration for our investment products.

In fixed annuities crediting rates have risen in line with market interest rates, making this product more attractive when compared to competing bank and short-term fixed income products.

Consequently we are seeing volume growth while continuing to achieve increases in our target returns.

Our $1.2 billion in fixed annuity sales is a high for the past seven quarters and is consistent with the improvement in the market overall.

Fixed annuity sales moderated with the recent pullback in market interest rates in October, but continue to be at levels higher than the first and second quarter of this year.

We are pleased with current pricing conditions and look forward to continued fixed annuity sales momentum assuming a modestly rising interest rate environment.

Our retirement income solutions business continues to grow profitably and we remain comfortable with our sales run rate.

By offering a product to the consumer that is competitively priced and meets their income and investment needs, with terms and conditions conservatively designed to enable us to manage our risk effectively, we've been able to grow our book of individual variable annuity business in a controlled and profitable manner.

At quarter end our variable annuity account value, including both fixed and separate accounts, was $35 billion in our retirement income solutions business and over $54 billion in our group retirement business.

And as an update to last quarter, of our $25 billion of VA's with guaranteed minimum withdrawal benefits, 63% are in benefits with strong de-risking features such as VIX indexing of fees, volatility control fund requirements and required minimum allocations to the fixed account.

So the combination of a relatively small legacy block and enhanced risk controls in our current features has allowed us to capitalize on opportunities when competitors have chosen or been forced to pull back from the market.

Finally, slide 15 and 16 depict our investment portfolio composition, returns and yields.

Overall base yields declined slightly in the quarter as a result of the impact of investment purchases made yields lower than the weighted average yield of the existing portfolio.

At the same time we've actively managed down crediting rates over the course of the year, which is reflected in the lower cost of funds from both our fixed annuities and group retirement businesses.

Overall spreads expanded for both fixed annuities and group retirement from the prior year.

At the end of the third quarter about three-quarters of our fixed annuity and universal life account values were at minimum guarantee crediting rates and we remained focused on managing spreads actively.

To sum it up, we're pleased with our solid earnings, strong sales, improving net flows and level of cash distributions to AIG through the first nine months of the year.

We remain focused on executing our growth strategies by leveraging our strong relationships with distribution partners to increase profitable sales of our broad product portfolio across all channels while continuing to look for opportunities to grow our business where we can achieve the most attractive risk-adjusted returns.

And with that I will turn it back to Liz to open things up for Q&A.

Thank you, Jay.

Operator, could we open up the lines for our Q&A period, please?

(Operator Instructions).

Michael Nannizzi, Goldman Sachs.

I guess one question, Bob, maybe on ILFC I guess.

If that does -- if it is not resolved immediately, I mean does that imply it could come back on the balance sheet?

And could that complicate the SIFI review process at all?

I don't think it would complicate any SIFI process whatsoever.

I think it is a non-core asset, we would continue to divest and deconsolidate it and we will do that in as rapid a time as it makes sense financially for the Company to do it.

We know what the value of that Company is; we know what has been accomplished.

And when you refinance almost $20 billion of debt and do it in a way that gives us a very tight match between cash flows and debt maturities and so on, I think it is a property that we can divest of.

But I will have David talk about the actual accounting.

Yes, thanks, Bob.

And good morning, Mike.

There are two things, one on the balance sheet held for sale that is one quote accounting judgment.

And then there is another judgment we make with respect to discontinued operations and those are two different judgments connected but they're two different judgments.

And the held for sale treatment is pursuant to our plan.

We have a plan, we are pursuing the plan.

It includes pursuit of the jumbo transaction, but there are other interested parties, as we have said, as well as an IPO alternative.

So there is a solid basis for the held for sale.

And then the question is on discontinued operations, depending upon the ultimate disposition path, we need to make a determination whether or not we will have significant continuing involvement.

And that will be a facts and circumstances judgment that we will make and we will continue to evaluate facts and circumstances.

So the held for sale, it is not going to come back on balance sheet.

And so now it is just a matter of how we go about divesting it.

Great, thank you.

and I guess maybe David, on partnership returns I guess you noted in your disclosure that returns were impacted negatively by equity markets.

But I am just -- I was trying to remember the lag; I think you are either three months or one month depending on the investments.

Equity margins have been pretty strong.

I was trying to understand even -- not relative to last year, but just relative to sort of a run rate the returns looked low.

I'm just trying to get a better understanding for how we should think about that.

Thanks.

Sure.

And I will comment, Bill, if you want to add anything.

The partnerships are a quarter lag.

And at hedge funds are a month lag.

Private equity -- or private equity partnerships are a quarter lag.

Bill, anything to add?

Yes, Mike, as far as the year is concerned, first of all, these returns aren't linear each quarter, so they are a little lumpy.

Where our market is somewhere between or our goals are somewhere between 8% to 10%.

And already this year we are close to our annual goal on the return on these assets.

So even though this quarter was lighter than the previous quarters this year, we're still very confident in it.

And, as David said, the hedge fund part of the portfolio is in the books already, we just don't know what it is because we need the information flows to come in and the hedge funds have one month to go.

And there is a correlation between that and the markets and you guys can judge from where the markets are today how the quarter is going to wind up.

But I think that asset class is certainly performing the way we expect it to.

Just a quick on that -- I mean, if we did that math backwards though I guess we wouldn't quite get there.

I wonder is the 8% to 10% return goal against the backdrop of a market that has risen as much as equity margin has risen this year.

And this could be just a wrong assumption, but that would kind of gradate with the underlying return in the equity markets and not be sort of a kind of fixed return threshold?

No, it is not a fixed return threshold.

As I said before, these returns aren't linear.

And the type of funds that we invest in, depending on the volatility of the fund, the risk associated with the funds, we try to maintain the 8% to 10%.

And as I said, we are in good shape through the first three quarters to attain those goals.

Great.

Thank you.

Josh Stirling, Sanford Bernstein.

A question for Peter if I may.

You have made a lots of progress in commercial lines in particular.

I'm wondering if we could talk a bit more about consumer.

When I think about these businesses, most of them are structurally more attractive than your consumer lines, lower elasticity, lower risk and not really as broken.

But you haven't thus far been getting a ton of margin momentum.

And recognize this is partially you are investing in growth and maybe some others just getting the team in order.

I am wondering if you can walk us through a bit more granularity what you guys intend to do to actually drive the consumer combined ratio to a low 90s number and sort of what a realistic trajectory of that would be to play through.

Thank you.

Thanks, Josh.

I think that the first thing to remind everybody is how much of our consumer business is in Japan.

And so, what is going on there is a major merger integration effort between Fuji Fire and Marine, AIU, and an integration of many capabilities which will improve the expense picture on by far the largest consumer operation we have.

So that is certainly progressing well and we expect that to improve the margins in what is a large and stable book of business.

But it is not growing that fast obviously with the demographics in Japan as they are.

The one exception there is the excitement we have about Fuji Life.

And so, we see good growth there as we rebuild the life business, taking advantage of the aging population in Japan.

The other dimension is the investments that we are making in building a firm foundation for growth, scalable growth in emerging countries.

And I would say that there are three large emerging countries which we have been investing quite heavily in over the last year where we have taken perhaps a little longer than expected to build the platform that we wanted and get the sales kicked off at the rate that we would like.

But we have still a high degree of confidence that those platforms will perform fairly promptly.

So slightly delayed start-up in three large emerging markets which we are investing in.

And then the USA&H story somewhat negative for a variety of reasons that are kind of one-offs.

But we have got other quite good growth momentum on the consumer side, especially on the extended warranty side, despite the short-term profitability issue that we talk about in this quarter on one particular extended warranty program.

That is helpful, thank you.

Bob, if I could switch to a sort of a bigger topic.

I get that -- we all get that you don't want to provide guidance.

And the aspirational goals were stretch goals back in 2010.

But you have since made a lot of progress against them.

And so, when you say, I think I'm getting this right, that we are not sure we will get them done by 2015, investors just wonder what to expect.

And recognizing you are not going to give guidance, there I think were fundamentally three big pieces to the aspirational goals -- driving ROE 10%, returning capital $25 billion to $30 billion and investing to get some growth and rebuild the franchise.

I'm wondering if you could at least give us some directional sort of color on which of these big pieces you think may be at risk.

I don't think -- first of all, you are assuming it is at risk.

What we are saying is that once we get closer to the time we need to give you some -- maybe a range around it -- we have discussed a whole lot of things one would have to do once we get closer.

Because look, if I could tell you exactly what I could be at exactly a point in time, I think I would have problems with some of the people in Washington in the enforcement group because you can't run this business with that degree of accuracy and you all know that.

What is important as we look at how we are running it, what our focus is on different things within this Company?

And we have said we are focusing on expense and we've been investing a lot of money to get our expenses down, so we had to spend to eventually see the savings.

We've talked about our investment portfolios and the things we are doing there.

We've talked about making sure we understand our cost of capital for the businesses and the risks we are taking, and we want to earn more than our cost of capital, especially in the Property Casualty business where there has been a big focus so that we are capital light on the things that make the most sense for us.

So we are continuing to do all of that and it all comes together including capital management.

So it is not a question of anything other than as you go through all of these things.

When we get closer to 2015 you are going to ask us to be a little bit more specific and it becomes more of an -- instead of an aspiration it becomes we will achieve something around this in this period of time.

And that would be guidance and that is what we are concerned about.

So we are focusing on all of it and we are proud of the progress we've made and we are putting a lot of energy to achieve all of it by 2015.

But what I'm saying to you today while in advance of the time is we may not get there by 2015.

It might be a little later.

And that is about all the comment we can make on the whole subject.

But I think you need to look at our progress every quarter, look at the trends every quarter and I think you will see a continually improving organization here.

Okay, so we will have to doing our jobs each quarter.

Thank you.

Adam Klauber, William Blair.

The ramp up in some of the Life and Retirement products is very good to see.

I guess two questions.

Do you think it is the earlier part of the ramp up, in other words can it continue to accelerate?

That is number one.

And number two, how should we think of the returns of that business today, particularly the fixed annuity business, today compared to what they have been more recently and historically?

Jay?

Sure, I will take that one.

First of all, in terms of the ramp up, I think that the potential demand for the products we are selling, based on demographics, a greater concern about longevity risk, outliving your savings and such, is definitely there, as well as the continued movement of money from defined-benefit pension plans into defined contribution plans and ultimately to IRA accounts where money moves from an effect institutional management to retail management and more personal control.

I think that primary driver though of the quarter-to-quarter growth is going to be -- have a lot to do with market conditions, the equity markets, certainly rates, shape of the yield curve and such.

But I think the underlying demographics and the basic demand growth will continue to be there but market conditions will have an overlay that is going to play a big role in quarter-to-quarter results.

You saw, for example, this quarter a very significant increased in fixed annuity sales based on rate movements and we generally follow the 10-year treasury assuming spreads -- credit spreads are the same quarter to quarter.

You saw the kind of movement not only for our Company where we are able to take advantage of that, but really for the industry, as I mentioned in my comments.

At the same time, the pricing continues very strong.

We continue to target pricing for fixed annuities in the roughly 11% to 12.5% return on equity or internal IRR basis.

And we continue to get that pricing; we believe at the time we are writing those -- that business.

So pricing is actually very good in this environment.

Market conditions will depend a lot on rates and spreads.

And I think we will be ready to go with our low-cost operating platform and our very strong distribution organization to take advantage of that or any other product segment that grows going forward.

I would just like to add to what Jay just said and it is a fact that people wonder about the businesses, keeping them together and the diversity of risk and the diversity of dividends to the holding Company and so on.

But a startling number that just keeps hitting me is that over the next 35 years there will be four times the number of people over 65 than there are today.

So forget about percentages and numbers and all the other stuff, that is four times the number of people in that age category.

And that is the area where we do a lot a business where we deal with protection and life and other products.

So we see the opportunity not only in the US market, but you have those statistics maybe even more exaggerated in China.

So this is a great growth business for us over time.

So it is not only quarter to quarter in the markets but it is also about client need.

Thanks a lot.

Greg Locraft, Morgan Stanley.

Just wanted to get a little more detail on -- the tax rate we were expecting was in the low 30%s, you put up an 18%, you mentioned the credits in the commentary.

Can you go into kind of the timing around that, what they were and whether there is any more like that coming forward?

Good morning, it's David.

Again, we will address discrete items in any particular quarter as they occur.

And will give you plenty of disclosure around that.

And so the 31% rate that we expect going forward is really a reflection of the ongoing operations.

As you know, we have -- over the last couple years we have done some portfolio rebalancing in Property Casualty to reduce our holdings of tax-exempt securities, so that certainly affected the effective tax rate.

So again, I'm not going to give you any specific guidance as to what to expect.

Again, the 31% is really sort of a normalized rate.

And then we will break out the discrete items that we do and then we will let you know when those occur.

Okay, okay.

I guess what I am wrestling with, and I know you mentioned it earlier, but it is just the difference between -- I don't know -- the definition of aspirational and guidance.

I mean to me they are the same thing.

And in the quarter where the pretax miss was pretty sizable why choose now to suspend guidance effectively going forward?

And I appreciate you guys are aiming for 10% plus.

But even then, I thought that the plus would have covered you from -- you don't have to give decimal point accuracy so to speak.

I just don't know why right now you would be suspending guidance.

It is very simple, we are getting too close.

We could -- it is all you want to wait until next quarter or the quarter after, sooner or later we are going to face this issue.

And so, the feeling is that guidance is something that I believe from what we have looked at we have a likely chance to achieve.

Aspirational says as we look at this Company and all the things we need to do over a five-year period, we believe that we could get to this kind of target.

And so, the word aspirational and why we used it was to say to you that we don't have a plan specifically that says you can get there.

We haven't gone through be the details, but we knew that directionally if we do a whole lot of things and it begins to take hold, we could get into that ballpark.

And so, we are going to get to a journey, we are going to get to Southern New York.

Now you are going to ask me, well, are you going to make it to Westchester, are you going to make it to Putnam, or you going to make it to Manhattan -- that is guidance.

Okay, okay.

Lastly just for Peter maybe.

On the pricing outlook in P&C, I don't know if you've given a lot of color on where you think it could be, but it is decelerating a little at the margin, it is great to see the gains.

But how do you think this thing plays out going forward from a pricing perspective on the commercial side?

I will actually toss that one to John Doyle.

So why don't you pick it up, John.

Thanks, Peter.

Hey, Greg.

Rates were up for us in the US where rate is needed the most, by 5.5% in the quarter, a little down from the second quarter.

Casualty rates in the US remain fairly strong.

The property market seems to have gotten a bit more competitive, we have been observing that over the course of the last several months.

But I expect the same factors driving pricing improvement in casualty in the US to continue over the near future.

I would like to also -- and John's answer is very correct, but underneath that answer is something that many of you would not know, and that is the amount of analytics going into understanding what is our account quality index, thinking about the quality of clients, the quality of the risk and so on down the line and make sure we have segmented that in a much more refined way.

We are now looking at brokers and what the broker quality index is so we know the kind of businesses being brought to us by brokers.

Some of them looking for -- taking a shot in the dark and hoping some -- AIG will write it versus somebody who really prides their business with AIG and tends to bring us very good risk and very well field underwritten.

And so, when we talk about price increases we actually look at it by these segments and we're going to get more refined by these segments.

So we have very good retention in our best clients and very little rate increase, but we are getting pretty good retention in some of our lower quality clients where you need the rate because of the performance of those accounts.

And so it isn't just following the market anymore, we are becoming much more scientific and where in our client base or brokerage brought business do we want to begin to add rate.

And that would be independent of what is actually happening in the market.

So it is not just the old everybody is up-and-down by the tide.

So I am very impressed and very optimistic about what John has been doing in particular in the whole commercial business with Peter.

So that is a different level of detail behind that answer.

Yes, Bob, I would add the add the tools that we are building to help making better judgments at the underwriter's desk.

We've made big investment on the claim side as well.

In people, in process and in technology that are enabling better results for us to reduce the cost to risk once the claim hits and so that is an important part of the improvement as well.

Okay, that makes a lot of sense, thanks a lot, guys.

Joshua Shanker, Deutsche Bank.

My first question is for Jay.

In terms of the amortization of the DAC on the life business, interest rates were kind of stable during the quarter, but you got a benefit there.

Can you talk a little bit about thinking about what went into this quarter's change in the DAC and what we might see happen in future quarters if rates go up and when that actually hits the P&L?

I'm going to actually -- Mary Jane Fortin, our CFO, is with me.

I'm going to let her take that question.

Yes, thank you.

So in terms of the DAC you are right.

In terms of the fixed annuities business, what we saw there were really two things -- the yields on the portfolio supporting the book were better than what we had modeled, as well as Jay has talked to you about the crediting rate actions we've been taking in really managing the overall spread.

That benefited us in terms of the actual spreads coming through versus what we had assumed in our model.

Our model, if you go back a year ago, still was anticipating a continued pressure around yields and spreads and we've been able to really manage through that by both the investing side and actively managing the crediting rates.

This might sound somewhat naive, but I would've probably thought that would happen more likely in 2Q when we didn't see it than in 3Q.

Well, we do our annual review of the critical assumptions on an annual basis, and so we are tracking our actual experience quarterly.

But we do do a detailed review.

And we also want to make sure we see the patterns emerge over time.

And so, this was really since last year, the first time that we did a detailed review of where the yield and spreads were coming in and therefore adjusted in the quarter across the whole life and retirement portfolio.

Okay, thank you, very clear.

And on share repurchases, what told you you had about -- capacity for $200 million of repurchasing during the quarter?

And I am wondering if you were blacked out for any periods in the quarter otherwise?

Brian, why don't you go ahead and give Josh some color on that?

Sure.

We received authorization midway through the quarter in August, so we didn't have a full quarter and we also have a blackout date that started on September 15.

So we were really only in the market for I guess 27 days.

We didn't have $200 million of capacity, that is how much we did.

Because we wanted to be just disciplined in how we were deploying the authorization.

Our capacity, Josh, was $1 billion.

We had the authorization for $1 billion, we used $190 million, and so we will -- again, as I said in my remarks, we will remain committed and disciplined around deploying that capital.

And is it reasonable to say you get about 25 days a quarter that you can be in the market?

No -- yes, but again, it depends on when we get the authorization, where in the quarter it is.

That is true, right, this quarter you already have the authorization so you have more days.

Right.

Thank you.

Jay Cohen, Bank of America-Merrill Lynch.

Two questions on the Property Casualty side.

The first is you had some adverse development in the primary casualty business more so than we have seen in the past.

And I am wondering what is going on there, what drove that?

And then secondly, just explain what happened in the retail warranty business, what drove those losses?

It wasn't quite clear from the press release.

Why don't you take the first question, John, and I will take the second.

Hey, Jay, the adverse POID we experienced was related primarily to construction defects.

And really what -- we saw some increased frequency, we accelerated a review that had been scheduled for a later period and really impact of prior major CAT events, as well as the expansion into some new states that historically hadn't been troubling in this regard.

We had historically tracked a couple of different states where CD had been a challenge for us.

We saw again some increased frequency and some new states accelerated a review.

And I would also say beyond the impact of major CATs in the United States, also the impact of the credit crisis.

We now are observing a tale that is longer than what we had expected and the issue moving into some other states.

So again, we accelerated a review and dealt with it in the quarter.

Warranty?

Great.

And the warranty business?

Yes, on the warranty business, this is working with one or two large retailers and in particular one.

So this is a program where the profits and the risks are shared with the retailer.

And there is a mechanism to true up through rate change historical profitability.

So while in any given quarter you can have fluctuations, which we have had, we have confidence that we can recoup those adverse results within a very prompt period.

So it really is a partnership with a retailer and there is not as much risk transfer as the numbers would suggest.

What kind of underlying products are we talking about, is it white goods, computers?

All of the above, but in particular mobile phones in this quarter.

Okay, thanks.

Operator, I think we are at the top of the hour.

And so, I know we have a lot of questions in the queue.

I would like everybody to reach out, and we certainly do want to respond to all your questions and make sure we get back to everybody.

So thank you for joining us this morning and we look forward to talking to you in the future.

Ladies and gentlemen, this will conclude your conference for today.

Thank you for your participation.