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AIG - Q4 2007 American International Group Earnings Conference Call
Event Date/Time: Feb. 29. 2008 / 8:30AM ET
© 2008 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
Feb. 29. 2008 / 8:30AM, AIG - Q4 2007 American International Group Earnings Conference Call
Charlene Hamrah American International Group - VP, IR Martin Sullivan American International Group - President & CEO Steven Bensinger American International Group - EVP & CFO Win Neuger American International Group - EVP & CIO Bob Lewis American International Group - SVP Edmund Tse American International Group - Chairman, American International Assurance Co. Kris Moor American International Group - EVP, Domestic General Insurance Nick Walsh American International Group - EVP, Foreign General Insurance Bob Clyde American International Group - President & CEO of AIG, Japan Rick Geissinger American International Group - Domestic Consumer Finance John Doyle American International Group - Executive Liability Business Bill Nutt American International Group - President & CEO, AIG United Guaranty Len Sweeney American International Group - CRO Kevin McGinn American International Group - CCO Joe Cassano American International Group - CEO, AIGFP Frank Douglas American International Group - SVP & Casualty Actuary Bob Sandler American International Group - Senior Claims Officer Andrew Foster American International Group
CONFERENCE CALL PARTICIPANTS
Jimmy Bhullar JPMorgan - Analyst Ron Bobman Capital Returns - Analyst
© 2008 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
Feb. 29. 2008 / 8:30AM, AIG - Q4 2007 American International Group Earnings Conference Call
Andrew Kligerman UBS - Analyst Nigel Daly Morgan Stanley - Analyst Josh Shanker Citigroup - Analyst Larry Greenberg Langen McAlenney - Analyst Jay Cohen Merrill Lynch - Analyst Alain Karaoglan Banc of America Securities - Analyst Eric Berg Lehman Brothers - Analyst Ian Gutterman Adage Capital - Analyst Gary Ransom Fox-Pitt Kelton - Analyst
Operator Welcome and thank you for standing by. At this time, all participants are in a listen-only mode. (OPERATOR INSTRUCTIONS). Today's call is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the meeting over to Ms. Charlene Hamrah. Ma'am, you may begin.
Charlene Hamrah - American International Group - VP, IR Thank you very much. Good morning and thank you for joining us today. Before we begin, I would like to remind you that the remarks made today may contain projections concerning financial information and statements concerning future economic performance and events, plans and objectives relating to management, operations, products and services and assumptions underlying these projections and statements. It is possible that AIG's actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these projections and statements. Factors that could cause AIG's actual results to differ, possibly materially, from those in the specific projections and statements are discussed in Item 1A, Risk Factors, of AIG's annual report on Form 10-K for the year ended December 31, 2007. AIG is not under any obligation and expressly disclaims any such obligation to update or alter its projections and other statements whether as a result of new information, future events or otherwise. The information provided today may also contain certain non-GAAP financial measures. The reconciliation of such measures to the comparable GAAP figures are included in the fourth-quarter 2007 financial supplement, which is available in the information -- investor information section of AIG's corporate website and now I would like to turn the call over to Martin Sullivan.
© 2008 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
AGF's adherence to disciplined underwriting standards will continue to help maintain credit quality.com Contact Us 3 © 2008 Thomson Financial. to value very complex instruments. the severe liquidity crisis affecting the structured finance markets and the effect of rating agency downgrades on the underlying collateral.3 billion in the fourth quarter of 2007 and an adjusted net loss of $3. losses will likely emerge in advance of premiums earned and we expect that negative operating results will persist throughout 2008 as a result of continued weakness of the US housing market.23 billion after-tax related to AIG financial products super senior credit default swap portfolio. residential real estate and credit markets significantly affected several of our operations and investments.12 billion pre-tax or $7. As expected. Rapid deterioration in the U. I want to take a few minutes now to further comment on the valuation of AIGFP's credit default swap portfolio and the circumstances that led to the filing of our recent 8-K. at all times. one. Republished with permission.71 billion in after-tax net realized capital losses. They involve difficult estimates and judgments. They also discussed that their estimated numbers accounted for the differences between what is described as. Two of our other operations exposed to the US residential real estate market were also affected in the fourth quarter. We expect operating results in both these businesses to continue to be challenged. First. This was a very challenging quarter and year. Charlene and good morning. the AIGFP team discussed the model and the methodologies that they use to value the super senior credit default swaps. United Guaranty reported an operating loss of $348 million and American General Finance reported $9 million in fourth-quarter operating income. adjusted net income for the fourth quarter was reduced by the net unrealized market valuation loss of $11. As you have seen. the pricing of the super senior credit default swap derivatives. net income was affected by $1. I am joined this morning by a number of my senior management colleagues. principally due to an increase in the provision for finance receivable losses and a decline in mortgage banking revenues. 2008 / 8:30AM. During that webcast conference. AIG's results in 2007 were clearly unsatisfactory. . As usual. We are obviously witnessing and living through extraordinary market conditions and we are trying.President & CEO Thank you very much.streetevents. as are many others. brought our best judgment to bear in making these valuations.American International Group .S.FINAL TRANSCRIPT Feb. a number of our businesses were adversely affected by their exposure to the domestic residential real estate market and we expect these businesses will continue to be challenged in the foreseeable future. Second. I can tell you that we have. as well as $418 million in after-tax other than temporary impairment charges related to AIGFPs available for sale investment securities. 29. ladies and gentlemen. www. we decided to devote a previously scheduled investor conference on December 5 to the subject of AIG's exposure to the residential mortgage market. These valuations are not mechanical. the cash prices for the underlying securities and two. AIG reported a net loss of $5. In response to strong investor interest in November. our best estimate is that future premiums on the existing in force book of both domestic first and second-lien risks will exceed future losses incurred. similar to the pending acquisition of Equity One's branch loan portfolio. With UGC. will continue. However. We also believe opportunities to acquire high-quality portfolios. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial. This offset the strong results generated through the first half of the year. While not immune to the downward cycle of the housing market. principally those related to US residential mortgages. Two large items adversely affected the quarter's results. These losses occurred in the context of a significant widening of spreads on asset-backed securities. This is the negative basis adjustment.Q4 2007 American International Group Earnings Conference Call Martin Sullivan .2 billion. AIG .
Under the terms of these credit derivatives. We continue to believe. Since becoming CEO. We believe the disclosure in the 10-K. For example. AIGFP did not detail the dollar amounts of these adjustments or the gross amount of the unrealized market valuation loss without those adjustments. but it was detailed because we were trying to ensure that investors could see exactly how the gross number related to the net number used in the December presentation through the adjustments that were referenced in that presentation. AIGFP complements and will continue to provide further diversification to our core insurance operations. the presentation we have just put on our website and the discussion my colleagues will lead you through shortly will help our investors better understand how the extreme market conditions are affecting our businesses. It has also been a tremendous source of intellectual capital and innovation within AIG. however.streetevents. We then promptly filed an 8-K describing all of this information in detail. With our other financial services businesses. efficiently utilizing capital and managed its business to generate low volatility in its economic results. AIGFP has provided excellent returns. This is clearly not representative of the risk AIGFP holds on the super senior credit default swap transactions. cash flow diversion features. Joe Cassano has decided with our concurrence that he would like to pursue opportunities www. we concluded that we should clarify and expand our prior disclosures relating to the methodology and data inputs used to determine the values of the super senior credit default swap portfolio. Based upon our most current analysis. that the unrealized market valuation losses on the super senior credit default swap portfolio are not indicative of the losses AIGFP may realize over time. we are in unchartered waters. as we prepared our year-end financials. Over many years. The mark we reported this quarter essentially values the super senior notes net of the benefit from the cash flow diversion features built into these transactions rather than the value of the credit derivatives that AIGFP has written to protect these notes. We also understood at that time that we would not be using a negative basis adjustment when we filed our 10-K. AIG expects AIG's FP unrealized market valuation losses to reverse over the remaining life of the super senior credit default swap portfolio. 2008 / 8:30AM. losses to AIG would result from the credit impairment of any bonds AIG would acquire in satisfying its swap obligations. our auditors concluded that the Company had a material weakness in the valuation process and the oversight of that process for the AIGFP super senior credit default swap portfolios. In early February. I have made increased transparency and improved disclosure a higher priority. This is the structural adjustment. We have taken considerable steps in the right direction and we will continue to do so. When we made that determination. At the same time.com Contact Us 4 © 2008 Thomson Financial. but we could not find observable data points in this highly disrupted and illiquid market to value the protection we provide. let me make a few observations. we believe that any credit impairment losses realized over time by AIGFP would not be material to AIG's consolidated financial condition. we decided to inform the market what the estimated November 30 number would be without the negative basis adjustment. My colleagues will speak to the valuation methodologies in further details in just a few minutes. Although it is possible that they could be material to results of operations for an individual reporting period.FINAL TRANSCRIPT Feb.Q4 2007 American International Group Earnings Conference Call The AIGFP team also noted that their numbers also took into account structural supports that provided additional protection to AIGFP in adverse circumstances. AIG . This business was carefully underwritten and structured using models to ensure that attachment points would withstand highly-stressed economic conditions. We have already begun the process to remediate the material weakness identified by PWC. . No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial. Except to the extent of any such realized credit impairment losses. We did provide a lot of detail. We have heard from some that our 8-K was confusing. Republished with permission. In many respects. In this context. 29. In that regard.
as well as our ongoing discussions with the rating agencies. Joe has recruited and trained a very strong senior management team at AIGFP and I'm confident that AIGFP is in excellent hands pending the appointment of a new CEO. We have a diverse portfolio of global businesses with the scale and world-class expertise that extends throughout the organization. a middle market commercial insurer in Germany and Matrix Direct. along with his current duties.com Contact Us 5 © 2008 Thomson Financial.Q4 2007 American International Group Earnings Conference Call outside of AIG and effective March 31 will be retiring from AIGFP. An additional 12 million shares were purchased in 2008 through February 15. Most of these impairment charges resulted from the significant rapid declines in market values of certain residential mortgage-backed securities in the fourth quarter. we also recorded $2.4 million purchased for the full year 2007. let me just say that AIG is well-positioned to grow shareholder value despite the current turbulent environment. As I mentioned earlier. Joe has been a very valuable member of the AIGFP senior management team for over 20 years.8 billion pre-tax in unrealized appreciation of investments included in other comprehensive income. Joe will be continuing as a consultant to AIGFP for the rest of the year. Substantially all of the shares purchased in 2007 and in 2008 through February 15 were funded by high grade debt issuances. Even while retaining their investment-grade ratings.4 million square feet international financial center in Seoul. Republished with permission. including RMBS. 29.3 billion for other than temporary declines in value. AIG recorded pre-tax charges of $3. bringing the total to 76. In China. He has had a great career with us and we wish him the very best in the future. including $2. Before turning to what we are currently seeing in our specific businesses. we repurchased over 21 million shares.54 billion after-tax or $3.32 billion in pre-tax impairments related to AIG's investments in structured securities. Details are included in the investment presentation posted on our website. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial. We also struck new distribution agreements with Japan Post and [Sinopak] in Taiwan. Despite our continuing intent and ability to hold them and despite structures that would indicate a substantial amount will continue to perform in accordance with their original terms. www. With regard to our share repurchase program. We acquired Wueba. 2008 / 8:30AM. including establishing an asset management company in India and launching three new mutual funds there. I know these issues are of great concern to all of AIG's stakeholders and is it is important that I emphasize again that we believe AIG can and will manage through them efficiently and effectively. during the fourth quarter. . We believe this is prudent in light of continued market volatility and credit market uncertainty. breaking ground on the 5. so we will continue to benefit from his expertise. AIG . Now I would like to turn to our investment portfolio.streetevents. a direct marketing life insurance business in the US. including increasing distribution through acquisitions and new partnerships. we secured a license for our Foreign General business to establish a wholly-owned foreign enterprise. We also completed several new ventures. We view this as an efficient use of capital as these transactions replaced high-cost common stock with more cost-efficient high grade securities.FINAL TRANSCRIPT Feb. Bill Dooley will assume interim responsibility for the day-to-day operation of AIGFP's business. AIG concluded that it could not reasonably determine that the recovery period will be near term or the impairment temporary. obtaining permissions from the Qatar financial center to conduct individual and group life. these securities were priced at a severe discount to book. AIG does not expect to purchase additional shares for the foreseeable future other than fulfilling commitments that existed at December 31. It is also important that we have not let these issues distract us from our focus on AIG's underlying businesses. the significant credit market disruption adversely affected that portfolio too. We have accomplished a number of important objectives in 2007. Effective April 1. as well as nonlife businesses and setting up a private pension fund administrator in Romania. In the fourth quarter. We also have a strong capital base and we are not raising additional capital. In the fourth quarter.
a nearly 4. We will also continue expanding our operations in emerging markets. we took aggressive steps to address investor-owned life insurance activity.streetevents.Q4 2007 American International Group Earnings Conference Call In 2007.51 for the full year 2007. With regard to our life insurance and retirement service businesses. In addition. within the domestic life insurance operations. Republished with permission. which we expect to begin emerging this year. we are monitoring the issue closely. it appears to be manageable. DBG remained disciplined. an example of our deliver the firm strategy. while not a growth-orientated company. In 2008 and beyond. has been able to improve the persistency and profitability of its business through a combination of better agent selection and training and a focus on expense efficiencies in distribution and the home office. I would now like to briefly touch on the performance of our major business segments. sales of Universal life picked up due to enhanced underwriting methods at the older ages and continued success from our innovative index Universal life product offering. DBG reported record results in 2007 with pre-tax operating income of $7. DBG posted improved underwriting results due to favorable loss trends and a higher net investment income. Throughout the year. the domestic life team is committed to building a presence in the variable life product area with plans to expand distribution in this market segment. responsible for an average of one new product or service launched per week in 2007. which is expected to continue into 2008 with favorable conditions in the terminal funding market and the opportunities to cross-sell structured settlement products with DBG. We are the leading provider of financial lines in Continental Europe. Like DBG. These competitive advantages will enable DBG to identify attractive opportunities that meet our underwriting criteria in a softening property/casualty marketplace.FINAL TRANSCRIPT Feb. Foreign General is particularly well-positioned for growth. In 2007. The 21st Century integration is progressing well and is on track to deliver significant cost savings. individual variable annuity fourth-quarter 2007 operating income was adversely affected by a change in actuarial estimates related to a system conversion and to a lesser extent a DAC unlocking. we are aggressively pursuing a direct response approach as part of our multi-distribution strategy. AIG . Foreign General was also successful in expanding its personal lines presence in the high net worth segment with strong growth in United Kingdom. a distinct advantage when serving the needs of top corporations while providing a platform to expand into other lines and market segments. 29. Issues related to the US residential mortgage market may affect our management and professional liability lines. creating a personal lines insurer with approximately $5 billion of premium covering the most attractive segments and distribution channels. taking advantage of opportunities offered by an extensive product set and expanding distribution platform in an innovative culture. AGLA.5 point improvement from the prior year.4 billion with a combined ratio of 85. They continue to shift their personal lines product mix to higher-margin non-auto business and to expand our private client group operations into new growth markets such as Australia and Dubai. we also made progress on streamlining our portfolio of businesses. posting a combined ratio of 85. others are. While it is clear that certain of AIG's businesses did not perform up to expectations. With the addition of Matrix Direct. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.com Contact Us 6 © 2008 Thomson Financial. . this business www. domestic personal lines reported a loss due to increased loss frequency. We believe these and other initiatives to innovate product offerings and to expand distribution will improve sales in 2008. including selling our stake in Allied World Assurance for an attractive return and completed the acquisition of the remainder of 21st Century. In domestic retirement services. At this point. Despite increased competition. which put pressure on sales in 2007. We have also begun marketing on a unified platform in the first quarter. 2008 / 8:30AM. Foreign General performed well.52. We did see continued strength in our payout annuity business. California wildfire losses and upfront costs related to the integration of 21st Century. as previously discussed. However. In the fourth quarter. We have provided detailed information on potential exposures on page 12 of the financial supplement and needless to say.
Q4 2007 American International Group Earnings Conference Call reported record fee income and assets under management in 2007. In Asia. However. Surrenders from business written during record sales periods are expected to continue at a higher level in 2008. The businesses that did not perform well to our expectations. the Philippines and Taiwan. While 2007 was a very challenging year. other lines of business will be affected by future returns from partnerships and other alternative investments. . the outlook for ILFC remains favorable as demand for its modern fuel-efficient fleet remains strong and all 73 of its 2008 new aircraft deliveries have been placed. Growth in first-year premium and single premiums were very strong.streetevents. anticipated to be completed in 2009. including bank assurance and independent producers. As we progress in 2008. will provide enhanced distribution opportunities and operating efficiencies. We expect that to continue in 2008 as independent distribution is being added to an already strong captive distribution force and our advisers continue to focus on the roll-over retirement market to retain assets. even those returns could be challenging. while bottom-line results were affected by actuarial changes in estimates. we executed on several strategic initiatives and many of our businesses performed well. total assets under management have grown to more than $750 billion and non-affiliated client assets under management have grown 26% in 2007 to approximately $94 billion. particularly strong performance in recent periods is not indicative of future returns. AIG's foreign life insurance operations performed well overall. As the world's seventh largest institutional asset manager. Sales growth should improve in 2008 due to AIG's SunAmerica's competitive live-in benefit features and initiatives to expand the wholesaler organization and wirehouse distribution. primarily as a result of our diverse robust product lineup across all asset classes. While our institutional clients have always benefited from our strong local presence in developed and emerging markets. Our institutional and retail asset management business reported strong results this quarter as we continued to attract client assets and grow this business.com Contact Us 7 © 2008 Thomson Financial. The planned integration of AIG Star and AIG Edison. 2008 / 8:30AM. we remain focused on meeting the growing demand for investment-orientated products through increasingly broad distribution channels. However. 29. Market conditions in Japan are expected to remain challenging. experienced double-digit deposit growth in 2007 and a steady increase in fee income and assets under management.FINAL TRANSCRIPT Feb. ILFC also concentrates on placing leases in strengthening regions such as Asia. we have concrete plans to address the issues and we expect improved performance in 2008. AIG Retirement. We expect the partnership asset classes to generate a 10% to 15% return over the long term. AIG . With regard to our investments. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial. As we have stated previously. on the strength of their multiproduct multidistribution platform. we expect to exceed industry growth in the long term. ILFC's excellent results reflect its status as the world's premier aircraft leasing franchise. Republished with permission. as well as domestic general insurance and to a lesser extent. remediation activities and losses in the UK from variable annuities. serving the needs of local retail investors with funds launched in China. Despite the potential for an economic slowdown. Central and eastern European operations performed well in 2007 and demographic and economic conditions in these countries provide excellent opportunities for growth in 2008 and beyond. we expect to achieve good growth in foreign life. Asia and the Pacific region have grown to account for 27% of ILFC's revenues. However. but in today's environment. we have further enhanced our capabilities. Our fixed annuity businesses experienced continued outflows in 2007 as a large volume of five-year business came out of their surrender charge period. We are encouraged by the sales momentum and distribution expansion gained by foreign life in 2007. further market dislocation will affect investment returns and diminish demand for certain products. domestic retirement services. we expect to take advantage of the full deregulation of insurance product sales in banks and privatization of the Japan Post. In 2008. also known as AIG VALIC. www. the current rate environment should provide for improved deposit and net flows through AIG Annuity's continued leadership in bank distribution.
The minimum attachment point for the super senior portion of the portfolio is modeled as a minimum threshold above which there is no expected loss to AIGFP. AIGFP augments the super senior structuring process with its own actuarial models. Each underlying security is assigned an internal credit rating by AIGFP where possible based on the fundamental credit analysis and judgment of AIGFP's credit officers and on the ratings assigned to the collateral from the three rating agencies where available. Now if you would turn to slide 4 in the Conference Call Credit Presentation. Bob will conclude with brief remarks on United Guaranty. corporate arbitrage and multisector CDOs. but there is no single definition of the term. The term super senior is used by market participants to denote very remote credit risk.1 billion in European mortgages and is typically subject to both regulatory and contractual calls by the counterparties with the former starting in January 2008 when Basel II took effect in Europe. 2008 / 8:30AM. Now let me turn the call over to my colleagues. almost $230 billion in corporate and $149. Over the next few minutes. along with a review of its current market spread. Second. This presentation contains more detailed information regarding our businesses and portfolios for your information and review. concentrating on the US residential mortgage-related investments. including comments concerning the unrealized market valuation loss we have taken. the largest category of the business is regulatory capital-motivated. We have posted two presentations to the Investor Relations section of our website. The final attachment point is negotiated to exceed the modeled attachment point and we will discuss typical transaction structures in a moment. one of the businesses in which AIGFP is engaged is the business of writing credit derivatives to cover the risk of incurring realized credit losses on the most senior tranche in the capital structure of a securitization.American International Group . our exposures to monoline insurers and our exposures to CDOs and CLOs. the expected maturity of the regulatory capital-motivated transactions. we are providing additional info informative disclosures. Republished with permission. we are providing a presentation on AIG's businesses with exposure to the current credit market disruptions. This presentation and additional supplemental materials are currently available on our website. The other one is entitled Conference Call Credit Presentation Supplemental Materials. based only on the contractual call dates. is 1. Each transaction is bespoke. Steven Bensinger . By net notional exposure. Win will comment on selected components of AIG's insurance investment portfolios. AIG . As shown in the table. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.Win Neuger.2 and 2. Finally. Now if you turn to slide 5. These transactions were structured to provide the counterparty with capital relief in their regulatory jurisdiction and not structured to transfer significant credit risk. This quarter.streetevents. Win -. has not incurred a realized loss in any of its super senior transactions.3 years respectively. starting with due diligence of the counterparty's motivation for entering into the transaction. AIGFP writing this business in 1998 and to date. our mortgage insurance business and American General Finance. AIGFP has entered into super senior credit derivative transactions in three broad categories -. we will be referring to the one entitled Conference Call Credit Presentation. commercial mortgage-backed securities.FINAL TRANSCRIPT Feb. our domestic consumer finance business. but many of these trades may be or are www. positive selection of the assets. First. During our discussion this morning. Martin and good morning. highly-customized and designed to withstand extreme stress and yet incur no expected loss. I will discuss the super senior credit derivative business at AIGFP. Great care has been exercised in structuring the deals. First. Counterparties achieve lower capital charges by transferring a portion of their regulatory capital requirements to AIG. Steve Bensinger. experience of the manager and definition of portfolio maintenance characteristics to name just a few. Bob Lewis and I will update you on various developments and certain of our businesses during 2007. 29.Q4 2007 American International Group Earnings Conference Call As in the past two quarters.EVP & CFO Thank you very much. referred to as the super senior risk layer. using assumptions more conservative than those used by the rating agencies. .com Contact Us 8 © 2008 Thomson Financial.regulatory capital-motivated corporate and European residential mortgages.
2007. if the CDO managers have latitude to substitute or exchange collateral in the pools. Typically 125 to 200 securities are purchased to form the collateral pool of a CDO. 29. the third category of exposure. By way of illustration. So-called high-grade CDOs have high investment-grade collateral securities.4 billion had some level of exposure to subprime mortgages. Another important risk mitigant in the super senior structures of AIGFP is the priority of the cash flow waterfall to the super senior layer.streetevents. Republished with permission. The final results of AIGFP's due diligence in modeling are then used to negotiate attachment points for the super senior structure. At inception. you will see the makeup of a typical multisector CDO super senior transaction. AIG . it ranges from an average of 15% on the high-grade deals to an average of 37% on the deals with mezzanine collateral. AIGFP determines an acceptable attachment point or subordination level over which it is willing to write protection. BBB. A and finally junior AAA-rated. the attachment points are always higher than the attachment points used by the rating agencies for the AAA rating equivalent. The CDO itself issues several tranches of debt securities from unrated equity to BB.3% of the notional exposure in the fourth quarter as a result of general credit spread widening experienced in the market. RMBS. servicers and geographies. including a thorough analysis of the historical and expected future performance of the collateral and the manager. AIGFP then utilizes proprietary data-driven actuarial models to analyze the fundamentals in the transactions. The models produce loss distributions by simulating the credit performance of the underlying obligations in the portfolio. AIGFP's arbitrage-motivated corporate book represented $70. of which $61. asset servicer and originator. At inception AIGFP conducts extensive due diligence. and please turn to slide 6.Q4 2007 American International Group Earnings Conference Call being terminated earlier than that as AIGFP's counterparties implement models compliant with the new Basel II accord.2 billion as of December 31. . The attachment point is the most important feature of the risk mitigants built into these deals.4 billion in notional exposure as of year-end 2007. AIGFP recorded an unrealized market valuation loss of $226 million or about 0. analysis and modeling. While we always sit at the top of the waterfall when it comes to being paid. www. each underlying obligor.com Contact Us 9 © 2008 Thomson Financial. Cash flow waterfalls dictate how principal and interest flows are allocated to the various tranches of the CDOs. the transaction is modeled assuming the CDO managers select the worst possible portfolio within approved criteria. AIGFP writes credit protection to the holders of the Super senior tranche of the CDO through the issuance of a credit derivative. including overcollateralization and interest coverage tests divert principal and/or interest flows to the more senior tranches of the CDOs. Now as we've stated in past communications. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial. Various assets. These portfolios of securities constitute the transaction gross notionals of the CDOs. such as residential and commercial mortgages. AIGFP's exposure to the CDO through the credit derivative is called the net notional exposure. The models are calibrated to be worse than the worst recession experienced post-World War II. As of February 26. totaled $78. typically rated AA or AAA at inception and so-called mezzanine CDOs consist of primarily low investment-grade with some subinvestment-grade securities in certain deals. Of the deals with some subprime exposure. up to a more senior AAA-rated tranche called the super senior tranche. are packaged together into asset-backed securities. AIGFP's exposure to multisector CDOs in its super senior credit derivative portfolio. Also. $54 billion in notional exposures have either been terminated or are in the process of being terminated.FINAL TRANSCRIPT Feb. 2008. Various tests. in the case of residential mortgages and CMBS in the case of commercial mortgages. this position is typically further enhanced by the existence of one or more overcollateralization or interest coverage tests that further direct available cash flows to amortize our position more rapidly if they are breached. The underlying collateral in these deals is comprised of primarily investment-grade corporate debt and collateralized loan obligations. 2008 / 8:30AM. These securities are structured into tranches with various ratings from AAA down to an unrated equity tranche. auto loans and student loans. after thorough due diligence. Considerable effort is spent to avoid concentrations to single obligors.
In addition. For that reason. Each transaction is independently subjected to an analytical review by credit risk management. thus potentially requiring the establishment of credit reserves of which there have been none to date. we characterize the conditions of the severe stress scenarios and show the result in the graph. must cause loss to the securities in the collateral pool underlying the CDO. 2007 using the lowest ratings of the major rating agencies updated through January 3. ERM also assesses whether any transactions could represent probable loss. began to see evidence that mortgage underwriting standards have declined and pulled back from this sector toward the end of 2005. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial. AIGFP's actuarial models are rerun with updated credit ratings to show the model attachment points relative to the available subordination levels to confirm to what extent the transactions still constitute super senior risk of incurring any realized loss. market risk and operational risk management. The securities losses have to accumulate to a level above the attachment point and reach the super senior layer after the waterfall diversions have been exhausted. The results of these stress tests indicated possible realized losses on a static basis since the assumptions in these stress tests assumed immediate realization of loss. recent credit quality deterioration in the subprime mortgage sector has led to market concerns about the credit quality of securities backed wholly or in part by subprime residential mortgages. which indicates that AIGFP accounts for its super senior credit derivatives in accordance with FAS 133 and EITF 02-3. 29.FINAL TRANSCRIPT Feb. you can see that the AIGFP super senior business is subject to the oversight processes of AIG Enterprise Risk Management.25 billion. Furthermore. AIGFP does not recognize income and earnings at the www. We also considered the guidance in FAS 157 and the paper issued in October 2007 by the Center for Audit Quality entitled Measurements of Fair Value in Illiquid or Less Liquid Markets. the realized loss would be approximately $900 million in contrast to the current unrealized market valuation loss of $11. Contractually. No benefit was taken in these stress tests for cash flow diversion features. but actual realized losses would only be experienced over time given the timing of losses incurred in the underlying portfolios and the timing of breaches in the subordination.Q4 2007 American International Group Earnings Conference Call On slide 7. second-lien mortgages. 2008 / 8:30AM. the stress tests were applied at December 31. Republished with permission.com Contact Us 10 © 2008 Thomson Financial. Clearly. In order to cause an economic or realized loss to the super senior layer. To test the potential for unexpected realized losses to the super senior layers under prevailing conditions. mortgage delinquencies have to deteriorate to default losses and the default losses. If you'd please turn to slide 8. AIG . which are updated to show realized loss trends and current subordination levels. the notional of 2006 and 2007 subprime collateral comprises a modest 4. Based on these analyses and stress tests. AIG ERM independently reviews the exposures. Super senior transactions entered into by AIGFP are subject to the approval of AIG's Chief Risk Officer and Chief Credit Officer under the delegations approved by AIG's credit risk committee. On this slide. both AIG's ERM and AIGFP have conducted risk analyses of the portfolio. Moreover. Although the super senior structures in AIGFP transactions only cover credit risk. not the loss of market value of the collateral securities or the CDO itself. ERM identifies all transactions that show unexpected deterioration and will add these to AIG's internal watch list. In addition to analyses of each individual risk in the portfolio. AIG has conducted an analysis to assess the risk of incurring net realized losses over the remaining life of the portfolio. AIGFP's multisector CDOs have only a modest exposure to higher-risk. recoveries upon default or other risk mitigant benefits. in turn. It is also noteworthy at this point to mention that the credit processes at AIGFP. which includes components of credit risk. Furthermore. Please turn to slide 9. which centered around further stressing of broad classes of the portfolio collateral from current rating levels. . 2008. Under this severe stress scenario.9% of the total collateral pools underlying the entire portfolio of CDOs with credit protection at year-end 2007. AIG believes that any losses realized over time by AIGFP as a result of meeting its obligations under these derivatives will not be material to AIG's consolidated financial condition.streetevents. Every quarter. this market valuation estimate is biased by factors in addition to credit risk. working in close collaboration with AIG ERM. the credit derivative protects the super senior CDO holder only for actual default losses in the underlying collateral. AIG conducted certain ratings-based stress tests. Although it is possible that such realized losses could be material to AIG's consolidated results of operations for any individual reporting period.
both corporate and European residential mortgage-related and please turn to slide 11 where you see it explains that these transactions were concluded with counterparties primarily to facilitate regulatory capital relief for them rather than to transfer credit risk to AIGFP. AIG conducted a comprehensive analysis of available information at year-end 2007. AIGFP employed the binomial expansion model to value this portfolio and it resulted in no noticeable change in fair value. underlying type and their respective cumulative mark-to-market losses experienced in the third and fourth quarter. The BET model also utilized diversity scores.Q4 2007 American International Group Earnings Conference Call inception of each transaction because the inputs to value these instruments are not derivable from observable market data. disparities in the valuation methodologies employed. Income is recognized over the life of the contract and as observable market data becomes available. the degree to which market data may be available to a market participant and the varying judgments reached by such participants when assessing volatile markets has increased the likelihood that the various parties to these instruments may arise at significantly different estimates of their fair values. These market conditions have increased reliance on management estimates and judgments in arriving at an estimate of fair value for financial reporting purposes. For regulatory capital trades. The fair valuation of AIGFP's super senior credit derivative portfolio is challenging given the bespoke nature of each transaction and the lack of market observable transactions or information. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.4 billion notional exposure for corporate arbitrage transactions. AIG believes that these regulatory-driven trades are appropriately valued at zero fair value as of December 31. the BET model. At September 30. . particularly in the fourth quarter of 2007. weighted average lives and discount rates. 29. Republished with permission. AIGFP concluded that there was minimal change in fair value since the inception of the derivatives as the super senior credit derivative were in essence put options significantly out of the money that are insensitive to normal changes in market credit spreads. AIGFP uses a combination of valuation models. AIGFP valued these transactions using relevant market indices or third-party prices and reported an unrealized market valuation loss in the amount of $226 million for the fourth quarter. The most compelling market observable data to support this conclusion is the fact that $54 billion notional of transactions have been terminated in early 2008 without AIG being required to make any payments and in some cases. AIGFP implemented a modified binomial expansion technique. with AIG being paid a fee. like Moody's historical recovery rates. In estimating fair value under GAAP. As I said earlier. Now the table on slide 10 breaks down the notional amount of AIGFP's exposure by super senior. principally the binomial expansion technique or BET.com Contact Us 11 © 2008 Thomson Financial. www. Through June 30.FINAL TRANSCRIPT Feb. AIGFP's valuation methodologies and processes for the super senior credit derivative portfolio have evolved in response to the deteriorating market conditions and the lack of sufficient market observable information. these transactions are expected to terminate within the next 12 to 18 months as the counterparties implement the new capital provisions under Basel II. 2007. 2007. The model accounts for the specific features of each transaction such as portfolio amortization and tranche subordination. using credit spread inputs on generic ABS obtained from a third-party source and other inputs. AIG . the fair valuation of the super senior credit derivatives has become increasingly challenging given the limited availability of market observable information due to the lack of trading and price transparency in the structured finance market. management's own judgment. third-party prices. As can be recognized from the information on slide 12. Furthermore. Our valuations indicated an unrealized loss of $352 million at September 30. marketplace indicators and transaction-specific considerations. 2007. In the third quarter. As a result of this analysis. relevant market indices and where necessary. including the counterparties' motivation and behavior. AIGFP must estimate fair value using the assistance of models.streetevents. In the absence of any observable market. 2007. For the $70. the portfolio's performance. 2008 / 8:30AM. as credit spreads started to widen considerably. in accordance with GAAP.
which AIGFP's credit derivative protects. Matrix pricing was used where third-party prices were unavailable. method B incorporated a negative basis adjustment to reflect the fact that cash and synthetic instruments frequently trade at different levels with cash instruments normally at a wider spread than CDS or high-quality assets. an averaging of prices was used. AIGFP estimated the benefit of this negative basis based upon best estimate assumptions provided by major market participants. evidence of negative basis in AIGFP's existing transactions is currently unobservable in these market conditions. diversity scores. AIGFP benchmarked these third-party prices to independent pricing services and sources. No negative basis adjustment was utilized for the reasons I explained earlier. Under method B. Second. 2007. AIGFP utilizes a model to determine fair value similar to method B in the previous slide. but in incorporated the net benefit of structural risk mitigants. despite the fact that the ABS market is quite illiquid. www. First. AIGFP obtained a number of super senior bond tranche quotes for the underlying CDOs or implied them from collateral calls from 12 major dealers to adjust the BET results where appropriate to make a best estimate of the exit value of the transactions.com Contact Us 12 © 2008 Thomson Financial. weighted average life of securities. First. principally the cash flow diversion benefits. AIGFP has filed a rigorous process to determine its best estimate of fair value for AIGFP's super senior credit derivatives on multisector CDOs at December 31. the wider the negative basis. Method B incorporated two new features. 2008 / 8:30AM. sufficient observable evidence supporting the existence and quantification of negative basis for AIGFP's transactions is needed to take into account any negative basis in its fair value determination.Q4 2007 American International Group Earnings Conference Call As the market continued to deteriorate in October. AIGFP performed a valuation review and stress testing of the modified BET results. You can think of negative spread as the difference between total spread and the credit spread. but also other risks such as funding cost differentials. 29. It enhanced its existing data inputs by adjusting our RMBS and CDO credit spreads for the relative change in the ABX home equity index. AIGFP continued to refine its model.streetevents. the spread achieved from holding a cash instrument incorporates not only credit risk. The method maximizes the use of third-party market observable inputs where possible. In times of market stress. These prices were used as inputs to the modified BET model to derive credit spreads more closely associated with the underlying collateral securities than the general spreads used in method A. In cases where AIGFP received multiple quotes. At November 30. entering into new transactions that demonstrate the existence of the negative basis is possible. 2007. liquidity risk and risk aversion costs. AIGFP ran two versions of the BET model that had been used for the October estimate of the portfolio mark. Upon completion of its review of the evidence available. Currently. AIGFP obtained third-party prices of the underlying collateral securities collected by CDO managers as of October 31. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial. Finally. For example. during the month of November. discount curves and Moody's recovery rates. credit risk. . When AIGFP entered into super senior CDS transactions on multisector CDOs. these and other risks tend to widen together with credit spread widening. there was an observable negative basis proven by the fact that the major motivation of the deals was to earn a net positive spread between the spread earned by the investor of the CDO and the premium cost the investor paid to AIGFP for its credit derivative hedge. Republished with permission.FINAL TRANSCRIPT Feb. that resulted in a reduction of the net unrealized market valuation loss. AIG concluded that recording a negative basis adjustment at this time is not consistent with GAAP fair value requirements. AIGFP was able to acquire third-party prices on about 70% of the underlying collateral securities in the multisector CDOs. However. Under GAAP. There are five key components to the process. This process is required because there are no observable market prices for the credit derivatives AIGFP has written. Third. Using cash spreads as inputs to the model in substance assumes that the entire spread is comprised of only one risk. The wider the spread becomes from these other risks. However. Method A was similar to the October version of the BET model. Now as described on slide 13. Therefore. other key inputs were obtained for the modified BET model. Next. Prices were reviewed for consistency across ratings and time. Under method B. Second. the BET model is effectively a valuation model that estimates the fair value of the CDO. AIG .
6 billion. will be materially below the GAAP fair value estimates. AIG does believe that any credit impairment losses realized over time by AIGFP will not be material to AIG's consolidated financial position nor to its excess economic capital position. on slide 16. commercial mortgage-backed securities. Republished with permission. 29. This market valuation loss represents management's best estimate of the exit value of this portfolio into the current illiquid and distressed market. We posted a more detailed presentation on the website as Steve mentioned. which resulted in realized capital losses in 2007 of $3. AIG believes that its $11. monoline insurers and collateralized debt obligations.4 billion net of tax. Now I will turn it over to Win to discuss our investment portfolios.streetevents. so far in our development of the methodology. in accordance with GAAP. we incurred significant negative realized and unrealized accounting losses during the fourth quarter. Slide 14 explains the net after-tax adjustment to GAAP we would apply to determine AIG's available economic capital as of December 31. they could be material to an individual reporting period. AIG is also currently developing new systems and processes. AIGFP underwrote its super senior credit derivative business to a zero loss standard incorporating conservative stress scenarios at inception. You can refer to the economic capital update memo we posted to our website for a thorough explanation of this process.25 billion unrealized market valuation loss we have recorded intrinsically assumes that we own the cash CDOs. I will talk a little bit about economic capital. AIG also believes that the results of its fundamental credit analysis and stress testing provide confidence that any realized losses in the portfolio.Q4 2007 American International Group Earnings Conference Call In effect. we have used GAAP capital as a proxy for available economic capital. AIG recognized the sizable unrealized market valuation loss in 2007 consequent to the severe market disruption and credit deterioration. as I stated. which will allow it to rely on front-end preventive and detective controls that will be more sustainable over the long term. Turning to slide 15. We also had reported an unrealized depreciation on investments of $8 billion. Let's turn to slide 14. Although there is likely to be continued volatility and perhaps further deterioration in the credit markets based upon AIG's analyses and stress tests. AIG . Finally. Although.25 billion best estimate of the unrealized market valuation loss represents fair value under GAAP. www. .FINAL TRANSCRIPT Feb. it would assume that the appropriate economic capital required for these obligations would be based upon the current distressed and illiquid capital markets. AIG intends to hold what we believe are good risks on our books until the transactions mature. plus the cost of capital charge. No credit is given to the synthetic nature of our obligations since the credit component of the spread widening is not presently observable. Win Neuger . Over time. the $11. would constitute the current market consistent settlement value of the loss. 2007.EVP & CIO Thanks. We do not feel it is appropriate to deduct the after-tax unrealized market valuation loss from available economic capital since if we did so. I will provide you with an update on AIG insurance investment's exposure to residential mortgages. AIG intends to reduce its reliance on certain manual controls that have been established and to migrate models that have been developed in response to market events to a more robust production environment.com Contact Us 13 © 2008 Thomson Financial. The overall market dislocation had an impact on investment valuations. However. In summary.American International Group . In determining the available economic capital at AIG. Steve. we would assume the severe stress loss described earlier. also. Economically. Here. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial. AIG is committed to making the significant investment necessary to make these improvements. reducing accumulated other comprehensive income to a still positive $4. particularly of subprime mortgage-backed collateral. 2008 / 8:30AM. as I said. Rather. AIG recognizes that continued improvement in its internal controls is necessary and remediation of the identified material weakness will be a very high priority in 2008.
The $3.6% for our AAA holdings and 21. we have presented our original and current average credit enhancements for the subprime 2006 vintage.9 billion at the end of September. AIG . Slide 22 displays further details of the RMBS portfolio by rating for each type of mortgage-backed security.3 billion. Please note that actual transactions during the year generated net gains of $1. the RMBS securities were most affected as shown in the far-right column. the components of the 2007 losses and declines are detailed. Slide 23 shows the details of AIG investment's $24. An important component in understanding the risk in our RMBS holdings is the degree of credit enhancement. commercial mortgage-backed securities and CDOs. $5. Slide 26 shows comparable information for the Alt-A portfolio. Alt-A RMBS holdings totaled $25. While subprime 2006 vintage loss estimates have risen into the high teens or even low 20%s.1 billion other than temporary impairment. the combination of excess spread and current credit enhancement is providing the intended cushion.2 billion and only $30 million of losses were taken on sales of RMBS.com Contact Us 14 © 2008 Thomson Financial. not by significant changes to the risk of principal repayment. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial. $2. As shown on slide 27. www. Another $500 million is associated with other than temporary changes in currency valuations and that leaves the remaining approximately $500 million. Slide 24 provides details of our Alt-A holdings. down from $28. our portfolio has delevered significantly with an average credit enhancement of 29. Although all risk assets were impacted. 2008 / 8:30AM. Moving to the $8 billion of unrealized depreciation for the year.1 billion is expected to recover in value. Beginning with realized losses. On slides 23 and 24 are details of the subprime and Alt-A portfolios by vintage year. I will now move to talk in more detail about the key segments of the RMBS portfolio and explain our current position and why we believe that we will be mostly repaid. 87% of subprime is rated AAA and another 12% is rated AA. rating and weighted average expected life. Of these downgraded securities. approximately $3.3 billion. the largest vintage year among our portfolio subprime holdings.1 billion or 63% is associated with RMBS.7 billion were subprime exposures and represented 11% of the total subprime holdings. About $443 million of AIG's RMBS securities were downgraded in the fourth quarter of 2007 and an additional $3. totally $25. Republished with permission.6 billion were downgraded through February 25. Although the market's loss expectations have increased. mostly rated AAA and AA.6 billion at the end of June and $25. Of that OTTI loss. I am going to skip from slide 20 to 21 and talk about the breakdown of the $89.1 billion amount that we expect to recover is associated with either our inability to reasonably assert that certain severe declines in valuations are temporary. $9.FINAL TRANSCRIPT Feb. the major rating agencies have been downgrading and placing many securities on negative watch during the past six months.5% for all holdings below AAA.Q4 2007 American International Group Earnings Conference Call On slide 19.7 billion of the portfolio is on negative watch as of that date. The slide also underscores the point that the overall RMBS portfolio is high quality with 91% rated AAA [or agency] and 7% rated AA. Our subprime RMBS holdings totaled $24. I also want to point out that these combined realized and unrealized losses are approximately 2% of the total insurance investment portfolio and not all of the losses on the left-hand column are even related to these portfolios and non-RMBS losses amount to 1% of non-RMBS insurance investment portfolios. In addition. of which 95% are rated AAA and 4% are rated AA. 29. we have also seen declines in valuations of monoline insurers. also down from earlier periods. We continue to believe that these market value declines are driven predominantly by market conditions.1 billion of subprime holdings. of full recovery of principle. which is associated with credit and structured securities impairments without expectation.streetevents.9 billion of RMBS exposure. our lack of intent to hold to recovery or an adverse change in the timing. more than 100% of the net number is accounted for by the $4. but not the amount of cash flows in structured securities. .1 billion. On slide 25.
However. we have been opportunistically increasing liquidity.com Contact Us 15 © 2008 Thomson Financial. Financial guarantees are viewed by AIG purely as a secondary source of payment for all wrapped investments. However. most of which are CDOs of corporate bank loans. The RMBS. CMBS and ABS that are wrapped by the monolines.6% of the holdings in the total portfolio were downgraded in 2007.Q4 2007 American International Group Earnings Conference Call Taking into account all rating actions through yesterday. All to varying degrees have been focal points of market volatility in the past six months. our holdings are $23.FINAL TRANSCRIPT Feb. Based on our current analysis. Republished with permission. FSA. Slide 34 summarizes the characteristics of our RMBS. MBAC and FGIC. since August 2007. Of the 9% of the CMBS exposure that comes from resecuritizations of CMBS and commercial real estate or CRE CDOs. the broader capital markets have emphasized liquidity and aversion to risk. 2008 / 8:30AM. Turning to commercial mortgage-backed securities or CMBS on slide 28. of which more than 99% are financial guarantees from the monoline companies.shows that our CDO portfolio amounts to $4. Slide 29 presents the CMBS portfolio's current delinquency profile compared to the market experience. And only 1. showing positive comparisons with only 23 basis points of delinquencies on the portfolio.streetevents. Slide 32. so the securities originally rated AAA retain their payment priorities. the pricing of this portfolio has been adversely affected by current market conditions. Next. 29.2 billion of exposure.4 billion of the monoline exposures supports the municipal bond portfolio. including trigger or [turborights] irrespective of their current ratings. underlying fundamentals remain strong with very low delinquencies. which shows -. In other words. It is important to note also that rating agency downgrades do not affect the structural priority of payments. In general. our preference for RMBS exposures high in the capital structure continues to guide our current expectation that the risk of an ultimate loss to investment principal in these securities remains low. but it is important to note that rating changes do not affect the structural protection and thus. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.slide 32 rather shows that 84% of the monoline exposure has an underlying rating of A or better. the ultimate loss of principal in the CDO holding is expected to be minimal. $31. . CMBS positions with internal ratings below investment grade represent primarily second-lien and HELOC home equity loan pools that have experienced worse than anticipated performance.9 billion with close to 89% rated AAA or AA and only 0. further downgrading migrations seem fairly likely. the investment portfolios have $42. after fourth quarter write-downs. the portfolio has only $58 million of remaining ABS CDOs with some subprime exposure. On slide 33 is the breakdown of exposure to each monoline insurer. Turning to AIG's exposure to the monoline insurers on slide 31.6 billion. Moreover. Furthermore. AIG . we expect substantially full recovery of principal and interest for most www. our holdings did not rely on financial guarantees from monoline insurers as a primary source of repayment at the time of acquisition. there are 10 RMBS second-lien and home equity transactions totaling $380 million or less than 1% of AIG's total insured portfolio that are known to be receiving contractual payments through their financial guarantees. The US residential mortgage market has continued to deteriorate with limited financing opportunities for mortgage borrowers and substantial increases in lifetime loss expectations on 2006 and 2007 US mortgages. $21 billion are traditional CMBS securities. our CDO holdings have suffered minimal downgrades in 2007 and have little exposure to the current struggling subprime CDO market. Currently. Because AIG focuses on fundamental credit analysis. We have also focused on monoline CMBS and CDOs in this presentation. slide 30 shows our CDO portfolio -.2% below investment grade. Concluding with slide 35. In this environment. the bonds that are being insured are rated A or better without the guarantee. So our CMBS holdings have suffered from volatile market pricing. two-thirds of the loans underlying these securities are seasoned 25 months or more. in our insurance portfolios. You'll see that 96% of the monoline exposure is to MBIA. This deterioration has increased our mark-to-market and downgrade risk. which has a high underlying credit quality of AA. 93% of our subprime RMBS exposure is still rated AAA and AA.
AIG .2 percentage points quarter-over-quarter and 2. The 2007 vintage exposure was driven by higher utilization of mortgage insurance in the overall mortgage market. UGC has been providing lenders mortgage insurance on first and second-lien mortgages since 1963. Bob Lewis . UGC maintains an important exclusion for fraud on both its first and second-lien business and it has a geographically diverse book and continues to focus on insuring single-family owner-occupied residences. However. Alt-A and option ARM business. future premiums are projected to exceed future losses on the existing domestic mortgage portfolio despite an inherent mismatch in the timing of premium earnings and incurred losses. 2007. are starting to have a significant effect on operating results and some further deterioration is expected in 2008. as of December 31. UGC employs risk-sharing arrangements through captive reinsurance with most of its major lender customers. . the deterioration of the US housing market has affected all segments of the mortgage business. the gap widened to 73 basis points from the 64 basis points in December. However.streetevents. however. in January.4% of UGC's domestic mortgage risk in force and 70% of their net risk in force has FICO scores greater than 660. It also purchases quota share reinsurance on portions of its subprime first-lien business and segments of its second-lien product. Nevertheless. Furthermore. The composition of UGC's portfolio has not changed significantly as shown on slide 38. Due to the accelerated claims cycle of second-lien mortgages. As a broad market participant in a cyclical business. However.FINAL TRANSCRIPT Feb. Several underwriting and eligibility adjustments being implemented by UGC and their lender customers are improving the quality of new business production. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial. I will turn it to Bob. In light of the cyclical nature of the mortgage insurance business. which is predominately subprime. is the primary driver behind UGC's better delinquency performance on first-lien mortgages than the rest of the mortgage insurance industry as depicted by the graph on slide 40. 2008 / 8:30AM. As slides 42 and 41 describe. UGC's performance is highly correlated to the fortunes of the housing market. Furthermore.3 percentage points year-over-year. UGC is engaged in a highly cyclical business and downturns in the housing industry have negatively affected short-term results. In summary on slide 44.com Contact Us 16 © 2008 Thomson Financial. First-lien net losses incurred. but the high LTV second-lien product is particularly sensitive and accounts for 51% of UGC's 2007 domestic mortgage net losses incurred. but UGC continues to outperform the industry on average. The graph is narrower -.Q4 2007 American International Group Earnings Conference Call of our investment holdings. expected losses are significantly below the net risk in force. high-risk products such as interest-only and option ARMs remain less than 10% of the risk in force.American International Group . www. we are looking for opportunities to take advantage here as the markets create what are truly compelling opportunities in the market. UGC continues to implement key risk initiatives to improve the quality of new business production. With that. Loans to borrowers with FICO scores less than 620 constitute about 8. Moreover.the gap is narrower than historical levels due to a rapid deterioration in the overall market. The current housing downturn has affected performance and asset quality. UGC's decision to be only a minor participant in the higher risk bulk channel. Republished with permission. UGC expects that the downward market cycle will continue to adversely affect its operating results for the foreseeable future and is likely to result in another significant operating loss in 2008. including tightening eligibility guidelines and increasing rates in select high-risk business segments. UGC continues to implement key risk initiatives to improve the quality of new business production in both the first and second-lien businesses. these net losses incurred should work through the portfolio much faster and peaked in 2007. Turning to slide 39. 29.SVP So moving on briefly to AIG's mortgage insurance subsidiary. There are a number of risk mitigating factors described on 43. UGC's marketshare of its traditional first-lien flow business did decline by 1. United Guaranty in slide 37.
AGF believes this is an excellent opportunity to augment organic growth with a large portfolio of first and second fixed-rate mortgages. In summary on slide 52. As we have mentioned in previous calls. the real estate portfolio remained at $19.000 accounts.5 billion. AGF has required full income verification on almost its entire real estate book. AGF did not relax underwriting standards when the market overheated in late '05 and '06. A limited ARM customer base is qualified on a fully indexed and fully amortizing basis at origination and only 9% of the overall real estate loan portfolio is due to reset interest rates by year-end 2008.Q4 2007 American International Group Earnings Conference Call Turning to slide 46. 2008 / 8:30AM. which were set by AIG and AGF management years ago to denote sound credit quality parameters. flat to the end of the third quarter. AGF's real estate 60 plus delinquency rate was 2. AGF believes that the housing market will likely continue to deteriorate for the remainder of '08. which have much lower delinquencies than losses than adjustable risk products. I want to conclude by reinforcing that AIG remains a great company with unmatched competitive advantages. Martin Sullivan .47% at year-end '07.64% and its real estate net charge-off ratio was 0. representing approximately 130. We know that this has been a very long presentation. AGF is a portfolio-based lender whose products include real estate. 29. We appreciate your patience and now we will be more than happy to take your questions. Nevertheless. 88% of the portfolios are fixed-rate mortgages.streetevents. And finally. this transaction is expected to close during the first quarter of '08.American International Group . consumer loans and retail receivables that is similar to AGF's customer profile and credit quality performance. Slide 50 highlights key risk mitigants in the mortgage portfolio. JPMorgan. AGF did not delegate underwriting on purchased loans and has not made option ARMs. The current housing downturn has resulted in delinquencies in losses that have risen from recent all-time lows and credit quality remains subject to future macroeconomic conditions. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial. AGF recently announced the pending acquisition of $1.com Contact Us 17 © 2008 Thomson Financial. . American General Finance is AIG's domestic consumer finance business. strong brand recognition and a unique global franchise. Slide 47 depicts the slowdown in AGF's real estate production beginning in the third quarter of 2005. The results of AGF's underwriting discipline has resulted in a mortgage portfolio with credit quality far superior to that of the subprime asset-backed security real estate market as shown on slide 48. Jimmy Bhullar.President & CEO Thank you. at the end of the fourth quarter. It originates real estate loans through its 1600 branches. nonreal estate and retail sales financed loans. Furthermore. they anticipated many of the real estate market issues and sacrificed growth for long-term credit quality and earnings stability. We believe AIG is extremely well-positioned for the upcoming market opportunities.5 billion in outstanding balances of branch-based consumer loans of Equity One Inc. In addition. Rather.FINAL TRANSCRIPT Feb. but there has been much to cover and I hope our disclosure has been helpful for you to understand these issues in more detail and in more depth. On slide 49. Essentially all the real estate loans are first mortgages and owner-occupied. Republished with permission. Bob. As described on slide 51. QUESTIONS AND ANSWERS Operator (OPERATOR INSTRUCTIONS). but the Company's business model and underwriting approach are sound and will allow the Company to continue to pursue opportunities as they arise. AGF's credit quality remains below its target ranges. AIG . AGF also originates and acquires loans through a centralized real estate operation. Martin.. www.
Q4 2007 American International Group Earnings Conference Call Jimmy Bhullar .com Contact Us 18 © 2008 Thomson Financial. Jimmy. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial. I can answer your first question relating to the capital requirement in Taiwan. but the last resort will be to probably thinking of is it preferred shares to enhance our further capital base in Taiwan. If we look at the past circumstances. which we. we do not. AIG . of course. need some time to fully model. 2007 numbers. may be in case of investment performance below the requirement of 200%. If you can discuss the rationale behind the change in language. but it is really impossible for me to give you any real level of confidence on that.FINAL TRANSCRIPT Feb. If you could quantify that on what that could be.Chairman. 29. I am here with the group.5 billion to $19.American International Group . So there is no expectation that there would be a major adjustment. you asked. risk-based capital.JPMorgan . but the initial assessment or estimate is based upon a roll-forward of certain assets and liabilities.5 billion range that we just published is based upon the roll-forward of our current modeling as I talked about earlier. (inaudible) revised higher or lower over time? Edmund Tse .American International Group . including possible reinsurance and/or realize some capital gains from certain investment assets and so forth.streetevents. the updates have been pretty consistent with the roll-forward. That range does already take into account the results -. I just have a few questions. the $14. With regard to your third question on economic capital loss estimates -. 2008 / 8:30AM.the loss estimates on the stress studies. Although I would say we feel pretty good about how we have derived these numbers at this point in time. on your $14. how much of it is just conservatism on your part and then just generally talk about the factors that could affect your realized loss estimate of $900 million. Steven Bensinger .I am sorry -. I will turn it over to Bob Lewis. Edmund here. We just plan ahead in case we are below that. In fact. but that is really for a precaution. The first one is for Edmund if he is there. American International Assurance Co. our RBC. Bob Lewis . but there is some new capital requirement that is regulated by the insurance commissioner and there is a capital charge to certain Taiwan investments and as a result. Republished with permission. what is the potential that this number could decline when you revise your excess capital estimate once you use the updated 12/31 inputs? I think it has been made that you are publishing the revised number? And the final question is on your economic loss language for the capital markets business. . it's Steve.SVP Yes. To what extent that might change when we do the full review on the December 31. Right now. how much of it is driven by a deterioration in the market. But based on the current situation. Then we may have a problem to increase our offshore investments as only if our RBC is above 200%. And secondly. you said when we actually run the numbers and validate whether you think that there would be a substantial change in that number. Jimmy. given our conservative estimate of excess capital at the end of '07 of between $14. We are thinking of different ways to see if we could further improve our RBC.EVP & CFO Jimmy. we do not need an injection of capital to support our local operation as it is very profitable and the financial is very strong. You mentioned that there is a chance that you have to contribute additional capital to your Taiwan business because of higher capital requirements.5 billion to $19.5 billion estimate for excess capital. Nan Shan is making operating income of $900 million for the year.5 billion and $19.American International Group . we have a very strong underlying performance in our life company in Taiwan. No.Analyst Hi. With regard to your second question on excess capital.the financial results that we have reported. namely Nan Shan. it is very difficult for me right now to project that. we don't have a problem. www. good morning.5 billion. Hi. They will approve a further increase in offshore investment from the 35% to 40%.
No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.Capital Returns . I think we have been pretty clear as we have discussed this over the last year that the rating agencies right now are not as far along as we are in terms of our own economic capital modeling. regarding -. Jimmy Bhullar . as far as the effect of further rating changes. Regarding how that estimate could move and what could move it.2 billion credits that you are taking or the benefit in your excess capital estimate. And are the $6.they are not using the same methodologies we are.on that. given the assumptions of delinquencies and losses and housing price appreciations underneath that.Analyst Okay. we are quite comfortable that that stress really is a severe stress to our business and that that number is right now our current best estimate of a real severe stress loss. but we expect that as we continue to converse with them over the next few weeks and the immediate future that we will be showing them the rationale for our own modeling and comparing that with them to their own and providing them with the information they need to come to their own conclusions. Some of them gave some initial views a couple of weeks ago when they changed our outlook or put the Company on rating watch or review.JPMorgan . Thank you. www. 29. Now I think you have seen from some of the publications over the past few weeks that a number of the rating agencies are doing their own modeling of our underlying super senior portfolios. However.Analyst Hi. It would seem to me given the circumstances that the greatest area in your control to create value and make money is in getting better rates in the property and casualty area and I wanted to know what you are doing on that end. good morning. Jimmy. Republished with permission. So they are not -. obviously no one knows exactly how deep and how long-lived this downturn will be. one. Thank you. so the rating agencies are using their own testing.American International Group .com Contact Us 19 © 2008 Thomson Financial.are the rating agencies okay with that treatment? Steven Bensinger . .FINAL TRANSCRIPT Feb. Jimmy Bhullar .Q4 2007 American International Group Earnings Conference Call Regarding your third question on the stresses.JPMorgan . particularly the rating agencies who have used that in determining the stress tests that we have shown there. the current ratings that exist through January in our current estimate and then also we have stressed those ratings substantially from here and so that I think that stress that we provide there in detail shows a significant change of a potential quality in the portfolios that is really driven from the current analysis of expected delinquencies and loss development.Analyst Okay.EVP & CFO Well. 2008 / 8:30AM.streetevents. as well as recovery rates or housing price appreciation. is that something that the rating agencies are okay with or is that -. Capital Returns. Operator Ron Bobman. So by accessing our own views and also those of third-party analysts. Ron Bobman . AIG . I think you can see from the stress description on page 8 that we have taken into account.
but both Kris Moor and Nick Walsh are here to give a little bit more color maybe by line where we are seeing continued rate pressures. terms and conditions. One area I am particularly concerned about is the aviation sector. rates were down about 11%.Q4 2007 American International Group Earnings Conference Call Martin Sullivan . www. I think rates were down around 9% and I think internationally in our commercial business. And in areas -. And in some other productlines. about down 8%. We have excellent growth in Latin America where there are some pricing opportunities because of reducing local capacity.e. The good news is that. obviously during the fourth quarter and year-end. Republished with permission. Ron. policy wordings and deductibles. but there is still lots of opportunities for Foreign Gen. we still feel that in almost all our lines of business except for a few that rates are plenty adequate and that there's a lot of opportunity out there for us. We are seeing similar in the first quarter so far.com Contact Us 20 © 2008 Thomson Financial. financial institutions is an area that rates we are pushing and leading the market and there are one or two others that are with us on that and increasing the rates in that area. Well.FINAL TRANSCRIPT Feb. So we look at that and we do lead the market in that area. UBS. Domestic General Insurance Ron. Operator Andrew Kligerman.EVP.President & CEO Thanks. of course. Domestic General Insurance Yes. .American International Group . this is Kris again. so far again generally speaking. But with that said. but excluding the property and workers' comp for the fourth quarter. and if you go down very specifically. 29.American International Group . in the United States. Ron. We are doing extremely well in Continental Europe where we are primarily under scale. Property rates declined in the fourth quarter about 13%. Overall. 2008 / 8:30AM. Foreign General Insurance Ron. AIG . overall. Nick Walsh . examples where that is challenged. It's a good comment.there are always areas that have exposures that you feel -. the comments on pricing are pretty much the same. So it may be tough in some of the more conventional markets. Kris Moor . holding reasonably well.EVP. Kris Moor . there was 9%. There are always.EVP. you will see spots where we are increasing rates. but I will let Chris and Nick add a few words. we see opportunities where the rates don't need to be increased. we still see a lot of opportunity out there. but besides that.Analyst I appreciate the commentary and the discussion of opportunities. they were down 10% and for a whole year. which continues to see significant rating pressures over many years. I am surprised I don't hear any talk about rating action that you are taking as a leader in large swaths of groups or lines of business in P&C basically taking a leadership position to hold rates or take rates up. Ron Bobman .American International Group . The areas that we are watching very closely or looking at closely is the aviation area and also in some of the states for workers' comp.streetevents. Overall rates are down about 10% and property rates are down about 12%. so there is lots of upside for us there and we are very excited about the Middle East and some of the emerging markets. but we have some terrific opportunities across the world. i. this is Kris. we continue to see rating pressures in the P&C environment and domestically. from a Foreign Gen standpoint. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.American International Group .that you are coming close or you are at the point where the rates have to change and obviously in today's environment. Then in other areas.Capital Returns .
when do you think it is possible that could get lifted? Martin Sullivan . as I have indicated.I assume your comments earlier indicated no. but don't they use a fair amount of manual marks in their accounting.let's see. 2008 / 8:30AM. You saw some weakness in the group premiums. So maybe if you could -. obviously we will advise you as soon as possible. And secondly. it looked like there were a few pressure points. I will take question number one. in the bottom line is that we have a clean audit opinion and that the accountants have signed off on the numbers and as Steve mentioned earlier. obviously because we have the material weakness that evolved during the closed process in implementing and overseeing the sufficient valuation process before the end of the fiscal year. so I will defer number three to him. 29. Andrew. obviously given the extreme dislocation in the markets affecting obviously AIGFP's super senior credit default swaps.and I don't mean this to be a long one. on the second part of your question. The good news and of course. we are obviously working very hard to remediate as soon as possible the material weakness. but could you give us a sense of what they are thinking on that front? And then in terms of the Japanese market.American International Group .Analyst Yes. While obviously we didn't succeed. we obviously have addressed those issues in preparing our year-end numbers by obviously inserting compensating controls. we are going to work very diligently to remediate the material weakness as quickly as we possibly can and we will be working very hard to do that through the balance of 2008 and as soon as we are fully remediated. I don't focus on the monoline insurers. AIG .com Contact Us 21 © 2008 Thomson Financial. Andrew. I obviously can't comment on the other companies.American International Group . on the first part of your question there. Is there a risk that they are going to ask you for more capital and maybe you could -. Obviously. obviously those numbers that were presented on December 5 were unaudited.streetevents. particularly the monolines as you suggest and how they have formulated their numbers.I know you have just touched a bit on your economic capital and the $14. You had -. Well. maybe just -. Just on the first part of your first question. www.when did that thinking come into play and with that.you just seemed so confident at that December Investor Day and it just makes me wonder what was PriceWaterhouseCoopers thinking at the time to let you go into that Investor Day and be so confident? Maybe this stuff could have been corrected in time before the material weakness and actually on that note. then Martin. He can give you a lot more color. also weakness in variable annuity sales though. but maybe just a quick collar around each of these products real quick in Japan and what the environment was like? Martin Sullivan . about 9% and the personal accident area actually showed an 8% increase. I am sure Steve will chart tackle question two and Bob Clyde is on the line from Japan.UBS . and correct me if I am wrong.President & CEO Thank you. Japan's sales were down in the fixed annuity area about 10%. so that would be question one? Part two is -. we were working during the fourth quarter to implement system and controls to accurately report our financial results. Andrew Kligerman .UBS . A couple of questions more conceptually. . Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.FINAL TRANSCRIPT Feb.Analyst Good morning.President & CEO Well.Q4 2007 American International Group Earnings Conference Call Andrew Kligerman . What was it that led to the conclusion by PriceWaterhouseCoopers that you have a material weakness? Where did that -.5 billion to $19 billion I think it is and it is not clear what the rating agencies are thinking.
AIG . Now again.UBS . Steven Bensinger . Andrew Kligerman . these super senior structures were designed to withstand very severe economic stress. 2008 / 8:30AM.EVP & CFO Well.Analyst Okay. and then -. Andrew Kligerman .EVP & CFO Andrew. obviously I can't speak for them. There has been. as you have stated.American International Group . 29. I think it would be just too difficult to really give any kind of an answer to that precisely.Analyst Steve. If you go back to the presentation that we discussed a few minutes ago.UBS . they involve a great deal of market information that takes time to obtain. I really can't speak for them other than to point you to what they have been saying publicly. I mean there has been more deterioration in the underlying market as a whole. I think if you read the publications that all four of the major rating agencies made a couple of weeks ago after we filed the 8-K. So I think the substance of that is also going to be a significant factor in the actions that the rating agencies take based upon the conversations we have had with them and also what they have actually already written. If you had to make the marks today.UBS . I can't speak for them or for what their conclusions might be once they digest our year-end numbers. I think a lot of what we have discussed with the rating agencies and what they have written has not only been focusing on the fair value marks for GAAP.FINAL TRANSCRIPT Feb. What that precisely implies to our overall portfolio. We will have our best estimate mark when we published our first-quarter financials. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial. but so far that has not been a discussion topic. I don't think that you will see any indication that they feel that we have capital issues discussed and that has not been the subject of any discussion with them so far.com Contact Us 22 © 2008 Thomson Financial. we just don't know at this point in time.Analyst Steve.American International Group .American International Group .Q4 2007 American International Group Earnings Conference Call Andrew Kligerman . do you think the mark will be similar in the first quarter to what we have just seen in the fourth quarter? Steven Bensinger . That is how they were underwritten and so far from an economic standpoint.streetevents. we really don't know that at this point in time.UBS . but they are also looking at the economic stress test analysis and the underlying strength of the portfolio. www. The processes that we now employ that I went through with you are highly complex.EVP & CFO Andrew. Andrew. further spread widening. would you be looking at something similar again for the first quarter and then would the agencies get concerned? Steven Bensinger . Republished with permission. on the question on the rating agencies. spreads have widened a fair amount in January and February. but right now.okay. So I think we just have to see how it evolves and again. they certainly seem to be performing as they were designed. However. . Andrew Kligerman .Analyst Okay.
. one of the megabanks and a mid fourth-quarter launch by BTMU. the risk categorization applied to these products. Bob Clyde .it is the only VA product sold at all four megabanks incidentally. hi. I would like -. We expect a new FIH product to be developed in December. Let me start with your questions about annuities. Now we initially introduced that in the face-to-face channel. ALICO launched a very innovative product called [ESDN] or [yen soto dollar naka]. the outlook I think is very favorable. we had 24 tieups by the end of February and we expect 30 banks by the end of April.Q4 2007 American International Group Earnings Conference Call Martin Sullivan . We have got a new cancer product that we will be launching in June that we are excited about.you didn't ask about life. which have profit margins that are significantly higher than our yen-based products. AIG . Bob. but it improved by 6% versus the third quarter. we had increased A&H sales through face-to-face channels. It will be particularly important to the female and younger market segments. we are anticipating a stronger outlook for A&H sales as concerns raised by the claims payment issue are starting to fade.American International Group . we are the only provider of products in all four megabanks and the mandates in the banks are running ahead of our plans. sales were up 14% in the fourth quarter and 8. We are into the final phase of the bank deregulation. The sales of fixed annuities were 11% below the fourth quarter of the prior year. we had launched that product in 35 banks and we are the only VA -. It will be competitively priced. we were 5% above fourth quarter. but let me just mention one thing about life.against the fourth quarter and that has helped -.American International Group . In fact. at the end of December. 29. We have several new product initiatives as well. And of course. Life insurance is down 12.that was helped in large part by a third-quarter launch by SMBC. we posted record sales of dollar products. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial. another mega-bank. Republished with permission. And also fixed annuity sales for ALICO's face-to-face channel has shown some nice gains too with the new knockout [rider] option that we offer. And the sales of that GMWB for life VA has continued to increase every month. And to offset that decline. Japan Yes. declined by 15.6% for the year and we had other products to overcome that impact of the suspension of LSIT and for example. Andrew. Just briefly. Single premium dollar whole life products remain very strong in both face-to-face and bank channels. If you exclude that increasing term product. Let me just move over to A&H sales. mainly due to deliberate measures that we had to reduce our advertising spend in ALICO's direct marketing channel to improve profitability. three banks have taken it up and we are on the process of launching a number of others. As we look forward. If we look forward in life. on the 22nd of December. Major driver of that negative trend was the suspension of the [lapse] supported increasing term product back in April of 2007 and following that suspension. Andrew.streetevents. 2008 / 8:30AM.com Contact Us 23 © 2008 Thomson Financial. which in the fourth quarter. our sales totally dried up. but we declined 22% versus the third quarter due to the turbulent equity markets. that has created a bit of a current going in the other direction.FINAL TRANSCRIPT Feb. We also introduced in the bank assurance channel and fourth quarter and thus far. including four megabanks and again.President & CEO of AIG. which marked the third straight quarter of increasing sales due largely to the strength in the yen. there was the final phase of deregulation and ALICO started to sell four A&H products. if I can ask you to respond to the third part of Andrew's question. Sales grew 65% versus the third quarter and 53% versus the -. And as a result.6% over prior year. Because of the new financial instruments and exchange law. With respect to variable annuities. the steepening of the yield curve and the recent equity market volatility. as you know.3% in the fourth quarter. including a new innovative single premium whole life FIH and 20 major banks. so that was a really positive outcome. but the new lifetime guarantee minimum withdrawal benefit VA for life product saw really significant growth in the fourth quarter. which www. which has opened up new opportunities as well. In fact.President & CEO Thanks.
American International Group .com Contact Us 24 © 2008 Thomson Financial. 2008 / 8:30AM. on the second part of your question. So there is a little bit of margin spread.Domestic Consumer Finance What was driving the fourth quarter is basically three or four major factors.FINAL TRANSCRIPT Feb.President & CEO Thank you very much indeed. Ladies and gentlemen. we have got a number of callers obviously and if I may ask that you kindly limit maybe to one or two questions and so we can take as many calls as we possibly can. www. obviously we can get back to you on that. so I will ask him to respond. AIG .Morgan Stanley . we have Rick Geissinger with us. if I can. Second. 29. I am going to have to try and end your response there only because we have got a lot of people on the call. Martin Sullivan . We are not immune to what is happening in credit markets. Morgan Stanley. good morning. Andrew. just a numbers question. Nigel Daly .Analyst Great.American International Group . . we are looking for that information and we will try to get back to you during the period of this call. Republished with permission. We continue to have problems in our mortgage company. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial. but we are still below the target ranges that we published in 1997 in all of our products. thank you. We also added about $70 million to our allowance for loan losses. We are taking a number of actions to correct that and we'll continue to do so. The reason for that is that we came off historical lows for the Company in the summer of '06 and delinquency and charge-offs are up somewhat.American International Group . obviously runs our domestic consumer finance business. Martin Sullivan .President & CEO Nigel. Martin Sullivan . Andrew Kligerman . You commented that consumer finance delinquencies and charge-offs remain below your target ranges. You are barely breaking even in these operations. if you can break down the mark-to-market losses between the high grade and the mezzanine model CDOs and subprime. Operator Nigel Daly. Martin Sullivan .President & CEO Bob. margin squeeze I should say and that is fundamentally what is driving the earnings in the fourth quarter. Thank you very much indeed.American International Group . So perhaps you can provide some additional color on what is driving the significant pressure on earnings if it is not the performance of your loan portfolio.streetevents. Rick Geissinger .Analyst That was great.UBS .President & CEO Nigel. if you would like anymore information.Q4 2007 American International Group Earnings Conference Call is a product that is yen on the outside and dollar on the inside and the product has surpassed our expectations in the first couple of months and we have a suite of about six products now through the banks.American International Group .
just breaking it down between the high grade and the mezzanine. Nigel Daly . Republished with permission. Steven Bensinger .American International Group . correct? Nigel Daly . that's correct.Analyst Thank you.Analyst The CDS mark-to-market loss. 29.EVP & CFO I am not sure we will be able to have that information at this call.streetevents. Citi.EVP & CFO Nigel.com Contact Us 25 © 2008 Thomson Financial. Thank you.Citigroup . but we can try to provide that.Analyst In the super senior. I wanted to discuss the $900 million stress test scenario number. we said that number was as of January 31. .Analyst Okay.Analyst Great.Morgan Stanley .Morgan Stanley . I just want to confirm that that is actually as of December 31.Q4 2007 American International Group Earnings Conference Call Nigel Daly . Steven Bensinger . yes.EVP & CFO Are you talking about on the super senior? Nigel Daly . how that relates to the less than $600 million discussion in what seemed like a worst-case scenario described at the December 5 conference call. AIG .Morgan Stanley . During the commentary on the Q&A. Then I want to also ask about that $900 million. You were talking about the investment losses. that would be great. Josh Shanker . Thanks.American International Group . just a clarification. The first one. I wonder if you could give any commentary on the D&O subprime exposure. which you took in the quarter. Steven Bensinger .FINAL TRANSCRIPT Feb. And finally. 2008 / 8:30AM. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial. Two questions. Operator Josh Shanker.Morgan Stanley . I noticed you added some new disclosure there and I am curious to know if you can talk about number of potential policies affected or what kind of rate online per million of coverage we are talking about in that book of business? www.American International Group .
the $600 million was writing off all 2005 subprime RMBS BBB and below in all '07 and '06 regardless of vintage. Republished with permission. the stress there is identified for you on slide 8 of the presentation we just referred to.Analyst And that is as of December. And on the D&O front? John Doyle . as well as ABS CDOs from those -. Bob Lewis. AIG . was defined as being and the $900 million.American International Group . We have done a number of stresses and the one we have articulated in the presentation today is the one that we feel. Josh. www. rating actions through January 3.Citigroup . the $600 million -. we continue to monitor the issue very.SVP Good morning. which seemed like an extreme stress. if you will. Josh.Q4 2007 American International Group Earnings Conference Call Martin Sullivan . Josh Shanker . but first Bob. It is 334 potential notices. however.SVP I think one can simply say it is a different stress. we are on notice of claims or potential claims on 261 policies. as we articulated there. Bob Lewis .American International Group . No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.American International Group . that this is the stress that we feel is the most appropriate for our own internal purposes to use as a severe stress. Josh Shanker .Analyst Very good. 2008 / 8:30AM.Citigroup .SVP As of December. incorporating.American International Group . but the $900 million that we've just discussed is really. So the actual components of the stress are slightly different.Citigroup . . given where the current stress is being shown in the marketplace. which is in the subprime and Alt-A areas. 29. I don't have the actual $600 million in front of me here.Executive Liability Business Good morning.I think regardless of vintage and year. as of a week ago and dating back to the beginning of 2007. Are you saying the $900 million is an even more extreme stress than that? Bob Lewis . We have. Josh. not January? Bob Lewis . Josh Shanker . As far as the comparison of the $900 million and the $600 million.streetevents. which described in it what the actual stress. so there were significant rating actions taken on January 3 and our stress is a stress from that. As Martin mentioned.American International Group . what we feel from current situations and rating situations that are in the marketplace.President & CEO Sorry.Analyst To be fair. very closely and claim activity remains manageable at this time. Bob will respond to the first part of your question there and we have John Doyle with us who is responsible for our executive liability business and he will give you some color on the last part and I think Nick will chime in there with some information on the international side as well. what we feel is a severe stress from here and that is rolled up on the portfolio to this $900 million potential unexpected loss.com Contact Us 26 © 2008 Thomson Financial.I assume you're referring to one of the frequently asked questions in the December 5 presentation.FINAL TRANSCRIPT Feb.
Executive Liability Business Sure. Larry Greenberg . so it is our worldwide operation.FINAL TRANSCRIPT Feb. well. 2008 / 8:30AM. As Kris mentioned. On the [FP] side. if you guys can give further disclosure on that.Analyst And is there anyway to get any more granular about how that $347 million in premium is divided among various clients or whatnot? John Doyle . 29. I am sure everyone would appreciate it.American International Group .Executive Liability Business I don't have that number in front of me. from small E&O risks to other parts of the portfolio.Executive Liability Business How many clients we have? Josh Shanker .Analyst Can you talk about rate online for D&O at that time? Is there any way that we can translate that into $347 million covers how many clients or anything of that nature? John Doyle . Langen McAlenney.Citigroup . AIG .Analyst How many clients -.Citigroup . very different from one segment to another. Is there any possibility that the rating agencies will require (technical difficulty) capital into FP? www.com Contact Us 27 © 2008 Thomson Financial.Langen McAlenney .Citigroup . That number -. is a global number. we are pushing price in the financial institution area and prices vary widely from private to public risks. . In the footnote. I know that AIG guarantees the (technical difficulty) capital there. but I am not sure what other information you are looking for there. it notes all the various classes of business that we took a look at.streetevents. by the way. Thank you very much.Analyst Okay. but we did an extensive ground-up review in the domestic insurance operation to come up with the profile of the accounts that are potentially exposed.Citigroup .Q4 2007 American International Group Earnings Conference Call Josh Shanker . Operator Larry Greenberg.American International Group .Analyst Thank you and good morning. how many clients does that actually cover? John Doyle .I mean how many possible clients are touched by -.American International Group . Republished with permission.that number of claims. Josh Shanker . So prices are very. $301 million of the $347 million in written premium is from our domestic operation.when you say that you have totaled the total subprime potential exposure. Josh Shanker . No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
The first comment is that the fourth-quarter expense ratio is always the highest of the year for seasonalization issues.American International Group .com Contact Us 28 © 2008 Thomson Financial. it was a benefit on operating income bottom line. no. What was the FX impact in the foreign life earnings? Kris Moor . the fourth-quarter '07 expense ratio is 42. that -.000 inquiries. The reasons for the difference is primarily through the realignment of certain legal entities and integration costs. Have any other key management of FP left or are planning to leave beyond Joe? Martin Sullivan . Larry and they are getting back to work straight after this call. Larry Greenberg .American International Group . it was 3%. 2008 / 8:30AM. which is about $130 million. but bottom line. Ascot had a -. which is a difference of 3.2 million customers and that was 10. Republished with permission. It looks like it was about four points above normal. And just a couple of small pieces.Analyst Okay. Larry Greenberg . Domestic General Insurance For the quarter.again. www.Langen McAlenney . The other part of the integration is between our acquisition in Taiwan Central and the AIG operation. Nick Walsh . We sent out information packets to 2. It involved 200 people for the majority of the year. A major part of that is what we call a [part seven transfer] of our organization in the UK from a US branch to a local subsidiary.Analyst Great. We disclosed the impact on revenues and GAAP premiums in our stat supplement.President & CEO (inaudible).had a spectacular year and the increased profit commission shows up as an impact on fourth-quarter expense ratio.American International Group . Aside from that. Is that reasonable for me to assume? Martin Sullivan .Analyst Great.Q4 2007 American International Group Earnings Conference Call John Doyle . So they are relying on AIG's overall financial strength to support the operation.FINAL TRANSCRIPT Feb.President & CEO Nick Walsh has got some color on that. .Executive Liability Business Larry.EVP. 2% year-to-date. Larry. in great detail.that's our [Lloyd's] business -. Larry Greenberg . It was a lift.streetevents.48.5 million pieces of paper and we received 47.25 against a prior of 38. I will give you some numbers. Foreign General Insurance For those of you who don't have the supplement in front of you. So that has not been a subject of discussion. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial. And you made reference to some unusual expenses in the Foreign Gen expense ratio. all of which were dealt with.Langen McAlenney .EVP. And the year is at 34. it was 3% for the quarter. 2% year-to-date.American International Group . It is finished. That started on time and will finish on time. AIG .95.American International Group .77. 29. great.Langen McAlenney . that has not been a subject matter of discussion because of the guarantee that AIG provides to AIG financial products.
So again under stress. 2008 / 8:30AM.com Contact Us 29 © 2008 Thomson Financial. the '05 book was underwritten with more conservative underwriting criteria than the '06 book and the first half of '07 book. Without giving any specifics. As regards the decline in home price appreciation and the impact on the '05 book.Q4 2007 American International Group Earnings Conference Call Aside from that.Analyst Yes.it did enjoy some early appreciation. so I will ask Billy to respond to the first part of your question. First question . Although it will experience some additional stress as property values continue to decline and we are estimating a decline or forecasting a decline in property values of another 7% or 8% for 2008. so it should perform better. but it had -. I am wondering if you could put any parameters around it. And as Bob Lewis said. is likely to result in another significant operating loss in 2008.CRO No. we have about $5 billion of risk in force. our Chief Risk Officer. Again. is going to put quite a bit of stress on our domestic portfolio. you make a reasonable distinction between the '06. Jay Cohen .American International Group . We have pushed out our economic forecast to suggest that the housing market is going to continue to experience a lot of stress through '08 and probably will not bottom out until the first half of '09. the operating expenses around that are higher. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial. So the combination of the deterioration in the housing market. 29. Len. we would anticipate that that operating loss would be somewhere in the range of where we were in '07 to somewhat higher than that. it is starting to see the same level of stress as the more recent books. And secondly.President & CEO. combined with obviously a slowing economy. Merrill Lynch. Billy. the housing indicators are all trending negative and they are trending negative at an accelerating pace. First. which I think up until this point. Republished with permission. Good morning. as we have all seen. .President & CEO Jay. AIG . Billy Nutt is with us. but probably not to the level of the '06 and '07 books. thank you. in a lot of your analysis. www. clearly you are suggesting that the '08 year is going to be another pretty bad one.streetevents. Should we be expecting losses in '08 to essentially mimic what we saw in the fourth quarter of '07? That is the first question. Jay. On the line with me is Len Sweeney. we have a continuing emphasis on the consumer business and part of our strategic imperative is to change the format of some of our commercial business we are targeting and I have spoken about this in previous events and we are targeting smaller businesses because we think we have an opportunity there and the commission costs and of course.Merrill Lynch . The '05 book. Two questions. do you see a risk or why don't you see a risk that the '05 year will look maybe as bad as '06 given that the real estate prices continue to fall? Martin Sullivan . that has been pretty reasonable. if then.American International Group . I think you said it well. would you like to add any color to the '05 and the prior books? Len Sweeney .American International Group . particularly in the fourth quarter and likely to continue to do so. but that is all according to our plans.FINAL TRANSCRIPT Feb. AIG United Guaranty Sure. on UGC. Bill Nutt . '07 vintages and the '05 vintages. but with real estate prices continuing to come down. Operator Jay Cohen.
29.Banc of America Securities . I was thinking more on the credit derivative business wherein the stress tests.American International Group . From an enterprise risk management point of view. but that seems to be a little inconsistent with the fact that we are stopping the share repurchases. Alain Karaoglan .Merrill Lynch .Merrill Lynch .com Contact Us 30 © 2008 Thomson Financial. A couple of questions on capital and on the property/casualty business. but the businesses performed exceptionally well to date.President & CEO Jay. Kevin McGinn . AIGFP has been a very important and continues to be a very important part of AIG. 2008 / 8:30AM. Steve? www. what I have described as unchartered waters and like everybody else.Analyst That's helpful.Q4 2007 American International Group Earnings Conference Call Jay Cohen . I think they add significantly to the diversification.American International Group .Analyst Actually. low 20s.streetevents. Would it be possible to see if you could give us the excess capital versus what the capital requirements from the rating agency at the rating that you would like would be if there would be any excess capital at that level? Martin Sullivan . Jay Cohen .President & CEO On the first part of your question. Banc of America Securities. Republished with permission. you mentioned $14. so I'm going to ask Kevin just to respond on that.5 billion to $19 billion. obviously you are stressing the 06.FINAL TRANSCRIPT Feb.American International Group . We are in. our Chief Credit Officer.5. It has produced very good returns over many. The rating stress tests that we've ran essentially took that into -. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial. The highest loss assumptions we are seeing in the '05s are really around 7. The '05 is definitely showing some deterioration. the rating agencies definitely and all the delinquency and default data suggest that the '06 and '07 losses are going to continue to climb and you're now seeing estimates as high as in the high teens. are you considering whether you should be in the AIG financial products business at all given the heartache that it has given to the stock and the mark-to-markets on the portfolio and the volatility to the book value? And from an excess capital point of view. On the second part. Jay. Obviously. they will continue to be reviewed. . everybody stays under constant review. '07 years more intensely and I am wondering in really that business. like all of our businesses. That is a good point about the resets to.CCO Yes. We think we are on top of that and we have essentially stressed it appropriately. with that distinction. Operator Alain Karaoglan.specifically took that into account because we are expecting some more downgrades in the '05 vintages. as I said in my opening remarks. Yes.Analyst Good morning. AIG . hi. why don't you do a similar stress on the '05 year? Martin Sullivan . but at the present moment. but the numbers are not nearly as bad and that is probably in large part because a lot of the resets have already happened in the '05 vintages. Thank you. many years at a very good return on capital. I have got Kevin McGinn with us.
It is the case that right now with the unrealized losses. some on negative outlook and two on rating watch and review. could you comment on the adverse reserve development on the 2000 to 2002 years that is still bothering you and not allowing the benefit of the recent year reserve releases to flow to the bottom line completely? And on the personal line segment. if I did the math correctly.and if you look at it on that basis. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.Banc of America Securities . I really can't speak for them. Steven Bensinger .American International Group .American International Group . we really -. Republished with permission. it's Joe Cassano. we think the return on capital is still very robust and when we get through this period. I get a combined ratio of 112. but they are not similar or comparable to the rest of the business? Steven Bensinger . So for the time being. that we will have more of a dialogue on that to see where they are relative to us. It does not reflect the rating agencies' views of our excess capital. isn't that a notional amount of capital that you are allocating that AIGFP wouldn't be able to operate on a standalone basis and so the return on capital are high. very high performer in terms of return on capital. Would've anything additional happened in the quarter in personal lines to lead to such a high combined ratio? www. if any.one of the things we do look at and one of the things we have been presenting over the last six months is the fundamental positive attributes of the portfolio we have written and looking at that. but on the capital. AIG .5 billion to $19.EVP & CFO It is notional. How are you? One of the things that we have done historically when we go through our own capital management within FP and measure the usage of capital with FP is we've -. we think it is prudent to suspend any new share repurchase activity until we have a better view on capital with all four of the major rating agencies.com Contact Us 31 © 2008 Thomson Financial.Banc of America Securities . as I said. I think they are looking at the entire financial strength of AIG. very positive types of returns that we have had in the past. They all have their own different perspectives on what level.CEO. I hope that helps. If you can think back or if you can find the files where we gave a presentation in May where we posted some of the historical return on capital.FINAL TRANSCRIPT Feb. 29. up until this period of time where we have these unrealized losses right now. And when we have done that. even excluding cats and adverse reserve development.will return back to the very. I think. 2008 / 8:30AM. with respect to your second question on excess capital. But what I would -.Analyst If I could follow-up just on that. it has actually been relatively good.American International Group . but it is also drawing on the implied guarantee of AIG. AIGFP Alain.streetevents. So when AIGFP's capital position is being reviewed by the agencies or by its clients. . as we go through the process in the near term of hopefully settling our ratings. it is a completely different story. which are now.there is basically a charge against the AIG capital book. again. we have always been a very.Q4 2007 American International Group Earnings Conference Call Alain Karaoglan . Joe.Analyst And on the property/casualty business.EVP & CFO Alain.5 billion range is our estimate based on our own internal economic capital modeling. the Company and the team will continue -. the $14. given the fact that our ratings right now are on negative outlook and in some cases on review. of excess capital that we have and again. would you like to add? Joe Cassano . Alain Karaoglan . Martin.
105 is not a number we aspire to.American International Group . the development has been less adverse than it was in prior years.com Contact Us 32 © 2008 Thomson Financial. 2008 / 8:30AM. And some of that is being caused by the newer business that we have been writing in 2007. 105 range if you do the math. . 2 . You have mentioned some of them. but we are certainly expecting minimal adverse development. www.FINAL TRANSCRIPT Feb. we ran about a 102 in the quarter. we have a response to the second part of the question. so I'm going to ask him to respond to the first part and then Bob will respond. I think the underlying book is pretty strong. Bob Sandler .streetevents.Senior Claims Officer This is Bob Sandler. you will see that 2002 and prior has about $1 billion less adverse development. Operator Pardon me.American International Group . it's a higher proportion of our in force than in previous periods. Last year. Bob Sandler. We are seeing a lot of latent claims still emerge from our excess casualty book that are a function of the soft market years and we have improved our terms and conditions and underwriting guidelines to the point where we just don't think you are going to see that kind of latent development from the more recent accident years and as those older years continue to wind down. from accident years 2002 and prior. You have got about $33 million of integration -. In the fourth quarter. about $800 million actually less than it did last year. There was $75 million roughly of wildfire losses that are included in those numbers from the private (technical difficulty) areas.American International Group . No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial. In general.SVP & Casualty Actuary Yes. we probably ran in the 97. but not all of the pieces that distort the quarter. You have got about $36 million of adverse development in the quarter. So that business. you'd actually find the quarter is probably running more on the 104. Those three areas. Operator And our next question comes from --. we have seen continued development as we have described really all year. first-year business does carry higher loss ratios typically and so while the 104. I think if you look in the 10-K.American International Group . we should see less of those surprises. 98 range on that direct book anyway when you account for some of this. They probably won't go away tomorrow.President & CEO Frank Douglas is here. 29. Martin Sullivan .seasonality generally affects that quarter. Frank Douglas . which is not a brilliant quarter. to some degree from transatlantic and to some degree from workers' compensation. so we are running maybe 2. but they did happen this year. That is particularly true of the 21st Century business outside of California. There is a lot of noise in the quarter.5 points higher than that. We still anticipate that the direct business is going to produce a pretty good underwriting profit in the year '08. We increased our loss pick in the quarter -.merger integration costs coming out off the merger of AIG and 21st Century. So if you look at those pieces in total and subtract them. the current accident year loss pick and that had about a $50 million impact on the first three quarters of 2007. It is coming largely from excess casualty. not as fast as we would like.for the year. it is not new this quarter.Q4 2007 American International Group Earnings Conference Call Martin Sullivan . we expect those numbers to diminish. respond to the second part. so it is trending down. for example. which we have talked about I think throughout the year. I would just remind you that the fourth quarter is typically -. Certainly as we go forward. Republished with permission. AIG . Let me take you through some of the pieces.President & CEO No.
I think I will let Bob and Kevin give you more color on that one.EVP & CFO You were breaking up there. Bob Lewis . . can you just clarify what is being expressed in the right-hand side of the table. Eric Berg .Lehman Brothers . can you hear me now? Steven Bensinger .American International Group .Analyst Steve.EVP & CFO Yes.Lehman Brothers . I have two questions. what the various percentages mean? Steven Bensinger .com Contact Us 33 © 2008 Thomson Financial.Lehman Brothers .this is Bob Lewis.Analyst (inaudible) help us understand what this means. AIG .American International Group . with respect to the slide on page 8 that culminates with a realized loss under the severe stress scenario of $900 million.Analyst Thank you very much. Steve.American International Group .Banc of America Securities .Q4 2007 American International Group Earnings Conference Call Alain Karaoglan .Lehman Brothers .streetevents. Eric Berg . They are the architects of that stress test.EVP & CFO Yes.American International Group . 2008 / 8:30AM.Analyst Thanks very much.Analyst Oh. if I understand -. Eric Berg . Bob Lewis .American International Group . Operator Eric Berg. can you just clarify --? Steven Bensinger . both for Steve Bensinger.SVP You are talking about the severe stress criteria? www.FINAL TRANSCRIPT Feb. with respect to this line on page 8 that culminates with a discussion of a realizable loss of $900 million.SVP Well. 29. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial. Republished with permission. Eric Berg .
Kevin McGinn . please. whether they are high grade or mezzanine and finally. www.Lehman Brothers . Steven Bensinger . we essentially wrote off 50% of all the second half of '05 BBBs and below.Analyst Yes. Eric Berg . relates to your discussion in connection with the negative spread or the negative basis and I think you said -.American International Group . We took also 100% of anything BB+ and below from the first half of 2005.American International Group .CCO Yes.SVP Okay. so we think we have basically captured that pretty well. you see we essentially took all the 2007 vintage. Those would be any CDO buckets within the CDOs themselves A+ or below regardless of vintage and regardless of type. We took the -. Steve. Eric Berg . Republished with permission. that those stresses were performed as static stresses. That's what that footnote says. we took 100% of the -. Eric.again. Let me restate it.FINAL TRANSCRIPT Feb. just to reemphasize. Now this is -. Is that what you were saying? Steven Bensinger . So it was assumed to result in immediate losses which they wouldn't. our Chief Credit Officer. 29. I got it. I think you have got it. I think that it would be useful for Kevin McGinn.com Contact Us 34 © 2008 Thomson Financial. we essentially took 100% of anything A+ and below and 50% of the AAs and we thought that was the appropriate stress given all the rating activity that has happened around the '06 and '07 vintages.Analyst Yes.Q4 2007 American International Group Earnings Conference Call Eric Berg .EVP & CFO And again.Analyst My second question.subprime.or spread on the CDO if it were only a credit instrument versus the actual spread that is observed given the multiple risks on a CDO liquidity aversion to risk and so forth. what we call. a lot of rating activity took place all the way through the fourth quarter. RMBS Alt-As and CDOs and going from the top. We then wrote off 100% of all the. 2008 / 8:30AM. AIG .American International Group .yes.Lehman Brothers . the inter-CDOs. we essentially stressed three categories of assets -. That basically takes you through the various categories there. .streetevents. they would occur over time and also there is no benefit in this scenario for cash flow diversion features and other mitigants that AIGFP has structured into these portfolios.Lehman Brothers .we wrote off everything A+ and below of Alt-A for '06 and '07.we did the same thing for the second half of '06 and for the first half of '06. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial. Bob Lewis . which I think is your question.I hope I have it right when I say that you said that one can think of this negative basis as the difference between the value of a CDO if it were uniquely a credit instrument versus the -. who has been managing the entire stress scenario work that we do to describe and put that stress in overall context. anything below AAA and wrote it off 100% with no recoveries.EVP & CFO What I was saying I think that's -.American International Group . In the '05. So that is why we call it severe.
Q4 2007 American International Group Earnings Conference Call Steven Bensinger .Analyst Hi. As of the December 5 call.do you have to resolve the material weakness and take credit for the negative basis or is the material weakness as much about procedures in that you might be able to if the market gets more robust and you can identify the negative basis in a way that PWC agrees.can you clarify. we could not take credit for those in coming up with a fair value determination at year end.American International Group .American International Group .com Contact Us 35 © 2008 Thomson Financial. can you start taking that earlier than the material weakness is resolved? Steven Bensinger .EVP & CFO In a different way. I think we have probably got time for one or two more questions. if the dealers were able to identify this spread differential on December 5 and you felt like it was perfectly fine to use it then.President & CEO Ladies and gentlemen.streetevents. And they made a judgment regarding how those spreads that they were -. So here then is my -.Analyst Thank you.Lehman Brothers . The material weakness www. That spread has various components that I outlined credit. . is the material weakness -. Operator Ian Gutterman. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial. a cash bond.FINAL TRANSCRIPT Feb.that they gathered from the market were related to their book of business. I just also want to clarify on the negative basis. Adage Capital.I think I have it right and I understand and thanks for that follow-up explanation. liquidity.EVP & CFO Yes. and this market perhaps market aversion risk and others. what we learned is that in today's market which had deteriorated much more significantly that those spreads were no longer identifiable and therefore. It is not connected to the material weakness. what exactly happened between December 5 and when you issued your 8-K that no longer made the application of the spread differential appropriate under US GAAP? Steven Bensinger . 2008 / 8:30AM.Adage Capital .Analyst Okay.American International Group .EVP & CFO It was a matter of observability. Eric Berg . our colleagues at AIG Financial Products had indications as I stated for market participants on different levels of negative spreads. thanks for keeping the call going so long. Martin Sullivan . And the difference between the total spread on the bond and just a credit spread on the bond would be the negative basis. A bond has a total spread attached to it.Lehman Brothers . 29. really more from the material weakness side and just -. I don't really see them connected on a perspective basis. AIG . Here is my second and final question. I think the credit for negative basis will come about based upon market changes that will illuminate the spreads more clearly.American International Group . Eric Berg . Ian Gutterman . Republished with permission. At year end upon an exhaustive review.
Adage Capital . if that is really the issue. to the extent -.it would take too long for me to recount each one of them.EVP & CFO Yes.FINAL TRANSCRIPT Feb. You said there was some remaining repurchase that was already committed to you.is your sense that the concern is -. so I can't -.EVP & CFO Well. www.Analyst Right. 2008 / 8:30AM. . Some are looking more at the underlying subsidiary financial strength ratings and so I would say everything right now is under review or under outlook and we are taking all of that very seriously in terms of providing all of them with as much information as we can and descriptions of what we have done to try to clarify it and ensure that we can try to stabilize this as soon as reasonably possible.Q4 2007 American International Group Earnings Conference Call is surrounding resources. Steven Bensinger . but as we stated.Analyst Okay and is anything you are doing procedurally to try to use the limited information to get more clarity or is it really just have to be patient and wait for the market to start trading better? Steven Bensinger .American International Group . So right now. we did a lot of work around year-end to see if we could -.EVP & CFO I think different rating agencies have different views.American International Group . So I wouldn't connect them on a perspective basis. Ian Gutterman .Adage Capital . and then again to clarify on the rating agency issues. Do you have the dollar amount of what that will be coming through? Steven Bensinger .Adage Capital . No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.com Contact Us 36 © 2008 Thomson Financial. Ian Gutterman .streetevents.Analyst Okay. Ian Gutterman .American International Group . I just wanted to clarify that $1 billion. but some of the rating agencies are looking more at the AIG debt ratings.is it an overall perception of consistency of results or is it something vague like that or have they been more specific that we are worried about the CDS losses or the investment portfolio losses? And I guess where I am going with this is to the extent the market seems to be most worried about the CDS.Adage Capital .Analyst Okay. it is a little over $1 billion. Ian Gutterman . AIG . Republished with permission. I think it has probably even less liquid and more opaque than it has been. the additional controls and procedures we are putting in place and what I talked about earlier in terms of sustainability of those controls. we don't intend to utilize that in the immediate future. is it possible that the rating agency concerns will be more around FP and maybe at the corporate debt rating and less around P&C and life and subsidiaries? Do you see where I am trying to go? Whether we are talking about corporate excess capital or whether we are talking about possible rating. After that. certainly I wouldn't say that we see that in the immediate future. the P&C or life companies that actually would affect your business more. Thank you so much. In fact.if there was market clarity and I don't think the opacity of the market has clarified any further since then. we would have about $9 billion remaining in the current authorization that the Board provided. In just one quick numbers question if you have it at the tip of your fingers. 29.
Q4 2007 American International Group Earnings Conference Call Operator Gary Ransom.SVP & Casualty Actuary Yes. in accident years 2006. Fox-Pitt Kelton. 2005 and 2004. tended to offset the rate decreases that have earned into 2007. As you know. Were there any other changes of note or significance in any of the other classes for the current year accident pick in the fourth quarter? Frank Douglas . it is a space that is going down in our priorities.American International Group . Gary Ransom .streetevents. We did an additional $39 billion of business in the fourth quarter and that has really been the focus that has still been a very strong sector for us and again. Gary Ransom . AIG .President & CEO We have Andrew Foster with us. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.Fox-Pitt Kelton .American International Group . Can I sneak in one little property/casualty question on loss ratio picks for the current accident year? You already addressed it for personal lines. that is probably declining as well with the onset of Basel II that was mentioned before.since that is the area where we have had these big marks.American International Group I think that marketplace in general is very much reduced anyway. What we have seen throughout the year is downward pressure from the favorable development.Analyst In the multisector and the arbitrage type deals especially. Andrew Foster . beginning of '06. 2008 / 8:30AM. so he will respond to that. Gary. Republished with permission. this is Frank Douglas. Gary Ransom . So obviously we are going www. So in general. our focus has predominantly been in the regulatory capital space where we have continued to do business. is that -. I think really since we pulled out of doing the subprime sectors back at the end of '05. . But going forward. The new issue sets pace there where that sort of collateral is pretty much dead and has been for some time and is likely to come back at any time.Fox-Pitt Kelton .com Contact Us 37 © 2008 Thomson Financial.FINAL TRANSCRIPT Feb. I think we expect a lot of -.Analyst Thank you. Nothing significant in the fourth quarter. can you see a possibility in the future that you would get back into it? Would this size of a mark more or less -.most of the losses to be reversed and we will always look at the different opportunities that are available to us and assess them on an ongoing basis.American International Group Yes.Fox-Pitt Kelton .Analyst All right. I sneaked in here. 29. I wanted to ask about the business of the CDO wrapping and how all this mark-to-market that has occurred is at all changing your strategy and whether there are certain parts of that business you never want to do again or want to get into again when times improve and just how has it changed your thought process about the business itself? Martin Sullivan . The earned rate decrease was probably only about 5% though.or the potential for the size of the mark we have seen more or less permanently take you out of that marketplace? Andrew Foster .
. Operator That concludes today's call. Gary. If you would like to call Charlene. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial. In the conference calls upon which Event Transcripts are based.Analyst All right. Although the companies may indicate and believe that the assumptions underlying the forward-looking statements are reasonable. Such forward-looking statements are based upon current expectations and involve risks and uncertainties. companies may make projections or other forward-looking statements regarding a variety of items. 2008 / 8:30AM. Thank you. OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE CONFERENCE CALLS.443 www. Actual results may differ materially from those stated in any forward-looking statement based on a number of important factors and risks.American International Group . Thank you very much indeed for all your patience. AIG . DISCLAIMER Thomson Financial reserves the right to make changes to documents. THERE MAY BE MATERIAL ERRORS. the answer was very little change was needed in loss picks. any of the assumptions could prove inaccurate or incorrect and. Republished with permission. which are more specifically identified in the companies' most recent SEC filings. THE INFORMATION CONTAINED IN EVENT TRANSCRIPTS IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION.streetevents. ©2008. Gary Ransom . or other information on this web site without obligation to notify any person of such changes. Ladies and gentlemen. 1771627-2008-03-02T21:39:56. virtually none. Martin Sullivan . USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S CONFERENCE CALL ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS. let me apologize to those who didn't have the opportunity of asking their question.com Contact Us 38 © 2008 Thomson Financial.Q4 2007 American International Group Earnings Conference Call to have to watch that going forward when the rate decrease is maybe a little bit larger.Fox-Pitt Kelton . we will try and respond as quickly as we can. It is much appreciated. 29. therefore. OMISSIONS. All Rights Reserved. IN NO WAY DOES THOMSON FINANCIAL OR THE APPLICABLE COMPANY ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY EVENT TRANSCRIPT.FINAL TRANSCRIPT Feb. Please disconnect your line at this time. Thomson Financial.President & CEO Thank you. Thank you very much. there can be no assurance that the results contemplated in the forward-looking statements will be realized. content. but for now.