However, in consideration of the rapid and severe market valuation decline, AIG could not reasonably assert that the recovery period would be temporary. The entire portfolio, including agency pass-through certificates is marked at approximately $0.77 on the dollar.
Despite continued rating agency actions taken in this sector, the company’s holdings are performing, and are still almost 95% rated AAA and AA.
Key questions and answers from the second quarter fiscal 2008 earnings call conducted by American International Group, Inc. (AIG) on August 7, 2008.
Daniel Johnson (Citadel Investments):
Would you mind giving us a tutorial around the issues referred to as 2a-7 Puts? How many more clients could put this business back to you that would cause you to generate more CDOs as we did in the second quarter?
Elias Habayeb: At this point we have written all the 2a-7s we''re committed to write. So that''s the maximum amount of 2a-7 Puts that we have outstanding. The way those work is that that if there is a failed remarketing then we would have potential obligation to buy the CDO back and/or the underlying security back and on most of them we do have backstop liquidity lines in the event those bonds have been put back to us.
Daniel Johnson (Citadel Investments):
And is it that we don''t have any more exposure to this because there is been no failed remarketings or even that whole issue is basically there are no more 2a-7 that we would be on, potentially on a risk for?
Elias Habayeb: No, we do have outstanding 2a-7 Puts that continue to be outstanding and given the current state of the market we would be expecting to be buying back those underlying referenced obligations.
Daniel Johnson (Citadel Investments):
And if sometime now what that means from capital consumption?
Elias Habayeb: Not at this point.
Daniel Johnson (Citadel Investments):
Moving over the MI business can we talk about the captive benefits that we probably are receiving by now and importantly do we have any captive counterparties that have put their captives into run-off?
William V. Nutt, Jr.: We have got approximately 65 captives that were ceding incurred losses to. So far this year we have ceded through 630, we''ve ceded $255 million in ceded incurred losses, we expect to cede about $460 million, this full year potential leakage from captives that would exhaust their trust accounts would be a modest. Right now we are estimating about $25 million, there have been some captives that have decided to get out of the mortgage guarantee reinsurance business and have notified us as such but of course they are still obligated for any books of business that we currently have on our books at this time. The obligation refers to the amount of money that''s already in the trust. We''ve got currently right now $1.1 billion of monies in the trust accounts in the 65 captives.
Daniel Johnson (Citadel Investments):
When we think about next year''s performance are we going to get most of the benefits from the captives in this year and potentially beyond the outside of the next year or maybe just a little color there?
William V. Nutt, Jr.: Right now we are estimating that most of the benefits will come through this year as losses accelerate due to the dislocation, the increase in dislocation in the housing markets. We will receive benefits next year though it''s a little early to estimate that but we think it will be some what less than the benefit that we are estimating for this year of $460 million.
Daniel Johnson (Citadel Investments):
Does the market growth assumption tell you that unrealized the DAC calculation?
Christopher Swift: The domestic one is roughly 10% inclusive of dividends?
Joshua Shanker (Citigroup):
You mentioned that two thirds of the OTTI loss were already reflected in book value at unrealized losses from prior quarters. Is there any way that we can understand the trend, what was the cumulative unrealized credit losses plus OTTI for the last three quarters?
Steven J. Bensinger: You have to look at the trend in the total evaluations of the portfolio other than temporary impairment charges but also including what comes through in the balance sheet. And if you look at the change in other comprehensive income for this quarter versus last quarter, you see about a $7 billion improvement in the change, in the AOCI, which is principally driven by unrealized appreciation or depreciation. So that''s 7 billion pre-tax, about $4 billion or so after tax. We''ve certainly seen a significant moderation in the second quarter of the overall pace of decline in those evaluations.
Joshua Shanker (Citigroup):
In the fourth quarter of last year, the OTTI losses were not taken from the AOCI calculation, but they are really sort of emergent losses at that time?
Steven J. Bensinger: Yes. That''s the big difference. This quarter, the OTTI was very significantly offset, effectively a lot of it moved from the balance sheet to the income statement, where certainly in the previous quarter and the fourth quarter, it was more additive.
Andrew Kligerman (UBS):
If you had to sort of assess your level of concern that you''re going to need to raise capital in the next six months, how would you rank it sort of low, medium or high?
