American International Group Inc.(AIG)
Q2 2008 Earnings Conference Call

August 7, 2008 10:30AM ET

Executives

Charlene M. Hamrah - VP and Director – IR
Robert B. Willumstad - Chairman and CEO
Steven J. Bensinger - EVP and CFO
Christopher Swift - VP - Life and Retirement Services
Elias Habayeb - CFO AIG Financial Services
William V. Nutt, Jr - President and CEO UGC
Kevin B. McGinn - VP and Chief Risk Officer
Richard W. Scott - Sr. VP - Investments
David Herzog - Chief Accounting Officer
Frank H. Douglas - VP and Casualty Actuary
Andy Foster
Allan Lynn

Analysts

Jamminder Bhullar - J.P. Morgan
Daniel Johnson - Citadel Investments
Joshua Shanker - Citigroup
Andrew Kligerman - UBS
Thomas Cholnoky - Goldman Sachs
Thomas Gallagher - Credit Suisse
Jay Gelb - Lehman Brothers
Alain Karaoglan - Banc of America Securities
Jay Cohen - Merrill Lynch
Larry Greenberg - Langen McAlenney
Andy Dan RBC

Presentation

Operator

Welcome and thank you for standing by at this time all participants are in a listen only mode until the question and answer session in today’s conference. At that time you may press start one on your touch tone phone to ask a question. I would also like to remind our listeners this call is being recorded if you have any objections disconnect at this time. I would now like to turn the call over to Ms Charlene Hamrah Thank you ma’am you may begin.

Charlene M. Hamrah - VP and Director – IR

Good morning and thank you for joining us today for AIG second quarter earnings conference call. Before we begin I would just 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 10K for the year ended December 31st 2007 and in the outlook section of management discussion and analysis of financial condition and results of operations in the quarterly report of form 10Q for the quarterly period ended June 30th 2008. AIG is not under any obligation and expresses disclaims to 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. A reconciliation of these measures to the comparable GAAP previews are included in the first quarter 2008 financial supplement or within the presentation available in the investor information section of AIG’s corporate website and now I would like to turn the call over to Bob Willumstad

Robert B. Willumstad - Chairman and CEO

Thank you Charlene, good morning to everybody. I would like to begin with some observation about the current economic market environment and how they affected AIG’s second quarter results. I will let Steven Bensinger provide more details on the quarter, finally I will make some comments on expenses and give you an update on our strategic review process and what you can expect from us when we report on that process in September, we will then take your questions.

Our second quarter results did not reflect the earnings power of AIG’s businesses. Results were reported for the quarter resulted from some external factors as well as some company specific operating issues. Three factors in particular had a significant effect on our results. We reported large investment impairment charges in unrealized losses that were primarily driven by severe conditions in the housing and credit markets. Nearly $3.6 billion after tax unrealized market valuation loss on super senior credit defaults slops in our capital markets business and a US$4,4 billion after tax rather than temporary impairment charge relating to our investment portfolio. Let me put these figures in context.

Regarding the unrealized market valuation loss in the CDS portfolio, clearly this is a big number. That said this loss is smaller that the after tax loss of $5.9 billion that we recognized in the first quarter. Regarding the $4.4 billion of after tax impairment charges in the investment portfolio approximately two thirds of the severity component of those charges was already reflected as unrealized depreciation in shareholders’ equity at March 31st. Steve will go into more detail on these points. In addition to those charges we also experienced below average investment performance in the quarter. Net investment income in the second quarter was $6.7 billion lower than $7.9 billion we reported last year but above what we reported in the first quarter.

Partnership income is the principal driver of the second quarter results. Our focus on liquidity also dampened our returns. We reported an operating loss of $518 million pre-tax at United Guarantee our mortgage insurance business. Largely reflecting the same housing and mortgage market conditions that drove the unrealized market valuation loss in our CDS portfolio. All three of these factors reflect extreme market conditions. I cite them to put our second quarter results in context not to minimize operational issues it needs and are getting our immediate attention. Our primary focus is on strengthening our balance sheet maintaining our liquidity and improving profits. Now I will turn it over to Steve for a review of the second quarter and I will come back after his comments.

Steven J. Bensinger- Chief Financial Officer, Executive Vice President

Thanks Bob please refer to the power point presentation posted to our website last night entitled Conference call presentation. If you start on page three there is four key messages we would like you to take away. First and maybe most obvious the disruption in the US housing market the Bob referenced continues to dominate our reported results. We reported a net loss for the third consecutive quarter. That said there was a tempering of some of the marks in the quarter as exemplified by the reduction in size of the AIG SP unrealized market valuation loss in the second quarter compared to the first and the reduction in the decline of the cumulative other comprehensive income which reflects the change in the unrealized depreciation or depreciation of our available for sale securities more on that in a moment.

Second our capital position is stronger today than it was as of the end of the first quarter granted we raised capital but that was the prudent action to take in light of the volatile capital markets we continue to face. Third you have seen the results of our four segment in last night’s release there are clearly some challenges none the less our franchise continues to show resilience. I will comment on that in more depth shortly. And finally our priorities, Bob has made it clear about our focus in these turbulent times protect our capital and reduce risk, focus on expenses and complete the business review. Bob will comment more on these in a moment.

Let’s turn to slide four as you can see our total equity in hybrid capital increased in the second quarter to $96.8 billion as a result of our capital raise. That’s less than a 5% decline from our year end position. Our financial debt to total capital ratio declined to 13.7% indicating increased financial flexibility. While we can’t predict what the future holds in terms of capital market conditions and the effect of US housing market disruptions. Based on what we know today our capital position is sound.