American International Group, Inc. (AIG)
Q3 2008 Earnings Call Transcript
November 10, 2008, 08:30 AM ET

Executives

Charlene M. Hamrah - VP and Director of IR
Edward M. Liddy - Chairman and CEO
David L. Herzog - EVP and CFO
Kris Moor – EVP Domestic General Insurance
Nicholas C. Walsh - EVP - Foreign General Insurance
Edmund Tse - Senior Vice Chairman - Life Insurance
Christopher J. Swift - VP and CFO - Life Insurance & Retirement Services

Analysts

John Levin - Levin Capital
Andrew Kligerman – UBS
Michael Behring – Banc of America
Jimmy Bhullar - JPMorgan
Ron Bobman - Capital Returns
Thomas Gallagher - Credit Suisse
Scott Frost - HSBC
Daniel Johnson - Citadel Investment Group

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 period. (Operator Instructions]) If you’d like to ask a question at that time, please press *, then the number 1 on your touchtone telephone. Today''s conference is bring recorded. If you have any objections you may disconnect at this time. Now, I would like to turn the meeting over to your host for today''s call Director of Investor Relations, Ms. Charlene Hamrah. Ma''am you may begin.

Charlene M. Hamrah - Vice President and Director of Investor Relations

Thank you. Good morning and thank you for joining us for this morning''s conference call. Before we begin, it should be noted that the remarks made today may contain projections concerning certain financial information and statements concerning future economic performance and events, plans and objectives relating to special purpose vehicles formed with the Federal Reserve Bank of New York. As such, dispositions, liquidity, collateral posting requirements, 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 include developments in global credit markets and such factors as are discussed in Items 1A, Risk Factors, of AIG''s Annual Report on Form 10-K for the year ended December 31, 2007, and in Item 1A, Risk Factors, and Item 2 Management''s Discussion and Analysis of Financial Condition and Results of Operations of AIG''s quarterly report on Form 10-Q for the period ended September 30, 2008. 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.

Remarks made on the conference call may also contain certain non-GAAP financial measures. The reconciliation of such measures to the comparable GAAP figures will be included in the third quarter financial supplement available in the Investor section of AIG''s corporate website.

And now, I would like to turn the call over to Ed Liddy, AIG''s Chairman and CEO.

Edward M. Liddy - Chairman and Chief Executive Officer

Thanks and good morning everyone. We have a really an awful lot to cover this morning so bear with us. We are going to try to do all this in about an hour. I think that will leave time for many of your questions if we don''t get to them, I invite you to call Charlene at the conclusion of the meeting. Sorry all for the play traffic, but if you turn off all Blackberries and things like that near your phones; it will make it possible for everyone else to hear. On October 3rd, scant five weeks ago, sometimes, it seems like five years, I laid out an initial game plan to address AIG''s immediate liquidity problems, to divest assets to repay the government loan, to refocus AIG on its historic strengths, and to restore the company to profitability.

At that point, there were a number of unresolved issues that still needed to be addressed. We''ve been hard at work since then and that work has resulted in the very comprehensive plan we announced this morning in conjunction with the U.S. Treasury, the Federal; Reserve Board, and the Federal Reserve Bank of New York. We believe this plan is win - win. It sends a strong signal to our policyholders, to governments and the regulators around the world to our business partners and counterparties that AIG is in fact on the road to recovery. It gives us a durable capital structure both now and in the future. It addresses the liquidity issues that have threatened AIG. It gives us greater financial flexibility to complete our restructuring for the benefit of all our constituencies. It gives U.S. tax payers a very attractive return on preferred stock, and debt investments in AIG as well as the potential for gains on asset purchases and the future appreciation in AIG common shares which they own. This plan represents a substantial progress over the past six weeks. It is part of a multi-year journey of which today is really the second milestone. The third milestone will be the business divestitures and I will talk a little bit more about those in a moment.

The subsequent phases of our plan will include appropriately recapitalizing the company after the federal credit facility is paid down. So, all investors should recognize that this would be a several year process, tied in no small part to the recovery of financial markets around the world. But importantly, following the restructuring transactions we are announcing today, we will have the stability to restore confidence in our global franchise. Business partners and customers can confidently continue to place business with us.

Before I go into the details of the restructuring plan and AIG''s third quarter results, I want to take this opportunity to clarify certain facts that may have been inaccurately characterized or may have been quite simply misunderstood. I know that many of you have tried to piece together information from different sources to understand the big picture. Our goal on this call is to give you the information you need to clearly understand the plan announced today in its totality as well as each of its components. There is also a substantial amount of detail in our 10-Q which was released this morning.

Now, in particular I''d like to focus on just a couple of key points. First, our indebtedness to the Federal Reserve Bank of New York under the original bridge loan currently stands at $61 billion. There have been reports citing indebtedness as high as $123 billion. To get to this number commentators are adding together the $85 billion of total capacity available under the bridge loan and the $37.8 billion available, well not currently borrowed under the securities lending facility. We do have 19.9 billion outstanding under that facility but the Federal Reserve Bank of New York holds collateral in the form of third party investment grade securities from our portfolio. So it''s apples and oranges that are being compared here. As evidence of why the two amounts should not be added together, the Federal Reserve is now providing an alternate mechanism that will completely extinguish the $37.8 billion facility.

Second, the terms of the restructuring are commercial in nature. All of the facilities being provided by the U.S. government are at market rates. Third as we anticipated, to undertake, such a dramatic restructuring of the company''s businesses, our quarterly earnings are showing, and may continue to exhibit substantial volatility reflecting the unprecedented conditions in global financial markets. Nevertheless, there is stability in our underlying insurance business, not withstanding catastrophe losses in competitive market conditions. Our insurance companies remain disciplined in their underwriting. They are well capitalized and they continue to meet or exceed all regulatory requirements. Last, because these businesses remain strong, disciplined well sequenced process of divestitures has been undertaken. The interest of the tax payers as well as the shareholders and bondholders of AIG will be best served by our ability to offer our remarkable assets for sale as market conditions permit.