AIG Earnings Call Insights: ML III, Capital Management
Andy Dinnhaupt – Franklin Mutual: I had two questions on ML III. The first is on Page 15 where you break out the composition. Could you just tell us where the MAX CDO that was recently sold; which category that sell into? Then secondly, in your 10-Q, you disclosed that the ML III assets were pledged against the direct investment book, does that hinder your ability to execute further sales in the ML III assets?
Robert H. Benmosche – President and CEO, AIG: Yes, I am going to turn it over to Bill Dooley, but, first of all ML III is being sold by the Federal Reserve and they go through the positions as they see fit and it’s up to the Federal Reserve to decide how they want to liquidate it. Max was the biggest one in the portfolio and the most complex from our point of view, so it was, in our view it was a very successful sale. As we think about those sales, we could also be a buyer. So, for the insurance companies we saw some value in the sale of Max and in fact we bought $600 million of the positions in the insurance companies as part of our investment portfolio. So, we don’t see anything that here at AIG that would represent constrain on the Federal Reserve to sell ML III assets and to the extent we can get the price we think makes sense, we would be a buyer. But Bill, do you want to talk about the pledge and the fact that this occurs, how that flows through in terms of cash.
A Closer Look: AIG Earnings Cheat Sheet>>
William Dooley – EVP Investments & Financial Services and CEO, Asset Management AIG: Sure. First of all, Maiden Lane III is an unencumbered asset at the parent Company. Once it’s monetized a substantial portion can go into the financial flexibility of the firm. So, that means liquidity management, leverage management, and the ongoing capital management that would go in. So, as Bob just said the flexibility is tremendous because of our opportunity to, if we like the asset, if we like the price and we do know something about these assets as everyone knows that they will also eligible for the insurance companies to be bought at the same time.
Robert H. Benmosche – President and CEO, AIG: I think the bottom line here is that we had talked everybody a year ago on the (Re-IPO) that we were looking at 2014 second half as the beginning of receiving cash out of ML III and we talked about ML II our cash wouldn’t have come until 2015 possibly. So (you’ve already) seen all that come in and what this basically says is we won’t have to wait till 2014 second half to begin to deal with the liquidity opportunities this would create for us. So again that plus the paying down of the SPV a year early gives us enormous flexibility we did not think we would have until the middle to the end of next year at the earliest as we’re already there.
Andrew Kligerman – UBS: Having said earlier in the call that you’re preparing AIG that is likely to be a non-bank SIFI; can you address the degree of capital management that you’d like to do given that over the next year? And then secondly with regard to variable annuities, you did a strong $1 billion plus in VA deposits (indiscernible). In that business you are doing $3 billion to $5 billion plus. What’s your appetite there? Do you want to get into that top three and do $3 billion to $5 billion per quarter?
Robert H. Benmosche – President and CEO, AIG: I’m going to let Jay talk about his appetite because I think he needs to talk about the product design. I think the question by itself Andrew would not make much sense unless we talked about how we price and ROEs and the risk management that’s around our products. So I’ll let Jay do that. In fact why don’t you do that first Jay so we get that one first and then I’ll talk about capital management second?
Jay Wintrob – President and CEO, SunAmerica Financial Group: I think the most important thing, Andrew, is that we have spent a lot of time over the past couple of years reducing the risk in our variable annuity product. First, as I mentioned, with time the variable annuity rider fees to changes in the VIX to reduce exposure to volatility, requiring a portion of the assets to be invested in bonds or in the fixed account or on the equity side being invested in certain asset allocation models, and then just this year our latest component, which was the volatility control fund being a part of the product in order to obtain the living benefit feature. We continue to feel good about how the product is structured and the pricing returns that we’re getting. At the same time, I think if you look at our benefit roll up rates and our withdrawal rates and our (agents which can take) withdrawals, they are not overly aggressive in any respect, and our fees remain certainly at the high end for the industry. Having said all of that, as we’ve been reinstated in certain distribution channels, a rebuilt up our internal and external wholesaling force and improve the productivity of our wholesalers, you’ve seen sales increase, and we continue to have an appetite to do that assuming we can do it with products that have terms and conditions and costs that we’re comfortable with. We’ve also invested a lot; continue to invest in our risk management and our hedging program and our more general risk management. So, I would say that our internal goal is to continue to build up our distribution consistent with our sales opportunities. If that moves us up in sales, so be it. We don’t tend to target any ranking level, but depending on external circumstances including how aggressive some of our competitors are, we may continue to move up in those rankings, and I do continue to see our variable annuity momentum in terms of sales and flows to be strong. So hope that’s helpful in response to your question?
Robert H. Benmosche – President and CEO, AIG: And the other piece I would add to it is that if you look at our year-over-year flows, we are concerned about fixed annuities at these low interest rate levels. We don’t want to build a large book at low interest rates and then be concerned about this (at the mediation) if and when we see an uptick in rates and especially if there is a rapid uptick in rates. So, that you’ll see a decline in sales and that’s one we are being very strong in terms of maintaining balance on getting our return and being careful what we put on our books. So, it’s really about the fixed annuity more so than the variable annuity that we’d most concerned about. Coming back to SIFI and capital; the key (to us) being regulated by the Fed and the impact of the capital management is you better have a very good, well-documented process. So, you have to know what you’re doing, how you’re doing it, show and demonstrate to you do it, and we believe we’ve got a team that’s excellent, we’re working through that, and we’re pretty confident if and when the Fed arrives, that we will have the process in place that will allow them to judge whether we have any constraints on our ability to continue capital management. So, we won’t know till they get here. We won’t know till we run their systems and they verify what we’ve done. But we feel pretty comfortable that we’re in a pretty good shape, and that we don’t see any significant impact to our ability other than to comply with their rules and regulations and timeframes.
Andrew Kligerman – UBS: So Bob, looking at the assets you’ve outlined; $6 billion plus worth of ML III, something on ILFC, $8 billion worth of AIA, you don’t see that as a constraint at all over the next 12 months?
Robert H. Benmosche – President and CEO, AIG: What I’m saying is that if the Fed arrives and when they determine our regulator, then they will decide. We don’t see the constraint, but we have to go through their stress test process and their review and their audit to make sure that we’re okay. And I think that the constraint might be more timed in our view, but could be wrong, but we’re thinking it’s more about when we could do things, not if we could do things, especially when they go through the Company for the very first time.
Andrew Kligerman – UBS: Right. So, in the meantime you’re looking forward with capital management?
Robert H. Benmosche – President and CEO, AIG: Meantime we see no constraint right now to our capital management. We’re going to continue to look at our capital, look at our non-core assets. The selling of ILFC is not only about capital management; it’s about recognizing. It’s a non-core business. It has a huge debt load and it’s a business that doesn’t fit the insurance business, and so we feel that that’s a business we should not be in. And to the extent that provides us a lot more capital, that’s great, because it helps us with capital management, but it’s also about derisking the Company, and that’s another aspect of it. So, in combination we’re doing things that makes the most sense for this Company, its credit ratings and our future.