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Article by DailyStocks_admin    (12-22-08 07:38 AM)

Filed with the SEC from Dec 11 to Dec 17:

American International Group (AIG)
Former AIG Chairman and CEO Maurice "Hank" Greenberg sent a letter to current CEO Edward Liddy seeking information on special-purpose vehicles. The Greenberg group holds 271,089,903 shares (10.1%).

BUSINESS OVERVIEW

American International Group, Inc. (AIG), a Delaware corporation, is a holding company which, through its subsidiaries, is engaged in a broad range of insurance and insurance-related activities in the United States and abroad. AIG’s primary activities include both General Insurance and Life Insurance & Retirement Services operations. Other significant activities include Financial Services and Asset Management. The principal business units in each of AIG’s operating segments are as follows*:
General Insurance

American Home Assurance Company (American Home)

National Union Fire Insurance Company of Pittsburgh, Pa. (National Union)

New Hampshire Insurance Company (New Hampshire)

Lexington Insurance Company (Lexington)

The Hartford Steam Boiler Inspection and Insurance Company (HSB)

Transatlantic Reinsurance Company

United Guaranty Residential Insurance Company

American International Underwriters Overseas, Ltd. (AIUO)

AIU Insurance Company (AIUI)
Life Insurance & Retirement Services

Domestic:

American General Life Insurance Company (AIG American General)

American General Life and Accident Insurance Company (AGLA)

The United States Life Insurance Company in the City of New York (USLIFE)

The Variable Annuity Life Insurance Company (VALIC)

AIG Annuity Insurance Company (AIG Annuity)

AIG SunAmerica Life Assurance Company (AIG SunAmerica)

Foreign:

American Life Insurance Company (ALICO)

AIG Star Life Insurance Co., Ltd. (AIG Star Life)

AIG Edison Life Insurance Company (AIG Edison Life)

American International Assurance Company, Limited, together with American International Assurance Company (Bermuda) Limited (AIA)

American International Reinsurance Company Limited (AIRCO)

Nan Shan Life Insurance Company, Ltd. (Nan Shan)

The Philippine American Life and General Insurance Company (Philamlife)
Financial Services

International Lease Finance Corporation (ILFC)

AIG Financial Products Corp. and AIG Trading Group Inc. and their respective subsidiaries (collectively, AIGFP)

American General Finance, Inc. (AGF)

AIG Consumer Finance Group, Inc. (AIGCFG)

Imperial A.I. Credit Companies (A.I. Credit)
Asset Management

AIG SunAmerica Asset Management Corp. (SAAMCo)

AIG Global Asset Management Holdings Corp. and its subsidiaries and affiliated companies (collectively, AIG Investments)

AIG Private Bank Ltd. (AIG Private Bank)

AIG Global Real Estate Investment Corp. (AIG Global Real Estate)
At December 31, 2007, AIG and its subsidiaries had approximately 116,000 employees.
AIG’s Internet address for its corporate website is www.aigcorporate.com . AIG makes available free of charge, through the Investor Information section of AIG’s corporate website, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and Proxy Statements on Schedule 14A and amendments to those reports or statements filed or furnished pursuant to Section 13(a), 14(a) or 15(d) of the Securities Exchange Act of 1934 (the Exchange Act) as soon as reasonably practicable after such materials are electronically filed with, or furnished to, the Securities and Exchange Commission (SEC). AIG also makes available on its corporate website copies of the charters for its Audit, Nominating and Corporate Governance and Compensation and Management Resources Committees, as well as its Corporate Governance Guidelines (which include Director Independence Standards), Director, Executive Officer and Senior Financial Officer Code of Business Conduct and Ethics, Employee Code of Conduct and Related-Party Transactions Approval Policy. Except for the documents specifically incorporated by reference into this Annual Report on Form 10-K, information contained on AIG’s website or that can be accessed through its website is not incorporated by reference into this Annual Report on Form 10-K.

General Insurance Operations
AIG’s General Insurance subsidiaries write substantially all lines of commercial property and casualty insurance and various personal lines both domestically and abroad. Domestic General Insurance operations are comprised of the Domestic Brokerage Group (DBG), Reinsurance, Personal Lines and Mortgage Guaranty.
AIG is diversified both in terms of classes of business and geographic locations. In General Insurance, workers compensation business is the largest class of business written and represented approximately 15 percent of net premiums written for the year ended December 31, 2007. During 2007, 10 percent and 7 percent of the direct General Insurance premiums written (gross premiums less return premiums and cancellations, excluding reinsurance assumed and before deducting reinsurance ceded) were written in California and New York, respectively. No other state or foreign country accounted for more than five percent of such premiums.
The majority of AIG’s General Insurance business is in the casualty classes, which tend to involve longer periods of time for the reporting and settling of claims. This may increase the risk and uncertainty with respect to AIG’s loss reserve development.
DBG
AIG’s primary Domestic General Insurance division is DBG. DBG’s business in the United States and Canada is conducted through American Home, National Union, Lexington, HSB and certain other General Insurance company subsidiaries of AIG. During 2007, DBG accounted for 51 percent of AIG’s General Insurance net premiums written.
DBG writes substantially all classes of business insurance, accepting such business mainly from insurance brokers. This provides DBG the opportunity to select specialized markets and retain underwriting control. Any licensed broker is able to submit business to DBG without the traditional agent-company contractual relationship, but such broker usually has no authority to commit DBG to accept a risk.
In addition to writing substantially all classes of business insurance, including large commercial or industrial property insurance, excess liability, inland marine, environmental, workers compensation and excess and umbrella coverages, DBG offers many specialized forms of insurance such as aviation, accident and health, equipment breakdown, directors and officers liability (D&O), difference-in -conditions, kidnap-ransom, export credit and political risk, and various types of professional errors and omissions coverages. Also included in DBG are the operations of AIG Risk Management, which provides insurance and risk management programs for large corporate customers and is a leading provider of customized structured insurance products, and AIG Environmental, which focuses specifically on providing specialty products to clients with environmental exposures. Lexington writes surplus lines for risks on which conventional insurance companies do not readily provide insurance coverage, either because of complexity or because the coverage does not lend itself to conventional contracts. The AIG Worldsource Division introduces and coordinates AIG’s products and services to U.S.-based multinational clients and foreign corporations doing business in the U.S.
Reinsurance
The subsidiaries of Transatlantic Holdings, Inc. (Transatlantic) offer reinsurance on both a treaty and facultative basis to insurers in the United States and abroad. Transatlantic structures programs for a full range of property and casualty products with an emphasis on specialty risk. Transatlantic is a public company owned 59.0 percent by AIG and therefore is included in AIG’s consolidated financial statements.
Personal Lines
AIG’s Personal Lines operations provide automobile insurance through aigdirect.com, the newly formed operation resulting from the 2007 combination of AIG Direct and 21st Century Insurance Group (21st Century) operations, and the Agency Auto Division, as well as a broad range of coverages for high net worth individuals through the AIG Private Client Group.
Mortgage Guaranty
The main business of the subsidiaries of United Guaranty Corporation (UGC) is the issuance of residential mortgage guaranty insurance, both domestically and internationally, that covers the first loss for credit defaults on high loan-to-value conventional first-lien mortgages for the purchase or refinance of one to four family residences. UGC subsidiaries also write second-lien and private student loan guaranty insurance.
Foreign General Insurance
AIG’s Foreign General Insurance group accepts risks primarily underwritten through American International Underwriters (AIU), a marketing unit consisting of wholly owned agencies and insurance companies. The Foreign General Insurance group also includes business written by AIG’s foreign-based insurance subsidiaries. The Foreign General Insurance group uses various marketing methods and multiple distribution channels to write both commercial and consumer lines insurance with certain refinements for local laws, customs and needs. AIU operates in Asia, the Pacific Rim, Europe, the U.K., Africa, the Middle East and Latin America. During 2007, the Foreign General Insurance group accounted for 28 percent of AIG’s General Insurance net premiums written.
Discussion and Analysis of Consolidated Net Losses and Loss Expense Reserve Development
The reserve for net losses and loss expenses represents the accumulation of estimates for reported losses (case basis reserves) and provisions for losses incurred but not reported (IBNR), both reduced by applicable reinsurance recoverable and the discount for future investment income, where permitted. Net losses and loss expenses are charged to income as incurred.
Loss reserves established with respect to foreign business are set and monitored in terms of the currency in which payment is expected to be made. Therefore, no assumption is included for changes in currency rates. See also Note 1(ff) to Consolidated Financial Statements.
Management reviews the adequacy of established loss reserves utilizing a number of analytical reserve development techniques. Through the use of these techniques, management is able to monitor the adequacy of AIG’s established reserves and determine appropriate assumptions for inflation. Also, analysis of emerging specific development patterns, such as case reserve redundancies or deficiencies and IBNR emergence, allows management to determine any required adjustments.
The “Analysis of Consolidated Losses and Loss Expense Reserve Development” table presents the development of net losses and loss expense reserves for calendar years 1997 through 2007. Immediately following this table is a second table that presents all data on a basis that excludes asbestos and environmental net losses and loss expense reserve development. The opening reserves held are shown at the top of the table for each year end date. The amount of loss reserve discount included in the opening reserve at each date is shown immediately below the reserves held for each year. The undiscounted reserve at each date is thus the sum of the discount and the reserve held.
The upper half of the table presents the cumulative amounts paid during successive years related to the undiscounted opening loss reserves. For example, in the table that excludes asbestos and environmental losses, with respect to the net losses and loss expense reserve of $24.83 billion as of December 31, 2000, by the end of 2007 (seven years later) $33.05 billion had actually been paid in settlement of these net loss reserves. In addition, as reflected in the lower section of the table, the original undiscounted reserve of $26.12 billion was reestimated to be $41.21 billion at December 31, 2007. This increase from the original estimate would generally result from a combination of a number of factors, including reserves being settled for larger amounts than originally estimated. The original estimates will also be increased or decreased as more information becomes known about the individual claims and overall claim frequency and severity patterns. The redundancy (deficiency) depicted in the table, for any particular calendar year, presents the aggregate change in estimates over the period of years subsequent to the calendar year reflected at the top of the respective column heading. For example, the redundancy of $672 million at December 31, 2007 related to December 31, 2006 net losses and loss expense reserves of $62.72 billion represents the cumulative amount by which reserves in 2006 and prior years have developed favorably during 2007.
The bottom of each table below presents the remaining undiscounted and discounted net loss reserve for each year. For example, in the table that excludes asbestos and environmental losses, for the 2002 year end, the remaining undiscounted reserves held as of December 31, 2007 are $13.57 billion, with a corresponding discounted net reserve of $12.57 billion.
The reserves for net losses and loss expenses with respect to Transatlantic and 21st Century are included only in consolidated net losses and loss expenses commencing with the year ended December 31, 1998, the year they were first consolidated in AIG’s financial statements. Reserve development for these operations is included only for 1998 and subsequent periods. Thus, the presentation for 1997 and prior year ends is not fully comparable to that for 1998 and subsequent years in the tables below.


MANAGEMENT DISCUSSION FROM LATEST 10K

Overview of Operations and Business Results

AIG identifies its reportable segments by product or service line, consistent with its management structure. AIG’s major product and service groupings are General Insurance, Life Insurance & Retirement Services, Financial Services and Asset Management. Through these operating segments, AIG provides insurance, financial and investment products and services to both businesses and individuals in more than 130 countries and jurisdictions. This geographic, product and service diversification is one of AIG’s major strengths and sets it apart from its competitors. AIG’s Other category consists of items not allocated to AIG’s operating segments.
AIG’s subsidiaries serve commercial, institutional and individual customers through an extensive property-casualty and life insurance and retirement services network. In the United States, AIG companies are the largest underwriters of commercial and industrial insurance and are among the largest life insurance and retirement services operations as well. AIG’s Financial Services businesses include commercial aircraft and equipment leasing, capital markets operations and consumer finance, both in the United States and abroad. AIG also provides asset management services to institutions and individuals. As part of its Spread-Based Investment activities, and to finance its operations, AIG issues various debt instruments in the public and private markets.
AIG’s operating performance reflects implementation of various long-term strategies and defined goals in its various operating segments. A primary goal of AIG in managing its General Insurance operations is to achieve an underwriting profit. To achieve this goal, AIG must be disciplined in its risk selection, and premiums must be adequate and terms and conditions appropriate to cover the risks accepted and expenses incurred.
AIG has commenced a realignment to simplify its Foreign General Insurance operations, many of which were historically conducted through branches of U.S. companies. On October 8, 2007, AIU Insurance Company announced the conversion of its existing China branches into AIG General Insurance Company China Limited, the first non-Chinese owned general insurance company established in China. This subsidiary assumed the existing business portfolio, assets and liabilities of the China branches. On October 15, 2007, AIG General Insurance (Taiwan) Co., Ltd. (AIGGI Taiwan) announced the completion of its merger with AIU Insurance Company Taiwan Branch. On December 1, 2007, Landmark Insurance Company Limited, a U.K. subsidiary, assumed all of the insurance liabilities of the U.K. branch of New Hampshire Insurance Company and changed its name to AIG U.K. Ltd. On January 1, 2008, AIU Insurance Company ceased participating in the Domestic General Insurance pooling arrangement. These ongoing simplification efforts are expected to result in better utilization of capital and a lower effective tax rate.
A central focus of AIG operations in recent years has been the development and expansion of distribution channels. In 2007, AIG continued to expand its distribution channels, which now include banks, credit card companies, television-media home shopping, affinity groups, direct response, worksite marketing and e-commerce.
AIG patiently builds relationships in markets around the world where it sees long-term growth opportunities. For example, the fact that AIG has the only wholly owned foreign life insurance operations in China, operating in 19 cities, is the result of relationships developed over nearly 30 years. AIG’s more recent extensions of operations into India, Vietnam, Russia and other emerging markets reflect the same growth strategy. Moreover, AIG believes in investing in the economies and infrastructures of these countries and growing with them. When AIG companies enter a new jurisdiction, they typically offer basic protection and savings products. As the economies evolve, AIG’s products evolve with them, to more sophisticated and investment-oriented models.
Growth for AIG may be generated internally as well as through acquisitions which both fulfill strategic goals and offer adequate return on capital. In October 2007, AIG expanded its Foreign General Insurance operations in Germany through the acquisition of WĂĽrttembergische und Badische Versicherungs-AG (WĂĽBA). In January 2007, American General Finance, Inc. (AGF) expanded its operations into the U.K. through the acquisition of Ocean Finance and Mortgages Limited, a finance broker for home owner loans in the U.K.
Outlook
General Trends
In mid-2007, the U.S. residential mortgage market began to experience serious disruption due to credit quality deterioration in a significant portion of loans originated, particularly to non-prime and subprime borrowers; evolving changes in the regulatory environment; a slower residential housing market; increased cost of borrowings for mortgage participants; and illiquid credit markets.
AIG participates in the U.S. residential mortgage market in several ways: AGF originates principally first-lien mortgage loans and to a lesser extent second-lien mortgage loans to buyers and owners of residential housing; United Guaranty Corporation (UGC) provides first loss mortgage guaranty insurance for high loan-to-value first- and second-lien residential mortgages; AIG insurance and financial services subsidiaries invest in mortgage-backed securities and CDOs, in which the underlying collateral is composed in whole or in part of residential mortgage loans; and AIGFP provides credit protection through credit default swaps on certain super senior tranches of collateralized debt obligations (CDOs), a significant majority of which have AAA underlying or subordinate layers.
Disruption in the U.S. residential mortgage market may also increase claim activity in the financial institution segment of AIG’s D&O and professional liability classes of business. However, based on its review of information currently available, AIG believes overall loss activity for the broader D&O and professional liability classes is likely to remain within or near the levels observed during the last several years, which include losses related to stock options backdating as well as to the U.S. residential mortgage market.
The operating results of AIG’s consumer finance and mortgage guaranty operations in the United States have been and are likely to continue to be adversely affected by the factors referred to above. The downward cycle in the U.S. housing market is not expected to improve until residential inventories return to a more normal level and the mortgage credit market stabilizes. AIG expects that this downward cycle will continue to adversely affect UGC’s operating results for the foreseeable future and will result in a significant operating loss for UGC in 2008. AIG also incurred substantial unrealized market valuation losses in 2007, particularly in the fourth quarter, on AIGFP’s super senior credit default swap portfolio and substantial other-than-temporary impairment charges on AIG’s Insurance and Financial Services available for sale securities. The results from AIG’s operations with exposure to the U.S. residential mortgage market will be highly dependent on future market conditions. Continuing market deterioration will cause AIG to report additional unrealized market valuation losses and impairment charges.
The ongoing effect of the downward cycle in the U.S. housing market on AIG’s other operations, investment portfolio and overall consolidated financial condition could be material if the market disruption continues and expands beyond the residential mortgage markets, although AIG seeks to mitigate the risks to its business by disciplined underwriting and active risk management.
Globally, heightened regulatory scrutiny of financial services companies in many jurisdictions has the potential to affect future financial results through higher compliance costs. This is particularly true in the United States, where Federal and state authorities have commenced various investigations of the financial services industry, and in Japan and Southeast Asia, where financial institutions have received remediation orders affecting consumer and policyholder rights.
In certain quarters, AIG’s returns from partnerships and other alternative investments were particularly strong, driven by favorable equity market performance and credit conditions. These returns may vary from period to period and AIG believes that the particularly strong performance in certain prior periods is not indicative of the returns to be expected from this asset class in future periods.
AIG has recorded out of period adjustments in the last two years due to the remediation of control deficiencies. As AIG continues its remediation activities, AIG expects to continue to incur expenses related to these activities and to record additional out of period adjustments, although all known errors have been corrected.
General Insurance
The commercial property and casualty insurance industry has historically experienced cycles of price erosion followed by rate strengthening as a result of catastrophes or other significant losses that affect the overall capacity of the industry to provide coverage. As premium rates decline, AIG will generally experience higher current accident year loss ratios, as the written premiums are earned. Despite industry price erosion in commercial lines, AIG expects to continue to identify profitable opportunities and build attractive new general insurance businesses as a result of AIG’s broad product line and extensive distribution networks in the United States and abroad.
Workers compensation remains under considerable pricing pressure, as statutory rates continue to decline. Rates for aviation, excess casualty, D&O and certain other lines of insurance also continue to decline due to competitive pressures. Rates for commercial property lines are also declining following another year of relatively low catastrophe losses. Further price erosion is expected in 2008 for the commercial lines; AIG seeks to mitigate the decline by constantly seeking out profitable opportunities across its diverse product lines and distribution networks while maintaining a commitment to underwriting discipline. There can be no assurance that price erosion will not become more widespread or that AIG’s profitability will not deteriorate from current levels in major commercial lines.
In Foreign General Insurance, opportunities for growth exist in the consumer lines due to increased demand in emerging markets and the trend toward privatization of health insurance. In commercial lines, the late 2007 acquisition of WüBa enhances AIG’s insurance offerings to small and medium sized companies in Europe.
Through operations in Bahrain designed to comply with Islamic law, AIG is tapping into a growing market. Islamic insurance, called Takaful, is an alternative to conventional insurance based on the concept of mutual assistance through pooling of resources.
The Personal Lines automobile marketplace remains challenging with rates declining steadily, increased spending on commissions and advertising and favorable liability frequency trends slowing, while severity in both liability and physical damage are expected to increase. In addition to the deteriorating underwriting cycle, a generally weakening economy leads to slower growth in automobile insurance exposure units and values. The Personal Lines business is focused on consolidation and improving operational efficiencies to reduce costs, as well as enhancing rating algorithms and creating a new aigdirect.com brand, as a result of the 2007 combination of AIG Direct and 21st Century Insurance Group (21st Century) operations, to support growth. The high net worth market continues to provide opportunities for growth as a result of AIG’s innovative products and services specifically designed for that market.
Losses caused by catastrophes can fluctuate widely from year to year, making comparisons of results more difficult. With respect to catastrophe losses, AIG believes that it has taken appropriate steps, such as careful exposure selection and adequate reinsurance coverage, to reduce the effect of possible future losses. The occurrence of one or more catastrophic events of higher than anticipated frequency or severity, such as a terrorist attack, earthquake or hurricane, that causes insured losses, however, could have a material adverse effect on AIG’s results of operations, liquidity or financial condition.
Life Insurance & Retirement Services
Disruption in the U.S. residential mortgage and credit markets had a significant adverse effect on Life Insurance & Retirement Services operating results in 2007 and will continue to be a key factor in 2008 and beyond, especially in the U.S.-based operations. The volatility in operating results will be further magnified by the continuing market shift to variable products with living benefits and the adoption of FAS No. 157, “Fair Value Measurements” (FAS 157). Life Insurance & Retirement Services elected the fair value option under FAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (FAS 159), for two products beginning January 1, 2008 - a closed block of single premium variable life business in Japan and an investment-linked life insurance product sold principally in Asia. After adoption on January 1, 2008, subsequent changes in fair value for these products will be reported in operating income. The adoption of FAS 159 for these products is expected to result in a decrease to opening 2008 retained earnings of approximately $600 million. For a description of these accounting standards, see Note 1 to Consolidated Financial Statements.
Life Insurance & Retirement Services uses various derivative instruments to hedge cash flows related to certain foreign currencies and fixed income related instruments. Although these derivatives are purchased to mitigate the economic effect of movements in foreign exchange rates and interest rates, reported earnings may be volatile due to certain hedges not qualifying for hedge accounting under FAS 133. The change in fair value of derivative instruments is reported in net realized capital gains (losses). Life Insurance & Retirement Services engages in hedging programs that use derivatives and other instruments to hedge the guaranteed living benefits associated with variable products. Nevertheless, short-term market movements will vary from long-term expectations underlying the product pricing assumptions and may cause volatility in reported earnings. The inclusion of risk margins in the valuation of embedded derivatives under FAS 157 will increase earnings volatility as differences emerge between the change in fair value of embedded derivatives and the change in fair value of hedging instruments. As variable products with guaranteed living benefits continue to grow, the reported earnings volatility associated with these programs will likely increase.
Life Insurance & Retirement Services may continue to experience volatility in net realized capital gains (losses) due to other-than-temporary impairment writedowns of the fair value of investments, primarily related to the significant disruption in the residential mortgage and credit markets and foreign currency related losses.
In Japan, given AIG’s multi-channel, multi-product strategy, AIG expects its Life Insurance & Retirement Services operations to exceed industry growth in the long term, although downward pressure on earnings growth rates is anticipated due to the difficult market conditions. Market conditions remain challenging as a result of increased competition due to new market entrants, the increasing financial strength of the domestic companies as the economy has recovered, the effect of additional regulatory oversight, changes to the tax deductibility of insurance premiums and the regulatory claims review which has negatively affected consumer perceptions of the industry. While the market shift to variable products with living benefits will constrain fixed annuity sales, AIG is positioned to grow annuity sales overall with its annuity products designed to meet the needs of consumers in a range of market conditions. In addition, AIG expects that the planned integration of AIG Star Life and AIG Edison Life, which is anticipated to be completed in 2009, will provide enhanced distribution opportunities and operational efficiencies pending regulatory approval.
Full deregulation of banks in Japan with respect to insurance product sales became effective in December 2007, and AIG expects that it will be able to leverage its existing bank relationships and innovative product expertise to expand sales of both life and accident and health products in 2008. Deregulation of Japan Post is also expected to provide additional growth opportunities during 2008 and beyond.
Although the Japanese Yen strengthened in the fourth quarter of 2007, historical volatility of Japanese Yen-dollar exchange rates has resulted in higher than normal surrenders, and if that trend returns, an acceleration of the amortization of deferred policy acquisition costs could occur.
Outside of Japan, ALICO continues to execute its strategy of diversifying distribution channels and developing new products. In particular, ALICO’s Central and Eastern European operations performed well and demographic and economic conditions in these countries provide excellent opportunities for continued growth.
AIG’s operations in China continue to expand, but AIG expects competition in China to remain strong. AIG’s success in China will depend on its ability to execute its growth strategy. Key growth strategies in 2008 include expansion of sales and service centers, increased bank distribution and entering into strategic alliances with key partners. In Southeast Asia, AIG’s operations are focused on growing market share and profits in Singapore, Malaysia, Thailand and Hong Kong with products focused on the life savings-oriented consumer along with high net worth consumers through the newly formed Wealth Management Group.
Domestically, AIG plans to continue expansion of its Life Insurance & Retirement Services businesses through direct marketing and independent agent distribution channels. The aging population in the United States provides a growth opportunity for a variety of products, including longevity, guaranteed income and supplemental accident and health products. Certain other demographic groups that have traditionally been underserved provide additional growth opportunities. The Domestic Life Insurance operations showed positive momentum in the second half of 2007 resulting from new products and expanded distribution. Domestic group life/health operations continue to face competitors with greater scale in group benefits.
The fixed annuities business experienced a difficult year as surrenders increased in 2007 due to both an increasing number of policies coming out of their surrender charge period and increased competition from bank deposit products. While surrenders are expected to continue to be higher than normal, the current interest rate environment should provide opportunities for improvements in net flows during 2008. AIG believes that improvement in net flows in the individual variable annuity market will be driven by variable annuity products with living benefits while the group retirement products will continue to experience a shift from group annuities to lower margin mutual fund products.
Since the beginning of 2000, the yield available on Taiwanese 10-year government bonds dropped from approximately 6 percent to less than 3 percent at December 31, 2007. Yields on most other invested assets have correspondingly dropped over the same period. New regulatory capital requirements being developed in Taiwan, combined with growth opportunities in bancassurance and variable annuities with living benefits, may potentially create a need for capital contributions in 2008 and beyond to support local solvency requirements.
Financial Services
Within Financial Services, demand for International Lease Finance Corporation (ILFC’s) modern, fuel efficient aircraft remains strong, and ILFC plans to increase its fleet by purchasing 73 aircraft in 2008. However, ILFC’s margins may be adversely affected by increases in interest rates. AIG Financial Products Corp. and AIG Trading Group Inc. and their respective subsidiaries (collectively, AIGFP) expect opportunities for growth across their product segments, but AIGFP is a transaction-oriented business, and its operating results will depend to a significant extent on actual transaction flow, which is affected by market conditions and other variables outside its control. AIG continues to explore opportunities to expand its Consumer Finance operations into new domestic and foreign markets.
The ongoing disruption in the U.S. residential mortgage and credit markets and the recent downgrades of residential mortgage-backed securities and CDO securities by rating agencies continue to adversely affect the fair value of the super senior credit default swap portfolio written by AIGFP. AIG expects that continuing limitations on the availability of market observable data will affect AIG’s determinations of the fair value of these derivatives, including by preventing AIG, for the foreseeable future, from recognizing the beneficial effect of the differential between credit spreads used to price a credit default swap and spreads implied from prices of the CDO bonds referenced by such swap. The fair value of these derivatives is expected to continue to fluctuate, perhaps materially, in response to changing market conditions, and AIG’s estimates of the value of AIGFP’s super senior credit derivative portfolio at future dates could therefore be materially different from current estimates. AIG continues to believe that the unrealized market valuation losses recorded on the AIGFP super senior credit default swap portfolio are not indicative of the losses AIGFP may realize over time. Under the terms of most of these credit derivatives, losses to AIG would generally result from the credit impairment of the referenced CDO bonds that AIG would acquire in satisfying its swap obligations. Based upon its most current analyses, AIG believes that any credit impairment losses realized over time by AIGFP will not be material to AIG’s consolidated financial condition, although it is possible that such realized losses could be material to AIG’s consolidated results of operations for an individual reporting period. Except to the extent of any such credit impairment losses, AIG expects the unrealized market valuation losses to reverse over the remaining life of the super senior credit default swap portfolio.
Approximately $379 billion of the $527 billion in notional exposure on AIGFP’s super senior credit default swap portfolio as of December 31, 2007 were written to facilitate regulatory capital relief for financial institutions primarily in Europe. AIG expects that the majority of these transactions will be terminated within the next 12 to 18 months by AIGFP’s counterparties as they implement models compliant with the new Basel II Accord. As of February 26, 2008, $54 billion in notional exposures have either been terminated or are in the process of being terminated. AIGFP was not required to make any payments as part of these terminations and in certain cases was paid a fee upon termination. In light of this experience to date and after other comprehensive analyses, AIG did not recognize an unrealized market valuation adjustment for this regulatory capital relief portfolio for the year ended December 31, 2007. AIG will continue to assess the valuation of this portfolio and monitor developments in the marketplace. There can be no assurance that AIG will not recognize unrealized market valuation losses from this portfolio in future periods. These transactions contributed approximately $210 million to AIGFP’s revenues in 2007. If AIGFP is not successful in replacing the revenues generated by these transactions, AIGFP’s operating results could be materially adversely affected. For additional information on the AIGFP super senior credit default swap portfolio, see Risk Management — Segment Risk Management — Financial Services — Capital Markets Derivative Transactions and Note 8 to Consolidated Financial Statements.
In March 2007, the U.S. Treasury Department published proposed regulations that, had they been adopted in 2007, would have had the effect of limiting the ability of AIG to claim foreign tax credits with respect to certain transactions entered into by AIGFP. AIGFP is no longer a participant in those transactions and therefore, the proposed regulations, if adopted in their current form in 2008 or subsequent years, would not be expected to have any material effect on AIG’s ability to claim foreign tax credits.
Effective January 1, 2008, AIGFP elected to apply the fair value option to all eligible assets and liabilities, other than equity method investments. The adoption of FAS 159 with respect to elections made by AIGFP is currently being evaluated for the effect of recently issued draft guidance by the FASB, anticipated to be issued in final form in early 2008, and its potential effect on AIG’s consolidated financial statements.
Asset Management
In the Spread-Based Investment business, the Guaranteed Investment Contract (GIC) portfolio continues to run off and was replaced by the Matched Investment Program (MIP). The results from domestic GICs and the MIP have been adversely affected by the ongoing disruption in the credit markets, the weakening U.S. dollar and declining interest rates. The MIP is exposed to credit and market risk in the form of investments in, among other asset classes, U.S. residential mortgage-backed securities, asset-backed securities, commercial mortgage-backed securities and single name corporate credit default swaps entered into by the MIP. In addition, earnings volatility for the MIP may arise from investments in bank loans that are held for future collateralized loan obligations to be managed by AIG Investments. The value of the investments may fluctuate materially from period to period due to market movements, which may result in realized and unrealized net losses. Although it is difficult to estimate future movements in these markets, effective hedges exist to mitigate the effect of interest rate and foreign currency exchange rate disruptions. Reported results may be volatile due to certain hedges not qualifying for hedge accounting treatment.

Effect of Credit Market Events in the Fourth Quarter of 2007
AIG reported a net loss of $8.4 billion before tax ($5.2 billion after tax) in the fourth quarter of 2007 as a result of severe credit market disruption. Contributing to this loss was an $11.5 billion pre-tax charge for the unrealized market valuation loss on AIGFP’s super senior credit default swap portfolio. Net realized capital losses totaled $2.6 billion before tax in the fourth quarter of 2007, arising primarily from other-than-temporary impairment charges in AIG’s investment portfolio, with an additional $643 million impairment charge related to Financial Services securities available for sale reported in other income. Also contributing to the operating loss for the fourth quarter was an operating loss of $348 million before tax from Mortgage Guaranty from continued deterioration in the U.S. residential housing market.
2007 and 2006 Comparison
AIG’s consolidated revenues decreased in 2007 compared to 2006 as growth in Premiums and other considerations and Net investment income in the General Insurance and Life Insurance & Retirement Services segments were more than offset by higher Net realized capital losses compared to 2006 and an unrealized market valuation loss of $11.5 billion on AIGFP’s super senior credit default swap portfolio recorded in other income. Net realized capital losses of $3.6 billion in 2007 included other-than-temporary impairment charges of the fair value of investments of $4.1 billion, primarily related to the significant disruption in the residential mortgage and credit markets, and foreign currency related losses of $500 million. Similarly, AIG recorded in other income, other-than-temporary impairment charges of $643 million related to its Financial Services securities available for sale reported in other income. Total other-than-temporary impairment charges in 2006 were $944 million. See Invested Assets — Other-than-temporary impairments herein.
Income before income taxes, minority interest and cumulative effect of accounting changes declined in 2007 due to the losses described above, partially offset by the favorable effects in 2007 of the application of hedge accounting under Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (FAS 133). In 2007, AIGFP applied hedge accounting to certain of its interest rate swaps and foreign currency forward contracts hedging its investments and borrowings. As a result, AIGFP recognized in earnings the change in the fair value of the hedged items attributable to the hedged risks, substantially offsetting the gains and losses on the derivatives designated as hedges. In 2006, AIGFP did not apply hedge accounting to any of its assets and liabilities.
2006 and 2005 Comparison
The increase in revenues in 2006 compared to 2005 was primarily attributable to the growth in Premiums and other considerations and Net investment income in the General Insurance and Life Insurance & Retirement Services segments. Revenues in the Financial Services segment declined as a result of the effect of hedging activities for AIGFP that did not qualify for hedge accounting treatment under FAS 133, decreasing revenues by $1.8 billion in 2006 and increasing revenues by $2.0 billion in 2005.
Income before income taxes, minority interest and cumulative effect of accounting changes increased in 2006 compared to 2005, reflecting higher General Insurance and Life Insurance & Retirement Services operating income. These increases were partially offset by lower Financial Services operating income reflecting the effects of hedging activities that did not qualify for hedge accounting treatment under FAS 133. Results in 2005 reflected the negative effect of $3.3 billion (pre-tax) in catastrophe-related losses incurred that year. Net income in 2005 also reflected the charges related to regulatory settlements, as described in Item 3. Legal Proceedings, and the fourth quarter charge resulting from the annual review of General Insurance loss and loss adjustment reserves.
Remediation
Throughout 2007 and 2006, as part of its continuing remediation efforts, AIG recorded out of period adjustments which are detailed below. In addition, certain revisions were made to the Consolidated Statement of Cash Flows.
2007 Adjustments
During 2007, out of period adjustments collectively decreased pre-tax operating income by $372 million ($399 million after tax). The adjustments were comprised of a charge of $380 million ($247 million after tax) to reverse net gains on transfers of investment securities among legal entities consolidated within AIGFP and a corresponding increase to accumulated other comprehensive income (loss); $156 million of additional income tax expense related to the successful remediation of the material weakness in internal control over income tax accounting; $142 million ($92 million after tax) of additional expense related to insurance reserves and DAC in connection with improvements in internal control over financial reporting and consolidation processes; $42 million ($29 million after tax) of additional expense, primarily related to other remediation activities; and $192 million ($125 million after tax) of net realized capital gains related to foreign exchange.
2006 Adjustments
During 2006, out of period adjustments collectively increased pre-tax operating income by $313 million ($65 million after tax). The adjustments were comprised of $773 million ($428 million after tax) of additional investment income related to the accounting for certain interests in unit investment trusts (UCITS); $300 million ($145 million after tax) of charges primarily related to the remediation of the material weakness in internal control over the accounting for certain derivative transactions under FAS 133; $58 million of additional income tax expense related to the remediation of the material weakness in internal control over income tax accounting; $85 million ($55 million after tax) of interest income related to interest earned on deposit contracts; $61 million (before and after tax) of expenses related to the Starr International Company, Inc. (SICO) Deferred Compensation Profit Participation Plans (SICO Plans); $59 million ($38 million after tax) of expenses related to deferred advertising costs; and $125 million ($116 million after tax) of additional expense, primarily related to other remediation activities.
Results in 2006 were also negatively affected by a one-time charge relating to the C.V. Starr & Co., Inc. (Starr) tender offer ($54 million before and after tax) and an additional allowance for losses in AIG Credit Card Company (Taiwan) ($88 million before and after tax), both of which were recorded in first quarter of 2006.
Cash Flows
As part of its ongoing remediation activities, AIG has made certain revisions to the Consolidated Statement of Cash Flows, primarily relating to the effect of reclassifying certain policyholders’ account balances, the elimination of certain intercompany balances and revisions related to separate account assets. Accordingly, AIG revised the previous periods presented to conform to the revised presentation. See Note 24 to Consolidated Financial Statements for further information.
Income Taxes
The effective tax rate declined from 30.1 percent in 2006 to 16.3 percent in 2007, primarily due to the unrealized market valuation losses on AIGFP’s super senior credit default swap portfolio and other-than-temporary impairment charges. These losses, which are taxed at a U.S. tax rate of 35 percent and are included in the calculation of income tax expense, reduced AIG’s overall effective tax rate. In addition, other tax benefits, including tax exempt interest and effects of foreign operations are proportionately larger in 2007 than in 2006 due to the decline in pre-tax income in 2007. Furthermore, tax deductions taken in 2007 for SICO compensation plans for which the expense had been recognized in prior years also reduced the effective tax rate in 2007. AIG has now completed its claims for tax refunds attributable to adjustments made for 2004 and prior financial statements. Refund claims for tax years 1991-1996 were filed with the Internal Revenue Service in June 2007. Claims for tax years 1997-2004 will be filed before September 2008.
AIG expects to receive cash tax benefits in 2008 as a result of the unrealized market valuation losses on AIGFP’s super senior credit default swap portfolio, whether AIG is in a regular or alternative minimum tax position.

General Insurance
AIG’s General Insurance operations provide property and casualty products and services throughout the world. Revenues in the General Insurance segment represent net premiums earned, net investment income and net realized capital gains (losses). The increase in General Insurance operating income in 2007 compared to 2006 was driven by strength in the Domestic Brokerage Group (DBG), partially offset by operating losses from the Mortgage Guaranty business and a decrease in Personal Lines operating income.
Life Insurance & Retirement Services
AIG’s Life Insurance & Retirement Services operations provide insurance, financial and investment-oriented products throughout the world. Revenues in the Life Insurance & Retirement Services operations represent premiums and other considerations, net investment income and net realized capital gains (losses). Foreign operations contributed approximately 76 percent, 68 percent and 59 percent of AIG’s Life Insurance & Retirement Services operating income in 2007, 2006 and 2005, respectively.
Life Insurance & Retirement Services operating income declined in 2007 compared to 2006 primarily due to higher net realized capital losses in 2007. In addition, operating income in 2007 was negatively affected by charges related to remediation activity in Asia; an industry wide regulatory claims review in Japan; the effect of Statement of Position 05-1, “Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts” (SOP 05-1), which was adopted in 2007; and investment losses where a FAS 115 trading election was made (trading account).
Financial Services
AIG’s Financial Services subsidiaries engage in diversified activities including aircraft and equipment leasing, capital markets, consumer finance and insurance premium finance. Revenues in the Financial Services segment include interest, realized and unrealized gains and losses, including the unrealized market valuation losses on AIGFP’s super senior credit default swap portfolio, lease and finance charges.
Financial Services reported an operating loss in 2007 compared to operating income in 2006, primarily due to an unrealized market valuation loss of $11.5 billion on AIGFP’s super senior credit default swap portfolio, an other-than-temporary impairment charge of $643 million on AIGFP’s investment portfolio of CDOs of asset-backed securities (ABS) and a decline in operating income for AGF. AGF’s operating income declined in 2007 compared to 2006 due to reduced residential mortgage origination volume, lower revenues from its mortgage banking activities and increases in the provision for finance receivable losses. In 2007, AGF’s mortgage banking operations recorded a pre-tax charge of $178 million, representing the estimated cost of implementing the Supervisory Agreement entered into with the Office of Thrift Supervision (OTS), which is discussed in the Consumer Finance results of operations section.
Operating income for ILFC increased in 2007 compared to 2006, driven to a large extent by a larger aircraft fleet, higher lease rates and higher utilization.
In 2007, AIGFP began applying hedge accounting under FAS 133 to certain of its interest rate swaps and foreign currency forward contracts that hedge its investments and borrowings and AGF and ILFC began applying hedge accounting to most of their derivatives that hedge floating rate and foreign currency denominated borrowings. Prior to 2007, hedge accounting was not applied to any of AIG’s derivatives and related assets and liabilities. Accordingly, revenues and operating income were exposed to volatility resulting from differences in the timing of revenue recognition between the derivatives and the hedged assets and liabilities.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Cautionary Statement Regarding Projections and Other Information About Future Events

This Quarterly Report on Form 10-Q and other publicly available documents may include, and AIG’s officers and representatives may from time to time make, projections concerning financial information and statements concerning future economic performance and events, plans and objectives relating to the establishment of special purpose vehicles with the NY Fed, asset dispositions, liquidity, collateral posting requirements, management, operations, products and services, and assumptions underlying these projections and statements. These projections and statements are not historical facts but instead represent only AIG’s belief regarding future events, many of which, by their nature, are inherently uncertain and outside AIG’s control. These projections and statements may address, among other things, the number, size, terms and timing of dispositions and their potential effect on AIG’s businesses, financial condition, results of operations, cash flows and liquidity (and AIG at any time and from time to time may change its plans with respect to the sale of one or more businesses), the effect on AIG’s liquidity of the establishment of two special purpose vehicles with the NY Fed, AIG’s exposures to subprime mortgages, monoline insurers and the residential and commercial real estate markets and AIG’s strategy for growth, product development, market position, financial results and reserves. 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 Risk Factors, and throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) and in Item 1A. Risk Factors of this Quarterly Report on Form 10-Q and Item 1A. Risk Factors of AIG’s Annual Report on Form 10-K for the year ended December 31, 2007 (2007 Annual Report on Form 10-K). AIG is not under any obligation (and expressly disclaims any such obligations) to update or alter any projection or other statement, whether written or oral, that may be made from time to time, whether as a result of new information, future events or otherwise.

In addition to reviewing AIG’s results for the three and nine months ended September 30, 2008, this MD&A supplements and updates the information and discussion included in the 2007 Annual Report on Form 10-K to reflect developments in or affecting AIG’s business to date during 2008. Throughout this MD&A, AIG presents its operations in the way it believes will be most meaningful. Statutory loss ratios and combined ratios are presented in accordance with accounting principles prescribed by insurance regulatory authorities because these are standard measures of performance filed with insurance regulatory authorities and used for analysis in the insurance industry and thus allow more meaningful comparisons with AIG’s insurance competitors. AIG also uses cross-references to additional information included in this Quarterly Report on Form 10-Q and in the 2007 Annual Report on Form 10-K to assist readers seeking related information on a particular subject.

Consideration of AIG’s Ability to Continue as a Going Concern

In connection with the preparation of its third quarter Form 10-Q, management has assessed whether AIG has the ability to continue as a going concern. In making this assessment, AIG has considered:


• The liquidity events leading up to September 22, 2008;

• AIG’s liquidity-related actions and plans to stabilize its businesses and repay the facility (Fed Facility) created pursuant to the $85 billion credit agreement, dated September 22, 2008 (Fed Credit Agreement), between AIG and the Federal Reserve Bank of New York (NY Fed);

• The negative effects of the liquidity events on AIG’s businesses and AIG’s efforts to address such effects; and

• The substantial risks to which AIG is subject.

Each of these items is discussed in more detail below.

In considering these items, management has made significant judgments and estimates with respect to the potentially adverse financial and liquidity effects of AIG’s risks and uncertainties. Management has also assessed other items and risks arising in AIG’s businesses and made reasonable judgments and estimates with respect thereto. After consideration, management believes that it will have adequate liquidity to finance and operate AIG’s businesses and continue as a going concern for at least the next twelve months.

It is possible that the actual outcome of one or more of management’s plans could be materially different or that one or more of management’s significant judgments or estimates about the potential effects of the risks and uncertainties could be prove to be materially incorrect or that the principal transactions disclosed in Note 11 to the Consolidated Financial Statements (and as discussed below) do not result in completed transactions. If one or more of these possible outcomes were realized, AIG may not have sufficient cash to meet its obligations. If AIG needs funds in excess of amounts available from the sources described below, AIG would need to find additional financing and, if such additional financing were to be unavailable, there could be substantial doubt about AIG’s ability to continue as a going concern.

Liquidity Events Leading Up to September 22, 2008

Liquidity Entering the Third Quarter

AIG parent entered the third quarter of 2008 with $17.6 billion of cash and cash equivalents, including the remaining proceeds from the issuance of $20 billion of common stock, equity units, and junior subordinated debt securities in May 2008. In addition, AIG’s securities lending collateral pool held $10.4 billion of cash and other short-term investments. On August 18, 2008, AIG raised $3.25 billion through the issuance of 8.25% Notes Due 2018.

Strategic Review and Proposed Liquidity Measures

From mid-July and throughout August 2008, AIG’s then Chief Executive Officer, Robert Willumstad, was engaged in a review of AIG’s businesses. Mr. Willumstad had announced that he would hold an investor meeting on September 25, 2008 to present the results of his review.

During this same time period, AIG was engaged in a review of measures to address the liquidity concerns in AIG’s securities lending portfolio discussed in previous SEC filings and to address the ongoing collateral calls with respect to AIGFP’s super senior multi-sector credit default swap portfolio. To facilitate this process, AIG asked a number of investment banking firms to discuss possible solutions to these issues. In late August, AIG engaged J.P. Morgan Securities, Inc. (J.P. Morgan) to assist in developing alternatives, including a potential additional capital raise.

Continuing Liquidity Pressures

Under AIG’s securities lending program, cash collateral is received from borrowers and invested by AIG primarily in fixed maturity securities to earn a spread. Historically, AIG had received cash collateral from borrowers of 100-102 percent of the value of the loaned securities. In light of more favorable terms offered by other lenders of securities, AIG accepted cash advanced by borrowers of less than the 102 percent historically required by insurance regulators. Under an agreement with its insurance company subsidiaries participating in the securities lending program, AIG parent deposited collateral in an amount sufficient to address the deficit. AIG parent also deposited amounts into the collateral pool to offset losses realized by the pool in connection with sales of impaired securities. Aggregate deposits by AIG parent to or for the benefit of the securities lending collateral pool through August 31, 2008 totaled $3.3 billion.

In addition, from July 1, 2008 to August 31, 2008, the continuing decline in value of the super senior collateralized debt obligations (CDO) securities protected by AIGFP’s super senior credit default swap portfolio, together with ratings downgrades of such CDO securities, resulted in AIGFP posting or agreeing to post collateral in an aggregate net amount of $6.0 billion.

By the beginning of September 2008, these collateral postings and securities lending requirements were placing increasing stress on AIG parent’s liquidity.

Rating Agencies

In early September 2008, AIG met with the representatives of the principal rating agencies to discuss Mr. Willumstad’s strategic review as well as the liquidity issues arising from AIG’s securities lending program and AIGFP’s super senior multi-sector CDO credit default swap portfolio. On Friday, September 12, 2008, S&P placed AIG on CreditWatch with negative implications and noted that upon completion of its review, the agency could affirm AIG parent’s current rating of “AA-” or lower the rating by one to three notches. AIG understood that both S&P and Moody’s would re-evaluate AIG’s ratings early in the week of September 15, 2008. Also on Friday, September 12, 2008, AIG’s subsidiaries ILFC and AGF were unable to replace all of their maturing commercial paper with new issuances of commercial paper. As a result, AIG advanced loans to these subsidiaries to meet their commercial paper obligations.

The Accelerated Capital Raise Attempt

As a result of S&P’s action, AIG accelerated the process of attempting to raise additional capital and over the weekend of September 13 and 14, 2008 discussed potential capital injections and other liquidity measures with private equity firms, sovereign wealth funds and other potential investors. AIG kept the United States Treasury and the NY Fed informed of these efforts. AIG also engaged Blackstone Advisory Services LP to assist in developing alternatives, including a potential additional capital raise. Despite offering a number of different structures through this process, AIG did not receive a proposal it could act upon in a timely fashion. AIG’s difficulty in this regard resulted in part from the dramatic decline in its common stock price from $22.76 on September 8, 2008 to $12.14 on September 12, 2008. This decrease in stock price made it unlikely that AIG would be able to raise the large amounts of capital that would be necessary if AIG’s long-term debt rating were downgraded.

AIG Attempts to Enter into a Syndicated Secured Lending Facility

On Monday, September 15, 2008, AIG was again unable to access the commercial paper market for its primary commercial paper programs, AIG Funding, ILFC and AGF. Payments under the programs totaled $2.2 billion for the day, and AIG advanced loans to ILFC and AGF to meet their funding obligations. In addition, AIG experienced returns under its securities lending programs which led to cash payments of $5.2 billion to securities lending counterparties on that day.

On Monday morning, September 15, 2008, AIG met with representatives of Goldman, Sachs & Co., J.P. Morgan and the NY Fed to discuss the creation of a $75 billion secured lending facility to be syndicated among a number of large financial institutions. The facility was intended to act as a bridge loan to meet AIG parent’s liquidity needs until AIG could sell sufficient assets to stabilize and enhance its liquidity position. Goldman, Sachs & Co. and J.P. Morgan immediately began the syndication attempt.

The Rating Agencies Downgrade AIG’s Long-Term Debt Rating

In the late afternoon of September 15, 2008, S&P downgraded AIG’s long-term debt rating by three notches, Moody’s downgraded AIG’s long-term debt rating by two notches and Fitch downgraded AIG’s long-term debt rating by two notches. As a consequence of the rating actions, AIGFP estimated that it would need in excess of $20 billion in order to fund additional collateral demands and transaction termination payments in a short period of time. Subsequently, in a period of approximately 15 days following the rating actions, AIGFP was required to fund approximately $32 billion, reflecting not only the effect of the rating actions but also changes in market levels and other factors.

The Private Sector Solution Fails

By Tuesday morning, September 16, 2008, it had become apparent that Goldman, Sachs & Co. and J.P. Morgan were unable to syndicate a lending facility. Moreover, the downgrades combined with a steep drop in AIG’s common stock price to $4.76 on September 15, 2008, had resulted in counterparties withholding payments from AIG and refusing to transact with AIG even on a secured short-term basis. As a result, AIG was unable to borrow in the short-term lending markets. To provide liquidity on Tuesday, September 16, 2008, both ILFC and AGF drew down on their revolving credit facilities, resulting in borrowings of approximately $6.5 billion and $4.6 billion, respectively.

Also, on September 16, 2008, AIG was notified by its insurance regulators that it would no longer be permitted to borrow funds from its insurance company subsidiaries under a revolving credit facility that AIG had maintained with certain of its insurance subsidiaries acting as lenders. Subsequently, the insurance regulators required AIG to repay any outstanding loans under that facility and to terminate it. The intercompany facility was terminated effective September 22, 2008.

Fed Credit Agreement

By early Tuesday afternoon on September 16, 2008, it was clear that AIG had no viable private sector solution to its liquidity crisis. At this point, AIG received the terms of a secured lending agreement that the NY Fed was prepared to provide. AIG estimated that it had an immediate need for cash in excess of its available liquid resources. That night, AIG’s Board of Directors approved borrowing from the NY Fed based on a term sheet that set forth the terms of the secured credit agreement and related equity participation. Over the next six days, AIG elected Edward M. Liddy, Director, Chairman, and CEO, replacing Robert Willumstad in those positions, and negotiated a definitive credit agreement with the NY Fed and borrowed, on a secured basis, approximately $37 billion from the NY Fed before formally entering into the Fed Credit Agreement.

Liquidity Related Actions and Plans

AIG’s Strategy for Stabilization and Repayment of the Fed Facility

AIG has developed certain plans (described below), some of which have already been implemented, to provide stability to its businesses and to provide for the timely repayment of the Fed Facility; other plans are still being formulated.

Preferred Equity Investment by the United States Treasury Pursuant to TARP

On November 9, 2008, AIG and the United States Treasury agreed in principle to a transaction pursuant to which the United States Treasury will purchase from AIG $40 billion liquidation preference of newly issued perpetual preferred stock (Series D Preferred Shares) under TARP. The Series D Preferred Shares will be in addition to the Series C Preferred Stock that AIG is obligated to issue to the Trust in connection with the Fed Credit Agreement. AIG is required to use the net proceeds from the sale of the Series D Preferred Shares to repay a portion of the outstanding balance under the Fed Facility.

The Series D Preferred Shares will rank pari passu with the Series C Preferred Stock and senior to AIG’s common stock. The Series D Preferred Shares will have limited class voting rights and will accumulate cumulative compounding dividends at a rate equal to 10 percent per annum. The dividends will be payable when, as and if declared by AIG’s Board of Directors. AIG will not be able to declare or pay any dividends on AIG’s common stock or on any AIG preferred stock ranking pari passu with or junior to the Series D Preferred Shares until dividends on the Series D Preferred Shares have been paid. AIG may redeem the Series D Preferred Shares at the stated liquidation preference, plus accumulated but unpaid dividends, at any time that the Trust or any successor entity beneficially owns less than 30 percent of AIG’s voting securities and no holder of Series D Preferred Shares controls or has the potential to control AIG.

Pursuant to the agreement between AIG and the United States Treasury in connection with the Series D Preferred Shares, for as long as the United States Treasury owns any of the Series D Preferred Shares, AIG will be subject to restrictions on its ability to repurchase capital stock and will be required to adopt and maintain policies on corporate expenses, lobbying activities and executive compensation.

In connection with the issuance of the Series D Preferred Shares, AIG will also issue a 10-year warrant to the United States Treasury exercisable for a number of shares of common stock of AIG equal to two percent of the issued and outstanding shares of common stock on the date of the investment. In connection with the issuance of the warrant, the voting, conversion rights and dividend rights of the Series C Preferred Stock will be reduced from 79.9 percent to 77.9 percent. The warrant will be exercisable at any time and have an exercise price equal to the par value of AIG’s common stock at the time of exercise. The United States Treasury has agreed that it will not exercise any voting rights with respect to the common stock issued upon exercise of the warrant. The warrant will not be subject to contractual transfer restrictions other than restrictions necessary to comply with U.S. federal and state securities laws. AIG will be obligated, at the request of the United States Treasury, to file a registration statement with respect to the warrant and the common stock for which the warrant can be exercised. During the 10-year term of the warrant, if the shares of common stock of AIG are no longer listed or trading on a national securities exchange, AIG may be obligated, at the direction of the United States Treasury, to exchange all or a portion of the warrant for another economic interest of AIG classified as permanent equity under U.S. GAAP with an equivalent fair value. If the Series D Preferred Shares issued in connection with the warrant are redeemed in whole, AIG may repurchase the warrant then held by the United States Treasury at any time for its fair value so long as no holder of a warrant controls or has the potential to control AIG. As a result of the issuance of the warrant, the number of shares into which the Series C Preferred Stock will be convertible will be reduced so as not to exceed 77.9 percent of the outstanding shares of common stock.

The Fed Securities Lending Program

On October 8, 2008, certain of AIG’s domestic life insurance subsidiaries entered into the Fed Securities Lending Agreement, providing that the NY Fed will borrow, on an overnight basis, investment grade fixed maturity securities from these AIG subsidiaries in return for cash collateral. Prior to this arrangement, draw downs under the existing Fed Facility were used, in part, to settle securities lending transactions. The NY Fed has been borrowing securities under the Fed Securities Lending Agreement, which has allowed AIG to replenish liquidity in the securities lending program on an as-needed basis, while providing possession and control of these third-party securities to the NY Fed.

As of November 5, 2008, the total value of securities lending payables was $34.2 billion, with $19.9 billion of this amount payable to the NY Fed under this agreement. This program will be terminated on the closing of the RMBS sale as described below.

Transfer of RMBS by certain AIG Insurance Subsidiaries

AIG and the NY Fed expect to establish a facility under which approximately $40 billion principal amount of residential mortgage-backed securities (RMBS) related to AIG’s U.S. securities lending program will be transferred by certain AIG insurance subsidiaries to a newly-formed limited liability company (the RMBS LLC) that will be financed by the NY Fed and AIG. Proceeds to the insurance company subsidiaries, together with other AIG funds, will be used to return all cash collateral posted by securities borrowers, including approximately $19.9 billion to be returned to the NY Fed. After all collateral is returned, AIG’s U.S. Securities lending program will be terminated.

The aggregate proceeds to the AIG insurance subsidiaries will be equal to the estimated fair value of the RMBS at October 31, 2008, adjusted for collections and certain other events between such date and the closing date of the purchase, which is expected to be prior to November 30, 2008. At September 30, 2008, the fair value of the RMBS being transferred was $23.5 billion. AIG will provide $1 billion of proceeds to the AIG entities and the NY Fed will provide the remainder of the proceeds up to $22.5 billion.

Interest on both the NY Fed’s senior loan and AIG’s subordinated loan will be capitalized (converted to principal of the related loan instead of being paid in cash). Payments of interest on, and principal of, the RMBS and the net sale proceeds, if any, on the RMBS received by the RMBS LLC will be used to pay principal of the NY Fed’s senior loan in full before any payments are made on AIG’s subordinated loan. None of the obligations of RMBS LLC have recourse to AIG, although AIG’s subordinated loan will be exposed to losses of the RMBS LLC up to $1 billion plus the amount of capitalized interest thereon. After the loans have returned amounts equal to their principal and capitalized interest, payments with respect to the remaining RMBS received by the RMBS LLC will be allocated as contingent interest on both of the loans. There are no economic interests in the RMBS LLC other than the NY Fed’s senior loan and AIG’s subordinated loan.

The implementation of RMBS LLC is subject to the approval of the relevant state insurance commissioners.

Terminations of Multi-Sector Credit Default Swap Transactions

AIGFP currently has outstanding multi-sector credit default swaps with third-party counterparties related to CDOs. Such credit default swaps require that AIGFP post collateral with the counterparties to secure its obligations based on fair value deterioration, ratings downgrades of referenced obligations and downgrades of AIG’s ratings. As of November 5, 2008, AIGFP had either agreed to post or posted collateral based on exposures, calculated in respect of super senior credit default swaps in an aggregate net amount of $37.3 billion.

CONF CALL

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 Item 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 party... 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 its part of a multi-year journey of which today is really is 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 will 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.
We expect to announce several key dispositions this year, proving that good deals can get done in this marketplace. But while we will report our progress and announce deals, we will not share a specific schedule for divestitures.
Now, let me turn to our discussion of the plan. This plan is designed to accomplish a number of objectives. It creates a durable capital structure for AIG with new equity capital and substantially reduced debt. These are good things.
The terms of the debt are restructured to give AIG a lower cost of capital as well as some financing breathing room. The plan directly addresses our securities lending and multi-sector CDO issues. It puts AIG in a much better position to successfully execute our divestiture plan and to emerge as a global insurance company.
The plan addresses all of these issues while giving tax payers both an attractive current return on their investment in AIG and the potential for upside from the assets purchased from AIG and in AIG common stock. It is not exactly a bailout.
Let me walk you through the current funding sources and how they will change as a result of the restructuring.
I think you know when I just hinted at or mentioned there are three components of the current structure. First, we presently have an $85 billion, two-year bridge loan facility from the Federal Reserve Bank in New York against which $61 billion is currently outstanding. That $61 billion carries a LIBOR plus 8.5 and the commitment fee of 2% and the fee on the undrawn portion of 8.5%. Clearly, these terms are not sustainable.
Second, we have $37.8 billion securities lending facility from the Federal Reserve of New York, with $19.9 billion currently outstanding and as noted earlier this amount is fully collateralized, it's a liquidity facility not a loan.
Third, we are participating in the government's commercial paper funding facility, that's a temporary facility designed to restore liquidity in the commercial paper market. We have an approved line of $20.9 billion, with $8 billion currently outstanding. Note that this is a broadly available program, not a program specific to AIG. Many of America's largest companies are also participating in this program because the commercial paper market simply is not working.
The next slide provides a schematic of the comprehensive plan we've announced today. What I think about this plan is as a combination of ongoing financing, which is shown on the top part of the page; and one-time transactions, which are shown on the bottom half.
Let's start with the ongoing financing that has several components. First, the U.S. Treasury will purchase $40 billion of newly issued AIG preferred stock. The preferred has a 10% coupon. All the proceeds will be used to pay down a portion of the Federal Reserve credit facility that is currently outstanding.
Second, the size of the current credit facility will be amended to reduce the capacity from 85 billion to 60 billion. Its terms will be extended from two years to five years and the interest rate and fee on undrawn portions will be reduced to LIBOR plus 3% on the drawn portion, which will be approximately $21 billion at the outset, and the fee on the undrawn portion will be reduced to 0.75%.
Third, AIG will continue to participate in the commercial paper funding facility. That's the ongoing portion. On the bottom of the slide, are diagrams of two one-time transactions we will undertake in partnership with the Federal Reserve. These transactions are designed to address our liquidity issues related to securities lending in multi-sector CDSs.
And the last is the securities lending solution, and first just let me remind you how the problem developed and then discuss the solution.
In our securities lending program AIG, like most institutional investors lends securities from our portfolios to third parties who will give us cash collateral in return. We invest the cash collateral for the term of the loan. Much of the collateral was invested in residential mortgage-backed securities. With the turmoil in the housing and mortgage markets, these RMBSs have declined sharply in price to levels well below those implied by the underlying cash flows they are producing.
When securities lending trades expire or are unwound, we have to return cash to our counterparties, in this case the combination of an ill-liquid market for RMBSs and the attended market value pressures resulted in unprecedented liquidity pressures. This has been a major source of our liquidity short falls.
To address this issue, we and the Federal Reserve Bank of New York are creating a new financing entity that will be capitalized with $1 billion of funding from AIG and up to $22.5 billion of funding from the Federal Reserve. This entity will acquire substantially all of the RMBSs from AIG's securities lending program.
It's really important that you note, as a result of this transaction, AIG's remaining exposure to losses from its U.S. securities lending program will be limited to declines in market value prior to the closing of this entity and our $1 billion of funding.
Similarly, on the bottom right hand portion of slide 3, there is a diagram of our solution to the multi-sector credit default swap issue.
Again let me summarize how the problem developed, then explain how the solution addresses the problem. AIG has written credit default swaps against collateralized debt obligations or CDOs which our securities backed by pools of debt.
Our credit default swap is essentially an insurance policy which reimburses the holder of the CDO for specified covered events. There are two problems that have developed with our CDSs. First, even though defaults on the securities and loans in the underlying pools haven't risen to levels that have required us to incur significant credit losses, the market prices of the underlying CDOs have declined sharply. As a result, we've been required to write-down our CDS positions. This write-down has caused hits to AIG's equity, which in turn contributed to credit ratings downgrades.
Second, our credit default swap contracts also specify that under certain conditions, we have to post cash collateral to our counterparties. This confluence of events has been particularly acute in our multi-sector credit default swaps, which account for less than 25% of our total swap portfolio, but about 95% of our write-downs.
So to address this issue, we and the Federal Reserve Board will create a second financing entity that will purchase up to approximately $70 billion face amount of multi-sector CDOs on which AIG has written credit default swaps. As I mentioned approximately 95% of the write-downs AIG financial products has taken to-date is in its CDS portfolio, these were the ones related to the multi-sector CDO. AIG will provide up to $5 billion in subordinated funding, and the Federal Reserve will provide up to $30 billion in senior funding to the financing entities.
The CDS contracts will be terminated on multi-sector CDOs that are purchased, and again importantly as a result of this transaction AIG's remaining exposure to losses will be limited to declines in market values of multi-sector CDOs prior to the pricing date of establishing this entity and to our... up to $5 billion funding.
Now, AIG will continue to have exposure to CDS contracts on multi-sector CDOs that are not terminated, and as AIG winds down its financial products division, it will also have exposure to other types of remaining CDS contracts, but these have generated substantially smaller total collateral demands than the CDSs in our multi-sector CDOs.
So to sum up, the plan we announced today represents a significant step forward for AIG. We still have a lot of work to do to execute this plan. And ultimately, transition to a restructured and recapitalized AIG. But, today's agreements put us in an improved position to succeed and emerge as a focused profitable global insurance company.
Before moving on to earnings, let me briefly turn you to slide 4. I will dwell on this slide, but I will merely offer this perspective. The American tax payer has and will be offered considerable returns as a result of the restructuring of AIG.
Now, let's turn to a review of third quarter results. Dave Herzog is going to take you through the numbers in a minute but first, I want to give you some perspective on the quarter. The loss we've reported reflects a confluence of really unprecedented events, rather than the core earnings power of AIG's insurance businesses.
The strengths of our global franchise allowed us to continue to write significant amounts of new business this quarter. Despite financial market turmoil, continuing price competition in property casualty and all of negative publicity about AIG, our consolidated premiums and other considerations were still $21 billion, up almost 7% from last year. Foreign General had a strong quarter with net premiums written up 11.5%. In Domestic Life, premiums, deposits and other considerations were up nearly 14%.
We did see some top-line pressure in the domestic commercial insurance business and Chris will have a couple of comments on that in a few moments. This reflected market concerns following the September 6th announcement as well as our decision, which we communicated to our brokers that we would maintain underwriting discipline and markets, where rates were not adequate to generate appropriate returns.
There are now indications that the situation in commercial insurance begin to stabilize in October and our prices are gaining traction in the market. All of our insurance businesses are making a concerted effort to get in front of customers and brokers to address their concerns.
Today's announcement should alleviate many of those concerns and put our businesses in a much better position going forward. Nevertheless, AIG's exposure to the U.S. housing market and associated financial instruments has materially undermined our financial performance.
And now let me turn it over to Dave Herzog, who will take you through the significant items affecting reported earnings in the quarter. Dave?
David L. Herzog - Executive Vice President and Chief Financial Officer
Thanks Ed and good morning, everyone. AIG reported the third quarter loss of over $24 billion after making the usual adjustments for net realized capital gains or losses and FAS 133, our adjusted net loss for the quarter was $9.2 billion. This is the largest quarterly loss we've ever reported and it reflects the extreme dislocations and volatility in the capital markets and significant charges related to restructuring activities that I will comment on more in a minute as well as catastrophe losses.
First, with respect to realized capital losses which totaled $18.3 billion before tax. The primary driver was other than temporary impairment charges of about 19.9 billion before tax. Securities lending related OTTI amounted to roughly 11.7 billion of which almost 7 billion stems from our decision to change our intent to hold such securities in light of the solutions that are announced this morning. More detailed discussion of the OTTI charges is included in our Form 10-Q that we filed this morning.
There is a table on page 2 of the earnings release which is also included as an appendix to the earnings presentation. This table details the major items affected both reported and adjusted earnings for the quarter. These items are also discussed in more detail in our Form 10-Q. In the interest of time I am not going to describe each of the items in the table. If you would like more information, once you've had a chance to review our 10-Q, again, please feel free to contact our Investor Relations.
I think it's helpful to think about these charges in three broad categories. The first category relates to capital markets disruption. The biggest item in this category is the $7.5 billion charge related to AIGFP, mostly due to the marks on the credit default swap portfolio. The restructuring plan we announced this morning will limit losses on this portion of the AIGFP portfolio and Ed described that earlier.
The second category is charges related to restructuring activities. The largest item in this category is a provision for deferred income taxes related to certain of our foreign businesses for sale, but we can no longer assert for tax purposes that we will reinvest profits and definitely in tax jurisdictions outside the U.S. As a result we've recorded a charge of about $3.6 billion.
The third category includes other noteworthy items the largest of which is our catastrophe losses related to hurricanes Gustav and Ike, totaling about $1.4 billion. Given the industries Cat loss this season this loss is inline with the industry.
And finally, I wanted to mention the $23 billion increase to additional paying capital, this represents the fair value of consideration received for preferred stock but not yet issued in conjunction with the entering of the Fed credit facility.
And with that I will turn it back over to Ed.
Edward M. Liddy - Chairman and Chief Executive Officer
As you know back in... on October 3rd we announced what we would look like when we emerge from this crisis and we will emerge from it. And that is we would have a Foreign Gen business or commercial insurance and a continuing ownership interest in AIA. I thought what I would do is ask Chris Moore [ph] and Nick Walsh to talk about the commercial insurance and foreign gen. The only reason we are not talking about AIA or any of the other businesses is that all of those businesses are either in total or in part for sale and I thought it wise to simply not go into those conservations.
So first let me turn it over to Chris [ph] for couple of comments on the commercial insurance business.
Unidentified Company Representative
Thank you, Ed. I appreciate this opportunity to discuss with you the state of our commercial insurance operations. There has been misinformation about the performance of these businesses in the marketplace, but I am happy to report the facts to you today.
There is no doubt that the days surrounding September 16th were difficult, but thanks to the extraordinary efforts of commercial insurance employees, our businesses have performed well. The tremendous support from the insurance brokerage community and our many customers has been gratifying.
In the two weeks after September 16th, we were able to speak to tens of thousands of brokers and customers to address their most immediate concerns with the following facts. First, commercial insurance maintains an exceptionally strong financial position, distinguished by its highest statutory policyholder surplus among its U.S. peers.
Second, our investment portfolio is conservative. Third, no part of commercial insurance is for sale. And fourth, policyholder interests are protected by state regulators, who have made strong public statements supporting our financial strength.
These efforts have helped us retain a vast majority of accounts. In September, account retention was down approximately 6.5% compared to September 2007. October's retention was down modestly from the previous October and that variance improved from September.
New business writings year-to-date through August has been declining approximately 20% from our delivered decision to maintain underwriting discipline in competitive market conditions. In September, new business was down an additional 10%. October was consistent with September.
That said, we continue to write a substantial amount of new business in both months.
While it's true that our counsel market as they have always been, it is also true that our franchise is intact and we continue to retain and win business, which speaks volumes about the extent of our offerings and depth of our customer relationships.
I want to make an additional point very clear; commercial insurance is not sacrificing underwriting integrities to retain market share. In fact, our actuarial report shows that year-to-date rate change through September was a negative 10%, while key indicators for October confirmed several points of rate improvement compared to September.
Terms and conditions continue to remain stable. I believe that allegations of excessive price cutting are coming from certain carriers frustrated of their inability to win significant market share from us.
Thankfully, customers continue to choose to do business with commercial insurance, because of our unique market strengths, which are not easily replicated and include a strong balance sheet, the broadest product selection with over 450 products and services and innovative culture, its worth noting that we launched 40 new products and services since September 16th. Commitment of these... 40 years of experience in most complex lines such as property, D&O and excess casualty, a large and experienced in-house claim staff, and AIG service infrastructure that regularly engages customers around the globe.
But perhaps the greatest of advantage is our over 12,000 dedicated professionals. It is not surprising that this seasoned staff is highly sought after by competitors. Of the more than 700 employees in the senior manager ranks, recent turnover is less than 6 %. Any open positions have been quickly and suitably filled. It is our top priority to ensure a bright future for all employees, and we have a number of initiatives in place to just to do just that.
We know full well that our business and people are highly valued by competitors. This is not new given our decades long leadership in the industry. However, I truly believe that out team continues to prove itself they are fighters. Our results and key performance indicators support the fact that out business is strong and we maintain a leading market position though we will not relax, we will continue to earn our customers business every single day.
Finally, with the changes announced today by AIG I believe that our greatest remaining challenge the uncertainty of our parent's financial situation will be behind us, and we will be free to compete on the merits of this great franchise. Nick?
Nicholas C. Walsh - Executive Vice President - Foreign General Insurance
As revenue where markets it's important point to remember that the Foreign Gen portfolio is well balanced with approximately half of our business coming from commercial, and half from consumer alliance. There is obviously a different pricing dynamic between these two segments with much of consumer lines being much less sensitive to rate movements and market volatility.
Turning specifically to the third quarter results Foreign Gen delivered an underwriting profit of $99 million or the 96.7 combined, excluding the impact of the unusually high level of catastrophe losses, the underwriting profit was 232 million at a 92 - 97% combined. This compares with combined ratio of 88.78 in the third quarter of '07.
With regard to rate movements, we've always been known and are still known for our superior technical underwriting discipline and capability. We have maintained our discipline over the years, and have not changed this in the current environment. For Commercial Alliance business, the market remains broadly soft, and in most regions rate reductions average around 10%.
We will continue to service our customers and deliver world-class underwriting results with the desirable combined ratio. Our business retention remains strong, even exceeding 90% in some areas. We are achieving this by the support and loyalty of our long-term partners, customers, intermediaries and sponsors. Not by cutting rates despite the claims of certain competitors and despite competitor attempts to restrict our access to business and deprive customers of choice.
We are maintaining the right technical pricing as we have always done. At the same time our new business is down in some areas, we are winning new business and growing our base in a number of regions.
For example, we had two record weeks for sales in AIG and AIG direct consumer lines business in October and despite the attacks on our D&O book, we also managed to close a new trophy D&O accounts in Germany. With strategy and competition is price, there are examples of companies offering the assumption of portfolios blind at a big rate discount. This is flattering to our underwriting process.
Price appears to be their only differentiator as we are not beatable on service, breadth of product or professional claims response. Our stock turnover is close to normal levels due to our bench strength, we have instantly been able to replace the few senior people who left, with very experienced and capable business leaders, despite the recent events we are still hiring new people to support our global franchise, retention and growth strategies.
We have had a continuous dialogue with our regulators around the world who have been very supportive. They are doing their job and making sure the policyholders are protected and we are fully cooperating with their requests.
In summary, the core Foreign Gen insurance operations once again produced good top-line growth and an underwriting profit, despite the unusually high level of catastrophe losses. Unprecedented conditions in the financial markets impacted our results, nevertheless we remain committed to our growth strategies and look forward to continuing to serve our customers and producers around the world. Thanks.
David L. Herzog - Executive Vice President and Chief Financial Officer
Nick, this is David, I just want to amplify on a point I made earlier. The borrowings under the commercial paper funding facility as of November 5th splitted 15.2 billion. Ed?
Edward M. Liddy - Chairman and Chief Executive Officer
Okay. We are ready to take your questions. It will make great sense if we kind of divide the Q&A into two sessions. Let's first take any questions you might have about the announcement we had with the U.S. Treasury and the Federal Reserve and then we will save time for any questions and answers that you might have with respect to our results for the third quarter. Charlene I am not quite sure how to do that. I don't want to lose their place in line. We'll try not to make that happen, but let's again, let's start with first any questions you might have regarding the relationships with the U.S. government entities. So first question.

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