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AIG Update 01/08/09

AIG Update 01/08/09. Summary of Previous Updates . AIG financial problems become widely known in mid-September 2008 Large write downs on value of assets related to mortgage backed securities (CDOs) Large losses on contracts on many of these securities held by others against default (CDSs)

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AIG Update 01/08/09

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  1. AIGUpdate01/08/09

  2. Summary of Previous Updates • AIG financial problems become widely known in mid-September 2008 • Large write downs on value of assets related to mortgage backed securities (CDOs) • Large losses on contracts on many of these securities held by others against default (CDSs) • Credit rating lowered by rating agencies triggering the requirement to post additional collateral • AIG on verge of declaring bankruptcy • Federal Government stepped in with three different bailout agreements

  3. 11/10/2008 Agreement (Bailout #3) • Approximately $153 billion. • Intended to address the concerns of, and take the place of the first two. • Provided longer term for repayment (5 yrs vs. 2 yrs.) • Considerably lower interest rates • Removed significant CDS portfolio risks from AIG balance sheet • Removed securities lending issues from AIG balance sheet • Reduced pressure for “fire sale” of assets, but asset sales still required to repay loan

  4. AIG, Inc. Agreement with Fed—November 10, 2008 *Subject to final terms. It is intended as a summary only. For complete details visit: www.aig.com

  5. Media Reports v. Actual Agreements “The U.S. government and AIG have revised the terms of the insurance giant's September bailout, boosting the size of the package to $150 billion…” –Dow Jones Newswires, 11/10/08 *AIG intends to redeem preferred equity investment as quickly as possible, however the equity is perpetual and does not need to be repaid. 1Excludes AIG’s participation in Commercial Paper Funding Facility, which replaced its historical commercial paper borrowings. 2SPV agreements are in process of being finalized. 3Amounts reported at November 20, 2008 **Subject to final terms. It is intended as a summary only. For complete details visit: www.aig.com

  6. Other Developments Since Last Update • Underwriting for AIG Public Entity business moved to Lexington, Boston • Lexington CEO, Kevin Kelley, leaves to take over as CEO of Ironshore Insurance Co. • Replaced by former Executive VP, Peter Eastwood • Managed Lexington’s Healthcare operations including EIA’s Medical Malpractice placement • AIG announces intent to sell up to 49% of American International Assurance Company • AIG announces sale of Hartford Steam Boiler to Munich Re for $742 million (valued at $1B - $2B)

  7. AIG Commercial Insurance (AIGCI) Key Discussion Points to Consider: • AIGCI maintains exceptionally strong financial position, distinguished by highest statutory surplus among US peers • AIGCI’s investment portfolio is generally conservative • No part of AIGCI is for sale • Policyholder interests are protected by state regulators, who have made strong public statements supporting our financial strength • AIGCI’s 3Q08 results were comparatively strong given the operating environment, including CATs and challenges of parent • AIGCI continued to perform well since events surrounding mid-September

  8. Policyholder statutory surplus increased 49% from 12/31/05 to 9/30/08 to $26.4B CATs and challenging market conditions in 3Q08 held surplus in $26B range Risk-Based Capital (RBC) ratios indicate that AIGCI is highly capitalized based on NAIC guidelines; at aggregate of 452%, exceeds recommended 200% minimum Strong regulatory oversight from multiple regulators protect policyholder interests Financial Strength ratings continue to be “Excellent” and recently affirmed AIG Commercial Insurance (AIGCI) Performance 1Includes financial data from entities owned at 11/12/08. Excludes AIU Insurance Company ($1.3B surplus at 12/31/07) and American International Pacific Ins. Co. (AIP) ($0.03B surplus at 12/31/06), which were transferred from AIGCI during this period. $ in millions. 2Estimated RBC for consolidation of 16 AIGCI legal entities at 11/12/08 (excluding AIUI and AIP for all years as noted above). 3At year end Slide Content Provided by AIGCI

  9. AIGCI Peer Comparison Compares statutory surplus, NWP and expense ratio of AIGCI’s peer group’s1 US property casualty operations. 1NAIC acknowledged entities of US property casualty operations only 2Reported at September 30, 2008 3Source: Annual Statutory Statements, December 31, 2007 4Raised capital of $2.875 billion, closing July 2008

  10. AIGCI: Legal Entity Structure and Regulation 16 Legal Entities • Each company is a stand-alone legal entity with its own assets and surplus for protection of policyholders • Each legal entity has a primary regulator • Regulators’ primary motivation is protection of policyholders • Key Regulators: New York, Pennsylvania, Delaware and Illinois • Each legal entity is audited on a stand-alone basis annually by PWC • Regular financial exams performed by state insurance regulators 2 Underwriting Pools – Shareunderwriting risk across pool participants and makes financial strength of entire pool relevant to policyholders. • Admitted Pool • Largest pool participants are National Union and American Home • Surplus Lines Pool • Lexington, Landmark and AIG Excess Liability are the participants

  11. AIGCI Pooling Structure Audubon Insurance AISLIC1 AIG Excess Lexington Granite State AI South American Home C&I AIG Casualty Audubon Indemnity NULA Landmark National Union New Hampshire Illinois National State of PA These four companies are not pooled Surplus Lines Pool Admitted Pool AIG Excess (18%) Lexington (80%) Granite State (0%) AI South (0%) American Home (36%) C&I (11%) AIG Casualty (5%) Landmark (2%) National Union (38%) New Hampshire (5%) Illinois National (0%) State of PA (5%) (%) indicates participation is respective pools UW Companies Pool Companies Pool Allocation State Domiciled Pennsylvania Illinois Louisiana Delaware 180% Quota share with National Union and support agreement with AIG. New York California Mississippi

  12. AIGCI Structure and Financial Strength Strong policyholder surplus in each of 16 Companies • Each company exceeds RBC requirements • Each company’s capital and RBC levels have improved significantly over the past few years, including during this financial crisis • Combined admitted assets in excess of liabilities (surplus) = $26.4B at 9/30/08 • Admitted Pool Surplus $26.3B • Non Admitted Pool Surplus $ 5.8B • Non Pool Company Surplus $ 0.8B • Eliminate Intercompany Investments ($6.5B) • Total Surplus $26.4B

  13. AIGCI Structure (continued) Pooling • Each company within each pool has a percentage interest in the pool • Losses are paid under each pool according to that percentage • I.e. National Union will pay only 5% of any loss from a policy written by National Union, but also 5% of any loss from a policy written by any other member of the admitted pool. • Provides for spread of risk • Rating agency ratings for each pool could be different (each pool stands on its own in the eyes of regulators)

  14. AIGCI Structure (continued) Lexington Ownership • Lexington owned by three other companies as follows: • National Union Fire Insurance Co. 70% • AIG Casualty Co. 10% • Insurance Co. State of Pennsylvania 20% • Lexington can receive direct cash infusion from parent companies subject to Delaware Department of Insurance approval • Lexington may pay cash dividends to parent companies only from earned surplus subject to a max of 10% of surplus or net income

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