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ENVIRONMENTAL FINANCIAL ASSURANCE Gary Lutz December 6, 2004

ENVIRONMENTAL FINANCIAL ASSURANCE Gary Lutz December 6, 2004. Financial Assurance. Two Mechanisms (offered by AIG) Financial Product Insurance Both Designed to Provide Financial Assurance to Regulators Different Risk Approach to Each. Financial Assurance. Financial Products

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ENVIRONMENTAL FINANCIAL ASSURANCE Gary Lutz December 6, 2004

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  1. ENVIRONMENTAL FINANCIAL ASSURANCE Gary Lutz December 6, 2004

  2. Financial Assurance • Two Mechanisms (offered by AIG) • Financial Product • Insurance • Both Designed to Provide Financial Assurance to Regulators • Different Risk Approach to Each

  3. Financial Assurance • Financial Products • GIC’s (Guaranteed Investment Contracts) • Basic Premise: Regulators Determine Liability, Pre-funding From Owner or PRP Group, and Government Assumes Risk • Insurance • Finite Insurance • Basic Premise: AIG Determines Liability. Pre-funding From Owner or PRP Group and AIG Assumes Risk

  4. Financial Assurance • GIC’s • Long Term Financial Planning Tool • Inherent Risks Assumed by Provider • Interest Rate Risk • Inflation Rate Risk • Inherent RisksAssumed by Regulators • Timing Risk • Estimate Risk • Long Term (Upwards of 50 Years)

  5. Financial Assurance • GIC’s • Structures • Annuity • Lump Sum • Annuity • Regulators Determine Annual Expected Costs Over Life of Post Closure Period • I.E. , Closed in 5 Years, Post Closure for 50 Years, at $1 Million a Year (easier for Landfills & Mines with more predictable L/T recurring costs) • Regulators Assume Risk for Incorrect Costs

  6. Financial Assurance • GIC’s (Annuity Continued) • Shortages Not Provided For (cash flow) • Unused Costs No Longer Invested • Programs Available to Mitigate Above • Roll Over Excesses if Any, (not true risk transfer) • AIG Assumes Inflation and Interest Risk • Costs Stay Invested with AIG Till Allotted Year • Interest Rate and Inflation Risk Fully Covered • Sites are Individually Accounted for, No Ability to Shift Funds to other Sites

  7. Financial Assurance • GIC’s (Continued) • Lump Sum • Regulators Determine Total Costs for Post Closure • I.E. , Need 50 Million Dollars in 5 Years to Complete OM&M • Regulators Assume Risk for Incorrect Estimate • No Up-front Shortage Problems, Have Full Access of Money. (May Cause Later Year Cash Flow Problems) • Regulators Take Interest and Inflation Rate Risk Upon Receipt of Funds.

  8. Financial Assurance • GIC’s (Continued) • Better Suited To A Program, Money Can Be Used Where Needed.

  9. Financial Assurance • Insurance • Long Term Financial Planning Tool • Inherent Risks Covered By AIG • Interest Rate • Inflation Rate • Timing • Estimate • Maximum Term 30 Years • Structure • Pre-Funded Expected Plus Addition Risk Transfer Premium

  10. Financial Assurance • Insurance • Structure • Pre-Funded Expected, Plus Risk Transfer Premium = Finite Premium • AIG Determines Costs To Secure Liability • PV Costs Usually Less Than Financial Assurance Amount, (Competitive Rates for Going Concern VS Agency Prescribed Formula Rates for Discontinued Operation) • Policy Limit Equals or Exceeds Financial Assurance Amount

  11. Financial Assurance • Insurance • Additional Benefits • Covers Regulatory Changes Over the Term • Offers Excess Coverage for the Unknown • Third Party Liability Can Be Covered • Limitations • Term 30 Years • Investment Discount Rate

  12. Financial Assurance • Insurance • Why a 30 Year Term? • 30 Year Policy is Extremely Long Period • No Re-Insurance market • Length of Term is Directly Proportional to Loss Ratio • The Longer the Term, the More Claims are Filed the Higher the Loss Ratio • Higher Loss Ratio = Higher Reserve Requirement, (Reserves are Invested in Low Risk, Low Yield Investments). Higher Reserves = Lower Discount Rates (Reduces Discounting, Increases Premiums, Decreases Profits).

  13. Financial Assurance • Insurance (Why Only 30 Years) • No Long Term Actuarial Data • Reserves Set Aside For More Historical Lines of Insurance • Investment Discount Rate • Low Yield Low Risk • Dictated By State Insurance Agency • Ties Up Capital Hurts Cash Flow

  14. Financial Assurance Solution • Combined Insurance & GIC Programs • Insurance: Initial 20 - 30 Years • Capital Intensive • High Risk Period • Unknown Commodity • Higher Concentrations

  15. Financial Assurance Solution • GIC: next 30 to 40 Years • Need Market Driven Rates • Higher Yields / Lower Prices • Let Insurers Take Investment Risk • Agency Can Always Commute • Pooling Spreads Risk • Cooperation Between Private and Regulatory Sides • Agencies Work With Carrier To Determine $$ Amount

  16. AIG Environmental • Member Company of AIG • A++, AAA Rated • >$600 Billion In Assets • 25 Years Underwriting Environmental Risk • >99% Claims Resolved w/o Litigation • Greatest Capacity In Marketplace • Gary Lutz (213) 689 - 3894 AIG

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