AIG ENVIRONMENTAL FINANCIAL ASSURANCE Gary LutzDecember 6, 2004

Financial Assurance Two Mechanisms (offered by AIG)Two Mechanisms (offered by AIG) –Financial Product –Insurance Both Designed to Provide Financial Assurance to RegulatorsBoth Designed to Provide Financial Assurance to Regulators Different Risk Approach to EachDifferent Risk Approach to Each

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

Financial Assurance GIC’sGIC’s –Long Term Financial Planning Tool –Inherent Risks Assumed by Provider Interest Rate RiskInterest Rate Risk Inflation Rate RiskInflation Rate Risk –Inherent Risks Assumed by Regulators Timing RiskTiming Risk Estimate RiskEstimate Risk –Long Term (Upwards of 50 Years)

Financial Assurance GIC’sGIC’s –Structures AnnuityAnnuity Lump SumLump Sum –Annuity Regulators Determine Annual Expected Costs Over Life of Post Closure PeriodRegulators 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

Financial Assurance GIC’s (Annuity Continued)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 RiskAIG 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

Financial Assurance GIC’s (Continued)GIC’s (Continued) Lump SumLump 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.Regulators Take Interest and Inflation Rate Risk Upon Receipt of Funds.

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

Financial Assurance InsuranceInsurance –Long Term Financial Planning Tool –Inherent Risks Covered By AIG Interest RateInterest Rate Inflation RateInflation Rate TimingTiming EstimateEstimate –Maximum Term 30 Years –Structure Pre-Funded Expected Plus Addition Risk Transfer PremiumPre-Funded Expected Plus Addition Risk Transfer Premium

Financial Assurance InsuranceInsurance –Structure Pre-Funded Expected, Plus Risk Transfer Premium = Finite PremiumPre-Funded Expected, Plus Risk Transfer Premium = Finite Premium AIG Determines Costs To Secure LiabilityAIG 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

Financial Assurance InsuranceInsurance Additional BenefitsAdditional Benefits –Covers Regulatory Changes Over the Term –Offers Excess Coverage for the Unknown –Third Party Liability Can Be Covered LimitationsLimitations –Term 30 Years –Investment Discount Rate

Financial Assurance InsuranceInsurance Why a 30 Year Term? 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).

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

Financial Assurance Solution Combined Insurance & GIC ProgramsCombined Insurance & GIC Programs Insurance: Initial YearsInsurance: Initial Years –Capital Intensive –High Risk Period Unknown CommodityUnknown Commodity Higher ConcentrationsHigher Concentrations

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

AIG Environmental Member Company of AIGMember Company of AIG A++, AAA RatedA++, AAA Rated >$600 Billion In Assets>$600 Billion In Assets 25 Years Underwriting Environmental Risk25 Years Underwriting Environmental Risk >99% Claims Resolved w/o Litigation>99% Claims Resolved w/o Litigation Greatest Capacity In MarketplaceGreatest Capacity In Marketplace Gary Lutz (213) Gary Lutz (213) AIG