AIGUpdate01/08/09

AIGUpdate01/08/09

         

Copyright © 2006 Alliant Insurance Services, Inc. Confidential; not for distribution 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

Copyright © 2006 Alliant Insurance Services, Inc. Confidential; not for distribution 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

StructureOriginal Fed Agreements

New Fed Agreements* Key Points

Credit facility •$85B•2-Year Term•LIBOR + 8.5% Interest•8.5% on Unused Funds•Preferred stock convertible into 79.9% of AIG’s outstanding shares

•$60B•5-Year Term•LIBOR + 3% Interest•0.75% on Unused Funds•Preferred stock convertible into 77.9% of AIG's outstanding shares

Lowers cost of capitalAlleviates pressure for “fire sale” of assets

Preferred Equity Investment from US Treasury (under TARP)

n/a •$40B•10% Coupon with cumulative dividends•Warrant with 10-year term to purchase common shares equal to 2% of AIG’s outstanding shares

Proceeds used to pay down portion of credit facilityPerpetual equity

Special Purpose Vehicle (SPV)—Credit Default Swaps

n/a •Approximately $30B invested by Fed•$5B invested by AIG•Assets held by SPV=$70B par CDOs

Removes significant CDS portfolio risks from AIG balance sheet, while keeping 1/3 participation in potential upside

Special Purpose Vehicle (SPV)—Securities Lending*

•$37.8B Sec Lending facility

•Approximately $23B invested by Fed•$1B invested by AIG•Assets held by SPV=$40B par RMBS

Removes securities lending issues from AIG balance sheet, while maintaining 1/6 participation in potential upside

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.comSlide Content Provided by AIGCI

Media Reports v. Actual Agreements

AgreementsReported “Bailout”

Actual debt to be repaid1 Comments

Credit facility $60B $27B Extended maturity to 5 years; more manageable interest rate

Preferred stock $40B * Perpetual = no “fire sale” of AIG assets; carries 10% coupon.

Senior financing of Special Purpose Vehicle (SPV)—Credit Default Swaps2

$30B $5BAIG not required to repay senior financing; repaid from cash flows of assets held by SPV ($70B par CDOs). AIG will also invest $5B to participate in potential upside of securities.

Senior financing of Special Purpose Vehicle (SPV)**—Securities Lending2

$23B $1BAIG not required to repay senior financing; repaid from cash flows of assets held by SPV ($40B par RMBS). AIG will also invest $1B to participate in potential upside of securities.

Total $153B $33B3 AIG is in the process of selling non-core businesses with estimated values far in excess of its total debt to the Fed.

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

“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.

**Subject to final terms. It is intended as a summary only. For complete details visit: www.aig.com

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Copyright © 2006 Alliant Insurance Services, Inc. Confidential; not for distribution 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)

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

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Page 8

AIG Commercial Insurance (AIGCI) Performance

AIGCIStat Financials1

3Q08YTD 2007 2006 2005Change '05 vs. '073

Amount %

Net Written Premium $18,826 $26,174 $26,319 $23,573 $2,601 11.0%

Net Income $1,331 $5,460 $3,949 $245 $5,215 2128.5%

Loss Ratio 77.4 67.3 69.5 90.4 -23.1 -25.6%

Expense Ratio 23.1 20.4 20.8 19.5 1.0 5.0%

Combined Ratio 100.5 87.7 90.3 109.9 -22.2 -20.2%

Policyholder Surplus $26,361 $27,484 $22,474 $17,686 $9,798 55.4%

Risk Based Capital Ratio2 452% 448% 385% 276%    

NWP : PHS <1.0 <1.0 <1.2 1.3    

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

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

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AIGCI Peer Comparison

CompanyStatutorySurplus2

Stat Surplus% Δ

since 2Q082 NWP3 Expense

Ratio3

AIGCI $26,361 -1.3% $26,873 20.8

Travelers $21,218 -1.1% $20,412 30.5

The Hartford $12,951 -14.7% $10,437 28.4

Chubb $12,569 -4.1% $9,676 28.7

Liberty Mutual $11,326 -26.3% $17,199 30.4

Zurich $6,498 -9.8% $5,865 21.9

Ace $4,597 -11.6% $4,045 21.9

XL4 $2,201 0.7% $786 16.3

1NAIC acknowledged entities of US property casualty operations only2Reported at September 30, 20083Source: Annual Statutory Statements, December 31, 20074Raised capital of $2.875 billion, closing July 2008

Compares statutory surplus, NWP and expense ratio of AIGCI’s peer group’s1 US property casualty operations.

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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 – Share underwriting 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

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AIGCI Pooling Structure U

W

Com

pani

esP

ool

Com

pani

esP

ool

Allo

catio

n

Pennsylvania

New York

Illinois

California

Louisiana

Mississippi

Delaware

State Domiciled

Admitted PoolSurplus Lines

Pool

AIG Excess (18%)

Lexington (80%)

GraniteState (0%)

AI South (0%)American

Home (36%)C&I (11%)

AIG Casualty (5%)

National Union (38%)

New Hampshire

(5%)

Illinois National

(0%)

State of PA(5%)

Landmark (2%)

AIG Excess LexingtonGraniteState

AI SouthAmerican

HomeC&I

AIG Casualty

National Union

New Hampshire

Illinois National

State of PALandmark

(%) indicates participation is respective pools

180% Quota share with National Union and support agreement with AIG.

Audubon Insurance

AISLIC1

Audubon Indemnity

NULA

These four companies are not pooled

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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

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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)

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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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