American International Group Tom Olson Tommy Yip Gordon

American International Group Tom Olson Tommy Yip Gordon Tang Michael Chiu Paul’s Sugiarto S

Agenda S Industry Overview S Regulations S Company Overview S Financial Statement S Risk Factors and Management

Industry Overview S

The Insurance Industry S Insurance companies generally have two branches of business S Life & Health Insurance S Individual’s well being S Property and Casualty Insurance S Protection against losses of a physical property, or its ability to generate income

Global Insurance Market S $3, 671. 7 billion in gross premiums in 2009 S Life insurance makes up approximately 57% of the insurance industry S Growth rate of 2. 7% per year

Global Insurance Market $bn 2005 3, 301. 4 - 2006 3, 517. 8 6. 6 2007 3, 676. 1 4. 5 2008 3, 701. 8 0. 7 2009 3, 671. 8 (0. 8) CAGR, 2005– 09 2. 7 Total Gross Premium $3, 800 $3, 700 $3, 600 $ billion Year Growth (%) $3, 500 $3, 400 $3, 300 $3, 200 $3, 100 2005 2006 2007 Year 2008 2009

Global Insurance Market S Projected to have gross premiums of $5, 082. 7 billion in 2014 S Average growth rate of 6. 7% per year, 38. 4% up from 2009

Global Insurance Market $bn 2009 3, 671. 1 (0. 8) 2010 3, 751. 8 2. 2 2011 3, 989. 5 6. 3 2012 4, 276. 8 7. 2 2013 4, 654. 2 8. 8 2014 5, 082. 7 9. 2 CAGR, 2009– 14 6. 7 Projected Total Gross Premium $ Billion Year Growth (%) $6, 000 $5, 000 $4, 000 $3, 000 $2, 000 $1, 000 $0 2009 2010 2011 2012 Year 2013 2014

Top 10 Global Insurance Companies Global Top 10 Insurance Companies Market Share by Net Earned Premium: AXA 2009 Company Share (%) AXA 3. 2 Assicurazioni Generali 2. 4 Allianz Group 2. 3 American International Group 1. 8 Munich Re Group 1. 5 Aviva Plc 1. 4 Munich Re Group Zurich Financial Services 1. 3 Aviva Plc CNP Assurances 1. 2 ING Group 1. 1 Prudential plc 0. 9 CNP Assurances Others 83. 0 ING Group TOTAL 100. 0 Assicurazioni Generali Allianz Group American International Group Zurich Financial Services Prudential plc Others

Performance for Top 5 Insurance Companies, 2009 15. 00% 10. 00% 5. 00% 0. 00% Operating Margin -5. 00% Return on Average Assets Return on Average Equity -10. 00% -15. 00% -20. 00% AXA Allianz 3. 60% 0. 50% 8. 60% 4. 70% 0. 56% 11. 64% Assicurazioni Generali 1. 40% 0. 30% 9. 40% American International Group -11. 40% -1. 30% -17. 90% Munich Re Group 4. 70% 1. 10% 11. 80%

US Insurance Market, 2010 S $1. 0 trillion of gross premiums S 58% in Life & Health ($581 billion) S 42% in Property and Casualty ($426 billion) S 2, 689 Property and Casualty insurance companies S 1, 061 Life & Health insurance companies S The U. S. insurance industry employs 2. 2 million people, including insurers, brokers, agents, etc

Top 5 US Property and Casualty Insurance Companies, 2010 Group Revenues Assets Berkshire Hathaway $136, 185 $372, 229 American International Group $104, 417 $683, 443 State Farm Insurance Cos. $63, 177 $192, 794 Liberty Mutual Insurance Group $33, 193 $112, 350 Allstate $31, 400 $130, 874

Regulations S

Regulations S The scope of regulation extends beyond the prudential oversight of insurance companies and their capital adequacy S Ensures policy holders (person buying the insurance) are protected against S bad faith claims S premiums are not unduly high S policies issued meet a minimum standard

Regulations S Insurance companies (in US) are not subject to federal regulation and only state level regulation exists for insurance companies S Therefore, regulation is different from state to state S State agencies usually called Department of Insurance with their head officials named Insurance Commissioner S Insurance commissioners are members of NAIC

What is NAIC S National Association of Insurance Commissioners S Formed in 1871 S Non-profit organization which seeks to organize the regulatory and supervisory efforts of the various state insurance commissioners from around the United States S Forum for the creation of model laws and regulations S Is NOT a regulator!

NAIC S Acts at the national level to advance laws and policies supported by state insurance regulators S Responsible for creating the Statutory Accounting Principles (SAP), which is required accounting for insurance companies, in addition to the state GAAP S SAP is notable for its very conservative valuation methods—aiming to keep reserve high in order and keeping the insurance companies solvent

Company Overview S

AIG S American International Group, Inc. (AIG) is a leading American multinational insurance organization serving customers in more than 130 countries S In 2000, AIG was the 29 th-largest public company in the world; listed on the DOWJONES (2004 -2008) S AIG common stock is listed on the New York Stock Exchange, as well as the stock exchanges in Ireland Tokyo

Businesses S Chartis Insurance S International Lease Finance Corporation S AIG Bank S AIG Direct S Sun. America Financial Group S United Guaranty Corporation

Chartis Insurance S World leading property-casualty and general insurance organization S Provides the following insurances: S S S Executive Liability Environmental Alternative Risk and Collateral Travelling Workers' Compensation Property Global Marine and Energy S Casualty S Accident and Health S Specialty S

International Lease Finance Corporation S The world's largest aircraft lessor by value S Leases Boeing and Airbus aircraft to major airlines worldwide such as American Airlines, Alaska Airlines, Emirates Airlines, Air Canada, Cathay Pacific, Lufthansa and other airlines S September 2, 2011 - AIG filled with the SEC to make an IPO

AIG Bank S Offers service on mortgages for refinance and purchase, home equity lines of credit, money market savings, & certificates of deposit S Provides specialized Federal Deposit Insurance Corporation insured deposit products, loan products, and banking services to the core customer groups nationwide S Serving consumers, small businesses, AIG policyholders and AIG employees

AIG Direct S Marketing name: Matrix Direct S Provides reliable and affordable term life insurance S Offers customized, personalized life insurance

Sun. America Financial Group S A group of companies that consist of financial advisors and insurance agents S The members:

United Guaranty Corporation S Provides mortgage insurance products and services to mortgage lenders and credit unions of all sizes. S United Guaranty Residential Insurance Company of North Carolina and United Guaranty Credit Insurance Company S United Guaranty Commercial Insurance Company of North Carolina S United Guaranty Services, Inc. S United Guaranty Mortgage Indemnity Company

AIG Stock Info as of November 4, 2011

AIG Stock Info – Last 5 years.

The AIG Crisis and Bailout S AIG Financial Products Corp. (AIGFP) S September 2008: Credit ratings downgraded below "AA" levels S The US Federal Reserve Bank created an $85 billion credit facility S The US Government would be entitled to 79. 9% equity ownership of AIG (preferred stock)

The AIG Crisis and Bailout – Cont. S November 2008, came up with : S Maiden Lane II (Lending Division) S Maiden Lane III (Credit default swap Division) S The US Treasury purchased $40 billion of newly issued AIG perpetual preferred shares through TARP S By 2009: $182. 5 billion available financial support S Sold a few subsidiaries and assets

Financial Statements S

Balance Sheet

Balance Sheet

Balance Sheet

Balance Sheet Derivatives

Balance Sheet Derivatives

Income Statement

Income Statement

Income Statement Derivatives

Non Hedging Derivatives

Net Realized Capital Gains

Cash Flow Hedging

Cash Flows Condensed

Cash Flows Operating

Cash Flows Financing

Cash Flow Investing

Risk Factors S

Risk Factors S Credit & Financial Strength Ratings S Market Conditions S Investment Portfolio & Concentration of Investments S Casualty Insurance S Competition S Guarantees with Variable Annuities

Risk Factors Cont. S Adjustments of Deferred Policy Acquisition Cost S Catastrophe Exposure S Reinsurance S Indemnity Obligations S Regulation S Change in Control

Risk Factors Cont. S Foreign Operations S Legal Proceedings S Use of Estimates S Aircraft Leasing Business S Liquidity

Risk Factors Cont. S Special Purpose Vehicle Intercompany Loans S Controlling Shareholder S Employees S Electronic Data Systems S Regulatory Capital Credit Default Swap Portfolios

Credit & Financial Strength Ratings S Credit and Financial Strength ratings measure the ability of the company to meet contract obligations S Establishes the company’s position relative to other companies S If ratings drop S Could limit new business S Lose current customers/business S Could require AIG to post additional collateral

Market Conditions S Insurance business is highly dependent on the business environment S If markets return to what they were a few years ago AIG could be affected by: S Decline in value of investment portfolio S Unrealized market valuation losses on investments S Impairments of good-will and other long lived assets S Increased liability from interest rate guarantees S Increase in policy surrenders and cancellations

Investment Portfolios & Concentration of Investments S Investment portfolio’s value affected by interest rates: S Can change from monetary policy changes, domestic and international political issues, and other factors S Concentration of investments: S Ability to sell may be limited because of others trying to sell in the same concentration S Ex. AIG has a large exposure to residential mortgage-backed securities, commercial mortgage-backed securities, and commercial mortgage loans

Casualty Insurance S Liabilities are difficult to predict S could exceed current reserves S Historical loss factors used to project future loss development S No guarantee that the future loss will follow the same pattern

Competition S Highly competitive market both domestically and overseas S Competing with insurance companies, banks, investment banks S 1800 US life insurance co. S 3300 other stock co. (competing with Chartis subsidiaries) S Position affected by credit ratings S Competing through: risk acceptance criteria, product pricing, and terms and conditions

Guarantees with Variable Annuities S Certain policies offered guarantee customers: S Guaranteed minimum death benefits, guaranteed minimum income benefits, guaranteed minimum withdrawal benefits, and guaranteed minimum account benefits S AIG uses derivatives and reinsurance to hedge some of this risk, not fully hedged

Adjustments of Deferred Policy Acquisition Cost S Interest rate changes, increased cancellations, increased investment returns may lead to accelerated amortization of deferred policy acquisition costs S Higher interest rates and investment returns cause an increase in the number of contracts surrendered S Forcing subsidiaries to accelerate the amortization of DACs S If this cost exceeds the cost of surrenders and withdrawals, business could be negatively affected

Catastrophe Exposure S Could cause widespread claim costs: property damage, worker’s compensation, morality and morbidity claims S Leads to a loss from declining value of investment assets

Reinsurance S The company reinsuring may not be able or willing to pay S Relying on a outside company S Bear credit risk with respect to reinsurers S If reinsurer can’t pay in time, AIG is still responsible to the policy holder

Indemnity Obligations S If indemnity claim is material: S AIG will be forced to obliged these claims S Will restrict cash flow, liquidity, and operations

Regulation S July 21, 2010 – Dodd-Frank Wall St. Reform and Consumer Protection Act S Can’t predict the requirements of the regulations that will be adopted and what their effect on AIG will be S May become subject to enforcer/supervisor authority as a savings and loan holding co. S May be forced to place financial activity in a intermediate holding co. S Designated Financial Company S Stress tests – whether or not AIG has necessary cap under adverse economic conditions

Regulation Cont. S If Designated Financial co. gave threat to US financial stability S Would be required to maintain a debt to equity ratio of no more than 15: 1 S Limit the ability of AIG to merge, acquire, consolidate, or become affiliated with other companies S Restrictions on the financial products offered S Required to terminate some current activities S Could be forced to sell or transfer assets to unaffiliated entities

Regulation Cont. S Valker Rule S If AIG continues to control AIG Federal Savings bank could be subject to this rule S Limits proprietary trading and the sponsorship/investment in hedge, private equity or similar funds S USA Patriot Act – 2001 S Requires companies to know certain information about their clients and to monitor their transactions for suspicious activities

Change in Control S Ability to utilize tax losses and credit carryforwards to offset future taxable income may be limited under the Internal Revenue Code S Entities that experience ownership change generally subject to annual limitation on its pre-ownership change tax losses and credit carryforwards equal to the equity value of the corporation multiplied by the long-term, tax exempt rate S Ownership change could occur if Department of Treasury’s position falls bellow 50% of the current shares

Foreign Operations S Provides insurance, investment and other financial products and services in over 130 countries S Can be affected by regional economic downturns, foreign exchange rate fluctuations, political upheaval, nationalism and other restrictive government actions S Licenses issued to AIG subsidiaries could be modified or revoked S Insurance subsidiaries could be restricted from doing future business in certain countries

Legal Proceedings S Security class actions, and regulatory and government investigations S Unable to predict the maximum liability of these claims S No precise damage claims, and the types of claims are uncertain

Use of Estimates S Generally Accepted Accounting Principles: S Require some sections with significant degrees of judgment/estimation S Estimates could turn out to be inaccurate

Aircraft Leasing Business S Aircraft business depends on lease payments S Exposes AIG to several risks: S Lessee non-performance S Aircrafts become obsolete S Decline in demand of product

Liquidity S Need liquidity to pay operating expenses, interest on debt, to meet capital requirements of AIG’s subsidiaries S Payments to AIG Parent S Require funs (dividends) from subsidiaries to fund payments due on obligations S Some investments by subsidiaries are illiquid or difficult to sell S AIG Parent may be unable to assist subsidiaries with unexpected cash flow obligations – may be difficult for subsidiaries to generate liquidity because of these assets

Special Purpose Vehicle Intercompany Loans S If AIG is unable to satisfy obligations made, secured parties may have the right to foreclose upon and sell the assets that secure the loans S Would negatively affect the designated subsidiaries

Controlling Shareholder S The Department of the Treasury is AIG’s controlling shareholder with over 50% of current shares S This gives them control over: S Approval of mergers or other business combinations S A sale of all or substantially all of AIG’s assets S Amendments to AIG Parents amended certificate of incorporation S Other matters that might be favorable to the Department of the Treasury but not other shareholders

Controlling Shareholder Cont. S Department of the Treasury could transfer control to another entity S Department of the Treasury is granted registration rights with respect to shares of common stock issued for recapitalization S Right to participate in any registered offering of AIG common stock S Right to engage in at the market offerings S Right to approve the terms, conditions, and pricing of any registered offering in which it participates until ownership falls bellow 33%

Employees S President and Chief Executive Offers of AIG – Mr. Robert Benmosche S Diagnosed with cancer and may be unable to provide his services S American Recovery and Reinvestment Act of 2009 S Restricts bonuses and other incentives payable to employees S Risk of employee fraud, error, failure to document properly or to obtain proper internal authorization, failure to comply with regulatory restrictions

Electronic Data Systems S Computer systems used to store, retrieve, evaluate, and utilize customer and company data S Systems rely on a 3 rd party S If the system fails and employees are unable to access the data – business operations could be forced on hold until the system is repaired S Confidential information may be misused or mishandled leading to legal liabilities

Regulatory Capital Credit Default Swap Portfolio S Deterioration in credit markets may cause AIG to experience unrealized market valuation losses S Could be required to post additional collateral S Net of $38. 1 Billion in credit default portfolio for providing capital relief rather than for arbitrage purposes

Management of Risk Factors S

Major Risk Factors S AIG identifies four major risk to which the corporation is exposed to S Credit Risk S Market Risk S Operation Risk S Insurance Risk

Credit Risk S Potential loss arising from an obligor’s inability or unwillingness to meet its obligations to AIG. S Direct and indirect credit exposures S fixed income investments S deposits S corporate and consumer loans S counterparty risk in derivatives activities S cessions of insurance risk to reinsurers and customers S credit risk assumed through credit derivatives written

Managing Credit Risk S Managed at a corporate level by the AIG Credit Risk Management (CRM) department, lead by the Chief Credit Officer (CCO) S delegated credit authorities among executives and officers S manage the credit limits, program limits and credit S administer portfolio credit reviews of all business units, and recommend any corrective actions where required S develop methodologies for quantification and assessment of credit risks S approve appropriate credit reserves and methodologies at the business unit and enterprise levels

Managing Credit Risk S Uses third-party guarantees, reinsurance recoverable, letters of credit and trust accounts to minimize level of credit risk S Also manages industry concentrations S Current largest industry credit exposure is global financial institutions sector

Managing Credit Risk S AIG’s largest credit exposures as a percentage of total equity Category Investment Grade: 10 largest combined Single largest financial institution Single largest corporate Single largest sovereign Non-Investment Grade: Single largest financial institution Single largest corporate Single largest sovereign Risk Rating of Total Equity (%) A+ AAAAA 84. 4% 4. 8 2. 9 21. 3 BB- BB BB 0. 3 0. 6 0. 1

Managing Credit Risk S AIG’s largest credit exposures to the global financial institution sector as a percentage of total equity Industry Money center / Global bank groups European regional financial institutions Global reinsurance companies Global life insurance companies North American based regional financial institutions Global non-life insurance companies Global securities companies Supranational Banks Credit Exposure as a Percentage of Total Equity 54. 90% 11. 1 10. 4 9. 5 6. 1 4. 6 4. 3 4. 2

Market Risk S Potential loss from fluctuations in interest rates, foreign currencies, equity and commodity prices, and their levels of volatility, etc S Managed by Market Risk Management and Independent Valuation (MRMIV), and Insurance Risk Management function (IRM) S AIG identifies the following factors as exposure to market risk S Benchmark interest rates S Credit spread or risk premium S Equity and alternative investment prices S Foreign currency exchange rates

Managing Market Risk S Duration / key rate duration S Scenario analysis. S Value-at-Risk (Va. R) S Stress testing

Operational Risk S Potential loss resulting from inadequate or failed internal processes, people, and systems, or from external events S Each business unit is responsible for its operational risk S pro-actively address potential operational risk issues S assign ownership and accountability for addressing identified issues.

Insurance Risks S Of all the insurance risks, liquidity risk is the fundamental risk for insurance companies. S Potential loss resulting from inadequate premiums, insufficient reserves and catastrophic exposures. S Main contributors to solvency issues.

How AIG Manages Liquidity Risk S Compliance with financial reporting and capital and solvency targets. S Extensive use of reinsurance, both internal and third- party. S Review and establishment of reserves.

Insurance Risks S Specific types of risks to these areas of insurance S Life Insurance S Property and Casualty Insurance

Life Insurance Risk S Potential loss resulting from experience deviating from expectations for mortality, morbidity and termination rates in the insurance-oriented products and insufficient cash flows to cover contract liabilities in the retirement savings products. S Sun. America has life insurance risks

Primary Risks of Sun. America S Pricing risk S Investment risk S Interest rate risk S Equity market risk

Ways to Manage Life Insurance Risks S Appropriate product design S Sound medical underwriting S Active management of the asset-liability relationship S External reinsurance programs S Sun. America generally limit their maximum underwriting exposure on life insurance of a single life to $15 million

Property and Casualty Insurance Risks S Chartis and Mortgage Guaranty have P&C risks S The mortgage insurance business (Mortgage Guaranty) manages risks through: S geographic location of the insured properties S the relative economic conditions in the local housing markets S credit attributes of the borrowers S the loan amount relative to the value of the respective collateral

Property and Casualty Insurance Risks S Chartis are exposed to different risks: S climate change S wind S flood S earthquake S terrorism S environmental damage

Property and Casualty Insurance Risks S Terrorism and environmental damage are managed differently than wind, flood, and earthquake, which are natural disasters. S Exposure to loss from terrorism is controlled by limiting the total insurance that is underwritten within a location. S Typically exclude or significantly limit coverage for pollution or related environmental damage.

Property and Casualty Insurance Risks S Risks from catastrophes like hurricanes and earthquakes are managed using a combination of techniques: S setting aggregate limits in key business units S monitoring and modeling accumulated exposures S purchasing catastrophe reinsurance

Property and Casualty Insurance Risks Modelling of Real Disaster Scenarios:

Managing Risks with Reinsurance S AIG uses reinsurance programs for its insurance risks as follow: S Facultative agreements to cover large individual exposures S Quota share treaties to cover specific books of business S Excess-of-loss treaties to cover large losses

Managing Risks with Reinsurance cont. S AIG uses reinsurance programs for its insurance risks as follow: S Excess or surplus automatic treaties to cover individual life risks in excess of stated per-life retention limits S Catastrophe treaties to cover specific catastrophes, including earthquake, windstorm and flood

Risk Management Recommendations S

Risk Management Recommendations S Credit Risk S Market Risk S Operation Risk S Insurance Risk

Questions? S