AIG ENVIRONMENTAL FINANCIAL ASSURANCE Gary LutzDecember 6, 2004

AIGAIG

ENVIRONMENTAL ENVIRONMENTAL FINANCIAL ASSURANCEFINANCIAL ASSURANCE

Gary LutzGary Lutz December 6, 2004December 6, 2004

Financial Assurance Financial Assurance

• Two Mechanisms (offered by AIG)Two Mechanisms (offered by AIG)– Financial ProductFinancial Product

– InsuranceInsurance

• Both Designed to Provide Financial Both Designed to Provide Financial Assurance to RegulatorsAssurance to Regulators

• Different Risk Approach to Each Different Risk Approach to Each


• Financial ProductsFinancial Products– GIC’s (Guaranteed Investment Contracts)GIC’s (Guaranteed Investment Contracts)

– Basic Premise: Regulators Determine Liability, Pre-Basic Premise: Regulators Determine Liability, Pre-funding From Owner or PRP Group, and funding From Owner or PRP Group, and Government Assumes Risk Government Assumes Risk

• InsuranceInsurance– Finite InsuranceFinite Insurance

– Basic Premise: AIG Determines Liability. Pre-funding Basic Premise: AIG Determines Liability. Pre-funding From Owner or PRP Group and AIG Assumes Risk From Owner or PRP Group and AIG Assumes Risk


• GIC’sGIC’s– Long Term Financial Planning ToolLong Term Financial Planning Tool

– Inherent Risks Assumed by ProviderInherent Risks Assumed by Provider• Interest Rate RiskInterest Rate Risk

• Inflation Rate RiskInflation Rate Risk

– Inherent RisksInherent Risks Assumed by RegulatorsAssumed by Regulators• Timing RiskTiming Risk

• Estimate RiskEstimate Risk

– Long Term (Upwards of 50 Years)Long Term (Upwards of 50 Years)


• GIC’sGIC’s– StructuresStructures

• AnnuityAnnuity

• Lump SumLump Sum

– AnnuityAnnuity• Regulators Determine Annual Expected Costs Over Life of Post Regulators Determine Annual Expected Costs Over Life of Post

Closure PeriodClosure Period

– I.E. , Closed in 5 Years, Post Closure for 50 Years, at $1 I.E. , Closed in 5 Years, Post Closure for 50 Years, at $1 Million a Year (easier for Landfills & Mines with more Million a Year (easier for Landfills & Mines with more predictable L/T recurring costs) predictable L/T recurring costs)

– Regulators Assume Risk for Incorrect CostsRegulators Assume Risk for Incorrect Costs


• GIC’s GIC’s (Annuity Continued) (Annuity Continued) – Shortages Not Provided For (cash flow)Shortages Not Provided For (cash flow)

– Unused Costs No Longer InvestedUnused Costs No Longer Invested

– Programs Available to Mitigate AbovePrograms Available to Mitigate Above

» Roll Over Excesses if Any, (not true risk transfer)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 Costs Stay Invested with AIG Till Allotted Year

» Interest Rate and Inflation Risk Fully CoveredInterest Rate and Inflation Risk Fully Covered

– Sites are Individually Accounted for, No Ability to Shift Sites are Individually Accounted for, No Ability to Shift Funds to other SitesFunds to other Sites


• GIC’s GIC’s (Continued) (Continued)

• Lump SumLump Sum– Regulators Determine Total Costs for Post ClosureRegulators Determine Total Costs for Post Closure

– I.E. , Need 50 Million Dollars in 5 Years to Complete I.E. , Need 50 Million Dollars in 5 Years to Complete OM&M OM&M

– Regulators Assume Risk for Incorrect EstimateRegulators Assume Risk for Incorrect Estimate

– No Up-front Shortage Problems, Have Full Access of No Up-front Shortage Problems, Have Full Access of Money. (May Cause Later Year Cash Flow Problems)Money. (May Cause Later Year Cash Flow Problems)

• Regulators Take Interest and Inflation Rate Risk Regulators Take Interest and Inflation Rate Risk Upon Receipt of Funds.Upon Receipt of Funds.


• GIC’s GIC’s (Continued) (Continued)

• Better Suited To A Program, Money Can Be Better Suited To A Program, Money Can Be Used Where Needed.Used Where Needed.


• InsuranceInsurance– Long Term Financial Planning ToolLong Term Financial Planning Tool– Inherent Risks Covered By AIGInherent Risks Covered By AIG

• Interest RateInterest Rate• Inflation RateInflation Rate• TimingTiming• EstimateEstimate

– Maximum Term 30 YearsMaximum Term 30 Years– StructureStructure• Pre-Funded Expected Plus Addition Risk Transfer Pre-Funded Expected Plus Addition Risk Transfer

PremiumPremium


• InsuranceInsurance– StructureStructure

• Pre-Funded Expected, Plus Risk Transfer Pre-Funded Expected, Plus Risk Transfer Premium = Finite PremiumPremium = Finite Premium

• AIG Determines Costs To Secure LiabilityAIG Determines Costs To Secure Liability– PV Costs Usually Less Than Financial Assurance PV Costs Usually Less Than Financial Assurance

Amount, (Competitive Rates for Going Concern VS Amount, (Competitive Rates for Going Concern VS Agency Prescribed Formula Rates for Discontinued Agency Prescribed Formula Rates for Discontinued Operation)Operation)

– Policy Limit Equals or Exceeds Financial Assurance Policy Limit Equals or Exceeds Financial Assurance Amount Amount


• InsuranceInsurance• Additional BenefitsAdditional Benefits

– Covers Regulatory Changes Over the TermCovers Regulatory Changes Over the Term

– Offers Excess Coverage for the UnknownOffers Excess Coverage for the Unknown

– Third Party Liability Can Be CoveredThird Party Liability Can Be Covered

• LimitationsLimitations– Term 30 YearsTerm 30 Years

– Investment Discount RateInvestment Discount Rate


• InsuranceInsurance• Why a 30 Year Term?Why a 30 Year Term?

– 30 Year Policy is Extremely Long Period30 Year Policy is Extremely Long Period– No Re-Insurance marketNo Re-Insurance market– Length of Term is Directly Proportional to Loss RatioLength of Term is Directly Proportional to Loss Ratio

» The Longer the Term, the More Claims are Filed the The Longer the Term, the More Claims are Filed the Higher the Loss RatioHigher the Loss Ratio

» Higher Loss Ratio = Higher Reserve Requirement, Higher Loss Ratio = Higher Reserve Requirement, (Reserves are Invested in Low Risk, Low Yield (Reserves are Invested in Low Risk, Low Yield Investments). Higher Reserves = Lower Discount Investments). Higher Reserves = Lower Discount Rates (Reduces Discounting, Increases Premiums, Rates (Reduces Discounting, Increases Premiums, Decreases Profits).Decreases Profits).


• Insurance Insurance (Why Only 30 Years(Why Only 30 Years ))» No Long Term Actuarial DataNo Long Term Actuarial Data

• Reserves Set Aside For More Historical Lines of Reserves Set Aside For More Historical Lines of InsuranceInsurance

• Investment Discount RateInvestment Discount Rate– Low Yield Low Risk Low Yield Low Risk

– Dictated By State Insurance AgencyDictated By State Insurance Agency

– Ties Up Capital Hurts Cash Flow Ties Up Capital Hurts Cash Flow

Financial Assurance Solution Financial Assurance Solution

• Combined Insurance & GIC ProgramsCombined Insurance & GIC Programs

• Insurance: Initial 20 - 30 YearsInsurance: Initial 20 - 30 Years– Capital IntensiveCapital Intensive

– High Risk PeriodHigh Risk Period

• Unknown CommodityUnknown Commodity

• Higher Concentrations Higher Concentrations

Financial Assurance Solution Financial Assurance Solution

• GIC: next 30 to 40 YearsGIC: next 30 to 40 Years– Need Market Driven Rates Need Market Driven Rates

• Higher Yields / Lower PricesHigher Yields / Lower Prices

• Let Insurers Take Investment RiskLet Insurers Take Investment Risk– Agency Can Always Commute Agency Can Always Commute

– Pooling Spreads RiskPooling Spreads Risk

– Cooperation Between Private and Regulatory SidesCooperation Between Private and Regulatory Sides

• Agencies Work With Carrier To Determine $$ Agencies Work With Carrier To Determine $$ AmountAmount

AIG EnvironmentalAIG 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) 689 - 3894Gary Lutz (213) 689 - 3894

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AIG ENVIRONMENTAL FINANCIAL ASSURANCE Gary LutzDecember 6, 2004