American International Group, Inc. New · NYSE:AIG
American International Group, Inc. New — American International Group — Debt Investor Presentation (February 2008)
54 slides from American International Group, Inc. New's debt investor presentation, Feb 29, 2008
Slide 1: Conference Call Credit Presentation
Conference Call Credit Presentation Financial Results for the Year Ended December 31, 2007 February 29, 2008 (Revised as to slide 10)
Slide 2: Forward-looking statements and non-GAAP notice
It should be noted that this presentation and the remarks made by AIG representatives may contain projections concerning financial information and statements concerning future economic performance and events, plans and objectives relating to management, operations, products and services, and assumpt
Slide 3: Capital Markets
Capital Markets
Slide 4: Outline
Outline • Business Rationale, Portfolio Composition & Underwriting Standards • Fundamental Risk Assessment & Stress Testing • Accounting, Valuation Fundamentals & Economic Capital • Conclusions & Next Steps 3
Slide 5: AIG Financial Products Super Senior Credit Default Swap Business
AIG Financial Products “Super Senior” Credit Default Swap (CDS) Business • No uniform definition for “Super Senior” risk across the market. • AIGFP defines “Super Senior” risk as a risk where there is no expected loss at contract inception, even under its conservative stress assumptions. • Due dilig
Slide 6: Summary Statistics Super Senior Credit Derivatives
Summary Statistics “Super Senior” Credit Derivatives* Multi-Sector CDOs European Corporate – Residential Corporate – Regulatory Mortgage – Transaction Type Arbitrage Transactions Capital Regulatory Total Multi- Motivated w/Mixed Collateral Transactions Motivated Capital Sector including w/No Subprim
Slide 7: Typical Tranche Structure of a Multi-Sector CDO Including Super Senior Layer
Typical Tranche Structure of a Multi-Sector CDO Including “Super Senior” Layer AAA AAA AAAAA AAAAA AAA “Super A AA Underlying Senior” AAA A AAAA portfolio Risk Layer typically BBB A A AA comprises - BBB A BBB A 125-200 AIGFP Net BBB obligations Notional BBB from various Exposure BBB sectors. Those o
Slide 8: Fundamental Risk Assessment
Fundamental Risk Assessment AIG ERM • Every quarter AIG ERM reviews AIGFP’s “Super Senior” credit derivative exposures. • The review considers delinquency, defaults and realized loss trends for each transaction relative to updated subordination levels. The assessment includes a review of rating agen
Slide 9: Stress Testing - Illustration of Potential Losses on Super Senior Portfolio
Stress Testing - Illustration of Potential Losses on AIGFP’s “Super Senior" Credit Derivative Portfolio on Multi-Sector CDOs Description of ERM Severe Stress Scenario* Value of Pre Tax Loss Estimates* Collateral Securities Severe Stress Scenario Q1-Q4 ’07 Subprime RMBS 100% of AA+ or lower $ BN Q3-Q
Slide 10: Accounting for Super Senior Credit Derivative Swaps
Accounting for “Super Senior” Credit Derivative Swaps • AIGFP accounts for its “Super Senior” Credit Derivative portfolio in accordance with FAS 133 and EITF 02-3: – At inception the credit derivative is recorded at its transaction price as that is the best indicator of fair value. – Subsequent chan
Slide 11: Super Senior CDS Portfolio Total Notional Amounts and Cumulative MTM Loss
AIGFP “Super Senior” CDS Portfolio Total Notional Amounts and Cumulative MTM Loss (December 31, 2007) Notional Amount Cumulative MTM Loss Type ($ Billions) ($ Billions) Corporate Arbitrage $ 70.4 $ 0.2 Regulatory Capital* $ 378.7 $ 0.0 Multi-Sector CDO, of which: $ 78.2** $ 11.3*** High Grade $ 59.3
Slide 12: Regulatory Capital Super Senior Transactions Valuation
Regulatory Capital (Corporate - Regulatory & European Residential Mortgage) “Super Senior” Transactions Valuation • Transactions entered into are of a highly customized, non-market standard nature, to facilitate regulatory capital relief, rather than for credit risk transfer. • Transactions are expe
Slide 13: Evolution of AIGFP's Valuation Methodologies and Inputs
Evolution of AIGFP’s Valuation Methodologies/Inputs for “Super Senior” Credit Derivatives Written on CDOs Date September 30, October 31, November 30, November 30, December 31, 2007 2007 2007 (Method A) 2007 (Method B) 2007 Methodology • Modified BET • Modified BET • Modified BET • Modified BET • Mod
Slide 14: Process Followed for December 31, 2007 GAAP Valuation
Process Followed for December 31, 2007 GAAP Valuation of “Super Senior” CDS Written on CDOs Acquisition & Modeled Review of Third Overlay of Benchmarking Key Inputs Super Party Prices of Super Senior to Independent to Modified Senior Collateral Tranche Price Sources BET Model market Securities value
Slide 15: Adjustments to Unrealized Market Valuation Loss for Available Economic Capital
Adjustments Made to Unrealized GAAP Market Valuation Loss to Determine Available Economic Capital Under AIG’s ECM Market Consistent Settlement Value • At June 30, 2007 AIG used GAAP equity Adjustment to Determine Available as a conservative proxy for Available Economic Capital (December 31, 2007) Ec
Slide 16: Conclusions
Conclusions • AIGFP “Super Senior” credit derivative business was underwritten to an AIGFP super senior standard which projects zero losses at inception. • There has been deterioration in the credit quality and the market’s assessment of expected losses in the underlying collateral securities and AI
Slide 17: Next Steps
Next Steps • Remediate the material weakness in internal control over financial reporting with respect to the controls over the AIGFP “Super Senior” credit derivative portfolio valuation process and oversight thereof. • Continue to monitor closely the portfolio risk of realized loss through fundamen
Slide 18: Insurance Investments
Insurance Investments
Slide 19: AIG Insurance Investment Portfolios
AIG Insurance Investment Portfolios • The investment portfolios of AIG’s insurance companies are managed by AIG Investments (AIGI)* on their behalf. • These portfolios are managed on a spread investment or Asset-Liability Management model, not as a transactional business. As a result, we do not: – “
Slide 20: Consolidated Summary of Gains & Losses
AIG Insurance Investment Portfolios Consolidated Summary of Gains & Losses Financial Effect of Market Disruption For the Year Ended December 31, 2007 Realized and Unrealized Gains / Losses (Pre-tax) Amount Attributable Total AIG* ($ Million) to RMBS Portfolio Net realized capital gains (losses) ($3,
Slide 21: Worldwide Insurance and Asset Management Bond Portfolios
AIG Insurance Investment Portfolios Worldwide Insurance and Asset Management Bond Portfolios • AIGI’s bond portfolios* had a fair value of $491.3 billion at December 31, 2007. • The securities are highly rated (approximately 95% are investment grade). • The bond portfolios are also well-diversified
Slide 22: RMBS Overview
AIG Insurance Investment Portfolios RMBS Overview • Holdings of global residential mortgage market products total approximately $89.9 Amortized Cost Fair Value RMBS Type % % billion at December 31, 2007, or about 10% ($ Billion) ($ Billion) of AIG’s total invested assets. Agency Pass-Through and CMO
Slide 23: RMBS Portfolio
AIG Insurance Investment Portfolios RMBS Portfolio Amortized Cost RATING ($ Millions) HOLDINGS AGENCY AAA AA A BBB NON INV TOTAL AGENCY $14,575 $ - $ - $ - $ - $ - $14,575 PRIME JUMBO - 12,708 1,794 483 143 1 15,129 ALT-A - 23,967 994 309 71 8 25,349 SUBPRIME - 20,843 2,833 388 10 - 24,074 SECOND-LI
Slide 24: Subprime RMBS Exposure by Vintage
AIG Insurance Investment Portfolios Subprime RMBS Exposure by Vintage - $24.1 Billion 12.0 AIGI focuses almost exclusively 10.0 on AAA and AA rated investments with relatively short tenors $ Billions 8.0 Weighted average expected life (WAL) is 4.12 years 6.0 4.0 2.0 0.0 Prior 2003 2004 2005 2006 200
Slide 25: Alt-A RMBS Exposure by Vintage
AIG Insurance Investment Portfolios ALT-A RMBS Exposure by Vintage - $25.3 Billion 12.0 AIGI focuses almost exclusively 10.0 on AAA and AA rated investments with relatively short tenors $ Billions 8.0 Weighted average expected life (WAL) is 4.04 years 6.0 4.0 2.0 AA AA AA 0.0 AA A A A AA AA A A A Pr
Slide 26: Subprime RMBS
AIG Insurance Investment Portfolios Subprime RMBS • Through its initial investment analysis, combined with ongoing 2006 Vintage Credit Enhancement for monitoring, virtually all of AIGI’s 2006/2007 exposure is high AIGI* up in the capital structure (AAAs and AAs). • Nevertheless, lifetime loss estima
Slide 27: Alt-A RMBS
AIG Insurance Investment Portfolios Alt-A RMBS • In the Alt-A sector, AIGI’s initial investment analysis and credit selection process have resulted 2006 Vintage Credit Enhancement for in most of our exposure being at the super senior* AIGI*** AAA level, especially in the 2006/2007 vintages. Original
Slide 28: RMBS Rating Agency Actions
AIG Insurance Investment Portfolios RMBS Rating Agency Actions* Fourth Quarter 2007 YTD 2008** % of Non- Agency Number of Value Number of Value RMBS Securities ($ Million) Securities ($ Million) Portfolio Downgraded 35 $443 128 $3,578 4.8% Watch List Negative 96 $3,396 252 $9,694 12.9% Upgrades 0 $0
Slide 29: CMBS Portfolios
AIG Insurance Investment Portfolios CMBS Portfolios • AIGI’s CMBS portfolio is predominantly comprised of traditional commercial mortgage backed securities. • The underlying collateral of the portfolio is of high quality with close to 89% rated AAA / AA and approximately 99% investment grade. Rating
Slide 30: CMBS Portfolios: Current Delinquency
AIG Insurance Investment Portfolios CMBS Portfolios Current Delinquency % • The U.S. CMBS sector has enjoyed strong credit performance. Delinquencies are near historic lows and have remained below 1% since 2005. • AIGI’s CMBS portfolio is currently outperforming the U.S. CMBS universe. 0 .6 0 0 .50
Slide 31: CDO Overview
AIG Insurance Investment Portfolios CDO Overview • As of December 31, 2007 the composition of the $4.55 billion CDO global portfolio is as follows: Collateral Type Amortized Ratings Amortized ($ in Billions) Cost % ($ in Billions) Cost % AAA $0.80 17.6% Bank Loans (CLO) $2.14 47.0% AA 1.02 22.5% Syn
Slide 32: Monoline Exposure
AIG Insurance Investment Portfolios Monoline Exposure • AIGI’s exposure to monolines totals $42.2 billion, 99% of which are financial guarantees. – 74% of the total exposure relates to municipal bonds, which are highly rated, even without the financial guarantees. – AIGI does not rely primarily on f
Slide 33: Monoline Exposure by Underlying Ratings
AIG Insurance Investment Portfolios Monoline Exposure by Underlying Ratings • The quality of the insured portfolio is high, with 84% having ratings of A or above. This is also a reflection of the large percentage of municipals in our wrapped monoline portfolio. Amortized Cost Underlying Ratings (1)
Slide 34: Monoline Exposure by Entity
AIG Insurance Investment Portfolios Monoline Exposure • Exposure by monoline entity and by type of exposure is as follows: Amortized Cost Financial Guarantees ($ in Billions) (1) Other (2) MBIA $13.10 $0.16 FSA 10.45 0.14 AMBAC 9.13 0.15 FGIC 7.37 0.04 SCA (XLCA/XLFA) 0.76 - CIFG 0.67 - Assured Guar
Slide 35: Monoline Exposure
AIG Insurance Investment Portfolios Monoline Exposure • Sound fundamental credit underwriting is the foundation for all of AIGI’s investment decisions, and financial guarantees are viewed as a secondary form of payment for all municipal and other wrapped investments. – More than 99% of the underlyin
Slide 36: In Conclusion
AIG Insurance Investment Portfolios In Conclusion • The global financial markets remain under considerable stress with reduced financing opportunities for residential mortgage borrowers. • Market expectations for losses in the 2006/2007 U.S. subprime and Alt-A vintages have increased substantially.
Slide 37: Mortgage Guaranty
Mortgage Guaranty
Slide 38: United Guaranty (UGC) Executive Statement
United Guaranty (UGC) Executive Statement • UGC, as a broad market participant, operates in an inherently cyclical business that is highly correlated to the fortunes of the housing market. • UGC prices for long-term profitability to absorb market disruptions and has cumulatively generated $2.6 billi
Slide 39: United Guaranty Real Estate Portfolio
United Guaranty December 31, 2007 Real Estate Portfolio Total Portfolio FICO (≥ 660) FICO (620-659) FICO (<620) Domestic Mortgage Net $29.8 Billion $21.0 Billion $6.3 Billion $2.5 Billion Risk-in-Force 60+ Day Delinquency 3.71% 2.10% 6.60% 15.56% 2007 Vintage $8.9 Billion $6.2 Billion $1.9 Billion $
Slide 40: United Guaranty Loss Emergence
United Guaranty Loss Emergence • The deterioration of the U.S. housing market United Guaranty Domestic Mortgage Net Risk-In-Force has affected all segments of the mortgage December 31, 2007 business, but the high LTV second-lien United Guaranty Domestic Mortgage Net Risk-In-Force Domestic First Dome
Slide 41: Delinquency Rates - UGC vs. Industry
United Guaranty Delinquency Rates – UGC vs. Industry (First-Lien Primary) 7.00 6.50 6.33 % 5.93 6.00 5.65 5.69 5.50 Industry* 5.28 5.30 5.01 5.06 4.94 4.92 4.89 4.89 5.00 4.73 4.69 4.68 4.68 4.65 4.59 4.62 4.49 4.51 4.52 4.52 4.41 4.39 4.44 4.39 4.50 4.26 4.29 4.29 4.23 3.98 3.91 4.00 3.76 3.72 3.74
Slide 42: First-Lien Key Risk Initiatives
United Guaranty First-Lien Key Risk Initiatives • Tightened underwriting standards and eligibility guidelines in conjunction with market movement. • Increased rates in select, higher risk business segments. • Established new and modified existing portfolio concentration caps. • Flight to quality: –
Slide 43: Second-Lien Key Risk Initiatives
United Guaranty Second-Lien Key Risk Initiatives • Strengthened Underwriting Guidelines – Eliminated Alternative Risk product in fourth quarter 2006. – Eliminating 100% Combined LTV (CLTV) purchase money (“piggyback”) seconds. – Eliminated significant segments of stated income and third party origin
Slide 44: Risk Mitigating Factors
United Guaranty Risk Mitigating Factors • UGC uses several mitigants to reduce the volatility of losses transferred from lenders, which are reflected in the net risk-in-force figures: - Risk sharing: funded arrangements through captive reinsurance with most major lenders, in which the lenders share
Slide 45: United Guaranty Summary
United Guaranty Summary • UGC is engaged in a highly cyclical business, with high returns in 8 out of 10 years and underwriting losses in 2 out of 10 years on average. The downturns in the housing industry negatively affect short-term profitability, as pricing is actuarially derived for the long-ter
Slide 46: Consumer Finance
Consumer Finance
Slide 47: American General Finance
American General Finance • For over 50 years, AIG’s domestic consumer finance business has provided mortgage and consumer loans through a network of branch offices, which currently consists of 1,600 locations. • In addition, AGF originates and acquires mortgage loans through its centralized mortgage
Slide 48: Net Real Estate Loan Growth
American General Finance Net Real Estate Loan Growth As the real estate market softened, AGF maintained its underwriting discipline despite experiencing lower volume $ Billions and growth. $1.8 $1.4 $1.2 $1.2 $0.6 $0.4 $0.3 $0.3 $0.2 $0.1 $0.1 $0.0 $0.0 $0.0 -$0.1 -$0.3 -$0.6 1Q05 2Q05 3Q05 4Q05 1Q0
Slide 49: AGF vs. Subprime ABS Market
American General Finance AGF vs. “Subprime ABS Market” 60+ Day Delinquency* 25% Subprime ABS Real Estate Market 20% 15% 10% 5% AGF Total Real Estate 0% 2004 2005 2006 1Q07 2Q07 3Q07 4Q07 * Source: Company and industry reports 48
Slide 50: Real Estate Credit Quality
American General Finance Real Estate Credit Quality AGF’s delinquency and losses have risen from recent all- time lows, yet remain below their targets as well as the industry during the current mortgage market conditions. 5% 4% 60+ Day Delinquency Target 3.0% - 4.0% 3% 2% Net Charge-off Target .75%
Slide 51: Risk Mitigating Practices - Real Estate Portfolio
American General Finance Risk Mitigating Practices - Real Estate Portfolio • 97% of mortgages are underwritten with full income verification. • 88% are fixed-rate mortgages; only about 9% of the total mortgage portfolio re-sets interest rates by the end of 2008; about 10% by the end of 2009. • Adjus
Slide 52: Equity One Portfolio Acquisition
American General Finance Equity One Portfolio Acquisition • AGF has agreed to acquire $1.5 billion in outstanding balances of branch-based consumer loans of Equity One, Incorporated. • Equity One’s branch-offered products are similar to those of AGF (1st & 2nd Fixed Rate Mortgages, Consumer Loans, R
Slide 53: American General Finance Summary
American General Finance Summary • At the end of the fourth quarter, AGF’s real estate loan portfolio remained at $19.5 billion, flat to the end of the third quarter – The 2007 vintage production is the result of balanced growth from both its centralized real estate and branch operations which met b
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