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ITEM 7 / RESULTS OF OPERATIONS.....................................................................................................................................................................................business in the U.S. In addition, ceding commissions decreased as a result of restructuring of the Property andSpecialty reinsurance program as part of the strategic decision to retain more profitable business while continuing tomanage aggregate exposures.The general operating expense ratio increased by 2.4 points due to increases in bad debt expense, investments instrategic initiatives and human resources, coupled with a lower net premiums earned base. The lower net premiumsearned base contributed approximately 0.2 points to the increase in the general operating expense ratio. Bad debtexpense increased by approximately $143 million, which contributed approximately 0.7 points to the generaloperating expense ratio increase in the year ended December 31, 2012. For the year ended December 31, 2012,investments in strategic initiatives, commercial lines platform, our newly formed scientific group, underwriting andpricing tools totaled approximately $51 million, representing an increase of approximately $41 million over the prioryear. The remainder of the general operating expense ratio increase was primarily due to higher personnel costs, aspart of AIG’s continued investment in its employees.Consumer Insurance RatiosThe accident year loss ratio, as adjusted, in the year ended December 31, 2012 improved in both A&H and Personallines. The improvement in A&H is primarily attributable to favorable underwriting performance of individual personalaccident business in Asia Pacific, targeted underwriting actions, coupled with rate increases and risk selection ofgroup A&H in the U.S. and the overall travel business. The improvement in Personal lines is primarily attributable toimproved underwriting and risk selection in the warranty line of business, price sophistication and rate strengtheningfor Japan, EMEA automobile and the U.S. private client group, and targeted business mix changes that resulted infaster growth in non-automobile products than the automobile line of business. Included in the accident year lossratio, as adjusted, for the year ended December 31, 2012, are severe losses totaling $33 million. There were nosevere losses for the year ended December 31, 2011.The acquisition ratio increased by 1.2 points primarily due to profit sharing arrangements in lines of business targetedfor growth, direct marketing expenses and the reduction in VOBA benefit. Overall direct marketing costs increased byapproximately 9 percent in 2012; total direct marketing spending outside the U.S. increased by approximately18 percent in the same period. There was also a decrease of approximately $49 million in the benefit from theamortization of VOBA liabilities recognized at the time of the Fuji acquisition.The general operating expense ratio increased by 0.9 points as a result of incurring additional expenses to grow keylines of business across a number of geographic areas and strategic expansion in growth economy nations. For theyear ended December 31, 2012, investments in strategic initiatives, including investments in an integrated consumerlines platform and information systems infrastructure totaled approximately $44 million, representing an increase ofapproximately $27 million or 0.2 points over the prior year. The remainder of the increase was primarily due to higherpersonnel costs, as we continue our efforts to align employee performance across the globe with our strategic goals.Other CategoryWe continued to invest in a number of strategic initiatives during 2012, including the implementation of global financeand information systems, preparation for Solvency II compliance, readiness for regulation by the FRB, legal entityrestructuring, and underwriting and claims improvement initiatives. We also continued to streamline our finance,policy and claims administration and human resources operations. The costs of these initiatives, which are notspecific to either Commercial Insurance or Consumer Insurance, are reported as part of the Other category. For theyear ended December 31, 2012, such costs totaled $391 million, representing an increase of approximately$195 million over the prior year, and contributed approximately 1.1 points to the AIG Property Casualty generaloperating expense ratio...................................................................................................................................................................................................................................84 AIG 2012 Form 10-K