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ITEM 7 / RESULTS OF OPERATIONS.....................................................................................................................................................................................income from the assets not attributable to the Commercial Insurance and the Consumer Insurance operatingsegments are assigned to the Other category.Net realized capital gains (losses), bargain purchase gains and other income (expense) – net are not allocated toCommercial Insurance and Consumer Insurance, but are reported as part of the Other category.2012 and 2011 ComparisonNet Investment IncomeNet investment income is influenced by a number of factors including the amounts and timing of inward and outwardcash flows, the level of interest rates and changes in overall asset allocation. Net investment income increased$472 million or 11 percent in 2012, compared to 2011, primarily due to the impact of the overall diversification in theasset portfolio during the year. We adopted yield-enhancement initiatives in 2011, and continued through 2012, whichincreased the average yield of our investment portfolio by 0.3 points to 4.0 percent during 2012.While corporate debt securities continued to be the largest asset category, we continued to reduce our concentrationin lower yielding tax exempt municipal bond holdings and focus on risk weighted opportunistic investments in higheryielding assets such as structured securities. This asset diversification has achieved an increase in average yieldswhile the overall credit ratings of our fixed maturity investments were largely unchanged. We expect to continue torefine our investment strategy in 2013 to meet our liquidity, duration and credit quality objectives as well as currentrisk-return and tax objectives.Our invested asset portfolio grew by approximately $4.3 billion, or 3 percent during the year with declining interestrates and narrowing spreads in both investment grade and higher yield asset classes contributing to higherunrealized appreciation in our portfolio.Net investment income from other investment categories increased by $160 million in 2012 compared to 2011, ofwhich $82 million was attributed to the strong performance of equity partnership investments, following a 16 percentincrease in the S&P 500 Index during 2012. Other investment income also increased by $72 million due to thestrategic group benefits partnership with AIG Life and Retirement, all of which is reported in Consumer Insurance.Net Realized Capital Gains (Losses)Net realized capital losses for the year ended December 31, 2012 were driven by other-than-temporary impairmentsand impairment charges on life settlement contracts offset by gains recognized on the sale of fixed maturity andequity securities. We recognized other-than-temporary impairment charges of $377 million primarily attributable to adecrease in recoverable values for structured securities, partnership investments and equity securities in anunrealized loss position for more than 12 months. During 2012, we recognized impairment charges on life settlementcontracts in the amount of $309 million as a result of decreases in their estimated fair value as well as a change inmanagement’s intent about continuing to hold certain life settlement contracts. In addition, we recognized a loss of$43 million from derivatives used to economically hedge foreign currency positions. These decreases were offset bygains recognized on the sale of fixed maturity and equity securities in the amount of $675 million and a gain on thesale of a property in the amount of $55 million.See Consolidated Results for further discussion on net investment income and net realized capital gains (losses).Legal SettlementsIn December of 2012, we recorded litigation settlement income from settlements with three financial institutions whoparticipated in the creation, offering and sale of RMBS as to which AIG and its subsidiaries suffered losses eitherdirectly on their own account or in connection with their participation in AIG’s securities lending program.2011 and 2010 ComparisonNet Investment IncomeNet investment income decreased slightly in 2011 compared to 2010. We experienced declines in private equity andhedge fund income, as well as increases in investment expenses, which were largely offset by increases in interestincome. The decrease in private equity and hedge fund income reflects the decline in the overall equity marketsduring the second half of 2011. The increase in investment expenses in 2011 resulted mainly from increases in both..................................................................................................................................................................................................................................AIG 2012 Form 10-K 87