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ITEM 7 / RESULTS OF OPERATIONS.....................................................................................................................................................................................The refined analysis confirmed that significant uncertainty remains for this class of business, especially fromunreported claims and from the propensity for future medical deterioration. Based on the more refined analysis wedid not recognize any material development for accident years 2011 and prior.AIG experienced significant adverse development of $825 million for this class in 2010. With the passage of theAffordable Care Act in March 2010, we concluded that there is increased vulnerability to the risk of furthercost-shifting to the excess workers’ compensation class of business. Settlement efforts can also be affected bychanges to evaluation protocols implemented by the Centers for Medicare & Medicaid Services in 2009. Thesechanges were expected to result in future prescription drug costs being borne by workers’ compensation insurers to asignificantly greater degree than in the past, and were assessed as being likely to lead to further deteriorating trendsfor the excess workers’ compensation class of business.As part of our 2010 comprehensive loss reserve analysis, we compared and contrasted the traditional techniquesthat have been used for this class with an alternative approach that focuses more explicitly on projecting the effect offuture calendar year trends, while placing less weight on prior-period loss development ratios due to the increasedevidence of changes to the claims environment. These various actuarial analyses indicated a substantial increase inloss estimates from the prior-year level, primarily for accident years 2002 and prior.Healthcare – U.S.During 2012, this class recognized $68 million of adverse prior year development due to several large claims thatinvolved unusual coverage issues for this class. With the exception of these claims, this class experienced claimactivity in line with expectations.Healthcare business written by AIG Property Casualty’s Americas region produced moderate favorable developmentin 2011 and 2010. Healthcare loss reserves have benefited from favorable market conditions and an improved legalenvironment in accident years 2002 and subsequent, following a period of adverse loss trends and market conditionsthat began in the mid 1990s.EnvironmentalWe maintain an active environmental insurance business related to pollution legal liability and general liability forenvironmental consultants and engineers, as well as runoff business for certain environmental coverage (includingCost Cap Containment) which provides cost overrun protection. We evaluate and report reserves associated with thisbusiness separately from the 1986 and prior asbestos and environmental reserves associated with standard GeneralLiability and Umbrella policies discussed in ‘‘Asbestos and Environmental Reserves’’.Because of an increase in the frequency and severity of claims observed beginning in 2011, the 2012 loss reservereview consisted of an intensive review of reported claims by a multi-disciplinary team including external experts inenvironmental law and engineering science, toxicologists and other experts, our actuaries, claims managers andunderwriters to reassess our indicated loss reserve need. The review improved our understanding of factors thatdrive claim costs such as policy term, limit, pollution conditions covered, location of incident and applicable laws andremediation standards. The analysis used these factors to segment and analyze the claim data to determine ultimatecosts, in some cases, on a claim by claim basis. As a result of this analysis, $326 million of prior year adversedevelopment was recognized during 2012, including $166 million reported in the AIG Property Casualty Otherreporting unit related to lines that are now in runoff. The majority (81 percent) of the adverse development related toaccident years 2003 and prior, before significant underwriting changes were adopted.Historically, we had used traditional actuarial methods to assess the reserves for the environmental products. Thecomprehensive claims review provided a more refined approach for the development of actuarial estimates for toxictort claims (which were found to have a distinctly lengthier loss development pattern than other general liability claimsin the environmental portfolio) as well as a more appropriate methodology for incorporating case reserving basedestimates of ultimate loss costs for complex claims involving environmental remediation and/or from policies with highpolicy limits (greater than $5 million per policy). Notwithstanding the refined methodology and approach applied in2012, considerable uncertainty remains over the ultimate loss cost for this class of business, especially for businesswritten in accident years 2003 and prior.We strengthened our post 1986 Environmental reserves in 2011 by $413 million, partly due to large reserveincreases on individual claims. Of this amount, $382 million was included in the AIG Property Casualty Other..................................................................................................................................................................................................................................94 AIG 2012 Form 10-K