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ITEM 7 / RESULTS OF OPERATIONS.....................................................................................................................................................................................Asbestos and Environmental Reserves..............................................................................................................................................................................................Third-Party Actuarial Review of Asbestos Loss Reserve EstimatesAs part of our more in-depth comprehensive loss-reserve review in the fourth quarter of 2010, we conducted a seriesof top-down and ground-up reserve analyses to determine the appropriate loss reserve estimate for our asbestosexposures. To ensure the most comprehensive analysis possible, we engaged an independent third-party actuarialfirm to assist in assessing these exposures. The ground-up study conducted by this firm used a proprietary model tocalculate the loss exposure on an insured-by-insured basis. We believe that the accuracy of the reserve estimate isgreatly enhanced through the combination of the actuarial firm’s industry modeling techniques and industryknowledge and our own specific account-level experience.Annually, we consider a number of factors and recent experience in addition to the results of the top-down andground-up analyses performed for asbestos and environmental reserves. We considered the significant uncertaintythat remains as to our ultimate liability for asbestos and environmental claims, which is due to several factors:• the long latency period between asbestos exposure and disease manifestation, leading to the potential forinvolvement of multiple policy periods for individual claims;• claims filed under the non-aggregate premises or operations section of general liability policies;• the number of insureds seeking bankruptcy protection and the effect of prepackaged bankruptcies;• diverging legal interpretations; and• the difficulty in estimating the allocation of remediation cost among various parties with respect to environmentalclaims.As a result of the top-down and ground-up reserve analyses and the factors considered, asbestos reserves werestrengthened by $3.3 billion gross and $1.5 billion net in 2010.In 2011, we completed a top-down report year projection as well as a market share projection of our indicatedasbestos and environmental loss reserves. These projections consisted of a series of tests performed separately forasbestos and for environmental exposures.For asbestos, these tests project the losses expected to be reported through 2027. This projection was based on theactual losses reported through 2011 and the expected future loss emergence for these claims. Three scenarios weretested, with a series of assumptions ranging from more optimistic to more conservative.For environmental claims, a comparable series of frequency/severity tests were produced. We updated the top-downreport year projections in 2012. In this updated projection, environmental claims from future report years (i.e., IBNR)are projected out ten years, through the year 2022.As a result of the studies, we determined that no additional strengthening was required for asbestos andenvironmental in 2011.After we carefully considered the recent experience compared to the results of the 2010 ground-up analysis, as wellas all of the above factors, no adjustment to gross and net asbestos reserves was recognized in 2012. Additionallyin 2012, a moderate amount of incurred loss pertaining to the asbestos loss reserve discount is reflected in the tablebelow and is related to the reserves not subject to the NICO reinsurance agreement.Upon completion of the environmental top-down analysis performed in the fourth quarter of 2012, we concluded thatthe $75 million net reserve strengthening recognized in the first half of 2012 was adequate.In addition to the U.S. asbestos and environmental reserve amounts shown in the tables below, AIG PropertyCasualty also has asbestos reserves relating to foreign risks written by non-U.S. entities of $140 million gross and$116 million net as of December 31, 2012. The asbestos reserves relating to non-U.S. risks written by non-U.S.entities were $233 million gross and $165 million net as of December 31, 2011...................................................................................................................................................................................................................................96 AIG 2012 Form 10-K