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ITEM 7 / RESULTS OF OPERATIONS.....................................................................................................................................................................................The following table provides a summary of reserve activity, including estimates for applicable IBNR, relatingto asbestos and environmental claims:As of or for the Years Ended December 31,2012 2011 2010(in millions) Gross Net Gross Net Gross NetAsbestos:Liability for unpaid claims and claims adjustment expense at beginning ofyear $ 5,226 $ 537 $ 5,526 $ 2,223 $ 3,236 $ 1,151Change in net loss reserves due to retroactive reinsurance:Paid losses recoverable under retroactive reinsurance contracts – 111 – 111 – –Re-estimation of amounts recoverable under retroactive reinsurancecontracts (a) – (21) – (1,814) – –Change in net loss reserves due to retroactive reinsurance – 90 – (1,703) – –Dispositions (10) (10) – – (17) (8)Loss and loss expenses incurred:Prior years, undiscounted 1 1 2 2 3,326 1,479Change in discount 83 37 190 74 (386) (162)Losses and loss expenses incurred (b) 84 38 192 76 2,940 1,317Losses and loss expenses paid (b) (404) (228) (492) (236) (633) (237)Other changes – – – 177 – –Liability for unpaid claims and claims adjustment expense at end of year $ 4,896 $ 427 $ 5,226 $ 537 $ 5,526 $ 2,223Environmental:Liability for unpaid claims and claims adjustment expense at beginning ofyear $ 204 $ 119 $ 240 $ 127 $ 338 $ 159Dispositions (1) (1) – – (27) (10)Losses and loss expenses incurred 150 75 33 27 23 24Losses and loss expenses paid (44) (30) (69) (35) (94) (46)Liability for unpaid claims and claims adjustment expense at end of year $ 309 $ 163 $ 204 $ 119 $ 240 $ 127Combined:Liability for unpaid claims and claims adjustment expense at beginning ofyear $ 5,430 $ 656 $ 5,766 $ 2,350 $ 3,574 $ 1,310Change in net loss reserves due to retroactive reinsurance:Paid losses recoverable under retroactive reinsurance contracts – 111 – 111 – –Re-estimation of amount recoverable under retroactive reinsurancecontracts – (21) – (1,814) – –Change in net loss reserves due to retroactive reinsurance – 90 – (1,703) – –Dispositions (11) (11) – – (44) (18)Losses and loss expenses incurred:Undiscounted 151 76 35 29 3,349 1,503Change in discount 83 37 190 74 (386) (162)Losses and loss expenses incurred 234 113 225 103 2,963 1,341Losses and loss expenses paid (448) (258) (561) (271) (727) (283)Other changes – – – 177 – –Liability for unpaid claims and claims adjustment expense at end of year $ 5,205 $ 590 $ 5,430 $ 656 $ 5,766 $ 2,350(a) Re-estimation of amounts recoverable under retroactive reinsurance contracts includes effect of changes in reserve estimates and changes indiscount. Additionally, the 2011 Net amount includes the effect on net loss reserves of the initial cession to NICO.(b)These amounts exclude benefit from retroactive reinsurance.Transfer of Domestic Asbestos LiabilitiesOn June 17, 2011, we completed a transaction under which the bulk of AIG Property Casualty’s net domesticasbestos liabilities were transferred to NICO, a subsidiary of Berkshire Hathaway, Inc. This was part of our ongoingstrategy to reduce our overall loss reserve development risk. This transaction covers potentially volatile U.S.-relatedasbestos exposures. It does not, however, cover asbestos accounts that we believe have already been reserved totheir limit of liability or certain other ancillary asbestos exposure assumed by AIG Property Casualty subsidiaries...................................................................................................................................................................................................................................AIG 2012 Form 10-K 97