Bring on tomorrow - AIG.com

ITEM 7 / RESULTS OF OPERATIONS.....................................................................................................................................................................................2012 and 2011 ComparisonAIG Life and Retirement Operating Income..............................................................................................................................................................................................Operating income increased in 2012 principally due to our efforts to actively manage spread income. Resultsbenefitted from higher net investment income, lower interest credited, lower reserve charges for death claims and theimpact of favorable separate account performance on policyholder benefit expenses and DAC amortization. Theseitems were partially offset by significant proceeds from legal settlements in 2011, higher mortality costs and a chargeto increase GIC reserves.Premiums decreased slightly in 2012 due to lower group benefit premiums partially offset by higher term insurancepremiums.Policy fees increased in 2012 as a result of growth in variable annuity assets under management from higher netflows and separate account performance, driven in large part by higher equity markets.Net investment income increased in 2012 reflecting higher base yields of 9 basis points due to the reinvestment ofsignificant amounts of cash and short-term investments during 2011, opportunistic investments in structuredsecurities, fair value gains on MLII and other structured securities, a fair value gain of approximately $57 million onthe investment in PICC Group, lower impairment charges on investments in leased commercial aircraft and higherreturns on alternative investments. The increase in net investment income combined with lower interest creditedresulted in improved net investment spreads in 2012 compared to 2011.Other income decreased due to legal settlement proceeds of $226 million in 2011 to resolve a litigation matter.Policyholder benefits and claims incurred decreased as lower reserve charges for death claims not submitted to AIGin the normal course of business and the impact of favorable separate account performance more than offset highermortality costs for individual life insurance.Interest credited decreased in 2012 due to active crediting rate management actions that included lowering renewalcredited rates, maintaining discipline on new business pricing including re-filing products to lower minimum rateguarantees.Amortization of deferred acquisition costs decreased in 2012 primarily as a result of updated assumptions related tofixed annuity surrender rates and the impact of favorable separate account performance.Other acquisition and insurance expenses were essentially flat with 2011.Life Insurance Operating IncomeLife Insurance operating income increased in 2012 due to higher net investment income and lower reserves for deathclaims, principally related to the effect of multi-state unclaimed property examinations, that have not been submittedto AIG in the normal course of business. These items were partially offset by higher mortality costs, DACamortization and loss recognition reserves related to a legacy block of long-term care insurance.Premiums decreased slightly in 2012 due to lower group benefit premiums partially offset by higher term insurancepremiums.Policy fees were essentially flat with 2011.Net investment income increased in 2012, reflecting the reinvestment of significant amounts of cash and short-terminvestments during 2011, opportunistic investments in structured securities, fair value gains on MLII in 2012 of$76 million, a fair value gain of $28 million on the investment in PICC made in 2012, lower impairment charges oninvestments in leased commercial aircraft and higher returns on alternative investments.Policyholder benefits and claims incurred increased in 2012 reflecting higher mortality costs and loss recognitionreserves, partially offset by lower charges to increase reserves for death claims as described below:• Mortality costs related to life insurance increased in 2012, although overall mortality results remain within pricingexpectations...................................................................................................................................................................................................................................AIG 2012 Form 10-K 101