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ITEM 7 / RESULTS OF OPERATIONS.....................................................................................................................................................................................• Certain long-duration products, including traditional life insurance, accident and health products, such as long-termcare insurance and payout annuities, may require increases in reserves if changes in estimates of futureinvestment returns result in projected future losses. Long term care products may also require additional reserves iffuture expected premium increases are not sufficient to cover future benefit cost increases not provided for in thecurrent reserves. For these long duration traditional products, the assumptions used to calculate benefit liabilitiesand DAC are ‘‘locked in’’ at policy issuance. These assumptions are based on our estimates of mortality, morbidity,persistency, maintenance expenses, investment returns and for long-term care, future premium increases. Ifobserved changes in actual experience or estimates result in projected future losses under loss recognition testing,DAC is adjusted and additional policyholder benefit liabilities may be recorded through a charge to policyholderbenefit expense. In the fourth quarter of 2012, loss recognition reserves of $61 million were recorded for a legacyblock of long-term care insurance issued prior to 2002.• During 2012 AIG Life and Retirement resolved multi-state examinations relating to the handling of unclaimedproperty and the use of the Social Security Death Master File (SSDMF) to identify death claims that have not beensubmitted to us in the normal course of business. The final settlement of these examinations was announced onOctober 22, 2012. AIG Life and Retirement is now taking enhanced measures to, among other things, routinelymatch policyholder records with the SSDMF to determine if its insured parties, annuitants, or retained accountholders have died and locate beneficiaries when a claim is payable. Charges related to the resolution of the multistateexaminations and use of the SSDMF were approximately $57 million in 2012 and $202 million in 2011.Amortization of deferred acquisition costs increased in 2012 as a result of updated assumptions for universal lifeproducts and certain blocks of fixed annuities included in the Life Insurance operating segment. The updatedassumptions increased amortization by $78 million and primarily reflected the impact of spread compression in thecurrent low interest rate environment.Other acquisition and insurance expenses decreased in 2012 primarily due to the sharing of group benefit costsrelated to our strategic partnership with AIG Property Casualty.Retirement Services Operating IncomeRetirement Services operating income increased in 2012 due to improved net investment spreads (higher netinvestment income and lower interest credited), the impact of favorable separate account performance on DACamortization and policyholder benefit expenses and lower DAC amortization due to updated assumptions for fixedannuity surrenders. These items were partially offset by significant proceeds from legal settlements in 2011 and anincrease in GIC reserves in 2012.Policy fees increased in 2012 as a result of growth in variable annuity assets under management due to higher netflows and separate account performance driven in large part by higher equity markets.Net investment income increased in 2012, reflecting higher base yields due to the reinvestment of significantamounts of cash and short-term investments during 2011, opportunistic investments in structured securities, fair valuegains on MLII in 2012 of $170 million, a fair value gain of $28 million on the investment in PICC made in 2012, lowerimpairment charges on investments in leased commercial aircraft and higher returns on alternative investments.Other income decreased due to the previously discussed legal settlement proceeds of $226 million in 2011 to resolvea litigation matter as discussed above.Policyholder benefits and claims incurred decreased in 2012 due to the impact of higher separate account returns forcertain guaranteed benefit features of variable annuities.Interest credited to policyholder account balances decreased in 2012 as a result of ongoing actions to activelymanage interest crediting rates on new and renewal business including lower renewal credited rates, discipline onnew business pricing and re-filing products to reduce minimum rate guarantees. As a result of a comprehensivereview of reserves for the GIC portfolio, AIG Life and Retirement recorded an increase to such reserves throughinterest credited of $110 million for 2012, which partially offset the impact of crediting rate actions.Amortization of deferred acquisition costs was lower in 2012 as a result of the favorable impact of updatedassumptions for lower fixed annuity surrenders and the impact of higher separate account returns described above.For investment-type annuity products, policy acquisition and issuance costs are deferred and amortized, with interest,based on the estimated gross profits expected to be realized over the lives of the contracts. Estimated gross profits..................................................................................................................................................................................................................................102 AIG 2012 Form 10-K