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ITEM 7 / RESULTS OF OPERATIONS.....................................................................................................................................................................................2012 and 2011 ComparisonOverall, net flows were negative in 2012, primarily due to lower fixed annuity deposits resulting from the low interestrate environment. Net flows improved in 2012 for individual variable annuities due to both the increase in depositsand favorable surrender experience. Net flows improved in 2012 for retail mutual funds due to increased deposits.2011 and 2010 ComparisonNet flows improved in 2011 due to both the significant increase in deposits and favorable surrender experience ingroup retirement and individual fixed annuities. However, individual fixed annuities net flows declined in the secondhalf of the year due to lower deposits resulting from the low interest rate environment.Surrender rates for individual fixed annuities also decreased in 2011 due to the low interest rate environment and therelative competitiveness of interest credited rates on the existing block of fixed annuities versus interest rates onalternative investment options available in the marketplace. AIG Life and Retirement returned to a more normal levelof group surrender activity that no longer reflects the negative AIG publicity associated with the events of 2008 and2009. Individual variable annuities net flows improved from 2010 levels due primarily to higher deposits throughout2011 and turned positive in the fourth quarter of 2011.The following table presents reserves by surrender charge category and surrender rates:2012 2011Group Individual Individual Group Individual IndividualAt December 31,Retirement Fixed Variable Retirement Fixed Variable(in millions) Products * Annuities Annuities Products * Annuities AnnuitiesNo surrender charge $ 55,892 $ 21,528 $ 11,548 $ 53,100 $ 18,179 $ 10,0610% - 2% 1,241 2,970 4,231 1,186 2,922 4,317Greater than 2% - 4% 1,400 2,867 2,125 1,248 4,719 2,068Greater than 4% 4,879 19,609 10,318 4,060 23,372 7,764Non-surrenderable 1,278 3,757 891 815 3,084 686Total reserves $ 64,690 $ 50,731 $ 29,113 $ 60,409 $ 52,276 $ 24,896Surrender rates 8.6% 6.8% 10.3% 8.4% 6.8% 11.9%* Excludes mutual funds of $11.8 billion and $9.5 billion at December 31, 2012 and 2011, respectively.Low Interest Rate EnvironmentThere are a variety of factors that impact AIG Life and Retirement’s businesses, and the life insurance and annuityindustry in general, during a prolonged low interest rate environment. Declining interest rates result in higher fairvalues of assets backing insurance and annuity liabilities and may result in improved persistency of certain lines ofbusiness. A sustained low interest rate environment may also result in lower sales of fixed annuities and otherproducts and lower net investment spreads as portfolio cash flows are reinvested at lower rates (spreadcompression). There are a number of management actions we may take to mitigate these impacts as discussedbelow...................................................................................................................................................................................................................................108 AIG 2012 Form 10-K