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ITEM 7 / RESULTS OF OPERATIONS.....................................................................................................................................................................................In December of 2012, we recorded litigation settlement income from settlements with three financial institutions whoparticipated in the creation, offering and sale of RMBS as to which AIG and its subsidiaries suffered losses eitherdirectly on their own account or in connection with their participation in AIG’s securities lending program.Mortgage Guaranty..............................................................................................................................................................................................The following table presents pre-tax income for Mortgage Guaranty:Years Ended December 31,Percentage Change(in millions) 2012 2011 2010 2012 vs. 2011 2011 vs. 2010Underwriting results:Net premiums written $ 858 $ 801 $ 756 7% 6%(Increase) decrease in unearned premiums (143) (9) 219 NM NMNet premiums earned 715 792 975 (10) (19)Claims and claims adjustment expenses incurred 659 834 500 (21) 67Underwriting expenses 193 187 271 3 (31)Underwriting profit (loss) (137) (229) 204 40 NMNet investment income 146 132 149 11 (11)Operating income (loss) 9 (97) 353 NM NMNet realized capital gains 6 20 44 (70) (55)Pre-tax income (loss) $ 15 $ (77) $ 397 NM% NM%2012 and 2011 ComparisonMortgage Guaranty recorded operating income in 2012 compared to an operating loss in 2011 primarily due to:• a decrease in claims and claims adjustment expenses of $175 million. This reflects decreases in first andsecond-lien businesses of $95 million and $110 million, respectively, which were partially offset by an increase ininternational claims and claims adjustment expenses of $34 million. Claims and claims adjustment expenses in2012 included favorable prior year loss development of $78 million, which consists of $45 million in second liens,$17 million in student loans and $33 million in the international business partially offset by unfavorabledevelopment in first liens of $17 million. This favorable prior year development was offset by current accident yearlosses attributable to business written in 2008 and prior;• the $95 million decrease in first-lien claims and claims adjustment expenses reflected 20 percent lower levels ofnewly reported delinquencies, an improvement in the cure rate and lower unfavorable loss development of$17 million in 2012 compared to $76 million of unfavorable development in 2011. The unfavorable development of$17 million in 2012, included $117 million of favorable development arising from the claims requests sent tolenders mentioned above, offset by $134 million of unfavorable development on delinquencies for which claimrequests were not made;• the $110 million decline in second-lien business claims and claims adjustment expenses. This reflected a decreasein claims and claims adjustment expenses paid as more business reached the respective stop loss limits; and• the increased claims and claims adjustment expenses in the international business. This reflected a reduction inclaim reserves in 2011 due to a settlement of certain delinquencies with a major European lender that resulted in a$43 million benefit.These items were partially offset by:• a decline in first-lien earned premiums of $19 million reflecting higher premium refunds due to the rescissionsarising from the claims requests sent to lenders during the fourth quarter of 2011 and continuing throughout 2012,as discussed in Outlook herein, in addition to the declining persistency on the 2008 and prior policy years;..................................................................................................................................................................................................................................112 AIG 2012 Form 10-K