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ITEM 7 / LIQUIDITY AND CAPITAL RESOURCES.....................................................................................................................................................................................AIG Life and Retirement..............................................................................................................................................................................................We believe that AIG Life and Retirement subsidiaries have liquidity sources adequate to satisfy future liquidityrequirements and meet their obligations, including those arising from reasonably foreseeable contingencies or events,through cash from operations and, to the extent necessary, asset dispositions. The AIG Life and Retirementsubsidiaries maintain liquidity in the form of cash and short-term investments, totaling $7.8 billion as of December 31,2012. In 2012, AIG Life and Retirement provided $2.9 billion of liquidity to AIG Parent through note repaymentsfunded by the payment of dividends from insurance subsidiaries. These payments included a $1.6 billion distributionrelating to the liquidation of ML II and a distribution of $440 million in the form of a note repayment.The need to fund product surrenders, withdrawals and maturities creates a significant potential liquidity requirementfor AIG Life and Retirement’s subsidiaries. We believe that because of the size and liquidity of our investmentportfolios, AIG Life and Retirement does not face a significant liquidity risk due to normal deviations from projectedclaim or surrender experience. As part of its risk management framework, AIG Life and Retirement continues toevaluate programs, including securities lending programs and other secured financings, to improve its liquidityposition and facilitate AIG Life and Retirement’s ability to maintain a fully invested asset portfolio.During 2012, AIG Life and Retirement began utilizing programs that lend securities from its investment portfolio tosupplement liquidity or for other uses as deemed appropriate by management. Under these programs, the AIG Lifeand Retirement subsidiaries lend securities to financial institutions and receive collateral equal to 102 percent of thefair value of the loaned securities. Reinvestment of cash collateral received is restricted to highly liquid short-terminvestments. AIG Life and Retirement’s liability to the borrower for collateral received was $3.1 billion as ofDecember 31, 2012. In addition, in 2011, certain AIG Life and Retirement insurance subsidiaries became membersof the FHLBs in their respective districts. As of December 31, 2012, AIG Life and Retirement had outstandingborrowings of $82 million from the FHLBs.In March 2011, AIG Parent entered into CMAs with certain AIG Life and Retirement insurance subsidiaries. Amongother things, the CMAs provide that AIG Parent will maintain the total adjusted capital of each of these AIG Life andRetirement insurance subsidiaries at or above a specified minimum percentage of the subsidiary’s projectedCompany Action Level RBC. As a result, the CMAs provide that if the total adjusted capital of these AIG Life andRetirement insurance subsidiaries falls below the specified minimum percentage of their respective Company ActionLevel RBC, AIG Parent will contribute cash or instruments admissible under applicable regulations to these AIG Lifeand Retirement insurance subsidiaries in the amount necessary to increase total adjusted capital to a level at leastequal to such specified minimum percentage. Any required contribution under the CMAs would generally be madeduring the second and fourth quarters of each year; however, AIG Parent may also make contributions in suchamounts and at such times as it deems appropriate.In addition, the CMAs provide that if the total adjusted capital of these AIG Life and Retirement insurancesubsidiaries is in excess of that same specified minimum percentage of their respective total company action levelRBC, subject to board approval, the subsidiaries would declare and pay ordinary dividends to their respective equityholders up to an amount that is the lesser of:• (i) the amount necessary to reduce projected or actual total adjusted capital to a level equal to or not materiallygreater than such specified minimum percentage or• (ii) the maximum amount of ordinary dividends permitted under applicable insurance law.The CMAs do not prohibit, however, the payment of extraordinary dividends, subject to board and regulatoryapproval, to reduce projected or actual total adjusted capital to a level equal to or not materially greater than thespecified minimum percentage. Any required dividend under the CMAs would generally be made on a quarterlybasis. As structured, the CMAs contemplate that the specified minimum percentage would be reviewed and agreedupon at least annually. As a result of a reduction in rating agency minimum requirements and greater capitalefficiency arising from the consolidation of legal entities, the specified minimum percentage decreased from435 percent to 385 percent effective February 19, 2013, except for the CMA with AGC Life Insurance Company,where the specified minimum percentage remained at 250 percent.For the years ended December 31, 2012 and 2011, AIG Parent received a total of approximately $2.9 billion and$1.4 billion, respectively, in distributions from AIG Life and Retirement subsidiaries in the form of note repaymentsfunded by the payment of dividends from these subsidiaries, which were made under the CMAs. AIG Parent was notrequired to make any capital contributions to AIG Life and Retirement subsidiaries in either period under the CMAsthen in place...................................................................................................................................................................................................................................128 AIG 2012 Form 10-K