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ITEM 7 / EXECUTIVE SUMMARY.....................................................................................................................................................................................Changes in Fair Value of Derivatives..............................................................................................................................................................................................To align the presentation of changes in the fair value of derivatives with changes in the administration of AIG’sderivatives portfolio, changes were made to the presentation within the Consolidated Statement of Operations andConsolidated Statement of Cash Flows. Specifically, amounts attributable to derivative activity where AIG FinancialProducts Corp. and AIG Trading Group Inc. and their respective subsidiaries (collectively AIGFP) is an intermediaryfor AIG subsidiaries have been reclassified from Other income to Net realized capital gains (losses).Liquidity and Capital Resources HighlightsIn March 2012, AIG paid down in full the $8.6 billion remaining preferred interests (the AIA SPV Preferred Interests)in the special purpose vehicle holding the proceeds of the AIA initial public offering (the AIA SPV) held by theDepartment of the Treasury.In addition, in 2012, the Department of the Treasury, as selling shareholder, sold its remaining shares of AIGcommon stock by completing five registered public offerings in March, May, August, September and December(collectively, the 2012 Offerings). The Department of the Treasury sold approximately 1.5 billion shares of AIGCommon Stock for aggregate proceeds of approximately $45.8 billion in the 2012 Offerings. We purchasedapproximately 421 million shares of AIG Common Stock at an average price of $30.86 per share for an aggregatepurchase amount of approximately $13.0 billion in the first four of the 2012 Offerings. We did not purchase anyshares in the December 2012 offering.In 2012, AIG received $10.1 billion in distributions from the FRBNY’s final disposition of ML II and ML III assets. Alsoin 2012, we sold our entire remaining interest in AIA ordinary shares for gross proceeds of approximately$14.5 billion.Additional discussion and other liquidity and capital resources developments are included in Note 17 to theConsolidated Financial Statements and Liquidity and Capital Resources herein.Investment HighlightsNet investment income increased 38 percent to $20.3 billion in 2012 compared to 2011, primarily through ourprevious investments in ML III and AIA. The overall credit rating of our fixed maturity portfolio was largely unchanged,and other-than- temporary impairments declined compared to prior year levels.• Our insurance operations achieved a $1.3 billion increase in net investment income in spite of thechallenges presented by a continuing low rate environment. Net investment income improved due to theimpact of yield enhancement initiatives and higher base yields. While corporate debt securities represented thecore of new investment allocations, we continued to focus on risk weighted opportunistic investments in residentialmortgage-backed (RMBS) and other structured securities to improve yields. These included purchases of assetssold in the ML II and ML III auctions by the FRBNY.• The unrealized appreciation of our investment portfolio grew from approximately $5.5 billion in 2011 toapproximately $10.7 billion in 2012. This was driven by declining interest rates and narrowing spreads in bothinvestment grade and high yield asset portfolios. We realized higher gains on the sales of securities compared tothe prior year as we repositioned assets to meet strategic and tactical asset allocation objectives.Other-than-temporary Impairments were lower than the prior year, in part driven by favorable developments in thehousing sector which drove strong performance in our structured products portfolios.• The overall credit ratings of our fixed maturity investments were largely unchanged from last year,reflecting a continued focus on long term risk adjusted portfolio performance...................................................................................................................................................................................................................................AIG 2012 Form 10-K 61