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ITEM 7 / EXECUTIVE SUMMARY.....................................................................................................................................................................................• Delinquent inventory review – During 2011 and 2012, UGC requested that lenders file claims, in accordance withthe terms of the respective master policies, on approximately 21,000 accounts that had been delinquentapproximately 24 months or more and were not expected to cure. Many of these delinquencies were the result ofthe foreclosure moratorium discussed below. Through December 31, 2012, UGC received responses toapproximately 96 percent of these requests. While accelerating the payment of claims, these requests alsoimpacted the cure rate of the delinquent inventory which in turn impacted UGC’s estimate of reserve for loss andloss adjustment expenses. During 2013, reserve development may continue to have an impact on the business.UGC expects that newly reported delinquent loans will continue to decline during 2013 and that the delinquentinventory will decline further albeit at a slower rate than in 2012. However, the extent of the decline indelinquencies and the number of newly reported delinquencies is dependent on the prevailing macroeconomicconditions and the extent that the domestic economy does or does not improve. UGC will closely monitor thesetrends and the impact on its incurred loss and loss expenses in 2013.• Foreclosure delays – Since 2010, a variety of servicing practices have come to light that have delayed theforeclosure process in many states. Some of these practices, such as the ‘‘robo-signing’’ of affidavits in judicialforeclosures, have resulted in government investigations into lenders’ foreclosure practices. These developmentshave slowed the reporting of foreclosures, which has in turn slowed the filing of mortgage insurance claims andincreased the uncertainty surrounding the determination of the liability for losses and loss adjustment expenses.UGC’s assumptions regarding future foreclosures on current delinquencies take into consideration this trend,although significant uncertainty remains surrounding the determination of the liability for unpaid claims and claimsadjustment expenses. UGC expects that this trend may continue for 2013 and may negatively affect UGC’s futurefinancial results. Final resolution of these issues is uncertain and UGC cannot reasonably estimate the ultimatefinancial impact that any resolution, individually or collectively, may have on its future results of operations orfinancial condition.Global Capital Markets (GCM)..............................................................................................................................................................................................AIG Markets acts as the derivatives intermediary between AIG and its subsidiaries and third parties to providehedging services. The derivative portfolio of AIG Markets consists primarily of interest rate and currency derivatives.The remaining derivatives portfolio of AIGFP consists primarily of hedges of the assets and liabilities of the DIB anda portion of the legacy hedges for AIG and its subsidiaries. Future hedging needs for AIG and its subsidiaries will beexecuted through AIG Markets. AIGFP’s derivative portfolio consists primarily of interest rate, currency, credit,commodity and equity derivatives. Additionally, AIGFP has a credit default swap portfolio being managed foreconomic benefit and with limited risk. The AIGFP portfolio continues to be wound down and is managed consistentwith our risk management objectives. Although the portfolio may experience periodic fair value volatility, it consistspredominantly of transactions that we believe are of low complexity, low risk or currently not economically appropriateto unwind based on a cost versus benefit analysis.Direct Investment Book (DIB)..............................................................................................................................................................................................The DIB portfolio is being wound down and is managed with the objective of ensuring that at all times it maintainsthe liquidity we believe is necessary to meet all its liabilities, as they come due, even under stress scenarios and tomaximize return consistent with our risk management objectives. We are focused on meeting the DIB’s liquidityneeds, including the need for contingent liquidity arising from collateral posting for debt positions of the DIB withoutrelying on resources beyond the DIB. As part of this program management, we may from time to time access thecapital markets, subject to market conditions. In addition, we may seek to buy back debt or sell assets on anopportunistic basis, subject to market conditions.From time to time, we may utilize cash allocated to the DIB that is not required to meet the risk target for generalcorporate purposes unrelated to the DIB.Certain non-derivative assets and liabilities of the DIB are accounted for under the fair value option and thusoperating results are subject to periodic market volatility. The overall hedging activity for the assets and liabilities ofthe DIB is executed by GCM. The value of hedges related to the non-derivative assets and liabilities of AIGFP in theDIB are included within the assets and liabilities and operating results of GCM and are not included within the DIBoperating results, assets or liabilities...................................................................................................................................................................................................................................AIG 2012 Form 10-K 67