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ITEM 7 / RESULTS OF OPERATIONS.....................................................................................................................................................................................AIG 2012 and 2011 ComparisonIncome from continuing operations before income taxes for 2012 and 2011 reflected the following:• pre-tax income from insurance operations of $5.6 billion in 2012, whichincluded catastrophe losses of $2.7 billion, largely arising from StormA Year of ProgressSandy, and severe losses of $326 million, compared to pre-tax income frominsurance operations of $4.8 billion in 2011, which included catastrophelosses of $3.3 billion, largely arising from Hurricane Irene, U.S. tornadoes• For the third consecutive yearand the Great Tohoku Earthquake & Tsunami in Japan (the Tohokuwe posted a full year profit.Catastrophe) and severe losses of $296 million;• increases in fair value of AIG’s interest in AIA ordinary shares of $2.1 billion • Our total AIG PropertyCasualty accident year lossand $1.3 billion in 2012 and 2011, respectively. The increase in fair value inratio, as adjusted, improved2012 included a gain on sale of AIA ordinary shares of approximately each year during the past$0.8 billion; three years.• an increase in fair value of AIG’s interest in ML III of $2.9 billion in 2012,• We enhanced spread incomecompared to a decrease in fair value of $646 million in the same period of and actively managed through2011; the low interest rateenvironment.• an increase in estimated litigation liability of approximately $783 million forthe year ended December 31, 2012 based on developments in several • Our investment portfolioactions;performance improved due tothe completion of the cash• litigation settlement income of $210 million in 2012 from settlements with deployment in 2011.three financial institutions who participated in the creation, offering and saleof RMBS from which AIG and its subsidiaries suffered losses either for theirown accounts or in connection with their participation in AIG’s securitieslending program; and• a $3.3 billion net loss, primarily consisting of the accelerated amortization ofthe remaining prepaid commitment fee asset resulting from the terminationof the credit facility provided by the FRBNY (the FRBNY Credit Facility) in2011. This was partially offset by a $484 million gain on extinguishment ofdebt in the fourth quarter of 2011 due to the exchange of subordinateddebt.For the year ended December 31, 2012, the effective tax rate on pre-tax income from continuing operations was16.8 percent. This rate differs from the statutory rate primarily due to tax benefits of $1.9 billion related to a decreasein the life-insurance-business capital loss carryforward valuation allowance and $302 million associated with taxexempt interest income. These items were partially offset by charges in uncertain tax positions of $586 million and$172 million associated with the effect of foreign operations.For the year ended December 31, 2011, the effective tax rate on pre-tax income from continuing operations was notmeaningful, due to the significant effect of releasing approximately $18.4 billion of the deferred tax asset valuationallowance. Other factors that contributed to the difference from the statutory rate included tax benefits of $454 millionassociated with tax exempt interest income, $386 million associated with the effect of foreign operations, and$224 million related to our investment in subsidiaries and partnerships.In 2012, AIG recorded a loss from discontinued operations, net of income taxes, of $4.1 billion, which included apre-tax loss of $6.7 billion on the announced sale of ILFC.After-tax operating income for 2012 was $6.6 billion compared to $2.1 billion for 2011...................................................................................................................................................................................................................................AIG 2012 Form 10-K 69