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ITEM 7 / RESULTS OF OPERATIONS.....................................................................................................................................................................................2011 and 2010 Pre-tax Income ComparisonAIG Property Casualty – AIG Property Casualty generated pre-tax income in 2011 compared to a pre-tax loss in2010. The increase in pre-tax income was the result of lower underwriting losses primarily due to an increase inpremium revenues, resulting from the consolidation of Fuji commencing in the third quarter of 2010 and lower prioryear adverse development in 2011. These increases in pre-tax income were partially offset by higher catastrophelosses, and higher acquisition and general operating expenses due to a change in business mix.Pre-tax income also increased as a result of net realized gains in 2011 compared to realized capital losses in 2010due to an increase in gains on sales of securities, economic hedges and foreign exchange. In 2010, AIG PropertyCasualty recognized a bargain purchase gain from the acquisition of Fuji and a gain on divested properties.AIG Life and Retirement – Pre-tax income increased in 2011 compared to 2010 primarily due to net realized capitalgains in 2011 compared to net realized capital losses in 2010 as a result of a decline in other-than-temporaryimpairments, partially offset by lower net investment income due to lower base yields and an increase in death claimreserves in conjunction with the use of the Social Security Death Master File (SSDMF) to identify potential claims notyet filed with its life insurance companies.Other Operations – Other Operations recorded a pre-tax loss in 2011 compared to pre-tax income in 2010 due to anet gain on sale of divested businesses in 2010, primarily related to AIA.AIG Property CasualtyAIG Property Casualty 2012 HighlightsNet premiums written decreased for the year ended December 31, 2012 reflecting the continued execution of ourstrategic initiatives to improve business mix, pricing and loss performance. Declines within Commercial Insurance dueto certain lines of business that did not meet internal operating objectives were partially offset by an increase inConsumer Insurance net premiums written.The loss ratio improved by 4.4 points for the year ended December 31, 2012, due to a decrease in catastrophelosses, the benefit from positive pricing trends, the execution of our strategic initiatives and an increase in reservediscount. Catastrophe losses, adjusted for reinstatement premiums, were $2.7 billion in 2012, primarily as a result ofStorm Sandy in the fourth quarter of 2012, compared to $3.3 billion in 2011. For the years ended December 31,2012 and 2011, catastrophe losses contributed 7.5 and 9.2 points to the loss ratio, respectively. Net prior yearadverse development, including related premium adjustments was $445 million and $39 million for the years endedDecember 31, 2012 and 2011, respectively.The acquisition ratio increased by 1.8 points for the year ended December 31, 2012, primarily due to the change inbusiness mix to higher value lines and increased market competition, the restructuring of the loss-sensitive businesswith low commission rates, and changes in our reinsurance strategy, all resulting in higher commissions.The general operating expense ratio increased by 2.4 points for the year ended December 31, 2012, as we continueto build, strengthen and streamline our financial and operating systems infrastructure and control environmentthroughout the organization, particularly in financial reporting, policy and claims administration, and human resourcesas a result of our continued investment in our employees. The total costs of these initiatives were approximately$455 million for the year ended December 31, 2012, an increase of approximately $233 million from the prior year. Inaddition, bad debt expense increased by approximately $143 million from the prior year.Net investment income increased by 11.0 percent for the year ended December 31, 2012, due to asset diversificationby reducing the concentration in tax-exempt municipal instruments and increasing investments in private placementdebt and structured securities...................................................................................................................................................................................................................................AIG 2012 Form 10-K 73