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ITEM 7 / RESULTS OF OPERATIONS.....................................................................................................................................................................................2012 and 2011 ComparisonAIG Property Casualty ResultsOperating income increased in 2012, primarily due to a decrease in catastrophe losses to $2.7 billion from$3.3 billion in the prior year. In addition, net investment income increased due to asset diversification, fromconcentration in tax-exempt municipal instruments into investments in private placement debt and structuredsecurities. This was slightly offset by an increase in acquisition costs due to the change in business mix to highervalue lines of business and the change in business mix from Commercial Insurance to Consumer Insurance. Generaloperating expenses increased due to the continued investment in strategic initiatives and human resources, as aresult of AIG’s continued investment in its employees. For the year ended December 31, 2012, investments instrategic initiatives totaled approximately $455 million, representing an increase of approximately $233 million overthe prior year. In addition, bad debt expense increased by approximately $143 million from the prior year. Net prioryear adverse development, including premium adjustments, was $445 million for 2012 compared to $39 million for2011.Commercial Insurance ResultsOperating income decreased in 2012, primarily due to a decrease in allocated net investment income reflecting adecrease in the risk-free rate. Underwriting losses increased slightly compared to the prior year, reflecting lowercatastrophe and improved current accident year losses, the effect of rate increases and enhanced risk selection, andan increase in reserve discount of $100 million, offset by higher acquisition and general operating expenses, andhigher adverse prior year development.Acquisition costs increased primarily as a result of higher commission expense due to the restructuring of the U.S.Casualty, primarily loss-sensitive business, as we move towards higher value lines. General operating expensesincreased due to an increase in bad debt expense of approximately $143 million and investments in strategicinitiatives.Consumer Insurance ResultsConsumer Insurance generated operating income in 2012 compared to an operating loss in 2011, reflecting areduction in underwriting loss as well as an increase in allocated net investment income resulting primarily from thestrategic group benefits partnership with AIG Life and Retirement. Underwriting results improved due to thecombination of lower catastrophe losses, favorable loss reserve development, the effect of rate increases, enhancedrisk selection and portfolio management. These improvements were offset in part by higher acquisition and generaloperating expenses.Acquisition costs increased primarily due to an increase in warranty profit sharing arrangements, increasedinvestment in direct marketing, and a decrease of approximately $49 million in the benefit from the amortization ofVOBA liabilities recognized at the time of the Fuji acquisition. General operating expenses increased in 2012 due toinvestments in infrastructure and strategic expansion in growth economy nations.2011 and 2010 ComparisonAIG Property Casualty ResultsWe recognized operating income in 2011 compared to an operating loss in 2010 primarily due to an increase inpremium revenues, partially offset by higher acquisition and general operating expenses. Prior year adverse lossdevelopment, net of premium adjustments, decreased from $4.8 billion in 2010 to $39 million in 2011. Catastrophelosses were $3.3 billion in 2011 compared to $1.1 billion in 2010.Acquisition and general operating expenses increased in 2011, primarily due to the effect of including Fuji results fora full year. General operating expenses also increased due to investments in a number of strategic initiatives during2011, including the implementation of improved regional governance and risk management capabilities, theimplementation of global accounting and claims systems, preparation for Solvency II and certain other legal entityrestructuring initiatives...................................................................................................................................................................................................................................76 AIG 2012 Form 10-K