Changes in the liability for unpaid claims and claim adjustment expenses are as follows:



	2012			2011			2010
	(in millions of dollars)
Balance at January 1	$	24,586.5		$	24,339.4		$	24,585.7
Less Reinsurance Recoverable	2,042.6			2,028.2			2,179.3
Net Balance at January 1	22,543.9			22,311.2			22,406.4

Incurred Related to
Current Year	4,946.2			4,684.4			4,517.9
Prior Years
Interest	1,247.6			1,262.9			1,268.9
All Other Incurred	(175.7		)	209.1			(61.3		)
Foreign Currency	101.1			(10.9		)	(73.9		)
Total Incurred	6,119.2			6,145.5			5,651.6

Paid Related to
Current Year	(1,715.4		)	(1,588.6		)	(1,514.8		)
Prior Years	(4,386.6		)	(4,324.2		)	(4,232.0		)
Total Paid	(6,102.0		)	(5,912.8		)	(5,746.8		)

Net Balance at December 31	22,561.1			22,543.9			22,311.2
Plus Reinsurance Recoverable	2,006.0			2,042.6			2,028.2
Balance at December 31	$	24,567.1		$	24,586.5		$	24,339.4

The majority of the net balances are related to disability claims with long-tail payouts on which interest earned on assets backing liabilities is an integral part of pricing and reserving. Interest accrued on prior year reserves has been calculated on the opening reserve balance less one-half year's cash payments at our average reserve discount rate used during 2012, 2011, and 2010.

We generally perform loss recognition tests on our deferred acquisition costs and policy reserves in the fourth quarter of each year, but more frequently if appropriate, using best estimate assumptions as of the date of the test. Included in our analysis for the long-term care product line during the fourth quarter of 2011 was a review of our reserve discount rate, mortality, and morbidity assumptions. Our analysis of reserve discount rate assumptions considered the significant decline in long-term interest rates which occurred late in the third quarter of 2011 due to the European Union debt crisis and the Federal Reserve Board's actions, including the announcement of "Operation Twist." We also considered an updated industry study for long-term care experience which was made available mid-year 2011 from the Society of Actuaries. Our analysis of this study, which was completed during the fourth quarter of 2011, showed that lower termination rates than we had previously assumed were beginning to emerge in industry and in our own company experience. Based on our analysis, as of December 31, 2011 we lowered the discount rate assumption to reflect the low interest rate environment and our expectation of future investment portfolio yield rates. We also changed our mortality assumptions to reflect emerging experience due to an increase in life expectancies which increases the ultimate number of people who will utilize long-term care benefits and also lengthens the amount of time a claimant receives long-term care benefits. We changed our morbidity assumptions to reflect emerging industry experience as well as our own company experience. While our morbidity experience is still emerging and is not fully credible, we modified our assumptions to align more closely with the recently published industry study. Using our revised best estimate assumptions, as of December 31, 2011 we determined that deferred acquisition costs of $196.0 million, as adjusted for the January 1, 2012 retrospective adoption of the accounting standards update related to deferred acquisition costs, were not recoverable and that our policy and claim reserves should be increased by $573.6 million to reflect our current estimate of future benefit obligations. Of this amount, $248.1 million was related to claim reserves, and approximately $215.0 million can be attributed to prior year incurred claims, thereby impacting the results shown in the preceding chart.

In December 2011, we analyzed our reserve assumptions for individual disability closed block claim reserves. Claim reserves supporting our individual disability closed block of business are calculated using assumptions based on actual experience believed to be currently appropriate. Claim reserves are subject to revision as current claim experience emerges and alters our view of future expectations. Claim resolution rates, which measure the resolution of claims from recovery, deaths, settlements, and benefit expirations, are very sensitive to operational and environmental changes and can be volatile. Our claim resolution rate assumption used in determining reserves is our expectation of the resolution rate we will experience over the life of the block of business. We are now able, with a higher degree of confidence, to assess our own experience for older ages in our long duration lifetime claim block as our data has become credible. There is very little industry experience for lifetime disability benefits, as our insurance companies were the primary disability companies in the insurance industry at the time lifetime disability benefits were offered. These benefits were offered during the 1980s and 1990s, recent enough such that claimants are just reaching the older ages and providing us with data to build our claim experience base. Emerging experience indicates a longer life expectancy for our older age, longer duration disabled claimants, which lengthens the time a claimant receives disability benefits. As a result of this experience, as of December 31, 2011 we adjusted our mortality assumption within our claim resolution rate assumption and, as a result, increased our claim reserves for our individual disability closed block of business by $183.5 million. Of this amount, approximately $176.0 million can be attributed to prior year incurred claims, thereby impacting the results shown in the preceding chart.

"Incurred Related to Prior Years - All Other Incurred" for 2012 was generally consistent with the level of 2011, excluding the 2011 reserve charges discussed in the preceding paragraphs. Throughout the period 2010 to 2012, we had generally stable to improving claims management performance, and our claim resolution rates were fairly consistent with or slightly favorable to our long-term assumptions. Our claims management performance during 2012 for Unum US group long-term disability exceeded our long-term assumptions for claim resolution rates. For the Closed Block individual disability and long-term care lines of business, the claims management performance in 2012 was consistent with the level of 2011. Our claim resolution rate assumption used in determining reserves is our expectation of the resolution rate we will experience over the life of the block of business and will vary from actual experience in any one period, both favorably and unfavorably.

A reconciliation of policy and contract benefits and reserves for future policy and contract benefits as reported in our consolidated balance sheets to the liability for unpaid claims and claim adjustment expenses is as follows:



	December 31
	2012		2011		2010
	(in millions of dollars)
Policy and Contract Benefits	$	1,484.6	$	1,494.0	$	1,565.0
Reserves for Future Policy and Contract Benefits	44,694.4		43,051.9		39,715.0
Total	46,179.0		44,545.9		41,280.0
Less:
Life Reserves for Future Policy and Contract Benefits	7,571.1		7,454.2		7,380.7
Accident and Health Active Life Reserves	7,763.3		7,259.6		6,451.6
Unrealized Adjustment to Reserves for Future Policy and Contract Benefits	6,277.5		5,245.6		3,108.3
Liability for Unpaid Claims and Claim Adjustment Expenses	$	24,567.1	$	24,586.5	$	24,339.4

The unrealized adjustment to reserves for future policy and contract benefits reflects the changes that would be necessary to policyholder liabilities if the unrealized investment gains and losses related to the available-for-sale securities had been realized. Changes in these adjustments are reported as a component of other comprehensive income or loss.