8. Unpaid Losses and Loss Expenses and Policy Benefits for Life and Annuity Contracts

Unpaid losses and loss expenses are categorized into three types of reserves: reported outstanding loss reserves (case reserves), additional case reserves (ACRs) and incurred but not reported (IBNR) reserves. Case reserves represent unpaid losses reported by the Company's cedants and recorded by the Company. ACRs are established for particular circumstances where, on the basis of individual loss reports, the Company estimates that the particular loss or collection of losses covered by a treaty may be greater than those advised by the cedant. IBNR reserves represent a provision for claims that have been incurred but not yet reported to the Company, as well as future loss development on losses already reported, in excess of the case reserves and ACRs. The following table shows the Company's gross liability for unpaid losses and loss expenses reported by cedants (case reserves) and those estimated by the Company (ACRs and IBNR reserves) at December 31, 2012 and 2011 (in thousands of U.S. dollars):

The table below is a reconciliation of the beginning and ending gross and net liability for unpaid losses and loss expenses, excluding policy benefits for life and annuity contracts, for the years ended December 31, 2012, 2011 and 2010 (in thousands of U.S. dollars):

		2012		2011		2010

Gross liability at beginning of year	$	11,273,091	$	10,666,604	$	10,811,483
Reinsurance recoverable at beginning of year		353,105		348,747		336,352

Net liability at beginning of year		10,919,986		10,317,857		10,475,131

Net incurred losses related to:
Current year		2,785,694		4,252,766		3,137,874
Prior years		(628,065)		(530,457)		(477,883)

		2,157,629		3,722,309		2,659,991

Change in Paris Re Reserve Agreement		(86,163)		(61,383)		(66,783)

Net paid losses related to:
Current year		237,783		930,407		311,253
Prior years		2,467,279		2,060,152		2,267,765

		2,705,062		2,990,559		2,579,018
Effects of foreign exchange rate changes		131,651		(68,238)		(171,464)

Net liability at end of year		10,418,041		10,919,986		10,317,857
Reinsurance recoverable at end of year		291,330		353,105		348,747

Gross liability at end of year	$	10,709,371	$	11,273,091	$	10,666,604

The table below is a reconciliation of losses and loss expenses including life policy benefits for the years ended December 31, 2012, 2011 and 2010 (in thousands of U.S. dollars):

		2012		2011		2010

Net incurred losses related to:
Non-life	$	2,157,629	$	3,722,309	$	2,659,991
Life		646,981		650,261		623,627

Losses and loss expenses and life policy benefits	$	2,804,610	$	4,372,570	$	3,283,618

The following table summarizes the net favorable prior year loss development for each of the Company's Non-life sub-segments for the years ended December 31, 2012, 2011 and 2010 (in thousands of U.S. dollars):

			2012		2011		2010

Net favorable prior year loss development:
Non-life sub-segment
	North America	$	218,483	$	189,180	$	165,780
	Global (Non-U.S.) P&C		114,279		115,995		97,539
	Global (Non-U.S.) Specialty		250,523		128,975		170,931
	Catastrophe		44,780		96,307		43,633

Total net favorable prior year loss development		$	628,065	$	530,457	$	477,883

Within the Company's North America sub-segment, the Company reported net favorable loss development for prior accident years in 2012, 2011 and 2010. The net favorable loss development for prior accident years in 2012 was driven by most lines of business, with the casualty line of business being the most pronounced. The net favorable loss development for prior accident years in 2011 was driven by most lines of business, predominantly the casualty line, while the credit/surety and motor lines experienced combined adverse loss development for prior accident years of $11 million. The net favorable loss development for prior accident years in 2010 was driven by most lines of business, predominantly the casualty and agriculture lines, while the motor line of business experienced adverse loss development for prior accident years of $8 million. The net favorable loss development in each year was primarily due to favorable loss emergence.

For the Global (Non-U.S.) P&C sub-segment, the Company reported net favorable loss development for prior accident years in 2012, 2011 and 2010. The net favorable loss development for prior accident years in 2012 and 2010 was driven by all lines of business, and was most pronounced in the property line. The net favorable loss development for prior accident years in 2011 was driven by all lines of business, and was most pronounced in the motor line. The net favorable loss development in each year was primarily due to favorable loss emergence.

For the Global (Non-U.S.) Specialty sub-segment, the Company reported net favorable loss development for prior accident years in 2012, 2011 and 2010. The net favorable loss development for prior accident years in 2012 was driven by most lines of business, predominantly the specialty property, aviation/space and marine lines, while the engineering line experienced adverse loss development for prior accident years of $6 million. The net favorable loss development for prior accident years in 2011 was driven by most lines of business, except for the energy and engineering lines, which experienced combined adverse loss development for prior accident years of $13 million. The net favorable loss development for prior accident years in 2010 was driven by all lines of business, except for the specialty casualty line, which experienced adverse loss development for prior accident years of $37 million. The net favorable loss development in each year was primarily due to favorable loss emergence.

For the Catastrophe sub-segment, the Company reported net favorable loss development for prior accident years in 2012, 2011 and 2010. The net favorable loss development in each year was primarily due to favorable loss emergence.

Following Paris Re's acquisition of substantially all of the reinsurance operations of Colisée Re in 2006, Paris Re's French operating subsidiary (Paris Re France) entered into a reserve agreement (Reserve Agreement), which provides that AXA and Colisée Re shall guarantee reserves in respect of Paris Re France and subsidiaries acquired in the acquisition. The Reserve Agreement relates to losses incurred prior to December 31, 2005. Accordingly, the Company's Consolidated Statements of Operations do not include any favorable or adverse development related to these guaranteed reserves. The reserve guarantee provided by AXA and Colisée Re is conditioned upon, among other things, the guaranteed business, including all related ceded reinsurance, being managed by AXA Liabilities Managers, an affiliate of Colisée Re.

Favorable or adverse development related to the guaranteed reserves is recorded as a change in unpaid losses and loss expenses in the Consolidated Balance Sheets and as a change in the Reserve Agreement payable or receivable balance to/from Colisée Re, which is included within Other reinsurance balances payable in the Consolidated Balance Sheets. Accordingly, the reconciliation of the beginning and ending gross and net liability for unpaid losses and loss expenses for the years ended December 31, 2012, 2011 and 2010 includes the change in the Reserve Agreement. At December 31, 2012 and 2011, the Company's net liability for unpaid losses and loss expenses includes $857 million and $1,012 million, respectively, of guaranteed reserves and Other reinsurance balances payable includes $12 million and $183 million, respectively, payable to Colisée Re related to the Reserve Agreement. During the year ended December 31, 2012, pursuant to the Reserve Agreement, the Company settled the payable to Colisée Re of approximately $265 million based on the estimated cumulative balance of net favorable prior year loss development related to the guaranteed reserves (see Note 5 for additional information).

A significant amount of judgment was used to estimate the range of potential losses related to the earthquakes that occurred in New Zealand in September 2010, February 2011 and June 2011 (the 2010 and the February and June 2011 New Zealand Earthquakes) and the Japan Earthquake and there remains a considerable degree of uncertainty related to the range of possible ultimate losses. These risks and uncertainties include the ongoing cedant revisions of loss estimates for each of these events, the degree to which inflation impacts construction materials required to rebuild affected properties, the characteristics of the Company's program participation for certain affected cedants and potentially affected cedants, and the expected length of the claims settlement period for these events. In addition, there is additional complexity related to the 2010 and the February and June 2011 New Zealand Earthquakes given multiple earthquakes have occurred in the same region in a relatively short time period, resulting in cedants continuing to revise their allocation of losses between the various events impacting different treaties, under which the Company may provide different amounts of coverage. Loss estimates arising from earthquakes are inherently more uncertain than those from other catastrophic events and the Company believes there remains a high degree of uncertainty related to its loss estimates for the 2010 and the February and June 2011 New Zealand Earthquakes and the Japan Earthquake, and the ultimate losses arising from these events may be materially in excess of, or less than, the amounts provided for in the Consolidated Balance Sheet at December 31, 2012.

The Company's net reserves for unpaid losses and loss expenses at December 31, 2012 and 2011 included $199 million and $195 million, respectively, that represent estimates of its net ultimate liability for asbestos and environmental claims. The gross liability for such claims at December 31, 2012 and 2011 was $205 million and $203 million, respectively, which primarily relate to Paris Re's gross liability for asbestos and environmental claims for accident years 2005 and prior of $125 million and $127 million, respectively, with any favorable or adverse development being subject to the Reserve Agreement. Of the remaining $80 million and $76 million, respectively, in gross reserves, the majority relates to casualty exposures in the United States arising from business written by PartnerRe SA and PartnerRe U.S.

Ultimate loss estimates for such claims cannot be estimated using traditional reserving techniques and there are significant uncertainties in estimating the amount of the Company's potential losses for these claims. In view of the legal and tort environment that affect the development of such claims, the uncertainties inherent in estimating asbestos and environmental claims are not likely to be resolved in the near future. There can be no assurance that the reserves established by the Company will not be adversely affected by development of other latent exposures, and further, there can be no assurance that the reserves established by the Company will be adequate. The Company does, however, actively evaluate potential exposure to asbestos and environmental claims and establishes additional reserves as appropriate. The Company believes that it has made a reasonable provision for these exposures and is unaware of any specific issues that would materially affect its unpaid losses and loss expense reserves related to this exposure.

The Life segment reported net favorable loss development for prior accident years of $14 million and $1 million for the years ended December 31, 2012 and 2011, respectively, and net adverse loss development for prior accident years of $12 million for the year ended December 31, 2010.

The net favorable prior year loss development of $14 million in 2012 was primarily due to the guaranteed minimum death benefit (GMDB) business, mainly driven by improvements in the capital markets, and certain short-term treaties in the mortality line of business.

The modest net favorable prior year loss development of $1 million in 2011 was the net result of favorable prior year loss development of $6 million on certain mortality treaties and $5 million related to the GMDB business, which were almost entirely offset by adverse prior year loss development related to disability riders on certain short-term non-proportional treaties in the mortality line following the receipt of updated information from cedants.

The net adverse prior year loss development of $12 million in 2010 was primarily driven by adverse development of $23 million due to an improvement in the mortality trend related to an impaired life annuity treaty in the longevity line and adverse development on certain mortality treaties. This adverse development was partially offset by favorable prior year loss development of $17 million resulting from the GMDB business, which was driven by new cedant information and updated assumptions.

The Company used interest rate assumptions to estimate its liabilities for policy benefits for life and annuity contracts which ranged from 0.2% to 6.6% and 1.0% to 7.0% at December 31, 2012 and 2011, respectively.