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ITEM 8 / NOTE 13. LIABILITY FOR UNPAID CLAIMS AND CLAIMS ADJUSTMENT EXPENSE AND FUTURE POLICYBENEFITS FOR LIFE AND ACCIDENT AND HEALTH INSURANCE CONTRACTS AND POLICYHOLDER CONTRACT DEPOSITS.....................................................................................................................................................................................13. LIABILITY FOR UNPAID CLAIMS AND CLAIMS ADJUSTMENT EXPENSE AND FUTURE POLICYBENEFITS FOR LIFE AND ACCIDENT AND HEALTH INSURANCE CONTRACTS ANDPOLICYHOLDER CONTRACT DEPOSITS..............................................................................................................................................................................................The liability for unpaid claims and claims adjustment expense represents the accumulation of estimates of unpaidclaims, including estimates for claims incurred but not reported and claim adjustments expenses, less applicablediscount for future investment income. We continually review and update the methods used to determine loss reserveestimates and to establish the resulting reserves. Any adjustments resulting from this review are currently reflected inpre-tax income. Because these estimates are subject to the outcome of future events, changes in estimates arecommon given that loss trends vary and time is often required for changes in trends to be recognized and confirmed.Reserve changes that increase previous estimates of ultimate cost are referred to as unfavorable or adversedevelopment or reserve strengthening. Reserve changes that decrease previous estimates of ultimate cost arereferred to as favorable development.The following table presents the reconciliation of activity in the Liability for unpaid claims and claimsadjustment expense:Years Ended December 31,(in millions) 2012 2011 2010Liability for unpaid claims and claims adjustment expense, beginning of year $ 91,145 $ 91,151 $ 85,386Reinsurance recoverable (20,320) (19,644) (17,487)Net liability for unpaid claims and claims adjustment expense, beginning ofyear 70,825 71,507 67,899Foreign exchange effect 757 353 (126)Acquisitions (a) –– 1,538Dispositions (11) – (87)Changes in net loss reserves due to NICO transaction 90 (1,703) –Total 71,661 70,157 69,224Losses and loss expenses incurred (b) :Current year 25,385 27,931 24,455Prior years, other than accretion of discount (c) 421 195 4,182Prior years, accretion of discount (63) 34 (562)Total 25,743 28,160 28,075Losses and loss expenses paid (b) :Current year 9,297 11,534 9,873Prior years 19,325 15,958 15,919Total 28,622 27,492 25,792Balance, end of year:Net liability for unpaid claims and claims adjustment expense 68,782 70,825 71,507Reinsurance recoverable 19,209 20,320 19,644Total $ 87,991 $ 91,145 $ 91,151(a) Represents the acquisition of Fuji on March 31, 2010.(b) Includes amounts related to dispositions through the date of disposition.(c) In 2012, includes $262 million, $46 million and $326 million related to excess casualty, commercial specialty workers’ compensation andenvironmental, respectively. In 2011, includes $(414) million, $145 million and $413 million related to excess casualty, commercial specialty workers’compensation and environmental, respectively. In 2010, includes $1.1 billion, $793 million and $1.5 billion related to excess casualty, excessworkers’ compensation and asbestos, respectively.The net adverse development includes loss-sensitive business, for which we recognized a $54 million, $172 millionand $8 million loss-sensitive premium adjustment for the years ended December 31, 2012, 2011 and 2010,respectively.The 2010 net adverse loss development for prior accident years primarily relates to the asbestos, excess casualty,excess workers’ compensation and primary workers’ compensation. Further, this charge primarily relates to accidentyears 2007 and prior (accident years before the financial crisis in 2008) and a significant amount relates to accident2005 and prior (accident years prior to the start of the managed reduction in these long-tail lines of business). In2010, the reserve charges were primarily due to long-tail lines of business which have been reduced since 2006. In..................................................................................................................................................................................................................................AIG 2012 Form 10-K 283