(13)

Unpaid losses and loss adjustment expenses

The liabilities for unpaid losses and loss adjustment expenses are based upon estimates of the ultimate claim costs associated with property and casualty claim occurrences as of the balance sheet dates including estimates for incurred but not reported (“IBNR”) claims. Considerable judgment is required to evaluate claims and establish estimated claim liabilities.

A reconciliation of the changes in liabilities for unpaid losses and loss adjustment expenses of our property/casualty insurance subsidiaries for each of the three years ending December 31, 2011 is as follows (in millions).


	2011			2010			2009
Unpaid losses and loss adjustment expenses:
Gross liabilities at beginning of year	$	60,075		$	59,416		$	56,620
Ceded losses and deferred charges at beginning of year		(6,545	)		(6,879	)		(7,133	)

Net balance at beginning of year		53,530			52,537			49,487


Incurred losses recorded during the year:
Current accident year		23,031			20,357			19,156
Prior accident years		(2,202	)		(2,270	)		(905	)

Total incurred losses		20,829			18,087			18,251


Payments during the year with respect to:
Current accident year		(9,269	)		(7,666	)		(7,207	)
Prior accident years		(8,854	)		(9,191	)		(8,315	)

Total payments		(18,123	)		(16,857	)		(15,522	)


Unpaid losses and loss adjustment expenses:
Net balance at end of year		56,236			53,767			52,216
Ceded losses and deferred charges at end of year		7,092			6,545			6,879
Foreign currency translation adjustment		(100	)		(312	)		232
Acquisitions		591			75			89

Gross liabilities at end of year	$	63,819		$	60,075		$	59,416

Incurred losses recorded during the current year but attributable to a prior accident year (“prior accident years”) reflects the amount of estimation error charged or credited to earnings in each calendar year with respect to the liabilities established as of the beginning of that year. We reduced the beginning of the year net losses and loss adjustment expenses liability by $2,544 million in 2011, $2,626 million in 2010 and $1,507 million in 2009, which excludes the effects of prior years’ discount accretion and deferred charge amortization referred to below. In 2011, the reduction in prior years’ liability estimates were primarily due to reductions in expected losses with respect to certain retroactive reinsurance contracts, as well as to lower than expected loss development in 2011 under primary private passenger auto and medical malpractice liabilities and casualty reinsurance liabilities business. In 2010 and 2009, the reductions in estimates for prior years’ were primarily due to lower than previously expected private passenger auto, commercial auto and medical malpractice losses, as well as lower than expected reported reinsurance losses in both property and casualty lines. Accident year loss estimates are regularly adjusted to consider emerging loss development patterns of prior years’ losses, whether favorable or unfavorable.

Incurred losses for prior accident years also include amortization of deferred charges related to retroactive reinsurance contracts incepting prior to the beginning of the year and the accretion of the net discounts recorded on liabilities for certain workers’ compensation claims. Amortization charges included in prior accident years’ incurred losses were $249 million in 2011, $261 million in 2010 and $504 million in 2009. Net discounted workers’ compensation liabilities at December 31, 2011 and 2010 were $2,250 million and $2,315 million, respectively, reflecting net discounts of $2,130 million and $2,269 million, respectively. The accretion of discounted liabilities related to prior accident years’ incurred losses was approximately $93 million in 2011, $95 million in 2010 and $98 million in 2009.

We are exposed to environmental, asbestos and other latent injury claims arising from insurance and reinsurance contracts. Liability estimates for environmental and asbestos exposures include case basis reserves and also reflect reserves for legal and other loss adjustment expenses and IBNR reserves. IBNR reserves are determined based upon our historic general liability exposure base and policy language, previous environmental loss experience and the assessment of current trends of environmental law, environmental cleanup costs, asbestos liability law and judgmental settlements of asbestos liabilities.

The liabilities for environmental, asbestos and latent injury claims and claims expenses net of reinsurance recoverables were approximately $13.9 billion at December 31, 2011 and $12.4 billion at December 31, 2010. These liabilities included approximately $12.3 billion at December 31, 2011 and $10.7 billion at December 31, 2010 of liabilities assumed under retroactive reinsurance contracts. The increase in liabilities in 2011 was primarily due to new retroactive reinsurance contracts entered into in 2011. Liabilities arising from retroactive contracts with exposure to claims of this nature are generally subject to aggregate policy limits. Thus, our exposure to environmental and latent injury claims under these contracts is, likewise, limited. We monitor evolving case law and its effect on environmental and latent injury claims. Changing government regulations, newly identified toxins, newly reported claims, new theories of liability, new contract interpretations and other factors could result in significant increases in these liabilities. Such development could be material to our results of operations. We are unable to reliably estimate the amount of additional net loss or the range of net loss that is reasonably possible.