Unpaid losses and loss expenses for the indicated years ended December 31 are comprised of:

(U.S. dollars in thousands)	2012		2011
Reserve for reported losses and loss expenses	$	7,976,121	$	8,153,585
Reserve for losses incurred but not reported		12,508,000		12,460,316
Unpaid losses and loss expenses	$	20,484,121	$	20,613,901

(U.S. dollars in thousands)	2012		2011		2010
Loss and loss expenses payments	$	4,673,997	$	4,911,737	$	4,309,523
Change in unpaid losses and loss expenses		(297,660)		260,631		(141,589)
Change in unpaid losses and loss expenses recoverable		279,900		(28,442)		(117,120)
Paid loss recoveries		(890,755)		(1,065,535)		(839,014)
Net losses and loss expenses incurred	$	3,765,482	$	4,078,391	$	3,211,800

The following table represents an analysis of the Company's paid and unpaid losses and loss expenses incurred and a reconciliation of the beginning and ending unpaid losses and loss expenses for the years indicated:

(U.S. dollars in thousands)		2012		2011		2010
Unpaid losses and loss expenses at the beginning of the year		$	20,613,901	$	20,531,607	$	20,823,524
Unpaid losses and loss expenses recoverable			3,629,928		3,649,290		3,557,391
Net unpaid losses and loss expenses at the beginning of the year		$	16,983,973	$	16,882,317	$	17,266,133
Increase (decrease) in net losses and loss expenses incurred in respect of losses occurring in:
	Current year		4,081,377		4,363,258		3,584,662
	Prior year		(315,895)		(284,867)		(372,862)
	Total net incurred losses and loss expenses	$	3,765,482	$	4,078,391	$	3,211,800
Exchange rate effects			156,206		(130,533)		(125,107)
Less net losses and loss expenses paid in respect of losses occurring in:
	Current year		416,844		589,870		442,262
	Prior year		3,366,398		3,256,332		3,028,247
	Total net paid losses	$	3,783,242	$	3,846,202	$	3,470,509
Net unpaid losses and loss expenses at the end of the year			17,122,419		16,983,973		16,882,317
Unpaid losses and loss expenses recoverable			3,361,702		3,629,928		3,649,290
Unpaid losses and loss expenses at the end of the year		$	20,484,121	$	20,613,901	$	20,531,607

Current year net losses incurred decreased by $281.9 million in 2012 as compared to 2011. This was mainly as a result of the current year loss ratio excluding prior year development decreasing by 11.1 loss percentage points due to lower losses from natural catastrophes as compared to 2011. In addition, the current year loss ratio excluding natural catastrophes improved in both the Insurance and Reinsurance segments due to lower large property risk losses, as well as business mix changes and other underwriting improvements.

Current year net losses incurred increased by $778.6 million in 2011 as compared to 2010. This was mainly as a result of the current year loss ratio excluding prior year development increasing by 10.7 loss percentage points due to higher losses from natural catastrophes as compared to 2010, but also from the following: (i) the Insurance segment in 2011 experienced higher large loss activity in the energy, property and marine businesses, as compared to 2010; and (ii) the Reinsurance segment in 2011 experienced higher levels of large loss events in U.S. property including a deterioration in the performance of a large U.S. agricultural program, higher attritional losses as well as business mix changes, as compared to 2010.

The following table presents the net (favorable) adverse prior year loss development of the Company's loss and loss expense reserves for its property and casualty operations by operating segment for each of the years indicated:

The significant developments in prior year loss reserve estimates for each of the years indicated within the Company's Insurance and Reinsurance segments are discussed below.

The following table summarizes the net (favorable) adverse prior year development by line of business relating to the Insurance segment for the last three years ended December 31:

(U.S. dollars in thousands)	2012		2011		2010
Property	$	(46,733)	$	(8,922)	$	(23,525)
Casualty		(61,633)		34,500		28,987
Professional		(106,368)		(87,520)		(118,552)
Specialty		(61,761)		(71,285)		(66,278)
Other		136,428		56,711		51,957
Total	$	(140,067)	$	(76,516)	$	(127,411)

Net favorable prior year reserve development for the Insurance Segment of $140.1 million for the year ended December 31, 2012 was mainly attributable to the following:

• For property lines, net prior year development during the year was $46.7 million favorable. This was driven by a release of $26.5 million for the non-catastrophe exposures in the general property, energy and construction books due to better than expected reported loss experience predominantly in the 2011 accident year. It was also driven by releases totaling $19.6 million for the catastrophe exposures, with $12.5 million and $6.1 million arising from the 2010 and 2011 accident years, respectively.

• For casualty lines, net prior year development during the year was $61.6 million favorable. This was driven by a release of $25.5 million in international primary casualty due to better than expected reported loss experience. The primary casualty releases relate to the 2006 to 2011 accident years. There was also a release of $50.7 million in the excess casualty lines due primarily to better than expected reported loss experience, the majority of which relates to the 2005 and prior accident years. The releases in primary and excess casualty were partially offset by an increase of $15.7 million in U.S. middle markets due to worse than expected reported loss experience primarily in the 2006 to 2011 accident years.

• For professional lines, net prior year development during the year was $106.4 million favorable. This was driven by releases in reserves for clash losses (which cover a number of substantially similar claims against multiple policyholders) in the U.S. and Bermuda core professional businesses totaling $120.8 million. This is comprised of $44.2 million and $37.0 million released from the 2010 and 2011 report years, respectively, to reflect the limited clash events for these years. In addition, $48.4 million was released from the 2007 report year to reflect that subprime claims are developing better than expected. Finally, the 2006 and prior report years were strengthened by $8.8 million to reflect the unfavorable reported loss experience across these years.

In terms of non-clash losses in the core professional businesses, $18.2 million and $19.8 million was released from the U.S. and Bermuda books, respectively, due to better than expected reported loss experience while the International core book was strengthened by $39.5 million due to unfavorable reported loss experience. Although this led to a relatively immaterial $1.5 million strengthening in aggregate across the core professional businesses, this resulted in strengthening between the 2009 and 2011 report years offset by releases in the 2008 and prior report years.

Offsetting the above, the Design portfolio, covering architects' and engineers' professional liability, was strengthened by $22.9 million due to worse than expected reported loss experience in the Canadian book partially offset by a release of $9.6 million in the U.S. book as a result of favorable reported loss experience.

• For specialty lines, net prior year development during the year was $61.8 million favorable. This was driven by releases of $44.0 million, $4.5 million and $4.0 million for the non-catastrophe exposures in aerospace, specie and product recall, respectively, due to continued better than expected reported loss experience in the more recent accident years. It was also driven by a release of $8.6 million in the London Market discontinued political risk book reflecting the limited remaining exposures on this mature portfolio.

• For other lines, net prior year development during the year was $136.4 million unfavorable. Continued adverse reported loss experience in the excess and surplus lines led to a strengthening of $80.4 million between the 2006 and 2011 accident years. This was primarily driven by strengthening of $36.5 million and $38.4 million in the Apartments and New York Contractors books respectively. The discontinued surety book was strengthened by $44.9 million based on recent settlements while a claims audit led to an increase of $11.8 million in programs predominantly in the more recent accident years.

Net favorable prior year reserve development for the Insurance segment of $76.5 million (corresponding gross development was $23.1 million unfavorable) for the year ended December 31, 2011 was mainly attributable to releases of $87.5 million in professional lines, $71.3 million for specialty lines and $8.9 million for property lines partially offset by strengthening of $34.5 million for casualty lines and $56.7 million for other lines. The professional lines benefitted from releases in reserves for clash losses totaling $88.5 million. Better than expected reported loss experience in the marine, aerospace, specie and discontinued lines led to the release in the specialty lines while the property lines benefited from better than expected reported loss activity for the non-catastrophe exposures. The strengthening in the casualty lines mainly related to adverse development on large excess casualty claims associated with the Deepwater Horizon event in the 2010 accident year totaling $135.6 million gross and $33.4 million net. Adverse development in the excess and surplus lines and run-off surety book of business led to the unfavorable result in other lines.

Net favorable prior year reserve development for the Insurance segment of $127.4 million for the year ended December 31, 2010 was mainly attributable to releases of $118.6 million in professional lines, $66.3 million for specialty lines and $23.5 million for property lines partially offset by strengthening of $29.0 million for casualty lines and $52.0 million for other lines. The favorable professional lines result was driven by lower than expected actual losses in the core professional businesses totaling $216.3 million partially offset by unfavorable development of $63.7 million in the U.S. Private Commercial lines, $27.4 million in the Select portfolio and $6.2 million in the Design portfolio. Lower than expected actual losses in the aerospace, marine, specie, equine and discontinued lines led to the release in the specialty lines while the property lines benefited from lower than expected actual losses for the non-catastrophe exposures. The strengthening in the casualty lines was driven by unfavorable development of $45.1 million in the U.S. risk management lines and $15.5 million in the environmental lines partially offset by a $26.0 million decrease in the uncollectible reinsurance reserve from reduced exposures and lower estimated risk levels from the Swiss operations. An unfavorable settlement in the surety lines and an unfavorable commutation in the financial lines led to the adverse result in other lines.

There is no assurance that conditions and trends that have affected the development of liabilities in the past will continue. Accordingly, it may not be appropriate to extrapolate future redundancies or deficiencies based on the Company's historical results.

The following table summarizes the net (favorable) adverse prior year development by line of business relating to the Reinsurance segment for the last three years ended December 31:

Net favorable prior year reserve development for the Reinsurance segment of $175.8 million for the year ended December 31, 2012 was mainly attributable to the following:

• Net favorable prior year development during the year of $107.6 million for the short-tailed lines and details of these by specific lines are as follows:

• For property catastrophe lines, net prior year development during the year was $16.5 million favorable mainly driven by lower than expected incurred losses for the 2011 and 2005 catastrophe losses on the Bermuda book.

• For property other lines, net prior year development during the year was $49.0 million favorable mainly due to favorable claim development on the International, North America and Bermuda books offset by some unfavorable claim development on the Latin America book.

• For marine and aviation lines, net prior year development during the year was $42.2 million favorable due mainly to favorable attritional development of $27.3 million on the International book together with $6.1 million release on prior year large losses. There is an additional $4.9 million favorable prior year development in Bermuda and $4.1 million favorable prior year development in North America.

• Net favorable prior year development during the year of $68.2 million for the long-tailed lines and details of these by specific lines are as follows:

• For casualty lines, net prior year development during the year was $60.3 million favorable arising mainly out of the North America book due to more favorable than expected development on the 2003 and 2004 underwriting years.

• For other lines, net prior year development during the year was $7.9 million favorable mainly driven by $8.4 million release on the Structured Indemnity book.

Net favorable prior year reserve development for the Reinsurance segment of $208.4 million for the year ended December 31, 2011 was attributable to a net favorable prior year development of $64.3 million for the short-tailed lines and a net favorable prior year development of $144.1 million for the long-tailed lines. The net favorable prior year development for short-tailed was explained by $37.3 million in favorable property catastrophe development, by $40.5 million in favorable property other lines releases and was partially offset by $13.5 million in unfavorable marine and aviation development. The net favorable prior year development for long-tailed lines was explained by $109.4 million in favorable casualty lines development and by additional $34.7 million in favorable other lines development mainly due to reserve releases on whole account treaties written on Lloyd's syndicates for the 2008 underwriting year as well as releases on large losses and trade credit.

Net favorable prior year reserve development for the Reinsurance segment of $245.5 million for the year ended December 31, 2010 was attributable to a net favorable prior year development of $145.8 million for the short-tailed lines and a net favorable prior year development of $99.7 million for the long-tailed lines. The net favorable prior year development for short-tailed lines was explained by $35.6 million net in favorable property catastrophe development, by $87.4 million in favorable property other lines releases and by additional $22.8 million net in favorable marine and aviation development. The net favorable prior year development for long-tailed lines was explained by $25.2 million in favorable casualty and professional development and by additional $74.5 million in favorable other lines development is mainly driven by reserve releases on whole account treaties written in Lloyd's syndicates.

Exchange rate effects on net loss reserves in each of the three years ended December 31, 2012, 2011 and 2010 related to our global operations primarily where reporting units have a functional currency that is not the U.S. dollar. In 2012, the U.S. dollar was weaker against the major currencies to which we are exposed, including the U.K. sterling, the Euro and the Swiss franc. In 2011, the U.S. dollar was stronger against U.K. sterling, the Euro, the Brazilian real and the Swiss franc, which more than offset losses that were driven by a stronger Australian dollar. In 2010, the U.S. dollar was stronger against the Euro, while weaker against the Swiss franc, Canadian dollar and Brazilian real. These movements in the U.S. dollar gave rise to translation and revaluation exchange movements related to carried loss reserve balances of $156.2 million, $(130.5) million and $(125.1) million in the years ended December 31, 2012, 2011 and 2010, respectively.

Total net paid losses were $3.8 billion, $3.8 billion and $3.5 billion in 2012, 2011 and 2010, respectively.

The Company did not dispose of or acquire net loss reserves in 2012, 2011 or 2010.

The Company's net incurred losses and loss expenses include actual and estimates of potential non-recoveries from reinsurers. As at December 31, 2012 and 2011, the reserve for potential non-recoveries from reinsurers was $107.9 million and $99.2 million, respectively. For further information, see Note 9, “Reinsurance.”

Except for certain workers' compensation (including long term disability) liabilities and certain U.K. motor liability claims, the Company does not discount its unpaid losses and loss expenses.

The Company utilizes tabular reserving for workers' compensation (including long-term disability) unpaid losses that are considered fixed and determinable, and discounts such losses using an interest rate of 5% in 2012 and 2011. The interest rate approximates the average yield to maturity on specific fixed income investments that support these liabilities. The tabular reserving methodology results in applying uniform and consistent criteria for establishing expected future indemnity and medical payments (including an explicit factor for inflation) and the use of mortality tables to determine expected payment periods. Tabular unpaid losses and loss expenses, net of reinsurance, at December 31, 2012 and 2011 on an undiscounted basis were $645.2 million and $612.9 million, respectively. The related discounted unpaid losses and loss expenses were $343.0 million and $290.3 million at December 31, 2012 and 2011, respectively.

The Company records a specific reserve allowance for Periodical Payment Orders (“PPO”) in the U.K. motor liabilities. This allowance includes the unpaid losses for claims already settled and notified as PPO at December 31, 2012, as well as the unpaid losses for claims to be settled in the future. The future care element of the unpaid losses were discounted using an interest rate of 1.5% at December 31, 2012 reduced from 2% at December 31, 2011 to reflect the increased reserve and the yields obtained on the additional purchase of assets. Unpaid losses and loss expenses, net of reinsurance, at December 31, 2012 and 2011 on an undiscounted basis were $240.0 million and $52.8 million, respectively. After discounting of the future care element the unpaid losses and loss expenses were $148.6 million and $29.6 million at December 31, 2012 and 2011, respectively. The increase in net undiscounted unpaid losses and loss expenses between December 31, 2011 and December 31, 2012 is explained in part by the identification of a proportion of the overall UK motor reserves that will settle as Periodical Payment claims in the future. This is in addition to a revision of the assumptions underlying the PPO reserve calculation and the worse than expected settlement of claims as PPOs during 2012.

The nature of the Company's high excess of loss liability and catastrophe business can result in loss events that are both irregular and significant. Similarly, adjustments to reserves for individual years can be irregular and significant. Such adjustments are part of the normal course of business for the Company. Conditions and trends that have affected development of liability in the past may not continue in the future. Accordingly, it is inappropriate to extrapolate future redundancies or deficiencies based upon historical experience.

The Company's reserving process includes a continuing evaluation of the potential impact on unpaid liabilities from exposure to discontinued asbestos and run-off environmental claims, including related loss adjustment expenses. Liabilities are established to cover both known and incurred but not reported claims. The Company's reserving and exposures to environmental liability business currently written within the NAPC and IPC business groups are not included in this note, which only relates to specific discontinued and/or run-off coverages, not originally written specifically to cover such environmental hazards.

The Company's exposure to discontinued asbestos and run-off environmental claims arises from the following three sources:

(1) Reinsurance contracts written, both on a proportional and excess basis, after 1972. The Company discontinued writing contracts with these exposures in 1985. Business written was across many different policies, each with a relatively small contract limit. The Company's reported asbestos claims relate to both traditional products and premises and operations coverage.

(2) Winterthur – business of Winterthur purchased by the Company from AXA Insurance (formerly Winterthur Swiss Insurance Company) in 2001. Pursuant to the Sale and Purchase Agreement and related agreements, AXA Insurance reimburses the Company for all asbestos losses.

(3) During 2006, the Company acquired $40.2 million in losses through a loss portfolio transfer contract of which $18.3 million in losses related to asbestos and environmental claims. Given the terms of the policy, the combined aggregate limit on the total acquired reserves is limited to $60.0 million, not including coverage for claims handling costs over a defined period.

A reconciliation of the opening and closing unpaid losses and loss expenses related to discontinued asbestos and run-off environmental exposure claims for the years indicated is as follows:

Year ended December 31,
(U.S. dollars in thousands)	2012		2011		2010
Net unpaid losses and loss expenses at beginning of year	$	77,778	$	84,075	$	100,922
Net incurred losses and loss expenses		6,558		(41)		(130)
Less net paid losses and loss expenses		6,021		6,256		16,718
Net increase (decrease) in unpaid losses and loss expenses		537		(6,297)		(16,848)
Net unpaid losses and loss expenses at end of year		78,315		77,778		84,075
Unpaid losses and loss expenses recoverable at end of year		123,799		134,323		142,037
Gross unpaid losses and loss expenses at end of year	$	202,114	$	212,101	$	226,112

Reserves for incurred but not reported losses, net of reinsurance, included in the above table were $52.2 million, $47.2 million and $54.9 million in 2012, 2011 and 2010, respectively. Unpaid losses recoverable are net of potential uncollectible amounts.

At December 31, 2012, the Company had 1,073 open claim files for potential discontinued asbestos claims exposures and 354 open claim files for potential run-off environmental claims exposures. Approximately 42%, 43% and 44% of the open claim files are due to precautionary claim notices in 2012, 2011 and 2010, respectively. Precautionary claim notices are submitted by the ceding companies in order to preserve their right to receive coverage under the reinsurance contract.

Such notices do not contain an incurred loss amount to the Company. The development of the number of open claim files for potential discontinued asbestos and run-off environmental claims, including precautionary claims, is as follows:

	Asbestos		Environmental
	Claims		Claims
Total number of claims outstanding at December 31, 2009		1,437		484
New claims reported in 2010		125		31
Claims resolved in 2010		(362)		(98)
Total number of claims outstanding at December 31, 2010		1,200		417
New claims reported in 2011		106		36
Claims resolved in 2011		(268)		(91)
Total number of claims outstanding at December 31, 2011		1,038		362
New claims reported in 2012		236		60
Claims resolved in 2012		(201)		(68)
Total number of claims outstanding at December 31, 2012		1,073		354

The estimation of loss and loss expense liabilities for discontinued asbestos and run-off environmental exposures is subject to much greater uncertainty than is normally associated with the establishment of liabilities for certain other exposures due to several factors, including: (i) uncertain legal interpretation and application of insurance and reinsurance coverage and liability; (ii) the lack of reliability of available historical claims data as an indicator of future claims development; (iii) an uncertain political climate which may impact, among other areas, the nature and amount of costs for remediating waste sites; and (iv) the potential of insurers and reinsurers to reach agreements in order to avoid further significant legal costs. Due to the potential significance of these uncertainties, the Company believes that no meaningful range of loss and loss expense liabilities beyond recorded reserves can be established. As the Company's net unpaid loss and loss expense reserves related to discontinued asbestos and run-off environmental exposures are less than 1% of the total net reserves at December 31, 2012 and 2011, further adverse development is not expected to be material to the Company's overall net loss reserves. The Company believes it has made reasonable provision for its discontinued asbestos and run-off environmental exposures and is unaware of any specific issues that would significantly affect its estimate for loss and loss expenses.