Note 13. Property and Casualty Unpaid Losses and Loss Expenses

The following table provides a reconciliation of our property and casualty beginning and ending loss and loss expense reserve balances for the years ended December 31:



(in millions)	Property and Casualty Group
	2012			2011			2010
Losses and loss expense reserves at January 1, – Gross	$	3,499		$	3,584		$	3,598
Less: reinsurance recoverable	151			188			200
Losses and loss expense reserves at January 1, – Net	3,348			3,396			3,398

Incurred losses and loss expenses related to:
Current accident year	3,494			3,616			3,053
Prior accident years	(115		)	(272		)	(244		)
Total incurred losses and loss expenses	3,379			3,344			2,809

Paid losses and loss expenses related to:
Current accident year	2,166			2,360			1,855
Prior accident years	1,117			1,032			956
Total paid losses and loss expenses	3,283			3,392			2,811

Losses and loss expense reserves at December 31, – Net	3,444			3,348			3,396
Add: reinsurance recoverable	154			151			188
Losses and loss expense reserves at December 31, – Gross	$	3,598		$	3,499		$	3,584

Loss reserves are set at full expected cost, except for workers compensation loss reserves, which have been discounted using an interest rate of 2.5% for all periods presented. This discounting reduced unpaid losses and loss expenses by $85 million, $84 million and $127 million at December 31, 2012, 2011 and 2010, respectively. The reserves for losses and loss expenses are reported net of receivables for salvage and subrogation, which totaled $150 million, $145 million and $141 million at December 31, 2012, 2011 and 2010, respectively.

Favorable development on prior accident year direct loss reserves in 2012 was primarily the result of improved claims frequency and severity trends combined with the closing of several large claims in our homeowners, commercial multi-peril, and commercial auto lines of business, offset somewhat by adverse development in our workers compensation line of business as a result of increased severity trends. In 2011, the favorable development on prior accident year direct loss reserves was primarily the result of improvements in severity trends in our personal auto, workers compensation, commercial multi-peril and homeowners lines of business combined with the closing of several large claims. In 2010, the favorable development on prior accident year direct loss reserves was primarily the result of improvements in severity trends in the commercial multi-peril, personal auto and workers compensation lines of business, combined with the closing of several large claims.