Mario Rizzo
President, Property-Liability at Allstate
Thanks, Tom. Let's start by reviewing underwriting profitability for the Property-Liability business in total on slide four. The overall message is that the underwriting loss was a result of auto insurance operating at a combined ratio above our targets, but homeowners insurance continued to be a strong source of profit. On the left chart, the recorded combined ratio of 109.1 in the fourth quarter was primarily driven by higher auto loss costs, unfavorable reserve development and higher catastrophes.
This led to a full year recorded combined ratio of 106.6, which was 10.7 points higher than the prior year. The table on the right shows the combined ratio and underwriting income by line of business for the quarter and the year. Auto insurance had a combined ratio of 112.6 in the quarter and 110.1 for the year, substantially worse than our targets given rapidly increasing loss costs throughout the year. This result was an underwriting loss of $974 million in the quarter and over $3 billion for the year.
Hence, you can see why Tom has said executing our auto profit improvement plan is the number one priority going forward. Homeowners insurance, on the other hand, had excellent results with the combined ratios in the low 90s, which generated $681 million of underwriting income for the year. This reflects industry-leading underwriting and risk management in this line of business. Commercial insurance was negatively impacted by the same auto insurance cost pressures, along with inadequate pricing for the coverage provided to the large transportation network companies.
The result was an underwriting loss for the year of $464 million. This led to the decision discussed last quarter to not provide insurance to transportation network companies unless telematics-based pricing is implemented and to exit five states in the Allstate traditional commercial business. These actions are expected to reduce commercial business premiums by over 50% in 2023. Now let's move to slide five and discuss auto margin in more detail.
As you can see from the chart on the left, which shows the auto insurance combined ratio and underlying combined ratio from 2017 through the current year, we have a long history of sustained profitability in auto insurance due to pricing sophistication, underwriting and claims expertise and expense management. In 2020, the combined ratio dropped to 86 even though we provided customers with over $1 billion of shelter-in-place payments. This was due to historically low accident frequency in the early stages of the pandemic. In 2021, frequency increased as mileage driven increased, but it did not reach pre-pandemic levels.
Claims severity, however, increased above historical levels because of more severe increasing costs to settle claims with third parties who are injured in accidents with our customers. In addition, used car prices were increasing at unprecedented levels, eventually peaking in December, reflecting an approximate 50% increase over the prior year. We had a reported combined ratio of 95 for the year despite all these pressures. This year, the combined ratio increased 14.7 points to 110.1, the drivers of which are shown in the right-hand chart.
The red bars reflect the impact of increasing loss costs, including a 3.6 point impact from prior year reserve additions and a 16.7 point impact from current year underlying losses, excluding catastrophes, which include increases in both frequency and more significantly, severity compared to last year. As we discussed, the core component of the profit improvement plan is to raise auto insurance rates and substantial progress was made on this front starting in the fourth quarter of 2021 and throughout last year. In 2022, the impact of higher average earned premium drove a benefit of 3.6 points, which is shown in green.
As I will cover in a minute, there is much more benefit to be realized in earned premiums based on what was implemented in 2022. Another part of the profit improvement plan is to reduce expenses and this contributed a favorable two point benefit this year. Moving to slide six, let's discuss prior year reserve reestimates before we look forward. Our loss estimates and reserve liabilities use consistent practices, multiple analytical methods and two external actuarial reviews to ensure reserve adequacy. These processes led us to increase the reserve liability for prior years throughout 2022 by amounts that are larger than recent years.
Property-Liability prior year reserve strengthening, excluding catastrophes, totaled $1.7 billion or 3.9 points on the combined ratio for the full year 2022. The pie chart on the left breaks down the impact by line and coverage, with $1.1 billion driven by Allstate brand personal auto, largely related to bodily injury claims. In addition, $295 million was related to Allstate Brand commercial insurance, also mostly related to auto. The table on the right breaks down the Allstate brand auto prior year reserve strengthening of $1.1 billion in 2022 by report year. Let me orient you to the table.
Reserve increases are shown by coverage in total and then for the report here to which they apply. The reserve liability for physical damage coverages was increased by $211 million, which was entirely attributable to 2021. This primarily related to adverse development and elongated repair time frames, which were primarily addressed in the first and second quarter. Injury reserves were the largest component at $676 million, which was spread across many report years. Incurred but not reported was increased by $226 million as late reported claim counts have exceeded prior estimates.
This reserve balance was increased in each of the first three quarters of 2022, but a larger amount was recorded in the fourth quarter. In total for all coverages, about 63% of the increases were for 2021 and 2020. At the bottom of the table, the reported combined ratio for the calendar year is shown and compared to the reserve changes. For example in 2021, the reported combined ratios for Allstate brand auto insurance was 95. The reserve additions indicate that costs were 2.1 points above this reported number.
Estimating reserve liability utilizes multiple reserving techniques, but is always subject to strengthening or releasing reserves over time. This variability increases with changes in the underlying data, such as claim counts, settlement times, or cost increases and as has been the case over the past three years. While reserves could change going forward, based on the 2022 claim statistics and data, reserves are appropriately established at year-end 2022. Moving to slide seven, let's provide some clarity on what the auto insurance combined ratio trend was by quarter in 2022.
As you can see on the left-hand chart, the recorded combined ratio peaked in the third quarter at 117.4, largely reflecting prior year reserve changes and catastrophe losses shown in light blue. The dark blue bars are the underlying combined ratio, as reported, which increased each quarter. Included in this dark blue bar is the impact of increasing claim severities within the year. We update the forecast on claim severities as the year progresses. As 2022 developed, loss cost trends resulted in increases to current report year ultimate severity expectations.
As shown in the call out on the left chart, 2022 incurred severities for collision, property damage and bodily injury was 17%, 21% and 14%, respectively, above the full report year of 2021 level. This estimate, however, increased throughout the year. The impact of increasing current report year on incurred severities as the year progressed influences the quarter underlying combined ratio trend. This impact from increasing full year severities from claims occurring in prior quarters is reflected in the financial results of the period where severities were increased.
For example, the fourth quarter of 2022 reflects the impact of higher severity expectations in the auto physical damage coverage, not just for claims reported in Q4 but also for claims that were reported throughout the prior three quarters as well. The chart on the right adjusts the quarterly underlying combined ratio to reflect full year average severity levels, which removes the influence of intra-year severity changes. As you can see, after adjusting for the timing of severity increases in the current year, the quarterly underlying combined ratio trend was essentially flat throughout 2022 and close to the full year level of 103.6.
Slide eight outlines our comprehensive approach to restore auto margins. There are four areas of focus: raising rates; a continued focus on reducing expenses; implementing stricter underwriting requirements; and modifying claim practices to manage loss costs. Starting with rates. Since the beginning of this year, we've implemented rate increases of 16.9% in the Allstate brand, including 6.1% in the fourth quarter, which significantly increased written premium. We expect to continue to pursue significant rate increases into 2023 to improve auto insurance margins to target levels.
We are also reducing operating expenses as part of transformative growth and have temporarily reduced advertising spend to manage new business volume. We are implementing more restrictive underwriting actions on new business in locations or risk segments where we cannot achieve adequate prices for the risk. Increased restrictions have been implemented in 37 states including California, New York and New Jersey, which account for a large portion of underwriting -- of underwriting losses.
Claim practices have been modified to deal with the higher loss cost environment. For example, we have strategic partnerships with part suppliers and repair facilities to mitigate the cost of repair and use predictive modeling to optimize repair versus total loss decisions and likelihood of injury and attorney representation. Moving to slide nine, let's discuss a key component of our multifaceted plan raising auto insurance prices. Growth in average premium per policy is accelerating due to implemented rate increases, but the impact to average earned premium per policy is on a lag due to the six-month policy term.
The chart on the left depicts the year-over-year growth in auto average gross written premium in orange, reaching 14.4% in the fourth quarter of 2022. The auto average earned premium growth of 9.7% in the fourth quarter, represented in blue, continues to increase, but on a lag due to the six-month policy term. The chart on the right is an estimation of when the rate increase is implemented will be earned into premiums. Of course, actual earned premium growth will be influenced by changes in the number of policies in force and absolute levels of new business and retention. This illustrative example assumes 85% of the annualized written premium will be earned since customers modify policy terms such as deductibles or limits where they may not renew.
Starting on the left, over the last 15 months, we've implemented Allstate brand auto rate increases of 19.8% for an estimated annualized written premium impact of approximately $4.8 billion. Using the historical 85% effectiveness assumption nets a total of $4.1 billion in expected earned premium, represented by the second blue bar. Approximately $1.2 billion has been earned through the fourth quarter. Of the remaining $2.9 billion of premium yet to be earned, roughly $2.6 billion will be earned in 2023 and $300 million in 2024 as shown in green.
As I mentioned earlier, we expect to implement additional rate increases in 2023, which will be additive to the figures shown on this chart. Slide 10 illustrates the drivers that will determine the timing of improved auto profitability. The chart on this page is an illustrative view we've shown in the past on our path to target profitability along with the magnitude of actions already taken and required prospectively. Starting on the left, the first blue bar shows the year-end 2022 auto insurance reported combined ratio 110.1.
To start with the normalized base, we removed the impact of prior year reserve increases and normalized the catastrophe loss ratio for our five-year historical average. This improves the combined ratio by roughly 4.5 points. The second green bar reflects the estimated impact of rate actions already implemented when fully earned into premium, which we discussed on the prior slide. The impact on the combined ratio is approximately 10.5 points when combining the Allstate brand and the National General brand actions. Those two adjustments would improve the combined ratio to target levels.
Now of course, we know that loss costs will increase, whether from severity or accident frequency, which would increase the combined ratio. So prospective rate increases and other margin improvement actions must meet or exceed loss cost increases to achieve historical returns. We continue to manage the auto insurance business with the expectation to achieve an auto insurance combined ratio target in the mid-90s. Moving to slide 11, the table shows Allstate brand model results in three major states: California, New York and New Jersey combined contributed approximately 1/4 of the Allstate brand auto written premiums in 2022 but accounted for approximately 45% of the underwriting loss.
While rates were increased in 2022 by 7% to 10%, this is not enough to achieve target margins. As a result, we have more work to do, some of which is listed on the right-hand side. The right-hand side of the slide is a list of actions we are taking in each of these states to improve margins. In California, we filed for an additional 6.9% rate increase in January after getting approval for an initial 6.9% rate increase and are significantly increasing down payment requirements. In New York, while multiple rate filings were requested, only partial approval of the increases requires us to make additional rate filings in early 2023.
Increased down payment requirements, allowable prior incidents and channel restrictions means fewer choices for consumers until an adequate rate is approved. In New Jersey, additional rate filings will also be made and similar underwriting actions will be implemented as those taken in New York. Moving to slide 12. Let's look at a continued good performance story in homeowners insurance. As you know, a significant portion of our customers bundle home and auto insurance, which improves retention and the overall economics of both product lines. We have a differentiated homeowners product, underwriting, reinsurance and claims ecosystem that is unique in the industry.
Net written premium has increased significantly throughout 2021 and into 2022, increasing 9.3% from the prior year quarter and 12% for the full year, predominantly driven by higher average gross written premium per policy and a 1.4% increase in policies in force. National general written premiums also increased as we improved underwriting margins closer to targeted levels. The fourth quarter combined ratio for homeowners of 92.6 increased by 5.5 points compared to the prior year quarter, while full year combined ratio of 93.8 and declined by three points compared to 2021.
For the year, this line generated $681 million of underwriting income. The increase in the fourth quarter is shown on the right side. The increased combined ratio was driven by elevated catastrophe losses, primarily due to winter storm Elliot. Homeowners insurance was also impacted by the higher loss cost environment as we continue to experience higher severities due to increasing labor and material costs. To address the inflationary environment, our products have sophisticated pricing features that respond to changes in home replacement values.
And now I'll turn it over to Jesse to discuss the remainder of our results.
