Glenn Thomas Shapiro
President-Personal Property-Liability at Allstate
Thank you, Tom, and good morning, everyone. Let's start by reviewing property liability profitability in the fourth quarter on Slide six. The recorded combined ratio of 98.9 increased 14.9 points compared to the prior year quarter, primarily driven by higher underwriting losses as well as prior year reserve strengthening. The chart on the bottom left takes you through the impact of each component compared to the prior year quarter. Auto insurance underwriting loss ratio drove most of the increase driven by the impact of rising inflation on auto severity and higher auto accident frequency compared to the prior year. Prior year reserve were strengthening of $182 million had a 1.8 point impact on the combined ratio in the quarter, primarily due to adverse loss development in auto insurance casualty coverage.
There was also a sizable impact relative to the premium in shared economy business, which was primarily driven in states we no longer insure with transportation network carriers. This was partially offset by lower underwriting expense ratio, mostly due to lower advertising expenses in the quarter. We continue to focus on cost reductions, which improve our operational flexibility and competitive position. The chart on the lower right shows Allstate's adjusted expense ratio over the last few years. And the adjusted expense ratio as a measure we're using to track our progress on improving value for customers through cost reductions.
The measure starts with our underwriting expense ratio, excludes restructuring, coronavirus-related expenses, amortization and impairment of purchase intangibles and investment in advertising. It then adds our claim expense ratio, excluding catastrophe claims costs. The adjusted expense ratio improved to 26 in the full year 2021, which is 0.6 points better than prior year and 3.2 lower than 2018. Our long-term objective is a further reduction of three points over the next three years, which would represent a 6-point reduction over the six years following 2018, allowing us to improve competitive price position while maintaining attractive returns. Slide seven provides further insight into the drivers of rising auto insurance costs.
Allstate Protection auto insurance underlying combined ratio was 100.2 in the fourth quarter and 92.5 through the full year 2021, representing increases of 15.3 and 7.4 points, respectively. The increases reflect higher loss costs due to severity and accident frequency, partially offset by lower expenses. While claim frequency increased relative to prior year, reflecting a return to more normal driving environment, we continue to see favorability compared to pre-pandemic levels. Allstate brand auto property damage frequency was up 21.5% in the fourth quarter of '21 compared to 2020, but it was down 13.3% compared to 2019.
While we've seen miles driven approach levels. We've seen a meaningful change in time of day driving, which continues to impact both frequency and severity. Increases in auto severity reflect inflationary pressure across coverages with a number of underlying components of severity rising faster than core inflation. Chart on the lower left shows used car values began increasing in late 2020 and accelerated in mid-2021 in -- a total increase of 68% beginning in 2019. OEM parts and labor rates have also accelerated in 2021, resulting in higher severities and coverages like collision and property damage. The impact of inflation is also influencing our casualty coverage. During 2020, at the onset of pandemic, when there was less road congestion and higher speeds, a higher proportion of accidents were more severe. That resulted in more severe injuries per claim and higher average casualty severity. And as 2021 developed, casualty costs continue to rise with more severe injuries, medical inflation and higher medical consumption and higher attorney representation rates.
The chart on the lower right breaks down auto report year losses, excluding catastrophe over the past two years. The impact of frequency was favorable in 2020 compared to 2019 with the pandemic. And as you shift into 2021, that favorability is partially reversed, creating a negative year-over-year frequency impact, but still favorable over two years. The impact from higher severities, on the other hand, were compounded over the 2-year period and put pressure on both physical damage and casualty coverages. The combination of these factors led to the auto insurance margin pressure that we've seen in the second half of 2021.
So let's move to Slide eight and go deeper into the steps we're taking to improve auto profitability. Allstate has, as you all know, have generated strong auto insurance margins over a long period of time. This is a core capability of ours, and we are taking a comprehensive and prescriptive approach to respond to the inflationary pressure and return to our auto margin targets in the mid-90s combined ratio. There are three areas of focus: reducing expenses, which we've talked about raising rates and managing loss costs through claim effectiveness. Since we already talked about the expenses, I'll start with the rates. And the chart on the lower left, it provides a view into 2021 rate actions. We implemented rate decreases in early 2021 to reflect, in part, Allstate's lower expense ratio and the reduced frequency we were experiencing from the pandemic. But as the year progressed and inflation escalated, we responded with rate increases that began in the third quarter and continued into the fourth quarter.
As those continued, you see in the fourth quarter, we took rate in 25 locations at an average increase of 7.1% and a weighted Allstate brand auto premium impact of 2.9%. We'll continue to take rate increases to restore out of profitability at targeted levels, and we'll keep you posted monthly, as Mark mentioned earlier, so that you know where we are on the rates. The chart on the right shows the estimated annual impact of the premium from the implemented rate in each quarter.
To relate these two views together, that large 2.9% increase implemented in the fourth quarter that you see on the left table, relates directly to the rightmost bar of $702 million in estimated annual written premium. While the rate will obviously help our margin, it takes a little time to be realized, as Tom mentioned, there's an inherent lag between when rates are implemented and when they're reflected in written premium and then ultimately in earned premium. As auto insurance policies generally have a six month term, it takes that time for all of the policies to have renewed at the new rate. And then the annualized written premium impact is fully reflected after 10 months -- after 12 months.
As we take more price increases in 2022, the incremental rate will be combined and drive higher levels of written premium first and then average earned premium second, as the year progresses and we favorably impact auto margins. Beyond expense reductions and rate increases, we're also leveraging advanced claim capabilities to mitigate loss cost pressure for our customers. We're broadening strategic partnerships with part suppliers and repair facilities to mitigate repair costs. We're using advanced claim analytics and predictive modeling tools to optimize repair versus total loss decisions and to assess the likelihood for injury and attorney representation on casualty claims.
The bottom line is we are highly confident in our ability to restore auto profitability to targeted levels. And while auto results tend to dominate discussions around the personal lines industry, it's really important to recognize the broad product suite we offer, as Tom mentioned earlier, and in particular, our homeowners insurance product. So moving to Slide nine. I want to spend a few minutes on our industry-leading homeowners business. A majority of our customers bundle home and auto insurance, which improves retention and overall economics of both lines.
And simply put, we have a differentiated homeowners ecosystem, including product, underwriting, reinsurance, claims capabilities that are unique in the industry. As a proof point to that, since 2017, we've earned $3.3 billion or an average of $667 million a year in underwriting income, while the industry has generated close to an $18 billion underwriting loss from 2017 to 2020. The graph at the bottom left shows homeowners insurance combined ratios for Allstate select competitors and the industry overall since 2011. And you can see there that Allstate's consistently outperformed. We're well positioned to maintain our margins in homeowners and to continue growing it.
Our House & Home product is designed to address severe weather risks and has sophisticated pricing features and inflation factors that respond to changes in replacement values which is particularly important during an inflationary environment like the one we're in. The chart on the lower right shows Allstate homeowners net written premium over time as well as policies in force. We've grown policies in force steadily, increasing to 1.5% up at year-end, and our Allstate agents are in a great position to continue to broaden customer relationships with homeowners products.
Net written premium has really taken off through 2021, reaching 13.8% variance by the fourth quarter. Now the increasing spread between those two lines, the net written premium and the policies in force, is due to an increased average in premium per policy, which has steadily grown through 2021. That is mostly due to the premium rising with the increases we saw in replacement costs and, to a lesser extent, rate increases. That view, that difference that I just illustrated, really helps show how our product reacts quickly to inflationary forces and allows us to better match price and risk. On the claims side, we've made investments in technology with photo, video and aerial imagery for timely and accurate loss cost management.
Shifting to National General's homeowners book. It provides us an awesome opportunity to grow in the independent agent channel, and we're really optimistic about the ability to bundle there with independent agents when we're deploying new middle-market products on the National General ecosystem. But in the near term, we're focused on improving their profitability in homeowners by leveraging Allstate's expertise in data, pricing sophistication and underwriting capabilities. Our ultimate goal is to meet customers' protection needs while optimizing shareholder risk and return. We underwrite risk directly in homeowners where we can achieve targeted returns.
We also broker other insurers property policies where we can meet protection needs for customers, but we can't achieve the adequate returns that we require, and this allows us to maintain an auto relationship with them. We also shift a lot of our catastrophe risk to reinsurance markets, including traditional reinsurance and alternative capital covering both individual large events and an annual aggregate cover. All in, as I said at the start of this, we have a differentiated homeowners insurance capability in the market, and it operates as a really strong diversifying book of business while we improve auto margins.
So with that, let me turn it over to Mario to cover the remainder of our results before we move to questions.
