Jess Merten
Executive Vice President and Chief Financial Officer at Allstate
Thank you, Mario, and good morning, everyone. On slide 11, let's begin with our prior year reserve development, property liability, prior year reserve strengthening, excluding catastrophes totaled $875 million in the third quarter. The pie chart on the left breaks down the impact by line with $643 million, driven by personal auto, $120 million one-off property liability from our annual reserve review related to environmental and asbestos exposures, $63 million in commercial, largely related to auto bodily injury and $51 million in homeowners.
The chart on the right breaks down Allstate Protection auto prior year reserve strengthening of $643 million in the third quarter, which was primarily driven by non-customer claim and bodily injury claims. The total cost to settle these claims continues to be impacted by more severe accidents and higher medical and litigation costs. Increases to commercial and homeowners insurance can also be attributed to these factors.
Physical damage prior year reserve increases in the third quarter from property damage collision and comprehensive coverages, excluding catastrophes, were largely offset by higher subrogation collection estimates.
Now, let's move to slide 12 to discuss the drivers of bodily injury development and our claims operating actions to manage loss costs. Bodily injury severities have increased as the mix of claims shifted to more costly claim segments. The chart on the left shows the relative severity of bodily injury claims by type of treatment, major versus non-major and whether the claim is unrepresented, attorney represented or litigated.
Major injuries have more expensive medical treatments, greater nonmedical related damages and often more attorney involvement. As a result, paid severity for major injury claims and litigation represented by the first bar on the left costs approximately 3.9 times the average paid bodily injury claim.
Non-major claims shown on the right-hand side of the chart have less medical and other related costs intend not to have attorney costs, so unrepresented non-major injury claims are roughly 10% of the average cost.
Let me be clear, in all cases, we settled the cases for what is fair and equitable regardless of attorney involvement. The table below the chart shows a significant shift from non-major claims that have below average cost to major injuries that are represented or in litigation in comparison to historical levels. This shift is partially attributable to more severe accidents. This shift to larger and more complex cases has also resulted in greater variability in paid and case reserve development patterns.
As part of our actuarial process, we review changes in claim development patterns to define an appropriate range of estimated outcomes based on weighing historical and more recent trends in the data. The chart on the right side depicts the value of two standard deviations to the average paid in case severity development over the last six report years.
As you can see, this measure of variability has almost doubled over the last two years, resulting in a wider range of estimated outcomes. The third quarter reserving process showed a continuation of these development patterns. Therefore, we increased reserves for prior years to reflect the persistence of the trends in major injuries, increased settlement costs and greater variability in case reserves. We're proactively responding to these trends by leveraging sophisticated models, increasing medical expertise, reviewing settlement processes and assessing litigation risks.
Now let's move to slide 13 and briefly discuss physical damage loss costs, which continue to pressure profitability. Rising inflation and delays in third-party carriers subrogation demands are driving higher expected severity in the property damage coverage leading to an increase in the current year -- the current report year variance from 12% to 17% when compared to 2021.
The left side of the slide includes a chart we have shown before, which indexes inflation to year-end 2018 for a few of the main inputs to physical damage severity. While used car values are below their recent peak, which is a positive indicator to continue to run more than 50% above pre-pandemic levels.
Conversely, labor and parts prices continue to accelerate from the prior peak levels seen just last quarter. This continues to put upward pressure on severities in the near term. The right-hand side of the page shows third-party subrogation demand dollars paid, again, indexed to the year-end 2018. Third-party demands are when our insured isn't an accident and the claimant files a claim to their carrier rather than us. As the other carrier evaluates the claim, the Allstate insured is wholly or partially at fault, they will reach out to us with subrogation demand.
We have recently experienced an uptick in the volume of severity -- volume and severity of these demands compared to prior year trends and expectations. It's worth noting that a similar dynamic is also impacting our first-party collision coverages. We are demanding and receiving elevated subrogation collections from other carriers following the declines during the pandemic and backlog and claim settlements due to delayed repairs.
Shifting gears now on slide 14. The Protection Services businesses in the lower strategic growing revenues and increasing shareholder value as we invest in future expansion. Revenues, excluding the impact of net gains and losses on investments and derivatives increased 7.2% to $640 million in the quarter, primarily driven by a 12.2% increase in Allstate Protection Plans.
Adjusted net income of $35 million for the third quarter of 2022 decreased $10 million compared to the prior year quarter due to increased severity on appliance repair for Allstate protection plans, in the absence of onetime restructuring expense at Allstate Identity Protection in the prior year quarter as well as investments in growth.
Policies in force declined 5%, reflecting the expiration of protection plan warranties primarily due to the -- to a high volume, low premium per policy retail account and overall decline in retail sales.
Moving now to slide 15. Allstate Health and Benefits is also growing an attractive set of businesses that protect millions of policyholders. The acquisition of National General in 2021 added both group and individual health products to our portfolio, as you can see on the left. Revenues of $570 million in the third quarter of 2022 increased 1.2% to the prior year quarter as growth in group health and employer voluntary benefits was partially offset by a reduction in individual health. Adjusted net income of $54 million increased $21 million from the prior year quarter, reflecting a lower benefit ratio, lower restructuring charges and increased revenue.
Shifting now to investments on slide 16. We'll review the performance and the portfolio risk and return position that we've taken given higher inflation and the possibility of a recession. As you may recall, we reduced our portfolio risk beginning in the fourth quarter of 2021. This included shortening the fixed income duration from 4.6 years to three years through the sale of bonds and use of derivatives, which resulted in a reduction to the portfolio's sensitivity to higher interest rates caused by increasing inflation.
We also reduced our exposure to recession-sensitive assets through the sales of high-yield bonds, bank loans and public equity. We maintained this defensive positioning in the third quarter, which continued to preserve portfolio value given ongoing market volatility, rising interest rates and a further decline in public equity markets.
As shown in the table, at the bottom left, our total return for the quarter was negative 0.8% and year-to-date is negative 6.4%, while adverse market conditions negatively impacted the portfolio, we estimate our duration shortening mitigated portfolio losses of approximately $2 billion. These proactive actions and the broad diversification of our portfolio produced results that were better than the S&P 500 index which is down 23.9% this year and the Bloomberg Intermediate corporate bond index, which has declined 11.8%.
Our net investment income, shown in the chart on the left, totaled $690 million in the quarter, which was $74 million below the third quarter of last year. Performance-based income of $335 million shown in dark blue was $102 million below a strong quarter in 2021. Three individual investments generated approximately 97% of the performance-based investment income in the quarter, including 2 sizable cash realizations.
Excluding those assets, results of the broader performance-based portfolio were largely flat with negative valuations in our private equity fund investments, which have a higher correlation to public equity markets, offset by increased valuations on other asset classes such as real estate and infrastructure.
Our market-based income, which is shown in blue, was $50 million above the prior year quarter, benefiting from reinvestment into market yields that are significantly higher than the overall portfolio's current yield.
The table on the right demonstrates how our shorter duration fixed income portfolio is positioned to generate higher levels of investment income as we reinvest into higher interest rates. Our fixed income yield has begun to rise and was 2.9% at quarter end, but is well below the current intermediate corporate bond yield of 5. 6%.
Now let's take a few minutes to discuss Allstate's financial condition and capital position, starting with slide 17. Allstate's corporate organizational structure provides sources of capital to the holding company from multiple reporting entities and intermediate holding companies. We manage capital at all levels using economic capital, rating agency models and regulatory requirements to guide decisions and maximize flexibility.
We commonly report a view of capital that includes both statutory surplus and parent company -- parent holding company assets. We prefer to dividend money up from subsidiaries to the holding company when possible as it provides more financial flexibility for the organization while maintaining adequate capital levels from subsidiaries to support operations.
The chart on the left shows an overview of our capital position since 2016. As you can see, it grew substantially beginning in 2019 following strong results leading up to and during the pandemic. While the current level of $19.8 billion is approximately $6 billion lower than a year ago, this was largely made up of two specific items.
First, $3 billion or roughly half is related to the sale of the Life and Annuity business, as represented by the first red bar on the chart. This transaction reduced our statutory capital as we sold the legal entities and significantly reduced our overall risk profile, freeing up an additional $1.7 billion of capital. We returned this capital to shareholders as part of the current $5 billion share repurchase authorization.
The second bar reflects our cash returns to shareholders, excluding the impact of the life and annuity sale. Together, these factors reduced capital by $5.4 billion with more than $4 billion going back to shareholders.
The last red bar primarily reflects the impact of current auto insurance profitability challenges, which have resulted in a statutory loss and then changes in unrealized gains and losses on equity investments due to recent market volatility. We also added a line to this chart that represents our average capital from year-end 2016 through Q3 of 2021, excluding surplus related to the life and annuity businesses.
Our current capital position of $19.8 billion is approximately $1 billion higher than this average, demonstrating that returning cash to shareholders after adjusting our risk profile in recent years of profitability has left us in a strong capital position. The right-hand side of this page isolates holding company assets, a key component of our capital relative to the remaining authorized repurchases and fixed charges. At the end of the third quarter, we had $4.5 billion in holding company assets with $1.2 billion remaining on the current share repurchase authorization we would still have $3.3 billion remaining in comparison to our annual fixed charges of $1.3 billion. We believe holding company assets and capital resources available from statutory operating companies provide significant financial flexibility as we continue to implement profit improvement actions and invest in transformative growth.
Now let's move to slide 18 to discuss Allstate's strong cash return to shareholders. Adjusted net income return on equity of 4.3% was below the prior year, primarily due to lower underwriting income. Achieving our targeted combined ratios for auto and homeowners insurance will bring adjusted net income returns on equity back to our long-term targeted range of 14% to 17%. Through the first three quarters of 2022, we've returned $2.8 billion to shareholders through $2.1 billion in share repurchases and $698 million in common shareholder dividends.
Over the last year, shares outstanding have been reduced by 7.7%, providing more upside per share as profitability has improved. There's $1.2 billion remaining on the current $5 billion share repurchase authorization as of September 30, which we expect to be completed in the second or third quarter of 2023 and as we moderately slow the pace of our repurchases.
With that context, we're going to open up the line for your questions.
