Mario Rizzo
President, Property-Liability at Allstate
Thanks, Tom. Let's turn to Slide 4. We are seeing the impact of our comprehensive auto profit improvement plan in our financial results, starting with the rate increases we have implemented to date. The chart on the left shows Property-Liability earned premium increased 9.6% above the prior year quarter, driven by higher average premiums in auto and homeowners insurance, which were partially offset by a decline in policies enforced. Price increases and cost reductions were largely offset by severe weather events and increased accident frequency and claim severity. The underwriting loss of $2.1 billion in the quarter was $1.2 billion worse than the prior year quarter due to the $1.6 billion increase in catastrophe losses.
The chart on the right highlights the components of the combined ratio, including 22.6 points from catastrophe losses. Prior-year reserve reestimates, excluding catastrophes, had a 1.6 point adverse impact on the combined ratio in the quarter. Of the $182 million of strengthening in the second quarter, $148 million was in National General, primarily driven by personal auto injury coverages in the 2022 accident year.
In addition, prior years were strengthened by approximately $31 million for litigation activity in the state of Florida related to tort reform that was passed in March of this year. We have been closely monitoring the increase in filed suits on existing claims, and the charge reflects a combination of higher legal defense costs and a modest loss reserve adjustment. Despite continuing pressure on the loss side, the underlying combined ratio of 92.9 improved modestly by 0.5 points compared to the prior year quarter and 0.4 points sequentially versus the first quarter of 2023.
Now, let's move to Slide 5 to discuss Allstate's auto insurance profitability in more detail. The second quarter recorded auto insurance combined ratio of 108.3 was 0.4 points higher than the prior year quarter, reflecting higher catastrophe losses and increased current report year accident frequency and severity, which were largely offset by higher earned premium, expense reductions, and lower adverse non-catastrophe prior year reserve reestimates. We continue to raise rates, reduce expenses, restrict growth, and enhance claim processes as part of our comprehensive plan to improve auto insurance margins.
This slide depicts the impact of our profit improvement actions on underlying auto insurance profitability trends. As a reminder, we continually assess claim severities as the year progresses. And last year, as 2022 developed, we continued to increase report year ultimate severity expectations. The chart on the left shows the quarterly underlying combined ratios from 2022 through the current quarter, with 2022 quarters adjusted to account for full year average severity assumptions, which removes the effect that intra-year severity changes had on recorded quarterly results. After adjusting for the timing of higher severity expectations, the quarterly underlying combined ratio trend was essentially flat throughout 2022. As we move into 2023, the underlying combined ratio has improved modestly in each of the first two quarters, reflecting both the impact of our profitability actions and the continued persistently high levels of loss cost inflation.
The chart on the right depicts the percent change in annualized average earned premium shown by the blue line and the average underlying loss and expense per policy shown by the light blue bars compared to prior year end. Rapid increases in claim severity and higher accident frequency since mid-2021 resulted in significant increases in the underlying loss and expense per policy, which outpaced the change in average earned premium and drove a higher underlying combined ratio in both 2021 and 2022. As we've implemented rate increases, the annualized earned premium trendline continues to increase and has begun to outpace the still elevated underlying cost per policy in the first two quarters of 2023, resulting in a modest improvement in the underlying combined ratio.
Slide 6 provides an update on the execution of our comprehensive approach to increase returns in auto insurance. There are four areas of focus; raising rates, reducing expenses, implementing underwriting actions, and enhancing claim practices to manage loss costs. Starting with rates, you remember the Allstate brand implemented 16.9% of rate in 2022. In the first six months of 2023, we have implemented an additional 7.5% across the book, including 5.8% in the second quarter. National General implemented rate increases of 10% in 2022 and additional 5.5% through the first six months of 2023. We will continue to pursue rate increases in 2023 to restore auto insurance margins back to the mid-90s target levels.
Reducing operating expenses is core to transformative growth, and we've also temporarily reduced advertising to reflect a lower appetite for new business. We continue to have more restrictive underwriting actions on new business in locations and risk segments where we have not yet achieved adequate prices for the risk, but are beginning to selectively remove these restrictions in states and segments that are achieving target margins. To this point, the number of states achieving an underlying combined ratio better than 100 increased from 23 states, which represented just under 30% of Allstate brand auto insurance premium at the end of 2022, to 36 states, representing approximately 50% of premium at the end of the second quarter.
Ensuring that our claim practices are operating effectively and enhancing those practices where necessary is key to delivering customer value, particularly in this high-inflation environment. This includes modifying claim processes in both physical damage and injury coverages by doing things like increasing resources, expanding reinspections, and accelerating the settlement of injury claims to mitigate the risk of continued loss development. We are also negotiating improved vendor service and parts agreements to offset some of the inflation associated with repairing vehicles.
Slide 7 provides an update on progress in three large states with a disproportionate impact on profitability. The table on the left provides rate increases either implemented so far this year or currently pending with the respective insurance department in California, New York, and New Jersey. Because our current prices are not adequate to cover our costs in these states, we have had to take actions to restrict new business volumes. As a result, new issued applications from the combination of California, New York, and New Jersey declined by approximately 62% compared to the prior year quarter.
In California, we implemented a second 6.9% rate increase in April and also filed for a 35% increase in the second quarter that is currently pending with the Department of Insurance. We continue to work closely with the California department to secure approval of this filing and restore auto rates to an adequate level.
In New York, we implemented approximately 3 points of weighted rate in June, driven by approved increases in two closed companies, and subsequently received approval for a 6.7% increase in the larger open company, which was implemented in July. We will continue to make further filings in 2023 that will be additive to the rates approved so far this year.
In New Jersey, we received approval for a 6.9% rate increase in the first quarter and filed a subsequent 29% increase in the second quarter. As mentioned earlier, we anticipate implementing additional rate increases for the balance of 2023 to counteract persistent loss cost increases.
Slide 8 dives deeper into how we are improving customer value through expense reductions. The chart on the left shows the Property-Liability underwriting expense ratio and highlights drivers of the 2.5 point improvement in the second quarter compared to the prior year quarter. The first green bar shows the 1.4 point impact from advertising spend, which has been temporarily reduced, given a more limited appetite for new business. The second green bar shows the decline in operating costs, mainly driven by lower agent and employee-related costs and the impact of higher premiums relative to fixed costs.
Shifting to our longer-term trend on the right, we remain committed to reducing the adjusted expense ratio as part of transformative growth. This metric starts with our underwriting expense ratio, excluding restructuring, coronavirus-related expenses, amortization and impairment of purchased intangibles, and advertising. It then adds in our claims expense ratio, excluding costs associated with settling catastrophe claims, because catastrophe-related costs tend to fluctuate.
Through innovation and strong execution, we've driven significant improvement with the second quarter adjusted expense ratio of 24.7. We expect to drive additional improvement, achieving an adjusted expense ratio of approximately 23 by year-end 2024, which represents a 6 point reduction compared to our starting point in 2018. While increasing average premiums certainly represent a tailwind, our intent in establishing the goal is to become more price competitive. This requires sustainable improvement in our cost structure, with our future focus on three primary areas, including enhancing digitization and automation capabilities, improving operating efficiency through outsourcing, business model rationalization and centralized support, and enabling higher growth distribution at lower cost through changes in agency compensation structure and new agent models.
Now, let's move to Slide 9 to review homeowner insurance results, which, despite improving underlying performance, incurred an underwriting loss in the quarter, driven by elevated catastrophe losses. Our business model incorporates a differentiated product, underwriting reinsurance and claims ecosystem that is unique in the industry. Our approach has consistently generated industry-leading underwriting results despite quarterly or yearly fluctuations in catastrophe losses. Our homeowners insurance combined ratio, including the impact of catastrophes, has outperformed the industry by 12 points from 2017 through 2022. During that same time period, we generated annual average underwriting income of approximately $650 million.
The chart on the left shows key Allstate protection homeowners insurance operating statistics for the quarter. Net written premium increased 12.4% from the prior year quarter, predominantly driven by higher average gross premium per policy in both the Allstate and National General brands and a 1% increase in policies enforced. Allstate brand average gross written premium per policy increased by 13.2% compared to the prior year quarter, driven by implemented rate increases throughout 2022 and an additional 7.4 points implemented through the first six months of 2023, as well as inflation in insured home replacement costs.
While the second quarter homeowners combined ratio is typically higher than full-year results primarily due to seasonally high severe weather-related catastrophe losses, the second quarter of 2023 combined ratio of 145.3 was among the highest in Allstate's history and increased by 37.8 points compared to last year's second quarter due to a 40.3 point increase in the catastrophe loss ratio. The underlying combined ratio of 67.6 improved by 1.9 points compared to the prior year quarter, driven by higher earned premium, lower frequency, and a lower expense ratio, partially offset by higher severity.
The chart on the right provides a historical perspective on the second quarter Property-Liability catastrophe loss ratio of 75.9 points, which was elevated compared to historical experience, reflecting an increased number of catastrophe events and larger losses per event. While the second quarter result was 33.9 points above the 15-year second quarter average of 42 points, it is not unprecedented and falls within modeled outcomes contemplated in our economic capital framework. We remain confident in our ability to generate attractive risk-adjusted returns in the homeowners business and continue to respond to loss trends by implementing rate increases to address higher repair costs and limiting exposures in geographies where we cannot achieve adequate return for our shareholders.
And now, I'll hand it over to Jess to discuss the remainder of our results.
