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TMCNet:  Fitch Affirms Allstate's Ratings; Outlook Stable

[December 18, 2013]

Fitch Affirms Allstate's Ratings; Outlook Stable

CHICAGO & NEW YORK --(Business Wire)--

Fitch Ratings has assigned a 'BB+' rating to Allstate's issuance of preferred stock. At the same time, Fitch affirmed the 'A-' Issuer Default Rating (IDR) of The Allstate Corporation (Allstate) as well as the 'A+' Insurer Financial Strength (IFS) ratings of Allstate Insurance Co. and its property/casualty subsidiaries, and the 'A-' IFS ratings of Allstate Life Insurance Co. and the other life subsidiaries (Allstate Financial). The Rating Outlook is Stable. A full list of ratings follows at the end of this release.

KEY RATING DRIVERS

Allstate's market position as a top tier personal lines writer, good property/liability underwriting performance and progress on the restructuring of the life insurance operations all support the current ratings. Favorably, capitalization at the operating subsidiaries improved modestly and Allstate's recapitalization during 2013 incrementally lowered financial leverage. Balanced against these strengths are elevated levels of risky assets at the life operation and challenges associated with undertaking a strategic shift in the life operations.

In December, Allstate will issue $135 million of 6.625% fixed rate perpetual non-cumulative preferred stock as part of its recapitalization plan. Proceeds from the issuance will go toward general corporate purposes. Based on its rating criteria, Fitch has assigned 100% equity credit to the preferred stock and has added one notch to the rating relative to standard notching to reflect more aggressive loss absorption features.

Similar to previously issued preferred stock, the security has no stated maturity, dividends are non-cumulative, and the company has the option to defer them at their discretion. In addition, the security has a mandatory deferral feature that requires deferral if certain capital ratios or operating results are breached. Fitch believes the mandatory deferral could be triggered before there is significant stress in the organization. Therefore, it deems the features as having more aggressive loss absorption.

Pro forma financial leverage ratio as of Sept. 30, 2013 was 23.6% and remained appropriate for the current rating category relative to Fitch's median guideline of 28%. This ratio reflects the equity credit assigned to the new and existing preferred stock as well as excludes unrealized investment gains on fixed income securities from shareholders' equity.

Allstate has the second leading market position in both private passenger auto and homeowners insurance with an approximate market share of 10% measured by premium written. State Farm Mutual Automobile Insurance Co. remains the largest with market share near 20%.

Underwriting results for Allstate's property/liability business were favorable with a GAAP combined ratio of 93.1% for the first nine months of 2013 relative to 95.5% for the full year 2012. Fitch believes this ratio may deteriorate somewhat in the fourth quarter due to Midwest storm losses. Personal standard auto accounts for approximately two-thirds of property/liability written premiums and reported a combined ratio of 96.6% for the first nine months of 2013, which was relatively steady from the comparable period in 2012.

Nearly one-quarter of Allstate's property/liability written premium comes from the homeowners line of business. Underwriting results for the homeowners line continue to be positive, reporting a combined ratio of 82.4% for the first nine months of 2013. A relatively benign catastrophe year through the first nine months and favorable pricing 2013 explain the improvement in the homeowners' combined ratio from 86.3% in the comparable period in 2012.

Allstate's year-to-date catastrophe losses were 5.5% of earned premiums, which was well below the company's 10-year average annual catastrophe loss of 9.7% of earned premiums.

Combined statutory surplus at Allstate's P/C operations was $17.1 billion at Sept. 30, 2013. Surplus continues to grow at a modest pace but remains below pre-financial crisis levels of $19.1 billion reported at year-end 2006. Net leverage excluding life company capital was 4.0x, which is somewhat better than the guideline for the current rating category. Allstate's score on Fitch's proprietary capital model, Prism, was 'Strong' which represents an improvement from 'Adequate' and coincides with the current rating category.

Allstate Financial reported a modest net loss of $24 million for the first nine months of 2013, down from $541 million of net income for the ull year 2012. A $644 million loss on the disposition of Lincoln Benefit Life (LBL), which remains on Rating Watch Negative pending close of the sale transaction, was primarily responsible for the change.


Allstate's life insurance operations reported risky assets of 163% of total adjusted capital as of Sept. 30, 2013 compared to Fitch's median guideline of 130% for the 'BBB' category. Below investment grade bonds and Schedule BA and 'Other' assets were responsible for the elevated ratio. Gross unrealized losses have improved significantly over the last couple years and no longer represent a material concern.

The rating on Allstate's life operations reflects Fitch's assessment of its limited strategic importance within the Allstate enterprise and view that the 'standalone' IFS rating is in the 'BBB' category. The ratings of the life operations continue to benefit from the Capital Support Agreement from Allstate Insurance Co. and its access to the holding company credit facility.

The life operations focus on traditional underwritten products and de-emphasize spread-based products, which improve its risk profile. Increased earnings at Allstate Financial could eventually improve its strategic importance within the Allstate enterprise, but Fitch believes it will take time for a significant increase in earnings to occur.

Fitch's rating rationale anticipates a continuation of Allstate's practice of maintaining liquid assets at the holding company level to fund at least one year of interest expense, preferred dividends and common dividends as well as upcoming debt maturities. Allstate had $2.8 billion in holding company assets at Sept. 30, 2013 that could be liquidated within three months, relative to forecasted annual interest expense, preferred and common dividends of approximately $860 million and 2014 debt maturities of $1 billion.

RATING SENSITIVITIES

Key rating triggers for Allstate that could lead to an upgrade include:

--Sustainable capital position measured by net leverage excluding life company capital below 3.8x and a score approaching 'Very Strong' on Fitch's proprietary capital model, Prism;

--Reduced volatility in earnings from catastrophe losses and better operating results consistent with companies in the 'AA' rating category;

--Standalone ratings for Allstate's life subsidiaries could increase if their consolidated statutory Risky Assets/TAC ratio approaching 100% and they are able to sustain a GAAP based Return on Assets ratio over 80 basis points.

Key rating triggers for Allstate that could lead to a downgrade include:

--A prolonged decline in underwriting profitability that is inconsistent with industry averages or is driven by an effort to grow market share during soft pricing conditions;

--Substantial adverse reserve development that is inconsistent with industry trends;

--Significant deterioration in capital strength as measured by Fitch's capital model, NAIC risk-based capital and statutory net leverage. Specifically, if net leverage excluding life company capital approached 4.8x it would place downward pressure on ratings;

--Significant increases in financial leverage ratio to greater than 30%;

--Unexpected and adverse surrender activity on liabilities in the life insurance operations;

--Liquid assets at the holding company less than one year's interest expense and common dividends.

Fitch has assigned the following ratings:

--6.625% preferred stock 'BB+'

Fitch affirms the following ratings for Allstate and subsidiaries:

The Allstate Corporation

--Long-term IDR at 'A-'.

The following junior subordinated debt at 'BBB-':

--6.125% $259 million debenture due May 15, 2067;

--5.10% $500 million subordinated debenture due Jan. 15, 2053;

--5.75% $800 million subordinated debenture due Aug. 15, 2053;

--6.5% $500 million debenture due May 15, 2067.

The following senior unsecured debt at 'BBB+':

--6.2% $300 million debenture due May 16, 2014;

--5% $650 million note due Aug. 15, 2014;

--6.75% $176 million debenture due May 15, 2018;

--7.45% $317 million debenture due May 16, 2019;

--3.15% $500 million debenture due Dec. 15, 2023;

--6.125% $159 million note due Dec. 15, 2032;

--5.35% $323 million note due June 1, 2033;

--5.55% $555 million note due May 9, 2035;

--5.95% $386 million note due April 1, 2036;

--6.9% $165 million debenture due May 15, 2038;

--5.2% $72 million note due Jan. 15, 2042

--4.5% $500 million note due June 15, 2043.

--Preferred stock 'BB+';

--Commercial paper at 'F1';

--Short-term IDR at 'F1'.

Allstate Life Global Funding Trusts Program

--$85 million medium-term notes due Nov. 25, 2016 at 'A-'.

Allstate Insurance Company

Allstate County Mutual Insurance Co.

Allstate Indemnity Co.

Allstate Property & Casualty Insurance Co.

Allstate Texas Lloyd's

Allstate Vehicle and Property Insurance Co.

Encompass Home and Auto Insurance Co.

Encompass Independent Insurance Co.

Encompass Insurance Company of America

Encompass Insurance Company of Massachusetts

Encompass Property and Casualty Co.

--IFS at 'A+'.

Allstate Life Insurance Co.

Allstate Life Insurance Co. of NY

American Heritage Life Insurance Co.

--IFS at 'A-'.

Fitch maintains the following rating on Rating Watch Negative:

Lincoln Benefit Life Insurance Co.

--IFS 'A-' on Rating Watch Negative.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria & Related Research:

--'Insurance Rating Methodology' (November 2013).

Applicable Criteria and Related Research:

Insurance Rating Methodology -- Amended

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=723072

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=812413

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON (News - Alert) THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.


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