Fitch Affirms Allstate’s Ratings

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has 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. In addition, Fitch has assigned a 'BBB+' rating to Allstate's $500 million senior unsecured debt issuance. The Rating Outlook is Stable. A full list of ratings can be found below.

Key issues supporting the rating are Allstate's market position as a top tier personal lines writer and acceptable capitalization at the operating subsidiaries. Balanced against these strengths was profitability challenged by catastrophe losses, life operations undergoing a strategic shift and remaining unrealized losses on asset-backed securities.

Allstate has the second leading market position in both private passenger auto and homeowners insurance behind State Farm Mutual Automobile Insurance Co. Allstate's acquisition of Esurance gives it access to direct distribution in an effort to compete more effectively against fast-growing peers GEICO and Progressive.

Statutory surplus at Allstate Insurance Company (AIC), the primary underwriting subsidiary, was $15 billion as of Dec. 31, 2011. While this level of capitalization is acceptable at the current rating category, it remains below pre-financial crisis levels of $19.1 billion reported at year-end 2006. Operating leverage, excluding the surplus attributable to Allstate's life operations, was 2.1 times (x), which is worse than the 1.8x median for 'A' rated companies in Fitch's universe.

Allstate's largest line of business, personal auto insurance, continues to perform well, while the homeowners' line was hit hard by catastrophes. The GAAP combined ratio for Allstate's property/liability operations was 103.4% for 2011 relative to 98.1% in 2010. Losses attributable to catastrophes during 2011 amounted to nearly 15 percentage points in the combined ratio compared to less than 9 percentage points in 2010. Allstate's 19-year average annual catastrophe loss as a percentage of earned premium appears high at 7.5 percentage points.

Allstate Financial reported net income of $586 million for 2011. This was up from $58 million in 2010 and represents a considerable improvement relative to net losses of $483 million and $1.7 billion for full years 2009 and 2008, respectively. Changes at Allstate Financial could eventually improve its strategic importance within the Allstate enterprise, but it will take time to see what level of earnings it will contribute.

Gross unrealized investment losses on fixed income securities continue to shrink, amounting to $1.7 billion at Dec. 31, 2011 compared to $2.4 billion, $5 billion and $11 billion at year-ends 2010, 2009 and 2008, respectively. Unrealized loss concentrations continue to be in asset-backed securities, which are more heavily focused in the life insurance operations. The total net unrealized investment gain on a pre-tax basis was $2.9 billion as of Dec. 31, 2011.

Fitch's rating rationale anticipates a continuation of Allstate's practice of maintaining sizeable liquid assets at the holding company level. Allstate has $2.2 billion in deployable assets at the holding company level, relative to annual interest expense and common dividends of approximately $800 million.

Allstate issued $500 million in senior notes in January 2012 to fund debt repayment during 2012. Debt-to-total capital remained appropriate for the current rating category at 26% at Dec. 31, 2011. This ratio was calculated excluding unrealized investment gains on fixed income securities from the denominator. On a pro forma basis, using the new $500 million debt issuance to fund the maturing $350 million debt leaves the financial leverage calculation virtually unchanged.

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' range. 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.

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

--Growth in surplus leading to an improved capitalization profile;

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

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 traditional operating leverage. Specifically, if operating leverage, excluding the surplus of the life insurance operations, approached 2.5x it would place downward pressure on ratings;

--Significant increases in financial leverage to a debt-to-total capital ratio 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 taken the following rating actions on Allstate and subsidiaries:

The Allstate Corporation

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

The following junior subordinated debt is affirmed at 'BBB-':

--6.125% $500 million debenture due May 15, 2037;

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

The following senior unsecured debt is rated 'BBB+':

--5.2% $500 million note due Jan. 15, 2042.

The following senior unsecured debt is affirmed at 'BBB+':

--6.125% $350 million note due Feb. 15, 2012;

--7.5% $250 million debenture due July 15, 2013;

--6.2% $300 million debenture due 2014;

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

--6.75% $250 million debenture due May 15, 2018;

--7.45% $700 million debenture due 2019;

--6.9% $250 million debenture due May 15, 2038;

--6.125% $250 million note due Dec. 15, 2032;

--5.35% $400 million note due June 1, 2033;

--5.55% $800 million note due May 9, 2035;

--5.95% $650 million note due April 1, 2036;

The following ratings are affirmed:

--Commercial paper at 'F1';

--Short-term IDR at 'F1'.

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 affirmed at 'A+'.

Allstate Life Insurance Co.

Allstate Life Insurance Co. of NY

American Heritage Life Insurance Co.

Lincoln Benefit Life Insurance Co.

--IFS affirmed at 'A-'.

Allstate Life Global Funding Trusts Program

--Affirmed at 'A-'.

Additional information is available at 'www.fitchratings.com'. The issuer did not participate in the rating process, or provide additional information, beyond the issuer's available public disclosure. For the Allstate Corp.: The ratings above were unsolicited and have been provided by Fitch as a service to investors. For the other companies mentioned: The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria & Related Research:

--'Insurance Rating Methodology' (Sept. 22, 2011).

Applicable Criteria and Related Research:

Insurance Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=651018

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Fitch Ratings
Primary Analysts:Douglas M. Pawlowski, CFA, +1-312-368-2054
(Allstate Corp. and Allstate Insurance Co.)
Senior Director
Fitch, Inc.
70 West Madison St.
Chicago, IL 60602
orBruce E. Cox, +1-312-606-2316
(Allstate Life Insurance Co.)
Director
or
Committee Chairman:
Jim Auden, +1-312-368-3146
Managing Director
or
Media Relations:Brian Bertsch, +1-212-908-0549 (New York)
[email protected]

Source: Fitch Ratings