Moody’s Lowers Debt Rating On Allstate After Portfolio, Shares Get Hammered

Jan. 29--Moody's Investor's Service lowered its rating on debt issued by insurance giant Allstate Corp., citing the Northbrook company's ""significant investment losses, weak earnings and reduced capitalization."

The credit-rating concern marked Allstate's senior debt down one notch to a still-solid "A2" rating from its former "A3" level. It also marked down Allstate's short-term commercial-paper rating to Prime-2 from Prime-1.

Moody's action lowered moderately the "insurance financial strength" rating on Allstate's principal property-casualty insurance subsidiary, as well as on the company's life-insurance subsidiaries.

The downgrade was announced little more than 24 hours after Allstate jarred investors by reporting that outsize losses in its investment portfolio had generated an unwelcome $1.13 billion fourth-quarter loss. That late Wednesday disclosure sparked a selloff that saw Allstate shares tumble $6.14, or 21 percent, to a Thursday close of $23.50.

Standard & Poor's Ratings Services also revised its outlook on the company and some of its affiliates, citing uncertainty in the insurer's capital adequacy.

"Financially it was a tough year and we all paid the price with a significant decline in our stock price," Tom Wilson, Allstate's chairman, president and chief executive, said on a call with analysts Thursday morning.

Late Wednesday, Allstate surprised investors for the second consecutive quarter with large losses on investments that have soured amid the global credit crisis.

The property and casualty insurer posted a $1.13 billion loss for the quarter ending Dec. 31, as losses mounted in its investment portfolio. Excluding the investment losses, Allstate's operating income was $518 million, a 26 percent decline from the year-ago period as underwriting income fell.

The company was hammered by $1.93 billion of net realized capital losses in its investment portfolio. Unrealized net capital losses ballooned to $8.8 billion as credit spreads widened on its fixed income investments.

Allstate also said it plans to cut 1,000 jobs in its financial services unit over the next two years.

"We were not able to run out the market and incurred losses," Wilson said. "As a result we had a net (yearly) loss of $1.7 billion." Catastrophe losses from tornadoes and hurricanes also hurt Allstate's bottom line.

Many financial firms have faced mounting losses because of the ongoing credit market turmoil and sharp declines in investment markets have slashed their dividends in an effort to preserve cash.

Allstate said it has kept its dividend for the fourth quarter level -- 41 cents per share -- throughout the year, and will review it again in February.

"As the chairman of the board, I reserve the right for the board to do whatever they want to do every quarter," Wilson said.

Analysts have expressed concern over the company's investment portfolios and feared that insurers may need to raise capital to avoid damaging downgrades from rating agencies.

S&P on Thursday lowered its counterparty credit and financial strength ratings on two Allstate subsidiaries, Allstate Protection and Allstate Financial, to "AA-" from "AA."

The ratings agency also said that it lowered its "A+" counterparty credit rating on Allstate to "A-".

The outlook on all these companies is negative.

"These rating actions reflect the significant deterioration in the operating companies' capital adequacy to the high end of the adequate range from strong," Standard & Poor's credit analyst Neil Stein said in a statement. "Although we expect the very strong underlying earnings power from the group to contribute to meaningful improvements in capital in 2009, we believe there are several factors that will inhibit the company's return to historical levels of profitability and capital adequacy."

Citi Investment Research analyst Joshua Shanker wrote in a research note that liquidity could become an issue for Allstate if the value of its investment portfolio does not rebound before it is depleted of its cash assets.

On the conference call with investors Thursday, Wilson said the cuts will have "no impact on our business."

"They cut it to 'AA-' which is not exactly a terrible rating," he added.

Keefe, Bruyette & Woods analyst Cliff Gallant cut his 2009 profit estimate to $4.80 per share from $5.65 per share, noting lower investment income, slower growth and depressed life earnings. Gallant maintained his "Market Perform" rating, but lowered his target price on the stock by $5 to $27.

"Unfortunately, with financial markets still in flux, we view further investment portfolio losses as a material risk factor and that a major catastrophic event could be devastating," Gallant wrote.

Associated Press contributed to this story.