Fitch Affirms Allstate’s Ratings, Upgrades Life Operations; Outlook Stable

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 (P/C) affiliates. In addition, Fitch has upgraded the IFS ratings of Allstate Life Insurance Co. and its subsidiaries (ALIC) along with American Heritage Life Insurance Co. (AHLIC) to 'A' from 'A-'. The Rating Outlook is Stable. A full list of ratings follows at the end of this release.

KEY RATING DRIVERS

Fitch's affirmation is supported by Allstate's top-tier market position in personal lines insurance, solid underwriting results in P/C insurance, and a holding company with good financial flexibility. The capitalization of Allstate's P/C operations is consistent with the current rating category, but consequently holds the rating down in the 'A' category.

The upgrade of ALIC reflects Fitch's improved view of ALIC's strategic importance within the Allstate enterprise as 'Very Important' compared with the previous view as 'Important.' This view considers the various strategic actions taken by the company to strengthen its risk profile, including de-emphasizing spread-based products in favor of traditional underwritten products, along with enhanced dividend capacity to support parent objectives.

The 'standalone' IFS rating on ALIC is 'BBB' with a three-notch uplift applied for parent support. The ratings continue to benefit from the Capital Support Agreement from Allstate Insurance Co. and its access to the holding company credit facility.

The upgrade of AHLIC reflects a 'standalone' IFS rating of 'A-' and an 'Important' strategic category. While Fitch views AHLIC's financial metrics more favorably than ALIC's, the agency views the company as less synergistic to the Allstate enterprise and ALIC. Thus, AHLIC receives a one-notch uplift in its rating.

Allstate has 'large' market position, size and scale that would be consistent with Fitch's guidelines for a higher rating category. Allstate is the second-largest personal lines insurance writer in the U.S. behind State Farm Mutual Automobile Insurance Company (State Farm). Allstate's market position in private auto is third behind Government Employees Insurance Co. (GEICO) and State Farm, while its homeowners insurance remains the second largest after State Farm.

Underwriting results for Allstate's property/liability business remained better than Fitch's median guidelines for the current rating category with a three-year average GAAP combined ratio of 93.8%. Allstate reported a combined ratio of 93.7% for the first three months of 2015 relative to 94.7% for the comparable period in 2014. Catastrophe losses accounted for 4.0 percentage points on the combined ratio for the first three months of 2015 compared to 6.3 points in the comparable period in 2014.

Personal auto accounts for approximately two-thirds of property/liability written premiums and reported a combined ratio of 98.5% for the first three months of 2015, deteriorating from 96.1% in the comparable period in 2014. Increased frequency and severity trends were responsible for the period-to-period deterioration in underwriting results.

One-fifth 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 79.2% for the first three months of 2015, improving from 88.4% in the first quarter of 2014 (1Q14). Catastrophe losses through 1Q15 were down to 13.9% of earned premium from 21.6% in 1Q14.

Consolidated earnings before interest expense and taxes covered interest expense and preferred dividends by 10x during the first three months of 2015, up from 8.8x in the comparable period of 2014. Fixed charge coverage at this level is approaching Fitch's median guideline of 12x for the 'AA' rating category.

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 $3.37 billion in holding company assets at March 31, 2015 that could be liquidated within three months, relative to forecasted annual interest expense, and preferred and common dividends of approximately $880 million.

Combined statutory surplus at Allstate's P/C operations was $17 billion at year-end 2014, down $1 billion from year-end 2013 and below pre-financial-crisis levels of $19.1 billion reported at year-end 2006. Capitalization at Allstate's P/C operations continues to be considered 'Strong' as measured by Fitch's proprietary Prism capital model, which is consistent with guidelines for the current rating category. Stated net leverage was 3.4x at March 31, 2015, and approximately 4x excluding life company capital.

ALIC reported a pre-tax GAAP operating return on assets (ROA) of 1.3% in 2014 and 1Q15 compared with 0.9% in 2013. This improvement was offset by the deterioration of ALIC's risky assets ratio, which increased to 212% in 2014 from 178% in 2013, remaining below expectations for the current rating level. AHLIC generated a statutory ROA of 9.8% in 2014 and has a much cleaner investment profile.

Fitch published newly updated insurance notching criteria on July 14, 2015 via an update to its master criteria report, 'Insurance Rating Methodology.' Today's affirmation reflects application of the updated notching criteria to Allstate's ratings.

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 Prism capital model;

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

Key rating triggers that could lead to an upgrade for the life operations include:

--Standalone ratings for ALIC could be upgraded if its statutory Risky Assets/TAC ratio improved to 130% and the company is able to sustain a GAAP-based ROA over 80 basis points;

--Ratings for ALIC could also be upgraded if Fitch's view of its strategic importance changes to 'Core' from 'Very Important;'

--AHLIC's standalone rating is unlikely to be upgraded in the intermediate term, due to its relatively small size and scale;

--Ratings for AHLIC could be upgraded if Fitch's view of its strategic importance changes to 'Very Important' from 'Important' or if the agency's view of parent support merits a greater degree of uplift.

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%;

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

Key rating triggers that could lead to a downgrade for the life operations include:

--Standalone ratings for ALIC could be downgraded if its statutory Risky Assets/TAC ratio deteriorates further or GAAP-based ROA declines to 50 basis points;

--Standalone ratings for ALIC could be downgraded if there is unexpected and adverse surrender activity on liabilities in the life insurance operations;

--AHLIC's standalone rating could be downgraded if financial performance or capitalization deteriorates significantly;

--Ratings for ALIC and AHLIC could be downgraded if Fitch's view of the strategic categories weaken.

Fitch affirms the following ratings for Allstate and subsidiaries with a Stable Outlook:

The Allstate Corporation

--Long-term IDR at 'A-';

--Preferred stock at 'BB+';

--Commercial paper at 'F1';

--Short-term IDR at 'F1'.

The following junior subordinated debt at 'BBB-':

--6.125% $252 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+':

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

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

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

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

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

--5.55% $546 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% $62 million note due Jan. 15, 2042;

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

Fitch also affirms the following with a Stable Outlook:

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+'.

Fitch upgraded the following with a Stable Outlook:

Allstate Life Insurance Co.

Allstate Life Insurance Co. of NY

American Heritage Life Insurance Co.

--IFS to 'A' from 'A-'.

Allstate Life Global Funding Trusts Program

The following medium-term notes to 'A' from 'A-':

--$85 million note due Nov. 25, 2016.

Additional information is available on www.fitchratings.com

Applicable Criteria

Insurance Rating Methodology (pub. 14 Jul 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=868367

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Source: Fitch Ratings