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 (Allstate Financial). The Rating Outlook is Stable. A full list of ratings follows at the end of this release.
Key issues supporting the rating are Allstate’s market position as a top tier personal lines writer, property/liability underwriting performance and acceptable capitalization at the operating subsidiaries. Balanced against these strengths is a history of material catastrophe losses and challenges associated with undertaking a strategic shift in the life operations.
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%.
Allstate’s announced losses from catastrophes in October 2012, primarily Hurricane Sandy, were $1.1 billion pre-tax and net of reinsurance. Allstate’s pre-tax earnings for the first nine months of 2012 were $2.8 billion, meaning moderate profit and growth in shareholders’ equity is expected for the full year 2012.
Allstate’s property/liability GAAP combined ratio was 93.4% for the first nine months of 2012 relative to 107.7% for the comparable period in 2011. Allstate’s 20-year average annual catastrophe loss as a percentage of earned premium appears high at eight percentage points. Losses attributable to catastrophes will exceed that average in 2012, but are likely to be well below the nearly 15 percentage points experienced in 2011.
Statutory surplus at Allstate Insurance Company (AIC), the primary property/casualty underwriting subsidiary, was $16 billion as of Sept. 30, 2012. 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 2.0x, which is considered consistent with the 1.8x median guideline for ‘A’ rated companies in Fitch’s universe.
Allstate Financial reported net income of $375 million for the first nine months of 2012, down from $455 million in the same period of 2011. Modest investment losses in 2012 relative to gains in 2011 were responsible for the period-to-period change. This result continues to represent an improvement relative to material net losses during the financial crisis.
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. 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 sizeable liquid assets at the holding company level. Allstate has $2.3 billion in deployable assets at the holding company level, relative to forecasted annual interest expense and common dividends of approximately $800 million. Further, holding company resources are sufficient to meet the July 2013 maturity of $250 million of senior notes.
Debt-to-total capital remained appropriate for the current rating category at 26% at Sept. 30, 2012, relative to Fitch’s median guideline of 28%. This ratio was calculated excluding unrealized investment gains on fixed income securities from shareholders’ equity.
Key rating triggers for Allstate that could lead to an upgrade include:
–Growth in surplus leading to an improved capitalization profile measured by operating leverage approaching 1.1x and a score of ‘Strong’ or better 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 falls below 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 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 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% $500 million debenture due May 15, 2037;
–6.5% $500 million debenture due May 15, 2067.
The following senior unsecured debt at ‘BBB+’:
–7.5% $250 million debenture due June 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;
–5.2% $500 million note due Jan. 15, 2042.
Fitch also affirms the following:
–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 at ‘A+’.
Allstate Life Insurance Co.
Allstate Life Insurance Co. of NY
American Heritage Life Insurance Co.
Lincoln Benefit Life Insurance Co.
–IFS at ‘A-‘.
Allstate Life Global Funding Trusts Program
–The following medium-term notes at ‘A -‘.
–5.375% $1,750 million note due April 30, 2013;
–$85 million note due Nov. 25, 2016.
Applicable Criteria & Related Research:
–‘Insurance Rating Methodology’ (Oct. 18, 2012).
Applicable Criteria and Related Research:
Insurance Rating Methodology ￢ﾀﾔ Amended