Fitch Rates Allstate's Senior Debt 'BBB+'; Affirms Existing Ratings
Fitch Rates Allstate's Senior Debt 'BBB+'; Affirms Existing Ratings
Fitch Ratings has assigned a 'BBB+' rating to Allstate's issuance of senior notes. 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. Allstate has also issued preferred stock, and Fitch expects to assign that rating shortly.
KEY RATING DRIVERS
Key issues supporting the rating are Allstate's market position as a top tier personal lines writer, good 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 announced a plan to retire approximately $3 billion in outstanding senior debt and subordinated notes funded by a combination of preferred stock, debt and cash. The company has $1.2 billion in debt maturing in 2013 and 2014 which will be included in the capital plan. Financial leverage ratios are likely to improve depending in part on the amount of cash used. The refinancing will likely reduce interest expense given the prevailing low interest rate environment.
Debt-to-total capital remained appropriate for the current rating category at 27.3% at March 31, 2013, relative to Fitch's median guideline of 28%. This ratio was calculated excluding 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 93.2% for the first quarter of 2013 relative to 92.1% for the comparable period in 2012. Personal auto accounts for approximately 70% of property/liability written premiums and reported a combined ratio of 95.7% for the first quarter of 2013, improving from 97.1% in the comparable period of 2012.
Approximately 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 85.6% for the first quarter of 2013. Greater catastrophe losses in the first quarter of 2013 explain the modest deterioration in the homeowners' combined ratio from 80.5% in the first quarter of 2012.
Allstate's 10-year average annual catastrophe loss remains high at 9.7% of earned premiums. Losses attributable to catastrophes in 2012 were slightly below the 10-year average at 8.8% of earned premiums, while 2011 was a particularly challenging year with catastrophe losses amounting to 14.7% of earned premiums.
Statutory surplus at Allstate Insurance Company (AIC), the primary property/casualty underwriting subsidiary, was $17.2 billion as of March 31, 2013. 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 $3.6 billion in surplus attributable to Allstate's life operations, was nearly 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 $146 million for the first three months of 2013, up from $112 million in the same period of 2012. Modest investment gains in 2013 relative to losses in 2012 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 $2.2 billion in holding company assets that could be liquidated within three months, relative to forecasted annual interest expense and common dividends of approximately $900 million. Further, holding company resources are sufficient to meet the July 2013 maturity of $250 million of senior notes.
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 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:
--3.15% $500 million senior notes 'BBB+';
--4.50% $500 million senior notes 'BBB+'.
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;
--5.10% $500 million subordinated debenture due Jan. 15, 2053;
--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-'.
--$85 million note due Nov. 25, 2016.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria & Related Research:
--'Insurance Rating Methodology' (January 2013)
Applicable Criteria and Related Research:
Insurance Rating Methodology -- Amended
Brian Bertsch, New York, +1-212-908-0549
Douglas M. Pawlowski, CFA (Allstate Corp. & Allstate Insurance), +1-312-368-2054
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
Cynthia J. Crosson (Allstate Life Insurance Co.), +1-212-908-0863
Fitch Ratings, Inc.
One State Street Plaza
New York, New York 10004
Julie Burke, CPA, CFA, +1-312-368-3146
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