Best Sees No Ratings Change for Allstate Insurance, Allstate Financial

February 3, 2009

A.M. Best Co. has commented that its ratings and outlook on Allstate Insurance Group and The Allstate Corporation (Allcorp) “remain unchanged, despite recently reported fourth quarter 2008 financial results, which included substantial realized and unrealized capital losses on Allstate’s and Allcorp’s investment portfolio.”

Best’s affirmation of the ratings on Allstate stands in contrast to the action taken by Standard & Poor’s last week and Fitch ratings action announced today (See following article). S&P lowered its ratings on Allstate from ‘AA’ to ‘AA-‘, i.e. {{dq0}} which is arguably slightly lower than Best’s ratings, i.e. “Superior.” (See IJ web site – https://www.insurancejournal.com/news/national/2009/01/30/97440.htm).

Best noted that it had had affirmed the financial strength rating (FSR) of ‘A+’ (Superior) but downgraded the issuer credit ratings (ICR) to “aa-” from “aa” of Allstate and its members on October 23, 2008. In addition Best downgraded the ICR and the debt ratings to “a-” from “a” of Allstate’s parent, Allcorp.

At the same time Best affirmed the FSR of ‘A+’ (Superior) and downgraded the ICRs to “aa-” from “aa” of the primary life/health member companies of Allstate Financial, as well as the debt ratings to “aa-” from “aa” for the outstanding notes issued under various funding agreement-backed securities (FABS) programs of Allstate Life Insurance Company (ALIC).

The outlook for all of the ratings remains stable.

Best explained that the rating actions it took last October “contemplated Allstate’s recent adverse trend in its risk-adjusted capital position. However, the group continues to maintain adequate risk-adjusted capitalization for its current ratings, despite significant realized and unrealized capital losses, dividend payments to Allcorp and modest operating earnings in 2008, driven by sizeable catastrophe losses.”

In addition Best noted that the ratings and outlook also reflect its expectation that Allstate’s underlying operating performance will continue to produce favorable results, thus allowing the group to replenish its risk-adjusted capital position over the near term.

“Allstate continues to maintain a significant market presence and strong overall business profile as the second-largest personal lines writer, a distinct advantage contributing to the expectation that the group will continue to produce favorable operating results. “Furthermore,” Best continued, “Allstate maintains moderate financial leverage as well as additional liquidity at the holding company level in both Allcorp and affiliate, Kennett Capital, Inc.”

The ratings of the primary life/health members of Allstate Financial “continue to reflect the financial strength and support from its direct parent, Allstate Insurance Company (AIC),” the analysis continued. “To offset statutory net losses incurred in 2008, AIC provided ALIC with $1.75 billion in capital contributions.” Best said it “believes this support demonstrates Allcorp’s commitment to Allstate Financial and that its operations remain strategically important to the Allstate Group.”

Best also indicated that in “response to the current economic climate, Allstate Financial has initiated a number of actions to reduce risk and improve returns such as reducing its concentration in spread-based products, maintaining high liquidity in the investment
portfolio and decreasing the number of product offerings.”

The above actions are generally positive in Best’s view, but the rating agency also notes that they have effectively “reduced Allstate Financial’s expected earnings run-rate and narrowed its operating profile.” In addition Best pointed out that “Allstate Financial’s unrealized loss position as of December 31, 2008 was nearly $7 billion, indicating the likelihood of additional investment-related losses.”

Source: A.M. Best – www.ambest.com

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