Best Affirms Allstate and Subsidiaries ‘A+’ Ratings; Outlook Stable

December 16, 2010

A.M. Best Co. has affirmed the financial strength rating (FSR) of ‘A+’ (Superior) and issuer credit ratings (ICR) of “aa-” of Allstate Insurance Group and its members. Best also affirmed the ICR of “a-” and debt ratings of Allstate’s parent, The Allstate Corporation (Allcorp). The outlook for all of these ratings is stable.

In addition Best affirmed the FSR of ‘A+’ (Superior) and ICRs of “aa-” of the primary life/health insurance member companies of Allstate Financial, as well as the debt ratings of “aa-” of the outstanding notes issued under various funding agreement-backed securities (FABS) programs of Allstate Life Insurance Company (ALIC); however, the outlook for these ratings remains negative.

The ratings reflect Allstate’s “solid risk-adjusted capitalization, favorable operating performance and significant market presence,” Best explained. “The group’s capital position reflects its profitable earnings, which have contributed to surplus growth over the past five-year period, excluding parental dividends.

“Allstate’s non-catastrophe operating results have been favorable, as a result of enhanced pricing sophistication and improved loss costs. Additionally, Allstate has a strong overall business profile as the second-largest personal lines writer in the United States. Furthermore, Allstate maintains moderate financial leverage as well as additional liquidity at the holding company level at both Allcorp and Kennett Capital, Inc., and through access to capital markets, lines of credit and its commercial paper program. The group’s operating returns compare favorably to its industry composite peers due to its solid underwriting capabilities and investment income.”

As partial offsetting factors, Best cited ‘Allstate’s inherent exposure to natural disasters due to its expansive market presence throughout the United States. This exposure has been evident in recent years as net catastrophe losses totaled $3.3 billion in 2008, $2.1 billion in 2009 and $1.7 billion through September 2010, with an overall combined ratio impact of 12.4 points, 7.9 points and 8.6 points, respectively.”

However, Best also pointed out that in recent years, “Allstate has executed an extensive catastrophe risk exposure reduction program, which includes a significantly enhanced property catastrophe reinsurance program, non-renewals, stricter underwriting guidelines, increased deductibles and discontinuance of selected lines of coverage, including earthquake.

“Additionally, Allstate has made large dividend payments to Allcorp in most of the past five years, which have contributed to volatility in risk-adjusted capitalization at times of heightened losses. In addition, relative to industry norms, the group maintains above average underwriting and investment leverage, further exposing its surplus position to potential volatility, as demonstrated in recent years. However, due to more recent reduced investment risk and correspondingly lower investment losses, combined with profitable underwriting performance, Allstate has been able to generate solid organic surplus growth and improve its risk-adjusted capitalization.”

Best said the ratings of the primary life/health insurance members of Allstate Financial “benefit significantly from the financial strength and support of their immediate parent, Allstate, as well as the ultimate parent, Allcorp.”

Best added that it believes this support “demonstrates Allstate and Allcorp’s continued commitment to Allstate Financial.” In Best’s opinion, the operations of Allstate Financial “remain strategically important to Allstate. Allstate Financial’s ratings also benefit from the strong Allstate brand-name recognition as well as the competitive advantages derived from Allstate’s exclusive agent field force that provides Allstate Financial significant cross-selling opportunities with Allstate’s vast customer base.

“In addition, the rating action reflects Allstate Financial’s competitive market positions, wide array of protection and voluntary health products, complementary distribution networks and adequate level of risk-adjusted capitalization.”

Furthermore, Best said it continues to” view favorably Allstate Financial’s new business direction, whereby spread-based products have been voluntarily de-emphasized, with more focus placed on growing its core protection products and workplace supplemental health products.”

As offsetting these positive factors, however, are “Allstate Financial’s modest operating trends that have been dampened in recent years by significant investment losses triggered primarily by the fallout of the credit market meltdown, the challenges of the continuing low interest rate environment, and ‘one-time’ charges.”

Best said that while it “views positively Allstate Financial’s new strategic business direction, it will continue to be challenged to administer its large—albeit declining—exposure to spread-based liabilities that continue to expose Allstate Financial to interest rate, credit, reinvestment and disintermediation risks.”

In conclusion Best said it “acknowledges the significant improvement in Allstate Financial’s fixed-income portfolio—the portfolio is currently in a large unrealized gain position—there remains the potential for additional asset impairments should the current fragile economic recovery stall or deteriorate as several structured asset classes continue to maintain large unrealized loss positions.

“Additionally, while Allstate Financial’s large direct commercial mortgage loan portfolio has performed reasonably well, it also could experience higher delinquencies should the commercial mortgage markets soften.”

A complete listing for all of the ratings on Allstate is available.

Sourcde: A.M. Best

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