S&P Lowers Outlook on Allstate and Subs to Negative; Affirms Ratings

November 3, 2011

Standard & Poor’s Ratings Services has revised its outlook on Allstate Corp., Allstate Insurance Co. (AIC), and its core property-liability insurance companies (collectively, Allstate Protection), as well as the life insurance companies, deemed strategically important to the group (collectively, Allstate Financial) to negative from stable.

S&P has also affirmed its ‘A-‘ counterparty credit, ‘A-2’ commercial paper, and ‘BBB’ junior subordinated debt ratings on Allstate, as well as its ‘AA-‘ counterparty credit and financial strength ratings on Allstate Protection; and its ‘A+’ counterparty credit and insurance financial strength ratings on Allstate Financial.

The negative outlook “reflects a deterioration in enterprise capital adequacy resulting from a combination of sizable catastrophe losses, the acquisition of Esurance (not rated) and Answer Financial (not rated), and a continued aggressive share-repurchase and dividend strategy,” S&P explained.

Credit analyst Timothy C. Connor added: “We believe capital adequacy is deficient at the rating level and, in our view, is a rating weakness. S&P said the outlook revision also stems from its “uncertainty in how continued catastrophe-risk reduction efforts in Allstate’s homeowners business will affect its personal auto business and overall competitive position.”

S&P added that “although it is likely that Allstate’s strong underlying earnings power from the group could contribute to rebuilding the capital base by year-end 2012, we believe several factors will pressure the company to organically restore capital and return capital adequacy to levels consistent with the rating. These include a combination of the potential decline in top-line growth, uncertainty of catastrophe losses, lower investment income, and competitive pressure at Allstate Financial.”

S&P indicated that the present ratings on Allstate “reflect its very strong and diversified national market presence in the U.S. as the second-largest domestic personal lines insurance company and 17th-largest life insurance company.

“Furthermore, the rating incorporates our expectation that Allstate will continue to sustain its competitive position while pursuing its catastrophe management reduction efforts. We believe that these efforts have not only hampered growth and reduced cross-selling opportunities but could also predispose Allstate to reputation risk.”

The rating agency noted, however, that it “could lower the ratings by one notch if Allstate does not meet our expectations, or there are developments that further dampen operating results, capital adequacy, or its competitive position. We would likely not lower the ratings if Allstate demonstrates in the next 12-18 months that it is able to improve and sustain its operating performance better than peers and with lower volatility than experienced in the last two years, organically replenish capital, and maintain its competitive position in its chosen businesses.”

Source: Standard & Poor’s

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