No Rating Change for Allstate after Loss Says S&P

July 28, 2008

Standard & Poor’s Ratings Services has announced that it is “taking no rating action on Allstate Corp. (NYSE:ALL; A+/Stable/A-1) or its subsidiaries following Allstate’s announcement that it had a pretax loss of $86 million for second-quarter 2008 compared with pretax income of $2.0 billion for the same quarter of 2007.”

S&P noted that Allstate had restructured its investment portfolio and declared that it “no longer intends to hold to recovery” a basket of securities. As a result it took a “$1.1 billion other-than-temporary-impairment (OTTI) charge to earnings. This charge is relative to total investments of $113.6 billion as of June 30, 2008.

“Unlike the more typical OTTI charges that reflect a deterioration of creditworthiness,” S&P explained, “this charge–triggered by Allstate’s change in intent to hold to recovery–is simply the income-statement recognition of market-pricing movements already incorporated in the GAAP balance sheet as unrealized losses.”

S&P also indicated: “Although this charge will hurt the statutory balance sheet of Allstate’s operating entities, as Allstate develops a plan to sell and sells these securities, including the effect of realized capital gains and losses as they should occur, we are comfortable that Allstate will maintain its commitment to keep statutory capital of its core entities at levels supportive of the rating.

“Accordingly, the true long-term economic cost to the enterprise of the portfolio restructuring could be reduced investment income as the company replaces higher-yielding, higher-risk securities with lower-yielding but lower-risk securities. A shorter-duration, lower-risk profile for the investment portfolio could emerge.” S&P also said it will “continue to review the strategic implications for the group of this portfolio repositioning.”

The rating agency also said that “notwithstanding catastrophe losses and the absence of favorable prior-year releases in the property/casualty segment (a 94.4 percent combined ratio and $592 million operating income in the second quarter 2008 versus 87.6 percent and $947 million for the same quarter in the prior year, respectively), underlying performance remained strong and consistent with our expectation.

“Excluding catastrophes and prior-year reserve releases, the company had an 84.1 percent combined ratio, which was unchanged from the prior year’s quarter. The life segment’s operating income decreased by $36 million to $118 million for the quarter because of lower investment yields on floating-rate assets, increased short-term investment balances held to offset increased liquidity needs in some products, and lower investment balances reflecting dividends paid by Allstate Life Insurance Co. in 2007.”

S&P added that its “ratings on Allstate and its subsidiaries are based on its diversified and national market presence in the U.S., which is supported by a strong competitive position borne from its position as the second-largest domestic personal lines insurance company in the U.S. and 13th-largest life insurance company, very strong interest and fixed-charge coverage metrics, very strong liquidity and financial flexibility, and excess capital at Kennett Capital Inc., a wholly owned investment company. Partially offsetting these strengths are the company’s somewhat aggressive capital-management strategy, which endorses a sizable share-repurchase policy that has contributed to a reduction in capitalization from historically higher levels, earnings and capital volatility because of continued exposure to potential catastrophic losses, and recurring adverse asbestos reserve development.”

In addition S&P indicated that the “stable outlook reflects our expectation that Allstate will remain focused on sustaining very strong profitability rather than premium growth and is expected to sustain operating performance in its property liability operations and outperform the industry, with a combined ratio of 95 percent or less. Fixed-charge coverage should be at least 10x, with financial leverage (debt-plus-hybrid-to-capital ratio) of less than 30 percent.

“The outlook also incorporates the expectation that Allstate will continue its success in reducing its catastrophe exposure while sustaining its very strong competitive position and earnings profile. If Allstate is unsuccessful in meeting these expectations or there are extensive negative operating developments, particularly in regard to the anticipated portfolio restructuring, which dampen consolidated results, we could revise the outlook to negative.

Source: Standard & Poor’s –

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