Fitch Downgrades Allstate Corp. and its Subs; Outlook Remains Negative

February 3, 2009

In contrast to A.M. Best and Standard & Poor’s, Fitch Ratings has downgraded the senior debt rating of the Allstate Corporation to ‘BBB+’ from ‘A’, and the financial strength ratings of Allstate’s P/C and life insurance subsidiaries to ‘A+’ from ‘AA’ and ‘A’ from ‘AA-‘, respectively, and has assigned a negative outlook to the ratings.

“The rating actions follow Allstate’s reported $1.1 billion loss in the fourth quarter of 2008 that included $1.9 billion in realized investment losses,” Fitch explained. “During the final quarter of 2008, stockholders’ equity fell $4.3 billion to $12.6 billion. Over the full year 2008, Allstate reported a net loss of $1.7 billion, but stockholders’ equity declined by $9 billion or 42 percent. More than $5 billion in pre-tax realized capital losses and nearly $9 billion in unrealized losses contributed to the full-year decline in equity.”

Fitch also explained that it had assigned the negative rating outlook because it “reflects Allstate’s weaker current financial position, as well as uncertainty regarding further investment portfolio deterioration during 2009. The negative outlook also reflects capital ratios that are still somewhat below targets for even the new ratings levels. Additional investment losses leading to further deterioration in risk-based capital would result in further downgrades. An increase in capital due to a return to more normalized operating results, and less realized investment losses, would likely lead to a movement to a Stable Outlook.”

Fitch also pointed out that “Allstate’s holding company financial leverage adjusted for hybrid equity credit increased to 27 percent at year-end 2008, up from 18 percent one year earlier, due to the decline in GAAP shareholders equity. This level of financial leverage is considered the upper boundary for the rating category. Favorably, Allstate’s financial flexibility appears strong, as the $1 billion bank line remains completely available and the holding company has approximately $3.6 billion of cash and securities relative to estimated annual fixed charges of $1.2 billion. In addition, Allstate Insurance Company (AIC) can pay dividends of approximately $1.3 billion in 2009 without prior regulatory approval.”

However, Fitch also indicated that it believes Allstate’s P/C operations “continue to offer favorable cash flow and earnings potential. Allstate’s personal lines property/casualty business was negatively impacted by $3.3 billion of catastrophe losses during 2008, accounting for greater than 12 percentage points of the 99 percent full-year combined ratio.

“The life operations received $1.8 billion of additional capital from the holding company and AIC during 2008 as well as benefiting from an accounting change that added $350 million to statutory surplus. The ‘standalone’ financial strength ratings of Allstate’s life operation is lower than the current ‘A’ level. The lower standalone rating reflects its more troubled assets relative to the property/casualty operation, liquidity needs from institutional product maturities, and generally weak performance. The current ratings on the life insurance subsidiaries receive an uplift due to the Capital Support Agreement from AIC and their access to company credit facilities.”

Source: Fitch Ratings –

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