|[June 17, 2014]
Fitch Rates Allstate's $250MM Preferred Stock 'BB+'; Affirms Ratings
CHICAGO --(Business Wire)--
Fitch Ratings has assigned a 'BB+' rating to Allstate's issuance of
preferred stock. At the same time, Fitch affirmed the 'A-' Issuer
Default Rating (IDR) of The Allstate Corporation (Allstate) as well as
the 'A+' Insurer Financial Strength (IFS) ratings of Allstate Insurance
Co. and its property/casualty subsidiaries, and the 'A-' IFS ratings of
Allstate Life Insurance Co. and the other life subsidiaries (Allstate
Financial). The Rating Outlook is Stable. A full list of ratings follows
at the end of this release.
KEY RATING DRIVERS
Allstate issued $250 million of 6.25% fixed-rate perpetual
non-cumulative preferred stock and proceeds from the issuance will go
toward general corporate purposes. Based on its rating criteria, Fitch
has assigned 100% equity credit to the preferred stock and has added an
additional notch to the rating to reflect more aggressive loss
Similar to previously issued preferred stock, the security has no stated
maturity, dividends are non-cumulative, and the company has the option
to defer them at its discretion. In addition, the security has a
mandatory deferral feature that requires deferral if certain capital
ratios or operating results are breached. Fitch believes the mandatory
deferral could be triggered before there is significant stress noted in
the organization. Therefore, it deems the features as having more
aggressive loss absorption.
After the $250 million preferred stock issuance and maturity of $300
million in senior notes, pro forma financial leverage ratio as of March
31, 2014 was 22%. Financial leverage remained appropriate for the
current rating category relative to Fitch's median guideline of 28%.
This ratio reflects the equity credit assigned to the new and existing
preferred stock as well as excluding unrealized investment gains on
fixed income securities from shareholders' equity.
Earnings before interest expense and taxes covered interest expense and
preferred dividends by 8.8x during the first quarter of 2014 (1Q'14).
This level of fixed charge coverage is consistent with Fitch's median
guideline of 7x for the current rating category. Fixed charge coverage
has been relatively steady, reporting a ratio of 8.3x for the full year
Underwriting results for Allstate's property/liability business
deteriorated modestly but remained solid with a GAAP combined ratio of
94.7% for 1Q'14 relative to 92.0% for the full year 2013. Catastrophe
losses accounted for 6.3 percentage points on 1Q'14 combined ratio
compared to 4.5 points on 2013's ratio. Fitch believes this ratio may
deteriorate somewhat in the second quarter as Allstate announced April
catastrophe losses of $280 million from six events plus some adverse
reserve development on prior-period catastrophe losses.
Personal auto accounts for two-thirds of property/liability written
premiums and reported a combined ratio of 96.1% for the first three
months of 2014, which was relatively steady from 95.7% in the comparable
period of 2013.
Nearly one-quarter of Allstate's property/liability written premium
comes from the homeowners line of business. Underwriting results for the
homeowners line continue to be positive, reporting a combined ratio of
88.4% for the first three months of 2014. Catastrophe losses through the
first quarter were responsible for modest deterioration in the
homeowners combined ratio from 85.6% in the comparable period in 2013.
Combined statutory surplus at Allstate's P/C operations was $18 billion
at year-end 2013. Surplus continues to grow at a modest pace, but
remains below pre-financial crisis levels of $19.1 billion reported at
year-end 2006. Stated net leverage was 3.1x at year-end 2013 and
approximately 3.6x excluding life company capital.
Allstate Financial reported a net income of $162 million for the first
three months of 2014, up modestly from $146 million for the comparable
period in 2013. Allstate Financial's annualized pre-tax operating return
on assets was 0.8% for 1Q'14. Risky assets ratio remains elevated at
178% of total adjusted capital at year-end 2013.
The rating on Allstte's life operations reflects Fitch's assessment of
its limited strategic importance within the Allstate enterprise and view
that the 'standalone' IFS rating is in the 'BBB' category. Ratings of
the life operations continue to benefit from the Capital Support
Agreement from Allstate Insurance Co. and its access to the holding
company credit facility. The life operations focus on traditional
underwritten products and de-emphasize spread-based products, which
improves its risk profile. Increased earnings at Allstate Financial
could eventually improve its strategic importance within the Allstate
enterprise, but Fitch believes it will take time for a significant
increase in earnings to occur.
Fitch's rating rationale anticipates a continuation of Allstate's
practice of maintaining liquid assets at the holding company level to
fund at least one year of interest expense, preferred and common
dividends, as well as upcoming debt maturities. Allstate has $3.3
billion in holding company assets at March 31, 2014 that could be
liquidated within three months, relative to forecasted annual interest
expense, preferred and common dividends of approximately $890 million,
and remaining 2014 debt maturities of $650 million.
Key rating triggers for Allstate that could lead to an upgrade include:
--Sustainable capital position measured by net leverage excluding life
company capital below 3.8x and a score approaching 'Very Strong' on
Fitch's proprietary capital model, Prism;
--Reduced volatility in earnings from catastrophe losses and better
operating results consistent with companies in the 'AA' rating category;
--Standalone ratings for Allstate's life subsidiaries could rise if
their consolidated statutory Risky Assets/TAC ratio approaches 100% and
they are able to sustain a GAAP-based Return on Assets ratio over 80
Key rating triggers for Allstate that could lead to a downgrade include:
--A prolonged decline in underwriting profitability that is inconsistent
with industry averages or is driven by an effort to grow market share
during soft pricing conditions;
--Substantial adverse reserve development that is inconsistent with
--Significant deterioration in capital strength as measured by Fitch's
capital model, NAIC risk-based capital and statutory net leverage.
Specifically, if net leverage excluding life company capital approached
4.8x it would place downward pressure on ratings;
--Significant increases in financial leverage ratio to greater than 30%;
--Unexpected and adverse surrender activity on liabilities in the life
--Liquid assets at the holding company reaching less than one year's
interest expense and common dividends.
Fitch has assigned the following ratings:
--6.25% preferred stock 'BB+'.
Fitch affirms the following ratings for Allstate and subsidiaries:
The Allstate Corporation
--Long-term IDR at 'A-'.
The following junior subordinated debt at 'BBB-':
--6.125% $259 million debenture due May 15, 2067;
--5.10% $500 million subordinated debenture due Jan. 15, 2053;
--5.75% $800 million subordinated debenture due Aug. 15, 2053;
--6.5% $500 million debenture due May 15, 2067.
The following senior unsecured debt at 'BBB+':
--5% $650 million note due Aug. 15, 2014;
--6.75% $176 million debenture due May 15, 2018;
--7.45% $317 million debenture due May 16, 2019;
--3.15% $500 million debenture due June 15, 2023;
--6.125% $159 million note due Dec. 15, 2032;
--5.35% $323 million note due June 1, 2033;
--5.55% $546 million note due May 9, 2035;
--5.95% $386 million note due April 1, 2036;
--6.9% $165 million debenture due May 15, 2038;
--5.2% $62 million note due Jan. 15, 2042
--4.5% $500 million note due June 15, 2043.
Fitch also affirms the following:
--Preferred stock at 'BB+'
--Commercial paper at 'F1';
--Short-term IDR at 'F1'.
Allstate Life Global Funding Trusts Program
--The following medium-term notes at 'A-'.
--$85 million note due Nov. 25, 2016.
Fitch also affirms the following:
Allstate Insurance Company
Allstate County Mutual Insurance Co.
Allstate Indemnity Co.
Allstate Property & Casualty Insurance Co.
Allstate Texas Lloyd's
Allstate Vehicle and Property Insurance Co.
Encompass Home and Auto Insurance Co.
Encompass Independent Insurance Co.
Encompass Insurance Company of America
Encompass Insurance Company of Massachusetts
Encompass Property and Casualty Co.
--IFS at 'A+'.
Allstate Life Insurance Co.
Allstate Life Insurance Co. of NY
American Heritage Life Insurance Co.
--IFS at 'A-'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria & Related Research:
--'Insurance Rating Methodology' (Nov. 2013)
Applicable Criteria and Related Research:
Insurance Rating Methodology
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