KEY RATING DRIVERS
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.
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 2013.
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
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
Allstate Financial reported a net income of
The rating on Allstate'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
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 basis points.
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 industry trends;
--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 insurance operations;
--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-':
The following senior unsecured debt at 'BBB+':
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-'.
Fitch also affirms the following:
Allstate Insurance Company
--IFS at 'A+'.
Allstate Life Insurance Co.
Allstate Life Insurance Co. of NY
--IFS at 'A-'.
Additional information is available at 'www.fitchratings.com'.
--'Insurance Rating Methodology' (
Insurance Rating Methodology
Source: Fitch Ratings
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