Fitch Rates Allstate's $250MM Preferred Stock 'BB+'; Affirms Ratings

CHICAGO--()--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 absorption features.

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 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 $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 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 $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.

RATING SENSITIVITIES

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-':

--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

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=723072

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=835075

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Contacts

Fitch Ratings
Primary Analyst
Douglas M. Pawlowski, CFA
Senior Director
+1 312-368-2054
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Martha M. Butler, CFA
Senior Director
+1 312-368-3191
or
Committee Chairperson
Julie A. Burke, CFA
Managing Director
+1 312-368-3158
or
Media Relations, New York
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Douglas M. Pawlowski, CFA
Senior Director
+1 312-368-2054
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Martha M. Butler, CFA
Senior Director
+1 312-368-3191
or
Committee Chairperson
Julie A. Burke, CFA
Managing Director
+1 312-368-3158
or
Media Relations, New York
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com