A.M. Best Affirms Ratings of The Allstate Corporation and Its Subsidiaries

A.M. Best Co. has affirmed the financial strength rating (FSR) of A+ (Superior) and issuer credit ratings (ICR) of “aa-” of Allstate Insurance Group (Allstate) and its members. Additionally, A.M. Best has affirmed the ICR of “a-” and debt ratings of Allstate’s parent, The Allstate Corporation (Allcorp) (Northbrook, IL) (NYSE: ALL). The outlook for these ratings is stable.

Concurrently, A.M. Best has affirmed the FSR of A+ (Superior) and ICRs of “aa-” of the primary life/health insurance member companies of Allstate Financial. A.M. Best also has affirmed the debt ratings of “aa-” of the outstanding notes issued under various funding agreement-backed securities (FABS) programs of Allstate Life Insurance Company (ALIC) (Northbrook, IL). The outlook for these ratings remains negative. (See link below for a detailed listing of the companies and ratings.)

The ratings reflect Allstate’s solid risk-adjusted capitalization, favorable operating performance and significant market presence. The group’s capital position reflects its profitable earnings, which have contributed to surplus growth over the past five-year period, excluding parental dividends. Allstate's non-catastrophe operating results have been favorable, as a result of enhanced pricing sophistication and improved loss costs. Additionally, Allstate has a strong overall business profile as the second-largest personal lines writer in the United States. Furthermore, Allstate maintains moderate financial leverage as well as additional liquidity at the holding company level at both Allcorp and Kennett Capital, Inc., and through access to capital markets, lines of credit and its commercial paper program. The group’s operating returns compare favorably to its industry composite peers due to its solid underwriting capabilities and investment income.

Partially offsetting these positive rating attributes is Allstate's inherent exposure to natural disasters due to its expansive market presence throughout the United States. This exposure has been evident in recent years as net catastrophe losses totaled $3.3 billion in 2008, $2.1 billion in 2009 and $1.7 billion through September 2010, with an overall combined ratio impact of 12.4 points, 7.9 points and 8.6 points, respectively. However, in recent years, Allstate has executed an extensive catastrophe risk exposure reduction program, which includes a significantly enhanced property catastrophe reinsurance program, non-renewals, stricter underwriting guidelines, increased deductibles and discontinuance of selected lines of coverage, including earthquake.

Additionally, Allstate has made large dividend payments to Allcorp in most of the past five years, which have contributed to volatility in risk-adjusted capitalization at times of heightened losses. In addition, relative to industry norms, the group maintains above average underwriting and investment leverage, further exposing its surplus position to potential volatility, as demonstrated in recent years. However, due to more recent reduced investment risk and correspondingly lower investment losses, combined with profitable underwriting performance, Allstate has been able to generate solid organic surplus growth and improve its risk-adjusted capitalization.

The ratings of the primary life/health insurance members of Allstate Financial benefit significantly from the financial strength and support of their immediate parent, Allstate, as well as the ultimate parent, Allcorp. A.M. Best believes this support demonstrates Allstate and Allcorp’s continued commitment to Allstate Financial and, in A.M. Best’s opinion, the operations of Allstate Financial remain strategically important to Allstate. Allstate Financial’s ratings also benefit from the strong Allstate brand-name recognition as well as the competitive advantages derived from Allstate’s exclusive agent field force that provides Allstate Financial significant cross-selling opportunities with Allstate’s vast customer base. In addition, the rating action reflects Allstate Financial’s competitive market positions, wide array of protection and voluntary health products, complementary distribution networks and adequate level of risk-adjusted capitalization. Furthermore, A.M. Best continues to view favorably Allstate Financial’s new business direction, whereby spread-based products have been voluntarily de-emphasized, with more focus placed on growing its core protection products and workplace supplemental health products.

Offsetting these positive factors are Allstate Financial’s modest operating trends that have been dampened in recent years by significant investment losses triggered primarily by the fallout of the credit market meltdown, the challenges of the continuing low interest rate environment, and “one-time” charges. While A.M. Best views positively Allstate Financial’s new strategic business direction, it will continue to be challenged to administer its large—albeit declining—exposure to spread-based liabilities that continue to expose Allstate Financial to interest rate, credit, reinvestment and disintermediation risks. Finally, while A.M. Best acknowledges the significant improvement in Allstate Financial’s fixed-income portfolio—the portfolio is currently in a large unrealized gain position—there remains the potential for additional asset impairments should the current fragile economic recovery stall or deteriorate as several structured asset classes continue to maintain large unrealized loss positions. Additionally, while Allstate Financial’s large direct commercial mortgage loan portfolio has performed reasonably well, it also could experience higher delinquencies should the commercial mortgage markets soften.

For a complete listing of The Allstate Corporation and its property/casualty and life/health subsidiaries’ FSRs, ICRs and debt ratings, please visit www.ambest.com/press/121505allstate.pdf.

The principal methodology used in determining these ratings is Best’s Credit Rating Methodology -- Global Life and Non-Life Insurance Edition, which provides a comprehensive explanation of A.M. Best’s rating process and highlights the different rating criteria employed. Additional key criteria utilized include: “Risk Management and the Rating Process for Insurance Companies”; “Understanding BCAR for Property/Casualty Insurers”; “Catastrophe Risk Management Incorporated Within the Rating Analysis”; “Understanding BCAR for Life and Health Insurers”; “A.M. Best’s Ratings & the Treatment of Debt”; “A.M. Best’s Perspective on Operating Leverage”; “Equity Credit for Hybrid Securities”; “Rating Funding Agreement-Backed Securities”; and “Rating Members of Insurance Groups.” Methodologies can be found at www.ambest.com/ratings/methodology.

Founded in 1899, A.M. Best Company is the world's oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.

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