A.M. Best Affirms Ratings of the Members of Allstate Financial Companies; Revises Outlook to Stable

A.M. Best Co. has revised the outlook to stable from negative and affirmed the financial strength rating (FSR) of A+ (Superior) and the issuer credit ratings (ICRs) of “aa-” of the primary life/health insurance member companies of the Allstate Financial Companies (Allstate Financial). The Allstate Financial segment is the provider of life insurance, retirement and investment products, and voluntary accident and health insurance products for the enterprise’s ultimate parent, The Allstate Corporation (Allcorp) [NYSE: ALL].

Concurrently, A.M. Best has revised the outlook to stable from negative and affirmed the debt ratings of “aa-” of the remaining outstanding notes issued under various funding agreement-backed securities programs of the group’s lead life company, Allstate Life Insurance Company (ALIC). Allcorp and ALIC are headquartered in Northbrook, IL. (See link below for a detailed listing of the companies and ratings.)

Allstate Financial’s revised outlook recognizes the improvement in the performance of its fixed-income investment portfolio, which has experienced declining levels of realized investment losses in the recent year and is currently in a large net unrealized gain position. The revised outlook also acknowledges the improvement in Allstate Financial’s GAAP operating performance—although statutory earnings remain a challenge—as well as the progress achieved as the group continues to voluntarily de-emphasize its interest-sensitive products while focusing on growing its core protection and workplace supplemental health products.

In affirming the ratings of the primary life/health insurance members of Allstate Financial, A.M. Best notes that the ratings significantly benefit from the financial strength and support of their immediate parent, Allstate Insurance Company (Allstate), as well as the ultimate parent, Allcorp. Allstate Financial’s ratings also benefit from the strong Allstate brand name recognition as well as the competitive advantages derived from Allstate’s exclusive agencies and insurance specialists that provide Allstate Financial with significant cross-selling opportunities within Allstate’s vast customer base. Moreover, the ratings reflect Allstate Financial’s competitive market position, its broad portfolios of protection and voluntary health products and its adequate level of stand-alone risk-adjusted capitalization.

Offsetting these positive factors are the challenges to sustain and improve Allstate Financial’s operating performance. While the life/health entities’ operating performance generally has been both profitable and diversified, enhanced by active spread management and good expense controls, overall results have fluctuated and remain modest relative to A.M. Best’s expectations. A.M. Best notes that Allstate Financial’s results have been dampened in recent years by significant investment losses, the challenges of the persistent low interest rate environment and several one-time charges. Although the scale of Allstate Financial’s interest-sensitive businesses continues to decline, the group may be challenged to manage its existing interest-sensitive liabilities that remain exposed to interest rate, credit, reinvestment and disintermediation risks.

While A.M. Best acknowledges the improvement in Allstate Financial’s fixed-income investment portfolio, several structured asset classes remain with large pockets of gross unrealized losses that could expose Allstate Financial to potential asset impairments should the fragile U.S. economic recovery stall or deteriorate. Additionally, Allstate Financial has elevated its exposure to alternative assets. While these assets generally enhance Allstate Financial’s spread management strategies, liquidity is reduced and operating performance and financial strength also could be adversely affected by adverse economic conditions.

A.M. Best believes Allstate Financial is well-positioned at the current rating level for the foreseeable future. Factors that could result in negative rating actions for Allstate Financial include a significant and sustained decline in consolidated risk-adjusted capitalization as measured by Best’s Capital Adequacy Ratio (BCAR) model, net operating performance that does not meet A.M. Best’s expectations, or negative rating actions taken on Allcorp.

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/012602allstatelh.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 Life/Health Insurers”; “A.M. Best’s Perspective on Operating Leverage”; “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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