ALL Allstate Corporation

Yesterday, Fitch Ratings affirmed the debt and credit ratings of Allstate Corp. (ALL) and its subsidiaries namely, Allstate Insurance Group, Allstate Financial and Allstate Life Insurance Co.

Accordingly, the ratings agency has affirmed issuer default ratings (IDR) of “A-” and debt ratings for Allstate Corp. Alongside, the insurer financial strength (IFS) rating of “A+” (Superior) and IDR of “A-” has been asserted on Allstate Insurance Group and its associates. Additionally, Fitch assigned a “BBB+” rating to Allstate's senior unsecured debt worth $500 million, issued last month, in order to fund a $350 million debt that is scheduled to mature this year. These ratings reflect a stable outlook.

Although the catastrophe losses eroded most of the profits of Allstate in 2011, it still remains a leading brand of personal lines writer and the second best leader in both private passenger auto and homeowners insurance business.

Meanwhile, a modest capitalization with a statutory surplus of $15 billion at 2011-end further strengthens the foundation of Allstate and its subsidiaries. A debt-to-capital ratio of 26% at 2011-end and annual interest expense and common dividends of about $800 million against deployable assets of $2.2 billion also reflects stable liquidity.

Furthermore, Allstate’s improved automobile and homeowners’ margins due to superior rates along with its underwriting capabilities, prudent capital management and strong liquidity continue to be impressive. This has also helped the company to expand its agency concentration in its operational areas, thereby revitalizing its distribution channel by having stronger market presence.

Additionally, the acquisition of the third largest online auto insurer – Esurance – in October 2011, has not only given a fillip to Allstate’s online auto insurance services but this access to direct distribution has also enhanced the company’s competitive leverage, thereby limiting the growth pace of its arch-rivals Geico of Berkshire Hathaway Inc. (BRK.A) and Progressive Corp. (PGR).

Further, after posting severe losses of $483 million and $1.7 billion in 2009 and 2008, respectively, followed by nominal earnings of $58 million in 2010, Allstate Financial posted net income of $586 million in 2011. Although this operation is yet to pronounce a consistent growth trend, its widespread clientele validate raised optimism for future growth.

However, Fitch believes that Allstate’s statutory surplus lags behind the pre-financial crisis levels of $19.1 billion at 2006-end. Even increased catastrophe losses deteriorated the company’s combined ratio to 103.4% in 2011 from 98.1% in 2010.

Moreover, given the increased expenses and claims benefits amid the unrealized losses on asset-backed securities and the strategic shift undergoing in its life operations is believed to be of limited significance on the fundamental growth of Allstate. Hence, Fitch ratings complement with the company’s operating leverage of 2.1x, which is worse than the 1.8x median for Fitch’s criterion for “A” rated companies.

Separately, another ratings agency A.M. Best reassured the financial strength rating (FSR) of “A-” (Excellent) and issuer credit ratings (ICR) of “a-” of Allstate New Jersey Insurance Group (Allstate New Jersey) and its associates.

Nevertheless, Allstate is taking strategic actions to reduce losses on its business from catastrophes through enhanced property catastrophe reinsurance program, non-renewals, stricter underwriting guidelines, increased deductibles and discontinuance of selected lines of coverage, including earthquake. 

Overall, with an operational strategy that enables acclimatizing to changing market regulations, Allstate is well positioned to benefit from an improving economy. While Allstate’s capital and liquidity levels are impressive and we anticipate continued benefits from its industry-leading position, diversification and pricing discipline, we apprehend that the uncertain economic environment will continue to affect its premium writings and investment risk in the upcoming quarters.

Hence, we maintain a Neutral stance on the stock with a Zacks Rank #3, implying a short-term Hold recommendation.

 
ALLSTATE CORP (ALL): Free Stock Analysis Report
 
BERKSHIRE HTH-A (BRK.A): Free Stock Analysis Report
 
PROGRESSIVE COR (PGR): Free Stock Analysis Report
 
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