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Following Allstate’s reported $1.1 billion loss in the final quarter of last year, a quarter which also saw $1.9 billion in realized investment losses, and a 4.3 billion in stockholders’ equity, Fitch Ratings, the organization that rates all insurance companies across the country, has downgraded the senior debt rating of the Allstate Corporation to BBB+ from A, and the financial strength ratings of Allstate’s life insurance and property/casualty subsidiaries from AA- to A, and AA to A+, respectively. The Rating Outlook for the company has been declared to be Negative.
In plainer language, the Negative rating outlook represents Allstate’s current financial position, which is weaker now than it was going into 2008, as well as the uncertainty with regard to further investment portfolio deterioration during 2009. The Negative outlook also represents below-target capital ratios, even when ratios are based on the new lower level. Any further investment losses that caused more deterioration of risk-based capital will result in more downgrades, while an increase in capital from more normal operating results could lead to an improved rating outlook of Stable.
Due to the decline in GAAP shareholders equity, Allstate’s holding company financial leverage increased to 27% at the end of 2008, up from 18% at year-end 2007. This level of financial leverage is considered the upper boundary for the rating category. Fortunately, Allstate’s financial flexibility appears strong, with a completely available billion-dollar bank line, and roughly $3.6 billion in cash and securities (as oppsed to an estimated $1.2 billion in annual fixed charges). In addition, without requiring regulatory approval, Allstate Insurance Company (AIC), can pay dividends of about $1.3 billion during the 2009 fiscal year.
Despite all downgrade the company, Fitch believes that the property/casualty operations at Allstate will continue to offer earnings potential and cash flow, even though their personal lines property/casualty had to weather the negative impact of $3.3 billion in catastrophe losses in 2008.
The entire list of downgraded Allstate components, as well as an explanation of the Negative Outlook rating, can be found at Fitch’s website: fitchratings.com.