S&P Rates Allstate Debentures

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Yesterday, Allstate Corp. (ALL) had its junior subordinated debentures rated by Standard & Poor's Ratings Services (S&P) at “BBB,” while the counterparty credit rating was affirmed at “A-.” However, the outlook remains negative based on the lingering concerns over adequate capital adequacy.

The company has recently issued hybrid debentures worth $1.0 billion with an expected maturity in 2053. The amount of the proceeds is expected to inject ample liquidity by utilizing funds for general corporate and capital purposes.

Particularly, Allstate projects to fund its new share buyback program worth $1.0 billion, announced last month, with these hybrid securities. The company plans to sell these debentures as per the requirements over the year.

While management justifies the decision to raise debt to repurchase shares on the back of low borrowing costs and higher redemption period, S&P remains wary of Allstate’s statutory capital that lags the pre-financial crisis levels.

Moreover, the ratings agency expects its financial leverage to deteriorate to about 30% in 2012 and 2013 from the current 26.6% at the end of September 2012. Even the fixed-charge ratio, which improved from 2.7x at 2011-end to 10.3x until September 2012-end, is further expected to wane around 9.0x in 2012 and 2013. This increased credit exposure poses credit and financial risks for the company.

Allstate is a leading brand of personal lines writer, private passenger auto and homeowners’ insurance business based on its strong underwriting discipline, which also improved financials and operating leverage in the first nine months of 2012.

However, severe catastrophe losses as estimated for the fourth-quarter 2012, higher operating costs, interest and restructuring expenses, along with consistent volatility in returns from the investment portfolio tend to limit growth of future cash flows. These factors also weaken the company’s competitive leverage in its space where Allstate competes with The Travelers Companies (TRV) and The Progressive Corp. (PGR), among others.

Nevertheless, with an operational strategy that enables acclimatizing to changing market regulations, Allstate is well positioned to benefit from an improving economy. Allstate is fairly liquid and we anticipate continued benefits from its industry-leading position, diversification, underwriting and pricing discipline, we apprehend that the uncertain economic environment will continue to affect its premium writings and investment risk in the upcoming quarters.

Currently, the stock carries a Zacks #2 Rank (Buy), while the long-term recommendation remains at Outperform.

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