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Fitch Avows Allstate's Credibility

Zacks Equity Research

Last week, Fitch Ratings asserted the debt and credit ratings of Allstate Corp. (ALL) and assigned rating of “BBB+” on the company’s newly issued notes worth $1 billion as well.

Recently, Allstate raised about $1 billion in a two-part note offering. The first tranche of notes worth $500 million were issued for 10 years with a coupon rate of 3.15%. This is expected to yield 102 basis points above the Treasury benchmark. The remaining $500 million of notes were issued for 30 years, bearing a coupon of 4.5% and are projected to yield 122 basis points above the Treasury.

Meanwhile, both sets of notes carry “A3” and “BBB+” ratings from Moody’s investor Service of Moody’s Corp. (MCO) and Fitch, respectively. The raised debt is expected to be utilized for enhancing the operating leverage of the company.

Simultaneously, Fitch affirmed its issuer default rating (:IDR) of “A-“on Allstate. Further, an insurer financial strength (:IFS) rating of “A+” was avowed on the company’s property-casualty (P&C) divisions, while an IFS of “A-“ remains static on Allstate’s life insurance and other financial subsidiaries. The outlook for all remains stable.

The rating affirmations exhibit Fitch’s confidence in Allstate’s recent debt refinancing activities, which are likely to improve the financial leverage and reduce the borrowing costs, stemming from the ongoing low interest rate environment. Even the current debt-to-capital ratio of 27.3% at the end of Mar 2013 is well within the rating agency’s benchmark of 28%. Moreover, Allstate is well funded to meet the immediate debt maturity of $250 million, scheduled next month.

On the other hand, with 10% of the market based on premiums written, spurred by favorable underwriting capabilities and strong risk-based capitalization, Allstate holds a leading position in the P&C market. However, uncertainty led by catastrophe losses and sluggishness in the company’s life insurance operations raise some concerns. Although Allstate P&C’s statutory surplus improved to $17.2 billion at the end of Mar 2013, it is still well-below $19.1 billion reported at 2006-end, prior to the financial downturn.

Nevertheless, Fitch believes that Allstate’s overall operating leverage of 2.0x is fairly ahead of its 1.8x benchmark. Going ahead, modest investment gains along with the company’s focus on shifting its life insurance business away from spread-based products should improve Allstate’s risk profile.

While Allstate carries a Zacks Rank #3 (Hold), Moody’s carries a Zacks Rank #2 (Buy). Other outperformers of the insurance sector include Hilltop Holdings Inc. (HTH) and Montpelier Re (MRH). Both the stocks carry a Zacks Rank #1 (Strong Buy).

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