Fitch Affirms Allstate's (ALL) IDR at 'A-'; Outlook is Stable

Fitch Ratings has affirmed the 'A-' Issuer Default Rating (IDR) of the Allstate Corporation (Allstate) as well as the 'A+' Insurer Financial Strength (IFS) ratings of Allstate Insurance Co. and its property/casualty (P/C) affiliates with a Stable Outlook. Fitch has also downgraded the short-term IDR of Allstate to 'F2' from 'F1'. Additionally, Fitch affirmed the IFS ratings of Allstate Life Insurance Co. and its subsidiaries (collectively referred to as ALIC) at 'A' and revised the Rating Outlook to Negative from Stable. Finally, Fitch affirmed American Heritage Life Insurance Co.'s (AHLIC) IFS rating at 'A' with a Stable Outlook. A full list of ratings follows at the end of this release.

KEY RATING DRIVERS
Fitch's affirmation of P/C affiliates and holding company long-term ratings is supported by Allstate's top-tier market position in personal lines insurance, and solid underwriting results in P/C insurance. The capitalization of Allstate's P/C operations is consistent with the current rating category.

The downgrade of Allstate's short-term IDR to 'F2' from 'F1' reflects an increase in the potential need for holding company liquidity. Specifically, catastrophe losses at the P/C operations could require capital contributions, since the capital cushion at the operating subsidiaries has deteriorated over the past couple of years. In addition, greater investment risk at the life operations along with weakening operating performance could also require the holding company's liquidity resources.

Fitch's revised ALIC's Outlook to Negative as a result of its increasing investment risk, with its portfolio among the riskiest in Fitch's rated life universe. Allstate's life operations have a materially lower standalone rating than the P/C operations given its relatively moderate scale and market position as well as its lower strategic importance. Consequently, the life operations receive significant rating uplift as part of the Allstate enterprise.

Allstate has a 'large' market position, size and scale that would be consistent with Fitch's guidelines for a higher rating category. Allstate is the second-largest personal lines insurance writer in the U.S. behind State Farm Mutual Automobile Insurance Company (State Farm). Allstate's market position in private auto is third behind Government Employees Insurance Co. (GEICO) and State Farm, while its homeowners insurance remains the second largest after State Farm.

The combined ratio for Allstate's property/liability business averaged 94.1% over the last four years (2012-2015), exceeding Fitch's median guidelines for the current rating category. Greater catastrophe losses during the first quarter of 2016 (1Q16) inflated the combined ratio to 98.4% compared to 93.7% for the comparable period in 2015. Catastrophe losses accounted for 10.7 percentage points (pp) on the combined ratio for the first three months of 2016, compared to 4pp in the comparable period in 2015. Catastrophe losses remain elevated with $835 million in pretax losses during April and May of 2016, which is comparable to 1Q16's total.

Personal auto accounts for approximately two-thirds of property/liability written premiums and reported a combined ratio of 99.7% for the first three months of 2016, up from 98.5% in the comparable period in 2015 and essentially flat from full-year 2015. Catastrophe losses in the 1Q amounted to 2.7pp of the combined ratio, masking improvement in the underlying underwriting results.

Nearly one-quarter of Allstate's property/liability written premium comes from the homeowners line of business. Underwriting results for the homeowners line were also adversely impacted by catastrophe losses during 1Q16. Homeowners reported a combined ratio of 94.1% for the first three months of 2016, deteriorating from 79.2% in the comparable period of 2015. Catastrophe losses in 1Q16 were 33.9pp of earned premium, up from 13.9pp in the comparable period of 2015.

Combined statutory surplus at Allstate's P/C operations was $16.1 billion at year-end 2015, down $1.9 billion over the last two years as AIC pays dividends in excess of earnings to support Allstate's share repurchase activity. Further deterioration in capitalization at the P/C operating company level would place downward pressure on ratings.

Capitalization at Allstate's P/C operations continues to deteriorate when measured using Fitch's proprietary Prism capital model as well as NAIC Risk-Based Capital, operating and net leverage ratios. Adjusted net leverage, excluding life company capital, was 4.5x at year-end 2015, approaching Fitch's downgrade trigger of 5.0x.

In 1Q16, ALIC reported net income of $52 million compared to $153 million for the prior year period. The decline was driven by realized investment losses and reduced net investment income, as the company is strategically repositioning its portfolio by selling longer-duration fixed income securities and increasing its exposure to private equities and real estate. ALIC's risky assets ratio, which increased to 241% in 2015 from 212% in 2014, is among the highest in Fitch's universe, and may continue to rise due to its portfolio repositioning if total adjusted capital (TAC) does not increase at a commensurate level. AHLIC generated a statutory return on assets (ROA) of 3.2% in 1Q16 and has a much cleaner investment profile.

ALIC's 'standalone' IFS rating of has been revised to 'BBB-' from 'BBB' reflecting the company's elevated investment risk. However, ALIC receives a four-notch uplift for parent support, elevating its IFS rating to 'A'. Fitch views ALIC's strategic importance within the Allstate enterprise as 'Very Important' and considers the various strategic actions taken to strengthen its risk profile. The ratings continue to benefit from the Capital Support Agreement from Allstate Insurance Co. and its access to the holding company credit facility. Based upon its standalone assessment and strategic importance, ALIC's final rating is capped at one notch below its parent, and any further deterioration in its standalone assessment will result in a downgrade.

AHLIC's 'standalone' IFS rating of 'A-' reflects an 'Important' strategic category within the Allstate enterprise. While Fitch views AHLIC's financial metrics more favorably than ALIC's, the company is seen as less synergistic to the Allstate enterprise. Thus, AHLIC receives a one-notch uplift in its rating.

RATING SENSITIVITIES

Key rating triggers for Allstate that could lead to an upgrade include:
--Sustainable capital position measured by net leverage excluding life company capital below 3.8x and a score approaching 'Very Strong' on Fitch's Prism capital model;
--No material deterioration in underwriting profitability of the property/casualty operations from current levels.

Given its Negative Outlook, Fitch considers an upgrade of ALIC unlikely over the near- to intermediate-term. The following rating triggers could result in a revision of ALIC's Outlook to Stable from Negative:
--An improvement in statutory Risky Assets/TAC ratio to 200% with operating performance remaining stable;
--Fitch's view of its strategic importance changes to 'Core' from 'Very Important.'

Given its relatively small size and scale, AHLIC is unlikely to be upgraded in the near- to intermediate-term, but the following could result in an upgrade over the longer term:
--Fitch's view of its strategic importance changes to 'Very Important' from 'Important' or if the agency's view of parent support merits a greater degree of uplift.

Key rating triggers for Allstate that could lead to a downgrade include:
--A prolonged decline in underwriting profitability that is inconsistent with industry averages or is driven by an effort to grow market share during soft pricing conditions;
--Significant deterioration in capital strength as measured by Fitch's capital model, NAIC risk-based capital, and statutory net leverage. Specifically, if net leverage excluding life company capital approached 5.0x it would place downward pressure on ratings;
--Significant increases in financial leverage ratio to greater than 30%;
--Liquid assets at the holding company of less than one year's interest expense, and preferred and common dividends.

Key rating triggers that could lead to a downgrade for ALIC include:
--Statutory Risky Assets/TAC ratio deteriorates further;
--Fitch's view of its strategic importance weakens.

Key rating triggers that could lead to a downgrade for AHLIC include:
--Financial performance or capitalization deteriorates significantly;
--Fitch's view of its strategic importance weakens.

Fitch affirms the following ratings for Allstate with a Stable Outlook:

The Allstate Corporation
--Long-term IDR at 'A-';
--Preferred stock at 'BB+';

The following senior unsecured debt at 'BBB+':
--6.75% $176 million debenture due May 15, 2018;
--7.45% $317 million debenture due May 16, 2019;
--3.15% $500 million debenture due June 15, 2023;
--6.125% $159 million note due Dec. 15, 2032;
--5.35% $323 million note due June 1, 2033;
--5.55% $546 million note due May 9, 2035;
--5.95% $386 million note due April 1, 2036;
--6.9% $165 million debenture due May 15, 2038;
--5.2% $62 million note due Jan. 15, 2042;
--4.5% $500 million note due June 15, 2043.

The following junior subordinated debt at 'BBB-':
--6.125% $241 million debenture due May 15, 2067;
--5.10% $500 million subordinated debenture due Jan. 15, 2053;
--5.75% $800 million subordinated debenture due Aug. 15, 2053;
--6.5% $500 million debenture due May 15, 2067.

Fitch downgraded the following ratings:

The Allstate Corporation
--Short-term IDR to 'F2' from 'F1'
--Commercial paper to 'F2' from 'F1'.

Fitch also affirms the following ratings with a Stable Outlook:

Allstate Insurance Company
Allstate County Mutual Insurance Co.
Allstate Indemnity Co.
Allstate Property & Casualty Insurance Co.
Allstate Texas Lloyd's
Allstate Vehicle and Property Insurance Co.
Encompass Home and Auto Insurance Co.
Encompass Independent Insurance Co.
Encompass Insurance Company of America
Encompass Insurance Company of Massachusetts
Encompass Property and Casualty Co.
--IFS at 'A+'.

American Heritage Life Insurance Co.
--IFS at 'A'.

Fitch affirmed the following ratings and revised the Outlook to Negative from Stable:

Allstate Life Insurance Co.
Allstate Life Insurance Co. of NY
--IFS at 'A'.

Fitch affirmed the following rating:

Allstate Life Global Funding Trusts Program
--$85 million medium-term note due Nov. 25, 2016 at 'A'.

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