A.M. Best Affirms Ratings of Allstate Insurance Group and Allstate Financial; Downgrades Issuer Credit Ratings

A.M. Best Co. has affirmed the financial strength rating (FSR) of A+ (Superior) and downgraded the issuer credit ratings (ICR) to "aa-” from "aa” of Allstate Insurance Group (Allstate) and its members. Additionally, A.M. Best has downgraded the ICR to "a-” from "a” and the debt ratings of Allstate’s parent, The Allstate Corporation (Allcorp) (Northbrook, IL) [NYSE: ALL]. Concurrently, A.M. Best has affirmed the FSR of A+ (Superior) and downgraded the ICRs to "aa-” from "aa” of the primary life/health member companies of Allstate Financial. A.M. Best also has downgraded the debt ratings to "aa-” from "aa” for the outstanding notes issued under various funding agreement-backed securities (FABS) programs of Allstate Life Insurance Company (ALIC). The outlook for all ratings is stable. All companies are domiciled in Northbrook, IL. (See link below for a detailed listing of the companies and ratings.)

These rating actions reflect Allstate’s considerable statutory surplus decline through third quarter 2008 due to catastrophe losses, realized and unrealized capital losses, as well as dividend payments to the parent. Although the group continues to maintain adequate risk-adjusted capitalization for its current ratings, the ICR downgrades contemplate the continued variability demonstrated in Allstate’s risk-adjusted capitalization position in recent years. While Allstate reported negative net earnings through third quarter 2008, its non-catastrophe operating results have been favorable through tightened underwriting guidelines, improved risk segmentation, adequate pricing and favorable loss trends. Additionally, Allstate has a significant market presence and strong overall business profile as the second-largest personal lines writer. Furthermore, Allstate maintains moderate financial leverage as well as additional liquidity at the holding company level in both Allcorp and Kennett Capital, Inc., and through access to capital markets, lines of credit and its commercial paper program.

Partially offsetting these positive rating attributes is Allstate’s inherent exposure to natural disasters due to its expansive market presence throughout the United States. This exposure was particularly evident over the previous five-year period as net catastrophe losses totaled $3.1 billion through third quarter 2008 with an overall combined ratio impact of 15 points; $5.7 billion in 2005 with an overall combined ratio impact of 21 points; and $2.5 billion in 2004 with an overall combined ratio impact of 10 points. However, in recent years, Allstate executed an extensive catastrophe risk exposure reduction program, including a significantly enhanced property catastrophe reinsurance program, non-renewals, stricter underwriting guidelines, policy transfers, increased deductibles and discontinuance of selected lines of coverage, including earthquakes.

The ratings of the primary life/health members of Allstate Financial acknowledge the financial strength and support from its direct parent, Allstate Insurance Company (AIC). To offset year-to-date statutory net losses, AIC has provided ALIC with $750 million in capital contributions in September 2008 and plans to contribute an additional $1.0 billion in fourth quarter 2008 for a total of $1.75 billion contributed in the form of both cash and surplus notes. A.M. Best believes this support demonstrates The Allstate Corporation’s commitment to Allstate Financial and that its operations remain strategically important to the Allstate group. Through September 2008, Allstate Financial also has experienced substantial GAAP realized capital losses, over half of which were due to a change in intent write-downs taken as a discretionary risk mitigation action. Net investment income was lower as a result of lower yields on floating rate securities, increased short-term balances reflecting liquidity management, lower average asset balances and valuation losses on limited partnership interests. Additionally, the interest expense associated with recently-issued surplus notes will be a drag on prospective statutory earnings.

Allstate Financial’s competitive market position and strong franchise are supported by a diversified distribution system that includes Allstate exclusive agents, independent agents, banks, broker/dealers and specialized structured settlement brokers. In response to the current economic climate, the organization plans to reduce its concentration in spread-based products. While A.M. Best views this de-leveraging as a positive, A.M. Best notes that the actions will result in a contraction of Allstate Financial’s operating profile. Additionally, ALIC’s quality of capital on a stand-alone basis is somewhat diminished as surplus notes now represent over 20% of the company’s statutory capital position. A.M. Best notes that Allstate Financial’s unrealized loss position at September 30, 2008 was approximately $3 billion, indicating the possibility of additional write-downs.

For a complete listing of The Allstate Corporation’s FSRs, ICRs and debt ratings, please visit www.ambest.com/press/102302allstate.pdf.

Founded in 1899, A.M. Best Company is a global full-service credit rating organization dedicated to serving the financial and health care service industries, including insurance companies, banks, hospitals and health care system providers. For more information, visit www.ambest.com.