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Highlighting a sharp drop in underwriting results, declines in statutory capital and outsized additions to prior-period loss reserves, Fitch Ratings moved the rating outlook on “A+” financial strength ratings of Allstate’s P/C insurance subsidiaries to negative.

In an announcement Friday, Fitch said it affirmed the “A+ (strong)” ratings but revised the outlook to negative from stable.

The Fitch announcement referred to Allstate’s pre-announcement of third-quarter results, which flagged estimated property/liability calendar year combined ratio of 111.6—with an auto combined ratio of 117.4 driving the overall result. Rising auto severity tied to inflationary increases to loss costs are contributing to underwriting losses.

In addition, in spite of generally favorable historical loss reserve experience, this year has been different. Allstate reported $875 million of adverse development in third-quarter 2022, with personal auto making up $643 million of the reserve additions. During the first-half of 2022, Allstate previously added $604 million of reserves, Fitch said, noting that the first-half addition had added 2.9 points to the calendar year combined ratio.

Related article: Allstate Sees Q3 Net Loss; Auto Reserve Boosts More Damaging Than Ian

P/C operating subsidiary capitalization also declined during the first half, the Fitch announcement said, indicating that statutory surplus dropped as a result of dividends to the parent of nearly $4 billion along with a net loss reported during the period.

“Fitch expects that Allstate will maintain strong overall capital levels and flexibility to contribute capital to operating subsidiaries from the holding company when prudent,” the announcement said, noting that while results of Fitch’s capital model, Prism, were ‘Very Strong’ for the group in 2021, Fitch expects Prism results and traditional statutory leverage to be pressured by surplus declines in 2022.

The Allstate subsidiary ratings could be downgraded, individually or collectively, if material unfavorable reserve revisions continue, or the operations fail to return to sustained calendar year underwriting profitability, Fitch said, also citing deterioration in consolidated statutory capital, Fitch’s capital model, NAIC risk-based capital and traditional leverage measures as potential downgrade drivers. The reverse conditions—stabilization of reserves, return to profitability and improved capital measures—could prompt positive rating actions.

Source: Fitch Ratings