Moody's Rating Services says Allstate's plan to restructure $3 billion in debt is credit positive and will lower its cost of capital heading into hurricane season.
The move is part of the Northbrook, Ill., company's enterprise risk management program aimed at reducing the effects of losses from catastrophes and weather-related events on both earnings and capital.
Over the past two years, Allstate has enhanced its catastrophe reinsurance program, which includes issuance of a $350 million catastrophe bond this year. It also strengthened underwriting in homeowners insurance nationwide with non-renewal of less profitable business and high-single digit premium rate increases.
Last week, Allstate issued approximately $1.3 billion of debt securities, its first step in retiring its $3 billion debt. Funding comes in the form of issuance of preferred stock, subordinated debt and senior debt. In addition to lowering the cost of capital, the program lowers financial leverage as a result of a higher mix of equity-like securities in the capital structure and lengthens the insurer's maturity profile.
Moody's says Allstate's adjusted financial leverage—debt in relation to equity in the firm's capital structure—has dropped from close to 40 percent in 2008 to less than 30 percent by March of this year. The rating service expects the figure to drop to close to 25 percent this year on a pro forma basis.
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