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Last week, The Allstate Corp. (ALL - Analyst Report) was lifted by Moody’s Investor Service of Moody’s Corp. (MCO - Analyst Report) to a stable outlook from a negative stance. Meanwhile, the debt and credit ratings were affirmed to reflect the company’s improved credibility.

Accordingly, the ratings agency asserted the senior debt ratings of “A3” on Allstate. Alongside, the insurer financial strength (IFS) of Allstate’s property-casualty (P&C) – Allstate Insurance Co. (AIC) and life insurer – Allstate Life Insurance Co. (ALIC) subsidiaries were avowed at “Aa3” and “A1”, respectively.

The upgraded outlook reflects Moody’s confidence in Allstate’s underwriting capabilities, which showed improvement in 2012. While expansion in insurance rates across the US to high single-digit drove growth, Allstate also took strategic steps to write-off unprofitable business in the past couple of years.

Moreover, a proactive underwriting approach and sizeable investment income have aided the improvement of margins within the automobile and homeowners' segments. Going ahead, these factors should control the loss-cost trends and improve underlying combined ratio (excluding catastrophe losses) as well.

Additionally, Allstate enjoys a strong competitive edge in its markets of operation driven by core fundamental growth. Such growth is cushioned by strong risk-based capital, diversified product portfolio and operating leverage. Consequently, Allstate is the second-largest personal lines writer in the US.

A modest financial leverage, with a debt-to-capital ratio of 28.4% at the end of 2012, further exhibit Allstate’s prudent capital management. Additionally, the excess liquidity profile of the company supports the ratings agency’s healthy capital outlook for 2013.

However, Moody’s expects financial leverage to be around 30% going ahead, factoring the lingering issues such as the regulatory challenges in the personal lines market, higher catastrophe losses, intense competitive pressure and the level of share buybacks. Moreover, Allstate Financial’s leading brand name, wide product portfolio and significant cross-selling benefits are partially offset by its contracted business strategy and substantial exposure to fixed annuity liabilities that are sensitive to interest-rate volatility.

Overall, consistent prudent capital management, low catastrophe losses and financial leverage below 25% should help Allstate enhance its earnings and pave the way for investments to boost business and return incremental wealth to shareholders. We believe that effective capital and enterprise risk management along with modest operating cash flow will be able to boost Allstate’s operating and competitive strength.

While Allstate holds a Zacks Rank #2 (Buy), other strong performers of the financial sector include Moody’s, Hilltop Holdings Inc. (HTH - Analyst Report) and Everest Re Ltd. (RE - Analyst Report). All these stocks carry a Zacks Rank #1 (Strong Buy).

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