Goldman Sachs Comments On Allstate's Earnings Miss

Allstate ALL reported 4Q EPS of $0.50/share compared to our estimate of $0.91/share. The miss was driven by much higher than expected catastrophe losses accompanied by an increase in the underlying auto loss ratio. On the positive side, ALL pushed rate increases across both lines, new auto applications rose, book value was near flat in the quarter, the company bought back shares for the first time since 2008, and cash flows remained robust. It is likely that the stock will trade down on these results. As a reminder, Goldman's original thesis on Allstate was that attractive operating returns, cash flows, and valuation presented a near-term opportunity while recognizing that 4Q10 results could be messy. Benign 4Q CATs for peers gave us a false read into Allstate's quarter as ALL CATs were worse than expected. Key risks include: if ALL is unable to maintain a combined ratio in the 88-91% range, or if catastrophe activity remains elevated for an extended period of time, its ability to generate attractive earnings and cash flows could be limited. Goldman Sachs has a $36 PT and Buy rating on ALL ALL closed Wednesday at $32.36