Good Hands Tied Behind Back? (ALL)

Allstate (ALL) just announced results from the third quarter of 2008. Management seemed nervous as concern over the potential for a "perfect storm." Three factors were at work: 1) a significant number of hurricanes, 2) investment portfolio declines, and 3) the potential of rating downgrades.

When I analyze ALL, my primary concern is the combined loss ratio in the property and casualty area, excluding catastrophes. Day in and day out, this ratio measures the profitability of the ALL franchise. This chart describes the loss ratio quarterly since the beginning of 2003:


The two lines drawn horizontally depict 86% and 88% combined ratios. For reference, a combined loss ratio lower than 94% is outstanding. When I evaluate ALL, I assume that the average combined loss ratio will average 97%. But the market analysts ignored this quarter's impressive 86% combined ratio. Why is this so?

Right now the urgent is superceding the important. The current environment has triggered significant liquidity and capital crises. The liquidity issue has been caused by the inability to sell anything. The capital issue is related as the lack of liquidity has caused depressed valuations which have caused capital to disappear.

Despite ALL's outstanding combined ratio performance, investors are selling out of ALL. This would be an ideal opportunity for ALL to repurchase shares as well as purchase other financial services companies. Unfortunately, the ratings environment is forcing ALL to stop the repurchase of shares, disinvest financial services company securities and not pursue acquisitions - tying their "good hands" behind their back.