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Allstate (NYSE:ALL) recently announced their quarterly earnings. In the conference call they of course took a question on the sub-prime exposure. Their response is that they feel very comfortable and feel that they took the necessary steps several years ago. They also claim to hold approximately $4.8 billion in subprime mortage securities and $164 million in ABS CDO's.

If you listen very carefully to the response they do admit to experiencing valuation declines. ie they are losing money. They claim to have not been bothered by the ratings declines. Who cares when you are losing money? The $4.8 billion is approximately equal to all of 2006 earnings. It would appear that the asset class will be costing them money as a result of increasing subprime woes.

Listen to this quote from Danny Hale the CFO

"And again, although we're comfortable with our holdings, given the current market environment we expect continued downward pressure on the market valuations. But to date none of them have been downgraded or put on negative watch. We'll continue to monitor the subprime market developments and make the appropriate valuation adjustments going forward."

Basically they know they will be taking a hit but they are soft pedalling and trying to put investors to sleep.

Jay Gelb (Lehman Brothers) just asked the question and never challenged or probed. For that matter no other analyst poked their finger into the problem either. The holdings are approximately 22% of Allstate's equity.

They have a problem here.

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