Allstate Subprime Threat Seen As Minimal

Allstate's exposure to the decline in the subprime mortgage loan market has not dampened one investment bank's enthusiasm for its shares.

Bear Stearns analyst David Small said he remains bullish on the stock. “We believe the underlying quarter was solid and should have heightened the stability of the business model,” Mr. Small wrote.

The fact that the personal auto market has outperformed expectations, and in the high end of the market in particular, further cements the analyst's confidence, he said.

Allstate traded lower yesterday following the announcement during the company's earnings conference call that it had $4.8 billion of subprime mortgage loan exposure through its ownership of mortgage backed securities.

“Since investors seemed unsatisfied in the knowledge that 73 percent of the portfolio is AAA, with the remaining portion rated AA, we tried to determine the vintage of the portfolio as well,” he wrote.

Allstate was in the process of pulling back from its mortgage-backed securities exposure and is most likely underweight in the troublesome 2006 securities sector, according to Mr. Small.

“This type of security tends to have a short average weighted life, therefore if you do not continue purchasing securities, the portfolio will quickly shrink,” he wrote.

Moreover, in an overall investment portfolio of $122 billion, a $4.8 billion exposure represents only modest write-down threat, which in the worst scenario would amount to about $140 million, he added.

Beyond the subprime issue, Allstate seems to have a problem with top-line growth recently, Mr. Small found.

But with reinsurance costs no longer rising on a year-over-year basis and the rolling out of the high-end “Your Choice” auto program in Florida, a point or two of growth over the next few quarters seems likely, Mr. Small forecast.