Allstate Shuns Bond Market Food Fight

Insurer shifts its portfolio from longer-term bonds to hotels and toll roads.

Allstate Corp. Chief Executive Officer Thomas Wilson is cutting longer-term bonds from the insurer’s $77.7 billion fixed-income portfolio as he seeks to invest in hotels and toll roads with yields near record lows.

The largest publicly traded U.S. auto and home insurer is shifting course three years after Wilson correctly predicted that yields would fall and boost the portfolio’s value. The assets have rebounded from more than $9 billion in unrealized losses at the end of March 2009 to almost $6 billion in gains as of Sept. 30, according to regulatory filings.

“We are taking some of that $6 billion off the table and effectively harvesting those interest-rate gains,” Wilson said in an interview in his office at Allstate’s Northbrook, Illinois headquarters. “We’d rather lock in those gains today, take the capital gains, and reinvest at a lower interest rate now, because we think that interest rates will eventually go up.”

The Federal Reserve has held borrowing costs near zero and expanded its balance sheet through bond purchases to help stimulate the economy after the deepest financial crisis since the Great Depression. That’s punished savers, said Wilson, and spurred businesses that rely on higher interest rates to take longer-term risks and settle for lower-quality investments.

“There’s a food fight going on in the fixed-income market right now, because everybody’s looking for yield,” Wilson, 55, said in the Nov. 30 interview. “We’re saying we’d rather own things than lend on things. Hotels, real assets, infrastructure, you pick it. Rather than loan you money to buy the toll way, we’d rather just own part of the toll way, because if interest rates go up, I’m going to get crushed on the bond.”


Corporate Debt

Bonds will still be a majority of the insurer’s investment portfolio even as the company looks for alternatives, said Chief Investment Officer Judy Greffin. About half of Allstate’s investment portfolio was in corporate debt at the end of September, according to regulatory filings.

The company has allocated about 10 percent of its investments to public and private equity, Greffin said. That portion of the portfolio could climb to as much as 20 percent, with a greater share of the total shifting toward private equity as the insurer weighs investments in real estate, energy, timber, agriculture and infrastructure, she said. The amount may stay closer to 10 percent if the firm struggles to find the right opportunities, she said in an interview in Northbrook.

Low bond yields have increased competition among investors including pension funds, sovereign-wealth funds and insurers for the kinds of assets Allstate seeks, she said. The company looks primarily for equity investments where most returns will come from stable cash flow rather than an appreciation in value, Greffin said.

Norway’s $660 billion sovereign-wealth fund, the world’s largest, said last week that it plans to invest about $11 billion as it enters the U.S. real estate market.

“The valuation of these assets is getting pulled forward as people are willing to pay higher and higher prices,” she said. “It’s just so competitive.”

The portion of Allstate’s bond portfolio due in more than 10 years fell to 25 percent as of Sept. 30 from 30 percent a year earlier, according to a presentation on the company’s website. Investments in securities due in three years or less climbed to 20 percent from 18 percent.

Declining Treasury yields have helped cut companies’ borrowing costs even as spreads remain near their average level since 1996. The average yield on investment-grade corporate debt dropped to a record low 2.73 percent on Nov. 8, according to Bank of America Merrill Lynch data.


Superstorm Sandy

Allstate climbed 1 cent to $40.49 at 4 p.m. in New York. The stock has rallied 48 percent this year, leading the 22- company Standard & Poor’s 500 Insurance Index.

Wilson has been charging customers more for coverage to improve underwriting results after losses from tornadoes and hurricanes hurt results in recent years. October disasters led by superstorm Sandy cost the company $1.08 billion before taxes.

Insurers hold investments including bonds to cover obligations to policyholders when they come due. Lower bond yields may have pushed insurers to improve underwriting, Keith Walsh, who was hired by broker Marsh & McLennan Cos. to head investor relations, said in September when he was working as an analyst at Citigroup Inc.

“There’s just no yield anywhere,” Monica Erickson, a Los Angeles-based money manager and credit analyst at DoubleLine Capital LP, which oversees about $50 billion, said in a telephone interview.

Allstate’s book value, a measure of assets minus liabilities, climbed 18 percent to $42.64 per share in the first nine months of the year as investments rose in value.


Bloomberg News


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