Allstate Corp. Chief Executive Officer Thomas Wilson is cuttinglonger-term bonds from the insurer's $77.7 billion fixed-incomeportfolio as he seeks to invest in hotels and toll roads withyields near record lows.

The largest publicly traded U.S. auto and home insurer isshifting course three years after Wilson correctly predicted thatyields would fall and boost the portfolio's value. The assets haverebounded from more than $9 billion in unrealized losses at the endof 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 andeffectively harvesting those interest-rate gains,” Wilson said inan interview in his office at Allstate's Northbrook, Illinoisheadquarters. “We'd rather lock in those gains today, take thecapital gains, and reinvest at a lower interest rate now, becausewe think that interest rates will eventually go up.”

The Federal Reserve has held borrowing costs near zero andexpanded its balance sheet through bond purchases to help stimulatethe economy after the deepest financial crisis since the GreatDepression. That's punished savers, said Wilson, and spurredbusinesses that rely on higher interest rates to take longer-termrisks and settle for lower-quality investments.

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

Corporate Debt

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

The company has allocated about 10 percent of its investments topublic and private equity, Greffin said. That portion of theportfolio could climb to as much as 20 percent, with a greatershare of the total shifting toward private equity as the insurerweighs investments in real estate, energy, timber, agriculture andinfrastructure, she said. The amount may stay closer to 10 percentif the firm struggles to find the right opportunities, she said inan interview in Northbrook.

Low bond yields have increased competition among investorsincluding pension funds, sovereign-wealth funds and insurers forthe kinds of assets Allstate seeks, she said. The company looksprimarily for equity investments where most returns will come fromstable cash flow rather than an appreciation in value, Greffinsaid.

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

“The valuation of these assets is getting pulled forward aspeople 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 10years fell to 25 percent as of Sept. 30 from 30 percent a yearearlier, according to a presentation on the company's website.Investments in securities due in three years or less climbed to 20percent from 18 percent.

Declining Treasury yields have helped cut companies' borrowingcosts even as spreads remain near their average level since 1996.The average yield on investment-grade corporate debt dropped to arecord low 2.73 percent on Nov. 8, according to Bank of AmericaMerrill Lynch data.

Superstorm Sandy

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

Wilson has been charging customers more for coverage to improveunderwriting results after losses from tornadoes and hurricaneshurt results in recent years. October disasters led by superstormSandy cost the company $1.08 billion before taxes.

Insurers hold investments including bonds to cover obligationsto policyholders when they come due. Lower bond yields may havepushed insurers to improve underwriting, Keith Walsh, who was hiredby broker Marsh & McLennan Cos. to head investor relations,said in September when he was working as an analyst at CitigroupInc.

“There's just no yield anywhere,” Monica Erickson, a LosAngeles-based money manager and credit analyst at DoubleLineCapital LP, which oversees about $50 billion, said in a telephoneinterview.

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

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