Allstate Corp. Chief Executive Officer Tom Wilson has increasedbond trading to boost returns as Wall Street scales back frommaking markets.

“We're a big player in the fixed-income market, we have capacityto hold stuff, we don't have high liquidity needs,” Wilson said inan interview at Bloomberg's New York headquarters last Thursday.“Rather than assume that everything we buy has to stay in thewarehouse at the same time, let's assume that we can buy it andsell it.”

Bankers including Goldman Sachs Group Inc.'s Gary Cohn andJPMorgan Chase & Co.'s Jamie Dimon have warned that a shortageof buyers could trigger wide price swings during a crisis. Bankshave limited their role due to higher capital and liquidityrequirements, making it harder to act as market makers and step into buy debt.

Allstate boosted fixed-income purchases to US$38.8 billion in2014, from $24.1 billion a year earlier, according to a regulatoryfiling. Sales climbed to $34.6 billion from $21.2 billion.

“A lot of other financial institutions, most of them banks, havegotten out of making inventory,” Wilson said. “So it was anopportunity for us to come in and fill that liquidity when there'ssupply-and-demand imbalance.” He said the strategy can improvereturns by as much as 1 percentage point.

Bond inventories for large banks, or dealers, shrank by about 27percent between 2007 and early 2015. Mutual funds and exchangetraded funds have almost doubled assets, while insurance companieshave been a source of liquidity as they hold longer-datedsecurities to match policy obligations.

Wilson said that government regulation has helped make banks anattractive investment for bondholders, even while suppressingreturns for equity investors.

“What you're seeing is capital moving out of the bankingindustry,” Wilson said, citing how the companies devote almost allof their profit to dividends and share repurchases. “If 90 percentof what you're making, you're giving back to your shareholders, itmeans you're not retaining capital to grow yourself as anentity.”

Allstate, the largest publicly traded U.S. auto and homeinsurer, has an investment portfolio valued at more than $80billion, mostly allocated toward fixed income. Wilson is amonginsurance executives seeking strategies beyond holding bonds tomaturity, as nearly record-low interest rates squeeze investmentincome. He has also diversified into holdings such as real estateand timber.

Wilson said the investing approach has become more active sincehe took over as CEO in 2007, first because of the opportunitiespresented by higher yields in the financial crisis.

Then, said Wilson, “We looked and we said, 'Well we don't thinkthat's going to happen that often, so we need a different way towork in what's a low-interest-rate environment.'”

–With assistance from Sridhar Natarajan and Alexandra Scaggs inNew York.

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