Nov. 1 (Bloomberg) -- Allstate Corp., the insurer with a $97.5 billion investment portfolio, is adding corporate bonds and cutting U.S. government debt as it seeks to maintain investment income amid near record-low interest rates.
“The rates were too low in government securities and the spreads were attractive on corporate bonds, so we shifted our allocation,” Chairman and Chief Executive Officer Thomas Wilson said yesterday in a phone interview. “That’s a better risk-return trade-off.”
Allstate’s holdings of corporate bonds rose 5 percent to $44.5 billion in the three months ended Sept. 30 and have increased about 20 percent in the past year, regulatory filings show. U.S. government and agency fixed-income assets declined 30 percent to $4.35 billion in the third quarter.
Wilson has reshaped Northbrook, Illinois-based Allstate’s investment portfolio since 2008, when writedowns contributed to an annual loss of $1.68 billion. In addition to cutting U.S. government securities, he’s pared municipal and real-estate-related investments. Ten-year Treasury yields dropped to record lows in September, as investors sought security during the European debt crisis.
The low yields have turned away other investors, including Leon Cooperman, chairman of hedge fund Omega Advisors Inc., who said last month he “wouldn’t be caught dead” owning a U.S. government bond.
Yields on 10-year Treasuries fell to 1.92 percent on Sept. 30, from 3.16 percent three months earlier. The yield on investment-grade corporate bonds climbed to 3.96 percent from 3.89 percent during the period, according to Bank of America Merrill Lynch index data.
Oil, Gas Royalties
Allstate is also adding so-called real assets that pay cash returns, such as investments in oil and gas royalties and infrastructure projects, to guard against inflation. The Federal Reserve announced a program in September to buy long-term Treasuries while selling shorter-term debt to spur growth by keeping borrowing costs down.
“We think the inflation risks are not great for the next 12 months,” said Wilson. “After that, of course, it’s anybody’s guess since nobody really knows with all this extra money in the system what will happen.”
The insurer is shifting more of its fixed-income investments into intermediate maturities. Bonds due in three to 10 years comprised 52 percent of the portfolio at the end of September, compared with 42 percent a year earlier. Debt that matures in fewer than three years and more than 10 years was reduced, according to presentation on the company’s website.
Allstate declined 1.5 percent to $25.94 at 9:41 a.m. in New York trading. It has fallen about 19 percent this year, compared with the 17 percent slide by the 24-company KBW Insurance Index.
Net investment income slipped to $994 million from $1.01 billion a year earlier, the insurer said yesterday in a statement announcing third-quarter results that beat analysts’ estimates.
Allstate’s net income declined 55 percent to $165 million on a surge in catastrophe costs, including claims from Hurricane Irene. Book value, a measure of assets minus liabilities, fell to $35.56 a share from $35.95 at the end of June.
Excluding the cost of catastrophes and reserve re-estimates, the insurer made 10.8 cents for every premium dollar it collected, matching results from a year earlier. Premium revenue in Allstate’s property and liability business slipped to $6.43 billion from $6.5 billion a year earlier.
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