Allstate dumps munis as local governments run budget deficits

Allstate Corp., the largest publicly traded U.S. home and auto insurer, is paring its municipal-bond holdings because state and local governments are "not in great shape," Chief Executive Officer Thomas Wilson said.

"We've just recently begun to reduce our exposure to municipals because we are uncomfortable with some of the fiscal practices of some of the government entities," Wilson said yesterday in an interview after the Northbrook-based company reported a third-quarter profit. "If you look at their balance sheets or income statements and put it in financial terms, they are not in great shape."

Allstate cut its municipal holdings 8.3 percent to $22.1 billion in the third quarter as state governments struggle to maintain budgets amid the recession. State tax collections declined by 16.6 percent in the three months through June from the year-earlier period, the largest quarterly decline since at least 1963, the Nelson A. Rockefeller Institute of Government said in a report last month.

Municipalities "haven't adjusted their spending so they are running deficits," Wilson said. "When we look at the risk- return profile we don't think we are being paid enough to take that risk today."

Municipal and corporate fixed-income securities are among the largest holdings in Allstate's investment portfolio. State and local government bonds returned 8.1 percent in the July- September period, the best quarterly performance in at least two decades, according to the Municipal Master Index that Merrill Lynch & Co. started compiling in 1989.

States Run Deficits

Budget deficits totaling $16 billion have opened in 26 states since their fiscal years began on July 1, according to the Center on Budget and Policy Priorities. California has a record $26 billion deficit and New York faces a $3.2 billion budget gap this year, up 50 percent from three months ago.

Wilson joins Pacific Investment Management Co.'s Bill Gross in cautioning against government deficits. Gross said investors should be risk averse until local and federal leaders show the discipline needed to correct the deficits amassed by the U.S. and states such as California.

"California's problems, while somewhat unique and self- inflicted, are really America's problems," Gross wrote in October in a commentary posted on Pimco's Web site. State and federal lawmakers "reflect a lack of discipline and indeed vision."

Allstate reported net income of $221 million, or 41 cents a share, compared with a loss of $923 million, or $1.70, in the same period a year earlier, as fewer storms reduced claims costs, the insurer said yesterday in a statement. Operating income was 99 cents a share, missing by four cents the average estimate of 14 analysts surveyed by Bloomberg.

The insurer has dropped 9.6 percent this year in New York Stock Exchange composite trading, compared with the 16 percent increase in the Standard & Poor's 500 Index. Allstate closed yesterday at $29.62 after falling 12 cents.