Allstate favors corporate debt over munis, real estate holdings
Allstate Corp., the largest publicly traded U.S. home and auto insurer, is investing in corporate debt as it reduces commercial real estate and municipal bond holdings.
"We made a very conscious choice to leave our significant credit exposure in place, and frankly it's paid off nicely," Judy Greffin, chief investment officer of the Northbrook-based insurer, said yesterday in an interview.
Allstate's $100.6 billion investment portfolio included $31.9 billion in corporate debt as of Sept. 30, up from $31 billion at yearend 2008. Municipal holdings fell $1.44 billion to $22.1 billion in the third quarter. Commercial mortgage- backed assets dropped to $3.74 billion from $5.84 billion as of Dec. 31, according to regulatory filings.
Corporate bonds returned 9.58 percent in the third quarter after a 13 percent yield in the second, the best quarterly performance, according to Merrill Lynch & Co. data going back to 1997. The bonds returned a negative 10.9 percent in 2008.
"If you don't like credit risk, you should not own our stock," Allstate's Chief Executive Officer Tom Wilson said in an interview in August.
The insurer's investments in corporate debt tied to utilities and energy climbed in the third quarter from the previous period, as banking and financial services dropped, according to a filing. Utilities rose to $5.52 billion from $5.28 billion and energy increased to $2.09 billion from $1.8 billion. Banking debt fell to $3.99 billion from $4.14 billion.
"There is probably more of a quality bias to our buying," Mark Cloghessy, managing director of Allstate's portfolio management group, said in an interview when asked about corporate debt. "We are looking at the investment-grade side of the market, not necessarily the high-yield part of the market. If we like those sectors in the investment-grade market, we will buy it."
Greffin said Allstate cut investments related to commercial real estate by more than $4 billion this year, including mortgage loans and commercial mortgage-backed securities.
"Our outlook is still fairly negative on commercial real estate," Greffin said. "Our outlook is still for it to struggle. We have a bias for selling. At some point there will be an opportunity to buy commercial real estate; we want to be in a position to take advantage of that."
Life insurers could lose as much as $22.6 billion on commercial real estate through 2011 as rents decline and vacancies increase, Fitch Ratings said in a Nov. 13 report.
"Fitch expects the realization of commercial mortgage backed securities losses to accelerate in the near term as many securities have experienced rating downgrades and market value losses," according to the report.
Allstate fell 38 cents to $28.99 at 4 p.m. in New York Stock Exchange composite trading. The shares have dropped 12 percent this year.