Allstate CEO: State, city borrowing 'out of control'

Allstate Corp. Chief Executive Officer Thomas Wilson said a surge in borrowing by U.S. state and local governments may trim the value of municipal debt holdings, and called for political leaders to cut costs.

"Government borrowing is way out of control." Wilson, 52, said yesterday in a Bloomberg Television interview from Aspen, Colorado. "We need to get our house in order."

Wilson said concerns about budget deficits and funding shortfalls will likely lead to market-value declines in the municipal bond market rather than widespread defaults. Allstate, the largest publicly traded U.S. home and auto insurer, cut its municipal-bond portfolio in three straight quarters through the end of March, reducing its holdings to $20.1 billion from $23.1 billion as of June 30, 2009. The insurer hasn't released second- quarter results yet.

Property-casualty insurance companies, whose investments pay for claims tied to car crashes, earthquakes and corporate board malfeasance, cut their holdings of municipal debt 3.3 percent to $369.4 billion in the 12 months ended Dec. 31, according to the Federal Reserve. U.S. banks added more than $84 billion to their holdings since 2003, according to the Fed.

"The way the bankruptcy laws work, you generally get your money back" on defaulted municipal debt, Wilson said. "But in the meantime, the value of those securities will go down as people readjust risk. We're more worried about the market value than ultimately not getting our money back."

Allstate's PortfolioAllstate's $100 billion portfolio is mostly comprised of municipal debt and corporate bonds, a class that rose 15 percent to $34.5 billion in the nine months ended March. Allstate, based in Northbrook, Illinois, sold stocks in the first quarter as Wilson bet on debt issued by companies.Billionaire Warren Buffett, whose Berkshire Hathaway Inc. sells auto policies and catastrophe coverage, told the Financial Crisis Inquiry Commission last month that municipal bonds faced a "terrible problem." The U.S. government may be compelled to rescue at least one state facing default, he told shareholders at Berkshire's annual meeting May 1.Travelers Cos., the insurer added to the Dow Jones Industrial Average last year, said in May that municipal investors may avoid defaults as taxpayers demand budget cuts.Companies are 98 times more likely to default than municipal issuers over a 10-year period, data from Moody's Investors Service show. Nineteen issuers have defaulted on about $1 billion of municipal debt this year, the Distressed Debt Securities Newsletter reported in its June issue. In the two previous years a combined $14.5 billion defaulted, a rate of $3.6 billion every six months.Muni YieldsDefault speculation and a move by investors to the safest securities drove municipal bond yields to a 13-month high relative to U.S. Treasuries in the first half of the year. The 9.5 percent U.S. unemployment rate and slump in property prices have slashed local governments' ability to pay bills and led officials to consider raising taxes.The middle class is "going to bear the brunt of the impact from all the things that we haven't fixed in the past whether that's borrowing too much money at the state of Illinois or a bad education system," Wilson said.Illinois, whose $13 billion deficit is about half its budget, had the cost of insuring debt against default more than double earlier this year. The state's debt is rated fifth- highest by Moody's, at A1, matching California's as the worst among U.S. states. The Illinois debt rating from Standard Poor's is A+.Waiting for Disaster"Nobody has the intestinal fortitude to actually move forward to try to change anything," Wilson said of government debt at the federal, state and local levels. "They're just sort of sitting there waiting for disaster to happen."Wilson said he is positioning Allstate to weather an eventual increase in interest rates. Futures on the CME Group Inc. exchange showed a 16 percent chance of the Fed raising its target lending rate for overnight bank loans by at least a quarter-percentage point by December."We think there's a greater chance that interest rates will go up and we're spending hundreds of millions of dollars hedging off our portfolio for a large spike," Wilson said.The insurer has also been cutting assets tied to commercial properties, said Wilson. He said the office market, which tends to improve with employment gains, has been weak as companies put off rehiring workers."We're still concerned about what's happening in real estate, both commercial real estate and residential," Wilson said.