Wednesday, December 5, 2012

Allstate's Strategy: Bail on Bonds, Own Cash Flow (ALL)

Very, very smart.
From Bloomberg:
Allstate Corp. (ALL) Chief Executive Officer Thomas Wilson is cutting longer-term bonds from the insurer’s $77.7 billion fixed-income portfolio as he seeks to invest in hotels and toll roads with yields near record lows.

The largest publicly traded U.S. auto and home insurer is shifting course three years after Wilson correctly predicted that yields would fall and boost the portfolio’s value. The assets have rebounded from more than $9 billion in unrealized losses at the end of March 2009 to almost $6 billion in gains as of Sept. 30, according to regulatory filings.

“We are taking some of that $6 billion off the table and effectively harvesting those interest-rate gains,” Wilson said in an interview in his office at Allstate’s Northbrook, Illinois headquarters. “We’d rather lock in those gains today, take the capital gains, and reinvest at a lower interest rate now, because we think that interest rates will eventually go up.”

The Federal Reserve has held borrowing costs near zero and expanded its balance sheet through bond purchases to help stimulate the economy after the deepest financial crisis since the Great Depression. That’s punished savers, said Wilson, and spurred businesses that rely on higher interest rates to take longer-term risks and settle for lower-quality investments.

“There’s a food fight going on in the fixed-income market right now, because everybody’s looking for yield,” Wilson, 55, said in the Nov. 30 interview. “We’re saying we’d rather own things than lend on things. Hotels, real assets, infrastructure, you pick it. Rather than loan you money to buy the toll way, we’d rather just own part of the toll way, because if interest rates go up, I’m going to get crushed on the bond.”...MORE