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Allstate forms rail-car venture to counter interest rate risks

Allstate has climbed 5.2% this year, the third-best performance in the 20-company Standard and Poor’s 500 Insurance Index. (AP Photo)
Allstate has climbed 5.2% this year, the third-best performance in the 20-company Standard and Poor’s 500 Insurance Index. (AP Photo)

(Bloomberg) -- Allstate Corp., the largest publicly traded U.S. home and auto insurer, helped form a freight rail-car leasing company as Chief Executive Officer Tom Wilson expands his bets on hard assets to generate better returns than bonds.

The insurer joins CC Industries and Duchossois Capital Management, which is known as DCM, in starting the venture, named Riverside Rail, the investors said Friday in a statement that didn’t disclose terms. The new company acquired 2,032 rail cars and is backed by a credit facility led by BMO Harris Bank.

Wilson has been boosting wagers on assets including real estate and timber while he cuts back on bonds, which are facing pressure from near record low interest rates. The insurer’s portfolio was valued at more than $77 billion as of Dec. 31, with about 6.3% in limited partnerships, up from 5.6% a year earlier.

“Rail-car leasing represents an attractive long-term investment,” the companies said in the statement. “Riverside Rail plans to build a full-service leasing and management- services company over the next several years.”

About three quarters of the insurer’s portfolio is still in bonds. Net investment income in the three months ended Dec. 31 fell 8.9% from a year earlier to $710 million.

‘Performance-based’

The insurer is “shifting the portfolio mix over time to have less reliance on investments whose returns come primarily from interest payments,” Northbrook, Illinois-based Allstate said last month in a regulatory filing. “We will shift to performance-based investments in which a greater proportion of return is derived from idiosyncratic asset or operating performance.”

Allstate has climbed 5.2% this year, the third-best performance in the 20-company Standard and Poor’s 500 Insurance Index. The stock changed hands for $65.31 at 11:58 a.m. in New York, unchanged from Thursday’s close.

Pacific Life Insurance Co. and Warren Buffett’s Berkshire Hathaway Inc. are among other financial firms that have been betting on transportation assets. PacLife owns Aviation Capital Group, which buys planes and leases them to airlines. Berkshire, which counts insurance as a key business, also owns Marmon, a unit that expanded its fleet last year with the purchase of about 25,000 rail cars from General Electric Co. in a $1 billion deal.

Buffett highlighted the business in his annual report to shareholders Saturday. About 97% of the rail cars were leased as of Dec. 31, and less than 20% of the fleet comes up for renewal each year, he wrote.

DCM is an investment firm owned by the Duchossois family, according to the statement. CC operates under the Henry Crown & Co. umbrella and invests in closely held ventures.

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