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By Erik Holm and Gabrielle Coppola Aug. 6 (Bloomberg) — Allstate Corp. Chief Executive Officer Tom Wilson , who yesterday posted the insurer’s first profit in a year, said investors should avoid the company’s stock if they believe bond markets will slump. The insurer’s $96.5 billion investment portfolio includes corporate debt worth $29.9 billion and $23.1 billion in municipal securities, a mix that the insurer left largely unchanged as bonds markets dropped amid the credit crisis. The strategy paid off in the second quarter as the holdings recovered some of their earlier losses. “If you don’t like credit risk, you should not own our stock,” Wilson said in an interview yesterday. “We stayed long credit spreads on purpose, and that moved the value of the portfolio about $3 billion” in the second quarter. Investment-grade corporates posted their best quarterly performance in more than 25 years in the period as near-zero interest rates drove investors to take on more risk, according to Merrill Lynch & Co.’s U.S. Corporate Master index. Allstate’s holdings of fixed-income securities rose 6.3 percent, while its short-term investment position declined. Allstate invested $5 billion of liquidity in higher- yielding assets, with 80 percent going to fixed-income, including corporate bonds, Chief Investment Officer Judy Greffin told analysts on a conference call today. The insurer is seeking higher returns, and said the fixed-income assets yield about 6 percent, Greffin said. Allstate also invested in equities and hedge funds, Greffin said. Corporate Bonds Yields on investment-grade corporate bonds have tightened nearly four percentage points relative to benchmark rates so far this year. Buyers of the bonds have earned 17.1 percent more than they would have had they invested the money in U.S. Treasuries, Merrill data show. Allstate’s second-quarter net income rose to $389 million from $25 million in the same period a year earlier on the sale of some investments and a derivative hedge to reduce the impact of interest-rate movements, the Northbrook, Illinois-based insurer said yesterday. Book value per share, a measure of assets minus liabilities, rose 23 percent in three months as the portfolio recovered in value. “As the capital position improves, they can afford to take more risk,” said Meyer Shields , an analyst at Stifel Nicolaus & Co. in Baltimore. “If an investor disagrees with that strategy, they would probably be uncomfortable with the portfolio they are building.” The fair value of securities tied to commercial mortgages fell 13 percent to $3.24 billion as the insurer reduced its bet on the ability of business tenants to meet their obligations. ‘Exposure Down’ “We continue to be bearish on the outlook for commercial real estate,” Wilson said. “We’ve brought our exposure down substantially in the last year and a half. We continue to bring it down.” The second-quarter profit comes after three periods of net losses totaling $2.33 billion, driven by writedowns, declines in private equity and hedge fund holdings, and hurricane claims in last year’s third quarter. Wilson is replacing the head of Allstate’s life insurance operation after reducing sales of fixed annuities and parting with some securities in the unit’s portfolio to reduce the potential for further investment losses. He said he had no new information on the search for a head of the life insurance operation, called Allstate Financial. Allstate fell 99 cents, or 3.5 percent, to $27.24 at 9:58 a.m. in New York Stock Exchange composite trading following the earnings announcement yesterday. The insurer has jumped 41 percent since the end of the first quarter, less than the 59 percent increase in the KBW Insurance Index. Allstate shares are down 42 percent over the past year. To contact the reporters on this story: Erik Holm in New York at eholm2@bloomberg.net ; Gabrielle Coppola in New York at gcoppola@bloomberg.net .