Allstate's Catastrophe Bonds Face 'Imminent' Default, S&P Says

By Neil Unmack
Bloomberg News
February 2, 2009

Feb. 2 (Bloomberg) -- Catastrophe bonds sold by Allstate Corp., the largest publicly traded U.S. home and auto insurer, face "imminent" default because of losses caused by the failure of Lehman Brothers Holdings Inc., according to Standard & Poor's.

S&P downgraded $250 million of debt sold by Allstate's Willow Re Ltd. to D, the lowest grade, from CC, S&P said in a Jan. 30 statement. Northbrook, Illinois-based Allstate sold the bonds in 2007 to protect against losses caused by U.S. hurricanes.

"The issuer has notified Standard & Poor's that it will not have sufficient funds to make the scheduled interest payment," S&P said in the statement.

Allstate Chief Executive Officer Tom Wilson is cutting 1,000 jobs and reviewing products sold by the life insurance business after injecting $1 billion of capital into the unit in October and removing its president in December. Moody's Investors Service downgraded the company last week to A3 from A2, citing "significant investment losses, weak earnings, and reduced capitalization."

Willow Re is one of four catastrophe bonds that used contracts sold by Lehman Brothers to guarantee returns on collateral backing the notes and to make interest payments. Lehman's collapse in September nullified the guarantees, leaving the securities open to market value losses on the collateral.

The bonds, due to make an interest payment today, have a five-day grace period until a default is declared, the S&P statement said.

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