Allstate defaulted catastrophe bond makes 91 percent payment

Investors in a defaulted catastrophe bond sold by Allstate Corp. received 91 percent of a scheduled interest payment, according to a company spokeswoman.

Standard & Poor's downgraded $250 million of debt issued by Allstate's Willow Re Ltd. to D, the lowest grade, from CC, on Jan. 30 citing "imminent" default. Northbrook-based Allstate set up the company as a means of selling the bonds in 2007 to protect against claims from hurricanes.

"Failure to meet the full interest payment triggers an interest payment default on the bond," a spokeswoman for Allstate said in an e-mailed response to questions. "Allstate continues to meet its obligations under its reinsurance agreement with Willow Re. The default of Willow Re does not create any contractual obligations for Allstate."

The Willow Re notes are one of four cat bonds that used contracts sold by Lehman Brothers Holdings Inc. to guarantee returns on collateral backing the notes. Lehman's collapse in September nullified the swaps, leaving the bonds reliant on collateral returns to make interest and principal payments.

Cat bonds have gained popularity as a way for insurers to protect against natural disasters, and buyers demand above- average returns because they risk losing their entire investment to the insurer if the catastrophe is large enough.

Willow Re's collateral is not part of Allstate's investment portfolio.

AM Best Co., an Oldwick, New Jersey-based rating company that also grades the bonds, said in a Feb. 6 statement it "remains concerned whether the trust assets and premium payments of Willow Re Ltd. will generate sufficient cash to pay scheduled interest and principal when due in the future."