Allstate's catastrophe bonds face 'imminent' default

A catastrophe bond sold by Allstate Corp. faces "imminent" default because of losses caused by the collapse of Lehman Brothers Holdings Inc., making it only the second such security to fail in more than a decade.

New York-based Standard & Poor's downgraded $250 million of debt sold by Allstate's Willow Re Ltd. to D, the lowest grade, from CC, according to a Jan. 30 statement. Northbrook-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.

Insurers started using so-called cat bonds in the 1990s to transfer the risk of claims that could threaten their solvency. Bond investors in Zurich Financial Services AG's Kamp Re 2005 Ltd. lost money when property damages caused by Hurricane Katrina in 2005 exceeded the threshold that entitled Zurich to keep investor funds.

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 largest publicly traded U.S. auto and home insurer, last week to A3 from A2, citing "significant investment losses, weak earnings, and reduced capitalization."

Returns Guaranteed

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.

S&P grades the other three cat bonds that used Lehman as a swap counterparty at either CC or CCC, its third and fifth-lowest ratings.

Scor SE, France's biggest reinsurer, is seeking to sell $200 million of catastrophe bonds to transfer potential losses on U.S. earthquakes, S&P said last week.