Allstate’s Catastrophe Bonds Face ‘Imminent’ Default

February 3, 2009 by · Leave a Comment
Filed under: Stock Market News 

After reading this article, I believe it was unwise for Allstate not to still carry a reserve for these bond payments even with Lehman Brother’s guarantee on them.  This type of behaviour is what made these financial depression so systematic.  Everyone moved their risk to counter-parties and when everyone does that, you have spread the risk around so much it creates multiple single points of failure.  In the credit markets, you do not want that or you can have a general loss of confidence like we are having now.


A catastrophe bond sold by Allstate Corp. faces “imminent” default following the collapse of Lehman Brothers Holdings Inc., Standard & Poor’s said. It would be only the second such security to fail in a decade.

New York-based S&P 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, Illinois-based Allstate set up Willow Re as a means of selling the bonds in 2007 to protect against claims from hurricanes, and investment losses by Willow Re aren’t tied to Allstate’s own portfolio.

“The issuer has notified Standard & Poor’s that it will not have sufficient funds to make the scheduled interest payment,” S&P analyst Gary Martucci in New York wrote in the statement.

So-called cat bonds have gained popularity as a way for insurers to protect against natural disasters, and buyers demand outsized returns because they risk losing their entire investment to the insurer if the catastrophe is large enough. With Willow Re and other bonds backed by Lehman, investors are on the verge of losing a portion of their stake because of a financial calamity instead of a natural one.

“The market was already pricing Willow Re in the area of 50 cents,” said Christophe Fritsch, head of insurance-linked securities at Axa SA in Paris. “New deals will improve dramatically. Investors will make sure that they will only be exposed to insurance risk and won’t take credit risk.”

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