Breaking: Allstate Confirms Default of Willow Re Cat Bonds

Time is very short. I’ll update this post with further analysis later.

We’ll begin with this story via Reuters:

A catastrophe bond sold by U.S. insurer Allstate Corp (ALL.N) is in default after special purpose vehicle Willow Re failed to make in full an interest payment that fell due last week.

The transaction is among four catastrophe bonds guaranteed by a unit of Lehman Brothers that were downgraded by credit rating agency Standard & Poor’s following the U.S. investment bank’s Sept. 15 bankruptcy filing.

Allstate confirmed late on Monday that Willow Re had not made the payment, due Feb. 2, within the five-day grace period.

“Last week, Willow Re paid approximately 91 percent of the interest due on the bond,” said spokeswoman Maria Gemskie.

“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 $250 million bond, which matures in June 2010, was sold two years ago to provide Allstate, the largest publicly listed U.S. home and auto insurer, with protection against losses from windstorms in the northeastern United States.

S&P had already cut Willow Re’s Class B 2007-1 notes from CC to D — its lowest rating — on Jan. 30, saying the issuer had given notice it would not have sufficient funds to make the scheduled payment. It said assets held in the collateral account were not generating enough income to cover the interest due.

Willow Re and three similar deals used a unit of Lehman Brothers as total return swap counterparty, contracted to ensure the collateral backing the bonds was sufficient to meet interest and principal repayments, and to make up any shortfall.

When it collapsed, investors were left with direct exposure to market losses on assets held as collateral. S&P had said on Oct. 9 that it believed payments on Willow Re were at risk.

The default will not trigger a termination of the underlying reinsurance agreement between Allstate and Willow Re, meaning the bonds could still pay out to Allstate in the event of a severe windstorm in the northeastern United States. In that case, the exact payment received by the insurer would depend on the value of the collateral pool.

3 thoughts on “Breaking: Allstate Confirms Default of Willow Re Cat Bonds”

  1. SOP—The White House has adapted your blogging technique which you perfected at the Yahoo investment board. For those who don’t know SOP INVENTED the live blogging of confernce calls on Yahoo. Given his background in reading quarterly reports and his ability to find even the most hidden nugget of BS in such reports his comment were sometimes meet with an angry post from a CEO or two. The fact that reports write stories about companies on the day of these reports and use Yahoo message boards for background info made his invention even more noticed by the CEO. Oh well can’t stop a good thing from spreading—

    I was hoping for some insurance news out of this visit.

    Liveblog: Ft. Myers, FL townhall (Update: pictures)

    http://www.whitehouse.gov/blog_post/LiveblogFtMyersFLtownhall/

  2. While the Willow Re might be what Allstate depends upon for its reinsurance. We have learned there is a better reinsurer for our most precious of possessions. That being the milk of human kindness which seems to spring eternal in New Orleans. This is how New Olreans was rebuilt—

    http://www.youtube.com/watch?v=3uVUNpkvAiA

  3. Let’s not give me too much credit Steve, there is little that is original on the net.

    In acknowledging the default Allstate still papers over the obvious in the impairment of their reinsurance program. I don’t have a sample Willow Re bond so we can only guess at the contents on the section on default. Since they were “guaranteed” it is even possible though not likely the document was silent.

    sop

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