Citizens aims to convert variable-rate debt to fixed-rate

Mar 7, 2008

The Miami Herald--Mar. 07, 2008

TALLAHASSEE — The state-run insurer is looking to convert $4.75 billion in variable-rate notes to fixed-rate debt to protect itself from rising interest costs in the credit crisis.

Citizens Property Insurance Corp. has bought back about $2 billion of the $4.75 billion in variable-rate securities on which interest rates reset every seven and 28 days.
Gotcha Covered
Consumers to Insurers:We Hate You
You would think that homeowners looking for a new insurance company might have some issues …

Traditionally, fixed-rate notes carry higher interest rates than variable-rate securities.

But because of the concern about liquidity in the credit markets, the fixed-rate notes are more favorable, said Bruce Douglas, chairman of Citizens’ board of governors.

The buyback has no effect on policyholders.

The notes are part of the borrowing that Citizens did in the past four years to augment its cash supply should it have to pay claims after a massive storm.

Citizens is the largest insurer of homes, condos, rental apartments and mobile homes in the state, with nearly 1.3 million policies.

Citizens has $5.8 billion in debt outstanding.

It has been asked to testify before the state Senate Banking and Insurance Committee on Tuesday to discuss the problems it’s having in the variable-rate market.

Citizens executives are in New York City this week to meet with investment bankers to discuss the possibility of converting some, if not all, of the variable-rate notes to fixed-rate bonds, Douglas said.

At a board meeting Thursday, the governors will consider a financing plan and are expected to vote to give Citizens Chief Financial Officer Sharon Binnun and financial adviser Raymond James & Co. the authority to at least refinance some or all of these securities. The board will consider several financing options.

Citizens parks these borrowed funds in short-term securities, earning enough on the investments to at least cover the interest it has to pay on the debt. In some cases, it even earns a bit of interest that goes into its coffers.

Because of the turmoil in the credit markets, rates have risen sharply, and now Citizens finds itself paying more in interest than it was earning on the invested funds.

Douglas said the variable-rate securities had worked fine for the insurer until the municipal market began to slide on credit worries.

Citizens had been paying between 7 percent and 9 percent on the auction-rate securities. But rates have shot up to about 15 percent.

The higher rates are a cost that "isn’t sustainable," said Christine Turner, director of legislative affairs for Citizens.