Citizens discounts millions
Mar 12, 2008
Miami Herald--Mar. 12, 2008
BY BEATRICE E. GARCIA
The state-run insurer has taken an $88 million write-down on the value of securities tied to the problems in the mortgage-backed securities market.
The securities were purchased for Citizens Property Insurance through a short-term investment fund managed by the State Board of Administration. The value of these securities plummeted last summer as the issues were downgraded.
But Citizens, which is the largest insurer of homes, condos, apartments and mobile homes in the state, hasn’t realized an actual loss on these investments yet because it still owns them.
Originally valued at $271.6 million, the securities’ current market value is about $183 million, Citizens estimates.
”These are the most troubled securities” that the SBA purchased for Citizens, John Fornay from Raymond James & Co. told the Senate Banking and Insurance Committee Tuesday.
Fornay is Citizens’ outside investment counsel.
The committee had asked Citizens officials to explain how the insurer is being affected by problems in the credit markets.
The securities Citizens has written down are held in the Local Government Investment Pool Fund ”B,” where withdrawals are prohibited.
This fund was frozen in November after municipalities that also invested in the fund panicked and withdrew billions of dollars in a few days as the news of the downgrades spread through the credit markets.
In December, company officials told The Miami Herald they hoped the value of these securities would improve by the time many issues matured early this year.
The money invested by the SBA for Citizens consisted of surplus cash the company has set aside to pay claims after a major storm. It also included proceeds from bonds Citizens sold in recent years. Citizens invests the money and hopes to earn enough on the investments to cover the interest cost on the bonds.
Until late last year, that strategy worked pretty well.
Sharon Binnun, Citizens’ chief financial officer, and Fornay also explained how the company is now paying a much higher interest rate on the borrowed funds.
Citizens has more than $4 billion of debt with variable interest rates. The credit crisis has driven buyers out of the market and pushed up the cost for Citizens. The rate on these securities resets every seven or 28 days.
At the end of 2007, Citizens had $2.64 billion in surplus. It expects to have about $4 billion in surplus this year.
But some lawmakers are eyeing that surplus as a way to reduce Citizens’ policy load.
There is talk in Tallahassee of taking about $100 million of Citizens’ surplus to fund the surplus note program the Legislature set up in 2006.
The loans to insurers help build up their capital and have allowed more than dozen companies to write more policies in Florida. Three companies took policies out of Citizens’ pool.
House Speaker Marco Rubio has said extending this program is one of his priorities this year.
But at a meeting with reporters Tuesday, he said funding for the program was still up in the air.