(Citizens Property Insurance Chairman, Bruce Douglas, Will be Answering Questions..)

Citizens hit with additional asset losses

TALLAHASSEE, Fla. – Dec. 15, 2008 – The credit market’s turmoil continues to haunt the state-run property insurer.

Citizens Property Insurance has written down an additional $119.5 million of the value of troubled mortgage-backed securities that had been included in a state-run investment pool.

The company’s general counsel disclosed at Friday’s Board of Governors meeting in Jacksonville that the state insurer has fielded questions from the Securities and Exchange Commission on the sale of auction-rate securities earlier this year. The notes were repurchased in June when there were no buyers for auction-rate notes.

A subpoena from the SEC’s Washington office was received by Citizens in June. It replied to the SEC’s inquiry in early July.

The state’s Office of Financial Regulation confirmed that it has an open investigation of Citizens. But a spokeswoman wouldn’t say why the insurer was being investigated or when the investigation started.

In 2007, Citizens had invested more than $2 billion in the Local Government Investment Pool run by the State Board of Administration. Like many cities, counties and local agencies, Citizens’ money in this fund was frozen after the news that several of its mortgage-related securities were downgraded caused a run.

As a result, the fund divided its money into two pools and restricted access to investors to prevent them from withdrawing their entire balance at one time.

Citizens has had more than $651 million sitting in the fund since last December, but will gain full access to the money Dec. 23. The insurer has $73.3 million in Fund B, which contains the most troubled securities, that it still can’t touch.

The $119.5 million write-down reflects the difference in current market price for these securities and what Citizens paid for them, Kerry McGovern, Citizens’ investment manager, told a Citizens governors board committee meeting Thursday. That’s in addition to an $88 million write-down last December.

McGovern said about 79 percent of the September write-down came from the securities in the local investment pool’s Fund B. The rest came from losses on Lehman Brothers Holdings, the Wall Street broker and investment firm that filed for bankruptcy in September.

Given continued market declines, McGovern said further markdowns might be needed at the end of the year.

Citizens did manage to skirt losses on about $8 million it had invested in the Reserve Primary money market fund, which “broke the buck” in mid-September when losses pushed its per-share price below a dollar.

McGovern said Citizens will be able to recoup its investment after Jan. 5.

At the board meeting, the financial statement presented by Sharon Binnun, Citizens’ chief financial officer, showed the insurer had a surplus of $3.3 billion at the end of the third quarter. Surplus is cash the insurer has stocked away to pay future claims.

Christine Turner, Citizens’ director of government relations, said the insurer has provided the documents and information requested by the SEC regarding its repurchase of auction-rate notes. She called it a “fact-finding inquiry.”

Citizens repurchased the notes when rates on these securities rose sharply as the credit markets deteriorated.

Both current board chairman James Malone and former chairman Bruce Douglas had been informed of the SEC inquiry. But the board hadn’t been told about it until Friday’s board meeting when the SEC request was mentioned during the general counsel’s report.

Allan Katz, a Tallahassee attorney and one of the governors, was dismayed that the board hadn’t been told earlier. Routine or not, “you don’t wait five months to tell board members.”

Copyright © 2008 The Miami Herald, Beatrice E. Garcia. Distributed by McClatchy-Tribune Information Services.