Citizens at eye of storm over state investment pool

Citizens at eye of storm over state investment pool

$7 billion of insurer’s assets invested in troubled state fund

By Julie Patel

South Florida Sun-Sentinel

January 13, 2008

Citizens Property Insurance Corp., Florida’s largest property insurer, is hoping its investments in a troubled state investment pool bounce back before hurricane season starts in June.

About $7 billion it taps to pay storm claims is managed by the State Board of Administration, which floundered late last year when its risky investments tied to the nation’s subprime mortgage crisis came to light.

In a big move to protect its investments, Citizens officials said Friday they plan to diversify by moving $5.1 billion, or about half of the insurer’s total assets, from SBA to private money managers.

For the state-backed insurer of last resort, about $700 million — or 7 percent of its portfolio — still is invested in those tarnished securities and about $1.8 billion is frozen in SBA’s Local Government Investment Pool after a run by Florida cities forced the state to prohibit withdrawals.

Bruce Douglas, chairman of Citizens’ board, said he anticipates that about 70 percent of the shaky securities will recover by June and is optimistic that they won’t lose money with the remaining investments.

"Maybe a small portion will go belly up, but not the whole thing," he said last week.

It’s too early to tell whether an investment loss could result in a shortfall big enough to lead to rate hikes or added fees for the more than a million Citizens’ policyholders. Virtually all state residents now pay a small fee added to their annual property and automobile policies to help offset Citizens’ deficits in past years.

With the start of storm season still five months away, Douglas says there’s plenty of time to contemplate possible mistakes, rethink strategies and prepare. Several Citizens committee and board meetings are scheduled later this month to discuss those issues.

If Citizens’ property insurance prices go up in years to come, there could be more at fault than hurricanes, said Edward Siedle, a former Securities and Exchange Commission attorney who is president of Benchmark Financial Services in Ocean Ridge.

"It’s one thing to ask policy holders to pay premiums based on claims, but it’s another thing to increase them due to mismanagement of assets," he said.

Citizens’ first mistake, Siedle says, was moving $4.2 billion from 10 private money managers in July to the SBA, a state agency that invests local government money. Within three weeks, two of the securities invested through SBA were downgraded by credit-rating agencies from the highest to almost the lowest ratings. What’s more, the SBA’s board required Local Government Investment Pool participants to give up the interest they had accrued in November. For Citizens, the pool’s largest investor, that totaled $10 million in lost money.

"This is the classic example of firing good money managers and hiring less experienced ones," Siedle said.

Citizens had paid a $30,000 transaction fee to move the $4.2 billion to the SBA, and now five months later it’s searching for a new money manager. This time the insurer is using a competitive bidding process to hire a money manager.

SBA officials said recently that they expect to make about $2.7 billion from the local government pool available to participants in the next four months. That will allow Citizens to slowly reduce its share of the pool from 15 percent to 10 percent. It isn’t planning to divest more than that, said Christine Turner, the insurer’s spokeswoman and director of legislative affairs.

For its part, Citizens caught wind of the subprime troubles earlier than many government entities and asked its money managers in August to stop investing in mortgage-related securities. Weeks before Nov. 29, when the local government pool was frozen, Citizens had withdrawn $800 million.

Citizens officials defended their investment guidelines but said they would consider making changes later this month when the board and its investment committee meets.

"Our guidelines are pretty strict, but in light of today’s market and mortgage-related securities … we are evaluating whether some changes should be made," said Sharon Binnun, Citizens’ chief financial officer.

The insurer generated about $175 million on average each month in net revenue last year, money that may make up for any potential investment losses, Binnun said.

As the state’s money manager, SBA has taken most of the heat for its slow reaction to the problems in the housing and credit markets. The agency’s board hired an outside money manager, new communications consultants and is conducting an internal audit to look into what happened and why.

But government bodies such as Citizens also have a responsibility to protect taxpayer money and should conduct their own investigations to determine what happened internally, Siedle said.

Groups such as Government Finance Officers Association issue reports advising local governments to independently assess potential investments, providing suggestions for data that can be used. Early last year, the group warned that local government investment pools such as SBA’s are considered risky because they’re exempt from Securities and Exchange Commission regulatory requirements.

"While this exemption allows pools greater flexibility, it also reduces investor protection. Investments in these pools are not insured or guaranteed and substantial losses have occurred in the past," the group warns in a report on its Web site.

Governments usually are limited by the kind of investments they’re allowed to make and their leaders often have limited resources, said Sylvain Raynes, a principal of New York-based R&R Consulting and an adjunct professor at Baruch College in New York.

Raynes said this leads many government officials to rely too heavily on ratings from credit agencies such as Moody’s and Standard and Poor’s — one of the key requirements for any Citizens investments.

"It’s more of a ‘How do I invest without losing my job?’ You have to be able to blame someone. What better than a rating agency?" Raynes said. Binnun said Citizens leaves the deeper research to its money managers.

"We outsource our money management to experts who have resources at their disposal," she said. "They might have to have certain investments up to the grade we require but we look to money managers to do all the background research."

Copyright © 2008, South Florida Sun-Sentinel

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