BRADENTON, Fla. - The Citizens Property Insurance Corp.'s finance committee yesterday green lighted a plan to take out all of the Florida insurer's remaining auction-rate securities and work on a replacement liquidity plan that includes a $1.5 billion short-term, fixed-rate bond transaction.
The state-run insurer has already purchased $2.4 billion of its own $4.75 billion of taxable auction-rate securities due to rising interest rates and negative arbitrage, and it has issued conditional 30-day call notices for early retirement of another $950 million of auction-rate securities as part of the plan to restructure its liquidity.
Citizens finance team also has entered discussions with more than 45 banks that are potential candidates for a $2 billion line of credit. The team is meeting with banks in New York on Monday.
On Tuesday, the finance team is meeting with Financial Security Assurance, and its parent company, DexiaSA, to work on details for the companies to insure and provide the liquidity facility for the sale of $1 billion of variable-rate demand notes.
The rush is to replace auction-rate securities, which were a cost-effective way for the insurer to ensure it had liquidity on hand to pay claims. But since the auction market collapsed in the wake of the subprime mortgage crisis, the securities have been anything but cost-effective.
For example, the average spread to the London Interbank Offered Rate for Citizens' securities in February was 216 basis points, compared to 66 basis points in January. Because of the auction-rate meltdown, Citizens has seen interest rates on its debt rise faster than the income on investments. As a result, negative arbitrage soared to about $30 million a month.
Citizens is a nonprofit agency established by the state to provide property insurance in Florida because not enough private companies are willing to do business in the hurricane-prone state. It is now the state's largest property insurance company, with 1.3 million policyholders and a statewide exposure of approximately $485 billion.
Because of its huge exposure, Citizens needed liquidity to pay claims quickly. The agency sold taxable auction-rate securities over three years and invested the proceeds to pay the interest. Because the proceeds were not needed to pay claims, the finance committee yesterday recommended moving ahead using the proceeds and other funds to redeem the auction-rate securities that remain outstanding.
"I am optimistic we will be able to put a liquidity replacement plan in place prior to the hurricane season," Citizens financial and investment adviser, John Forneywith Raymond James & AssociatesInc., told the committee yesterday. The hurricane season begins June 1.
However, Forney warned that the new multifaceted liquidity plan will cost more than the agency previously paid.
Those costs will be presented to Citizens board of governors as each phase of the new liquidity plan is implemented. The board meets today and is expected to approve taking out the remaining auction-rate securities and to use Citi, Goldman, Sachs& Co., Morgan Stanley, and UBS Securities LLC as senior managing underwriters for a portion of its restructured liquidity plan.
The board of governors also will hold a special meeting at 9 a.m. on March 21 to approve bond documents for the $1.5 billion short-term, fixed-rate bond transaction.
The underlying ratings for Citizens' various bond issues are in the single-A category with a stable outlook.