August 3, 2007 / 4:47 PM / in 10 years

Health insurers' subprime exposure limited: analyst

NEW YORK (Reuters) - WellPoint Inc WLP.N and Universal American Financial Corp UHCO.O seem to have the most exposure among U.S. health insurers to subprime mortgages, but the exposure is small, even at those companies, according to a report by a CIBC analyst.

Fallout from credit concerns linked to the U.S. housing slump and risky subprime mortgages has been spreading beyond the mortgage industry to other sectors, including health insurance companies.

Several health insurers report holding more than 20 percent of their portfolios in mortgage loans, but most companies have almost no exposure to subprime loans, CIBC analyst Carl McDonald said in an analysis published on Friday.

“Our work in the past couple days suggests that the recent issues in the mortgage market will have very little impact on the investment portfolios held by managed care plans,” McDonald said in his report.

The vast majority of the mortgage loans held by the insurers are commercial loans, supporting offices and retail facilities rather than residential properties, McDonald said.

McDonald said some companies with mortgage loan exposure use proceeds from the loans to pay claims tied to insurance plans other than for health care, such as life or disability coverage. These claims have longer turnaround times for payment by the insurers than health claims.

Other companies, such as WellPoint, see the loans as a way to improve investment returns, the analyst said.

WellPoint, the largest U.S. health insurer by membership had nearly 27 percent of its total cash and investments in mortgage loans as of the end of 2006, McDonald said.

WellPoint has $300 million in subprime loans, giving it the most subprime exposure among health insurers, McDonald said. But the amount represents only about 1 percent of its total investment portfolio and virtually all of the subprime loans are of the highest-quality, the analyst said.

    McDonald calculated that a write-down of WellPoint’s entire subprime portfolio would equate to a 35 cent shave for the company’s share price, which hovered at around $76 on Friday.

    The portfolio for Universal American, a far smaller insurer, includes $150 million in subprime assets, according to McDonald. But the vast majority of Universal’s subprime loans have strong credit ratings and it is unlikely the company will have to write down its subprime book.

    The risks of subprime loans to the health insurance industry came to light earlier this week when Cigna Corp (CI.N) faced questions from analysts about the mortgage loans on its balance sheet. Analysts said jitters about the loans contributed to a sell-off in the company’s shares after its second-quarter earnings report.

    But Cigna said of the nearly $18 billion in investments listed on its balance sheet, the company thought only $5 million of its loans potentially had exposure to the subprime sector.

    Cigna lists nearly $3.7 billion in mortgage loans on its balance sheet, but those are commercial loans, a Cigna official said.

    Reporting by Lewis Krauskopf

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