By Gaurav Bhola, Managing Editor
Tuesday, August 07, 2007
As the mortgage malaise hits Wall Street, health insurers may be able to escape the mortgage market infirmity. Many health insurers’ portfolios invest more than 20% in mortgage loans. However, most of these health insurance companies have little exposure to subprime mortgages.
The mortgage-housing market has been going through dramatic changes the last few months. Many mortgage lenders in the heydays of the housing boom doled out subprime mortgages, now many of these home loans are in default. The escalating defaults on subprime mortgages have permeated beyond the mortgage arena to other sectors of the economy, even to the health insurance industry.
Health insurers, Universal American Financial and WellPoint Inc. have the most exposure to subprime mortgages among U.S. health insurance companies. These companies may escape the fallout due to small exposure to risky subprime mortgages in their portfolios.
The majority of portfolios holding mortgage loans held by managed health care plans are invested in commercial loans, consisting of retail and office properties.
The commercial real-estate arena had shown signs in the recent past of a real estate bubble, driven by an influx of investment and low interest rates. Unlike its residential cousin, the main difference between the two is that supply and demand have been linked to rents and vacancies not increasing interest rates. Herein, the cooling real estate markets, the increasing defaults on residential loans, and the subprime mortgage fiasco have had nominal impact on the dexterity of the commercial and retail real estate market.
Some health insurance plan companies use mortgage loans to increase returns, while other insurers use proceeds from loans to pay claims for life or disability coverage.
In 2006 WellPoint, one of America’s largest health insurers has approximately 27% of its cash invested in mortgage loans, over $300 million in subprime loans. Conversely, the subprime portion represents about 1% of the company’s entire portfolio, most of it in high quality subprime loans.
Meanwhile CIGNA had a sell-off of its shares on Wall Street, after analysts’ questioned the mortgage portion of the $18 billion investment portfolio. The sell-off by some investors may have been premature, only $5 million of its loans had possible exposure to subprime mortgages.
Majority of CIGNA's mortgage loans are invested in income producing commercial real estate. It seems that health insurance companies made the right bet in the real estate market.
