Capital Markets

Subprime Loss Strikes Health Insurer

Universal American reports that "investment income is an important part of our total revenues and profitability."
Stephen TaubMarch 18, 2008

Another non-bank company is feeling the effects of the subprime crisis. Universal American Corp., which provides a broad array of health insurance and managed care products and services, mainly to senior citizens, announced that it would write down $26.7 million worth of sub-prime holdings. The company took the action after its auditors concurred that the market value of the securities became “other than temporarily impaired” as of year-end.

The health insurer added that the after-tax impairment had already been reflected as an unrealized loss in the preliminary balance sheet data that it reported in its February 19 earnings release, continuing indications of a widening of the impact of the credit crunch beyond the financial sector. Last month, for instance Bristol-Myers Squibb took a $275 million impairment charge of $275 million on investments in auction rate securities partially consisting of subprime mortgages. Similarly, IAC/InterActiveCorp, owner of Ticketmaster and the HSN home-shopping channel, wrote down the value of its LendingTree mortgage broker.

Most of Universal American’s sub-prime holdings are in senior or senior-mezzanine tranches which have preferential liquidation characteristics, the company reported. Those securities have an average S&P rating of AA . Although none of these securities have experienced credit downgrades, 12 securities, including 11 of the 14 securities that have been written down through income, have been placed on negative credit watch by rating agencies, it added.

The company also warned that there would be further impairments on these securities in the first quarter, as prices have continued to decline since December 31. “However, the company believes that it will recover principal and interest greater than the market prices currently indicate,” it added.

Universal American did not explain why a health services company was investing in sub-prime mortgages in the first place. But the company does state in its annual report that “investment income is an important part of our total revenues and profitability.”

In each of the past three years, its yield on average cash and investments was in the low-5 percent range. In 2007, it had a more than $40 million net realized investment loss before taxes, including other-than-temporary declines in market value.

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