It’s seems logical that managed care companies—which have huge portfolios of investments—are likely to take some big writeoffs of unrealized losses in the third quarter. Not so, says analyst Carl McDonald of Oppenheimer. He also notes that the average plan has a pretty good-sized cushion and can write off nearly 20% of investments without having to raise additional capital.
“There will be realized losses in the third quarter, and we’re likely to see unrealized losses increase as well, as the equity markets were down, and spreads have widened. That said, at most plans, the vast majority of investments are held in government-protected assets, like Treasuries, mortgage-backed securities from Fannie & Freddie, which are safe, and municipal bonds,” McDonald says in a note.
McDonald adds, “Our analysis of state regulatory filings shows that managed care plans at the end of 2007 had $39.4 billion in capital, compared with required capital of about $18.5 billion, an RBC ratio of 532%. In total, the group could write off over $18 billion of assets, amounting to 18% of the industry’s cash and investments, reducing capital to 250% RBC. UnitedHealth is the best capitalized company in the group, as it could sustain a write-off of more than 32% of its statutory capital base. Universal American, Humana, and Molina are also well capitalized, with a cushion above 20% of investments….The least well capitalized companies in the group include Amerigroup, WellCare, and HealthSpring, as these plans could afford to write off 6-8% of assets.”
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