Are Insurers Credit Crunch's Next Victim?

Market watchers are keeping an eye on that. Massachusetts investment strategist Peter Cohen worries that health insurer Aetna(AET Quote - Cramer on AET - Stock Picks), for example, could be hiding some risks inside its "non-revealing" long-term investment category. In its fourth-quarter report, the company reclassified some assets and now includes mortgage loans with its long-term assets.

"I don't even know what's in there," says Cohen, who has no investments in health-insurance companies. "I would definitely like to know how safe those investments are."

But even Aetna, which relies on investment income for roughly 40% of its earnings, has escaped without a major hit so far. The company suffered only a modest dip in investment income last quarter.

Fellow big insurers UnitedHealth (UNH Quote - Cramer on UNH - Stock Picks) and WellPoint (WLP Quote - Cramer on WLP - Stock Picks) have also started offering more details about their investment portfolios in their regulatory filings. Goldman Sachs analyst Matthew Borsch, in a research note Friday, said he spotted no reason for alarm, noting that each took relatively modest investment-related charges last year.

"Both companies provided snapshots of their investment holdings that were consistent with management commentary provided last month on the earnings calls -- but with additional details," Borsch wrote. "We view the 10K disclosures positively relative to market speculation that auditors for one or both companies might have required significant impairment charges, given market developments over the past month as well as the recent writedowns at financial and non-health insurance companies."

It may be the very reliance on short-term assets by health insurers which end up saving those companies. That's because short-dated instruments are constantly being turned over. Older-vintage assets, say, from the heady debt-issuance days of 2006 and 2007, are replenished with new fresher and cleaner assets.

Property/Casualty Insurers

Property/casualty firms, likely the least risky of the three types of insurers, typically find their investing strategies constrained by the rating agencies, Merkel explains.

That's because the events against which they insure tend to have a lot of variability, meaning they are less predictable. For that reason, their investing policies and practices tend to be scrutinized closely.

"Rating agencies frequently threaten to downgrade P&C companies if they don't follow conservative investment policies," Merkel explains. For that reason, even the mortgage-related investments are typically of the highest quality, such as federally insured home loans.

In general, those practices seem to have steered property/casualty firms away from many of the potential landmines being felt in so many segments of the credit markets.

Analysts from Credit Suisse said of Travelers(TRV Quote - Cramer on TRV - Stock Picks) insurance company that "investment in mortgage-backed securities totals $7.1 billion or 9.5% of invested assets only $286 million of these assets have subprime or Alt-A collateral (0.38% of invested assets)," in a January note. "There did not appear to be any credit impairment to these securities or significant change in fair value," and "none of these securities have been downgraded in 2007."

Even so, that doesn't preclude some short-term weakness in all the insurance stocks. A domino effect could take place.

As the bond-insurance companies, such as Ambac Financial(ABK Quote - Cramer on ABK - Stock Picks) and MBIA(MBI Quote - Cramer on MBI - Stock Picks), weaken or possibly disappear, the credit ratings of the bonds they insured could start to slip leading quickly to lower market values for the securities.

To the extent that those bonds are held by insurance companies, their balance sheets could take a hit, explains Justin Urquart Stewart, director at Seven Investment Management in London.

"It would be an unpleasant shock," Urquart Stewart adds, although he doesn't see any long-term weakness with the life sector.

Don Coxe, global portfolio strategist at BMO Financial Group in Chicago and a veteran of the life insurance business, agrees. He says the industry's long-term stability and conservative management should bring it through in the long term.

"It takes a lot of bleeding to kill insurance companies," BMO's Coxe says. "I don't know anyone who's gotten rich shorting" them.

Senior writer Melissa Davis contributed to this article.

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