Storm damage won't drown countrywide.

To insulate itself from interest-rate fluctuations a decade ago Countrywide Financial Corp. began diversifying into business segments outside its core mortgage lending practice.

Now it's one of Countrywide's diversification steps, Balboa Insurance Group Inc., that makes the company susceptible to the destruction inflicted on the Gulf Coast by Hurricane Katrina.

The Calabasas-based company announced last week that Katrina's impact would "not be insignificant" and losses--mostly from its insurance division--could top the $70 million from the entire 2005 hurricane season. Countrywide's insurance operation, which started out offering homeowners' insurance, now offers a broad range of services. Katrina is expected to have its biggest impact on Countrywide's homeowners and reinsurance insurance operations.

Stanford L. Kurland, Countrywide's president and chief operating officer, said in a statement that the company had protocols in place to assess the damage but its inspectors were still unable to access areas to determine the extent of the toll.

"While the financial impact of Hurricane Katrina to Countrywide is not determinable at present, we believe it will not be insignificant," Kurland said. "Management believes, however, that the company is well-positioned to effectively manage the consequences of this natural disaster."

Estimates of what the private insurance sector could be facing from Katrina range from $40 to $60 billion--which would make it one of the worst natural disasters the country has ever faced.

Several Wall Street analysts estimate Countrywide's pre-tax exposure to Hurricane Katrina could be as high as $150 million. At the same time, none of the analysts questioned Countrywide's ability to weather the impact.

Robert P. Napoli, senior research analyst at Piper Jaffray, reduced Countrywide's estimated earnings per share by 15 cents to $4 for 2005, but kept his prediction for 2006 earnings in place at $4.50 a share.

"We believe the long-term Countywide story is very much intact," he wrote in a Sept. 12 report.

While Countrywide, the nation's largest mortgage bank, has taken a hit in its insurance business, analysts say the loan business is so strong it won't be a serious factor.

Countrywide's strong August results, fueled by a robust residential real estate market, could overshadow the expected losses from Katrina.

The company's origination volume for August totaled $53.1 billion, a 20 percent increase from July and a 71 percent increase from the year-ago period. The results beat Piper Jaffray's estimate for Countrywide's August volume by more than 20 percent.

Napoli said Countrywide's mortgage business shows no sign of slowing. "The pipeline of loans in process increased again to $78 billion," he wrote. "(That's) up slightly from July and represented the second largest pipeline (Countrywide) has ever had."

Insurance impacts

Still, Countrywide is relatively unique among lenders facing losses in property and casualty insurance coverage. Other giants in the home lending arena such as Washington Mutual Inc. and Wells Fargo & Co. don't have their own insurance divisions.

Countrywide Insurance Services Inc. started out offering homeowner's insurance to its loan customers. By the late 1990s, Countywide Insurance had expanded to include condo, life, health, disability and automotive coverage.

Then in late 1999, Countrywide purchased Balboa Life & Casualty, an insurer with a broad range of products designed for financial institutions and merged the company into its existing insurance business.

Analysts say Countrywide's reinsurance business has some of the largest liabilities. Balboa Reinsurance provides reinsurance to primary mortgage insurers who service Countrywide's portfolio and thus may have to cover losses on mortgages that Countrywide has issued.

The concern is that many homeowners did not have insurance coverage for flooding, which caused most of the damage in New Orleans and surrounding areas. Those homeowners, facing a complete teardown and without insurance coverage, may walk away from mortgages issued by Countrywide and others.

In New Orleans alone, some $2.4 billion in mortgage loans are outstanding in pooled funds held by institutional investors, according to LoanPerformance in San Francisco. The research firm estimates total investment-fund exposure to mortgages in areas affected by Katrina to be nearly $13 billion. These figures do not include mortgage loans held by Fannie Mae or Freddie Mac.

Another area where Countrywide may see an effect is with delayed mortgage payments in Alabama, Mississippi and Louisiana. Countrywide announced it's suspending for up to 90 days the mortgage payment requirements for customers in hurricane-damaged areas that have uninhabitable homes, lost jobs or are unable to work because of the storm.

After that period, Countrywide has said it will further review customer hardships on a case-by-case basis.

Countrywide has also given $1.6 million for immediate relief efforts. The company has 24 offices with 500 employees in the hurricane-battered region.

Investor Exposure

Mortgage loans held by private investment
pools in areas affected by Katrina.

                     Number       Balance
Region              of Loans    (millions)

Memphis               29,223      $3,067
New Orleans           21,230       2,395
Birmingham, Ala.      18,909       2,232
Baton Rouge, La.      10,683       1,049
Mobile, Ala.           6,579         669
Jackson, Miss.         7,264         644
Huntsville, Ala.       5,190         541
Biloxi, Miss.          4,587         360

Total                127,664     $12,889

Does not include loans held by Fannie Mae or Freddie Mac.

Source: LoanPeriormance, San Francisco