AFLAC Incorporated (AFL), Prudential Financial Inc (PRU): Will the Insurance Giants Survive the Japanese Tsunami?

The first quarter of the current year saw a few events that had significant impact on the operating performances of the US life insurance giants. In this article you will see how the events impacted different insurers and what analysts are expecting the insurers will report at the end of the first quarter of the current year.

What Happened During 1Q13?

Some of the events include the negative impact from the depression of the yen and the sharp drop in Japanese government bond yields. Further, US equity markets experienced a solid first quarter. However, the drag related to  ongoing, persistently low US interest rates and depressed new money yields still exists.

The shock announcement by the Bank of Japan (BOJ) to expand its easing programs to stimulate the Japanese economy had a negative impact on US insurance giants like AFLAC Incorporated (NYSE:AFL) and Prudential Financial Inc (NYSE:PRU). Metlife Inc (NYSE:MET) was also affected but to a much lesser extent. Since AFLAC Incorporated (NYSE:AFL) is considered to have the most exposure on the currency side, you should expect the company to hedge its future profit repatriations. Besides, Prudential Financial Inc (NYSE:PRU) will experience a large negative adjustment to its book value of the first quarter due to its sensitivity to the yen.

Further, since Prudential Financial Inc (NYSE:PRU) has been a substantial buyer of Japanese government bonds, a decline in their yields will negatively impact its margins on yen denominated products. Yields on Japanese bonds have dropped across the yield curve. The 10-year yields are down at least 15 bps, while the 30-year yields are down 55 bps. On the other hand, AFLAC Incorporated (NYSE:AFL) rolled out its US dollar based investment program, de-emphasizing the Japanese government bonds over the past few quarters.

Therefore, this quarter’s results for the life insurance giants will be highly sensitive to the situation in Japan. The stronger equity markets, coupled by solid private equity returns, partially offset by the prevailing ultra low interest rate environment in the US, will lead the insurance giants to report decent fundamentals at the end of the first quarter of the current year.

EPS Estimates

Analysts have a consensus mean earnings estimate of $1.62 for AFLAC Incorporated (NYSE:AFL) for which Credit Suisse analysts are expecting $1.63. The consensus mean earnings estimate for American International Group Inc (NYSE:AIG) is $0.84, while it is $0.29 per share for Genworth Financial Inc (NYSE:GNW). Metlife and Prudential Financial Inc (NYSE:PRU) are expected to report  earnings of $1.29 and $1.85 per share. While analysts at Credit Suisse agree with the consensus mean estimate for Prudential Financial, they believe Metlife will report $1.33 in income per share at the end of the first quarter of the current year.