Yen Weakness Could Hurt U.S. Insurance Giants


The U.S. Dollar continues to trade higher against major currencies. The exchange rate per U.S. dollar reached over 110 Yen for the first time in six years.

Sterne Agee analyst John M. Nadel said that the weakening of the Yen could hurt the earnings performance of life insurance companies.

Insurance companies’ sensitivity to the weakening Yen

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In a note to investors, Nadel said he reviewed the exposure of insurance companies under Sterne Agee’s coverage including AFLAC Incorporated (NYSE:AFL), Prudential Financial Inc (NYSE:PRU), American International Group Inc (NYSE:AIG) and Metlife Inc (NYSE:MET).

He focused his review on the movement of the U.S. dollar versus Yen and its impact to EPS performance of life insurance companies.


AFLAC expected to fall by 1% in annual EPS

According to Nadel, the sensitivity of AFLAC Incorporated (NYSE:AFL) to the weakening of the Yen was well-defined. Based on its existing business mix, the impact of the decline of one Yen versus the U.S. dollar in the earnings of AFLAC is $0.035 per share annually.

Nadel said, “Every two points weaker Yen results in a roughly 1% drop in annual EPS” for AFLAC Incorporated (NYSE:AFL).

Prudential Financial’s EPS may decline 7-8%

Based on the disclosures of Prudential Financial Inc (NYSE:PRU), it appears that every one point decline of the Yen versus the U.S. dollar is equivalent to a loss of about $0.025 in annual EPS for the company, according to the analyst.

He added that although Prudential Financial Inc (NYSE:PRU) is hedging its exposure, the translation will catch to the current exchange rates over the next few years.

Nadel noted that Prudential Financial Inc. (NYSE:PRU) is translating its Yen-based earnings at 82 Yen/Dollar in 2014. According to him, “Assuming 110 Yen instead would reduce EPS by roughly $0.70 per share or about 7-8%.Based on our calculations, we expect the Yen/Dollar hedge to translate earnings at roughly 90 in 2015 and 98 in 2016.”

AIG expected to experience 3% earnings pressure next year

Nadel admitted that it harder to tell the impact of the weakness of the Yen to American International Group Inc (NYSE:AIG) because the company did not provide any specific disclosure that it aware of.

He estimated the sensitivity of American International Group Inc (NYSE:AIG) using a combination of data from the recent investor day and by making simple assumptions. According to him, for every one point weaker Yen/Dollar, AIG may be hurt by approximately $0.01 in annual EPS. He expected the company to experience around 3% year-over-year pressure on EPS growth in 2015 assuming the current movement of the Yen/Dollar continues until next year.

Metlife estimated earnings pressure is 1% in 2015

Meanwhile, Nadel estimated that each one point weakness of the Yen/Dollar costs Metlife Inc (NYSE:MET) approximately $0.005 per share in operating earnings. He noted that the company is also translating Yen/Dollar in 2014 at 97 and is hedged for 2015/16 at 107 and 106 Yen/Dollar, respectively.

According to him, investors should expect Metlife Inc (NYSE:MET) to experience year-over-year earnings pressure in the range of $50-60 million or about $0.05 per share (around 1% of EPS) in 2015.


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