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
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.