It was only a matter of time before several leading U.S. life insurers with business dealings in Japan felt reverberations from the devastating 9.0 earthquake on March 11, followed by a major tsunami and nuclear reactor leaks. While industry observers are still assessing the long-term financial impact of these events on Aflac, MetLife and The Hartford, disaster may have been averted on their balance sheets.
“Unless things get much, much more serious with the Fukushima Daiichi reactor, I wouldn’t expect any real hit to either Aflac or MetLife in any meaningful way,” says Steven Schwartz, an analyst covering the life insurance industry at Raymond James Associates Inc.
He notes that Aflac provides cancer insurance in Japan (and is the largest seller of that product line), as well as supplemental health insurance and very low face value life insurance, while MetLife provides the same types of products and used to be involved in a joint venture with Mitsui-Sumitomo to sell variable annuities. Schwartz doesn’t believe The Hartford “is particularly well hedged in Japan, so it could affect the company’s capital levels,” adding that its exposure in Japan is through variable annuity guarantees.
Although it is still studying the financial impact on U.S.-based life insurers, A.M. Best Co. released a statement saying “it is too soon to calculate the cost of these events to the insurance industry... Any rating impact will depend on multiple factors, including each company’s business mix and net exposure.”
Eyes on Aflac
Bloomberg estimates that roughly 75% of Aflac’s sales last year were generated in Japan, which Insurance Networking News reported as the most among U.S.-based companies with a market value of at least $100 million. The insurer lost more than $3 billion of market value, while shares slid more than 10% in the days following Japan’s earthquake and tsunami. Aflac’s $2.3 billion in profit in 2010 soared 57% from the previous year.
Fears also are running high about the prospect of massive claims being filed in the wake of radiation leaks from nuclear reactors and how that would affect Aflac’s bottom line. Cancer is reportedly much more prevalent now in Japan as that nation’s life expectancy has increased, which may bode well for sales of these policies.
Mitch Stringer, managing partner with Select Benefits Communications Group, explains that while Aflac writes a large percentage of its overall business in Japan, “life insurance is a relatively small portion of their overall sales volume.” He adds that the carrier’s hospital indemnity, cancer and accident coverage “would only have claims if the conditions were diagnosed.” Another issue to consider is act-of-God exclusions that may exclude coverage for an earthquake or tsunami much like after Sept. 11 when “insurance carriers could have denied death benefit claims due to an act of war, but chose to avoid the negative public relations and paid the victims beneficiaries claims,” according to Stringer.
Sterne Agee analyst John Nadel recently was quoted as saying that since Aflac’s 20 million supplemental medical and cancer insurance policies in Japan provide fixed benefits, “the frequency of claim, rather than severity, would be the driver of any negative impact on profitability. And even in the event that frequency spiked 10% or 20%, the present value of such an impact would be modest.”
Aflac has adequate reserves to handle its exposure to any losses incurred in Japan’s supplemental insurance market, which it entered in 1974, reports company spokeswoman Laura Kane. She says the events in Japan will not affect the price and availability of Aflac’s voluntary products sold in the U.S., since those premiums are based solely on experience in this country.
Daniel Amos, the company’s CEO, was moved by the resilient spirit of Japanese citizens he encountered on a recent trip there following the nation’s multiple disasters and the company had wristbands made featuring the Japanese and English word for “together” for employees in those countries to wear as part of a Red Cross fundraiser.
In a related development, Aflac recently fired comedian Gilbert Gottfried as the long-time voice of its irreverent duck in advertising campaigns for posting insensitive jokes about the crisis on his Twitter account and put out a casting call to replace him with auditions in six cities across the U.S. during the first week of April. The duck has appeared in 52 television ads and numerous radio spots since 2000, helping raise Aflac’s brand recognition to a whopping 93% from slightly more than 10%.
Karen Eldred, a spokeswoman for MetLife, says the carrier is focused on the safety of its associates and their families and helping deliver on promises to Japanese customers and business partners. “Although it is premature to draw any conclusions about the effect, if any, of the earthquake and ensuing events on MetLife’s business in Japan,” she says, “MetLife continues to monitor the situation in the region for its employees, customers and operations.”
The Hartford ’s more than 200 employees in Japan are unharmed and operations have resumed, according to company spokeswoman Kelly Carter, who notes that the carrier has contributed $100,000 to the American Red Cross disaster relief efforts there. The company’s general account investment exposure in Japan is limited and primarily takes the form of Japanese government bonds purchased to support specific Japanese liabilities. It “does not expect to incur material claims as a result of the Japan earthquake and tsunami,” Carter explains. “In our variable annuity business, we expect to see a modest increase in death benefit claims given the unfortunate loss of life in Japan.”
Bruce Shutan is a freelance writer based in Los Angeles.
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