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Sell-off of Life Insurer Shares Eases One Week After Quake

Source: WSJ - Leslie Scism

Posted on 18 Mar 2011

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On Thursday, the sell-off of U.S. life insurer shares brought on by the Japan earthquake subsided. And in report, one Wall Street team suggested a possible spike in revenues for companies with a Japan presence, with a potential increase in sales of life insurance.

Morgan Stanley in a report noted that sales of life policies surged after the Sept. 11 terrorist attacks in the U.S. in 2001 and the Kobe earthquake in Japan in 1995.

Japan's earthquake, tsunami and nuclear-reactor disasters "illustrate the need" for life insurance, and will "likely spur at least temporarily a surge in demand in the back-half of the year" wrote Morgan Stanley analysts Nigel Dally, Hayley Locker and Matt Lipton.

The report notes that, during the second quarter of 2002, about six months after the terrorist attacks, total U.S. life-insurance sales surged nearly 8%, and they were up about 4% in each of the next two quarters, year over year.
Following the 1995 Kobe earthquake, life-insurance sales reached a record high in Japan, before slowing in the following year, the analysts write.

Many U.S. life-insurance stocks regained some lost ground Thursday, part of a broad market rally, after they fell this week on concerns about the effect of the crisis on their claims costs, future earnings and investment portfolios. Prudential Financial Inc. shares closed up 2%, while MetLife Inc. added 1.7% and Aflac Inc. declined less than 1%.

Wall Street analysts are fairly uniform that, despite a potentially large death toll, the exposure from claims costs is limited for any single life insurer.

"The exposure would be spread among many" Japanese and foreign insurers, concluded analysts at UBS Investment Research.

Wall Street analysts also agree on another point: In the short-term, sales could fall sharply in Japan as the country contends with the immediate crisis. Insurers themselves face disruption to business from power outages, which, among other things, hamper agents' transportation. Morgan Stanley estimates the first-quarter hit to industry sales in Japan could be about 15%.

But for the medium-term, Morgan Stanley says U.S. life insurers could benefit. "Unlike the domestic Japanese insurers that have roughly 10-20% of their investment portfolio in Japanese equities, U.S. insurers typically have very little exposure," the analysts write. That means U.S. insurers' financial-strength rankings "should improve" relative to Japanese peers, they write.

"The net result is that we expect the lost sales due to the near-term disruption will be more than offset by stronger sales thereafter," they conclude.
Prudential expanded its operations in Japan earlier this year with a $4.8 billion pact to acquire two Japan units from American International Group Inc.

Prudential is one of the five biggest life insurers in Japan as measured by in-force business, according to UBS. Prudential declined to comment on the analyst reports, saying its priority is the safety of employees and serving customers.

Meanwhile, one U.S. life insurer that analysts have been eyeing for its exposure to Japanese stocks is Hartford Financial Services Group Inc. Hartford in years past was one of the industry's biggest sellers of variable annuities, a form of investing in stock and bond funds that can carry performance guarantees. Hartford had a significant business in Japan, until it discontinued sales there in 2009 as it sought to contain its risk exposure in the wake of the 2008-09 global markets crisis.

Still, Hartford continues to be responsible for guarantees on the older business, and some of that makes it vulnerable to declines in Japanese stocks, analysts say.

After several days of battering, Hartford shares were up 1.8% Thursday.

In a Tuesday report, Credit Suisse said it thinks the decline in Japan's stock market could prompt Hartford to strengthen claims reserves for its variable annuities. A Hartford spokesman declined to comment.