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Metlife, Prudential, Aflac expected to face Q3 headwinds from Japan COVID claims

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Metlife, Prudential, Aflac expected to face Q3 headwinds from Japan COVID claims

While the impact of the pandemic appears to be waning across large swaths of the globe, Japan was hit hard by COVID-19 in the third quarter and life insurers with substantial exposure to the country are expected to see weakened results.

MetLife Inc., Prudential Financial Inc. and Aflac Inc. are among the life insurers that should experience third-quarter headwinds from the heightened impact of COVID-19 in Japan, according to Credit Suisse analyst Andrew Kligerman.

All three life insurers noted underwriting issues in the second quarter of 2022 when Japan reported around 3 million COVID-19 cases. The country's case count spiked in the third quarter to almost 12 million cases, which will likely result in higher claims activity for the life insurers.

"It's going to make for some tough quarterly results for these companies that have substantial exposure," Kligerman said in an interview.

Due to the way Japan classifies COVID-19, medical insurance policyholders with confirmed infections were able to file for insurance payments as if they were hospitalized. Regulatory changes made toward the tail end of the quarter should restrict eligibility for claims and limit the impact on life insurers going forward, Kligerman said.

Drop in earnings sequentially, YOY

The vast majority of the top 15 publicly traded U.S. life insurers are expected to post year-over-year decreases in earnings in the third quarter, according to analyst estimates compiled by S&P Global Market Intelligence. Only a handful of companies — Lincoln National Corp., Unum Group and Globe Life Inc. — are projected to book higher year-over-year earnings for the period.

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Ten of the top 15 U.S. life insurers are projected to report sequential earnings decreases in the third quarter, and third-quarter revenue estimates reflect sequential and year-over-year decreases for most of the companies among the group of top publicly traded U.S. life insurers.

The third quarter also marks the time when most life insurers complete their annual actuarial assumption reviews. UBS analyst Brian Meredith in a note said he does not expect "material assumption changes, even in the backdrop of the rising interest rate environment."

Prudential, however, which completed its assumption review in the second quarter, took a large charge in its secondary universal life product due to a change in lapse assumptions. Kligerman said the market is also watching to see if Lincoln might find itself in a similar situation.

With respect to mortality, Piper Sandler analyst John Barnidge said in an interview he expects to see companies like Globe Life and Reinsurance Group of America, Incorporated experience improved mortality, and pointed out that the third quarter has historically been the quarter with the lowest mortality rates.

Barnidge also noted that he expects fixed annuity sales to be strong for the quarter.

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