Its investment portfolio is heavily invested in Japanese debt or preferred stocks. Per its latest financials, out of its $86 billion total investments in fixed maturity and preferred securities, about $70 billion was invested in Japanese yen denominated securities.
This subjects its portfolio to the capital market's correction in Japan and globally. Insurance companies’ stock price usually trades closely to its book value. At a $50 stock price, its P/B is around 2.12x based on most recent quarterly book value per share of $23.54. Supposing its P/B ratio does not shrink given the current environment, a 2% hit at its investment portfolio would imply a stock price of $42.16.
Although some of the hits in investments may not show up on income statements initially but are recorded as unrealized losses on balance sheet, a deep and prolonged Japanese market correction would result in an Other-Than-Temporary -Impairment write-down eventually and the result would show up on earnings and EPS. The natural disaster and nuclear crisis would require the Japanese government increase spending significantly on an already debt laden government. A further rating downgrade is not unlikely following January’s downgrade by S&P of the country’s rating from AA to AA-.
Disclosure: I am short AFL.