13 December 2008
European Insurers
Pawn to queen four: 2009
outlook
Spencer Horgan
Research Analyst
(44) 20 754 54138
spencer.horgan@db.com
Oliver Steel
Research Analyst
(44) 20 754 77592
oliver.steel@db.com
Paolo Tamagnini
Research Analyst
(44) 20 754 58483
paolo.tamagnini@db.com
Pockets of risk / reward
Capital will remain at the forefront of investors' minds in the first half of 2009, in
our view, as asset markets continue to grapple for a bottom. Still, many
companies look able to absorb further shocks, and while the most defensive end
of the sector looks well overbought (relatively), we believe there are material
pockets of value in the middle ground. The most geared names in the sector, in
terms of asset exposure and leverage, still look too binary to us.
Deutsche Bank AG/London
All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local
exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche
Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm
may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision. Independent, third-party research (IR) on certain companies covered by DBSI's research
is available to customers of DBSI in the United States at no cost. Customers can access IR at
http://gm.db.com/IndependentResearch or by calling 1-877-208-6300. DISCLOSURES AND ANALYST CERTIFICATIONS ARE
LOCATED IN APPENDIX 1.
Industry Update
European Insurers relative performance
100
150
200
250
300
350
400
450
Dec-
98
Dec-
99
Dec-
00
Dec-
01
Dec-
02
Dec-
03
Dec-
04
Dec-
05
Dec-
06
Dec-
07
Dec-
08
40
50
60
70
80
90
100
110
DJ Stoxx (LHS) Sector Relative (RHS)
European Insurers vs bond yields
3.0%
3.5%
4.0%
4.5%
5.0%
5.5%
6.0%
Dec-
98
Dec-
99
Dec-
00
Dec-
01
Dec-
02
Dec-
03
Dec-
04
Dec-
05
Dec-
06
Dec-
07
Dec-
08
40
50
60
70
80
90
100
110
10 year European long bond yield (LHS) Sector relative (RHS)
Specialist Sales
Nicholas Byrne
nicholas.byrne@db.com +44 20 7547 7454
Global Markets Research Company
Capital likely to remain the key focus near term
With huge volatility, the sector has performed broadly in line with equity markets
over the course of 2008. Heavy underperformance in October has been recovered
in recent weeks, with balance sheets showing resilience despite the fallout from
investment losses. Nevertheless, with global uncertainties remaining high, we
expect capital will continue to dominate the debate, at least until investors feel
some sort of floor is being formed in asset markets. As such, we review capital
positions, asset exposures, and leverage in more detail in this report. But we also
consider wider factors. In addition to strong balance sheets and manageable asset
risks, can we find stocks which we would want to own longer term based on
viability of business models, trustworthy management teams, and strong market
positions? We expect the latter will start to take over from immediate balance
sheet concerns as we head into the latter part of 2009 / early 2010. We review
these points also, and expect to revisit the theme in more detail in coming
months, as and when the global outlook starts to become clearer.
But forced capital-raising still unlikely
In general, we expect insurers to be able to withstand further pain without
recourse to capital markets, though we are expecting substantial dividend cuts, of
27% on average. Our strategy is to cautiously move up the risk curve. We think it
is still too early to head to the very high beta end of the sector, with many names
still looking rather binary despite optically appealing valuations. Conversely, many
names at the defensive end, like Munich Re (Hold), RSA (Hold) and Standard Life
(Hold) feel to us like very crowded trades. We find the most appealing risk reward
towards the middle ground of the risk spectrum, where further asset market falls
would not trigger rights issues, but where valuation upside looks more substantial,
and business models more appealing longer term. Allianz (Buy) and ZFS (Buy)
look among the most attractive at the more non-life biased end. AXA (Buy) and
Aviva (Buy), while slightly higher up the risk curve, should reward investors richly
over time, with solid long term market positions and a dependable management
team at the former, and an ongoing corporate reinvention story –
underappreciated by investors in our view – at the latter.
Valuation and risks
We continue to value the sector using a sum of the parts approach, but with an
additional deduction for macro risk in the current environment. On this basis, we
see 23% upside across the sector. Key risks are financial market risks,
catastrophic loss events, reserving risk, and regulatory risk. We have made
marginal changes to target prices (less than 10%), as set out in Figure 22 within.

Table of Contents
Sector strategy ..................................................................................
Overview..................................................................................................................................4
Stock selection.........................................................................................................................5
Valuation ..................................................................................................................................7
A retrospective .................................................................................. 8
Share price performance from the peak ...................................................................................8
Capital & balance sheets................................................................. 11
Current position ......................................................................................................................11
Longer-term re-building of capital – a key differential .............................................................19
Beyond capital ................................................................................. 21
Appendix .......................................................................................... 23
Debt Maturity Profile...............................................................................................................23
Asset risk – exposures and leverage.......................................................................................25
Insurance share prices – equity market correlation & sensitivity ............................................28
Vluation & stress test details ..................................................................................................29
P&C Insurance & Reinsurance outlook ...................................................................................31
Numbers changes...................................................................................................................33