Life Insurance Industry
2009 outlook: Hanging in the
balance
Darin C Arita, CFA
Research Analyst
(1) 212 250 7321
darin.c.arita@db.com
Valerie Zhang, CFA
Research Associate
(1) 212 250 2861
valerie.zhang@db.com
Credit and equity market concerns continue in 2009
We expect credit losses to continue in 2009 for the life insurers. In addition,
investors are likely to remain concerned about insurers with large exposures to
equity market guarantees, and the rating agencies have yet to assess fully the
capital pressure from those guarantees, in our view.
Deutsche Bank Securities Inc.
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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
Top picks
Aflac Incorporated (AFL.N),USD46.15 Buy
Companies featured
Aflac Incorporated (AFL.N),USD46.15 Buy
Aflac Incorporated (AFL.N),USD46.15Buy
2007A 2008E 2009E
EPS (USD) 3.27 3.93 4.35
P/E (x) 16.3 11.7 10.6
Genworth Financial (GNW.N),USD3.49 Buy
Genworth Financial (GNW.N),USD3.49Buy
2007A 2008E 2009E
EPS (USD) 3.07 1.96 1.50
P/E (x) 10.4 1.8 2.3
Hartford Financial Services (HIG.N),USD17.28 Buy
Hartford Financial Services (HIG.N),USD17.28 Buy
2007A 2008E 2009E
EPS (USD) 10.99 4.70 5.95
P/E (x) 8.7 3.7 2.9
Lincoln National (LNC.N),USD17.67 Hold
Lincoln National (LNC.N),USD17.67Hold
2007A 2008E 2009E
EPS (USD) 5.15 4.95 5.05
P/E (x) 12.8 3.6 3.5
MetLife (MET.N),USD34.43 Hold
MetLife (MET.N),USD34.43 Hold
2007A 2008E 2009E
EPS (USD) 6.25 3.80 3.65
P/E (x) 10.4 9.1 9.4
Protective Life (PL.N),USD10.53 Hold
Protective Life (PL.N),USD10.53 Hold
2007A 2008E 2009E
EPS (USD) 3.99 3.37 4.05
P/E (x) 11.3 3.1 2.6
Prudential Financial (PRU.N),USD29.80 Hold
Prudential Financial (PRU.N),USD29.80Hold
2007A 2008E 2009E
EPS (USD) 7.31 3.30 5.50
P/E (x) 12.8 9.0 5.4
Unum (UNM.N),USD17.72 Hold
Unum (UNM.N),USD17.72 Hold
2007A 2008E 2009E
EPS (USD) 2.20 2.50 2.50
P/E (x) 11.0 7.1 7.1
Global Markets Research Company
Low investment yields are a potential new issue in 2009
Should Treasury yields remain low and bond spreads contract, life insurers could
face margin compression on fixed annuities and fixed universal life products. This
would lead to earnings pressure and potentially capital pressure. Conseco (CNO),
Lincoln (LNC), and Phoenix (PNX) derive a significant portion of earnings from such
products. In addition, interest rate hedges on variable annuity equity market
guarantees would need to be re-examined.
Capital regeneration and risk reassessment are positives
The recurring revenues from existing policies are an important source of internal
capital generation that should help the companies offset some of the pressure
from investment losses and equity market guarantees. Life insurers are also
reassessing risk. In 2009, life insurers are re-pricing risk on variable annuity equity
market guarantees. We expect insurers to consider raising prices on other
products given a new level of appreciation on credit and capital market risks.
4Q’08 – tough quarter expected; unrealized losses decrease in December
Many of the life insurers gave some indication to their 4Q’08 results in their
November and December investor days. Increased write-offs of deferred
acquisition costs, variable annuity hedge breakage, and poor alternative
investment income were a common theme. Unrealized losses, however, are likely
to be lower than what many of the insurers previously indicated given the decline
in investment grade corporate bond yields during December.
Recommended stocks for 2009
Valuations are well below historical averages, but uncertainty remains with the
macro environment. Thus, we prefer core holdings around defensive names with
high quality investments, little equity market risk, and strong statutory operating
earnings, like our Top Pick Aflac (AFL). Outside of those stocks, we recommend
being nimble and picking ones that are relatively inexpensive and have near-term
catalysts. We see those opportunities in Genworth (GNW) and Hartford (HIG).
Valuation and risks
Our target prices are based primarily on price-to-book multiples relative to
expected ROEs. We further discounted the valuations for those companies that
have thin excess capital margins and/or significant exposure to equity market
guarantees in variable annuities. Downside risks include further deterioration in the
equity and credit markets, rating agency downgrades, and the potential for
additional capital raises and dividend cuts. Upside risks include an equity market
rally, credit spreads narrowing, the US government providing capital to the
industry, easing of rules by insurance regulators, and improved disclosure.

Table of Contents
2009 outlook....................................................................................... 4
4Q’08 earnings preview .................................................................. 12
Aflac.......................................................................................................................................19
Genworth...............................................................................................................................21
The Hartford...........................................................................................................................26
Hartford Life...........................................................................................................................27
P&C Operations ......................................................................................................................29
Lincoln....................................................................................................................................31
MetLife ..................................................................................................................................35
Protective Life.........................................................................................................................39
Prudential ...............................................................................................................................41
Unum .....................................................................................................................................44