Life Insurance Industry
2Q'09 preview: a tough act to
follow; EPS revised
Darin C Arita, CFA
Research Analyst
(1) 212 250 7321
darin.c.arita@db.com
Valerie Zhang, CFA
Research Associate
( ) 212 250 2861
valerie.zhang@db.com
Expectations for a strong 2Q
The rise in the equity market and tighter credit spreads during 2Q’09 should lead
to in-line to better-than-expected earnings across the life insurers. Equity-market
sensitive life insurers for the first time in four quarters should benefit from
favorable amortization of deferred acquisition costs (DAC). Reported book value
per share should also increase meaningfully as corporate bond spreads have
narrowed to closer to year-end 2007 levels. We revised EPS estimates for several
companies to account for the equity market move and capital raises (see page 4).
Deutsche Bank Securities Inc.
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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. MICA(P) 106/05/2009
Forecast Change
Companies featured
Aflac Incorporated (AFL.N),USD31.50 Hold
2008A 2009E 2010E
EPS (USD) 3.99 4.65 5.00
P/E (x) 14.4 6.8 6.3
Genworth Financial (GNW.N),USD6.24 Hold
2008A 2009E 2010E
EPS (USD) 1.08 0.28 0.80
P/E (x) 14.7 22.3 7.8
Hartford Financial Services (HIG.N),USD11.86 Buy
2008A 2009E 2010E
EPS (USD) 2.74 -0.45 3.65
P/E (x) 20.4 – 3.2
Lincoln National (LNC.N),USD16.16 Hold
2008A 2009E 2010E
EPS (USD) 3.31 3.10 3.10
P/E (x) 13.0 5.2 5.2
MetLife (MET.N),USD30.45 Hold
2008A 2009E 2010E
EPS (USD) 3.81 2.45 3.60
P/E (x) 13.3 12.4 8.5
Protective Life (PL.N),USD13.19 Hold
2008A 2009E 2010E
EPS (USD) 3.37 2.95 2.75
P/E (x) 9.4 4.5 4.8
Prudential Financial (PRU.N),USD39.03 Hold
2008A 2009E 2010E
EPS (USD) 2.47 4.65 5.15
P/E (x) 25.7 8.4 7.6
Unum (UNM.N),USD16.36 Hold
2008A 2009E 2010E
EPS (USD) 2.51 2.50 2.60
P/E (x) 8.5 6.5 6.3
Global Markets Research Company
Positive DAC unlock, however, might be smaller than expected
Although the 15% rise in the equity market in 2Q’09 erased the 1Q’09 decline, the
positive DAC unlock in 2Q’09 will only partially reverse the negative DAC unlock
recognized in 1Q’09. In this report, we illustrated how the reversion-to-the-mean
DAC amortization method might only produce a small positive DAC unlock
following two successive periods of significant negative DAC charges.
Variable annuity living benefit reserves to decline somewhat
The variable annuity reserves for withdrawal and accumulation benefits should
decline in 2Q’09 as a result of the increased equity market and higher interest
rates. This reserve change, however, will be offset by a reversal of nonperformance
risk benefit under FASB 157 following the reduction in the credit
spreads of the life insurers. This could have a larger EPS effect on Ameriprise
(AMP) and Prudential (PRU), as both insurers run these items through operating
income and have large variable annuity portfolios.
Investment portfolio deterioration to continue
We expect investment losses to continue, in particular from residential and
commercial mortgage-backed securities. Investment income is also likely to
remain weak, as a result of continued pressure on partnership income, offset
partially by strong hedge fund performance.
Much of the good news seems to be priced in
Life insurance stocks increased by 82% on average in 2Q’09 versus a 15%
increase in the S&P 500, and are now trading on average at 0.71 times book value
(excluding unrealized investment gains/losses) and 5.5 times 2010E EPS. Although
the valuations are still below the historical averages, it will be difficult for the life
insurance stocks to perform unless the equity and credit markets continue to rally.
We expect the life insurance stocks to oscillate in 2H’09 as the equity and credit
markets have difficulty assessing the macroeconomic outlook.
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 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, easing of rules by insurance regulators, and improved
disclosure on variable annuity living benefits.

Table of Contents
2Q’09 earnings preview .................................................................... 4
Aflac.......................................................................................................................................17
Genworth...............................................................................................................................20
The Hartford...........................................................................................................................24
Hartford Life...........................................................................................................................25
Hartford P&C...........................................................................................................................27
Lincoln....................................................................................................................................29
MetLife ..................................................................................................................................32
Protective Life.........................................................................................................................36
Prudential ...............................................................................................................................38
Unum .....................................................................................................................................41