Insurance Industry
Statutory results highlight
credit and equity pressures
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
Valuations remain depressed, but caution is still warranted
The life insurance stocks have rallied more than 70% on average since the March
5 low, but the industry’s capital position remains leveraged to further deterioration
in the credit and equity markets. Net unrealized investment losses have increased
to an average of 112% of statutory capital in 2008 versus 0% in 2007. Statutory
reserves for variable annuity equity market guarantees increased to $14 billion at
the end of 2008 from $3 billion at YE’07. Most of these changes occurred in
4Q’08.
Deutsche Bank Securities Inc.
All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local
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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.
Industry Update
Companies featured
Aflac Incorporated (AFL.N),USD18.38 Hold
2008A 2009E 2010E
EPS (USD) 3.99 4.75 5.00
P/E (x) 14.4 3.9 3.7
Genworth Financial (GNW.N),USD1.78 Buy
2008A 2009E 2010E
EPS (USD) 1.08 0.35 1.00
P/E (x) 14.7 5.1 1.8
Hartford Financial Services (HIG.N),USD7.62 Buy
2008A 2009E 2010E
EPS (USD) 2.74 4.55 4.85
P/E (x) 20.4 1.7 1.6
Lincoln National (LNC.N),USD7.31 Hold
2008A 2009E 2010E
EPS (USD) 3.31 3.65 3.80
P/E (x) 13.0 2.0 1.9
MetLife (MET.N),USD20.78 Hold
2008A 2009E 2010E
EPS (USD) 3.81 3.50 4.00
P/E (x) 13.3 5.9 5.2
Protective Life (PL.N),USD4.60 Hold
2008A 2009E 2010E
EPS (USD) 3.37 3.40 3.35
P/E (x) 9.4 1.4 1.4
Prudential Financial (PRU.N),USD16.69 Hold
2008A 2009E 2010E
EPS (USD) 2.69 5.15 5.45
P/E (x) 23.6 3.2 3.1
Unum (UNM.N),USD11.41 Hold
2008A 2009E 2010E
EPS (USD) 2.51 2.50 2.60
P/E (x) 8.5 4.6 4.4
Global Markets Research Company
Further pressure on statutory capital and earnings can be significant
Although we do not expect most of the unrealized losses to be realized, there is
room for the unrealized loss to increase as the net unrealized losses represent just
9% of the investment portfolios on average. Also, to the extent the S&P 500 index
declines below 700 at the end of 1Q’09 or 2Q’09, statutory operating losses will
be significant again for the variable annuity players like Ameriprise, Hartford,
Lincoln, MetLife, and Prudential. This would likely lead to further downgrades by
the rating agencies.
Sharp divergence between 4Q’08 statutory and GAAP operating earnings
The statutory earnings from the US life insurance subsidiaries reflected a much
greater deterioration than the consolidated GAAP results, as the statutory
operating earnings declined to a loss of $6.6 billion in 4Q’08 from a gain of $902
million in 3Q’08. The Hartford had the most significant loss at $4.3 billion, but
others also had large losses including MetLife at $1.7 billion, Ameriprise at $1.2
billion, and Prudential at $672 million. Partially offsetting these losses in statutory
capital were gains on hedge derivatives. A sharp rise in statutory GMDB reserves
might be a leading indicator for increases in GAAP GMDB reserves. Non-equity
sensitive names like Aflac, Assurant, Torchmark, and Unum produced steadier,
positive statutory earnings. These companies with predictable statutory operating
earnings are in a better position to offset investment losses.
Many helpful charts and tables
Our report contains the following tables: statutory reserves for variable annuity
living and death benefits, historical statutory results including annual results from
2001 to 2008, quarterly results over the past eight quarters, organization charts
illustrating the statutory entities, and statutory dividend rules/capacity. We added a
few more organization charts for some of the companies that we do not yet cover.
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 on
variable annuity living benefits.

Table of Contents
Statutory and GAAP operating earnings diverged sharply ........................................................8
Statutory and GAAP investment losses keeping pace ..............................................................9
Dividends to the holding company continue to decrease .......................................................10
Statutory capital bolstered in 4Q’08, but resources are dwindling .........................................12
Capital regeneration is a positive for the industry ...................................................................13
Excess capital and RBC ratio comparisons .............................................................................14
Comparison of statutory vs GAAP consolidated earnings.......................................................16
Valuations and risks.................................................................................................................40