For the avoidance of doubt
• We reinitiate coverage on Swiss Life with an Underperform rating and Baloise with an In Line rating,
with risk the key differentiator. With the sector trading at close to 5.6x 2011e EPS or a modest discount
to our market-adjusted embedded value and our risk-reward framework modestly inverted, risk is very much
the primary differentiator of our ratings. This proves to be no different with the smaller Swiss insurers. Swiss
Life’s higher risk – both on assets and capital – coupled with weaker upside leads us to reinitiate coverage
with a relative Underperform rating. Turning to Baloise there is much to like – robust cash flow driven by
solid underwriting, unutilised debt capacity and a history of repatriation; however, we believe this is offset by
acquisition risk.
• Swiss Life – an unattractive risk-reward. Our Underperform rating reflects the less-than-sector upside to
our fair value estimate of CHF122 coupled with higher-than-sector risk. Our rationale is threefold: (1) the
apparent discount valuation to the recently disclosed MCEV figures disappears when we seek to harmonise
onto a comparable basis due its treatment of liquidity premiums and debt, (2) we believe the road to
recovery will be difficult and protracted with Swiss Life enjoying fewer options than it did from the 2002 nadir
and (3) risks remain elevated both on asset exposure and capital leaving the risk-reward unattractive. The
key risk to our rating would be rising interest rates, though the regulator would also need to relent on
solvency impacts given the continued and comparatively harsh deduction of unrealised losses on bonds.
• Baloise – value offset by acquisition risk. Our In Line rating reflects the tension between Baloise’s
valuation attractions and the potentially substantial and increasing level of acquisition risk. We would make
three points: (1) we do see absolute value attractions with the stock on 5.6x 2011e EPS but with so much of
the sector derated this offers little obvious relative; (2) acquisition risk could be substantial with Baloise
enjoying over CHF2bn of available financial resources, which would swing our valuation of CHF8 per share
after tax were Baloise to over or underpay by 25%, and (3) at the margin we also believe Baloise’s
defensiveness has been overstated and while its claim trends have been favourable this looks industry and
not stock specific. We prefer Sampo or Zurich as our defensive options.

Table of contents
Executive summary...................................................................................... 4
Swiss Life – risk-reward unattractive ........................................... 9
Company profile and history...................................................................9
Strategy and targets ..............................................................................11
Making profits, capital and cash .........................................................12
Valuation........................................................................................................17
Scenarios and risks ..............................................................................................18
Baloise – value offset by acquisition risk ................................................. 19
Company profile and history................................................................19
Investments in context – low gearing if all stays normal............................... 26
Capital in context – adequate but weaker than sector average.................. 28
Swiss insurance overview – mature and vulnerable to politics ...................... 33