North America Equity Research

17 August 2011

J.P. Morgan Life Insurance

Macro Conditions Challenging, But Sector Better Positioned than in 2008
Low interest rates, the weak equity market, and the sluggish economy present headwinds for life insurance companies. However, we believe insurers are better positioned to withstand a severe macro event than in 2008 given healthier balance sheets and better risk management. While stocks could pull back further if equity and credit markets deteriorate, we believe the risk-reward is attractive and see compelling long-term upside. Macro trends are challenging, but underlying business trends are improving. Margins are stabilizing, sales/flows across most products are picking up, and companies are getting more proactive in deploying capital. While the weak markets could challenge near-term results, we expect returns to gradually improve over time. Healthier balance sheets and improved risk management should prevent a repeat of 2008. Life insurers are holding significantly more capital today than prior to the 2008 crisis (average RBC ratio was 370% at 12/31/07 vs. 420% at 12/31/10). Also, companies have increased holding company cash, reduced reliance on short-term funding, and made hedging programs more robust (by hedging more variables and/or adding macro hedges). Investment portfolio risk appears manageable as well, with insurers having reduced exposure to structured securities and most companies having minimal European holdings. Hence, we believe equity raises are unlikely, even if markets return to 2008/2009 levels. Estimates likely to move lower, but valuations still compelling. Our models assume a 10-year Treasury yield of 3.5% and do not incorporate the market drop in 3Q11. Thus, EPS estimates for most companies could be adjusted if markets remain near current levels. The group is currently trading at 0.8x BV ex. AOCI and 6.6x 2012E, and valuations seem attractive even when adjusted for potential estimate reductions. Sustained low interest rates are a key fundamental risk. Declining new money yields are weighing on investment income and should pressure EPS growth in 2012. While prolonged low rates could also result in DAC charges, we do not consider them a threat to stat capital. In the current environment, we favor high-quality franchises with strong balance sheets and limited earnings exposure to the markets. RGA (rated Overweight) is our best idea as we expect sustained high returns, strong operating trends, and limited exposure to the equity market and low interest rates to enable it to outperform the group. Among large cap stocks, we favor PRU. Also, we believe that TMK and UNM (both rated Neutral) are defensively positioned if markets remain volatile. We expect turnaround companies or insurers with less capital flexibility (GNW, PNX) to be the most pressured if recent trends sustain. See page 12 for analyst certification and important disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, 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. www.morganmarkets.com
Insurance -- Life Jimmy S. Bhullar, CFA
AC

(1-212) 622-6397 jimmy.s.bhullar@jpmorgan.com

Erik J Bass, CFA

(1-212) 622-2295 erik.bass@jpmorgan.com

Matthew Byrnes
(1-212) 622-0695 matthew.p.byrnes@jpmorgan.com J.P. Morgan Securities LLC

Sector Less Risky than in 2008 Higher capital ratios Increased liquidity Improved risk management Lower exposure to RMBS, CMBS Key Headwinds Low interest rates Weak equity market Sector Performance Down 19% YTD (S&P -3%) Down 20% in 3Q11 (S&P -10%) Valuations Current P/BV ex. AOCI: Current P/E (2012E): Trough P/BV: 0.4x (March 09) Trough P/E: 3x (March 09)

Please visit our Bloomberg page on JPMA Bhullar <GO>

Jimmy S. Bhullar, CFA (1-212) 622-6397 jimmy.s.bhullar@jpmorgan.com

North America Equity Research 17 August 2011

Table of Contents
Life Sector Less Vulnerable than in 2008...............................3 How 2011 Differs from 2008.....................................................4
Life Insurers Are Significantly Better Capitalized ....................................................4 Increased Liquidity, Less Short-Term Debt Reduce Risk..........................................4 Expanded Hedging Reduces Tail Risk .....................................................................5 Investment Portfolio Risk Manageable.....................................................................6 Product Changes Positive, But Guarantees Still a Concern .......................................6 Low Interest Rates Key Challenge for Life Insurers .................................................7 Earnings Highly Susceptible to Market Volatility.....................................................8

Return to Trough Valuations Unwarranted ............................8 Defensive Stocks Should Outperform N-T .............................9

Index of Tables
Table 1: Macro Conditions a Significant Headwind, But Industry Better Positioned than in 2008 ............................................................................................................3 Table 2: RBC Ratios Have Steadily Increased Over the Past 3 Years........................4 Table 3: Debt Levels Unchanged from '07 ...............................................................5 Table 4: Modest Near-Term Refinance Risk ............................................................5 Table 5: Commercial Paper Use Reduced ................................................................5 Table 6: Modest Portfolio Exposure to Distressed European Countries.....................6 Table 7: Most Insurers Have Raised Fees for VA Living Benefits and Reduced Guarantees ..............................................................................................................7 Table 8: Low Interest Rates Will Pressure Investment Income and EPS Estimates....8 Table 9: EPS Sensitivity to Changes in Macro Conditions........................................8

Index of Figures
Figure 1: Life Insurance: Historical P/BV ................................................................9 Figure 2: Life Insurance: Historical P/E...................................................................9

Jimmy S. Bhullar, CFA (1-212) 622-6397 jimmy.s.bhullar@jpmorgan.com

North America Equity Research 17 August 2011

Life Sector Less Vulnerable than in 2008

Through 8/16/11, the J.P. Morgan Life Insurance Index is down 18.8% year to date versus a 16.7% decline in the S&P Financials Index and a 3.1% decline in the S&P 500.

In our view, life insurers are better positioned to weather macro deterioration than in 2008 given healthier balance sheets and improved risk management. Most companies are holding significantly more capital and have increased holding company liquidity. In addition, while overall debt levels have not changed materially, insurers have extended maturities and are relying less on short-term financing (such as commercial paper), reducing near-term refinance risk. A number of companies, particularly those with more market-sensitive business mixes, have also added macro hedges to protect capital during a tail event. Investment portfolio risk appears manageable given reduced exposure to non-agency RMBS and lower-rated CMBS and modest holdings of European debt. Sustained low interest rates are our key concern, but this is more of a headwind for earnings than a threat to capital. In our opinion, most life insurers will not need to raise equity, even if the market revisits 2008-2009 lows. Therefore, we believe a return to trough valuations (0.4x P/BV ex. AOCI in March 2009) is not justified, even if markets deteriorate further.

Table 1: Macro Conditions a Significant Headwind, But Industry Better Positioned than in 2008
12/31/2007 Capital (RBC) Leverage (Debt-to-Capital) Liquidity (% of debt maturing in 3 years) Investment Portfolio Risk Commercial real estate Residential real estate Product Risk Median: 370% 25.9% 17.4% 12/31/2010 Median: 420% 25.1% 10.3%

Significant holdings of CMBS Sub-prime and Alt-A 2.4% of investments Aggressive VA living benefit features Reliance on securitizations in UL and term Limited VA hedging Limited overall tail-risk hedging

Mostly whole loans; reduced CMBS allocations RMBS primarily agency-backed; minimal sub-prime VA prices higher, features less generous UL prices higher, product designs more conservative More extensive VA hedging Increased use of macro hedging to protect capital

Hedging

Macro Factors: Interest Rates ('A' 5-7 Yr. Corporate Yield) Equity Market Volatility (VIX Index) U.S. Unemployment Rate
Source: Bloomberg, DataQuery, company reports, and J.P. Morgan estimates.

5.71% 22.5 5.00%

3.74% (8/15/11) 32.9 (8/15/11) 9.1% (7/31/11)

Jimmy S. Bhullar, CFA (1-212) 622-6397 jimmy.s.bhullar@jpmorgan.com

North America Equity Research 17 August 2011

How 2011 Differs from 2008

The following section highlights the key differences in how life insurers are positioned for a crisis currently versus prior to 2008. While the group remains highly sensitive to equity market returns, credit market conditions, and the level of interest rates, we believe insurers are less vulnerable to a severe market event today than they were three years ago.

Life Insurers Are Significantly Better Capitalized

Life insurers have steadily increased capital levels over the past few years and have significantly more cushion today than they did heading into 2008. The median risk-based capital (RBC) ratio for the group was 420% at 12/31/10 compared to 370% at 12/31/07. In addition, most companies have increased cash and investments at the holding company, which is not reflected in the RBC ratio. While ratings agency RBC thresholds have increased as well, we believe most life insurers are amply capitalized and could withstand significant deterioration in the equity and credit markets without needing to raise additional equity. Sustained market weakness could curtail capital deployment for share buybacks and dividend increases, but we do not anticipate equity raises.
Table 2: RBC Ratios Have Steadily Increased Over the Past 3 Years
RBC ratio at period end RBC Ratio 12/31/06 AFL AIZ CNO GNW HIG LNC MET PFG PL PNX PRU RGA SYA TMK UNM Median 601% 409% 315% 357% 374% 386% 387% 326% >400% 400% 314% 466% 320% 338% 300% 366% RBC Ratio 12/31/07 574% 322% 291% 296% 385% 416% 475% 370% 419% 376% 325% 551% 321% 278% 344% 370% RBC Ratio 12/31/08 476% 236% 252% 255% 450% 462% 393% 389% 340% 441% 298% 463% 245% 329% 331% 340% RBC Ratio 12/31/09 480% 279% 309% 426% 381% 450% 419% 426% 429% 223% 589% 259% 413% 357% 383% 413% RBC Ratio 12/31/10 555% 300% 332% 390% 435% 490% 458% 420% 455% 284% 530% 300% 480% 400% 398% 420%

Source: SNL, company reports, and J.P. Morgan estimates.

Increased Liquidity, Less Short-Term Debt Reduce Risk

Following the 2008 credit crisis, most management teams have increased holding company liquidity and reduced reliance on short-term financing. Liquidity was a key concern pressuring many life stocks in 2008-2009 given significant upcoming debt maturities and an inability to access the capital markets. In our view, this is unlikely to re-emerge as an issue for the sector. While overall debt levels are essentially unchanged (median debt-to-capital ratio of 25.9% at 12/31/07 compared to 25.1% currently), most companies have taken advantage of low interest rates to prefinance upcoming maturities and secure long-term funding. In addition,
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Jimmy S. Bhullar, CFA (1-212) 622-6397 jimmy.s.bhullar@jpmorgan.com

North America Equity Research 17 August 2011

the use of short-term funding solutions, such as commercial paper, is much less prevalent. On average, companies only have 10.3% of their debt maturing in the next three years (down from 17.4% at 12/31/07). Companies are also retaining more cash at the holding company in the event a market dislocation prevents them from raising new funds. We believe most insurers have enough liquidity to cover interest payments and holding company expenses for 18-24 months without any additional sources of cash.
Table 3: Debt Levels Unchanged from 07
Debt-to-capital (debt/total debt+equity) 2007 AFL AIZ CNO GNW HIG LNC MET NFP PFG PL PNX PRU RGA SYA TMK UNM Median 15.6% 19.6% 21.0% 35.1% 21.4% 30.8% 34.2% 27.6% 19.3% 49.6% 28.8% 17.3% 40.2% 25.7% 21.5% 25.9% 25.9% 2008 18.0% 19.0% 27.9% 40.6% 30.6% 34.3% 36.8% 29.3% 21.0% 52.8% 32.6% 27.0% 37.8% 25.1% 23.6% 25.3% 29.3% 2009 22.3% 17.4% 21.6% 35.2% 25.3% 31.5% 39.4% 41.8% 16.3% 50.1% 26.3% 25.3% 37.2% 23.3% 23.9% 23.9% 25.3% 2010 21.6% 18.3% 20.0% 35.8% 25.0% 32.6% 44.2% 33.6% 15.2% 46.2% 26.9% 22.8% 33.6% 18.7% 22.0% 25.1% 25.1% AFL AIZ CNO GNW HIG LNC MET NFP PFG PL PNX PRU RGA SYA TMK UNM Median
estimates

Table 4: Modest Near-Term Refinance Risk

% of total debt maturing in next three years 2007 55.1% 0.0% NA 17.2% 29.9% 25.2% 10.2% 40.8% 51.0% 0.0% 17.4% 67.5% 1.5% 0.0% 32.6% 12.1% 17.4% 2008 74.4% 0.0% NA 29.4% 17.7% 23.7% 20.6% 43.3% 59.4% 6.3% 0.7% 54.8% 11.5% 0.0% 39.3% 17.0% 20.6% 2009 42.4% 0.0% NA 22.8% 16.6% 16.7% 18.6% 100.0% 13.0% 10.7% 0.0% 36.8% 9.0% 0.0% 20.2% 8.8% 16.6% 2010 25.0% 0.0% 7.7% 11.7% 14.5% 14.8% 12.9% 18.2% 7.7% 5.9% 0.0% 33.9% 9.0% 0.0% 26.3% 7.9% 10.3%

Table 5: Commercial Paper Use Reduced

Commercial paper as % of total debt 2007 AFL AIZ CNO GNW HIG LNC MET NFP PFG PL PNX PRU RGA SYA TMK UNM Avg. 0.0% 0.0% 0.0% 2.6% 7.0% 5.1% 3.6% 0.0% 13.7% 0.0% 0.0% 3.1% 0.0% 0.0% 21.9% 0.0% 3.8% 2008 0.0% 0.0% 0.0% 2.3% 5.0% 5.7% 3.4% 0.0% 26.8% 0.0% 0.0% 3.2% 0.0% 0.0% 29.6% 0.0% 4.5% 2009 0.0% 0.0% 0.0% 0.0% 0.0% 1.8% 1.4% 0.0% 4.4% 0.0% 0.0% 0.5% 0.0% 0.0% 20.2% 0.0% 1.7% 2010 0.0% 0.0% 0.0% 0.0% 0.0% 1.7% 0.3% 0.0% 2.9% 0.0% 0.0% 0.9% 0.0% 0.0% 17.9% 0.0% 1.4%

Source: SNL Financial, company reports, and J.P. Morgan estimates

Source: SNL Financial, company reports, and J.P. Morgan

Source: SNL Financial, company reports, and J.P. Morgan estimates

Expanded Hedging Reduces Tail Risk

Increased hedging activity should make life insurers capital less vulnerable to market volatility or a tail event. Following the 2008 crisis, several companies (including HIG, MET, and PRU) purchased hedges designed to protect against macro events such as a steep equity market decline or a spike in credit spreads. Insurers have also improved variable annuity risk management by addressing previously unhedged risks (notably volatility and interest rates), increasing the use of index funds (which are easier to hedge), and making asset allocation limits more rigorous. In our view, these measures should reduce the capital volatility for insurers with large VA businesses. However, factors such as basis risk (hedging instruments are not perfectly correlated with the underlying assets), roll risk (having to reinvest maturing short-duration hedge assets because durations offered are not long enough to match liabilities), and policyholder behavior (voluntary surrenders and feature utilization rates) are inherently unhedgeable. Although the impact of these factors should even out over time, some degree of short-term hedge breakage appears inevitable, especially in a stressed or volatile market environment.

Jimmy S. Bhullar, CFA (1-212) 622-6397 jimmy.s.bhullar@jpmorgan.com

North America Equity Research 17 August 2011

Investment Portfolio Risk Manageable

We expect investment portfolio losses to be manageable, even in a double-dip scenario for the economy. Overall portfolio allocations have not changed meaningfully over the past few years, but underlying portfolio quality appears to have improved. In general, companies are investing new money into higher-rated bonds and have de-emphasized structured securities. RMBS was a big source of losses over the past few years, but most insurers have sold or written off the majority of their subprime and alt-A securities. Most remaining RMBS exposure is agency backed. In commercial real estate, insurers have reduced exposure to CMBS while continuing to underwrite mortgage loans (which performed much better than expected through the financial crisis). Our biggest concerns currently include European sovereign and financial services debt, but these represent very modest allocations for most U.S. life insurers (with AFL and MET being notable exceptions). In our view, the major risk for U.S. life insurers would be if the problems in Europe led to significant deterioration in U.S. corporate credit (especially in the financials sector).
Table 6: Modest Portfolio Exposure to Distressed European Countries
$ in millions, as of 6/30/11 or most recent disclosure

AFL Sovereign Debt Greece Ireland Italy Portugal Spain Total Sovereign Debt Financial Institutions Greece Ireland 525.0 Italy 186.0 Portugal 282.0 Spain 531.0 Total Financial Institutions 1,524.0 Total exposure as a % of investments as a % of total equity 2,571.0 2.9% 21.5% 310.0 737.0 1,047.0

AIZ

CNO

GNW

HIG

LNC

MET

PFG

PL

PNX

PRU

RGA

SYA

TMK

UNM

4.0 14.0 28.0 46.0

3.0 3.0

452.3 37.0 166.6 161.1 116.9 934.0

595.0 595.0

0.0 0.0% 0.0%

52.7 52.7 52.7 0.2% 1.2%

5.0 5.0 29.0 214.0 253.0 299.0 0.4% 2.1%

20.0 20.0 20.0 0.0% 0.1%

62.0 2,000.0 62.0 2,000.0 65.0 2,934.0 0.1% 0.5% 0.6% 5.7%

40.0 63.0 478.0 581.0 581.0 0.9% 5.9%

0.0 0.0% 0.0%

5.0 5.0 5.0 0.0% 0.4%

400.0 400.0 995.0 0.4% 3.0%

0.0 0.0% 0.0%

1.5 1.5 1.5 0.0% 0.1%

0.0 0.0% 0.0%

5.1 4.0 86.9 96.0 96.0 0.2% 1.1%

Source: Company reports and J.P. Morgan estimates.

Product Changes Positive, But Guarantees Still a Concern

Life insurers have taken important steps to reduce product risk, but we still see the proliferation of guarantee features as a risk, especially in a tail scenario. Most insurers have raised variable annuity guarantee prices and made features less generous. In addition, companies have increased prices on universal life policies and tightened underwriting standards to limit exposure to premium financed and strangerowned policies. Companies have also raised rates on both new and in-force long6

Jimmy S. Bhullar, CFA (1-212) 622-6397 jimmy.s.bhullar@jpmorgan.com

North America Equity Research 17 August 2011

term care policies, but we expect older blocks to still be only marginally profitable. While we view these initiatives positively, we remain concerned about insurers exposure to guarantees as well as the potential for an uptick in product competition once equity market conditions improve (MET and HIG increased their VA guarantee rates in 2Q11).
Table 7: Most Insurers Have Raised Fees for VA Living Benefits and Reduced Guarantees
GMWB rider fees as % of AUM Prior Feature AMP AXA HIG LNC MFC MET NFS PRU SecureSource GWB for Life Lifetime Income Builder Selects i4LIFE Advantage Principal Plus for Life GMIB Plus L-Inc HD Lifetime 7 Fee 0.65% 0.65% 0.55% 0.40% 0.40% 0.80% 0.70% 0.60% Accum. % NA 7.0% NA 3.0%-6.0% 5.0% 6.0% 7.0% 7.0% Withdrawal % 6.0% 4.0%-7.0% 5.0%-8.0% NA 5.0% 6.0% 4.0%-7.0% 5.0%-8.0% Current Feature SecureSource Stages 2 GMIB with GWB for life conversion Future6 Lifetime Income Advantage 2.0 Income Plus for Life GMIB Max L-Inc (10% option) HD Lifetime Income Fee 0.95% 0.90% 0.85% 1.05% 1.00% 1.00% 1.20% 0.95% Accum. % 6.0% 4.0%-8.0% 6.0% 5.0% 5.0% 6.0% 10.0% 5.0% Withdrawal % 4.0%-7.0% 4.0%-6.0% 4.0%-5.0% 4.0%-5.0% 4.0%-5.0% 6.0% 3.0%-6.0% 3.0%-6.0%

Source: VARDS, company reports and J.P. Morgan estimates.

Low Interest Rates Key Challenge for Life Insurers

In our view, the major fundamental negative in the current environment is the low level of interest rates. Our 2012 estimates assume a 10-year Treasury rate of roughly 3.5%, significantly above the current level of 2.21%. Even though Treasury yields have been low for the past several years (average 10-year yield of 3.65% in 2008, 3.25% in 2009, 3.20% in 2010, 3.20% YTD), wide credit spreads mitigated the impact on insurers new money rates in 2008, 2009, and 1H10. As a result, portfolio yields have only really been pressured by low rates for the past year. If rates remain at current levels, portfolio yields will gradually decline, pressuring investment income and likely resulting in downward revisions to EPS estimates. Prolonged low rates could also result in balance sheet charges if companies are forced to reduce discount rates for reserves or write off DAC and/or goodwill. Among our coverage companies, we believe results for LNC, MET, PL, and SYA are the most sensitive to sustained low interest rates, while AFL, AIZ, RGA, and TMK seem the least at risk. Besides their impact on earnings, low rates are likely to continue to weigh on investor sentiment on the group, limiting P/BV multiple expansion. While low rates are a headwind for earnings, we do not expect them to necessitate capital raises for life insurance companies.

Jimmy S. Bhullar, CFA (1-212) 622-6397 jimmy.s.bhullar@jpmorgan.com

North America Equity Research 17 August 2011

Table 8: Low Interest Rates Will Pressure Investment Income and EPS Estimates
$ in millions

Portfolio Investment Yield (2010) Income (2010) AFL AIZ CNO GNW HIG LNC MET PFG PL PNX PRU RGA SYA TMK UNM Median 3.73% 4.83% 5.81% 4.66% 4.40% 5.47% 4.33% 5.34% 5.46% 5.98% 3.02% 5.60% 5.34% 6.19% 5.57% 3,007 703 1,348 3,266 4,392 4,541 17,615 3,581 1,684 845 8,628 1,218 1,199 706 2,496

Portfolio Portfolio Duration Turnover 10.7 7.3 8.8 5.8 5.4 6.0 6.0 3.8 5.9 4.4 7.1 9.0 5.7 9.0 7.6 6.0 9.4% 13.7% 11.4% 17.2% 18.5% 16.7% 16.7% 26.0% 17.0% 22.6% 14.1% 11.1% 17.5% 11.1% 13.2% 16.7%

Assumed New Portfolio Yield Portfolio Yield Money Yield after 1 Yr. Change (bps) 2.73% 3.83% 4.81% 3.66% 3.40% 4.47% 3.33% 4.34% 4.46% 4.98% 2.02% 4.60% 4.34% 5.19% 4.57% 3.63% 4.69% 5.69% 4.49% 4.21% 5.30% 4.16% 5.08% 5.29% 5.76% 2.88% 5.49% 5.16% 6.08% 5.43% (9) (14) (11) (17) (19) (17) (17) (26) (17) (23) (14) (11) (18) (11) (13) (17)

Invest. Income % Change in Invest. Income % Change in after 1 Yr. Invest. Income as %of Revenue Revenues 2,931 683 1,322 3,145 4,207 4,403 16,937 3,407 1,631 813 8,225 1,194 1,160 694 2,436 -2.5% -2.8% -2.0% -3.7% -4.2% -3.0% -3.8% -4.9% -3.1% -3.8% -4.7% -2.0% -3.3% -1.8% -2.4% -3.2% 14.2% 8.3% 33.4% 31.9% 16.1% 43.0% 33.2% 41.2% 53.9% 40.3% 26.9% 15.2% 65.2% 20.8% 24.5% 29.5% -0.4% -0.2% -0.7% -1.2% -0.7% -1.3% -1.3% -2.0% -1.7% -1.5% -1.3% -0.3% -2.1% -0.4% -0.6% -1.2%

Source: Company reports and J.P. Morgan estimates. Note: Most insurers should be able to offset part of the impact on revenues through crediting rate reductions, price increases, or other company actions.

Earnings Highly Susceptible to Market Volatility

Although life insurers balance sheets are less susceptible to market volatility than previously, earnings remain highly sensitive to rates and equity returns. As insurers have shifted their business mix toward fee-based accumulation products (such as variable annuities, variable life, defined contribution plans, and asset management), earnings have become more sensitive to changes in the equity market. Our models assume a flat equity market in 3Q11 and 2% market appreciation per quarter thereafter, so EPS estimates for many companies would need to be revisited if the market remains near current levels (the S&P 500 is down 9.7% in 3Q11). The table below shows our estimates for our coverage companies EPS sensitivity to changes in equity market returns and the level of interest rates.
Table 9: EPS Sensitivity to Changes in Macro Conditions
Estimated impact to full-year 2012E EPS
AFL EPS Impact of 10% change in the equity market % of 2012 EPS EPS Impact of 100 bps change in interest rates % of 2012 EPS $0.00 NM $0.07 1.1% AIZ $0.00 NM $0.04 0.8% AMP $0.55 8.6% $0.04 0.6% CNO $0.00 NM $0.01 1.2% GNW $0.02 1.4% $0.02 1.4% HIG $0.20 5.1% $0.04 1.0% LNC $0.19 4.4% $0.10 2.3% MET $0.15 2.6% $0.15 2.6% NFP $0.05 2.2% $0.00 NM PFG $0.20 5.9% $0.07 2.1% PL $0.02 0.6% $0.10 2.9% PNX $0.01 2.5% $0.01 2.5% PRU $0.28 3.5% $0.10 1.3% RGA $0.00 NM $0.07 0.9% SYA $0.00 NM $0.04 2.6% TMK $0.00 NM $0.05 1.6% UNM $0.00 NM $0.05 1.6%

Source: Company reports and J.P. Morgan estimates.

Return to Trough Valuations Unwarranted

In our view, valuations are attractive, and we believe that P/BV multiples should not revert to 2008/2009 lows, even if macro conditions worsen further. The group is currently trading at 0.8x book value (ex. AOCI) and 6.6x 2012E EPS. Based on our forecast for normalized ROEs of 10-12% and EPS growth of 8-10%,
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Jimmy S. Bhullar, CFA (1-212) 622-6397 jimmy.s.bhullar@jpmorgan.com

North America Equity Research 17 August 2011

we believe the fair value range for the group is 1.0x-1.2x book value (ex. AOCI) and 8-10x forward EPS. While 2012 EPS estimates would need to be revisited if current interest rate and equity market conditions sustain, valuations appear to be discounting a considerably worse macro environment. Given life insurers improved balance sheets and risk management, we do not anticipate equity raises even if the markets return to 2008/2009 levels. Therefore, we believe a return to trough valuations (0.4x P/BV ex. AOCI and P/E of 3x in March 2009) would be unwarranted. On the other hand, investors are likely to assign a higher risk premium to the group than in the past, especially if market volatility remains elevated. Nonetheless, we believe the group offers compelling long-term upside and think the risk-reward for most life insurance stocks is attractive.
Figure 1: Life Insurance: Historical P/BV
Based on total book values

Figure 2: Life Insurance: Historical P/E

Based on one year forward calendar year earnings

2.8 2.4 2.0 1.6 1.2 0.8 0.4 12/98 6/00 12/01 6/03 12/04 6/06 12/07 6/09 12/10
Actual P/BV Average P/BV

16.0 14.0 12.0

Average = 1.4

10.0 8.0 6.0 4.0

Average = 10.5

2.0 12/98 6/00 12/01 6/03 12/04 6/06 12/07 6/09 12/10
Actual P/E Average P/E

Source: Bloomberg and J.P. Morgan.

Source: Bloomberg and J.P. Morgan.

Defensive Stocks Should Outperform N-T

If macro conditions deteriorate, we believe insurers with strong capital positions, clean portfolios, and limited market exposure offer the best riskreward. Our current ratings and model assumptions do not contemplate a U.S. recession or severe market downturn, but we believe that companies with the following attributes would perform best if market conditions remain volatile: Strong capital position: In our view, companies with capital flexibility to continue to repurchase stock despite poor macro trends will outperform the group. In addition, if markets deteriorate further, investors will be less concerned about capital and liquidity at insurers with stronger balance sheets, providing downside support to these companies P/BV multiples. In our view, AIZ, TMK, and UNM have the strongest balance sheets as shown by their considerable

Jimmy S. Bhullar, CFA (1-212) 622-6397 jimmy.s.bhullar@jpmorgan.com

North America Equity Research 17 August 2011

excess capital, strong free cash flow generation, and liability profiles that are less sensitive to market volatility. Low investment portfolio risk: If credit market conditions worsen, we expect investors to place increased emphasis on the perceived risk in a companys portfolio. Thus, we believe insurers with low allocations to European investments, structured securities, and commercial real estate would be viewed favorably. In our view, RGA, TMK, and UNM have the most conservative investment portfolio allocations. Below-average sensitivity to equity market declines or low interest rates: In a volatile market environment, we would favor companies whose earnings are driven by non-market-driven factors such as mortality or morbidity. Given their more predictable results, we believe these stocks would garner a premium P/E multiple relative to the group. Notable companies in this category include AFL, RGA, TMK, and UNM. International exposure: We expect results in companies international businesses (ex. Europe) to continue to generate healthy growth even if the U.S. economy weakens. In addition, low interest rates are less of a headwind in foreign businesses. The companies with the largest and best-positioned international businesses, in our view, are AFL, MET, PRU, and RGA. On the other hand, companies with the following characteristics are likely to perform poorly in the event of continued volatile equity markets and low interest rates: Cheap stocks with weak business fundamentals: In our view, with the entire sector trading below book value, investors should focus on higher-quality franchises as opposed to low-priced turnaround stories. We are especially concerned about further deterioration in operating trends at GNW and PNX if the macro environment worsens. Above-average sensitivity to equity markets and interest rates: If current market conditions continue, companies with high exposure to interest rates (LNC, MET, PL, SYA) and those with a significant presence in equity-sensitive products (HIG, LNC, PFG, PRU) should be the most affected. In the current environment, RGA (rated Overweight) is our best idea. We expect sustained high returns, strong operating trends, and limited exposure to macro conditions to enable RGA to outperform the group. While growth in the U.S. business is likely to be muted given low cession rates, margins should remain robust given a favorable pricing environment. Also, RGAs international business should grow at a double-digit rate as the company expands into new countries and increases its penetration rate in existing markets. RGA appears even more attractive in the current environment given its conservative investment portfolio, below-average exposure to low interest rates, and minimal earnings sensitivity to the equity market. The stock is currently valued at 0.9x book value (ex. AOCI) and 6.4x 2012E earnings, close to the group level. Given RGAs superior returns (12% ROE vs. 10% for the group) and lower risk profile, we believe a premium valuation is warranted. TMK and UNM (both rated Neutral) should also perform well in a volatile market environment. Both companies have considerable capital flexibility, belowaverage investment portfolio risk, and no equity market sensitivity. As a result, we expect both to continue repurchasing stock, which should drive healthy EPS growth
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Jimmy S. Bhullar, CFA (1-212) 622-6397 jimmy.s.bhullar@jpmorgan.com

North America Equity Research 17 August 2011

despite low interest rates and weak top-line growth. Higher unemployment could hold back UNMs disability margins and weigh on the stocks multiple, but we expect the companys overall results to hold up better than peers if the macro environment deteriorates further. We remain cautious on PNX (rated Underweight) and would also avoid GNW (rated Neutral) despite their depressed valuations. In our view, PNX deserves to trade at a sizable discount to the group given its low returns, poor operating trends, and weak financial health. We lack visibility into the timing of a turnaround in Genworths U.S. mortgage insurance business, which we believe is critical for the stocks valuation to recover. Among our Overweight-rated stocks, we expect HIG to perform worst in a poor macro environment due to its high sensitivity to the equity market and weak operating fundamentals in the annuity business. MET and PRU also have aboveaverage market sensitivity, but we see modest downside risk given superior operating trends and the large earnings contribution from international markets. Of the two, we prefer PRU as a result of its superior ROE potential, better operating trends (stronger growth in foreign business), and lower earnings sensitivity to interest rates. In our coverage universe, AFL has by far the most exposure to European investments and would likely underperform if credit conditions deteriorate. However, the companys core business has higher return potential than other insurers and has below-average exposure to the weak equity market and low interest rates. As a result, we expect the stock to outperform once concerns about Europe dissipate, even if the U.S. economy remains weak and the markets are volatile.

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Jimmy S. Bhullar, CFA (1-212) 622-6397 jimmy.s.bhullar@jpmorgan.com

North America Equity Research 17 August 2011

Companies Recommended in This Report (all prices in this report as of market close on 16 August 2011) Genworth Financial, Inc. (GNW/$6.45/Neutral), Phoenix Companies (PNX/$1.92/Underweight), Reinsurance Group of America (RGA/$51.30/Overweight), Torchmark Corp (TMK/$36.16/Neutral), Unum Group (UNM/$23.02/Neutral)
Analyst Certification: The research analyst(s) denoted by an AC on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an AC on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report.

Important Disclosures

Lead or Co-manager: J.P. Morgan acted as lead or co-manager in a public offering of equity and/or debt securities for Reinsurance Group of America, Unum Group, Genworth Financial, Inc. within the past 12 months. Client:J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients: Reinsurance Group of America, Torchmark Corp, Unum Group, Genworth Financial, Inc., Phoenix Companies. Client/Investment Banking: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as investment banking clients: Reinsurance Group of America, Torchmark Corp, Unum Group, Genworth Financial, Inc.. Client/Non-Investment Banking, Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients, and the services provided were non-investment-banking, securities-related: Reinsurance Group of America, Torchmark Corp, Unum Group, Genworth Financial, Inc., Phoenix Companies. Client/Non-Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients, and the services provided were non-securities-related: Reinsurance Group of America, Torchmark Corp, Unum Group, Genworth Financial, Inc., Phoenix Companies. Investment Banking (past 12 months): J.P. Morgan received in the past 12 months compensation for investment banking Reinsurance Group of America, Torchmark Corp, Unum Group, Genworth Financial, Inc.. Investment Banking (next 3 months): J.P. Morgan expect to receive, or intend to seek, compensation for investment banking services in the next three months from Reinsurance Group of America, Torchmark Corp, Unum Group, Genworth Financial, Inc., Phoenix Companies. Non-Investment Banking Compensation:J.P. Morgan has received compensation in the past 12 months for products or services other than investment banking from Reinsurance Group of America, Torchmark Corp, Unum Group, Genworth Financial, Inc., Phoenix Companies.
Reinsurance Group of America (RGA) Price Chart
108 OW $57 90 OW $60

OW $50

OW $62

Date
OW $65 OW $67

Rating Share Price ($) 38.69 30.17 39.23 46.99 55.96 47.79 48.26 55.51 59.10 OW OW OW OW OW OW OW OW

Price Target ($) 51.00 42.00 50.00 57.00 64.00 62.00 60.00 65.00 67.00

72 Price($)

OW $51

OW $42

OW $64

19-Dec-08 OW 24-Apr-09 28-Jul-09 27-Oct-09 21-Apr-10 15-Jul-10 11-Oct-10 04-Jan-11 19-Apr-11

54

36

18

0 Mar 08 Dec 08 Sep 09 Jun 10 Mar 11

Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends. Initiated coverage Dec 19, 2008.

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Jimmy S. Bhullar, CFA (1-212) 622-6397 jimmy.s.bhullar@jpmorgan.com

North America Equity Research 17 August 2011

Torchmark Corp (TMK) Price Chart

75

N $24

OW $40

OW $44

Date
N $44

Rating Share Price ($) 29.42 20.65 20.27 26.60 30.52 29.39 36.84 36.27 38.21 40.74 42.99 43.17 N N N N OW OW OW OW OW OW N

Price Target ($) 32.00 27.00 24.00 31.50 35.50 35.50 40.00 42.00 43.00 44.00 44.00 44.00

60

N $27

OW $35.5

OW $43

19-Dec-08 N 05-Feb-09 23-Apr-09 28-Jul-09 06-Jan-10 08-Feb-10 21-Apr-10 11-Oct-10

N $32 45 Price($) 30

N $31.5

N $35.5

OW $42

OW $44

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28-Oct-10 04-Jan-11 06-Jul-11

Jul 08 Oct 08 Jan 09 Apr 09 Jul 09 Oct 09 Jan 10 Apr 10 Jul 10 Oct 10 Jan 11 Apr 11 Jul 11

11-Jul-11

Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends. Initiated coverage Dec 19, 2008.

Unum Group (UNM) Price Chart

50

40

N $20

Date
N $26 N $24 N $27 N $26 N $28

Rating Share Price ($) 17.01 14.24 19.75 20.23 25.89 22.73 24.83 N N N N N N

Price Target ($) 22.00 20.00 26.00 24.00 27.00 26.00 28.00

30 Price($) 20

N $22

19-Dec-08 N 04-Feb-09 05-Aug-09 06-Jan-10 21-Apr-10 04-Aug-10 04-Jan-11

10

0 Oct 06 Jul 07 Apr 08 Jan 09 Oct 09 Jul 10 Apr 11

Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends. Initiated coverage Dec 19, 2008.

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Jimmy S. Bhullar, CFA (1-212) 622-6397 jimmy.s.bhullar@jpmorgan.com

North America Equity Research 17 August 2011

Genworth Financial, Inc. (GNW) Price Chart

70 N $13 56 N $18 42 Price($) 28 N $15 N $10

Date

Rating Share Price ($) 3.34 5.28 12.10 13.84 18.50 15.79 12.77 12.58 9.06 7.82

Price Target ($) -15.00 16.00 18.00 17.00 15.00 13.00 12.00 10.00

19-Dec-08 N
N N N $15 N $16 N $17 N $12

08-May-09 N 07-Oct-09 29-Jan-10 21-Apr-10 30-Jul-10 11-Oct-10 29-Oct-10 18-Jul-11 29-Jul-11 N N N N N N N N

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0 Oct 06 Jul 07 Apr 08 Jan 09 Oct 09 Jul 10 Apr 11

Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends. Break in coverage May 08, 2009 - Oct 07, 2009.

Phoenix Companies (PNX) Price Chart

21

UW

14 Price($)

0 Mar 08 Dec 08 Sep 09 Jun 10 Mar 11

Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.

The chart(s) show J.P. Morgan's continuing coverage of the stocks; the current analysts may or may not have covered it over the entire period. J.P. Morgan ratings: OW = Overweight, N= Neutral, UW = Underweight Explanation of Equity Research Ratings and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analyst's (or the analyst's team's) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analyst's (or the analyst's team's) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analyst's (or the analyst's team's) coverage universe.] The analyst or analyst's team's coverage universe is the sector and/or country shown on the cover of each publication. See below for the specific stocks in the certifying analyst(s) coverage universe. Coverage Universe: Bhullar, Jimmy S: AFLAC, Inc. (AFL), American International Group (AIG), Assurant, Inc. (AIZ), Genworth Financial, Inc. (GNW), Hartford Financial Services (HIG), Lincoln National (LNC), MetLife, Inc. (MET), National Financial Partners (NFP), Phoenix Companies (PNX), Principal Financial Group (PFG), Protective Life (PL), Prudential Financial (PRU), Reinsurance Group of America (RGA), Symetra Financial (SYA), Torchmark Corp (TMK), Unum Group (UNM)

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Jimmy S. Bhullar, CFA (1-212) 622-6397 jimmy.s.bhullar@jpmorgan.com

North America Equity Research 17 August 2011

J.P. Morgan Equity Research Ratings Distribution, as of June 30, 2011

J.P. Morgan Global Equity Research Coverage IB clients* JPMS Equity Research Coverage IB clients* Overweight (buy) 47% 50% 45% 70% Neutral (hold) 42% 46% 47% 64% Underweight (sell) 11% 32% 8% 52%

*Percentage of investment banking clients in each rating category. For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category.

Equity Valuation and Risks: Please see the most recent company-specific research report for an analysis of valuation methodology and risks on any securities recommended herein. Research is available at http://www.morganmarkets.com , or you can contact the analyst named on the front of this note or your J.P. Morgan representative. Equity Analysts' Compensation: The equity research analysts responsible for the preparation of this report receive compensation based upon various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues, which include revenues from, among other business units, Institutional Equities and Investment Banking.

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Jimmy S. Bhullar, CFA (1-212) 622-6397 jimmy.s.bhullar@jpmorgan.com

North America Equity Research 17 August 2011

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