European Insurers Insurance The Magnificent Seven ... · The Magnificent Seven; Initiating on...

Mkt. Cap Price Cons. Current EPS Estimates Valuation (P/E)Company Name Ticker (MM) Rating Price Target Next FY 2013 2014 2015 2014 2015 AEGON AGN NA €12,630.0 HOLD €6.00 €6.60 €0.68 €0.63 €0.69 €0.74 8.7x 8.1xAllianz ALV GY €56,867.0 HOLD €124.90 €132.50 €13.60 €13.20 €13.40 €13.80 9.3x 9.1xAviva Plc AV/ LN £14,511.8 BUY 493.60p 584.00p 46.00p 42.70p 45.00p 50.60p 11.0x 9.8xAXA CS FP €41,815.4 BUY €17.54 €21.40 €2.07 €2.03 €2.17 €2.29 8.1x 7.7xGenerali G IM €24,429.3 HOLD €15.69 €16.10 €1.42 €1.33 €1.54 €1.76 10.2x 8.9xPrudential Plc PRU LN £35,179.3 BUY 1,378.50p 1,577.00p 97.00p 90.80p 99.00p 111.10p 13.9x 12.4xZurich Insurance Group ZURN VX CHF37,742.4 HOLD CHF262.10 CHF254.00 CHF25.40 CHF25.70 CHF25.40 CHF26.30 10.3x 10.0x

INDUSTRY NOTE

Initiating Coverage

Financials | Insurance 6 August 2014

InsuranceThe Magnificent Seven; Initiating onEuropean Insurers

EQU

ITY R

ESEARC

H EU

ROPE

Mark Cathcart *Equity Analyst

44 (0) 20 7029 8784 [email protected]

* Jefferies International Limited

Key Takeaway

Balance sheets are all but repaired, with tighter operational management andcash flow controls leading to possible structural increases in dividends andability to invest in growth. We stress test for deflation and falling yields tocalculate likely pay-out levels and future levels of reinvestment. We would buyAviva, AXA and Prudential in expectation of longer-term dividend progressionand commitment to growth, and hold AEGON, Allianz, Generali and Zurich.

Conglomerate transformation. The formal introduction of Solvency II next year shouldmark the end of a decade of sector repair. The conglomerate insurance proposition hastransformed into a lean operational model with tight central controls structured to deliverthe cash for future growth and potentially higher dividends. Returns have recovered to thesame levels as 15 years ago on our calculation, despite capital requirements 30% higher andyield potential considerably lower.

Strategies for cash. Prudential was one of the first to restructure a decade ago, andhas outperformed since, focusing on life products designed for faster cash release tofund growth and fuel higher dividends. ‘Cash and growth’ has since become the widerconglomerate purpose. With all companies on our reckoning ‘capital-free’ by 2016,managements will likely have excess cash available each year to spend on acquisitions andgrowth, higher dividends and share buybacks.

Higher dividends. We stress test capital and cash earnings for deflationary risk to assessthe likely levels of dividend increases that might be expected in the medium term onceSolvency II has been formally introduced. Our eventual dividend pay-out ratio forecasts(2017 onwards) show an aggregate 10% upside from consensus levels for 2016, with Allianz,Aviva, AXA and Generali able to surprise positively over the medium term, AEGON over thelonger term and Prudential’s current trend of dividend momentum likely to be maintained.

And growth. We assess the organic growth profiles at each of the companies. Prudential’slong-term growth trend of 8%-10% compares with 4%-5% elsewhere. Reinvesting thecapital generated each year surplus to growth and dividend requirements into acquisitionsand new distribution (we factor in 12% hurdle ROEs where the excess generated is based onthe higher dividend pay-out ratios we are expecting) could close the growth gap over time,in our view, and capital redeployment could facilitate further emerging market developmentalongside.

Valuation and risks. Our valuations are driven from multi-stage residual incomemodelling to accommodate for the changing return dynamics of the life business overtime, with these cross checked by a DDM analysis. We stress test our share price targetsto accommodate for the range of deflationary risks, a fall in equity markets, declines infinancial yields and non-life underwriting deterioration. Within the basket of stocks we lookat, we recommend Aviva, AXA and Prudential as Buys, spread over the spectrum of marketand underwriting risk, where all three appear committed to further developing emerginggrowth, with dividend momentum potential alongside.

Jefferies does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that Jefferies may have a conflictof interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.Please see analyst certifications, important disclosure information, and information regarding the status of non-US analysts on pages 113 to 116 of this report.

Executive Summary The conglomerate proposition has vastly improved: corporate governance,

franchise focus, and an attractive cash and return profile despite the higher

capital demands from Solvency II. Prudential has demonstrated to the market

over the past decade the benefits of investing in growth with products

designed to quickly release the cash, and has been extensively re-rated

because of it. With the wider conglomerate insurance sector on the cusp of

capital recovery, we explore the prospects for growth and higher dividend

pay-out ratios at the other companies. We assess earnings growth potential,

both organic and acquired, and stress test for deflation to construct the likely

pay-out levels for each company. Our Buy-rated stocks – Aviva, AXA and

Prudential – are spread over the spectrum of market and underwriting risk,

where all three appear committed to emerging growth, with dividend

momentum potential alongside.

In this note, we initiate coverage on seven major European insurers, with Buy

ratings on Aviva, AXA and Prudential, and Hold ratings on AEGON, Allianz,

Generali and Zurich.

Sector repair. The formal introduction of Solvency II next year will mark the

denouement of a decade of sector repair for a group of companies that, after years of

mega acquiring, had found themselves woefully undercapitalised in the sequence of

financial collapses that followed. See Appendix, The Conglomer-creation.

Operational transformation. Today the conglomerate insurance proposition has

transformed, a lean operational model with tight central controls structured specifically to

deliver the cash in the form of dividends, with life products designed for faster cash

release to fund future growth. See later section, Corporate Assessment, for a full overview.

Chart 1: European Insurance Sector versus Market

Source: Factset

Chart 2: Prudential versus European Insurance Sector

Source: Factset

Prudential has led the way. Prudential was one of the first to restructure a decade

ago, focusing on markets with profitable growth, and early to recognise the value of

‘cash’, restructuring life products to ensure distribution costs were quickly covered with

profits in the form of cash flowing to the shareholder soon after. Prudential has

outperformed since, demonstrating the longer-term value of investing in growth, able to

pay increasingly higher dividend streams.

‘Cash and growth’ has since become the holy grail for the conglomerate insurance

sector, with management teams refocusing their conglomerate propositions, keen to

replicate in some way or other the Prudential re-rating, and the Prudential management

team keen to keep ahead. All companies, on our reckoning, are ‘capital-free’ by 2016 at

'95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '1420

40

60

80

100

120

140

Source: FactSet PricesEuro STOXX (TMI) / Insurance - SS

'05 '06 '07 '08 '09 '10 '11 '12 '13 '1450

100

150

200

250

300

Source: FactSet PricesPrudential plc

Balance sheets repaired

Focus on cash

Prudential’s decade of performance

With all now seeking ‘cash and

growth’

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page 2 of 116 , Equity Analyst, 44 (0) 20 7029 8784, [email protected] Cathcart

Please see important disclosure information on pages 113 - 116 of this report.

the latest with free cash generated no longer required to shore up capital or pay down

debt, available instead for acquisitions and growth alongside dividends and share

buybacks. See later sections, Corporate Assessment: Growth, Cash, Dividend.

Chart 3: Capital Strength

Source: Jefferies estimates, company data

Dividend pay-out upside. We stress test cash flows for deflation to assess the likely

level of dividend pay-out ratios over the longer term. We highlight Allianz, Aviva, AXA,

and Generali as the companies most likely to lift their pay-out ratios between now and

2016, with Prudential also likely to re-base its dividend at intermittent intervals to reflect

its ongoing growth trend. AEGON, by contrast, is still prioritising capital rebuild and

deleveraging over this timeframe, while Zurich already has the highest pay-out ratio with

further increases unrealistic, in our view. We note the longer-term upside in dividend

paying potential based on our analysis compared with the consensus forecasts for 2016,

with an aggregate absolute upside of 10%. See later section, Corporate Assessment:

Dividend.

Chart 4: Long Term Dividend Pay-out Scenarios


Reinvestment potential. We also consider the reinvestment possibility from the excess

cash being generated each year beyond dividend requirements (based on the pay-out

ratios we have forecast for the longer term), constructing long-terms earnings growth

profiles, first organically (where no additional growth or expense initiatives at the

company level are included), second including the potential earnings increment from

acquisitions, and third taking into account possible capital reallocations over the longer

term. We compare these with the growth rates implied by the current share price (based

on a reverse DDM analysis), suggesting that the market values organic growth potential

but places negligible credibility on the ability of the companies to reinvest and reallocate.

The credibility gaps appear widest at AEGON, Allianz, Aviva and AXA.

2016 Economic Interest Dividend Dividend Capital

Solvency* Leverage** cover Pay-out cover Freedom

AEGON 185% 26% 10.0 34% 187% 2015

Allianz 215% 22% 13.4 50% 197% 2013

AXA 214% 24% 12.7 45% 148% 2015

Aviva 192% 39% 6.6 39% 152% 2016

Generali 202% 30% 8.0 45% 156% 2015

Prudential 290% 25% 14.2 35% 133% 2007

Zurich 140% 28% 7.1 65% 117% 2006

* For Zurich Z-ECM not comparable

** Tangible net of unrealised gains on bonds

Company Actual Consensus Long term Long term versus Timing

2013 2016 potential vs 2016 consensus

AEGON 32% 34% 40% 18% 2017

Allianz 40% 45% 50% 10% 2014/15

Aviva 35% 39% 40% 2% 2016

AXA 40% 43% 45% 5% 2014/15

Generali 33% 41% 45% 10% 2016

Prudential 37% 36% 36% 1% NA

ZFS 66% 63% 63% 0% NA

Our dividend stress text suggests

10% absolute upside over the longer

term versus 2016 consensus

Reverse DDM analysis suggests the

market is valuing organic growth

only, placing zero credibility on

reinvestment potential

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Chart 5: Growth Potential


Capital reallocation. So far, business exits have been predominantly driven by

solvency rebuild considerations. We consider the scope of further divestments that could

facilitate share buybacks or additional emerging market investments. Aviva could, for

example, divest its Italian Spanish and Irish operations assuming appropriate levels of

profitability are restored over the medium term and use the proceeds to build out its Asian

presence. The attractions of owning US assets also appears less post Solvency II given the

lack of diversification benefits afforded to these. On which basis Prudential, AXA and

Allianz might IPO their US operations, with AEGON possibly taking a more radical path

and re-domiciling in the US and IPO Europe. See later section, The Seventh Day.

Growth rates Growth rates Growth Growth gap

DDM Implied Organic Reinvest Reallocate Total Organic Total

AEGON 4% 4% 4% 0% 7-8% 1% 3%

Allianz 4% 4% 4% 0% 8% 0% 4%

Aviva 4% 4% 2% 2% 6-8% 0% 3%

AXA 3% 5% 2% 1% 7-8% 2% 5%

Generali 5% 4% 3% 0% 7-8% 0% 2%

Prudential 8% 9% 1% 0% 10% 0% 2%

Zurich 3% 4% 1% 1% 5-6% 1% 2%

Where reallocation of capital could

lead to additional upside

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Recommendations To participate in the potential re-rating of the conglomerates in the run up to the

completion of Solvency II, we focus our conglomerate recommendations on companies

where dividend and growth strategies are likely to lead to longer-term re-ratings. To

reflect the uncertain economic outlook (deflation versus reflation), our recommendations

are spread across the spectrum of financial market risk.

Below we summarise our recommendations, with emphasis on the Buy-rated names:

Aviva, AXA and Prudential.

Aviva – Buy, Price Target 584p

We see dividend momentum shorter term driven by operational overhaul,

increasing cash remittance, and possible growth resurfacing in the core

business. Wider scale capital reallocation is likely over the longer term, in

our view, leading to an increasing emerging growth profile and longer-term

dividend momentum.

Aviva’s corporate culture has rapidly transformed following the arrival

of Mark Wilson as CEO (late 2012), former CEO and restorer of AIA ahead of its

IPO with a new management team appointed since. Initial focus has been on

cash generation and remittance to the group, simplification of the corporate

structure and tighter central management controls, where management’s target

of a group expense ratio of sub-50% for 2016 (53% 2013) suggests further

efficiency drives across the group.

The organic growth profile of the group is gaining momentum, with

management confident of a return to UK growth driven by their unique

composite leadership and IT edge (app and web facilitating sales), where cross-

sell stands at just 1.2, and asset management rebuild under Euan Munroe. The

distribution agreements across Europe have also been refocused and

strengthened.

CEO Mark Wilson underlined at the recent Investor Day that the £800m cash

earnings guidance for 2016 at the holding was for future dividends.

Our forecasts assume that 75% of this amount will eventually be set aside for

dividend (likely timeframe 2017), equating to a 40% pay-out ratio on operating

EPS, albeit with upside risk. This would leave £250-300m annual for investment

in growth, which if successfully reinvested on a 12% ROE would benefit

earnings growth by 2% annually on our calculation.

The key area of interest for us, however, is capital reallocation and the £2bn-

plus (10%-15% of group capital) that could be released from eventual sales of

Italy, Spain and Ireland (likely time horizon 2016-17). With the group CEO

formerly CEO at AIA, and the global life CEO formerly CEO of Great Eastern

Holdings, further investment in Asia (jvs and distribution deals) seems the

most likely home for this capital. Capital redeployment over the longer term

could see the group’s long-term earnings growth potential rising to 8% (versus

the 4% we calculate for the group as-is), where the dividend pay-out ratio will

likely sit in the 40%-45% range (versus 35% currently).

Factoring the current share price into our DDM, where we assume that the full

£800m will not be paid out until the dividend for 2018, suggests that the market

is valuing Aviva on a long-term growth rate of 4%, in line with its base-case

organic profile. Our price target of 584p is based on an eventual 40% pay-

out ratio and assumes long-term growth of 6% (rather than 8%), allowing for

risk to margins where we assume a 2 percentage point deterioration in the

combined ratio over time (see Aviva’s Long View at the end of this report for

more detail).

Buy recommendations spread across

the spectrum of economic risk

Tighter controls over expense and

cash generation driven by new CEO

UK growth potential

Dividend momentum

Longer-term capital reallocation

potential from Europe to Asia

Share price upside based on our

growth and dividend expectations

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Downside risks are continued underwriting downturn in UK non-life, limited

cross-sell progress within the UK, further weakening of European distribution,

and failure to deliver on the operational improvements with cash earnings

disappointing in the process.

AXA – Buy, Price Target €21.4

Ambition 2015 has steered the group back towards a level of acceptable

balance sheet strength, which can now afford to grow, with increased cash

flows at the holding reflecting the successful overhaul in life business mix.

The current valuation fails to accommodate for the longer-term growth

profile of the group, with commitment to the emerging market build likely to

continue, in our view.

AXA’s solid European base (top 3 in a number of markets) is supported by a

focused life presence in the US and Japan, with a broad spread of emerging

market presence, and a leading global brand that has enabled it to secure a

range of leadership distribution deals in recent years. The management team

under Henri de Castries have recently signed up for four more years having

successfully restructured the balance sheet since the financial crisis,

repositioning the life portfolio to lower capital intensive unit-linked and

protection lines.

Ambition 2015 targeted a 2.5x increase in the growth contribution to group

earnings from a 5% base. At 12% for full year 2013, AXA’s commitment to

emerging growth expansion continues, where management have recently

expressed interest in the corporate insurance assets of the Brazilian bank Itau

Unibanco. Later next year AXA’s objectives for Ambition 2020 will possibly be

set out, with a further doubling of growth contribution to earnings quite likely

to be included. Successful execution would see AXA more than halfway towards

Prudential’s emerging growth profile by 2020.

We expect the dividend level to rise by 30% over the next three years,

with an increase in the pay-out ratio from 40% to 45% by 2016. This would

still leave €1bn of excess cash at the holding each year for growth reinvestments

(on a 12% ROE equates to close to 3% of earnings on our calculation), where

there might also be scope for additional capital release from the life back books.

We also consider the possibility of an IPO of its US life and annuity division (see

later section, Seventh Day, for a more detailed rationale), which would free up

around 15% of group capital on our calculation.

Factoring the current share price into our DDM, where we assume an increase in

the dividend pay-out ratio to 45% for 2016, suggests that the market is valuing

AXA on a long-term growth rate of 4%, below our base-case organic profile at

5%. Our price target of €21.4 is based on an eventual 45% pay-out ratio and

assumes long-term growth of 5% allowing for risk to margins, where we assume

a 2 percentage point deterioration in the combined ratio over time (please see

AXA’s Long View at the end of this report for more details). AXA is on the lowest

PER of the conglomerates (2015F 7.6X vs 8.8X ex Prudential), and highest cash

earnings yield (2015F 10.4% vs 9.5% ex Prudential).

Downside risks are underwriting downturn in European non-life, life margin

compression from falling yields, thwarted progress in building up the emerging

market profile, further falls in European and US bond yields, and falling equity

markets.

Strong management, powerful

franchise, leading brand

Emerging market commitment likely

to grow

Medium-term dividend momentum

driven by likely higher pay-out ratio

Share price fails to accommodate for

growth potential in our view

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Prudential – Buy, Price Target 1577p

The insurance conglomeration that has set the pace in terms of cash

generation and capital navigation. The premium rating reflects the long-

term growth potential of Asia, where upside remains considerable, in our

view, and where dividend rebases are likely to continue as a result.

The cash and growth strategies pursued in the UK (repositioning towards

cash), Asia (growth focus on medical expenses to emerging middle class) and

US (counter-cyclical US VA growth driven by conservative pricing and hedging

strategy) have all conspired to produce double-digit growth and high

returns in recent years. Prudential now benefits from the leading Asian

franchise based on both distribution strength and geographic spread, leadership

in US variable annuities (market share and efficiency), and a UK franchise backed

by M&G, the leading UK asset manager.

Solvency II is the strongest in the sector at 253% (2013 FY), with ROCs the

highest of the conglomerates by some margin; we forecast 23% for 2015,

reflecting >20% IRRs in all life business (short paybacks, medical expense bias in

Asia, with-profit support in the UK).

The recent convergence of growth trends in the US and Asia has fuelled

momentum but where Jackson has recently increased its pricing to secure

margins. We expect the longer-term growth focus to be firmly on Asia,

where agency distribution continues to grow at double-digit rates, and where

Standard Chartered is also broadening (customer penetration still only 3%),

with new initiatives in Hong Kong and Singapore, India and China in the process

of opening, and with other markets to follow. Specifically, in Thailand

(undeveloped by Prudential’s standards but the second largest SE Asian

economy), distribution was secured last year via auto finance leader Thanachart.

Crucially, the growth trend in Prudential’s core health product shows no signs

of abating. Out-of-pocket medical expenses stand at 30%-60% across the

regions, according to management, versus 10% in the US/UK. Above all,

Prudential’s customer base, the middle class, is expected to grow to 135m by

2030 vs 45m 2012 (vs Prudential’s 2m customers). And beyond Asia, the

African continent now appears to be in Prudential’s sights.

Prudential’s clean corporate structure, with no internal debt, Asia with its own

holding structure, US life with no diversification benefits likely under Solvency II,

and management commentary on business optionality all point to at least the

possibility of a break-up of the group at some stage in the future, if

not a straight sale or IPO of Jackson. We note the successful IPO of Voya

(US life insurer) from ING last year. Asian investors are possibly less willing to

own Prudential given the difficulties in understanding the UK and US businesses.

With Jackson sold, the Asian business could then re-rate, possibly to a premium

to AIA based on a qualitative assessment between the two.

Factoring the current share price into our DDM, where we expect dividend

momentum to reflect earnings growth, but with no dividend pay-out increase,

suggests that the market is valuing Prudential on a long-term growth rate of

8.5% based on a CoC of 10%. Asian exposure arguably demands a higher risk

premium, but Prudential versus the conglomerate sector has limited exposure

to financial market risks, where roughly half of the Asian business is US$

denominated, and where the Asian premium mix should prove defensive

in any economic downturn (affordability of products to the bourgeoning middle

class). The PER for 2016F at 11.3x fails to accommodate for the group’s growth

profile and capital optionality, in our view. Our price target of 1577p

values the group on a PER 2016F of 12.7x, equating to a 10% long-term

growth rate on our DDM analysis. Please see Prudential’s Long View at the end

of this report for more detail.

Highest return and growth profile of

the conglomerates

The strongest on Solvency II

Asian upside remains considerable,

in our view

US IPO a possibility

Share price fails to accommodate for

the double-digit growth potential

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Downside risks are regulatory changes in Asia undermining Prudential’s

product offering, Asian downturn deflating growth expectations, unfavourable

policyholder behaviour decreasing the expected value of Jackson’s annuity

portfolio, and further changes to government regulation of life and pensions

sales in the UK impacting margins and volumes.

AEGON – Hold, Price Target €6.6

The improving return and growth profile of the group reflects extensive cost cutting and

portfolio repositioning in the core markets (US, Netherlands and UK), where successful

exit of non-core in France and Canada should secure an ROE of above 10% on our

calculation. ROCs still remain the lowest in the sector, however, reflecting the drag from

life back books with guarantees and extensive hedging costs, and continued sub

profitability in the UK, where critical mass has yet to be achieved in its new platform. The

indicative Solvency II range (150%-200%) is also at the low end for the sector, with the

mid-point of 175% comparing with typically 200% elsewhere. This reflects the US

overweight and absence of diversification benefits afforded to these assets under the new

capital regime, with dividend momentum likely to remain constrained longer than

elsewhere within the sector because of this, where the stock dividend yield at 4.4% for

2016 is at the low end for the sector. Risks to our Hold thesis are: a rise in US yields

leading to improving margins, an increased likelihood of selling the non-core run-off

books, faster capital replenishment, and dividend hikes earlier than expected; UK platform

momentum securing appropriate levels of returns; and (unlikely in our view), a re-

domiciling of the business to the US, and IPO of the European assets.

Allianz – Hold, Price Target €132.5

Strong cash flows relative to current growth and dividend requirements are likely to fuel

market expectation of pay-out increases over time (we expect a 50% pay-out ratio by

2016), where the market seems to be placing limited value on the group’s reinvestment

potential. Clarification of capital strategy is expected later this year. PIMCO outflows

have been weighing on the group’s rating in recent months following US tapering, a blip

in fund performance last year and the resignation of the CEO. We anticipate stabilisation

of outflows and a gradual return to a growth trend reflecting recent fund performance

recovery, and management rebuild (six new deputy CIOs appointed alongside CIO Bill

Gross, and a new CEO, former COO). Our €132.5 price target is based on a 50% pay-out

ratio and gives some benefit for reinvestment potential for the excess capital generation.

Risks to our thesis are continued outflows at PIMCO, underwriting downturn in European

non-life, and life margin compression from falling yields.

Generali – Hold, Price Target €16.1

Modernisation and de-politicisation under CEO Mario Greco and his new management

team are major positives for the group’s rating. Improving efficiency on the back of wide-

scale integration, higher domestic growth rates driven by the tied agents diversifying their

sales into non-traditional life products, and capital repair following the recent sale of BSI

have given management confidence to point to a higher dividend pay-out ratio in the

future (above 40% vs 36% 2013). Generali is the most exposed of the conglomerates to

falling yields in Italy and Germany, however, where falling domestic auto rates may begin

to affect profit momentum. Risks to our thesis are a sooner-than-expected move to 45%

pay-out ratio (our long-term forecast), additional expense cuts more than offsetting

margin pressures and reversal of the recent bond yield declines. The stock is underpinned

at current levels by its high free cash yield (9.6% 2016F vs 10.1% sector ex Pru).

Zurich – Hold, Price Target CHF254

Dividend upside is limited by an already high pay-out ratio (65%) and low earnings

growth profile (overweight non-life, where Farmers omni-channel approach has yet to

convince in the face of direct competition). Non-core sales are also expected to be small,

with guidance at 5% of total capital. The stock does, however, benefit from strong yield

underpin (2016F 6.7%) and is economically defensive. Risks to our thesis include a

convincing growth trend being established at Farmers, and additional capital release (life

back books for example) fuelling expectations of more emerging market roll-out.

Dividend upside considerable;

PIMCO trajectory less certain

Significant cost cutting under new

management team, but drag of

falling yields and lower domestic

auto rates

Dividend pay-out already high,

growth potential limited

Solvency II at the low end for the

sector constrains dividend

momentum for the medium term

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Valuation Our formal share price targets are driven from a traditional multi-period

residual return model. However, to reflect the increased emphasis on

dividends within the sector we use reverse dividend discount modelling to

assess the growth rates implied by the current share price and also by our

share price targets.

We flex our valuations for deflationary/reflationary scenarios. For reflation, we

assume a 10% increase in equity markets and a 50bps upward shift in bond yields; for

deflation, the opposite but also specifically take into account the likely deterioration in

non-life profitability. In a deflationary cycle, non-life earnings would possibly take a

double hit, from lower reinvestment rates (we have assumed 15bps for the 50bps decline

in bond yields to reflect the offset of asset diversification) and from likely falling prices

with customers more price conscious. We note the current combination in Italy of falling

bond yields and declining rates for auto insurance.

Chart 6 shows the share price (the line across the bars), the current share price target (the

division between red and grey), and the share price targets on deflationary and

reflationary scenarios. Those companies towards the left are the most at risk from

deflation, but those that would be most advantaged by a move to reflation. Those to the

right are the more economically defensive stocks. The additional downside in a

deflationary cycle from non-life, and the decline in traditional spreads as yield potential

gets closer to the long-term guarantees leads to asymmetric risk at both ends of the chart,

Zurich (non-life) and AXA (life).

For a full explanation of how our share price targets are derived, please see Appendices 2,

3 and 4: Valuation, Financial Market Influence and Recent Conglomerate Performance. The

last of these sections strips out financial market impact on share price moves since the

beginning of the year to assess the stock specific re-ratings/de-ratings.

Chart 6: Share Price Target Flex: Deflation/Reflation Scenarios


The conglomerates are currently trading at a 17% discount to the small/mid -cap insurers

on a consensus PER basis (2016F) where a premium rating appears more appropriate

given their range of growth strategies in an uncertain regulatory world. Please see later

section, The Conglomerate Premium, for arguments as to why a premium rating might

become attached to these stocks over the longer-term horizon (post Solvency II and GSII)

not seen since the early part of 2001.

80

90

100

110

120

130

140

150

AXA Generali AEGON Allianz Aviva Prudential Zurich

Min PT : Base PT range Base PT : Max PT range Share price

We flex our share price targets for

deflation and reflation

With asymmetric risk to the

downside

The conglomerate discount at 17%

appears harsh given the uncertain

regulatory world for the mono-line

insurers

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Chart 7: Conglomerate Discount Ratings

Source: Factset

The ‘complex’ nature of insurance leads the market to the more obvious PER, cash and

dividend yields and price to book comparisons.

Chart 8: European Insurance Valuation Metrics

Source: Jefferies estimates, company data. Priced at close on 1 August.

Consensus PERs weighted average 2014 2015 2016

Conglomerates 10.4 9.6 9.1

Prudential 14.1 12.7 11.4

Ex Prudential 9.5 8.9 8.5

European mid/small caps* 12.8 11.2 10.7

UK mid/small caps** 13.0 12.3 11.3

Conglomerate discount 80% 82% 83%

Conglomerate discount ex Pru 74% 76% 78%

* AGEAS, Baloise, Delta Lloyd, Gjensidige, M apfre, NN, Sampo, Storebrand, Swiss Life, Topdanmark, Tryg,

** Admiral, Amlin, Catlin, Direct Line, Esure, Hiscox, Just Retirement, Lancashire, Legal & General, Partnership, RSA, Standard Life

Share Rec Target Upside PER Dividend yield

Price 2014 F 2015 F 2016 F 2014 F 2015 F 2016 F

AEGON 6.1 Hold 6.6 9% 8.9 8.3 7.6 3.8% 4.1% 4.4%

Allianz 123 Hold 132.5 8% 8.9 8.5 8.1 4.9% 5.1% 5.9%

Aviva 494 Buy 584 18% 11.0 9.8 8.8 3.4% 3.8% 4.5%

AXA 17.4 Buy 21.4 23% 8.0 7.6 7.1 5.3% 5.7% 6.4%

Generali 15.6 Hold 16.1 3% 10.1 8.9 8.2 3.7% 4.8% 5.5%

Prudential 1343 Buy 1577 17% 13.6 12.1 10.9 2.6% 2.9% 3.2%

Zurich 265 Hold 254 -4% 10.4 10.0 9.7 6.5% 6.5% 6.7%

Average ex Prudential* 9.5 8.8 8.2 4.6% 5.0% 5.6%

Free cash yield Price to TNAV ROTNAV

2014 F 2015 F 2016 F 2014 F 2015 F 2016 F 2014 F 2015 F 2016 F

AEGON 8.7% 9.1% 9.6% 76% 72% 68% 9.1% 9.2% 9.4%

Allianz 9.4% 10.0% 10.6% 159% 144% 132% 19.2% 18.7% 17.9%

Aviva 6.8% 7.9% 8.8% 223% 196% 172% 23.0% 22.8% 22.3%

AXA 9.7% 10.4% 11.3% 132% 121% 112% 18.6% 17.4% 17.2%

Generali 10.6% 9.9% 10.6% 160% 144% 130% 17.4% 18.1% 17.6%

Prudential 6.0% 6.7% 7.5% 348% 291% 246% 31.0% 28.8% 26.8%

Zurich 9.0% 9.4% 9.6% 159% 149% 139% 17.6% 17.6% 17.1%

Average ex Prudential* 9.0% 9.5% 10.1% 152% 138% 125% 17.5% 17.3% 16.9%

EPS Dividend Cash EPS TNAV

2014 F 2015 F 2016 F 2014 F 2015 F 2016 F 2014 F 2015 F 2016 F 2014 F 2015 F 2016 F

AEGON 0.68 0.74 0.80 0.23 0.25 0.27 0.53 0.55 0.58 8.0 8.5 9.0

Allianz 13.8 14.4 15.2 6.0 6.2 7.3 11.6 12.2 13.0 77 85 93

Aviva 45.0 50.6 56.3 17.0 19.0 22.0 33.7 39.2 43.3 222 252 286

AXA 2.17 2.29 2.46 0.91 0.99 1.11 1.68 1.81 1.96 13.2 14.3 15.5

Generali 1.54 1.76 1.91 0.58 0.75 0.85 1.66 1.55 1.65 9.7 10.9 12.0

Prudential 99 111 124 35.5 39.2 43.1 81 90 100 385 461 545

Zurich 25.5 26.5 27.4 17.1 17.2 17.8 23.8 24.9 25.4 167 178 190

* Prudential's higher growth profile with share price ratings justifiably higher

With closure possible post Solvency

II

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Risks Aside from the economic risks outlined above (falling investment yields, equity market

decline, widening corporate bond spreads), and the specific workings of deflation and

reflation leading to decreased/increased demand for products and higher/lower claims,

there are the insurance risks. These include the rating cycle in non-life, where price

aggregators might force a secular decline in pricing power; a sudden and unexpected

escalation in non-life claims; longevity and mortality risks, where people live longer or

shorter than assumed in pricing assumptions; and distribution shifts, where cheaper forms

of customer access (Apps, internet) undermine the traditional agency structures. There

are also the regulatory risks to contend with, which might impact product relevance (tax

breaks removed, annuity rules changed) and distribution channels (UK RDR for example).

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Chart 9: Company Summaries

Source: Jefferies

Stock Conglomerate assessment Re-rating scenario

AEGON Conglomerate proposition challenged by US overweight though franchise rebuild mainly

successful; lowest ROC in sector where recovery dependent on non core sales; Solvency II

ratio low versus peers restricting near term dividend momentum; growth & cash profile

improving .

Sale of France and Canada near term, run-off books

medium term alleviating residual Solvency II concerns,

facilitating share buybacks (3-10%) and possible increase in

payout ratio to 40% from 33%.

Allianz Strong conglomerate proposition based on extensive global leadership where PIMCO acts

as deflationary hedge; Solvency II confident; 12-14% ROE range; cash generation high

versus current requirements suggesting higher dividend potential and/or ability to

acquire growth.

Dividend payout guidance to 50% versus 40% possible

later this year; scope for exceptional dividends if

acquisitions fail to transpire. Stabilisation of PIMCO flows.

Aviva Conglomerate proposition enhanced following corporate rationalisation under new CEO;

exploitation of UK composite leadership through digital edge; growth proposition from

Asset Management build out; longer term capital reallocation from Europe to Asia likely.

Dividend momentum, reflecting cash and efficiency actions,

UK digitaledge for growth, and AM build out .

Confirmation of emerging growth profile over the longer

term.

AXA Strong conglomerate proposition based on global spread and niche expertise; stable

management with successful turnaround and franchise repositioning from financial crisis;

cash flow momentum gives scope for dividend payout increase; emerging market build

out has traction.

Dividend payout increase to 45% formalised. Steady

increase in capital allocation to emerging markets leads to

higher rating.

Generali Conglomerate proposition sealed by modernisation and de-politicisation of the group

under CEO Mario Greco's new management team; composite strength across middle

Europe with emerging franchise in CEE for growth; improving cash earnings profile to

facilitate higher dividends in future, with scope for continued emerging build out.

Dividend payout increase to 40% from 33%; longer term

trajectory possibly to 45%. Profit disclosures confirm

resilience of Italian profits to falling yields, with offset of

higher hybrid life sales, and investment diversification

Prudential The conglomerate to aspire to, 3 self financing units, franchise power in each, capital

optionality across the group; premier Asian and US VA franchises; Solvency II highest

amongst peers; growth trend in Asia remains strong; group cash flows capable of feeding

higher dividends.

Confirmation of Asian growth trend, reflecting secure and

growing middle class base, distribution build out, and

expansion into new territories.

Zurich Conglomerate proposition based on global corporate leadership; weaker retail market

shares 'compensated' by hub strategy; a range of growth initiatives to help compensate

for non-life bias; emerging build out to be financed by capital reallocation; limited scope

for dividend increase.

Return to growth trend at Farmers; capital release in sub

ROE components for reallocation to emerging growth.

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Report outline

Corporate Assessment…………………………………………………….………………………………14

Corporate governance has transformed: simplified reporting lines,

centralised underwriting and expense controls, with cash flows streamlined to

the holding. Following the recent overhauls at Aviva and Generali, all

companies have now ‘modernised’.

The conglomerate proposition has gained definition, with non-core

exits and franchise rebuilds leading to a sequence of groups with rationalised

geographic presence and global offerings of expertise.

Solvency II is set for formal introduction next year. All ‘seven’ appear

comfortably capitalised on our analysis (AEGON at the lower end) and able to

withstand a deflationary shock

Returns have recovered to double-digit levels despite the significantly higher

level of capital requirements imposed, where the profitability drag from the life

back book should decline further over time.

Prudential has set the growth aspiration for the rest of the sector. The

conglomerate growth profile appears low single digit, but with a range of

growth strategies in place to lift this higher.

Cash has become the key attraction for the sector, with product

transformation in life leading to faster cash release, and corporate restructuring

leading to higher cash flows to the holding.

Increases in the dividend pay-out ratios are likely over the medium term

even in a deflationary backdrop.

Growth investment potential; reallocate capital to emerging growth.

The Seventh Day……………………………………………………….…………………………………….40

We consider the likely cash and capital strategies for each of the companies,

and long-term scope for higher dividend pay-outs and earnings growth.

Conglomerate Premium………………………………………………………………………….…..…44

The larger-cap conglomerate insurers trade at a 17% discount to the small/mid-

caps, unmerited in our view given the diversification benefits that should be

afforded to the valuation if not the capital.

Company Sections: Brief overviews, p&l, cash flow, solvency, ROCs & valuation……..47

Appendices: Valuation, Financial Markets, Recent Performance, History…....90

We allocate capital using a factor-based approach, and value the companies on

a multi-stage residual income basis.

We cross check the longer-term growth rates and dividend paying

capacity suggested by our analysis with current market expectations

implied by the current share price using dividend discount modelling,

where the market unsurprisingly appears to be factoring in only limited

expectations of dividend growth.

We stress test valuations for deflationary and reflationary trends recognising

the asymmetric risk to the downside.

Recent share price performance driven by markets, and company specifics.

The Conglomer-creation: A historical overview on conglomeration and

leverage of the past that led to the last decade of capital and operational repair

The Long Views on each stock…………………………………………………………………..…….106

2) Conglomerate Franchise

3) Capital

4) Returns

5) Growth

6) Cash

7) Dividend

Corporate Assessment

The Seventh Day

The Conglomerate Premium

The Seven Insurance Wonders

Appendices:-

Appendix 1 Capital Allocation

Appendix 2 Valuation

The Long View

Appendix 4 Recent Performance

Appendix 3 Financial Markets

1) Corporate Will

Appendix 5 The Conglomer-creation

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Corporate Assessment: Ocean 7 The challenges that the insurance conglomerates have faced since the turn of

the millennium have been as tough as any 7 Ocean challenge, and not all

made it (Fortis and ING). Two equity market collapses, a seismic fall in bond

yields, the global financial crisis alongside, and a host of 1:200 year events

(natural and man-made) all took their toll. We highlight the main areas

where we believe the conglomerates disappointed in the past, where the

companies are today in relation to these issues, and structural changes that

might occur in the future.

Corporate will: corporate governance, management style and objectives.

Conglomerate franchise: market share, distribution power and the benefit of

the groupings to the shareholder.

Capital: tangible strength, and debt reliance.

Return: ROC’s by division with likely medium-term progression.

Growth: divisional and composite growth rates; strategies to increase market

share.

Cash: holding cash flows and dividend cover.

Dividend: strategic direction when cash and capital levels allow a ‘free’

corporate rein.

The Seventh Day: We explore the longer-term structure of the companies,

potential for capital reallocation, and likely mix of cash for dividend and cash for

growth. We are equally supportive of self-funded cash for acquisitions given the

ability management teams have displayed in recent years in corporate and IT

integration, where Solvency II facilitates a much tighter understanding of the

financial risks that are being acquired.

Chart 10: Corporate Assessment

Source: Jefferies estimates

Corporate assessment

Based on the commentary that follows, we have built quartile scores for our various

assessments. These are, of course, open to debate driven to a large extent by intuition

even if based on a range of facts. But the results are no surprise: Prudential the ‘stand

out’ on a range of factors, with AEGON weak by comparison, with the lowest ROCs and

Solvency II scores and limited ability to increase the dividend pay-out ratio at least for the

time being. The rest cluster in the middle, all striving over time to emulate Prudential.

Total Franchise Solvency Returns Growth Cash Dividend Restructure

Prudential 86% 4 4 4 4 3 2 3

Allianz 57% 3 3 2 2 2 2 2

Aviva 57% 2 2 2 2 2 2 4

AXA 57% 3 3 2 2 2 2 2

Zurich 57% 2 3 2 1 2 4 2

Generali 54% 3 2 2 2 2 2 2

AEGON 43% 2 1 1 2 2 1 3

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1) Corporate Will: ‘kill complexity’ The management teams of the ‘seven’ are all ‘proven’, with track records of

successful operational re-engineering and balance sheet repair, whether in

their existing roles, or previous positions of leadership. An overhaul of

internal corporate governance has been wide-scale yet crucial to secure risk

controls, best allocation of group capital, and ultimately flows of cash to the

holding, with Aviva and Generali the most recent to restructure.

Chart 12 (overleaf) highlights the corporate changes since the last CEO appointment,

both in terms of governance structures, and profitability targets/achievements:

Prudential has set the corporate aspiration with a management team that has

been repositioning the group towards cash and growth for the past decade with

growth and return objectives that have surpassed internally set expectations.

AEGON, Allianz and AXA management have proved remarkably stable given

the range of challenges to their business models since the financial crisis, with all

successfully changing operational and strategic tack during their tenure.

Aviva and Generali are late in the restructuring cycle and consequently have

the highest momentum of change; corporate reinvention at the former,

governance modernization at the latter.

We list the corporate motivators, highlighting the sense of urgency, purpose and

management essence of the companies.

Chart 11: Corporate Motivators

Source: Company Data

The argument that the personality of the CEO seeps into the entire psychology of the

company, from the top to the lowest levels in terms of internal management styles, work

ethics and customer focus, and within 18 months of CEO change, holds true in our view.

The intangible nature of the insurance industry possibly leads the investment community

to think of management identity rather more than at other sectors. AXA becomes Henri de

Castries, Aviva becomes Mark Wilson, Generali becomes Mario Greco.

Whatever their styles (‘optimise’ or ‘kill’), all seven management teams have

demonstrated the same relentless focus to cut costs, generate cash and find locations of

growth that can be supported by internal resources. In an insurance world of Solvency II,

ongoing regulatory change and unpredictable strains caused by financial market

dislocation, ‘kill complexity’ and ‘simplicity’ have become crucial. Generali pre CEO

change was run as a collection of fiefdoms with myriad holdings and head offices. Aviva

Europe, pre CEO change, worked at least in part to its own agenda with its own holding

company. All divisions at both now report directly into the group holding with clear

reporting lines and remits of responsibility. Corporate governance has transformed.

Company Corporate motivators CEO Appointed

AEGON Optimise the portfolio, achieve operational excellence, with loyal

customers and empowered employees

6 years Internal

Allianz Sustainable profitable growth 11 years Internal

AXA Ambition 15 years Internal

Aviva Care more, never rest, kill complexity, create legacy < 2 years External

Generali Discipline, simplicity and focus < 2 years External

Prudential Delivering cash and growth/Headroom for growth 5 years Internal

ZFS None at present: 'Zurich Way' previously 4 years Internal

Diverse management styles

Identical corporate objectives

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Chart 12: Corporate Governance

Source: Jefferies

Management team Governance

AEGON Alex Wynaendts, CEO since 2008, successfully steered the group trough the government bail-out, and its subsequent recapitalisation, shifting the

business mix from spread to fee based products with cash flows recovering since and facilitating a return to dividend. The management team has

proved stable since where the CEO, CFO and US CEO have over 50 years of AEGON experience between them. AEGON is on the cusp of a double

digit ROE on our calculation dependent on successful exits of residual non-core businesses.

Streamlining of management, in the US especially, with

one CEO, one head office and three units (12 previously)

and greater management accountability.

Aviva Mark Wilson, CEO since late 2012, former CEO and restorer of AIA leading up to its successful IPO, has initiated a vigorous focus on cost cutting

(£400m target for 2014 achieved early, £200m additional located), cash generation and remittance, annual expense ratio reductions, and new

areas for growth. An extensive management overhaul has been conducted with new operational heads (Global life, UK non-life, Ireland, Europe,

Poland, Canada, Asia, and Aviva Investors) CFOs (Group, UK general, Asia), and key functions (HR, Group Treasurer, Chief Information Officer).

Streamlining and removal of head office Europe,

centralising capital and cash controls. Introduction of

quarterly monitoring of the group’s 42 business cells,

whereby the top and bottom performing 3 are highlighted

to the group.

AXA Henri de Castries, CEO since 2000, and 25 years at the company, has managed the group through 15 years of financial turbulence without the

need for emergency equity, with AXA’s Ambition plan (2010-15) working towards a successful conclusion. The top management team has been

stable throughout, recently signing up for 4 more years, demonstrating as a team a considerable ability to adapt to changing market conditions

with the cash focus in life with protection products replacing the earlier variable annuity MCEV strategy.

Strong centralised management team, where country

heads have knowledge and experience of wider group (US

CEO formerly Asia, France CEO formerly UK). Henri de

Castries, CEO and chairman, with vice chairman securing

independent governance.

Allianz Michael Diekmann, CEO for the past decade, and 26 years at the company, initially installed an operational transformation program that saw

operating ratios improve significantly (the group’s current operating ROE stands at 14%), and later steered the group through the financial crisis

without fresh need for capital, engineering the successful exit of Dresdner. The Allianz board is comprised of predominantly long serving

members. Management succession is possible later this year given the CEO’s 60th birthday, where Oliver Bate (Europe and Global), and Markus

Reiss (CEO Germany) are highlighted as core contenders. Given the breadth of board continuity no change of strategy is expected.

Simplification of reporting structures in recent years, with

closure of a number of head offices, in Germany

particularly. The group operates with a strong central

management holding, with no holding blocks elsewhere.

Generali The arrival of Mario Greco as CEO (August 2012), known for his efficiency drives at RAS (Allianz) and Zurich, has proved the catalyst of governance

modernisation at Generali, driving the group from a loosely run federation of companies into a fully integrated conglomerate. A new

management team has since been appointed, including the CFO CRO CIO, and the country heads of Italy and France. The ROE target 13% 2015

looks achievable, with operating improvements of Euro 1.6bn/2.0bn by 2015/16 targeted, 12 IT data centres in Europe reduced to 2, and full

Italian integration.

Head office controls replacing previously localized

corporate functions; global programs;with holding function

now separated clearly from the operating functions of the

Italian businesses. Shareholder pacts terminated.

Quarterly business review processes at all units.

Prudential TidjaneThiam prior to his appointment as group CEO in 2009 refocused the UK operations towards cash, with his CEO-ship since providing

impressive cash and growth trends across the group. The long serving management team (CEO Asia 2009, CEO US 1999, CFO 2009. M&G CEO

2000) have secured premier market positions in all core units.

Recent creation of Asian holding has secured 3 self-

contained geographic units allowing group capital to

navigate according to growth patterns, and paving the

way for ownership optionality in the future.

Zurich Martin Senn, CEO since 2009, has adopted a more open strategy to growth, acquiring the Latam operations of Santander in 2011,and installing a

sequence of strategies in the core units designed to achieve growth despite the predominantly non-life composition of the business. The recent

appointment of George Quinn as new CFO has added to the board’s credibility. Individual board members have breadth of management

experience across both non-life & life divisions.

Centralised management and strong corporate identity

across the group, with underwriting practices determined

at the holding level. Hub strategies have been developed

to compensate for mid market shares over cross border

regions.

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2) Conglomerate franchise: ‘focus’ Insurance conglomerates have been gaining definition across the sector since

the financial crisis through non-core exits and focus on strengths. Prudential

is the corporate paradigm for now, though we note the ongoing

improvements elsewhere, where franchise rebuilds have been required in a

number of core markets.

The conglomerate proposition

Prudential the paradigm franchise: number one rankings (UK asset management,

US variable annuities, the market leading Asian franchise) with brand strengths that can

each generate their own momentum: ‘M&G’ and ‘Prudential’ in the UK, ‘Jackson’ in the

US, with the ‘Prudential’ brand on bill boards and neon lights across vast swathes of Asia

as visible as any Coca Cola. The UK has purposefully been pared back in product base to

form a cash generator for the group; Asia is building its own franchise power feeding

earnings growth to the group level, self-funding, and where success in Indonesia is

inspiring distribution partners to team up with Prudential elsewhere (most recently

Thanachart in Thailand); Jackson is an expert in drawdown annuity products, relevant to

the UK division post annuity budget changes, and arguably de-risks the group to any

negative economic development in Asia post tapering, with any rise in US interest rates

accompanying the tapering trend increasing Jackson’s economic value.

We assess the conglomerate proposition at the other six. Chart 12 sets out the

conglomerate propositions of the other companies aside from Prudential: global

leadership (Allianz non-life, AXA insurance, Zurich corporate), core strengths (AEGON

pensions and retirement savings for example), and cross-border efficiencies (Generali

most notably).

In the same chart, we address the conglomeration challenges, highlighting the two that

are most likely to impact share price ratings currently:

AEGON ‘US heavy’: Solvency II will most likely disallow diversification benefits

for US businesses (>50% of the total). Earlier attempts to grow Europe to

compensate stalled (UK RDR dislocation, CEE pension rule changes), but are

likely to be reinvigorated post capital repair.

Allianz’s PIMCO rationale: Profits from the global leader in bond asset

management have increased to close to 30% of group total in recent years.

Profit streams at PIMCO rise as interest rates fall with fees increasing on rising

bond values, a trend that neatly offsets the negative impact of falling yields on

life guarantees in the European portfolio. PIMCO outflows have proved

problematic over the past year, following US tapering and the bond markets

sell-off, exacerbated by a performance blip in Bill Gross’s core fund, and the

resignation of the group CEO earlier this year. Allianz remain committed to

PIMCO as its in-house asset manager, and has responded by significant fund

diversification over the past year, and management strengthening (the

appointment of six new deputy CIO’s alongside Bill Gross as CIO, with the new

CEO former COO).

The franchise collection

Market shares and rankings for each of the companies are listed on a by-country basis in

the later company sections, with customer segmentation and product focus highlighted

within countries where relevant. Non-core sales have been especially helpful in this

regard (AEGON US reinsurance, Allianz Dresdner, Aviva Amerus, AXA UK life, Generali US

reinsurance & Migdal Israel, Prudential Egg, Zurich Scudder & Converium).

Financial market moves (falling bond yields impacting spread-based products with

guarantees), regulatory changes (UK budget impact on UK annuities for example), and

distribution shifts (migration to direct and internet from traditional agency) can lead to

product lines becoming suddenly unprofitable and business models that risk redundancy.

Non-core exits

Franchise rebuilds

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We highlight the core threats that each company has faced under current management

teams and the effectiveness of the response. AEGON and AXA have been noteworthy in

this regard with wide-scale product overhaul successfully achieved post financial crisis.

Aviva is currently reinvigorating its business proposition across its core markets.

AEGON: The group has required a sequence of franchise rebuilds: in the US

from spread-based products (fixed annuities, GICs) to fee income (variable

annuity, pensions funds) to compensate for low interest rates; in the UK from

IFA to platform distribution post RDR dislocation; and in the Dutch market an

increased focus on corporate pensions where individual life is being eroded by

increased competition from the banks following regulatory change. The US

rebuild has proved remarkably successful with notable momentum in the fee-

driven components of VA and pensions; the Dutch group pension business has

further consolidated its market leadership, where AEGON Bank and Knab (on-

line banking) should help preserve individual life rankings; the UK has yet to

convince, however, where the platform strategy designed to offset IFA

dependency is in the final phase of build-out.

Allianz: Reliance on tied agency distribution in Germany, where Allianz is

market leader, has been a perennial concern, but where brand strength, a range

of innovative products in life (Perspective and Index) and modular packaging in

non-life has so far maintained if not enhanced market shares.

Aviva: Market shares in UK life and non-life have been steadily falling in recent

years from mid-teens to closer to 10%. The new management team are

confident of a return to growth over the next 12 months, with their

technological edge, market leading app, website that gives customer access to

all Aviva products, and purchase ability. The planned build-out of Aviva

Investors under new management, with Euan Munroe seeking to replicate his

success of GARs at Standard Life with AIMs, should also help the UK proposition.

AXA: The life offering has transformed across the group over the past five years,

from traditional savings to unit linked and protection, with the US VA offering

successfully overhauled in the process. The build-out of emerging growth has

also been notable (12% of group profits more than doubling since 2009).

Generali: The Italian life business is in the process of refocusing sales away

from traditional savings to hybrid products with unit-linked elements under the

new management team. Initial signs of momentum following this year’s

product launch bode well.

Prudential: Asian focus on unit-linked investment policies with health and

protection riders (CEO Asia Barry Stowe was head of health at AIA before his

arrival in 2006) has successfully located the core insurance need of the growing

middle classes, driving substantial growth in recent years. The US annuity

business in the mean-time has benefited from above-market growth in variable

annuities thanks to its conservative hedging programme ahead of the financial

crisis. The move towards cash focused life a decade ago in the UK, as well as

Asia and the US, has been inspirational to the rest of the sector.

Zurich: Farmers management in the US has recently adopted an ‘omni’ sales

approach (agencies and direct working in connection) to combat loss of market

share to the direct writers in their core auto business.

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Chart 13: The Conglomerate Proposition

Source: Jefferies

Stengths Weaknesses

AEGON Global pensions and retirement focus (US, Netherlands and UK) of the group enabling

cross-border product, IT and systems knowledge, with management placing special

emphasis on the global culture of the group and shared identity.

The core US business still represents over half of group profits and capital, though appears tightly

and seamlessly managed by the smaller Dutch parent. Solvency II is unlikely to give diversification

benefits for US assets, with ROC implications at the group level versus European peers.

Allianz Global leader in non-life, 3rd in life. Core European base, 'niche' in US, UK and Asia, with a

brand able to attract new distribution. PIMCO, leader global fixed income, manages

Allianz’s extensive global bond portfolio, and acts as internal hedge from negative impact

on value of life business if interest rates fall.

PIMCO has ballooned to a third of group profits potentially obscuring the conglomerate investment

proposition, where management are committed to its ownership.

Aviva Unique composite leadership in UK, multi distribution, where digital edge gives potential

cross sell advantage. Analytics leadership in Canadian non-life imputed to UK by CEO

transfer. Asian local partnership with local brand leaders (Astra, COFCO, DBS).

Collection of smaller European life franchises with some reliance on third party distribution. Growth

strategy in UK will take time to convince.

AXA Leading global insurer, core European base with specific franchise strengths in the US,

Japan and Asia. AXA brand has secured a range of leadership distribution deals in

emerging markets (Tian Ping, ICBC in China for example).

Diversification from European life back books with long term guarantee via growth elesewhere will

take time.

Generali Market leader Italy & Austria, top 3 rankings in Germany and France (85% of total capital

on our calculation); residual 15% represented by emerging markets (CEE 6% market share

and Asia) for growth. Direct leader across Europe. Italian synergies now being developed

in full (INA, Alleanza and Tore) and cross European border.

The group has concentration risk in Europe where guaranteed life risk in a deflationary backdrop

will take time to unravel.

Zurich Global leader corporate insurance, top 5 US commercial non-life, with consistent

application of risk tools and predictive analytics.

Retail proposition (Europe & US) less strong: 2/3rds less than 5% market shares; hub strategies to

extract efficiencies.

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3) Capital: ‘sustainability’ With Economic Solvency ratios typically around 200%, any additional capital

demands ahead of final implementation of Solvency II (and any new layers

from G-SII) should be absorbed by existing buffers, in our view, with the ratio

improving sufficiently over time from future earnings to cover any potential

gaps. Leverage levels supporting the capital have also been steadily falling

and at all companies will have dropped to targeted levels by 2016 at the

latest on our calculation. Based on the sensitivities supplied by the

companies, the capital bases at current levels also appear strong enough to

absorb a deflationary shock. AEGON appears the least strong on Solvency II

reflecting, on our understanding, the more penal treatment of US assets

versus local regulation, an issue that brings into spotlight potential for future

changes to US ownership structures across the conglomerate insurers.

Economic Solvency

Solvency II is timetabled for full implementation by 2015. Assessing relative

capital strength of insurance companies is currently more difficult than usual

for a variety of reasons:

The methods of calibration and presentation vary considerably from company to

company. Zurich, outside of the solvency II remit, has constructed its own

internal model Z-ECM where the Q1 2014 figure of 127% compares with its

target floor of 100%. Allianz has published its interpretation of Solvency II with

its figure of 203% (Q1 2014) and a ‘floor’ of 170%. AEGON, in the meantime,

has indicated a range of 150%-200%, with a mid-point of 175%.

Chart 14: Economic Solvency Forecasts

Source: Jefferies, company data

The amplitude to movements in financial markets is crucial in this regard. On

our calculation a 100 basis point drop in interest rates decreases Generali’s

economic solvency capital by 5% (or 10 percentage points), versus 9% (or 18

percentage points) at Allianz (reflecting Allianz’s higher level of policyholder

guarantees and the risk that these represent to the capital base). AEGON has yet

to disclose financial sensitivities to economic solvency.

2012 2013 2014F 2015F 2016F

AEGON 170% 175% 180% 185% 190%

Allianz 199% 194% 196% 201% 215%

Aviva 147% 182% 188% 190% 192%

AXA 199% 206% 216% 226% 237%

Generali 160% 184% 192% 197% 202%

Prudential 257% 270% 281% 290%

Zurich 114% 127% 131% 136% 140%

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Chart 15: Economic Solvency Sensitivities %


Solvency II has yet to be finalised. The core residual area of controversy is the US

where local capital requirements are less than those being demanded for Europe

under the new solvency regime. A likely outcome is the rule of equivalence

(applying the lower local rules) but compensation to Solvency II by exclusion of

any geographical diversification benefits that would have been derived from

having a US/European business mix. There are also the issues of sovereign debt

– where Allianz has a charge for this but the others, on our understanding, have

not – and the volatility adjustor.

A further layer of complexity has been introduced by G-SII whereby all the

companies in this report (AEGON and Zurich excepted) are deemed too big to

fail. This could lead to a further layer of capital requirement, with the final

results not expected to be known until later next year.

The final outcome for Solvency II and G-SII is unlikely to cause any capital

alarm at the companies, in our view, though could restrict dividend

momentum:

Any increased capital requirements between now and Solvency II’s final

ratification will be translated into lower levels of capital ratios being accepted, at

least in the short term, by the companies without undue panic, where a

combination of retained earnings, non-core exits and capital efficiency measures

would over time take the ratios back towards the 200% level, the current peer

group ‘benchmark for ‘very comfortable’ (110%, we think, in Zurich’s case) with

170% appearing to be an ‘acceptable floor’. Allianz is a case in point where the

recent 28 point drop due to a local regulatory inclusion for sovereign bonds led

to a lower ratio (194% for FY 2013 versus 222% previously) but no talk of

additional capital raising by the company to plug the difference.

Dividend momentum will likely be restrained at those companies where the

Solvency II ratio remains close to the 170% floor. In this context, AEGON’s

dividend momentum will likely remain limited near term while the company

prioritises its Solvency II build.

We highlight the guidance levels set by management:

Allianz and Zurich have both given floor targets for their economic solvency

ratios, at 170% and 100%, respectively: current levels of capital suggest

comfort margins (in per cent, not percentage points) of 19% and 27%,

respectively.

Prudential, at 257%, with its slogan ‘headroom for growth’ has shown no

signs of anything but capital comfort under the Solvency II regime.

Yields life Equities Credit Earnings

-100bps -10% +100bps 2014

AEGON na na na na

Allianz -9% -2% -5% 10%

Aviva -6% -2% -5% 9%

AXA -8% -1% -1% 10%

Generali -5% -3% -1% 6%

Prudential -7% -1% -7% 14%

Zurich 2% 2% -15% 12%

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AXA appears comfortable with its latest (2014 1H) economic ratio at 215%, with

management stating this as a reason for guiding towards a more generous

dividend policy at the 1H results presentation.

Generali’s Solvency 1 target of 160% was confirmed as being met in its recent

2014 1H results release (162%), where the 7 point negative impact of the

planned residual buy-out of its CEE minorities later this year will be offset by the

recently confirmed sale of BSI (worth 9 points). With economic solvency at

187% at the 1H stage, management feel sufficiently confident to point to

dividend pay-out ratios in excess of 40% in the future (36% 2013).

AEGON at its recent Investor Day gave an indicative range for Solvency II at

150%-200% dependent on resolution of the various outstanding issues. From a

rating agency standpoint, AEGON is comfortably above its AA rating floor levels

in the US, Netherlands and at the holding, and at least adequate in the UK (post

last year’s £300m capital injection). The mid-point at 175% does appear to be

at the ‘low end’, however, and struck on a less conservative basis that

Prudential’s 257%: Prudential calibrates the US business on a US RBC basis at

250% for 100% Solvency II, AEGON at 200%. The relative weakness of AEGON

reflects, in our view, the limited geographical diversification benefits that can be

afforded to the group where over 50% of group capital is in the US.

Aviva’s economic solvency ratio at 182% as at full year 2013 is also towards the

low end and compares with its target level of 175%.

Solvency appears adequate even on our deflationary stress test:

We estimate current levels of the solvency ratio since the last reporting date and factor in

the deflationary scenario impact of a 50bps decline in bond yields, a 10% drop in equity

markets and a 25bps widening of corporate spreads. The ‘current’ solvency ratio in the

table is based on our calculations, applying sensitivities given by the companies since the

last accounting date.

Chart 16: Economic Solvency Deflation Stress Test


In our deflationary scenario, all companies still have ratios above or close to internally set

target levels (where these already contain significant buffers).

Even on a deflationary X2 scenario (where government yields in Germany would be just

above zero!), all companies still appear at acceptable ratio levels even if slightly below

target levels in the case of Aviva and Allianz.

AEGON does not give sufficient data to perform this sensitivity analysis, but we

understand that there is no downside to the Solvency II ratio from falling yields in Europe

due to extensive hedging on the Dutch back-book, limiting the impact of a European

move towards deflation.

2013 2014 2014 Current Yields life Equities Credit Deflation Scenario X1 Scenario X2 Company

FY Q1 1H -50bps -10% +25bps Stress Target

AEGON 150-200%

Allianz 203% 194% 185% -9% -4% -2% -15% 170% 155% 170%

Aviva 182% 177% -5% -3% -2% -10% 167% 157% 175%

AXA 206% 215% 213% -8% -2% -1% -11% 202% 192%

Generali 184% 187% 185% -4% -5% 0% -10% 175% 165%

Prudential 257% 249% -9% -2% -4% -15% 234% 219%

Zurich 121% 127% 129% 1% 3% -5% -1% 128% 128% 100%

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Leverage

We forecast debt interest cover at AA levels by 2016, by which time residual

leverage concerns will have been addressed by Generali and Aviva.

Chart 17: Leverage


In terms of capital composition, we show the leverage ratios calculated on a consistent

tangible basis (debt versus debt plus shareholders’ funds less goodwill), where Aviva

(notably) and Generali appear at the more levered end. Aviva management points to the

absence of riskier components in their life portfolio (US variable annuity, European

guaranteed savings) as possible justification for their higher debt element. In any case,

debt interest cover at all companies, Aviva included, rises to above 6x by 2016 (the level

required for an aspirant S&P AA rated company on our understanding). The leverage

ratios on a deflationary scenario will not be impacted (or in this case benefited) by falling

bond yields as unrealised gains/losses are stripped out from the initial calculation.

US ownership

Lack of diversification benefits afforded to the US might bring into question

future ownership structures of the US divisions.

We believe AEGON’s recent disclosure of its low range Solvency II 150%-200% highlights

in part the relatively penal treatment of US assets under the new capital regime versus the

US regulator.

Chart 18: Ownership of US Assets


Zurich in this context is unaffected, where we believe diversification benefits are afforded

to its US assets under the Swiss Solvency Test (the Swiss equivalent of Solvency II). Zurich

currently scores 217% on this measure (Q1 2014).

The successful IPO of Voya (the former US division of ING) last year, where the current PER

(2015F 11.7X – FACSET consensus) compares favourably with the ratings attached to the

conglomerates in this report (2015F 9.9X FACTSET consensus), might highlight to the

various management teams the relative merits of the IPO option:

Prudential has indicated that all options are possible in terms of the future

ownership structure of the group, where Asia and the UK can operate on a

stand-alone basis.

Debt leverage % Interest cover X

2014 2015 2016 2014 2015 2016

AEGON 28% 27% 26% AEGON 7.7 9.4 10.0

Allianz 25% 24% 22% Allianz 12.2 12.8 13.4

Aviva 46% 42% 39% Aviva 5.1 5.9 6.6

AXA 34% 31% 29% AXA 10.5 11.8 12.7

Generali 38% 34% 33% Generali 6.4 7.2 7.6

Prudential 32% 28% 25% Prudential 11.6 12.9 14.2

Zurich 30% 29% 28% Zurich 6.7 6.9 7.1

Parent US company % group capital

AEGON Transamerica, AEGON 50%

Allianz Fireman's, Allianz USA 8%

AXA AXA Financial, Alliance 17%

Prudential Jacskon 35%

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Allianz is committed to improving the ROE at Fireman’s over the medium term,

with all options possible thereafter.

We note AXA’s enthusiasm to increase its emerging profile, where an exit of the

US would increase its emerging growth exposure from 12% to 15%

automatically and where at least part of the IPO proceeds could act as a source

of capital for future investment. We have no impression that AXA would

consider such a move, however.

AEGON is in a more difficult position, where the bulk of the group is still US

based. Re-domiciling to the US with the European operations IPO’d alongside

could prove a value accretive solution for the shareholder, where we note the

recent and successful IPO of NN (the European arm of ING) with its similar

spread of assets. NN’s PER 2015F 9.8x currently compares with AEGON at 8.1x

(FACTSET consensus). Management, we believe, remain committed to the

existing formation of the group, however.

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4) The Return: ‘ambition’ The return profile of the insurance sector is little changed from 15 years ago

despite significantly higher capital requirement, and financial yield potential

considerably lower. In our view, this is a considerable achievement, reflecting

a relentless drive for improved technical profitability and lower expenses at

the conglomerate insurers. Return momentum is currently highest on our

forecasts at those companies late in the restructuring cycle, namely Aviva and

Generali, followed by AXA (the later stages of Ambition) and Zurich (fresh

cost cutting), with evolution at AEGON mainly dependent on non-core sales.

To compensate for the current absence of capital splits of Solvency II (life/non-life), we

have constructed a simple factor-based approach to match capital by business not to

economic solvency but to the tangible capital base of each company (shareholders’ funds

plus debt less goodwill and VIF). See Appendix 1 Capital Allocation.

Based on this capital allocation methodology, we set out the return profiles of the various

companies, where the earnings element contained within the return on capital (ROC) is

based on operating profits on an IFRS basis.

Chart 19: ROC Evolution


By 2016, with the exception of AEGON, all companies are producing ROCs in excess of

10%. This is a remarkable achievement, in our analytical view. ROE targets in the second

half of the 1990s were typically 12%-15% (12% at AEGON, 14% at Generali, 1000bps plus

risk free, effectively 15%, at Zurich), implying ROC levels of 10%-12% assuming similar

leverage to current levels. Yet capital requirements 15 years ago, according to our

Solvency7 analysis, were some 30%-40% lower (risk adjusted), at a time when bond

yields in Europe and the US were mid-single digit versus 1%-3% today. The ROC and ROE

potential has barely changed.

2013 2014F 2015F 2016F 2016 vs 2013

Group

AEGON 7.8% 7.7% 8.0% 7.9% 101%

AEGON core 9.6% 9.3% 9.5% 9.3% 119%

Allianz 10.8% 11.1% 11.1% 11.2% 104%

Aviva 11.1% 11.4% 12.2% 12.7% 115%

AXA 11.6% 12.3% 12.5% 12.7% 109%

Generali* 10.2% 10.7% 10.8% 11.2% 110%

Prudential 21.0% 20.8% 21.6% 21.9% 104%

Zurich 11.2% 12.0% 12.0% 12.2% 109%

* understated possibly by >1% versus peers due to real estate depreciation on own property, & limited use of DAC

Life 2013 IRRs 10 bps life margin

AEGON 7.8% 7.7% 8.0% 7.9% 1.0%

Allianz 7.3% 7.9% 7.7% 7.6% 11.9% 1.4%

Aviva 14.2% 15.2% 15.4% 15.8% 15.9% 1.9%

AXA 10.6% 11.7% 11.8% 11.9% 14.2% 1.3%

Generali 9.5% 9.4% 9.2% 9.6% 11.9% 1.1%

Prudential 21.0% 20.8% 21.6% 21.9% >20% 1.6%

Zurich 11.1% 12.7% 12.1% 12.2% 12.0% 1.7%

Non-life 1 point combined ratio

Allianz 13.8% 14.6% 14.5% 14.7% 1.2%

Aviva 11.4% 11.9% 14.3% 14.5% 1.2%

AXA 13.1% 14.0% 15.4% 15.4% 1.3%

Generali 12.5% 14.7% 15.8% 16.1% 1.5%

Zurich 14.6% 14.8% 14.7% 14.7% 1.3%

ROCs have recovered to the levels of

15 years ago when capital

requirements were much lower

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The relentless drive by management teams over the past 15 years to drive costs down,

improve underwriting and reinvent life margin dynamics at the same time (away from

traditional savings with guarantees to fee driven unit linked) to get to CoC returns and

higher has been remarkable. To do this against a back drop of equity market collapse and

recovery (twice), bond yield demise, the financial crisis, deflationary threats and Solvency

II has been nothing short of ‘magnificent’, in our view.

We highlight the following macro trends influencing non-life and life ROCs:

Non-life returns reflect the pricing cycle and investment yields. The

continental European cycle versus the UK (where auto prices have fallen sharply

in the past 18 months) has been relatively benign, with prices still rising in

Germany, although falling in Italy (compensating in turn for lower claims levels

and frequency), and with US commercial lines, of particular benefit to Zurich,

still firm. We calculate that one point on the combined ratio equates to an

average of 1.3% on the non-life ROE for these companies. The question now,

following several years of underwriting improvement in most markets, is

whether prices begin a cyclical decline. Bond markets are critical in this regard,

where a 100 bps shift in yields is roughly equivalent in profit terms to 2

percentage points on the combined ratio. The greatest risk, in our view, is

further falls in investment yields but the inability to pass the price increases onto

the customer in a deflationary cycle, rather than rising yields where the benefit

tends to be passed onto the customer in the form of lower pricing (and higher

combined ratios). Or a price war across continental Europe driven by sharper

use of telematics and/or internet pricing visibility, as with the price aggregators

in the UK.

Life returns vary substantially across the peer group. AEGON’s are at the

lowest end, reflecting a large book of spread business in both the Dutch market

and the US (including run-off), where margins have suffered severe compression

from the low yield environment in recent years. Prudential’s returns, by

contrast, are the highest in the sector, reflecting Asia’s unit-linked business with

health and protection riders (where roughly a third of the region’s premium

base is effectively non-life in profit profile) and also earlier moves by

management to focus on cash-generative rather than capital-consumptive

products in both Asia and the UK. Zurich’s return profile also appears relatively

high on our calculation, reflecting the group’s product switch focus towards

unit linked away from traditional under CEO Jim Schiro’s leadership a decade

ago.

Life IRRs on new business are higher than on the back book with the

rest of the sector since following Prudential’s and Zurich’s lead of a decade ago

towards cash, driven from products with less capital intensity. AXA’s new

business IRR at 14.5% in 2013, for example, compares with its overall life ROC of

11.9% on our calculation for 2016. As the more capital-consumptive back

books at AEGON, Allianz, Aviva, AXA and Generali mature, the rising trend in the

ROC towards new business IRRs should continue. This is a long-term trend,

however, where the average duration to maturity extends to well over 10 years

for some elements of these portfolios, although generally around eight overall.

All management teams are working towards better management of these

onerous back books, both in terms of efficiency gains but also more radical

solutions (reinsurance to release capital or straight exits). AXA, for example, has

a global in-force optimisation programme across Belgium, France, Germany,

Switzerland and the US, with all options explored for efficient back-book

management inclusive of exit sales (as with AXA UK’s disposal to Resolution).

We highlight the companies with the greatest ROC momentum:

The ROC rises the fastest at AXA, Aviva, Generali in percentage terms (2016

versus 2013), reflecting the later stage of their restructuring programmes, where

Reflecting the success of wide-scale

management actions and portfolio

repositioning

Non-life pricing cycle risk

Life returns reflect earlier portfolio

actions; Prudential & Zurich early in

cycle to cash

Life ROCs to move towards the

higher IRRs on new business over

time

ROC momentum reflects

restructuring phase

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Zurich also rises by 9% over the same timeframe with an additional US$ 250m

of expense reductions targeted for 2015.

Prudential’s rise, at 4%, is driven by growing economies of scale in Asia rather

than any specific restructuring.

AEGON and Allianz by contrast are relatively flat where earlier expense

programmes have already fed through (aside from the 95% combined ratio

target in Germany), and the step change in product mix at AEGON has already

happened.

AEGON’s ROC for 2016 could edge above 9% (versus 7.9% here) assuming the

UK platform delivers a level of inflows in line with management’s own

expectation (our forecasts assume a miss), with at least some progress on non-

core sales. Successful exit from the operations signposted as non-core by

AEGON – France and Canada (and possibly the US BOLI and VA run off books

though interest rates would need to rise from here to make valuations viable) –

increases the ROC on our calculation by more than a full percentage point to

over 9%.

We also point out the following company peculiarities that might lead to ROC

distortions:

Generali’s ROC is possibly understated relative to the peers for two reasons:

first, the high level of annual property depreciation (€230m pre-tax in 2013)

where Generali has above-average exposure to real estate; and second, limited

use of life DAC versus peers, which possibly understates life profits versus the

peer group by 10%-15%, albeit offset in the ROC by the lower DAC element

in shareholders’ funds. Increasing life profits by 10%, and adding back a third of

the real estate depreciation (where the policyholders in life might share some of

the cost), the 2016 ROC would climb by 70bps to 11.7%.

The life return at Allianz is distorted by elements of policyholder funds that

can count as capital. We have included only the free RfB in our calculations in

line with our understanding of rating agency practice. On a local regulatory

basis, the terminal bonus and ZZR segments can also be included, on which

basis the ROC for Allianz would rise to 10.5% (up 260bps).

Returns at Aviva and Prudential are supported to an extent by with profits

funds where the policyholder supplies the capital.

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5) Growth: ‘headroom’ Prudential broke the growth trend for the sector over the past decade with

its early focus on capital-light products and emerging market development.

Following significant product overhauls across the sector since towards

capital light, cash for growth (or additional dividend) should soon be in

plentiful supply at all the companies. Our analysis suggests that the growth

gap with Prudential clearly exists but is possibly not as wide many investors

might believe. In any case, with powerful global brands, continued purchase

of emerging distribution is as likely at, say, an AXA or Allianz as it is at

Prudential.

Growth trends for the insurance sector in the past tended to evaporate as quickly as they

appeared, with trends of growth of today unsurprisingly greeted by investors with an

element of cynicism and a low rating. If the growth trend was working, competitors

swamped the growth with capital and destroyed the margin, or the regulator stepped in

and dismantled the product premise, or the government arrived and demanded tax, or

both.

Prudential’s path to growth has broken the trend, both sustained and at times

stratospheric, a scalable business model in Asia selling to the burgeoning middle class

products that produce high margins and cash to spare, continuing to attract new

distribution (both agency and banks) and customers (in their droves), and rolling out into

new territories (Cambodia) and even a new continent (Africa).

Earlier growth propositions of the ‘six left behind’ all ended rather differently:

AEGON’s growth-proposition of the 1990s, the baby boom growth in the

Western hemisphere that inspired the sizable US acquisitions of Providian (1997)

and Transamerica (1999) broken by the US sub-prime crisis, with falling interest

rates compressing the product margins.

Allianz’s purchase of Dresdner (2000) for cross-sell growth and the €14bn

value collapse that followed as equity markets crashed around it.

AXA’s roll-out to the globe of its variable annuity offering that had sold so well

in the US until the financial crisis unravelled tail risk and demanded capital

injections.

Generali’s positioning for the pension boom in Italy with its purchase of INA

(2000), curtailed by Italian politics and regulatory intervention.

Zurich’s growth aspirations post its merger with BAT Eagle Star (1999) to grow

top and bottom line by 15% annually with a new IT system for cross sell, turned

victim to technology fall-out and a balance sheet that caved in under its own

financial leverage.

One Aviva Twice the Value, acquiring across Europe and the US, forced into

retrenchment by unsustainable leverage levels and lack of profitability.

The track record aside from Prudential does not look impressive. Yet CEO Tidjane Thiam

still talks of headroom for growth for a business that was in the cash remittance red in

2004, generated close to £600m of cash in 2013, with £1bn forecast for 2017. Could the

rest of the sector follow Prudential in its focus on capital-light products capitalising on

their franchises, locating growth opportunities inclusive of investing in emerging market

distribution?

Organic growth rates

Our starting point in assessing growth is the organic growth rates that can be expected in

the markets in which they operate. For this exercise, we look beyond short-term cycles of

any accelerated growth trends and specific growth initiatives in place. For example, at

Growth trends for the sector have

been traditionally fragile

Growth at Prudential by contrast has

been powerfully sustained

Compared with growth implosions

elsewhere

While Prudential still talks of

headroom

We assess growth prospects at all

‘seven’

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Jackson, Prudential’s US annuity provider, we forecast 6% growth, despite double-digit

net inflows each year since the financial crisis (where profits have since trebled). Jackson

growth has, to an extent, been contra-cyclical, where recent changes to commission

structures to the agents and product charges to protect margins (where additional

hedging costs have been incurred due to falling interest rates) could possibly mark the

end of the recent growth surge.

If we assume 2% growth for the remainder of the portfolio where there is no obvious

growth trend, the growth gap between Prudential and the rest of the sector is not quite as

wide as many might suspect.

Chart 20: Organic Growth Rates


We stress that we are looking at the organic market growth dynamic alone, outside of any

profit/growth enhancements that management teams may be seeking from cost cutting

and product shifts. An organic growth trend that we have detected of 5% might translate

to earnings growth of 7%-plus within specific timeframes if further efficiency drives have

been initiated by management in their latest business plans, or additional areas of growth

in specific markets have been located.

Organic market growth potential long term

Organic growth rate Market Organic % of total

Prudential 8.7% growth earnings

AXA 4.6% AXA Emerging 15% 12%

AEGON 4.4% US VA 6% 11%

Generali 4.3% Japan 4% 9%

Allianz 4.0% Asset management 7% 7%

Aviva 3.7% Direct non-life 6% 2%

Zurich 3.5% Other 2% 59%

4.6%

Market Organic % of total

growth earnings Generali CEE 10% 10%

AEGON Emerging CEE 10% 3% Latam 15% 3%

Emerging Asia 15% 2% Asia 15% 1%

US VA, pensions & savings 6% 30% Italian Life 4% 23%

Dutch pensions 4% 9% German life 3% 8%

Asset management 10% 6% Asset management 10% 5%

Other 2% 50% Other 2% 50%

Total 4.4% 4.3%

Allianz PIMCO 4% 28% Prudential Asia 15% 30%

Emerging 15% 8% US 7% 35%

US annuities 7% 6% Asset management 10% 14%

World wide partners 5% 2% UK 2% 17%

Other 2% 58% 8.7%

4.0%

ZFS Emerging non-life 10% 6%

Aviva CEE 10% 6% Latam life 15% 6%

Asia 15% 4% Asia life 15% 2%

Asset management 15% 5% Other 2% 86%

Other 2% 85% 3.5%

3.7%

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Growth strategies

Insurance is a commoditized business where sustainable competitive advantage is difficult

to achieve, where products can be copied, technology replicated, and where

governments and regulators can derail.

Yet management teams remain passionate about their growth potential, resolute about

their competitive edge and unique customer propositions. Prudential has set a

benchmark for sustainable growth, and the conglomerates across Europe are seeking

methods and entry points to replicate it.

Chart 21: Growth Strategies


We lists a range of strategies for growth currently being pursued by the companies (by no

means exhaustive), highlighting the specific products lines and segments which they are

targeting rather than the wider geographical areas in which they operate.

AEGON Life US retirement savings roll over retention from 10% to 30% per year; IT edge in US pensions;

commitment to US VA during financial crisis generating >market growth, new distribution deals Edward

Jones, Voya Financial; Santander distribution Spain; agency expansion CEE; Dutch group pensions

strong capital base focus on larger corporations & self employed, fully developed product offering; UK

platform inflows >market rates, drawdown expertise post UK budget change.

Aviva UK cross-sell (1.2 per customer currently) boosted by IT edge (web and app); UK non-life to grow via

smart pricing via analytics; UK Aviva Investors build out under new management (AIMS the new GARS);

UK life mid sized bulk purchase annuities, SME corporate pensions market leading auto enrolment tool;

UK platform growth, launch D2C; Poland omni distribution; Euro bancassurance new product focused

distribution deals; Asia the power of COFCO, ASTRA brands for jvs.

Allianz Germany non-life modular approach (mein auto), life new products (Perspektive, index); Italy launch of

hybrid product Progetto Redditto; UK to double direct revenues; Australia grow 2%> market non-life

multi distribution; World Wide Partners cross sell via App; US index annuities exclusive deal with

Barclays Index until 2022; PIMCO new product diversification from core fund.

AXA France unit linked, family & self employed protection; US variable life (market stabiliser option), US VA

third party distribution; UK wealth management, Elevate platform momentum; Germany long term

care; Europe direct roll out; Asia non-life leadership with non auto health diversification; Japan medical

focus, disability offering; China Tian Ping direct offering.

Generali Italy life hybrid products (Valero Futuro) via traditonal network; Germany multi distribution base;

Europe non-life direct leader.

Prudential Asia: distribution expansion banking (SCB), agency growth, new jvs Thanachart Thailand, new territories

Cambodia, Vietnam; operational leverage volumes>expenses; Asian focus on medical expense riders

where middle class demand; Africa developing; US product redesign new business margins 76% 2013

(42% 2007), non-living benefits >30% of sales, lowest expense ratio in market; M&G Europe

diversification.

Zurich Global cross-sell corporate life; Farmers omni channel servicing (agents leveraging off 21st Century

direct platform for cross sell), customer segmentation to increase retention of quality, East coast

development with 6 new states planned; Europe life protection & unit linked bias; UK growth push in

corporate protection and pensions IFA focus; Brazil leverage global, build affinity schemes; Indonesia

grow agency distribution.

The fragility of a growth trend

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To give insight into the profit enhancement that such strategies can bring,

we highlight two examples:

AEGON’s plan to increase retention roll-over of US retirement savings would

increase net deposits annually by US$2bn versus US$128bn of US pension

assets, where margins would be higher than those on the overall book. The

potential long-term boost to US earnings if achieved would be 0.6% per annum

on our calculation, and 0.4% at the group level.

Successful build-out of Aviva Investors under the new management team could

double existing asset management profits, assuming inflows of £10-15bn into

new funds where the infrastructure is already in place. The positive uplift to

group profits would be 3% on our calculation.

The market is likely to take a wait-and-see approach, and factor in growth

boosters only when the track record suggests sustainability:

Cross-sell in Europe has often been highlighted in the past as a growth strategy

but has rarely been demonstrated as a success. Yet improved IT and customer

web pages might be the required catalyst that actually makes this work for the

composite insurers. Aviva is promoting this in the UK with its customer app,

Zurich in the US with Farmers and its omni-channel approach for home and auto

cross-sell.

Growth objectives can fall flat as quickly as they are created. As a recent specific

example, the UK insurers in varying degrees had to accept loss of future revenue

streams due to UK budget changes to annuities. AXA’s Q1 stall in new business

trends is also interesting in this regard. The decision to de-emphasise certain

product lines (Swiss group bundled health products, Japan long-term life

protection, US indexed universal life) affirms management focus on hurdle rates

and returns, but also highlights the ongoing competitive pressures that can

frequently eliminate growth in the markets in which insurers operate.

Diversification strategies for growth are effectively a requirement if companies

are to have confidence of achieving in-line growth rates overall. The companies

are all spinning growth plates, replacing those that topple with fresh growth

initiatives that at some stage in the future will likely topple in turn.

Growth capacity

The capital required to back chosen areas of growth is considerably less than for the back

books of business. Take AEGON as an example, effectively running off its fixed annuity

business in the US and increasing its exposure to fee-driven business that requires less

than half of the capital. All ‘seven’ have been moving away from traditional capital-

consumptive savings towards products with lower capital requirements, protection and

unit linked in Europe; unit linked with health riders in Asia; fee driven versus fixed annuity

in the US. Traditional savings products that are still being sold are in any case being

written with significantly lower guarantees, and again less capital. At Allianz, for example,

the new and popular German Perspektive product only guarantees the paid-in capital,

with the duration shortened until the end of the savings phase when any guarantees are

then reset for the annuity. Growth elements within the mature economies (German

annuities being one) can be internally financed (as with Prudential in Asia) from higher

levels of capital being released from the older traditional portfolio.

IT facilitates growth via cross sell

Margin versus growth

Growth displacement

Growth internally financed by lower

capital consumptive products

Financials

Initiating Coverage

6 August 2014



6) Cash: ‘simplicity’ Delivery of hard cash has become the new management focus at both the

operational level, with life products structured for early cash release, and at

the holding for dividend paying purposes. The remittance ratio – the

proportion of cash transferred from the operating units to the parent – has

become critical in this regard, with the positive trend expected to continue

over the medium term.

Cash-efficient life products

Cash was the last consideration on managements’ and markets’ minds in the 1990s.

Skandia (now part of Old Mutual) in early 2000 was trading on a cash PER of >100x. The

market believed in the intangible new business profits that were being generated, mainly

related to dotcom NASDAQ investments in Skandia’s case, where any hopes of cash

profits were destroyed by the 80% market slump that followed.

The opposite holds true today, with life products structured to release the cash within an

acceptable timeframe. We call it the COT, the Cost of Time, where a unit of cash that we

expect to be delivered in two years is valued at a higher rate than the same unit of cash

(on a net present value basis) than might be delivered to us in 10 years’ time.

Prudential is the master of COT management, with all products able to pay back the initial

investment required in setting up the policy within 2-3 years. Prudential’s COT

mastership is also reflected by an increase in the VNB (value of new business) compared

with the initial costs required to write it initially, 3.3x in 2013 versus 1.7x in 2012.

Prudential has a number of advantages that the other companies are not able to replicate:

a with-profits fund in the UK that can expense the new business written; inclusion in its

Asian life VNB of health rider profits (essentially non-life in any case). It would be unfair to

make a direct comparison with the other companies in this report on this basis, where

management teams have been targeting increased cash efficiency in their product lines.

Chart 22: Cash Efficiency of Life New Business


We compare the life cash efficiency of the other companies in this report. Aviva stands

out as the highest, but like Prudential is able to use its UK with-profits fund to help

expense the new business written. Excluding this, the figure drops on our calculation to

1.1x, in line with the peer group. Zurich, at 1.79, was the first a decade ago to shift away

from European traditional savings to unit linked and protection, and highlights where the

rest might go to over time. AXA is relatively advanced now, four years in to the Ambition

2015 plan where the proportion of new business sales in traditional savings has almost

halved dropping from 27% of the group total in 2009 to 14% in 2013. The improving

trend at AEGON (where 0.88 compares with 0.5 in 2012) is also expected to continue

reflecting its continued promotion of fee-driven business (37% of the total Q1 2014

versus 16% back in 2010) with emphasis on VA, pension management and mutual fund

sales in the US, versus fixed annuities and GICs in the past.

2013 Payback VNB/cash

Years invested

AEGON na 0.88

Allianz 7 0.56

Aviva 7 1.85

AXA 7 1.08

Generali 8 0.62

Zurich 7 1.79

Cash the new holy-grail, replacing

embedded value

Cash payback periods crucial

Prudential has set the benchmark

The sector in pursuit led by Zurich

and AXA

Financials

Initiating Coverage

6 August 2014



Allianz and Generali are also expected to follow this positive trend of improvement given

their new product structures, with Allianz’s launch in Germany of its capital-light

Perspektive annuity (single premium, where the principal is guaranteed at 0% only until

the annuity phase when it is reset) and Generali’s launch of Valero Futuro (hybrid 70%

savings, 30% unit linked). Both products have met with initially strong demand.

Cash remittance to the holding

Cash remitted to the holding is a key analytical focus for two obvious reasons: the higher

the remittance, the higher the dividend potential; the more the cash is up-streamed to the

holding, the greater the level of management control on how to spend the fresh capital

generated each year, whether for growth, acquisition or dividend.

Chart 23: Cash to Holding Remittance Ratios


We show our forecasts for remittance ratio development until 2016:

At all companies with the exception of Prudential, the remittance ratios are close

if not higher than 80% by 2016. Much above 80% becomes more challenging,

with the local regulators preferring some capital created to shore up capital or to

be held back for future potential investment in the home territory.

Prudential is at the low end, where Jackson retains a portion of its cash earnings

to maintain its RBC ratio of 450% and thereby maintain its AA- rating, the

highest among the key US variable annuity writers. The US remittance ratio

rebasing to the 200% requirement set for the group would actually be in line

with the long-term average for the group at around 60%.

Allianz and Zurich are calculated slightly differently to the rest, where life

remittance is given as a percentage of stated life profits rather than actual cash

generated by the life business, in both cases giving a lower result, in Zurich’s

case by a few percentage points.

AEGON leaps quite sharply on our 2016 projections, the year in which

management expects the UK to start paying a full dividend to the holding.

Management teams have now made this a core focus of how the business is run, where

Aviva, AXA and Generali all have medium-term aspirations of surpassing the 80%

threshold. Aviva’s 2013 corporate restructuring at the holding and non-life division

(internal debt created between the two enabling the holding to have direct ownership of

all the group divisions) has, for example, led to easier controls over capital flows with

reporting lines adjusted to facilitate management motivation on future remittance ratios

achieved.

2012 2013 2014F 2015F 2016F Longer term

Remittance ratios

AEGON 73% 65% 77% 82% 87% 87%

Allianz* 68% 92% 84% 84% 84% 84%

Aviva 51% 72% 74% 77% 79% 82%

AXA 74% 76% 77% 78% 79% 80%

Generali 64% 68% 71% 75% 77% 85%

Prudential 58% 54% 57% 57% 57% 57%

Zurich* 54% 72% 73% 73% 73% 73%

* life % IFRS profits, the rest % cash generated

With Allianz and Generali gaining

their own momentum

Remittance now critical in

management’s business objectives

Financials

Initiating Coverage

6 August 2014



7) Dividend: ‘optimise’ The companies covered in this report are at, or will soon reach, capital

freedom (Solvency II, G-SII confident, leverage goals achieved) – by 2016 at

the latest, on our calculations. Management teams will then have a choice:

raise the dividend pay-out ratio, and/or look for additional avenues of

investment. Given the high levels of value destruction caused by acquisition

strategies of the past, dividends might seem the preferred option, where we

expect higher pay-out ratios to be confirmed by Allianz, AXA and Generali for

the full year dividend 2014. However, we are equally supportive of

acquisition strategies alongside, reflecting the track record of recent

integration and cost drives combined with a better understanding of

financial market risks now afforded by Solvency II.

The companies are all at different stages of capital repair, debt deleveraging, and portfolio

pruning, in their quest for eventual capital freedom, and scope for future capital

repatriation and/or investment in growth. The chart below shows the first year in which

we believe each company will feel financial ‘freedom’. Prudential and Zurich have been

at this point for several years already, with Aviva anticipated to arrive in 2016 (2015 at the

earliest on our debt calculations). Generali and AXA management were both

communicating openly at their recent 1H results conferences about higher dividend-

paying potential in the future, in line with our 2015 capital freedom year when the

dividend for 2014 is set. In the same table we show the key operational dynamics for

each of the companies as we expect them to be for 2016, leverage, dividend cover,

remittance, ROC, and solvency within this timeframe.

Chart 24: Capital Freedom


The more interesting question for the share price ratings now is what the companies

choose to do with the future cash they generate: pay higher dividends or seek to reinvest,

either adding to existing market positions, developing synergies and cross-sell, or

expanding presence in emerging markets via new distribution agreements or

acquisitions?

Chart 25: Dividend Stress Test


2016 Economic Interest Dividend Dividend Capital

Solvency* Leverage** cover Pay-out cover Freedom

AEGON 185% 26% 10.0 34% 187% 2015

Allianz 215% 22% 13.4 50% 197% 2013

AXA 214% 24% 12.7 45% 148% 2015

Aviva 192% 39% 6.6 39% 152% 2016

Generali 202% 30% 8.0 45% 156% 2015

Prudential 290% 25% 14.2 35% 133% 2007

Zurich 140% 28% 7.1 65% 117% 2006

* For Zurich Z-ECM not comparable

** Tangible net of unrealised gains on bonds

Local 2016 F 2016 F Stress Cash less Stressed % Pay-out Potential Consensus Upside

currency m Earnings Cash test stress 2016F cash +5% (A) 2016 (B) A/B

AEGON 1,647 982 -226 756 77% 81 46% 34% 35%

Allianz 6,601 5,554 -1272 4,282 77% 330 65% 45% 44%

Aviva 1,656 847 -203 645 76% 74 39% 39% 0%

AXA 5,842 3,605 -847 2,758 77% 306 47% 43% 10%

Generali 2,950 1,817 -443 1,374 76% 147 47% 41% 14%

Prudential 3,164 1,331 -178 1,153 87% 158 36% 36% 1%

ZFS 4,428 3,214 -611 2,603 81% 197 59% 63% -7%

Dividend strategies to be determined

Capital freedom approaching

Financials

Initiating Coverage

6 August 2014



Dividend Stress Test

We stress test cash earnings to gauge the likely range of dividend pay-out ratios for the

future. Our cash earnings stress test assumes a 2 percentage point deterioration in the

non-life combined ratio, non-life investment returns -50bps, a 10% decline in unit-linked

fees, a 10bps decline in the life traditional savings margin and a 20% decline in asset

management earnings. We deduct the total of these from the cash remittances we are

forecasting for 2016. These are compared with our 2016 earnings forecasts (not stressed)

to demonstrate maximum pay-out ratios in a deflationary scenario, and also to the cash

earnings themselves.

The dividend upside (the difference between the full potential pay-out on the

deflationary stress test to 2016 consensus) varies considerably, with most upside

at AEGON, followed by Allianz, Generali and AXA.

The stress test, by contrast, suggests minimal upside potential in the dividend

pay-outs at Aviva and Prudential versus 2016 consensus.

Zurich is cash deficient on our stress test based on current dividend pay-out

levels. Management would possibly source the dividend shortfall from capital

release elsewhere (as in 2012).

The 20-year history of the sector has demonstrated the risks of not being sufficiently

cautious in setting dividend policies for the long term. All ‘seven’ at some stage in recent

years have had to cut their dividend levels due to external financial market disturbance;

Prudential in 2003 (albeit the first since 1914), Aviva more recently in 2013.

We make the following initial observations on potential pay-out outcomes at each of the

companies:

AEGON will likely increase the dividend pay-out ratio from 2017, in our view,

where a 40% pay-out ratio level, for example, equates to 67% of cash earnings.

In the meantime, management are prioritising a 3% share buyback for 2015/16

to compensate for the 2013 capital restructuring that led to the cancellation of

the preference stock.

Similar cash pay-out ratios (ie 67%) would translate to dividend pay-out ratios of

55% at Allianz, 42% at AXA, and 44% at Generali. Given their recent

commentaries of dividend and capital optimism to the market, we anticipate

higher dividend pay-out ratios to be confirmed at all three for the full-year

dividend 2014.

Aviva appears to have minimal scope to increase the pay-out ratio beyond

market expectations for 2016, at least according to our stress test. Higher pay-

out levels could, however, be supported by cash buffers created by capital

release and sales elsewhere.

Prudential has minimal upside in the pay-out ratio where absolute dividend

rebases are likely to continue in line with the continued growth trend in

earnings we are anticipating.

Zurich has no pay-out upside, in our view, arguably being left stranded with

the high dividend level that was struck ahead of the financial crisis.

The current cash-conspiracy between insurance management and the analyst community

(increased pay-out ratio leads to higher stock currency) is perfectly understandable,

following a decade-plus of value-destructive growth by acquisition. Allianz, at its recent

Investor Day, highlighted an acceleration of cash release of some €3bn over the next three

years, leading to analyst calls for exceptional dividends to help it celebrate its 125th

anniversary next year.

Stress tested for deflation

We assess scope for pay-out ratio

increases

With analysts as keen for higher

dividend now…

AEGON shows most upside

Zurich the least

Financials

Initiating Coverage

6 August 2014



Yet this cash-conspiracy mirrors perfectly the leverage-conspiracy that preceded it two

decades ago, the same analyst community encouraging the same companies to increase

debt and acquire (where increased leverage two decades ago led to higher stock

currency).

The Cash Cactus

Prudential and Zurich were the first to restructure several years ago, early to recognise the

value of ‘cash’, restructuring their life products to ensure distribution costs were quickly

covered with profits in the form of cash flowing to the shareholder soon after. In terms of

capital management, they took very different paths, however. Prudential cut the dividend

and invested in growth; Zurich promoted the dividend and paid back excess capital.

Zurich outperformed initially with its dividend strategy, applauded at the time for its

shareholder friendliness; Prudential has outperformed since demonstrating the longer-

term value of investing in growth.

Zurich has since been seeking ways of reinvigorating growth, inclusive of acquisition

(Santander Latam 2011) while maintaining its high pay-out ratio, where uncertainty over

the latter has led to bouts of share price weakness. Management are currently locating

sub performing blocks of capital for potential release to reabsorb into growth, thereby

hoping to reinstate a secure positive earnings trajectory. Prudential, in the meantime,

continues to grow organically, reinvest into distribution and increase the dividend.

Chart 26: Prudential versus Zurich

Source: Factset

Cash and Growth

The cash cactus grows slowly, although blooms magnificently once a year

with its high pay-out ratio and dividend. Read any recent corporate presentation

from the companies covered in this report and it is clear that all management teams,

Zurich included, have moved on from the cash-cactus objective alone. All companies,

including the latest to restructure, Aviva, are in pursuit of cash and growth.

Allianz’s pay-out ratio, at 40%, has been under particular scrutiny, where the residual

60% is currently being allocated by management as follows: 20% growth, 20% bolt-on,

20% increase in risk capital, where €1bn of capital allows a €5bn investment reallocation

from cash and bonds into equities, real estate, and infrastructure products. Assuming that

the risk profile in investment levels is built up to acceptable levels over the next 2-3 years,

€2-3bn is effectively left available each year for acquisitions and/or more dividend.

Management have disclosed to the market that they will wait until the end of the year

before deciding whether or not to raise their current pay-out ratio of 40%, where each

10% equates to around €600m on our calculation.

'05 '06 '07 '08 '09 '10 '11 '12 '13 '1440

60

80

100

120

140

160

180

200

220

240


…as they were for higher leverage in

the past

While Zurich increased the dividend

and has since underperformed

The risk of the cash-cactus

Versus cash to invest in growth

Prudential cut the dividend a decade

ago to focus on growth and has

since outperformed

Financials

Initiating Coverage

6 August 2014



Recent acquisitions at Allianz have been small and bolt-on in size, in line with

management’s stated intention of seeking strategic additions for scale and integration

where there is existing presence already: for example, the recently announced purchase of

Unipol from FonSai, paying €440m for the renewal rights on the €1.1bn premium base;

and last year’s purchase of Yapi Kredi Insurance in Turkey, an exclusive 15-year banking

agreement. The PER of 8x on our calculation for Unipol seems conservative enough even

with the Italian non-life pricing cycle arguably at peak. The €650m paid for Yapi Kredi is

more dependent on future growth rates, so less easy to assess at the current time, but

management can point to the market share gains achieved since the acquisition date.

AXA, in the meantime, has been reallocating capital away from developed markets

(€8.5bn on our understanding since 2010) to emerging markets since investing in jvs

(Tian Ping) and emerging distribution (HSBC). The earnings profile of the group has

already started to transform; 12% of 2013 earnings is ‘growth’ versus mid-single digit in

2009.

We would make the following observations to support a return to strategic

acquisitions on an internally financed basis at least:

The management teams have all been in intensive training in recent years for

their ‘Masters in Integration’. AXA’s €1.7bn of targeted cost saves equates to

almost 10% of group acquisition and administrative costs; Generali’s €1bn is

even higher at 14% on our calculations. Allianz went through a similar process

in Germany with its earlier TOM program (Target Operating Model), as did

Zurich with the Zurich Way and hub strategy. These are and have been huge

projects, with management teams not disappointing in the process, rather lifting

the targets as progress is made (AXA’s initial €1.5bn was raised to €1.7bn,

Aviva’s detection of further scope for at least another £200m of cost cuts, with

the initial £400m plan ahead of schedule). Surely the market can trust the same

management teams to integrate add-on acquisitions the size of Unipol and

create a modicum of value in the process!

The due diligence process has improved. The move towards economic

solvency and the framework of Solvency II has enabled much better

understanding of the financial risks involved when purchasing a set of insurance

assets.

The strength of global brand demands it. As G-SII companies (where AEGON

and Zurich have specific global strengths) by definition all represent a powerful

option for partnership and distribution. We note the recent partnerships

secured between Prudential and Thanachart, the leading auto finance business

in Thailand, Aviva and Astra Group, the leading industrial conglomerate in

Indonesia, and AXA and Tian Ping, the leading auto insurer operating inside the

Great Wall of China. The recent move towards platforms for distribution

increases the importance of brand recognition even further in this regard.

With fully integrated IT systems (where scale increasingly matters) at the

group level it suddenly becomes much easier to integrate smaller units

acquired.

Stronger group identities also help, with product designs that can be

shared, alongside technical expertise (telematics, analytics, pricing systems, risk

selection processes, client multi access, digitalisation), and where best

underwriting practice and technical excellence can be promoted across the

group, transported from one unit to another.

The composite advantage (life and non-life combined) where the single view

of the customer in the digital world lends itself to easily resourced growth.

There is also the economic hedge where inflation tends to benefit life over non-

life, deflation non-life over life (see later section: Financial Markets).

As currently pursued by Allianz

And AXA

We support internally financed

acquisitions

Financials

Initiating Coverage

6 August 2014



In defence of the acquiring management teams of the past, a large proportion of

value destruction inflicted on the insurance companies through earlier

acquisitions was driven by the unprecedented collapse of the global financial

system. Whatever level of expense cuts and integration process was initiated at

the time of AEGON’s US$10bn purchase of Transamerica in 1999, or AXA’s €8bn

purchase of Winterthur in 2006, the black hole of the financial crisis that

followed would have inevitably sucked them into value destruction. Something

far greater than straightforward management miscalculation had led their

valuations to implode.

We calculate the additional growth potential from reinvesting the excess cash beyond

organic growth. We assume eventual ROE targets of 12% (assuming an unlevered ROC of

10%) on the element of equity invested where up to 30% of the acquisition will be able to

be funded by leverage. We calculate the uplift to growth potential on this basis, whereby

for example, Allianz’s growth potential increases to 8% from the 4% organic growth we

calculated earlier if the excess generated at the holding company each year is reinvested.

Chart 27: Reinvesting For Growth


Potential lack of reinvestment opportunity is a clear block to our reinvestment thesis. If

this is the case, management can make assurances that if excess builds up beyond a

certain level, buybacks will be used to pay back the capital. In this way, management are

not trapped by the pay-out ratio.

To demonstrate the value enhancement of reinvesting rather than increasing the dividend

pay-out ratio, we input into a DDM model (Scenario 1) an equity base of 1000 generating

earnings of 120 (ROE 12%), where the existing pay-out ratio is 40% and where organic

earnings growth is 4%. Surplus cash earnings will permit the dividend to be raised by

50% to a pay-out ratio of 60% for the following year, with the remainder required for the

existing 4% growth requirements. Our DDM generates a value of 1250 units based on a

CoC of 10%, where we factor in the 4% dividend growth rate indefinitely.

If, alternatively, we assume that the dividend pay-out ratio of 40% is maintained (scenario

2), where the 20% excess is invested instead on a 12% ROE, 2.9 units of additional

earnings (120*.2*0.12) are created, whereby the earnings growth increases by 2.4%

(2.9/120) to 6.2%. The value calculated by the DDM based on a CoC of 10% increases to

1319, 6% higher than scenario 1. In year 20, we assume a one-off increase in the dividend

pay-out ratio by 50%, after which the growth rate for the dividend drops back to 4%.

Assuming that the additional capital is invested in 10% growth markets leads to a 1%

additional earnings growth rate every eight years (compounding the growth). If we input

this additional growth into the DDM model, a value of 1433 is generated, 15% higher

than scenario 1.

Dividend Net cash 12% ROE % Grow and acquire

pay-out at holding on new 2016 eps Earnings growth

long term cash Organic Reinvest

AEGON 40% 372 45 3% 4% 7%

Allianz 50% 2426 291 4% 4% 8%

Aviva 40% 300 36 2% 4% 6%

AXA 45% 1000 120 2% 5% 7%

Generali 45% 645 77 3% 4% 7%

Prudential 35% 327 39 1% 9% 10%

ZFS 65% 369 44 1% 4% 5%

Potential earnings uplift from

reinvesting the cash

With special dividends offered as an

alternative

DDM analysis to indicate the value

upside from reinvesting

Financials

Initiating Coverage

6 August 2014



Chart 28: DDM Modelling: Pay-out & Invest Scenarios

Source Jefferies

DDM scenario testing

Equity Earnings Div Yr 0 Div Yr 1 Valuation PER Yield

Scenario 1 1000 120 48 72 1248 10.4 5.8%

Scenario 2 1000 120 48 51 1436 12.0 3.6%

Scenario 1: 4% growth, 60% payout ratio

2,014 2,015 2,016 2,017 2,018 2,019 2,020 2,021 2,022 2,023 2,024 2,025 2,026 2,027 2,028 2,029 2,030 2,031 2,032 2,033 2,034 2,035 TV TV growth

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22

DPS EUR 48 72 75 78 81 84 88 91 95 99 102 107 111 115 120 125 130 135 140 146 152 158 2,735

Growth 50% 4% 4% 4% 4% 4% 4% 4% 4% 4% 4% 4% 4% 4% 4% 4% 4% 4% 4% 4% 4% 4%

Discount factor 0.91 0.83 0.75 0.68 0.62 0.56 0.51 0.47 0.42 0.39 0.35 0.32 0.29 0.26 0.24 0.22 0.20 0.18 0.16 0.15 0.14 0.14

48 65 62 59 55 52 49 47 44 42 40 37 35 33 32 30 28 27 25 24 23 21 370

CoC 10%

DDM valuation 1,248


1000 120 48 72 1,248 10.4 5.8%

Scenario 1: 6%-plus growth 40% payout ratio

2,014 2,015 2,016 2,017 2,018 2,019 2,020 2,021 2,022 2,023 2,024 2,025 2,026 2,027 2,028 2,029 2,030 2,031 2,032 2,033 2,034 2,035 TV TV growth

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22

DPS EUR 48 51 54 57 61 65 69 73 78 83 89 95 102 109 117 126 136 147 159 172 185 278 4,818

Growth 6% 6% 6% 6% 6% 6% 6% 7% 7% 7% 7% 7% 7% 7% 8% 8% 8% 8% 8% 8% 50% 4%

Discount factor 0.91 0.83 0.75 0.68 0.62 0.56 0.51 0.47 0.42 0.39 0.35 0.32 0.29 0.26 0.24 0.22 0.20 0.18 0.16 0.15 0.14 0.14

48 46 45 43 42 40 39 37 36 35 34 33 32 32 31 30 30 29 29 28 28 38 651

CoC 10%

DDM valuation 1,436

Equity 100


1000 120 48 51 1,436 12.0 3.6%

Financials

Initiating Coverage

6 August 2014



The Seventh Day: ‘Never Rest’ With all ‘seven’ at or close to capital freedom, we assess the most likely

outcome on the dividend and capital reallocation decisions, and future

evolution of corporate shape.

Seven has long been assigned in human folklore as the number of purity and spiritual

completion. Six days for toil, the seventh for rest. As Solvency II fulfils its long-awaited

journey in 2015, the insurance sector enters its own Seventh Day, a time when

management will ponder on the decisions that will forge their companies for the decades

ahead.

We summarise our longer-term expectations for the companies in terms of scope for

capital allocation and dividend/reinvestment strategies.

Chart 29: The Seventh Day


AEGON’s exits of non-core either by disposal of run-off still leave the group

overweight in the US, more pronounced if the UK is eventually sold. Build-out

of New Markets will likely continue but will take time to achieve portfolio

rebalance. We do not believe management will engage in a more radical

restructuring of re-domiciling to the US, with an IPO for its European operations

alongside.

Allianz will likely retain ownership of PIMCO, and seek to strengthen its

collection of franchises by add-on acquisitions and investments, in both mature

and emerging markets. The eventual outcome of Fireman’s in the US remains

undecided.

Aviva stands out as the company most likely to change its operational balance

over the longer term, with promotion of asset management, possible de-

emphasis of Europe (potential exits over the medium term from Spain, Italy and

Ireland), and probable build-out of Asia.

AXA’s build-out of emerging growth exposure will likely continue, currently at

12% (versus 5% 2009), possibly to rise to 20%-25% by 2020. Despite lack of

diversification benefits afforded to the US, we have no expectation of AXA

divesting its US operations, and do not include this option in the discussion

here.

Generali will likely remain focused on its central European core with further

cross-border synergies developed, with additional build-out of emerging growth

beyond the CEE.

Capital Annual cash Areas for EPS Dividend

Redeployed post reinvestment growth pay-out

dividend potential long term

AEGON 5-10% 3% Buybacks, New Markets 7-8% 40%

Allianz <10% 4% Add-ons, mature & emerging 8% 50%

Aviva 10%-20% 2% Emerging markets 6-8% 40-45%

AXA <5% 2% Emerging markets 7-8% 45%

Generali <5% 3% Emerging markets 7-8% 45%

Prudential 0-30% 1% Emerging markets 10% 35%

Zurich 5%-plus 1% Emerging markets 5-6% 65%

Financials

Initiating Coverage

6 August 2014



Prudential’s move towards Asian growth will continue with the outside

possibility of a disposal of Jackson.

Zurich’s strategies for growth in non-life Farmers and global corporate cross-

sell will continue, with further push into the emerging markets from capital

released from non-core.

AEGON: The Seventh Day

Management faces the perennial conundrum: justification of a large US asset controlled

by a Dutch holding. Solvency II has not been helpful in this regard with the likely absence

of diversification benefits under US equivalence. Faced with the decision of exiting the UK

(13% of group capital) or making it work, management have opted for the latter, driven

in their decision making in part perhaps by the need to counterweight the US.

At the same time, NN has been recently floated from its parent ING, and is currently

commanding a higher PER rating than AEGON (a Dutch insurer with CEE and run-off

exposure), where the US insurance operations of ING were spun-off separately last year,

again commanding a higher rating on PER than AEGON. This might lead AEGON

management to consider a double-dutch alternative: re-domicile to the US, sell the UK,

and use part of the proceeds to participate in the Dutch government’s sale of REAAL

and/or ASR. AEGON would then have a similar international profile to NN with CEE assets

and, based on ING’s experience, where both AEGON USA and AEGON Europe (to be

IPO’d would benefit from higher share price ratings.

There is no sign that the tradition of AEGON is about to change, not least with the US and

holding management thoroughly integrated (CFO Daryl Button formerly US CFO), One

AEGON, integrated IT and the global pension strategy. On which basis AEGON will sweat

out the UK, sell non-core in Canada and France (the run-off books of VA GMIB, and Boli

too if US interest rates rise and make the exit valuations work) and possibly buy back

shares from the proceeds (3%-7%) to help lift the rating. In addition to the 3% share

buyback already prioritised for 2015/16 as the offset to the earlier preference capital

dilution, this could lead to the share count falling 6%-10% from current levels. We can

also expect the dividend to be raised over time (likely timeframe 2017 onwards), the most

likely scenario in our view to 40% of earnings or 67% of cash (where the timing of the

increase will be dependent on the speed of the non-core sales and outcome on the final

parameters of Solvency II), with the residual capital of €300m generated each year set

aside for emerging investment. Successful reinvest on a 12% ROE would add 2% to group

earnings growth annually to give a total growth profile of 7%.

Allianz: The Seventh Day

Management remain committed to PIMCO (close to 30% of group profits) where

significant fund diversification over the past year, and the appointment of six deputy

CIO’s to alleviate key man risk and a replacement CEO (former COO) should help offset

shareholder concerns on recent performance concerns and the recent loss of CEO.

Ownership not only gives diversification benefits under Solvency II but an offset to falling

yield risk impacting future life returns, where rising bond assets at PIMCO as yield falls

generate higher fees. Fireman’s, the US non-life asset (2% of group capital), is expected

to achieve CoC over the medium term, according to management recovery plans, with all

options open thereafter. We expect the dividend pay-out ratio to be raised above the

current 40% level, possibly to as high as 50% over the medium term, with more

communication on this towards the end of the year, by which time internal CEO

succession, if one is required, may well have been announced. The main challenge for

management is finding a home for the €2.5bn excess capital generated annually. If

successfully reinvested in growth markets and/or add-ons earnings on a 12% ROE,

earnings would benefit by an additional 4% annually on our calculation.

Aviva: The Seventh Day

Management’s current priority is cost cutting, technical excellence, IT edge and cash

remittance. Double-digit increases in the dividend are likely, in our view, reflecting the

earnings trend, with an increasing pay-out ratio alongside. CEO Mark Wilson underlined

Question marks over future

ownership structure post Solvency II

Exit of non-core to facilitate a move

to higher pay-out ratios; we project

40% over the medium term.

Management committed to PIMCO.

Higher dividend pay-out ratio likely

to be announced later this year; we

project 50%, with scope for

acquisitive investment alongside.

Dividend increases to be driven by

earnings momentum.

Financials

Initiating Coverage

6 August 2014



that the £800m cash earnings guidance for 2016 at the holding available was for future

dividends. We suspect that 75%-80% of this amount will eventually be set aside for

dividend (likely timeframe 2017), equating to a 40% pay-out ratio on operating EPS. This

would leave £250-300m annual for investment in growth, which if successfully reinvested

would benefit a 12% ROE by approaching 2% annually on our calculation. The key area

of interest for us, however, is the £2bn-plus that could be released from eventual sales of

Italy, Spain and Ireland (likely time horizon 2016-17). With the group CEO formerly CEO

at AIA, and the global life CEO formerly CEO of Great Eastern Holdings, further investment

in Asian jvs and distribution deals seems the most likely home for this capital. Successful

reinvestment of 10%-15% of group capital in Asia would be the final stage of a significant

transformation for the group.

AXA: The Seventh Day

Management indicated strongly at the recent 1H analyst conference an imminent move to

a more generous dividend pay-out ratio. We project 45% versus the 40% that has usually

been paid out in recent years. In terms of growth, Ambition 2015 targeted back in 2009 a

2.5x increase in the growth contribution to group earnings from a 5% base. At 12% for

full year 2013, the target has been reached two years early. AXA’s commitment to

growth expansion continues, however, where management have recently expressed

interest in the corporate insurance assets of the Brazilian bank Itau Unibanco. Later next

year AXA objectives for Ambition 2020 will possibly be set out, with a further doubling of

growth contribution to earnings quite likely included. Aside from the reinvestment

potential on the €1bn of excess cash the group will be generating annually on 45%

dividend pay-out assumption (reinvestment on a 12% ROE equates to close to 3% of

earnings on our calculation), there might also be scope for additional capital release from

the life back books. These have played an important role in AXA’s capital management

programme, with exits from the UK (to Resolution) and US (Mony), reinsurance of €7bn

of French life reserves, and most recently buyouts in the US of policyholder benefits

(earnings neutral but reducing tail risk). Successful execution would see AXA more than

half way towards Prudential’s emerging growth profile by 2020.

Generali: The Seventh Day

Disposal of non-core has now been completed with the recently announced disposal of

BSI. Based on management’s recent commentary at the 1H analyst conference that the

pay-out ratio would be higher than 40% going forwards we project the dividend pay-out

ratio to rise in steps towards 45%, equivalent to 67% of cash earnings. We forecast

€650m of annual free cash post dividend from 2016, by which time the bulk of group

integration will have been achieved. Successful reinvestment on a 12% ROE of the excess

would add 3% to group earnings growth annually, to give a total growth profile of 7%.

The current buyout of the CEE minorities at €2.5bn, 10% of group capital (versus the

€4bn non-core exits disposal programme), highlights Generali’s high level commitment

to emerging market growth.

Prudential: The Seventh Day

Prudential’s clean corporate structure, with no internal debt, Asia with its own holding

structure, US life with no diversification benefits likely under Solvency II, and management

commentary on business optionality all point to at least the possibility of a break-up of the

group at some stage in the future, if not a straight sale or IPO of Jackson. Asian investors

are possibly less willing to own Prudential given the difficulties in understanding the UK

and US businesses. With Jackson sold, the Asian business could then re-rate possibly to a

premium to AIA based on a qualitative assessment between the two. In Prudential’s

current corporate state, we expect the growth focus to be firmly on Asia, with the US

growth likely to fall back to a normalised growth trend over the coming quarters. Asian

agency distribution continues to grow at double-digit rates with graduate recruitment

fuelling the tripling of agents over the past six years. Standard Chartered is also

broadening (customer penetration still only 3%), with new initiatives in Hong Kong and

Singapore, India and China in the process of opening, and with other markets to follow.

Specifically in Thailand (undeveloped by Prudential’s standards but the second largest SE

Asian economy), distribution was secured last year via auto finance leader Thanachart.

Dividend pay-out increases possible

medium term, alongside capital

reallocation from Europe to Asia

Likely move to structurally higher

dividend pay-out ratio for 2014

Growth aspirations to continue with

a possible further doubling in

emerging growth by 2020

Dividend pay-out ratio set to rise, to

45% on our estimates, with

continued investment in emerging

markets over the longer term

Group optionality to IPO the US, and

achieve a higher rating on the Asian

core

Double digit Asian growth likely to

continue driven by customer and

distribution expansion

Financials

Initiating Coverage

6 August 2014



Crucially, the growth trend in Prudential’s core health product shows no signs of abating.

Out-of-pocket medical expenses stand at 30%-60% across the regions, according to

management, versus 10% in the US/UK. Above all, Prudential’s customer base, the

middle class, is expected to grow to 135m vs 45m 2012 (versus Prudential’s 2m

customers). And beyond Asia, the African continent now appears to be in Prudential

sights.

Zurich: The Seventh Day

Management remain committed to the high dividend pay-out ratio (65% for 2013),

despite limited excess cash each year (US$470m on our calculation) available for

investment elsewhere (reinvestment on a 12% ROE equates to 1% of earnings on our

calculation). Existing excess capital is currently set aside for additional investments in

corporate bonds and equities to help offset falling yields.

Management are also seeking ways of increasing the growth profile of the business. To

this end, a more active capital management programme is being developed at the group,

to highlight sub cost of capital units. The majority of this, according to management, is

backing the back books of life where methods of capital release and improved efficiency

are being explored. Nine operations have, however, been signposted for sale. No

indication has been given on the size of capital allocated to these exit markets but we

suspect quite small, with 5% of group capital regarded by management as non-strategic.

We note that recent exits have all been tiny in the context of the group: Russia, Taiwan

Life, Australian group risk, and the Hong Kong tied agency business. We believe that any

additional capital extracted from non-core sales and capital released from the life back

books will most likely be set aside for emerging market acquisitions, where Mexico,

Indonesia and Malaysia have been highlighted as targeted areas for expansion (following

the 2011 Santander acquisition in Brazil). Management have committed to updating on

the strategic objectives set out last December at the 1H results presentation in early

August.

High pay-out ratio at 65% prevents

further increases from here

Growth initiatives across the group,

though with limited scope for capital

reallocation

Financials

Initiating Coverage

6 August 2014



Conglomerate premium: ‘care more’ The conglomerate insurers have traded at discount ratings to their mono-line

peers since the aftermath of the dotcom crash. This discount rating has

overstayed its welcome and is counter-intuitive, in our view, given the

insurance world of risk diversification (inherent to the Solvency II capital

framework), where regulatory shifts can dismantle mono-line business

models overnight (recent budget impact on the UK annuity market is one

example of many). We argue for an eventual return to the conglomerate

premium following a decade of restructuring and capital formalization.

Conglomerate Discount

To assess the current level of conglomerate rating, we show weighted averages for the

‘seven’ and compare these separately with the European and UK small to mid-caps.

Current PERs for all stocks, including those covered in this report, are based on consensus

earnings (FACTSET), not our own, to ensure current market thinking is properly reflected.

On weighted averages based on 2016 PERs, the conglomerate discount currently stands

at 17%.

Chart 30: Conglomerate Discount


We highlight the possible reasons why conglomerates might be trading at

their current discount ratings:

Mono-line stocks represent a straightforward investment proposition, and are

easier to understand and assess. The value of the business will not be lost in the

morass of the whole.

Management and employees can more easily be motivated by company share

schemes and, to use the Aviva banner, ‘care more’ because of it. Operational

efforts in one particular aspect of the business will not be undermined or

overrun by a sudden and unexpected corporate shift elsewhere.

Risk of management or operational errors lower down the command line or

communication blocks leading to unexpected losses eventually feeding through

are less likely to occur.

Consensus PERs weighted average 2014 2015 2016

Conglomerates 10.4 9.6 9.1

Prudential 14.1 12.7 11.4

Ex Prudential 9.5 8.9 8.5

European mid/small caps* 12.8 11.2 10.7

UK mid/small caps** 13.0 12.3 11.3

Conglomerate discount 80% 82% 83%

Conglomerate discount ex Pru 74% 76% 78%

* AGEAS, Baloise, Delta Lloyd, Gjensidige, M apfre, NN, Sampo, Storebrand, Swiss Life, Topdanmark, Tryg,

** Admiral, Amlin, Catlin, Direct Line, Esure, Hiscox, Just Retirement, Lancashire, Legal & General, Partnership, RSA, Standard Life

Financials

Initiating Coverage

6 August 2014



Diversification of Risk…

One core consideration, however, crucial to the very essence of insurance, does appear to

be being overlooked: the diversification of risk, not least given the backdrop of ongoing

regulatory change.

The formation of ING in 1991 was justified by its CEO Aad Jacobs at the time by this very

premise, diversification of risk, a collection of economic cycles across the globe that would

permit an uninterrupted growth trend in earnings. In theory this made sense, in practice

the opposite occurred, with ING somehow attracting concentration of risk: at the

epicenter of the 1997 Asian Crisis, suffering huge losses from WTC reinsurance, and the

overwhelming level of MBS sub-prime losses that required government bail-out.

Wherever it rained in the world, there seemed to be a torrential downpour on ING. So

what makes us confident that risk concentration will not undermine the conglomerate at

some stage again in the future?

ING’s concentration woes would have been mitigated since by the improvement of

corporate governance now being employed across the insurance conglomerates, along

with better reporting lines, and also stronger understanding of financial market risk under

the precepts of Solvency II.

…. and the CORCers

The risk dynamics for the insurance sector appear to have shifted in any case, away from

financial markets more towards specific underwriting and regulatory risks. The CORC, the

Cost of Regulatory Change, has proved especially damaging to the mono-line insurers

recently, with Partnership and Just Retirement suffering substantial share price declines

(share price underperformance versus the sector of over 55% and 35%, respectively, since

the beginning of the year) following the UK budget’s dismantling of the individual

annuity market, essential to their business. The recent introduction of simpler individual

life savings products in Holland that can now be sold just as easily via the banks could

have been equally derailing to any mono-line Dutch life stock given the potential for loss

of market share (where NN has put its individual Dutch life business into run-off). AEGON

the conglomerate is involved in both of these markets, with exposure to both of these

risks, but the risk has been diversified away by its conglomerate status and spread of

global businesses.

There have been plenty of ‘CORCers’ in the past: the UK alone has a long list of them:

pensions auto enrollment (2006), RDR (end 2012), DWP caps (April 2015) to name but

three. All countries have them, even those in emerging Asia. ING was forced by the

regulator to halve its South Korean life pricing a decade ago due to excessive margins

being made (in the regulator’s view).

Whether the final introduction of Solvency II means that the geographical and business

line diversification benefits afforded to insurance conglomerates are negated at least in

part by the level of capital required by additional G-SII requirements or US equivalence

(no diversification benefit because of it) is irrelevant in this regard. The arbitrary move of

one regulator or one pricing cycle will not dismantle the investment premise and earnings

potential of a diversified conglomerate overnight. The PER rating attached to the earnings

streams should be higher on this consideration alone regardless of any actual capital

benefit.

Financials

Initiating Coverage

6 August 2014



Chart 31: Conglomerate Premium

Source: Jefferies

Conglomerate Premium

The chart above shows the PERs of the ‘seven’ (for CGNU read Aviva, and Zurich Allied,

Zurich) back in their heyday of mid-2000 and includes alongside them the conglomerates

that have since been dismantled, Fortis and ING. We compare these to PERs of nine

small/mid cap stocks of the time. The conglomerate premium at that stage stood at

>50% versus the 17% discount today. The PERs shown here have been adjusted for

various accounting anomalies at the time; the premium rating would actually be

considerable higher on a stated PER basis.

We do not expect the level of premium rating achieved back in 2000 to be repeated

today, where part of this premium at the turn of the millennium reflected extended levels

of belief in leverage and value-creative mega-acquisitions, compared with the minority

risk at several of the mono-lines. But with conglomerate solvency and leverage repaired,

tighter corporate governance installed, management actions leading to acceptable levels

of profitability alongside scope for growth organic and/or acquired, the diversification

merits of the conglomeration model do suggest at least some scope for the discount

rating to close, with a premium rating to re-emerge over time.

PERs mid 2000 one year forward

AEGON 17 AGF 9

Allianz 15 Britannic 12

AXA 16 CNP 8

CGNU 16 ERGO 9

Fortis 11 Legals 13

Generali 14 Mapfre 6

ING 12 RAS 9

Prudential 20 SAI 7

Zurich Allied 10 Storebrand 11

15 9

Conglomerate premium 157%

Financials

Initiating Coverage

6 August 2014



The Seven Insurance Wonders:

Company Sections

Financials

Initiating Coverage

6 August 2014



AEGON: The Redeemer The franchise rebuild in the core US and Dutch markets has been successful.

The UK has yet to convince, however. The ROC is the lowest in the sector,

though, on the cusp of double digit assuming non-core exits. Dividend

momentum remains held back by uncertain Solvency II demands where the

capital overweight in the US limits the diversification benefits to capital.

Stock performance from here requires rising US yields to ease back-book

pressures.

Management: CEO Alex Wynaendts, appointed just ahead of the financial

crisis, has successfully recapitalised the group since the government bailout,

streamlining management, cutting head offices and costs, and most importantly

refocusing the life and pensions business towards capital-light products.

Conglomerate franchise: Global pensions provider with pension product

and platform knowledge shared by three key markets (US, UK, Netherlands); US

top heavy, represents >50% of total, but with no diversification benefits likely

under SII; top 10 US franchise, growing market share in variable annuities and

pensions (strong IT and service); Dutch mixed, group pensions leader growing

market share, individual challenged by life reform; UK top 10 life challenged

post RDR; CEE leadership in risk rider segment, Asia limited.

Capital: Solvency II indication 150%-200% at low end of peers, reflects US

overweight and lack of diversification benefits; last phase of deleverage 2014.

Returns: ROC lowest in sector at 8% (2015F), 9.5% ex run-off and non-core.

Cash: Momentum with remittance set to rise above 80% 2015/16 (65% 2013)

provided UK platform delivers.

Growth profile: 4% organic. US driven by VAs, pensions (seeking to grow

retention in roll-over assets from 10% to 30%), Dutch flat, New Markets

collection of growth strategies.

Dividend: No near-term momentum. 33% pay-out ratio, plus 3% buyback

2015/16. Eventual rise to 40% pay-out on our forecasts.

Corporate potential: Capital redeployment (Canada, France, US run-off) 8%;

annual reinvestment (dividend pay-out at 40%) 2%-3%; long-term earnings

progression would lift to 5%-8% dependent on future buyback levels.

Financial markets: US interest rate sensitive.

Re-rating scenario

Planned exit from France and Canada to allay residual concerns over SII.

Momentum at UK platform facilitates future dividends to holding.

Chart 32: AEGON Snapshot


Price EUR Net income Stated Cash Dividend PE PE Yield Price/ ROTNAV

6.07 m eps eps stated cash TNAV

2012 1,583 0.61 0.55 0.21 9.9 11.0 3.5% 77.5% 7.9%

2013 848 0.63 0.51 0.22 9.6 11.9 3.6% 80.7% 8.0%

2014F 1,607 0.68 0.53 0.23 8.9 11.6 3.8% 76.2% 9.1%

2015F 1,650 0.74 0.55 0.25 8.3 11.0 4.1% 71.9% 9.2%

2016F 1,757 0.80 0.58 0.27 7.6 10.4 4.4% 67.7% 9.4%

AGN NA

Hold

Price Target €6.60

Financials

Initiating Coverage

6 August 2014



Chart 33: AEGON versus European Equity Market

Source: Factset

Chart 34: AEGON versus European Insurance Sector

Source: Factset

AEGON Capital Allocation


Chart 35: AEGON: Earnings by Division


Chart 36: AEGON Rankings


Chart 37: AEGON Management


'10 '11 '12 '13 '1440

50

60

70

80

90

100

110

120

130

Source: FactSet PricesAEGON N.V.

'10 '11 '12 '13 '1460

70

80

90

100

110

120

130

Source: FactSet PricesAEGON N.V.

America55%

Nether14%

UK14%

ROW10%

Run-off capital

7%

Life Asset management

Rankings, market shares (%)

America Pensions 6, life 6 4%, variable annuites 7

Netherlands Group pensions 1 25%, individual 4 life 9%, a&h,

mortgages 7%, non-life 4%, savings <1%

UK Pensions 5 10%, protection 4%, individual

annuities 3%

CEE Life Hungary 6 9%, Poland 13 2%, Ukraine 7 6%;

pensions Solvakia 4 12%, Hungary 3 16%;

leadership risk riders

Asia Local strengths (leader India online term life)

Spain/France Spain Santander partnership

Office Appointed AEGON Previous

CEO Alex Wynaendts 2008 1997

CFO Daryl Button 2013 1999

US Mark Mullin 2009 1994

Dutch CEO Marco Keim 2008 2008 Swiss Life

UK CEO Adrian Grace 2011 2010 GE

Eastern Europe Gabor Kepecs 2010 1992

Chief Risk Officer Tom Grondin 2003 2000

Financials

Initiating Coverage

6 August 2014



Chart 38: AEGON P&L


EUR mn 2012 2013 2014F 2015F 2016F

Group underlying earnings

Americas 1,367 7% 1,369 0% 1,367 0% 1,436 5% 1,505 5%

The Netherlands 325 9% 354 9% 494 39% 501 2% 512 2%

United Kingdom 110 99 -10% 84 -15% 130 55% 152 55%

Other countries 274 10% 236 -14% 267 13% 314 18% 350 18%

Holding -224 -26% -113 -50% -136 20% -142 5% -142 5%

Group underlying earnings before tax 1,852 22% 1,945 5% 2,076 7% 2,239 8% 2,377 8%

Tax -427 48% -405 -5% -538 33% -580 8% -617 8%

Net underlying earnings 1,424 16% 1,540 8% 1,538 0% 1,659 8% 1,760 8%

Tax rate -23% -21% -26% -26% -26%

Fair value 11 -1,309 0 0 0

Net gains/losses on investments 407 502 102 0 0

Impairment charges -176 -121 -121 -130 -130

Other income/expenses -162 -52 0 0 0

Run-off 2 14 13 13 13

Income before tax 1,934 109% 978 -49% 2,070 112% 2,123 3% 2,261 3%

Corporation tax -351 -130 -464 257% -472 2% -504 2%

Net income 1,583 82% 848 -46% 1,606 89% 1,651 3% 1,757 3%

Perpetual debt charge -254 -278 -138 -50% -110 -20% -110 -20%

Net income ex pref 1,329 109% 570 -57% 1,468 158% 1,541 5% 1,647 5%

Tax rate -18% -13% -22% -22% -22%

EPS underlying (Euro) 0.61 16% 0.63 3% 0.68 8% 0.74 9% 0.80 8%

EPS net income (Euro) 0.70 106% 0.29 -58% 0.72 148% 0.73 2% 0.79 2%

Payout 30% 76% 32% 34% 34%

Dividend (Euro) 0.21 110% 0.22 5% 0.23 5% 0.25 9% 0.27 9%

0.23 0.26 0.28

Number of shares (average) 1,907 2,044 2,044 2,105 2,073

Number of shares (outstanding) 1,943 2,105 2,105 2,105 2,041

ROE underlying 7.4% 7.4% 8.3% 8.7% 8.8%

USA

Life and protection 581 11% 567 -2% 549 -3% 553 1% 553 0%

Fixed annuities 198 -3% 154 -22% 153 -1% 138 -9% 125 -10%

Variable annuities 279 9% 339 21% 345 2% 389 13% 436 12%

Mutual funds 19 23% 25 28% 33 31% 36 11% 40 10%

Employer solutions and pensions 248 6% 264 6% 268 2% 297 11% 327 10%

Canada 31 -15% 14 -56% 14 1% 14 5% 15 4%

Latam 9 7 7 8 10

US underlying earnings before tax 1,367 7% 1,369 0% 1,367 0% 1,436 5% 1,505

Account balance

Life and protection total 28,447 15% 28,435 0% 28,527 0% 29,762 4% 30,826 4%

Fixed annuities 14,604 -8% 12,925 -11% 11,269 -13% 10,217 -9% 9,195 -10%

Variable annuities 36,416 19% 44,108 21% 46,148 5% 50,207 9% 54,223 8%

Mutual funds 10,178 24% 11,469 13% 12,221 7% 13,296 9% 14,360 8%

Pensions 76,774 28% 92,426 20% 104,760 13% 121,360 16% 135,923 12%

Stable value solutions 47,374 10% 46,193 -2% 46,988 2% 49,700 6% 52,185 5%

Canada 5,654 -2% 5,423 -4% 5,253 -3% 5,292 1% 5,292 0%

Profit margins % account balance

Life and protection 2.10% 2.02% 1.96% 1.89% 1.83% -3%

Fixed annuities 1.25% 1.14% 1.28% 1.28% 1.28% 0%

Variable annuities 0.80% 0.85% 0.78% 0.80% 0.83% 4%

Mutual funds 0.20% 0.23% 0.28% 0.28% 0.29% 2%

Employer solutions and pensions 0.21% 0.20% 0.19% 0.18% 0.18% -1%

Canada 0.55% 0.25% 0.26% 0.27% 0.28% 4%

Financials

Initiating Coverage

6 August 2014



Chart 39: AEGON P&L (continued)


EUR mn 2012 2013 2014F 2015F 2016F

FY FY FY FY FY

Netherlands

Life 267 44% 243 -9% 267 10% 249 -7% 236 -5%

Pensions 67 -32% 111 66% 205 85% 226 10% 248 10%

General -27 -20 0 5 5 0%

Distribution 16 18 13% 19 5% 20 5% 21 5%

Share in profit/(loss) of associates 2 2 0% 2 2 2 0%

Neth underlying earnings before tax 325 9% 354 9% 494 39% 501 2% 512 2%

Profit margins % account balance

Life 1.48% 1.36% 1.50% 1.42% 1.38%

Pensions 0.20% 0.30% 0.52% 0.53% 0.54%

Account balance

Life and savings deposits 17690 -4% 18038 2% 17677 -2% 17324 -2% 16977 -2%

Pensions 35677 8% 37800 6% 40824 8% 44090 8% 47617 8%

UK

Life 81 -18% 98 21% 99 1% 100 1% 101 1%

Pensions 31 3 -15 30 51 70%

Distribution -2 -2 0 0 0

Underlying earnings before tax 110 99 -10% 84 -15% 130 55% 152 17%

Tax 29 83 -18 -26 47% -30 17%

UK underlying earnings 139 266% 182 31% 66 -64% 104 57% 122 17%

Tax rate 26% 84% -21% -20% -20% 0%

Account balance

Life 9941 6% 9628 -3% 9724 1% 9724 0% 9724 0%

Pensions 57163 8% 56997 0% 58707 3% 60468 3% 62282 3%

Total 67,104 8% 66,624 -1% 68,430 3% 70,192 3% 72,006 3%

Other

CEE 85 -11% 59 -31% 71 20% 76 7% 81 7%

Asia 19 42 30 45 50% 50 12%

Spain and France 69 -22% 33 -52% 35 7% 38 7% 40 7%

Variable annuities Europe 0 -100% 7 7 0% 7 5% 8 5%

AEGON Asset Management 101 68% 95 -6% 124 30% 148 20% 170 15%

Other underlying earnings before tax 274 10% 236 -14% 267 13% 314 18% 350 11%

Shareholders' equity opening 19914 23488 17601 19741 20717

Net income 1581 846 1606 1651 1757

Dividend paid -207 -323 -533 -564 -598

Foreign currency -107 -763 0 0 0

Own shares 0 0 0 0 0

Revaluation reserves 2592 -3075 1328 0 0

Perpetuals -195 -166 -138 -110 -110

Other -90 -40 -124 0 0

Shareholders' equity close 23488 12% 17601 -25% 19741 12% 20717 5% 21767 5%

Shareholders' funds average 15879 16976 7% 16868 -1% 17812 6% 18825 6%

Financials

Initiating Coverage

6 August 2014



Chart 40: AEGON Capital Allocation & ROCs


Tangible Capital 2012 2013 2014F 2015F 2016F

Hybrid debt 4990 4834 4331 4331 4331

Senior debt 3734 2834 2334 2334 2334

Total leverage 8724 37% 7668 -12% 6665 -13% 6665 0% 6665 0%

Shareholders' equity 21076 17601 19741 20717 21767

Defined benefit plans 1085 706 706 706 706

Non contolling interests and options 115 109 109 109 109

Total capital 31000 26084 27221 4% 28197 4% 29247 4%

Including unrealised gains on bonds 4737 2004 3232 61% 3232 0% 3232 0%

Total capital excluding unrealised gains 26263 24080 23989 0% 24965 4% 26015 4%

Goodwill -638 -211 -211 -211 -211

Tangible Capital 31638 26295 27432 4% 28408 4% 29458 4%

Tangible Capital excluding unrealised gains 26901 24291 24200 0% 25176 4% 26226 4%

Gross tangible debt ratio (26-30% range) 33.2% 31.6% 27.8% 26.7% 25.6%

Coverage ratio (6-8X target range) 4.5 5.1 7.7 9.4 10.0

Risk capital by division

US life and protection 1,138 1,137 0% 1,141 0% 1,190 4% 1,233 4%

US fixed annuities 1,168 1,034 -11% 902 -13% 817 -9% 736 -10%

US variable annuities 2,185 2,646 21% 2,769 5% 3,012 9% 3,253 8%

US mutual funds 102 115 13% 122 7% 133 9% 144 8%

US pensions 4,966 5,545 12% 6,070 9% 6,842 13% 7,524 10%

Canada 1,251 1,200 -4% 1,162 -3% 1,171 1% 1,171 0%

US total 10,810 11,677 8% 12,166 4% 13,166 8% 14,061 7%

UK 3,087 3,065 -1% 3,148 3% 3,229 3% 3,312 3%

Dutch 2,856 2,988 5% 3,131 5% 3,286 5% 3,457 5%

International 2,165 1,834 -15% 2,013 10% 2,214 10% 2,436 10%

Asset Management 222 236 6% 243 3% 267 10% 294 10%

US run-off 1,700 1,524 -10% 1,468 -4% 1,394 -5% 1,321 -5%

Allocated capital 20,839 21,323 2% 22,167 4% 23,557 6% 24,880 6%

Buffer 6,062 2,968 2,032 -32% 1,619 -20% 1,346 -17%

Total 26,901 24,291 -10% 24,200 0% 25,176 4% 26,226 4%

Solvency ratios by division

US life and protection 4% 4% 4% 4% 4%

US fixed annuities 8% 8% 8% 8% 8%

US variable annuities 6% 6% 6% 6% 6%

US mutual funds 1% 1% 1% 1% 1%

US pensions 4% 4% 4% 4% 4%

Canada (including VA run-off) 22% 22% 22% 22% 22%

UK 5% 5% 5% 5% 5%

Dutch 5% 5% 5% 5% 5%

International 19% 19% 19% 19% 19%

Asset Management 0.4% 0.4% 0% 0% 0%

ROC

America 9.3% 8.6% 8.6% 8.4%

Netherlands 9.6% 12.9% 12.5% 12.2%

UK 5.9% 2.2% 3.3% 3.8%

Other 4.4% 5.2% 5.5% 5.4%

Asset management 28.7% 35.1% 40.9% 42.7%

Run -off capital 0.6% 0.7% 0.7% 0.8%

ROC group 7.8% 7.7% 8.0% 7.9%

ROC ex non core 9.4% 8.9% 9.1% 9.0%

ROC ex non core and run -off 9.6% 9.3% 9.5% 9.3%

Financials

Initiating Coverage

6 August 2014



Chart 41: AEGON Cash Earnings


Chart 42: AEGON Valuation


Euro m 2012 2013 2014F 2015F 2016F

Cash generation

US 900 900 900 0% 945 5% 992 5%

Netherlands 250 250 250 0% 250 0% 250 0%

UK 175 135 160 170 190

New markets 50 50 50 0% 50 0% 50 0%

Ex market impact 1,375 11% 1,335 -3% 1,360 2% 1,415 4% 1,482 5%

Market impact 268 212 136 113 77

Total 1,643 872% 1,547 -6% 1,496 -3% 1,528 4% 1,559 2%

Remittance

US 900 850 850 0% 901 6% 901 0%

Netherlands 250 500 250 -50% 250 0% 250 0%

UK -400 0 50 150

Other 50 50 50 0% 50 0% 50 0%

Remittance 1,200 1,000 1,150 15% 1,251 9% 1,351 8%

Remittance ratio 73% 65% 77% 82% 87%

Holding -572 -11% -475 -17% -384 -19% -369 -4% -368 0%

Group cash flow 1,071 -326% 1,072 0% 1,112 4% 1,160 4% 1,191 3%

Holding cash flow 628 525 766 46% 882 15% 983 11%

Cash dividend -188 -408 -463 -484 -526

Net group cash flow 883 -286% 664 -25% 649 -2% 675 4% 664 -2%

Net holding cash flow 440 117 -73% 303 159% 398 32% 456 15%

Group cash earnings per share 0.55 0.51 -8% 0.53 4% 0.55 4% 0.58 6%

Dividend cover 334% 129% 165% 182% 187%

Net holding cash % tangible capital 2% 0% 1% 2% 2%

EUR mn Capital '14 Earnings '15 ROC CoC Growth Value Price to book PER Capital Value

US 9,804 1,029 10.5% 10.0% 4.0% 10,619 1.08 10.3 44% 52%

Netherlands 3,131 391 12.5% 10.0% 0.0% 3,857 1.23 9.9 14% 19%

UK 3,148 104 3.3% 10.0% 2.5% 1,694 0.54 16.3 14% 8%

International 1,671 96 5.7% 10.0% 4.0% 1,054 0.63 11.0 8% 5%

Asset management 243 99 1,291 13.0 1% 6%

Canada 1,162 10 581 0.50 5% 3%

France 342 15 171 0.50 2% 1%

US VA run off 1,200 10 600 0.50 5% 3%

US run-off other 1,489 10 745 0.50 7% 4%

Operational value 22,189 1,765 9.2 20,612 100% 100%

Excess capital 2,012 0 0.0

Debt -6,665 -249 -6,665

Total value 1,516 13,947 9.2

Per share 6.6

Financials

Initiating Coverage

6 August 2014



Allianz: Machu Picchu (The Old Mountain) Strong conglomerate franchise, comfortably capitalised on Solvency II, where

cash flows at the holding suggest significant scope to increase the dividend

pay-out ratio. Our mid-term forecast of 50% sees scope for 4% annual fresh

investments, suggesting a longer-term total earnings progression of 8%.

Management: Long-standing management team under CEO Michael

Diekmann; successful exit from Dresdner during the financial crisis, extensive

operational overhaul, cost cutting and streamlining over past decade; internal

succession possible later this year.

Conglomerate franchise: Grouping of leading franchises; German leader

(market share growing), mid-rankings in Europe, top US index annuities

provider, global leader credit insurance and assistance; problematic US non-life,

but small in context. PIMCO, the leading global fixed income manager, creates

an effective hedge for the impact of falling interest rates on life margins.

Capital: Solvency II confident 203% post additions for sovereign bonds;

leverage at acceptable levels.

Returns: ROC in line with peers 11% (2015F), life low at 8% but gradually

rising over long term as new business on higher IRRs replaces the back book.

Growth: 4% organic. Recent momentum has faltered on the back of PIMCO

outflows post tapering.

Cash: High remittance >80% high versus sector reflecting non-life and AM units;

management have indicated cash acceleration to holding of €3bn over next

three years.

Dividend: ‘Decision’ to be disclosed by management towards year-end. Scope

to increase to 50%-plus.

Corporate potential: Annual fresh investment potential 4%-5% (dividend

pay-out at 50%), suggesting long-term earnings progression 8%-9%.

Financial markets: European interest rate sensitivity, with PIMCO offset.

Re-rating scenario

PIMCO flows stabilise following recent fall in US interest rates, and fund

performance recovery, management rebuild (six new deputy CIOs, new CEO).

Possible management succession later this year leads to expectation of dividend

pay-out increase.

Chart 43: Allianz Snapshot


Price EUR Net income Stated Cash Dividend PE PE Yield Price / ROTNAV

123 m eps eps stated cash TNAV

2012 5,231 11.7 9.6 4.50 10.5 12.8 3.7% 191% 18.2%

2013 5,996 13.3 11.7 5.30 9.2 10.5 4.3% 165% 17.9%

2014F 6,098 13.8 11.6 6.04 8.9 10.6 4.9% 159% 19.2%

2015F 6,262 14.4 12.2 6.20 8.5 10.0 5.1% 144% 18.7%

2016F 6,601 15.2 13.0 7.26 8.1 9.4 5.9% 132% 17.9%

ALV GY

Hold


Financials

Initiating Coverage

6 August 2014



Chart 44: Allianz versus EuroStoxx

Source: Factset

Chart 45: Allianz Capital Allocation


Chart 46: Allianz Market Profile


Chart 47: Allianz versus EuroStoxx Insurance

Source: Factset

Chart 48: Allianz Divisional Earnings 2013


Chart 49: Allianz Management


'10 '11 '12 '13 '1490

100

110

120

130

140

150

Source: FactSet PricesAllianz SE

Germanic31%

France11%Italy

9%

Europe other

9%

USA8%

Global and UK

13%

ROW7%

AM12%


Germanic 1/1/3 life/non-life/health 17%/15%/9%

(tied agent leader,

Commerzbank/Dresdner)

Italy 5 life & non-life

Europe Various mid rankings

USA 1 equity index linked; 10 non-life

Global and UK 1 Credit and Assitance, 5 UK 5% pet

plan focus, affinity sales, car dealers, 4

Australia

Growth markets Non-life 1 Malaysia, 1 Hungary, 5

Poland, 5 Russia, 10 Indonesia; China

25% jv CPIC

Worldwide Partners 1

Asset management Top 5 globally, US 1 fixed interest

'10 '11 '12 '13 '1490

95

100

105

110

115

120

125

130

135

Source: FactSet PricesAllianz SE

Non-life Life Asset management

Office Appointed Allianz Previous

CEO Michael Diekmann 2003 1988

CFO Dieter Wemmer 2013 2013 Zurich CFO

COO Cristof Mascher 2009 1989

HR, Germanic markets Werner Zedelius 2011 2000

Germany Markus Riess 2007 2007

Europe, global p&c Oliver Bate 2013 2008 McKinsey

US Gary Bhojwani 2012 2004 Lincoln

Global Life Maximilian Zimmerer 2012 1988

Growth Markets Manuel Bauer 2011 1990

Global, Anglo Clemet B Booth 2006 2006 Munich Re, Aon

Iberia Latam Helga Jung 2012 1993

Asset management Jay Ralph 2012 1997

Douglas Hodge PIMCO CEO 2014 1989 PIMCO COO

Financials

Initiating Coverage

6 August 2014



Chart 50: Allianz P&L


EUR mn 2012 2013 2014F 2015F 2016F

Operating profit

Non-life 4,614 10% 5,268 14% 5,463 4% 5,610 3% 5,869 5%

Life 2,943 22% 2,709 -8% 2,920 8% 3,050 4% 3,189 5%

Asset management 2,953 31% 3,161 7% 2,845 -10% 3,026 6% 3,145 4%

Corporate -1,114 -1,004 -1,025 -1,025 -1,025

Consolidation -59 -68 -68 -68 -68

Total 9,337 19% 10,066 8% 10,135 1% 10,592 5% 11,110 5%

Finance costs -991 2% -901 -9% -829 -8% -829 0% -829 0%

Non operating 373 479 238 108 108

Pre-tax 8,719 80% 9,644 11% 9,544 -1% 9,871 3% 10,389 5%

Tax -3,161 55% -3,300 4% -3,120 -5% -3,250 4% -3,414 5%

Minorities -327 26% -348 6% -327 -6% -359 10% -374 4%

Net income (cont. ops) 5,231 106% 5,996 15% 6,098 2% 6,262 3% 6,601 5%

Tax rate 36% 34% 33% 33% 33%

EPS (operating) 11.2 33% 12.8 13% 13.8 8% 14.4 4% 15.2 5%

EPS (net) 11.5 44% 13.2 15% 13.4 2% 13.8 3% 14.5 5%

Dividend 4.5 0% 5.3 18% 6.0 14% 6.2 3% 7.3 17%

Payout ratio 39% 40% 45% 45% 50%

Number of shares 455 455 455 455 455

ROE 13.4% 13.3% 14.2% 13.4% 13.1%

Non-life

EUR mn 2012 2013 2014F 2015F 2016F

Net earned premiums 41,705 5% 42,047 1% 43,308 3% 44,608 3% 45,946 3%

Underwriting result 1,150 95% 2,008 75% 2,160 8% 2,314 7% 2,475 7%

Current investment income 3,463 -2% 3,280 -5% 3,162 -4% 3,152 0% 3,247 3%

Income from fair value assets -46 n.m -76 65% 0 0 0

Interest charge -47 -13% -52 11% -52 0% -52 0% -52 0%

Other (fee & other income & expenses) 89 -12% 111 25% 122 10% 122 0% 122 0%

Restructuring charge -146 -61 -20 -20 -20

Technical profit 4,463 6% 5,210 17% 5,372 3% 5,516 3% 5,772 5%

Net capital gains/losses 168 n.m. 69 -59% 102 48% 105 3% 108 3%

Impairments -17 -63% -11 -35% -11 0% -11 0% -11 0%

Operating profit 4,614 10% 5,268 14% 5,463 4% 5,610 3% 5,869 5%

Financial ratios

Premium retention 90% 91% 91% 91% 91%

Loss ratio 68.3% 65.9% 65.9% 65.9% 65.9%

Expense ratio 27.9% 28.4% 28.2% 28.0% 27.8%

Combined ratio 96.2% 94.3% 94.1% 93.9% 93.7%

Run-off ratio (2.5-3.0 points expected) -2.9% -4.0% -3.0% -3.0% -3.0%

Large claims ratio (3.2 points budget) 1.7% 2.9% 3.2% 3.2% 3.2%

Underlying combined ratio 97.4% 95.4% 93.9% 93.7% 93.5%

Underlying loss ratio 69.5% 67.0% 65.7% 65.7% 65.7%

Current investment income 3.5% 3.2% 3.1% 3.0% 3.0%

Capital gains 0.2% 0.1% 0.1% 0.1% 0.1%

Total investment income 3.5% 3.1% 3.1% 3.0% 3.0%

Financials

Initiating Coverage

6 August 2014



Chart 51: Allianz P&L (continued)


Life/Health

2012 2013 2014F 2015F 2016F

Premium loadings 2,973 2,987 0% 3,100 4% 3,193 3% 3,287 3%

Reserve loadings 926 1,004 8% 1,078 7% 1,143 6% 1,212 6%

Unit linked management fees 394 491 25% 527 7% 595 13% 672 13%

Loading & fees 4,293 4,482 4% 4,706 5% 4,931 5% 5,171 5%

Investment margin 2,925 2,532 -13% 2,765 9% 2,931 6% 3,107 6%

Acquisition expenses -4,072 -4,080 0% -4,325 6% -4,584 6% -4,859 6%

Admin & other expenses -1,358 -1,445 6% -1,528 6% -1,620 6% -1,717 6%

Total expenses -5,430 -5,525 2% -5,853 6% -6,204 6% -6,576 6%

Technical margin 1,208 1,191 -1% 1,274 7% 1,364 7% 1,459 7%

Operating profit pre DAC 2,996 2,680 -11% 2,892 8% 3,022 4% 3,161 5%

DAC impact -41 28 n.m 28 0% 28 0% 28 0%

Operating profit 2,955 2,708 -8% 2,920 8% 3,050 4% 3,189 5%

Financial ratios

Loadings % premiums 5.7% 5.3% 5.2% 5.1% 5.0%

Loadings % reserves 0.23% 0.24% 0.24% 0.24% 0.24%

Fees % UL reserves 0.59% 0.64% 0.61% 0.61% 0.61%

Investment reserves % policyholder reserves 0.87% 0.73% 0.75% 0.75% 0.75%

Expenses % PVNBP -9.0% -8.52% -8.52% -8.52% -8.52%

Admin expenses % reserves -0.3% -0.34% -0.34% -0.34% -0.34%

Operating profit % technical reserves 0.73% 0.59% 0.60% 0.59% 0.58%

Reserves 452,190 9% 471,937 4% 502,019 6% 534,448 6% 569,451 7%

Asset Management

Performance fees 766 68% 510 -33% 271 -47% 413 52% 429 4%

Management fees 7,163 21% 6,617 -8% 6,406 -3% 6,505 2% 6,766 4%

Net fee and commission income 6,731 23% 7,127 6% 6,677 -6% 6,918 4% 7,195 4%

Net interest income 24 9% 12 -50% 12 0% 12 0% 12 0%

Fair value result (operating) 16 n.m 13 -19% 13 0% 13 0% 13 0%

Other income 15 -29% 10 -33% 10 0% 10 0% 10 0%

Operating revenues 6,786 23% 7,162 6% 6,712 -6% 6,953 4% 7,230 4%

Operating expenses -3,770 16% -3,995 6% -3,868 -3% -3,928 2% -4,085 4%

Operating profit 2,953 31% 3,161 7% 2,845 -10% 3,026 6% 3,145 4%

Financial ratios

Net fees % AUM 0.50% 0.51% 0.49% 0.50% 0.50%

Expenses % AUM 0.28% 0.29% 0.29% 0.29% 0.29%

Pre-tax profit % AUM 0.21% 0.22% 0.20% 0.22% 0.22%

Opening AuM 1,281,000 1,438,000 1,329,000 1,348,935 1,402,892

Net flows 114,000 -12,000 -19,935 13,489 14,029

Market effect 115,000 -1,300 39,870 40,468 42,087

Other -72,000 -64,300 0 0 0

Closing AuM 1,438,000 1,361,000 1,348,935 1,402,892 1,459,008

Net flows % opening AuM 8.9% -0.8% -1.5% 1.0% 1.0%

Shareholders' funds opening 44,915 53,553 50,084 53,773 57,291

Net income 5,169 5,996 6,098 6,262 6,601

Other 5,506 -7,426

Dividend -2,037 -2,039 -2,409 -2,744 -2,818

Shareholders' funds close 53,553 50,084 53,773 57,291 61,074

Average ex unrealised gains 39,134 45,078 43,002 46,606 50,257

Financials

Initiating Coverage

6 August 2014



Chart 52: Allianz Capital Allocation & ROCs


Tangible Capital Euro m 2012 2013 2014F 2015F 2016F

Debt 7,400 7,500 6,700 6,700 6,700

PCs and sub debt 11,400 9,800 10,200 10,200 10,200

Total leverage 18,800 17,300 -8% 16,900 -2% 16,900 0% 16,900 0%

Shareholders' funds 53,553 50,084 53,773 57,291 61,074

Minorities 2,575 2,765 2,771 2,963 3,158

Total capital 93,728 87,449 90,344 94,054 98,032

Including unrealised gains 10,100 8,926 8,926 8,926 8,926

Total capital excluding unrealised gains 83,628 78,523 81,418 85,128 89,106

Goodwill -12,572 -13,727 -13,680 -13,635 -13,593

Tangible capital 81,156 73,722 76,664 80,419 84,439

Tangible Capital ex unrealised gains 71,056 64,796 -9% 67,738 5% 71,493 6% 75,513 6%

Gross debt ratio (tangible capital) 26.5% 26.7% 24.9% 23.6% 22.4%

Coverage ratio X 11.2 12.2 12.8 13.4


Non-life 25,023 25,228 1% 25,985 3% 26,765 3% 27,568 3%

Life 24,459 24,858 2% 26,437 6% 28,112 6% 29,889 6%

Asset management 7,190 6,805 -5% 6,745 -1% 7,014 4% 7,295 4%

Holding 4,600 4,600 4,600 0% 4,600 0% 4,600 0%


Buffer 14,384 3,304 3,971 20% 5,002 26% 6,162 23%

Total 71,056 64,796 -9% 67,738 5% 71,493 6% 75,513 6%


Non-life 60% 60% 60% 60% 60%

Traditional 7% 7% 7% 7% 7%

Variable annuities 6% 6% 6% 6% 6%

Unit linked 2% 2% 2% 2% 2%

Asset management 1% 1% 1% 1% 1%

ROC

Non-life 13.8% 14.6% 14.5% 14.7%

Life 7.3% 7.9% 7.7% 7.6%


ROC group 10.8% 11.1% 11.1% 11.2%

Financials

Initiating Coverage

6 August 2014



Chart 53: Allianz Cash Earnings


Chart 54: Allianz Valuation


Euro m 2012 2013 2014F 2015F 2016F

Cash remittance

Life 622 -42% 2,144 245% 1,376 -36% 1,432 4% 1,499 5%

Non-life 2,353 21% 2,772 18% 2,969 7% 3,038 2% 3,182 5%

AM 1,788 44% 1,975 10% 1,819 -8% 1,928 6% 2,006 4%

Total 4,763 12% 6,892 45% 6,165 -11% 6,398 4% 6,687 5%

Remittance ratio

Life (% stated life profits) 32% 118% 70% 70% 70%

Non-life 84% 84% 85% 85% 85%

AM 100% 100% 100% 100% 100%

Total 68% 92% 82% 82% 82%

Holding & debt -1,100 0% -1,100 0% -1,300 18% -1,300 0% -1,300 0%

Group cash flow 4,371 21% 5,317 22% 5,258 -1% 5,549 6% 5,901 6%

Holding cash flow 3,663 16% 5,792 58% 4,865 -16% 5,098 5% 5,387 6%

Dividend -2,045 0% -2,045 0% -2,409 18% -2,744 14% -2,818 3%

Group net cash flow 2,326 48% 3,271 41% 2,849 -13% 2,805 -2% 3,083 10%

Holding net cash flow 1,618 46% 3,746 132% 2,456 -34% 2,354 -4% 2,568 9%

Plus exceptional cash releases 1,000 1,000 1,000

Cash earnings per share 9.6 21% 11.7 22% 11.6 -1% 12.2 6% 13.0 6%

Dividend cover 179% 283% 202% 186% 191%

Net cash % tangible capital 3% 5% 4% 4% 4%

£ mn Capital '14 Earnings '15 ROE CoC Growth Value Price to capital PER '15 Capital Value

Non-life 25,985 3,874 14.9% 10.0% 2.5% 37,625 1.45 9.7 44% 46%

Life 26,437 2,088 7.9% 10.0% 3.5% 25,184 0.95 12.1 45% 31%

Asset management 6,745 1,752 19,268 11.0 11% 23%

Holding 4,600 -733 -7,331 10.0

Operational value 63,767 6,981 74,747 10.7 100% 100%

Excess 3,971 2,383 0.6

Debt -16,900 -556 3.3% -16,900

Total 50,838 6,425 60,229 9.4

Per share 132.5

Financials

Initiating Coverage

6 August 2014



Aviva: The Legacy of Chichen Itza Operational transformation under the new management team with cash flow

focus driven by deleveraging, expenses cuts and tighter head office controls

New growth strategies are being pursued to refocus the conglomerate

franchise (asset management rebuild, UK cross-sell), with potential for

capital release in the future from Europe to Asia.

Management: Corporate culture in rapid transformation following the arrival

of Mark Wilson as CEO (late 2012), former CEO and restorer of AIA ahead of its

IPO, with new management team appointed since. Management focus has

since been on cash generation and remittance to the group, simplification of the

corporate structure and tighter central management controls.

Conglomerate franchise: UK composite leader advantage with digital edge

for cross-sell; leading Canadian non-life insurer enabling transfer of analytics;

European proposition weaker, life franchises with third-party distribution; Asia

nascent though with strong distribution partners.

Capital: Solvency II low end for the sector 182% (2013 FY); leverage high

versus peer group with 40% target possibly achieved by 2015.

Returns: ROCs in line with peers 12.7% 2016F with the highest momentum in

the sector versus 2013 reflecting management actions.

Growth: We calculate 4% organic but to increase over time; seeking to increase

AM under Euan Munroe; emerging exposures in CEE & Asia where recent

distribution deal with Astra in Indonesia highlights Asian potential (Chris Wei

new CEO Global Life (previously CEO Great Eastern).

Cash: Remittance 79% 2016F versus 72% 2013; management aspiration >80%

longer term, with £800m guidance for 2016.

Dividend: Pay-out ratio 35% 2013, likely to rise to 40% over medium term.

Corporate potential: Annual fresh investment potential 2% (dividend pay-out

at 40%), suggesting 6% long-term earnings progression, rising to 7%-8% if asset

management expands to 20% of profit flows (5% currently). Future potential

exits from Spain, Italy and Ireland (15% of capital), financing Asian rebuild.

Financial markets: Some influence from UK equity markets; limited interest

rate sensitivity.

Re-rating scenario

Management over-deliver on expense, cash remittance ratios and deleveraging.

Longer-term growth prospects improve (growth strategies, capital reallocation).

Chart 55: Aviva Snapshot


Price p Net income Stated Cash Dividend PE PE Yield Price / ROTNAV


2012 -326 43.1 30.3 19.00 11.4 16.3 3.8% 242%

2013 648 42.7 37.3 15.00 11.6 13.2 3.0% 252% 20.9%

2014F 1,127 45.0 33.7 17.00 11.0 14.6 3.4% 223% 23.0%

2015F 1,336 50.6 39.2 19.00 9.8 12.6 3.8% 196% 22.8%

2016F 1,487 56.3 43.3 22.00 8.8 11.4 4.5% 172% 22.3%

AV/ LN

Buy

Price Target 584p

Financials

Initiating Coverage

6 August 2014



Chart 56: Aviva vs European Market (EuroStoxx)

Source: Factset

Chart 57: Aviva Capital Allocation


Chart 58: Aviva Market Profile


Chart 59: Aviva vs EuroStoxx Insurance

Source: Factset

Chart 60: Aviva Divisional Earnings 2014F


Chart 61: Aviva Management


'10 '11 '12 '13 '1470

80

90

100

110

120

130

Source: FactSet PricesAviva plc

UK life32%

UK non-life23%

Europe33%

Canada6%

Asia Pacific

5%

AM1%

UK 1/1 life/non-life 11%, multi distribution (digital edge,

Barclays, RBS, Santander, Tesco Post Office), protection 2,

healthcare 3; Ireland 3/1

Canada 2/3 life/non-life 8/6%

Europe Life: France 9 4% (AFER, direct, Credit du Nord), Spain 4

7%, Italy 7 6% (3/5 top banks), Poland 2 & Turkey

pensions 2, life 5

Other 5 Singapore, China 50/50 jv COFCO, Indonesia protection

via Astra

'10 '11 '12 '13 '1470

75

80

85

90

95

100

105

110

115

120

Source: FactSet PricesAviva plc

Life Non-life Asset Management

Office Appointed Aviva Previous

Chairman John McFarlane 2011 2011 CEO ANZ

CEO Mark Wilson 2012 2012 CEO AIA

CFO Tom Stoddard 2014 2014 Blackstone

Group Transformation Nick Amin 2013 2013 AIA

Aviva UK general Maurice Tulloch 2014 1992 Canada

UK & Ireland life David Barral 2011 1999 UK distribution

Europe David McMillan 2012 2002 Transformation

Aviva Investors Euan Munro 2014 2014 Standard Life

Financials

Initiating Coverage

6 August 2014



Chart 62: Aviva P&L


GBP mn 2012 2013 2014F 2015F 2016F

Life 1,831 1,901 4% 1,971 4% 2,069 5% 2,207 7%

General insurance and health 894 797 -11% 758 -5% 856 13% 889 4%

Asset Management 51 93 82% 117 25% 142 22% 171 20%

Other operations -177 -90 -100 11% -100 0% -100 0%

Market operating profit 2,599 2,701 2,746 2% 2,968 8% 3,167 7%

Corporate centre -136 -150 10% -150 0% -150 0% -150 0%

Group debt and interest -537 -502 -7% -461 -8% -421 -9% -391 -7%

Delta Lloyd 112

Total operating profit 2,038 2,049 1% 2,135 4% 2,396 12% 2,626 10%

Restructuring costs -461 -363 0% -100 -72% -50 -50% -50 0%

Total operating profit 1,577 1,686 7% 2,035 21% 2,346 15% 2,576 10%

Non operational items -1,402 -405 -168 -168 -168

Pre-tax profit 175 1,281 632% 1,867 46% 2,178 17% 2,408 11%

Tax operational -499 -534 -550 -634 -695

Tax non operational 238 131 45 45 45

Profit after tax -86 878 1,363 55% 1,590 17% 1,758 11%

Minorities -168 -143 -149 4% -167 12% -183 10%

Net income -254 735 1,214 1,423 1,574

DCI coupon -55 -70 27% -70 0% -70 0% -70 0%

Pref dividend -17 -17 0% -17 0% -17 0% -17 0%

Net income available to shareholders -326 648 1,127 1,336 1,487

Per share pence

EPS operating 43.1 42.7 -1% 45.0 5% 50.6 13% 56.3 11%

EPS net income -11.2 22.0 38.3 74% 45.4 19% 50.6 11%

Dividend pence 19.0 15.0 -21% 17.0 13% 19.0 12% 22.0 16%

Payout ratio 44% 35% 38% 38% 39%

Tax rate operational -32% -32% -27% -27% -27%

Number of shares 2,910 2,940 2,940 2,940 2,940

ROE operating net income 15.5% 15.9% 16.4% 16.6%

Life total

Gross premiums 13209 12,674 -4% 12,674 0% 12,674 0% 12,674 0%

New business income 987 838 -15% 803 -4% 816 2% 874 7%

APE 2,728 2,710 -1% 2,631 -3% 2,689 2% 2,879 7%

Underwriting margin 658 570 -13% 567 -1% 588 4% 629 7%

Total investment margin 1,964 1,944 -1% 2,020 4% 2,111 5% 2,209 5%

Total income 3,609 3,352 -7% 3,389 1% 3,515 4% 3,713 6%

Acqusition expenses -868 -678 -22% -663 -2% -682 3% -733 7%

Admin expenses -919 -904 -2% -884 -2% -893 1% -902 1%

Expenses -1,787 -1,582 -11% -1,547 -2% -1,575 2% -1,635 4%

DAC/AVIF amortization 9 131 1356% 129 -2% 129 0% 129 0%

Operating profit 1,831 1,901 4% 1,971 4% 2,069 5% 2,207 7%

Life margin % reserves

Unit-linked 1.07% 1.02% 1.02% 1.03% 1.03%

Partcipating 0.54% 0.59% 0.60% 0.61% 0.62%

Spread 0.43% 0.44% 0.43% 0.43% 0.43%

Total 0.80% 0.82% 0.82% 0.83% 0.85%

Average reserves

Unit-linked 82,100 86,400 5% 92,872 7% 99,293 7% 106,247 7%

Partcipating 101,400 100,400 -1% 100,073 0% 100,772 1% 101,599 1%

Spread 45,300 46,400 2% 48,012 3% 49,951 4% 51,969 4%

Total 228,800 233,200 2% 240,957 3% 250,016 4% 259,815 4%

Financials

Initiating Coverage

6 August 2014



Chart 63: Aviva P&L (continued)


AVIVA non-life 2012 2013 2014F 2015F 2016F

Premiums net earned 7,960 7,758 -3% 7,310 -6% 7,471 2% 7,636 2%

Underwriting result 200 208 4% 166 -20% 264 59% 297 13%

Longer-term investment result 697 549 -21% 528 -4% 511 -3% 493 -3%

Other -28 -10 0 0 0

Operating profit 869 747 -14% 693 -7% 774 12% 790 2%

Operating profit: Health 25 50 100% 65 30% 82 26% 99 21%

Operating profit: Non-life 894 797 -11% 758 -5% 856 13% 889 4%

Loss ratio 64.2% 64.5% 65.4% 64.7% 64.6%

Expense ratio 32.8% 32.8% 32.3% 31.8% 31.5%

Combined ratio 97.0% 97.3% 97.7% 96.5% 96.1%

Current year 61.6% 61.1% 61.3% 61.3% 61.2%

Weather 3.5% 4.3% 5.0% 4.3% 4.3%

Reserve releases -0.9% -0.9% -0.9% -0.9% -0.9%

Loss ratio 64.2% 64.5% 65.4% 64.7% 64.6%

Long term investment yield 3.4% 3.0% 3.0% 2.8% 2.7%

AVIVA Fund management

Aviva investors 39 68 74% 80 17% 91 14% 105 15%

United Kingdom 11 23 109% 35 50% 48 40% 63 30%

Asia Pacific 1 2 2 20% 3 20% 3 20%

Total 51 93 82% 117 25% 142 22% 171 20%

3rd party assets (Aviva Investors)

Opening 51,309 48,135 51,504 55,625

Net sales -1,264 1,444 2,060 2,781

Market -1,910 1,925 2,060 2,225

Closing 51,300 48,135 -6% 51,504 7% 55,625 8% 60,631 9%

Average 49,722 49,820 53,565 58,128

Inflows % opening -2.5% 3.0% 4.0% 5.0%

Operating profit % AuM 0.14% 0.16% 0.17% 0.18%

Group expenses 3,234 3,006 -7% 2,900 -4% 2,900 0% 2,900 0%

Operating expense ratio 57% 54% 53% 51% 49%

Group debt costs and other interest

Sub debt -294 -305 0% -287 -6% -269 -6% -259 -4%

Other -23 -23 0% -23 0% -22 -6% -21 -4%

Internal debt -307 -231 -25% -208 -10% -187 -10% -168 -10%

Net finance on UK pensions 87 57 0% 57 0% 57 0% 57 0%

Total -537 -502 -7% -461 -8% -421 -9% -391 -7%

AVIVA shareholder's funds development

Opening shareholders' equity 12,207 8,204 7,964 8,650 9,486

Net income taken through equity -3,810 1,215 1,127 1,336 1,487

Capital and dividends -847 -538 -441 -500 -559

Increase in capital & other items 654 -917 0 0 0

Closing shareholders' equity 8,204 7,964 8,650 9,486 10,415

Shareholders' funds average 8,084 8,307 9,068 9,951

Financials

Initiating Coverage

6 August 2014



Chart 64: Aviva Capital Allocation & ROCs


Chart 65: Aviva Valuation



DCI, Tier 1 1,832 1,832 1,832 1,832 1,832

Subordinated debt 4,337 4,370 4,130 3,870 3,870

Other debt 802 755 755 755 755

Total debt 6,971 6,957 6,717 6,457 6,457


Minorities 1,324 1,221 1,326 1,454 1,597

Total capital 16,499 16,142 16,693 17,398 18,469

Goodwill -2,523 -2,204 -2,135 -2,065 -1,996


Gross debt ratio (tangible) 49.9% 49.9% 46.1% 42.1% 39.2%

Fixed charge cover X 5.1 5.9 6.6


Life 9,132 9,442 9,815 4% 10,225 4% 10,655 4%

P&C 4,776 4,655 4,386 -6% 4,483 2% 4,581 2%

Asset Management 513 481 515 7% 556 8% 606 9%

Allocated capital 14,421 14,578 14,716 1% 15,263 4% 15,843 4%

Buffer -445 -640 -158 69 -144% 630 815%

Total (tangible capital) 13,976 13,938 14,559 4% 15,332 5% 16,473 7%


Non-life % premiums 60% 60% 60% 60% 60%

Life unit linked % funds 2% 2% 2% 2% 2%

Life participating % funds 7% 7% 7% 7% 7%

Life spread % funds (ex UK with-profits) 7% 7% 7% 7% 7%

Asset Management requirement 1% 1% 1% 1% 1%

ROC

Life 14.2% 15.2% 15.4% 15.8%

Non-life 11.4% 11.9% 14.3% 14.5%

ROC group 11.1% 11.4% 12.2% 12.7%


Non-life 4,386 625 14.3% 10.0% 2.5% 6,585 1.50 10.5 30% 24%

Life 9,815 1,510 15.4% 10.0% 4.0% 18,928 1.93 12.5 67% 69%


Holding 0 -183 -1,825 10.0

Operational value 14,716 2,057 25,764 12.5

Excess -158 0 0.0

Debt 6,717 -423 -6.3% -6,717

Minorities 1,326 -149 -1,867 12.5

Total 22,602 1,485 17,181 11.6

Per share 584

Financials

Initiating Coverage

6 August 2014



Chart 66: Aviva Cash Earnings


GBP mn 2012 2013 2014F 2015F 2016F

Cash generation

UK & Ireland life 688 595 -14% 593 0% 596 1% 620 4%

UK & Ireland non-life 376 374 -1% 335 -10% 352 5% 356 1%

France 330 294 -11% 321 9% 347 8% 370 7%

Poland 124 135 9% 156 16% 173 11% 189 10%

Italy 75 88 17% 94 7% 101 7% 108 7%

Spain 78 51 -35% 51 0% 54 7% 58 6%

Other Europe -36 -10 -72% -10 0% -10 0% -10 0%

Europe 571 558 -2% 612 10% 666 9% 716 8%

Canada 192 177 143 -19% 180 25% 182 1%

Asia 80 97 21% 96 -1% 109 14% 126 16%

Other -48 -29 -15 -15 -15

Total 1,859 1,772 -5% 1,764 0% 1,887 7% 1,986 5%

Cash remittance

UK & Ireland life 150 370 147% 415 12% 435 5% 465 7%

UK & Ireland non-life 150 347 131% 312 -10% 327 5% 331 1%

France 202 235 16% 257 9% 278 8% 296 7%

Poland 70 85 21% 113 32% 130 15% 151 17%

Italy 0 12 19 30 43

Spain 68 51 -25% 51 0% 54 7% 58 6%

Other Europe 3 5 67% 5 0% 5 0% 5 0%

Europe 343 388 13% 444 14% 497 12% 554 11%

Canada 136 130 110 142 146

Asia 25 20 -20% 29 44% 44 52% 63 45%

Other 140 14 0 0 0

Total 944 1,269 34% 1,310 3% 1,445 10% 1,559 8%

Remmitance ratio

UK & Ireland life 22% 62% 70% 73% 75%

UK & Ireland non-life 40% 93% 93% 93% 93%

France 61% 80% 80% 80% 80%

Poland 56% 63% 72% 75% 80%

Italy 0% 14% 20% 30% 40%

Spain 87% 100% 100% 100% 100%

Europe 60% 70% 73% 75% 77%

Canada 71% 73% 77% 79% 80%

Asia 31% 21% 30% 40% 50%

Remittance Ratio 51% 72% 74% 77% 79%

Local holding costs -422 -250 -240 -230 -230

Central costs, debt -677 -621 -8% -533 -14% -504 -5% -482 -4%

Group cash flow 883 1,096 24% 991 -10% 1,153 16% 1,274 10%

Holding cash flow -155 398 -357% 537 35% 711 32% 847 19%

Dividends -723 -537 -26% -441 -18% -500 13% -559 12%

Net group cash flow 160 559 249% 550 -2% 653 19% 715 10%

Net holding cash flow -878 -139 -84% 96 -169% 211 120% 289 37%

Cash earnings per share 0.30 0.37 0.34 -10% 0.39 16% 0.43 10%

Dividend cover -21% 74% 122% 142% 152%

Net holding cash % tangible capital -6% -1% 1% 1% 2%

Financials

Initiating Coverage

6 August 2014



AXA: The Great Wall of China Ambition plan 2015 has steered the group back towards a level of acceptable

balance sheet strength, which can now afford to grow, with increased cash

flows at the holding reflecting the earlier overhaul in life business mix.

Commitment to emerging market growth has increased in recent years, a

trend we expect to continue.

Management: Henri de Castries (CEO since 2000) and his long-standing

management team have recently signed up for four more years. AXA was not

forced at any stage of market stress over the past 15 years to raise capital, with

AXA’s leadership demonstrating a considerable ability in the process to adapt to

changing market conditions.

Conglomerate franchise: AXA’s solid European base (top 3 in a number of

markets) is supported by a focused life presence in the US and Japan with a

broad spread of emerging market presence representing 12% of group profits,

and a leading global brand that has enabled it to secure a range of leadership

distribution deals in recent years.

Capital: Solvency II ratio 210% (Q1 2014) towards high end for peers (though

with residual uncertainty); leverage within management’s target zone.

Returns: ROC towards the high end for peers 13% 2016F rising from 12% 2013

reflecting Ambition 2015 benefits.

Growth: 5% organic where non-life growth is supported by direct presence,

market leadership in Asia and cross-sell in commercial. Emerging market

exposure currently at 12% is likely to expand further to 20-25% by 2020.

Cash: Remittance 79% 2016F versus 76% 2013. We forecast €1.2bn of excess

cash generated at the holding annually by 2016.

Dividend: We expect the pay-out ratio range of 40%-50% (in normal market

conditions 40%) to ‘lift’ to 45% following strong signals from management at

the recent 1H analyst conference.


at 45%), suggesting 7% long-term earnings progression, rising to 8% from

potential capital release elsewhere (life back books).

Financial markets: Interest rate and equity market sensitive versus peers.

Re-rating scenario

Earnings momentum driven by specific growth strategies.

Earnings growth over the longer term feeding through from add-on

acquisitions, distribution deals and emerging market commitment.

Chart 67: AXA Snapshot


Price Euro Net income Stated Cash Dividend PE PE Yield Price / ROTNAV


2012 4,453 1.8 1.5 0.72 9.6 11.4 4.1% 165% 16.9%

2013 5,161 2.0 1.7 0.81 8.6 10.3 4.7% 148% 19.3%

2014F 5,586 2.2 1.7 0.91 8.0 10.3 5.3% 132% 18.6%

2015F 5,933 2.3 1.8 0.99 7.6 9.6 5.7% 121% 17.4%

2016F 6,391 2.5 2.0 1.11 7.1 8.8 6.4% 112% 17.2%

CS FP

Buy


Financials

Initiating Coverage

6 August 2014



Chart 68: AXA versus European equity market (EuroStoxx)

Source: Factset

Chart 69: AXA Capital Allocation


Chart 70: AXA Market Rankings


Chart 71: AXA versus European insurers (EuroStoxx)

Source: Factset

Chart 72: AXA Earnings by Division 2013


Chart 73: AXA Management


'10 '11 '12 '13 '1440

50

60

70

80

90

100

110

120

130

140

Source: FactSet PricesAXA SA

France22%

Germany9%

Europe other18%

Switz 11%

UK5%

US16%

Japan4%

Other6%

AM9%


France 2 non-life 15% 1/1/3/gp pensions, protection,

savings 18%/13%/8%

Germany 4/7/5 non-life/life/health 6%/4%/7%

Mediterranean

Region

non life: Italy/Spain 5/4 5%/7% - life Italy/Spain

7/12 5%/2%

Switzerland 1/1 non-life/life 13%/30%

Belgium 1/1 non-life/life 19%/14%

United Kingdom 4/2 non-life/medical 6%/27%

United States 2/6 variable life/VA 10%/5%

Japan 17/7 life/medical 2%

Hong Kong 1/5 non life/life 6%/8%

Direct 3 Europe

Other China jvs Tian Ping, ICBC; Philippines 2,

Thailand 4, Indonesia 2; Asia non-life 1.

'10 '11 '12 '13 '1475

80

85

90

95

100

105

110

115

Source: FactSet PricesAXA SA

Non-life Life Asset Management

Office Appointed AXA Previous

Chairman CEO Henri de Castries 2000 1989

Deputy CEO, CFO Denis Duverne 2010 1995

Deouty CFO Gerald Harlin 2008 1990

Med, Latam, Global Jean-Laurent Granier 2010 1990

Alliance Peter Kraus 2008 2008 Goldman

France, Direct Nicolas Moreau 2010 1997

US Mark Pearson 2011 1995

COO Jacques de Vauccleroy 2013 2006 JP Morgan

Vice Chairman* Norbert Dentressangle 2006 2006

*Independent governance

Financials

Initiating Coverage

6 August 2014



Chart 74: AXA P&L


EUR mn 2012 2013 2014F 2015F 2016F

Life & Savings 2,603 15% 2,793 7% 2,994 7% 3,192 7% 3,427 7%

Property & Casualty 1,877 2% 2,105 12% 2,325 10% 2,432 5% 2,564 5%

International Insurance 167 -40% 202 21% 211 4% 225 7% 240 7%

Asset Management 379 18% 400 6% 400 0% 439 10% 474 8%

Banking 4 -88% 78 1850% 78 0% 82 5% 86 5%

Holding -875 4% -851 -3% -882 4% -838 -5% -800 -4%

Total AXA underlying 4,155 6% 4,727 14% 5,126 8% 5,533 8% 5,991 8%

Capital gains 298 434 460 400 400

Total AXA adjusted 4,453 24% 5,161 16% 5,586 8% 5,933 6% 6,391 8%

Other -396 -680 -288 -238 -238

Net income 4,057 -6% 4,481 10% 5,298 18% 5,695 8% 6,153 8%

Debt charges not on net income -292 -284 -311 -311 -311

Per share

Earnings AXA adjusted 1.81 26% 2.03 12% 2.17 7% 2.29 6% 2.46 7%

Earnings net income 1.61 -8% 1.76 10% 2.06 17% 2.20 7% 2.36 7%

Dividend 0.72 4% 0.81 13% 0.91 13% 0.99 8% 1.11 12%

Payout ratio 40% 40% 42% 43% 45%

Number of shares (average) 2,343 2,384 2,426 2,450 2,475

ROE AXA adjusted 13.3% 14.8% 14.9% 14.2% 14.0%

AXA Life

P&l 2012 2013 2014F 2015F 2016F

FY FY FY FY FY

Underlying earnings

Margin on revenues 4955 4% 5139 4% 4402 -14% 4578 4% 4761 4%

Margin on assets 5069 5% 5277 4% 5194 -2% 5555 7% 5899 6%

Of which unit linked fees 2066 3% 2559 24% 2493 -3% 2690 8% 2900 8%

Of which general account margin 2697 11% 2710 0% 2692 -1% 2856 6% 2990 5%

Of which other fees 306 -27% 8 -97% 8 5% 9 5% 9 5%

Total revenues 10024 5% 10416 4% 9596 -8% 10133 6% 10661 5%

Mortality margin 1400 -4% 943 -33% 1300 38% 1390 3% 1470 3%

VA hedging margin -1043 -217 -280 -280 -280

Technical margin total 357 726 1020 40% 1110 9% 1190 7%

Acquisition -3,972 23% -4,415 11% -3,910 -11% -4,133 6% -4,370 6%

Admin -2,885 -4% -2,859 -1% -2,746 -4% -2,779 1% -2,832 2%

Expenses -6,910 11% -7,274 5% -6,656 -8% -6,912 4% -7,202 4%

VIF unwind -179 -25% -167 -7% -109 -35% -109 0% -109 0%

Associates 86 85 106 25% 106 0% 106 0%

Pre-tax 3,378 15% 3,786 12% 3,958 5% 4,328 9% 4,647 7%

Tax -696 17% -905 30% -871 -4% -1,034 19% -1,111 7%

Minorities -78 15% -89 12% -93 5% -102 9% -109 7%

Net 2,604 15% 2,792 7% 2,994 7% 3,192 7% 3,427 7%

Capital gains 214 332 275 275 275

Adjusted earnings 2,818 26% 3,124 11% 3,269 5% 3,467 6% 3,702 7%

Financial ratios

Margin on revenues 9.0% 9.3% 7.8% 7.8% 7.8%

Unit linked fees % funds 1.46% 1.65% 1.44% 1.44% 1.44%

General account fees % funds 0.77% 0.80% 0.79% 0.80% 0.80%

Mortality margin 0.29% 0.19% 0.27% 0.27% 0.27%

Acquisition expenses % new business APE -64.4% -69.8% -62.5% -62.0% -61.5%

Admin expenses -0.60% -0.59% -0.56% -0.54% -0.52%

Pre tax profits 0.70% 0.78% 0.81% 0.84% 0.85%

Financials

Initiating Coverage

6 August 2014



Chart 75: AXA P&L (continued)


P&L 2012 2013 2014F 2015F 2016F

AXA non-life

Earned premiums 28,356 6% 28,757 1% 29,332 2% 29,919 2% 30,517 2%

Claims -19,172 6% -19,516 2% -19,848 2% -20,245 2% -20,650 2%

Expenses -7,637 5% -7,639 0% -7,568 -1% -7,569 0% -7,568 0%

Reinsurance -956 6% -673 -30% -684 2% -698 2% -712 2%

Underwriting result 591 929 1,232 1,406 1,587

Investment income 2,012 -1% 2,047 2% 2,047 -1% 2,029 -1% 2,040 -1%

Interest -5 -5 -5 0% -5 0% -5 0%

Affiliates & associates 43 13% 29 -33% 44 50% 44 0% 44 0%

Other 59 -20% 57 -3% 59 3% 59 0% 59 0%

Pre-tax 2,700 3% 3,057 13% 3,376 10% 3,532 5% 3,724 5%

Tax -834 11% -911 9% -1,006 -1,053 -1,110

Minorities 11 -133% -41 -473% -45 10% -47 5% -50 5%

Net 1,877 2% 2,105 12% 2,325 10% 2,432 5% 2,564 5%

Capital gains 171 108 155 100 100

Adjusted earnings 2,048 15% 2,213 8% 2,480 12% 2,532 2% 2,664 5%

Financial ratios

Loss ratio -70.8% -70.1% -70.0% -70.0% -70.0%

Expense ratio -26.9% -26.5% -25.8% -25.3% -24.8%

Combined ratio -97.7% -96.6% -95.8% -95.3% -94.8%

Nat Cats -0.4% -0.8% -1.0% -1.0% -1.0%

Prior year reserve developments 1.2% 1.2% 1.3% 1.3% 1.3%

Current year loss ratio -72.0% -71.3% -71.3% -71.3% -71.3%

Current year combined ratio -98.9% -97.8% -97.1% -96.6% -96.1%

Investment yield 3.6% 3.6% 3.6% 3.5% 3.4%


Dividend -1,626 -1,720 -1,960 -2,238 -2,442

Net income 4,152 4,152 4,152 4,152 4,152

Pension actuarial 4,722 -3,115 6,079 1,232 1,690

Shareholders' funds close 53,665 52,923 61,194 64,341 67,741

Financials

Initiating Coverage

6 August 2014



Chart 76: AXA Capital & ROCs



Senior debt 3,345 2,421 1,621 621 621

Subordinated 7,300 7,800 6,600 6,500 6,500

Derivatives -400 0 0 0 0

Cash -5,100 -5,700 -4,700 -3,200 -2,900

Total net debt 5,145 4,521 3,521 3,921 4,221

Perpetual sub 1,600 1,800 2,700 2,700 2,700

Perpetual deep sub 6,200 6,000 6,100 6,100 6,100

Total perpetual 7,800 7,800 8,800 8,800 8,800

Total gross debt 18,045 18,021 17,021 15,921 15,921

Shs equity (excluding perpetual) 45,865 45,123 52,394 55,541 58,941

Minorities 2,355 2,391 2,765 2,907 3,060

Total capital 66,265 65,535 72,179 74,368 77,922

Including unrealised bond gains 9,543 6,494 10,558 10,558 10,558

Total capital ex unrealised gains 56,722 -1% 59,041 4% 61,621 4% 63,810 4% 67,364 6%

Add back real estate gains off balance sheet 3,472 3,415 3,415 3,415 3,415

Goodwill -14,784 -13,795 -14,252 -14,252 -14,252


Tangible capital excluding real estate gains 41,938 45,246 47,369 49,558 53,112

Gross debt ratio (tangible) 39.7% 37.0% 33.5% 30.1% 28.2%

Coverage ratio 9.3 10.2 10.5 11.8 12.7

Solvency 7 capital by division

Life 26,527 26,709 27,707 4% 29,229 5% 30,803 5%

P&C 15,596 15,816 16,133 2% 16,455 2% 16,784 2%

Asset Management 4,073 4,112 4,530 10% 4,834 7% 5,165 7%

International 1,968 2,092 2,176 4% 2,285 5% 2,399 5%


Buffer -785 -68 239 169 1,376

Total 45,410 48,661 50,784 52,973 56,527

Solvency 7 ratios by division


International % premiums 70% 70% 70% 70% 70%


Life traditional % funds 7% 7% 7% 7% 7%

VA % funds 4% 6% 6% 6% 6%

Asset Management requirement 1% 1% 1% 1% 1%

ROC

Nonlife 13.1% 14.0% 15.4% 15.4%

Life 10.6% 11.7% 11.8% 11.9%

ROC total 11.6% 12.3% 12.5% 12.7%

Financials

Initiating Coverage

6 August 2014



Chart 77: AXA Cash Earnings


Chart 78: AXA Valuation


AXA cash generation

2012 2013 2014F 2015F 2016F

Cash generation

Life 2,157 23% 2,274 5% 2,464 8% 2,663 8% 2,872 8%

Non-life 2,209 6% 2,404 9% 2,339 -3% 2,398 3% 2,538 6%

AM 383 1% 478 25% 478 0% 521 9% 560 9%

Total 4,749 13% 5,156 9% 5,280 2% 5,582 6% 5,970 7%

Cash remittance 3,500 9% 3,900 11% 4,066 4% 4,354 7% 4,717 8%


Holding & interest -1,167 3% -1,135 -3% -1,193 5% -1,149 -4% -1,111 -3%

Group cash flow 3,582 16% 4,021 12% 4,087 2% 4,434 8% 4,859 10%

Holding cash flow 2,333 13% 2,765 19% 2,873 4% 3,206 12% 3,605 12%

Dividend -1,615 2% -1,708 6% -1,955 14% -2,226 14% -2,430 9%

Net group cash flow 1,967 32% 2,314 18% 2,132 -8% 2,207 4% 2,429 10%

Net holding cash flow 718 49% 1,057 47% 918 -13% 979 7% 1,176 20%

Dividend cover 144% 162% 147% 144% 148%

Cash flow % IFRS profits 86% 82% 77% 79% 80%

Net holding cash % net tangible capital 2% 2% 2% 2% 2%

Cash earnings per share 1.53 14% 1.69 10% 1.68 0% 1.81 7% 1.96 9%

£ mn Capital '14 Earnings '15 ROE CoC Cap Growth Value Price to capital PER '15 Capital Value

Non-life 16,133 2,532 15.7% 10.0% 2.5% 25,340 1.57 10.0 32% 35%

Life 27,707 3,467 12.5% 10.5% 4.0% 37,866 1.37 10.9 55% 52%

International non-life 2,176 225 10.3% 10.0% 2,251 10.0 4% 3%

Asset management 4,530 521 11.5% 6,777 13.0 9% 9%

Holding 0 -512 -5,117 10.0 100% 100%

Operational value 50,545 6,234 67,117

Buffer 239 0

Debt -15,400 -681 -15,400

Total 35,384 5,553 51,765 9.3

Per share 21.4

Financials

Initiating Coverage

6 August 2014



Generali: The Colisseum Generali’s operational transformation and de-politicisation under CEO

Greco’s new management team should see the full return potential of the

strong European franchise finally being achieved.

Management: Mario Greco , CEO since 2012, known for his efficiency drives at

RAS (Allianz) and Zurich, is proving the catalyst of governance modernisation at

Generali, driving the group from a loosely run federation of companies into a

fully integrated conglomerate.

Conglomerate franchise: Italian leadership supported by positions of

strength in Germany, Austria and France, with a 6% market share in the CEE

facilitating a growth angle. Cross-border European efficiencies likely to be

developed further.

Capital: Solvency II in line with peers, close to 200%, where the expected sale

of BSI would secure the Solvency 1 target at 160%. Leverage set to reach target

levels in 2015 on our forecasts.

Returns: ROC 10%-11% towards low end for the sector possibly reflects low

usage of DAC accounting; recent impact of falling yields in Italy and declining

non-life pricing to be offset by full integration of the Italian businesses.

Growth: 4%-5% organic. Hybrid offerings in Italy initially successful, diversified

distribution in Germany, direct leader Europe, CEE franchise.

Cash: Remittance ratio of >75% reached in 2015 on our forecasts. We calculate

€800m of excess cash generated at the holding by 2016 based on a 40% pay-

out ratio.

Dividend: Likely to increase in steps to 45% (versus 36% 2013F) following

management guidance of above 40% at the 1H analyst conference, where an

additional 5% on the pay-out equates to €125m.


at 45%), suggesting 7% long-term earnings progression.

Financial markets: The most sensitive to European yields, Italian and German;

benefits from spread tightening between the two.

Re-rating scenario

The current efficiency measures more than compensate for the fall in yields and

lower non-life pricing in Italy, where a further wave of cross-border integration is

initiated over the medium term.

Growth rate surprises on the upside (launch of Italian life hybrid products).

Chart 79: Generali Snapshot


Price Euro Net income Stated Cash Dividend PE PE Yield Price / ROTNAV


2012 95 1.25 0.94 0.20 12.5 16.6 1.3% 202% 18.6%

2013 2,136 1.33 1.37 0.45 11.7 11.4 2.9% 176% 17.2%

2014F 2,160 1.54 1.66 0.58 10.1 9.4 3.7% 160% 17.4%

2015F 2,701 1.76 1.55 0.75 8.9 10.1 4.8% 144% 18.1%

2016F 2,950 1.91 1.65 0.85 8.2 9.4 5.5% 130% 17.6%

G IM

Hold


Financials

Initiating Coverage

6 August 2014



Chart 80: Generali versus equity market (EuroStoxx)

Source: Factset

Chart 81: Generali Capital Allocation


Chart 82: Generali Market Rankings


Chart 83: Generali versus insurance sector (EuroStoxx)

Source: Factset

Chart 84: Generali Earnings by Division


Chart 85: Generali Management


'10 '11 '12 '13 '1450

60

70

80

90

100

110

120

Source: FactSet PricesAssicurazioni Generali S.p.A.

Italy31%

Germany21%

France23%

Europe other14%

CEE5%

ROW6%


Italy 1/1 life/non-life 22%; tied agents, direct

Germany 2/3 life/non-life 8/6%; tied agents, DVAG,

Cosmos Direct, Commerzbank

France 5/7/5 life/non-life/health 6%/6%/7%

Austria 1 25%

Europe other Spain 5%; various

CEE Total 6%: Czech Republic 35%, Slovakia 10%,

Hungary 22%/9% (non-life/life), Slovakia 8%,

Romania 6%, Poland 4%, Bulgaria 4%.

Asia China, CNPC partnership

'10 '11 '12 '13 '1460

65

70

75

80

85

90

95

100

105

110

Source: FactSet PricesAssicurazioni Generali S.p.A.

Non-life Life AM

Office Appointment Generali Previous

CEO Mario Greco Aug-12 2012 Zurich, RAS

CFO Alberto Minali Oct-12 2012 RAS

CRO Sandra Panizza Jul-05 2004 Ina/Alleanza

CIO Nikhil Srinivasan Feb-13 2013 Allianz Inv

COO Carsten Schildknecht Apr-13 2013 Deutsche

Germany Dietmar Meister 2007 1980 AMB

France Eric Lombard Oct-13 2013 BNP Cardif

Italy Philippe Donnet Oct-13 2013 AXA

Global lines Paolo Vagnone 2012 2007 Banca Gen

Financials

Initiating Coverage

6 August 2014



Chart 86: Generali P&L


Generali earnings

EUR mn 2012 2013 2014F 2015F 2016F

Operating profit

Non-life 1,561 6% 1,616 4% 1,997 24% 2,103 5% 2,176 3%

Life 2,535 9% 2,644 4% 2,845 8% 3,097 9% 3,358 8%

Asset management 408 19% 483 18% 460 -5% 481 4% 503 5%

Corporate -313 -354 -389 -389 -389

Consolidation -197 -182 -160 -160 -160

Total 3,994 10% 4,207 5% 4,753 13% 5,131 8% 5,488 7%

Non operating inv income -1,356 17 -10 150 150

Non operating expenses -417 -850 -306 -236 -216

Interest on debt -668 -751 12% -720 -4% -690 -4% -690 0%

Pre-tax 1,553 -5% 2,623 69% 3,717 42% 4,355 17% 4,732 9%

Discontinued operations 58 560 -50 0 0

Tax -1,239 63% -820 -34% -1,269 55% -1,487 17% -1,615 9%

Minorities -277 -7% -227 -18% -238 5% -167 -30% -167 0%

Net income 95 -83% 2,136 2148% 2,160 1% 2,701 25% 2,950 9%

Tax rate -80% -31% -34% -34% -34%

EPS operating 1.25 1.33 7% 1.54 16% 1.76 14% 1.91 9%

EPS 0.06 1.38 1.39 1% 1.74 25% 1.89 9%

Dividend 0.20 0% 0.45 125% 0.58 29% 0.75 28% 0.85 14%

Payout ratio 326% 33% 42% 43% 45%

No. of shares total 1,557 1,557 1,557 1,557 1,557

No. of shares average 1,549 1,548 1,557 1,557 1,557

ROE operating 12.1% 11.8% 12.1% 12.7% 12.3%

Generali Non-life

Net earned premiums 19,785 0% 19,825 0% 19,429 -2% 19,817 2% 20,213 2%

Claims -13,586 -1% -13,577 0% -12,978 -4% -13,238 2% -13,503 2%

Expenses -5,363 0% -5,371 0% -5,187 -3% -5,232 1% -5,296 1%

Other technical income -25 -71 0 0 0

Underwriting result 811 23% 806 -1% 1,263 57% 1,348 7% 1,415 5%

Investment income 1,020 -5% 1,029 1% 1,014 -1% 1,035 2% 1,041 1%

Other expenses -270 5% -219 -19% -280 28% -280 0% -280 0%


Loss ratio -68.7% -68.5% -66.8% -66.8% -66.8%

Expense ratio -27.1% -27.1% -26.7% -26.4% -26.2%

Combined ratio -95.8% -95.6% -93.5% -93.2% -93.0%

Nat Cat -1.4% -2.3% -2.0% -2.0% -2.0%

Prior years 3.5% 3.4% 3.5% 3.5% 3.5%

Current year -70.8% -69.6% -68.3% -68.3% -68.3%

Investment yield 3.9% 3.7% 3.5% 3.5% 3.4%

Financials

Initiating Coverage

6 August 2014



Chart 87 Generali P&L continued


Generali Life 2012 2013 2014F 2015F 2016F


Technical margin 5,786 -7% 5,743 -1% 5,332 -7% 5,492 3% 5,657 3%

Interest income 10,163 10,286 10,796 5% 11,516 7% 11,846 3%

Fair value 5,918 4,853 5,096 5% 5,350 5% 5,618 5%

Capital gains 973 2,089 1,500 1,000 1,000

Impairments -1,978 -390 -200 -150 -100

Interest expense -256 -261 -209 -20% -209 0% -209 0%

Other investment expenses -520 -545 -556 2% -556 0% -556 0%

Policyholders' interest -12,575 -14,248 -14,373 1% -14,798 3% -15,346 4%

Investment result 1,725 1% 1,784 3% 2,053 15% 2,153 5% 2,253 5%

Expenses -4,976 -8% -4,882 -2% -4,541 -7% -4,548 0% -4,552 0%


UL fees % UL assets 0.75% 0.66% 0.66% 0.66% 0.66%

Technical margin % premiums 14.1% 14.0% 12.8% 12.8% 12.8%

Technical margin % reserves 1.85% 1.81% 1.56% 1.50% 1.47%

Investment return % trad assets 0.63% 0.63% 0.64% 0.64% 0.64%

Expense ratio % premiums -12.2% -11.9% -10.9% -10.6% -10.3%

Expense result % reserves -1.59% -1.54% -1.33% -1.24% -1.18%

P'holder interest % inv income 87.9% 88.9% 87.5% 87.3% 87.2%

Operating profit % assets 0.78% 0.77% 0.79% 0.80% 0.83%

Generali Asset Management

Fees 827 -4% 474 -43% 512 8% 541 12% 574 12%

Administrative expenses -862 -6% -345 -60% -352 10% -362 10% -389 10%

Investment income 539 23% 288 -47% 340 18% 346 2% 366 6%

Other expenses -96 -30 -40 33% -44 10% -48 10%

Operating profit 408 19% 387 -5% 460 19% 481 4% 503 5%

Fees % AUM 1.33% 1.26% 1.27% 1.27% 1.27%

Expenses % AUM -1.39% -0.91% -0.87% -0.85% -0.86%

Cost/income ratio -104.2% -72.8% -68.7% -66.9% -67.7%

Pre-tax profit % AUM 1.03% 1.14% 1.13% 1.11%


Dividend -311 -311 -701 -907 -1,162

Net income 90 2,136 2,160 2,701 2,950

Other 4,562 -839 1,973 0 0

Shareholders' funds close 19,688 28% 19,999 2% 23,210 16% 25,004 8% 26,792 7%

Financials

Initiating Coverage

6 August 2014



Chart 88: Generali Capital and ROCs


2012 2013 2014F 2015F 2016F

Capital available

Sub debt 7,833 19% 7,612 -3% 8,085 6% 8,085 0% 8,085 0%

Senior debt 4,464 0% 4,468 0% 3,418 -24% 2,918 -15% 2,918 0%

Other debt 937 -18% 678 -28% 652 -4% 652 0% 652 0%

Total debt 13,234 8% 12,758 -4% 12,155 -5% 11,655 -4% 11,655 0%

Shareholders' funds 19,688 28% 19,999 2% 23,210 16% 25,004 8% 26,792 7%

Minorities 2,713 3% 1,627 -40% 1,570 -4% 1,691 8% 1,812 7%

Total capital 35,635 18% 34,384 -4% 36,935 7% 38,351 4% 40,260 5%


Total capital excluding unrealised gains 33,153 2% 31,871 -4% 32,014 0% 33,430 4% 35,339 6%

Add back real estate gains off balance sheet 4,749 40% 4,205 -11% 4,205 0% 4,205 0% 4,205 0%

Goodwill -6,500 -6,500 -5,915 -5,915 -5,915

Tangible Capital 33,884 26% 32,089 -5% 35,225 10% 36,641 4% 38,550 5%

Tangible Capital excluding unrealised gains 31,402 8% 29,576 -6% 30,304 2% 31,720 5% 33,629 6%


Life 19,200 19,948 22,099 11% 22,989 4% 23,927 4%

Non-life 8,903 8,921 8,743 -2% 8,918 2% 9,096 2%



Buffer 2,938 312 -952 -626 -34% 140 -122%

Total 31,402 29,576 30,304 2% 31,720 5% 33,629 6%





Asset management % FuM 1% 1% 1% 1% 1%

ROC

Life 9.5% 9.4% 9.2% 9.6%

Non-life 12.5% 14.7% 15.8% 16.1%


ROC group 10.2% 10.7% 10.8% 11.2%

Financials

Initiating Coverage

6 August 2014



Chart 89: Generali Cash Earnings


Chart 90: Generali Valuation


Euro m 2012 2013 2014F 2015F 2016F

Cash generation

Life 1,125 9% 1,392 24% 1,525 10% 1,645 8% 1,752 7%

Non-life 1,046 6% 1,111 6% 1,315 18% 1,385 5% 1,433 3%

AM 273 19% 332 303 317 332

Investment p&c and AM 0 0 164 -215 -220

Total operations 2,171 7% 2,835 31% 3,307 17% 3,131 -5% 3,296 5%

Cash remittance 1,400 1,900 2,348 24% 2,349 0% 2,538 8%


Holding -709 1% -700 -1% -721 3% -721 0% -721 0%

Group cash flow 1,462 11% 2,135 46% 2,586 21% 2,410 -7% 2,575 7%

Holding cash flow 691 15% 1,200 74% 1,627 36% 1,627 0% 1,817 12%

Dividend -308 -56% -310 1% -697 125% -907 30% -1,162 28%

Group net cash flow 1,154 83% 1,825 58% 1,889 4% 1,503 -20% 1,413 -6%

Holding net cash flow 383 890 132% 930 5% 720 -23% 655 -9%

Dividend holding group cash 224% 387% 234% 179% 156%

Net holding cash % tangible cash 1% 3% 3% 2% 2%

Cash earnings per share 0.94 1.37 46% 1.66 21% 1.55 -7% 1.65 7%


Non-life 8,743 1,385 15.8% 10.0% 2.5% 14,384 1.65 10.4 28% 34%

Life 22,099 2,040 9.2% 10.0% 4.0% 23,787 1.08 11.7 71% 56%


Holding 0 -362 -3,618 10.0


Holding//excess 0 0 0.2

Debt -11,655 -454 3.9% -11,655

Minorities -1,570 -167 -1,919 11.5

Total 18,030 2,758 25,097 9.1

Per share 16.1

Adjustments 0.0

Target price 16.1

Financials

Initiating Coverage

6 August 2014



Prudential: The Taj Mahul Headroom The insurance conglomeration that has set the pace in terms of cash growth

and capital navigation. The premium rating reflects the long-term growth

potential of Asia, where upside remains considerable, in our view.

Management: Cash and growth strategies pursued by CEO Tidjane Thiam (UK

repositioning towards cash), Asia CEO Barry Stowe (growth focus on medical

expenses) US CEO Mike Wells (counter-cyclical US VA growth driven by

conservative pricing and hedging strategy) have all conspired to produce

double-digit growth and high returns in recent years.

Franchise: Asia premier franchise based on strength of agency and distribution

partners, US (Jackson) top VA player, UK M&G leading asset manager.

Optionality of growth and divestments based on stand-alone US and Asian

entities.

Capital: Solvency II highest in sector at 253%, debt coverage ratio >10X

Returns: ROC 2015 23%, reflecting >20% IRRs in all life business (short

paybacks, medical expense bias in Asia, with-profit support in the UK).

Growth: 8%-10% organic. Recent convergence of growth trends in the US and

Asia but where Jackson has recently increased its pricing to secure margins.

Asian growth driven by growing middle class customer base, expanding

distribution, roll-out into new territories.

Cash: Remittance ratio 54% 2013 is low, reflects higher local regulatory

demands in US and Asian build-out.

Dividend: Pay-out ratio 37% 2013, where an additional 5% on the pay-out

equates to £150m versus £300m of annual excess cash generated.

Corporate Potential: Annual fresh investment potential 1%-2% (dividend

pay-out at 37%), suggesting 10% long-term earnings progression. Optionality

of spinning off the US: unlikely at this stage, in our view.

Financial markets: Negligible sensitivity to bond yields; Asia economic risk

mitigated by middle class customer bias.

Re-rating scenario:

Growth momentum increases in expanding emerging market franchise.

Spin-off of US generates higher rating for Asian operations.

Chart 91: Prudential Snapshot


Price Pence Net income Stated Cash Dividend PE PE Yield Price / ROTNAV


2012 2,163 77 70 29.2 17.5 19.0 2.2% 384% 27.5%

2013 1,346 91 84 33.6 14.8 16.0 2.5% 420% 26.0%

2014F 2,535 99 81 35.5 13.6 16.7 2.6% 348% 31.0%

2015F 2,845 111 90 39.2 12.1 14.9 2.9% 291% 28.8%

2016F 3,164 124 100 43.1 10.9 13.4 3.2% 246% 26.8%

PRU LN

Buy

Price Target 1577p

Financials

Initiating Coverage

6 August 2014



Chart 92: Prudential versus Europe (EuroStoxx)

Source: Factset

Chart 93: Prudential Capital Allocation


Chart 94: Prudential Rankings


Chart 95: Prudential versus Insurers (EuroStoxx)

Source: Factset

Chart 96: Prudential Earnings by Division

Source: Factset

Chart 97: Prudential Management


'10 '11 '12 '13 '1480

100

120

140

160

180

200

220

240

260

280


Asia US UK M&G

Market share (%), rankings

Asia 1st Malaysia, Philippines, Singapore,

Vietnam, India , 3rd China, 4th HK;

Standard Chartered distribution.

US I variable annuities, 1 wholesale

distributor

UK 5% market share: annuities, corporate

pensions, with profits savings

M&G 1 UK

'10 '11 '12 '13 '1480

100

120

140

160

180

200

220

240


Asia life US life UK life Asset Management

Office Appointed Prudential Previous

CEO Tidjane Thiam 2009 2007 Aviva Europe

CFO Nic Nicandrou 2009 2009 Aviva

UK CEO Jackie Hunt 2013 2013 Standard Life CFO

Asia CEO Barry Stowe 2006 2006 AIA Health

M&G Michael McLintock 2000 2000 M&G

CRO Pierre-Olivier Bouee 2014 2008 Aviva

US Mike Wells 2011 1999

Financials

Initiating Coverage

6 August 2014



Chart 98: Prudential P&L


GBPmn 2012 2013 2014F 2015F 2016F

Asia 906 29% 1,001 10% 1,117 12% 1,291 16% 1,468 14%

US 964 48% 1,243 29% 1,363 10% 1,516 11% 1,688 11%

UK 703 3% 706 0% 703 0% 713 1% 707 -1%

M&G 371 4% 441 19% 485 10% 536 10% 588 10%

Other operations 141 -2% 162 15% 177 9% 198 12% 221 12%

Head office -285 26% -294 3% -306 4% -319 4% -332 4%

Interest payable on core debt -280 -2% -305 9% -305 0% -305 0% -305 0%

Operating profit pre-tax 2,520 24% 2,954 17% 3,233 9% 3,629 12% 4,036 11%

Tax -567 -638 -698 -784 -872

Net operating profit 1,953 2,316 2,535 2,845 3,164

Tax rate -23% -22% -22% -22% -22%

Market impacts & exceptionals 227 -1,319 0 0 0

Pre-tax profit 2,747 50% 1,635 -40% 3,233 98% 3,629 12% 4,036 11%

Tax -584 43% -289 -51% -698 142% -784 12% -872 11%

Tax rate -21% -18% -22% -22% -22%

Net profit 2,163 1,346 2,535 2,845 3,164

EPS operating 76.9 22% 90.8 18% 99.0 9% 111.1 12% 123.6 11%

EPS net 85.1 52% 52.7 -38% 99.0 88% 111.1 12% 123.6 11%

Dividend 29.2 16% 33.6 15% 35.5 6% 39.2 10% 43.1 10%

Payout ratio 38% 37% 36% 35% 35%

Number of shares (average) 2,541 0% 2,552 0% 2,560 0% 2,560 0% 2,560 0%

ROE operating profit 20.6% 23.1% 24.2% 23.1% 22.1%

Asia

Spread income 93 6% 115 24% 126 10% 145 15% 174 20%

Fee income 141 8% 154 9% 161 5% 181 12% 202 12%

With-profits 39 3% 47 21% 48 3% 53 9% 57 9%

Insurance margin 589 679 15% 725 7% 820 13% 943 15%

Margin on revenues 1,439 20% 1,562 9% 1,687 8% 1,906 13% 2,154 13%

Return on shareholder assets 94 262% 58 -38% 63 8% 68 8% 73 8%

Total income 2,395 22% 2,615 9% 2,810 7% 3,172 13% 3,604 14%

Acquisition costs -903 18% -1,015 12% -1,103 9% -1,268 15% -1,452 15%

Admin expenses -570 13% -634 11% -628 -1% -655 4% -728 11%

DAC -16 -214% 35 -319% 38 9% 42 9% 45 9%

Total 906 29% 1,001 10% 1,117 12% 1,291 16% 1,468 14%

Margin

Spread 1.56% 1.54% 1.54% 1.54% 1.54%

Fee 1.11% 1.12% 1.12% 1.12% 1.12%

With-profit 0.30% 0.35% 0.35% 0.35% 0.35%

Insurance margin 3.16% 3.21% 3.21% 3.21% 3.21%

Acquisition cost -48% -48% -48% -48% -48%

Admin cost -3.06% -3.00% -2.97% -2.90% -2.85%

Operating profits % reserves 2.76% 2.87% 3.01% 3.14% 3.21%

Total assets 31,616 6% 34,423 9% 36,384 6% 40,582 12% 45,754 13%

Asia life by country

Hong Kong 88 28% 101 15% 108 7% 124 15% 139 12%

Indonesia 260 23% 291 12% 311 7% 358 15% 405 13%

Malaysia 118 13% 137 16% 147 7% 167 14% 194 16%

Philippines 15 200% 18 20% 22 20% 26 20% 31 20%

Singapore 206 23% 219 6% 237 8% 260 10% 286 10%

Thailand 7 53 64 20% 76 20% 92 20%

Vietnam 25 -17% 54 116% 65 20% 78 20% 93 20%

China 16 10 17 70% 26 50% 29 14%

India 50 51 61 20% 70 15% 81 15%

Korea 16 -6% 17 6% 19 10% 21 10% 23 10%

Taiwan 18 800% 12 -33% 20 70% 26 25% 32 25%

Other 87 -350% 38 -20% 47 59 64

Total long term profit 906 29% 1,001 10% 1,117 12% 1,291 16% 1,468 14%

Financials

Initiating Coverage

6 August 2014



Chart 99: Prudential P&L


GBPmn 2012 2013 2014F 2015F 2016F

Long term business - US

Spread income 702 730 4% 751 3% 774 3% 797 3%

Fee income 875 1,172 34% 1,311 12% 1,507 15% 1,733 15%

With-profits 0 0 0 0 0

Insurance margin 399 588 604 3% 666 10% 737 11%

Margin on revenues 0 0 0 0 0

Return on shareholder assets 55 24 -56% 24 0% 24 0% 24 0%

Total income 2,031 2,514 24% 2,689 7% 2,971 10% 3,291 11%

Acquisition costs -972 -914 -6% -943 3% -988 5% -1,037 5%

Admin expenses -537 -670 25% -665 -1% -720 8% -795 10%

DAC 442 313 -29% 282 -10% 254 -10% 228 -10%

Total 964 1,243 29% 1,363 10% 1,516 11% 1,688 11%

Margin

Spread 2.39% 2.46% 2.46% 2.46% 2.46%

Fee 1.99% 1.96% 1.96% 1.96% 1.96%

Insurance margin 0.53% 0.60% 0.57% 0.57% 0.57%


Admin cost -0.71% -0.68% -0.68% -0.68% -0.68%


Total assets 75,802 97,856 29% 105,909 8% 116,855 10% 129,332 11%

New business APE 1,462 1,573 8% 1,626 3% 1,704 5% 1,787 5%

Long term business - UK

Spread income 266 228 -14% 226 -1% 230 2% 231 0%

Fee income 61 65 7% 67 2% 68 2% 68 1%

With-profits 272 251 -8% 255 2% 257 1% 260 1%

Insurance margin 39 89 89 89 89

Margin on revenues 216 187 -13% 187 0% 187 0% 187 0%

Return on shareholder assets 107 134 25% 134 0% 134 0% 134 0%

Total income 961 954 -1% 957 0% 965 1% 969 0%

Acquisition costs -122 -110 -10% -112 2% -106 -5% -113 7%

Admin expenses -128 -124 -3% -128 3% -132 3% -135 2%

DAC -8 -14 75% -14 0% -14 0% -14 0%

Total 703 706 0% 703 0% 713 1% 707 -1%

Margin

Spread 1.02% 0.84% 0.82% 0.80% 0.78%

Fee 0.28% 0.28% 0.28% 0.28% 0.28%

With-profit 0.33% 0.30% 0.30% 0.30% 0.30%


Admin cost -0.27% -0.25% -0.25% -0.25% -0.25%


Total assets 47,777 6% 50,142 5% 51,304 2% 52,906 3% 54,011 2%

APE 836 12% 725 -13% 747 3% 709 -5% 757 7%

Shareholders' equity opening 8,564 14% 10,359 21% 9,650 -7% 11,325 17% 13,262 17%

Net income 2,163 1,346 -38% 2,535 88% 2,845 12% 3,164 11%

Dividends -655 -781 19% -859 10% -909 6% -1,004 10%

Other 287 -1,274 0 0 0

Shareholders' equity close 10,359 21% 9,650 -7% 11,325 17% 13,262 17% 15,422 16%

Financials

Initiating Coverage

6 August 2014



Chart 100: Prudential Capital and ROC


2012 2013 2014F 2015F 2016F

Prudential tangible capital

Sub debt 2,577 -3% 3,662 42% 3,662 0% 3,662 0% 3,662 0%

Debenture loans 977 2% 974 0% 974 0% 974 0% 974 0%

Total debt 3,554 -2% 4,636 30% 4,636 0% 4,636 0% 4,636 0%

Shareholders' funds 10,359 21% 9,650 -7% 11,325 17% 13,262 17% 15,422 16%

Minorities 5 1 1 1 1

Total capital 13,918 14% 14,287 3% 15,962 12% 17,899 12% 20,059 12%

Including unrealised gains 0 0 0 0 0

Total capital excluding unrealised gains 13,918 14% 14,287 3% 15,962 12% 17,899 12% 20,059 12%

Goodwill -1,469 -1,461 -1,461 -1,461 -1,461

Tangible Capital 12,449 16% 12,826 3% 14,501 13% 16,438 13% 18,598 13%

Tangible Capital excluding unrealised 12,449 16% 12,826 3% 14,501 13% 16,438 13% 18,598 13%

Gross debt ratio (tangible) 29% 36% 32% 28% 25%

Coverage ratio X 10.0 10.7 11.6 12.9 14.2


Asia 3,873 4,332 4,699 8% 5,225 11% 5,827 12%

US 4,550 5,131 5,521 8% 6,040 9% 6,627 10%

UK 2,356 2,372 2,434 3% 2,497 3% 2,562 3%

Asset management 1,335 1,482 1,675 13% 1,876 12% 2,085 11%


Buffer 336 -491 173 800 363% 1,497 87%

Total 12,449 12,826 14,501 13% 16,438 13% 18,598 13%


Asian spread 7% 7% 7% 7% 7%

Asian fee 4% 4% 4% 4% 4%

Asian new business premiums 50% 50% 50% 50% 50%

US variable annuity 4% 4% 4% 4% 4%

US fixed annuity 6% 6% 6% 6% 6%

UK spread 7% 7% 7% 7% 7%

UK fee 2% 2% 2% 2% 2%

Asset Management 1% 1% 1% 1% 1%

ROC

Asia 21.4% 21.4% 22.8% 23.3%

US 19.8% 18.9% 19.5% 19.8%

UK 25.6% 25.2% 24.9% 24.1%


Total 21.0% 20.8% 21.6% 21.9%

Financials

Initiating Coverage

6 August 2014



Chart 101: Prudential Cash Earnings


Chart 102: Prudential Valuation


Prudential cash earnings

GBP mn 2012 2013 2014F 2015F 2016F

Free surplus generated

Asia 537 573 7% 629 10% 751 20% 894 19%

US 773 870 13% 887 2% 976 10% 1,074 10%

UK 487 673 38% 517 -23% 542 5% 568 5%

AM 285 346 21% 346 0% 346 0% 346 0%

Total 2,082 5% 2,462 18% 2,378 -3% 2,616 10% 2,883 10%

Net cash remitted

Asia 341 66% 400 17% 440 10% 526 20% 626 19%

US 249 -23% 294 18% 302 3% 332 10% 365 10%

UK 313 5% 355 13% 331 -7% 347 5% 364 5%

AM 297 6% 292 291 0% 291 0% 291 0%

Group ongoing 1,200 9% 1,341 12% 1,363 2% 1,495 10% 1,646 10%

Remittance ratio

Asia 64% 70% 70% 70% 70%

US 32% 34% 34% 34% 34%

UK 64% 53% 64% 64% 64%

AM 104% 84% 84% 84% 84%

Total 58% 54% 57% 57% 57%

Holding -289 -315 -315 -315 -315

Group cash flow 1,793 6% 2,147 20% 2,064 -4% 2,301 11% 2,568 12%

Holding cash flow 911 13% 1,026 13% 1,048 2% 1,181 13% 1,331 13%

Dividend -655 2% -781 19% -859 10% -909 6% -1,004 10%

Net group cash flow 1,138 9% 1,366 20% 1,204 -12% 1,392 16% 1,565 12%

Net holding cash flow 256 53% 245 -4% 189 -23% 272 44% 327 20%

Cash earnings per share (p) 70 84 81 90 100

Dividend cover 139% 131% 122% 130% 133%

Net cash % tangible capital 2.1% 1.9% 1.3% 1.7% 1.8%


Asian life 5,000 1,071 21.4% 11.0% 9.7% 21,094 4.22 19.7 34% 44%

Jackson National 5,521 1,076 19.5% 12.0% 4.4% 9,905 1.79 9.2 38% 21%

UK 2,434 606 24.9% 9.0% 2.3% 7,388 3.04 12.2 17% 16%

Asset management 1,675 552 9,111 16.5 11% 19%

Holding 0 -250 -2,500 10.0

Operational value 14,630 3,056 44,998 14.7 100% 100.0%

Excess 0 0 0.20

Debt -4,636 -239 -4,636

Total 2,817 40,362 14.3

Per share 1,577

Financials

Initiating Coverage

6 August 2014



Zurich: Petra Zurich has the highest pay-out ratio at 65%, reflecting the cash generative

profile of the businesses. Management remain keen to promote growth

alongside initiatives across the group, notably at Farmers, and scope for

capital reallocation.

Management: The recent appointment of George Quinn as CFO (formerly

from Swiss Re) adds to management credibility.

Franchise: Global leader corporate non-life, top 5 US non-life, middle ranking

in number of European markets; 2/3rds of retail < 5% market shares, with hub

strategies to compensate and extract cross-border efficiencies.

Capital: Capital on internal solvency model Z-ECM appears strong at 127%

versus the target range of 100%-120%.

Returns: ROC towards the lower end for peers 11.3% 2016F, albeit rising from

10.3% 2013 reflecting the latest US$ 250m expense drive. The US Farmers

division (retail non-life) is best in class for efficiency, the European operations yet

to achieve best practice. Efficiency measures for the low return life back-books

are also being explored.

Growth: 3% organic reflecting non-life bias. The 2012 acquisition of

Santander’s Latam life business signalled a move to emerging growth though,

with steps to reignite growth at Farmers so far proving so allusive.

Cash: Remittance 73% (% life profits). Cash flows from life are static, reflecting

the maturity profile of the back book where the group repositioned towards

capital light a decade ago, but should begin to lift from 2017.

Corporate potential: We forecast US$470m of excess cash generated at the

holding by 2016, equating to 1% on earnings if successfully reinvested.

Management recently highlighted nine turnaround/exit markets, with 5% of

capital regarded as non-strategic.

Dividend: Pay-out ratio 66% 2013, which we expect to be maintained.

Financial markets: Interest rate defensive; low gearing to equity markets;

above-average exposure to US corporate bond spreads.

Re-rating scenario:

Capital withdrawals from non-core lead to additional investments in growth.

The growth trend at Farmers re-established with additional upside from

corporate life cross-sell.

Chart 103: Zurich Snapshot


Price CHF Net income Stated Cash Dividend PE PE Yield Price / ROTNAV


2012 3,887 25.1 24.0 17.0 10.6 11.0 6.4% 173% 17.4%

2013 4,028 25.7 27.1 17.0 10.3 9.8 6.4% 164% 18.1%

2014F 4,125 25.5 23.8 17.1 10.4 11.1 6.5% 159% 17.6%

2015F 4,253 26.5 24.9 17.2 10.0 10.6 6.5% 149% 17.6%

2016F 4,428 27.4 25.4 17.8 9.7 10.4 6.7% 139% 17.1%

ZURN VX

Hold

Price Target €254

Financials

Initiating Coverage

6 August 2014



Chart 104: Zurich versus European Market (EuroStoxx)

Source: Factset

Chart 105: Zurich Capital Allocation


Chart 106: Zurich Rankings


Chart 107: Zurich versus Insurance Sector

Source: Factset

Chart 108: Zurich Earnings by Division


Chart 109: Zurich Management


'10 '11 '12 '13 '1460

70

80

90

100

110

120

130

Source: FactSet PricesZurich Insurance Group AG

Europe40%

US commercial 21%

US retail6%

Global corporate

16%

Latam 2%

Asia life2%

Other13%


Europe* 5/5 life/non-life various 2/3rds <5%

US commercial 5 4%,

US retail 4 6%

Global corporateMarket leader, 75% >5%

Latam 4 life (stengths Brazil, Chile)

* UK Germany, Switzerland, Ireland

Bank partners: Barclays, Deutsche, CS, Sabadell, HSBC, Citibank, Santander, ICBC

'10 '11 '12 '13 '1470

80

90

100

110

120

130


Non-life Life Farmers Other

Office Appointed Zurich Previous

CEO Martin Senn 2010 2006 Swiss Life, SBC

CFO George Quinn 2014 2014 CFO Swiss Re

Chief Op & Tech Robert Dickie 2014 2014 AIG

North America Mike Foley 2008 2006 McKinsey

General Insurance Mike Kerner 2012 1992 Global, Re, Strategy

Global Life Kristof Terryn 2006 2004 Global, General. NA

CRO & Europe Axel P. Lehman 2011 1996 Germany, UK, NA

CIO Cecilia Reyes 2010 2001

Farmers Jeff Dailey 2008 2008 Bristol West

Group controller Vibhu Sharma 2012 2008 Interim CFO

Financials

Initiating Coverage

6 August 2014



Chart 110: Zurich P&L


Business operating profit US$ m 2012 2013 2014F 2015F 2016F

General insurance 2,112 -7% 2,859 35% 3,043 6% 3,133 3% 3,233 3%

Global life 1,351 0% 1,271 -6% 1,325 4% 1,421 7% 1,510 6%

Farmers 1,404 -6% 1,515 8% 1,591 5% 1,598 0% 1,629 2%

Other operating businesses -340 -59% -453 33% -379 -16% -349 -8% -339 -3%

Interest on debt -570 -586 -586 0% -586 0% -586 0%

Non-core businesses 127 n.m 72 -43% 40 -44% 50 25% 60 20%

Business operating profit 4,084 -4% 4,678 15% 5,034 8% 5,267 5% 5,507 5%

Net capital gains/losses and impairments 1,313 11% 1,144 -13% 536 -53% 436 -19% 436 0%

Net gain/loss on divestments of businesses -35 n.m -1 -97% 0 0 0

Restructuring provisions and other -249 -49% -436 75% -163 -63% -121 -25% -121 0%

Non-controlling interests 164 n.m. 289 76% 288 0% 290 1% 292 1%

Pre-tax 5,277 6% 5,674 8% 5,695 0% 5,872 3% 6,114 4%

Income taxes (attributable to shareholders) -1,302 8% -1,415 9% -1,338 -5% -1,380 3% -1,437 4%

Minorities -88 14% -231 163% -232 0% -239 3% -249 4%

Net income after minorities 3,887 5% 4,028 4% 4,125 2% 4,253 3% 4,428 4%

Tax rate -25% -25% -24% -6% -24% 0% -24% 0%

Net attributable to common shareholder 3,887 4,028 4,125 2% 4,253 3% 4,428 4%

Per share

EPS (diluted) CHF 25.1 7% 25.7 2% 25.5 -1% 26.5 4% 27.4 3%

Dividend CHF 17.0 0% 17.0 0% 17.1 5% 17.2 1% 17.8 1%

Payout ratio 68% 66% 67% 65% 65%

Number of shares 144 0% 144 0% 144 0% 144 0% 144 0%

ROE (BOPAT) 10.0% 11.2% 12.4% 12.5% 12.5%

General insurance

Gross premiums 35610 36438 2% 37,531 3% 38,657 3% 39,817 3%


Claims -20,528 -2% -20,321 -1% -20,728 2% -21,318 3% -21,957 3%

Policyholder dividends -4 -6 -6 0% -6 0% -6 0%

Expenses -8,185 5% -8,095 -1% -8,923 10% -9,127 2% -9,401 3%

Underwriting result 478 1,347 1,006 -25% 1,131 12% 1,165 3%

Current investment income 2,516 2,217 2,110 -5% 2,078 -1% 2,141 3%

Capital gains 71 167 183 10% 189 3% 195 3%

Investment result 2,587 -8% 2,384 -8% 2,293 -4% 2,267 -1% 2,335 3%

Other income 992 8% 830 -16% 830 0% 830 0% 830 0%

Non technical expenses -1,526 5% -1,265 -17% -665 -632 -5% -632 0%

Policyholder interest -18 -25% -19 6% -19 0% -19 0% -19 0%

Restructuring provisions and other 113 -53% 276 144% 83 -70% 41 -50% 41 0%

Business operating profit (BITDA) 2,626 -7% 3,553 35% 3,528 -1% 3,619 3% 3,721 3%

Depreciation -110 28% -90 -18% -90 0% -90 0% -90 0%

Amortization of intangibles -211 -24% -394 87% -185 -185 0% -185 0%

Interest expense -141 -33% -138 -2% -138 0% -138 0% -138 0%

Non-controlling interests -52 n.m -72 38% -71 -1% -73 3% -75 3%

Business operating profit 2,112 -7% 2,859 35% 3,043 6% 3,133 3% 3,233 3%

Loss ratio 70.3% 68.3% 67.6% 67.5% 67.5%

Expense ratio 28.0% 27.2% 29.1% 28.9% 28.9%

Combined ratio 98.4% 95.5% 96.7% 96.4% 96.4%

Underlying combined ratio (reported) 96.6% 94.2% 94.7% 94.4% 94.4%

Claims ratio (net) 70.3% 68.3% 67.6% 67.5% 67.5%

Accident year claims ratio 72.2% 70.7% 69.1% 69.0% 69.0%

Runoff ratio -1.9% -2.4% -1.5% -1.5% -1.5%

Nat cat ratio 3.7% 3.7% 3.5% 3.5% 3.5%

Underlying claims ratio 68.5% 67.0% 65.6% 65.5% 65.5%

Current investment yield 2.9% 2.5% 2.3% 2.2% 2.2%

Capital gains 0.1% 0.2% 0.2% 0.2% 0.2%

Total investment yield 3.0% 2.6% 2.5% 2.4% 2.4%

Reserve ratio 235.6% 231.9% 0.0% 0.0% 0.0%

Financials

Initiating Coverage

6 August 2014



Chart 111: Zurich P&L continued


Global life US$ m 2012 2013 2014F 2015F 2016F

New business expense margin -1,434 -7% -1,340 -7% -1,350 1% -1,350 0% -1,350 0%

In force expense margin 1,398 -3% 1,523 9% 1,569 3% 1,639 4% 1,704 4%

Net expense margin -23 -77% 183 n.m 219 20% 289 32% 354 22%

Net risk margin 769 1% 821 7% 821 0% 821 0% 821 0%

Net investment margin 716 1% 579 -19% 595 3% 622 4% 646 4%

Other profit margins 27 n.m 19 -30% 19 0% 19 0% 19 0%

Business operating profit before deferrals 1,489 19% 1,602 8% 1,655 3% 1,751 6% 1,840 5%

Acquisitions deferrals 264 -20% 188 -29% 189 1% 189 0% 189 0%

Business operating profit interest, depreciation 1,753 10% 1,790 2% 1,844 3% 1,940 5% 2,029 5%

Interest, depreciation, amortisation -420 -524 -524 0% -524 0% -524 0%

Non-controlling interests 18 -86% 5 -72% 5 0% 5 0% 5 0%

BOP 1,351 0% 1,271 -6% 1,325 4% 1,421 7% 1,510 6%

Financial ratios

Net flows % start assets -1.2% -1.1% -1.1% -1.0%

New business expense margin -5.0% -5.0% -5.0% -5.0%

In-force expense margin 0.58% 0.59% 0.58% 0.58% 0.58%

Net expense margin / assets -0.01% 0.07% 0.08% 0.10% 0.12%

Net risk margin / premiums 5.7% 5.9% 5.9% 5.9% 5.9%

Net investment margin / total assets 0.30% 0.22% 0.22% 0.22% 0.22%

Other profit margins / assets 0.01% 0.01% 0.01% 0.01% 0.01%

Acquisition deferrals/NB expense -18.4% -14.0% -14.0% -14.0% -14.0%

BOP/assets 0.56% 0.49% 0.49% 0.50% 0.51%

BOP/technical provisions 0.66% 0.58% 0.57% 0.58% 0.59%

Farmers

USD mn 2012 2013 2014F 2015F 2016F

Farmers Exchanges

Farmers Exchanges GWP 18,935 3% 18,643 -2% 18,829 1% 19,018 1% 19,398 2%

Farmer Re BOP -25 n.m 125 n.m 140 12% 140 0% 140 0%

Farmers management services

Management fees 2,846 3% 2,810 -1% 2,862 2% 2,872 0% 2,929 2%

Expenses -1,480 3% -1,457 -2% -1,451 0% -1,453 0% -1,479 2%

Gross management result 1,366 2% 1,353 -1% 1,411 4% 1,419 1% 1,450 2%

Investment result 52 0% 40 -23% 40 0% 40 0% 40 0%

Non-technical result 11 n.m -3 n.m 0 0 0

BOP 1,429 4% 1,390 -3% 1,451 4% 1,459 1% 1,490 2%

Financial ratios

Quota share Farmers exchanges 23.0% 21.7% 21.0% 20.0% 19.0%

Farmers fee % GWP 15.0% 15.1% 15.2% 15.1% 15.1%

Gross management margin 7.2% 7.3% 7.5% 7.5% 7.5%

Shareholders' funds opening 31,636 0% 34,505 9% 32,503 -6% 33,889 4% 35,289 4%

Net income 3,878 3% 4,028 4% 4,125 2% 4,253 3% 4,428 4%

Dividends paid -1,923 1% -1,933 1% -2,739 42% -2,722 4% -2,767 1%

Other movements 903 n.m. -4,097 n.m 0 9 0

Shareholders' funds close 34,494 9% 32,503 -6% 33,889 4% 35,429 4% 37,090 4%

Financials

Initiating Coverage

6 August 2014



Chart 112: Zurich ROC & Capital Allocation


Capital available 2012 2013 2014F 2015F 2016F

Senior debt 5,831 5,972 5,972 5,972 5,972

Subordinated debt 5,833 6,314 6,314 6,314 6,314

Total debt 11,664 12,286 12,286 12,286 12,286


Minorities 2,368 2,231 2,211 2,304 2,402

Total capital 48,537 47,020 48,386 49,878 51,519


Total capital excluding unrealised gains 44,014 2% 45,185 3% 45,694 1% 47,186 3% 48,827 3%

Goodwill -5951 -5531 -5284 -5051 -4831


Tangible Capital excluding unrealised gains 38,063 -1% 39,654 4% 40,410 2% 42,135 4% 43,996 4%

Gross debt ratio (tangible) 31% 31% 30% 29% 28%

Coverage ratio 6.1 6.5 6.7 6.9 7.1

Capital allocation 2,012 2013 2014F 2015F 2016F

Non-life 17,517 17,861 2% 18,397 3% 18,949 3% 19,518 3%

Life 10,192 10,626 4% 11,073 4% 11,513 4% 11,982 4%

Farmers 4,000 4,000 0% 4,074 2% 4,088 0% 4,170 2%

Holding & other ops 4,354 4,867 12% 4,624 -5% 4,392 -5% 4,173 -5%


Buffer capital (above ZECM 120%) 2,000 2,300 15% 2,242 3,193 4,154

Total 38,063 39,654 4% 40,410 2% 42,135 4% 43,996 4%

Solvency capital ratios


Life % unit linked 3.0% 3.0% 3.0% 3.0% 3.0%

Life % traditional reserves 7.0% 7.0% 7.0% 7.0% 7.0%

ROC

General insurance risk 14.6% 14.8% 14.7% 14.7%

Global life 11.1% 12.7% 12.1% 12.2%

Farmers 28.4% 30.4% 30.0% 30.5%

Total 11.2% 12.0% 12.0% 12.2%

CROC life 4.9% 4.7% 4.5% 4.3%

CROC group 13.9% 12.3% 12.4% 12.4%

Financials

Initiating Coverage

6 August 2014



Chart 112: Zurich Cash Earnings


Chart 114: Zurich Valuation


2012 2013 2014F 2015F 2016F

Operating cash generation

Life 500 500 0% 500 0% 500 0% 500 0%

Farmers 1,053 1,136 1,193 5% 1,199 0% 1,222 2%

Non-life 2,567 2,714 6% 2,732 1% 2,832 4% 2,908 3%

Non-core 129 65 -50% 30 -53% 38 25% 45 20%

Holding -724 -197 -626 217% -603 -4% -596 -1%

Capital expenditure & accounting adjustments 174 0 0 0 0

Total 3,700 4,218 14% 3,830 -9% 3,965 4% 4,080 3%

Dividends to holding

Life 600 -14% 600 0% 600 0% 600 0% 600 0%

Farmers 700 900 990 10% 1,019 3% 1,039 2%

Non-life 1,400 -51% 2,450 75% 2,466 1% 2,556 4% 2,625 3%

Non core 500 0 0 0 0

Other -1,100 -4% -1,050 -1,050 -1,050 -1,050

Total 2,100 -43% 2,900 38% 3,007 4% 3,125 4% 3,214 3%

Remittance ratio

Life (% stated profits) 51% 58% 59% 63% 59%

Farmers 66% 79% 83% 85% 85%

Non-life 55% 90% 90% 90% 90%

Total 54% 72% 73% 73% 73%

Group cash flow 3,700 7% 4,218 14% 3,830 -9% 3,965 4% 4,080 3%

Holding cash flow 2,100 -43% 2,900 38% 3,007 4% 3,125 4% 3,214 3%

Dividend -2,663 0% -2,615 -2% -2,645 1% -2,744 4% -2,745 0%

Net group cash flow 1,036 1,603 1,185 -26% 1,220 3% 1,335 9%

Net holding cash flow -563 285 362 27% 381 5% 469 23%

Dividend cover holding cash 79% 111% 114% 114% 117%

Net holding cash % tangible capital -1% 1% 1% 1% 1%

Cash earnings per share CHF 24.0 9% 27.1 13% 23.8 -12% 24.9 4% 25.4 2%

US$ mn Capital '14 Earnings '15 ROC CoC Growth Value Price to capital PER '15 Capital Value

Non-life 18,397 2,708 14.7% 10.0% 2.5% 26,880 1.46 9.9 55% 47%

Life 11,073 1,342 12.1% 10.0% 3.0% 15,292 1.38 11.4 33% 27%

Farmers 4,074 1,223 14,674 12.0 12% 26%

Holding/other 4,624 -217 -2,169 10.0

Operational value 38,168 5,056 54,677 10.8 100% 100.0%

Excess 2,250 450 0.2

Debt -12,286 -448 3.6% -12,286

Minorities -2,211 -239 -2,390 10.0

Total 25,920 4,369 40,451 9.3

Per share CHF 254

Financials

Initiating Coverage

6 August 2014



Appendix 1: Capital Allocation

‘Solvency 7’ To compensate for the current absence of capital splits of Solvency II

(life/non-life), we have constructed a simple factor-based approach to match

capital by business not to economic solvency but to the tangible capital base

of each company (shareholders’ funds plus debt less goodwill and VIF).

Solvency II disclosures give limited information of capital splits between the operating

units. The difficulty for the analyst is how to allocate the capital where economic solvency

splits given by the companies do not always match the life/non-life split. To

circumnavigate the hugely complex solvency modelling required by economic solvency,

we construct Solvency7. The homogenous nature of the insurance sector in terms of

asset risk (driven by the more stringent demands of Solvency II where the investment

composition of portfolios at all the companies is now broadly similar) and product design

(where the guarantee profile of the life business has been substantially reduced at all of

the companies) actually lends itself back to the old factor method of Solvency 1, applying

a straight percentage to liabilities.

Solvency 1 demanded a minimum capital base of 4%/0.5% of traditional/unit-linked life

reserves, plus a pre-determined percentage of the non-life premium base dependent on

lines of business. Analyst and company reports in the 1990s pre economic solvency

typically applied a comfort margin to these levels with the capital base constructed at

6%/1% of traditional/unit linked life reserves capital and 40%-70% of the non-life

premium base.

Based on this factor approach for each company, and for the more stringent demands

from Solvency II, we have applied higher factors: 7%/2% of traditional/unit linked reserves

(4%-6%/7%-8% for US variable/fixed annuities), 50%-80% of non-life premiums (lower

for retail non-auto, higher for long tail commercial), and 0.5%-1% for third-party assets.

Specifically, at Zurich for Farmers we have used the US$2bn as deducted from Z-ECM

(Zurich’s internal model); at Prudential we have taken into account the non-life element

of the health riders attached to the life policies and the extra capital set aside for ongoing

investment in the region; at Allianz, AXA and Generali we have incorporated into the

capital base the free RfB component of policyholder funds, which on our understanding

can count as local and rating agency capital.

Using this method, we are more or less able to match the derived capital base in each case

with the tangible capital base of the companies, or with a slight comfort margin (the

earlier individual company sections show greater detail on the breakdown and

progression of the capital allocated). We show Generali as an example here. This seems

to tie in with the guidance given to us by the various management teams, where Solvency

II ratios (calculated completely differently) are mainly sitting within 10%-20% (per cent

not points) comfort margins above targeted levels. AEGON is the exception, appearing

comfortably capitalised on this simple factor-based approach. The difference is explained

by AEGON’s US overweight denying the group the level of diversification benefits that can

be afforded to the peer group.

The purpose of Solvency7 is to facilitate a capital split for return assessment and valuation

purposes in this report, not per se to assess capital strength of the companies, where any

conclusions are bound to be at best suspect given the array of complications within any

valuation of risk evolution (life guarantees are just one obscure hurdle). We show

Generali as an example, with Solvency 7 splits given in the same detail in the earlier

company sections.

Limited economic solvency

disclosure on divisional capital

We allocate capital on a simple

factor-based approach

Matching this to the tangible equity

base of the group

Financials

Initiating Coverage

6 August 2014



Chart 115: Generali: Solvency 7


The overall capital base is not that much higher (in broad terms 20%) than would have

been applied by management teams and analysts 15 years ago, at least in terms of the

required capital base versus overall balance sheet size. On a risk adjusted basis, however,

the capital requirement is substantially higher than that given the lower level of asset risk

being taken by the sector today versus 15 years ago, tighter asset liability matching, and

less generous life guarantees. We guesstimate the total risk adjusted capital requirement

to be some 30%-40% higher than it was 15 years ago in the run up of optimism ahead of

the millennium.

2012 2013 2014F 2015F 2016F

Capital available

Sub debt 7,833 19% 7,612 -3% 8,085 6% 8,085 0% 8,085 0%

Senior debt 4,464 0% 4,468 0% 3,418 -24% 2,918 -15% 2,918 0%

Other debt 937 -18% 678 -28% 652 -4% 652 0% 652 0%

Total debt 13,234 8% 12,758 -4% 12,155 -5% 11,655 -4% 11,655 0%

Shareholders' funds 19,688 28% 19,999 2% 23,210 16% 25,004 8% 26,792 7%

Minorities 2,713 3% 1,627 -40% 1,570 -4% 1,691 8% 1,812 7%

Total capital 35,635 18% 34,384 -4% 36,935 7% 38,351 4% 40,260 5%


Total capital excluding unrealised gains 33,153 2% 31,871 -4% 32,014 0% 33,430 4% 35,339 6%

Add back real estate gains off balance sheet 4,749 40% 4,205 -11% 4,205 0% 4,205 0% 4,205 0%

Goodwill -6,500 -6,500 -5,915 -5,915 -5,915


Tangible Capital excluding unrealised gains 31,402 8% 29,576 -6% 30,304 2% 31,720 5% 33,629 6%


Life 19,200 19,948 22,099 11% 22,989 4% 23,927 4%

Non-life 8,903 8,921 8,743 -2% 8,918 2% 9,096 2%



Buffer 2,938 312 -952 -626 -34% 140 -122%

Total 31,402 29,576 30,304 2% 31,720 5% 33,629 6%





Asset management % FuM 1% 1% 1% 1% 1%

ROC

Life 9.5% 9.4% 9.2% 9.6%

Non-life 12.5% 14.7% 15.8% 16.1%


ROC group 10.2% 10.7% 10.8% 11.2%

Absolute capital levels are roughly

20% higher than 15 years ago, with

risk adjusted some 30%-40% higher

Financials

Initiating Coverage

6 August 2014



Appendix 2: Valuation

Given the increased emphasis on dividends within the sector, we use dividend

discount modelling to assess the growth rates implied by the current share

prices. Our share price targets are driven from a multi-period residual return

model, useful for valuing the life business where capital levels are projected

to grow less quickly than profits (capital-light products gradually replacing

the older block of lower returning capital-heavy business).

Multi-Stage Income

Given the changing shape of the return profiles in the life business, we have adopted a

multi-stage residual income approach. Based on our allocation of tangible capital

(shareholders’ funds plus debt less goodwill), we calculate the difference between the

Return on Capital (ROC) and the Cost of Capital (CoC) until 2025, with a terminal value

for the years that follow. We add these results to the existing capital base, and deduct the

debt at face to generate our valuation of the business for the shareholder.

With limited exception, we apply a universal cost of capital (CoC) of 10% where,

excluding periods of financial market stress, the sector has generally traded on forward

PERs of 10-12x (a range that allows for token expectations of growth). To discriminate

between the various risks adds little value. What appears to be safe, at the sudden shake

of a regulator’s or politician’s hand can become suddenly less value productive, if not

redundant. 1/200-year events have been a frequent feature in recent years, challenging

the predictability of non-life risk. Financial market volatility has been an additional core

feature for the sector over the past 15 years, where inflationary and deflationary pressures

act in their different ways on life and non-life risks. Operationally, changes in distribution

and customer access on the back of big data and digitalisation are a considerable threat

and opportunity. All lines in all economies have risks that lack predictability.

The ROCs are initially based on our earnings forecasts until 2016. For the 10 years that

follow, for non-life we flex the ROC based on our combined ratio sensitivities, to allow for

medium-term competitive pressures. For life, we assume limited growth (in some cases

zero) in the projected capital base (where the older run-off books of traditional business

with higher guarantees require more capital than the newer fee-based products replacing

them) with earnings, however, that are generally rising faster. To facilitate this approach,

we use the IRRs on new business as published by the companies as guidance for the

future returns on the entire capital base. The IRR at Allianz, for example, at 11.9% (2013)

is higher than the 7.9% ROC we have for the existing business. Over time, assuming no

future margin deterioration, the ROC should theoretically rise to the IRR level. This is, of

course, a long-term evolution; in Allianz’s case a number of years given the eight-year

average duration of the portfolio. Our life ROCs projected until 2025 capture this rising

trend. We assume IRRs are calculated on similar capital requirement levels to our ROCs.

We factor in long-term growth rates according to business and geography. Possible

expense benefits from any future Ambition, Sustainability or Optimsation programmes

(which the various management teams tend to initiate every 3-5 years) are not taken into

consideration. Nor are specific attempts to beat market growth with product design or

distribution channel. In a commoditised business, such initiatives can be quickly copied

and are essential for the insurance ‘dog’ to catch its tail. The terminal growth in most

cases drops to 2%.

As an example, we show Generali, with separate sections for life and non-life detailing our

expectations for ROC development, and showing the multi stage additions to generate a

valuation for the whole. In line with our explanations above, the non-life ROE drops over

time by the equivalent of a 2 percentage point deterioration in the non-life combined

ratio (the sensitivity is given on the right hand side of the table), whereas the life ROE

gradually climbs over time towards the IRR’s currently being achieved on new business.

The climb in life ROE plus the 6% assumed annual increase in capital equates to a total

growth in profits of 7.5% per annum.

ROC versus CoC projected until

2025, plus terminal value, plus

capital less debt

CoC set at 10% for the majority of

insurance lines

ROCs based on forecasts until 2016,

with further adjustments made until

2025

IRRs used as guidance for eventual

ROCs for life

Growth rates based on market levels,

with terminal typically at 2%

We show our full valuation model for

Generali

Financials

Initiating Coverage

6 August 2014



Chart 116: Generali Valuation



Non-life 8,743 1,385 15.8% 10.0% 2.5% 14,384 1.65 10.4 28% 34%

Life 22,099 2,040 9.2% 10.0% 4.0% 23,787 1.08 11.7 71% 56%


Holding 0 -362 -3,618 10.0


Holding//excess 0 0 0.2

Debt -11,655 -454 3.9% -11,655

Minorities -1,570 -167 -1,919 11.5

Total 18,030 2,758 25,097 9.1

Per share 16.1

Generali non-life 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Terminal Average

0 1 2 3 4 5 6 7 8 9 10 11 CR flex 1 point

Core ROTE (%) 15.8% 16.5% 16.4% 16.1% 15.7% 15.4% 15.1% 14.8% 14.4% 14.1% 13.8% 1.5%

Cost of equity (%) 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 2014

Core Surplus Return (%) 5.8% 6.5% 6.4% 6.1% 5.7% 5.4% 5.1% 4.8% 4.4% 4.1% 3.8% 93.5%

Capital 8,743 9005 9275 9554 9840 10135 10439 10753 11075 11407 11750 12102

Growth 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 2.0% 2.5%

Residual income 526 603 611 597 582 565 546 526 504 481 455 5,802

Discount factor to end 2012 1.00 0.91 0.83 0.75 0.68 0.62 0.56 0.51 0.47 0.42 0.39 0.35 0.35

478 498 459 408 361 319 280 245 214 185 159 2,033

Capital 8,743

Value years until 2025 3,608

Terminal value 2,033

Total 14,384

Generali life 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Terminal

0 1 2 3 4 5 6 7 8 9 10 11 Margin flex 10bps

Core ROTE (%) 9.2% 9.5% 9.7% 9.8% 10.0% 10.1% 10.3% 10.4% 10.6% 10.7% 10.9% 1.1%

Cost of equity (%) 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 2013 IRR

Core Surplus Return (%) -0.8% -0.5% -0.4% -0.2% -0.1% 0.1% 0.3% 0.4% 0.6% 0.7% 0.9% 11.9%

Capital 22,099 23204 24364 25582 26861 28204 29614 31095 32650 34282 35996 37796

Growth 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 3.0% 4.0%

Residual income -179 -122 -90 -54 -14 30 78 131 189 252 321 4727

Discount factor to end 2012 1.00 0.91 0.83 0.75 0.68 0.62 0.56 0.51 0.47 0.42 0.39 0.35 0.35

-163 -101 -67 -37 -9 17 40 61 80 97 113 1,657

Capital 22,099

Value years until 2025 31

Terminal value 1,657

Total 23,787

Financials

Initiating Coverage

6 August 2014



Dividend Discount Mode cross-check

To assess how much growth the market is currently attributing to the companies, we

construct DDMs. Given the currently high level of market interest in the cash and dividend

prospects for the sector, we see this as an appropriate cross-reference valuation tool.

Based on a discount rate of 10%, we show the dividend (and therefore earnings) growth

rates implied by the current share prices assuming that the long-term pay-out ratios

remain at the levels we are forecasting for the medium term. In 2035, we assume a one-

off dividend increase to attain a 70% pay-out ratio with a nominal terminal growth rate of

2%.

Chart 117: DDM Implied Growth Rates


The implied growth rate for Generali according to our DDM model is 5%, compared with

the 4% organic growth rate we ascribe to Generali, rising to 7% if we assume successful

reinvestment of the cash generated each year in excess of dividend requirements. The

chart below shows how the implied growth rate has been calculated, where for ease of

showing the table we have omitted years 2021-2030. The dividend inputs for 2014-2016

are based on our actual forecasts, with the rises in 2017 and 2018 reflecting a lift in the

pay-out ratio to 45% from 40% in line with our medium-term expectations for the

company. The sharp increase in 2035 re-sets the pay-out ratio to 70% for the terminal

period, at which stage the assumed growth rate drops to 2%. The input for the period

2017 to 2035 is determined by the share price, where in this case 5% growth equates to a

€15.2 per share valuation, Generali’s share price at the time of writing this report.

Chart 118: Generali DDM


Growth rates Growth rates Growth Growth gap

DDM Implied Organic Reinvest Reallocate Total Organic Total

AEGON 5% 4% 3% 1% 8% 0% 3%

Allianz 4% 4% 4% 0% 8% -1% 4%

Aviva 5% 4% 2% 2% 8% -1% 4%

AXA 4% 5% 2% 0% 7% 1% 3%

Generali 5% 4% 3% 0% 7% -1% 2%

Prudential 8% 9% 1% 0% 10% 0% 2%

Zurich 4% 4% 1% 0% 5% 0% 1%

2014 2015 2016 2017 2018 2019 2020 2031 2032 2033 2034 2035 TV

0 1 2 3 4 5 6 17 18 19 20 21 22

DPS Euro 0.58 0.75 0.85 0.89 0.93 0.98 1.02 1.67 1.75 1.83 1.92 2.98 38.0

Growth 28% 14% 5% 5% 5% 5% 5% 5% 5% 5% 56%

Discount factor 1.00 0.91 0.83 0.75 0.68 0.62 0.56 0.20 0.18 0.16 0.15 0.14 0.14

0.58 0.68 0.70 0.67 0.64 0.61 0.58 0.33 0.31 0.30 0.28 0.40 5.1

CoC 10.0%

DDM valuation 15.6 (The current share price, 1/8/2014)

Financials

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6 August 2014



Appendix 3: Financial Market Influence Financial market developments still have notable influence on the ratings

attached to the insurance stocks, despite significant de-risking of the

financial portfolios in recent years. We assess the possible impacts of a

continued move towards deflation alongside those of a shift towards a

reflationary cycle. Based on our analysis, AXA (followed by AEGON and

Generali) are the most sensitive to financial market risk, Aviva, Prudential

and Zurich the least, with Allianz in the middle on our scenario testing.

Insurance margin development is dictated at least in part by financial market

direction. To demonstrate this for each of the ‘seven’, we have calculated the valuation

impact as a percentage of market cap from a 10% drop in equity markets and, separately,

a 100bps fall in bond yields (the 10-year government yield).

Chart 119: Financial Market Sensitivities


Equity markets

The 10% sensitivity in equity markets comprises four factors:

The change in value of the existing book of life business, where we take the face

value of the sensitivity as given by the company in the embedded value

disclosures.

The impact on the margins of life new business, where we apply a 5x multiplier

to the new business value sensitivity provided by the company, thereby

capitalising the impact on future earnings streams.

The flex in asset management earnings from the move in the value of funds,

where we have assumed a 10% earnings shift in the equity component of the

funds.

The value change in the equity portfolio backing non-life business, where we

have shown 10% of the value of the assets net of tax.

The flex on Allianz’s valuation is 3% according to this set of calculations. The share price

reaction may be greater than this dependent on whether the equity market has

risen/fallen on the back of earnings upgrades/downgrades or a fall/rise in the risk

premium. In the case of the latter, Allianz would move by 13% (3% flex in Allianz’s value,

plus 10% to accommodate for the 10% shift in the risk premium), giving 3% performance

versus the market.

Yields life Yields life Yields life Yields life Equities Non-life Non-life US$ Other

-100bps Total Europe US Other -10% CR +1 pt Yield -100bps gearing *-100bps

AEGON -5.4% 0.0% -5.4% 0.0% -5.4% 0.0% 0.0% 67%

Allianz -5.0% -4.1% 0.2% -1.2% -3.1% -4.8% -1.1% 10% 2%

Aviva -0.2% -0.2% 0.0% 0.0% -4.4% -3.9% -0.5% 0%

AXA -10.4% -4.8% -2.0% -3.5% -6.3% -3.6% -0.7% 11%

Generali -8.3% -8.3% 0.0% 0.0% -5.8% -6.3% -1.3% 0% 6%

Prudential -0.6% 1.3% -1.6% -0.3% -3.7% 0.0% 0.0% 39%

Zurich 0.8% 0.8% 0.0% 0.0% -1.5% -5.7% -1.7% 48%

Average -4.4% -2.4% -1.0% -1.0% -4.1% -3.5% -0.8% 23.1%

* Other equates to PIMCO, and tightening of Italian versus German spreads at Generali

Financials

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6 August 2014



Bond yields

The impact of the 100 bps move in bond yields comprises two factors:

The shift in value of the existing book of life business, where we take the face

value of the sensitivity as given by the company in the embedded value

disclosures.

The impact on the margins of life new business, where we apply a 5x multiplier

to the new business value sensitivity provided by the company, thereby

capitalising the impact on future earnings streams.

At this stage we have ignored any impact of moving yields on the value of the

non-life business.

Life companies tend to re-rate/de-rate as bond yields rise/fall reflecting margin

risk in the interest rate sensitive life policies, particularly those with guarantees. As yields

rise/fall, the gap between what can be earned on the portfolio, and what needs to be paid

out expands/contracts. The capital requirement to operate the business falls/rises

alongside to accommodate for the de/increasing risk of operating losses if yields cut

below the guaranteed level.

As equity markets rise/fall the value of fee-driven life products invested in equities

expands/contracts partly from portfolio gains and higher levels of fees because of it

but also from likely higher product sales.

Non-life earnings are additionally at risk from declining bond yields creating lower

investment income. Allianz earnings on our calculations decline by 1.1% for each 10bps

fall in total non-life investment yields including equities, real estate and corporate bonds.

We usually discount this in our overall valuation sensitivity, however, on the basis that

non-life pricing will tend to correct upwards to compensate. The correlation between the

two is apparent over the long term, overriding the shorter-term market influences that

might also influence pricing. In the mid-1990s, combined ratios were typically in the

region of 105%-107% versus 95%-97% now, with the 10 percentage point fall

compensating for the negative profit impact from falling investment yields over this

timeframe. To demonstrate the relationship for each company, we show the sensitivity of

earnings to movements in the non-life combined ratio and investment yields, where an

average of 100 bps shift in yield equates to just over 2% in the combined ratio. Non-life

yields inclusive of corporate bonds and equities are 3%-4% currently versus 8% back in

the mid-1990s, where the 500bps yield shift equates to the 10 percentage point decline in

the sector combined ratios over this timeframe.

Historically, non-life companies tend to de-rate during periods of upward

moves in bond yields. This might seem surprising but the relationship is logical:

The quality of the earnings arguably deteriorates. Bond yields rise, non-life

pricing consequently drops, with the element of earnings not within

management’s control (investment versus underwriting income) becoming less

as a result.

Rising bond yields suggest a higher risk of rising inflation where reserves set

aside for claims to be paid out in the future may prove inadequate. Conversely,

when yields drop, the likely decrease in the inflationary trend accompanying it

might lead to reserve releases (where initial reserves set aside for future claims

proved too conservative). In recent years when inflation has been on a falling

trend, the combined ratio of the non-life sector has benefited by typically 2-4

points because of such reserve releases.

There is also the mark-to-market impact on shareholders’ funds from rising

yields leading to bond price declines and lower NAVs. This is optical only, does

not represent any change in economic value, and is not the underlying reason

driving the relationship, in our view.

Life benefits from rising yields

And positive equity markets

Non-life companies are usually

defensive in a falling yield

environment

But tend to de-rate as bond yields

rise

Financials

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6 August 2014



A move towards deflation is also a risk for non-life stocks, however. In a

deflationary environment, where non-life prices would already have risen to

accommodate for earlier falling bond yields earlier as inflation levels dropped, the ability

to pass on higher pricing to the customers (presumably stretched in their budgets)

arguably becomes harder to achieve. We note the price war in UK auto over the past

couple of years where customers have been easily enticed on price comparison sites to

change provider for lower initial entry prices.

Non-life investment portfolios are typically 65% invested in bonds, half of which are

government. To achieve higher yield, the insurance companies in this report have

recently been decreasing their exposure to government bonds, increasing investments in

corporate bonds and other asset classes (project finance at Allianz, for example) to

compensate. In a deflationary scenario, we therefore calculate the impact on investment

yield at 30% of the total. In Allianz’s case, the impact of a 100bps decline in government

bonds would therefore lead to a 3.3% impact on group earnings (1.1% x 10bps x 0.3).

Scenario testing: Deflation In our deflationary scenario, we have assumed a 50bps drop in government yields. We

factor in the non-life impact from falling yields as described above and a one percentage

point drop in the combined ratio where the ability to pass on price increases to the

customer deteriorates. We assume a 10% fall in equity markets alongside, half of which

will be driven by an increase in the market risk premium. For Allianz, we have specifically

imputed an offset for PIMCO, a beneficiary of falling yields and rising bond prices (see

below).

All stocks aside from Prudential would underperform the market on this basis, with AXA

and Generali most affected.

Chart 120: Deflationary Scenario


Scenario testing: Reflation In our reflationary scenario, we have assumed a 50bps rise in government yields, and a

10% climb in equity markets alongside, half of which will be driven by a decrease in the

market risk premium. We have ignored the impact of rising yields in non-life, on the basis

that competition in pricing will offset any long-term benefits. For Allianz, we have

specifically included the negative impact from outflows at PIMCO.

AXA would benefit the most, followed by Generali, with Zurich benefiting least on our

reflationary scenario.

Yields Equities Yields CR +1pts PIMCO Value Market Stock Rel to

Life Non-life Non-life impact risk move market

AEGON -2.7% -5.4% 0.0% -8% 5.0% -13% -3%

Allianz -2.5% -3.1% -1.7% -4.8% 1.0% -11% 5.0% -16% -6%

Aviva -0.1% -4.4% -0.8% -3.9% -9% 5.0% -14% -4%

AXA -5.2% -6.3% -1.1% -3.6% -16% 5.0% -21% -11%

Generali -4.2% -5.8% -1.9% -6.3% -18% 5.0% -23% -13%

Prudential -0.3% -3.7% 0.0% 0.0% -4% 5.0% -9% 1%

Zurich 0.4% -1.5% -2.6% -5.7% -9% 5.0% -14% -4%

We stress test valuations for deflation

We stress test valuations for reflation

Financials

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Chart 121: Reflationary scenario


Financial market trading patterns Based on empirical observation, we note the following relationships between the ‘seven’

and the financial markets:

Chart 122: Financial Market Trading Patterns


Yields Equities Yields PIMCO Total Market Stock Rel to

Life Non-life impact risk move market

AEGON 2.7% 5.4% 0.0% 8% -5.0% 13% 3%

Allianz 2.5% 3.1% 0.0% -1.0% 5% -5.0% 10% 0%

Aviva 0.1% 4.4% 0.0% 5% -5.0% 10% 0%

AXA 5.2% 6.3% 0.0% 12% -5.0% 17% 7%

Generali 4.2% 5.8% 0.0% 10% -5.0% 15% 5%

Prudential 0.3% 3.7% 0.0% 4% -5.0% 9% -1%

Zurich -0.4% 1.5% 0.0% 1% -5.0% 6% -4%

AEGON US yield direction > 50% profits US, where Dutch guarantees

extensively hedged.

Allianz Euro yield direction tempered by PIMCO European life guarantees offset by higher fees and

inflows at PIMCO in the US as bond yields fall and

prices rise.

Aviva UK equity markets (limited) Limited life guarantees.

AXA Euro/US yield direction European/US yields driven by long term life

guarantees in France and Germany especially, and

interest sensitivity in the US variable annuity

business.

Generali Euro yield direction, German/ Italian

spreads

Bond yield spread German versus Italy, where

tightening reflects decreased country risk; Euro

yields reflecting life guarantees Germany and Italy

especially.

Prudential Asian economy (limited) 50% of group value in Asia on our calculation but

defensively positioned: over half of Asian new

business profit is US$ denominated; the affordability

of the products being sold to Asia’s middle class in

the event of an economic downturn.

Zurich US bond price direction A rise in inflation would possibly lead to combined

ratio deterioration.

Financials

Initiating Coverage

6 August 2014



Appendix 4:Recent Conglomerate

Performance The wider European insurance sector has been on a steadily underperforming

trend since the beginning of the year, at -6% versus the European market

(Euro Stoxx), with life and non-life segments on an equally negative trend.

This is in sharp contrast to the significant re-rating that benefited the sector

in 2013, and roughly a quarter of the performance has been given back since.

The seven large-cap conglomerate primary insurers covered in this report

have, however, proved more resilient than the overall sector: -3% versus the

European market.

European Insurance Sector versus European Market

Source: Factset

We use the financial market sensitivities to calculate the influence on share prices since the

beginning from the year, from financial market moves specifically (total impact), and

other de-rating/re-rating influences (the difference between the share price move and the

financial market impact as we calculate it).

Chart 123: Financial Market Influence


Macro Trends The financial backdrop has been less supportive for the insurance sector so

far this year, with steadily falling bond yields in Europe and the US compared

with significant rises last year and only limited support from equity markets.

10/12 1/13 4/13 7/13 10/13 1/14 4/14 7/1490

100

110

120

130

140

150

Source: FactSet PricesEuro STOXX / Insurance - SS

Company Yields Equities Yields Other US$ Total Share price Re-rating

Life Non-life impact Absolute Relative*

AEGON -3.0% 2.3% 0.0% 1.7% 1% -11% -10% -13%

Allianz -4.4% -0.4% -2.8% 1.1% 0.3% -6% -6% -5% 0%

Aviva -0.1% -0.5% -0.8% 0.0% -1% 10% 11% 11%

AXA -6.8% 2.7% -1.8% 0.3% -6% -14% -13% -8%

Generali -7.7% -0.8% -5.4% 2.7% 0.0% -11% -9% -7% 2%

Prudential 0.0% -0.4% 0.0% 1.0% 1% 0% 2% 0%

Zurich 0.4% 0.7% -2.8% -0.9% -3% 2% 4% 5%

* to market (EuroSTOXX) -4% -5% -3% -1%

Financials

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6 August 2014



The combination of bond yield falls and the slight rise in equity

markets suggests 3% value decline overall from these factors. AXA, with the

highest sensitivity overall on our calculations, has fared the worst. With flat

absolute performance overall, however, the sector has been marginally re-rated

over this time frame, Aviva and Zurich most notably.

Regulatory risks have been at the fore so far this year, with the budget

changes to UK annuities leading to dramatic share price declines at Just

Retirement and Partnership (the core business of these companies). The

investment case for diversification of risk by line and thereby conglomerate

proposition has been strengthened as a consequence, in our view.

Non-life pricing remains benign in most European markets and US

commercial. Italian pricing is on a falling trend, however, with UK pricing yet to

stabilise after several months of falling prices.

In life the trend towards capital-light life products (protection, unit linked,

and savings with lower guarantees) has continued across the sector with US

variable annuity business faring especially well in terms of margin and growth.

Products launches in Italy and Germany of hybrid products with considerably

lower levels of guarantees have proved especially popular in recent months.

Signs of margin pressures are beginning to emerge, with AXA, for

example, withdrawing from certain product lines in Switzerland and Japan on

profitability grounds.

The wider focus on cash generation across the sector continues, with higher

levels of cash remittance to the holding for dividend and other corporate

purposes a key theme for the sector.

Capital visibility in the run-up to Solvency II’s introduction next year has

generally been improving so far this year, with Solvency II type ratios published

by the companies, mainly around the 200% level, sufficient in our view to

absorb any final adjustments, and any increased demands at a later stage from

G-SII. AEGON’s recent disclosure at 150%-200% (mid-point 175%) has been

disappointing, however.

Company specifics Stripping out the financial market impacts, we assess which stocks have been

re-rated and de-rated based on operational and company-specific news flow.

Aviva: re-rated 11%. Late in the restructuring cycle, with faster-than-expected progress

on deleveraging and cash remittance at the full-year stage, and announcement of further

operational and efficiency measures.

Zurich: re-rated 5%. Management’s ability to maintain the full-year dividend despite

the high pay-out ratio, with suggestions of more active capital management going

forwards in relation to sub performing components and non-core units. The recent

appointment of George Quinn (from Swiss Re) as CFO is positive in this regard.

Generali: re-rated 2%. Significant integration and streamlining under CEO Mario

Greco’s new management team offset by concerns over future declining investment

yields (govt bond yield down by over 150bps since beginning of year). Recent

management commentary on lifting the dividend pay-out ratio to above 40% and a 1H

2014 4% operational earnings beat driven by expense cuts have both lifted the share price

since.

Prudential: 0%. Confidence on the outlook for Asian growth continues, fuelled by

expanding distribution (Standard Chartered), development of new territories and the

growing middle class customer base in the region. Jackson has continued to deliver high

growth, with an improving margin trend in its core variable annuity offering.

Financials

Initiating Coverage

6 August 2014



Allianz: 0%. The recent Investor Day disclosed higher-than-expected free cash flows,

and €3bn of cash which is to be accelerated to the holding over the next three years. This

has led to increased market optimism on higher dividend pay-out ratios in the future.

Since the beginning of the year, PIMCO has been a destabilising influence, following the

resignation of group CEO in January, and continued outflows. Fund performance has

recovered this year in the core fund, and appointment of six deputy CIO’s alongside a

new CEO (former COO) to alleviate key man risk should lead to some stabilisation during

the rest of the year.

AXA: de-rated 8%. Growth momentum stalled at the Q1 stage in terms of life value of

new business (VNB) following management’s decision to de-emphasise certain

components of group health business in Switzerland, and long-term protection in Japan

due to inadequate margins. The 1H half results announced last week were considerably

more supportive, however, with a growth trend re-established in life new business (Q2 vs

Q2 2013 +5%), a return to positive inflows at Alliance Bernstein, and an underlying

earnings beat reflecting positive operational momentum driven by expense cuts. The

strong signal of an increase in the dividend pay-out ratio has also helped lift the shares.

AEGON: de-rated 13%. Recent Solvency II disclosure suggested a range of 150%-

200%, where the mid-point at 175% is lower than the conglomerate peers typically

around 200%. The planned sale of the non-core operations in France and Canada should

help in this regard (adding 5-7 points to the ratio on our guesstimates). Cash flow levels

have also been guided to increase to comfortable levels for dividend and future growth

requirements on our calculations.

Financials

Initiating Coverage

6 August 2014



Appendix 5: The Conglomer-Creation We outline the key events that led to the European Insurance

Conglomerations covered in this report.

Chart 124: European Insurance Sector versus Market (EuroStoxx)

Source: Factset

The European insurance sector was highly cash generative at the beginning of the 1990s.

We timeline its move towards forced recapitalization a decade later.

The Conglomeration

‘In the beginning…’

1990: the cash generative insurance industry. In the early 1990s,

insurance companies across Europe were operating in regulated markets with

protected non-life pricing in many, where high government yields and tax

incentives made it easy to construct and sell life products and make ample

returns. Cash and capital were in ample supply. The question was what to do

with all the excess capital that was building up. It was not so different to the

current move towards excess cash generation.

1991: the move to conglomeration. ING was the first to inspire

management teams across Europe towards mega deals of conglomeration by

merging a Dutch insurance company (Nationale-Nederlanden) with a Dutch

bank (NMB Postbank Group) to create ING. CEO Aad Jacobs at the time justified

the rapid sequence of international acquisitions that followed at his new

company ING on the solid argument of risk diversification, with exposure to so

many different businesses and economic cycles a guarantee to a steadily

growing earnings stream.

1994: leverage to fund wide-scale conglomeration. This appetite for

acquisition was whetted further by the insurance sector’s move towards

leverage, where a dramatic balance sheet re-engineering at Swiss Re in 1994

generated higher market leverage and a sustained share price re-rating on the

back of it. Rather than discouraging leverage at the time, the analyst community

demanded more of the same with a wave of mega mergers and acquisitions that

followed: AEGON (Providian, Transamerica), Aviva (Commercial Union GA,

Norwich Union), Allianz (Fireman’s, AGF/RAS, Dresdner), AXA (Equitable, UAP,

Nippon Dantai), Generali (AMB, INA), Zurich (BAT, Eagle Star, Scudder).

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Source: FactSet PricesEuro STOXX / Insurance - SS

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6 August 2014



1990s: net present value accounting. The arrival of embedded value

accounting spurred the valuations of the sector higher, with life products

structured not for the speed of cash return but the net present value of future

earnings steams that could take several years to turn into cash (provided that the

actuarial and investment assumptions that had calculated them proved correct).

The 1990s were in bull market phase with millennium optimism and dot com

innovation alongside, with life products sold and companies acquired on the

increasingly precarious assumption (following an extended bull market in

equities) that equity markets would rise 8% annually with current (inflated)

levels as their base.

2000s: financial market dislocation unravels the conglomeration model.

Allianz’s acquisition of Dresdner in 2001 mirrored the bank insurance deal that

ING had engineered a decade earlier, with Allianz’s exposure to equities

significantly increased in the process. But the investment environment for

levered investment vehicles was about to change: initial equity market collapse,

a sustained drop in interest rates and financial yield, and the eventual

unravelling of the global financial crisis in decade that followed. The

conglomerate insurance companies were left stranded with balance sheets that

were over-geared, selling life products where the net present value had

disappeared, owning a sequence of operations that had been acquired but were

now sitting uncomfortably together, with poor lines of control and inconsistent

practices and systems, with returns once promised now collapsed under the pile

of cash that had been raised by the market to fund it all.

The Cash-glomerates The insurance conglomerates cut their dividends, recapitalised, and their

focus now became ‘cash’

Chart 125: Zurich versus European Market (EuroStoxx)

Source: Factset

2002: return to cash. In the summer of 2002, in the midst of a sequence of emergency

rights issues in the insurance sector, the new CEO of Zurich, Jim Schiro, held an open

discussion with a group of analysts and investors. Mr Schiro set out his new framework of

thinking, one that would focus on future excess returns no longer being spent on

acquisitions or market share gains but being paid back to shareholders instead. The

reaction of the audience was one of overriding disbelief, unsurprising given their

experience of the previous decade’s unbridled expansion. A few months later, Schiro

formally presented the ‘Zurich Way’ to the market, a business plan setting out his plans

for risk management (best practice underwriting practices dictated by the holding),

sizable expense cuts with streamlining, synergies and shared services, and most

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6 August 2014



importantly for the shareholder, higher dividend pay-out ratios with a share buyback

strategy. Zurich delivered on its strategy in the years that followed and the stock enjoyed

a sustained re-rating on the back of it. The blueprint ‘Zurich Way’ had been set for the

rest of the insurance conglomerates to follow if they wished.

2006: return to cash and growth. In the spring of 2005, Mark Tucker took over as

CEO of Prudential. The ousting of the exiting CEO, Jonathan Bloomer, highlighted the

growing level of market discontent towards insurance conglomerates still keen to grow

by acquisition (Bloomer had been foiled in his earlier attempt to buy American General in

the US), unable to pay out cash to shareholders (Prudential cut its dividend in 2003), and

keen to raise fresh equity to grow (Prudential’s £1bn rights issue in 2004 on the premise

of expanding the UK business). At CEO Mark Tucker’s first full-year analyst presentation

for 2005, net cash remittance (ie the cash dividends paid by the operations to the holding)

at the group level was a paltry £99m, with Asia in the cash red by £96m. Tucker’s

challenge was twofold, financing the growth in Asia and appeasing the market concerns

over cash flow in the process. As a former executive of Prudential whose remit at one

stage (1993) was to build up the Asian franchise but with negligible cash to spend, and as

a former professional footballer and not a qualified actuary, Tucker focused the Asian

business on what he knew best, ‘cash’. This meant selling products that required low

initial capital spend but generated fast payback return (on this occasion unit linked with

medical expense riders attached). Products that demanded high initial capital-spend were

de-emphasised in the process or stopped altogether. Cash returns at Prudential were set

to grow exponentially because of this move, with growth soon to become self-financed

and where cash left over was then used to fund the group’s growing dividend. Prudential

demonstrated to the market that cash and growth and, yes, dividend increases, could be

achieved hand in hand.

Chart 126: Prudential versus European Market (EuroStoxx)

Source: Factset

Zurich: the Cash-Way. The re-rating of Zurich initially, and the sustained re-rating of

Prudential that followed more dramatically, focused conglomerate management teams

not only on the cash generation of their businesses (underwriting in non-life, product

design in life to secure cash flow, corporate structures to ensure easy flow of cash to the

holding) but also on the range of markets in their quest for growth. Management teams

initially looked to the Zurich Way for guidance, but now increasingly looked to Prudential

as the ‘light’ for growth.

Prudential: the Cash-Light. The progression of Zurich following the Zurich Way was

interesting in this regard. Following the demanding growth levels set by CEO Rolf Huppi

in the 1990s, namely 15% top and bottom line organically, and the forced re-

capitalisation that followed, replacement CEO Jim Schiro initially focused the group on

cash generation, happy to pay back to the shareholders any build-up of excess return.

'95 '97 '99 '01 '03 '05 '07 '09 '11 '1340

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6 August 2014



The 2011 acquisition of Santander’s Latam operations following the appointment of

Zurich’s next CEO Martin Senn suggested a step away from cash, however, to a growth

strategy fuelled by emerging market expansion, albeit maintaining the level of cash

dividend to the shareholders.

Chart 127: Prudential versus Zurich

Source: Factset

The Cash Cactus Cash cactus versus cash and growth. The cash cactus grows slowly, although

blooms magnificently once a year with its high pay-out ratio and dividend. Read any

recent corporate presentation from the companies covered in this report and it is clear

that all management teams, Zurich included, have moved on from the cash-cactus

objective alone. All companies, including the latest to restructure, Aviva, are in pursuit of

cash and growth.

The seven-year feast and famine. Swiss Re’s corporate move in 1994 inspired the

cash generative insurance industry of the 1990’s to embrace financial leverage in their

quest for growth. Seven years later, insurance companies had no choice but to re-trench,

with forced equity issues in some cases, as financials markets began their dislocation. For

the past seven years, the insurance conglomerates one by one have been finding their

way back to cash replenishment following the example of Zurich and, now, based on our

calculations in this report, are finally able to make cash choices if not now at least within

the next two years.

The seven-year cash and growth. The challenge for the Magnificent Seven

conglomerate insurers has already been set, by themselves, to be generous with their

cash, and also to grow; above all, in our view, to demonstrate to the market that any fresh

investments and acquisitions funded by the cash, and not paid back to the shareholder,

can create shareholder value and profitable growth over the long term.

‘And on the seventh day…’

'05 '06 '07 '08 '09 '10 '11 '12 '13 '1440

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6 August 2014



Long Term Financial Model Drivers

Life op pre-tax (US FA/VA) 128/83bps

Growth (US, Dutch, UK) 5%/2%/3%

Pay-out ratio long term 40%

Other Considerations

AEGON’s Solvency II ratio (current

indication 150%-200%) appears low

versus sector reflecting, we believe, the US

overweight where no diversification

benefits are given. The optimal solution in

our view is for the group to be re-

domiciled to the US, and the European

operations IPO’d as per NN recently.

Management have shown no indication to

this effect, so the stock will likely trade at a

discount to the sector.

2 Year Forward P/E

Source: Factset, Jefferies estimates

Global pensions and retirement savings, US, UK, Netherlands, with smaller European, CEE

and Asian operations. US top 6 life and pensions, 7 VA; Netherlands 1 group pensions, 4

individual life; UK 5 pensions, platform build out.

2Q14 earnings 14th August 2014:

continued UK platform momentum crucial

3Q earnings 13th November 2014

Solvency II update towards end of year

Potential of non-core sales Canada &

France

Catalysts

Target Investment Thesis

Life pre-tax operating margin medium

term US FA 128bps, VA 83bps, pensions

18bps, Dutch pensions 54bps

Growth long term US 5%, Dutch 2%, UK

3%

Non-core valued at 50% of book

AM and International valued at 15x 2015F

Dividend pay-out 33%, rising to 40% long

term

CoC Asia 11%, US 12%, UK 9%

Upside Scenario

Reflationary back-drop

Bond yields +50bps: life value expansion

(EV sensitivities)

Equity markets 10% higher: life value

expansion (EV sensitivities), higher AM fees

CoC decreases by 50bps


term

Price target €7.5

Downside Scenario

Deflationary backdrop

Bond yields -50bps: life value contraction

(EV sensitivities)

Equities -10% life value contraction (EV

sensitivities), lower AM fees

CoC increases by 50bps to 10.5%.


term

Price target €5.8

Long Term Analysis

Scenarios

2015 PER


P/TNAV vs RoTNAV


Recommendation / Price Target

Ticker Rec. PT

AGN NA Hold €6.6

ALV GR Hold €132.5

AV /LN Buy 584p

CS FP Buy €21.4

G IM Hold €16.1

PRU LN Buy 1577p

ZURN VX Hold CHF254

Company Description

THE LO

NG

VIE

W

Peer Group

AEGON

Hold: €6.6 Price Target

Financials

Initiating Coverage

6 August 2014




Non-life combined ratio 96%

Non-life yield 3.0%

Life margin 58bps

PIMCO pre-tax % AuM 22bp

Pay-out ratio 50%


PIMCO has ballooned in recent years to

close to 30% of group profits, but

tapering last year, a performance blip, and

resignation of the CEO led to outflows.

Allianz remain committed to the group,

with a new CEO appointed and six deputy

CIOs to Bill Gross. The group is highly

cash generative relative to growth and

dividend requirements, leading to

expectations of a higher pay-out strategy

to be announced later this year.

2 Year Forward P/E


Global composite insurer with market leadership in Germany, middle rankings across

Europe and the UK, with operations in the US and Asia. Allianz owns PIMCO the leading

bond asset manager.

2Q14 earnings 8th August 2014

3Q14 earnings 7th November 2014

Stabilisation of PIMCO outflows; return to

single digit growth trend over medium

term

Possible management succession to be

announced in the autumn

Outline of dividend strategy towards end

of 2014

Catalysts


Non-life combined ratio 2014 94%;

terminal 96%

Life pre-tax operating margin 58bps;

growth mid-single digit

PIMCO valued at 11.0x 2015F

Dividend pay-out lifted to 50% medium

term (from 40%)

Upside Scenario



(EV sensitivities), non-life margins

unchanged, lower fee income offset at

PIMCO


expansion (EV sensitivities)

CoC decreases by 50bps to 9.5%

Dividend pay-out lifted to 50%,

Price target €146

Downside Scenario


(EV sensitivities), non-life yields -15bps,

higher fee income benefit at PIMCO

Non-life combined ratio 1 percentage

point deterioration: terminal 97%


sensitivities)


Dividend pay-out lifted to 50%

Price target €111

Long Term Analysis

Scenarios

2015 PER


P/TNAV vs RoTNAV



Ticker Rec. PT

AGN NA Hold €6.6


AV /LN Buy 584p

CS FP Buy €21.4

G IM Hold €16.1

PRU LN Buy 1577p

ZURN VX Hold CHF254

Company Description

THE LO

NG

VIE

W

Peer Group

Allianz


Financials

Initiating Coverage

6 August 2014




Non-life combined ratio 98.1%

Nonlife yield 2.7%

Life margin 85bps


Other considerations

The group is undergoing significant

corporate change under new CEO Mark

Wilson, with focus on cash and dividend

momentum, and reinvigoration of growth

strategies across the group. Longer term

we think it likely that capital will be

released from Europe, with an increasing

focus on emerging market development

(group CEO former AIA CEO, with the

new head of global life formerly CEO of

Great Eastern Holdings).

2 Year Forward P/E


UK composite leader; European operations (life and non-life) France, Italy, Spain mainly via

distribution partners (banks, AFER); leading Canada non-life insurer. Emerging market

presence Poland, Turkey, Asian jvs (COFCO, Astra).

2Q14 earnings 7th August 2014

3Q14 earnings 17thNovember 2014

Confirmation of cost saves, and cash

remittance progress

Growth trend re-established in the UK

Catalysts


Non-life combined ratio 2014 96.1%;

terminal 98.1%

Non-life yield medium term 2.7%


term 85bps; growth mid-single digit

AM valued at 20.0x 2015F reflecting rapid

build-out

Dividend pay-out 35%, rising to 40%

medium term

CoC 10%

Upside Scenario




unchanged


expansion (EV sensitivities); higher AM fees



medium term

Price target 639p

Downside Scenario



(EV sensitivities), non-life yields -15bps


point deterioration: terminal 99.1%

Equities -10%: life value contraction (EV

sensitivities); lower AM fees.



medium term

Price target 502p

Long Term Analysis

Scenarios

2015 PER


P/TNAV vs RoTNAV



Ticker Rec. PT

AGN NA Hold €6.6


AV /LN Buy 584p

CS FP Buy €21.4

G IM Hold €16.1

PRU LN Buy 1577p

ZURN VX Hold CHF254

Company Description

THE LO

NG

VIE

W

Peer Group

AVIVA

Buy: 584p Price Target

Financials

Initiating Coverage

6 August 2014





Life margin 85bps



Management have successfully

repositioned the group to the more cash

generative unit linked and protection

products. The back book of traditional life

business still weighs down on the group’s

growth profile where we expect more

capital to be released from these over

time. The group’s emerging profile (12%

of profits), is likely to remain the emphasis

for any fresh investments.

2 Year Forward P/E


Leading global insurer with strong European base (top 3 in several markets), specific areas

of strength in US (variable life and annuities), and Japan (medical, disability), growing

emerging franchise, top Asian non-life insurer. Owns Alliance Bernstein, US fund manager.

3Q14 earnings 24thOctober2014

Investor Day strategy update 20th

November 2014

Ambition 2015 plan: cost saves offset

impact of declining yields

Potential life back book deals to release

capital

Catalysts



terminal 97.8%



term 85bps; growth mid-single digit

AM valued at 13.0x 2015F


medium term

CoC 10%

Upside Scenario




unchanged


expansion (EV sensitivities); higher AM

fees.



term

Price target €25.0

Downside Scenario







sensitivities); lower AM fees.



medium term


Long Term Analysis

Scenarios

2015 PER


P/TNAV vs RoTNAV



Ticker Rec. PT

AGN NA Hold €6.6


AV /LN Buy 584p

CS FP Buy €21.4

G IM Hold €16.1

PRU LN Buy 1577p

ZURN VX Hold CHF254

Company Description

THE LO

NG

VIE

W

Peer Group

AXA

Buy: €21.4 Price Target

Financials

Initiating Coverage

6 August 2014





Non-life yield 3.4$

Life margin 83bps


2 Year Forward P/E


Leading European composite insurer; market leader Italy, with top/mid rankings in

Germany, France, Spain, CEE. 3Q14 earnings 6th November 2014

Investor Day strategy update 19th

November 2014

Progress on €1bn cost savings acting as

offset to impact of falling yields and

declining non-life pricing in Italy

Catalysts



terminal 95.5%





medium term

CoC 10%

Upside Scenario




unchanged





medium term


Downside Scenario







sensitivities)



medium term


Long Term Analysis

Scenarios

2015 PER


P/TNAV vs RoTNAV



Ticker Rec. PT

AGN NA Hold €6.6


AV /LN Buy 584p

CS FP Buy €21.4

G IM Hold €16.1

PRU LN Buy 1577p

ZURN VX Hold CHF254

Company Description

THE LO

NG

VIE

W

Peer Group

Generali



CEO Mario Greco is in the process of

modernising and de-politicising Generali,

improving corporate governance, and

implementing full integration across the

group. The benefits of this, however, are

currently being overshadowed by the

rapid decline in Italian bond yields and

falling non-life pricing in Italy, weighing

down core margin potential.

Financials

Initiating Coverage

6 August 2014




Life op pre-tax (Asia, US, UK) 320/88/53bps

Growth (Asia, US, UK) 15%/6%/3%



The group is run as three separate

operations, all independently financed.

Given the lack of diversification benefits

afforded to the US under Solvency II, we

think it possible that the US operation is

IPO’d (cf ING’s successful IPO of Voya last

year). This could lead to a higher multiple

being attached to the Asian business, with

Asian investors arguably reluctant to own

a US variable annuity operation.

2 Year Forward P/E


Leading Asian life franchise (1st Malaysia, Philippines, Singapore, Vietnam, India 3rd China,

4th HK) Standard Chartered distribution; US top variable annuity provide, leading

wholesale distributor; UK top 5 annuity and corporate pensions provider; M&G leading UK

asset manager .

2Q14 earnings 12 August 2014:

confirmation of Indonesian growth trend

following Q1 natcat influence

Growth momentum in Asia continuing

over coming quarters following SCB

distribution expansion and opening of new

territories

Potential break-up of group, or IPO of

Jackson in US

Catalysts



term Asia 320bps, US 88bps, UK 53bps

IRRs >20% falling to mid (US) to high (Asia)

teens longer term

Growth Asia15% fading to 11% by 2025,

6% thereafter; US 6%, UK 3%

M&G valued at 16.5x 2015F

Dividend pay-out 35%

CoC Asia 11%, US 12%, UK 9%

Upside Scenario

Reflationary backdrop


(EV sensitivities)


expansion (EV sensitivities), higher AM fees

CoC decreases by 50bps

Price target 1743p

Downside Scenario



(EV sensitivities)


sensitivities), lower AM fees


Price target 1457p

Long Term Analysis

Scenarios

2015 PER


P/TNAV vs RoTNAV



Ticker Rec. PT

AGN NA Hold €6.6


AV /LN Buy 584p

CS FP Buy €21.4

G IM Hold €16.1

PRU LN Buy 1577p

ZURN VX Hold CHF254

Company Description

THE LO

NG

VIE

W

Peer Group

Prudential

Buy: 1577p Price Target

Financials

Initiating Coverage

6 August 2014





Life margin 57bps

Farmers managing margin 7.5%

Pay-out ratio 65%


Management appear keen to re-establish a

growth trend but the high pay-out ratio at

65% constricts fresh investment potential.

More capital reallocation to growth is

possible (following the 2011 purchase of

Santander Latam) where so far only 5% of

capital has been signposted as non-core.

Organic growth is being pursued at

Farmers (US auto non-life) with the omni-

channel approach (agency connecting

with direct) yet to convince.

2 Year Forward P/E


Global composite insurer, market leader in corporate non-life, with middle ranking

positions in the US (non-life), Europe (non-life and life) and Latam (life). Zurich also owns

Farmers the US personal lines insurer.

2Q14 earnings 7 August 2014

3Q14 earnings 6 November 2014

Return to growth trend at Farmers

reflecting push into Eastern states, and

omni-channel approach

More detail on capital allocation between

core and non-core and potential areas for

exits

Catalysts



terminal 98.7%




Farmers valued at 12x 2015F


CoC 10%

Upside Scenario

Reflationary backdrop

Bond yields +50bps: life value contraction


unchanged





Price target CHF273

Downside Scenario


Bond yields -50bps: life value expansion





sensitivities)



Price target CHF217

Long Term Analysis

Scenarios

2015 PER


P/TNAV vs RoTNAV



Ticker Rec. PT

AGN NA Hold €6.6


AV /LN Buy 584p

CS FP Buy €21.4

G IM Hold €16.1

PRU LN Buy 1577p

ZURN VX Hold CHF254

Company Description

THE LO

NG

VIE

W

Peer Group

Zurich

Hold: CHF254 Price Target

Financials

Initiating Coverage

6 August 2014



Company DescriptionGlobal pensions, long term savings, life and health insurance provider predominantly in the US, Netherlands, the UK and CEE, with non-lifeoperations in the Netherlands, Spain and Hungary.

Aviva is the UK's leading life and non-life insurer focused on the mass-market segment and employing a multi-distribution approach acrossa range of products. It has also gained leading positions in Canadian non-life and US indexed annuities that add to a growing Europeanbancassurance network. The group is differentiated versus peers through distributing via banks versus traditional agents. More recently,strategic focus has sharpened towards the life and savings opportunity in Europe as opposed to Asia.

Generali is a European composite insurer, offering the full range of non-life, life and insurance products with market leading positions in Italy,Austria, Germany, France and the CEE.

Axa is a leading global multi-line insurer, enjoying uniquely diversified geographical insurance operations. It is underweight Asia ex-Japan,but no other insurance company offers the same breadth of life, non-life and asset management businesses. Axa has historically traded on asector premium partly reflecting above-growth prospects. This has been supported by geographical mix and the potential to leverage market-leading US product capability into a broad European distribution platform.

Allianz is a one of the world''s largest insurers. It is biased to personal non-life insurance in Continental Europe and the US but also hassignificant life and asset management operations (including Pimco in the US). Allianz sells mainly via proprietary distribution channels (tiedagents) differentiating it versus other insurers and supporting various cross-selling/ best practice initiatives. The life business has significantguarantees on its mainly traditional, spread-based reserves.

Prudential is a leading life and asset management company based in the UK. It has strong positions in the relatively mature and competitivemarkets of the UK and the US, and a large Asian franchise that is very well placed for long-term growth opportunities. Risky asset exposureis above average but partly balanced by relatively strong capitalisation.

Zurich Financial Services (ZFS) is one of the world's largest non-life insurers. It also has significant life insurance operations and a managementcompany known as Farmers. Zurich is based in Switzerland, reports in US$ and quoted in Swiss Francs.

Analyst CertificationI, Mark Cathcart, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.Registration of non-US analysts: Mark Cathcart is employed by Jefferies International Limited, a non-US affiliate of Jefferies LLC and is notregistered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, andtherefore may not be subject to the NASD Rule 2711 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, publicappearances and trading securities held by a research analyst.

As is the case with all Jefferies employees, the analyst(s) responsible for the coverage of the financial instruments discussed in this report receivescompensation based in part on the overall performance of the firm, including investment banking income. We seek to update our research asappropriate, but various regulations may prevent us from doing so. Aside from certain industry reports published on a periodic basis, the large majorityof reports are published at irregular intervals as appropriate in the analyst's judgement.Mark Cathcart holds a long equity position in AVIVA PLC.Mark Cathcart holds a long equity position in AXA SA.

Company Specific DisclosuresFor Important Disclosure information on companies recommended in this report, please visit our website at https://javatar.bluematrix.com/sellside/Disclosures.action or call 212.284.2300.

Meanings of Jefferies RatingsBuy - Describes stocks that we expect to provide a total return (price appreciation plus yield) of 15% or more within a 12-month period.Hold - Describes stocks that we expect to provide a total return (price appreciation plus yield) of plus 15% or minus 10% within a 12-month period.Underperform - Describes stocks that we expect to provide a total negative return (price appreciation plus yield) of 10% or more within a 12-monthperiod.The expected total return (price appreciation plus yield) for Buy rated stocks with an average stock price consistently below $10 is 20% or more withina 12-month period as these companies are typically more volatile than the overall stock market. For Hold rated stocks with an average stock priceconsistently below $10, the expected total return (price appreciation plus yield) is plus or minus 20% within a 12-month period. For Underperformrated stocks with an average stock price consistently below $10, the expected total return (price appreciation plus yield) is minus 20% within a 12-month period.NR - The investment rating and price target have been temporarily suspended. Such suspensions are in compliance with applicable regulations and/or Jefferies policies.CS - Coverage Suspended. Jefferies has suspended coverage of this company.NC - Not covered. Jefferies does not cover this company.

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Restricted - Describes issuers where, in conjunction with Jefferies engagement in certain transactions, company policy or applicable securitiesregulations prohibit certain types of communications, including investment recommendations.Monitor - Describes stocks whose company fundamentals and financials are being monitored, and for which no financial projections or opinions onthe investment merits of the company are provided.

Valuation MethodologyJefferies' methodology for assigning ratings may include the following: market capitalization, maturity, growth/value, volatility and expected totalreturn over the next 12 months. The price targets are based on several methodologies, which may include, but are not restricted to, analyses of marketrisk, growth rate, revenue stream, discounted cash flow (DCF), EBITDA, EPS, cash flow (CF), free cash flow (FCF), EV/EBITDA, P/E, PE/growth, P/CF,P/FCF, premium (discount)/average group EV/EBITDA, premium (discount)/average group P/E, sum of the parts, net asset value, dividend returns,and return on equity (ROE) over the next 12 months.

Jefferies Franchise PicksJefferies Franchise Picks include stock selections from among the best stock ideas from our equity analysts over a 12 month period. Stock selectionis based on fundamental analysis and may take into account other factors such as analyst conviction, differentiated analysis, a favorable risk/rewardratio and investment themes that Jefferies analysts are recommending. Jefferies Franchise Picks will include only Buy rated stocks and the numbercan vary depending on analyst recommendations for inclusion. Stocks will be added as new opportunities arise and removed when the reason forinclusion changes, the stock has met its desired return, if it is no longer rated Buy and/or if it underperforms the S&P by 15% or more since inclusion.Franchise Picks are not intended to represent a recommended portfolio of stocks and is not sector based, but we may note where we believe a Pickfalls within an investment style such as growth or value.

Risk which may impede the achievement of our Price TargetThis report was prepared for general circulation and does not provide investment recommendations specific to individual investors. As such, thefinancial instruments discussed in this report may not be suitable for all investors and investors must make their own investment decisions basedupon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Past performance ofthe financial instruments recommended in this report should not be taken as an indication or guarantee of future results. The price, value of, andincome from, any of the financial instruments mentioned in this report can rise as well as fall and may be affected by changes in economic, financialand political factors. If a financial instrument is denominated in a currency other than the investor's home currency, a change in exchange rates mayadversely affect the price of, value of, or income derived from the financial instrument described in this report. In addition, investors in securities suchas ADRs, whose values are affected by the currency of the underlying security, effectively assume currency risk.

Other Companies Mentioned in This Report• ING Groep N.V. (INGA NA: €9.63, BUY)• Standard Chartered PLC (STAN LN: p1,219.00, UNDERPERFORM)

Distribution of RatingsIB Serv./Past 12 Mos.

Rating Count Percent Count Percent

BUY 966 51.77% 252 26.09%HOLD 752 40.30% 122 16.22%UNDERPERFORM 148 7.93% 8 5.41%

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Other Important Disclosures

Jefferies Equity Research refers to research reports produced by analysts employed by one of the following Jefferies Group LLC (“Jefferies”) groupcompanies:

United States: Jefferies LLC which is an SEC registered firm and a member of FINRA.

United Kingdom: Jefferies International Limited, which is authorized and regulated by the Financial Conduct Authority; registered in England andWales No. 1978621; registered office: Vintners Place, 68 Upper Thames Street, London EC4V 3BJ; telephone +44 (0)20 7029 8000; facsimile +44 (0)207029 8010.

Hong Kong: Jefferies Hong Kong Limited, which is licensed by the Securities and Futures Commission of Hong Kong with CE number ATS546; locatedat Suite 2201, 22nd Floor, Cheung Kong Center, 2 Queen’s Road Central, Hong Kong.

Singapore: Jefferies Singapore Limited, which is licensed by the Monetary Authority of Singapore; located at 80 Raffles Place #15-20, UOB Plaza 2,Singapore 048624, telephone: +65 6551 3950.

Japan: Jefferies (Japan) Limited, Tokyo Branch, which is a securities company registered by the Financial Services Agency of Japan and is a memberof the Japan Securities Dealers Association; located at Hibiya Marine Bldg, 3F, 1-5-1 Yuraku-cho, Chiyoda-ku, Tokyo 100-0006; telephone +813 52516100; facsimile +813 5251 6101.

India: Jefferies India Private Limited (CIN - U74140MH2007PTC200509), which is licensed by the Securities and Exchange Board of India as a MerchantBanker (INM000011443) and a Stock Broker with Bombay Stock Exchange Limited (INB011491033) and National Stock Exchange of India Limited(INB231491037) in the Capital Market Segment; located at 42/43, 2 North Avenue, Maker Maxity, Bandra-Kurla Complex, Bandra (East) Mumbai 400051, India; Tel +91 22 4356 6000.

This material has been prepared by Jefferies employing appropriate expertise, and in the belief that it is fair and not misleading. The information setforth herein was obtained from sources believed to be reliable, but has not been independently verified by Jefferies. Therefore, except for any obligationunder applicable rules we do not guarantee its accuracy. Additional and supporting information is available upon request. Unless prohibited by theprovisions of Regulation S of the U.S. Securities Act of 1933, this material is distributed in the United States ("US"), by Jefferies LLC, a US-registeredbroker-dealer, which accepts responsibility for its contents in accordance with the provisions of Rule 15a-6, under the US Securities Exchange Act of1934. Transactions by or on behalf of any US person may only be effected through Jefferies LLC. In the United Kingdom and European EconomicArea this report is issued and/or approved for distribution by Jefferies International Limited and is intended for use only by persons who have, or havebeen assessed as having, suitable professional experience and expertise, or by persons to whom it can be otherwise lawfully distributed. JefferiesInternational Limited has adopted a conflicts management policy in connection with the preparation and publication of research, the details of whichare available upon request in writing to the Compliance Officer. Jefferies International Limited may allow its analysts to undertake private consultancywork. Jefferies International Limited’s conflicts management policy sets out the arrangements Jefferies International Limited employs to manage anypotential conflicts of interest that may arise as a result of such consultancy work. For Canadian investors, this material is intended for use only byprofessional or institutional investors. None of the investments or investment services mentioned or described herein is available to other personsor to anyone in Canada who is not a "Designated Institution" as defined by the Securities Act (Ontario). In Singapore, Jefferies Singapore Limited isregulated by the Monetary Authority of Singapore. For investors in the Republic of Singapore, this material is provided by Jefferies Singapore Limitedpursuant to Regulation 32C of the Financial Advisers Regulations. The material contained in this document is intended solely for accredited, expert orinstitutional investors, as defined under the Securities and Futures Act (Cap. 289 of Singapore). If there are any matters arising from, or in connectionwith this material, please contact Jefferies Singapore Limited, located at 80 Raffles Place #15-20, UOB Plaza 2, Singapore 048624, telephone: +656551 3950. In Japan this material is issued and distributed by Jefferies (Japan) Limited to institutional investors only. In Hong Kong, this report isissued and approved by Jefferies Hong Kong Limited and is intended for use only by professional investors as defined in the Hong Kong Securities andFutures Ordinance and its subsidiary legislation. In the Republic of China (Taiwan), this report should not be distributed. The research in relation tothis report is conducted outside the PRC. This report does not constitute an offer to sell or the solicitation of an offer to buy any securities in the PRC.PRC investors shall have the relevant qualifications to invest in such securities and shall be responsible for obtaining all relevant approvals, licenses,verifications and/or registrations from the relevant governmental authorities themselves. In India this report is made available by Jefferies India PrivateLimited. In Australia this information is issued solely by Jefferies International Limited and is directed solely at wholesale clients within the meaning ofthe Corporations Act 2001 of Australia (the "Act") in connection with their consideration of any investment or investment service that is the subject ofthis document. Any offer or issue that is the subject of this document does not require, and this document is not, a disclosure document or productdisclosure statement within the meaning of the Act. Jefferies International Limited is authorised and regulated by the Financial Conduct Authorityunder the laws of the United Kingdom, which differ from Australian laws. Jefferies International Limited has obtained relief under Australian Securitiesand Investments Commission Class Order 03/1099, which conditionally exempts it from holding an Australian financial services licence under theAct in respect of the provision of certain financial services to wholesale clients. Recipients of this document in any other jurisdictions should informthemselves about and observe any applicable legal requirements in relation to the receipt of this document.

This report is not an offer or solicitation of an offer to buy or sell any security or derivative instrument, or to make any investment. Any opinion orestimate constitutes the preparer's best judgment as of the date of preparation, and is subject to change without notice. Jefferies assumes no obligationto maintain or update this report based on subsequent information and events. Jefferies, its associates or affiliates, and its respective officers, directors,and employees may have long or short positions in, or may buy or sell any of the securities, derivative instruments or other investments mentioned ordescribed herein, either as agent or as principal for their own account. Upon request Jefferies may provide specialized research products or servicesto certain customers focusing on the prospects for individual covered stocks as compared to other covered stocks over varying time horizons orunder differing market conditions. While the views expressed in these situations may not always be directionally consistent with the long-term viewsexpressed in the analyst's published research, the analyst has a reasonable basis and any inconsistencies can be reasonably explained. This materialdoes not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individualclients. Clients should consider whether any advice or recommendation in this report is suitable for their particular circumstances and, if appropriate,seek professional advice, including tax advice. The price and value of the investments referred to herein and the income from them may fluctuate. Pastperformance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Fluctuations in exchangerates could have adverse effects on the value or price of, or income derived from, certain investments. This report has been prepared independently ofany issuer of securities mentioned herein and not in connection with any proposed offering of securities or as agent of any issuer of securities. Noneof Jefferies, any of its affiliates or its research analysts has any authority whatsoever to make any representations or warranty on behalf of the issuer(s).Jefferies policy prohibits research personnel from disclosing a recommendation, investment rating, or investment thesis for review by an issuer prior

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to the publication of a research report containing such rating, recommendation or investment thesis. Any comments or statements made herein arethose of the author(s) and may differ from the views of Jefferies.

This report may contain information obtained from third parties, including ratings from credit ratings agencies such as Standard & Poor’s. Reproductionand distribution of third party content in any form is prohibited except with the prior written permission of the related third party. Third party contentproviders do not guarantee the accuracy, completeness, timeliness or availability of any information, including ratings, and are not responsible forany errors or omissions (negligent or otherwise), regardless of the cause, or for the results obtained from the use of such content. Third party contentproviders give no express or implied warranties, including, but not limited to, any warranties of merchantability or fitness for a particular purpose oruse. Third party content providers shall not be liable for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequentialdamages, costs, expenses, legal fees, or losses (including lost income or profits and opportunity costs) in connection with any use of their content,including ratings. Credit ratings are statements of opinions and are not statements of fact or recommendations to purchase, hold or sell securities. Theydo not address the suitability of securities or the suitability of securities for investment purposes, and should not be relied on as investment advice.

Jefferies research reports are disseminated and available primarily electronically, and, in some cases, in printed form. Electronic research issimultaneously available to all clients. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent ofJefferies. Neither Jefferies nor any officer nor employee of Jefferies accepts any liability whatsoever for any direct, indirect or consequential damagesor losses arising from any use of this report or its contents.

For Important Disclosure information, please visit our website at https://javatar.bluematrix.com/sellside/Disclosures.action or call 1.888.JEFFERIES

© 2014 Jefferies Group LLC

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